| DELPHI FINANCIAL GROUP INC/DE ITEM 1A RISK FACTORS RESERVES ESTABLISHED FOR FUTURE POLICY BENEFITS AND CLAIMS MAY PROVE INADEQUATE The Companyapstas reserves for future policy benefits and unpaid claims and claim expenses are estimates |
| in Item 7, Managementapstas Discussion and Analysis of Financial Condition and Results of Operations for a description of the most significant assumptions used in the estimation process |
| These estimates are subject to variability, since the factors and events affecting the ultimate liability for claims have not all taken place, and thus cannot be evaluated with certainty |
| Moreover, under the actuarial methodologies discussed previously, these estimates are subject to reevaluation based on developing trends with respect to the Companyapstas loss experience |
| Such trends may emerge over longer periods of time, and changes in such trends cannot necessarily be identified or predicted at any given time by reference to current claims experience, whether favorable or unfavorable |
| If the Companyapstas actual loss experience from its current or discontinued products is different from the Companyapstas assumptions or estimates, the Companyapstas reserves could be inadequate |
| In such event, the Companyapstas results of operations, liquidity or financial condition could be materially adversely affected |
| THE MARKET VALUES OF THE COMPANY &apos S INVESTMENTS FLUCTUATE The market values of the Companyapstas investments vary depending on economic and market conditions, including interest rates, and such values can decline as a result of changes in such conditions |
| Increasing interest rates or a widening in the spread between interest rates available on US Treasury securities and corporate debt, for example, will typically have an adverse impact on the market values of the fixed maturity securities in the Companyapstas investment portfolio |
| If interest rates decline, the Company generally achieves a lower overall rate of return on investments of cash generated from the Companyapstas operations |
| In addition, in the event that investments are called or mature in a declining interest rate environment, the Company may be unable to reinvest the proceeds in securities with comparable interest rates |
| The Company may also in the future be required or determine to sell certain investments, whether to meet contractual obligations to its policyholders, or otherwise, at a price and a time when the market value of such investments is less than the book value of such investments |
| Declines in the fair value of investments that are considered in the judgment of management to be other than temporary are reported as realized investment losses |
| in Item 7, Managementapstas Discussion and Analysis of Financial Condition and Results of Operations, for a description of managementapstas evaluation process |
| The Company has experienced and may in the future experience losses from other than temporary declines in security values |
| Such losses are recorded as realized investment losses in the income statement |
| See "e Results of Operations - 2005 Compared to 2004 "e in Item 7, Managementapstas Discussion and Analysis of Financial Condition and Results of Operations |
| In addition, the Company invests in certain limited partnerships and limited liability companies that invest in various financial instruments |
| These investments are reflected in the Companyapstas financial statements under the equity method; accordingly, positive or negative changes in the value of the investees &apos financial instruments are included in net investment income |
| Thus, the Companyapstas results of operations, in addition to its liquidity and financial condition, could be materially adversely affected if these entities were to experience significant losses in the values of their financial assets |
| THE COMPANY &apos S INVESTMENT STRATEGY EXPOSES THE COMPANY TO DEFAULT AND OTHER RISKS The management of the Companyapstas investment portfolio is an important component of the Companyapstas profitability since a substantial portion of the Companyapstas operating income is generated from the difference between the yield achieved on invested assets and, in the case of asset accumulation products, the interest credited on policyholder funds and, in the case of the Companyapstas other products for which reserves are discounted, the discount rate used to calculate the related reserves |
| in Item 7, Managementapstas Discussion and Analysis of Financial Condition and Results of Operations, for a description of the Companyapstas investment portfolio and strategy |
| The Company is subject to the risk, among others, that the issuers of the fixed maturity securities the Company owns will default on principal and interest payments |
| A major economic downturn or any of the various other factors that affect issuers &apos abilities to pay could result in issuer defaults |
| Because the Companyapstas investments consist primarily of fixed maturity securities and short-term investments, such defaults could materially adversely affect the Companyapstas results of operations, liquidity or financial condition |
| The Company continually monitors its investment portfolio and attempts to ensure that the risks associated with concentrations of investments in either a particular sector of the market or a single entity are limited |
| -16- THE COMPANY &apos S FINANCIAL POSITION EXPOSES THE COMPANY TO INTEREST RATE RISKS Because the Companyapstas primary assets and liabilities are financial in nature, the Companyapstas consolidated financial position and earnings are subject to risks resulting from changes in interest rates |
| The Company manages this risk by active portfolio management focusing on minimizing its exposure to fluctuations in interest rates by matching its invested assets and related liabilities and by periodically adjusting the crediting rates on its annuity products |
| in Item 7, Managementapstas Discussion and Analysis of Financial Condition and Results of Operations |
| Profitability of certain group employee benefit products is also affected by the difference between the yield achieved on invested assets and the discount rate used to calculate the related reserves |
| The Company manages this risk by seeking to adjust the prices charged for these products |
| THE COMPANY &apos S ABILITY TO REDUCE ITS EXPOSURE TO RISKS DEPENDS ON THE AVAILABILITY AND COST OF REINSURANCE The Company transfers its exposure to some risks through reinsurance arrangements with other insurance and reinsurance companies |
| Under the Companyapstas reinsurance arrangements, another insurer assumes a specified portion of the Companyapstas losses and loss adjustment expenses in exchange for a specified portion of policy premiums |
| At December 31, 2005 and 2004, the Company had reinsurance receivables of dlra413dtta1 million and dlra428dtta7 million, respectively |
| The availability, amount, cost and terms of reinsurance may vary significantly based on market conditions |
| Any decrease in the amount of the Companyapstas reinsurance will increase the Companyapstas risk of loss and any increase in the cost of reinsurance will, absent a decrease in the reinsurance amount, reduce the Companyapstas premium income |
| In either case, the Companyapstas operating results could be adversely affected unless it is able to accordingly adjust the prices or other terms of its insurance policies or successfully implement other operational initiatives, as to which no assurance can be given |
| Furthermore, the Company is subject to credit risk with respect to reinsurance |
| The Company obtains reinsurance primarily through indemnity reinsurance transactions in which the Company is still liable for the transferred risks if the reinsurers fail to meet their financial obligations |
| Such failures could materially affect the Companyapstas results of operations, liquidity or financial condition |
| Some reinsurers experienced significant losses related to the terrorist events of September 11, 2001 |
| As a result of this and other market factors, higher prices and less favorable terms and conditions continue to be offered in the reinsurance market |
| These market conditions are reflected in the terms of the replacement reinsurance arrangements entered into during 2003 and remaining in effect for the Companyapstas excess workers &apos compensation and long-term disability products |
| In the future, the Companyapstas reinsurers may continue to seek price increases, although the extent of any such increases cannot currently be predicted |
| Also, there has been significantly reduced availability of reinsurance covering risks such as terrorist and catastrophic events |
| Accordingly, substantially all of the Companyapstas coverages of this nature were discontinued during 2002, which would result in the Company retaining a higher portion of losses from such events if they occur |
| The Company has not been able to replace such coverages on acceptable terms due to present market conditions, and there can be no assurance that the Company will be able to do so in the future |
| However, under the Terrorism Act, which terminates on December 31, 2007, the federal government will pay 90prca of the Companyapstas covered losses during 2006 and 85prca of the Companyapstas covered losses during 2007, relating to acts of international terrorism from property and casualty products directly written by SNCC above the Companyapstas annual deductible |
| The occurrence of a significant catastrophic event could have a material adverse effect on the Companyapstas results of operations, liquidity or financial condition |
| THE INSURANCE BUSINESS IS A HEAVILY REGULATED INDUSTRY The Companyapstas insurance subsidiaries, like other insurance companies, are highly regulated by state insurance authorities in the states in which they are domiciled and the other states in which they conduct business |
| Such regulations, among other things, limit the amount of dividends and other payments that can be made by such subsidiaries without prior regulatory approval and impose restrictions on the amount and type of investments such subsidiaries may have |
| These regulations also affect many other aspects of the Companyapstas insurance subsidiaries &apos businesses, including, for example, RBC requirements, various reserve requirements, the terms, conditions and manner of sale and marketing of insurance products, claims-handling practices and the form and content of required financial statements |
| These regulations are intended to protect policyholders rather than investors |
| The ability of the Companyapstas insurance subsidiaries to continue to conduct their businesses is dependent upon the maintenance of their licenses in these various states |
| In April 2004, the New York Attorney General ( "e NYAG "e ) initiated an investigation into certain insurance broker compensation arrangements and other aspects of dealings between insurance brokers and insurance companies, and, in connection therewith, filed a civil complaint in October 2004 against a major insurance brokerage firm based on certain of such firmapstas compensation arrangements with insurers and alleged misconduct in connection with the placement of -17- insurance business |
| Other state regulators subsequently announced the commencement of similar investigations and reviews |
| The Company has received administrative subpoenas or similar requests for information from the Illinois Division of Insurance, the Missouri Department of Insurance, the NYAGapstas office and the North Carolina Department of Insurance in connection with their investigations |
| The Company anticipates that additional regulatory inquiries may be received by its insurance subsidiaries as the various investigations continue |
| The Company has fully cooperated with inquiries it has received to date, and it intends to fully cooperate with any future inquiries of this type |
| As also previously disclosed, based on an internal review in 2004 relating to the Companyapstas insurance subsidiaries, the Company had identified certain potential issues concerning past insurance solicitation practices involving SNCC and Marsh & McLennan |
| The instances that the Company was able to specifically identify in this regard were limited in number and involved modest amounts of premium |
| The Company reported on these issues to the NYAGapstas office and to the Missouri Department of Insurance |
| In 2005, SNCC was the subject of a targeted market conduct examination by the Missouri Department of Insurance relating to these issues, which did not result in any significant adverse findings |
| The Company will fully cooperate with these and any other regulatory agencies relating to these issues |
| It is not possible to predict the future impact of this matter on the Company or of the various investigations, or any regulatory changes or litigation resulting from such investigations, on the insurance industry or on the Company and its insurance subsidiaries |
| From time to time, increased scrutiny has been placed upon the insurance regulatory framework, and a number of state legislatures have considered or enacted legislative measures that alter, and in many cases increase, state authority to regulate insurance companies |
| In addition to legislative initiatives of this type, the NAIC and insurance regulators are continuously involved in a process of reexamining existing laws and regulations and their application to insurance companies |
| Furthermore, while the federal government currently does not directly regulate the insurance business, federal legislation and administrative policies (and court interpretations thereof) in a number of areas, such as employee benefits regulation, age, sex and disability-based discrimination, financial services regulation and federal taxation, can significantly affect the insurance business |
| It is not possible to predict the future impact of changing regulation on the operations of the Company and those of its insurance subsidiaries |
| The Companyapstas insurance subsidiaries can also be required, under solvency or guaranty laws of most states in which they do business, to pay assessments to fund policyholder losses or liabilities of insurance companies that become insolvent |
| THE FINANCIAL SERVICES INDUSTRY IS HIGHLY COMPETITIVE The Company competes with numerous other insurance and financial services companies |
| Many of these organizations have substantially greater assets, higher ratings from rating agencies, larger and more diversified portfolios of insurance products and larger agency sales operations than the Company |
| Competition in asset accumulation product markets is also encountered from banks, securities brokerage firms and other financial intermediaries marketing alternative savings products, such as mutual funds, traditional bank investments and retirement funding alternatives |
| THE COMPANY MAY BE ADVERSELY IMPACTED BY A DECLINE IN THE RATINGS OF ITS INSURANCE SUBSIDIARIES OR ITS OWN CREDIT RATINGS Ratings with respect to claims-paying ability and financial strength have become an increasingly important factor impacting the competitive position of insurance companies |
| The financial strength ratings of RSLIC as of February 2006 as assigned by AM Best, Fitch, Moodyapstas and Standard & Poorapstas were A (Excellent), A (Strong), A3 (Good) and A (Strong), respectively |
| The financial strength ratings of SNCC as of February 2006 as assigned by AM Best, Fitch and Standard & Poorapstas were A (Excellent), A (Strong) and A (Strong), respectively |
| Each of the rating agencies reviews its ratings of companies periodically and there can be no assurance that current ratings will be maintained or improved in the future |
| Claims-paying and financial strength ratings are based upon factors relevant to policyholders and are not directed toward protection of investors |
| Downgrades in the ratings of the Companyapstas insurance subsidiaries could adversely affect sales of their products and could have a material adverse effect on the results of the Companyapstas operations |
| In addition, downgrades in the Companyapstas credit ratings could materially adversely affect its ability to access the capital markets |
| The Companyapstas senior unsecured debt ratings as of February 2006 from AM Best, Fitch, Moodyapstas and Standard & Poorapstas were bbb, BBB, Baa3 and BBB, respectively |
| ALMOST HALF OF THE VOTING POWER OF DELPHI IS CONTROLLED BY ROBERT ROSENKRANZ, WHOSE INTERESTS MAY DIFFER FROM THOSE OF OTHER SECURITYHOLDERS Each share of our Class A Common Stock entitles the holder to one vote and each share of our Class B Common Stock entitles the holder to a number of votes per share equal to the lesser of (1) the number of votes such that the aggregate of all outstanding shares of Class B Common Stock will be entitled to cast 49dtta9prca of all of the votes represented by the aggregate of all outstanding shares of Class A Common Stock and Class B Common Stock or (2) ten votes |
| Each share of -18- Class B Common Stock is convertible at any time into one share of Class A Common Stock |
| The holders of the Class A Common Stock vote as a separate class to elect one director of the Company |
| As of March 1, 2006, Mr |
| Robert Rosenkranz, our Chairman, President and Chief Executive Officer, by means of beneficial ownership of the general partner of Rosenkranz & Company and direct or beneficial ownership, had the power to vote all of the outstanding shares of Class B Common Stock, which as of such date represented 49dtta9prca of the aggregate voting power of the Common Stock |
| Holders of a majority of the combined voting power of our stockholders have the power to elect all of the members of our Board of Directors (other than the director elected by the holders of Class A Common Stock) and to determine the outcome of fundamental corporate transactions, including mergers and acquisitions, consolidations and sales of all or substantially all of our assets |
| We are a party to consulting and other agreements with certain affiliates of Mr |
| Rosenkranz which are expected to continue in accordance with their terms |