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, 2000
[ ] 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, 2000, the Registrant had 14,951,534 shares of Class A Common
Stock and 5,164,072 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, 2000 and 1999 .......................... 3
Consolidated Balance Sheets at June 30, 2000 and
December 31, 1999 ............................................ 4
Consolidated Statements of Shareholders' Equity for the
Six Months Ended June 30, 2000 and 1999 ...................... 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999 ...................... 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
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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,
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Revenue:
Premium and fee income ................................... $ 112,123 $ 113,628 $ 224,882 $ 238,989
Net investment income .................................... 46,536 44,353 97,212 88,154
Net realized investment losses ........................... (5) (8,380) (1,552) (9,497)
--------- --------- --------- ---------
158,654 149,601 320,542 317,646
--------- --------- --------- ---------
Benefits and expenses:
Benefits, claims and interest credited to policyholders .. 81,904 88,699 167,675 185,602
Commissions .............................................. 9,967 8,361 19,238 17,561
Amortization of cost of business acquired ................ 7,308 6,888 13,480 13,464
Other operating expenses ................................. 18,886 18,271 40,889 38,610
--------- --------- --------- ---------
118,065 122,219 241,282 255,237
--------- --------- --------- ---------
Operating income ...................................... 40,589 27,382 79,260 62,409
Interest expense ............................................ 5,380 4,340 10,739 8,823
--------- --------- --------- ---------
Income from continuing operations before income
tax expense and dividends on Capital Securities
of Delphi Funding L.L.C .......................... 35,209 23,042 68,521 53,586
Income tax expense .......................................... 10,788 6,918 21,293 16,420
--------- --------- --------- ---------
Income from continuing operations before dividends
on Capital Securities of Delphi Funding L.L.C. ... 24,421 16,124 47,228 37,166
Dividends on Capital Securities of Delphi Funding L.L.C ..... 1,513 1,513 3,026 3,026
--------- --------- --------- ---------
Income from continuing operations ..................... 22,908 14,611 44,202 34,140
Loss on disposal of discontinued operations, net
of income tax benefit .................................... -- -- -- (13,847)
--------- --------- --------- ---------
Net income ............................................ $ 22,908 $ 14,611 $ 44,202 $ 20,293
========= ========= ========= =========
Basic results per share of common stock:
Income from continuing operations excluding net
realized investment losses ........................... $ 1.13 $ 0.96 $ 2.22 $ 1.91
Income from continuing operations ........................ 1.13 0.70 2.17 1.62
Net income ............................................... 1.13 0.70 2.17 0.96
Diluted results per share of common stock:
Income from continuing operations excluding net
realized investment losses ........................... $ 1.09 $ 0.93 $ 2.15 $ 1.85
Income from continuing operations ........................ 1.09 0.68 2.11 1.56
Net income ............................................... 1.09 0.68 2.11 0.93
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,
2000 1999
------------- --------------
Assets:
Investments:
Fixed maturity securities, available for sale ............................. $ 2,081,797 $ 1,715,289
Cash and cash equivalents.................................................. 42,590 357,692
Other investments.......................................................... 513,728 442,829
------------- -------------
2,638,115 2,515,810
Cost of business acquired..................................................... 156,397 144,172
Reinsurance receivables....................................................... 421,710 386,229
Other assets.................................................................. 299,896 278,386
Assets held in separate account............................................... 67,429 71,091
------------- -------------
Total assets............................................................... $ 3,583,547 $ 3,395,688
============= =============
Liabilities and Shareholders' Equity:
Future policy benefits........................................................ $ 535,951 $ 528,247
Unpaid claims and claim expenses.............................................. 629,082 612,440
Policyholder account balances................................................. 721,260 676,664
Corporate debt................................................................ 274,841 283,938
Advances from Federal Home Loan Bank.......................................... 137,251 75,495
Other liabilities and policyholder funds...................................... 633,833 555,904
Liabilities related to separate account....................................... 57,446 61,583
------------- -------------
Total liabilities.......................................................... 2,989,664 2,794,271
------------- -------------
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;
16,339,885 and 16,285,161 shares issued and outstanding, respectively... 163 163
Class B Common Stock, $.01 par; 20,000,000 shares authorized;
5,180,072 shares issued and outstanding................................. 52 52
Additional paid-in capital................................................. 365,094 364,390
Net unrealized depreciation on investments................................. (143,686) (101,465)
Retained earnings.......................................................... 321,555 277,353
Treasury stock, at cost; 1,435,390 and 1,110,290 shares of Class A
Common Stock, respectively.............................................. (49,295) (39,076)
------------- -------------
Total shareholders' equity.............................................. 493,883 501,417
------------- -------------
Total liabilities and shareholders' equity.......................... $ 3,583,547 $ 3,395,688
============= =============
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
Stock Stock Capital Investments
----- ----- ------- -----------
Balance, January 1, 1999 ................ $ 150 $ 54 $ 329,023 $ (18,074)
Net income .............................. -- -- -- --
Increase in net unrealized
depreciation on investments .......... -- -- -- (69,095)
Comprehensive loss ......................
Issuance of stock, exercise of stock
options and share conversions ........ 3 (2) 6,116 --
Stock dividend .......................... 3 1 15,048 --
Acquisition of Treasury Stock ........... -- -- -- --
--------- --------- --------- ---------
Balance, June 30, 1999 .................. $ 156 $ 53 $ 350,187 $ (87,169)
========= ========= ========= =========
Balance, January 1, 2000 ................ $ 163 $ 52 $ 364,390 $(101,465)
Net income .............................. -- -- -- --
Increase in net unrealized
depreciation on investments .......... -- -- -- (42,221)
Comprehensive income ....................
Issuance of stock, exercise of stock
options and share conversions ........ -- -- 704 --
Acquisition of Treasury Stock ........... -- -- -- --
--------- --------- --------- ---------
Balance, June 30, 2000 .................. $ 163 $ 52 $ 365,094 $(143,686)
========= ========= ========= =========
Retained Treasury
Earnings Stock Total
-------- ----- -----
Balance, January 1, 1999 ................ $ 255,287 $ -- $ 566,440
---------
Net income .............................. 20,293 -- 20,293
Increase in net unrealized
depreciation on investments .......... -- -- (69,095)
---------
Comprehensive loss ...................... (48,802)
Issuance of stock, exercise of stock
options and share conversions ........ -- -- 6,117
Stock dividend .......................... (15,055) -- (3)
Acquisition of Treasury Stock ........... -- (27,693) (27,693)
--------- --------- ---------
Balance, June 30, 1999 .................. $ 260,525 $ (27,693) $ 496,059
========= ========= =========
Balance, January 1, 2000 ................ $ 277,353 $ (39,076) $ 501,417
---------
Net income .............................. 44,202 -- 44,202
Increase in net unrealized
depreciation on investments .......... -- -- (42,221)
---------
Comprehensive income .................... 1,981
Issuance of stock, exercise of stock
options and share conversions ........ -- -- 704
Acquisition of Treasury Stock ........... -- (10,219) (10,219)
--------- --------- ---------
Balance, June 30, 2000 .................. $ 321,555 $ (49,295) $ 493,883
========= ========= =========
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,
---------------------------
2000 1999
----------- -----------
Operating activities:
Net income........................................................................ $ 44,202 $ 20,293
Adjustments to reconcile net income to net cash (used) provided
by operating activities:
Change in policy liabilities and policyholder accounts......................... 36,234 80,728
Net change in reinsurance receivables and payables............................. (94,445) 6,868
Amortization, principally the cost of business acquired and investments........ (1,605) (4,140)
Deferred costs of business acquired............................................ (23,998) (21,973)
Net realized losses on investments............................................. 1,552 9,497
Net change in trading account securities....................................... (4,352) (5,491)
Net change in federal income tax liability..................................... 20,429 15,952
Discontinued operations........................................................ - 13,847
Other.......................................................................... (22,846) (28,723)
----------- -----------
Net cash (used) provided by operating activities............................. (44,829) 86,858
----------- -----------
Investing activities:
Purchases of investments and loans made........................................... (749,206) (1,335,574)
Sales of investments and receipts from repayment of loans......................... 266,421 1,103,507
Maturities of investments......................................................... 13,420 72,450
Sale of real estate............................................................... 16,656 -
Business acquisitions, net of cash acquired....................................... - (8,993)
Change in deposit in separate account............................................. (475) (1,062)
----------- -----------
Net cash used by investing activities........................................ (453,184) (169,672)
----------- -----------
Financing activities:
Deposits to policyholder accounts................................................. 79,565 34,778
Withdrawals from policyholder accounts............................................ (43,117) (32,715)
Proceeds from issuance of common stock and exercise of stock options ............. 704 1,132
Acquisition of Treasury Stock..................................................... (10,219) (27,693)
Borrowings under the Credit Agreements............................................ 19,000 95,000
Principal payments under the Credit Agreements.................................... (19,000) (109,000)
Principal payment under SIG Senior Notes.......................................... (9,000) (9,000)
Advances from Federal Home Loan Bank.............................................. 61,500 -
Change in liability for securities loaned or sold under agreements to repurchase.. 103,478 (34,522)
----------- -----------
Net cash provided (used) by financing activities............................. 182,911 (82,020)
----------- -----------
Decrease in cash and cash equivalents................................................ (315,102) (164,834)
Cash and cash equivalents at beginning of period..................................... 357,692 298,843
----------- -----------
Cash and cash equivalents at end of period..................................... $ 42,590 $ 134,009
=========== ===========
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 accompanying consolidated financial statements were prepared in conformity
with accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United
States for complete financial statements. The information furnished includes all
adjustments and accruals of a normal recurring nature which are, in the opinion
of management, necessary for a fair presentation of results for the interim
periods. Operating results for the six months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000. Certain reclassifications have been made in the 1999
financial statements to conform to the 2000 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,
1999. 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, 1999.
NOTE B - INVESTMENTS
At June 30, 2000, the Company had fixed maturity securities available for sale
with a carrying value and a fair value of $2,081.8 million and an amortized cost
of $2,325.3 million. At December 31, 1999, the Company had fixed maturity
securities available for sale with a carrying value and a fair value of $1,715.3
million and an amortized cost of $1,890.0 million.
NOTE C - SEGMENT INFORMATION
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---------- ---------- --------- ----------
Revenues excluding net realized investment losses:
Group employee benefit products............................. $ 132,470 $ 131,616 $ 269,290 $ 276,399
Asset accumulation products................................. 20,741 21,068 41,884 40,423
Other (1)................................................... 5,448 5,297 10,920 10,321
---------- ---------- --------- ----------
$ 158,659 $ 157,981 $ 322,094 $ 327,143
========== ========== ========= ==========
Operating income (2):
Group employee benefit products............................. $ 33,766 $ 28,704 $ 67,433 $ 58,864
Asset accumulation products................................. 6,852 8,419 15,324 16,159
Other (1)................................................... (24) (1,361) (1,945) (3,117)
---------- ---------- ---------- ----------
$ 40,594 $ 35,762 $ 80,812 $ 71,906
========== ========== ========== ==========
(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 losses
and before interest and income tax expense and dividends on Capital
Securities of Delphi Funding L.L.C.
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DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE D - COMPUTATION OF RESULTS PER SHARE
Prior period results per share and applicable share amounts have been restated
to reflect the 2% stock dividend distributed to stockholders on December 15,
1999. The following table sets forth the calculation of basic and diluted
results per share:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- -------- -------- ---------
(dollars in thousands, except per share data)
Numerator:
Income from continuing operations excluding net
realized investment losses............................... $ 22,911 $ 20,058 $ 45,211 $ 40,313
Realized investment losses, net of income tax benefit...... (3) (5,447) (1,009) (6,173)
--------- -------- -------- ---------
Income from continuing operations...................... 22,908 14,611 44,202 34,140
Loss on disposal of discontinued operations, net
of income tax benefit.................................... - - - (13,847)
--------- -------- -------- ---------
Net income............................................. $ 22,908 $ 14,611 $ 44,202 $ 20,293
========= ======== ======== =========
Denominator:
Weighted average common shares outstanding................. 20,323 20,904 20,355 21,090
Effect of dilutive securities............................ 645 704 627 728
--------- -------- -------- ---------
Weighted average common shares outstanding,
assuming dilution........................................ 20,968 21,608 20,982 21,818
========= ======== ======== =========
Basic results per share of common stock:
Income from continuing operations excluding net
realized investment losses.............................. $ 1.13 $ 0.96 $ 2.22 $ 1.91
Realized investment losses, net of income tax benefit... - (0.26) (0.05) (0.29)
--------- -------- -------- ---------
Income from continuing operations.................... 1.13 0.70 2.17 1.62
Loss on disposal of discontinued operations, net
of income tax benefit................................... - - - (0.66)
--------- -------- -------- ---------
Net income........................................... $ 1.13 $ 0.70 $ 2.17 $ 0.96
========= ======== ======== =========
Diluted results per share of common stock:
Income from continuing operations excluding net
realized investment losses.............................. $ 1.09 $ 0.93 $ 2.15 $ 1.85
Realized investment losses, net of income tax benefit......... - (0.25) (0.04) (0.29)
--------- -------- -------- ---------
Income from continuing operations.................... 1.09 0.68 2.11 1.56
Loss on disposal of discontinued operations, net
of income tax benefit................................... - - - (0.63)
--------- -------- -------- ---------
Net income........................................... $ 1.09 $ 0.68 $ 2.11 $ 0.93
========= ======== ======== =========
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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, 1999. 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, 1999.
RESULTS OF OPERATIONS
Six Months Ended June 30, 2000 Compared to
Six Months Ended June 30, 1999
Premium and Fee Income. Premium and fee income was $224.9 million for the first
half of 2000 as compared to $239.0 million for the first half of 1999. This
decrease reflects the termination of the Company's participation in the
reinsurance pools in which it had historically participated and a lower level of
premium from loss portfolio transfers, which are episodic in nature. Excluding
reinsurance pools and loss portfolio transfers, group employee benefit premiums
increased $14.9 million, or 8%, as compared to the first half of 1999. This
increase reflects growth in most products, strong production of new business and
normal growth in employment and salary levels for the Company's existing
customer base. Deposits from the Company's asset accumulation products,
including the Company's MVA annuity product, increased 135% to $78.7 million for
the first half of 2000 from $33.5 million for the first half of 1999. 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 2000 is principally the result of an increase in the number of
networks of independent agents distributing the Company's annuity products and a
more favorable environment for fixed annuity sales.
Net Investment Income. Net investment income was $97.2 million for the first
half of 2000 as compared to $88.2 million for the first half of 1999, 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 2000. The weighted average annualized yield on invested assets was
7.6% on average invested assets(1) of $2,572.2 million for the first half of
2000 as compared to 7.3% on average invested assets(1) of $2,424.5 million for
the first half of 1999.
Benefits and Expenses. Policyholder benefits and expenses for the first half of
2000 were $241.3 million as compared to $255.2 million for the first half of
1999. This decrease primarily reflects the termination of the Company's
participation in reinsurance pools and the lower level of premium from loss
portfolio transfers discussed above. The combined ratio (loss ratio plus expense
ratio) for the Company's group employee benefits segment was 93.6% in the first
half of 2000 and 94.4% for the comparable period of 1999. Benefits and interest
credited on asset accumulation products increased by $2.5 million in the first
half of 2000 principally due to an increase in average funds under management
from $619.6 million in the first half of 1999 to $648.6 million in the 2000
period. Also contributing to this increase was an increase in the weighted
average annualized crediting rate on asset accumulation products from 5.3% in
the first half of 1999 to 5.5% in the first half of 2000.
Interest Expense. Interest expense was $10.7 million in the first half of 2000
as compared to $8.8 million in the first half of 1999. This increase was
primarily due to increases in the weighted average outstanding borrowings and
the weighted average borrowing rate under the Credit Agreement, partially offset
by a decrease in the average principal amount of the SIG Senior Notes due to
scheduled principal repayments.
Income Tax Expense. The Company's effective tax rate was 31.1% in the first half
of 2000 as compared to 30.6% in the first half of 1999. The effective tax rate
in the 1999 period reflects a lower level of income taxed at the statutory tax
rate due to net realized investment losses.
(1) Average invested assets are computed by dividing the total of invested
assets as reported on the 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.
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Three Months Ended June 30, 2000 Compared to
Three Months Ended June 30, 1999
Premium and Fee Income. Premium and fee income was $112.1 million for the second
quarter of 2000 as compared to $113.6 million for the second quarter of 1999.
This decrease reflects the termination of the Company's participation in the
reinsurance pools in which it had historically participated. Excluding
reinsurance pools, group employee benefit premiums increased $8.8 million, or
9%, as compared to the second quarter of 1999. This increase reflects growth in
most products, strong production of new business and normal growth in employment
and salary levels for the Company's existing customer base. Deposits from the
Company's asset accumulation products, including the Company's MVA annuity
product, increased 141% to $45.5 million for the second quarter of 2000 from
$18.9 million for the second quarter of 1999. 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 second quarter
of 2000 is principally the result of an increase in the number of networks of
independent agents distributing the Company's annuity products and a more
favorable environment for fixed annuity sales.
Net Investment Income. Net investment income was $46.5 million for the second
quarter of 2000 as compared to $44.4 million for the second quarter of 1999, an
increase of 5%. This increase primarily reflects an increase in average invested
assets in 2000. The weighted average annualized yield on invested assets was
7.0% on average invested assets(2) of $2,650.0 million for the second quarter of
2000 as compared to 7.1% on average invested assets(2) of $2,500.9 million for
the second quarter of 1999.
Benefits and Expenses. Policyholder benefits and expenses for the second quarter
of 2000 were $118.1 million as compared to $122.2 million for the second quarter
of 1999. This decrease primarily reflects the termination of the Company's
participation in reinsurance pools discussed above. The combined ratio (loss
ratio plus expense ratio) for the Company's group employee benefits segment was
92.1% in the second quarter of 2000 as compared to 94.3% for the same period of
1999. This decrease was primarily attributable to changes in the Company's
product mix. Benefits and interest credited on asset accumulation products
increased by $1.5 million in the second quarter of 2000 principally due to an
increase in average funds under management from $621.3 million in the second
quarter of 1999 to $659.1 million in the 2000 period. Also contributing to this
increase was an increase in the weighted average annualized crediting rate on
asset accumulation products from 5.3% in the second quarter of 1999 to 5.5% in
the second quarter of 2000.
Interest Expense. Interest expense was $5.4 million in the second quarter of
2000 as compared to $4.3 million in the second quarter of 1999. This increase
was primarily due to increases in the weighted average outstanding borrowings
and the weighted average borrowing rate under the Credit Agreement, partially
offset by a decrease in the average principal amount of the SIG Senior Notes due
to scheduled principal repayments.
Income Tax Expense. The Company's effective tax rate was 30.6% in the second
quarter of 2000 as compared to 30.0% in the second quarter of 1999. The
effective tax rate in the 1999 period reflects a lower level of income taxed at
the statutory tax rate due to net realized investment losses. The effective tax
rate in the 2000 period reflects a tax refund related to a prior period.
LIQUIDITY AND CAPITAL RESOURCES
The Company had approximately $295.2 million of financial resources available at
the holding company level at June 30, 2000, 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.
During the second quarter of 2000, the Company entered into a new revolving
credit facility with a group of lenders. The amount of this facility is
presently $80.0 million, and this amount may be increased up to a total of $100
million at the Company's option if additional loan commitments are obtained.
This facility, which expires in April 2003, is
(2) Average invested assets are computed by dividing the total of invested
assets as reported on the balance sheet at the beginning and end of each
period by two and deducting one-half of net investment income.
-10-
11
subject to certain restrictions and financial covenants which are substantially
identical to those contained in the Company's existing revolving credit
facility. They include, among others, the maintenance of certain financial
ratios, minimum statutory surplus requirements for RSLIC and SNCC, minimum
consolidated equity requirements for the Company and certain investment and
dividend and stock repurchase limitations. This new facility, in combination
with the Company's existing $180.0 million revolving credit facility
(collectively, the "Credit Agreements"), provided the Company with available
additional borrowing capacity of $103.0 million as of June 30, 2000.
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 totaling $49.5 million
during 2000, of which $18.5 million has been paid during the first half of 2000.
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 outstanding borrowings
under the Credit Agreements, the Senior Notes, the SIG Senior Notes and the
Subordinated Notes and distributions on the Capital Securities. At the Company's
current level of borrowings, no principal repayments will be required under the
Credit Agreements until October 2002. 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 2001, 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. In addition, the Company utilizes reverse repurchase
agreements, Federal Home Loan Bank advances, futures and options contracts and
interest rate swap contracts from time to time in connection with its investment
strategy. These transactions require the Company to maintain securities or cash
on deposit with the applicable counterparty as collateral. As the market value
of the transaction or the collateral maintained changes, the Company may be
required to deposit additional collateral or be entitled to have a portion of
the collateral returned to it.
Operating activities increased cash and cash equivalents by $33.0 million in the
first half of 2000, excluding $58.1 million of funds from a rescinded
reinsurance transaction which were returned to the ceding company during the
first quarter and a net cash payment of $19.7 million related to the cession by
the Company of group employee benefit product reserves. Operating cash flow in
the first half of 1999 included cash inflows of $31.0 million related to the
rescinded reinsurance transaction and $10 million related to the recapture of
ceded group employee benefit product reserves. During the first half of 2000,
proceeds from securities sold under reverse repurchase agreements, Federal Home
Loan Bank advances and available cash were used to fund investment purchases.
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, 1999.
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 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 relating to insurance products and
services, and those relating specifically to the Company's business, such as the
level of its
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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 emergence of Year 2000 problems not currently
apparent, acquisitions of companies or blocks of business, and ratings by major
rating organizations of the Company or its insurance subsidiaries. These
uncertainties and contingencies can affect actual results and could cause actual
results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company. The Company disclaims any
obligation to update forward-looking information.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on May 9, 2000.
The directors elected at the meeting will serve for a term ending on
the date of the 2001 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 2000 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.................................................. 13,012,997 621,300
Directors:
Robert Rosenkranz................................................. 27,792,987 681,977
Edward A. Fox..................................................... 27,853,664 621,300
Charles P. O'Brien................................................ 27,791,156 683,808
Lewis S. Ranieri.................................................. 27,853,745 621,219
Robert M. Smith, Jr............................................... 27,792,725 682,239
B.K. Werner....................................................... 27,838,863 636,101
2) All Other Matters - With regard to the amendment to the Company's
Second Amended and Restated Employee Stock Option Plan, this
proposal received 20,665,586 votes for approval, 4,140,439 votes
against approval, 135,037 votes abstaining and 3,533,902 broker
non-votes. With regard to transacting such other business that
properly comes before the meeting or any adjournment thereof,
this proposal received 25,321,041 votes for approval, 2,897,990
votes against approval and 255,933 votes abstaining; however, no
such other business came before the meeting.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 - Fourth Amended and Restated Credit Agreement, dated as of June 1,
2000, among the Company, the Lenders named therein, The Bank of New
York and Fleet National Bank, as Co-Agents, and Bank of America,
N.A., as Administrative Agent and Collateral Agent
10.2 - Credit Agreement, dated as of June 1, 2000, among the Company, the
Lenders named therein, Fleet National Bank and First Union National
Bank, as Co-Syndication Agents, and Bank of America, N.A., as
Administrative Agent and Collateral Agent
10.3 - Delphi Financial Group, Inc. Second Amended and Restated Employee
Nonqualified Stock Option Plan, as amended May 9, 2000
11 - Computation of Results per Share of Common Stock (incorporated by
reference to Note D to the Consolidated Financial Statements
included elsewhere herein)
27 - Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DELPHI FINANCIAL GROUP, INC. (Registrant)
/s/ ROBERT ROSENKRANZ
----------------------------
Robert Rosenkranz
Chairman of the Board, President and Chief
Executive Officer (Principal Executive
Officer)
/s/ LAWRENCE E. DAURELLE
-------------------------------
Lawrence E. Daurelle
Vice President and Treasurer
(Principal Accounting and Financial Officer)
Date: August 11, 2000
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