<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number 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>
<TABLE>
<S> <C>
1105 North Market Street, Suite 1230, P.O. Box 8985, Wilmington, Delaware 19899
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(Address of principal executive offices) (Zip Code)
</TABLE>
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 [ ]
As of July 31, 1999, the Registrant had 14,920,636 shares of Class A Common
Stock and 5,311,346 shares of Class B Common Stock outstanding.
<PAGE> 2
DELPHI FINANCIAL GROUP, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 1999 and 1998 ................ 3
Consolidated Balance Sheets at June 30, 1999 and
December 31, 1998 .................................. 4
Consolidated Statements of Shareholders' Equity for
the Six Months Ended June 30, 1999 and 1998 ........ 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998 ............ 6
Notes to Consolidated Financial Statements ............ 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations ................ 9
PART II. OTHER INFORMATION ..................................... 12
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Premium and fee income ................................ $ 135,019 $ 104,734 $ 285,462 $ 202,110
Net investment income ................................. 44,353 42,515 88,154 88,223
Net realized investment (losses) gains ................ (8,380) 5,177 (9,497) 33,299
--------- --------- --------- ---------
170,992 152,426 364,119 323,632
--------- --------- --------- ---------
Benefits and expenses:
Benefits, claims and interest credited to policyholders 107,242 84,401 226,866 162,946
Commissions ........................................... 8,433 8,649 17,718 16,142
Amortization of cost of business acquired ............. 7,377 7,045 14,526 13,417
Other operating expenses .............................. 18,271 13,951 38,610 28,980
--------- --------- --------- ---------
141,323 114,046 297,720 221,485
--------- --------- --------- ---------
Operating income ................................... 29,669 38,380 66,399 102,147
Interest expense ......................................... 4,340 3,912 8,823 7,824
--------- --------- --------- ---------
Income from continuing operations before income tax
expense and dividends on Capital Securities of
Delphi Funding L.L.C. ........................... 25,329 34,468 57,576 94,323
Income tax expense ....................................... 7,718 11,214 17,816 31,314
--------- --------- --------- ---------
Income from continuing operations before dividends
on Capital Securities of Delphi Funding L.L.C. .... 17,611 23,254 39,760 63,009
Dividends on Capital Securities of Delphi Funding L.L.C. . 1,513 1,513 3,026 3,026
--------- --------- --------- ---------
Income from continuing operations .................. 16,098 21,741 36,734 59,983
Loss on disposal of discontinued operations, net
of income tax benefit ................................. -- -- (13,847) --
--------- --------- --------- ---------
Net income ......................................... $ 16,098 $ 21,741 $ 22,887 $ 59,983
========= ========= ========= =========
Basic results per share of common stock:
Income from continuing operations excluding realized
investment (losses) gains ........................... $ 1.05 $ 0.90 $ 2.08 $ 1.88
Income from continuing operations ..................... 0.79 1.06 1.78 2.93
Net income ............................................ 0.79 1.06 1.11 2.93
Diluted results per share of common stock:
Income from continuing operations excluding realized
investment (losses) gains ........................... $ 1.02 $ 0.86 $ 2.01 $ 1.80
Income from continuing operations ..................... 0.76 1.02 1.72 2.82
Net income ............................................ 0.76 1.02 1.07 2.82
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 4
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- -----------
<S> <C> <C>
Assets:
Investments:
Fixed maturity securities, available for sale .......................... $ 2,022,150 $ 1,889,604
Cash and cash equivalents .............................................. 134,009 298,843
Other investments ...................................................... 370,144 171,269
----------- -----------
2,526,303 2,359,716
Cost of business acquired ................................................. 127,954 104,460
Reinsurance receivables ................................................... 372,561 356,030
Other assets .............................................................. 301,688 404,674
Assets held in separate account ........................................... 70,713 62,177
----------- -----------
Total assets ........................................................... $ 3,399,219 $ 3,287,057
=========== ===========
Liabilities and Shareholders' Equity:
Future policy benefits .................................................... $ 509,775 $ 482,481
Unpaid claims and claim expenses .......................................... 641,759 563,907
Policyholder account balances ............................................. 672,215 664,576
Corporate debt ............................................................ 242,039 265,165
Advances from Federal Home Loan Bank ...................................... 75,479 75,495
Other liabilities and policyholder funds .................................. 597,689 514,857
Liabilities related to separate account ................................... 61,610 54,136
----------- -----------
Total liabilities ...................................................... 2,800,566 2,620,617
----------- -----------
Company-obligated mandatorily redeemable Capital Securities of Delphi
Funding L.L.C. holding solely junior subordinated deferrable interest
debentures of the Company .............................................. 100,000 100,000
----------- -----------
Shareholders' equity:
Preferred Stock, $.01 par; 10,000,000 shares authorized ................ -- --
Class A Common Stock, $.01 par; 40,000,000 shares authorized;
15,618,845 and 14,955,755 shares issued and outstanding, respectively 156 150
Class B Common Stock, $.01 par; 20,000,000 shares authorized;
5,311,346 and 5,433,203 shares issued and outstanding, respectively . 53 54
Additional paid-in capital ............................................. 350,187 329,023
Net unrealized depreciation on investments ............................. (87,169) (18,074)
Retained earnings ...................................................... 263,119 255,287
Treasury stock, at cost; 706,613 shares of Class A Common Stock ........ (27,693) --
----------- -----------
Total shareholders' equity .......................................... 498,653 566,440
----------- -----------
Total liabilities and shareholders' equity ...................... $ 3,399,219 $ 3,287,057
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 5
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Unrealized
Appreciation
Class A Class B Additional (Depreciation)
Common Common Paid-in on Retained Treasury
Stock Stock Capital Investments Earnings Stock Total
----- ----- ------- ----------- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998............. $ 129 $ 62 $ 262,963 $ 40,545 $ 205,787 $ - $ 509,486
---------
Net income........................... - - - - 59,983 - 59,983
Decrease in net unrealized
appreciation on investments....... - - - (4,838) - - (4,838)
---------
Comprehensive income................. 55,145
Issuance of stock, exercise of stock
options and share conversions..... 10 (6) 27,699 - - - 27,703
Stock dividend....................... 3 1 19,929 - (19,937) - (4)
--------- --------- --------- --------- --------- --------- ---------
Balance, June 30, 1998............... $ 142 $ 57 $ 310,591 $ 35,707 $ 245,833 $ - $ 592,330
========= ========= ========= ========= ========= ========= =========
Balance, January 1, 1999............. $ 150 $ 54 $ 329,023 $ (18,074) $ 255,287 $ - $ 566,440
---------
Net income........................... - - - - 22,887 - 22,887
Increase in net unrealized
depreciation on investments....... - - - (69,095) - - (69,095)
---------
Comprehensive loss................... (46,208)
Issuance of stock, exercise of stock
options and share conversions..... 3 (2) 6,116 - - - 6,117
Stock dividend....................... 3 1 15,048 - (15,055) - (3)
Acquisition of Treasury Stock........ - - - - - (27,693) (27,693)
--------- --------- --------- --------- --------- --------- ---------
Balance, June 30, 1999............... $ 156 $ 53 $ 350,187 $ (87,169) $ 263,119 $ (27,693) $ 498,653
========= ========= ========= ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE> 6
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Operating activities:
Net income ....................................................................... $ 22,887 $ 59,983
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Change in policy liabilities, reinsurance receivables and policyholder accounts 80,434 45,067
Policy liabilities recaptured from (ceded to) Oracle Reinsurance Company Ltd. . 10,000 (100,000)
Amortization, principally the cost of business acquired and investments ....... (4,140) (17,404)
Deferred costs of business acquired ........................................... (21,973) (17,329)
Net realized losses (gains) on investments .................................... 9,497 (33,299)
Net change in trading account securities ...................................... (5,491) 21,195
Net change in federal income tax liability .................................... 17,348 (10,284)
Discontinued operations ....................................................... 13,847 --
Other ......................................................................... (35,551) (48,244)
----------- -----------
Net cash provided (used) by operating activities ............................ 86,858 (100,315)
----------- -----------
Investing activities:
Securities available for sale:
Purchases of investments and loans made ....................................... (1,335,574) (1,613,200)
Sales of investments and receipts from repayment of loans ..................... 1,103,507 1,712,614
Maturities of investments ..................................................... 72,450 18,778
Cash portion of the SIG Merger contingent consideration .......................... (8,993) (6,436)
Change in deposit in separate account ............................................ (1,062) (290)
Cash acquired in acquisition of Matrix, net of consideration paid ................ -- (5,356)
----------- -----------
Net cash (used) provided by investing activities .............................. (169,672) 106,110
----------- -----------
Financing activities:
Deposits to policyholder accounts ................................................ 34,778 24,633
Withdrawals from policyholder accounts ........................................... (32,715) (44,082)
Proceeds from issuance of common stock and exercise of stock options ............. 1,132 734
Borrowings under the Credit Agreement ............................................ 95,000 44,000
Principal payments under the Credit Agreement .................................... (109,000) (23,000)
Principal payment under SIG Senior Notes ......................................... (9,000) --
Change in liability for securities loaned or sold under agreements to repurchase . (34,522) 143,704
Acquisition of Treasury Stock .................................................... (27,693) --
Repayment of advances from the Federal Home Loan Bank ............................ -- (75,000)
----------- -----------
Net cash (used) provided by financing activities .............................. (82,020) 70,989
----------- -----------
(Decrease) increase in cash and cash equivalents .................................... (164,834) 76,784
Cash and cash equivalents at beginning of period .................................... 298,843 50,580
----------- -----------
Cash and cash equivalents at end of period .................................... $ 134,009 $ 127,364
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 7
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
The financial statements included herein were prepared in conformity with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
Such principles were applied on a basis consistent with those reflected in the
Company's report on Form 10-K for the year ended December 31, 1998. The
information furnished includes all adjustments and accruals of a normal
recurring nature which are, in the opinion of management, necessary for a fair
presentation of results for the interim periods. Operating results for the six
months ended June 30, 1999 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1999. Certain reclassifications
have been made in the 1998 financial statements to conform to the 1999
presentation. For further information refer to the consolidated financial
statements and footnotes thereto included in the Company's report on Form 10-K
for the year ended December 31, 1998. Capitalized terms used herein without
definition have the meanings ascribed to them in the Company's report on Form
10-K for the year ended December 31, 1998.
NOTE B - DISCONTINUED OPERATIONS
Effective April 30, 1999, the Company completed the disposition of its Unicover
Managers, Inc. subsidiary and a related company (collectively, "Unicover"),
which were acquired in the fourth quarter of 1998, to certain of the former
owners of Unicover. The Company expects that, after giving effect to the
anticipated tax benefits associated with the disposition, the cumulative effect
on the Company, from a cash flow standpoint, resulting from its investment in
and disposition of Unicover will be neutral. The Company recognized a loss of
$13.8 million on the disposition of the discontinued operations of Unicover, net
of a related tax benefit of $8.7 million, in the first quarter of 1999. Revenue
associated with Unicover for the first four months of 1999 totaled $24.6
million, and no operating income was associated with Unicover for such period.
NOTE C - INVESTMENTS
At June 30, 1999, the Company had fixed maturity securities available for sale
with a carrying value and a fair value of $2,022.2 million and an amortized cost
of $2,169.7 million. At December 31, 1998, the Company had fixed maturity
securities available for sale with a carrying value and a fair value of $1,889.6
million and an amortized cost of $1,917.0 million.
NOTE D - SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues excluding net realized investment (losses) gains:
Group employee benefit products ....................... $ 153,007 $ 123,800 $ 322,872 $ 242,505
Asset accumulation products ........................... 21,068 21,613 40,423 44,313
Other (1) ............................................. 5,297 1,836 10,321 3,515
--------- --------- --------- ---------
$ 179,372 $ 147,249 $ 373,616 $ 290,333
========= ========= ========= =========
Operating income (2):
Group employee benefit products ....................... $ 30,991 $ 25,479 $ 62,854 $ 51,104
Asset accumulation products ........................... 8,419 7,753 16,159 17,387
Other (1) ............................................. (1,361) (29) (3,117) 357
--------- --------- --------- ---------
$ 38,049 $ 33,203 $ 75,896 $ 68,848
========= ========= ========= =========
</TABLE>
(1) Consists of operations that do not meet the quantitative thresholds for
determining reportable segments and includes integrated disability and
absence management services, other insurance products and certain corporate
activities.
(2) Income from continuing operations excluding net realized investment gains
and losses and before interest and income tax expense and dividends on
Capital Securities of Delphi Funding L.L.C.
-7-
<PAGE> 8
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE E - COMPUTATION OF RESULTS PER SHARE
Prior period results per share and applicable share amounts have been restated
to reflect 2% stock dividends distributed to stockholders on June 8, 1999 and
December 15, 1998. The following table sets forth calculation of basic and
diluted results per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- -------- -------- ---------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Numerator:
Income from continuing operations excluding net
realized investment (losses) gains....................... $ 21,545 $ 18,376 $ 42,907 $ 38,339
Realized investment (losses) gains, net of income taxes.... (5,447) 3,365 (6,173) 21,644
--------- -------- -------- ---------
Income from continuing operations...................... 16,098 21,741 36,734 59,983
Loss on disposal of discontinued operations, net
of income tax benefit.................................... - - (13,847) -
--------- -------- -------- ---------
Net income............................................. $ 16,098 $ 21,741 $ 22,887 $ 59,983
========= ======== ======== =========
Denominator:
Weighted average common shares outstanding ................ 20,494 20,473 20,676 20,440
Effect of dilutive securities............................ 690 835 714 827
--------- -------- -------- ---------
Weighted average common shares outstanding,
assuming dilution........................................ 21,184 21,308 21,390 21,267
========= ======== ======== =========
Basic results per share of common stock:
Income from continuing operations excluding net
realized investment (losses) gains...................... $ 1.05 $ 0.90 $ 2.08 $ 1.88
Realized investment (losses) gains, net of taxes........ (0.26) 0.16 (0.30) 1.05
--------- -------- -------- --------
Income from continuing operations.................... 0.79 1.06 1.78 2.93
Loss on disposal of discontinued operations, net
of income tax benefit................................... - - (0.67) -
--------- -------- -------- ---------
Net income........................................... $ 0.79 $ 1.06 $ 1.11 $ 2.93
========= ======== ======== ========
Diluted results per share of common stock:
Income from continuing operations excluding net
realized investment (losses) gains...................... $ 1.02 $ 0.86 $ 2.01 $ 1.80
Realized investment (losses) gains, net of taxes.......... (0.26) 0.16 (0.29) 1.02
--------- -------- -------- --------
Income from continuing operations.................... 0.76 1.02 1.72 2.82
Loss on disposal of discontinued operations, net
of income tax benefit................................... - - (0.65) -
--------- -------- -------- ---------
Net income........................................... $ 0.76 $ 1.02 $ 1.07 $ 2.82
========= ======== ======== ========
</TABLE>
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<PAGE> 9
DELPHI FINANCIAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following is an analysis of the results of operations and financial
condition of Delphi Financial Group, Inc. (the "Company," which term includes
the Company and its consolidated subsidiaries unless the context indicates
otherwise). This analysis should be read in conjunction with the Consolidated
Financial Statements and related notes included in this document, as well as the
Company's report on Form 10-K for the year ended December 31, 1998. Capitalized
terms used herein without definition have the meanings ascribed to them in the
Company's report on Form 10-K for the year ended December 31, 1998.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1999 Compared to
Six Months Ended June 30, 1998
Premium and Fee Income. Premium and fee income for the first half of 1999 was
$285.5 million as compared to $202.1 million for the first half of 1998, an
increase of 41%. This increase was primarily attributable to the Company's group
employee benefits segment and reflects strong growth in most products, high
levels of new business production 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, were $33.2 million
during the first half of 1999 as compared to $22.1 million during the first half
of 1998. Deposits for these products, which are long-term in nature, are not
recorded as premiums; instead, the deposits are recorded as a liability. The
increase in annuity deposits in the 1999 period is principally the result of an
increase in the number of networks of independent agents distributing the
Company's annuity products, as well as enhancements made to the Company's
products to improve their competitive position in the marketplace.
Net Investment Income. Net investment income for the first half of 1999 and 1998
was $88.2 million in each period. A decrease in the weighted average annualized
yield in the 1999 period was substantially offset by an increase in average
invested assets. The weighted average annualized yield on invested assets,
excluding realized and unrealized investment gains and losses, was 8.2% on
average invested assets of $2,151.7 million for the first half of 1999 and 8.4%
on average invested assets of $2,103.1 million for the comparable period of
1998.
Benefits and Expenses. Policyholder benefits and expenses were $297.7 million
for the first half of 1999 as compared to $221.5 million for the first half of
1998, an increase of 34%. This increase was principally due to growth in the
Company's group employee benefits segment. The combined ratio (loss ratio plus
expense ratio) for group employee benefit products decreased from 95.9% in the
first half of 1998 to 93.9% in the first half of 1999. This decrease was
primarily attributable to changes in the Company's product mix.
Operating Income. Income from continuing operations excluding realized
investment gains and losses and before interest and income tax expense and
dividends was $75.9 million in the first half of 1999 as compared to $68.8
million in the first half of 1998, an increase of 10%. This increase primarily
reflects the growth in the Company's group employee benefits segment, partially
offset by a decrease in the yield on invested assets in the asset accumulation
products segment.
Net Realized Investment (Losses) Gains. Net realized investment losses were $9.5
million in the first half of 1999 as compared to net realized investment gains
of $33.3 million in the first half of 1998. The Company's investment strategy
results in periodic sales of securities and the recognition of realized
investment gains and losses.
Discontinued Operations. Effective April 30, 1999, the Company completed the
disposition of its Unicover Managers, Inc. subsidiary and a related company
(collectively, "Unicover"), which were acquired in the fourth quarter of 1998,
to certain of the former owners of Unicover. The Company expects that, after
giving effect to the anticipated tax benefits associated with the disposition,
the cumulative effect on the Company, from a cash flow standpoint, resulting
from its investment in and disposition of Unicover will be neutral. The Company
recognized a loss of $13.8 million on the disposition of the discontinued
operations of Unicover, net of a related tax benefit of $8.7 million, in the
first quarter of 1999. See Note B to the Consolidated Financial Statements.
-9-
<PAGE> 10
Three Months Ended June 30, 1999 Compared to
Three Months Ended June 30, 1998
Premium and Fee Income. Premium and fee income for the second quarter of 1999
was $135.0 million as compared to $104.7 million for the second quarter of 1998,
an increase of 29%. This increase was primarily attributable to the Company's
group employee benefits segment and reflects strong growth in most products,
high levels of new business production 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, were $18.8
million during the second quarter of 1999 as compared to $13.9 million during
the second quarter of 1998. Deposits for these products, which are long-term in
nature, are not recorded as premiums; instead, the deposits are recorded as a
liability. The increase in annuity deposits in the 1999 period is principally
the result of an increase in the number of networks of independent agents
distributing the Company's annuity products, as well as enhancements made to the
Company's products to improve their competitive position in the marketplace.
Net Investment Income. Net investment income for the second quarter of 1999 was
$44.4 million as compared to $42.5 million for the second quarter of 1998, an
increase of 4%. This increase primarily reflects an increase in average invested
assets in the 1999 period. The weighted average annualized yield on invested
assets, excluding realized and unrealized investment gains and losses, was 8.1%
on average invested assets of $2,185.4 million for the second quarter 1999 and
8.1% on average invested assets of $2,109.2 million for the comparable period of
1998.
Benefits and Expenses. Policyholder benefits and expenses were $141.3 million
for the second quarter of 1999 as compared to $114.0 million for the second
quarter of 1998, an increase of 24%. This increase was principally due to growth
in the Company's group employee benefits segment. The combined ratio (loss ratio
plus expense ratio) for group employee benefit products decreased from 95.5% in
the second quarter of 1998 to 93.6% in the second quarter of 1999. This decrease
was primarily attributable to changes in the Company's product mix.
Operating Income. Income from continuing operations excluding realized
investment gains and losses and before interest and income tax expense and
dividends was $38.0 million in the second quarter of 1999 as compared to $33.2
million in the second quarter of 1998, an increase of 15%. This increase
primarily reflects the growth in the Company's group employee benefits segment.
Net Realized Investment (Losses) Gains. Net realized investment losses were $8.4
million in the second quarter of 1999 as compared to net realized investment
gains of $5.2 million in the second quarter of 1998. The Company's investment
strategy results in periodic sales of securities and the recognition of realized
investment gains and losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company had approximately $246.8 million of financial resources available at
the holding company level at June 30, 1999, which was primarily comprised of
investments in the common stock of its investment subsidiaries and fixed
maturity securities. The assets of these investment subsidiaries are primarily
invested in fixed maturity securities, balances with independent investment
managers and 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 the Surplus Debenture issued by RSLIC-Texas to the
Company, dividends paid from subsidiaries, primarily generated from operating
cash flows and investments, and borrowings available under the Credit Agreement.
The Company's insurance subsidiaries are permitted, without prior regulatory or
other approval, to make dividend payments of $40.4 million during 1999, of which
$10.0 million has been paid during the first half of 1999. In general, dividends
from the Company's non-insurance subsidiaries are not subject to regulatory or
other restrictions. As of June 30, 1999, the Company had $85.0 million of
borrowings available to it under the Credit Agreement.
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, the SIG Senior Notes and the Subordinated Notes. The junior
subordinated debentures underlying the Capital Securities are not redeemable
prior to March 25, 2007, and, at the Company's current level of borrowings, no
principal repayments are required under the
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<PAGE> 11
Credit Agreement until October 1, 2001. 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 mature in $9.0
million annual installments, with the next installment payable in May 2000, and
the Subordinated Notes mature in their entirety in June 2003. Sources of
liquidity available to the Company and its subsidiaries are expected to exceed
their cash requirements on both a short-term and long-term basis.
Effective April 30, 1999, the Company completed the disposition of Unicover,
which was acquired in the fourth quarter of 1998, to certain of the former
owners of Unicover. The Company expects that, after giving effect to the
anticipated tax benefits associated with the disposition, the cumulative effect
on the Company, from a cash flow standpoint, resulting from its investment in
and disposition of Unicover will be neutral. The discontinuance and disposition
of Unicover is not expected to have a material effect on the Company's future
results, financial condition or liquidity. See Note B to the Consolidated
Financial Statements.
IMPACT OF YEAR 2000
The Year 2000 issue relates to whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. This inability to
recognize the Year 2000 may cause systems to process critical financial and
operational information incorrectly. This, in turn, could cause disruptions of
normal business operations, including the inability to process claims, bill and
collect premium, perform policy administration and manage investment activities.
The Company has a corporate-wide program underway to address the Year 2000
issue, as it relates to its own computer systems, as well as to instances in
which computer systems of third parties may have a significant impact on the
Company's operations, such as those of suppliers, business partners, customers,
facilities and telecommunications.
The Company has completed an assessment of its critical computer related systems
and has implemented the necessary modifications or replacements so that its
computer systems will function properly with respect to dates in the Year 2000
and thereafter. The Company plans to continue testing its critical systems for
Year 2000 compliance throughout the remainder of 1999. The Company is primarily
utilizing external resources to remediate and test its software for Year 2000
compliance.
The Company estimates that total internal (opportunity costs) and external
(out-of-pocket) pre-tax costs for addressing the Year 2000 issue will be
approximately $7.9 million, of which $5.7 million will be expensed as incurred
and $2.2 million will be capitalized and amortized over the life of the
replacement computer systems. Since 1997, the Company has incurred $7.2 million
of costs to address the Year 2000 issue of which $5.1 million was expensed and
$2.1 million was capitalized.
The Company has also requested assurances of Year 2000 compliance from third
parties, the failure of whose computer systems to be Year 2000 compliant may
have a significant impact on the Company's operations, in an effort to identify
and address potential problems arising from such non-compliance. There can be no
assurance, however, that the Company's operations will not be adversely impacted
by such non-compliance on the part of one or more such third parties.
Failure by the Company or significant third parties to successfully address Year
2000 issues could have a material adverse impact on the operations and financial
condition of the Company. During 1999, the Company expects to finalize and have
ready for implementation appropriate contingency plans in the event any of the
computer systems of the Company or significant third parties are not Year 2000
compliant. If the Company's internal computer systems failed due to the Year
2000 issue, the Company would be forced to return to manual operations on an
interim basis until the problem could be resolved. With regard to third parties,
the Company would attempt to implement alternative arrangements where possible
if Year 2000 problems are encountered as to these parties. The Company does not
believe that these scenarios are reasonably likely due to planned testing and
problem resolution of all mission critical systems prior to any anticipated
material impact of the Year 2000 issue; however, no assurance can be given in
this regard.
MARKET RISK
There have been no material changes in the Company's exposure to market risk or
its management of such risk since December 31, 1998.
-11-
<PAGE> 12
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
above "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and elsewhere in this Form 10-Q and in any other statement made
by, or on behalf of, the Company, whether or not in future filings with the
Securities and Exchange Commission, including but not limited to press releases
and oral statements by Company management. 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 the
economic and interest rate environment, legislative and regulatory developments
and market pricing and competitive trends, and those relating specifically to
the Company and its businesses, such as the level of its insurance premiums and
fee income, the claims experience and other factors affecting the profitability
of its insurance products, the performance of its investment portfolio, the
successful completion by the Company of its year 2000 compliance program,
acquisitions of companies or blocks of business and the ratings by major rating
organizations of its insurance subsidiaries. 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.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on May 11, 1999.
The directors elected at the meeting will serve for a term ending on
the date of the 2000 Annual Meeting of Stockholders. The directors
elected at the meeting were Thomas L. Rhodes, Robert Rosenkranz, Edward
A. Fox, Charles P. O'Brien, Lewis S. Ranieri, Robert M. Smith, Jr., and
B.K. Werner. One director is voted upon by the Class A stockholders,
voting separately as a class. At the 1999 Annual Meeting that director
was Mr. Rhodes.
The voting results for all matters at the meeting were as follows:
1) Election of Directors
<TABLE>
<CAPTION>
VOTES
--------------------------
Withhold
For Authority
---------- ---------
<S> <C> <C>
Class A Director:
Thomas L. Rhodes.................................................. 11,502,961 81,307
Directors:
Robert Rosenkranz................................................. 24,108,843 107,339
Edward A. Fox..................................................... 24,143,455 72,727
Charles P. O'Brien................................................ 24,110,614 105,568
Lewis S. Ranieri.................................................. 23,975,697 240,485
Robert M. Smith, Jr............................................... 24,100,098 116,084
B.K. Werner....................................................... 23,975,585 240,597
</TABLE>
2) All Other Matters - With regard to transacting such other business that
properly comes before the meeting or any adjournment thereof, this
proposal received 21,360,859 votes for approval, 2,704,823 votes against
approval and 150,500 votes abstaining; however, no such other business
came before the meeting.
-12-
<PAGE> 13
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 - Computation of Results per Share of Common Stock
(incorporated by reference to Note E to the Consolidated
Financial Statements included elsewhere herein)
27 - Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DELPHI FINANCIAL GROUP, INC. (Registrant)
/s/ ROBERT ROSENKRANZ
------------------------------------------------------------
Robert Rosenkranz
Chairman of the Board, President and Chief Executive Officer
(Principal Executive Officer)
/s/ LAWRENCE E. DAURELLE
------------------------------------------------------------
Lawrence E. Daurelle
Vice President and Treasurer
(Principal Accounting and Financial Officer)
Date: August 13, 1999
-13-
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 (UNAUDITED) AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 2,022,150
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,392,294
<CASH> 134,009
<RECOVER-REINSURE> 372,561
<DEFERRED-ACQUISITION> 127,954
<TOTAL-ASSETS> 3,399,219
<POLICY-LOSSES> 1,151,534
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 672,215
<NOTES-PAYABLE> 242,039
100,000<F1>
0
<COMMON> 209
<OTHER-SE> 498,444
<TOTAL-LIABILITY-AND-EQUITY> 3,399,219
285,462
<INVESTMENT-INCOME> 88,154
<INVESTMENT-GAINS> (9,497)
<OTHER-INCOME> 0
<BENEFITS> 226,866
<UNDERWRITING-AMORTIZATION> 14,526
<UNDERWRITING-OTHER> 65,151
<INCOME-PRETAX> 57,576
<INCOME-TAX> 17,816
<INCOME-CONTINUING> 36,734
<DISCONTINUED> (13,847)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,887
<EPS-BASIC> 1.11<F2>
<EPS-DILUTED> 1.07<F2>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<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>THE COMPANY'S BOARD OF DIRECTORS DECLARED A 2% STOCK DIVIDEND ON MAY 11, 1999,
WHICH WAS DISTRIBUTED ON JUNE 8, 1999 TO STOCKHOLDERS' OF RECORD ON MAY 25,
1999. FINANCIAL DATA SCHEDULES FOR PRIOR PERIODS HAVE NOT BEEN RESTATED TO
REFLECT THE STOCK DIVIDEND.
</FN>
</TABLE>
