Delphi Financial Group, Inc. (NYSE: DFG) announced today that
operating earnings (1) were $49.4 million or $0.88 per diluted
share for the fourth quarter of 2011 compared to $54.1 million or
$0.97 per share for the fourth quarter of 2010. Net income
attributable to shareholders was $38.0 million or $0.67 per diluted
share, compared to $52.9 million or $0.95 per share in the fourth
quarter of 2010. For the year ended December 31, 2011, operating
earnings were $193.9 million or $3.43 per diluted share, up from
$190.7 million or $3.42 per share in 2010. Net income attributable
to shareholders in 2011 was $178.7 million or $3.16 per diluted
share, up from $168.9 million or $3.03 per share in 2010. Net
income in the fourth quarter and full-year 2011 was reduced by $5.5
million or $0.10 per diluted share from corporate expenses related
to Delphi’s proposed merger with Tokio Marine Holdings, Inc., which
was announced on December 21, 2011. The $2.7 billion transaction is
expected to close in the second quarter of 2012.
Financial highlights for 2011 include the following (2):
- Core premium income of $1.49 billion,
an increase of 9.6% from 2010;
- Core production of $334.6 million, an
increase of 11.2% from 2010;
- Annuity sales of $507.7 million, an
increase of 34.5% from 2010;
- Annuity funds under management
increased to $2.1 billion, up 20.1% from December 31, 2010;
- Annualized operating return on
beginning shareholders’ equity in 2011 of 12.7%; and
- Record shareholders’ equity of $1.77
billion and record diluted book value per share of $31.60 at
December 31, 2011
Robert Rosenkranz, Chairman and Chief Executive Officer, said,
“Delphi achieved excellent top-line growth and double-digit
operating returns in 2011 despite difficult economic conditions, as
we capitalized on the leadership positions of Reliance Standard
Life and Safety National in their attractive specialty markets.
Following the closing of the merger, we expect to build on our
track record of growth and profitability as we benefit from the
substantial global resources of the Tokio Marine group.”
Group Employee Benefit Segment
Core group employee benefit premiums for the fourth quarter of
2011 were $384.2 million, up 11.0% from the fourth quarter of 2010.
Core premiums at Delphi’s Safety National subsidiary rose 18.8%
while core premiums at Delphi’s Reliance Standard Life subsidiary
increased 8.2%. Core production in the fourth quarter of 2011
declined 10.2% from the fourth quarter of 2010, with core
production at Safety National decreasing 1.6% and core production
at Reliance Standard Life decreasing 11.2%.
For the full-year 2011, core group employee benefit premiums
were $1.49 billion, up 9.6% from 2010. Core premiums at Safety
National rose 18.1% while core premiums at Reliance Standard Life
increased 6.8%. Core production in 2011 increased 11.2%, with core
production at Safety National increasing 45.9% and core production
at Reliance Standard Life increasing 2.2%.
Delphi’s group employee benefit combined ratio in the fourth
quarter of 2011 was 96.2% compared to 96.5% for the fourth quarter
of 2010. The group employee benefit combined ratio for the full
year 2011 was 95.3%, unchanged from 2010.
Operating income for the group employee benefit segment for the
fourth quarter of 2011 was $73.2 million, a 3.4% decrease from
$75.8 million in the fourth quarter of 2010. For the full year
2011, operating income for the group employee benefit segment was
$286.6 million, an increase of 1.9% from $281.2 million in
2010.
Asset Accumulation Segment
Delphi’s asset accumulation segment, which is primarily focused
on individual fixed annuities, achieved new annuity sales of $85.5
million in the fourth quarter of 2011, a decrease of 20.0% from the
fourth quarter of 2010. For the full-year 2011, new annuity sales
rose to $507.7 million, an increase of 34.5% from 2010. Funds under
management at December 31, 2011 were $2.1 billion, up 20.1% from
$1.7 billion at December 31, 2010.
Operating income for the asset accumulation segment for the
fourth quarter of 2011 was $11.2 million, a decrease of 25.7% from
$15.1 million the fourth quarter of 2010. For the full-year 2011,
operating income for the asset accumulation segment was $39.7
million, a decline of 16.2% from $47.4 million in 2010.
Investments
Delphi’s net investment income in the fourth quarter of 2011 was
$95.5 million, a decrease of 6.4% from $102.1 million in the fourth
quarter of 2010. Invested assets at December 31, 2011 were $7.5
billion, an increase of 14.0% from $6.5 billion at December 31,
2010. The tax equivalent yield on the Company’s investment
portfolio in the fourth quarter of 2011 was 5.6% compared to 6.8%
in the fourth quarter of 2010.
Net investment income in the full-year 2011 was $351.1 million,
unchanged from $351.2 million in 2010. The tax equivalent yield on
the Company’s investment portfolio in 2011 was 5.6% compared to
6.3% in 2010.
Investment income was impacted in the fourth quarter by the
challenging environment for fixed income securities, with interest
rates trending lower and spreads remaining tight. In addition, the
Company’s alternative investments, which have historically provided
enhanced investment income and reduced overall portfolio
volatility, had a slightly positive total return in the fourth
quarter of 0.2%, compared with total return of 6.4% in the fourth
quarter of 2010. For the full-year 2011, alternative investments
had a total return of 3.2% compared with a total return of 15.5% in
2010.
Delphi reported after-tax net realized investment losses in the
fourth quarter of 2011 of $(5.9) million, including
other-than-temporary impairments (“OTTI”) of $(4.0) million,
compared with after-tax net realized investment gains of $1.2
million, including OTTI of $(7.1) million, in the fourth quarter of
2010. For the full-year 2011, Delphi reported after-tax net
realized investment losses of $(9.7) million, including
other-than-temporary impairments (“OTTI”) of $(19.5) million,
compared with after-tax net realized investment losses of $(16.8)
million, including OTTI of $(39.7) million, in 2010.
Capitalization and Shareholders’ Equity
Shareholders’ equity at December 31, 2011 increased 15.8% to a
record $1.77 billion from $1.53 billion at December 31, 2010.
Diluted book value per share reached a record $31.60 at December
31, 2011, up 16.6% from $27.09 at December 31, 2010.
Total capitalization at December 31, 2011 was $2.3 billion,
including $375 million of corporate debt and $175 million of junior
subordinated debentures. Corporate debt to total capitalization was
16.1% at December 31, 2011 and holding company financial resources
were a comfortable $172.7 million.
About Delphi Financial Group, Inc.
Delphi Financial Group, Inc. is a financial services company
focused on specialty insurance and insurance-related businesses.
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,
large casualty programs including large deductible workers’
compensation, 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.
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, 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,” “effort,” “attempt,” “achieve,”
“project,” 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 interpretations thereof, 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, ratings by major rating organizations of Delphi and its
insurance subsidiaries, customer loss and business disruption,
including but not limited to, difficulties in maintaining
relationships with employees, customers or suppliers, may be
greater than expected following the announcement of the merger with
Tokio Marine Holdings, Inc., the retention of certain key employees
at Delphi, the conditions to the completion of the merger with
Tokio Marine Holdings, Inc. may not be satisfied, or the regulatory
approvals required for the merger may not be obtained on the terms
expected or on the anticipated schedule and the parties to the
merger may not be able to meet expectations regarding the timing,
completion and accounting and tax treatments of the merger. 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.
Non-GAAP Financial Measures
In presenting the Company’s financial results, management has
included and discussed certain financial measures that are not
calculated under standards or rules that comprise U.S. GAAP. Such
measures are referred to as non-GAAP. These measures should not be
viewed as a substitute for those determined in accordance with U.S.
GAAP. These non-GAAP financial measures are used by Delphi
management in the management of its operations. Management of
Delphi believes that showing these non-GAAP financial measures
enables investors, analysts, rating agencies and other users of its
financial information to more easily analyze Delphi’s results of
operations in a manner similar to how management analyzes Delphi’s
underlying performance.
Operating earnings, which is a non-GAAP financial measure,
consists of net income attributable to shareholders excluding
after-tax realized investment gains and losses, losses on early
retirement of senior notes, merger-related corporate expenses and
results from discontinued operations, as applicable. The Company
believes that because these excluded items arise from events that
are largely within management’s discretion and whose fluctuations
can distort comparisons between periods, a measure excluding their
impact is useful in analyzing the Company's operating trends.
Investment gains or losses are realized based on management’s
decision to dispose of an investment, and investment losses are
realized based on management’s judgment that a decline in the
market value of an investment is other than temporary. Early
retirement of senior notes occurs based on management’s decision to
redeem or repurchase these notes. Merger-related corporate expenses
represent costs incurred during 2011, primarily for external legal
and financial advisory services, relating to the proposed merger
with Tokio Marine. Discontinued operations result from management’s
decision to exit or sell a particular business. Thus, these
excluded items 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 their
effects. For these reasons, management uses the measure of
operating earnings to assess performance and make operating plans
and decisions, and the Company believes that analysts and investors
typically utilize measures of this type as one element of their
evaluations of insurers’ financial performance. However, gains or
losses associated with these excluded items, particularly as to
investments, can occur frequently and should not be considered as
nonrecurring items. Further, operating earnings should not be
considered a substitute for net income attributable to
shareholders, 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 amounts of operating earnings to the corresponding amounts of
net income attributable to shareholders for the indicated periods,
see the table captioned “Non-GAAP Financial Measures –
Reconciliation to GAAP” which follows.
Annualized operating return on beginning shareholders’ equity,
which is a non-GAAP financial measure, is based on operating
earnings divided by beginning shareholders’ equity. For
reconciliations of the amounts of annualized operating return on
equity to the corresponding amounts of annualized net income return
on equity for the indicated periods, see the table captioned
“Non-GAAP Financial Measures – Reconciliation to GAAP” which
follows.
(1) Information regarding this and other
non-GAAP financial measures included in this press release can be
found under the caption “Non-GAAP Financial Measures” above.
(2)
In October 2010, the FASB issued guidance
limiting the extent to which an insurer may capitalize costs
incurred in the acquisition of an insurance contract. The guidance
provides that, in order to be capitalized, such costs must be
incremental and directly related to the acquisition of a new or
renewal insurance contract. Insurers may only capitalize costs
related to successful efforts in attaining a contract and
advertising costs may only be capitalized if certain direct
response advertising criteria are met. This guidance is effective
for interim and annual reporting periods beginning after December
15, 2011, with either prospective or retrospective adoption
permitted. Effective January 1, 2011, Delphi elected to adopt this
guidance on a retrospective basis, which resulted in the write-off
of the portion of its cost of business acquired that does not
satisfy the standards for being capitalized under such guidance, as
well as the restatement of certain of Delphi’s financial
information for prior periods. Accordingly, the 2010 financial
information has been restated to increase operating earnings per
share for the fourth quarter of 2010 by $0.01, and to reduce
diluted book value per share at December 31, 2010 by $1.07.
Detailed financial data concerning these matters is contained in
the Company’s Fourth Quarter 2011 Financial Supplement, which is
available on the Company’s website at
www.delphifin.com/financial/stats11.html.
DELPHI FINANCIAL GROUP, INC. Non-GAAP
Financial Measures Reconciliation to GAAP (Unaudited;
in thousands, except per share data)
Three Months Ended Twelve Months Ended 12/31/2011
12/31/2010 12/31/2011 12/31/2010
Income Statement
Data
Operating earnings $ 49,432 $ 54,083 $ 193,921 $
190,713
Net realized investment (losses) gains
(A)
(5,888 ) 1,243 (9,691 ) (16,819 )
Loss on early retirement of senior notes
(B)
- (2,401 ) - (4,983 )
Merger-related corporate expenses (C)
(5,534 ) - (5,534 ) -
Net income attributable to shareholders (GAAP
measure) $ 38,010 $ 52,925 $ 178,696 $
168,911
Diluted results per share of common stock
attributable to shareholders: Operating earnings $ 0.88
$ 0.97 $ 3.43 $ 3.42 Net realized investment (losses) gains (A)
(0.11 ) 0.02 (0.17 ) (0.30 ) Loss on early retirement of senior
notes (B) - (0.04 ) - (0.09 )
Merger-related corporate expenses (C)
(0.10 ) - (0.10 ) -
Net income attributable to shareholders (GAAP
measure) $ 0.67 $ 0.95 $ 3.16 $ 3.03
Annualized operating return on beginning
shareholders' equity 11.5 % 13.7 % 12.7 % 14.7 %
Annualized net income return on beginning shareholders' equity
(GAAP measure) 8.8 % 13.4 % 11.7 % 13.0 %
(A)
Net of an income tax benefit (expense) of
$3.2 million, $(0.7) million, $5.2 million and $9.1 million, or
$0.06 per diluted share, $(0.01) per diluted share, $0.09 per
diluted share and $0.16 per diluted share for the three months
ended 12/30/2011 and 12/31/2010 and the full year ended 12/31/2011
and 12/31/2010, respectively. The tax effect is calculated using
the Company's statutory tax rate of 35%.
(B) Net of an income tax benefit of $1.3 million or $0.02
per diluted share for the three months ended 12/31/2010 and $2.7
million or $0.05 per diluted share for the full year ended
12/31/2010. The tax effect is calculated using the Company's
statutory tax rate of 35%. (C)
These expenses are included in the
"Commissions and expenses" line of the accompanying Consolidated
Statements of Income for the three months and twelve months ended
December 31, 2011. Any related tax benefits have not been
recognized.
DELPHI FINANCIAL
GROUP, INC. Consolidated Statements of Income
(Unaudited; in thousands, except per share data)
Three Months Ended Twelve Months Ended 12/31/2011 12/31/2010
12/31/2011 12/31/2010 Revenue: Premium and fee income $ 404,209 $
362,214 $ 1,564,239 $ 1,419,562 Net investment income 95,493
102,057 351,080 351,227 Net realized investment (losses) gains:
Total other than temporary impairment losses (6,684 ) (14,585 )
(33,967 ) (77,403 )
Less: Portion of other than temporary
impairment losses recognized in other comprehensive income
463 3,697 4,033
16,296 Net impairment losses recognized in earnings (6,221 )
(10,888 ) (29,934 ) (61,107 ) Other net realized investment
(losses) gains (2,837 ) 12,801 15,025
35,232 Net realized investment (losses) gains
(9,058 ) 1,913 (14,909 ) (25,875 ) Loss on early retirement of
senior notes - (3,694 ) -
(7,666 ) Total revenue 490,644 462,490
1,900,410 1,737,248 Benefits and
expenses: Benefits, claims and interest credited to policyholders
301,350 263,783 1,135,811 1,005,385 Commissions and expenses
129,153 119,753 494,886
469,145 430,503 383,536
1,630,697 1,474,530 Operating income
60,141 78,954 269,713 262,718 Interest expense: Corporate
debt 6,129 6,732 24,195 30,102 Junior subordinated debentures 3,242
3,241 12,981 12,971 Income tax expense 12,508
14,995 52,660 49,558 Net income
38,262 53,986 179,877 170,087 Less: Net income attributable
to noncontrolling interest 252 1,061
1,181 1,176 Net income
attributable to shareholders $ 38,010 $ 52,925 $
178,696 $ 168,911 Basic results
per share of common stock: Net income attributable to shareholders
$ 0.68 $ 0.95 $ 3.19 $ 3.05 Weighted average shares
outstanding 55,827 55,458 55,961 55,327 Diluted results per
share of common stock: Net income attributable to shareholders $
0.67 $ 0.95 $ 3.16 $ 3.03 Weighted average shares
outstanding 56,423 55,978 56,608 55,750 Dividends paid per
share of common stock $ 0.12 $ 0.11 $ 0.47 $ 0.42
DELPHI FINANCIAL GROUP, INC.
Summarized Consolidated Balance
Sheets
(Unaudited; in thousands)
12/31/2011 12/31/2010
Assets:
Investments:
Fixed maturity securities, available for sale $ 6,489,637 $
5,717,090 Short-term investments 277,552 334,215 Investment
accounts receivable 24,406 45,645 Other investments 678,133
453,033 7,469,728 6,549,983 Cash 93,898
72,806 Cost of business acquired 156,675 149,325 Reinsurance
receivables 365,391 360,255 Premiums receivable 154,612 130,111
Accrued investment income 74,672 60,831 Goodwill 93,929 93,929
Other assets 108,138 120,635 Assets held in separate account
117,365 123,674 Total assets $
8,634,408 $ 7,661,549
Liabilities and Equity:
Future policy benefits: Life $ 328,678 $ 331,816 Disability and
accident 845,750 812,258 Unpaid claims and claim expenses Life
57,049 53,763 Disability and accident 481,826 457,642 Casualty
1,506,129 1,314,910 Policyholder account balances 2,100,675
1,753,744 Unearned premium reserve 192,261 159,169 Corporate debt
375,000 375,000 Junior subordinated debentures 175,000 175,000
Advances from Federal Home Loan Bank 55,342 55,342 Investment
accounts payable 41,719 27,667 Net deferred tax liability 135,559
75,545 Other liabilities and policyholder funds 442,172 410,889
Liabilities related to separate account 117,365
123,674 Total liabilities 6,854,525
6,126,419
Equity:
Class A Common Stock 568 565 Class B Common Stock 63 60 Additional
paid-in capital 705,036 682,816 Accumulated other comprehensive
income 107,529 30,932 Retained earnings 1,165,756 1,013,369
Treasury stock, at cost (206,931 ) (197,246 ) Total
shareholders' equity 1,772,021 1,530,496 Noncontrolling interest
7,862 4,634 Total equity 1,779,883
1,535,130 Total liabilities and equity $ 8,634,408
$ 7,661,549
DELPHI
FINANCIAL GROUP, INC. Consolidated Statements of Cash
Flows (Unaudited; in thousands) Twelve Months
Ended 12/31/2011 12/31/2010 Operating activities: Net income
attributable to shareholders $ 178,696 $ 168,911
Adjustments to reconcile net income
attributable to shareholders to net cash provided by operating
activities:
Change in policy liabilities and policyholder accounts 308,172
213,687 Net change in reinsurance receivables and payables (7,987 )
(5,322 ) Net change in premiums receivable (24,501 ) (3,176 )
Amortization, principally the cost of business acquired and
investments 35,932 47,090 Deferred costs of business acquired
(98,351 ) (88,808 ) Net realized losses on investments 14,909
25,875 Net change in federal income taxes 31,612 24,128 Other
38,464 (19,583 ) Net cash provided by
operating activities 476,946 362,802
Investing activities: Purchases of investments and loans
made (3,188,213 ) (2,451,199 ) Sales of investments and receipts
from repayment of loans 1,936,963 1,463,446 Maturities of
investments 446,086 291,475 Net change in short-term investments
56,663 72,567 Net cash used by
investing activities (748,501 ) (623,711 )
Financing activities: Deposits to policyholder accounts 525,913
389,720 Withdrawals from policyholder accounts (205,024 ) (113,241
) Proceeds from issuance of 2020 Senior Notes - 250,000 Borrowings
under bank credit facility - 175,000 Principal payments under bank
credit facility - (272,000 ) Early retirement of senior notes -
(143,750 ) Acquisition of treasury stock (9,685 ) - Cash dividends
paid on common stock (26,309 ) (23,247 ) Other financing activities
7,752 5,769 Net cash provided by
financing activities 292,647 268,251
Increase in cash 21,092 7,342 Cash at beginning of year
72,806 65,464 Cash at end of year $
93,898 $ 72,806
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