Lehman/A.M. Best Co. 2nd Annual Conference

"Management's sole focus is now on insurance operations. We decided to undertake this even though it cost us earnings."
Robert Rosenkranz
Chairman & President
Delphi Financial Group, Inc.

Fresh Off Debt Reduction, Delphi Hopes to Capitalize

Delphi Financial Group Inc. (NYSE: DFG) has fully implemented its debt-reduction strategy and believes it is well-positioned for growth this year in its integrated employee-benefit services business, said Robert Rosenkranz, chairman, president and chief executive officer.

"Management's sole focus is now on insurance operations," said Rosenkranz, who spoke at the second annual Insurance Conference held in New York and co-sponsored by Lehman Bros. and A.M. Best Co. "We decided to undertake this even though it cost us earnings."

Analysts and investors had been critical of Delphi's previous strategy of leveraging its earnings. They said the company was taking too much risk, was exposing itself to unnecessary volatility and that the company was too difficult to follow, Rosenkranz said. The company also was "taking heat" from rating agencies. "If shareholders were not reaping rewards, then we decided we might as well pay down the debt," he said. "We're vastly more user-friendly for investors," he said.

Delphi is a holding company whose subsidiaries provide group employee benefits in life insurance, workers' compensation, long- and short-term disability, travel accident insurance and dental. The company has developed a special capability in integrating disability and workers' comp and in helping disabled employees return quickly to work. Delphi reduced its corporate debt by $150 million in the first quarter, bringing its debt-to-capitalization ratio to 15%. The company reported core employee-benefit premiums of $109.7 million in the first quarter.

Rosenkranz is especially bullish about integrated disability, which simplifies administration for employers. Employee absences due to long-term disability, short-term disability, workers' comp and family medical leaves can create "administrative nightmares" for employers, Rosenkranz said. "But we're one stop. We cover it, no matter what it is, and we deal with it," he said. Absence management and integrated disability also provide opportunities for Delphi to write business with large employers, he added, since it helps the company to "keep up the margins" in a segment that is normally able to negotiate lower margins for its coverage.

He also is optimistic about growth prospects in the company's target markets of small to midsize companies, where there is limited competition. In workers' comp, the company has developed a strong niche: It writes excess workers' comp, which Rosenkranz said is particularly appropriate for employers that self-insure the primary risk. Excess workers' comp limits an employer's liability, and Rosenkranz said it is highly profitable, because Delphi can collect premiums today but may not have to pay a claim for 10 years.

Speaking to investors, Rosenkranz reported that Delphi has a five-year annual growth rate in after-tax operating profit of 22% and that it expects 10% to 12% in the future. Operating profit excludes investment gains and losses. Driving those profits have been a 14% historic growth in core premium and a combined ratio of under 100; in the first quarter, it was 92. He also pointed out that management owns more than 40% of Delphi stock, so it is "highly motivated and entrepreneurial."

In its asset-accumulation segment, Delphi sold about $160 million last year in fixed annuities. Its spreads have averaged 150 to 250 basis points, Rosenkranz said, and the company had about $760 million of funds under management on March 31.

Rosenkranz said a couple of Delphi's product lines traditionally are indicators of a weakening national economy, but he has not yet seen any evidence of weakening. Employees tend to file more disability claims in anticipation of being laid off, but claims have not increased significantly in recent months, he said. Also, the company has seen little difference in travel accident claims, an indication that insured companies have not significantly changed their travel frequency.

(By Ron Panko, senior associate editor, Best's Review: pankor@ambest.com)