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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from __________ to __________
Commission File Number 001-11462
DELPHI FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
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)
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, $.01 par value New York Stock Exchange
(Title of Each Class) (Name of Each Exchange
On Which Registered)
Securities registered pursuant to Section 12(g) of the Act:
None
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, based upon the closing price for the Registrant's Class A Common
Stock on March 3, 2000, was $383,778,876.
As of March 3, 2000, the Registrant had 14,900,149 shares of Class A Common
Stock and 5,180,072 shares of Class B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 2000 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
2
This document contains certain forward-looking statements as defined in the
Securities Exchange Act of 1934, some of which may be identified by the use of
terms such as "expects," "believes," "anticipates," intends," "judgment" or
other similar expressions. These statements are subject to certain uncertainties
and contingencies, which could cause actual results to differ materially from
those expressed in such statements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Cautionary Note Regarding
Forward-Looking Statements."
PART I
ITEM 1. BUSINESS
Delphi Financial Group, Inc. (the "Company," which term includes the Company and
its consolidated subsidiaries unless the context indicates otherwise), organized
as a Delaware corporation in 1987, is a holding company whose subsidiaries
provide integrated employee benefit services. The Company manages all aspects of
employee absence to enhance the productivity of its clients and provides the
related insurance coverages: long-term and short-term disability, excess and
primary workers' compensation, group life and travel accident. The Company's
asset accumulation business emphasizes individual annuity products. The Company
offers its products and services in all fifty states and the District of
Columbia. The Company's two reportable segments are group employee benefit
products and asset accumulation products. See Note A and Note P to the
Consolidated Financial Statements for additional information regarding the
Company's segments.
OPERATING STRATEGY
The Company's operating strategy is to offer financial products and services
which have the potential for significant growth or which require expertise to
meet the specialized needs of its customers and which offer the Company the
opportunity to earn an above average return on its shareholders' capital.
The Company has concentrated its efforts within certain niche insurance markets,
primarily group employee benefits for small to mid-sized employers where nearly
all the employment growth in the American economy has occurred in the last few
years. The Company markets unbundled employee benefit products and absence
management services as well as programs that integrate both employee benefit
products and absence management services. The Company also operates an asset
accumulation business that focuses primarily on offering fixed annuities to
individuals planning for retirement.
The Company's operating strategy has contributed to an average return on
shareholders' equity of 21% from January 1988 to December 1999. Over this same
period, net income and shareholders' equity have grown at a compound annual rate
of 24% and 29%, respectively, and book value per share has grown at a compound
annual rate of 23%. This strategy has also contributed to a 12% compound annual
growth rate in insurance premiums and fee income during the period from January
1988 to December 1999 and an increase in total assets from $819.1 million at
December 31, 1987 to $3,395.7 million at December 31, 1999, a compound annual
growth rate of 13%.
The Company's primary operating subsidiaries are as follows:
Reliance Standard Life Insurance Company ("RSLIC"), founded in 1907 and having
administrative offices in Philadelphia, Pennsylvania, and its subsidiary, First
Reliance Standard Life Insurance Company ("FRSLIC"), underwrite a diverse
portfolio of life and accident and health insurance products targeted
principally to the employee benefits market. These companies also market asset
accumulation products, primarily fixed annuities, to individuals and groups. The
Company, through Reliance Standard Life Insurance Company of Texas
("RSLIC-Texas"), acquired RSLIC and FRSLIC in November 1987.
Safety National Casualty Corporation ("SNCC") is an insurance specialist that
focuses primarily on providing workers' compensation products to the
self-insured market. Founded in 1942 and located in St. Louis, Missouri, SNCC is
one of the oldest continuous writers of excess workers' compensation insurance
in the United States. The Company acquired SNCC in March 1996. See "Other
Transactions" and Note B to the Consolidated Financial Statements.
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Matrix Absence Management, Inc. ("Matrix") provides integrated disability and
absence management services to the employee benefits market across the United
States. Headquartered in San Jose, California, Matrix was acquired by the
Company in June 1998. See "Other Transactions" and Note B to the Consolidated
Financial Statements.
GROUP EMPLOYEE BENEFIT PRODUCTS
The Company emphasizes the origination of specialty insurance products directed
to the employee benefits market, primarily group life, disability, workers'
compensation and travel accident insurance. The Company also offers group dental
insurance. The Company markets its group products to employer-employee groups
and associations in a variety of industries. The Company insures groups ranging
from 2 to more than 1,000 individuals, although the average size of insured
groups currently ranges from 100 to 300 individuals. In underwriting its group
employee benefit products, the Company attempts to avoid concentrations of
business in any industry segment or geographic area.
The following table sets forth, for the periods indicated, selected financial
data concerning the Company's group employee benefit products:
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(dollars in thousands)
Insurance premiums:
Life .............................................................. $184,161 $171,726 $146,485
Disability income ................................................. 145,398 110,983 96,469
Workers' compensation ............................................. 79,448 79,118 64,499
Travel accident and other ......................................... 58,915 54,584 48,439
-------- -------- --------
Total insurance premiums ........................................ $467,922 $416,411 $355,892
======== ======== ========
Sales (new annualized premiums):
Life .............................................................. $ 38,421 $ 37,848 $ 29,801
Disability income ................................................. 61,030 43,860 27,476
Workers' compensation ............................................. 55,852 43,577 20,987
Travel accident and other ......................................... 19,153 16,449 11,405
-------- ------- --------
Total insurance premiums ........................................ $174,456 $141,734 $ 89,669
======== ======== ========
The profitability of group employee benefit products is affected by, among other
things, differences between actual and projected claims experience and the
ability to control administrative expenses. The table below shows the loss and
expense ratios as a percent of premium income for the Company's group employee
benefit products for the periods indicated. Changes in the components of the
ratio between years primarily reflect changes in the Company's product mix.
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Loss ratio ....... 72.3% 71.6 % 68.3%
Expense ratio .... 22.9 24.9 27.6
---- ---- ----
Combined ratio 95.2% 96.5% 95.9%
==== ==== ====
The Company's group life insurance products provide for the payment of a stated
amount upon the death of a member of the insured group and policy terms are
generally one year. Accidental death and dismemberment insurance, which provides
for the payment of a stated amount upon the accidental death or dismemberment of
a member of the insured group, is frequently sold in conjunction with group life
policies and is included in premiums charged for group life insurance. The
Company reinsures risks in excess of $150,000 per individual for employer
provided group life insurance policies and $100,000 for voluntary group term
life policies. See "Reinsurance."
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Group disability products offered by the Company, principally long-term
disability insurance, generally provide a specified level of periodic benefits
to persons who, because of sickness or injury, are unable to work for a
specified period of time. The Company focuses group long-term disability sales
toward employers engaged principally in service industries such as accounting,
architecture and engineering, as well as certain retailing and manufacturing
fields. Long-term disability benefits generally are paid monthly and typically
are limited for any one employee to two-thirds of the employee's earned income
up to a specified maximum benefit. The Company actively manages its disability
claims, working with claimants to help them return to work as quickly as
possible. When insureds' disabilities prevent them from returning to their
original jobs, the Company, in appropriate cases, provides assistance in
developing new productive skills for an alternative career. Premiums are
generally determined annually for disability insurance and are based upon
expected morbidity and emerging experience of the insured group, as well as
assumptions regarding operating expenses and future interest rates. The Company
reinsures risks in excess of $2,500 per individual per month. See "Reinsurance."
The Company's workers' compensation products include excess workers'
compensation, workers' compensation self-insured loss portfolio transfers,
workers' compensation self-insurance bonds and primary workers' compensation
insurance with risk sharing features. Historically, the Company has specialized
in excess workers' compensation insurance which provides coverage to employers
and groups who self-insure their workers' compensation risks. The coverage
applies to losses in excess of the applicable self-insured retentions ("SIRs" or
deductibles) of employers and groups, whose workers' compensation claims are
generally handled by third-party administrators ("TPAs"). This product is
principally targeted to mid-sized companies and association groups, particularly
small municipalities, hospitals and schools. These companies and groups tend to
be less prone to catastrophic workers' compensation exposures and less price
sensitive than larger account business. Because claim payments do not begin
until after the SIR is met, it takes an average of 15 years from the date the
claim is incurred to the time claim payments begin. At that point, the payments
are primarily for wage replacement, similar to the benefit provided under
disability coverage. Medical payments, if any, tend to be stable and
predictable. The Company began to actively market its other workers'
compensation products during 1998 due to the weak pricing environment in the
excess workers' compensation sector. These products are typically marketed to
the same types of clients who have historically purchased the Company's excess
workers' compensation product. The Company reinsures excess workers'
compensation risks between $500,000 and $50.0 million per policy per occurrence
and primary workers' compensation up to $3.0 million per policy per occurrence.
See "Reinsurance."
The Company's other group insurance products include business travel and "all
risk" accidental death and dismemberment insurance. These policies pay a stated
amount based on a predetermined schedule in the event of accidental
dismemberment or death of a member of the insured group. The Company reinsures
risks in excess of $150,000 per individual and, under a catastrophe reinsurance
agreement, the amount of the Company's loss arising from any one occurrence is
limited to $500,000. See "Reinsurance." The Company's other group insurance
products also include group dental insurance, which provides coverage for
preventive, restorative and specialized dentistry up to a stated maximum benefit
per individual per year.
The Company's group employee benefit products are sold primarily by independent
brokers, agents and TPAs. The Company's home office and 23 sales offices located
throughout the country provide nationwide sales support and service existing
business. The Company believes that its national sales network minimizes
expenses traditionally associated with large insurance company captive marketing
systems.
ASSET ACCUMULATION PRODUCTS
The Company's asset accumulation products consist primarily of annuity products,
principally single premium deferred annuities ("SPDAs") and flexible premium
annuities ("FPAs"). An SPDA provides for a single payment by an annuity holder
to the Company and the crediting of interest by the Company at the applicable
crediting rate. An FPA provides for periodic payments by an annuity holder to
the Company, the timing and amount of which are at the discretion of the annuity
holder, and the crediting of interest by the Company at the applicable crediting
rate. Interest credited on SPDAs and FPAs is not paid currently to the annuity
holder but instead accumulates and is added to the annuity holder's account
value. This accumulation is tax deferred. The crediting rate may be increased or
decreased by the Company annually, typically on the policy anniversary, subject
to specified guaranteed minimum crediting rates. Minimum guaranteed crediting
rates currently range from 3.00% to 5.50%. Withdrawals may be made at any time,
but some withdrawals may result in the assessment of surrender charges, market
value adjustments, taxes, and/or tax penalties on the withdrawn amount.
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The Company principally markets SPDA products, including a product with a market
value adjustment ("MVA") feature that provides for an adjustment to the
accumulated value of the policy if it is surrendered during the surrender charge
period. These products are sold predominantly through networks of independent
agents. In 1999, the Company's SPDA products accounted for $77.3 million of
asset accumulation product deposits, of which $66.5 million was attributable to
the MVA annuity product. Three networks of independent agents accounted for
approximately 55% of the deposits from these products during 1999, with no other
network of independent agents accounting for more than 10% of these deposits.
The Company believes that it has a good relationship with these networks. Prior
to 1995, the Company's strategy with respect to this product line focused
primarily on the acquisition of blocks of annuity business from other insurers.
See "Reinsurance."
The following table sets forth for the periods indicated selected financial data
concerning the Company's asset accumulation products:
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(dollars in thousands)
Asset accumulation product deposits (sales).................. $ 78,813 $ 47,245 $ 57,926
Funds under management (at period end) ..................... 645,555 633,676 658,928
At December 31, 1999, funds under management consisted of $566.9 million of SPDA
liabilities and $78.7 million of FPA liabilities, with a weighted average
crediting rate of 5.48%. Of these liabilities, $264.7 million were subject to
surrender charges averaging 7.35% at December 31, 1999. Annuity liabilities not
subject to surrender charges have been in force, on average, for 18 years.
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 market interest rates and by the
adjustment of the crediting rate on its annuity products. In response to changes
in interest rates, the Company increases or decreases the crediting rates on its
annuity products. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources -
Asset/Liability Management and Market Risk."
In light of the annuity holder's ability to withdraw funds and the volatility of
market interest rates, it is difficult to predict the timing of the Company's
payment obligations under its SPDAs and FPAs. Consequently, the Company
maintains a portfolio of investments which are readily marketable and expected
to be sufficient to satisfy liquidity requirements. See "Investments."
OTHER PRODUCTS AND SERVICES
The Company provides integrated disability and absence management services
through Matrix, which was acquired in June 1998. See Note B to the Consolidated
Financial Statements. The Company offers a comprehensive package of disability
and absence management services designed to assist clients in identifying and
minimizing lost productivity and benefit payment costs resulting from employee
absence due to illness, injury or personal leave. Services that the Company
offers include event reporting, leave of absence management, claims and case
management and return to work management. The goal of these services is to
enhance employee productivity and provide more efficient benefit delivery and
enhanced cost containment. Included among the Company's clients for these
services are approximately half of the Fortune 500 companies located in
California, where most of Matrix's business was located prior to the
acquisition. Subsequent to the acquisition of this business, the Company has
begun to expand the offering of these services on a nationwide basis through the
Company's national sales offices.
In 1991, the Company introduced a variable flexible premium universal life
insurance policy under which the related assets are segregated in a separate
account not subject to claims of general creditors of the Company. Policyholders
may elect to deposit amounts in the account from time to time, subject to
underwriting limits and a minimum initial deposit of $1.0 million. Both the cash
values and death benefits of these policies fluctuate according to the
investment experience of the assets in the separate account; accordingly, the
investment risk with
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respect to these assets is borne by the policyholders. The Company earns fee
income from the separate account in the form of charges for management and other
administrative fees. The Company is not presently actively marketing this
product. The Company reinsures risks in excess of $200,000 per individual under
indemnity reinsurance arrangements with various reinsurance companies. See
"Reinsurance."
UNDERWRITING PROCEDURES
Premiums charged on insurance products are based in part on assumptions about
the incidence and timing of insurance claims. The Company has adopted and
follows detailed underwriting procedures designed to assess and qualify
insurance risks before issuing policies to groups and individuals. To implement
these procedures, the Company employs a professional underwriting staff.
In underwriting group coverage, the Company focuses on the risk characteristics
of the group to be insured as a whole. A prospective group is evaluated with
particular attention paid to the claims experience of the group with prior
carriers, the occupations of the insureds, the nature of the business of the
group, the current economic outlook of the group in relation to others in its
industry and of the industry as a whole, the appropriateness of the benefits or
SIR applied for and income from other sources during disability. The Company's
products generally afford it the flexibility to adjust premiums charged annually
to its policyholders in order to reflect emerging mortality or morbidity
experience.
INVESTMENTS
The Company's management of its investment portfolio is an important component
of its profitability since a substantial portion of its operating income is
generated from the difference between the yield achieved on invested assets and
the interest credited on policyholder funds and reserves. 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, managing the
durations of the Company's interest-sensitive assets and liabilities and
minimizing the Company's exposure to fluctuations in interest rates.
For information regarding the composition and diversification of the Company's
investment portfolio and asset/liability management, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and Notes A, C and I to the Consolidated
Financial Statements.
The following table sets forth for the periods indicated the Company's pretax
investment results:
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(dollars in thousands)
Average invested assets (1) .................................. $2,149,435 $2,082,993 $2,048,181
Net investment income (2) .................................... 180,945 168,692 162,380
Weighted average annual yield (3) ............................ 8.4% 8.1% 7.9%
Net realized investment (losses) gains ....................... $ (25,720) $ 8,060 $ 14,568
(1) Average invested assets are computed by dividing the total of the
amortized cost of investments at the beginning of the period reduced by
investment related liabilities plus the individual quarter-end balances
by five and deducting one-half of net investment income.
(2) Consists principally of interest and dividend income less investment
expenses.
(3) The weighted average annual yield on the Company's investment portfolio
for each period is computed by dividing net investment income
(exclusive of realized and unrealized gains and losses) by average
invested assets for the period. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations."
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REINSURANCE
The Company participates in various reinsurance arrangements both as the ceding
insurer and as the assuming insurer. Arrangements in which the Company is the
ceding insurer afford various levels of protection against excessive loss by
assisting the Company in diversifying its risks and by limiting its maximum loss
on risks that exceed retention limits. Under indemnity reinsurance transactions
in which the Company is the ceding insurer, the Company is exposed to a degree
of risk if the assuming company is unable to meet its obligations. To limit this
risk, the Company monitors the financial condition of its reinsurers, including,
among other things, the companies' financial ratings, and in certain cases
receives collateral security from the reinsurer. Also, certain of the Company's
reinsurance agreements require the reinsurer to set up trust arrangements for
the Company's benefit in the event of certain ratings downgrades.
The Company cedes portions of the risks relating to its group employee benefit
and variable life insurance products under indemnity reinsurance agreements with
various unaffiliated reinsurers. The terms of these agreements, which are
typical for agreements of this type, provide, among other things, for the
automatic acceptance by the reinsurer of ceded risks in excess of the Company's
retention limits stated in the agreements. The Company pays reinsurance premiums
to these reinsurers which are, in general, based upon percentages of premiums
received by the Company on the business reinsured less, in certain cases, ceding
commissions and experience refunds paid by the reinsurer to the Company. These
agreements are generally terminable at any time as to new risks by either the
Company or the reinsurer on appropriate notice; however, termination does not
affect risks ceded during the term of the agreement, which generally remain with
the reinsurer. See Note O to the Consolidated Financial Statements.
In January 1998, an offering was completed whereby shareholders and
optionholders of the Company received, at no cost, rights to purchase shares of
Delphi International Ltd. ("Delphi International"), a newly-formed, independent
Bermuda insurance holding company. During 1998, the Company entered into various
reinsurance agreements with Oracle Reinsurance Company Ltd. ("Oracle Re"), a
wholly owned subsidiary of Delphi International. Pursuant to these agreements,
approximately $101.5 million of group employee benefit reserves ($35.0 million
of long-term disability insurance reserves and $66.5 million of net excess
workers' compensation and casualty insurance reserves) were ceded to Oracle Re.
The Company has received collateral security from Oracle Re in an amount
sufficient to support the ceded reserves. In May 1999, Oracle Re and the Company
effected the partial recapture of approximately 35%, or $10 million, of the
long-term disability liabilities ceded to Oracle Re. These agreements are not
expected to have a material effect on the Company's financial condition,
liquidity or results of operations.
The Company has participated as an assuming insurer in a number of reinsurance
pools. These reinsurance pools generally are administered by TPAs or managing
underwriters who underwrite risks, coordinate premiums charged and process
claims. The Company has the right, generally exercisable annually, to terminate
or change its participation in any of these pools as to new business. In 1999,
these reinsurance pools represented, in the aggregate, $59.7 million of premiums
and $57.4 million of benefits, and the Company's five largest participations in
these reinsurance pools represented $51.2 million of earned premiums and $49.5
million of benefits. In the fourth quarter of 1999, the Company discontinued its
participation in a federal employee group life reinsurance pool in order to
enhance available resources for products believed to offer greater financial
potential. Premium income from this reinsurance pool totaled $32.8 million in
1999 and incurred benefits totaled $32.4 million. In addition, in the first
quarter of 2000, the Company terminated, on a prospective basis, its
participations in all except three of the other reinsurance pools in which the
Company participated. The Company plans to terminate its participation in the
remaining three reinsurance pools as of July 1, 2000. However, the terms of such
pools provide for the continued assumption of risks by, and payments of premiums
to, pool participants with respect to business written in the periods during
which they formerly participated in such pools. The Company does not expect its
withdrawals from these reinsurance pools to have a material impact on its
underwriting results.
In addition, the Company acquired five blocks of annuity policies between 1988
and 1992 that resulted in the assumption of $967.1 million of policyholder
account balances. The first acquisition was an assumption reinsurance
transaction, and the others were indemnity reinsurance transactions. In the case
of each acquisition, assets supporting the related reserves were transferred to,
and are managed by, the Company. Pursuant to the assumption reinsurance
acquisition, the Company has the right to establish the crediting rate with
respect to the business acquired. The Company has the right under each indemnity
reinsurance transaction to recommend to the ceding company crediting rates with
respect to the business acquired. The ceding company is solely responsible for
payment of crediting rates to the extent that these rates exceed the greater of
the recommended rate and certain
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benchmark rates. The aggregate lapse rates experienced on the annuity
acquisitions have been consistent with the levels assumed in pricing the
transactions and consequently have not adversely affected the Company's
liquidity or results of operations.
LIFE AND ACCIDENT AND HEALTH INSURANCE RESERVES
The Company carries as liabilities actuarially determined reserves to satisfy
its life, accident and health and annuity policy and contract obligations. These
reserves, together with premiums to be received on policies in force and
interest thereon at certain assumed rates, are calculated to be sufficient to
satisfy policy and contract obligations. The Company performs periodic studies
to compare current experience for mortality, interest and lapse rates with
expected experience in the reserve assumptions to determine future policy
benefit reserves for these products. Differences are reflected currently in
earnings for each period. The Company has not experienced significant adverse
deviations from its assumptions.
The life and accident and health insurance reserves carried in the Consolidated
Financial Statements are calculated based on accounting principles generally
accepted in the United States ("GAAP") and differ from those reported by the
Company for statutory financial statement purposes. These differences arise from
the use of different mortality and morbidity tables and interest assumptions,
the introduction of lapse assumptions into the reserve calculation and the use
of the net level method on all insurance business. See Note A to Consolidated
Financial Statements for certain additional information regarding reserve
assumptions under GAAP.
WORKERS' COMPENSATION INSURANCE RESERVES
The Company carries as liabilities actuarially determined reserves for
anticipated claims and claim expenses for its workers' compensation insurance
and other casualty insurance products. Reserves for claim expenses represent the
estimated probable costs of investigating those claims and, when necessary,
defending lawsuits in connection with those claims. Reserves for claims and
claim expenses are estimated based on individual loss data, historical loss data
and industry averages and indices and include amounts determined on the basis of
individual and actuarially determined estimates of future losses. Therefore, the
ultimate liability could deviate from the amounts currently reflected in the
Consolidated Financial Statements.
Reserving practices under GAAP allow discounting of claim reserves related to
workers' compensation losses to reflect the time value of money. Reserve
discounting for these types of claims is common industry practice, and the
discount factors used are less than the annual tax-equivalent investment yield
earned by the Company on its invested assets. Reserves for claim expenses are
not discounted.
The following table provides a reconciliation of beginning and ending unpaid
claims and claim expenses for the periods indicated and excludes the effects of
reinsurance:
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(dollars in thousands)
Unpaid claims and claim expenses, beginning of period .............. $ 406,214 $ 388,051 $ 380,826
Provision for claims and claim expenses incurred in the current year 73,271 61,776 41,221
Increase (decrease) in estimated claims and claim expenses
incurred in prior years (1) ................................... 1,398 (166) (2,419)
--------- --------- ---------
Incurred claims and claim expenses during the current year 74,669 61,610 38,802
--------- --------- ---------
Deduct claims and claim expenses paid, occurring during:
Current year .................................................. 12,529 6,953 1,498
Prior years ................................................... 46,881 36,494 30,079
--------- --------- ---------
Total paid ................................................ 59,410 43,447 31,577
--------- --------- ---------
Unpaid claims and claim expenses, end of period .................... $ 421,473 $ 406,214 $ 388,051
========= ========= =========
(1) The change in estimated claims and claim expenses incurred in prior years
reflects favorable claims development offset by the accretion of discount on
reserves.
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The effects of the discount to reflect the time value of money have been removed
from the loss development table which follows in order to present the gross loss
development. This discount totaled $176.7 million, $180.8 million, and $192.2
million at December 31, 1997, December 31, 1998 and December 31, 1999,
respectively. During 1999, $8.6 million of discount was amortized, and $20.0
million was accrued. The loss development table below illustrates the
development of reserves from March 5, 1996 to December 31, 1999 and excludes the
effects of reinsurance.
March 5, December 31,
-------- ------------
1996(1) 1996 1997 1998 1999
------- ---- ---- ---- ----
(dollars in thousands)
Reserve for unpaid losses and claims expenses $533,871 $549,653 $ 564,734 $586,984 $613,693
Cumulative amount of liability paid:
One year later ......................... 24,444 30,079 36,494 46,881
Two years later ........................ 53,605 62,833 68,976
Three years later ...................... 85,739 93,314
Four years later ....................... 115,266
Liability reestimated as of:
One year later ......................... 524,423 531,118 549,577 580,222
Two years later ........................ 506,024 524,304 545,155
Three years later ...................... 500,301 517,568
Four years later ....................... 505,688
Cumulative Redundancy ....................... 28,183 32,085 19,579 6,762
(1) Amounts are as of or for the periods subsequent to March 5, 1996, the date
the Company acquired its workers' compensation business.
The "Reserve for unpaid claims and claim expenses" line of the table above shows
the estimated reserve for unpaid claims and claim expenses recorded at the end
of each of the periods indicated. These liabilities represent the estimated
amount of losses and expenses for claims arising in the current year and all
prior years that are unpaid at the end of each period. The "Cumulative amount of
liability paid" line of the table represents the cumulative amounts paid with
respect to the liability previously recorded as of the end of each succeeding
period. The "Liability reestimated" line of the table shows the reestimated
amount relating to the previously recorded liability and is based upon
experience as of the end of each succeeding period. This estimate is either
increased or decreased as additional information about the frequency and
severity of claims for each period becomes available and is reviewed. The
Company periodically reviews the estimated reserves for claims and claim
expenses and any changes are reflected currently in earnings for each period.
The Company has not experienced significant adverse deviations from its
assumptions. The "Cumulative redundancy" line of the table represents the
aggregate change in the estimated claim reserve liabilities from the dates
indicated through December 31, 1999.
The workers' compensation insurance reserves carried in the Consolidated
Financial Statements are calculated in accordance with GAAP and, net of
reinsurance, are approximately $41.2 million less than those reported by the
Company for statutory financial statement purposes at December 31, 1999. This
difference is primarily due to the use of different discount factors under GAAP
and statutory accounting principles. See Note A to Consolidated Financial
Statements for certain additional information regarding reserve assumptions
under GAAP.
COMPETITION
The financial services industry is highly competitive. The Company competes with
numerous other insurance and financial services companies both in connection
with sales of insurance and asset accumulation products and integrated
disability and absence management services and in acquiring blocks of business
and companies. Many of these organizations have substantially greater asset
bases, higher ratings from ratings agencies, larger and more diversified
portfolios of insurance products and larger sales operations. Competition in
asset accumulation product markets is also encountered from the expanding number
of banks, securities brokerage firms and other financial intermediaries
marketing alternative savings products, such as mutual funds, traditional bank
investments and retirement funding alternatives.
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In November 1999, the Gramm-Leach-Bliley financial modernization act, which
removed many of the restrictions on affiliations among banking, securities and
insurance organizations, was signed into law. Although it is too early to assess
the effects of this legislation, this act could result in additional competition
in the markets in which the Company sells its products.
The Company believes that its reputation in the marketplace, quality of service
and investment returns have enabled it to compete effectively for new business
in its targeted markets. The Company reacts to changes in the marketplace
generally by focusing on products with adequate margins and attempting to avoid
those with low margins. The Company believes that its smaller size, relative to
some of its competitors, enables it to more easily tailor its products to the
demands of customers.
REGULATION
The Company's insurance subsidiaries are regulated by state insurance
authorities in the states in which they are domiciled and the states in which
they conduct business. These regulations, among other things, limit the amount
of dividends and other payments that can be made by the Company's insurance
subsidiaries without prior regulatory approval and impose restrictions on the
amount and type of investments these subsidiaries may have. These regulations
also affect many other aspects of the Company's insurance subsidiaries'
business, including, for example, risk-based capital ("RBC") requirements,
various reserve requirements, the terms, conditions and manner of sale and
marketing of insurance products and the form and content of required financial
statements. These regulations are intended to protect policyholders rather than
investors. The Company's insurance subsidiaries are required under these
regulations to file detailed annual reports with the supervisory agencies in the
various states in which they do business, and their business and accounts are
subject to examination at any time by these agencies. To date, no examinations
have produced any significant adverse findings or adjustments. In 1998, the
National Association of Insurance Commissioners (the "NAIC") approved a
codification of statutory accounting principles, effective January 1, 2001,
which will serve as a comprehensive and standardized guide to statutory
accounting principles. The adoption of the codification will change, to some
extent, the accounting practices that the Company's insurance subsidiaries use
to prepare their statutory financial statements; however, the Company does not
believe that such changes will have a material adverse impact on the reported
statutory financial condition of any such subsidiaries.
From time to time, increased scrutiny has been placed upon the insurance
regulatory framework, and a number of state legislatures have considered or
enacted legislative measures that alter, and in many cases increase, state
authority to regulate insurance companies. In addition to legislative
initiatives of this type, the NAIC and insurance regulators are continuously
involved in a process of reexamining existing laws and their application to
insurance companies. Furthermore, while the federal government currently does
not directly regulate the insurance business, federal legislation and
administrative policies in a number of areas, such as employee benefits
regulation, age, sex and disability-based discrimination, financial services
regulation and federal taxation, can significantly affect the insurance
business. It is not possible to predict the future impact of changing regulation
on the operations of the Company and its insurance subsidiaries.
The NAIC's RBC requirements for insurance companies take into account asset
risks, insurance risks, interest rate risks and other relevant risks with
respect to the insurer's business and specify varying degrees of regulatory
action to occur to the extent that an insurer does not meet the specified RBC
thresholds, with increasing degrees of regulatory scrutiny or intervention
provided for companies in categories of lesser RBC compliance. The Company
believes that its insurance subsidiaries are adequately capitalized under the
RBC requirements and that the thresholds will not have any significant
regulatory effect on the Company. However, were the insurance subsidiaries' RBC
position to decline in the future, the insurance subsidiaries' continued ability
to pay dividends and the degree of regulatory supervision or control to which
they are subjected may be affected.
The Company's insurance subsidiaries can also be required, under solvency or
guaranty laws of most states in which they do business, to pay assessments to
fund policyholder losses or liabilities of insurance companies that become
insolvent. These assessments may be deferred or forgiven under most solvency or
guaranty laws if they would threaten an insurer's financial strength and, in
most instances, may be offset against future state premium taxes. None of the
Company's insurance subsidiaries has ever incurred any significant costs of this
nature.
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EMPLOYEES
The Company and its subsidiaries employed approximately 794 persons at December
31, 1999. The Company believes that it enjoys good relations with its employees.
OTHER SUBSIDIARIES
The Company conducts certain of its investment management activities through its
wholly-owned subsidiary, Delphi Capital Management, Inc. ("DCM"), and makes
certain investments through other wholly-owned non-insurance subsidiaries.
OTHER TRANSACTIONS
On March 5, 1996, SIG Holdings, Inc. ("SIG") and its subsidiary SNCC were merged
into a subsidiary of the Company (the "SIG Merger") for consideration of
approximately $131.9 million consisting of $54.5 million of cash, net of
approximately $1.0 million payable upon the exercise of certain SIG stock
options, and approximately 5.7 million shares of the Company's Class A Common
Stock, including shares reserved for issuance upon the exercise of stock options
of SIG assumed by the Company in connection with the merger (the "SIG Options"),
plus contingent consideration of up to $20.0 million if SIG met specified
earnings targets subsequent to the merger. Because SIG had met all of the
specified earnings targets, the Company paid $10.0 million of the contingent
consideration consisting of $6.9 million of cash and 63,000 shares of the
Company's Class A Common Stock during 1998 and the remaining $10.0 million of
the contingent consideration consisting of $9.0 million of cash and 30,000
shares of the Company's Class A Common Stock in 1999. The Company also assumed
$45.0 million of SIG's 8.5% senior secured notes due 2003 (the "SIG Senior
Notes"). The SIG Senior Notes began maturing in $9.0 million annual installments
in 1999 and are collateralized by all of the common stock of SNCC.
On June 30, 1998, the Company acquired Matrix, a provider of integrated
disability and absence management services to the employee benefits market. The
purchase price of $33.8 million consisted of 409,424 shares of the Company's
Class A Common Stock, $7.9 million of cash and $5.7 million of 8% subordinated
notes due 2003 (the "Subordinated Notes"). Additional consideration of up to
$4.2 million in cash will be payable if Matrix's earnings meet specified targets
over the four-year period subsequent to the acquisition. See Note B to the
Consolidated Financial Statements.
Effective April 30, 1999, the Company completed the disposition of its Unicover
Managers, Inc. subsidiary and a related company (collectively, "Unicover"),
which were acquired in the fourth quarter of 1998, to certain of the former
owners of Unicover. See Note Q to the Consolidated Financial Statements. In
January 2000, the Company received from Unicover's pool and facility members and
the retrocessionaires of Unicover's pools and facilities legal releases relating
to, among other things, the Company's former ownership of Unicover. The releases
were obtained in connection with a global Unicover-related settlement involving
Reliance Insurance Company, its retrocessionaires and a group of ceding
companies and brokers. The Company contributed to this settlement by agreeing to
rescind a quota share reinsurance contract with Reliance Insurance Company.
Accordingly, the Company restated its financial results for the first three
quarters of 1999 to exclude the effects of this contract.
ITEM 2. PROPERTIES
The Company leases its principal executive office at 1105 North Market Street,
Suite 1230, Wilmington, Delaware under an operating lease expiring in October
2003. RSLIC owns its administrative office building at 2501 Parkway,
Philadelphia, Pennsylvania, which consists of approximately 100,000 square feet.
In the fourth quarter of 1999, the Company entered into an agreement to sell
RSLIC's administrative office building. The sale is expected to close in
mid-2000. In conjunction with the sale, the Company has entered into a nine-year
lease agreement for approximately 108,000 square feet of office space in
Philadelphia, Pennsylvania to which the Company will relocate its administrative
office. SNCC owns its home office building at 2043 Woodland Parkway, Suite 200,
St. Louis, Missouri, which consists of approximately 58,000 square feet. DCM and
FRSLIC lease their offices at 153 East 53rd Street, 49th Floor, New York, New
York under an operating lease expiring in July 2008. Matrix leases its
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principal office at 4777 Hellyer Avenue, Suite 200, San Jose, California under
an operating lease expiring in December 2006. The Company also maintains sales
and administrative offices throughout the country to provide nationwide sales
support and service existing business.
ITEM 3. LEGAL PROCEEDINGS
In the course of their respective businesses, the Company's subsidiaries are
defendants in litigation; in the case of its insurance subsidiaries, principally
involving insurance policy claims and agent disputes and in the case of its
integrated disability and absence management subsidiary, benefit claims-related
litigation. The ultimate disposition of such pending litigation is not expected
to have a material adverse effect on the Company's financial condition,
liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The table below presents certain information concerning each of the executive
officers of the Company:
Name Age Position
--------------------------------------------------------------------------------------------------------
Robert Rosenkranz 57 Director of the Company; Chairman of the Board, President and Chief
Executive Officer of the Company; Chairman of the Board of RSLIC
Robert M. Smith, Jr. 48 Director and Executive Vice President of the Company
Harold F. Ilg 52 President and Chief Executive Officer of RSLIC; Chairman of the Board
of SNCC
Chad W. Coulter 37 Vice President and General Counsel of the Company; Vice President,
General Counsel and Assistant Secretary of RSLIC
Louis C. Lucido 51 Vice President, Investments of the Company
Lawrence E. Daurelle 48 Vice President and Treasurer of the Company and RSLIC
Mr. Rosenkranz has served as the President and Chief Executive Officer of the
Company since May 1987 and has served as Chairman of the Board of Directors of
the Company since April 1989. He is also Chairman of the Board of RSLIC-Texas,
RSLIC, and FRSLIC and serves on the Board of Directors of SNCC. Mr. Rosenkranz,
by means of beneficial ownership of the corporate general partner of Rosenkranz
& Company, an irrevocable proxy and direct or beneficial ownership, has the
power to vote all of the outstanding shares of Class B Common Stock, which
represents 49.9% of the voting power of the Company's common stock as of March
3, 2000.
Mr. Smith has served as Executive Vice President of the Company and DCM since
November 1999 and as a Director of the Company since January 1995. From July
1994 to November 1999, he served as Vice President of the Company and DCM. Mr.
Smith also serves as a Director of RSLIC-Texas, RSLIC, FRSLIC and SNCC. Prior to
July 1994, Mr. Smith was Director, Investment Banking for Merrill Lynch &
Company in New York, New York.
Mr. Ilg has served as Chairman of the Board of SNCC since January 1999 and as
President and Chief Executive Officer of RSLIC since April 1999. Prior to
January 1999, Mr. Ilg served as Vice Chairman of the Board of SNCC, where he has
been employed in various capacities since 1978. Mr. Ilg also serves as a
Director of RSLIC and as President, Chief Executive Officer and a Director of
RSLIC-Texas and FRSLIC.
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Mr. Coulter has served as Vice President and General Counsel of the Company and
as Vice President, General Counsel and Assistant Secretary of RSLIC, FRSLIC and
RSLIC-Texas since January 1998. He also served for RSLIC in similar capacities
from February 1994 to August 1997, and in various capacities from January 1991
to February 1994. From August 1997 to December 1997, Mr. Coulter was Vice
President and General Counsel of National Life of Vermont.
Mr. Lucido has served as Vice President, Investments of the Company since July
1997 and as a Director of FRSLIC since August 1997. Prior to July 1997, Mr.
Lucido was Managing Director, Chief Operating Officer and Corporate Secretary of
Hyperion Capital Management, Inc. in New York, New York.
Mr. Daurelle has served as Vice President and Treasurer of the Company since
August 1998 and as Vice President and Treasurer of RSLIC, FRSLIC and RSLIC-Texas
since May 1995. From October 1994 to April 1995, he was Senior Vice President
and Chief Financial Officer for Mutual Assurance Company.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The closing price of the Company's Class A Common Stock was $25.9375 on March 3,
2000. There were approximately 2,700 holders of record of the Company's Class A
Common Stock as of March 3, 2000.
The Company's Class A Common Stock is listed on the New York Stock Exchange
under the symbol DFG. The following table sets forth the high and low sales
prices for the Company's Class A Common Stock. Prior periods have been restated
to reflect the stock dividends distributed in 1998 and 1999.
High Low
---- ---
1998: First Quarter $ 49 3/16 $ 37 7/8
Second Quarter 56 25/32 48 3/64
Third Quarter 59 23/64 33 11/16
Fourth Quarter 50 15/16 30 29/64
1999: First Quarter $ 55 13/16 $ 26 7/16
Second Quarter 39 57/64 28 23/64
Third Quarter 37 59/64 29 17/32
Fourth Quarter 33 53/64 26 15/32
The Company presently intends to retain earnings to finance the development and
growth of its business. Accordingly, cash dividends have not been declared or
paid on the Class A Common Stock or the Class B Common Stock, and the Company
does not anticipate payment of any cash dividends in the foreseeable future.
Cash dividend payments are permitted under the terms of the Company's $180.0
million revolving credit facility (the "Credit Agreement") and $85.0 million 8%
Senior Notes due 2003 (the "Senior Notes") subject to certain restrictions and
covenants. See Note K to the Consolidated Financial Statements.
In addition, dividend payments by the Company's insurance subsidiaries to the
Company are subject to certain regulatory restrictions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and "Business - Regulation."
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data below should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and related notes.
Year Ended December 31, (1)
---------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
INCOME STATEMENT DATA:
(dollars and shares in thousands, except per share data)
Insurance premiums and fee income:
Group employee benefit products ........... $ 467,922 $ 416,411 $ 355,892 $ 331,378 $ 257,079
Asset accumulation products ............... 2,126 2,583 3,072 2,122 2,121
Other ..................................... 15,220 7,880 1,907 1,733 1,702
--------- --------- --------- --------- ---------
485,268 426,874 360,871 335,233 260,902
Net investment income ....................... 180,945 168,692 162,380 157,020 117,112
Net realized investment (losses) gains ...... (25,720) 8,060 14,568 (2,651) 704
--------- --------- --------- --------- ---------
Total revenue ............................. 640,493 603,626 537,819 489,602 378,718
Operating income (2) ........................ 144,995 124,960 118,326 102,270 63,465
Income from continuing operations excluding
realized investment (losses) gains ........ 80,850 68,564 65,513 55,577 32,284
Income from continuing operations ........... 64,132 73,802 74,982 53,854 32,742
Net income (3) .............................. 50,285 87,035 74,982 47,253 30,464
BASIC RESULTS PER SHARE:(4)
Income from continuing operations excluding
realized investment (losses) gains ........ $ 3.85 $ 3.25 $ 3.23 $ 2.91 $ 2.07
Income from continuing operations ........... 3.06 3.50 3.70 2.82 2.10
Net income (3) .............................. 2.40 4.13 3.70 2.48 1.96
Weighted average shares outstanding ......... 20,979 21,095 20,275 19,074 15,559
DILUTED RESULTS PER SHARE: (4)
Income from continuing operations excluding
realized investment (losses) gains ........ $ 3.73 $ 3.13 $ 3.07 $ 2.72 $ 2.03
Income from continuing operations ........... 2.96 3.37 3.51 2.64 2.06
Net income (3) .............................. 2.32 3.97 3.51 2.32 1.92
Weighted average shares outstanding ......... 21,674 21,920 21,367 20,407 15,875
OTHER DATA:
Diluted book value per share (4) (5) ........ $ 24.52 $ 26.59 $ 24.09 $ 17.43 $ 14.04
Diluted book value per share before net
unrealized (depreciation) appreciation
on investments (4) (6) .................... $ 28.96 $ 27.36 $ 22.25 $ 18.25 $ 16.17
Return on average shareholders' equity (7) .. 15.4% 13.1% 15.0% 18.5% 16.6%
Interest coverage ratio (8) ................. 6.56x 7.66x 8.84x 5.83x 4.84x
December 31, (1)
----------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
BALANCE SHEET DATA: (dollars in thousands)
Total investments ..................... $2,515,810 $2,359,716 $2,480,402 $2,295,007 $1,791,531
Total assets .......................... 3,395,688 3,287,057 3,203,713 2,857,906 2,323,010
Long-term debt ........................ 283,938 265,165 178,769 231,004 134,611
Capital Securities (9) ................ 100,000 100,000 100,000 -- --
Shareholders' equity .................. 501,417 566,440 509,486 366,965 222,815
Debt to total capitalization ratio (10) 32.1% 28.5% 22.7% 38.6% 37.7%
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(1) Reflects the acquisitions of Matrix in 1998 and SNCC in 1996. See Note
B to the Consolidated Financial Statements.
(2) Income from continuing operations excluding realized investment gains
and losses and before interest and income tax expense and dividends on
Capital Securities of Delphi Funding L.L.C.
(3) In 1999, the Company disposed of Unicover and recognized an after-tax
loss of $13.8 million on the disposition. After-tax income from
Unicover's operations totaled $13.2 million in 1998. See Note Q to the
Consolidated Financial Statements. The Company discontinued its
long-term care business in 1996 and recorded a one-time after-tax
charge of $5.8 million in 1996 attributable to this discontinuance.
After-tax operating losses on this business were $0.8 million and $2.3
million in 1996 and 1995, respectively.
(4) Restated to reflect stock dividends distributed during 1999.
(5) Diluted book value per share is calculated by dividing shareholders'
equity, as increased by the proceeds and tax benefit from the assumed
exercise of outstanding stock options, by total shares outstanding,
also increased by shares issued upon the assumed exercise of the
options and deferred shares.
(6) Diluted book value per share before net unrealized (depreciation)
appreciation on investments is calculated by dividing shareholders'
equity excluding net unrealized (depreciation) appreciation on
investments, as increased by the proceeds and tax benefit from the
assumed exercise of outstanding stock options, by total shares
outstanding, also increased by shares issued upon the assumed exercise
of the options and deferred shares.
(7) Return on average shareholders' equity is calculated by dividing income
from continuing operations, excluding after-tax realized investment
gains and losses, by average shareholders' equity, excluding after-tax
realized investment gains and losses, discontinued operations,
extraordinary items and changes in accounting principles, as determined
as of the beginning and end of each year.
(8) The interest coverage ratio is calculated by dividing income from
continuing operations before interest and income tax expense and
dividends on the Capital Securities by interest expense (1996 excludes
interest paid in connection with the settlement of prior-year federal
income taxes).
(9) Reflects the issuance of and the payment of dividends on $100.0 million
of Capital Securities by Delphi Funding L.L.C. (the "Capital
Securities"). See Note J to the Consolidated Financial Statements.
(10) The debt to total capitalization ratio is calculated by dividing
long-term debt by the sum of the Company's long-term debt, Capital
Securities and shareholders' equity.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion and analysis of the results of operations and financial condition
of the Company below should be read in conjunction with the Consolidated
Financial Statements and related notes.
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
Premium and Fee Income. Premium and fee income in 1999 was $485.3 million as
compared to $426.9 million in 1998, an increase of 14%. This increase was
primarily attributable to growth in the Company's group life, disability and
travel accident products within its group employee benefits segment. This growth
reflects high levels of new business production and normal growth in employment
and salary levels for the Company's existing customer base. Excess workers'
compensation premiums for 1999 were in line with 1998 levels reflecting
improvements in the pricing environment in this market sector. As of December
31, 1999, the Company has terminated its participation in substantially all of
the reinsurance pools in which it had historically participated. See "Business -
Reinsurance." In 1999, reinsurance pools, in the aggregate, represented $59.7
million of premium income and $57.4 million of incurred benefits. The Company
does not expect its withdrawals from these reinsurance pools to have a material
impact on its underwriting results. Deposits from the Company's SPDA products,
including the Company's MVA annuity product, were $77.3 million in 1999 as
compared to $46.0 million in 1998. Deposits for these products, which are
long-term in nature, are not recorded as premiums; instead, the deposits are
recorded as a liability. The increase in annuity deposits in 1999 is principally
the result of an increase in the number of networks of independent agents
distributing the Company's annuity products, as well as enhancements made to the
Company's products to improve their competitive position in the marketplace and
a more favorable environment for fixed annuity sales due to increases in
interest rates during 1999.
Net Investment Income. Net investment income in 1999 was $180.9 million as
compared to $168.7 million in 1998, an increase of 7%. This increase primarily
reflects an increase in the weighted average annual yield on invested assets and
an increase in average invested assets in 1999. The weighted average annual
yield on invested assets, excluding realized and unrealized investment gains and
losses, was 8.4% on average invested assets of $2,149.4 million in 1999 and 8.1%
on average invested assets of $2,083.0 million in 1998.
Benefits and Expenses. Policyholder benefits and expenses were $521.2 million in
1999 as compared to $470.6 million in 1998, an increase of 11%. Benefits and
expenses for the Company's group employee benefit products increased by $43.8
million in 1999 primarily due to growth in this segment. The combined ratio
(loss ratio plus expense ratio) for the Company's group employee benefits
segment decreased from 96.5% in 1998 to 95.2% in 1999. This decrease was
primarily attributable to changes in the Company's product mix. Benefits and
interest credited on asset accumulation products decreased by $2.5 million in
1999 principally due to a decrease in average funds under management from $628.7
million in 1998 to $622.9 million in 1999, partially offset by an increase in
the weighted average annual crediting rate on asset accumulation products from
5.2% in 1998 to 5.3% in 1999.
Operating Income. Income from continuing operations excluding realized
investment gains and losses and before interest and income tax expense and
dividends in 1999 was $145.0 million as compared to $125.0 million in 1998, an
increase of 16%. This increase is primarily attributable to the growth in the
Company's group employee benefits segment and the increase in the yield on
invested assets in 1999.
Net Realized Investment (Losses) Gains. Net realized investment losses were
$25.7 million in 1999 as compared to net realized investment gains of $8.1
million in 1998. The Company's investment strategy results in periodic sales of
securities and the recognition of realized investment gains and losses.
Interest Expense. Interest expense was $18.2 million in 1999 as compared to
$17.4 million in 1998. This increase was primarily due to an increase in average
outstanding borrowings under the Credit Agreement, partially offset by a decline
in the weighted average borrowing rate on the Credit Agreement and a decrease in
the average principal amount of the SIG Senior Notes due to the scheduled
partial principal repayment on the notes in 1999.
Income Tax Expense. The Company's effective tax rate decreased from 31.0% in
1998 to 30.6% in 1999 primarily due to a decrease in income taxed at the
Company's marginal tax rate as a result of net realized investment losses in
1999 as compared to net realized investment gains in 1998.
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Discontinued Operations. Effective April 30, 1999, the Company completed the
disposition of Unicover, which was acquired in the fourth quarter of 1998. The
Company recognized a loss of $13.8 million on the disposition of the
discontinued operations of Unicover, net of a related tax benefit of $8.7
million, in the first quarter of 1999. Income from Unicover's operations totaled
$13.2 million in 1998, net of tax expense of $8.8 million. See Note Q to the
Consolidated Financial Statements.
1998 COMPARED TO 1997
Premium and Fee Income. Premium and fee income in 1998 was $426.9 million as
compared to $360.9 million in 1997, an increase of 18%. This increase was
primarily attributable to the Company's group employee benefits segment and
reflects strong production of new business, normal growth in employment and
salary levels for the Company's existing customer base and expansion within the
alternative risk transfer market. A decrease in excess workers' compensation
premiums from prior year levels as a result of a weak pricing environment in
this market sector did not have a material impact on underwriting results due to
corresponding decreases in benefits. Deposits from the Company's SPDA products,
including the Company's MVA annuity product, were $46.0 million in 1998 as
compared to $55.5 million in 1997. Deposits for these products, which are
long-term in nature, are not recorded as premiums; instead, the deposits are
recorded as a liability. The decrease in deposits was principally attributable
to a decline in the demand for fixed annuity products due to the low interest
rate environment during 1998.
Net Investment Income. Net investment income in 1998 was $168.7 million as
compared to $162.4 million in 1997, an increase of 4%. The weighted average
annual yield on invested assets, excluding realized and unrealized investment
gains and losses, was 8.1% on average invested assets of $2,083.0 million in
1998 and 7.9% on average invested assets of $2,048.2 million in 1997.
Benefits and Expenses. Policyholder benefits and expenses were $470.6 million in
1998 as compared to $404.9 million in 1997, an increase of 16%. Benefits and
expenses for the Company's group employee benefit products increased by $60.6
million in 1998 primarily due to growth in this segment. The combined ratio
(loss ratio plus expense ratio) for the Company's group employee benefits
segment was 96.5% in 1998 and 95.9% in 1997. Benefits and interest credited on
asset accumulation products decreased by $4.1 million in 1998 principally due to
a decrease in average funds under management from $670.1 million in 1997 to
$628.7 million in 1998. In addition, the weighted average annual crediting rate
on asset accumulation products decreased from 5.3% in 1997 to 5.2% in 1998.
Operating Income. Income from continuing operations excluding realized
investment gains and losses and before interest and income tax expense and
dividends in 1998 was $125.0 million as compared to $118.3 million in 1997, an
increase of 6%. This increase is primarily attributable to the growth in the
Company's group employee benefits segment and the increase in yield on invested
assets in the asset accumulation products segment.
Net Realized Investment Gains. Net realized investment gains were $8.1 million
in 1998 as compared to $14.6 million in 1997. The Company's investment strategy
results in periodic sales of securities and the recognition of realized
investment gains and losses.
Interest Expense. Interest expense was $17.4 million in 1998 as compared to
$15.0 million in 1997. This increase was primarily due to additional borrowings
under the Credit Agreement in 1998 to fund acquisitions and investment
opportunities.
Income Tax Expense. The Company's effective tax rate decreased from 32.4% in
1997 to 31.0% in 1998 primarily due to tax-exempt investment income.
Discontinued Operations. During 1998, income from Unicover's operations totaled
$13.2 million, net of tax expense of $8.8 million. Effective April 30, 1999, the
Company completed the disposition of Unicover, which was acquired in the fourth
quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company had approximately $286.0 million of financial resources
available at the holding company level at December 31, 1999, which was primarily
comprised of investments in the common stock of its investment subsidiaries and
fixed maturity securities. The assets of these investment subsidiaries are
primarily invested in fixed
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maturity securities, balances with independent investment managers and
marketable securities. Substantially all of the amounts invested with
independent investment managers are withdrawable at least annually, subject to
applicable notice requirements. A shelf registration is also in effect under
which up to $49.2 million in securities may be issued by the Company.
Other sources of liquidity at the holding company level include dividends paid
from subsidiaries, primarily generated from operating cash flows and
investments, and borrowings available under the Credit Agreement. During 2000,
RSLIC will be permitted, without prior regulatory approval, to make dividend
payments of $30.0 million. In addition, SNCC will be permitted, without
regulatory or other approval, to make dividend payments of $19.5 million in
2000. Additional dividends may also be paid by RSLIC and SNCC with the requisite
approvals. See "Business Regulation." In general, dividends from the Company's
non-insurance subsidiaries are not subject to regulatory or other restrictions.
As of December 31, 1999, the Company had $23.0 million of borrowings available
to it under the Credit Agreement.
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, the SIG Senior Notes and the
Subordinated Notes and distributions on the Capital Securities. The maximum
amount of borrowings available under the Credit Agreement will be reduced to the
following amounts in October of each year: 2000 - $150.0 million, 2001 - $110.0
million and 2002 - $60.0 million. At the Company's current level of borrowings,
a principal repayment of $7.0 million will be required under the Credit
Agreement in October 2000. 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 2000, 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. See Note E to the Consolidated Financial Statements.
The Company from time to time engages in discussions with respect to acquiring
blocks of business and insurance and financial services companies, any of which
could, if consummated, be material to the Company's operations.
Sources of liquidity available to the Company on a parent company-only basis,
including the undistributed earnings of its subsidiaries and additional
borrowings available under the Credit Agreement, are expected to exceed the
Company's current and long-term cash requirements.
The principal liquidity requirements of the Company's insurance subsidiaries are
their contractual obligations to policyholders. The primary sources of funding
for these obligations, in addition to operating earnings, are the marketable
investments included in the investment portfolios of these subsidiaries. The
Company believes that these sources of funding will be adequate for its
insurance subsidiaries to satisfy on both a short-term and long-term basis these
contractual obligations throughout their estimated or stated period.
Cash Flows. Operating activities increased cash and cash equivalents by $111.3
million in 1999 as compared with an increase of $19.0 million in 1998, excluding
the effect of the cession of $101.5 million of policy liabilities to Oracle Re
in 1998 and the recapture of $10.0 million of these liabilities in 1999 (see
Note O to the Consolidated Financial Statements). Operating cash flows in 1999
include $58.1 million from a reinsurance transaction that was rescinded. These
funds were returned to the ceding company in January 2000. Also contributing to
the increase in operating cash flows in 1999 was a decrease in federal income
taxes paid principally due to timing differences in recognizing income from
investing activities. Net investing activities provided $96.6 million of cash
during 1999 primarily from sales of securities, and financing activities used
$159.1 million of cash principally due to a reduction in securities lending and
reverse repurchase agreement liabilities.
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, managing the durations of the Company's interest-sensitive
assets and liabilities and minimizing the Company's exposure to fluctuations in
interest rates. The Company's investment portfolio primarily consists of
investments in fixed maturity securities, cash and short-term investments. The
weighted average credit rating of the Company's fixed maturity portfolio as
rated by Standard & Poor's Corporation was "AA" at December 31, 1999. While the
investment grade rating of the Company's fixed maturity portfolio addresses
credit risk, it does not address other risks, such as prepayment and extension
risks, which are discussed below.
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During the year ended December 31, 1999, the Company reduced its investments in
mortgage-backed securities to 21% of total invested assets or $524.5 million,
from 35% of total invested assets, or $775.0 million, at December 31, 1998.
Approximately 43% of the Company's mortgage-backed securities are guaranteed by
U.S. Government sponsored entities as to the full amount of principal and
interest and the remaining 57% consists of investments in trusts created by
banks and finance and mortgage companies. Ninety-four percent of the Company's
mortgage-backed securities portfolio, based on fair values, has been rated as
investment grade by nationally recognized statistical rating organizations.
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 sensitivity of each security's underlying collateral to prepayments under
varying interest rate environments and the repayment priority of the securities
in the particular securitization structure. The Company seeks to limit the
extent of this risk by emphasizing the more predictable payment classes and
securities with stable collateral.
The Company maintains an investment program in which securities were financed
using advances from the FHLB. The Company has utilized this program to manage
the duration of its liabilities and to earn spread income, which is the
difference between the financing cost and the earnings from the securities
purchased with those funds. At December 31, 1999, the Company had outstanding
advances of $75.0 million that do not begin to mature until 2003. In addition,
the Company utilizes reverse repurchase agreements, futures and option 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 collateral or contracts changes, the Company may be
required to deposit additional collateral or be entitled to have a portion of
the collateral returned to it. The Company also maintains a securities lending
program under which certain securities from its portfolio are loaned to other
institutions for short periods of time. The collateral received for securities
loaned is recorded at the fair value of the collateral, which is generally in an
amount in excess of the market value of the securities loaned. The Company
monitors the market value of the securities loaned and obtains additional
collateral as necessary.
The ability of the Company's insurance subsidiaries to make investments is
subject to the insurance laws and regulations of their respective state of
domicile. Each of these states has comprehensive investment regulations. In
addition, the Credit Agreement and, as to SNCC, the SIG Senior Notes also
contain limitations, with which the Company is currently in compliance in all
material respects, on the composition of the Company's investment portfolio. The
Company also continually monitors its investment portfolio and attempts to
ensure that the risks associated with concentrations of investments in either a
particular sector of the market or a single entity are limited.
Asset/Liability Management and Market Risk. Because the Company's primary assets
and liabilities are financial in nature, the Company's financial position and
earnings are subject to risks resulting from changes in interest rates. The
Company manages this risk 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. In addition, the Company, at times, utilizes
exchange-traded futures and option contracts to reduce the risk associated with
changes in the value of its fixed maturity portfolio due to changes in the
interest rate environment and to reduce the risk associated with changes in
interest rates in connection with anticipated securities purchases. Generally,
market prices of fixed maturity securities decline in an environment of
increasing interest rates in a manner similar to that of U.S. Treasury
securities. Therefore, in order to reduce the extent of this interest rate risk,
the Company enters into option contracts and short U.S. Treasury futures, the
value of which will rise in such an environment. At December 31, 1999, the
Company had realized gains of $13.3 million on closed positions and unrealized
gains of $15.3 million on open positions related to this program that have been
deferred and recorded as adjustments to the amortized cost of the fixed maturity
securities being hedged.
The Company periodically analyzes the results of its asset/liability matching
through cash flow analysis and duration matching under multiple interest rate
scenarios. These analyses enable the Company to measure the potential gain or
loss in fair value of its interest-rate sensitive financial instruments due to
hypothetical changes in interest rates. Based on these analyses, if interest
rates were to immediately increase by 10% from their year-end levels, the fair
value of the Company's interest-sensitive assets, net of corresponding changes
in the fair value of cost of business acquired and insurance and
investment-related liabilities, would decline by approximately $85.7 million at
December 31, 1999 as compared to a decline of approximately $69.8 million at
December 31, 1998. These analyses incorporate numerous assumptions and estimates
and assume no changes in the composition of the Company's investment portfolio
in reaction to such interest rate changes. Consequently, the results of this
analysis
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will likely be different from the actual changes experienced under given
interest rate scenarios, and those differences may be material.
A portion of the Company's trading account portfolio consists of equity
securities which are subject to risks resulting from, among other things,
changes in the level of equity prices. To reduce the extent of this risk, the
Company has entered into corresponding short positions relating to certain of
these securities. If the fair value of the Company's trading account securities
were to decrease by 10% from their year-end levels, the fair value of these
securities, net of the corresponding change in the fair value of the related
short positions, would decrease by approximately $10.9 million at December 31,
1999 as compared to a decline of approximately $5.5 million at December 31,
1998.
The Company manages the composition of its borrowed capital by considering
factors such as the ratio of borrowed capital to total capital, future debt
requirements, the interest rate environment and other market conditions.
Approximately 45% of the Company's corporate debt was issued at fixed interest
rates. A hypothetical 10% decrease in market interest rates would cause a
corresponding $1.8 million increase in the fair value of the Company's
fixed-rate corporate debt at December 31, 1999 as compared to an increase of
$2.1 million at December 31, 1998. Because interest expense on the Company's
floating-rate corporate debt fluctuates as prevailing interest rates change,
changes in market interest rates would not materially affect its fair value.
IMPACT OF YEAR 2000
The Year 2000 issue relates to whether computer systems will properly recognize
date-sensitive information in years subsequent to 1999. Prior to 2000, the
Company underwent a corporate-wide program to address the Year 2000 issue, as it
relates to its own computer systems, as well as to instances in which computer
systems of third parties may have a significant impact on the Company's
operations, such as those of suppliers, business partners, customers, facilities
and telecommunications. Since 1997, the Company has incurred $8.2 million of
costs to address the Year 2000 issue, of which $6.1 million was expensed and
$2.1 million was capitalized. The Company does not anticipate incurring any
material additional costs related to the Year 2000 issue. The Company has not
experienced any significant disruptions of business operations related to the
Year 2000 issue to date and believes that the risk of any such disruption in the
future is low, although no assurance can be given in this regard. It is possible
that Year 2000 problems that are not currently apparent may arise in the future.
Accordingly, the Company will continue to monitor its systems for Year 2000
compliance.
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-K 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 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 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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21
ITEM 7A. MARKET RISK DISCLOSURE
The information required by Item 7A is included in this Form 10-K under the
heading "Asset/Liability Management and Market Risk" beginning on page 18 of
this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is included in this Form 10-K beginning on
page 24 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is included in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with the Company's 2000 Annual Meeting of
Stockholders, under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" and is incorporated herein by
reference, and in Item 4A in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is included in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with the Company's 2000 Annual Meeting of
Stockholders, under the caption "Executive Compensation" and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT
The information required by Item 12 is included in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with the Company's 2000 Annual Meeting of
Stockholders, under the caption "Security Ownership of Certain Beneficial Owners
and Management" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is included in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with the Company's 2000 Annual Meeting of
Stockholders, under the caption "Certain Relationships and Related Party
Transactions" and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The financial statements and financial statement schedules filed as
part of this report are listed in the Index to Consolidated Financial
Statements and Financial Statement Schedules on page 25 of this Form
10-K.
(b) No reports on Form 8-K were filed during the fourth quarter of 1999.
-20-
22
(c) The following Exhibits are numbered in accordance with the Exhibit
Table of Item 601 of Regulation S-K:
2.1 Agreement and Plan of Merger, dated October 5, 1995, among the
Company, SIG Holdings Acquisition Corp., and SIG Holdings,
Inc. (8)
2.2 Agreement and Plan of Merger, dated June 11, 1998, by and
among Delphi Financial Group, Inc., Matrix Absence Management,
Inc. and the Shareholders named therein (13)
2.3 Stock Purchase Agreement, dated as of October 1, 1998, by and
among Delphi Financial Group, Inc., Unicover Managers, Inc.,
Unicover Intermediaries, LLC and the Shareholders named
therein (13)
2.4 Merger, Exchange and Release Agreement, dated April 30, 1999,
by and among Delphi Financial Group, Inc., Unicover Managers,
Inc., Unicover Intermediaries, LLC, Unicover Management
Partners, LLC and the Buyers named therein (Exhibit 2.1) (14)
3.1 Restated Certificate of Incorporation of Delphi Financial
Group, Inc. (Exhibit 3.2) (3)
3.2 Certificate of Amendment of Restated Certificate of
Incorporation of Delphi Financial Group, Inc. (Exhibit 3.1)
(10)
3.3 Restated Certificate of Incorporation of Delphi Financial
Group, Inc. (Exhibit 3.2) (10)
3.4 Amended and Restated By-laws of Delphi Financial Group, Inc.
(3)
4.1 Indenture, dated as of October 8, 1993, between Delphi
Financial Group, Inc. and State Street Bank of Connecticut
(formerly Shawmut Bank Connecticut, N.A.) as Trustee (8.0%
Senior Notes due 2003) (4)
4.2 Amended and Restated Limited Liability Agreement of Delphi
Funding L.L.C. dated as of March 25, 1997, among Delphi
Financial Group, Inc., as Managing Member, Chestnut Investors
III, Inc., as Resigning Member, and the Holders of Capital
Securities described therein, as Members (Exhibit 4(a))(11)
4.3 Subordinated Indenture, dated as of March 25, 1997, between
Delphi Financial Group, Inc. and Wilmington Trust Company as
Trustee (Exhibit 4(b)) (11)
4.4 Guarantee Agreement dated March 25, 1997, between Delphi
Financial Group, as Guarantor, and Wilmington Trust Company,
as Trustee (Exhibit 4(c)) (11)
10.1 Third Amended and Restated Credit Agreement dated as of
December 5, 1996, among the Company, the Lenders named
therein, The Bank of New York, NationsBank, N.A. (South) and
Fleet National Bank, as Co-Agents for the lenders, and Bank of
America National Trust and Savings Association, as
Administrative Agent for the lenders (Exhibit 10.4) (9)
10.2 Borrower Pledge Agreement, dated as of February 23, 1993,
between the Company and Bank of America Illinois (Exhibit
10.5) (2)
10.3 Amendment, dated as of August 11, 1999, to the Third Amended
and Restated Credit Agreement dated as of December 5, 1996,
among the Company, the co-agents party thereto, the lenders
party thereto, and Bank of America, N.A. (as successor by
merger to Bank of America National Trust and Savings
Association), as administrative agent. (Exhibit 10.29) (15)
10.4 Second Amended and Restated Employee Nonqualified Stock Option
Plan (Exhibit 10.2) (5)
10.5 The Delphi Capital Management, Inc. Pension Plan for Robert
Rosenkranz (Exhibit 10.3) (2)
10.6 Investment Consulting Agreement, dated as of November 10,
1988, between Rosenkranz, Inc. and the Company (Exhibit 10.8)
(3)
10.7 Investment Consulting Agreement, dated as of November 6, 1988,
between Rosenkranz, Inc. and Reliance Standard Life Insurance
Company (Exhibit 10.9) (3)
10.8 Assumption Reinsurance Agreement, dated as of December 5,
1988, between John Alden Life Insurance Company and Reliance
Standard Life Insurance Company (Exhibit 10.11) (3)
10.9 Delphi Financial Group, Inc. Long-Term Performance-Based
Incentive Plan (12)
10.10 Settlement Agreement and Release of February 1988 among
Insurers Service Corporation, Frank B. Hall & Co. Inc.,
Reliance Group Holdings Inc. and Safety National Casualty
Corporation, as supplemented and amended by letter agreement
dated March 4, 1996 (Exhibit 10.11) (7)
10.11 SIG Holdings, Inc. 1992 Long-Term Incentive Plan (Exhibit
10.12) (7)
10.12 Stockholders Agreement, dated as of October 5, 1995, among the
Company and the affiliate stockholders named therein (Exhibit
10.30) (8)
10.13 Reliance Standard Life Insurance Company Nonqualified Deferred
Compensation Plan (Exhibit 10.14)(8)
10.14 Reliance Standard Life Insurance Company Supplemental
Executive Retirement Plan (Exhibit 10.15) (8)
10.15 Delphi Financial Group, Inc. Amended and Restated Directors
Stock Option Plan (Exhibit 10.26) (12)
10.16 Indemnity Coinsurance Agreement and Administrative Services
Agreement, dated as of October 3, 1994, between Reliance
Standard Life Insurance Company and Protective Life Insurance
Company (Exhibit 10.21) (6)
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23
10.17 Indemnity Coinsurance Agreement, dated as of June 30, 1990,
between Reliance Standard Life Insurance Company and John
Alden Life Insurance Company (with exhibit 1 thereto) (Exhibit
10.22) (1)
10.18 Indemnity Coinsurance Agreement, dated as of October 31, 1990,
between Reliance Standard Life Insurance Company and John
Alden Life Insurance Company (with exhibit 1 thereto) (Exhibit
10.23) (1)
10.19 Indemnity Coinsurance Agreement, dated as of March 31, 1992,
between Reliance Standard Life Insurance Company and
Washington National Life Insurance Company of New York (filed
with the Trust Agreement dated as of April 27, 1992, between
Reliance Standard Life Insurance Company and Washington
National Life Insurance Company of New York) (Exhibit 10.24)
(1)
10.20 Indemnity Coinsurance Agreement, dated as of December 31,
1992, between Reliance Standard Life Insurance Company and
Lamar Life Insurance Company (Exhibit 10.25) (1)
10.21 Employment Agreement, dated March 18, 1994, for Robert M.
Smith, Jr. (Exhibit 10.31) (6)
10.22 SIG Holdings, Inc. Note Agreement, dated as of May 20, 1994
(8.5% Senior Secured Notes due 2003) (Exhibit 10.25) (7)
10.23 Borrower Pledge Agreement, dated as of May 20, 1994, between
SIG Holdings, Inc., and the Chase Manhattan Bank, N.A., as
collateral agent (Exhibit 10.26) (7)
10.24 Subsidiary Pledge Agreement, dated as of March 5, 1996,
between SIG Holdings, Inc. and Bank of America National Trust
and Savings Association, as Administrative Agent (Exhibit
10.27) (7)
10.25 Reinsurance Agreement, dated January 27, 1998, between
Reliance Standard Life Insurance Company and Oracle
Reinsurance Company Ltd. (Exhibit 10.27) (12)
10.26 Casualty Excess of Loss Reinsurance Agreement, dated January
27, 1998, between Safety National Casualty Corporation and
Oracle Reinsurance Company Ltd. (Exhibit 10.28) (12)
11.1 Computation of Results per Share of Common Stock (16)
21.1 List of Subsidiaries of the Company (17)
23.1 Consent of Ernst & Young LLP (17)
24.1 Powers of Attorney (17)
27 Financial Data Schedule (17)
- ---------------------------------------------
(1) Incorporated herein by reference to the designated
exhibit to the Company's Registration Statement on
Form S-1 dated September 30, 1993 (Registration No.
33-65828).
(2) Incorporated herein by reference to the designated
exhibit to the Company's Form 10-K for the year ended
December 31, 1992.
(3) Incorporated herein by reference to the designated
exhibit to the Company's Registration Statement on
Form S-1 dated March 13, 1990 (Registration No.
33-32827).
(4) Incorporated herein by reference to the designated
exhibit to the Company's Form 10-K for the year ended
December 31, 1993.
(5) Incorporated herein by reference to the designated
exhibit to the Company's Registration Statement on
Form S-8 dated August 6, 1997 (Registration No.
333-32961).
(6) Incorporated herein by reference to the designated
exhibit to the Company's Form 10-K for the year ended
December 31, 1994.
(7) Incorporated herein by reference to the designated
exhibit to the Company's Form 10-K for the year ended
December 31, 1995.
(8) Incorporated herein by reference to the designated
exhibit to the Company's Registration Statement on
Form S-4 dated January 30, 1996 (Registration No.
33-99164).
(9) Incorporated herein by reference to the designated
exhibit to the Company's Form 10-K for the year ended
December 31, 1996.
(10) Incorporated herein by reference to the designated
exhibit to the Company's Form 10-Q for the quarter
ended June 30, 1997.
(11) Incorporated herein by reference to the designated
exhibit to the Company's Current Report on Form 8-K
dated March 21, 1997.
(12) Incorporated herein by reference to the designated
exhibit to the Company's Form 10-K for the year ended
December 31, 1997.
(13) Incorporated herein by reference to the designated
exhibit to the Company's Form 10-K for the year ended
December 31, 1998.
(14) Incorporated herein by reference to the designated
exhibit to the Company's Form 10-Q for the quarter
ended March 31, 1999.
(15) Incorporated herein by reference to the designated
exhibit to the Company's Form 10-Q for the quarter
ended September 30, 1999.
(16) Incorporated herein by reference to Note N to the
Consolidated Financial Statements included elsewhere
herein.
(17) Filed herewith.
(d) The financial statement schedules listed in the Index to Consolidated
Financial Statements and Financial Statement Schedules on page 25 of
this Form 10-K are included under Item 8 and are presented beginning on
page 48 of this Form 10-K. All other schedules for which provision is
made in the applicable accounting regulations of the Securities and
Exchange Commission are not required under the related instructions or
are inapplicable, and therefore have been omitted.
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DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /S/ ROBERT ROSENKRANZ
-----------------------------------
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Name Capacity Date
- ---- -------- ----
/S/ ROBERT ROSENKRANZ Chairman of the Board, March 10, 2000
- -------------------------- President and Chief Executive
(Robert Rosenkranz) Officer (Principal Executive
Officer)
* Director March 10, 2000
- --------------------------
(Edward A. Fox)
* Director March 10, 2000
- --------------------------
(Charles P. O'Brien)
* Director March 10, 2000
- --------------------------
(Lewis S. Ranieri)
* Director March 10, 2000
- --------------------------
(Thomas L. Rhodes)
/S/ ROBERT M. SMITH, JR. Director and Executive March 10, 2000
- --------------------------- Vice President
(Robert M. Smith, Jr.)
* Director March 10, 2000
- --------------------------
(B.K. Werner)
* Vice President and March 10, 2000
- -------------------------- Treasurer (Principal
Lawrence E. Daurelle Accounting and Financial
Officer)
* BY: /S/ ROBERT ROSENKRANZ
-------------------------
Attorney-in-Fact
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25
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL RESULTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31, 1999
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenues ..................................... $ 168,045 $ 149,601 $ 166,786 $ 156,061
Income from continuing operations, excluding
realized investment (losses) gains ........ 20,255 20,058 20,455 20,082
Income from continuing operations ............ 19,529 14,611 16,692 13,300
Net income ................................... 5,682 14,611 16,692 13,300
Basic results per share of common stock:
Income from continuing operations excluding
realized investment (losses) gains ..... $ 0.95 $ 0.96 $ 0.98 $ 0.96
Income from continuing operations ......... 0.92 0.70 0.80 0.64
Net income ................................ 0.27 0.70 0.80 0.64
Diluted results per share of common stock:
Income from continuing operations excluding
realized investment (losses) gains ..... $ 0.92 $ 0.93 $ 0.95 $ 0.93
Income from continuing operations ......... 0.89 0.68 0.77 0.62
Net income ................................ 0.26 0.68 0.77 0.62
Year Ended December 31, 1998
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenues...................................... $ 171,206 $ 152,426 $ 125,893 $ 154,101
Income from continuing operations, excluding
realized investment gains (losses) ........ 19,963 18,376 17,084 13,141
Income from continuing operations ............ 38,242 21,741 10,555 3,264
Net income ................................... 38,242 21,741 10,555 16,497
Basic results per share of common stock:
Income from continuing operations excluding
realized investment gains (losses) ..... $ 0.96 $ 0.88 $ 0.80 $ 0.61
Income from continuing operations ......... 1.84 1.04 0.50 0.15
Net income ................................ 1.84 1.04 0.50 0.77
Diluted results per share of common stock:
Income from continuing operations excluding
realized investment gains (losses) ..... $ 0.92 $ 0.85 $ 0.77 $ 0.59
Income from continuing operations ......... 1.77 1.00 0.48 0.15
Net income ................................ 1.77 1.00 0.48 0.74
The results of interim periods may not be indicative of the results for the
entire year. Computations of results per share for each quarter are made
independently of results per share for the year. Due to transactions affecting
the weighted average number of shares outstanding in each quarter, the sum of
quarterly results per share does not equal results per share for the year.
Results for the first quarter of 1999 include a loss on the disposition of
Unicover, which was acquired in the fourth quarter of 1998. See Note Q to the
Consolidated Financial Statements. In connection with a settlement pursuant to
which the Company obtained certain legal releases relating to Unicover, the
Company rescinded a quota share reinsurance contract with Reliance Insurance
Company. Accordingly, the Company restated its financial results for the first
three quarters of 1999 to exclude the effects of this contract. The effect of
this restatement on originally reported amounts was a reduction in revenue of
$25.1 million, $21.4 million and $18.9 million; after-tax income of $1.1
million, $1.5 million and $1.3 million; and basic and diluted results per share
of $0.05, $0.07 and $0.06 in the first, second and third quarters of 1999,
respectively. See "Other Transactions." Prior period results per share have been
restated to reflect stock