<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 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>
<CAPTION>
<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
- ---------------------------------------------------------------------------------------------------
(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 October 29, 1999, the Registrant had 15,183,700
shares of Class A Common Stock and 5,078,504 shares
of Class B Common Stock outstanding.
<PAGE> 2
DELPHI FINANCIAL GROUP, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1999 and 1998.............................................. 3
Consolidated Balance Sheets at September 30, 1999 and
December 31, 1998..................................................................... 4
Consolidated Statements of Shareholders' Equity for the
Nine Months Ended September 30, 1999 and 1998......................................... 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 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>
-2-
<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 Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Premium and fee income................................ $ 145,233 $ 101,753 $ 430,695 $ 303,863
Net investment income................................. 46,258 34,184 134,412 122,407
Net realized investment (losses) gains................ (5,789) (10,044) (15,286) 23,255
----------- ----------- ----------- -----------
185,702 125,893 549,821 449,525
----------- ----------- ----------- -----------
Benefits and expenses:
Benefits, claims and interest credited to
policyholders....................................... 117,217 77,060 344,083 240,006
Commissions........................................... 8,705 8,459 26,423 24,601
Amortization of cost of business acquired............. 7,245 4,664 21,771 18,081
Other operating expenses.............................. 19,686 15,792 58,296 44,772
----------- ----------- ----------- -----------
152,853 105,975 450,573 327,460
----------- ----------- ----------- -----------
Operating income................................ 32,849 19,918 99,248 122,065
Interest expense...................................... 4,452 4,232 13,275 12,056
----------- ----------- ----------- -----------
Income from continuing operations before
income tax expense and dividends on
Capital Securities of Delphi Funding L.L.C... 28,397 15,686 85,973 110,009
Income tax expense.................................... 8,871 3,618 26,687 34,932
----------- ----------- ----------- -----------
Income from continuing operations before
dividends on Capital Securities of Delphi
Funding L.L.C. .............................. 19,526 12,068 59,286 75,077
Dividends on Capital Securities of Delphi
Funding L.L.C. ..................................... 1,513 1,513 4,539 4,539
----------- ----------- ----------- -----------
Income from continuing operations .............. 18,013 10,555 54,747 70,538
Loss on disposal of discontinued operations, net of
income tax benefit.................................... - - (13,847) -
----------- ----------- ----------- -----------
Net income...................................... $ 18,013 $ 10,555 $ 40,900 $ 70,538
=========== =========== =========== ===========
Basic results per share of common stock:
Income from continuing operations excluding
realized investment (losses) gains.............. $ 1.06 $ 0.82 $ 3.14 $ 2.69
Income from continuing operations..................... 0.88 0.51 2.66 3.43
Net income............................................ 0.88 0.51 1.99 3.43
Diluted results per share of common stock:
Income from continuing operations excluding
realized investment (losses) gains.............. $ 1.03 $ 0.79 $ 3.04 $ 2.59
Income from continuing operations..................... 0.85 0.49 2.57 3.29
Net income............................................ 0.85 0.49 1.92 3.29
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE> 4
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Assets:
Investments:
Fixed maturity securities, available for sale ............................... $ 1,928,410 $ 1,889,604
Cash and cash equivalents.................................................... 174,794 298,843
Other investments............................................................ 378,548 171,269
------------ ------------
2,481,752 2,359,716
Cost of business acquired....................................................... 135,434 104,460
Reinsurance receivables......................................................... 371,251 356,030
Other assets.................................................................... 326,042 404,674
Assets held in separate account................................................. 71,502 62,177
------------ ------------
Total assets................................................................. $ 3,385,981 $ 3,287,057
============ ============
Liabilities and Shareholders' Equity:
Future policy benefits.......................................................... $ 522,939 $ 482,481
Unpaid claims and claim expenses................................................ 662,917 563,907
Policyholder account balances................................................... 677,751 664,576
Corporate debt.................................................................. 246,989 265,165
Advances from Federal Home Loan Bank............................................ 75,479 75,495
Other liabilities and policyholder funds........................................ 542,424 514,857
Liabilities related to separate account......................................... 62,230 54,136
------------ ------------
Total liabilities............................................................ 2,790,729 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;
15,876,091 and 14,955,755 shares issued and outstanding, respectively..... 159 150
Class B Common Stock, $.01 par; 20,000,000 shares authorized;
5,078,504 and 5,433,203 shares issued and outstanding, respectively....... 51 54
Additional paid-in capital................................................... 350,906 329,023
Net unrealized depreciation on investments................................... (107,830) (18,074)
Retained earnings............................................................ 281,132 255,287
Treasury stock, at cost; 751,813 shares of Class A Common Stock.............. (29,166) -
------------ ------------
Total shareholders' equity................................................ 495,252 566,440
------------ ------------
Total liabilities and shareholders' equity............................ $ 3,385,981 $ 3,287,057
============ ============
</TABLE>
See notes to consolidated financial statements.
-4-
<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
Stock Stock Capital Investments
----- ----- ------- -----------
<S> <C> <C> <C> <C>
Balance, January 1, 1998 $ 129 $ 62 $ 262,963 $ 40,545
Net income -- -- -- --
Decrease in net unrealized
appreciation on investments -- -- -- (18,914)
Comprehensive income
Issuance of stock, exercise of
stock options and share
conversions 12 (7) 28,265 --
Stock dividend 3 1 19,930 --
--------- --------- --------- ---------
Balance, September 30, 1998 $ 144 $ 56 $ 311,158 $ 21,631
========= ========= ========= =========
Balance, January 1, 1999 $ 150 $ 54 $ 329,023 $ (18,074)
Net income -- -- -- --
Increase in net unrealized
depreciation on investments -- -- -- (89,756)
Comprehensive loss
Issuance of stock, exercise of
stock options and share
conversions 6 (4) 6,835 --
Stock dividend 3 1 15,048 --
Acquisition of Treasury Stock -- -- -- --
--------- --------- --------- ---------
Balance, September 30, 1999 $ 159 $ 51 $ 350,906 $(107,830)
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Retained Treasury
Earnings Stock Total
-------- ----- -----
<S> <C> <C> <C>
Balance, January 1, 1998 $ 205,787 $ -- $ 509,486
---------
Net income 70,538 -- 70,538
Decrease in net unrealized
appreciation on investments -- -- (18,914)
---------
Comprehensive income 51,624
Issuance of stock, exercise of
stock options and share
conversions -- -- 28,270
Stock dividend (19,938) -- (4)
--------- ----------- ---------
Balance, September 30, 1998 $ 256,387 $ -- $ 589,376
========= =========== =========
Balance, January 1, 1999 $ 255,287 $ -- $ 566,440
---------
Net income 40,900 -- 40,900
Increase in net unrealized
depreciation on investments -- -- (89,756)
---------
Comprehensive loss (48,856)
Issuance of stock, exercise of
stock options and share
conversions -- -- 6,837
Stock dividend (15,055) -- (3)
Acquisition of Treasury Stock -- (29,166) (29,166)
--------- ----------- ---------
Balance, September 30, 1999 $ 281,132 $(29,166) $495,252
========= =========== =========
</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>
Nine Months Ended
September 30,
-------------------
1999 1998
---- ----
<S> <C> <C>
Operating activities:
Net income........................................................................ $ 40,900 $ 70,538
Adjustments to reconcile net income to net cash (used) provided
by operating activities:
Change in policy liabilities, reinsurance receivables and policyholder accounts 120,547 56,435
Policy liabilities recaptured from (ceded to) Oracle Reinsurance Company Ltd... 10,000 (101,500)
Amortization, principally the cost of business acquired and investments........ (2,875) (29,278)
Deferred costs of business acquired............................................ (32,771) (26,311)
Net realized losses (gains) on investments..................................... 15,286 (23,255)
Net change in trading account securities....................................... (7,637) 24,974
Net change in federal income tax liability..................................... 21,953 (22,173)
Discontinued operations........................................................ 13,847 -
Other.......................................................................... (40,971) (44,848)
----------- -----------
Net cash provided (used) by operating activities............................. 138,279 (95,418)
----------- -----------
Investing activities:
Securities available for sale:
Purchases of investments and loans made........................................ (1,564,324) (2,452,526)
Sales of investments and receipts from repayment of loans...................... 1,380,238 2,617,332
Maturities of investments...................................................... 87,028 30,243
Cash portion of the SIG Merger contingent consideration........................... (8,993) (6,447)
Change in deposit in separate account............................................. (1,231) 915
Cash acquired in acquisition of Matrix, net of consideration paid................. - (5,356)
----------- -----------
Net cash (used) provided by investing activities............................... (107,282) 184,161
----------- -----------
Financing activities:
Deposits to policyholder accounts................................................. 62,060 36,577
Withdrawals from policyholder accounts............................................ (55,725) (59,995)
Proceeds from issuance of common stock and exercise of stock options ............. 1,852 1,301
Borrowings under Credit Agreement................................................. 105,000 77,000
Principal payments under Credit Agreement......................................... (114,000) (27,000)
Principal payment under SIG Senior Notes.......................................... (9,000) -
Change in liability for securities loaned or sold under agreements to repurchase.. (116,067) 124,750
Acquisition of Treasury Stock..................................................... (29,166) -
Repayment of Federal Home Loan Bank advances...................................... - (75,000)
----------- -----------
Net cash (used) provided by financing activities............................... (155,046) 77,633
----------- -----------
(Decrease) increase in cash and cash equivalents..................................... (124,049) 166,376
Cash and cash equivalents at beginning of period..................................... 298,843 50,580
----------- -----------
Cash and cash equivalents at end of period..................................... $ 174,794 $ 216,956
=========== ===========
</TABLE>
See notes to consolidated financial statements
-6-
<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 nine
months ended September 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 September 30, 1999, the Company had fixed maturity securities available for
sale with a carrying value and a fair value of $1,928.4 million and an amortized
cost of $2,110.4 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 Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues excluding net realized investment (losses) gains:
Group employee benefit products ....................... $ 165,647 $ 114,981 $ 488,519 $ 357,486
Asset accumulation products ........................... 20,788 16,448 61,211 60,761
Other (1) ............................................. 5,056 4,508 15,377 8,023
--------- --------- --------- ---------
$ 191,491 $ 135,937 $ 565,107 $ 426,270
Operating income (2):
Group employee benefit products ....................... $ 31,003 $ 22,811 $ 93,857 $ 73,915
Asset accumulation products ........................... 8,655 6,901 24,814 24,288
Other (1) ............................................. (1,020) 250 (4,137) 607
--------- --------- --------- ---------
$ 38,638 $ 29,962 $ 114,534 $ 98,810
</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 the calculation of basic and
diluted results per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 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 .................. $21,776 $17,084 $ 64,683 $55,422
Realized investment (losses) gains, net of income taxes (3,763) (6,529) (9,936) 15,116
------- ------- -------- -------
Income from continuing operations ................. 18,013 10,555 54,747 70,538
Loss on disposal of discontinued operations, net
of income tax benefit ............................... -- -- (13,847) --
------- ------- -------- -------
Net income ........................................ $18,013 $10,555 $ 40,900 $70,538
======= ======= ======== =======
Denominator:
Weighted average common shares outstanding ............ 20,455 20,892 20,602 20,591
Effect of dilutive securities ....................... 691 812 707 821
------- ------- -------- -------
Weighted average common shares outstanding,
assuming dilution ................................... 21,146 21,704 21,309 21,412
======= ======= ======== =======
Basic results per share of common stock:
Income from continuing operations excluding net
realized investment (losses) gains .................. $ 1.06 $ 0.82 $ 3.14 $ 2.69
Realized investment (losses) gains, net of taxes .... (0.18) (0.31) (0.48) 0.74
------- ------- -------- -------
Income from continuing operations ............... 0.88 0.51 2.66 3.43
Loss on disposal of discontinued operations, net
of income tax benefit ............................... -- -- (0.67) --
------- ------- -------- -------
Net income ...................................... $ 0.88 $ 0.51 $ 1.99 $ 3.43
======= ======= ======== =======
Diluted results per share of common stock:
Income from continuing operations excluding net
realized investment (losses) gains .................. $ 1.03 $ 0.79 $ 3.04 $ 2.59
Realized investment (losses) gains, net of taxes ...... (0.18) (0.30) (0.47) 0.70
------- ------- -------- -------
Income from continuing operations ............... 0.85 0.49 2.57 3.29
Loss on disposal of discontinued operations, net
of income tax benefit ............................... -- -- (0.65) --
------- ------- -------- -------
Net income ...................................... $ 0.85 $ 0.49 $ 1.92 $ 3.29
======= ======= ======== =======
</TABLE>
-8-
<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
Nine Months Ended September 30, 1999 Compared to
Nine Months Ended September 30, 1998
Premium and Fee Income. Premium and fee income for the first nine months of 1999
was $430.7 million as compared to $303.9 million for the first nine months of
1998, an increase of 42%. 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. In the fourth
quarter of 1999, the Company discontinued its participation in a federal
employee group life reinsurance pool in order to deploy its resources into more
profitable products. Premium income from this reinsurance pool totaled $24.7
million in the first nine months of 1999 and incurred benefits totaled $24.2
million. The Company does not expect its withdrawal from this facility to have a
material impact on its underwriting results. Deposits from the Company's SPDA
products, including the Company's MVA annuity product, were $58.6 million for
the first nine months of 1999 as compared to $33.2 million for the same period
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 and a more
favorable environment for fixed annuity sales due to increases in interest rates
during 1999.
Net Investment Income. Net investment income for the first nine months of 1999
was $134.4 million as compared to $122.4 million for the same period in 1998, an
increase of 10%. This increase primarily reflects an increase in the weighted
average annualized yield on invested assets and 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 8.3%
on average invested assets of $2,148.4 million for the first nine months of 1999
and 7.8% on average invested assets of $2,086.8 million for the comparable
period of 1998. The weighted average annualized yield on invested assets in the
1998 period reflects the decline in the financial markets during the third
quarter of 1998.
Benefits and Expenses. Policyholder benefits and expenses were $450.6 million
for the first nine months of 1999 as compared to $327.5 million for the first
nine months of 1998, an increase of 38%. 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 95.4% in the first nine months of 1998 to 94.5% in the first nine months 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 $114.5 million in the first nine months of 1999 as compared to
$98.8 million in the first nine months of 1998, an increase of 16%. This
increase primarily reflects the growth in the Company's group employee benefits
segment. Also contributing to the increase was the increase in the yield on
invested assets and the increase in weighted average invested assets in the 1999
period.
Net Realized Investment (Losses) Gains. Net realized investment losses were
$15.3 million in the first nine months of 1999 as compared to net realized
investment gains of $23.3 million in the first nine months of 1998. The
Company's investment strategy results in periodic sales of securities and the
recognition of realized investment gains and losses.
-9-
<PAGE> 10
Income Tax Expense. The Company's effective tax rate decreased from 31.8% in the
first nine months of 1998 to 31.0% in the comparable period of 1999 primarily
due to a decrease in income taxed at the Company's marginal tax rate as a result
of net realized investment losses in the 1999 period as compared to net realized
investment gains in the 1998 period.
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.
Three Months Ended September 30, 1999 Compared to
Three Months Ended September 30, 1998
Premium and Fee Income. Premium and fee income for the third quarter of 1999 was
$145.2 million as compared to $101.8 million for the third quarter of 1998, an
increase of 43%. 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. In the fourth quarter of 1999,
the Company discontinued its participation in a federal employee group life
reinsurance pool in order to deploy its resources into more profitable products.
Premium income from this reinsurance pool totaled $7.0 million in the third
quarter of 1999 and incurred benefits totaled $6.8 million. The Company does not
expect its withdrawal from this facility to have a material impact on its
underwriting results. Deposits from the Company's SPDA products, including the
Company's MVA annuity product, were $25.4 million during the third quarter of
1999 as compared to $11.1 million during the third 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 and a more favorable environment
for fixed annuity sales due to increases in interest rates during 1999.
Net Investment Income. Net investment income for the third quarter of 1999 was
$46.3 million as compared to $34.2 million for the third quarter of 1998, an
increase of 35%. This increase primarily reflects an increase in the weighted
average annualized yield on invested assets and 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 8.3%
on average invested assets of $2,222.0 million for the third quarter of 1999 and
6.5% on average invested assets of $2,116.6 million for the comparable period of
1998. The weighted average annualized yield on invested assets in the 1998
period reflects the decline in the financial markets during the third quarter of
1998.
Benefits and Expenses. Policyholder benefits and expenses were $152.9 million
for the third quarter of 1999 as compared to $106.0 million for the third
quarter of 1998, an increase of 44%. 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 was 95.6% in the third
quarter of 1999 as compared to 94.3% for the third quarter of 1998. This
increase was primarily attributable to changes in the Company's product mix. The
amortization of cost of business acquired related to asset accumulation products
was decelerated by $2.0 million during the third quarter of 1998 as a result of
differences between expected and actual investment results. There was no
acceleration or deceleration of cost of business acquired in the 1999 period.
Operating Income. Income from continuing operations excluding realized
investment gains and losses and before interest and income tax expense and
dividends was $38.6 million in the third quarter of 1999 as compared to $30.0
million in the third quarter of 1998, an increase of 29%. This increase
primarily reflects the growth in the Company's group employee benefits segment
and the increase in the yield on invested assets in the 1999 period.
Net Realized Investment Losses. Net realized investment losses were $5.8 million
in the third quarter of 1999 as compared to $10.0 million in the third quarter
of 1998. The Company's investment strategy results in periodic sales of
securities and the recognition of realized investment gains and losses.
-10-
<PAGE> 11
Income Tax Expense. The Company's effective tax rate increased from 23.1% in the
third quarter of 1998 to 31.2% in the third quarter of 1999 primarily due to a
decrease in net realized investment losses, which are taxed at the Company's
marginal tax rate, in the 1999 period and changes in the level of tax-exempt
investment income.
LIQUIDITY AND CAPITAL RESOURCES
The Company had approximately $255.5 million of financial resources available at
the holding company level at September 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
$13.5 million has been paid during the first nine months of 1999. In general,
dividends from the Company's non-insurance subsidiaries are not subject to
regulatory or other restrictions. As of October 1, 1999, the Company had $60
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 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 implemented a corporate-wide program 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 will continue to test its critical systems for Year
2000 compliance throughout the remainder of 1999 primarily utilizing internal
resources. The Company principally used external resources to remediate its
software for Year 2000 compliance.
-11-
<PAGE> 12
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 $8.1 million, of which $6.0 million will be expensed as incurred
and $2.1 million will be capitalized and amortized over the life of the
replacement computer systems. Since 1997, the Company has incurred $7.5 million
of costs to address the Year 2000 issue of which $5.4 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. The Company has developed 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 will 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 continued 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.
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. 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.
-12-
<PAGE> 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<S> <C> <C>
11 - Computation of Results per Share of Common Stock (incorporated
by reference to Note E to the Consolidated Financial
Statements included elsewhere herein)
10.1 - Amendment, dated as of August 11, 1999, to the Third Amended
and Restated Credit Agreement dated as of December 5, 1996,
among the Company, the co-agents party thereto, the lenders
party thereto, and Bank of America, N.A. (as successor by
merger to Bank of America National Trust and Savings
Association), as administrative agent.
27 - Financial Data Schedule
</TABLE>
(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: November 12, 1999
-13-
<PAGE> 1
Exhibit 10.1
August 11, 1999
Delphi Financial Group, Inc.
1105 North Market Street
Suite 1230
Wilmington, Delaware 19801
Re: Waiver and Amendment
Ladies and Gentlemen:
We make reference to that certain Third Amended and Restated
Credit Agreement, dated as of December 5, 1996 (as amended or modified to date,
the "Credit Agreement"), among Delphi Financial Group, Inc. ("Delphi"), the
co-agents party thereto (the "Co-Agents"), the lenders party thereto (the
"Lenders") and Bank of America, N.A. (as successor by merger to Bank of America
National Trust and Savings Association), as administrative agent (the
"Administrative Agent"). Capitalized terms used herein and not otherwise defined
shall have the meanings provided in the Credit Agreement.
We understand that, absent the waiver provided for herein, an
Event of Default would exist under Section 10.6 of the Credit Agreement (Capital
Expenditures) as a result of Delphi exceeding the limit on Consolidated Capital
Expenditures by approximately $3,000,000 as of the Fiscal Quarter ended June 30,
1999. We also understand that Delphi has requested that (a) the Event of Default
resulting from its violation of Section 10.6 of the Credit Agreement be waived
by the Lenders, (b) Section 10.6 of the Credit Agreement be deleted and (c)
Section 9.4 of the Credit Agreement be amended to provide, among other things,
that any unused dividend and stock repurchase/redemption capacity in any given
Fiscal Year be carried forward to succeeding Fiscal Years.
Each of the undersigned hereby:
(a) waives any Event of Default resulting from Delphi's
violation of Section 10.6 of the Credit Agreement as of the Fiscal
Quarter ended June 30, 1999;
(b) agrees that Section 10.6 of the Credit Agreement shall be
deleted in its entirety and replaced with the following:
"SECTION 10.6. [Intentionally Omitted]."
(c) agrees that Section 9.4 of the Credit Agreement shall be
deleted in its entirety and replaced with the following:
"SECTION 9.4 Dividends, etc. Except for (a) dividends
made on preferred stock of the Borrower when no Default has
occurred, (b) dividends made on common stock of the Borrower
and the repurchase or redemption of capital stock of the
Borrower, in each case, when no Default has occurred and which
do not, in the aggregate in any Fiscal Year, exceed 4% of the
Consolidated Equity of the Borrower as of December 31 of the
Fiscal Year immediately
<PAGE> 2
preceding the Fiscal Year in which such dividend, repurchase
or redemption is to be made; provided, that, solely for the
Borrower's 1999 Fiscal Year, dividends made on common stock of
the Borrower and repurchases or redemptions of capital stock
of the Borrower shall be permitted when no Default has
occurred and which do not, in the aggregate, exceed 4% of the
Consolidated Equity of the Borrower as of June 30, 1999, plus
the amount of any repurchases of common stock of the Borrower
made by the Borrower from January 1, 1999 to August 11, 1999
(approximately $29,000,000); and provided, further, that to
the extent the aggregate amount of such dividends, repurchases
or redemptions in any Fiscal Year is less than the amount
permitted for such Fiscal Year, the Borrower may carry over
the additional amount to any succeeding Fiscal Year, and (c)
in addition to clauses (a) and (b), repurchases of capital
stock of the Borrower when no Default has occurred in an
aggregate amount not to exceed $20,000,000 during the term of
this Agreement, not (i) declare, pay or make any dividend or
distribution (in cash, property or obligations) on any shares
of any class of capital stock (now or hereafter outstanding)
of the Borrower or on any warrants, options or other rights
with respect to any shares of any class of capital stock (now
or hereafter outstanding) of the Borrower (other than
dividends or distributions payable in its common stock or
warrants to purchase its common stock or splitups or
reclassifications of its stock into additional or other shares
of its common stock) or apply, or permit any of its
Subsidiaries to apply, any of its funds, property or assets to
the purchase, redemption, sinking fund or other retirement of
any shares of any class of capital stock (now or hereafter
outstanding) of the Borrower or any option, warrant or other
right to acquire shares of the Borrower's capital stock (other
than any such payment pursuant to stock appreciation rights
granted and exercised in accordance with applicable rules and
regulations of the Securities and Exchange Commission); or
(ii) make any deposit for any of the foregoing purposes."
(d) acknowledges that Delphi's address for notices pursuant to
Section 15.2 of the Credit Agreement shall be as follows:
1105 North Market Street, Suite 1230
Wilmington, Delaware 19899
Attention: Robert Rosenkranz
Telephone: (302) 478-5142
Facsimile: (302) 427-7663
with a copy to:
Delphi Capital Management, Inc.
153 East 53rd Street, 49th Floor
New York, New York 10022
Attention: General Counsel
Telephone: (212) 838-7000
Facsimile: (212) 838-7598
-2-
<PAGE> 3
In consideration of the foregoing waiver and amendment, Delphi
hereby represents and warrants to the Lenders and the Administrative Agent that:
(a) The execution, delivery and performance of this agreement
is within the Delphi's authority (corporate or otherwise), has been
duly authorized by all necessary action, has received all necessary
consents and approvals (if any shall be required), and does not and
will not contravene or conflict with any provision of law or of the
charter, bylaws or other organizational documents of Delphi or its
Subsidiaries, or of any other agreement binding upon Delphi or its
Subsidiaries or their respective property;
(b) This agreement constitutes the legal, valid, and binding
obligation of Delphi, enforceable against Delphi in accordance with its
terms;
(c) Except for any Default or Event of Default waived by the
terms of this agreement, no Default or Event of Default has occurred
and is continuing or will result from the terms set forth in this
consent agreement; and
(d) The representations and warranties of Delphi set forth in
Section 7 of the Credit Agreement are true and correct as if made on
the date hereof, except any such representation or warranty which
speaks to a specific date.
Notwithstanding anything contained in the foregoing to the
contrary, the waiver and amendment granted hereunder will not in any way operate
as an amendment or modification of the Credit Agreement, or any other Loan
Document or a consent or waiver with respect to any existing or future Default
or Event of Default not specifically enumerated above.
This letter agreement may be executed in counterparts and each
such counterpart shall be one and the same agreement.
The parties agree that facsimile signatures shall be deemed to
be original signatures for purposes of this letter agreement.
-3-
<PAGE> 4
If the foregoing is in accordance with your understanding and
is acceptable to you, please so indicate by executing this letter in the space
provided below and returning the original to Michael L. Boykins at McDermott,
Will & Emery, 227 West Monroe Street, Chicago, Illinois 60606 and faxing a copy
of your executed signature page to Mr. Boykins at (312) 984-7700.
Very truly yours,
ADMINISTRATIVE AGENT:
BANK OF AMERICA, N.A. (as successor by
merger to Bank of America National Trust
and Savings Association)
By: _____________________________________
Name: ___________________________________
Title: __________________________________
LENDERS:
BANK OF AMERICA, N.A. (as successor by
merger to Bank of America National Trust
and Savings Association)
By: _____________________________________
Name: ___________________________________
Title: __________________________________
BANK OF MONTREAL
By: _____________________________________
Name: ___________________________________
Title: __________________________________
THE BANK OF NEW YORK
By: _____________________________________
Name: ___________________________________
Title: __________________________________
CORESTATES BANK, N.A.
By: _____________________________________
Name: ___________________________________
Title: __________________________________
<PAGE> 5
DEUTSCHE BANK AG, NEW YORK AND/OR
CAYMAN ISLANDS BRANCHES
By: _____________________________________
Name: ___________________________________
Title: __________________________________
By: _____________________________________
Name: ___________________________________
Title: __________________________________
DRESDNER BANK AG, NEW YORK BRANCH
AND/OR GRAND CAYMAN BRANCH
By: _____________________________________
Name: ___________________________________
Title: __________________________________
By: _____________________________________
Name: ___________________________________
Title: __________________________________
MELLON BANK, N.A.
By: _____________________________________
Name: ___________________________________
Title: __________________________________
FLEET NATIONAL BANK
By: _____________________________________
Name: ___________________________________
Title: __________________________________
<PAGE> 6
Agreed and Accepted this ___ day
of August, 1999.
DELPHI FINANCIAL GROUP, INC.
By: ______________________________
Name: ____________________________
Title: ___________________________
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 (UNAUDITED) AND THE
CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 1,928,410
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,306,958
<CASH> 174,794
<RECOVER-REINSURE> 371,251
<DEFERRED-ACQUISITION> 135,434
<TOTAL-ASSETS> 3,385,981
<POLICY-LOSSES> 1,185,856
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 677,751
<NOTES-PAYABLE> 246,989
100,000<F1>
0
<COMMON> 210
<OTHER-SE> 495,042
<TOTAL-LIABILITY-AND-EQUITY> 3,385,981
430,695
<INVESTMENT-INCOME> 134,412
<INVESTMENT-GAINS> (15,286)
<OTHER-INCOME> 0
<BENEFITS> 344,083
<UNDERWRITING-AMORTIZATION> 21,771
<UNDERWRITING-OTHER> 97,994
<INCOME-PRETAX> 85,973
<INCOME-TAX> 26,687
<INCOME-CONTINUING> 54,747
<DISCONTINUED> (13,847)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,900
<EPS-BASIC> 1.99
<EPS-DILUTED> 1.92
<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.
</FN>
</TABLE>
