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, 2001
-------------
[ ] 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)
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)
1105 North Market Street, Suite 1230, P.O. Box 8985, Wilmington, Delaware 19899
----------------------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
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, 2001, the Registrant had 16,093,664 shares of Class A Common
Stock and 4,237,522 shares of Class B Common Stock outstanding.
2
DELPHI FINANCIAL GROUP, INC.
FORM 10-Q
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER INFORMATION
Page
----
PART I. FINANCIAL INFORMATION
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 2001 and 2000................................. 3
Consolidated Balance Sheets at June 30, 2001 and
December 31, 2000................................................... 4
Consolidated Statements of Shareholders' Equity for the
Six Months Ended June 30, 2001 and 2000............................. 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2001 and 2000............................. 6
Notes to Consolidated Financial Statements.............................. 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 9
PART II. OTHER INFORMATION....................................................... 13
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PART I. FINANCIAL INFORMATION
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2001 2000 2001 2000
---------- --------- --------- ---------
Revenue:
Premium and fee income....................... $ 122,513 $ 112,123 $ 245,818 $ 224,882
Net investment income........................ 39,433 46,536 78,499 97,212
Net realized investment gains (losses)....... 225 (5) 676 (1,552)
--------- --------- --------- ---------
162,171 158,654 324,993 320,542
--------- --------- --------- ---------
Benefits and expenses:
Benefits, claims and interest credited to
policyholders .............................. 90,170 81,904 179,869 167,675
Commissions.................................. 10,531 9,967 19,966 19,238
Amortization of cost of business acquired.... 7,759 7,308 16,375 13,480
Other operating expenses..................... 22,390 18,886 45,406 40,889
--------- --------- --------- ---------
130,850 118,065 261,616 241,282
--------- --------- --------- ---------
Operating income.......................... 31,321 40,589 63,377 79,260
Interest expense............................... 2,665 5,380 6,474 10,739
--------- --------- --------- ---------
Income before income tax expense,
dividends on Capital Securities of
Delphi Funding L.L.C. and
extraordinary gain....................... 28,656 35,209 56,903 68,521
Income tax expense............................. 9,282 10,788 18,421 21,293
--------- --------- --------- ---------
Income before dividends on Capital
Securities of Delphi Funding L.L.C.
and extraordinary gain................... 19,374 24,421 38,482 47,228
Dividends on Capital Securities of Delphi
Funding L.L.C. ............................... 902 1,513 2,382 3,026
---------- --------- --------- -------
Income before extraordinary gain.......... 18,472 22,908 36,100 44,202
Extraordinary gain, net of income taxes........ 3,196 - 6,213 -
--------- --------- --------- ---------
Net income................................ $ 21,668 $ 22,908 $ 42,313 $ 44,202
========= ========= ========= =========
Basic results per share of common stock:
Income before extraordinary gain excluding
net realized investment gains (losses)...... $ 0.89 $ 1.13 $ 1.74 $ 2.22
Income before extraordinary gain............. 0.90 1.13 1.76 2.17
Net income................................. 1.06 1.13 2.06 2.17
Diluted results per share of common stock:
Income before extraordinary gain excluding
net realized investment gains (losses)...... $ 0.87 $ 1.09 $ 1.69 $ 2.15
Income before extraordinary gain............. 0.88 1.09 1.71 2.11
Net income................................... 1.03 1.09 2.01 2.11
Dividend paid per share of common stock........ $ 0.07 $ - $ 0.14 $ -
See notes to consolidated financial statements.
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DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
June 30, December 31,
2001 2000
----------- ------------
Assets:
Investments:
Fixed maturity securities, available for sale ................. $2,034,183 $2,010,634
Cash and cash equivalents...................................... 127,077 56,093
Other investments.............................................. 140,798 421,562
---------- ----------
2,302,058 2,488,289
Cost of business acquired......................................... 163,790 156,556
Reinsurance receivables........................................... 452,289 437,844
Other assets...................................................... 283,220 289,433
Assets held in separate account................................... 72,777 67,888
---------- ----------
Total assets................................................... $3,274,134 $3,440,010
========== ==========
Liabilities and Shareholders' Equity:
Future policy benefits............................................ $ 542,486 $ 523,911
Unpaid claims and claim expenses.................................. 656,245 646,233
Policyholder account balances..................................... 792,886 782,452
Corporate debt.................................................... 100,717 267,770
Advances from Federal Home Loan Bank.............................. 142,862 149,409
Other liabilities and policyholder funds.......................... 343,629 374,292
Liabilities related to separate account........................... 62,324 57,750
---------- ----------
Total liabilities.............................................. 2,641,149 2,801,817
---------- ----------
Company-obligated mandatorily redeemable Capital Securities
of Delphi Funding L.L.C. holding solely junior
subordinated deferrable interest debentures of the Company..... 46,050 100,000
---------- ----------
Shareholders' equity:
Preferred Stock, $.01 par; 10,000,000 shares authorized........ - -
Class A Common Stock, $.01 par; 40,000,000 shares authorized;
17,494,157 and 16,844,982 shares issued and outstanding,
respectively 175 168
Class B Common Stock, $.01 par; 20,000,000 shares authorized;
4,237,522 and 4,839,072 shares issued and outstanding,
respectively 42 48
Additional paid-in capital..................................... 367,607 366,834
Net unrealized depreciation on investments..................... (45,126) (53,622)
Retained earnings.............................................. 313,532 274,060
Treasury stock, at cost; 1,435,390 shares of Class A Common Stock (49,295) (49,295)
--------- ----------
Total shareholders' equity.................................. 586,935 538,193
---------- ----------
Total liabilities and shareholders' equity................ $3,274,134 $3,440,010
========== ==========
See notes to consolidated financial statements.
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DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Net
Unrealized
Class A Class B Additional Depreciation
Common Common Paid-in on Retained Treasury
Stock Stock Capital Investments Earnings Stock Total
---------- ------- ---------- ------------ ---------- --------- -----------
Balance, January 1, 2000...... $ 163 $ 52 $364,390 $(101,465) $277,353 $(39,076) $501,417
--------
Net income.................... - - - - 44,202 - 44,202
Increase in net unrealized
depreciation on investments. - - - (42,221) - - (42,221)
--------
Comprehensive income.......... 1,981
Issuance of stock, exercise of
stock options and share
conversions................. - - 704 - - - 704
Acquisition of treasury stock. - - - - - (10,219) (10,219)
------- ------- -------- --------- -------- -------- --------
Balance, June 30, 2000........ $ 163 $ 52 $365,094 $(143,686) $321,555 $(49,295) $493,883
======= ======= ======== ========= ======== ======== ========
Balance, January 1, 2001...... $ 168 $ 48 $366,834 $ (53,622) $274,060 $(49,295) $538,193
--------
Net income.................... - - - - 42,313 - 42,313
Decrease in net unrealized
depreciation on investments. - - - 8,496 - - 8,496
--------
Comprehensive income.......... 50,809
Issuance of stock, exercise of
stock options and share
conversions................. 7 (6) 773 - - - 774
Dividends paid on common stock - - - - (2,841) - (2,841)
------- ------- -------- --------- -------- -------- --------
Balance, June 30, 2001........ $ 175 $ 42 $367,607 $ (45,126) $313,532 $(49,295) $586,935
======= ======= ======== ========= ======== ======== ========
See notes to consolidated financial statements.
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DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Six Months Ended
June 30,
-----------------------
2001 2000
---------- ----------
Operating activities:
Net income......................................................... $ 42,313 $ 44,202
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Change in policy liabilities and policyholder accounts........... 29,342 36,234
Net change in reinsurance receivables and payables............... (13,361) (90,975)
Amortization, principally the cost of business acquired and
investments .................................................... 7,119 (1,605)
Deferred costs of business acquired.............................. (23,584) (23,998)
Net realized (gains) losses on investments....................... (676) 1,552
Net change in trading account securities......................... 28,832 (4,352)
Net change in federal income tax liability....................... 26,050 20,429
Extraordinary gain............................................... (6,213) -
Other............................................................ 401 (26,334)
--------- ---------
Net cash provided (used) by operating activities............... 90,223 (44,847)
--------- ---------
Investing activities:
Purchases of investments and loans made............................ (327,967) (749,206)
Sales of investments and receipts from repayment of loans.......... 487,500 266,421
Maturities of investments.......................................... 34,168 13,420
Sale of real estate................................................ - 16,656
Change in deposit in separate account.............................. (315) (475)
--------- ---------
Net cash provided (used) by investing activities............... 193,386 (453,184)
--------- ---------
Financing activities:
Deposits to policyholder accounts.................................. 43,186 79,565
Withdrawals from policyholder accounts............................. (34,930) (43,117)
Proceeds from issuance of common stock and exercise of stock
options .......................................................... 774 704
Dividends paid on common stock..................................... (2,841) -
Acquisition of treasury stock...................................... - (10,219)
Borrowings under the Credit Agreements............................. - 19,000
Principal payments under the Credit Agreements..................... (150,000) (19,000)
Principal payment under SIG Senior Notes........................... (9,000) (9,000)
Change in liability for Federal Home Loan Bank advances............ (6,500) 61,500
Repurchase of Capital Securities................................... (43,379) -
Change in liability for securities loaned or sold under agreements
to repurchase .................................................... (9,935) 103,496
--------- ---------
Net cash (used) provided by financing activities............... (212,625) 182,929
--------- ---------
Increase (decrease) in cash and cash equivalents...................... 70,984 (315,102)
Cash and cash equivalents at beginning of period...................... 56,093 357,692
--------- ---------
Cash and cash equivalents at end of period....................... $ 127,077 $ 42,590
========= =========
See notes to consolidated financial statements
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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
accounting principles generally accepted in the United States ("GAAP") 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 GAAP 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, 2000. 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, 2001 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2001. Certain reclassifications
have been made in the 2000 financial statements to conform to the 2001
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, 2000. 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, 2000.
Recently Adopted Accounting Standards. In June 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 is required to be
adopted for fiscal years beginning after December 15, 2001. Under SFAS No. 142,
goodwill and intangible assets deemed to have indefinite lives will no longer be
amortized over a pre-determined period, but are required to be periodically
reviewed for impairment. Other intangible assets with finite lives will continue
to be amortized over their useful lives. An impairment loss resulting from the
adoption of SFAS No. 142 would be accounted for as a cumulative effect of a
change in accounting principle and recognized in the entity's first interim
period financial statements regardless of the interim period in which the
measurement is completed. Any subsequent impairment losses would be reflected
within operating results in the income statement. The Company has not yet
determined what the effect of SFAS No. 142 will be on the earnings and financial
position of the Company.
NOTE B - INVESTMENTS
At June 30, 2001, the Company had fixed maturity securities available for sale
with a carrying value and a fair value of $2,034.2 million and an amortized cost
of $2,115.8 million. At December 31, 2000, the Company had fixed maturity
securities available for sale with a carrying value and a fair value of $2,010.6
million and an amortized cost of $2,103.2 million.
NOTE C - SEGMENT INFORMATION
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -------------------
2001 2000 2001 2000
--------- -------- -------- --------
(dollars in thousands)
Revenues excluding net realized investment gains
(losses):
Group employee benefit products.................. $138,507 $132,470 $277,490 $269,290
Asset accumulation products...................... 18,305 20,741 36,525 41,884
Other (1)........................................ 5,134 5,448 10,302 10,920
-------- -------- -------- --------
$161,946 $158,659 $324,317 $322,094
======== ======== ======== ========
Operating income (2):
Group employee benefit products.................. $ 28,943 $ 33,766 $ 58,478 $ 67,433
Asset accumulation products...................... 3,359 6,852 6,721 15,324
Other (1)........................................ (1,206) (24) (2,498) (1,945)
-------- -------- -------- --------
$ 31,096 $ 40,594 $ 62,701 $ 80,812
======== ======== ======== ========
(1) Consists of operations that do not meet the quantitative thresholds for
determining reportable segments and includes integrated disability and
absence management services and certain corporate activities.
(2) Income excluding net realized investment gains (losses) and before
interest and income tax expense, dividends on Capital Securities of
Delphi Funding L.L.C. and extraordinary gain.
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DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE D - REPURCHASE OF SENIOR NOTES AND CAPITAL SECURITIES OF DELPHI FUNDING
L.L.C.
In June 2001, the Company repurchased $8.0 million par value of the 8.0% Senior
Notes due in October 2003. This transaction settled in July 2001. The Company
also repurchased $54.0 million liquidation amount of the 9.31% Capital
Securities, Series A, due in March 2027, during the first half of 2001. The
Company recognized an extraordinary gain of $6.2 million, net of income tax
expense of $3.3 million, in connection with these repurchases.
NOTE E - COMPUTATION OF RESULTS PER SHARE
The following table sets forth the calculation of basic and diluted results per
share:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2001 2000 2001 2000
-------- ------- ------- -------
(dollars in thousands, except per share data)
Numerator:
Income before extraordinary gain excluding net
realized investment gains (losses)............. $ 18,326 $22,911 $35,661 $45,211
Realized investment gains (losses), net of taxes. 146 (3) 439 (1,009)
-------- ------- ------- -------
Income before extraordinary gain............. 18,472 22,908 36,100 44,202
Extraordinary gain, net of taxes................. 3,196 - 6,213 -
-------- ------- ------- -------
Net income................................... $ 21,668 $22,908 $42,313 $44,202
======== ======= ======= =======
Denominator:
Weighted average common shares outstanding....... 20,534 20,323 20,531 20,355
Effect of dilutive securities.................. 544 645 553 627
-------- ------- ------- -------
Weighted average common shares outstanding,
assuming dilution.............................. 21,078 20,968 21,084 20,982
======== ======= ======= =======
Basic results per share of common stock:
Income before extraordinary gain excluding net
realized investment gains (losses)............. $ 0.89 $ 1.13 $ 1.74 $ 2.22
Realized investment gains (losses), net of taxes. 0.01 - 0.02 (0.05)
-------- ------- ------- -------
Income before extraordinary gain........... 0.90 1.13 1.76 2.17
Extraordinary gain, net of taxes................. 0.16 - 0.30 -
-------- ------- ------- -------
Net income................................. $ 1.06 $ 1.13 $ 2.06 $ 2.17
======== ======= ======= =======
Diluted results per share of common stock:
Income before extraordinary gain excluding net
realized investment gains (losses)............ $ 0.87 $ 1.09 $ 1.69 $ 2.15
Realized investment gains (losses), net of taxes. 0.01 - 0.02 (0.04)
-------- ------- ------- -------
Income before extraordinary gain........... 0.88 1.09 1.71 2.11
Extraordinary gain, net of taxes................. 0.15 - 0.30 -
-------- ------- ------- -------
Net income................................. $ 1.03 $ 1.09 $ 2.01 $ 2.11
======== ======= ======= =======
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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, 2000. 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, 2000.
RESULTS OF OPERATIONS
Six Months Ended June 30, 2001 Compared to
Six Months Ended June 30, 2000
Premium and Fee Income. Premium and fee income was $245.8 million for the first
half of 2001 as compared to $224.9 million in the 2000 period, an increase of
9%. Premiums from core group employee benefit products increased 13% to $219.1
million in the first half of 2001 from $193.2 million in the comparable period
of 2000. This increase reflects strong production of new business and normal
growth in employment and salary levels for the Company's existing customer base.
Core group employee benefit products include group life, disability, excess and
large deductible workers' compensation, travel accident and dental insurance and
self-insurance workers' compensation bonds. Excess workers' compensation
premiums increased 32% to $34.4 million in the first half of 2001 from $26.1
million in the comparable period of 2000. This increase reflects improvements in
the pricing environment in this market sector and increased demand due to higher
primary workers' compensation rates. Disruption in the excess workers'
compensation marketplace due to difficulties experienced by some competitors
created opportunities for SNCC, which contributed to high levels of new
production, particularly during 2000. Non-core group employee benefit products
include reinsurance pools, loss portfolio transfers ("LPTs"), primary workers'
compensation, commercial automobile liability and bail bond insurance, and
property reinsurance. Premiums from non-core group employee benefit products
decreased to $18.1 million in the first half of 2001 from $22.4 million in the
comparable period of 2000 primarily due to a lower level of premium from LPTs,
which are episodic in nature. Deposits from the Company's asset accumulation
products were $42.1 million for the first half of 2001 as compared to $78.7
million for the first half of 2000. Deposits for these products, which are
long-term in nature, are not recorded as premiums; instead, the deposits are
recorded as a liability. During the first half of 2001, market interest rates
and the resulting interest rate spreads available to the Company on these
products declined. The Company maintained its disciplined approach to
establishing crediting rates offered on its asset accumulation products, in
contrast to some of its competitors who did not react quickly to the declining
interest rates. Accordingly, the Company experienced a lower level of production
from its asset accumulation products during the first half of 2001 as compared
to the first half of 2000.
Net Investment Income. Net investment income for the first half of 2001 was
$78.5 as compared to $97.2 million for the 2000 period. The tax equivalent
weighted average annualized yield (1) on invested assets was 6.9% on average
invested assets(2) of $2,353.1 million for the first half of 2001 and 7.7% on
average invested assets(2) of $2,594.6 million for the first half of 2000. The
decrease in investment income reflects the Company's liquidation during the
fourth quarter of 2000 of a substantial majority of its holding company
investments. The proceeds from these sales were used to repay in full the $150.0
million of outstanding borrowings under the Company's $150.0 million revolving
credit facility and to repurchase $54.0 million liquidation amount of the
Capital Securities during the first half of 2001.
Benefits and Expenses. Policyholder benefits and expenses for the first half of
2001 were $261.6 million as compared to $241.3 million for the 2000 period, an
increase of 8%. This increase primarily reflects the increase in
(1) The tax equivalent weighted average annualized yield on the Company's
investment portfolio for each period is computed by dividing net investment
income, increased by the tax savings generated from tax exempt interest
income and the dividends received deduction, by average invested assets for
the period.
(2) Average invested assets are computed by dividing the total of invested
assets as reported on the Company's balance sheet at the beginning of each
period plus the individual quarter-end balances by the total number of
periods and deducting one-half of net investment income, including tax
savings.
-9-
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premiums from the Company's core group employee benefit products discussed
above. The combined ratio (loss ratio plus expense ratio) for the Company's
group employee benefits segment decreased from 93.6% in the first half of 2000
to 92.3% for the 2001 period. Certain non-core group employee benefit products
expose the Company to the possibility of episodic losses, which could cause the
combined ratio to differ materially from current trends. Benefits and interest
credited on asset accumulation products increased by $2.6 million in the first
half of 2001 principally due to an increase in average funds under management
from $648.6 million in the first half of 2000 to $740.6 million in the 2001
period. Also contributing to this increase was an increase in the weighted
average annualized crediting rate on asset accumulation products from 5.5% in
the first half of 2000 to 5.7% in the 2001 period.
Interest Expense. Interest expense was $6.5 million in the first half of 2001 as
compared to $10.7 million in the 2000 period, a decrease of $4.2 million. This
decrease was primarily a result of the Company's repayment in full of the $150.0
million of outstanding borrowings under the Company's $150.0 million revolving
credit facility during the first half of 2001.
Extraordinary Gain. During the first half of 2001, the Company repurchased $54.0
million liquidation amount of the Capital Securities in the open market. In
addition, the Company repurchased $8.0 million par value of the 8.0% Senior
Notes in June 2001. The Company recognized an extraordinary gain of $6.2
million, net of income tax expense of $3.3 million, in connection with these
repurchases. The reduction in dividends from the Capital Securities for the 2001
period does not fully reflect the future reduction in dividends since these
repurchases occurred on various dates during the first half of 2001.
Three Months Ended June 30, 2001 Compared to
Three Months Ended June 30, 2000
Premium and Fee Income. Premium and fee income for the second quarter of 2001
was $122.5 million as compared to $112.1 million for the 2000 period, an
increase of 9%. Premiums from core group employee benefit products increased 13%
to $109.4 million in the second quarter of 2001 from $97.2 million in the
comparable period of 2000. This increase reflects strong production of new
business and normal growth in employment and salary levels for the Company's
existing customer base. Core group employee benefit products include group life,
disability, excess and large deductible workers' compensation, travel accident
and dental insurance and self-insurance workers' compensation bonds. Excess
workers' compensation premiums increased 22% to $16.0 million from $13.1 million
in the comparable period of 2000. This increase reflects improvements in the
pricing environment in this market sector and increased demand due to higher
primary workers' compensation rates. Disruption in the excess workers'
compensation marketplace due to difficulties experienced by some competitors
created opportunities for SNCC, which contributed to high levels of new
production, particularly during 2000. Non-core group employee benefit products
include reinsurance pools, loss portfolio transfers ("LPTs"), primary workers'
compensation, commercial automobile liability and bail bond insurance, and
property reinsurance. Premiums from non-core group employee benefit products
decreased to $8.8 million in the second quarter of 2001 from $10.0 million in
the comparable period of 2000 primarily due to a lower level of premium from
LPTs, which are episodic in nature. Deposits from the Company's asset
accumulation products were $13.4 million for the second quarter of 2001 as
compared to $45.5 million for the second quarter of 2000. Deposits for these
products, which are long-term in nature, are not recorded as premiums; instead,
the deposits are recorded as a liability. This decrease was primarily due to the
Company maintaining its disciplined approach to establishing crediting rates
offered on its asset accumulation products in a declining interest rate
environment during the second quarter of 2001.
Net Investment Income. Net investment income for the second quarter of 2001 was
$39.4 million as compared to $46.5 million in the second quarter of 2000. The
tax equivalent weighted average annualized yield(1) on invested assets was 7.0%
on average invested assets(2) of $2,325.8 million for the second quarter of 2001
and 7.2% on average invested assets(2) of $2,675.4 million for the second
quarter of 2000. The decrease in investment income reflects the
(1) The tax equivalent weighted average annualized yield on the Company's
investment portfolio for each period is computed by dividing net investment
income, increased by the tax savings generated from tax exempt interest
income and the dividends received deduction, by average invested assets for
the period.
(2) Average invested assets are computed by dividing the total of invested
assets as reported on the Company's balance sheet at the beginning of each
period plus the individual quarter-end balances by the total number of
periods and deducting one-half of net investment income, including tax
savings.
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11
Company's liquidation during the fourth quarter of 2000 of a substantial
majority of its holding company investments. The proceeds from these sales were
used to repay in full the $150.0 million of outstanding borrowings under the
Company's $150.0 million revolving credit facility and to repurchase $54.0
million liquidation amount of the Capital Securities during the first half of
2001.
Benefits and Expenses. Policyholder benefits and expenses for the second quarter
of 2001 were $130.9 million as compared to $118.1 million for the second quarter
of 2000, an increase of 11%. This increase primarily reflects the increase in
premiums from the Company's core group employee benefit products discussed
above. The combined ratio (loss ratio plus expense ratio) for the Company's
group employee benefits segment was 92.7% in the second quarter of 2001 as
compared to 92.1% for the 2000 period. Certain non-core group employee benefit
products expose the Company to the possibility of episodic losses, which could
cause the combined ratio to differ materially from current trends. Benefits and
interest credited on asset accumulation products increased by $0.6 million in
the second quarter of 2001 principally due to an increase in average funds under
management from $659.1 million in the second quarter of 2000 to $744.3 million
in the 2001 period. Also contributing to this increase was an increase in the
weighted average annualized crediting rate on asset accumulation products from
5.5% in the second quarter of 2000 to 5.7% in the second quarter of 2001.
Interest Expense. Interest expense was $2.7 million for the second quarter of
2001 as compared to $5.4 million in the second quarter of 2000, a decrease of
$2.7 million. This decrease was primarily a result of the Company's repayment in
full of $150.0 million of outstanding borrowings under the Company's $150.0
million revolving credit facility during the first half of 2001.
Extraordinary Gain. During the second quarter of 2001, the Company repurchased
$32.7 million liquidation amount of the Capital Securities in the open market.
In addition, the Company repurchased $8.0 million par value of the 8.0% Senior
Notes in June 2001. The Company recognized an extraordinary gain of $3.2
million, net of income tax expense of $1.7 million, in connection with these
repurchases. The reduction in dividends from the Capital Securities for the
second quarter of 2001 does not fully reflect the future reduction in dividends
since these repurchases occurred at various dates during the 2001 period.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company had $71.3 million of financial resources available at the
holding company level at June 30, 2001, which was primarily comprised of fixed
maturity securities and investments in the common stock of its investment
subsidiaries. The assets of the investment subsidiaries are primarily invested
in fixed maturity securities. Financial resources available at the holding
company level have decreased $195.6 million since December 31, 2000 primarily
due to the liquidation of a substantial majority of the investments of its
investment subsidiaries. The Company used the proceeds from these sales to repay
in full the $150.0 million of outstanding borrowings under the Credit Agreements
and to repurchase $54.0 million liquidation amount of the Capital Securities
during the first six months of 2001. In addition, the Company repurchased $8.0
million par value of the 8% Senior Notes in June 2001. The maximum amount of
borrowings available under the Credit Agreements, which mature in April 2003, is
currently $230.0 million and will reduce to $190.0 million in October 2001 and
$140.0 million in October 2002. 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 dividends paid
from subsidiaries, primarily generated from operating cash flows and
investments. The Company's insurance subsidiaries are permitted, without prior
regulatory or other approval, to make dividend payments of $77.8 million during
2001, of which $20.0 million has been paid during the first half of 2001. In
general, dividends from the Company's non-insurance subsidiaries are not subject
to regulatory or other restrictions.
The Company's current liquidity needs, in addition to funding operating
expenses, include principal and interest payments on the Senior Notes, the SIG
Senior Notes and the Subordinated Notes and distributions on the Capital
Securities. The Senior Notes mature in their entirety in October 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 2002 and the Subordinated Notes mature in
their entirety in June 2003. The junior subordinated debentures underlying the
Capital Securities are not redeemable prior to March 25, 2007.
Operating activities, which include $28.8 million of cash provided by trading
account activity, increased cash and cash equivalents by $90.2 million in the
first half of 2001. Operating activities during the first half of 2000 increased
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cash and cash equivalents by $33.0 million, excluding $58.1 million of funds
related to a rescinded reinsurance transaction that were returned to the ceding
company during the first quarter of 2000 and a net cash payment of $19.7 million
related to the cession by the Company of group employee benefit product reserves
in the second quarter of 2000. During the first half of 2001, proceeds from
investment sales were primarily used to repay in full the $150.0 million of
outstanding borrowings under the $150.0 million revolving credit facility and
repurchase $54.0 million liquidation amount of the Capital Securities. Sources
of liquidity available to the Company and its subsidiaries are expected to
exceed their current and long-term cash requirements.
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, 2000.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
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 in future filings with the Securities
and Exchange Commission or otherwise. 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," "judgment" or other similar expressions.
Forward-looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic, competitive and
other 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, federal and state
legislative and regulatory developments, including but not limited to changes in
financial services and tax laws and regulations, and market pricing and
competitive trends relating to insurance products and services, and those
relating specifically to the Company's business, 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 and changes in the Company's investment strategy,
acquisitions of companies or blocks of business, and 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.
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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 23, 2001. The
directors elected at the meeting will serve for a term ending on the
date of the 2002 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 2001 Annual Meeting that director was Mr.
Rhodes.
The voting results for all matters at the meeting were as follows:
1) Election of Directors
VOTES
-----------------------
Withhold
For Authority
---------- ---------
Class A Director:
Thomas L. Rhodes...................................... 12,493,219 1,441,495
Directors:
Robert Rosenkranz..................................... 26,208,000 2,723,373
Edward A. Fox......................................... 27,481,522 1,449,851
Charles P. O'Brien.................................... 27,462,145 1,469,228
Lewis S. Ranieri...................................... 27,460,445 1,470,928
Robert M. Smith, Jr................................... 26,238,119 2,693,254
B.K. Werner........................................... 28,251,277 680,096
2) All Other Matters - The proposal to amend the Company's Second Amended
and Restated Employee Stock Option Plan received 24,862,809 votes for
approval, 4,052,863 votes against approval and 15,701 votes
abstaining. The proposal to amend the Company's Amended and Restated
Directors Stock Option Plan received 24,829,824 votes for approval,
4,081,895 votes against approval and 19,654 votes abstaining. The
proposal with regard to transacting such other business that properly
comes before the meeting or any adjournment thereof received
24,584,807 votes for approval, 4,067,308 votes against approval and
279,258 votes abstaining; however, no such other business came before
the meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 - Delphi Financial Group, Inc. Second Amended and Restated
Employee Nonqualified Stock Option Plan, as amended
10.2 - Delphi Financial Group, Inc. Amended and Restated Directors
Stock Option Plan, as amended
(b) Reports on Form 8-K
None.
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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/ THOMAS W. BURGHART
--------------------------------------------------
Thomas W. Burghart
Vice President and Treasurer
(Principal Accounting and Financial Officer)
Date: August 14, 2001
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