DFG Delphi Financial Grp., Inc.

Delphi Financial Group, Inc. (NYSE:DFG) announced today that its net income in the second quarter of 2008 was $26.9 million or $0.55 per share, compared to $42.9 million or $0.83 per share in the second quarter of 2007. Net income in the second quarter of 2008 included after-tax realized investment losses of $(12.7) million or $(0.26) per share, while net income in the second quarter of 2007 included after-tax realized investment gains of $0.6 million or $0.01 per share. Net income for the first half of 2008 was $48.0 million or $0.97 per share, compared with net income in the first half of 2007 of $82.1 million or $1.59 per share. Net income in the first half of 2008 included after-tax realized investment losses of $(16.9) million or $(0.34) per share, while net income in the first half of 2007 included after-tax realized investment gains of $0.4 million or $0.01 per share and an after-tax loss of $(1.4) million or $(0.03) per share from the redemption of junior subordinated deferrable interest debentures. Operating earnings (1) in the second quarter of 2008 were $39.5 million or $0.81 per share, compared to $42.3 million or $0.82 per share in the second quarter of 2007. Operating earnings for the first half of 2008 were $64.9 million or $1.31 per share, compared to $83.2 million or $1.61 per share in the first half of 2007. Annualized operating return on beginning equity (2) in the second quarter of 2008 was 14.7%, compared to 14.8% in the second quarter of 2007. Core group employee benefit premiums in the second quarter of 2008 rose 4.5% over the prior year quarter to $324 million. This growth was driven by an 11% increase in group life premiums and a 5% increase in group disability premiums at Delphi�s Reliance Standard Life subsidiary. Delphi�s group employee benefit combined ratio in the second quarter of 2008 was 91.8%, down from 92.4% for the second quarter of 2007 and full-year 2007. Delphi�s net investment income in the second quarter of 2008 was $60.8 million compared to $69.1 million a year ago. Invested assets at June 30, 2008 were $4.8 billion compared to $4.7 billion at June 30, 2007. The tax equivalent yield on the Company�s investment portfolio in the second quarter of 2008 was 5.4%, compared to 6.3% in the second quarter of 2007. Diluted book value per share before accumulated other comprehensive income or loss(3) was $24.91 at June 30, 2008, compared with $24.34 at Dec. 31, 2007 and $23.46 at June 30, 2007. Robert Rosenkranz, Chairman and Chief Executive Officer, commented, �Delphi Financial�s solid performance in the second quarter resulted from continued strong underwriting profits in our insurance businesses. Improvement in our combined ratio continues to be driven by our disciplined pricing and underwriting at both Reliance Standard and Safety National. Reliance Standard continues to benefit from our emphasis on the small case market focused on companies with less than 500 employees, and our focus on voluntary products. At Safety National, we were very pleased with preliminary results for the July renewal period in excess workers� compensation, in which we had continued excellent renewal ratios, solid growth in new sales, modest declines in rates and modest increases in the important self-insured retention level.� Mr. Rosenkranz added, �Our investment results improved in the second quarter compared to the first quarter as we achieved better returns in our investments in alternative assets. We plan to gradually reduce our exposure to alternative assets and increase allocations to our traditional fixed income asset classes, including municipal securities and highly-rated mortgage-backed securities, where we are seeing improved yield opportunities. Delphi continues to have a strong balance sheet which gives us excellent financial flexibility to invest in our insurance businesses and build shareholder value through share repurchases. In the second quarter of 2008, Delphi repurchased 965,200 shares at a volume weighted average price of $26.61, and we have remaining authorization to repurchase one million shares.� Conference Call On July 23, 2008 at 11:00 AM (Eastern time), Delphi will broadcast the Company�s second quarter 2008 earnings teleconference live on the Internet, hosted by Robert Rosenkranz, Chairman and Chief Executive Officer. Investors can access the broadcast at www.delphifin.com by clicking on the webcast icon on the home page. It is advisable to register at least 15 minutes prior to the call to download and install any necessary audio software. The online replay will be available on Delphi�s website for one week beginning at approximately 1:00 PM (Eastern time) on July 23, 2008. Investors can also download Delphi�s second quarter 2008 statistical supplement from the Company�s website at www.delphifin.com. In connection with, and because it desires to take advantage of, the �safe harbor� provisions of the Private Securities Litigation Reform Act of 1995, Delphi cautions readers regarding certain forward-looking statements in the foregoing discussion and in any other statements made by, or on behalf of, Delphi, 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, prospects, outlooks or other developments. Some forward-looking statements may be identified by the use of terms such as �expects,� �believes,� �anticipates,� �intends,� �judgment,� �outlook� or other similar expressions. Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic, competitive and other uncertainties and contingencies, many of which are beyond Delphi�s control and many of which, with respect to future business decisions, are subject to change. Examples of such uncertainties and contingencies include, among other important factors, those affecting the insurance industry generally, such as the economic and interest rate environment, federal and state legislative and regulatory developments, including but not limited to changes in financial services, employee benefit and tax laws and regulations, changes in accounting rules or interpretation, market pricing and competitive trends relating to insurance products and services, acts of terrorism or war, and the availability and cost of reinsurance, and those relating specifically to Delphi�s business, such as the level of its insurance premiums and fee income, the claims experience, persistency and other factors affecting the profitability of its insurance products, the performance of its investment portfolio and changes in Delphi�s investment strategy, acquisitions of companies or blocks of business, and ratings by major rating organizations of Delphi and 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, Delphi. Forward-looking statements contained in the foregoing discussion are made as of the date of this press release and Delphi disclaims any obligation to update these or any other forward-looking statements. Delphi Financial Group, Inc. is an integrated employee benefit services company. Delphi is a leader in managing all aspects of employee absence to enhance the productivity of its clients and provides the related group insurance coverages: long-term and short-term disability, life, excess workers� compensation for self-insured employers, travel accident, dental and limited benefit health insurance. Delphi�s asset accumulation business emphasizes individual annuity products. Delphi�s common stock is listed on the New York Stock Exchange under the symbol DFG and its corporate website address is www.delphifin.com. (1) � Operating earnings, which is a non-GAAP financial measure, consist of income from continuing operations excluding after-tax realized investment gains and losses, and the loss on redemption of junior subordinated deferrable interest debentures, as applicable. The Company believes that because realized investment gains and losses, redemption of junior subordinated deferrable interest debentures, and discontinued operations arise from events that, to a significant extent, are within management's discretion and can fluctuate significantly, thus distorting comparisons between periods, a measure excluding their impact is useful in analyzing the Company's operating trends. Redemptions of junior subordinated deferrable interest debentures occur based on management's decision to exercise its ability to redeem the outstanding debentures. Investment gains or losses may be realized based on management's decision to dispose of an investment, and investment losses may be realized based on management's judgment that a decline in the market value of an investment is other than temporary. Discontinued operations occur based on management's decision to exit or sell a particular business. Thus, realized investment gains and losses, losses on redemption of junior subordinated deferrable interest debentures and results from discontinued operations are not reflective of the Company's ongoing earnings capacity, and trends in the earnings of the Company's underlying insurance operations can be more clearly identified without the effects of these items. For these reasons, management uses the measure of operating earnings to assess performance and make operating plans and decisions, and analysts and investors typically utilize measures of this type when evaluating the financial performance of insurers. However, gains and losses of these types, particularly as to investments, occur frequently and should not be considered as nonrecurring items. Further, operating earnings should not be considered a substitute for net income, the most directly comparable GAAP measure, as an indication of the Company's overall financial performance and may not be calculated in the same manner as similarly titled captions in other companies' financial statements. For reconciliations of the respective operating earnings amounts to the corresponding net income amounts for the indicated periods, see the table captioned "Non-GAAP Financial Measures - Reconciliation to GAAP" which follows. All per share amounts are on a diluted basis. � (2) Annualized operating return on beginning equity, which is a non-GAAP financial measure, is based on operating earnings, as defined in the preceding footnote (1) (rather than the most directly comparable GAAP measure, net income), divided by beginning shareholders' equity. For the reasons that the Company believes that the calculation of this non-GAAP measure based upon operating earnings is useful, see such footnote. For reconciliations of the respective annualized operating return on equity amounts to the corresponding annualized net income return on equity amounts for the indicated periods, see the table captioned "Non-GAAP Financial Measures - Reconciliation to GAAP" which follows. � (3) Diluted book value per share before accumulated other comprehensive income and loss, which is a non-GAAP financial measure, is based on shareholders' equity excluding the effect of accumulated other comprehensive income and loss. The Company believes that, because accumulated other comprehensive income and loss fluctuates from period to period primarily due to changes in the value of its assets resulting from fluctuations in market interest rates, while the values of its liabilities are not similarly marked to market in determining diluted book value per share (the most directly comparable GAAP measure), this non-GAAP measure is useful in analyzing the Company's operating trends. For reconciliations of the respective diluted book value per share before accumulated other comprehensive income and loss amounts to the corresponding diluted book value per share amounts for the indicated dates, see the table captioned "Non-GAAP Financial Measures - Reconciliation to GAAP" which follows. DELPHI FINANCIAL GROUP, INC.Non-GAAP Financial MeasuresReconciliation to GAAP(Unaudited; in thousands, except per share data) � � � � � Three Months Ended Six Months Ended � 6/30/2008 � � 6/30/2007 � � 6/30/2008 � � 6/30/2007 � Income Statement Data � Operating earnings (Non-GAAP measure) $ 39,549 $ 42,305 $ 64,877 $ 83,172 Net realized investment (losses) gains, net of taxes (12,674 ) 609 (16,858 ) 361 Loss on redemption of junior subordinated deferrable interest debentures, net of taxes � - � � - � � - � � (1,425 ) � Net income (GAAP measure) $ 26,875 � $ 42,914 � $ 48,019 � $ 82,108 � � Diluted results per share of common stock: Operating earnings (Non-GAAP measure) $ 0.81 $ 0.82 $ 1.31 $ 1.61 Net realized investment (losses) gains, net of taxes (0.26 ) 0.01 (0.34 ) 0.01 Loss on redemption of junior subordinated deferrable interest debentures, net of taxes � - � � - � � - � � (0.03 ) � Net income (GAAP measure) $ 0.55 � $ 0.83 � $ 0.97 � $ 1.59 � � � Annualized operating return on beginning equity 14.7 % 14.8 % 11.4 % 15.2 % � Annualized net income return on beginning equity (GAAP measure) 10.0 % 15.0 % 8.4 % 15.0 % � � � Balance Sheet Data � 6/30/2008 � � 12/31/2007 � � Shareholders' equity, excluding accumulated other comprehensive (loss) income $ 1,188,524 $ 1,183,887 Add: Accumulated other comprehensive loss � (155,929 ) � (42,497 ) � Shareholders' equity (GAAP measure) $ 1,032,595 � $ 1,141,390 � � Diluted book value per share of common stock, excluding accumulated other comprehensive (loss) income (Non-GAAP measure) $ 24.91 $ 24.34 Add: Accumulated other comprehensive loss � (2.88 ) � (0.77 ) � Diluted book value per share of common stock (GAAP measure) $ 22.03 � $ 23.57 � � � Please see footnotes 1 through 3 of the press release to which this table is attached for important information regarding these non-GAAP financial measures. DELPHI FINANCIAL GROUP, INC.CONSOLIDATED STATEMENTS OF INCOME(Unaudited; in thousands, except per share data) � � � � � Three Months Ended Six Months Ended � 6/30/2008 � � 06/30/2007 � 6/30/2008 � � 06/30/07 � Revenue: Premium and fee income $ 340,774 $ 324,337 $ 683,064 $ 646,584 Net investment income 60,750 69,107 93,087 140,410 Net realized investment (losses) gains (19,499 ) 937 (25,935 ) 555 Loss on redemption of junior subordinated deferrable interest debentures � - � � - � - � � (2,192 ) � 382,025 � � 394,381 � 750,216 � � 785,357 � Benefits and expenses: Benefits, claims and interest credited to policyholders 243,755 235,483 486,667 473,695 Commissions and expenses � 94,683 � � 90,814 � 184,576 � � 181,365 � � 338,438 � � 326,297 � 671,243 � � 655,060 � � Operating income 43,587 68,084 78,973 130,297 � Interest expense: Corporate debt 4,289 4,591 8,513 9,645 Junior subordinated debentures 3,246 1,406 6,486 1,406 Junior subordinated deferrable interest debentures underlying company-obligated mandatorily redeemable capital securities issued by unconsolidated subsidiaries 353 479 757 1,763 Income tax expense � 8,824 � � 18,694 � 15,198 � � 35,375 � � Net income $ 26,875 � $ 42,914 $ 48,019 � $ 82,108 � � � Basic results per share of common stock: Net income $ 0.56 $ 0.85 $ 0.99 $ 1.63 � Weighted average shares outstanding 48,146 50,441 48,600 50,309 � Diluted results per share of common stock: Net income $ 0.55 $ 0.83 $ 0.97 $ 1.59 � Weighted average shares outstanding 49,000 51,734 49,576 51,601 � Dividends paid per share of common stock $ 0.10 $ 0.09 $ 0.19 $ 0.17 DELPHI FINANCIAL GROUP, INC.SUMMARIZED CONSOLIDATED BALANCE SHEETS(Unaudited; in thousands) � � � � 6/30/2008 � � 12/31/2007 � Assets: Investments: Fixed maturity securities, available for sale $ 3,811,763 $ 3,691,694 Short-term investments 325,716 286,033 Other investments � 631,902 � � 1,010,141 � 4,769,381 4,987,868 � Cash 43,544 51,240 Cost of business acquired 209,877 174,430 Reinsurance receivables 381,259 402,785 Goodwill 93,929 93,929 Other assets 275,171 260,602 Assets held in separate account � 118,592 � � 123,956 � � Total assets $ 5,891,753 � $ 6,094,810 � � Liabilities and Shareholders' Equity: Policy liabilities and accruals $ 2,459,146 $ 2,353,375 Policyholder account balances 1,190,604 1,083,121 Corporate debt 272,750 217,750 Junior subordinated debentures 175,000 175,000 Junior subordinated deferrable interest debentures underlying company-obligated mandatorily redeemable capital securities issued by unconsolidated subsidiaries 20,619 20,619 Other liabilities and policyholder funds 622,447 979,599 Liabilities related to separate account � 118,592 � � 123,956 � � Total liabilities 4,859,158 4,953,420 � Shareholders' equity: Class A Common Stock 489 487 Class B Common Stock 59 59 Additional paid-in capital 518,109 509,742 Accumulated other comprehensive loss (155,929 ) (42,497 ) Retained earnings 867,113 828,116 Treasury stock, at cost � (197,246 ) � (154,517 ) � 1,032,595 � � 1,141,390 � Total liabilities and shareholders' equity $ 5,891,753 � $ 6,094,810 � DELPHI FINANCIAL GROUP, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited; in thousands) � � Six Months Ended � 6/30/2008 � � 6/30/2007 � Operating activities: Net income $ 48,019 $ 82,108 Adjustments to reconcile net income to net cash provided by operating activities: Change in policy liabilities and policyholder accounts 108,256 153,073 Net change in reinsurance receivables and payables 16,881 (11,492 ) Amortization, principally the cost of business acquired and investments 33,010 40,549 Deferred costs of business acquired (60,481 ) (53,659 ) Net realized losses (gains) on investments 25,935 (555 ) Net change in federal income tax liability (24,913 ) 9,267 Other � 15,866 � � (38,188 ) Net cash provided by operating activities � 162,573 � � 181,103 � � Investing activities: Purchases of investments and loans made (706,313 ) (665,152 ) Sales of investments and receipts from repayment of loans 148,589 249,879 Maturities of investments 317,518 73,720 Net change in short-term investments (39,683 ) 173,647 Change in deposit in separate account � 3,430 � � (330 ) Net cash used by investing activities � (276,459 ) � (168,236 ) � Financing activities: Deposits to policyholder accounts 154,302 55,642 Withdrawals from policyholder accounts (53,226 ) (82,476 ) Borrowings under revolving credit facility 58,000 38,000 Principal payments under revolving credit facility (3,000 ) (158,000 ) Proceeds from the issuance of junior subordinated debentures - 172,309 Redemption of junior subordinated deferrable interest debentures underlying company-obligated mandatorily redeemable capital securities issued by unconsolidated subsidiaries - (37,728 ) Acquisition of treasury stock (42,729 ) - Other financing activities � (7,157 ) � 4,566 � Net cash provided (used) by financing activities � 106,190 � � (7,687 ) � (Decrease) Increase in cash (7,696 ) 5,180 Cash at beginning of period � 51,240 � � 48,204 � Cash at end of period $ 43,544 � $ 53,384 �