Delphi Financial Announces Second Quarter Financial Results

WILMINGTON, Del.--([ BUSINESS WIRE ])--Delphi Financial Group, Inc. (NYSE: DFG) announced today operating earnings⁽¹⁾ of $48.7 million or $0.86 per diluted share for the second quarter of 2011 compared to $43.8 million or $0.79 per share for the second quarter of 2010. Net income attributable to shareholders was $49.4 million or $0.87 per diluted share, compared to $34.7 million or $0.62 per share in the second quarter of 2010.

"Non-GAAP Financial Measures a" Reconciliation to GAAP"

Highlights for the second quarter include the following⁽²⁾:

Core premium income of $366.5 million, an increase of 8.5% from the second quarter of 2010;
Annuity sales of $149.0 million, an increase of 90.9% from the second quarter of 2010;
Total premium and fee income of $385.0 million, an increase of 9.2% from the second quarter of 2010;
Combined ratio of 93.8%, a decrease of 80 basis points from the second quarter of 2010;
Net investment income of $83.2 million, an increase of 6.3% from the second quarter of 2010;
Annualized operating return on beginning shareholdersa� equity in the second quarter of 2011 of 12.2%, compared to 12.9% in the second quarter of 2010;
Diluted book value per share of $29.28 at June 30, 2011, up 14.2% from June 30, 2010.

Robert Rosenkranz, Chairman and Chief Executive Officer, said, aOur financial results in the second quarter kept us on track to meet Delphia�s targets for the year. We are pleased with this performance, although investment results were somewhat below our expectations. Operating earnings benefited from strong underwriting margins in our insurance businesses. Reliance Standarda�s modest premium growth and lower production in the quarter reflect our ongoing commitment to pricing and underwriting discipline. Safety National continued to expand our market leadership position in the excess workersa� compensation market and achieved robust growth in assumed workersa� compensation reinsurance. This positive momentum carried over into Safety Nationala�s important July renewal period in excess workersa� compensation, which is not included in second quarter results, as we achieved high renewal ratios, strong new production and solid increases in rates and self-insured retentions.a

Mr. Rosenkranz added, aDelphi continues to maintain excellent financial flexibility to support the growth of our insurance and asset accumulation businesses, with shareholdersa� equity at an all-time high, debt to total capitalization of 16.9% and holding company financial resources at a comfortable $140million.a

Group Employee Benefit Segment

Core group employee benefit premiums for the second quarter of 2011 were $366.5 million, up 8.5% from $337.7 million in the second quarter of 2010. Core premiums at Delphia�s Safety National subsidiary rose 16.6% while core premiums at Delphia�s Reliance Standard Life subsidiary increased 5.9%. Core production in the second quarter of 2011 rose 5.3%, with core production at Safety National increasing 77.2% and core production at Reliance Standard Life decreasing 7.9%.

Delphia�s group employee benefit combined ratio in the second quarter of 2011 improved to 93.8% compared to 94.6% for the second quarter of 2010 and 95.3% for the full year 2010. Delphia�s group employee benefit loss ratio in the second quarter of 2011 improved by 200 basis points over the fourth quarter of 2010, resulting from the effect of better pricing and other actions taken to address elevated long-term disability claims incidence experienced in the second half of 2010.

Operating income for the group employee benefit segment for the second quarter of 2011 was $73.1 million, an 11.9% increase from $65.3 million in the second quarter of 2010.

Asset Accumulation Segment

Delphia�s asset accumulation segment, which is primarily focused on individual fixed annuities, achieved new annuity sales of $149.0 million in the second quarter of 2011, an increase of 90.9% from $78.0 million in the second quarter of 2010. The strong growth in annuity sales reflected continued favorable market conditions in Delphia�s wholesaler distribution channel. Funds under management at June 30, 2011 were $1.9 billion, up from $1.5 billion at June 30, 2010.

Operating income for the asset accumulation segment was $9.6 million, a decrease of 14.9% from $11.3 million the second quarter of 2010. Profitability was impacted by lower than expected investment income.

Investments

Delphia�s net investment income in the second quarter of 2011 was $83.2 million, a gain of 6.3% from $78.2 million in the second quarter of 2010. Invested assets at June 30, 2011 were $7.0 billion compared to $6.1 billion at June 30, 2010. The tax equivalent yield on the Companya�s investment portfolio in the second quarter of 2011 was 5.3% compared to 5.6% in the second quarter of 2010.

Investment income was impacted in the second quarter by the challenging environment for fixed income securities, with interest rates trending lower and spreads remaining tight. In addition, returns from the Companya�s alternative investments, which have historically provided enhanced investment income and reduced overall portfolio volatility, were essentially flat in the quarter.

Delphi reported after-tax net realized investment gains in the second quarter of 2011 of $0.7 million, including other-than-temporary impairments (aOTTIa) of $(3.5) million, compared with after-tax net realized investment losses of $(9.0) million, including OTTI of $(13.5) million, in the same quarter a year ago.

Capitalization and Shareholdersa� Equity

Shareholdersa� equity at June 30, 2011 increased 17% to a record $1.7 billion from $1.4 billion at June 30, 2010. Diluted book value per share reached a record $29.28 at June 30, 2011, up 14.2% from $25.64 at June 30, 2010.

Total capitalization at June 30, 2011 was $2.2 billion, including $375 million of corporate debt and $175 million of junior subordinated debentures.

Conference Call

On July 27, 2011 at 11:00 AM (Eastern time), Delphi will broadcast the Companya�s second quarter 2011 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 Delphia�s website for one week beginning at approximately 1:00 PM (Eastern time) on July 27, 2011. Investors can also download Delphia�s second quarter 2011 Financial Supplement from the Companya�s website at [ www.delphifin.com/financial/stats11.html ].

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 workersa� compensation for self-insured employers, large casualty programs including large deductible workersa� compensation, travel accident, dental and limited benefit health insurance. Delphia�s asset accumulation business emphasizes individual annuity products. Delphia�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 asafe harbora 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 aexpects,a abelieves,a aanticipates,a aintends,a ajudgment,a aoutlook,a aeffort,a aattempt,a aachieve,a aproject,a 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 Delphia�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 Delphia�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 Delphia�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.

Non-GAAP Financial Measures

In presenting the Companya�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 Delphia�s results of operations in a manner similar to how management analyzes Delphia�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 and results from discontinued operations, as applicable. The Company believes that because these excluded items arise from events that are largely within managementa�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 managementa�s decision to dispose of an investment, and investment losses are realized based on managementa�s judgment that a decline in the market value of an investment is other than temporary. Early retirement of senior notes occurs based on managementa�s decision to redeem or repurchase these notes. Discontinued operations result from managementa�s decision to exit or sell a particular business. Thus, these excluded items are not reflective of the Companya�s ongoing earnings capacity, and trends in the earnings of the Companya�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 insurersa� financial performance. However, gains or losses from the 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 Companya�s overall financial performance and may not be calculated in the same manner as similarly titled captions in other companiesa� 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 aNon-GAAP Financial Measures a" Reconciliation to GAAPa which follows.

Annualized operating return on beginning shareholdersa� equity, which is a non-GAAP financial measure, is based on operating earnings divided by beginning shareholdersa� 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 aNon-GAAP Financial Measures a" Reconciliation to GAAPa which follows.


(1)		Information regarding this and other non-GAAP financial measures included in this press release is contained under aNon-GAAP Financial Measuresa 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 Delphia�s financial information for prior periods. Accordingly, the 2010 financial information has been restated to reduce operating earnings per share for the second quarter of 2010 by $0.04, and to reduce diluted book value per share at June 30, 2010 by $1.10. Detailed financial data concerning these matters is contained in the Companya�s Second Quarter 2011 Financial Supplement, which is available on the Companya�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						Six Months Ended
		06/30/2011			06/30/2010			06/30/2011			06/30/2010
Income Statement Data

Operating earnings	$	48,697		$	43,818		$	100,203		$	90,153
Net realized investment gains (losses) ^(A)		730			(9,018	)		(552	)		(18,837	)
Loss on early retirement of senior notes ^(B)		-			(138	)		-			(138	)

Net income attributable to shareholders (GAAP measure)	$	49,427		$	34,662		$	99,651		$	71,178

Diluted results per share of common stock attributable to shareholders:
Operating earnings	$	0.86		$	0.79		$	1.76		$	1.62
Net realized investment gains (losses) ^(A)		0.01			(0.17	)		(0.01	)		(0.34	)
Loss on early retirement of senior notes ^(B)		-			(0.00	)		-			(0.00	)

Net income attributable to shareholders (GAAP measure)	$	0.87		$	0.62		$	1.75		$	1.28


Annualized operating return on beginning shareholders' equity		12.2	%		12.9	%		13.1	%		13.9	%

Annualized net income return on beginning shareholders' equity (GAAP measure)		12.4	%		10.2	%		13.0	%		11.0	%

(A) Net of an income tax expense (benefit) of $0.4 million, $(4.9) million, $(0.3) million, $(10.1) million, or $0.01 per diluted share, $(0.09) per diluted share, $(0.01) per diluted share, $(0.18) per diluted share for the three and six months ended 06/30/2011 and 06/30/2010, respectively. The tax effect is calculated using the Company's statutory tax rate of 35%.


(B) Net of an income tax benefit of $0.07 million or $0.00 per diluted share for the three and six months ended 06/30/2010. The tax effect is calculated using the Company's statutory tax rate of 35%.




Balance Sheet Data								6/30/2011			12/31/2010

Shareholders' equity, excluding accumulated other comprehensive income							$	1,596,205		$	1,499,564
Add: Accumulated other comprehensive income								78,231			30,932

Shareholders' equity (GAAP measure)							$	1,674,436		$	1,530,496

Diluted book value per share of common stock, excluding accumulated other comprehensive income							$	28.00		$	26.57
Add: Accumulated other comprehensive income								1.28			0.52

Diluted book value per share of common stock (GAAP measure)							$	29.28		$	27.09


DELPHI FINANCIAL GROUP, INC.
Consolidated Statements of Income
Total Operations
(Unaudited; in thousands, except per share data)


		Three Months Ended					Six Months Ended
	06/30/2011			06/30/2010			06/30/2011			06/30/2010
Revenue:
Premium and fee income	$	385,012		$	352,566		$	761,411		$	700,329
Net investment income		83,191			78,234			175,485			162,284
Net realized investment gains (losses):
Total other than temporary impairment losses		(7,775	)		(21,659	)		(15,314	)		(48,932	)
Less: Portion of other than temporary impairment losses recognized in other comprehensive income		2,432			826			953			5,101
Net impairment losses recognized in earnings		(5,343	)		(20,833	)		(14,361	)		(43,831	)
Other net realized investment gains		6,466			6,959			13,512			14,851
Net realized investment gains (losses)		1,123			(13,874	)		(849	)		(28,980	)
Loss on early retirement of senior notes		-			(212	)		-			(212	)
Total revenue		469,326			416,714			936,047			833,421

Benefits and expenses:
Benefits, claims and interest credited to policyholders		273,163			244,687			544,428			491,008
Commissions and expenses		121,137			116,460			240,575			229,789
		394,300			361,147			785,003			720,797

Operating income		75,026			55,567			151,044			112,624

Interest expense:
Corporate debt		6,007			8,264			12,017			15,587
Junior subordinated debentures		3,248			3,248			6,490			6,489
Income tax expense		15,762			9,385			32,157			19,297
Net income		50,009			34,670			100,380			71,251

Less: Net income attributable to noncontrolling interest		582			8			729			73

Net income attributable to shareholders	$	49,427		$	34,662		$	99,651		$	71,178



Basic results per share of common stock:
Net income attributable to shareholders	$	0.88		$	0.63		$	1.78		$	1.29

Weighted average shares outstanding		56,091			55,287			56,006			55,224

Diluted results per share of common stock:
Net income attributable to shareholders	$	0.87		$	0.62		$	1.75		$	1.28

Weighted average shares outstanding		56,868			55,765			56,801			55,611

Dividends paid per share of common stock	$	0.12		$	0.10		$	0.23		$	0.20


DELPHI FINANCIAL GROUP, INC.
SUMMARIZED CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands)


	06/30/2011			12/31/2010
Assets:
Investments:
Fixed maturity securities, available for sale	$	6,181,482		$	5,717,090
Short-term investments		228,486			334,215
Other investments		614,180			498,678
		7,024,148			6,549,983

Cash		90,271			72,806
Cost of business acquired		140,872			149,325
Reinsurance receivables		357,010			360,255
Goodwill		93,929			93,929
Other assets		337,274			311,577
Assets held in separate account		126,213			123,674

Total assets	$	8,169,717		$	7,661,549

Liabilities and Equity:
Policy liabilities and accruals	$	3,098,737		$	2,970,389
Policyholder account balances		1,884,029			1,753,744
Corporate debt		375,000			375,000
Junior subordinated debentures		175,000			175,000
Other liabilities and policyholder funds		830,157			728,612
Liabilities related to separate account		126,213			123,674

Total liabilities		6,489,136			6,126,419

Equity:
Class A Common Stock		567			565
Class B Common Stock		60			60
Additional paid-in capital		692,696			682,816
Accumulated other comprehensive income		78,231			30,932
Retained earnings		1,100,128			1,013,369
Treasury stock, at cost		(197,246	)		(197,246	)
Total shareholders' equity		1,674,436			1,530,496
Noncontrolling interest		6,145			4,634
Total equity		1,680,581			1,535,130

Total liabilities and equity	$	8,169,717		$	7,661,549


DELPHI FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)

	Six Months Ended
	06/30/2011			06/30/2010
Operating activities:
Net income attributable to shareholders	$	99,651		$	71,178
Adjustments to reconcile net income attributable to shareholders to net cash provided by operating activities:
Change in policy liabilities and policyholder accounts		149,619			84,646
Net change in reinsurance receivables and payables		(4,016	)		(11,574	)
Amortization, principally the cost of business acquired and investments		16,626			24,624
Deferred costs of business acquired		(45,230	)		(34,273	)
Net realized losses on investments		849			28,980
Net change in federal income taxes		25,534			(5,473	)
Other		(45,373	)		(25,398	)
Net cash provided by operating activities		197,660			132,710

Investing activities:
Purchases of investments and loans made		(1,574,882	)		(936,660	)
Sales of investments and receipts from repayment of loans		1,002,719			494,984
Maturities of investments		171,331			176,718
Net change in short-term investments		105,729			55,689
Change in deposit in separate account		-			(2,965	)
Net cash used by investing activities		(295,103	)		(212,234	)

Financing activities:
Deposits to policyholder accounts		252,096			122,809
Withdrawals from policyholder accounts		(129,235	)		(54,905	)
Proceeds from issuance of 2020 Senior Notes		-			250,000
Principal payments under bank credit facility		-			(222,000	)
Early retirement of senior notes		-			(5,000	)
Cash dividends paid on common stock		(12,892	)		(11,054	)
Other financing activities		4,939			2,095
Net cash provided by financing activities		114,908			81,945

Increase in cash		17,465			2,421
Cash at beginning of year		72,806			65,464
Cash at end of period	$	90,271		$	67,885

Contributing Sources

Market Wire

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Delphi Financial Announces Second Quarter Financial Results