<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission File Number 001-11462
DELPHI FINANCIAL GROUP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware (302) 478-5142 13-3427277
-------- -------------- ----------
(State or other jurisdiction of (Registrant's telephone number, (I.R.S. Employer Identification
incorporation or organization) including area code) Number)
</TABLE>
1105 North Market Street, Suite 1230, Wilmington, Delaware 19899
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(Address of principal executive offices) (Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Class A Common Stock, $.01 par value New York Stock Exchange
------------------------------------ -----------------------
<S> <C>
(Title of Each Class) (Name of Each Exchange
On Which Registered)
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, based upon the closing price for the Registrant's Class A Common
Stock on February 26, 1998, was $562,225,000.
As of February 26, 1998, the Registrant had 12,925,733 shares of Class A Common
Stock and 6,156,787 shares of Class B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1998 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
<PAGE> 2
PART I
ITEM 1. BUSINESS
Delphi Financial Group, Inc. (the "Company," which term includes the Company and
its consolidated subsidiaries unless the context specifies otherwise), organized
as a Delaware corporation in 1987, is an insurance holding company engaged
through its subsidiaries in offering a diverse portfolio of group employee
benefit products including life, disability, excess workers' compensation and
personal accident insurance. The Company also offers asset accumulation
products, primarily annuities, to individuals and groups. The Company's two
product categories are group employee benefit products and asset accumulation
products. The Company offers its insurance products in all fifty states and the
District of Columbia. Pennsylvania, California, New Jersey, Illinois, New York
and Florida collectively accounted for approximately 46% of the Company's direct
written premiums determined in accordance with statutory accounting principles
("SAP"), with no state representing more than approximately 10% of these
premiums for the year ended December 31, 1997.
OPERATING STRATEGY
The Company's operating strategy is to offer financial products and services
which have the potential for significant growth or which require expertise to
meet the specialized needs of its customers. The Company has concentrated its
efforts within certain niche insurance markets, primarily group employee
benefits for small to mid-sized employers where nearly all of the employment
growth in the American economy has occurred in the last few years. It has also
developed complementary investment management skills which, together with its
insurance business, are aimed at achieving above average returns on the capital
of the Company. The Company's operating strategy has also emphasized the
acquisition of blocks of insurance business and financial services companies and
the active management of its investment portfolio.
The Company's operating strategy has contributed to an average annual return on
shareholders' equity of 22% during the period from January 1988 to December
1997. Over this same period, net income and shareholder's equity have grown at a
compound annual rate of 36%, and book value per share has grown at a compound
annual rate of 28%. This strategy has also contributed to a 12% compound annual
growth rate in insurance premiums and policyholder fees during the period from
January 1988 through December 1997 and an increase in total assets from $819.1
million at December 31, 1987 to $3,203.7 million at December 31, 1997, a
compound annual growth rate of 15%.
The Company acquired Reliance Standard Life Insurance Company ("RSLIC") and its
subsidiary, First Reliance Standard Life Insurance Company ("FRSLIC") in
November 1987. RSLIC, founded in 1907, and FRSLIC underwrite a diverse portfolio
of life and accident and health insurance products targeted principally to the
employee benefits market and also market asset accumulation products, primarily
annuities, to individuals and groups.
SIG Holdings, Inc. ("SIG"), the parent company of Safety National Casualty
Corporation ("SNCC"), was merged into the Company in March 1996 (the "SIG
Merger"). See "Other Transactions." SNCC is an insurance specialist providing
excess workers' compensation insurance products to the self-insured market.
Founded in 1942, SNCC is one of the oldest continuous writers of excess workers'
compensation insurance in the United States.
The Company's management of its investment portfolio is an important component
of its profitability. The Company's strategy emphasizes liquidity and yield,
while seeking to limit risks associated with interest rate fluctuations and
credit quality. The Company's average yield on invested assets (excluding
realized and unrealized investment gains and losses) was 7.8%, 8.5% and 8.3% for
the years ended December 31, 1997, 1996 and 1995, respectively. See
"Investments."
GROUP EMPLOYEE BENEFIT PRODUCTS
The Company emphasizes the origination of specialty insurance products directed
to the employee benefits market, primarily group life, disability, excess
workers' compensation and personal accident insurance. The Company also offers
group dental insurance. The Company markets its group products to
employer-employee groups and associations in a variety of industries. The
Company insures groups ranging from 10 to more than 1,000 individuals, although
the average size of insured groups currently ranges from 100 to 300 individuals.
In underwriting its group employee benefit products, the Company attempts to
avoid concentrations of business in any industry segment or geographic area.
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The following table sets forth, for the periods indicated, selected financial
and statistical data concerning the Company's group employee benefit products:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ -----------
(dollars in thousands)
<S> <C> <C> <C>
Insurance premiums:
Life............................................................ $ 146,485 $ 135,806 $ 127,760
Disability income............................................... 96,469 92,024 85,849
Excess workers' compensation (1)................................ 64,499 56,200 -
Personal accident and other..................................... 48,439 47,348 43,470
------------ ------------ -----------
Total insurance premiums...................................... $ 355,892 $ 331,378 $ 257,079
============ ============ ===========
Group life insurance policy data: Group life insurance in force:
Balance, beginning of period................................ $ 49,156,630 $ 43,468,174 $45,547,840
Sales....................................................... 7,482,524 6,969,825 6,412,543
Lapses...................................................... (7,236,287) (8,201,918) (8,430,816)
Other increases (decreases) (2)............................. 7,552,486 6,920,549 (61,393)
------------ ------------ -----------
Balance, end of period...................................... $ 56,955,353 $ 49,156,630 $43,468,174
============ ============ ===========
Policy count ................................................. 7,106 6,976 6,652
</TABLE>
(1) Reflects the acquisition of excess workers' compensation business in
March 1996.
(2) Represents net increases (decreases) due to changes in the face amounts
of policies issued.
The profitability of group employee benefit products is affected by, among other
things, differences between actual and projected claims experience and the
ability to control administrative expenses. The table below sets forth for the
periods indicated the loss and expense ratios as a percent of premium income for
the Company's group employee benefit products.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997 (1) 1996 (1) 1995
------ ------ -----
<S> <C> <C> <C>
Loss ratio........................................................... 68.3 % 70.0 % 74.4 %
Expense ratio........................................................ 27.6 26.7 24.5
------ ------ -----
Combined ratio................................................... 95.9 % 96.7 % 98.9 %
====== ====== =====
</TABLE>
(1) Reflects the acquisition of excess workers' compensation business in
March 1996.
The Company's group life insurance products, which include voluntary group term
life, provide for the payment of a stated amount upon the death of a member of
the insured group and policy terms are generally one year. Accidental death and
dismemberment insurance, which provides for the payment of a stated amount upon
the accidental death or dismemberment of a member of the insured group, is
frequently sold in conjunction with group life policies and is included in
premiums charged for group life insurance. The Company reinsures risks in excess
of $150,000 per individual for employer provided group life insurance policies
and $100,000 for voluntary group term life policies under indemnity reinsurance
arrangements with various reinsurers. See "Reinsurance."
Group disability products offered by the Company, principally long-term
disability insurance, generally provide a specified level of benefits to persons
who, because of sickness or injury, are unable to work for a specified period of
time. The Company focuses group long-term disability sales toward employers
engaged principally in service industries such as accounting, architecture and
engineering, as well as certain retailing and manufacturing fields. Long-term
disability benefits generally are paid monthly and typically are limited for any
one employee to two-thirds of the employee's earned income up to a specified
maximum benefit. The Company actively manages its disability claims, working
with claimants to help them return to work as quickly as possible. When
insureds' disabilities prevent them from returning to their original jobs, the
Company, in appropriate cases, provides assistance in developing new productive
skills for an alternative career. Premiums are generally determined annually for
disability insurance and are based upon expected morbidity and emerging
experience of the insured group, as well as assumptions regarding operating
expenses and future interest rates. The Company reinsures risks in excess of
$2,500 per individual per month under an indemnity reinsurance arrangement. See
"Reinsurance."
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<PAGE> 4
The Company's excess workers' compensation business was acquired in March 1996
as a result of the SIG Merger. This product provides coverage to employers and
groups who self-insure their workers' compensation risks. The coverage applies
to losses in excess of the applicable self-insured retentions ("SIRs" or
deductibles) of employers and groups, whose workers' compensation claims are
generally handled by third-party administrators ("TPAs"). This product is
principally targeted to mid-sized companies and association groups, particularly
small municipalities, hospitals and schools. These companies and groups tend to
be less prone to catastrophic workers' compensation exposures and less price
sensitive than larger account business. Because claim payments do not begin
until after the SIR is met, it takes an average of 13 years from the date the
claim is incurred to the time claim payments begin. At that point, the payments
are primarily for wage replacement, similar to the benefit provided under
disability coverage. Medical payments, if any, tend to be stable and
predictable. The Company reinsures risks between $500,000 and $50.0 million per
policy per occurrence. See "Reinsurance."
The Company's personal accident insurance products include business travel and
"all risk" accidental death and dismemberment insurance. These policies pay a
stated amount based on a predetermined schedule in the event of accidental
dismemberment or death of a member of the insured group. The Company reinsures
risks in excess of $150,000 per individual under indemnity reinsurance
arrangements with pools of reinsurers through managing reinsurance underwriters.
In addition, under a catastrophe reinsurance agreement, the amount of the
Company's loss arising from any one occurrence is limited to $500,000. See
"Reinsurance."
The Company's group employee benefit products are sold primarily by independent
brokers, agents and TPAs. The Company's home offices and 23 sales offices
located throughout the country provide nationwide sales support and service
existing business. The Company believes that its national sales network
minimizes expenses traditionally associated with large insurance company captive
marketing systems.
ASSET ACCUMULATION PRODUCTS
The Company's asset accumulation products consist primarily of annuity products,
principally single premium deferred annuities ("SPDAs") and flexible premium
annuities ("FPAs"). The Company consummated five separate annuity block
acquisitions between 1988 and 1992 that resulted in the assumption of $967.1
million in liabilities in the form of policyholder account balances. The first
acquisition was an assumption reinsurance transaction, and the others were
indemnity reinsurance transactions. In the case of each acquisition, assets
supporting the related reserves were transferred to, and are managed by, the
Company. Pursuant to the assumption reinsurance acquisition, the Company has the
right to establish the crediting rate with respect to the business acquired. The
Company has the right under each indemnity reinsurance transaction to recommend
to the ceding company crediting rates with respect to the business acquired. The
ceding company is solely responsible for payment of crediting rates to the
extent that these rates exceed the greater of the recommended rate and certain
benchmark rates. A substantial portion of the Company's profitability on asset
accumulation products is generated from spread income, which is the difference
between the net yield achieved on invested assets and the interest credited on
policyholder account balances. As a result of the Company's ability to recommend
increases or decreases to applicable crediting rates annually, it believes that
it can manage the spread income on the annuity business acquired. The aggregate
lapse rates experienced on the annuity acquisitions have been consistent with
the levels assumed in pricing the transactions and consequently have not
adversely affected the Company's liquidity or results of operations.
In the fall of 1995, the Company began to market its new SPDA annuity products,
including a product with a market value adjustment ("MVA") feature that provides
for an adjustment to the accumulated value of the policy if it is surrendered
during the surrender charge period. These new products are sold predominantly
through networks of independent agents. For the year ended December 31, 1997,
these new products accounted for $55.5 million of asset accumulation product
deposits, of which $43.8 million was attributable to the new MVA annuity
product. One network of independent agents accounted for approximately 70% of
the deposits from these new products during 1997. The Company believes that it
has a good relationship with this network.
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<PAGE> 5
The following table sets forth for the periods indicated selected financial and
statistical data concerning the Company's asset accumulation products:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ -----------
(dollars in thousands)
<S> <C> <C> <C>
Asset accumulation product deposits.............................. $ 57,926 $ 59,460 $ 13,580
============ ============ ===========
Funds under management (at period end):
Annuities.................................................... $ 657,882 $ 689,952 $ 695,737
GICs (1)..................................................... 1,046 1,046 18,997
------------ ------------ -----------
Total funds under management.............................. $ 658,928 $ 690,998 $ 714,734
============ ============ ===========
Policy count..................................................... 34,943 37,288 38,119
</TABLE>
(1) The Company no longer actively markets guaranteed investment contracts
("GICs") and the remaining contract matures in 1998.
An SPDA provides for a single payment by an annuity holder to the Company, and
the crediting of interest by the Company at the applicable crediting rate. An
FPA provides for periodic payments by an annuity holder to the Company, the
timing and amount of which are at the discretion of the annuity holder, and the
crediting of interest by the Company at the applicable crediting rate. Interest
credited on SPDAs and FPAs is not paid currently to the annuity holder but
instead accumulates and is added to the annuity holder's account value. This
accumulation is tax deferred. The crediting rate may be increased or decreased
by the Company annually, typically on the policy anniversary, subject to
specified guaranteed minimum crediting rates. Minimum guaranteed crediting rates
currently range from 3.0% to 5.5%. Withdrawals may be made at any time, but some
withdrawals may result in the assessment of surrender charges, market value
adjustments, taxes, and/or tax penalties on the withdrawn amount.
At December 31, 1997, annuity liabilities were composed of $482.8 million of
SPDA liabilities and $175.1 million of FPA liabilities, for a total of $657.9
million of annuity liabilities with a weighted average crediting rate of 5.5%.
Of these liabilities, $214.0 million were subject to surrender charges averaging
7.4% at December 31, 1997. Annuity liabilities not subject to surrender charges
have been in force, on average, for 16 years.
The Company prices its annuity products based on assumptions concerning
prevailing and expected interest rates and other factors to achieve a positive
difference, or spread, between its expected return on investments and the
crediting rate. The Company achieves this spread by active portfolio management
focusing on matching the durations of invested assets and related liabilities to
minimize the exposure to fluctuations in market interest rates and by the
adjustment of the crediting rate on its annuity products. In response to changes
in interest rates, the Company increases or decreases the crediting rates on its
annuity products. Although the Company believes that these strategies will
continue to permit it to achieve a positive spread, a significant decline in the
yield on the Company's investments could adversely affect the results of
operations and financial condition of the Company.
In light of the annuity holder's ability to withdraw funds and the volatility of
market interest rates, it is difficult to predict the timing of the Company's
payment obligations under its SPDAs and FPAs. Consequently, the Company
maintains a portfolio of investments which are readily marketable and expected
to be sufficient to satisfy liquidity requirements. See "Investments."
VARIABLE LIFE INSURANCE PRODUCTS
In 1991, the Company introduced a variable flexible premium universal life
insurance policy under which the related assets are segregated in a separate
account not subject to claims of general creditors of the Company. Policyholders
may elect to deposit amounts in the account from time to time, subject to
underwriting limits and a minimum initial deposit of $1.0 million. At December
31, 1997, these deposits, excluding the Company's deposit, totaled $63.3
million. Pursuant to the investment option that is available to policyholders,
the assets of the separate account have been invested with independent
investment managers employing a variety of diversified investment strategies.
Both the cash values and death benefits of these policies fluctuate according to
the investment experience of the assets in the separate account; accordingly,
the investment risk with respect to these assets is borne by the policyholders
and any adverse investment experience with respect
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<PAGE> 6
to these investments would not have a material adverse effect on the Company's
results of operations and financial condition. The Company earns fee income from
the separate account in the form of charges for management and other
administrative fees. The Company reinsures risks in excess of $200,000 per
individual under indemnity reinsurance arrangements with various reinsurance
companies. See "Reinsurance."
UNDERWRITING PROCEDURES
Premiums charged on insurance products are based in part on assumptions about
the incidence and timing of insurance claims. The Company has adopted and
follows detailed underwriting procedures designed to assess and qualify
insurance risks before issuing policies to groups and individuals. To implement
these procedures, the Company employs a professional underwriting staff.
In underwriting group coverage, the Company focuses on the risk characteristics
of the group to be insured as a whole. A prospective group is evaluated with
particular attention paid to the claims experience of the group with prior
carriers, the occupations of the insureds, the nature of the business of the
group, the current economic outlook of the group in relation to others in its
industry and of the industry as a whole, the appropriateness of the benefits or
SIR applied for and income from other sources during disability. The Company's
policies generally afford it the flexibility to adjust premiums charged annually
to its policyholders in order to reflect emerging mortality or morbidity
experience.
INVESTMENTS
The Company's management of its investment portfolio is an important component
of its profitability since a substantial portion of its operating income is
generated from the difference between the yield achieved on invested assets and
the interest credited on policyholder funds and reserves. The Company's overall
investment strategy to achieve its objectives of safety and liquidity, while
seeking the best available return, focuses on, among other things, managing the
durations of the Company's interest-sensitive assets and liabilities and
minimizing the Company's exposure to fluctuations in interest rates.
For information regarding the composition and diversification of the Company's
investment portfolio, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources -
Investments" and Notes A, C, D, and J to the Consolidated Financial Statements.
The following table sets forth for the periods indicated the pretax investment
results of the Company's investment portfolio:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1997 1996 1995
------------- ------------ --------------
(dollars in thousands)
<S> <C> <C> <C>
Average investments (1) (2)............................... $ 2,049,274 $ 1,823,223 $ 1,417,472
Net investment income (2) (3)............................. 160,194 154,750 117,112
Weighted average annual yield (4)......................... 7.8% 8.5% 8.3%
Net realized investment gains (losses).................... $ 14,568 $ (2,651) $ 704
</TABLE>
(1) Average investments are computed by dividing the total of the
amortized cost of investments at the beginning of the period reduced
by advances from the Federal Home Loan Bank of Pittsburgh ("FHLB"),
reverse repurchase agreement liabilities and short securities
positions plus the individual quarter-end balances by five and
deducting one-half of net investment income.
(2) The increases in 1996 reflect the impact of the SIG Merger.
(3) Consists principally of interest and dividend income less investment
expenses.
(4) The weighted average annual yield on the Company's investment
portfolio for each period is computed by dividing net investment
income (exclusive of realized and unrealized gains and losses) by
average investments for the period. The 1996 and 1995 investment
yields reflect strong performance by the Company's independent
investment managers program. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Results of
Operations."
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<PAGE> 7
REINSURANCE
The Company participates in various reinsurance arrangements both as the ceding
insurer and as the assuming insurer. Arrangements in which the Company is the
ceding insurer afford various levels of protection against excessive loss by
assisting the Company in diversifying its risks and by limiting its maximum loss
on risks that exceed retention limits. Under indemnity reinsurance transactions
in which the Company is the ceding reinsurer, the Company is exposed to a degree
of risk if the assuming company becomes insolvent. To limit this risk, the
Company reevaluates each of these reinsurance arrangements on a periodic basis
focusing principally on the ratings and claims-paying abilities of the
respective reinsurers.
The Company cedes portions of the risks relating to its group employee benefit
and variable life insurance products under indemnity reinsurance agreements with
various unaffiliated reinsurers. The terms of these agreements, which are
typical for agreements of this type, provide, among other things, for the
automatic acceptance by the reinsurer of ceded risks in excess of the Company's
retention limits stated in the agreements. The Company pays reinsurance premiums
to these reinsurers which are, in general, based upon percentages of premiums
received by the Company on the business reinsured less, in certain cases, ceding
commissions and experience refunds paid by the reinsurer to the Company. These
agreements are generally terminable at any time as to new risks by either the
Company or the reinsurer on appropriate notice; however, termination does not
affect risks ceded during the term of the agreement, which generally remain with
the reinsurer, subject, in certain cases, to specified rights on the part of the
Company to recapture these risks. At December 31, 1997, all of the Company's
significant reinsurers were rated "A-" (Excellent) or higher by A.M. Best
Company. See Notes D and P to the Consolidated Financial Statements.
As of December 31, 1997, reinsured amounts with the Company's reinsurers are as
follows:
<TABLE>
<CAPTION>
Policy Amounts
Reserves and Recoverable
Premium Policyholder from Reinsurers
Income Account Balances for Paid and
Ceded Ceded Unpaid Claims
---------- ---------- -------------
(dollars in thousands)
<S> <C> <C> <C>
Protective Life Insurance Company......................... $ 13,891 $ 134,972 $ 1,049
Cologne Life Reinsurance Company.......................... - 16,694 8,627
TAURUS.................................................... 7,590 - -
Sun Life Assurance of Canada.............................. 8,913 20,008 9,499
All other reinsurers...................................... 36,665 10,474 25,282
---------- ---------- ----------
Total................................................. $ 67,059 $ 182,148 $ 44,457
========== ========== ==========
</TABLE>
The Company currently participates as an assuming insurer in a number of
reinsurance pools. These reinsurance pools generally are administered by TPAs or
managing underwriters which underwrite risks, coordinate premiums charged and
process claims. The Company has the right, generally exercisable annually, to
terminate or change its participation in any of these pools as to new business.
For the year ended December 31, 1997, these reinsurance pools represented, in
the aggregate, $50.6 million of premiums and policyholder fees and $47.3 million
of benefits, and the Company's five largest participations in these reinsurance
pools represented $41.5 million of earned premiums and $39.4 million of
benefits. The Company has also acquired blocks of annuity business through
indemnity and assumption reinsurance agreements. See "Asset Accumulation
Products."
In January 1998, the Company entered into various reinsurance agreements with
Oracle Reinsurance Company Ltd. ("Oracle Re"), a wholly-owned subsidiary of
Delphi International Ltd. ("Delphi International"), a newly-formed, independent
Bermuda insurance holding company. See "Other Transactions." Pursuant to these
agreements, approximately $100.0 million of group employee benefit reserves
($35.0 million of long-term disability insurance reserves and $65.0 million of
excess workers' compensation and casualty insurance reserves) were ceded to
Oracle Re. The Company has received collateral security from Oracle Re in an
amount sufficient to support the ceded reserves. These agreements are not
expected to have a material effect on the Company's financial condition,
liquidity or results of operations.
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<PAGE> 8
LIFE AND ACCIDENT AND HEALTH INSURANCE RESERVES
The Company carries as liabilities actuarially determined reserves to satisfy
its life, accident and health and annuity policy and contract obligations. These
reserves, together with premiums to be received on policies in force and
interest thereon at certain assumed rates, are calculated to be sufficient to
satisfy policy and contract obligations. The Company performs periodic studies
to compare current experience for mortality, interest and lapse rates with
expected experience in the reserve assumptions to determine future policy
benefit reserves for these products. Differences are reflected currently in
earnings for each period. The Company has not experienced significant adverse
deviations from its assumptions.
The life and accident and health insurance reserves carried in the Consolidated
Financial Statements are calculated based on generally accepted accounting
principles ("GAAP") and differ from those reported by the Company for statutory
financial statement purposes. These differences arise from the use of different
mortality and morbidity tables and interest assumptions, the introduction of
lapse assumptions into the reserve calculation and the use of the level-premium
reserve method on all insurance business. See Note A to Consolidated Financial
Statements for certain additional information regarding reserve assumptions
under GAAP.
EXCESS WORKERS' COMPENSATION INSURANCE RESERVES
The Company carries as liabilities actuarially determined reserves for
anticipated claims and claim expenses for casualty insurance products. Reserves
for claim expenses represent the estimated probable costs of investigating those
claims and, when necessary, defending lawsuits in connection with those claims.
Reserves for claims and claim expenses are estimated based on individual loss
data, historical loss data and industry averages and indices and include amounts
determined on the basis of individual and actuarially determined estimates of
future losses. Therefore, the ultimate liability could deviate from the amounts
currently reflected in the Consolidated Financial Statements. At December 31,
1997, over 93% of these reserves related to excess workers' compensation
insurance, and the balance consisted of reserves for workers' compensation
insurance, excess unemployment compensation insurance, self-insurance bonds and
an excess umbrella liability insurance product that was discontinued in 1985.
Reserving practices under GAAP allow discounting of claim reserves related to
excess workers' compensation losses to reflect the time value of money. Reserve
discounting for these types of claims is common industry practice, and the
discount factors used are less than the annual tax-equivalent investment yield
earned by the Company on its invested assets. Reserves for claim expenses are
not discounted.
The following table provides a reconciliation of beginning and ending unpaid
claims and claim expenses for the periods indicated:
<TABLE>
<CAPTION>
Period from
Year Ended March 5 (1)
December 31, to December 31,
1997 1996
--------- ----------
(dollars in thousands)
<S> <C> <C>
Unpaid claims and claim expenses, beginning of period........................ $ 380,826 $ 369,871
Provision for claims and claim expenses incurred in the current year......... 41,221 28,290
(Decrease) increase in estimated claims and claim expenses incurred in
prior years................................................................. (2,419) 7,358
--------- ----------
Incurred claims and claim expenses during the current year............... 38,802 35,648
---------- ----------
Deduct claims and claim expenses paid, occurring during:
Current year............................................................. 1,498 249
Prior years.............................................................. 30,079 24,444
---------- ----------
Total paid.......................................................... 31,577 24,693
---------- ----------
Unpaid claims and claim expenses, end of period.............................. $ 388,051 $ 380,826
========== ==========
</TABLE>
(1) The date of the SIG Merger.
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<PAGE> 9
The 1997 decrease in estimated claims and claim expenses incurred in prior years
is principally due to favorable claims development during the year. The 1996
increase in estimated claims and claim expenses incurred in prior years is
primarily due to the accretion of interest on discounted claim reserves. The
effects of the discount to reflect the time value of money of $164.0 million,
$168.8 million and $176.7 million at March 5, 1996, December 31, 1996 and
December 31, 1997, respectively, have been removed from the loss development
table which follows in order to present the gross loss development. The loss
development table below illustrates the development of reserves from March 5,
1996 to December 31, 1997.
<TABLE>
<CAPTION>
March 5, December 31, December 31,
1996 (1) 1996 1997
-------- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Reserve for unpaid claims and claim expenses............. $ 533,871 $ 549,653 $ 564,734
Cumulative amount of liability paid:
One year later....................................... 24,444 30,079
Two years later...................................... 53,605
Liability reestimated as of :
One year later....................................... 524,423 531,118
Two years later...................................... 506,024
Cumulative redundancy.................................... 27,847 18,535
</TABLE>
(1) The "One year later" amounts are for the period from March 5, 1996,
the date of the SIG Merger, to December 31, 1996. The "Two years
later" amounts are for the period from March 5, 1996 to December 31,
1997.
The "Reserve for unpaid claims and claim expenses" line of the table shows the
estimated reserve for unpaid claims and claim expenses recorded at the end of
each of the periods indicated. These liabilities represent the estimated amount
of losses and expenses for claims arising in the current year and all prior
years that are unpaid at the end of each period. The "Cumulative amount of
liability paid" line of the table represents the cumulative amounts paid with
respect to the liability previously recorded as of the end of each succeeding
period. The "Liability reestimated" line of the table shows the reestimated
amount relating to the previously recorded liability and is based upon
experience as of the end of each succeeding period. This estimate is either
increased or decreased as additional information about the frequency and
severity of claims for each period becomes available and is reviewed. The
Company periodically reviews the estimated reserves for claims and claim
expenses and any changes are reflected currently in earnings for each period.
The Company has not experienced significant adverse deviations from its
assumptions. The "Cumulative redundancy" line of the table represents the
aggregate change in the estimated claim reserve liabilities over the prior
period.
The excess workers' compensation insurance reserves carried in the Consolidated
Financial Statements are calculated in accordance with GAAP and, excluding the
effects of reinsurance, are approximately $34.8 million less than those reported
by the Company for statutory financial statement purposes at December 31, 1997.
This difference is primarily due to the use of different discount factors under
GAAP and SAP. See Note A to Consolidated Financial Statements for certain
additional information regarding reserve assumptions under GAAP.
COMPETITION
The insurance industry is highly competitive. The Company competes with numerous
other insurance and financial services companies both in connection with sales
of insurance and asset accumulation products and in acquiring blocks of business
and companies. Many of these organizations have substantially greater asset
bases, higher ratings from ratings agencies, larger and more diversified
portfolios of insurance products and larger agency sales operations. Competition
in asset accumulation product markets is also encountered from the expanding
number of banks, securities brokerage firms and other financial intermediaries
marketing alternative savings products, such as mutual funds, traditional bank
investments and retirement funding alternatives.
The Company believes that its reputation in the marketplace, quality of service
and investment returns have enabled it to compete effectively for new insurance
business in its targeted markets. The Company reacts to changes in the
marketplace generally by focusing on products with adequate margins and
attempting to avoid those with low margins. The Company believes that its
smaller size, relative to some of its competitors, enables it to more easily
tailor its products to the demands of customers.
-8-
<PAGE> 10
REGULATION
The Company's insurance subsidiaries are highly regulated by state insurance
authorities in the states in which they are domiciled and the other states in
which they conduct business. These regulations, among other things, limit the
amount of dividends and other payments that can be made by the Company's
insurance subsidiaries without prior regulatory approval and impose restrictions
on the amount and type of investments these subsidiaries may have. These
regulations also affect many other aspects of the Company's insurance
subsidiaries' business, including, for example, risk-based capital ("RBC")
requirements, various reserve requirements and the terms and conditions and
manner of sale and marketing of the these subsidiaries' insurance products.
These regulations are intended to protect policyholders rather than investors.
The Company's insurance subsidiaries are required under these regulations to
file detailed annual reports with the supervisory agencies in the various states
in which they do business, and their business and accounts are subject to
examination at any time by these agencies. Under state insurance laws and the
rules of the National Association of Insurance Commissioners ("NAIC"), the
Company's insurance subsidiaries may be examined periodically, usually at three-
to five-year intervals, by the supervisory agencies of the states in which they
do business. To date, no examinations have produced any significant adverse
findings or adjustments.
The ability of the Company to receive dividends from its insurance subsidiaries
is governed by the insurance laws of the subsidiaries' respective states of
domicile. These insurance laws require, among other things, that the statutory
surplus of the domiciled insurance company, following any dividend or
distribution, be reasonable in relation to its outstanding liabilities and
adequate to its financial needs, as determined under standards contained
therein. The insurance commissioners of these states may bring an action to
enjoin or rescind the payment of a dividend or distribution by an insurer
domiciled in its state that would cause the insurer's statutory surplus to be
unreasonable or inadequate under this standard. For further information on state
limitations on dividends by insurers, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources - General" and Note L to the Consolidated Financial Statements.
From time to time, increased scrutiny has been placed upon the insurance
regulatory framework, and a number of state legislatures have considered or
enacted legislative measures that alter, and in many cases increase, state
authority to regulate insurance companies. In addition to legislative
initiatives of this type, the NAIC and insurance regulators are continuously
involved in a process of reexamining existing laws and their application to
insurance companies. Among other things, this reexamination has focused on
insurance company investment and financial regulatory issues and, more recently,
issues relating to the manner in which insurance products are sold and marketed.
In some instances, it has resulted in new interpretations of existing law, the
development of new laws and the implementation of nonstatutory guidelines. In
addition, the NAIC is currently in the process of comprehensively codifying
(and, in certain respects, revising) SAP, which process, when complete, may
affect the manner in which insurance companies, including the Company's
insurance subsidiaries, report their statutory financial condition and operating
results. It is not possible to predict the future impact of changing regulation
or accounting practices on the operations of the Company and its insurance
subsidiaries.
The NAIC's RBC requirements for insurance companies take into account asset
risks, insurance risks, interest rate risks and other relevant risks with
respect to the insurer's business and specify varying degrees of regulatory
action to occur to the extent that an insurer does not meet the specified RBC
thresholds, with increasing degrees of regulatory scrutiny or intervention
provided for companies in categories of lesser RBC compliance. The Company
believes that its insurance subsidiaries are adequately capitalized under the
RBC requirements and that the thresholds will not have any significant
regulatory effect on the Company. However, were the insurance subsidiaries' RBC
position to decline in the future, the insurance subsidiaries' continued ability
to pay dividends and the degree of regulatory supervision or control to which
they are subjected may be affected.
The Company's insurance subsidiaries can also be required, under solvency or
guaranty laws of most states in which they do business, to pay assessments to
fund policyholder losses or liabilities of insurance companies that become
insolvent. These assessments may be deferred or forgiven under most solvency or
guaranty laws if they would threaten an insurer's financial strength and, in
most instances, may be offset against future state premium taxes. The amount of
any future assessments under these laws cannot reasonably be estimated and thus
is not included in the Company's reserves, although none of the Company's
insurance subsidiaries has ever incurred any significant costs of this nature.
The federal government currently does not directly regulate the insurance
business. However, federal legislation and administrative policies in a number
of areas, such as employee benefits regulation, age, sex and disability-based
discrimination, financial services regulation and federal taxation, can
significantly affect the insurance business.
-9-
<PAGE> 11
From time to time, federal legislative proposals have been made that would, if
enacted, have an adverse impact on the federal income tax treatment of certain
annuity contracts. There can be no assurance that such legislation will not be
adopted in the future. Any legislation adopted, depending on its nature, could
have a positive or adverse effect on the persistency of the Company's SPDAs and
FPAs and the Company's ability to market or acquire additional blocks of these
types of products.
EMPLOYEES
The Company and its subsidiaries employed 534 persons at December 31, 1997. The
Company believes that it enjoys good relations with its employees.
OTHER SUBSIDIARIES
The Company conducts certain of its investment management activities through its
wholly-owned subsidiary, Delphi Capital Management, Inc. ("DCM"), and makes
certain investments through other wholly-owned non-insurance subsidiaries.
OTHER TRANSACTIONS
In February 1993, the Company entered into an $85.0 million revolving credit
facility with a group of institutional lenders (the "Credit Agreement") and used
a portion of the facility to refinance a term loan with an institutional lender.
Beginning in July 1993, the Company implemented a recapitalization plan (the
"Recapitalization") designed to enhance its financial condition by increasing
shareholders' equity, reducing leverage and decreasing interest expense. In
addition, the Recapitalization was designed to increase the liquidity of the
Company's Class A Common Stock. The first step of the Recapitalization occurred
in July 1993 and included (i) increasing the principal amount available under
the Credit Agreement from $85.0 million to $120.0 million and (ii) using $30.0
million of the additional available funds to redeem $29.0 million aggregate
principal amount of the Company's 11 3/4% Senior Subordinated Debentures due
1999 (the "Senior Subordinated Debentures") at 103.42% of par value. In October
1993, the Company completed the second step of the Recapitalization, which
included (i) the public offering of $85.0 million of 8.0% Senior Notes due 2003
(the "Senior Notes"), for net proceeds of $82.4 million and (ii) the public
offering of 3.4 million shares of Class A Common Stock (of which 1.2 million
shares were sold by selling shareholders) for net proceeds to the Company of
$35.8 million. The Recapitalization was completed in November 1993, when the
Company redeemed all of the remaining $87.8 million par value Senior
Subordinated Debentures at 103.42% of par value.
In July 1994, the Company's shelf registration statement was declared effective
by the Securities and Exchange Commission. The shelf registration statement
provides for the sale, from time to time, of up to $150.0 million of securities.
To date, the Company has issued $100.8 million of the total amount of securities
available for issuance.
In December 1995, the Company and its existing lenders, along with additional
lenders, agreed to amend and restate the terms of the Credit Agreement to
increase the maximum amount available under the facility at any one time to
$200.0 million. Of the total facility, $98.0 million is restricted for use in
connection with, among other things, acquisitions or the redemption of the SIG
Senior Notes (as defined below).
On March 5, 1996, SIG was merged into the Company for consideration of
approximately $54.5 million of cash, net of approximately $1.0 million payable
upon the exercise of certain SIG stock options, which was funded from additional
borrowings under the Credit Agreement, and approximately 5.3 million shares of
the Company's Class A Common Stock, including shares of Class A Common Stock
reserved for issuance upon the exercise of stock options of SIG assumed by the
Company in connection with the merger, plus additional contingent consideration
of up to $20.0 million. In connection with the merger, the Company also assumed
$45.0 million of SIG's 8.5% Senior Secured Notes due 2003 (the "SIG Senior
Notes"). The contingent consideration will be payable in shares of the Company's
Class A Common Stock or, at the option of the Company, in cash. No contingent
consideration is due unless SIG's cumulative net income exceeds $41.8 million
for the two years ending December 31, 1997, $62.6 million for the three years
ending December 31, 1998, or $83.5 million for the four years ending December
31, 1999, and the maximum amount is triggered at cumulative net income levels of
$75.3 million for the three-year period or $104.4 million for the four-year
period. Because SIG's cumulative net income exceeded the income goal for the two
years ended December 31, 1997, the Company accrued $10.0 million of the
contingent consideration and recorded $10.0 million of additional goodwill in
1997.
-10-
<PAGE> 12
The Company's Board of Directors declared a 20% stock dividend on August 30,
1996, which was distributed to stockholders on September 30, 1996, and a 2%
stock dividend on May 13, 1997, which was distributed to stockholders on June
10, 1997. Results per share and applicable share amounts have been restated to
reflect the stock dividends.
In December 1996, the Company and its existing lenders agreed to amend and
restate the terms of the Credit Agreement to, among other things, reduce the
Company's borrowing costs. Under the amended terms, the maximum amount available
will be reduced incrementally over a four and one-half year period beginning in
October 1999. See Note F to the Consolidated Financial Statements.
During 1997, the Company disposed of its long-term care insurance business,
which was discontinued in 1996. This business was purchased in December 1994 and
was expected to become a significant part of the Company's operations. The
Company exited this business due to its continued losses attributable to lower
than expected sales and profit levels and decided to concentrate its resources
on other opportunities such as product and distribution enhancements for the
Company's group employee benefit products. See Note Q to the Consolidated
Financial Statements.
In March 1997, Delphi Funding L.L.C. ("Delphi Funding"), a subsidiary of the
Company, issued $100.0 million liquidation amount of 9.31% Capital Securities,
Series A (the "Capital Securities") in a public offering. In connection with the
issuance of the Capital Securities and the related purchase by the Company of
all of the common limited liability company interests in Delphi Funding, the
Company issued to Delphi Funding $103.1 million principal amount of 9.31% junior
subordinated deferrable interest debentures, Series A, due 2027 (the "Junior
Debentures"). Interest on the Junior Debentures is payable semiannually, but
may, subject to certain exceptions, be deferred at any time or from time to time
for a period not exceeding five years with respect to each deferral period, in
which event distributions on the Capital Securities will also be deferred and
the Company will not be permitted to pay cash dividends or make payments on any
junior indebtedness. No interest payments on the Junior Debentures have been
deferred since their issuance. The distribution and other payment dates on the
Capital Securities correspond to the interest and other payment dates on the
Junior Debentures. The Junior Debentures are not redeemable prior to March 25,
2007, but the Company has the right to dissolve Delphi Funding at any time and
distribute the Junior Debentures to the holders of the Capital Securities.
Pursuant to the related transaction documents, the Company has, on a
subordinated basis, guaranteed all payments due on the Capital Securities.
In January 1998, an offering was completed whereby shareholders and
optionholders of the Company received, at no cost, rights to purchase shares of
Delphi International, a newly-formed, independent Bermuda insurance holding
company. Delphi International will provide, through its wholly-owned subsidiary,
Oracle Re, reinsurance primarily for group employee benefit insurance products,
including group long-term disability and excess workers' compensation insurance
offered by RSLIC and SNCC. Delphi International will also seek to expand its
customer base and to develop additional products and services. Delphi
International was organized to take advantage of reinsurance and alternative
risk market opportunities that are believed to exist in the Bermuda market.
Subsequent to the completion of the rights offering, the Company entered into
certain reinsurance agreements with Oracle Re. See "Reinsurance." These
agreements are not expected to have a material effect on the Company's financial
condition, liquidity or results of operations.
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 1105 North Market
Street, Suite 1230, Wilmington, Delaware 19899. This office space is leased
through an operating lease expiring in November 1999. RSLIC owns its home office
building at 2501 Parkway, Philadelphia, Pennsylvania, which consists of
approximately 100,000 square feet. SNCC also owns its home office building at
2043 Woodland Parkway, Suite 200, St. Louis, Missouri which consists of
approximately 58,000 square feet. The Company also maintains 23 sales offices
throughout the country to provide nationwide sales support and service existing
business.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Company's insurance subsidiaries are
defendants in litigation principally involving insurance policy claims and agent
disputes, including claims for compensatory and punitive damages. In the opinion
of management, the ultimate disposition of such pending litigation will not have
a material adverse effect on the Company's financial condition, liquidity or
results of operations.
-11-
<PAGE> 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY, RSLIC AND SNCC
The table below presents certain information concerning each of the executive
officers of the Company, RSLIC and SNCC.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Robert Rosenkranz 55 Director of the Company; Chairman of the Board, President and Chief
Executive Officer of the Company; Chairman of the Board of RSLIC
Robert M. Smith, Jr. 46 Director and Vice President of the Company
Charles P. O'Brien 61 Director of the Company; President and Chief Executive Officer of RSLIC
B.K. Werner 64 Director of the Company; Chairman of the Board and Chief Executive
Officer of SNCC
Chad W. Coulter 35 Vice President and General Counsel of the Company; Vice President, General
Counsel and Assistant Secretary of RSLIC
Louis C. Lucido 49 Vice President, Investments of the Company
Lawrence E. Daurelle 46 Vice President and Treasurer of RSLIC
</TABLE>
Mr. Rosenkranz has served as the President and Chief Executive Officer of the
Company since May 1987 and has served as Chairman of the Board of Directors of
the Company since April 1989. He is also Chairman of the Board of RSLIC, FRSLIC
and Reliance Standard Life Insurance Company of Texas ("RSLIC-Texas") and serves
on the Board of Directors of SNCC. Mr. Rosenkranz, by means of beneficial
ownership of the corporate general partner of Rosenkranz & Company, an
irrevocable proxy and direct or beneficial ownership, has the power to vote all
of the outstanding shares of Class B Common Stock, which represents 49.9% of the
voting power of the Company's common stock as of February 26, 1998.
Mr. Smith has served as Vice President of the Company and as Vice President of
DCM since July 1994 and as a Director of the Company since January 1995. Mr.
Smith also serves as a Director of RSLIC-Texas, RSLIC, FRSLIC and SNCC. Prior to
July 1994, Mr. Smith was Director, Investment Banking for Merrill Lynch &
Company in New York, New York.
Mr. O'Brien has served as a Director of the Company since November 1987. Since
August 1976, Mr. O'Brien has served as President, Chief Executive Officer and a
Director of RSLIC. Mr. O'Brien also serves as President and Chief Executive
Officer and a Director of RSLIC-Texas and FRSLIC and as a Director of SNCC.
Mr. Werner has served as a Director of the Company since the SIG Merger in March
1996. He has served as Chairman of the Board of SNCC since June 1987 and as
Chief Executive Officer since June 1990. Mr. Werner has served as a Director of
and has been employed in various capacities by SNCC since 1959.
Mr. Coulter has served as Vice President and General Counsel of the Company and
as Vice President, General Counsel and Assistant Secretary of RSLIC, FRSLIC and
RSLIC-Texas since January 1998. He also served for RSLIC in similar capacities
from February 1994 to August 1997, and in various capacities from January 1991
to February 1994. From August 1997 to December 1997 Mr. Coulter was Vice
President and General Counsel of National Life of Vermont.
Mr. Lucido has served as Vice President, Investments of the Company since July
1997 and as a Director of FRSLIC since August 1997. Prior to July 1997, Mr.
Lucido was Managing Director, Chief Operating Officer and Corporate Secretary of
Hyperion Capital Management, Inc. in New York, New York.
Mr. Daurelle has served as Vice President and Treasurer of RSLIC, FRSLIC and
RSLIC-Texas since May 1995. From October 1994 to April 1995, he was Senior Vice
President and Chief Financial Officer for Mutual Assurance Company, and from
September 1993 to October 1994 he was Senior Vice President, Strategic Planning
for The Fidelity Mutual Life Insurance Company. Prior to September 1993, Mr.
Daurelle was Vice President of United Pacific Life Insurance Company.
-12-
<PAGE> 14
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The closing price of the Company's Class A Common Stock was $43.50 on February
26, 1998. There were approximately 1,700 holders of record of the Company's
Class A Common Stock as of February 26, 1998.
The following table sets forth high and low closing prices for the Company's
Class A Common Stock. The Company's Class A Common Stock is listed on the New
York Stock Exchange under the symbol DFG and, prior to October 31, 1996, was
traded on the NASDAQ National Market under the symbol DLFI. Prior periods have
been restated to reflect the 20% stock dividend distributed September 30, 1996
and the 2% stock dividend distributed June 10, 1997.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C> <C>
1996: First Quarter $ 20 5/8 $ 17 17/64
Second Quarter 23 57/64 19 3/32
Third Quarter 28 7/16 20 5/8
Fourth Quarter 28 59/64 26 23/32
1997: First Quarter $ 35 19/64 $ 28 59/64
Second Quarter 42 3/4 29 19/64
Third Quarter 45 3/8 38
Fourth Quarter 45 38 1/8
</TABLE>
Cash dividends have not been declared or paid on the Class A Common Stock or the
Class B Common Stock. Dividend payments are permitted under the terms of the
Senior Notes subject to certain restrictions and covenants. Under the Credit
Agreement, dividends on, together with any repurchases or redemptions by the
Company of, its capital stock, may not, during any fiscal year, exceed 4% of the
Company's Consolidated Equity (as defined in the Credit Agreement) as of the end
of the preceding fiscal year. The Credit Agreement also permits additional
repurchases by the Company of its capital stock in an aggregate amount of up to
$20.0 million over the term of the Credit Agreement.
In addition, dividend payments by the Company's insurance subsidiaries to the
Company are subject to certain regulatory restrictions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and "Business - Regulation." The Company
presently intends to retain earnings to finance the development and growth of
its business. Accordingly, the Company does not anticipate payment of any cash
dividends in the foreseeable future.
-13-
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of the Company set forth below were derived from the
Consolidated Financial Statements included elsewhere herein or previously filed
by the Company. This information should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements and related notes.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1997 (1) 1996 (1) 1995 1994 1993
----------- ----------- ----------- ----------- ----------
INCOME STATEMENT DATA: (dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Insurance premiums and policyholder fees:
Group employee benefit products...... $ 355,892 $ 331,378 $ 257,079 $ 233,697 $ 206,587
Annuities............................ 3,072 2,122 2,121 1,716 6,285
Other insurance products (2)......... 1,907 1,733 1,702 13,099 22,047
Net investment income................... 160,194 154,750 117,112 106,576 177,374
Net realized investment gains (losses).. 14,568 (2,651) 704 10,213 13,963
---------- ---------- ---------- ---------- ----------
Total revenue........................ 535,633 487,332 378,718 365,301 426,256
Benefits and expenses................... 402,739 387,713 314,549 315,407 335,685
---------- ---------- ---------- ---------- ----------
Income from continuing operations before
interest and income tax expense and
dividends on Capital Securities of
Delphi Funding....................... 132,894 99,619 64,169 49,894 90,571
Interest expense........................ 15,030 18,269 13,257 12,252 17,720
Income taxes............................ 38,226 27,496 18,170 11,698 26,098
Dividends on Capital Securities of
Delphi Funding (3)................... 4,656 - - - -
---------- ---------- ---------- ---------- ----------
Income from continuing operations....... $ 74,982 $ 53,854 $ 32,742 $ 25,944 $ 46,753
========== ========== ========== ========== ==========
Net income (4) ......................... $ 74,982 $ 47,253 $ 30,464 $ 25,818 $ 34,746
========== ========== ========== ========== ==========
BASIC RESULTS PER SHARE (5):
Income from continuing operations excluding
realized investment gains (losses)... $ 3.50 $ 3.15 $ 2.25 $ 1.37 $ 3.42
Income from continuing operations....... $ 4.00 $ 3.06 $ 2.28 $ 1.83 $ 3.79
Net income (4).......................... $ 4.00 $ 2.68 $ 2.12 $ 1.83 $ 2.81
Weighted average shares
outstanding (000's) (6).............. 18,731 17,622 14,374 14,141 12,344
DILUTED RESULTS PER SHARE (5):
Income from continuing operations excluding
realized investment gains (losses)... $ 3.32 $ 2.95 $ 2.20 $ 1.33 $ 3.28
Income from continuing operations....... $ 3.80 $ 2.86 $ 2.23 $ 1.78 $ 3.64
Net income (4).......................... $ 3.80 $ 2.51 $ 2.08 $ 1.77 $ 2.71
Weighted average shares
outstanding (000's) (6).............. 19,740 18,853 14,666 14,559 12,843
OTHER DATA:
Diluted book value per share (7) (8).... $ 26.07 $ 18.86 $ 15.20 $ 11.66 $ 14.05
Return on average shareholders' equity (9) 15.0% 18.5% 16.6% 10.4% 25.5%
Interest coverage ratio (10)............ 8.84x 5.83x 4.84x 4.07x 5.11x
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
1997 (1) 1996 (1) 1995 1994 1993
------------ ------------- ------------ ------------ -----------
BALANCE SHEET DATA: (dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total investments.................. $ 2,480,402 $ 2,295,007 $ 1,791,531 $ 1,965,154 $ 2,041,774
Total assets....................... 3,203,713 2,857,906 2,323,010 2,472,776 2,344,321
Long-term debt..................... 178,769 231,004 134,611 159,577 159,545
Capital Securities of Delphi Funding (3) 100,000 - - - -
Shareholders' equity (8)........... 509,486 366,965 222,815 170,382 200,968
Debt to total capitalization ratio (11) 22.7% 38.6% 37.7% 48.4% 44.3%
</TABLE>
-14-
<PAGE> 16
(1) Includes excess workers' compensation business acquired as a result of the
SIG Merger.
(2) Amounts for 1994 and 1993 include individual life insurance business, which
the Company exited in July 1994.
(3) Reflects the issuance of and the payment of dividends on $100.0 million of
Capital Securities by Delphi Funding. See "Business - Other Transactions"
and Note K to the Consolidated Financial Statements.
(4) The Company discontinued its long-term care business in 1996 and recorded a
one-time after-tax charge of $5.8 million in 1996 attributable to this
discontinuance. After-tax operating losses on this business were $0.8
million, $2.3 million and $0.1 million for the years ended December 31,
1996, 1995 and 1994, respectively. Additionally, the Company incurred an
after-tax extraordinary loss of $12.0 million for the year ended December
31, 1993 associated with the early extinguishment of debt.
(5) Prior periods have been restated to reflect the adoption of Statement of
Financial Accounting Standard No. 128, "Earnings Per Share," the 20% stock
dividend distributed September 30, 1996 and the 2% stock dividend
distributed June 10, 1997.
(6) Weighted average shares outstanding reflect the issuance of 2.1 million
shares of Class A Common Stock in October 1993.
(7) Diluted book value per share is calculated by dividing shareholders'
equity, as increased by the proceeds and tax benefit from the assumed
exercise of outstanding stock options, by total shares outstanding, also
increased by shares issued upon the assumed exercise of the options and
deferred shares.
(8) In 1994, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("SFAS No. 115"). Equity was increased (decreased)
by net unrealized appreciation (depreciation) on investments of $40.5
million, $(17.9) million, $(34.8) and $(57.9) million as of December 31,
1997, 1996, 1995 and 1994, respectively, due to the impact of SFAS No. 115.
(9) Return on average shareholders' equity is calculated by dividing income
from continuing operations, excluding after-tax realized investment gains
and losses, by average shareholders' equity, excluding after-tax realized
investment gains and losses, discontinued operations, extraordinary items
and changes in accounting principles, as determined as of the beginning and
end of each year.
(10) The interest coverage ratio is calculated by dividing income from
continuing operations before interest and income tax expense by interest
expense (1996 excludes interest paid in connection with the settlement of
prior-year federal income taxes).
(11) The debt to total capitalization ratio is calculated by dividing long-term
debt by the sum of the Company's long-term debt, Capital Securities of
Delphi Funding and shareholders' equity.
-15-
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The analysis of the results of operations and financial condition of the Company
below should be read in conjunction with the Consolidated Financial Statements
and related notes.
RESULTS OF OPERATIONS
Year Ended December 31, 1997
Compared to Year Ended December 31, 1996
Insurance Premium and Policyholder Fees. Insurance premiums and policyholder
fees in 1997 were $360.9 million as compared to $335.2 million in 1996, an
increase of 8%. Premiums from the Company's group employee benefit products,
excluding excess workers' compensation insurance, increased by $16.2 million
primarily due to the impact of certain price increases, growth and development
of the Company's distribution system and normal growth in employment and salary
levels for the Company's existing customer base. Premiums from the Company's
excess workers' compensation insurance product, which was acquired in March 1996
and included in the Company's results from the date of the acquisition, totaled
$64.5 million in 1997 as compared to $56.2 million in 1996. Excess workers'
compensation insurance premiums have decreased from full-year 1996 levels
primarily due to state mandated reductions in workers' compensation premium
rates and increased competition. The Company does not expect this reduction in
premiums to have a material impact on the underwriting results for this product
as decreased workers' compensation benefit levels, also mandated by the states,
are expected to offset the decline in premiums. Deposits from the Company's SPDA
products, including the Company's MVA annuity product, were $55.5 million in
1997 as compared to $57.5 million in 1996. Deposits for these products, which
are long-term in nature, are not recorded as premiums; instead, the deposits are
recorded as a liability.
Net Investment Income. Net investment income in 1997 was $160.2 million as
compared to $154.8 million in 1996, an increase of 3%. The increase is primarily
due to an increase in average invested assets as a result of the SIG Merger and
the investment of a portion of the proceeds from the issuance of the Capital
Securities and net cash provided by operating activities, partially offset by a
decrease in the weighted average yield. The 1996 investment results reflect
strong performance by the Company's independent investment managers program. The
weighted average annual yield on invested assets, excluding realized and
unrealized investment gains and losses, was 7.8% on average invested assets of
$2,049.3 million in 1997 and 8.5% on average invested assets of $1,823.2 million
in 1996.
Net Realized Investment Gains (Losses). The Company's investment strategy
results in periodic sales of securities and the recognition of realized
investment gains and losses. Net realized investment gains were $14.6 million in
1997 as compared to net realized investment losses of $2.7 million in 1996.
During 1997, the Company reevaluated the amortization period for deferred
futures losses associated with its mortgage-backed securities portfolio due to a
decline in market interest rates to record low levels and accelerated the
amortization by $9.9 million.
Benefits and Expenses. Policyholder benefits and expenses were $402.7 million in
1997 as compared to $387.7 million in 1996, an increase of 4%. During 1997,
benefits and expenses for group employee benefit products increased by $20.8
million as compared to 1996, primarily due to growth in these product lines.
Also contributing to the increase was the inclusion of the Company's excess
workers' compensation insurance product, which was acquired in March 1996, for
the full year of 1997. The combined ratio (loss ratio plus expense ratio) for
group employee benefit products was 95.9% and 96.7% for 1997 and 1996,
respectively. While amortization of cost of business acquired related to asset
accumulation products was accelerated by $4.8 million during 1996 due to better
than expected investment results, there was no net acceleration or deceleration
during 1997. The weighted average annual crediting rate on asset accumulation
products for 1997 and 1996 was 5.3% and 5.2%, respectively.
Operating Income. Income from continuing operations before interest and income
tax expense and dividends in 1997 was $132.9 million as compared to $99.6
million in 1996, an increase of 33%. The increase was primarily due to the
inclusion of excess workers' compensation insurance results for the entire year
of 1997 and realized investment gains in 1997 as compared to realized investment
losses in 1996.
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Interest Expense. Interest expense in 1997 was $15.0 million as compared to
$18.3 million in 1996. This decrease is primarily due to the repayment of $50.0
million of borrowings under the Credit Agreement with a portion of the proceeds
from the issuance of the Capital Securities, partially offset by the inclusion
of a full year of interest expense on the SIG Senior Notes in 1997. In addition,
the 1996 period includes interest paid in connection with the settlement of
prior year federal income taxes.
Income Taxes. Income tax expense in 1997 was $38.2 million as compared to $27.5
million in 1996. The increase was primarily due to the $33.3 million increase in
operating income partially offset by a decrease in the effective tax rate from
33.8% in 1996 to 32.4% in 1997 due to tax-exempt interest income.
Dividends on Capital Securities. In March 1997, Delphi Funding issued $100.0
million of Capital Securities in a public offering. See "Business - Other
Transactions" and Note K to the Consolidated Financial Statements.
Discontinued Operations. During 1997, the Company disposed of its long-term care
business, which was discontinued in 1996. The proceeds from the disposal were
not material and the actual results for this business subsequent to its
discontinuance did not materially differ from the loss of $5.8 million, net of a
tax benefit of $3.2 million, provided for in 1996 in connection with the
discontinuance of this business. See Note Q to the Consolidated Financial
Statements.
Year Ended December 31, 1996
Compared to Year Ended December 31, 1995
Insurance Premiums and Policyholder Fees. Insurance premiums and policyholder
fees in 1996 were $335.2 million as compared to $260.9 million in 1995, an
increase of 28%. Contributing to this increase was $56.2 million in premiums
from the Company's excess workers' compensation business which was acquired as a
result of the SIG Merger. Also contributing to the increase was growth in
premiums from the Company's other group employee benefit products, including the
impact of certain price increases, growth and development of the Company's sales
force and normal growth in employment and salary levels for the Company's
existing customer base. Deposits from the Company's SPDA products, including the
Company's MVA annuity product, which it began marketing in the fall of 1995,
were $57.5 million during 1996 as compared to $11.4 million in 1995. Deposits
for the Company's asset accumulation products, which are long-term in nature,
are not recorded as premiums; instead, the deposits are recorded as a liability.
Net Investment Income. Net investment income in 1996 was $154.8 million as
compared to $117.1 million in 1995, an increase of 32%. The increase is
principally due to an increase in average invested assets as a result of the SIG
Merger. The weighted average annual yield on invested assets, excluding realized
and unrealized investment gains and losses, was 8.5% on average invested assets
of $1,823.2 million and 8.3% on average invested assets of $1,417.5 million in
1996 and 1995, respectively.
Net Realized Investment (Losses) Gains. The Company's investment strategy
results in periodic sales of securities and the recognition of realized
investment gains and losses arising from those sales. Net realized investment
losses were $2.7 million in 1996 as compared to net realized investment gains of
$0.7 million in 1995.
Benefits and Expenses. Policyholder benefits and expenses in 1996 were $387.7
million as compared to $314.5 million in 1995, an increase of 23%. During 1996,
benefits and expenses for group employee benefit products increased by $66.2
million as compared to 1995. Of this increase, $51.7 million was attributable to
the Company's excess workers' compensation business which was acquired as a
result of the SIG Merger. The remaining increase was primarily attributable to
growth in the Company's other group employee benefit product lines. The combined
ratio for group insurance lines, excluding excess workers' compensation
insurance, decreased from 98.9% in 1995 to 97.7% in 1996. This decrease reflects
the impact of certain price increases and the expansion of the Company's loss
management capabilities during 1995. Amortization of cost of business acquired
related to asset accumulation products was accelerated by $4.8 million during
1996 primarily due to better than anticipated investment results. Benefits and
interest credited on asset accumulation products decreased by $4.0 million in
1996 as compared to 1995, principally due to the scheduled maturities during
1995 of guaranteed investment contracts with crediting rates that were generally
higher than the Company's other asset accumulation products. Primarily due to
these maturities, average funds under management decreased by $87.1 million and
the weighted average annual crediting rate on asset accumulation products
declined from 5.6% to 5.2%.
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Operating Income. Income from continuing operations before interest and taxes in
1996 was $99.6 million as compared to $64.2 million in 1995, an increase of 55%.
The increase was primarily due to the acquisition of the excess workers'
compensation business through the SIG Merger, partially offset by net realized
investment losses in 1996.
Interest Expense. Interest expense in 1996 was $18.3 million as compared to
$13.3 million in 1995. The increase was primarily due to interest expense on the
SIG Senior Notes, which were assumed in conjunction with the SIG Merger, and
additional borrowings under the Credit Agreement in 1996 to fund the SIG Merger
partially offset by a decline in the weighted average borrowing rate on the
Credit Agreement. Also contributing to the increase was interest paid in 1996 in
connection with the settlement of prior-year federal income taxes.
Income Taxes. Income tax expense in 1996 was $27.5 million as compared to $18.2
million in 1995. The increase was primarily due to the $35.4 million increase in
operating income partially offset by a decrease in the effective tax rate from
35.7% in 1995 to 33.8% in 1996 due to tax-exempt interest income.
Discontinued Operations. The Company recorded the discontinuance of its
long-term care insurance business in 1996. Operating losses on this business
totaled $0.8 million and $2.3 million, net of a tax benefit of $0.4 million and
$1.2 million, in 1996 and 1995, respectively. The Company also recorded a
one-time charge in 1996 of $5.8 million, net of a tax benefit of $3.2 million,
as a result of the discontinuance of this business. See Note Q to the
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
General. In March 1997, Delphi Funding issued $100.0 million liquidation amount
of Capital Securities in a public offering under the Company's existing shelf
registration statement. See "Business - Other Transactions" and Note K to the
Consolidated Financial Statements. Of the net proceeds from the offering, $50.0
million was used to repay borrowings under the Credit Agreement, and the
remainder was invested with selected independent investment managers.
The Company had approximately $216.8 million of financial resources available at
the holding company level at December 31, 1997, as compared to $117.2 million at
December 31, 1996. The increase in available financial resources was primarily
due to funds received from the Capital Securities offering and earnings from the
Company's non-insurance subsidiaries. The financial resources available at the
holding company level are primarily comprised of investments in the common stock
of its non-insurance subsidiaries and fixed maturity securities. The assets of
these non-insurance subsidiaries are primarily invested in balances with
independent investment managers and fixed maturity and other marketable
securities. Substantially all of the amounts invested with independent
investment managers are withdrawable at least annually, subject to applicable
notice requirements. A shelf registration is also in effect under which up to
$49.2 million in securities may be issued by the Company.
Other sources of liquidity at the holding company level include interest and
principal payments made on a surplus debenture (the "Surplus Debenture") issued
by RSLIC-Texas to the Company, dividends paid from insurance subsidiaries,
primarily generated from operating cash flows and investments, and borrowings
available under the Credit Agreement. At December 31, 1997, the unpaid principal
balance of the Surplus Debenture, which is payable in quarterly installments
through December 31, 1999, was $43.0 million. RSLIC-Texas generates less than 1%
of the Company's premiums, policyholder fees and deposits; therefore, payments
on the Surplus Debenture are generally funded by dividend payments made by RSLIC
to RSLIC-Texas. These dividends are subject to regulatory restrictions and, in
the absence of regulatory approval, are generally limited within any 12-month
period, in the aggregate, to the greater of RSLIC's statutory net income for the
preceding calendar year, or 10% of RSLIC's statutory surplus as of the preceding
December 31, determined in accordance with state regulations. RSLIC will be
permitted to make dividend payments of $30.1 million during 1998 without prior
regulatory approval. SNCC's ability to pay dividends is subject to regulatory
and certain other contractual restrictions and, in the absence of the requisite
approvals, dividends are generally limited within any 12-month period, in the
aggregate, to the lesser of 10% of SNCC's statutory surplus as of the preceding
December 31, or SNCC's statutory net investment income for the preceding
calendar year, determined in accordance with state regulations. SNCC will be
permitted to make dividend payments totaling $16.9 million during 1998 without
prior approval. Additional dividends may also be paid by RSLIC and SNCC with the
requisite approvals. See "Business - Regulation." The Credit Agreement permits
the Company to borrow up to $200.0 million at any one time. Of the $152.0
million unused portion of the Credit Agreement facility, $98.0 million is
restricted for use in connection with, among other things, acquisitions or the
redemption of the SIG Senior Notes.
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The Company's current liquidity needs, in addition to funding operating
expenses, include distributions on the Capital Securities and principal and
interest payments on outstanding borrowings under the Credit Agreement, the
Senior Notes and the SIG Senior Notes. The Junior Debentures underlying the
Capital Securities are not redeemable prior to March 25, 2007, and interest on
the Junior Debentures may, subject to certain exceptions, be deferred at any
time or from time to time for a period not exceeding five years with respect to
each deferral period, in which event distributions on the Capital Securities
will also be deferred and the Company will not be permitted to pay cash
dividends or make payments on any junior indebtedness. No interest payments on
the Junior Debentures have been deferred since their issuance. Beginning in
1999, the maximum amount available to the Company under the Credit Agreement
will be reduced on October 1 of each year with the balance due on April 1, 2003.
At the Company's current level of borrowing, no principal repayments would be
required until April 1, 2003. The Senior Notes mature in their entirety on
October 1, 2003 and are not subject to any sinking fund requirements nor are
they redeemable prior to maturity. The SIG Senior Notes amortize in $9.0 million
annual installments beginning in May 1999. See Note F to the Consolidated
Financial Statements.
The Company actively pursues acquisitions of blocks of business and insurance
and financial services companies that complement or may otherwise be
strategically consistent with its existing business. The Company routinely
engages in discussions with respect to certain potential transactions, any of
which could, if consummated, be material to the Company's operations.
Sources of liquidity available to the Company on a parent company-only basis,
including the undistributed earnings of its subsidiaries, scheduled payments
under the Surplus Debenture and additional borrowings available under the Credit
Agreement, are expected to exceed the Company's current and long-term cash
requirements.
The principal liquidity requirements of the Company's insurance subsidiaries
are, in the cases of RSLIC, FRSLIC and SNCC, their contractual obligations to
policyholders and contractholders, and in the case of RSLIC-Texas, its payments
to the Company on the Surplus Debenture. The primary sources of funding for
these obligations, in addition to operating earnings, are the marketable
investments included in the investment portfolios of RSLIC, FRSLIC and SNCC. The
Company believes that these sources of funding will be adequate for its
insurance subsidiaries to satisfy on both a short-term and long-term basis these
contractual obligations throughout their estimated or stated period.
Investments. The Company's overall investment strategy to achieve its objectives
of safety and liquidity, while seeking the best available return, focuses on,
among other things, managing the durations of the Company's interest-sensitive
assets and liabilities and minimizing the Company's exposure to fluctuations in
interest rates. The Company's investment portfolio primarily consists of
investments in fixed maturity securities. The weighted average credit rating of
the Company's fixed maturity portfolio as rated by Standard & Poor's Corporation
was "AA" at December 31, 1997. While the investment grade rating of the
Company's fixed maturity portfolio addresses credit risk, it does not address
other risks, such as prepayment and extension risks, which are discussed below.
Thirty-nine percent of the Company's total invested assets were comprised of
mortgage-backed securities, of which 52% are guaranteed by U.S. Government
sponsored entities as to the full amount of principal and interest and the
remaining 48% consists of investments in trusts created by banks and finance and
mortgage companies. Ninety-nine percent of the Company's mortgage-backed
securities portfolio, based on fair value, have been rated as investment grade
by nationally recognized statistical rating organizations. The single largest
investment in mortgage-backed securities backed by a single mortgage pool
totaled $42.8 million, or 2% of total invested assets, at December 31, 1997.
Mortgage-backed securities subject the Company to a degree of interest rate
risk, including prepayment and extension risk, which is generally a function of
the sensitivity of each security's underlying collateral to prepayments under
varying interest rate environments and the repayment priority of the securities
in the particular securitization structure. The Company seeks to limit the
extent of this risk by emphasizing the more predictable payment classes and
securities with stable collateral.
The Company maintains an investment program in which securities were purchased
using advances from the FHLB. The Company has utilized this program to manage
the duration of its liabilities and to earn spread income, which is the
difference between the financing cost and the earnings from the securities
purchased with those funds. The advances from the FHLB, which are at a fixed
rate, had an average term to maturity of 2.8 years. This program requires the
Company to maintain securities on deposit with the FHLB as collateral for the
advances outstanding. As the fair value of those securities increases or
decreases, the Company may be allowed to retake possession of securities or be
required to deposit additional securities.
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<PAGE> 21
The ability of the Company's insurance subsidiaries to make investments is
subject to the insurance laws and regulations of their respective state of
domicile. Each of these states has comprehensive investment regulations. In
addition, the Credit Agreement and, as to SNCC, the SIG Senior Notes also
contain limitations, with which the Company is currently in compliance in all
material respects, on the composition of the Company's investment portfolio. The
Company also continually monitors its investment portfolio and attempts to
ensure that the risks associated with concentrations of investments in either a
particular sector of the market or a single entity are limited.
Asset/Liability Management. A significant aspect of the Company's continued
profitability is its ability to manage risks associated with interest-sensitive
assets and liabilities. The Company prices its annuity products based on
assumptions concerning prevailing and expected interest rates and other factors
to achieve a positive difference, or spread, between its expected return on
investments and the crediting rate. The Company achieves this spread by active
portfolio management focusing on matching the durations of invested assets and
related liabilities to minimize the exposure to fluctuations in interest rates
and by the adjustment of the crediting rate on annuity products. The results of
this asset/liability matching are analyzed periodically through cash flow
analysis under multiple interest rate scenarios. The Company believes that it
will continue to achieve a positive spread and that the amount of lapses and
surrender rates will remain consistent with those assumed in the pricing of the
products.
Impact of Year 2000. The Company has completed an assessment of its computer
related systems and is in the process of modifying portions of its software so
that its computer systems will function properly with respect to dates in the
year 2000 and thereafter. These modifications, the cost of which is not expected
to be material to the Company's financial condition, liquidity or results of
operations, are being accomplished utilizing both external and internal
resources and are expected to be completed during the fourth quarter of 1998,
which is prior to any anticipated material impact of the year 2000 issue on the
Company's computer systems. The Company believes that, with the scheduled
alterations to its computer systems, this issue will not have a material effect
on its operations. However, if such modifications are not effectively
implemented, or not completed on a timely basis, the year 2000 issue could have
a material adverse impact on the operations of the Company.
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-K 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, 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 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.
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<PAGE> 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is included in this Form 10-K beginning on
page 25 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is included in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with the Company's 1998 Annual Meeting of
Stockholders, under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" and is incorporated herein by
reference, and in Item 4A in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is included in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with the Company's 1998 Annual Meeting of
Stockholders, under the caption "Executive Compensation" and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT
The information required by Item 12 is included in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with the Company's 1998 Annual Meeting of
Stockholders, under the caption "Security Ownership of Certain Beneficial Owners
and Management" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is included in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with the Company's 1998 Annual Meeting of
Stockholders, under the caption "Certain Relationships and Related Party
Transactions" and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The response to this portion of Item 14 is submitted as a separate section
of this report (see page 25 of this Form 10-K).
(b) No reports on Form 8-K were filed during the fourth quarter of 1997.
(c) The following Exhibits are numbered in accordance with the Exhibit Table of
Item 601 of Regulation S-K:
2.1 Agreement and Plan of Merger, dated October 5, 1995, among the
Company, SIG Holdings Acquisition Corp., and SIG Holdings, Inc.
(Exhibit 2.1) (8)
3.1 Restated Certificate of Incorporation of Delphi Financial Group,
Inc. (Exhibit 3.2) (3)
3.2 Certificate of Amendment of Restated Certificate of Incorporation
of Delphi Financial Group, Inc. (Exhibit 3.1) (10)
3.3 Restated Certificate of Incorporation of Delphi Financial Group,
Inc. (Exhibit 3.2) (10)
3.4 Amended and Restated By-laws of Delphi Financial Group, Inc.
(Exhibit 3.4) (3)
4.1 Indenture, dated as of October 8, 1993, between Delphi Financial
Group, Inc. and State Street Bank of Connecticut (formerly Shawmut
Bank Connecticut, N.A.) as Trustee (8.0% Senior Notes due 2003).
(Exhibit 4.1) (4)
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<PAGE> 23
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. - (CONTINUED)
4.2 Amended and Restated Limited Liability Agreement of Delphi Funding
L.L.C. dated as of March 25, 1997, among Delphi Financial Group,
Inc., as Managing Member, Chestnut Investors III, Inc., as
Resigning Member, and the Holders of Capital Securities described
therein, as Members. (Exhibit 4(a)) (11)
4.3 Subordinated Indenture, dated as of March 25, 1997, between Delphi
Financial Group, Inc. and Wilmington Trust Company as Trustee.
(Exhibit 4(b)) (11)
4.3 Guarantee Agreement dated March 25, 1997, between Delphi Financial
Group, as Guarantor, and Wilmington Trust Company, as Trustee.
(Exhibit 4(c)) (11)
10.1 Senior Management Incentive Plan of Reliance Standard Life
Insurance Company. (13)
10.2 Second Amended and Restated Employee Nonqualified Stock Option
Plan of the Company. (Exhibit 4.1) (5)
10.3 The Delphi Capital Management, Inc. Pension Plan for Robert
Rosenkranz. (Exhibit 10.4) (2)
10.4 Third Amended and Restated Credit Agreement dated as of December
5, 1996, among the Company, the Lenders named therein, The Bank of
New York, NationsBank, N.A. (South) and Fleet National Bank, as
Co-Agents for the lenders, and Bank of America National Trust and
Savings Association, as Administrative Agent for the lenders.
(Exhibit 10.4) (9)
10.5 Borrower Pledge Agreement, dated as of February 23, 1993, between
the Company and Bank of America Illinois. (Exhibit 10.6) (2)
10.6 Investment Consulting Agreement, dated as of November 10, 1988,
between Rosenkranz, Inc. and the Company. (Exhibit 10.8) (3)
10.7 Investment Consulting Agreement, dated as of November 6, 1988,
between Rosenkranz, Inc. and Reliance Standard Life Insurance
Company. (Exhibit 10.9) (3)
10.8 Assumption Reinsurance Agreement, dated as of December 5, 1988,
between John Alden Life Insurance Company and Reliance Standard
Life Insurance Company. (Exhibit 10.11) (3)
10.9 Delphi Financial Group, Inc. Long-Term Performance-Based Incentive
Plan. (13)
10.10 Settlement Agreement and Release of February 1988 among Insurers
Service Corporation, Frank B. Hall & Co. Inc., Reliance Group
Holdings Inc. and Safety National Casualty Corporation, as
supplemented and amended by letter agreement dated March 4, 1996.
(Exhibit 10.11) (7)
10.11 SIG Holdings, Inc. 1992 Long-Term Incentive Plan. (Exhibit 10.12)
(7)
10.12 Stockholders Agreement, dated as of October 5, 1995, among the
Company and the affiliate stockholders named therein. (Exhibit
10.30) (8)
10.13 Reliance Standard Life Insurance Company Non-Qualified Deferred
Compensation Plan. (Exhibit 10.14) (8)
10.14 Reliance Standard Life Insurance Company Supplemental Executive
Retirement Plan. (Exhibit 10.15) (8)
10.15 Amended and Consolidated Surplus Debenture, in the amount of
$58,000,000, dated December 1, 1996, issued by Reliance Standard
Life Insurance Company of Texas to Delphi Financial Group, Inc.
(Exhibit 10.15) (9)
10.16 Indemnity Coinsurance Agreement and Administrative Services
Agreement, dated as of October 3, 1994, between Reliance Standard
Life Insurance Company and Protective Life Insurance Company.
(Exhibit 10.21) (6)
10.17 Indemnity Coinsurance Agreement, dated as of June 30, 1990,
between Reliance Standard Life Insurance Company and John Alden
Life Insurance Company (with exhibit 1 thereto). (Exhibit (10.22)
(1)
10.18 Indemnity Coinsurance Agreement, dated as of October 31, 1990,
between Reliance Standard Life Insurance Company and John Alden
Life Insurance Company (with exhibit 1 thereto). (Exhibit 10.23)
(1)
10.19 Indemnity Coinsurance Agreement, dated as of March 31, 1992,
between Reliance Standard Life Insurance Company and Washington
National Life Insurance Company of New York (filed with the Trust
Agreement dated as of April 27, 1992, between Reliance Standard
Life Insurance Company and Washington National Life Insurance
Company of New York). (Exhibit 10.24) (1)
10.20 Indemnity Coinsurance Agreement, dated as of December 31, 1992,
between Reliance Standard Life Insurance Company and Lamar Life
Insurance Company. (Exhibit 10.25) (1)
10.21 Employment Agreement, dated March 18, 1994, for Robert M. Smith,
Jr. (Exhibit 10.31) (6)
10.22 Employment Agreement, dated December 22, 1995, for B.K. Werner.
(Exhibit 10.22) (9)
10.23 SIG Holdings, Inc. Note Agreement, dated as of May 20, 1994 (8.5%
Senior Secured Notes due 2003). (Exhibit 10.25) (7)
10.24 Borrower Pledge Agreement, dated as of May 20, 1994, between SIG
Holdings, Inc., and the Chase Manhattan Bank, N.A., as collateral
agent. (Exhibit 10.26) (7)
10.25 Subsidiary Pledge Agreement, dated as of March 5, 1996, between
SIG Holdings, Inc. and Bank of America National Trust and Savings
Association, as Administrative Agent. (Exhibit 10.27) (7)
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<PAGE> 24
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. - (CONTINUED)
10.26 Delphi Financial Group, Inc. Amended and Restated Directors Stock
Option Plan. (13)
10.27 Reinsurance Agreement, dated January 27, 1998, between Reliance
Standard Life Insurance Company and Oracle Reinsurance Company
Ltd. (13)
10.28 Casualty Excess of Loss Reinsurance Agreement, dated January 27,
1998, between Safety National Casualty Corporation and Oracle
Reinsurance Company Ltd. (13)
11.1 Computation of Results per Share of Common Stock. (12)
21.1 List of Subsidiaries of the Company. (13)
23.1 Consent of Ernst & Young LLP. (13)
24.1 Powers of Attorney. (13)
27 Financial Data Schedule (13)
-------------------
(1) Incorporated herein by reference to the designated exhibit to the
Company's Registration Statement on Form S-1 dated September 30,
1993 (Registration No. 33-65828).
(2) Incorporated herein by reference to the designated exhibit to the
Company's Form 10-K for the year ended December 31, 1992.
(3) Incorporated herein by reference to the designated exhibit to the
Company's Registration Statement on Form S-1 dated March 13, 1990
(Registration No. 33-32827).
(4) Incorporated herein by reference to the designated exhibit to the
Company's Form 10-K for the year ended December 31, 1993.
(5) Incorporated herein by reference to the designated exhibit to the
Company's Registration Statement on Form S-8 dated August 6, 1997
(Registration No. 333-32961).
(6) Incorporated herein by reference to the designated exhibit to the
Company's Form 10-K for the year ended December 31, 1994.
(7) Incorporated herein by reference to the designated exhibit to the
Company's Form 10-K for the year ended December 31, 1995.
(8) Incorporated herein by reference to the designated exhibit to the
Company's Registration Statement on Form S-4 dated January 30, 1996
(Registration No. 33-99164).
(9) Incorporated herein by reference to the designated exhibit to the
Company's Form 10-K for the year ended December 31, 1996.
(10) Incorporated herein by reference to the designated exhibit to the
Company's Form 10-Q for the quarter ended June 30, 1997.
(11) Incorporated herein by reference to the designated exhibit to the
Company's Current Report on Form 8-K dated March 21, 1997.
(12) Incorporated herein by reference to Note O to the Consolidated
Financial Statements included elsewhere herein.
(13) Filed herewith.
(d) The following consolidated financial statement schedules of Delphi
Financial Group, Inc. and subsidiaries are included under Item 8 and are
presented beginning on page 47 of this Form 10-K:
Schedule I - Summary of Investments Other Than Investments in Related
Parties
Schedule II - Condensed Financial Information of Registrant
Schedule IV - Reinsurance
Schedule VI - Supplemental Information Concerning Property-Casualty
Operations
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
-23-
<PAGE> 25
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 Financial Group, Inc.
By: /S/ ROBERT ROSENKRANZ
----------------------------------------
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Capacity Date
- ---- -------- ----
<S> <C> <C>
/S/ ROBERT ROSENKRANZ Chairman of the Board, March 17, 1998
- ---------------------------------------------------------- President and Chief Executive
(Robert Rosenkranz) Officer (Principal Executive
Officer)
* Director March 17, 1998
- ----------------------------------------------------------
(Edward A. Fox)
* Director March 17, 1998
- ----------------------------------------------------------
(Charles P. O'Brien)
* Director March 17, 1998
- ----------------------------------------------------------
(Lewis S. Ranieri)
* Director March 17, 1998
- ----------------------------------------------------------
(Thomas L. Rhodes)
/S/ ROBERT M. SMITH, JR. Director and March 17, 1998
- ---------------------------------------------------------- Vice President
(Robert M. Smith, Jr.)
* Director March 17, 1998
- ----------------------------------------------------------
(Thomas A. Sullivan)
* Director March 17, 1998
- ----------------------------------------------------------
(B.K. Werner)
* Vice President and March 17, 1998
- ---------------------------------------------------------- Treasurer of RSLIC
Lawrence E. Daurelle (Principal Accounting and
Financial Officer)
</TABLE>
* BY: /S/ ROBERT ROSENKRANZ
----------------------------------------------------
Attorney-in-Fact
-24-
<PAGE> 26
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL RESULTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31, 1997
--------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues............................................. $ 139,071 $ 127,622 $ 135,490 $ 133,450
Income from continuing operations, excluding realized
investment gains (losses)......................... 17,545 15,934 16,450 15,584
Income from continuing operations.................... 20,298 16,017 19,839 18,828
Net income........................................... 20,298 16,017 19,839 18,828
Basic results per share of common stock:
Income from continuing operations excluding
realized investment gains (losses)............. $ 0.94 $ 0.86 $ 0.88 $ 0.82
Income from continuing operations................. 1.09 0.86 1.06 0.99
Net income........................................ 1.09 0.86 1.06 0.99
Diluted results per share of common stock:
Income from continuing operations excluding
realized investment gains (losses)............. $ 0.89 $ 0.81 $ 0.83 $ 0.79
Income from continuing operations................. 1.03 0.81 1.01 0.95
Net income........................................ 1.03 0.81 1.01 0.95
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
--------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues............................................. $ 101,868 $ 120,731 $ 128,730 $ 136,003
Income from continuing operations, excluding realized
investment gains (losses)......................... 11,025 15,978 14,945 13,629
Income from continuing operations.................... 10,246 13,333 14,512 15,763
Net income........................................... 9,875 7,103 14,512 15,763
Basic results per share of common stock:
Income from continuing operations excluding
realized investment gains (losses)............. $ 0.71 $ 0.88 $ 0.82 $ 0.74
Income from continuing operations................. 0.66 0.73 0.79 0.86
Net income........................................ 0.63 0.39 0.79 0.86
Diluted results per share of common stock:
Income from continuing operations excluding
realized investment gains (losses)............. $ 0.68 $ 0.81 $ 0.76 $ 0.69
Income from continuing operations................. 0.63 0.67 0.74 0.80
Net income........................................ 0.61 0.36 0.74 0.80
</TABLE>
Computations of results per share for each quarter are made independently of
results per share for the year. Due to the transactions affecting the weighted
average number of shares outstanding in each quarter and due to the uneven
distribution of earnings and losses during the year, the sum of quarterly
results per share does not equal results per share for the year.
Results reflect the inclusion of SIG from the date of the SIG Merger. Prior
period results per share have been restated to reflect the adoption of Statement
of Financial Accounting Standard No. 128, "Earnings Per Share," the 20% stock
dividend distributed September 30, 1996 and the 2% stock dividend distributed
June 10, 1997. The Company discontinued its long-term care insurance business
during 1996 (see Note Q to the Consolidated Financial Statements).
Reporting the results of operations on a quarterly basis requires the use of
numerous estimates throughout the year, primarily in the computation of
insurance reserves and the effective rate for federal income taxes. The Company
reviews estimates at the end of each quarter and, if necessary, makes
appropriate adjustments, with the effect of these adjustments being reported in
current operations. The Company is able to assess the accuracy of its previous
quarterly estimates only at year-end. The Company's fourth quarter results
include the effect of the difference between previous estimates and actual
year-end results. Therefore, the results of an interim period may not be
indicative of the results for the entire year.
-25-
<PAGE> 27
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Audited Consolidated Financial Statements of Delphi Financial Group, Inc. and Subsidiaries:
Report of Independent Auditors...................................................................... 27
Consolidated Statements of Income - Years Ended December 31, 1997, 1996 and 1995.................... 28
Consolidated Balance Sheets - December 31, 1997 and 1996 ........................................... 29
Consolidated Statements of Shareholders' Equity - Years Ended December 31, 1997, 1996 and 1995...... 30
Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1996 and 1995................ 31
Notes to Consolidated Financial Statements.......................................................... 32
The following Consolidated Financial Statement Schedules of Delphi Financial Group, Inc. and
Subsidiaries are included under Item 14(d):
Schedule I, Summary of Investments Other Than Investments in Related Parties........................ 47
Schedule II, Condensed Financial Information of Registrant.......................................... 48
Schedule IV, Reinsurance............................................................................ 52
Schedule VI, Supplemental Information Concerning Property-Casualty Insurance Operations............. 53
</TABLE>
-26-
<PAGE> 28
REPORT OF INDEPENDENT AUDITORS
Shareholders and Directors
Delphi Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of Delphi Financial
Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedules listed in the Index at Item 14(d).
These financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Delphi
Financial Group, Inc. and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
February 9, 1998
-27-
<PAGE> 29
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Insurance premiums and policyholder fees....................... $ 360,871 $ 335,233 $ 260,902
Net investment income.......................................... 160,194 154,750 117,112
Net realized investment gains (losses)......................... 14,568 (2,651) 704
---------- ---------- ----------
535,633 487,332 378,718
---------- ---------- ----------
Benefits and expenses:
Benefits, claims and interest credited to policyholders........ 290,761 280,620 241,165
Commissions.................................................... 27,270 24,550 21,304
Amortization of cost of business acquired...................... 27,883 31,221 17,045
Other operating expenses....................................... 56,825 51,322 35,035
---------- ---------- ----------
402,739 387,713 314,549
---------- ---------- ----------
Income from continuing operations before
interest and income tax expense and dividends
on Capital Securities of Delphi Funding L.L.C............. 132,894 99,619 64,169
Interest expense.................................................. 15,030 18,269 13,257
---------- ---------- ----------
Income from continuing operations before
income tax expense and dividends on Capital
Securities of Delphi Funding L.L.C........................ 117,864 81,350 50,912
Income tax expense................................................ 38,226 27,496 18,170
---------- ---------- ----------
Income from continuing operations before dividends
on Capital Securities of Delphi Funding L.L.C............. 79,638 53,854 32,742
Dividends on Capital Securities of Delphi Funding L.L.C........... 4,656 - -
---------- ---------- ----------
Income from continuing operations........................... 74,982 53,854 32,742
Discontinued operations, net of income tax benefit:
Loss from operations........................................... - (765) (2,278)
Loss on disposal............................................... - (5,836) -
---------- ---------- ----------
Net income.................................................. $ 74,982 $ 47,253 $ 30,464
========== ========== ==========
Basic results per share of common stock:
Income from continuing operations.............................. $ 4.00 $ 3.06 $ 2.28
Net income..................................................... $ 4.00 $ 2.68 $ 2.12
Diluted results per share of common stock:
Income from continuing operations.............................. $ 3.80 $ 2.86 $ 2.23
Net income..................................................... $ 3.80 $ 2.51 $ 2.08
</TABLE>
See notes to consolidated financial statements.
-28-
<PAGE> 30
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Assets:
Investments:
Fixed maturity securities, available for sale ............................ $ 2,165,069 $ 1,891,512
Cash and cash equivalents................................................. 50,580 89,711
Other investments......................................................... 264,753 313,784
----------- -----------
2,480,402 2,295,007
Cost of business acquired.................................................... 92,931 94,594
Reinsurance receivables...................................................... 234,746 214,529
Other assets................................................................. 322,985 174,157
Assets held in separate account.............................................. 72,649 79,619
----------- -----------
Total assets.............................................................. $ 3,203,713 $ 2,857,906
=========== ===========
Liabilities and Shareholders' Equity:
Future policy benefits....................................................... $ 436,021 $ 416,854
Unpaid claims and claim expenses............................................. 531,409 509,720
Policyholder account balances................................................ 689,542 719,229
Corporate debt............................................................... 178,769 231,004
Advances from Federal Home Loan Bank......................................... 201,057 201,055
Other liabilities and policyholder funds..................................... 494,082 341,181
Liabilities related to separate account...................................... 63,347 71,898
----------- -----------
Total liabilities 2,594,227 2,490,941
----------- -----------
Company-obligated mandatorily redeemable Capital Securities of Delphi
Funding L.L.C. holding solely junior subordinated deferrable interest
debentures of the Company................................................. 100,000 -
----------- -----------
Shareholders' equity:
Preferred Stock, $.01 par; 10,000,000 shares authorized................... - -
Class A Common Stock, $.01 par; 40,000,000 shares authorized;
12,884,188 and 11,813,064 shares issued and outstanding, respectively.. 129 118
Class B Common Stock, $.01 par; 20,000,000 shares authorized;
6,156,787 and 6,258,944 shares issued and outstanding, respectively.... 62 63
Additional paid-in capital................................................ 262,963 240,203
Net unrealized appreciation (depreciation) on investments................. 40,545 (17,949)
Retained earnings......................................................... 205,787 144,530
----------- -----------
Total shareholders' equity............................................. 509,486 366,965
----------- -----------
Total liabilities and shareholders' equity......................... $ 3,203,713 $ 2,857,906
=========== ===========
</TABLE>
See notes to consolidated financial statements.
-29-
<PAGE> 31
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- --------------------
Shares Amounts Shares Amounts Shares Amounts
<S> <C> <C> <C> <C> <C> <C>
Class A Common Stock:
Beginning balance.................. 11,813 $ 118 6,696 $ 67 5,901 $ 59
Issuance of stock, exercise
of stock options and
conversion of shares......... 832 9 3,303 33 795 8
Stock dividend.................. 239 2 1,941 19 - -
Retirement of Treasury Stock.... - - (127) (1) - -
-------- --------- -------- -------- ------- ---------
Ending balance .................... 12,884 $ 129 11,813 $ 118 6,696 $ 67
======== ========= ======== ======== ======= =========
Class B Common Stock:
Beginning balance.................. 6,259 $ 63 5,216 $ 52 5,866 $ 59
Conversion of shares............ (226) (2) - - (650) (7)
Stock dividend.................. 124 1 1,043 11 - -
-------- --------- -------- -------- ------- ---------
Ending balance .................... 6,157 $ 62 6,259 $ 63 5,216 $ 52
======== ========= ======== ======== ======= =========
Class A Treasury Stock:
Beginning balance.................. - $ - 127 $ (2,342) - $ -
Retirement of Treasury Stock.... - - (127) 2,342 - -
Receipt of Treasury Stock....... - - - - 127 (2,342)
-------- --------- -------- -------- ------- ---------
Ending balance .................... - $ - - $ - 127 $ (2,342)
======== ========= ======== ======== ======= =========
Additional Paid-in Capital:
Beginning balance.................. $ 240,203 $ 87,734 $ 86,481
Issuance of stock and
exercise of stock options... 9,040 79,982 1,253
Stock dividend.................. 13,720 74,579 -
Retirement of Treasury Stock.... - (2,092) -
--------- -------- ---------
Ending balance..................... $ 262,963 $240,203 $ 87,734
========= ======== =========
Net Unrealized Appreciation (Depreciation)
on Investments:
Beginning balance.................. $ (17,949) $(34,832) $ (57,889)
Change in net unrealized
appreciation (depreciation).. 58,494 16,883 23,057
--------- -------- ---------
Ending balance..................... $ 40,545 $(17,949) $ (34,832)
========= ======== =========
Retained Earnings:
Beginning balance.................. $ 144,530 $172,136 $ 141,672
Net income...................... 74,982 47,253 30,464
Stock dividend.................. (13,725) (74,610) -
Retirement of Treasury Stock.... - (249) -
--------- -------- ---------
Ending balance..................... $ 205,787 $144,530 $ 172,136
========= ======== =========
Total Shareholders' Equity............. $ 509,486 $366,965 $ 222,815
========= ======== =========
</TABLE>
See notes to consolidated financial statements.
-30-
<PAGE> 32
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Operating activities:
Net income..................................................... $ 74,982 $ 47,253 $ 30,464
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in future policy benefits, unpaid claims and claim
expenses, reinsurance receivables and policyholder accounts 10,493 28,614 3,744
Amortization, principally the cost of business acquired
and investments........................................... 14,540 26,978 19,099
Deferred costs of business acquired......................... (32,727) (28,718) (19,624)
Net realized (gains) losses on investments.................. (14,568) 2,651 (704)
Net change in trading account securities.................... (21,793) (6,995) (32,285)
Other....................................................... 21,624 28,042 25,593
---------- ---------- ----------
Net cash provided by operating activities................. 52,551 97,825 26,287
---------- ---------- ----------
Investing activities:
Securities available for sale:
Purchases of investments and loans made..................... (1,662,213) (1,445,664) (500,866)
Sales of investments and receipts from repayment of loans... 1,429,752 1,475,106 770,963
Maturities of investments................................... 35,429 35,722 44,806
Securities held to maturity:
Purchases of investments.................................... - - (10,327)
Maturities of investments................................... - - 15,165
Cash acquired in SIG Merger, net of consideration paid......... - 37,313 -
Change in deposit in separate account.......................... (1,580) (1,506) 1,077
---------- ---------- ----------
Net cash (used) provided by investing activities.......... (198,612) 100,971 320,818
---------- ---------- ----------
Financing activities:
Deposits to policyholder accounts.............................. 57,931 59,460 13,580
Withdrawals from policyholder accounts......................... (78,132) (78,435) (172,876)
Proceeds from issuance of common stock
and exercise of stock options............................... 9,045 530 1,254
Net proceeds from issuance of Capital Securities of Delphi
Funding L.L.C............................................... 98,750 - -
Borrowings under Credit Agreement.............................. 20,000 64,000 -
Principal payments under Credit Agreement...................... (72,000) (14,000) (25,000)
Change in amounts due to brokers and other
short-term financing........................................ - (5,000) (10,000)
Change in liability under reverse repurchase agreements........ 71,336 (152,325) (138,821)
---------- ---------- ----------
Net cash provided (used) by financing activities.......... 106,930 (125,770) (331,863)
---------- ---------- ----------
(Decrease) increase in cash and cash equivalents.................. (39,131) 73,026 15,242
Cash and cash equivalents at beginning of year.................... 89,711 16,685 1,443
---------- ---------- ----------
Cash and cash equivalents at end of year....................... $ 50,580 $ 89,711 $ 16,685
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
-31-
<PAGE> 33
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include the
accounts of Delphi Financial Group, Inc. ("DFG") and all of its wholly-owned
subsidiaries, including, among others, Reliance Standard Life Insurance Company
("RSLIC"), Safety National Casualty Corporation ("SNCC"), First Reliance
Standard Life Insurance Company ("FRSLIC") and Reliance Standard Life Insurance
Company of Texas ("RSLIC-Texas"). DFG and its subsidiaries are herein
collectively referred to as the "Company." All significant intercompany accounts
and transactions have been eliminated. Certain reclassifications have been made
in the 1996 and 1995 consolidated financial statements to conform with the 1997
presentation. As of December 31, 1997, Mr. Robert Rosenkranz, Chairman of the
Board, President and Chief Executive Officer of DFG, by means of beneficial
ownership of the corporate general partner of Rosenkranz & Company, an
irrevocable proxy and direct or beneficial ownership, had the power to vote all
of the outstanding shares of Class B Common Stock, which represents 49.9% of the
voting power of the Company's common stock.
Nature of Operations. The Company is an insurance holding company engaged
through its subsidiaries in offering a diverse portfolio of group employee
benefit products including life, disability, excess workers' compensation and
personal accident insurance. The Company also offers asset accumulation
products, primarily annuities, to individuals and groups. The Company offers its
insurance products in all fifty states and the District of Columbia. The
Company's two product categories are group employee benefit products and asset
accumulation products, which represented approximately 99% and 1%, respectively,
of total insurance premiums and policyholder fees of $360.9 million for the year
ended December 31, 1997 and 48% and 44%, respectively, of the Company's reserves
and policyholder account balances of $1,657.0 million.
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.
Investments. Securities available for sale are carried at fair value with
changes in unrealized appreciation and depreciation charged directly to
shareholders' equity. For the years ended December 31, 1997, 1996 and 1995,
respectively, the change in net unrealized appreciation (depreciation) related
to available for sale securities was $58.5 million, $16.9 million and $23.0
million, net of deferred income tax expense of $31.5 million, $9.1 million and
$12.4 million and a decrease (increase) in cost of business acquired of $6.5
million, $(1.6) million and $21.4 million.
As of June 30, 1995, certain fixed maturity securities classified as held to
maturity, and therefore carried at amortized cost, were transferred to the
available for sale category. The transferred securities had an amortized cost of
$450.3 million and a fair value of $422.7 million; accordingly, shareholders'
equity was reduced by net unrealized depreciation of $15.3 million, net of a
deferred tax benefit of $8.3 million and an increase in cost of business
acquired of $4.0 million, related to the transferred securities. This transfer
was made in anticipation of future reductions of mortgage-backed securities in
response to concerns of rating agencies and insurance regulators regarding
mortgage-backed securities based upon unfavorable publicity about this category
of securities and, in particular, their higher risk classes. Although the
Company's mortgage-backed securities portfolio emphasized the more predictable
payment classes, the Company reduced its mortgage-backed securities holdings as
a result of such concerns.
Other investments consist primarily of trading account securities, balances with
independent investment managers and equity securities. Trading account
securities include bonds, common stocks and preferred stocks and are carried at
fair value with any changes in fair value included in net investment income.
Interest income, dividend income and realized gains and losses from trading
account securities are also included in net investment income. Balances with
independent investment managers principally represent investments in limited
partnerships and are reflected on the equity method, with earnings included in
net investment income. Equity securities are stated at fair value, with
unrealized appreciation or depreciation charged to shareholders' equity.
Net realized investment gains and losses, determined under the specific
identification method, are included in income. Declines in fair value of
investments which are considered to be other than temporary are reported as
realized losses.
-32-
<PAGE> 34
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Cost of Business Acquired. Costs relating to the acquisition of new business,
such as commissions and policy issue costs, are deferred when incurred. For
certain asset accumulation products, these costs are amortized in relation to
the incidence of expected gross profits over the life of the policies and
products. Deferred acquisition costs for life, accident and health and excess
workers' compensation insurance policies are amortized over the premium-paying
period or the expected life of the related policies. The present value of
estimated future profits, which was recorded in connection with the acquisition
of RSLIC and FRSLIC in 1987, is amortized in relation to premium income on life
and health lines of business and gross profits on annuity business. The
amortization of cost of business acquired was accelerated by $4.8 million before
taxes in 1996, primarily due to better than anticipated investment results. The
effect of the accelerated amortization was to decrease net income by $3.1
million, or $0.18 per share ($0.16 per share assuming dilution), for the year
ended December 31, 1996.
Receivables from Reinsurers. Receivables from reinsurers for future policy
benefits, unpaid claims and claim expenses and policyholder account balances are
estimated in a manner consistent with the related liabilities associated with
the reinsured policies.
Separate Account. The separate account assets and liabilities represent funds
invested in a separately administered variable life insurance product for which
the policyholder, rather than the Company, bears the investment risk. The excess
of separate account assets over the related liabilities represents the Company's
deposit in the separate account which is maintained to support the operation of
the separate account program. The Company receives a proportionate share of the
income or loss earned by the assets of the separate account, which it generally
reinvests in the separate account.
Future Policy Benefits. The liabilities for future policy benefits for
traditional nonparticipating business, excluding annuity business, have been
computed using a net level method. Mortality, withdrawals and other assumptions
are based either on the Company's past experience or various actuarial tables,
modified as necessary for possible variations. Changes in these assumptions
could result in changes in these liabilities.
Unpaid Claims and Claim Expenses. The liability for unpaid claims and claim
expenses includes amounts determined on an individual basis for reported losses
and estimates of incurred but not reported losses developed on the basis of past
experience. The methods of making these estimates and establishing the resulting
reserves are continually reviewed and updated, and any resulting adjustments are
reflected in earnings currently. Reserves with a carrying value of $479.1
million have been discounted at rates ranging from 3.7% to 7.0%.
Policyholder Account Balances. Policyholder account balances are comprised of
the Company's reserves for interest-sensitive insurance products, including
annuities. Reserves for annuity products are equal to the policyholder's
accumulated value at any point in time.
Income Taxes. RSLIC-Texas and RSLIC are taxed as life insurance companies and
file a consolidated federal tax return. FRSLIC does not qualify as a life
insurance company for federal income tax purposes and files a separate federal
tax return. DFG, SNCC and the non-insurance subsidiaries of the Company file as
a separate subgroup. The Company computes a balance sheet amount for deferred
income taxes, which is included in other assets or other liabilities, at the
rates expected to be in effect when the underlying differences will be reported
in the Company's federal income tax returns.
Insurance Premiums and Policyholder Fees. The Company's group insurance products
consist primarily of short-duration contracts, and, accordingly, premiums for
these products are reported as earned over the contract period. The liabilities
for unearned premiums, included in other liabilities and policyholder funds,
represent the portion of the premiums written which applies to the unexpired
terms of the policies in force. Revenues from certain asset accumulation
products consist of policy charges for the cost of insurance, policy
administration and surrender fees. Deposits for asset accumulation products are
not recorded as premiums; instead the account balance is recorded as a
liability, since these products generally do not involve mortality or morbidity
risk.
-33-
<PAGE> 35
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Statements of Cash Flows. For purposes of the Statements of Cash Flows, the
Company defines cash equivalents as highly liquid debt instruments purchased
with maturities of three months or less. In 1995, the Company received 126,568
shares (not adjusted for stock dividends) of the Company's Class A Common Stock
with an aggregate market value of $2.3 million in exchange for liquidating its
entire limited partnership interest in RSL Partners, L.P., a limited partnership
whose primary asset is a limited partnership interest in Rosenkranz & Company.
This treasury stock was retired in 1996.
Recently Adopted Accounting Standards. In June 1997, the Financial Accounting
Standards Board issued Statement of Accounting Standard ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
is effective for financial statements for fiscal years beginning after December
15, 1997, and therefore, the Company will adopt the new requirements
retroactively in 1998. Management has not completed its review of SFAS No. 131
and, accordingly, has not yet determined the effect of adopting this accounting
standard.
NOTE B - SIG MERGER
On March 5, 1996, SIG Holdings, Inc. ("SIG") was merged into the Company (the
"SIG Merger") for consideration of approximately $131.9 million consisting of
$54.5 million of cash, net of approximately $1.0 million payable upon the
exercise of certain SIG stock options, which was funded from additional
borrowings under the Credit Agreement, and approximately 5.3 million shares of
the Company's Class A Common Stock, including shares of Class A Common Stock
reserved for issuance upon the exercise of stock options of SIG assumed by the
Company in connection with the merger (the "SIG Options"), plus additional
contingent consideration of up to $20.0 million. In connection with the merger,
the Company also assumed $45.0 million of SIG's corporate debt. The contingent
consideration will be payable in shares of the Company's Class A Common Stock
or, at the option of the Company, in cash. No contingent consideration is due
unless SIG's cumulative net income exceeds $41.8 million for the two years
ending December 31, 1997, $62.6 million for the three years ending December 31,
1998, or $83.5 million for the four years ending December 31, 1999, and the
maximum amount is triggered at cumulative net income levels of $75.3 million for
the three-year period or $104.4 million for the four-year period. Because SIG's
cumulative net income exceeded the income goal for the two years ended December
31, 1997, the Company accrued $10.0 million of the contingent consideration and
recorded $10.0 million of additional goodwill in 1997. As of March 5, 1996, SIG
had total assets of $572.5 million, and shareholders' equity was $96.8 million.
The SIG Merger was accounted for using the purchase accounting method with the
results of SIG included in the Company's results from the date of the SIG
Merger. Goodwill recorded in connection with the SIG Merger is being amortized
on a straight-line basis over 40 years.
The unaudited pro forma operating results, which assume the SIG Merger had
occurred at the beginning of each period, are as follows: total revenue of
$505.6 million and $487.2 million, which includes realized investment (losses)
gains of $(2.7) million, or $(0.09) per share after taxes (basic and assuming
dilution), and $3.3 million, or $0.11 per share after taxes (basic and assuming
dilution), income from continuing operations of $56.3 million and $50.7 million
and earnings per share from continuing operations of $2.85 and $2.58 ($2.81 and
$2.54 per share assuming dilution) for the years ended December 31, 1996 and
1995, respectively. Unaudited pro forma net income, after losses from
discontinued operations of $6.6 million, or $0.33 per share (basic and assuming
dilution), and $2.3 million, or $0.11 per share (basic and assuming dilution),
would be $49.7 million, or $2.52 per share ($2.48 per share assuming dilution),
and $48.4 million, or $2.47 per share ($2.43 per share assuming dilution), for
the years ended December 31, 1996 and 1995, respectively. In preparing the
unaudited pro forma data, adjustments have been made to reflect the purchase
accounting adjustments and interest expense on the additional borrowings under
the Credit Agreement that would have occurred. The pro forma weighted average
numbers of shares outstanding of 19.7 million and 19.6 million (20.0 million and
19.9 million, assuming dilution) for the years ended December 31, 1996 and 1995,
respectively, used in calculating the unaudited pro forma per share data assume
that all of the outstanding SIG Options were exercised at the beginning of each
period. The unaudited pro forma information does not purport to be indicative of
the operating results that actually would have been achieved had the SIG Merger
been consummated as of the respective dates indicated and should not be
construed as representative of future operating results.
-34-
<PAGE> 36
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
NOTE C - INVESTMENTS IN SECURITIES
The amortized cost and fair value of investments in fixed maturity securities
are as follows:
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ---------- ---------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities........................ $ 818,835 $ 18,176 $ (10,695) $ 826,316
Corporate securities.............................. 147,414 4,076 (1,819) 149,671
U.S. Treasury and other U.S. Government
guaranteed securities.......................... 715,914 32,867 (862) 747,919
Obligations of U.S. states, municipalities and
political subdivisions......................... 287,889 12,815 (1,724) 298,980
Securities held under reverse repurchase agreements 126,968 9,279 - 136,247
Other fixed maturity securities................... 4,835 1,101 - 5,936
------------ ---------- ---------- -----------
Total fixed maturity securities................ $ 2,101,855 $ 78,314 $ (15,100) $ 2,165,069
============ ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ---------- ---------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities........................ $ 819,353 $ 2,419 $ (46,805) $ 774,967
Corporate securities.............................. 127,154 4,749 (2,865) 129,038
U.S. Treasury and other U.S. Government
guaranteed securities.......................... 678,541 7,060 (2,971) 682,630
Obligations of U.S. states, municipalities and
political subdivisions......................... 222,867 3,487 (8,262) 218,092
Securities held under reverse repurchase agreements 57,183 - (2,666) 54,517
Other fixed maturity securities................... 31,151 1,196 (79) 32,268
------------ ---------- ---------- -----------
Total fixed maturity securities................ $ 1,936,249 $ 18,911 $ (63,648) $ 1,891,512
============ ========== ========== ===========
</TABLE>
The amortized cost and fair value of fixed maturity securities at December 31,
1997, by contractual maturity are shown below. Expected maturities will differ
from contractual maturities because issuers may have the right to call or prepay
obligations, with or without prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- -----------
(dollars in thousands)
<S> <C> <C>
Available for sale:
Mortgage-backed securities $ 945,803 $ 962,563
Other securities:
Less than one year 81,494 81,847
Greater than 1, up to 5 years 310,396 313,247
Greater than 5, up to 10 years 155,772 160,677
Greater than 10 years 608,390 646,735
----------- -----------
Total $ 2,101,855 $ 2,165,069
=========== ===========
</TABLE>
-35-
<PAGE> 37
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
NOTE C - INVESTMENTS IN SECURITIES - (CONTINUED)
Net investment income was attributable to the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996 1995
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Gross investment income:
Fixed maturity securities...................................... $ 120,628 $ 116,170 $ 91,277
Other.......................................................... 53,956 55,018 37,404
---------- ---------- ----------
174,584 171,188 128,681
Less: Investment expenses................................... 14,390 16,438 11,569
---------- ---------- ----------
$ 160,194 $ 154,750 $ 117,112
========== ========== ==========
</TABLE>
Net realized investment gains (losses) arose from the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996 1995
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Fixed maturity securities......................................... $ 1,911 $ (5,947) $ (401)
Other investments................................................. 12,657 3,296 1,105
---------- ---------- ----------
$ 14,568 $ (2,651) $ 704
========== ========== ==========
</TABLE>
Proceeds from sales of investments in fixed maturity securities during 1997,
1996 and 1995 were $1,199.6 million, $1,114.9 million and $338.8 million,
respectively. Gross gains of $34.3 million, $17.1 million and $13.8 million and
gross losses of $21.1 million, $21.7 million and $13.7 million, respectively,
were realized on those sales during the years ended December 31, 1997, 1996 and
1995, respectively. Sales of fixed maturity securities and gross gains and
losses from such sales do not include sales of securities classified as trading
account securities. During 1997, the Company reevaluated the amortization period
for deferred futures losses associated with its mortgage-backed securities
portfolio due to a decline in market interest rates to record low levels and
accelerated the amortization by $9.9 million.
The change in net unrealized appreciation (depreciation) in fair value was as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996 1995
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Fixed maturity securities...................................... $ 107,951 $ 13,684 $ 126,482
Equity securities.............................................. (10,717) 10,756 2,307
Trading account securities..................................... (1,436) 5,365 10,779
</TABLE>
Bonds and short-term investments with amortized costs of $25.2 million at
December 31, 1997 and 1996, respectively, are on deposit with various states'
insurance departments in compliance with statutory regulations. Additionally,
certain assets of the Company were restricted under the terms of annuity
reinsurance agreements. These agreements provide for the distribution of assets
to the reinsured companies covered under the agreements prior to any general
distribution to policyholders in the event of the Company's insolvency or
bankruptcy. The amount of assets restricted for this purpose was $129.5 million
and $153.4 million at December 31, 1997 and 1996, respectively.
Other investments at December 31, 1997 and 1996 principally include trading
account securities of $134.5 million and $115.4 million, balances with
independent investment managers of $47.4 million and $110.6 million and equity
securities of $62.3 million and $74.0 million, respectively. Included in other
assets are amounts receivable from brokers for investment sales totaling $185.6
million and $48.1 million at December 31, 1997 and 1996, respectively.
-36-
<PAGE> 38
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
NOTE C - INVESTMENTS IN SECURITIES - (CONTINUED)
Summarized aggregate unaudited financial information for the entities in which
the balances with independent investment managers have been invested is shown
below:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
------------ -------------
(dollars in thousands)
<S> <C> <C>
Assets....................................................................... $ 13,006,724 $ 13,859,317
============ =============
Liabilities ................................................................. $ 6,985,778 $ 8,643,569
Partners' capital............................................................ 6,020,946 5,215,748
------------ -------------
Total liabilities and partners' capital...................................... $ 13,006,724 $ 13,859,317
============ =============
Net income................................................................... $ 1,929,201 $ 1,239,305
============ =============
</TABLE>
NOTE D - CONCENTRATIONS OF CREDIT RISK
As of December 31, 1997 and 1996, approximately 39% and 36%, respectively, of
the Company's total invested assets were comprised of mortgage-backed
securities. The Company's mortgage-backed securities are diversified with
respect to size and geographic distribution of the underlying mortgage loans.
The Company also invests in certain non-investment grade securities as
determined by nationally recognized statistical rating agencies. Non-investment
grade securities included in fixed maturity securities had fair values of $84.2
million and $104.2 million at December 31, 1997 and 1996, respectively. Trading
account securities include additional non-investment grade securities with fair
values of $59.5 million and $52.9 million at December 31, 1997 and 1996,
respectively. In the aggregate, non-investment grade securities constituted 6%
and 7% of total invested assets at December 31, 1997 and 1996, respectively.
The Company's only significant non-investment assets subject to credit risk are
its reinsurance receivables. To reduce its exposure to significant losses from
reinsurer insolvency, the Company monitors the financial condition of its
reinsurers, including, among other things, the companies' financial ratings, and
in certain cases receives collateral security from the reinsurer. Also, certain
of the Company's reinsurance agreements require the reinsurer to set up trust
arrangements for the Company's benefit in the event of certain ratings
downgrades. The receivable from the Company's largest reinsurer at December 31,
1997 was $136.0 million, or 58% of total reinsurance receivables. This reinsurer
is rated "A+" (Superior) by A.M. Best Company.
At December 31, 1997, the fair value of the Company's investment in a
mortgage-backed security backed by a single mortgage pool issued by Prudential
Home Mortgage Securities Corp. totaled $42.8 million. The Company had no other
investments in any one issuer, excluding U.S. Government obligations, whose
value represents 10% or more of shareholders' equity at December 31, 1997.
-37-
<PAGE> 39
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
NOTE E - ACCIDENT AND HEALTH AND CASUALTY FUTURE POLICY BENEFITS AND UNPAID
CLAIMS AND CLAIM EXPENSES
The following table provides a reconciliation of the beginning and ending
accident and health and casualty future policy benefits and unpaid claims and
claim expenses:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1996 1995
---------- ---------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year, net of reinsurance.................. $ 630,485 $ 245,323 $ 219,405
SNCC reserves at merger, net of reinsurance....................... - 356,370 -
Add:..............................................................
Provisions for claims and claim expenses incurred in the
current year, net of reinsurance............................ 140,393 133,111 98,804
Decrease in estimated claims and claim expenses incurred
in prior years, net of reinsurance.......................... (9,102) (3,461) (1,441)
---------- ---------- ---------
Incurred claims and claim expenses during the current
year, net of reinsurance.................................... 131,291 129,650 97,363
---------- ---------- ---------
Deduct claims and claim expenses paid, net of reinsurance,
occurring during:
Current year................................................ 24,454 23,870 20,586
Prior year.................................................. 87,303 76,988 50,859
---------- ---------- ---------
111,757 100,858 71,445
---------- ---------- ---------
Balance at end of year, net of reinsurance........................ 650,019 630,485 245,323
Reinsurance receivables at end of year............................ 84,446 66,172 41,840
---------- ---------- ---------
Balance at end of year, gross of reinsurance...................... $ 734,465 $ 696,657 $ 287,163
========== ========== =========
</TABLE>
NOTE F - CORPORATE DEBT
The Company has outstanding borrowings pursuant to a Credit Agreement with Bank
of America National Trust and Savings Association and a group of lenders named
therein (the "Credit Agreement") which permits it to borrow up to $200.0 million
under a revolving loan arrangement. The amount of the outstanding borrowings was
$48.0 million and $100.0 million at December 31, 1997 and 1996, respectively. Of
the unused portion of the facility at December 31, 1997, $98.0 million is
restricted for use in, among other things, acquisitions or the redemption of the
SIG Senior Notes (as defined herein). The borrowings under the Credit Agreement
accrue interest at a floating rate which is indexed to various published
interest indices. In addition to interest on the outstanding borrowings, a
non-use fee is charged on the remaining unused commitment. The maximum amount of
borrowings available under the Credit Agreement will be reduced to the following
amounts in October of each year: 1999 - $180.0 million, 2000 - $150.0 million,
2001 - $110.0 million and 2002 - $60.0 million. The final maturity of the Credit
Agreement is on April 1, 2003. The debt is secured by a security interest in all
of the common stock and the surplus debenture of RSLIC-Texas, the issued and
outstanding common stock of substantially all of the Company's non-insurance
subsidiaries and, on a subordinated basis, the common stock of SNCC. The debt is
also subject to certain restrictions and financial covenants considered ordinary
for this type of borrowing. They include, among others, the maintenance of
certain financial ratios, minimum statutory surplus requirements for RSLIC and
SNCC, minimum consolidated equity requirements for the Company and certain
investment and dividend limitations. As of December 31, 1997, the Company was in
compliance in all material respects with all restrictions and covenants in the
Credit Agreement.
In 1993, the Company issued $85.0 million of 8.0% Senior Notes due 2003 (the
"Senior Notes"). The Senior Notes are not redeemable prior to maturity or
entitled to any sinking fund. Interest on the Senior Notes is payable
semiannually on April 1 and October 1 of each year. In certain instances,
holders of the Senior Notes have the right to require the Company to repurchase
any or all of the Senior Notes owned by such holder at 101% of the principal
amount thereof, plus accrued and unpaid interest. The Senior Notes are senior
unsecured obligations of the Company and, as such, are effectively subordinated
to all existing and future obligations of the Company's subsidiaries, including
the insurance subsidiaries' obligations to policyholders. The terms of the
indenture pursuant to which the Senior Notes were issued contain certain
covenants and
-38-
<PAGE> 40
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
NOTE F - CORPORATE DEBT - (CONTINUED)
restrictions which set forth, among other things, limitations on incurrence of
indebtedness by the Company and its subsidiaries, limitations on payments of
dividends on and repurchases of stock of the Company and limitations on
transactions with stockholders and affiliates. As of December 31, 1997, the
Company was in compliance in all material respects with the terms of the
indenture.
In conjunction with the SIG Merger, the Company assumed $45.0 million of SIG's
8.5% senior secured notes (the "SIG Senior Notes"). The SIG Senior Notes mature
in $9.0 million annual installments beginning in May 1999 and are collateralized
by all of the common stock of SNCC. The terms of the note agreement pursuant to
which the SIG Senior Notes were issued contain certain covenants and
restrictions which set forth, among others, minimum statutory requirements for
SNCC, minimum consolidated equity requirements for SIG, as well as the
maintenance of certain financial ratios. As of December 31, 1997, SIG was in
compliance in all material respects with the terms of the note agreement.
Interest paid during the years ended December 31, 1997, 1996 and 1995 totaled
$14.5 million, $17.2 million and $12.8 million, respectively.
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
The Company maintains an investment program in which securities were purchased
using advances from the Federal Home Loan Bank of Pittsburgh ("FHLB"). As of
December 31, 1997 and 1996, advances from the FHLB, including accrued interest,
totaled $201.1 million. Interest expense on the advances is included as an
offset to investment income on the financed securities. For the years ended
December 31, 1997 and 1996, the average interest rate on the outstanding
advances was 6.2%. The advances had a weighted average term of 2.8 years at
December 31, 1997 and were collateralized by mortgage-backed securities with a
fair value of $246.6 million.
NOTE H - INCOME TAXES
Federal income tax expense is reconciled to the amount computed by applying the
statutory federal income tax rate to income from continuing operations before
federal income taxes as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996 1995
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Federal income tax at statutory rate .......................... $ 41,252 $ 28,473 $ 17,819
Dividends received deduction and tax-exempt income............. (3,026) (2,747) (1,274)
Other.......................................................... - 1,770 1,625
---------- ---------- ----------
$ 38,226 $ 27,496 $ 18,170
========== ========== ==========
</TABLE>
-39-
<PAGE> 41
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
NOTE H - INCOME TAXES - (CONTINUED)
Deferred tax assets and liabilities are determined based on the difference
between the book basis and tax basis of assets and liabilities using tax rates
in effect for the year in which the differences are expected to reverse. The
components of the net deferred tax liability are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
---------- ----------
(dollars in thousands)
<S> <C> <C>
Cost of business acquired......................................................... $ 23,895 $ 25,152
Investments....................................................................... 53,873 30,882
Future policy benefits and unpaid claims and claim expenses....................... 13,867 8,846
Other............................................................................. 702 951
---------- ----------
Gross deferred tax liabilities................................................ 92,337 65,831
---------- ----------
Future policy benefits and unpaid claims and claim expenses....................... (6,674) (8,246)
Investments....................................................................... (9,455) (13,169)
Other liabilities................................................................. (17,653) (18,423)
Other............................................................................. (1,651) (1,775)
---------- ----------
Gross deferred tax assets..................................................... (35,433) (41,613)
---------- ----------
Net deferred tax liability.................................................... $ 56,904 $ 24,218
========== ==========
Deferred tax expense ............................................................. $ 7,759 $ 3,537
========== ==========
</TABLE>
Current tax expense (benefit), current tax liability (recoverable) and income
taxes paid are as follows:
<TABLE>
<CAPTION>
As of or for the Year Ended
December 31,
-----------------------------------------
1997 1996 1995
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Current tax expense (benefit) .................................... $ 27,960 $ 23,959 $ (9,123)
Current tax liability (recoverable) .............................. 9,097 272 (16,419)
Income taxes paid (net of refunds of $0, $12,465 and $783, respectively) 18,856 4,887 7,589
</TABLE>
All of the Company's current and deferred income tax expense is due to federal
income taxes as opposed to state income taxes.
NOTE I - PRESENT VALUE OF FUTURE PROFITS
In connection with the acquisition of RSLIC and FRSLIC in 1987, the Company
recorded the present value of the estimated future profits of the business
acquired ("PVFP"). This PVFP, which is included in cost of business acquired on
the consolidated balance sheet, relates to all of the business acquired,
including group life and disability insurance, annuities and individual life
insurance. The PVFP related to the annuities is subject to accrual of interest
on the unamortized balance at the credited rate and amortization is a constant
percentage of the present value of estimated future gross profits on the
business. Changes in the estimates of future gross profits are accounted for
prospectively as adjustments to amortization and are included as amortization in
the table below. Amortization of PVFP for group life and disability insurance is
at the discount rate established at the time of the acquisition of RSLIC.
-40-
<PAGE> 42
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
NOTE I - PRESENT VALUE OF FUTURE PROFITS - (CONTINUED)
A summary of the activity related to the PVFP asset, which is included in the
cost of business acquired balance, is shown below:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1997 1996 1995
---------- ---------- -----------
(dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year...................................... $ 23,653 $ 26,898 $ 29,404
Interest accrued.............................................. 506 639 522
Amortization.................................................. (2,547) (3,884) (3,028)
---------- ---------- -----------
Balance at end of year............................................ $ 21,612 $ 23,653 $ 26,898
========== ========== ==========
</TABLE>
An estimate of the percentage of the December 31, 1997 PVFP balance to be
amortized over each of the next five years is as follows: 1998 - 13%, 1999 -
11%, 2000 - 11%, 2001 - 11% and 2002 - 9%.
NOTE J - FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments are shown below using a
summarized version of the Company's assets and liabilities at December 31, 1997
and 1996. Because fair values for all balance sheet items are not required to be
disclosed pursuant to SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," the aggregate fair value amounts presented below do not
necessarily represent the underlying value of the Company.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1997 1996
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------ ----------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Assets:
Fixed maturity securities, available for sale. $ 2,165,069 $ 2,165,069 $ 1,891,512 $ 1,891,512
Cash and cash equivalents..................... 50,580 50,580 89,711 89,711
Other investments............................. 264,753 264,753 313,784 313,784
Assets held in separate account............... 72,649 72,649 79,619 79,619
Liabilities:
Policyholder account balances:
Annuities ................................. 640,395 638,952 665,245 658,840
GICs....................................... 1,046 1,046 1,046 1,055
Corporate debt................................ 178,769 183,340 231,004 231,588
Advances from Federal Home Loan Bank.......... 201,057 205,954 201,055 205,754
Securities sold under agreements to repurchase 121,506 121,506 50,170 50,170
Liabilities related to separate account....... 63,347 63,347 71,898 71,898
</TABLE>
The fair values for fixed maturity securities have been obtained from
broker-dealers and from nationally recognized statistical rating organizations.
The carrying values for all other invested assets approximate fair values based
on the nature of the investments. The carrying values of separate account assets
and liabilities are equal to fair value.
Policyholder account balances are net of reinsurance receivables and the
carrying values have been decreased for related acquisition costs of $26.7
million and $33.2 million at December 31, 1997 and 1996, respectively. Fair
values for annuity liabilities were determined by deducting an estimate of the
future profits to be realized from the business, discounted at a current
interest rate, from the adjusted carrying values. Fair value for the GIC
liabilities represents the present value of future cash flows discounted at
current interest crediting rates.
-41-
<PAGE> 43
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
NOTE J - FAIR VALUES OF FINANCIAL INSTRUMENTS - (CONTINUED)
The Company believes the fair value of its variable rate long-term debt is equal
to its carrying value. The Company pays a variable rate of interest on the debt
which reflects changed market conditions since the time the terms were
negotiated. The fair values of the Senior Notes and the SIG Senior Notes are
based on the expected cash flows discounted to net present value. The fair
values for advances from the FHLB were calculated using discounted cash flow
analyses based on the interest rates for the advances at the balance sheet date.
The fair value of the liability for securities sold under agreements to
repurchase approximates carrying value as the liability is very short-term in
nature, with amounts normally due in one month or less.
NOTE K - CAPITAL SECURITIES OF DELPHI FUNDING L.L.C.
In March 1997, Delphi Funding L.L.C. ("Delphi Funding"), a subsidiary of the
Company, issued $100.0 million liquidation amount of 9.31% Capital Securities,
Series A (the "Capital Securities") in a public offering. In connection with the
issuance of the Capital Securities and the related purchase by the Company of
all of the common limited liability company interests in Delphi Funding (the
"Common Securities" and, collectively with the Capital Securities, the "L.L.C.
Securities"), the Company issued to Delphi Funding $103.1 million principal
amount of 9.31% junior subordinated deferrable interest debentures, Series A,
due 2027 (the "Junior Debentures"). Interest on the Junior Debentures is payable
semiannually, but may, subject to certain exceptions, be deferred at any time or
from time to time for a period not exceeding five years with respect to each
deferral period, in which event distributions on the Capital Securities will
also be deferred and the Company will not be permitted to pay cash dividends or
make payments on any junior indebtedness. No interest payments on the Junior
Debentures have been deferred since their issuance. The distribution and other
payment dates on the Capital Securities correspond to the interest and other
payment dates on the Junior Debentures. The Junior Debentures are not redeemable
prior to March 25, 2007, but the Company has the right to dissolve Delphi
Funding at any time and distribute the Junior Debentures to the holders of the
Capital Securities. Pursuant to the related transaction documents, the Company
has, on a subordinated basis, guaranteed all payments due on the Capital
Securities.
NOTE L - SHAREHOLDERS' EQUITY AND RESTRICTIONS
The holders of the Company's Class A Common Stock are entitled to one vote per
share, and the holders of the Company's Class B Common Stock are entitled to the
number of votes per share equal to the lesser of (1) the number of votes such
that the aggregate of all outstanding Class B Common Stock will be entitled to
cast 49.9% of all votes represented by the aggregate of all Class A Common Stock
and Class B Common Stock or (2) ten votes per share. The Company's Board of
Directors declared a 20% stock dividend on August 30, 1996, which was
distributed to stockholders on September 30, 1996, and a 2% stock dividend on
May 13, 1997, which was distributed to stockholders on June 10, 1997. Results
per share and applicable share amounts have been restated to reflect the stock
dividends.
The Company's life insurance subsidiaries had consolidated statutory capital and
surplus of $192.5 million and $180.3 million at December 31, 1997 and 1996,
respectively. Consolidated statutory net income for the Company's life insurance
subsidiaries, after interest expense of $4.9 million, $6.6 million and $8.4
million, respectively, on the surplus debenture payable to DFG, was $27.8
million, $19.9 million and $28.2 million for the years ended December 31, 1997,
1996 and 1995, respectively. The Company's casualty insurance subsidiary, which
was acquired as a result of the SIG Merger, had statutory capital and surplus of
$168.9 million and $139.8 million at December 31, 1997 and 1996, respectively,
and statutory net income of $34.8 million and $23.5 million for the years ended
December 31, 1997 and 1996, respectively. Payment of shareholder dividends is
regulated by insurance laws. Dividends are permitted based on, among other
things, the level of prior-year statutory surplus and net income. The Company's
insurance subsidiaries will be permitted to make dividend payments totaling
$47.0 million during 1998 without prior regulatory approval.
-42-
<PAGE> 44
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
NOTE M - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company's insurance subsidiaries are
defendants in litigation principally involving insurance company policy claims
and agent disputes, including compensatory and punitive damages. In the opinion
of management, the ultimate disposition of such pending litigation will not have
a material adverse effect upon the Company's financial condition, liquidity or
results of operations.
NOTE N - STOCK OPTIONS
The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock option plans because the alternative
fair value approach provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation," requires the use of option valuation models that were not
developed for use in valuing employee stock options. Accordingly, no
compensation expense has been recognized in the accompanying financial
statements for the Company's stock option plans because the exercise price of
the options granted equaled the market price of the underlying stock on the date
of grant.
The Company's employee stock option plan provides for the granting of options to
key employees to purchase shares of the Company's Class A Common Stock (the
"Employee Option Plan"). Under the terms of the Employee Option Plan, a total of
2,019,600 shares of Class A Common Stock have been reserved for issuance under
the plan. The exercise price for options granted under this plan is the fair
market value of the underlying stock as of the date of the grant and the maximum
term of an option is ten years. The stock options granted under the Employee
Option Plan expire at various dates between 2002 and 2007. As of December 31,
1997, 602,533 options are remaining to be granted under the Employee Option
Plan.
The Company also has a stock option plan for the outside directors of the
Company (the "Directors Option Plan"). Under the Directors Option Plan, a
maximum of 122,400 shares of Class A Common Stock will be issuable upon the
exercise of options. The exercise price for options granted under this plan is
the fair market value of the underlying stock as of the date of the grant and
the maximum term of the options is ten years. The stock options granted under
the Directors Option Plan expire at various dates between 2004 and 2007. As of
December 31, 1997, 75,738 options are remaining to be granted under the
Directors Option Plan.
In 1996, the Stock Option and Compensation Committee of the Company's Board of
Directors approved a long-term performance-based incentive plan for the
Company's chief executive officer (the "Performance Plan"), which provides for
the award of up to 293,760 shares or options for shares of the Company's Class B
Common Stock (73,440 restricted or deferred shares and options to purchase
220,320 shares) per year over a ten-year term contingent upon the Company
meeting specified annual performance goals. The restricted or deferred shares do
not vest until the earliest of the individual's retirement, disability or death
or a change of ownership of the Company. The exercise price of the options
awarded under the Performance Plan is the fair market value of the underlying
stock as of the date of the grant and the maximum term of the options is ten
years. The options become exercisable 30 days following the date of grant. For
each of the years ended December 31, 1997 and 1996, 73,440 deferred shares and
220,320 options were awarded under the Performance Plan. The Company recognized
$3.1 million and $2.1 million of compensation expense for the years ended
December 31, 1997 and 1996, respectively, related to the deferred shares.
-43-
<PAGE> 45
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
NOTE N - STOCK OPTIONS - (CONTINUED)
Activity with respect to the options granted under the above plans for the years
ended December 31, 1997, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1997 1996 1995
------------------- -------------------- ---------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Options outstanding - beginning of year... 952,196 $13.15 690,688 $ 6.13 750,236 $ 5.02
Options granted........................... 272,606 41.44 279,888 29.78 89,964 14.45
Options forfeited......................... - - - - (3,978) 14.50
Options exercised......................... (473,394) 3.10 (18,380) 2.21 (145,534) 5.37
--------- --------- ---------
Options outstanding - end of year......... 751,408 29.75 952,196 13.15 690,688 6.13
========= ========= =========
Exercisable options - end of year......... 353,826 24.65 561,771 4.66 526,251 3.62
</TABLE>
The weighted average grant-date fair value of options granted during 1997, 1996
and 1995 was $19.71, $14.88 and $5.07, respectively. As of December 31, 1997,
the weighted average remaining contractual life of options under the above
option plans by range of exercise price was as follows: 12,240 options
outstanding and exercisable with an exercise price of $7.46 have a remaining
contractual life of 4.4 years, 186,674 options outstanding, of which 106,983 are
exercisable, with exercise prices ranging from $13.68 to $14.71 (weighted
average exercise price of $14.09) have a weighted average contractual life of
7.0 years, 279,888 options outstanding, of which 232,233 are exercisable, with
exercise prices ranging from $23.49 to $30.52 (weighted average exercise price
of $29.78) have a weighted average contractual life of 9.0 years and 272,606
options, of which 2,370 are exercisable with exercise prices ranging from $37.99
to $43.75 (weighted average exercise price of $41.44) have a contractual life of
9.9 years.
In connection with the SIG Merger, the Company assumed 7,341,205 SIG Options.
Upon the exercise of the SIG Options, the holder is entitled to receive (i)
.1056 of a share of Class A Common Stock for each SIG Option; plus (ii) an
additional number of shares of Class A Common Stock equal to (a) $1.552
multiplied by the number of SIG Options being exercised increased from time to
time by an interest component (the 90-day U.S. Treasury Bill rate) from the time
of the SIG Merger to the exercise date, divided by (b) the average closing share
price for the Company's Class A Common Stock for the ten days prior to the
exercise date. Pursuant to the terms of the SIG Merger, the exercise price of
$0.016 per SIG Option remained the same. The SIG Options were granted annually
from 1992 to 1996 and each grant vests over five years beginning in the fourth
year after the grant date. All of the SIG Options expire on October 1, 2006. As
of December 31, 1997, the weighted average contractual life of the outstanding
SIG Options was 8.8 years.
Activity with respect to the SIG Options for 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
Year Ended Period March 5, 1996 to
December 31, 1997 December 31, 1996
------------------------- -----------------------
Number Equivalent Number Equivalent
of SIG Class A of SIG Class A
Options Shares Options Shares
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SIG Options outstanding - beginning of period.......... 5,802,671 943,113 7,341,205 1,550,726
Options exercised...................................... (677,206) 102,861 (1,464,481) 251,226
Options forfeited...................................... (23,982) - (74,053) -
---------- ----------
SIG options outstanding - end of year.................. 5,101,483 743,681 5,802,671 943,113
========== ==========
Exercisable options - end of year...................... 375,920 54,801 144,390 23,468
</TABLE>
-44-
<PAGE> 46
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
NOTE N - STOCK OPTIONS - (CONTINUED)
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 and has been determined as if the Company had accounted for its
stock options under the fair value method of that statement. The fair value for
these options was estimated at the date of grant using the Black-Scholes option
pricing model with the following assumptions for 1997 and 1996: risk-free
interest rates ranging from 5.2% to 6.5%, volatility factors of the expected
market price of the Company's common stock ranging from 25% to 26%, expected
lives of the options ranging from five to ten years and dividend yields of 0%.
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting period.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different than
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock options.
Had the provisions of SFAS No. 123 been adopted, the Company's pro forma
information for the years ended December 31, 1997, 1996 and 1995 would be as
follows: net income of $71.6 million, $44.7 million and $30.4 million and
earnings per share of $3.82, $2.54 and $2.12 ($3.62, $2.37 and $2.08 , assuming
dilution), respectively. This information may not be representative of the
effects on pro forma net income in future years.
NOTE O - COMPUTATION OF RESULTS PER SHARE
Prior period results per share and applicable share amounts have been restated
to reflect the adoption in 1997 of SFAS No. 128, "Earnings Per Share." The
following table sets forth the computation of basic and diluted results per
share:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1996 1995
---------- ---------- ----------
(dollars in thousands, except per share data)
<S> <C> <C> <C>
Numerator:
Income from continuing operations.................................. $ 74,982 $ 53,854 $ 32,742
Discontinued operations, net of income tax benefit:
Loss from operations........................................... - (765) (2,278)
Loss on disposal............................................... - (5,836) -
---------- ---------- ----------
Net income......................................................... $ 74,982 $ 47,253 $ 30,464
========== ========== ----------
Denominator:
Weighted average common shares outstanding ........................ 18,731 17,622 14,374
Effect of dilutive securities...................................... 1,009 1,231 292
---------- ---------- ----------
Weighted average common shares outstanding, assuming dilution...... 19,740 18,853 14,666
========== ========== ==========
Basic results per share of common stock:
Income from continuing operations.................................. $ 4.00 $ 3.06 $ 2.28
Discontinued operations, net of income tax benefit:
Loss from operations........................................... - (0.05) (0.16)
Loss on disposal............................................... - (0.33) -
---------- ---------- ----------
Net income......................................................... $ 4.00 $ 2.68 $ 2.12
========== ========== ----------
Diluted results per share of common stock:
Income from continuing operations.................................. $ 3.80 $ 2.86 $ 2.23
Discontinued operations, net of income tax benefit:
Loss from operations........................................... - (0.04) (0.15)
Loss on disposal............................................... - (0.31) -
---------- ---------- ----------
Net income......................................................... $ 3.80 $ 2.51 $ 2.08
========== ========== ==========
</TABLE>
-45-
<PAGE> 47
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
NOTE P - REINSURANCE
The Company assumes and cedes reinsurance on both a coinsurance and a risk
premium basis. The Company obtains reinsurance for amounts above certain
retention limits which vary with age, plan of insurance and underwriting
classification. Amounts of standard risks in excess of those limits are
reinsured. Indemnity reinsurance treaties do not provide absolute protection to
the Company since the ceding insurer remains responsible for policy claims to
the extent the reinsurer fails to pay such claims.
A summary of reinsurance activity follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996 1995
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Premium income assumed............................................ $ 67,469 $ 62,626 $ 49,850
Premium income ceded.............................................. 67,059 61,516 57,507
Benefits, claims, and interest credited ceded..................... 68,442 63,525 48,206
</TABLE>
NOTE Q - DISCONTINUED OPERATIONS
During 1997, the Company disposed of its long-term care insurance business,
which was discontinued in 1996. This business was purchased in December 1994 and
was expected to become a significant part of the Company's operations. The
Company exited this business due to its continued losses attributable to lower
than expected sales and profit levels and decided to concentrate its resources
on other opportunities such as product and distribution enhancements for the
Company's group employee benefit products. The loss on the disposal of this
business is primarily attributable to the write-off of deferred acquisition
costs and goodwill associated with the business and a provision of $1.4 million,
net of a tax benefit of $0.8 million, for operating losses during the phase-out
period. The proceeds from the disposal were not material and the actual results
for this business subsequent to its discontinuance did not materially differ
from the loss provided for. Operating losses from this business are presented
net of a tax benefit of $0.4 million and $1.2 million for the years ended
December 31, 1996 and 1995, respectively. Revenues from the long-term care
insurance business totaled $1.6 million and $1.1 million for the years ended
December 31, 1996 and 1995, respectively.
-46-
<PAGE> 48
SCHEDULE I
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Amount
Shown in
Amortized Fair Balance
Type of Investment Cost Value Sheet
- ------------------ ------------- ------------ -------------
<S> <C> <C> <C>
Fixed maturity securities available for sale:
U.S. Government backed mortgage-backed securities........ $ 484,257 $ 499,754 $ 499,754
Other mortgage-backed securities......................... 461,546 462,809 462,809
U.S. Treasury and other U.S. Government
guaranteed securities................................. 715,914 747,919 747,919
Obligations of U.S. states, municipalities and political
subdivisions......................................... 287,889 298,980 298,980
Corporate securities..................................... 147,414 149,671 149,671
Other fixed maturity securities.......................... 4,835 5,936 5,936
------------- ------------ -------------
Total fixed maturity securities....................... 2,101,855 2,165,069 2,165,069
Equity securities (primarily common stock).................. 62,288 62,307 62,307
Cash and cash equivalents................................... 50,580 50,580 50,580
Other investments. . ....................................... 196,550 202,446 202,446
------------- ------------ -------------
Total investments..................................... $ 2,411,273 $ 2,480,402 $ 2,480,402
============= ============ =============
</TABLE>
-47-
<PAGE> 49
SCHEDULE II
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
DELPHI FINANCIAL GROUP, INC. (PARENT COMPANY)
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS:
Fixed maturity securities, available for sale.................................. $ 145,638 $ 54,517
Cash and other invested assets (including cash and
cash equivalents of $801 and $1,035 at December 31,
1997 and 1996, respectively)................................................ 5,816 1,142
Investment in subsidiaries..................................................... 618,889 481,283
Surplus debenture due from subsidiary.......................................... 43,000 58,000
Amounts due from subsidiaries.................................................. 65,792 10,858
Other assets................................................................... 9,436 6,348
---------- ----------
Total assets................................................................ $ 888,571 $ 612,148
========== ==========
LIABILITIES:
Corporate debt................................................................. $ 132,690 $ 184,649
Junior subordinated debentures payable to Delphi Funding, L.L.C................ 103,093 -
Securities sold under agreements to repurchase................................. 121,506 50,170
Other liabilities.............................................................. 21,796 10,364
---------- ----------
379,085 245,183
---------- ----------
SHAREHOLDERS' EQUITY:
Class A Common Stock........................................................... 129 118
Class B Common Stock........................................................... 62 63
Additional paid-in capital..................................................... 262,963 240,203
Net unrealized appreciation (depreciation) on investments, net of deferred taxes 40,545 (17,949)
Retained earnings.............................................................. 205,787 144,530
---------- ----------
509,486 366,965
---------- ----------
Total liabilities and shareholders' equity.................................. $ 888,571 $ 612,148
========== ==========
</TABLE>
See notes to condensed financial statements.
-48-
<PAGE> 50
SCHEDULE II (CONTINUED)
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
DELPHI FINANCIAL GROUP, INC. (PARENT COMPANY)
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Equity in undistributed earnings of subsidiaries............... $ 129,287 $ 84,872 $ 52,999
Interest from subsidiaries..................................... 4,853 6,981 8,747
Dividends from subsidiaries.................................... 4,322 1,600 1,600
Other net investment income (loss)............................. 707 (2,365) (61)
Realized investment losses..................................... (5,357) - (572)
---------- ---------- ----------
133,812 91,088 62,713
---------- ---------- ----------
Expenses:
Operating expenses............................................. 4,245 5,661 1,978
Interest expense............................................... 18,866 14,232 13,328
---------- ---------- ----------
23,111 19,893 15,306
---------- ---------- ----------
Income before income tax expense......................... 110,701 71,195 47,407
Income tax expense................................................ 35,719 23,942 16,943
---------- ---------- ----------
Net income .............................................. $ 74,982 $ 47,253 $ 30,464
========== ========== ==========
</TABLE>
See notes to condensed financial statements.
-49-
<PAGE> 51
SCHEDULE II (CONTINUED)
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
DELPHI FINANCIAL GROUP, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Operating activities:
Net income..................................................... $ 74,982 $ 47,253 $ 30,464
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
Equity in undistributed earnings of subsidiaries............ (86,189) (56,143) (34,099)
Change in accrued investment income......................... 342 286 3,384
Change in other assets and other liabilities................ 4,341 4,119 (61)
Change in current and deferred income taxes................. (748) 8,025 5,818
Amortization, principally of investments and debt
issuance costs.......................................... (2,399) 1,341 749
Net realized losses on investments.......................... 5,357 - 572
Change in amounts due from/to subsidiaries.................. (54,934) (21,865) 10,338
---------- ---------- ----------
Net cash (used) provided by operating activities......... (59,248) (16,984) 17,165
---------- ---------- ----------
Investing activities:
Purchases of investments....................................... (187,411) (24,604) (123,068)
Sales of investments........................................... 100,194 24,343 218,800
Maturities of investments...................................... 4,100 200 665
Purchases of investments in subsidiaries....................... (3,093) (54,534) (4,600)
---------- ---------- ----------
Net cash (used) provided by investing activities............ (86,210) (54,595) 91,797
---------- ---------- ----------
Financing activities:
Proceeds from issuance of common stock and exercise of
stock options............................................... 9,045 530 1,254
Net proceeds from issuance of Junior Debentures................ 101,843 - -
Borrowings under Credit Agreement.............................. 20,000 64,000 -
Principal payments under Credit Agreement...................... (72,000) (14,000) (25,000)
Payments received on surplus debenture......................... 15,000 7,000 18,739
Change in borrowings under reverse repurchase agreements ...... 71,336 6,291 (96,636)
---------- ---------- ----------
Net cash provided (used) by financing activities............ 145,224 63,821 (101,643)
---------- ---------- ----------
(Decrease) increase in cash and cash equivalents.................. (234) (7,758) 7,319
Cash and cash equivalents at beginning of year.................... 1,035 8,793 1,474
---------- ---------- ----------
Cash and cash equivalents at end of year.................... $ 801 $ 1,035 $ 8,793
========== ========== ==========
</TABLE>
See notes to condensed financial statements.
-50-
<PAGE> 52
SCHEDULE II (CONTINUED)
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
DELPHI FINANCIAL GROUP, INC. (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and related notes of Delphi Financial
Group, Inc. and Subsidiaries.
The Company received cash dividends from subsidiaries of $4.2 million, $1.6
million and $1.6 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
-51-
<PAGE> 53
SCHEDULE IV
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
REINSURANCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed
Amount Companies Companies Amount to Net
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Life insurance in force as of
December 31, 1997........... $ 50,380,657 $ 4,647,109 $ 11,261,038 $ 56,994,586 19.8 %
============ ============ ============ ============ ====
Year ended December 31, 1997:
Insurance premiums and
policyholder fees:
Life insurance and annuity $ 139,311 $ 21,709 $ 33,862 $ 151,464 22.4 %
Accident and health insurance 154,439 35,318 25,787 144,908 17.8 %
Casualty insurance (1)... 66,711 10,032 7,820 64,499 12.1 %
------------ ------------ ------------ ------------
Total insurance premiums and
policyholder fees........... $ 360,461 $ 67,059 $ 67,469 $ 360,871
============ ============ ============ ============
Life insurance in force as of
December 31, 1996........... $ 45,013,763 $ 6,611,333 $ 10,788,577 $ 49,191,007 21.9 %
============ ============ ============ ============ ====
Year ended December 31, 1996:
Insurance premiums and
policyholder fees:
Life insurance and annuity $ 124,955 $ 21,679 $ 36,385 $ 139,661 26.1 %
Accident and health insurance 150,396 37,265 26,241 139,372 18.8 %
Casualty insurance (1)... 58,772 2,572 - 56,200 - %
------------ ------------ ------------ ------------
Total insurance premiums and
policyholder fees........... $ 334,123 $ 61,516 $ 62,626 $ 335,233
============ ============ ============ ============
Life insurance in force as of
December 31, 1995........... $ 36,929,009 $ 4,944,355 $ 11,516,374 $ 43,501,028 26.5 %
============ ============ ============ ============ ====
Year ended December 31, 1995:
Insurance premiums and
policyholder fees:
Life insurance and annuity $ 125,283 $ 25,400 $ 32,689 $ 132,572 24.7 %
Accident and health insurance 144,101 31,869 16,098 128,330 12.5 %
------------ ------------ ------------ ------------
Total insurance premiums and
policyholder fees........... $ 269,384 $ 57,269 $ 48,787 $ 260,902
============ ============ ============ ============
</TABLE>
- -----------------
(1) Reflects the acquisition of excess workers' compensation business
acquired as a result of the merger with SIG Holdings, Inc. on March 5,
1996.
-52-
<PAGE> 54
SCHEDULE VI
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
---------- ----------
<S> <C> <C>
Deferred policy acquisition costs........................................ $ 1,921 $ 2,397
Reserves for unpaid claims and claim expenses............................ 388,051 380,826
Discount, if any, deducted from above (1)................................ 176,683 168,827
Unearned premiums........................................................ 14,404 17,865
</TABLE>
<TABLE>
<CAPTION>
Period from
Year Ended March 5, 1996 to
December 31, December 31,
1997 1996
--------------- ------------------
<S> <C> <C>
Earned premiums.......................................................... $ 64,499 $ 56,200
Net investment income.................................................... 33,748 25,028
Claims and claim expenses incurred related to:
Current year......................................................... 41,221 28,290
Prior years.......................................................... (2,419) 7,358
Amortization of deferred policy acquisition costs........................ 8,896 7,998
Paid claims and claim adjustment expenses................................ 31,577 24,693
Premiums written......................................................... 71,070 45,480
</TABLE>
- -----------------
(1) Based on interest rates ranging from 3.7% to 6.2%.
-53-
<PAGE> 1
EXHIBIT 10.1
RELIANCE STANDARD LIFE INSURANCE COMPANY
1997 SENIOR MANAGEMENT INCENTIVE PLAN
FOR THE TWELVE MONTH PERIOD
JANUARY 1, 1997 THROUGH DECEMBER 31, 1997
<PAGE> 2
I OBJECTIVE
To promote profitable growth of Reliance Standard Life Insurance
Company ("RSL") by providing a financial incentive plan that will
compensate its eligible employees for the achievement of results
recommended by the Corporate Compensation Committee (the "Committee")
of the Board of Directors of Reliance Standard Life Insurance Company
(the "Board") and ratified by the Board. Thus, RSL will attract and
retain employees of the highest caliber who will demonstrate
outstanding performance and will assist in the achievement of overall
objectives.
II ADMINISTRATION
The Reliance Standard Life Senior Management Incentive Plan (the
"Plan") will be supervised by the Committee.
The Committee shall have the authority to recommend procedures for the
administration of the Plan to the Board for approval and to take any
and all action necessary to implement such procedures. Any references
in this document to the Board shall include any committee designated by
the Board from time to time to exercise authority with respect to the
Plan, including the Executive Committee of the Board.
III INCENTIVE PARTICIPATION
Eligibility to participate in the Plan is restricted to the positions
outlined in Exhibit B. The approved percentages relate to the
employees' December 31, 1996 base salary. Changes in incentive rates or
participants shall be approved by the Committee and the Board.
Each participant will be notified of his or her participation in the
Plan, either in terms of the applicable percentage participation or
dollar amount, if the specified results are achieved.
IV METHOD
Targets for Operating Results and Personal Objectives, as well as
participants and payout schedules, must be submitted to the Committee
and approved by the Board. The bonus paid is allocated to the
achievement of the established objectives as outlined in Exhibit C
(Method of Computation) and is subject to the Management Pool available
as outlined in Exhibit A (Management Pool).
V DISTRIBUTION
Up to 70% of the estimated bonus amount may be distributed prior to
year-end. The final payment shall not be distributed until the amounts
are determined and verified. Any estimated payments shall be deducted
from the final distribution which shall be made to eligible
participants no later than 60 days following the last day of the year
for the performance achieved for the previous year.
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VI PAYMENT OF INCENTIVE AND GENERAL GUIDELINES
No employee shall participate in more than one Incentive Compensation
Plan, except as required by transfer within a given year.
Except as provided below, an employee must be employed by RSL at the
close of the year in order to participate in and receive compensation
under the Plan. If employment is terminated during the year on account
of death, disability, or retirement, he or she may participate
proportionately for the part of the year he or she was employed prior
to termination. If employment is terminated during the year for the
convenience of RSL, but not for cause or by resignation, he or she will
participate to the extent (if any) deemed appropriate by the President
of RSL, at his sole discretion. If an employee is terminated for cause
after the close of the year but prior to the date for actual payment of
compensation under this Plan no such compensation will be paid.
If an employee terminates employment (other than on account of death,
disability, or retirement) after the close of the year but prior to the
date for actual payment of compensation under this Plan, the President
of RSL, will unilaterally determine, at his sole discretion, whether
and to what extent (if any), under the circumstances, payment of
incentive compensation to the former employee under the terms of the
Plan would be appropriate.
Participants hired or promoted during the year to a participating
position will become a participant on the first day of the month
following permanent assignment to a participating position after having
been approved by the Committee and the Board of Directors.
This Plan does not constitute a contract between RSL and the
participants, and no participant shall have any legal rights by reason
of the existence of this Plan. It may be changed, modified, amended or
terminated at any time by the Committee or the Board of Directors.
No right or benefit under this Plan shall be subject to anticipation,
alienation, sale, assignment, pledge, encumbrance or charge, and any
attempt to anticipate, alienate, sell, assign, pledge, encumber or
charge the same shall be void; and, if any participant hereunder should
become bankrupt or attempt to participate, alienate, sell, assign,
pledge, encumber or charge any right or benefit hereunder, then such
right or benefit shall, at the discretion of the Committee or the Board
of Directors, cease and terminate. RSL may offset any claim it has
against the participant against any amount to which a participant may
otherwise be entitled to hereunder, but rights hereunder shall not
otherwise be subject to debts or liabilities of the participant.
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<PAGE> 4
VII RESPONSIBILITY
The Committee is responsible for establishing appropriate rationale,
strategy and targets within the organizational structure for approval
by the Board of Directors.
If the agreed upon operating strategy for RSL is changed during the
year, objectives and strategies in the Plan may be changed accordingly,
with approval of the Committee or the Board of Directors.
RSL is responsible for providing full financial data to establish
appropriate rates to compute results, obtaining approval of the Plan,
and for coordination of the total program.
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<PAGE> 5
EXHIBIT A
MANAGEMENT POOL
I. THE POOL
A pool will be established for the purpose of paying incentive
compensation to senior officers. The pool will be based on a percentage
(1.15%) of the excess by which Delphi's pre-tax, pre-dividend income,
per the Elements of Profit, exceeds 10% of beginning equity (before
application of FAS 115).
The total pool amount available will be the maximum amount which could
be paid to participants in this plan and will be based on the following
formula:
- Minimum pre-tax pre-dividend earnings for Delphi (excluding
compensation expense related to the long-term performance
based incentive plan), which must be achieved before any
incentive compensation will be paid, will be 10% of beginning
equity without regard for FAS 115 adjustments.
Beginning equity (1-1-97) $ 366,965
FAS 115 adjustment 17,949
-----------
384,914
-----------
Times 10% (minimum earnings) $ 38,491
===========
- This amount of $38,491 will be subtracted from the actual
pre-tax pre-dividend earnings of Delphi Financial Group as per
Form 10-K, and the result multiplied by the pool (multiplier)
percentage of 1.15%.
- For example, if the actual pre-tax pre-dividend earnings,
exactly matched budget of $98,948, the pool amount would be
$695 as follows:
Pre-tax pre-dividend earnings $ 98,948
Minimum earnings 38,491
-----------
Pool 60,457
(Multiplier) percentage x 1.15%
-----------
Pool available $ 695
===========
If actual earnings deviate by 10% from plan earnings, either over or
under, the pool (multiplier) percentage is adjusted.
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EXHIBIT A
MANAGEMENT POOL - (Continued)
- If actual pre-tax pre-dividend earnings for Delphi exceed
budgeted pre-tax pre-dividend earnings ($98,948) by 10% or
more, the multiplier of 1.15% will be increased to 1.80%.
Therefore, pre-tax earnings must be at least $108,843 in order
to achieve a multiplier of 1.80%.
- Also, if actual pre-tax pre-dividend earnings for Delphi are
less than budgeted pre-tax pre-dividend earnings ($98,948) by
10% or more, the multiplier will be reduced to 0.75%.
Therefore, if pre-tax pre-dividend earnings decrease to
$89,053 or less, the multiplier will decrease to 0.75%
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EXHIBIT B
SENIOR MANAGEMENT PARTICIPANTS
BONUS
NAME POSITION PERCENTAGE
---- -------- ----------
Charles P. O'Brien President & Chief Executive Officer 75%
Wayne M. Benseler Vice President & Chief Actuary 60%
Jane R. Dunlap Vice President, Finance 60%
Lawrence E. Daurelle Vice President & Treasurer 45%
Chad Coulter Vice President, Secretary & General Counsel 40%
Kenneth R. Hamm Vice President, Group Actuary 40%
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EXHIBIT C
METHOD OF COMPUTATION
Achievement of specific operating results for Delphi Financial Group, Inc., and
subsidiaries, as described in Exhibit E, have been assigned percentages as shown
on the chart in Exhibit D. The percentage of achievement is determined pro rata
based on the actual achievement at year-end. These percentages are then
aggregated and added to the percentage of achievement awarded to each
participant for personal objectives, as described in Exhibit F. If results
exactly equaled plan, these percentages would total 120%.
The actual sum of these percentages will be multiplied by the participation
percentage (as shown on Exhibit B) and salary as of December 31, 1996 (as shown
on Exhibit G) to determine the amount of incentive compensation.
Finally, the sum of all bonus amounts to be paid to the senior officers listed
in Exhibit G will be compared to the pool amount in Exhibit A. Any excess over
the pool amount will be eliminated pro rata.
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<PAGE> 9
EXHIBIT D
1997 INCENTIVE COMPENSATION PLAN OBJECTIVES
<TABLE>
<CAPTION>
Life Companies Asset
Earnings Per "Spread" Group Accumulation
Share Income Production Production Expenses
----- ------ ---------- ---------- --------
Objective Objective Objective Objective Objective
($) % ($000) % ($000) % ($000) % ($000) %
--- - ------ - ------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
3.89 40.0 54,700 75.0 81,200 15.0 140,000 10.0 38,700 25.0
3.57 32.5 50,200 60.0 75,600 12.5 120,000 7.5 39,700 20.0
3.25 25.0 45,700 45.0 70,000 10.0 100,000 5.0 40,700 15.0
2.93 17.5 41,200 30.0 64,400 7.5 80,000 2.5 41,700 10.0
2.61 10.0 36,700 15.0 58,800 5.0 60,000 0.0 42,700 5.0
</TABLE>
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EXHIBIT E
OBJECTIVES DEFINED
1. EARNINGS PER SHARE (Objective $3.25)
A. Earnings per share (EPS) will be "Income from Continuing
Operations After Dividends on Capital Securities, Excluding
Realized Investment Gains (Losses)" divided by "weighted average
shares outstanding" as reported on the Consolidated Statements of
Income per Form 10-K for Delphi Financial Group, Inc.
B. Compensation, if any, related to the long-term performance based
incentive plan will be excluded from the calculation of "Earnings
Per Share."
2. LIFE INSURANCE COMPANIES OPERATING RESULTS (Objective $45,700)
A. This objective will be "the spread" per the Elements of Profit on
page two of the monthly financial package for the life insurance
companies only. Change in DAC will be excluded to the extent that
it is either accelerated or decelerated based on corporate
investment results.
3. GROUP PRODUCTION (Objective $70,000)
A. All wholesale and retail production generated through the efforts
of RSL and affiliates will be considered, including business
written by Reliance Standard Life Insurance Company of Texas
(RSL-T) and First Reliance Standard Life Insurance Company (FRSL).
B. Retail Group Production is defined as total new annualized
production for Group Life, Disability (LTD and Weekly Income),
Dental, and Special Risk before deduction of reinsurance.
C. Retail production will be determined using the Paid Annualized
Premium Production Report from the internal financial package,
with certain adjustments. Any policy that has an effective date of
September 30, 1997 or prior and has not been approved by the
Underwriting department will not be included in the 1997 incentive
calculation.
D. For the three-year Special risk policies which are fully paid at
inception, the first year's annualized premium (before discount
factor) will count as production.
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<PAGE> 11
E. If a submitted policy does not remain in force for twelve months,
production will be reduced in the year that the policy lapses. In
the case of submitted production in 1996 not equaling paid
production in 1997, adjustments will be made to the Annualized
Paid Production Report in 1997. Likewise, should submitted
production in 1997 not equal paid production in 1998, adjustments
will be made to the Annualized Paid Production Report in 1998.
F. Wholesale production (or alternative distribution) can include
blocks of policies in any line of business listed in Section B
(above). Reinsurance assumed will be included only if the contract
provides for risk transfer and material economic value.
4. ASSET ACCUMULATION PRODUCTION (Objective $100,000)
A. Components of asset accumulation production will include FPA, GIC,
SPDA, MVA, Group annuities and variable products.
B. Blocks of annuity business acquired, regardless of the source,
will be counted in determining actual asset accumulation
production.
C. Reinsurance assumed will be considered for purposes of determining
achievement of this objective only if the contract provides for
risk transfer and has material economic value.
4. EXPENSES (Objective $40,700)
A. The objective is defined as total general expenses on an accrual
basis including investment expenses allocated to the investment
function by RSL. The objective will be the statutory general
expense as shown on the "Statutory Income Statements" report in
the monthly financial package ($37,700) plus RSL expenses
allocated to investment or corporate functions ($3,000) also shown
on the same report.
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<PAGE> 12
EXHIBIT F
PERSONAL OBJECTIVES
Each senior officer has established personal goals and objectives to be achieved
during 1997.
Achievement of these goals and objectives will be reviewed at year-end 1997 and
a percentage (up to 20%) will be assigned based on results.
11
<PAGE> 1
EXHIBIT 10.9
DELPHI FINANCIAL GROUP, INC.
LONG-TERM PERFORMANCE-BASED INCENTIVE PLAN
1. PURPOSE
The purpose of this Long-Term Performance-Based Incentive Plan (the "Plan") is
to advance the interests of Delphi Financial Group, Inc. (the "Company") by
providing Mr. Robert Rosenkranz, Chairman, President and Chief Executive Officer
of the Company, with a compensation arrangement that rewards him for significant
gains in shareholder wealth as measured by the performance of the Company's
Class A Common Stock ("Stock") against the S&P Insurance Composite Index Total
Return to Shareholders, as defined in Section 5.2(d).
The Plan is intended to accomplish these goals by enabling the Company to grant
Awards in the form of Options and Restricted Stock or Deferred Shares, all as
more fully described below.
2. ADMINISTRATION
Unless otherwise determined by the Board of Directors of the Company (the
"Board"), the Plan will be administered by a Committee of the Board designated
for such purpose (the "Committee"). The Committee shall consist of at least two
directors. A majority of the members of the Committee shall constitute a quorum,
and all determinations of the Committee shall be made by a majority of its
members. Any determination of the Committee under the Plan may be made without
notice or meeting of the Committee by a writing signed by a majority of the
Committee members. So long as the Stock is registered under the Securities
Exchange Act of 1934 (the "1934 Act"), all members of the Committee shall be
Non-Employee Directors within the meaning of Rule 16b-3 under the 1934 Act and
outside directors within the meaning of Section 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code"). The Committee will have authority, not
inconsistent with the express provisions of the Plan and in addition to other
authority granted under the Plan, to (a) grant Awards at such time or times as
they are earned in accordance with the Plan; (b) prescribe the form or forms of
instruments that are required or deemed appropriate under the Plan, including
any required written notices and elections, and change such forms from time to
time; (c) adopt, amend and rescind rules and regulations for the administration
of the Plan; and (d) interpret the Plan and decide any questions and settle all
controversies and disputes that may arise in connection with the Plan. Such
determinations and actions of the Committee, and all other determinations and
actions of the Committee made or taken under authority granted by any provision
of the Plan, will be conclusive and will bind all parties. Nothing in this
paragraph shall be construed as limiting the power of the Committee to make
adjustments under Section 8.6.
3. EFFECTIVE DATE AND TERM OF PLAN
The Plan shall be subject to approval by the stockholders of the Company, and
Awards granted prior to such approval shall also be subject to such approval.
The Plan will terminate on December 31, 2007.
4. SHARES SUBJECT TO THE PLAN
Subject to the adjustment as provided in Section 8.6 below, the aggregate number
of shares of Company common stock subject to Award during any calendar year of
the Plan shall not exceed 240,000, consisting of 60,000 shares of restricted or
deferred shares of Company common stock and options to purchase 180,000 shares
of Company common stock, plus the Carryover Amount. The "Carryover Amount" is
240,000 shares, consisting
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of 60,000 shares of restricted or deferred shares of Company common stock and
options to purchase 180,000 shares of Company common stock for each calendar
year of the Plan commencing on or after January 1, 1996 and ending prior to the
year for which the Award is being made, reduced by the number of shares of
Company common stock for which Awards have been made during any calendar year.
The foregoing share amounts do not reflect the stock dividend paid on September
30, 1996, which stock dividend will result in adjustments of such share amounts
under Section 8.6 hereof.
No fractional shares of Company common stock will be delivered under the Plan.
5. PARTICIPATION AND AWARDS
5.1 PARTICIPATION
Mr. Robert Rosenkranz, Chairman, President and Chief Executive Officer
of the Company, is the sole participant in the Plan. Mr. Rosenkranz will
receive an Award under the Plan following the end of each Performance Period
(as defined below), beginning with the year ending December 31, 1996, when
and only if the Ending Stock Value (as defined below) exceeds the Beginning
Stock Price (as defined below) by an amount greater than the S&P Insurance
Composite Index Total Return to Shareholders over the comparable period. The
first Award under the Plan will be based on a Beginning Stock Price as of
January 1, 1996 and an Ending Stock Value as of December 31, 1996.
Thereafter, Awards will be based on the Beginning Stock Price and the Ending
Stock Value for each Performance Period.
5.2 DETERMINATION OF AWARDS
(a) Award. Promptly following the end of each Performance Period of the
Plan, the Committee shall determine whether Ending Stock Value exceeds
Beginning Stock Price for such period. If Ending Stock Value is less than or
equal to Beginning Stock Price, no Award will be made. If Ending Stock Value
exceeds Beginning Stock Price, the Committee shall then determine the "S&P
Return Value" for such period in the manner described below. If the Ending
Stock Value exceeds the S&P Return Value, Mr. Rosenkranz will be entitled to
receive an Award, as specified below, valued at two and a half percent
(2.5%) of the excess of Ending Market Value over Beginning Market Value (the
"Award Amount"). If the Ending Stock Value for a Performance Period exceeds
the Beginning Stock Price for the period by an amount greater than the S&P
Insurance Composite Index Total Return to Shareholders over the comparable
period, the Award Amount for the Performance Period will be increased by the
portion of the Award Amount from previous Performance Periods which did not
result in Awards due to the limitation of Section 4 hereof; provided,
however, that the total Awards in any calendar year shall not exceed the
maximum for the year set forth in Section 4. To the extent required under
the Code, the Committee shall certify the achievement of the performance
goals.
(b) Beginning Stock Price. For purposes of this Plan, "Beginning Stock
Price" means the average closing price of the Stock for each of the 20
trading days commencing 10 trading days prior to the first trading day of
the relevant Performance Period; except that the Beginning Stock Price for a
particular Performance Period shall never be less than the Ending Stock
Price (as defined below) for any previously elapsed Performance Period with
respect to which an Award was made under the Plan.
(c) Ending Stock Value. For purposes of this Plan, "Ending Stock Value"
means the average closing price of the Stock for each of the 20 trading days
commencing 9 trading days prior to the last trading day of the relevant
Performance Period (the "Ending Stock Price") adjusted for the payment of
cash dividends during the period, assuming such dividends had been
reinvested in Company common stock on the date
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paid to stockholders using the methodology consistent with the determination
of the S&P Insurance Composite Index Total Return to Shareholders.
(d) S&P Insurance Composite Index Total Return to Shareholders. For
purposes of this Plan, "S&P Insurance Composite Index Total Return to
Shareholders" for a particular period shall mean the Standard & Poor's
Insurance Composite Index Total Return to Shareholders as determined by
Standard & Poor's Compustat, measured from the first day of the period in
question to the last day.
(e) S&P Return Value. For purposes of this Plan, "S&P Return Value"
means Beginning Stock Price multiplied by the sum of one (1) plus the S&P
Insurance Composite Index Total Return to Shareholders, provided that the
S&P Return Value for a Performance Period under the Plan may never be less
than the Beginning Stock Price for such period.
(f) Performance Period. For purposes of this Plan, "Performance Period"
means the calendar year (beginning with calendar year 1996); provided,
however, that if an Award is not made for a calendar year, the next
succeeding Performance Period shall include all calendar years following the
last calendar year for which an Award was made.
(g) Beginning Market Value. For purposes of this Plan, "Beginning Market
Value" means the Beginning Stock Price multiplied by the number of shares of
common stock of the Company outstanding on the first day of the Performance
Period (for this purpose treating shares of Company stock that are subject
to acquisition as of such day (without regard to applicable vesting periods)
under the options to purchase the common stock of SIG Holdings, Inc. ("SIG")
assumed by the Company pursuant to the Agreement and Plan of Merger dated as
of October 5, 1995 among SIG, the Company and SIG Holdings Acquisition Corp.
(the "SIG Option Shares") as outstanding Company common stock).
(h) Ending Market Value. For purposes of this Plan, "Ending Market
Value" means the Ending Stock Price for the Performance Period multiplied by
the number of shares of common stock of the Company outstanding on the last
day of the Performance Period (for this purpose treating the SIG Option
Shares as outstanding Company common stock). Ending Market Value shall be
adjusted for the payment of cash dividends during the period, assuming such
dividends had been reinvested in Company common stock on the date paid to
stockholders using the methodology consistent with the determination of the
S&P Insurance Composite Index Total Return to Shareholders.
5.3 PAYMENT OF AWARDS
The Award to be made following any Performance Period shall consist of:
(a) that number of shares of restricted Company Class B Common Stock
("Restricted Stock") as are determined by dividing fifty percent (50%) of
the Award Amount by the Ending Stock Price for the period; and
(b) Options covering a number of shares of Company Class B Common Stock
equal to three times the number of shares of Restricted Stock determined
above, except that Options awarded for the Performance Period ending
December 31, 1996 shall be options to purchase such number of shares of
Stock.
The Restricted Stock and Options shall be granted upon the terms and conditions
set forth below.
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5.4 DEFERRED SHARES
(a) Awards in Lieu of Restricted Stock. If the Committee determines that
the payment of an Award, in whole or in part, in shares of Restricted Stock
may result in the Company not being able to take a tax deduction under
Section 162(m) of the Code upon the vesting of such Restricted Stock or
otherwise would not be in the best interests of the Company, or if the
Committee determines that the Plan objective of deferral of taxation may not
be met by issuance of Restricted Stock, it may elect instead to pay the
Restricted Stock portion of the Award in an equivalent number of Deferred
Shares. Deferred Shares represent the right to receive the stated number of
shares of Company Class B Common Stock upon the same events described in
Section 6.2(c) hereof for the vesting of Restricted Stock. In the event that
any Deferred Shares are awarded pursuant to this Section 5.4(a), all
references to Restricted Stock in this Plan (including the forfeiture
provision in Section 6.2(c) hereof) shall be deemed to apply, insofar as
they are applicable, to the Deferred Shares.
(b) Dividend Equivalents. In the event that a dividend is paid or
property is distributed (including, without limitation, shares of Stock)
with respect to a share of Company Class B Common Stock while a Deferred
Share is outstanding, Mr. Rosenkranz shall receive with respect to each
Deferred Share then outstanding:
(i) in the case of a cash dividend, or a distribution of property
other than stock, dividend equivalents in cash or such property which
shall be paid concurrently with the payment of the dividend on the stock;
and
(ii) in the case of stock dividends, a number of additional Deferred
Shares equal to the number of whole or fractional shares of stock that
would have been paid if the Deferred Shares had been stock outstanding on
the date of distribution.
Any additional Deferred Shares issued under this Section 5.4(b) shall be subject
to the same terms and conditions, including with respect to vesting, forfeiture
and distribution, as apply to the Deferred Shares in respect of which they are
issued.
5.5 AWARDS FOR PARTIAL YEARS
If Mr. Rosenkranz's employment terminates during any Performance Period of the
Plan other than by the Company for Cause or by Mr. Rosenkranz without Good
Reason, Mr. Rosenkranz will be entitled to receive an Award based on the
performance of the Stock versus the S&P Insurance Composite Index through the
date of termination. In addition, on the day prior to the consummation of any
transaction described in Section 6.2(f)(1) or (2), Mr. Rosenkranz will be
entitled to receive an Award based on the performance of the Stock versus the
S&P Insurance Composite Index through such date. The portion of any such Award
that would have been paid in Restricted Stock will be satisfied by an equivalent
number of shares of Company Class B Common Stock free of any restrictions.
6. TYPES OF AWARDS
6.1 OPTIONS
(a) Nature of Options; Grant Date. An Option will entitle Mr. Rosenkranz
to purchase Company Class B Common Stock (Stock in the case of Options
granted for the Performance Period ending December 31, 1996) at a specified
exercise price. The grant date for each Option shall be the last trading day
used to determine the Ending Stock Price used in calculating the Award.
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(b) Exercise Price. The exercise price per share of an Option will be
the Fair Market Value per share of the stock subject to the Option,
determined as of the grant date. In no case may the exercise price paid for
stock which is part of an original issue of authorized stock be less than
the par value per share of the stock. For purposes hereof, "Fair Market
Value" shall be the closing price per share of Stock, as reported on the New
York Stock Exchange ("NYSE") on the grant date, or if the Stock is not
listed for trading on the NYSE, the closing price of Stock as reported on
another recognized securities exchange or on the NASDAQ National Market
System if the stock shall then be listed on such exchange or system. If the
stock did not trade on the grant date on the NYSE or such other applicable
exchange or system, the Fair Market Value for purposes hereof shall be the
reported closing price on the last business day on which the Stock was
traded preceding the grant date.
(c) Duration of Options. The latest date on which an option may be
exercised will be the tenth anniversary of the day immediately preceding the
date the Option was granted.
(d) Exercise of Options. Options granted under any Award will be
exercisable 30 days following such grant, subject to approval of the Plan by
shareholders of the Company. Any exercise of an Option must be in writing,
delivered or mailed to the Company, accompanied by (1) any documents
required by the Committee and (2) payment in full in accordance with
paragraph (e) below for the number of shares for which the Option is
exercised.
(e) Payment for Stock. Stock purchased on exercise of an Option must be
paid for as follows: (1) in cash or by check (acceptable to the Company in
accordance with guidelines established for this purpose), bank draft or
money order payable to the order of the Company or (2) (i) through the
delivery of shares of Company common stock which have been outstanding for
at least six months and which have a fair market value on the last business
day preceding the date of exercise equal to the exercise price, or (ii) by
delivery of an unconditional and irrevocable undertaking by a broker to
deliver promptly to the Company sufficient funds to pay the exercise price,
or (iii) by any combination of the permissible forms of payment.
6.2 RESTRICTED STOCK
(a) Nature of Restricted Stock Award. The portion of the Award paid in
Restricted Stock entitles Mr. Rosenkranz to receive shares of Company Class
B Common Stock subject to the restrictions described in paragraph (c) below.
(b) Rights as a Stockholder. Mr. Rosenkranz will have all the rights of
a stockholder with respect to the Company Class B Common Stock granted in
connection with an Award, including voting and dividend rights, subject to
the restrictions described in paragraph (c) below, and subject to approval
of the Plan by shareholders of the Company. Certificates evidencing shares
of Restricted Stock will remain in the possession of the Company until such
shares are free of such restrictions, at which time such certificates will
be delivered to Mr. Rosenkranz.
(c) Restrictions. Restricted Stock may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of until the
earliest of (i) Mr. Rosenkranz's termination of employment (A) by reason of
death, Disability or normal retirement in accordance with the policies set
by the Board of Directors, (B) by the Company other than for Cause or (C) by
Mr. Rosenkranz for Good Reason (each a "Qualifying Termination") and (ii) a
Change of Ownership of the Company. If the Company terminates Mr.
Rosenkranz's employment for Cause or if Mr. Rosenkranz terminates his
employment other than for Good Reason or in connection with an event
described in clause (A) above, any shares of Restricted Stock that he then
holds subject to restrictions will be forfeited to the Company.
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(d) Cause. For purposes of this Plan, "Cause" means (i) conviction of a
felony or other crime involving fraud, dishonesty or moral turpitude, (ii)
fraud with respect to the business of the Company, or (iii) gross neglect of
duties of the office specified in writing by the Board. For purposes of this
Plan, Mr. Rosenkranz shall not be deemed to have been terminated for Cause
until the later to occur of (i) the 30th day after notice of termination is
given and (ii) the delivery to him of a copy of a resolution duly adopted by
the affirmative vote of not less than a majority of the Company's directors
at a meeting called and held for that purpose, and at which Mr. Rosenkranz
together with his counsel was given an opportunity to be heard, finding that
Mr. Rosenkranz was guilty of conduct described in the definition of "Cause"
above, and specifying the particulars thereof in detail.
(e) Good Reason. For purposes of this Plan, "Good Reason" means the
voluntary termination by Mr. Rosenkranz of his employment (1) to enter
public service or (2) within 120 days after the occurrence without his
express written consent of any of the following events, provided that Mr.
Rosenkranz gives notice to the Company at least 30 days in advance
requesting that the situation be remedied, and the situation remains
unremedied upon expiration of such 30-day period:
(i) Mr. Rosenkranz's removal from, or any failure to reelect him to,
the positions of Chairman of the Board, President or Chief Executive
officer, except in connection with his termination for Cause or
Disability or termination by him other than for Good Reason; or
(ii) reduction in Mr. Rosenkranz's rate of Base Salary for any fiscal
year to less than 100 percent of the rate of Base Salary paid to him in
fiscal 1996; or
(iii) failure of the Company to continue in effect any retirement,
life insurance, medical insurance or disability plan in which Mr.
Rosenkranz was participating on the date of Board adoption of this Plan
unless the Company provides Mr. Rosenkranz with a plan or plans that
provide substantially comparable benefits; or
(iv) a Change of Ownership; or
(v) any purported termination by the Company of Mr. Rosenkranz's
employment for Cause that is not effected in compliance with paragraph
(d) of this Section 6.2.
(f) Change of Ownership. For purposes of this Plan, a "Change of
Ownership" shall be deemed to have occurred (1) if individuals who, as of
the effective date of this Plan, constitute the Board of Directors of the
Company (the "Board of Directors" generally and as of the date hereof the
"Incumbent Board") cease for any reason to constitute at least a majority of
the directors constituting the Board of Directors, provided that any person
becoming a director subsequent to the effective date of this Plan whose
election, or nomination for election by the Company's shareholders, was
approved by a vote of at least three-quarters (3/4) of the then directors
who are members of the Incumbent Board (other than an election or nomination
of an individual whose initial assumption of office is (A) in connection
with the acquisition by a third person, including a "group" as such term is
used in Section 13(d)(3) of the 1934 Act, of beneficial ownership, directly
or indirectly, of 20% or more of the combined voting securities ordinarily
having the right to vote for the election of directors of the Company
(unless such acquisition of beneficial ownership was approved by a majority
of the Board of Directors who are members of the Incumbent Board), or (B) in
connection with an actual or threatened election contest relating to the
election of the directors of the Company, as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the 1934 Act) shall be, for
purposes of this Plan, considered as though such person were a member of the
Incumbent Board; or (2) if the stockholders of the Company approve a merger,
consolidation, recapitalization or reorganization of the Company, reverse
split of any class of voting securities of the Company, or an acquisition of
securities
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or assets by the Company, or the sale or disposition by the Company of all
or substantially all of the Company's assets, or if any such transaction is
consummated without stockholder approval, other than any such transaction in
which the holders of outstanding Company voting securities immediately prior
to the transaction receive, with respect to such Company voting securities,
voting securities of the surviving or transferee entity representing more
than 60 percent of the total voting power outstanding immediately after such
transaction, with the voting power of each such continuing holder relative
to other such continuing holders not substantially altered in the
transaction; or (3) if the stockholders of the Company approve a plan of
complete liquidation of the Company.
(g) Disability. For purposes of this Plan, "Disability" means an
illness, injury, accident or condition of either a physical or psychological
nature as a result of which Mr. Rosenkranz is unable to perform
substantially the duties and responsibilities of his position for 180 days
during a period of 365 consecutive calendar days.
(h) Notice of Election. If Mr. Rosenkranz makes an election under
Section 83(b) of the Code with respect to Restricted Stock, he must provide
a copy thereof to the Company within 10 days of the filing of such election
with the Internal Revenue Service.
7. EVENTS AFFECTING OUTSTANDING OPTIONS
7.1 QUALIFYING TERMINATION
If Mr. Rosenkranz's employment with the Company terminates in connection with a
Qualifying Termination, he (or his executor or administrator or the person or
persons to whom the Option is transferred by will or the applicable laws of
descent and distribution) may exercise all or any Options he then holds at any
time prior to the expiration of their respective terms.
7.2 TERMINATION OF EMPLOYMENT (OTHER THAN A QUALIFYING TERMINATION)
If Mr. Rosenkranz's employment with the Company terminates other than in
connection with a Qualifying Termination, all Options will continue to be
exercisable for a period of ninety days following the termination and shall
thereupon terminate, unless the termination was by the Company for Cause, in
which case all such Options shall immediately terminate. In no event, however,
shall an Option remain exercisable beyond the latest date on which it could have
been exercised without regard to this Section 7.
8. GENERAL PROVISIONS
8.1 DOCUMENTATION OF AWARDS
Awards will be evidenced by such written instruments, if any, as may be
prescribed by the Committee from time to time.
8.2 RIGHTS AS A STOCKHOLDER
Except as specifically provided by the Plan, the receipt of an Award will not
give Mr. Rosenkranz rights as a stockholder. He will obtain such rights, subject
to any limitations imposed by the Plan or the instrument evidencing the Award,
upon actual receipt of Company common stock.
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8.3 CONDITIONS ON DELIVERY OF STOCK
The Company will not be obligated to deliver any shares of Company common stock
pursuant to the Plan or to remove restrictions from shares previously delivered
under the Plan (a) until all conditions of the Award have been satisfied or
removed, (b) until, in the opinion of the Company's counsel, all applicable
federal and state laws and regulations have been complied with, (c) if the
outstanding Company common stock is at the time listed on any stock exchange,
until the shares to be delivered have been listed or authorized to be listed on
such exchange upon official notice of issuance, and (d) until all other legal
matters in connection with the issuance and delivery of such shares have been
approved by the Company's counsel. If the sale of Company common stock has not
been registered under the Securities Act of 1933, as amended, the Company may
require, as a condition to exercise of the Award, such representations or
agreements as counsel for the Company may consider appropriate to avoid
violation of such Act and may require that the certificates evidencing such
stock bear an appropriate legend restricting transfer.
8.4 TAX WITHHOLDING
Upon the lapse of restrictions on the Restricted Stock, the delivery of any
Deferred Shares and the exercise of any Options, the Committee will have the
right to require that Mr. Rosenkranz or his representative remit to the Company
an amount sufficient to satisfy the withholding requirements, or make other
arrangements satisfactory to the Committee with regard to such requirements,
prior to the delivery of any Company common stock. If and to the extent that
such withholding is required, the Committee may permit Mr. Rosenkranz or such
other person to elect at such time and in such manner as the Committee provides
to have the Company hold back from the shares to be delivered, or to deliver to
the Company, Company common stock having a value calculated to satisfy the
withholding requirement.
8.5 NONTRANSFERABILITY OF AWARDS
Except as set forth below and in Section 6.2(c), Awards granted hereunder may
not be sold, assigned, transferred, pledged or otherwise encumbered or disposed
of other than by will or the laws of descent and distribution. Notwithstanding
the foregoing, if the Committee expressly so provides in the applicable Award
agreement (at the time of grant or at any time thereafter), an Option granted
hereunder may be transferred for no consideration by Mr. Rosenkranz to members
of his "immediate family", to a trust or trusts established for the exclusive
benefit of solely one or more members of his "immediate family" or to a
partnership in which his "immediate family" members are the only partners. Any
Option held by the transferee will continue to be subject to the same terms and
conditions that were applicable to the Option immediately prior to the transfer,
except that the Option will be transferable by the transferee only by will or
the laws of descent and distribution. For purposes hereof, "immediate family"
means Mr. Rosenkranz's children, stepchildren, grandchildren, parents,
stepparents, grandparents, spouse, siblings (including half brothers and
sisters), in-laws, and relationships arising because of legal adoption.
8.6 ADJUSTMENTS
(a) In the event of a stock dividend, stock split or combination of
shares, recapitalization or other change in the Company's capitalization, or
other distribution to common stockholders other than normal cash dividends,
after the effective date of the Plan, the Committee will make any
appropriate adjustments to the maximum number of shares that may be
delivered under the Plan under Section 4 above.
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(b) In any event referred to in paragraph (a), the Committee will also
make any appropriate adjustments to the number and kind of shares of stock
or securities subject to Awards then outstanding or subsequently granted,
any exercise prices relating to Awards and any other provision included in
or relating to the calculation of Awards (including the Beginning Stock
Price determined in accordance with Section 5.2(b)) affected by such change.
The Committee may also make appropriate adjustments to take into account,
mergers, consolidations, acquisitions, dispositions or similar corporate
transactions if it is determined by the Committee that adjustments are
appropriate to avoid distortion in the operation of the Plan and to preserve
(but not enhance) the benefits under the Plan.
8.7 STOCKHOLDER APPROVAL OF CHARTER AMENDMENT
Notwithstanding any provision of the Plan to the contrary, if the proposal to
amend the Company's restated certificate of incorporation to limit the voting
rights of the Company Class B common stock as described in the Company's proxy
statement for its 1997 annual meeting of stockholders is not approved by the
stockholders of the Company at the 1997 annual meeting of stockholders, only
shares of Stock shall be subject to any Award made hereunder and all references
in the Plan to shares of Company Class B common stock shall instead be
references to Stock.
8.8 EMPLOYMENT RIGHTS, ETC.
Neither the adoption of the Plan nor the grant of Awards will confer upon Mr.
Rosenkranz any right to continued retention by the Company as an employee or
otherwise, or affect in any way the right of the Company to terminate an
employment relationship at any time.
8.9 DEFERRAL OF PAYMENTS
The Committee may agree at any time, upon Mr. Rosenkranz's request but subject
to its discretion, to defer the date on which any payment under an Award will be
made.
8.10 EXCISE TAX GROSS-UP
In the event it shall be determined that any payment or distribution made, or
benefit provided (including, without limitation, the acceleration of any
payment, distribution or benefit and the acceleration of vesting of any
restricted stock or deferred stock), by the Company to or for the benefit of Mr.
Rosenkranz (whether paid or payable or distributed or distributable pursuant to
the terms of this Plan or otherwise, but determined without regard to any
additional payments required under this Section 8.9) (a "Payment") would be
subject to the excise tax imposed by Section 4999 of the Code (or any similar
excise tax) or any interest or penalties are incurred by Mr. Rosenkranz with
respect to such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
Mr. Rosenkranz shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by Mr. Rosenkranz of all taxes
(including any Excise Tax, income tax or payroll tax) imposed upon the Gross-Up
Payment and any interest or penalties imposed with respect to such taxes, Mr.
Rosenkranz retains from the Gross-Up Payment an amount equal to the Excise Tax
imposed upon the Payments.
9. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION
The Committee may at any time or times amend the Plan or any outstanding Award
for any purpose which may at the time be permitted by law, provided that (except
to the extent expressly required or permitted by the Plan) no such amendment
will without Mr. Rosenkranz's consent, amend the Plan or any outstanding Award
so as to adversely affect his rights under the Plan or any outstanding Award.
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EXHIBIT 10.26
DELPHI FINANCIAL GROUP, INC.
AMENDED AND RESTATED DIRECTORS STOCK OPTION PLAN
INTRODUCTION
Delphi Financial Group, Inc. (the "Company") adopted the Delphi Financial Group,
Inc. 1994 Directors Stock Option Plan effective April 12, 1994. Effective as of
March 20, 1997, the Company amended and restated such plan (subject to the
approval of the stockholders of the Company) to incorporate provisions whereby
the eligible members of its Board of Directors may receive stock options in lieu
of their annual cash retainers, to increase the number of shares subject to
nonqualified stock options available for issuance under such plan, and to effect
certain further amendments. Such plan, as so amended and restated, is as
follows:
1. PURPOSE
This Amended and Restated Directors Stock Option Plan (the "Plan") is intended
to increase the proprietary interest in Delphi Financial Group, Inc. (the
"Company") of outside directors of the Company, i.e., directors who are not
officers or employees of the Company or its subsidiaries, whose continued
services are important to the continued success of the Company, thereby
providing them with additional incentive to continue to serve as directors. The
Plan provides for the issuance of nonqualified stock options ("Options"). The
Plan shall be effective upon its approval by the stockholders of the Company (as
provided in Section 10 below).
2. ADMINISTRATION
The Plan shall be substantially self-executing. To the extent, however, that any
administrative determinations regarding the Plan are required to be made, they
shall be made pursuant to the affirmative vote of a majority of the members of a
committee consisting of the members of the Company's Board of Directors (the
"Committee"). All ministerial matters relating to the Plan shall be performed by
or at the direction of the Committee.
3. ELIGIBILITY
The persons who shall receive Options (the "Optionees") shall be members of the
Company's Board of Directors who are not officers or employees of the Company or
any of its subsidiaries ("Subsidiaries"), as that term is defined by Section
424(f) of the Internal Revenue Code of 1986, as amended from time to time (the
"Code"). Persons eligible to be Optionees are sometimes referred to herein as
"Outside Directors."
4. STOCK
The stock subject to the Options shall be shares (the "Shares") of the Company's
authorized but unissued or reacquired Class A common stock, par value $.01 per
share). The aggregate number of Shares as to which Options may be granted shall
not exceed 120,000. The limitation established by the preceding sentence shall
be subject to adjustment as provided in Section 5(B)(ix) of the Plan. In the
event that any outstanding Option under the Plan for any reason expires,
terminates or is canceled, the Shares allocable to the unexercised portion of
such Option will again be subject to Options thereafter awarded under the Plan.
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5. TERMS AND CONDITIONS OF OPTIONS
A. Options shall automatically be granted under the Plan as follows:
(i) On the day immediately following the date on which the Plan is
approved by the stockholders of the Company (as provided in Section 10
below), and thereafter on the first business day immediately following the
each date on which the Company holds its annual meeting of stockholders
(commencing with the 1997 meeting), each Outside Director then in office
will automatically be awarded as of such date Options exercisable for a
number of Shares determined pursuant to the following formula: Number of
Option Shares = 2,000 multiplied by [1 + (.125 multiplied by the number of
years of continuous service of such Outside Director to that point,
including any portion of a year of service, which shall be treated as a full
year)].
(ii) Each Outside Director shall, on the first business day following
each date on which such director is elected, re-elected or appointed, as
applicable, to the Company's Board of Directors (the "Election Date"),
commencing with the elections to occur at the 1997 annual meeting of
stockholders, be awarded Options in lieu of the cash amount (the "Retainer
Amount") that such director would be entitled to receive for serving as such
in the period from the Election Date up to the date of the Company's next
following annual meeting of stockholders, exclusive of meeting fees, fees
for serving on any committee of the Board, or fees associated with any other
services provided to the Company or its Subsidiaries. Such Options will be
exercisable for the nearest number of whole Shares determined pursuant to
the following formula: Number of Option Shares = (Retainer Amount multiplied
by 3), divided by (Fair Market Value, as that term is defined in Section
5(B) (ii) hereof, as of the award date). Notwithstanding the foregoing,
Options will not be awarded pursuant to this Section 5(A)(ii) if the Outside
Director files with the Secretary of the Company, on or prior to the
commencement of the calendar year in which the applicable Election Date is
to occur, a written election not to receive Options in lieu of the Retainer
Amount (other than the Election Date on which such director is first elected
or appointed, in which case such election may be made at any time prior to
such Election Date).
B. Promptly after each award pursuant to Section 5(A), a Notice of Award of
Stock Option (an "Option Notice") shall be given to each Optionee, which notice
shall comply with and be subject to the following terms and conditions:
(i) Number of Shares. Each Option Notice shall state the number of
Shares to which it pertains.
(ii) Option Price. Each Option Notice shall state the Option price per
Share, which shall be 100% of the Fair Market Value of a Share on the date
of the grant of the Option (the "Option Price"). For purposes hereof, "Fair
Market Value" shall be the closing price on the applicable date of a Share,
as reported on the New York Stock Exchange (the "NYSE"), or, if the Shares
are not then listed for trading on the NYSE, the closing price of the Shares
as reported on another recognized securities exchange or on the NASDAQ
National Market System if the Shares shall then be listed on such exchange
or system. If the Shares did not trade on the award date on the NYSE or such
other applicable exchange or system, the Fair Market Value for purposes
hereof shall be the reported closing price on the last business day on which
the Shares were traded preceding the award date.
(iii) Option Price. The Option Notice may provide that the Optionee may
make payment of the Option Price in cash, Shares or such other consideration
as may be specified therein or as may be acceptable to the Committee, or any
combination thereof, in an amount or having an aggregate value, as the case
may be, equal to the total Option Price. Such payment shall be made upon
exercise of the Option.
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(iv) Term, Transferability and Exercisability of Options.
(a) Each Option Notice shall state the date on which the Option shall
expire (the "Expiration Date"), which shall be ten years from the date on
which the Option is awarded. Options are not assignable or transferable
by an Optionee other than by will or the laws of descent and
distribution, or pursuant to a qualified domestic relations order as
defined by the Code or by Title I of the Employee Retirement Income
Security Act, or the rules thereunder. Notwithstanding the foregoing, if
provided in the applicable Option Notice (at the time of grant or at any
time thereafter), an Option granted hereunder may be transferred for no
consideration by the Optionee to members of his or her immediate family,
to a trust or trusts established for the exclusive benefit only of one or
more members of his or her immediate family or to a partnership in which
his or her immediate family members are the only partners. Any Option
held by the transferee will continue to be subject to the same terms and
conditions that were applicable to the Option immediately prior to the
transfer, except that the Option will be transferable by the transferee
only by will or the laws of descent and distribution. For purposes
hereof, "immediate family" means the Optionee's children, stepchildren,
grandchildren, parents, stepparents, grandparents, spouse, siblings
(including half brothers and sisters), in-laws, and relationships arising
because of legal adoption.
(b) Options granted pursuant to Section 5(A)(i) hereof shall become
exercisable in five equal annual installments of twenty percent (20%) per
year. Options granted pursuant to Section 5(A)(ii) hereof shall become
exercisable in four substantially equal installments (without taking into
account any fractional share) on the dates which follow the date of the
grant by 90, 180, 270 and 360 days, respectively. Once Options with
respect to Shares become exercisable as aforesaid, they may be exercised
in whole or in part from time to time through the applicable Expiration
Date, subject to the terms and conditions hereof. Upon or in connection
with a Change of Ownership, each Optionee shall have the right,
immediately prior to such Change of Ownership, to exercise his or her
Options without regard to the foregoing installment provisions as to
exercisability. For purposes of this Plan, a "Change of Ownership" shall
be deemed to have occurred (1) if individuals who, as of the effective
date of this Plan, constitute the Board of Directors of the Company (the
"Board of Directors" generally and as of the date hereof the "Incumbent
Board") cease for any reason to constitute at least a majority of the
directors constituting the Board of Directors, provided that any person
becoming a director subsequent to the effective date of this Plan whose
election, or nomination for election by the Company's shareholders, was
approved by a vote of at least three-quarters (3/4) of the then directors
who are members of the Incumbent Board (other than an election or
nomination of an individual whose initial assumption of office is (A) in
connection with the acquisition by a third person, including a "group" as
such term is used in Section 13(d)(3) of the Securities and Exchange Act
of 1934, as amended (the "1934 Act"), of beneficial ownership, directly
or indirectly, of 20% or more of the combined voting securities
ordinarily having the right to vote for the election of directors of the
Company (unless such acquisition of beneficial ownership was approved by
a majority of the Board of Directors who are members of the Incumbent
Board), or (B) in connection with an actual or threatened election
contest relating to the election of the directors of the Company, as such
terms are used in Rule 14a-11 of Regulation 14A promulgated under the
1934 Act) shall be, for purposes of this Plan, considered as though such
person were a member of the Incumbent Board; or (2) if the stockholders
of the Company approve a merger, consolidation, recapitalization or
reorganization of the Company, reverse split of any class of voting
securities of the Company, or an acquisition of securities or assets by
the Company, or the sale or disposition by the Company of all or
substantially all of the Company's assets, or if any such transaction is
consummated without stockholder approval, other than any such transaction
in which the
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holders of outstanding Company voting securities immediately prior to the
transaction receive, with respect to such Company voting securities,
voting securities of the surviving or transferee entity representing more
than 60 percent of the total voting power outstanding immediately after
such transaction, with the voting power of each such continuing holder
relative to other such continuing holders not substantially altered in
the transaction; or (3) if the stockholders of the Company approve a plan
of complete liquidation of the Company.
(c) At any time and from time to time when any Option or portion
thereof is exercisable, such Option or portion thereof may be exercised
in whole or in part, as applicable; provided, however, that the Company
shall not be required to issue fractional Shares.
(v) Termination of Service Except by Death, Disability, Retirement or
Removal for Cause. In the event that the Optionee shall cease to be an
Outside Director for any reason other than death, disability, retirement or
removal for cause as further provided herein, Options may be exercised only
within three (3) months after such termination of service or such longer
period as may be established by the Committee at the time of grant or
thereafter, but only to the extent such Option was exercisable on the last
day on which the Optionee was an Outside Director, and in no event may an
Option be exercised after its Expiration Date. Any portion of the Option
which was not exercisable on such last day shall expire immediately.
(vi) Death or Disability of Optionee. In the event an Optionee shall die
or become disabled while a director of the Company, Options may be exercised
at any time within one (1) year after the Optionee's death or disability or
such longer period as may be established by the Committee at the time of
grant or thereafter, but only to the extent that such Option was exercisable
by the Optionee on the last day on which the Optionee was an Outside
Director, and in no event may an Option be exercised after its Expiration
Date. During such one-year period, the Option may be exercised by the
Optionee or a representative, or in the case of death, by the executors or
administrators of the Optionee or by any person or persons who shall have
acquired the Option directly from the Optionee by bequest or inheritance.
Whether an Optionee shall have become disabled for the purposes of the Plan
shall be determined by the Committee, which determination shall be final and
conclusive.
(vii) Removal for Cause. If an Optionee is removed as a director of the
Company on account of any act of (a) fraud or intentional misrepresentation
or (b) embezzlement, misappropriation or conversion of assets or
opportunities of the Company, or any unauthorized disclosure or confidential
information or trade secrets of the Company, all unexercised Options shall
terminate as of the date of such Optionee's removal.
(viii) Retirement. To the extent an Option was exercisable on the last
date of service as a director of the Company, such Option may be exercised
up to one (1) year following the Optionee's retirement at or after age 75 or
such longer period as may be established by the Committee at the time of
grant or thereafter, but in no event may an Option be exercised after its
Expiration Date.
(ix) Recapitalization, Reorganization, Etc., of Company.
(a) Subject to any required action by the stockholders, the number of
Shares covered by each outstanding Option, and the price per Share so
covered, shall automatically be proportionately adjusted for any increase
or decrease in the number of issued shares of Class A Common Stock of the
Company resulting from a subdivision or consolidation of Shares or the
payment of a stock dividend or any other increase or decrease in the
number of such shares effected without receipt of consideration by the
Company.
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(b) If, pursuant to any reorganization, recapitalization, sale or
exchange of assets, consolidation or merger, outstanding Class A Common
Stock of the Company is or would be exchanged for other securities of the
Company or of another corporation which is a party to such transaction,
or for property, whether or not any such transaction gives rise to a
Change of Ownership, any Options under the Plan theretofore granted shall
apply to the securities or property into which the Class A Common Stock
covered thereby shall be so changed or for which such Class A Common
Stock shall be exchanged. In any of such events, the total number and
class of Shares then remaining available for issuance under the Plan
(including Shares reserved for outstanding Options and Shares available
for future grant of Options under the Plan) shall likewise be adjusted so
that the Plan shall thereafter cover the number and class of shares
equivalent to the Shares covered by the Plan immediately prior to such
event.
(c) In the event of a change in the Class A Common Stock of the
Company as presently constituted, which is limited to a change of all of
its authorized shares with par value into the same number of shares with
a different par value or without par value, the shares resulting from any
such change shall be deemed to be the Class A Common Stock within the
meaning of the Plan.
(d) Adjustments pursuant to Section 5(B)(ix)(b) hereof shall be made
by the Committee, whose determination as to which shall be final, binding
and conclusive.
(e) Except as hereinbefore expressly provided in this Section
5(B)(ix), an Optionee shall have no rights by reason of any subdivision
or consolidation of shares of stock of any class or the payment of any
stock dividend or any other increase or decrease in the number of shares
of stock of any class or by reason of any dissolution, liquidation,
merger or consolidation or spin-off of assets or stock of another
corporation, and any class, or securities convertible into shares of
stock of any class, shall not affect, and no adjustment by reason thereof
shall be made with respect to, the number or price of shares of Class A
Common Stock subject to the Option.
(f) The grant of an Option pursuant to the Plan shall not affect in
any way the right or power of the Company to make adjustments,
reclassifications, mergers, reorganizations or changes of its capital or
business structure, to merge or to consolidate, to dissolve or liquidate
or to sell or transfer all or any part of its business or assets.
(x) Rights as a Stockholder. No person shall have any rights as a
stockholder with respect to any Shares covered by an Option until the date
of the issuance of the Shares to such person. No adjustments shall be made
to outstanding Options for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions or other rights, except
as provided in Section 5(B)(ix) hereof.
(xi) Modification, Extension and Renewal of Options. Subject to the
terms and conditions and within the limitations of the Plan, the Committee
may modify, extend or renew outstanding Options granted under the Plan, or
accept the surrender of outstanding Options (to the extent not theretofore
exercised). Notwithstanding the foregoing, however, no modification of an
Option shall, without the consent of the Optionee, alter or impair any
rights or obligations under any Option theretofore granted under the Plan.
(xii) Investment Purpose. Each Option under the Plan shall be granted on
the condition that the purchases of Shares hereunder shall be for investment
purposes and not with a view to resale or distribution, except that in the
event the Shares subject to such Option are registered under the Securities
Act of 1933, as amended (the "Act"), or in the event a resale of such Shares
without such registration would otherwise be permissible, such condition
shall be inoperative if, in the opinion of counsel for the Company, such
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condition is not required under the Act, or any other applicable law,
regulation or rule of any governmental agency.
(xiii) Other Provisions. The Option Notice shall comply with and be
subject to the terms and conditions of the Plan, and shall contain such
other terms, conditions and provisions as the Committee shall deem
advisable.
6. TERM OF PLAN
Options shall be granted pursuant to the Plan from time to time within the
period of ten years from the earlier of the date of adoption of the Plan and the
date on which the Plan is approved by the stockholders of the Company.
7. AMENDMENT OF THE PLAN
The Board of Directors may, insofar as permitted by law, from time to time, with
respect to any Shares not then subject to Options, suspend or discontinue the
Plan or revise or amend it in any respect whatsoever, subject to the approval of
the stockholders of the Company where such approval is required by law or
regulation or pursuant to the rules of the NYSE or, if the Shares are not listed
on the NYSE, the rules of any other exchange or market on which the Shares may
be traded.
8. APPLICATION OF FUNDS
The proceeds received by the Company from the sale of shares pursuant to Options
will be used for general corporate purposes.
9. NO OBLIGATION TO EXERCISE OPTION
The granting of an Option shall impose no obligation upon the Optionee to
exercise such Option.
10. APPROVAL OF STOCKHOLDERS
This Plan shall be effective upon its approval by the stockholders of the
Company.
11. NO RIGHT TO NOMINATION
Neither the Plan nor any action taken hereunder shall be construed as giving any
director any right to be nominated for reelection to the Company's Board of
Directors.
12. EFFECT OF PLAN UPON OTHER OPTIONS AND COMPENSATION PLANS
The adoption of this Plan shall not affect any other compensation or incentive
plans in effect for the Company or any Subsidiary. Nothing in this Plan shall be
construed to limit the right of the Company or any Subsidiary to (a) establish
any other forms of incentives or compensation for employees or directors of or
persons associated with the Company or any Subsidiary, or (b) grant or assume
options otherwise than under this Plan in connection with any proper corporate
purpose, including, but not by way of limitation, the grant or assumption of
options in connection with the acquisition by purchase, lease, merger,
consolidation or otherwise, of the business, stock or assets of any corporation,
firm or association.
B-6
<PAGE> 1
EXHIBIT 10.27
REINSURANCE AGREEMENT
between
RELIANCE STANDARD LIFE INSURANCE COMPANY
and
ORACLE REINSURANCE COMPANY LTD.
This Agreement is made and entered into on the 27 day of January, 1998
by and between Reliance Standard Life Insurance Company, a corporation duly
organized under the insurance laws of the State of Illinois (hereinafter
referred to as "Ceding Company"), and Oracle Reinsurance Company Ltd., a
corporation duly organized under the insurance laws of Bermuda (hereinafter
referred to as "Reinsurer").
WHEREAS, the parties desire to provide for the reinsurance on a quota
share basis by the Reinsurer of a portion of Ceding Company's liabilities under
group long-term disability claims incurred prior to January 1, 1996 and
outstanding as of the Effective Date, as defined below, on the terms more
specifically provided below;
NOW, THEREFORE, the parties agree as follows:
I. APPROVAL
This Agreement shall have no force or effect until it shall have been
approved or deemed approved by the Director of Insurance of the State of
Illinois as and in the manner required by the Illinois Insurance Code and the
regulations thereunder (collectively, the "Illinois Laws").
II. REINSURANCE
The reinsurance provided for hereunder shall become effective as of
12:01 a.m. on January 1, 1998 (the "Effective Date").
III. BUSINESS COVERED
Ceding Company agrees to cede, and Reinsurer agrees to accept as
indemnity reinsurance, 27.838118% (the "Reinsured Percentage") of Ceding
Company's liabilities with respect to claims incurred under Ceding Company's
group long-term disability policies prior to January 1, 1996 which are open and
outstanding as of the Effective Date (the "Reinsured Claims"). This Agreement
shall not, however, relate in any way to liabilities with respect to Reinsured
Claims which are the subject of reinsurance cessions effected by Ceding Company
prior to the Effective Date, and such liabilities shall be disregarded for
purposes of applying all of the provisions of this
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Agreement.
IV. REINSURANCE PREMIUM
Ceding Company shall pay to Reinsurer, within ten (10) days of receipt
of the approval referenced in Section I hereof, or upon such other date to which
Ceding Company and Reinsurer mutually agree, an initial reinsurance premium
which shall be equal to the Reinsured Percentage of Ceding Company's aggregate
statutory reserves with respect to the Reinsured Claims, as required by
applicable regulatory authorities (the "Reinsured Claim Reserves"), determined
as of the Effective Date, less the sum of an initial ceding commission equal to
$4,833,950.00 and federal excise tax in the amount equal to 1% of the Reinsured
Claim Reserves, together with interest on the amount of the Reinsured Claim
Reserves for the period beginning on the Effective Date and ending on the date
of such payment at the rate of six percent (6%) per annum.
V. REPORTS AND RECONCILIATION
A. Quarterly Reports and Payments
Ceding Company will furnish to Reinsurer within thirty (30)
days after the close of each calendar quarter during which this Agreement is in
effect, commencing with the calendar quarter ending on March 31, 1998, on forms
mutually acceptable to Ceding Company and to Reinsurer, the following
information relating to the Reinsured Claims with respect to such quarter:
1. total benefit amounts paid with respect to Reinsured
Claims;
2. the amount of the expense allowance, which for
purposes hereof shall equal three percent (3%) of benefits
paid with respect to the Reinsured Claims during the
applicable calendar quarter;
3. the total amount of the Covered Claim Expenses (as
defined in Section VI hereof) incurred by Ceding Company
during such calendar quarter; and
4. the total amount of the Reinsured Claim Reserves as
of the end of such calendar quarter.
Reinsurer shall remit to Ceding Company, in cash, the Reinsured
Percentage multipled by the sum of (a) the amount described in clause 1 above,
(b) the amount described in clause 2 above and (c) the amount described in
clause 3 above, all as reflected in each such report, within ten (10) days of
receipt of such report.
B. Annual Investment Return Commission
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1. Ceding Company shall be entitled to share, on an annual
basis, in a portion of the Investment Return of Reinsurer on the
reserves maintained by Reinsurer with respect to the Reinsured Claims
(the "Reinsurer's Reserves"). The amount of such portion shall be equal
to the lesser of (a) the product of (i) seventy percent (70%) of the
amount by which the Investment Return for the applicable calendar year,
expressed as a percentage, exceeds six percent (6%), multiplied by (ii)
the Average Reserves or (b) two percent (2%) of the Average Reserves
for such calendar year, as increased, in either case, by any Carryover
Amount existing as of the end of such calendar year.
For purposes of the preceding paragraph and the formula contained
therein:
"Investment Return" shall mean the Reinsurer's net investment income
earned after investment expenses plus realized gains and losses divided
by the product of (i) one-half (1/2) and (ii) the sum of the
Reinsurer's total invested assets as of the first day of the applicable
calendar year and the Reinsurer's total invested assets as of the last
day of such calendar year. For purposes of the Investment Return
Commission calculation in 1998, the year of the inception of this
Agreement, and the year of termination of this Agreement, the
Investment Return shall be calculated based upon the dates the
Agreement was in force on an annualized basis.
"Average Reserves" shall mean the product of (a) one-half (1/2) and (b)
the sum of the Reinsurer's Reserves as of the first day of the
applicable calendar year and the Reinsurer's Reserves as of the last
day of such calendar year.
"Carryover Amount" shall mean, as to each calendar year beginning with
calendar year 1999, the cumulative sum of any amounts in the preceding
calendar years by which the amount obtained pursuant to clause (b) of
such formula exceeded the amount obtained pursuant to clause (a) of
such formula, and which amounts have not already been applied so as to
increase the amount payable pursuant to such formula.
2. Reinsurer will furnish to Ceding Company within fifteen
(15) days after the close of each calendar year during which this
Agreement is in effect, commencing with the calendar year ending on
December 31, 1998, on forms mutually acceptable to Ceding Company and
to Reinsurer, reports setting forth the amounts of the Investment
Return and the Average Reserves for such calendar year, along with the
amounts of any Carryover Amount existing as of the end of such calendar
year, including, in each case, supporting calculations. Each payment
due pursuant to this Section shall be made by Reinsurer to Ceding
Company within ten (10) days of its receipt of the calculation thereof
from Ceding Company.
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<PAGE> 4
VI. CLAIMS
All settlements made by Ceding Company with respect to the Reinsured
Claims shall under all circumstances be binding upon Reinsurer. Reinsurer shall
pay the Reinsured Percentage of the Covered Claim Expenses, net of any portion
thereof for which Ceding Company is entitled to be reimbursed from any third
party reinsurer, relating to any contest or compromise of a Reinsured Claim, and
Reinsurer shall share in the total amount of savings in the same proportion.
"Covered Claim Expenses" shall include costs of investigation, legal fees, court
costs, interest charges, and extracontractual payments or damages not resulting
from the negligence or willful misconduct of Ceding Company, if any, relating to
the Reinsured Claims. Compensation of salaried officers and employees shall not
be considered Covered Claim Expenses.
VII. LETTERS OF CREDIT
A. Reinsurer agrees to maintain, at all times during which any
liabilities or obligations to Ceding Company under this Agreement remain
outstanding, one or more letters of credit from a financial institution or
institutions acceptable to Ceding Company, the terms of which letters of credit
shall comply with all provisions of the Illinois Laws as may be necessary in
order for Ceding Company to receive a reduction from the Reinsured Claim
Reserves in the full amount of the reinsurance ceded hereunder. Reinsurer shall
cause the terms of such letters of credit to be amended as may be necessary to
assure continued compliance with the Illinois Laws in the event of any changes
or modifications that may occur thereto from time to time, except to the extent
that such changes or modifications, by their terms, do not apply to letters of
credit issued prior to the effective date of such changes. The amount of such
letter of credit shall at all times be at least equal to the Reinsured
Percentage of the claim reserves that would be required to be held by Ceding
Company if not for the reinsurance cession provided for in this Agreement.
B. Reinsurer and Ceding Company agree that, notwithstanding any other
provisions in this Agreement, the letter(s) of credit provided by Reinsurer
pursuant to the provisions of Section VII(A), (i) may be drawn upon by Ceding
Company at any time, (ii) shall remain under the exclusive control of Ceding
Company and (iii) may be utilized by Ceding Company or its successors in
interest only for one or more of the following reasons:
1. To reimburse Ceding Company for Reinsurer's share of
premiums returned to the owners of policies reinsured under this
Agreement on account of cancellations of such policies.
2. To reimburse Ceding Company for Reinsurer's share of
surrenders and benefits or losses paid by Ceding Company under
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<PAGE> 5
the terms and provisions of the policies reinsured under this
Agreement.
3. To fund an account with Ceding Company in an amount at
least equal to the deduction, for reinsurance ceded, from Ceding
Company's liabilities for the Reinsured Claims. This amount shall
include, but not be limited to, amounts for policy reserves, claims and
losses incurred (including losses incurred but not reported) and
unearned premium reserves. Ceding Company shall be liable to Reinsurer
for interest at a rate equal to a base rate, as determined from time to
time by Bank of America, plus three percent (3%), on all amounts in
such account for the period beginning when they are obtained pursuant
to the letter of credit until the time they actually become due to
Ceding Company under this Agreement.
4. To pay any other amounts Ceding Company claims are due
under this Agreement. Ceding Company shall return to Reinsurer any
amounts drawn down in excess of the actual amounts required for such
amounts or any amounts that are subsequently determined not to be due.
5. To pay existing liabilities between Ceding Company
and Reinsurer upon a termination of this Agreement pursuant to
Section XIII hereof.
The foregoing provisions of this Section VII(B) shall be applied
without diminution because of insolvency on the part of Ceding Company or
Reinsurer.
VIII. INSPECTION
Each party hereto shall allow the other party to inspect, at all
reasonable times, all of its books and records with respect to all transactions
under or relating to this Agreement. Each party shall hold in confidence the
results of such inspection.
IX. ERRORS AND OMISSIONS
If any failure of either party hereto to comply with any provision of
this Agreement is shown to have been unintentional, and if such party promptly
takes appropriate steps to cure such failure, such party shall not be deemed by
reason of such failure to be in breach of its obligations under this Agreement.
The failure of either party to make any remittance to the other required by this
Agreement shall not be deemed to be a breach of this Agreement if cured within
five (5) business days after written notice of the party to receive such
remittance that such remittance is due and unpaid, unless such notice is the
third or greater such notice given in any one calendar year. Such notice will be
effective upon receipt.
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<PAGE> 6
X. INSOLVENCY
The reinsurance provided under this Agreement shall be payable by
Reinsurer on the basis of the liability of Ceding Company with respect to the
Reinsured Claims without diminution because of the insolvency of Ceding Company.
In the event of the insolvency of Ceding Company, payments by Reinsurer shall be
made directly to Ceding Company or its liquidator, receiver or statutory
successor.
In such event, the liquidator, receiver, or statutory successor of
Ceding Company shall give written notice of the pendency of a Reinsured Claim
against Ceding Company on the Reinsured Policy within a reasonable time after
such Reinsured Claim is filed in the insolvency proceeding. During the pendency
of any such claim, Reinsurer may investigate such claim and interpose, at its
own expense, in the proceeding where such claim is to be adjudicated any
defenses which Reinsurer considers available to Ceding Company or its
liquidator, receiver, or statutory successor. The expense thus incurred by
Reinsurer shall be chargeable against Ceding Company as part of the expense of
liquidation to the extent of a proportionate share of the benefit which may
accrue to Ceding Company solely as a result of the defense undertaken by
Reinsurer.
XI. ARBITRATION
In the event of any dispute arising under this Agreement either party
hereto may elect that such dispute be resolved by arbitration. In order to make
such an election, such party must select an arbitrator and give written notice
to the other party of its election and of the name and address of the arbitrator
so selected. Within twenty (20) days after receiving that notice, the other
party shall select an arbitrator and give the first party notice of the name and
address of said arbitrator. If the other party fails to notify the first party
of the name and address of an arbitrator within such 20-day period, the
arbitrator selected by the first party shall serve as sole arbitrator. Within
twenty (20) days thereafter the two arbitrators so selected shall select a third
arbitrator. Should the two arbitrators be unable to agree upon a choice of the
third within such time period, each shall provide the name of an acceptable
third arbitrator and lots shall be drawn to select the third.
The arbitrators shall conduct any arbitration under this Agreement in
accordance with the rules of the American Arbitration Association. Each party
shall submit its case to the arbitrators within thirty (30) days after the third
arbitrator is chosen. The Court of Arbitrators will be held in Philadelphia, PA.
The arbitrators shall be active or retired and disinterested officers
of life or health insurance companies other than the two parties to this
Agreement or any of their affiliates and shall be
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<PAGE> 7
familiar with the reinsurance business. The arbitrators shall base their
decision on the terms and conditions of this Agreement and, as necessary, on the
generally accepted customs and practices of the life and health insurance and
life and health reinsurance industry rather than solely on a strict
interpretation of applicable law. They shall decide by a majority of votes, and
their written decision shall be binding upon the parties and shall not be
subject to appeal. The cost of arbitration, including the fees of the
arbitrators, shall be borne by the losing party unless the arbitrators shall
decide otherwise.
The parties intend this Section XI to be enforceable in accordance with
the Federal Arbitration Act, including any amendments thereto which are
subsequently adopted. In the event that either party refuses to submit to
arbitration as required by this Section XI, the other party may request a United
States Federal District Court to compel arbitration in accordance with the
Federal Arbitration Act. Both parties consent to the jurisdiction of any such
court to enforce this Article and to confirm and enforce the performance of any
award of the arbitrators.
XII. NO THIRD PARTY BENEFICIARIES
This Agreement is solely between Ceding Company and Reinsurer.
Performance of the respective obligations of each party under this Agreement
shall be rendered solely to the other party. In no event shall any policyholder
or insured of Ceding Company, any beneficiary of such policyholder or insured or
any other person or entity (other than Ceding Company and Reinsurer) have any
rights under this Agreement and Ceding Company shall remain solely liable to
such policyholder, insured or beneficiary of such insured. Without limiting the
generality of the foregoing, Reinsurer shall have no direct or indirect
obligation to insureds, claimants or beneficiaries under the Reinsured Claims or
the policies under which such claims arose.
XIII. TERMINATION
A. This Agreement shall terminate upon the first to occur of
any of the following events:
1. At such time as all of Ceding Company's liabilities and
obligations with respect to the Reinsured Claims have been satisfied or
expired in their entirety, and Reinsurer has paid to Ceding Company in
full all amounts owing to Ceding Company under the provisions of this
Agreement.
2. At any time, by mutual written consent of the
parties.
3. Upon the delivery to Reinsurer of an election in
writing by Ceding Company, in the event that an event
constituting a Change of Control (as defined below) occurs
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<PAGE> 8
with respect to Reinsurer.
4. Upon the delivery to Reinsurer of an election in writing by
Ceding Company, thirty (30) or less days prior to the scheduled
expiration of one or more of the letters of credit required to be
maintained by Reinsurer pursuant to Section VII hereof if, at such time
Reinsurer has not provided assurance acceptable to Ceding Company, in
its sole discretion, that such letter or letters of credit will be
renewed for an additional term of not less than one (1) year or
replaced with one or more letters of credit meeting the requirements of
Section VII hereof and having a term or terms of no less than one (1)
year.
For purposes of Section XIII(A)(3), a "Change of Control" shall be
deemed to have occurred (1) if individuals who, as of the effective date of this
Plan, constitute the Board of Directors of Reinsurer's parent company, Delphi
International Ltd. (the "Board of Directors" generally and as of the date of
this Agreement the "Incumbent Board"), cease for any reason to continue to
constitute at least a majority of the directors constituting the Board of
Directors, provided that any person becoming a director subsequent to the date
of this Agreement whose election, or nomination for election by International's
shareholders, was approved by a vote of at least three-quarters (3/4) of the
then directors who are members of the Incumbent Board (other than an election or
nomination of an individual whose initial assumption of office is (A) in
connection with the acquisition by a third person, including a "group" as such
term is used in Section 13(d)(3) of the Securities and Exchange Act of 1934, as
amended (the "1934 Act"), of beneficial ownership, directly or indirectly, of
20% or more of the combined voting securities ordinarily having the right to
vote for the election of directors of International(unless such acquisition of
beneficial ownership was approved by a majority of the Board of Directors who
are members of the Incumbent Board), or (B) in connection with an actual or
threatened election contest relating to the election of the directors of
International, as such terms are used in Rule 14a- 11 of Regulation 14A
promulgated under the 1934 Act) shall be, for purposes of this Plan, considered
as though such person were a member of the Incumbent Board; or (2) if the
stockholders of International approve a merger, consolidation, recapitalization
or reorganization of International, reverse split of any class of voting
securities of International, or an acquisition of securities or assets by
International, or the sale or disposition by International of all or
substantially all of International's assets, or if any such transaction is
consummated without stockholder approval, other than any such transaction in
which the holders of outstanding International voting securities immediately
prior to the transaction receive, with respect to such International voting
securities, voting securities of the surviving or transferee entity representing
more than 60 percent of the total voting power outstanding immediately after
such transaction, with the voting power of each such continuing holder relative
to other
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<PAGE> 9
such continuing holders not substantially altered in the transaction; or (3) if
the stockholders of International approve a plan of complete liquidation of
International.
B. In the event of any termination of this Agreement pursuant to
subsections 2, 3 or 4 of Section XIII(A), Reinsurer shall pay to Ceding Company,
no later than the effective date of such termination, the full amount of the
reserves required to be maintained by Ceding Company with respect to the portion
of the Reinsured Claim Reserves ceded pursuant to this Agreement, along with all
other amounts owing to Ceding Company under the provisions of this Agreement, as
of such effective date.
XIV. SETOFFS
Ceding Company and Reinsurer may setoff any balance due and payable by
it to the other party against any balance due and payable from such other party.
XV. CURRENCY
All amounts as to which payments are provided for hereunder
shall be paid in U.S. dollars.
XVI. NOTICES
Any notice, report, statement, or other communication provided for or
appropriate under this Agreement shall be in writing and be given by personal
delivery, by a nationally recognized overnight delivery service, or by first
class United States mail, postage prepaid, as follows:
To Reinsurer:
Oracle Reinsurance Company Ltd.
Clarendon House
11 Church Street
Hamilton, Bermuda
Attention: Colin O'Connor
To Ceding Company:
Reliance Standard Life Insurance Company
2501 Parkway
Philadelphia, Pennsylvania 19130
Attention: Wayne Benseler
Either party may change its address for purposes of receipt of any such
communication by giving ten (10) days notice of such change to the other party
in the manner above prescribed.
XVII. GOVERNING LAW
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This Agreement shall be deemed to have been made under and shall be
governed by the laws, regulations and decisions of the State of Illinois in all
respects, including matters of construction, validity, and performance, without
giving effect to principles of conflicts of laws.
XVIII. POLICY FORMS
Reinsurer acknowledges receipt from Ceding Company of specimen forms of
the insurance policies under which the Reinsured Claims have been incurred.
XIX. ENTIRE AGREEMENT; AMENDMENTS
This Agreement constitutes the entire agreement of the parties hereto
with respect to the Reinsured Claims and there are no understandings between the
parties other than as expressed in this Agreement. Any amendment, change or
modification to this Agreement shall be null and void unless the same is made by
a written amendment to this Agreement signed by both parties hereto.
XX. EXPENSES
Except as may be otherwise expressly provided in this
Agreement, whether or not the transactions contemplated hereby are consummated,
each of the parties hereto shall pay its own costs and expenses incident to
preparing for, entering into and carrying out this Agreement and the
consummation of the transactions contemplated hereby.
XXI. COUNTERPARTS
This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which shall constitute one
and the same instrument and shall become effective when one or more counterparts
have been signed by each of the parties and delivered to the other parties.
XXII. ASSIGNMENT; BINDING EFFECT
Neither this Agreement nor any of the rights, interests or
obligations under this Agreement shall be assigned, in whole or in part, by any
of the parties hereto without the prior written consent of the other party, and
any such assignment that is attempted without such consent shall be null and
void. Subject to the preceding sentence, this Agreement shall be binding upon,
inure to the benefit of, and be enforceable by the parties and their respective
successors and permitted assigns.
XXIII. INVALID PROVISIONS
If any provision of this Agreement is held to be illegal,
invalid, or enforceable under any present or future law, and if the
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<PAGE> 11
rights or obligations of the parties hereto under this Agreement will not be
materially and adversely affected thereby, (a) such provision shall be fully
severable; (b) this Agreement shall be construed and enforced as if such
illegal, invalid, or unenforceable provision had never comprised a part hereof;
and (c) the remaining provisions of this Agreement shall remain in full force
and effect and shall not be affected by the illegal, invalid, or unenforceable
provision or by its severance herefrom.
XXIV. WAIVER
Any term or condition of this Agreement may be waived in
writing at any time by the party that is entitled to the benefit thereof. A
waiver on one occasion shall not be deemed to be a waiver of the same or any
other breach or nonfulfillment on a future occasion. All remedies, either under
the terms of this Agreement, or by law or otherwise afforded, shall be
cumulative and not alternative, except as otherwise provided by law.
XXV. JURISDICTION; DESIGNATED ATTORNEY
In the event of the failure of Reinsurer to perform its
obligations under the terms of this Agreement, Reinsurer, at the request of
Ceding Company, shall (i) submit to the jurisdiction of any court of competent
jurisdiction in any state of the United States, (ii) comply with all
requirements necessary to give such court jurisdiction, and (iii) shall abide by
the final decision of the court or of any appellate court in the event of an
appeal. Reinsurer hereby designates the Illinois Director of Insurance (or an
attorney designated by such Director) as Reinsurer's true and lawful attorney
upon whom may be served any lawful process in any action, suit, or proceeding
instituted by or on behalf of the Ceding Company.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the date first written above.
Attest: RELIANCE STANDARD LIFE INSURANCE COMPANY
______________________ By: ___________________________________
Name:
Title:
Attest: ORACLE REINSURANCE COMPANY LTD.
______________________ By: ___________________________________
Name:
Title:
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<PAGE> 1
EXHIBIT 10.28
CASUALTY EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
between
SAFETY NATIONAL CASUALTY CORPORATION
St. Louis, Missouri
(hereinafter referred to as the "Reinsured")
and
ORACLE REINSURANCE COMPANY LTD.
Hamilton, Bermuda
(hereinafter referred to as the "Reinsurer")
PREAMBLE
In consideration of the mutual covenants hereinafter contained and upon
the terms and conditions hereinafter set forth, the parties hereto agree as
follows:
ARTICLE I
BUSINESS COVERED
This Agreement shall cover business classified by the Reinsured as
Specific and/or Aggregate Excess Workers' Compensation and Casualty Business,
and shall apply to the Reinsured's Net Losses occurring prior to January 1, 1997
for Policies effective on or before December 31, 1996.
ARTICLE II
TERM & CANCELLATION
1. This Agreement shall become effective at 12:01 A.M. Local Standard Time,
January 27, 1998, and shall apply to all Losses Occurring prior to January 1,
1997.
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2. This Agreement shall terminate upon the first to occur of any of the
following events:
a.) At such time as all of the Reinsured's liabilities and
obligations with respect to the reinsured claims have been
satisfied in their entirety, and the Reinsurer has paid to the
Reinsured in full all amounts owing to the Reinsured under the
provisions of this Agreement.
b.) At any time, by mutual written consent of the parties.
c.) The Reinsured shall have the right to terminate this Agreement
immediately by giving the Reinsurer notice:
(1) If the performance of the whole or any part of this
Agreement is prohibited or rendered impossible de
jure or de facto in particular and without prejudice
to the generality of the preceding words in
consequence of any law or regulations which is or
shall be in force in any country or territory or if
any law or regulations shall prevent directly or
indirectly the remittance of any or all or any part
of the balance or payments due to or from either
party.
(2) If the Reinsurer at any time shall:
(a) Become insolvent, or
(b) Suffer any impairment of capital, or
(c) File a petition in bankruptcy, or
(d) Go into liquidation or rehabilitation, or
(e) Have a receiver appointed, or
(3) In the event of the severance or obstruction of free
and unfettered communication and/or normal commercial
and/or financial intercourse between the United
States of America and the country in which the
Reinsurer is incorporated or has its principal office
as a result of war, currency regulations, or any
circumstances arising out of political, financial or
economic emergency.
d.) Upon the election in writing by the Reinsured, in the event
that any event constituting a Change of Control occurs with
respect to the Reinsurer.
e.) Upon the election in writing by the Reinsured, thirty (30) or
less days prior to the scheduled expiration of one or more of
the letters of credit required to be maintained by the
Reinsured pursuant to Article XXII hereof if, at such time the
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Reinsurer has not provided assurance acceptable to the
Reinsured, in its sole discretion, that such letter or letters
of credit will be renewed for an additional term of not less
than one (1) year or replaced with one or more letters of
credit meeting the requirements of Article XXII hereof and
having a term or terms of not less than one (1) year.
For purposes of Section 2(d) of this Article, a "Change of Control"
shall be deemed to have occurred (1) if individuals who, as of the
effective date of this Plan, constitute the Board of Directors of
Reinsurer (the "Board of Directors" generally and as of the date of
this Agreement the "Incumbent Board") cease for any reason to continue
at least a majority of the directors constituting the Board of
Directors, provided that any person becoming a director subsequent to
the date of this Agreement whose election, or nomination for election
by Reinsurer's shareholders, was approved by a vote of at least
three-quarters (3/4) of the then directors who are members of the
Incumbent Board (other than an election or nomination of an individual
whose initial assumption of office is (A) in connection with the
acquisition by a third person, including a "group" as such term is used
in Section 13(d) (3) of the Securities and Exchange Act of 1934, as
amended (the "1934 Act"), of beneficial ownership, directly or
indirectly, of 20% or more of the combined voting securities ordinarily
having the right to vote for the election of directors of Reinsurer
(unless such acquisition of beneficial ownership was approved by a
majority of the Board of Directors who are members of the Incumbent
Board), or (B) in connection with an actual or threatened election
contest relating to the election of the directors of Reinsurer, as such
terms are used in Rule 14a-11 of Regulation 14A promulgated under the
1934 Act) shall be, for purposes of this Plan, considered as though
such person were a member of the Incumbent Board; or (2) if the
stockholders of Reinsurer approve a merger, consolidation,
recapitalization or reorganization of Reinsurer, reverse split of any
class voting securities of Reinsurer, or an acquisition of securities
or assets by Reinsurer, or the sale or disposition by Reinsurer of all
or substantially all of Reinsurer's assets, or if any such transaction
is consummated without stockholder approval, other than any such
transaction in which the holders of outstanding Reinsurer voting
securities immediately prior to the transaction receive, with respect
to such Reinsurer voting securities, voting securities of the surviving
or transferee entity representing more than 60 percent of the total
voting power outstanding immediately after such transaction, with the
voting power of each such continuing holder relative to other such
continuing holders not substantially altered in the transaction; or (3)
if the stockholders of Reinsurer approve a plan of complete liquidation
of Reinsurer.
3. In the event of any termination of this Agreement pursuant to subsections b,
c, d or e of Section 2 of this Article, the Reinsurer shall pay to the
Reinsured, no later than the effective date of such termination, the full amount
of the reserves required to be maintained by Reinsured, along with all other
amounts owing to Reinsured under the provisions of this Agreement, as of such
effective date.
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4. This Agreement shall have no force or effect until it shall have been
approved or deemed approved by the Director of Insurance of the State of
Missouri as and in the manner required by the Missouri Insurance Code and the
regulations thereunder (collectively, the "Missouri Laws"). In addition,
pursuant to the Missouri Laws, the termination or cancellation of this Agreement
is subject to the prior regulatory approval of the Director of Insurance of the
State of Missouri.
ARTICLE III
RETENTION AND LIMIT
1. The Reinsurer shall not be liable for any loss under Specific and/or
Aggregate Excess Workers' Compensation Policies until the Net Loss of the
Reinsured exceeds $590,900,000 in excess of various self-insured retentions, and
then the Reinsurer shall be liable for the amount of Net Loss sustained by the
Reinsured in excess of $590,900,000, but the Reinsurer's liability shall not
exceed $185,100,000.
2. The Reinsurer shall not be liable for any loss under Casualty Business
Policies until the Net Loss of the Reinsured exceeds $80,000,000, and then the
Reinsurer shall be liable for the amount of Net Loss sustained by the Reinsured
in excess of $80,000,000, but the Reinsurer's liability shall not exceed
$5,000,000.
ARTICLE IV
PREMIUM
The net funds due shall be $64,190,000, consisting of a gross
reinsurance premium of $81,000,000 netted against $16,000,000 Advance
Underwriting Cash Flow Profit Commission and $810,000 of Federal Excise Tax. The
net funds due shall be remitted within thirty (30) days
of the execution of this Agreement.
ARTICLE V
REPORTS & REMITTANCES
1. The Reinsured shall report to the Reinsurer in a form mutually acceptable,
within thirty (30) days after the end of each calendar quarter the amount of
Losses Paid by the Reinsured during the quarter. The Reinsured shall also
furnish such other information as may be required by the Reinsurer for the
completion of the Reinsurer's quarterly and annual statements and internal
records. The Reinsurer shall furnish quarterly unaudited financial statements
and annual audited financial statements to the Reinsured.
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2. The Reinsurer shall remit to the Reinsured within forty-five (45) days after
the end of each calendar year the amount of Losses Paid by the Reinsured which
are in excess of the Reinsured's retention as identified in Article III of this
Agreement.
3. The Reinsured's Losses Paid through December 31, 1996 are $214,092,382 on
Specific and/or Aggregate Excess Workers' Compensation Policies and $63,934,116
on Casualty Business Policies.
ARTICLE VI
PROFIT COMMISSIONS
An Investment Profit Commission and an Underwriting Profit Commission
shall be calculated annually by the Reinsured during the term of the Agreement.
1. Investment Profit Commission:
a.) The Reinsured shall be entitled to share, on an annual basis,
in a portion of the Investment Return of the Reinsurer on the
assets maintained by Reinsurer with respect to this
Agreement. The amount of such portion shall be equal to the
product of (i) seventy percent (70%) of the first three
percent (3%) of the amount by which the Investment Return for
the applicable calendar year, expressed as a percentage,
exceeds five percent (5%), multiplied by (ii) the Cash
Balance at the beginning of the period. Such product shall be
increased by any Shortfall existing as of the beginning of
such calendar year.
For the purposes of the preceding paragraph and the formula contained
therein:
"Investment Return" shall mean the Reinsurer's net investment income
earned after investment expenses plus realized gains and losses divided by the
product of (i) one-half (1/2) and (ii) the sum of the Reinsurer's total invested
assets as of the first day of the applicable calendar year and the Reinsurer's
total invested assets as of the last day of such calendar year. For purposes of
the Investment Profit Commission calculation in 1998, the year of the inception
of this Agreement, and the year of termination of this Agreement, the Investment
Return shall be calculated based upon the dates the Agreement was in force on an
annualized basis.
"Cash Balance" shall mean gross premiums received less Advance
Underwriting Profit Commission paid, less actual cumulative losses paid by the
Reinsurer and cumulative investment profit commission paid plus cumulative
investment income earned.
"Shortfall" shall mean, as to each calendar year, the cumulative sum of
any amounts in the preceding calendar years by which the amount obtained
pursuant to section a) above is not sufficient to generate profits up to the
maximum percentage specified.
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b.) The Reinsurer will furnish to the Reinsured within fifteen
(15) days after the close of each calendar year during which
this Agreement is in effect, on forms mutually acceptable to
the Reinsured and to the Reinsurer, reports setting forth the
amounts of the Investment Return and the Cash Balance for such
calendar year, along with the amounts of any cumulative
Shortfall carried over to such calendar year.
c.) The Investment Profit Commission shall be made annually within
sixty (60) days after year end beginning as of December 31,
1998. The final Investment Profit Commission calculation shall
be made as of December 31, 2034. Payments of any positive
Investment Profit Commission shall be made within thirty (30)
days after the calculation of such Investment Profit
Commission.
2. Underwriting Cash Flow Profit Commission:
The Underwriting Cash Flow Profit as of the close of the applicable
calendar year shall be calculated by the Reinsured as follows in the first year:
a.) The gross premium received,
b.) Less losses paid in the applicable year by the Reinsurer,
c.) The result of a.) less b.) above shall be multiplied by a 5%
growth rate.
For all subsequent years, the Underwriting Cash Flow Profit shall by
calculated by the Reinsured as follows:
d.) The prior year's calculated Underwriting Cash Flow Profit,
e.) Less losses paid by the Reinsurer for the year ended December
31,
f.) The result of d.) less e.) shall be multiplied by a 5% growth
rate.
g.) For purposes of the calculation of the Underwriting Cash Flow
Profit, actual losses paid shall include remittances made
within forty-five (45) days after the end of the calendar
year.
The Reinsurer shall pay to the Reinsured an Underwriting Cash Flow
Profit Commission equal to 1.35% of any positive Underwriting Cash Flow Profit,
calculated as described above, and shall be calculated annually within sixty
(60) days of the close of the applicable calendar year. Payments shall be made
within thirty (30) days after the calculation of such Underwriting Cash Flow
Profit. The initial calculation shall be made as of December 31, 1998 and the
final calculation shall be made as of December 31, 2034.
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3. Advance Underwriting Cash Flow Profit Commission:
At inception of this Agreement, the Reinsurer shall advance the
Reinsured $16 million of Underwriting Cash Flow Profit Commission to be held as
collateral against non-performance under the Agreement. This advance commission
shall be used to pay Underwriting Cash Flow Profit Commissions earned under the
Agreement. In the event the Underwriting Cash Flow Profit Commissions earned do
not reduce the Advance Underwriting Cash Flow Profit to zero, the Reinsured
shall retain such advance until all losses are paid under this Agreement.
ARTICLE VII
NET RETAINED LINES
This Agreement applies to that portion of any insurance or reinsurance
which the Reinsured retains net for its own account, and shall include
reinsurance which the Reinsured has commuted with former Reinsurers, and
reinsurance deemed uncollectible by the Reinsured due to the insolvency of such
other Reinsurers or otherwise. In calculating the amount of any loss hereunder
and also in computing the amount or amounts in excess of which this Agreement
attaches, only loss or losses in respect of that portion of any insurance or
reinsurance which the Reinsured retains net for its own account, commuted with
former Reinsurers, or deemed uncollectible by the Reinsured due to the
insolvency of such other Reinsurers or otherwise shall be included.
ARTICLE VIII
NET LOSS
1. The term "Net Loss(es)" shall mean the actual loss incurred by the Reinsured
under Policies covered hereunder. Such loss shall include sums paid in
settlement of claims and suits and in satisfaction of judgments, including
prejudgment interest when added to a judgment. Such loss also shall include any
allocated loss adjustment expenses incurred by the Reinsured with respect to
Casualty Business. Allocated loss adjustment expenses shall include without
limitation:
a) expenses sustained in connection with settlement and
litigation of claims and suits, satisfaction of judgments,
defense of or negotiations concerning a loss (which shall
include the pro rata share of the Reinsured's outside
employees according to the time occupied in adjusting such
loss and the salaries and expenses of the Reinsured's
employees while diverted from their normal duties to the
service of field adjustment but shall not include any salaries
of officers nor normal overhead salaries and expenses of the
Reinsured),
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b) legal expenses and costs incurred in connection with coverage
questions and legal actions, including declaratory judgment
actions, connected thereto, and
c) any interest on judgments other than prejudgment interest when
added to a judgment.
2. All salvages, recoveries, payments and reversals or reductions of verdicts or
judgments (net of the cost of obtaining such salvage, recovery, payment or
reversal or reduction of a verdict or judgment) whether recovered, received or
obtained prior to or subsequent to loss settlement under this Agreement,
including amounts recoverable under other reinsurance whether collected or not,
shall be applied as if recovered, received or obtained prior to the aforesaid
settlement and shall be deducted from the actual losses sustained to arrive at
the amount of the net loss. Nothing in this Article shall be construed to mean
losses are not recoverable until the net loss to the Reinsured finally has been
ascertained.
3. The Reinsurer shall be subrogated, as respects any loss for which the
Reinsurer shall actually pay or become liable, but only to the extent of the
amount of payment by or the amount of liability to the Reinsurer, to all the
rights of the Reinsured against any person or other entity who may be legally
responsible for damages as a result of said loss. Should the Reinsured elect not
to enforce such rights, the Reinsurer are hereby authorized and empowered to
bring any appropriate action in the name of the Reinsured or its policyholders,
or otherwise to enforce such rights. The Reinsurer shall promptly remit to the
Reinsured the amount of any judgment awarded in such an action in excess of the
amount of payment by, or the amount of liability to, the Reinsurer hereunder.
ARTICLE IX
DEFINITIONS
1. Casualty Business
The term "Casualty Business" shall include but is not limited to:
Primary and Excess Automobile and General Liability, Umbrella
Liability, Medical Payments, Uninsured Motorists, No Fault Automobile
Programs, and the foregoing coverages under Multiple Peril and similar
types of Policies.
2. Loss(es) Paid
The term "Loss(es) Paid" shall mean actual payments to claimants under
Policies covered hereunder.
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3. Loss Occurrence
The term "Loss Occurrence" as used herein shall be construed to mean
any one accident, disaster, casualty or occurrence, or series of
accidents, disasters, casualties or occurrences arising out of or
caused by any event.
However, the Reinsurer agrees to follow the fortunes of the Reinsured
and recognize any definition of occurrence or accident imposed upon the
Reinsured by any workers' compensation board or other board, court or
tribunal, having competent jurisdiction.
If any of this Article is held to be invalid under the laws of any
state, that provision shall be deemed to comply with the minimum
requirements of such law, giving due consideration to the original
intentions of the parties. But this shall not affect the validity or
enforceability of the original provisions in any other jurisdiction.
4. Loss(es) Occurring
The term "Loss(es) Occurring" shall be defined as in the original
Specific and/or Aggregate Excess Workers' Compensation and/or Casualty
Business Policy.
5. Net Loss
The term "Net Loss" shall have the meaning set forth in Article VIII
above.
6. Policy
The term "Policy" or "Policies" shall mean any and all Specific and/or
Aggregate Excess Workers' Compensation, and/or Employers Liability,
and/or Casualty Business binders, certificates, Policies and contracts
of insurance, issued or held bound, provisionally or otherwise, by the
Reinsured and effective on or before December 31, 1996.
7. Specific and/or Aggregate Excess Workers' Compensation
The term "Specific and/or Aggregate Excess Workers' Compensation" shall
mean the insurance afforded under the Policies which the Reinsured
identifies as Excess Workers' Compensation and/or Employers Liability.
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ARTICLE X
EXTRA CONTRACTUAL OBLIGATIONS
1. This Agreement shall indemnify the Reinsured within the limits hereof, where
the net loss includes any extra contractual obligations. "Extra Contractual
Obligations" (ECO) are defined as those liabilities not covered under any other
provision of this Agreement and which arise from the handling of any claim on
business covered hereunder, such liabilities arising because of, but not limited
to, the following: failure by the Reinsured to settle within the Policy limit,
or by reason of alleged or actual negligence, fraud or bad faith in rejecting an
offer of settlement or in the preparation of the defense or in the trial of any
action against its insured or reinsured or in the preparation or prosecution of
an appeal consequent upon such action.
2. The date on which an Extra Contractual Obligation is incurred by the
Reinsured shall be deemed, in all circumstances, to be the date of the original
accident, casualty, disaster or loss occurrence.
3. However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a corporate officer of the
Reinsured acting individually or collectively or in collusion with any
individual or corporation or any other organization or party involved in the
presentation, defense or settlement of any claim covered hereunder.
4. If any of this Article is held to be invalid under the laws of any state,
that provision shall be deemed to comply with the minimum requirements of such
law, giving due consideration to the original intentions of the parties. But
this shall not affect the validity or enforceability of the original provisions
in any other jurisdiction.
ARTICLE XI
LOSS IN EXCESS OF POLICY LIMITS
1. This Agreement shall indemnify the Reinsured within the limits hereof in
connection with Net Loss in excess of the limit of its original Policy, such
loss in excess of the limit having been incurred because of failure by it to
settle within the Policy limit or by reason of alleged or actual negligence,
fraud or bad faith in rejecting an offer of settlement or in the preparation of
the defense or in the trial of any action against its insured or reinsured or in
the preparation or prosecution of any appeal consequent upon such action.
2. However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a corporate officer of the
Reinsured acting individually or collectively or in collusion with any
individual or corporation or any other organization or party involved in the
presentation, defense or settlement of any claim covered hereunder.
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3. For the purpose of this Article, the word "loss" shall mean any amounts for
which the Reinsured would have been contractually liable to pay had it not been
for the limit of the original Policy.
ARTICLE XII
TERRITORY
This Agreement shall apply to losses occurring within the territorial
limits of the Reinsured's original insurances.
ARTICLE XIII
CURRENCY
Whenever the word "Dollars" or the "$" sign appears in this Agreement,
they shall be construed to mean United States Dollars and all transactions under
this Agreement shall be in United States Dollars.
Amounts paid or received by the Reinsured in any other currency shall
be converted to United States Dollars at the rate of exchange at the date such
transaction is entered on the books of the Reinsured.
ARTICLE XIV
TAXES
The Reinsurer shall reimburse the Reinsured one percent (1%) of the
premium hereon, or in the alternative, to deduct one percent (1%) or such other
rate that may be in effect from time to time for the purpose of paying the
Federal Excise Tax to the extent such premium is subject to Federal Excise Tax.
ARTICLE XV
REMITTANCE
1. Unpaid loss payments, premium payments and profit commissions due hereunder
shall be subject to interest, calculated by multiplying the unpaid amount by the
U.S. Prime Rate as published in the Wall Street Journal Eastern Edition on the
date upon which the unpaid loss payments, premium payment or profit commissions
begins to accrue interest as set forth below, the product of which shall be
multiplied by 1/365 for each day that interest accrues.
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2. Unpaid loss payments due hereunder shall accrue interest from sixty (60) days
subsequent to the sending (whether by mail, telecopy, or otherwise) by the
Reinsured the Reinsured's quarterly report to the Reinsurer, until such time as
the Reinsured receives the loss payment.
Notwithstanding the foregoing, no unpaid loss payment, premium payment or profit
commission due hereunder shall accrue interest:
a.) during any period(s) between the receipt by the Reinsured of a
Reinsurer's specific written request for additional,
substantive information regarding the loss for which claim is
being made and the sending (whether by mail, telecopy or
otherwise) by the Reinsured of a written response thereto,
except that, if the Reinsured receives such a request for
additional information more than thirty (30) days subsequent
to its sending of the original proof of loss or a response to
a Reinsurer's specific request for additional information,
this Subparagraph a. shall not apply as respects such
period(s).
b.) during any period(s) between the receipt by the Reinsured of a
specific written request by the Reinsurer for additional,
substantive information regarding the premium payment or
profit commissions and the sending (whether by mail, telecopy,
or otherwise) by the Reinsured of a written response thereto.
If, however, either party receives such a request for
additional information from the payor more than thirty (30)
days subsequent to its sending of the billing of premium or
profit commissions or a response to the other party's specific
request for additional information, this Subparagraph b. shall
not apply as respects such period(s). Furthermore, if either
party receives such a request for additional information from
the payee more than thirty (30) days subsequent to its sending
of the premium payment or profit commissions calculation or a
response to the other party's specific request for additional
information, this Subparagraph b. shall not apply as respects
such period(s).
c.) during any period(s) in which the unpaid loss payments,
premium payment or profit commissions due hereunder is in
dispute. For the purpose of this Subparagraph c., a loss,
premium payment or profit commissions shall be deemed in
dispute if litigation or arbitration proceedings concerning
the loss, premium payment or profit commissions have been
initiated, or as respects loss, the Reinsurer has issued a
formal written notification denying the validity of coverage.
Nothing in this Subparagraph c. shall in any way preclude or
restrict the awarding of interest in any litigation or
arbitration proceeding.
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3. Premium payments shall accrue interest from sixty (60) days from the due date
specified in this Agreement until such time as the Reinsurer receives the
premium payment. Profit commissions shall accrue interest from one hundred and
twenty (120) days from the end of the last Agreement year to which they apply
until such time as the Reinsured receives the profit commission payment.
4. If the interest due from one party to the other as respects any one payment
is less than one thousand dollars ($1,000), such interest shall be waived.
5. Nothing in this Article shall in any way alter, amend or modify any provision
of any other Article pertaining to the obligation to pay losses or premiums, it
being the intent of this Article only to establish the period during which
interest shall automatically accrue on unpaid loss, premium payments or profit
commissions due hereunder.
ARTICLE XVI
ERRORS AND OMISSIONS
Inadvertent delays, errors or omissions made in connection with this
Agreement shall not relieve either party from any liability which would have
attached had such delays, errors or omissions not occurred, provided always that
such delays, errors or omissions shall be rectified as soon as possible after
discovery.
ARTICLE XVII
COMMUTATION
The Reinsured may at any time request that this Agreement be
commuted. In such event, the Reinsurer and the Reinsured shall review such
losses and shall attempt to reach a settlement by mutual agreement. If the
Reinsurer and the Reinsured cannot reach a settlement by mutual agreement, then
the Reinsurer and the Reinsured shall mutually appoint an independent actuary
(F.S.A./F.C.A.S.; or A.S.A./A.C.A.S.) who shall investigate, determine and
capitalize the present value of such losses, and the payment by the Reinsurer of
its proportion of the amount so ascertained to be the capitalized value of such
loss or losses shall constitute a complete and final release of the Reinsurer in
respect of such loss or losses.
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ARTICLE XVIII
INSPECTION
Upon reasonable notice being given to the Reinsured, the Reinsured
shall place at the disposal of the Reinsurer at the Reinsured's office where
such records are maintained, and the Reinsurer shall have the right to inspect,
through its authorized representatives, at all reasonable times during the
currency of this Agreement and thereafter, the books, records and papers of the
Reinsured pertaining to the reinsurance provided hereunder and all claims made
in connection therewith.
ARTICLE XIX
OFFSET
Each party hereto shall have, and may exercise at any time and from
time to time, the right to offset any balance or balances, whether on account of
premiums or on account of losses or otherwise, due from each party to the other
party hereto under this Agreement.
ARTICLE XX
ARBITRATION
Any dispute or other matter in question between the Reinsured and the
Reinsurer arising out of or relating to the formation, interpretation,
performance, or breach of this Agreement, whether such dispute arises before or
after termination of this Agreement, shall be settled by arbitration.
Arbitration shall be initiated by the delivery of a written notice of demand for
arbitration by one party to the other within a reasonable time after the dispute
has arisen. Those Reinsurers involved in the dispute or other matter in
controversy shall be considered as one party for the purpose of allocating the
cost of arbitration. However, in the event of the insolvency of any party
hereto, offset shall only be allowed in accordance with the statutes and/or
regulations of the state or other jurisdiction having control over the
insolvency.
Each party shall appoint an individual as arbitrator and the two so
appointed shall then appoint a third arbitrator. If either party refuses or
neglects to appoint an arbitrator within thirty (30) days, the other party may
appoint the second arbitrator. If the two arbitrators do not agree on a third
arbitrator within ten (10) days of their appointment, each of the arbitrators
shall nominate three individuals. Each arbitrator shall then decline two of the
nominations presented by the other arbitrator. The third arbitrator shall then
be chosen from the remaining two nominations by drawing lots. The arbitrators
shall be active or retired officers of insurance or reinsurance companies; the
arbitrators shall not have a personal or financial interest in the result of the
arbitration.
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<PAGE> 15
The arbitration hearings shall be held in the city in which the
Reinsured's Head Office is located or such other place as may be mutually
agreed. Each party shall submit its case to the arbitrators within thirty (30)
days of the selection of the third arbitrator or within such longer period as
may be agreed by the arbitrators. The arbitrators shall not be obliged to follow
judicial formalities or the rules of evidence except to the extent required by
governing law, that is, the state law of the situs of the arbitration as herein
agreed; they shall make their decisions according to the practice of the
reinsurance business. The decision by a majority of the arbitrators shall be
rendered within sixty (60) days from the conclusion of the arbitration hearings
and such decision shall be final and binding on both parties. Such decision
shall be a condition precedent to any right of legal action arising out of the
arbitrated dispute which either party may have against the other. Judgment upon
the award rendered may be entered in any court having jurisdiction thereof.
Each party shall pay the fee and expenses of its own arbitrator and
one-half of the fee and expenses of the third arbitrator. All other expenses of
the arbitration shall be equally divided between the parties.
ARTICLE XXI
SERVICE OF SUIT
It is agreed that in the event of the failure of the Reinsurer hereon
to pay any amount claimed to be due hereunder, the Reinsurer hereon, at the
request of the Reinsured, will submit to the jurisdiction of a Court of
competent jurisdiction within the United States. Nothing in this Article
constitutes or should be understood to constitute a waiver of the Reinsurer's
rights to commence an action in any Court of competent jurisdiction in the
United States, to remove an action to a United States District Court, or to seek
a transfer of a case to another Court as permitted by the laws of the United
States or of any State in the United States. It is further agreed that service
of process in such suit may be made upon Baker & McKenzie, 805 Third Avenue, New
York, New York, 10022, and that in any suit instituted against any one of them
upon this Agreement, the Reinsurer will abide by the final decision of such
Court or of any Appellate Court in the event of an appeal.
The above named are authorized and directed to accept service of
process on behalf of the Reinsurer in any such suit and/or upon the request of
the Reinsured to give a written undertaking to the Reinsured that they will
enter a general appearance upon the Reinsurer's behalf in the event such a suit
shall be instituted.
Further, pursuant to any statute of any state, territory or district of
the United States which makes provision therefor, the Reinsurer hereon hereby
designates the Superintendent, Commissioner or Director of Insurance or other
officer specified for that purpose in the statute,
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<PAGE> 16
or his successor or successors in office as his true and lawful attorney upon
whom may be served any lawful process in any action, suit or proceeding
instituted by or on behalf of the Reinsured or any beneficiary hereunder arising
out of this Agreement, and hereby designates the above named as the person to
whom the said officer is authorized to mail such process or a true copy thereof.
ARTICLE XXII
LOSS RESERVES
1. If a jurisdiction of the United States will not permit the Reinsured in the
statements required to be filed with its regulatory authority(ies), to receive
full credit as admitted reinsurance for any Reinsurer's share of obligations,
the Reinsured shall forward to such Reinsurer a statement of the Reinsurer's
share of such obligations. Upon receipt of such statement the Reinsurer shall
promptly apply for, and provide the Reinsured with, a "clean," unconditional and
irrevocable Letter of Credit, in the amount specified in the statement
submitted, with terms and bank acceptable to the regulatory authority(ies)
having jurisdiction over the Reinsured.
2. "Obligations," as used in this Article, shall mean any amounts due under this
Agreement, including but not limited to, the sum of losses paid and allocated
loss adjustment expenses paid by the Reinsured but not yet recovered from the
Reinsurer plus reserves for reported losses, losses incurred but not reported,
allocated loss adjustment expenses, and premiums unearned, if any, plus
Investment Profit Commission and Underwriting Cash Flow Profit Commission.
3. The Reinsurer hereby agrees that the Letter of Credit will provide for
automatic extension of the Letter of Credit without amendment for one year from
the date of expiration of said Letter or any future expiration date unless
thirty (30) days prior to any expiration the issuing bank shall notify the
Reinsured by registered mail that the issuing bank elects not to consider the
Letter of Credit renewed for any additional period. An issuing bank, not a
"qualified bank" as defined by Regulation No. 133 promulgated by the Insurance
Department of the State of New York, shall provide sixty (60) days notice to the
Reinsured prior to any expiration.
4. Notwithstanding any other provision of the Agreement, the Reinsured or any
successor by operation of law of the Reinsured including, without limitation,
any liquidator, rehabilitator, receiver or conservator of the Reinsured may draw
upon such credit, without diminution because of the insolvency of any party
hereto, at any time and undertakes to use and apply such credit for one or more
of the following purposes only:
a.) To pay the Reinsurer's share or to reimburse the Reinsured for
the Reinsurer's share of any obligations, as stipulated in the
statement submitted by the Reinsured to the Reinsurer which is
due to the Reinsured and not otherwise paid by the Reinsurer.
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<PAGE> 17
b.) In the event the Reinsured has received effective notice of
non-renewal of the Letter of Credit and the Reinsurer's
liability remains unliquidated and undischarged thirty (30)
days prior to the expiry date of the Letter of Credit, to
withdraw the balance of the Letter of Credit and place such
sums in an interest bearing trust account to secure the
continuing liabilities of the Reinsurer under this Agreement
until a renewal Letter of Credit acceptable to the regulatory
authority(ies) having jurisdiction over the Reinsured, or a
substitute in lieu thereof acceptable to the regulatory
authority(ies) having jurisdiction over the Reinsured, has
been received by the Reinsured. The Reinsured shall provide to
the Reinsurer payment of any interest thereon accruing from
such account.
c.) To make refund of any sum which is in excess of the actual
amount required for Sections a. and b. of this Paragraph.
5. At annual intervals or more frequently as determined by the Reinsured, but
never more frequently than quarterly, the Reinsured shall prepare a specific
statement, for the sole purpose of amending the Letter of Credit, of Reinsurer's
share of any obligations. If the statement shows that the Reinsurer's share of
obligations exceeds the balance of credit as of the statement date, the
Reinsurer shall, within thirty (30) days after receipt of notice of such excess,
secure delivery to the Reinsured of an amendment of the Letter of Credit
increasing the amount of credit by the amount of such difference. If the
statement shows, however, that Reinsurer's share of obligations is less than the
balance of credit as of the statement date, the Reinsured shall, within thirty
(30) days after receipt of written request from the Reinsured, release such
excess credit by agreeing to secure an amendment to the Letter of Credit
reducing the amount of credit available by the amount of such excess credit.
6. The bank shall have no responsibility whatsoever in connection with the
propriety of withdrawals made by the Reinsured or the disposition of funds
withdrawn, except to assure that withdrawals are made only upon the order of
properly authorized representatives of the Reinsured. The Reinsured shall incur
no obligation to the bank in acting upon the credit, other than as appears in
the express terms thereof.
7. All expenses incurred in the establishment or maintenance of such Letter of
Credit shall be for the account of the Reinsurer.
ARTICLE XXIII
INSOLVENCY
In the event of the insolvency of the Reinsured, this reinsurance shall
be payable directly to the Reinsured, or to its liquidator, receiver,
conservator or statutory successor on the basis of the liability of the
Reinsured without diminution because of the insolvency of the Reinsured or
because the liquidator, receiver, conservator or statutory successor of the
Reinsured has failed to
17
<PAGE> 18
pay all or a portion of any claim. It is agreed, however, that the liquidator,
receiver, conservator or statutory successor of the Reinsured shall give written
notice to the Reinsurer of the pendency of a claim against the Reinsured
indicating the Policy insured which claim would involve a possible liability on
the part of the Reinsurer within a reasonable time after such claim is filed in
the conservation or liquidation proceeding or in the receivership, and that
during the pendency of such claim, the Reinsurer may investigate such claim and
interpose, at their own expense, in the proceeding where such claim is to be
adjudicated, any defense or defenses that they may deem available to the
Reinsured or its liquidator, receiver, conservator or statutory successor. The
expense thus incurred by the Reinsurer shall be chargeable, subject to the
approval of the court, against the Reinsured as part of the expense of
conservation or liquidation to the extent of a pro rata share of the benefit
which may accrue to the Reinsured solely as a result of the defense undertaken
by the Reinsurer.
ARTICLE XXIV
NOTICES
Any notice, report, statement, or other communication provided for or
appropriate under this Agreement shall be in writing and be given by personal
delivery, by a nationally recognized overnight delivery service, or by first
class United States mail, postage prepaid, as follows:
To Reinsurer:
Oracle Reinsurance Company Ltd.
Clarendon House
11 Church Street
Hamilton, Bermuda
Attention:
---------------------
To Reinsured:
Safety National Casualty Corporation
2043 Woodlands Parkway
Suite 200
St. Louis, MO 63146
Attention:
---------------------
Either party may change its address for purposes of receipt of any such
communication by giving ten (10) days notice of such change to the other party
in the manner above prescribed.
18
<PAGE> 19
ARTICLE XXV
GOVERNING LAW
This Agreement shall be deemed to have been made under and shall be
governed by the laws, regulations and decisions of the State of Missouri in all
respects, including matters of construction, validity, and performance, without
giving effect to principles of conflicts of laws.
ARTICLE XXVI
AMENDMENTS
This Agreement constitutes the entire agreement of the parties hereto
with respect to the business covered and there are no understandings between the
parties other than as expressed in this Agreement. Any amendment, change or
modification to this Agreement shall be null and void unless the same is made by
a written amendment to this Agreement signed by both parties hereto.
ARTICLE XXVII
SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon the successors and permitted
assigns of the respective parties hereto.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the date first written above.
Attest: SAFETY NATIONAL CASUALTY CORPORATION
- ------------------------------
By:
----------------------------------------
Name:
Title:
Attest: ORACLE REINSURANCE COMPANY LTD.
- -------------------------------
By:
----------------------------------------
Name:
Title:
19
<PAGE> 1
EXHIBIT 21.1
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
LIST OF SUBSIDIARIES OF THE REGISTRANT
Reliance Standard Life Insurance Company of Texas (Incorporated in Texas), a
subsidiary of Delphi Financial Group, Inc.
Reliance Standard Life Insurance Company (Incorporated in Illinois), a
subsidiary of Reliance Standard Life Insurance Company of Texas.
First Reliance Standard Life Insurance Company (Incorporated in New York), a
subsidiary of Reliance Standard Life Insurance Company.
SIG Holdings, Inc. (Incorporated in Delaware), a subsidiary of Delphi Financial
Group, Inc.
Safety National Casualty Corporation (Incorporated in Missouri), a subsidiary of
SIG Holdings, Inc.
Safety National Re (Incorporated in the Cayman Islands), a subsidiary of Safety
National Casualty Corporation
RSL Investors, Inc. (Incorporated in Delaware), a subsidiary of Delphi Financial
Group, Inc.
Chestnut Investors II, Inc. (Incorporated in Delaware), a subsidiary of Delphi
Financial Group, Inc.
Chestnut Investors III, Inc. (Incorporated in Delaware), a subsidiary of Delphi
Financial Group, Inc.
Chestnut Investors IV, Inc. (Incorporated in Delaware), a subsidiary of Delphi
Financial Group, Inc.
DFG II Corporation (Incorporated in Delaware), a subsidiary of Delphi Financial
Group, Inc.
DFG Corporation (Incorporated in Delaware), a subsidiary of DFG II Corporation.
APDEL LLC (Organized in Delaware), a subsidiary of DFG II Corporation and
Chestnut Investors IV, Inc.
Delphi Capital Management, Inc. (Incorporated in Delaware), a subsidiary of
Delphi Financial Group, Inc.
RSL Marketing, Inc. (Incorporated in Nevada), a subsidiary of Delphi Financial
Group, Inc.
Delphi Brokerage Company (Incorporated in Delaware), a subsidiary of Delphi
Financial Group, Inc.
Delphi Funding L.L.C. (Organized in Delaware), a subsidiary of Delphi Financial
Group, Inc.
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation be reference in the Registration Statements
(Form S-8 No. 33-42634) pertaining to the Employee Nonqualified Stock Option
Plan, (Form S-8 No.333-32961) pertaining to the Employee Nonqualified Stock
Option Plan,(Form S-8 No. 33-72614) pertaining to the Employee Stock Purchase
Plan, (Form S-8 No. 33-99164) pertaining to the SIG Holdings, Inc. 1992 Long
Term Incentive, (Form S-3 No. 33-77028) and in the related Prospectus pertaining
to the Shelf Registration of securities of Delphi Financial Group, Inc. of our
report dated February 9, 1998, with respect to the consolidated financial
statements and schedules of Delphi Financial Group, Inc. included in the Annual
Report (Form 10-K) for the year ended December 31, 1997.
/s/ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 12, 1998
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a director of
Delphi Financial Group, Inc., a Delaware corporation (the "Company"), hereby
constitutes and appoints Robert Rosenkranz and Robert M. Smith, Jr. or either
of them his true and lawful attorney(s)-in-fact and agent(s), with full power
of substitution and resubstitution, for him and in his place and stead in any
and all capacities, to execute one or more Annual Reports for the Company's
fiscal year ended December 31, 1997, on Form 10-K pursuant to the Securities
Exchange Act of 1934, as amended, or such other form as such
attorney(s)-in-fact may deem necessary or desirable, any amendments thereto,
and all additional amendments thereto in such form as either of them may
approve, and to file the same with all exhibits thereto and other documents in
connection therewith with the Securities and Exchange Commission, granting unto
said attorney(s)-in-fact and agent(s) full power and authority to do and perform
each and every act and thing requisite and necessary to be done to the end that
such Annual Report or Annual Reports shall comply with the Securities Exchange
Act of 1934, as amended, and the applicable rules and regulations of the
Securities and Exchange Commission adopted or issued pursuant thereto, as fully
and to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney(s)-in-fact and agent(s) or his
substitute or resubstitute, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 3rd day
of February, 1998.
/s/EDWARD A. FOX
----------------
Edward A. Fox
Director
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a director of
Delphi Financial Group, Inc., a Delaware corporation (the "Company"), hereby
constitutes and appoints Robert Rosenkranz and Robert M. Smith, Jr. or either of
them his true and lawful attorney(s)-in-fact and agent(s), with full power of
substitution and resubstitution, for him and in his place and stead in any and
all capacities, to execute one or more Annual Reports for the Company's fiscal
year ended December 31, 1997, on Form 10-K pursuant to the Securities Exchange
Act of 1934, as amended, or such other form as such attorney(s)-in-fact may deem
necessary or desirable, any amendments thereto, and all additional amendments
thereto in such form as either of them may approve, and to file the same with
all exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission, granting unto said attorney(s)-in-fact and
agent(s) full power and authority to do and perform each and every act and thing
requisite and necessary to be done to the end that such Annual Report or Annual
Reports shall comply with the Securities Exchange Act of 1934, as amended, and
the applicable rules and regulations of the Securities and Exchange Commission
adopted or issued pursuant thereto, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that said
attorney(s)-in-fact and agent(s) or his substitute or resubstitute, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 30th
day of January, 1998.
/s/ CHARLES P. O'BRIEN
----------------------
Charles P. O'Brien
Director
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a director of
Delphi Financial Group, Inc., a Delaware corporation (the "Company"), hereby
constitutes and appoints Robert Rosenkranz and Robert M. Smith, Jr. or either of
them his true and lawful attorney(s)-in-fact and agent(s), with full power of
substitution and resubstitution, for him and in his place and stead in any and
all capacities, to execute one or more Annual Reports for the Company's fiscal
year ended December 31, 1997, on Form 10-K pursuant to the Securities Exchange
Act of 1934, as amended, or such other form as such attorney(s)-in-fact may deem
necessary or desirable, any amendments thereto, and all additional amendments
thereto in such form as either of them may approve, and to file the same with
all exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission, granting unto said attorney(s)-in-fact and
agent(s) full power and authority to do and perform each and every act and thing
requisite and necessary to be done to the end that such Annual Report or Annual
Reports shall comply with the Securities Exchange Act of 1934, as amended, and
the applicable rules and regulations of the Securities and Exchange Commission
adopted or issued pursuant thereto, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that said
attorney(s)-in-fact and agent(s) or his substitute or resubstitute, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 11th
day of February, 1998.
/s/ LEWIS S. RANIERI
----------------------
Lewis S. Ranieri
Director
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a director of
Delphi Financial Group, Inc., a Delaware corporation (the "Company"), hereby
constitutes and appoints Robert Rosenkranz and Robert M. Smith, Jr. or either of
them his true and lawful attorney(s)-in-fact and agent(s), with full power of
substitution and resubstitution, for him and in his place and stead in any and
all capacities, to execute one or more Annual Reports for the Company's fiscal
year ended December 31, 1997, on Form 10-K pursuant to the Securities Exchange
Act of 1934, as amended, or such other form as such attorney(s)-in-fact may deem
necessary or desirable, any amendments thereto, and all additional amendments
thereto in such form as either of them may approve, and to file the same with
all exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission, granting unto said attorney(s)-in-fact and
agent(s) full power and authority to do and perform each and every act and thing
requisite and necessary to be done to the end that such Annual Report or Annual
Reports shall comply with the Securities Exchange Act of 1934, as amended, and
the applicable rules and regulations of the Securities and Exchange Commission
adopted or issued pursuant thereto, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that said
attorney(s)-in-fact and agent(s) or his substitute or resubstitute, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 29th
day of January, 1998.
/s/ THOMAS L. RHODES
----------------------
Thomas L. Rhodes
Director
<PAGE> 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a director of
Delphi Financial Group, Inc., a Delaware corporation (the "Company"), hereby
constitutes and appoints Robert Rosenkranz and Robert M. Smith, Jr. or either of
them his true and lawful attorney(s)-in-fact and agent(s), with full power of
substitution and resubstitution, for him and in his place and stead in any and
all capacities, to execute one or more Annual Reports for the Company's fiscal
year ended December 31, 1997, on Form 10-K pursuant to the Securities Exchange
Act of 1934, as amended, or such other form as such attorney(s)-in-fact may deem
necessary or desirable, any amendments thereto, and all additional amendments
thereto in such form as either of them may approve, and to file the same with
all exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission, granting unto said attorney(s)-in-fact and
agent(s) full power and authority to do and perform each and every act and thing
requisite and necessary to be done to the end that such Annual Report or Annual
Reports shall comply with the Securities Exchange Act of 1934, as amended, and
the applicable rules and regulations of the Securities and Exchange Commission
adopted or issued pursuant thereto, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that said
attorney(s)-in-fact and agent(s) or his substitute or resubstitute, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 3rd
day of February, 1998.
/s/ THOMAS A. SULLIVAN
----------------------
Thomas A. Sullivan
Director
<PAGE> 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a director of
Delphi Financial Group, Inc., a Delaware corporation (the "Company"), hereby
constitutes and appoints Robert Rosenkranz and Robert M. Smith, Jr. or either of
them his true and lawful attorney(s)-in-fact and agent(s), with full power of
substitution and resubstitution, for him and in his place and stead in any and
all capacities, to execute one or more Annual Reports for the Company's fiscal
year ended December 31, 1997, on Form 10-K pursuant to the Securities Exchange
Act of 1934, as amended, or such other form as such attorney(s)-in-fact may deem
necessary or desirable, any amendments thereto, and all additional amendments
thereto in such form as either of them may approve, and to file the same with
all exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission, granting unto said attorney(s)-in-fact and
agent(s) full power and authority to do and perform each and every act and thing
requisite and necessary to be done to the end that such Annual Report or Annual
Reports shall comply with the Securities Exchange Act of 1934, as amended, and
the applicable rules and regulations of the Securities and Exchange Commission
adopted or issued pursuant thereto, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that said
attorney(s)-in-fact and agent(s) or his substitute or resubstitute, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 30th
day of February, 1998.
/s/ B. K. WERNER
----------------------
B. K. Werner
Director
<PAGE> 7
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a director of
Delphi Financial Group, Inc., a Delaware corporation (the "Company"), hereby
constitutes and appoints Robert Rosenkranz and Robert M. Smith, Jr. or either of
them his true and lawful attorney(s)-in-fact and agent(s), with full power of
substitution and resubstitution, for him and in his place and stead in any and
all capacities, to execute one or more Annual Reports for the Company's fiscal
year ended December 31, 1997, on Form 10-K pursuant to the Securities Exchange
Act of 1934, as amended, or such other form as such attorney(s)-in-fact may deem
necessary or desirable, any amendments thereto, and all additional amendments
thereto in such form as either of them may approve, and to file the same with
all exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission, granting unto said attorney(s)-in-fact and
agent(s) full power and authority to do and perform each and every act and thing
requisite and necessary to be done to the end that such Annual Report or Annual
Reports shall comply with the Securities Exchange Act of 1934, as amended, and
the applicable rules and regulations of the Securities and Exchange Commission
adopted or issued pursuant thereto, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that said
attorney(s)-in-fact and agent(s) or his substitute or resubstitute, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this
3rd day of February, 1998.
/s/ LAWRENCE C. DAURELLE
----------------------------
Lawrence C. Daurelle
Principal Financial Officer
and Principal Accounting
Officer
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 2,165,069
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,429,822
<CASH> 50,580
<RECOVER-REINSURE> 234,746
<DEFERRED-ACQUISITION> 92,931
<TOTAL-ASSETS> 3,203,713
<POLICY-LOSSES> 967,430
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 689,542
<NOTES-PAYABLE> 178,769
100,000<F1>
0
<COMMON> 191
<OTHER-SE> 509,295
<TOTAL-LIABILITY-AND-EQUITY> 3,203,713
360,871
<INVESTMENT-INCOME> 160,194
<INVESTMENT-GAINS> 14,568
<OTHER-INCOME> 0
<BENEFITS> 290,761
<UNDERWRITING-AMORTIZATION> 27,883
<UNDERWRITING-OTHER> 99,125
<INCOME-PRETAX> 117,864
<INCOME-TAX> 38,226
<INCOME-CONTINUING> 74,982
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 74,982
<EPS-PRIMARY> 4.00<F2>
<EPS-DILUTED> 3.80<F2>
<RESERVE-OPEN> 380,826
<PROVISION-CURRENT> 41,221
<PROVISION-PRIOR> (2,419)
<PAYMENTS-CURRENT> 1,498
<PAYMENTS-PRIOR> 30,079
<RESERVE-CLOSE> 388,051
<CUMULATIVE-DEFICIENCY> 27,847
<FN>
<F1>Represents Company-obligated mandatorily redeemable Capital Securities of
Delphi Funding L.L.C. holding solely junior subordinated deferrable interest
debentures of the Company.
<F2>Reflects the adoption in 1997 of Statement of Financial Accounting Standards
No. 128, "Earnings Per Share," ("SFAS 128"). Financial Data Schedules for
prior periods have not been restated to reflect the adoption of SFAS 128.
</FN>
</TABLE>
