10-Q 1 w42454e10-q.txt 10-Q FOR DELPHIA INTERNATIONAL FOR 9/30/00 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2000 ------------------ [ ] 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 333-34829 --------- DELPHI INTERNATIONAL LTD. ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Bermuda (441) 295-3688 N/A ------------------------------- ------------------------------ ------------------------------- (State or other Jurisdiction of (Registrant's telephone number, (I.R.S. Employer Identification incorporation or organization) including area code) Number)

Chevron House, 11 Church Street, Hamilton, Bermuda HM 11 ----------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to filing requirements for the past 90 days: Yes X No --- --- As of November 9, 2000, the Registrant had 4,079,014 Common Shares outstanding. 1 2 DELPHI INTERNATIONAL LTD. FORM 10-Q INDEX PART I. FINANCIAL INFORMATION Page ----- Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2000 and 1999 3 Consolidated Balance Sheets at September 30, 2000 and December 31, 1999 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999 5 Notes to Consolidated Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION 11

2 3 PART I. FINANCIAL INFORMATION DELPHI INTERNATIONAL LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED; IN US DOLLARS)

See notes to consolidated financial statements 3 4 DELPHI INTERNATIONAL LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED; IN U.S. DOLLARS)

See notes to consolidated financial statements 4 5 DELPHI INTERNATIONAL LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED; IN US DOLLARS)

See notes to consolidated financial statements 5 6 DELPHI INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - SIGNIFICANT ACCOUNTING POLICIES The financial statements included herein were prepared in conformity with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Such principles were applied on a basis consistent with those reflected in the Company's report on Form 10-K for the year ended December 31, 1999. The information furnished includes all adjustments and accruals of a normal recurring nature which are, in the opinion of management, necessary for a fair presentation of results for the interim periods. Operating results for the nine months ended September 30, 2000 are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. Certain reclassifications have been made in the 1999 financial statements to conform to the 2000 presentation. For further information refer to the consolidated financial statements and footnotes thereto included in the Company's report on Form 10-K for the year ended December 31, 1999. Capitalized terms used herein without definition have the meanings ascribed to them in the Company's report on Form 10-K for the year ended December 31, 1999. Recently Adopted Accounting Standards. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended ("SFAS 133"), which is required to be adopted in fiscal years beginning after June 15, 2000. SFAS 133 will require all derivatives to be recognized on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through earnings. If a derivative is a hedge, depending on the nature of the hedge, changes in fair value of the derivative will either be offset against the change in fair value of the hedged item or items through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The portion of a derivative's change in fair value not effective as a hedge will be immediately recognized in earnings. The Company does not expect the adoption of SFAS 133 to have a material impact on the earnings or financial position of the Company. NOTE B - INVESTMENTS At September 30, 2000, the Company had fixed maturity securities available for sale with a carrying value of $89.0 million and an amortized cost of $90.2 million and balances with independent investment managers with a carrying value and a fair value of $28.9 million. At December 31, 1999, the Company had fixed maturity securities available for sale with a carrying value of $84.2 million and an amortized cost of $85.8 million and balances with independent investment managers with a carrying value and a fair value of $27.4 million. The amounts invested with independent investment managers are, with certain limited exceptions, withdrawable at least annually, subject to applicable notice requirements. During the first quarter of 2000, the Company elected to receive the $5.3 million dividend due on the preferred securities of the LLC in the form of additional preferred securities of the LLC in lieu of cash. 6 7 DELPHI INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE C - CAPITAL SECURITIES AND LOAN FINANCING Pursuant to the terms of the Subordinated Notes, interest due on such notes of $3.0 million and $1.4 million for the nine months ended September 30, 2000 and 1999, respectively, has been paid by the issuance of additional Subordinated Notes. The Company's Series A Preferred Shares (the "Preferred Shares") are entitled to receive, when and as declared by the Board of Directors out of funds legally available therefor, a cumulative dividend of 9.5% per annum on the shares' issue price. The dividend is payable in cash or in additional Preferred Shares or a combination thereof. A provision for the cumulative dividend at September 30, 2000 has been recorded as an appropriation of additional paid-in capital. In accordance with a resolution passed at the Company's annual general meeting held on May 8, 2000, $20.9 million has been transferred from the Company's share premium account to the Company's contributed surplus account, which account, under the Bermuda Companies Act, 1981 (the "Act"), is available for the payment of dividends or other distributions to shareholders, subject to compliance with the solvency requirements of the Act. The amount available for distribution due to the increase in the contributed surplus account is included in additional paid-in capital on the Company's balance sheet. The cumulative dividend on the Preferred Shares outstanding at December 31, 1999 was declared on July 24, 2000, and paid by the issuance of 9,000 additional Preferred Shares, which are redeemable at $100 per share, and the distribution of $50,000 in cash. NOTE D - COMPUTATION OF NET INCOME PER COMMON SHARE The following table sets forth the numerators and denominators used to calculate basic and diluted results per share:

7 8 DELPHI INTERNATIONAL LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following is an analysis of the results of operations and financial condition of Delphi International Ltd. (the "Company" which term includes the Company and its consolidated subsidiaries unless the context indicates otherwise). This analysis should be read in conjunction with the Consolidated Financial Statements and related notes included in this document, as well as the Company's report on Form 10-K for the year ended December 31, 1999. Capitalized terms used herein without definition have the meanings ascribed to them in the Company's report on Form 10-K for the year ended December 31, 1999. Results of Operations Underwriting Income. The Company did not earn any premium income from reinsurance contracts during the nine months ended September 30, 2000 and 1999. Due to excess capacity in the global reinsurance markets and the resulting lack of attractively priced reinsurance programs, the Company did not take on any new reinsurance business during either period. During the third quarter of 2000, the Company effected three new rent-a-captive programs for which it receives underwriting fee income. Investment Income. Investment income for the nine months ended September 30, 2000 was $12.5 million as compared with $16.7 million for the nine months ended September 30, 1999. Investment results during these periods are primarily derived from preferred dividends from the LLC, the assets of which are invested with independent investment managers, and from investment vehicles of independent investment managers, which are accounted for under the equity method, with earnings and losses included in net investment income. Investment income for the nine months ended September 30, 1999 primarily resulted from the recovery in numerous sectors of global financial markets in the period, which impacted positively upon the performance of the investment portfolios of the independent investment managers. Underwriting and Other Expenses. Losses and loss expenses for the nine months ended September 30, 2000 were $2.7 million as compared with $4.1 million for the nine months ended September 30, 1999. Losses and loss expenses primarily reflect the increase in discounted values of existing reserves, which accrete over time. Losses and loss expenses for the nine months ended September 30, 2000 have been reduced by a $0.5 million gain realized on the recapture by RSL of approximately 29% of the existing group long term disability liabilities ceded to Oracle Re under its quota share reinsurance agreement with RSL. Underwriting and acquisition expenses totalled $2.4 million for the nine months ended September 30, 2000 as compared with $5.5 million for the nine months ended September 30, 1999. Underwriting and acquisition expenses for the first nine months of 2000 reflect $2.3 million of profit sharing commissions payable under the Safety National and RSL reinsurance agreements for this period while underwriting and acquisition expenses in the 1999 period reflect $5.3 million of profit sharing commissions payable under the Safety National and RSL reinsurance agreements for the period from inception through September 30, 1999. 8 9 DELPHI INTERNATIONAL LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The Company's current liquidity needs at the holding company level include funding operating expenses and interest payments on the Subordinated Notes. At the Company's option, the Company may pay interest on the Subordinated Notes in additional Subordinated Notes in lieu of cash payments during any five-year period. During the nine-month period ended September 30, 2000, $3.0 million of interest due on the Subordinated Notes was paid by the issuance of additional Subordinated Notes with an aggregate principal amount of $3.0 million. As of September 30, 2000, the Company had $14.5 million in financial assets at the holding company level. The Company's other source of liquidity at the holding company level consists of dividends from Oracle Re. Dividend payments by the Company's insurance subsidiary to the Company are subject to certain Bermuda regulatory restrictions as well as contractual restrictions. Under the LOC Agreement, dividends by Oracle Re in any fiscal year may generally not exceed the greater of (a) 50% of Oracle Re's statutory net income for the preceding fiscal year and (b) the lesser of (i) $3,000,000 and (ii) Oracle Re's statutory net income for the preceding fiscal year. The principal liquidity requirement of the Company's insurance subsidiary, Oracle Re, in addition to funding operating expenses, is the fulfilment of the obligations under its reinsurance agreements. The primary source of funding for these obligations, in addition to operating earnings, is the net cash flow from the investments included in Oracle Re's investment portfolio. Each of the Company's reinsurance agreements involved a one-time payment to Oracle Re at inception and does not provide for ongoing reinsurance premiums. In the second quarter of 2000, Oracle Re and RSL effected the recapture of approximately 29% of the existing group long term disability liabilities ceded to Oracle Re under its quota share reinsurance agreement with RSL. In connection with such recapture, $4.3 million in cash was transferred to RSL. In addition to Oracle Re's current liquidity requirements, Oracle Re is required to provide collateral security with respect to letters of credit outstanding under the LOC Agreement and otherwise. Under the LOC Agreement, the collateral maintenance requirement is equal to up to 145% of the amount of the outstanding letters of credit. In the event that sufficient collateral cannot be maintained relative to these requirements, Oracle Re may be required to negotiate with its reinsureds to reduce the size of the reinsurance transactions, thereby decreasing the amounts of letters of credit and related collateral requirements under the LOC Agreement. Moreover, if Oracle Re were unable to furnish sufficient collateral or otherwise were to fail to satisfy any covenant or requirement under the LOC Agreement, it may be required to liquidate all or a substantial portion of its investment portfolio or otherwise secure its obligations under its reinsurance agreements, which would likely have a material adverse effect on the business and operations of the Company. The Company believes that the sources of funding available at the holding company and insurance subsidiary levels, respectively, will be adequate to satisfy on both a short-term and long-term basis the companies' applicable liquidity requirements. MARKET RISK There have been no material changes in the Company's exposure to market risk or its management of such risk since December 31, 1999. 9 10 DELPHI INTERNATIONAL LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 its readers regarding certain forward-looking statements in the foregoing discussions and elsewhere in this Form 10-Q and in any other statement made by, or on behalf of, the Company, whether or not in future filings with the Securities and Exchange Commission. 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," or "judgment." 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 changes in global economic and financial conditions and markets, the Company's investment strategy and implementation thereof, the performance of the Company's investment portfolio, competitive conditions in the global reinsurance markets, the ability of the Company to generate new business opportunities and submissions and changes in insurance or other laws and regulations or governmental interpretations thereof. These uncertainties 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. 10 11 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 11- Computation of Earnings Per Common Share (incorporated herein by reference to Note D to the Consolidated Financial Statements included elsewhere herein) 27- Financial Data Schedule (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DELPHI INTERNATIONAL LTD. (Registrant) /s/ COLIN O'CONNOR -------------------------------------- Colin O'Connor President and Chief Executive Officer (Principal Executive Officer) /s/ DAVID EZEKIEL -------------------------------------- David Ezekiel Vice President and Director (Principal Accounting and Financial Officer) Date: November 10, 2000 11

DELPHI INTERNATIONAL LTD 10-Q