Add
DFG to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| DFG > SEC Filings for DFG > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
Quarterly Report
markets have been the subject of extraordinary volatility and dramatically
widened credit spreads in numerous sectors. At the same time, the overall level
of risk-free interest rates has declined substantially. These market conditions
resulted in a significant decrease in the Company's level of net investment
income in 2008, due primarily to the adverse performance of those investments
whose changes in value, positive or negative, are included in the Company's net
investment income, such as investment funds organized as limited partnerships
and limited liability companies, trading account securities and hybrid financial
instruments. In an effort to reduce fluctuations of this type in its net
investment income, the Company has repositioned its investment portfolio to
reduce its holdings of these types of investments and, in particular, those
investments whose performance had demonstrated the highest levels of
variability. As part of this effort, the Company has increased its investments
in more traditional sectors of the fixed income market such as mortgage-backed
securities and municipal bonds, whose present spreads have widened to
historically high levels due to the market conditions discussed above. In
addition, in light of the aforementioned market conditions, the Company is
presently maintaining a significantly larger proportion of its portfolio in
short-term investments, which totaled $609.6 million at March 31, 2009 and
$401.6 million at December 31, 2008.
These market conditions may persist or worsen in the future and may continue to
result in significant fluctuations in net investment income, and as a result, in
the Company's results of operations. Accordingly, there can be no assurance as
to the impact of the Company's investment repositioning on the level or
variability of its future net investment income. In addition, the Company has
experienced substantial declines in the carrying values of certain portions of
its investment portfolio, as well as significantly increased levels of realized
investment losses from declines in market value relative to the amortized cost
of certain securities that it determined to be other than temporary. In light of
the aforementioned market conditions, losses of this type and magnitude may
continue or increase in the future.
The following discussion and analysis of the results of operations and financial
condition of the Company should be read in conjunction with the Consolidated
Financial Statements and related notes included in this document, as well as the
Company's annual report on Form 10-K for the year ended December 31, 2008 (the
"2008 Form 10-K"). Capitalized terms used herein without definition have the
meanings ascribed to them in the 2008 Form 10-K. The preparation of financial
statements in conformity with GAAP requires management, in some instances, to
make judgments about the application of these principles. The amounts of assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period could differ materially
from the amounts reported if different conditions existed or different judgments
were utilized. A discussion of how management applies certain critical
accounting policies and makes certain estimates is contained in the 2008 Form
10-K in the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Critical Accounting Policies and
Estimates" and should be read in conjunction with the following discussion and
analysis of results of operations and financial condition of the Company. In
addition, a discussion of uncertainties and contingencies which can affect
actual results and could cause future results to differ materially from those
expressed in certain forward-looking statements contained in this Management's
Discussion and Analysis of Financial Condition and Results of Operations can be
found below under the caption "Forward-Looking Statements And Cautionary
Statements Regarding Certain Factors That May Affect Future Results," in Part I,
Item 1A of the 2008 Form 10-K, "Risk Factors".
Results of Operations
Summary of Results. Net income was $24.5 million, or $0.51 per diluted share, in
the first quarter of 2009 as compared to $21.1 million, or $0.42 per diluted
share, in the first quarter of 2008. Net income in the first quarter of 2009 and
2008 included net realized investment losses, net of the related income tax
benefit, of $14.3 million, or $0.30 per diluted share, and $4.2 million, or
$0.09 per diluted share, respectively. Net income in the first quarter of 2009
as compared to the first quarter of 2008 benefited from growth in income from
the Company's core group employee benefit products and a significant increase in
net investment income, including increased investment spreads on the Company's
asset accumulation products, and was adversely impacted by an increased level of
realized investment losses due to the adverse market conditions discussed above.
See "Introduction". Core group employee benefit products include disability,
group life, excess workers' compensation, travel accident and dental insurance.
Premiums from these core group employee benefit products increased 4% in the
first quarter of 2009. Net investment income in the first quarter of 2009, which
increased 95% from the first quarter of 2008, reflects an increase in the tax
equivalent weighted average annualized yield to 5.8% from 2.9%. Investment
losses in the first quarters of 2009 and 2008 included losses, net of the
related income tax benefit, of $11.4 million, or $0.24 per diluted share, and
$4.0 million, or $0.08 per diluted share, respectively, due to other than
temporary declines in the market values of certain fixed maturity securities and
other investments.
Premium and Fee Income. Premium and fee income in the first quarter of 2009 was
$357.7 million as compared to $342.3 million in the first quarter of 2008, an
increase of 4%. Premiums from core group employee benefit products increased 4%
to $337.6 million in the first quarter of 2009 from $324.3 million in the first
quarter of 2008. This increase reflects normal growth in employment and salary
levels for the Company's existing customer base, price increases, and new
business production. Premiums from excess workers' compensation insurance for
self-insured employers were $67.8 million in the first quarter of 2009 as
compared to $66.7 million in the first quarter of 2008. Excess workers'
compensation new business production, which represents the amount of new
annualized premium sold, increased 251% to $15.1 million in the first quarter of
2009 from $4.3 million in the first quarter of 2008. SNCC's rates for its 2009
renewal policies declined modestly and SIRs on average are up modestly in 2009
new and renewal policies. SNCC's retention of its existing customers remained
strong in the first quarter of 2009.
Premiums from the Company's other core group employee benefit products increased
5% to $269.8 million in the first quarter of 2009 from $257.6 million in the
first quarter of 2008, primarily reflecting increases in premiums from the
Company's group life and group disability products and new business production.
During the first quarter of 2009, premiums from the Company's group life
products increased 4% to $103.7 million from $99.5 million in the first quarter
of 2008. During the first quarter of 2009, premiums from the Company's group
disability products increased 3% to $146.4 million from $141.6 million in the
first quarter of 2008. Premiums from the Company's turnkey disability business
were $15.2 million in the first quarter of 2009 compared to $12.2 million in the
first quarter of 2008. New business production for the Company's other core
group employee benefit products was $44.5 million and $61.1 million in the first
quarter of 2009 and 2008, respectively. New business production includes only
directly written business, and does not include premiums from the Company's
turnkey disability business. The level of production achieved from these
products reflects the Company's focus on the small case niche (insured groups of
10 to 500 individuals), which resulted in an 8.6% increase in production based
on the number of cases sold as compared to the first quarter of 2008. The
Company continued to implement price increases for certain existing disability
and group life customers.
Non-core group employee benefit products include primary workers' compensation,
bail bond insurance, workers' compensation reinsurance and reinsurance
facilities. Premiums from these products were $8.5 million and $8.3 million in
the first quarters of 2009 and 2008, respectively.
Deposits from the Company's asset accumulation products were $59.7 million in
the first quarter of 2009 as compared to $52.2 million in the first quarter of
2008. Deposits from the Company's asset accumulation products, consisting of new
annuity sales and issuances of funding agreements, are recorded as liabilities
rather than as premiums. The Company is continuing to maintain its discipline in
setting the crediting rates offered on its asset accumulation products in 2009
in an effort to achieve its targeted interest rate spreads on these products.
Net Investment Income. Net investment income in the first quarter of 2009 was
$62.9 million as compared to $32.3 million in the first quarter of 2008, an
increase of 95%. This increase reflects an increase in the tax equivalent
weighted average annualized yield on invested assets to 5.8% in the first
quarter of 2009 from 2.9% in the first quarter of 2008. The 2008 yield amount
reflected adverse performance from investments whose changes in value were
included in net investment income. The Company's holdings of these types of
investments in the first quarter of 2009 were substantially lower than in the
first quarter of 2008 due to the investment portfolio repositioning effected by
the Company. See "Introduction". Average invested assets were $4,685.9 million
and $4,895.7 million in the first quarters of 2009 and 2008, respectively.
Net Realized Investment Losses. Net realized investment losses were
$22.0 million in the first quarter of 2009 compared to $6.4 million in the first
quarter of 2008. The Company monitors its investments on an ongoing basis. When
the market value of a security declines below its amortized cost, the decline is
included as a component of accumulated other comprehensive income or loss, net
of the related income tax benefit and adjustment to cost of business acquired,
on the Company's balance sheet, and if management judges the decline to be other
than temporary, the decline is reported as a realized investment loss. Due to
the adverse market conditions for financial assets described above, the Company
recognized $17.6 million of losses due to the other than temporary declines in
the market values of certain fixed maturity securities and other investments in
the first quarter of 2009 as compared to $6.2 million of such losses in the
first quarter of 2008. See "Introduction". The Company's investment strategy
results in periodic sales of securities and, therefore, the recognition of
realized investment gains and losses. During the first quarters of 2009 and
2008, the Company recognized $4.4 million and $0.2 million, respectively, of net
losses on sales of securities.
The Company may recognize additional losses due to other than temporary declines
in security market values in the future, and such losses may be significant,
particularly if the adverse financial market conditions described above persist
or worsen. The extent of such losses will depend on, among other things, future
developments in the global economy, financial and credit markets, credit
spreads, interest rates, the outlook for the performance by the issuers of their
obligations under such securities
and changes in security values. The Company continuously monitors its
investments in securities whose fair values are below the Company's amortized
cost pursuant to its procedures for evaluation for other than temporary
impairment in valuation. See the section in the 2008 Form 10-K entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies and Estimates" for a description of
these procedures, which take into account a number of factors. It is not
possible to predict the extent of any future changes in value, positive or
negative, or the results of the future application of these procedures, with
respect to these securities. For further information concerning the Company's
investment portfolio, see "Liquidity and Capital Resources - Investments".
Benefits and Expenses. Policyholder benefits and expenses were $361.7 million in
the first quarter of 2009 as compared to $332.8 million in the first quarter of
2008. This increase primarily reflects the increase in premiums from the
Company's group employee benefit products discussed above and does not reflect
significant additions to reserves for prior years' claims and claim expenses.
However, there can be no assurance that future periods will not include
additions to reserves of this type, which will depend on the Company's future
loss development. If the Company were to experience significant adverse loss
development in the future, the Company's results of operations could be
materially adversely affected. The combined ratio (loss ratio plus expense
ratio) for group employee benefit products increased to 93.2% in the first
quarter of 2009 from 91.3% in the first quarter of 2008. The combined ratio in
the first quarter of 2009 was adversely impacted by increased spending on new
product development at SNCC. The weighted average annualized crediting rate on
the Company's asset accumulation products, which reflects the effect of the
first year bonus crediting rate on certain newly issued products, was 4.3% and
4.2% in the first quarters of 2009 and 2008, respectively.
Interest Expense. Interest expense was $7.2 million in the first quarter of 2009
as compared to $7.9 million in the first quarter of 2008, a decrease of
$0.7 million. This decrease primarily resulted from the redemption of the
redemption of the 2003 Junior Debentures in the third quarter of 2008.
Income Tax Expense. Income tax expense was $5.1 million in the first quarter of
2009 as compared to $6.4 million in the first quarter of 2008. The Company's
effective tax rate was 17.3% in the first quarter of 2009 compared to 23.2% in
the first quarter of 2008. This change is primarily due to the proportionately
higher level of tax-exempt interest income earned on invested assets in the
first quarter of 2009.
Liquidity and Capital Resources
General. The Company's current liquidity needs include principal and interest
payments on outstanding borrowings under its Amended and Restated Credit
Agreement with Bank of America, N.A., as administrative agent, and a group of
major banking institutions (the "Amended Credit Agreement") and interest
payments on the 2033 Senior Notes and 2007 Junior Debentures, as well as funding
its operating expenses and dividends to stockholders. The 2033 Senior Notes
mature in their entirety in May 2033 and are not subject to any sinking fund
requirements. The 2007 Junior Debentures will become due on May 15, 2037, but
only to the extent that the Company has received sufficient net proceeds from
the sale of certain specified qualifying capital securities. Any remaining
outstanding principal amount will be due on May 1, 2067. The 2033 Senior Notes
and the 2007 Junior Debentures contain certain provisions permitting their early
redemption by the Company. For descriptions of these provisions, see Notes E and
I to the Consolidated Financial Statements included in the 2008 Form 10-K.
As a holding company that does not conduct business operations in its own right,
substantially all of the assets of the Company are comprised of its ownership
interests in its insurance subsidiaries. In addition, the Company had
approximately $36.2 million of financial resources available at the holding
company level at March 31, 2009, primarily comprised of investments in fixed
maturity securities available for sale, short-term investments and investment
subsidiaries whose assets are primarily invested in investment funds organized
as limited partnerships and limited liability companies. A substantial portion
of these resources consists of investments having significantly limited
liquidity. Other sources of liquidity at the holding company level include
dividends paid from subsidiaries, primarily generated from operating cash flows
and investments, and borrowings under the Amended Credit Agreement. The
Company's insurance subsidiaries would be permitted, without prior regulatory
approval, to make dividend payments totaling $100.1 million during 2009, of
which $1.8 million has been paid to the Company during the first three months of
2009. However, the level of dividends that could be paid consistent with
maintaining the insurance subsidiaries' RBC and other measures of capital
adequacy at levels consistent with its current claims-paying and financial
strength ratings from rating agencies is likely to be substantially lower than
such amount. In general, dividends from the Company's non-insurance subsidiaries
are not subject to regulatory or other restrictions. In addition, the Company is
presently categorized as a well known seasoned issuer under Rule 405 of the
Securities Act. As such, the Company has the ability to file automatically
effective shelf registration statements for unspecified amounts of different
securities, allowing for immediate, on-demand offerings.
In October 2006, the Company entered into the Amended Credit Agreement, which,
among other things, increased the maximum borrowings available to $250 million,
improved the pricing terms and extended the maturity date from May 2010 to
October 2011. On November 8, 2007, the amount of the facility was increased to
the amount of $350 million, and certain financial institutions were added as new
lenders, pursuant to a supplement to the Amended Credit Agreement. Borrowings
under the Amended Credit Agreement bear interest at a rate equal to the LIBOR
rate for the borrowing period selected by the Company, which is typically one
month, plus a spread which varies based on the Company's Standard & Poor's and
Moody's credit ratings. Based on the current levels of such ratings, the spread
is currently equal to 62.5 basis points. The Amended Credit Agreement contains
various financial and other affirmative and negative covenants, along with
various representations and warranties, considered ordinary for this type of
credit agreement. The covenants include, among others, a maximum Company
consolidated debt to capital ratio, a minimum Company consolidated net worth,
minimum statutory risk-based capital requirements for RSLIC and SNCC, and
certain limitations on investments and subsidiary indebtedness. As of March 31,
2009, the Company was in compliance in all material respects with the financial
and various other affirmative and negative covenants in the Amended Credit
Agreement. At March 31, 2009, the Company had $222.0 million of outstanding
borrowings and $128.0 million of borrowings remaining available under the
Amended Credit Agreement.
During the first quarter of 2006, the Company issued $100.0 million in aggregate
principal amount of fixed and floating rate funding agreements with maturities
of three to five years in connection with the issuance by an unconsolidated
special purpose vehicle of funding agreement-backed notes in a corresponding
principal amount. On December 31, 2008, the Company adopted FSP FAS 140-4 and
FIN 46(R)-8, "Disclosures about Transfers of Financial Assets and Interests in
Variable Interest Entities," which requires public entities to make additional
disclosures about transfers of financial assets and their involvement with
variable interest entities. Based on the Company's investment at risk compared
to that of the holders of the funding agreement-backed notes, the Company has
concluded that it is not the primary beneficiary of the special purpose vehicle
that issued the funding agreement-backed notes. During the first quarter of
2009, the Company repaid $35.0 million in aggregate principal amount of floating
rate funding agreements at their maturity. At March 31, 2009 and 2008, reserves
related to the funding agreements were $65.2 million and $100.2 million,
respectively.
On May 1, 2009, the Company sold 3.0 million shares of its Class A Common Stock
in a public offering at a price to the public of $17.50 per share pursuant to an
underwriting agreement dated April 28, 2009 with Barclays Capital Inc., as
underwriter. The proceeds to the Company from the offering were $50.7 million,
net of related underwriting discounts, commissions and estimated expenses. The
Company intends to use the proceeds from this offering for general corporate
purposes.
On May 6, 2009, the Company's Board of Directors declared a cash dividend of
$0.10 per share, which will be paid on the Company's Class A Common Stock and
Class B Common Stock on June 3, 2009.
The Company and its subsidiaries expect available sources of liquidity to exceed
their current and long-term cash requirements.
Investments. The Company's overall investment strategy emphasizes safety and
liquidity, while seeking the best available return, by focusing on, among other
things, managing the Company's interest-sensitive assets and liabilities and
seeking to minimize the Company's exposure to fluctuations in interest rates.
The Company's investment portfolio, which totaled $4,784.9 million at March 31,
2009, consists primarily of investments in fixed maturity securities, short-term
investments, mortgage loans and equity securities. The Company's investment
portfolio also includes investments in investment funds organized as limited
partnerships and limited liability companies and trading account securities
which collectively totaled $243.0 million at March 31, 2009. At March 31, 2009,
the total carrying value of the portfolio of private placement corporate loans,
mortgage loans, interests in limited partnerships and limited liability
. . .
|
|