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 March 31, 1996
/ / 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 000-18269
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, 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 May 10, 1996, the Registrant had 14,892,871 shares of
Common Stock outstanding.
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DELPHI FINANCIAL GROUP, INC.
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Consolidated Statements of Income for the Three
Months Ended March 31, 1996 and 1995 3
Consolidated Balance Sheets at March 31, 1996 and
December 31, 1995 4
Consolidated Statements of Shareholders' Equity for the
Three Months Ended March 31, 1996 and 1995 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1996 and 1995 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
March 31,
--------------------------
1996 1995
--------- --------
Revenue:
Insurance premiums and policyholder fees ................ $ 72,776 $ 63,543
Net investment income ................................... 30,624 24,997
Net realized investment losses .......................... (1,201) (1,588)
--------- --------
102,199 86,952
--------- --------
Benefits and expenses:
Benefits, claims, and interest credited to policyholders 62,774 59,545
Commissions ............................................ 5,606 5,249
Amortization of cost of business acquired .............. 4,906 4,094
Premium and other taxes, licenses and fees ............. 2,731 2,405
Other operating expenses ............................... 7,536 6,997
--------- --------
83,553 78,290
--------- --------
Operating income ................................... 18,646 8,662
Interest expense .......................................... 3,453 3,512
--------- --------
Income before income tax expense ................... 15,193 5,150
Income tax expense ........................................ 5,318 1,653
--------- --------
Net income ................................................ $ 9,875 $ 3,497
========= ========
Net income per share of common stock ...................... $ .74 $ .29
========= ========
Weighted average shares outstanding (in thousands) ........ 13,404 12,179
See notes to consolidated financial statements.
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DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
March 31, December 31,
1996 1995
----------- -----------
ASSETS:
Investments:
Fixed maturities, available for sale .............................. $ 1,869,360 $ 1,554,283
Cash and cash equivalents ......................................... 79,767 16,685
Other investments ................................................. 269,035 220,563
----------- -----------
2,218,162 1,791,531
Cost of business acquired ............................................. 103,209 94,420
Reinsurance receivables ............................................... 198,627 183,077
Other assets .......................................................... 240,300 193,458
Assets held in separate account ....................................... 68,938 64,901
----------- -----------
Total assets ................................................ $ 2,829,236 $ 2,327,387
=========== ===========
LIABILITIES:
Policy liabilities and accruals ....................................... $ 918,760 $ 504,390
Policyholder account balances ......................................... 751,755 743,745
Corporate debt ........................................................ 241,217 134,611
Advances from Federal Home Loan Bank .................................. 200,986 201,057
Securities sold under agreements to repurchase ........................ 84,244 202,495
Other liabilities and policyholder funds .............................. 272,792 259,589
Liabilities related to separate account ............................... 62,315 58,685
----------- -----------
2,532,069 2,104,572
=========== ===========
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par; 10,000,000 shares authorized ............... -- --
Class A Common Stock, $.01 par; 40,000,000 shares authorized;
9,776,094 and 6,696,355 shares issued and outstanding, respectively 98 67
Class B Common Stock, $.01 par; 20,000,000 shares authorized;
5,215,788 shares issued and outstanding ........................... 52 52
Additional paid-in capital ............................................ 165,327 87,734
Net unrealized depreciation on investments ............................ (47,979) (34,832)
Retained earnings ..................................................... 182,011 172,136
Treasury Stock, at cost; 126,568 shares of Class A Common Stock ....... (2,342) (2,342)
----------- -----------
297,167 222,815
----------- -----------
Total liabilities and shareholders' equity .................. $ 2,829,236 $ 2,327,387
=========== ===========
See notes to consolidated financial statements.
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DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS AND SHARES IN THOUSANDS)
Three Months Ended March 31
------------------------------------------------
1996 1995
---------------------- ----------------------
Shares Amounts Shares Amounts
--------- --------- --------- --------
CLASS A COMMON STOCK:
Beginning balance................................................ 6,696 $ 67 5,901 $ 59
Issuance of stock, exercise of stock options and
conversion of shares....................................... 3,080 31 171 2
--------- --------- --------- --------
Ending balance .................................................. 9,776 $ 98 6,702 $ 61
========= ========= ========= ========
CLASS B COMMON STOCK:
Beginning balance................................................ 5,216 $ 52 5,866 $ 59
Conversion of shares.......................................... - - (127) (2)
--------- --------- --------- --------
Ending balance .................................................. 5,216 $ 52 5,739 $ 57
========= ========= ========= ========
CLASS A TREASURY STOCK:
Beginning balance................................................ 127 $ (2,342) - $ -
Receipt of Treasury Stock..................................... - - 127 (2,342)
--------- --------- --------- --------
Ending balance .................................................. 127 $ (2,342) 127 $ (2,342)
========= ========= ========= ========
ADDITIONAL PAID-IN CAPITAL:
Beginning balance................................................ $ 87,734 $ 86,481
Issuance of stock and exercise of stock options............... 77,593 313
--------- --------
Ending balance................................................... $ 165,327 $ 86,794
========= ========
NET UNREALIZED DEPRECIATION ON INVESTMENTS:
Beginning balance................................................ $ (34,832) $(57,889)
Change in net unrealized (depreciation) appreciation.......... (13,147) 11,247
--------- --------
Ending balance................................................... $ (47,979) $(46,642)
========= ========
RETAINED EARNINGS:
Beginning balance................................................ $ 172,136 $141,672
Net income.................................................... 9,875 3,497
--------- --------
Ending balance................................................... $ 182,011 $145,169
========= ========
TOTAL SHAREHOLDERS' EQUITY............................................ $ 297,167 $183,097
========= ========
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)
Three Months Ended
March 31,
---------------------------
1996 1995
--------- ---------
Operating activities:
Income from operations ................................................... $ 9,875 $ 3,497
Adjustments to reconcile income from operations
to net cash provided (used) by operating activities:
Change in policy liabilities and accruals, reinsurance
receivables and policyholder accounts .............................. 15,229 5,826
Amortization, principally the cost of business acquired and investments 4,236 4,316
Deferred costs of business acquired ................................... (6,556) (4,979)
Net realized losses on investments .................................... 1,201 1,588
Net change in trading account activities .............................. (2,225) (18,181)
Other ................................................................. (890) (13,165)
--------- ---------
Net cash provided (used) by operating activities ................... 20,870 (21,098)
--------- ---------
Investing activities:
Securities available for sale:
Purchases of investments and loans made ............................... (330,272) (76,079)
Sales of investments and receipts from repayment of loans ............. 268,095 115,353
Sales of short-term investments ....................................... -- 125
Maturities of investments ............................................. -- 13,571
Net change in securities held under reverse repurchase agreements ..... 121,984 27,285
Securities held to maturity:
Purchases of investments .............................................. -- (10,327)
Maturities of investments ............................................. -- 12,086
Cash acquired in the SIG Merger, net of consideration paid ............... 37,313 --
Change in deposit in separate account .................................... (407) 1,901
--------- ---------
Net cash provided by investing activities ............................. 96,713 83,915
--------- ---------
Financing activities:
Deposits to policyholder accounts ........................................ 17,259 381
Withdrawals from policyholder accounts ................................... (13,747) (44,634)
Proceeds from issuance of common stock and exercise of stock options ..... 238 313
Borrowings under Credit Agreement ........................................ 64,000 --
Principal payments under Credit Agreement ................................ (4,000) --
Change in liability under reverse repurchase agreements .................. (118,251) (13,022)
--------- ---------
Net cash used by financing activities ................................. (54,501) (56,962)
--------- ---------
Increase in cash and cash equivalents ....................................... 63,082 5,855
Cash and cash equivalents at beginning of period ............................ 16,685 1,443
--------- ---------
Cash and cash equivalents at end of period ............................ $ 79,767 $ 7,298
========= =========
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
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, 1995. 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 three
month period ended March 31, 1996 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1996. Certain
reclassifications have been made in the 1995 financial statements to conform
with the 1996 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, 1995. Capitalized terms without
definition have the meanings ascribed to them in the Company's report on Form
10-K for the year ended December 31, 1995.
NOTE B - MERGER
On March 5, 1996, SIG Holdings, Inc. ("SIG") was merged into the Company for
consideration of approximately $54.5 million of cash, net of approximately $1.0
million payable upon the exercise of certain SIG stock options, which was funded
from additional borrowings under the Credit Agreement, and approximately 4.3
million shares of the Company's Class A Common Stock, including shares of Class
A Common Stock reserved for issuance upon the exercise of stock options of SIG
assumed by the Company, plus additional contingent consideration of up to $20.0
million (the "SIG Merger"). The contingent consideration will be payable in
shares of the Company's Class A Common Stock or, at the option of the Company,
in cash. No contingent consideration is due unless SIG's cumulative net income
exceeds $41.8 million for the two years ending December 31, 1997, $62.6 million
for the three years ending December 31, 1998 or $83.5 million for the four years
ending December 31, 1999, and the maximum amount is triggered at cumulative net
income levels of $75.3 million for the three year period or $104.4 million for
the four year period. The Company also assumed $45.0 million of SIG's 8.5%
senior secured notes (the "SIG Senior Notes"). The SIG Senior Notes amortize in
$9.0 million annual installments beginning in May 1999. SIG, through its
subsidiary Safety National Casualty Corporation ("SNCC"), is a provider of
excess workers' compensation products to the self-insured market. As of March 5,
1996, SIG had total assets of $572.5 million, and shareholders' equity was $96.8
million. The merger was accounted for using the purchase accounting method with
the results of SIG included in the Company's results from the date of the
merger.
The following pro forma data summarize the results of operations of the Company
for the three months ended March 31, 1996 and 1995, assuming that the merger
with SIG had occurred at the beginning of each period presented. In preparing
the pro forma data, adjustments have been made to reflect the purchase
accounting adjustments and interest expense on the additional borrowings under
the Credit Agreement that would have occurred. The pro forma information does
not purport to be indicative of the operating results that actually would have
been achieved had the merger been consummated as of the date indicated and
should not be construed as representative of future operating results.
Three months ended
March 31,
--------------------------
1996 1995
--------- ----------
(dollars in thousands)
Total revenue.................................................... $ 120,008 $ 115,311
Net income....................................................... 12,796 8,485
Earnings per common share........................................ .78 .51
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DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE C - INVESTMENTS
At March 31, 1996, the Company had fixed maturity securities available for sale
with a carrying value and a fair value of $1,869.4 million and an amortized cost
of $1,952.7 million. At December 31, 1995, the Company had fixed maturity
securities available for sale with a carrying value and a fair value of $1,554.3
million and an amortized cost of $1,612.7 million.
NOTE D - REVERSE REPURCHASE AGREEMENTS
The Company's liabilities for securities sold under agreements to repurchase
totaled $84.2 million and $202.5 million at March 31, 1996 and December 31,
1995, respectively. Included in the Company's fixed maturity securities on the
Consolidated Balance Sheet are $88.0 million and $212.0 million of securities,
including accrued interest on those securities, at March 31, 1996 and December
31, 1995, respectively, which serve as collateral to secure these liabilities.
NOTE E - CONSOLIDATED STATEMENTS OF CASH FLOW
Supplemental schedule of non-cash investing and financing activities:
The consideration for the SIG Merger included approximately 4.3 million shares
of the Company's Class A Common Stock, including shares of Class A Common Stock
reserved for issuance upon the exercise of stock options of SIG assumed by the
Company.
NOTE F-- EARNINGS PER SHARE
Earnings per share is computed by dividing net income by the weighted average
number of shares outstanding for the applicable period adjusted by the number of
shares issuable on exercise of common stock options, reduced by the number of
shares assumed to have been repurchased (at the average market value per share
of the Company's common stock) with the proceeds from their exercise.
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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 specifies
otherwise) . This analysis should be read in conjunction with the consolidated
financial statements and notes thereto included in this document, as well as the
Company's report on Form 10-K for the year ended December 31, 1995. Capitalized
terms without definition have the meanings ascribed to them in the Company's
report on Form 10-K for the year ended December 31, 1995.
RESULTS OF OPERATIONS
Insurance Premiums and Policyholder Fees. Insurance premiums and policyholder
fees for the three months ended March 31, 1996 were $72.8 million as compared to
$63.5 million for the three months ended March 31, 1995, an increase of 14.5%.
The increase was primarily due to increased premiums from group employee benefit
products, including life, excess workers' compensation, long-term disability and
special accident insurance. Contributing to this increase was $5.2 million in
premiums from the Company's excess workers' compensation business which was
acquired as a result of the merger with SIG Holdings, Inc. ("SIG") on March 5,
1996 (the "SIG Merger"). Also contributing to the increase in premiums was the
continued development of the Company's distribution system, normal growth in
employment and salary levels for the Company's existing customer base and
certain price increases. Deposits from the Company's single premium deferred
annuity products, including the Company's new market value adjusted annuity
product, which it began marketing in the fall of 1995, were $16.8 million for
the three months ended March 31, 1996. Deposits for these products, which are
long-term in nature, are not recorded as premiums; instead, the deposits are
recorded as a liability.
Net Investment Income. Net investment income for the three months ended March
31, 1996 was $30.6 million as compared to $25.0 million for the three months
ended March 31, 1995, an increase of 22.5%. The increase is principally due to
improved performance by the Company's independent investment managers program
and an increase in average invested assets as a result of the SIG Merger. The
weighted average annualized yield on invested assets, excluding realized and
unrealized investment gains and losses, was 7.8% on average invested assets of
$1,580.0 million and 6.6% on average invested assets of $1,517.8 million for the
three months ended March 31, 1996 and 1995, respectively.
Net Realized Investment Losses. Net realized investment losses were $1.2 million
for the three months ended March 31, 1996 as compared to net realized investment
losses of $1.6 million for the three months ended March 31, 1995. The Company's
investment strategy results in periodic sales of securities and the recognition
of realized investment gains and losses.
Benefits and Expenses. Policyholder benefits and expenses for the three months
ended March 31, 1996 were $83.6 million as compared to $78.3 million for the
three months ended March 31, 1995, an increase of 6.7%. During the first quarter
of 1996, benefits and expenses for group employee benefit products increased by
$8.8 million as compared to the same period in 1995. Of this increase, $4.3
million was attributable to the Company's excess workers' compensation business
which was acquired as a result of the SIG Merger. The remaining increase was
primarily attributable to premium growth in the Company's other group product
lines. The combined ratio (loss ratio plus expense ratio) for group insurance
lines, excluding excess workers' compensation insurance, was 98.4% in both
periods. Benefits and interest credited on asset accumulation products decreased
by $2.9 million. The primary cause of the decrease was a decline in average
funds under management of $149.4 million for the three months ended March 31,
1996 as compared to the three months ended March 31, 1995, due to policy
maturities and surrenders. Also contributing to the decrease was a decline in
the weighted average annualized crediting rate on asset accumulation products
from 5.7% for the first three months of 1995 to 5.3% for the comparable period
in 1996, primarily due to scheduled maturities of guaranteed investment
contracts, which had higher average crediting rates than the Company's other
asset accumulation products.
Operating Income. Operating income before interest and taxes for the three
months ended March 31, 1996 was $18.6 million as compared to $8.7 million for
the three months ended March 31, 1995, an increase of 115.3%. The increase in
1996 was primarily due to the acquisition of the excess workers' compensation
business through the SIG Merger and an increase in the weighted average yield on
invested assets.
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Interest Expense. Interest expense for the three months ended March 31, 1996 and
1995 was $3.5 million. While interest on the Senior Notes was unchanged,
interest expense on borrowings under the Credit Agreement decreased due to a
decline in the weighted average borrowing rate during the first quarter of 1996
as compared to the first quarter of 1995. This decrease was offset by interest
expense on the SIG Senior Notes, which were assumed in conjunction with the SIG
Merger.
Income Taxes. Income tax expense for the three months ended March 31, 1996 was
$5.3 million as compared to $1.7 million for the three months ended March 31,
1995. The increase was primarily due to the $9.9 million increase in operating
income.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company has approximately $87.3 million of financial resources
available at the holding company level at March 31, 1996 which are primarily
comprised of investments in the common stock of its non-insurance subsidiaries.
The assets of these non-insurance subsidiaries were primarily invested in
balances with independent investment managers and marketable securities. All of
the amounts invested with independent investment managers are withdrawable at
least annually, subject to applicable notice requirements. A shelf registration
statement is also in effect under which up to $149.2 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 Debentures issued by RSLIC-Texas,
dividends paid from insurance subsidiaries, primarily generated from operating
cash flows and investments, and borrowings available under the Credit Agreement.
RSLIC-Texas generates less than 1% of the Company's premiums, policyholder fees
and deposits; therefore, payments on the Surplus Debentures are generally funded
by dividend payments made by RSLIC to RSLIC-Texas. These dividends are subject
to regulatory restrictions and, in the absence of regulatory approval, are
generally limited within any 12-month period, in the aggregate, to the greater
of RSLIC's statutory net income for the preceding year, or 10% of RSLIC's
statutory surplus at the end of the preceding year. RSLIC has $32.7 million
available for dividend payments without prior regulatory approval during 1996.
SNCC's ability to pay dividends is subject to regulatory and certain other
contractual restrictions and, in the absence of the requisite approvals,
dividends are generally limited within any 12-month period, in the aggregate, to
the lesser of 10% of SNCC's statutory surplus at the end of the preceding year
or SNCC's statutory net investment income for the preceding year. SNCC has $12.2
million available for dividend payments without prior regulatory approval during
1996. Additional dividends may also be paid by RSLIC and SNCC with the requisite
approvals.
The Company's current liquidity needs, in addition to funding operating
expenses, include principal and interest payments on outstanding borrowings
under the Credit Agreement, the Senior Notes and the SIG Senior Notes. The
Credit Agreement permits the Company to borrow up to $200.0 million at any one
time. Of the total facility, $43.5 million is restricted for use in connection
with, among other things, acquisitions or the redemption of the SIG Senior
Notes. The maximum amount available to the Company under the Credit Agreement
will be reduced on October 1 of each year with the balance due on April 1, 2002.
At the Company's current level of borrowing, no principal repayments would be
required until October 1, 2000. The Senior Notes mature in their entirety on
October 1, 2003 and are not subject to any sinking fund requirements nor are
they redeemable prior to maturity. The SIG Senior Notes amortize in five annual
installments of $9.0 million beginning in May 1999. Sources of liquidity
available at the holding company level in 1996 are expected to exceed the
Company's cash requirements for 1996.
The primary sources of liquidity of the Company's significant insurance
subsidiaries are premiums and deposits on policies and contracts, investment
income and repayments of principal on, and proceeds from sales and maturities
of, invested assets. The liquidity requirements of these subsidiaries
principally relate to the contractual obligations associated with their
insurance and annuity products and operating expenses. The Company believes that
these sources of funding will be adequate to satisfy on both a short-term and
long-term basis its insurance subsidiaries' liquidity requirements.
Operating activities increased cash and cash equivalents by $20.9 million for
the three months ended March 31, 1996. Net investing activities provided $96.7
million of cash during the first quarter of 1996, primarily due to sales of
mortgage-backed securities and net cash acquired as a result of the SIG Merger.
Financing activities used $54.5 million of cash for the three months ended March
31, 1996, principally to reduce reverse repurchase agreement liabilities offset
by additional borrowings under the Credit Agreement to fund the SIG Merger.
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Investments. The Company's overall investment strategy to achieve its objectives
of safety and liquidity, while seeking the best available return, focuses on,
among other things, (i) matching of durations of the Company's interest
sensitive assets and liabilities to minimize the Company's exposure to
fluctuations in interest rates, (ii) financing the purchase of securities
through advances from the FHLB to enhance investment yields and to manage the
duration of its liabilities, and (iii) using hedging strategies to reduce
interest rate risk and to better match the duration of its interest-sensitive
assets and liabilities. The Company has de-emphasized the use of reverse
repurchase agreements and has reduced its liabilities under these agreements
from $202.5 million at December 31, 1995 to $84.2 million at March 31, 1996. The
weighted average credit rating of the Company's fixed maturity portfolio as
rated by Moody's Investor Service was "Aa" at March 31, 1996. While an
investment grade rating of this type addresses credit risk, it does not address
other risks, such as interest rate risk, which is discussed below.
During the first quarter of 1996, the Company reduced its investments in
mortgage-backed securities to 40% of total invested assets, or $881.4 million,
as compared to 63% of total invested assets, or $1,133.5 million, at December
31, 1995. This reduction resulted from the sale of $235.3 million of
mortgage-backed securities and the acquisition of SIG's investment portfolio,
which totaled $545.3 million at March 31, 1996. Approximately 35% of the
Company's mortgage-backed securities are guaranteed by U.S. Government sponsored
entities as to the full amount of principal and interest. The remaining 65% of
the mortgage-backed portfolio consists of investments in trusts created by banks
and finance and mortgage companies. All of these holdings have been given an
investment grade credit rating by nationally recognized statistical rating
organizations. The single largest investment in a mortgage-backed security
totaled $50.7 million, or 2% of invested assets, at March 31, 1996. At times,
the Company invests in privately placed mortgage-backed securities. The carrying
value of the Company's portfolio invested in this type of security totaled
$129.4 million at March 31, 1996. Although there is an additional degree of
liquidity risk associated with privately placed securities, the Company believes
that, if necessary, it could liquidate all or a portion of its investments in
these securities in a timely manner at or close to market value. The Company has
not experienced any material write-downs in its mortgage-backed portfolio.
Mortgage-backed securities subject the Company to a degree of interest rate
risk, including prepayment and extension risk which is generally a function of
the repayment priority of the securities in the overall securitization structure
and the sensitivity of each security's underlying collateral to prepayments
under varying interest rate environments. The Company seeks to limit the extent
of this risk by emphasizing the more predictable payment classes and securities
with stable collateral. In addition, the Company has developed a hedging program
to assist it in managing the duration of its mortgage-backed securities. The
hedging program utilizes short positions in U.S. Treasury futures contracts to
reduce the Company's interest rate risk, effectively shortening the duration of
the Company's mortgage-backed securities. At March 31, 1996, the Company
maintained mortgage-backed securities with a weighted average duration of 5.4
years, after giving effect to hedging activities, in line with the duration of
its interest sensitive liabilities, which range from three to six years. The
duration of the Company's mortgage-backed securities without the hedging
instruments was approximately 6.0 years. At March 31, 1996, realized losses on
closed futures positions totaling $26.4 million and unrealized gains on open
futures positions totaling $2.1 million have been deferred and recorded as
adjustments to the amortized cost of the mortgage-backed securities being hedged
and will be amortized into investment income over the expected term of the
securities being hedged.
The Company has also developed a hedging program to reduce the interest rate
risk associated with its municipal securities portfolio. This hedging program
also utilizes short positions in U.S. Treasury futures contracts and limits the
interest rate risk associated with its investments in trusts comprised of
municipal securities. The short futures contracts hedging these securities have
a net deferred realized loss on closed positions of $3.2 million and an
unrealized gain on open positions of $1.9 million which have been recorded as
adjustments to the amortized cost of the municipal securities being hedged and
will be amortized into investment income over the expected term of the
securities being hedged.
The Company manages investment programs in which securities are financed using
advances from the Federal Home Loan Bank of Pittsburgh ("FHLB"). The Company
earns spread income from this program, which is the difference between the
financing cost and the earnings from the securities purchased with those funds.
The advances from the FHLB, which are at a fixed rate, had an average term to
maturity of 4.5 years. This program requires the Company to maintain securities
on deposit with the FHLB as collateral for the funds outstanding. As the fair
value of those securities increases or decreases, the Company may be allowed to
retake possession of securities or be required to deposit additional securities.
The Company may also be subject to risks related to the differences between the
duration of the assets and liabilities outstanding under these advances. At
March 31, 1996, the assets under this program had a longer duration than the
liabilities.
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Asset/Liability Management. A significant aspect of the Company's continued
profitability is its ability to manage risks associated with interest-sensitive
assets and liabilities. The Company prices its annuity products based on
assumptions concerning prevailing and expected interest rates and other factors
to achieve a positive difference, or spread, between its expected return on
investments and the crediting rate. The Company achieves this spread by active
portfolio management focusing on matching the durations of invested assets and
related liabilities to minimize the exposure to fluctuations in interest rates
and by the adjustment of the crediting rate on annuity products. The results of
this asset/liability matching are analyzed periodically through cash flow
analysis under multiple interest rate scenarios. In response to the decline in
interest rates during 1995, the Company has reduced the crediting rates on its
annuity products for 1996. The Company believes that it will continue to achieve
a positive spread and that the amount of lapses and surrender rates will remain
consistent with those assumed in the pricing of the products.
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13
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held a Special Meeting of Stockholders on March 1, 1996 to
vote upon a proposal to approve the issuance by the Company of shares
of Class A Common Stock in connection with the consummation of the
merger and upon the exercise of certain stock options assumed in
connection therewith, all as contemplated by the Agreement and Plan of
Merger dated as of October 5, 1995, by and among the Company, SIG
Holdings Acquisition Corp. and SIG Holdings, Inc. The stockholders
approved the issuance by the Company of shares of Class A Common Stock
by a vote of 54,457,648 votes in favor of the merger, 17,972 votes
abstaining and 57,433 broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits)
11.1 - Computation of Earnings Per Share of Common Stock
27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on March 19, 1996, and an
amendment thereto on April 11, 1996, announcing the completion of the
merger with SIG Holdings, Inc. on March 5, 1996. The report included
the financial statements of SIG Holdings, Inc. as of December 31,
1995 and 1994 and for the years ended December 31, 1995, 1994 and
1993 and unaudited pro forma condensed financial statements giving
effect to the merger as of and for the year ended December 31, 1995.
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/ JANE R. DUNLAP
------------------------------------------------------------
Jane R. Dunlap
Vice President and Treasurer
(Chief Accounting Officer)
Date: May 13, 1996
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