Delphi Reiterated at Neutral - Analyst Blog
18 August 2011 - 10:45PM
Zacks
We are reiterating our Neutral recommendation on the shares of
Delphi Financial Group Inc. (DFG) following its second quarter 2011
earnings release.
Delphi’s second quarter core operating income of 86 cents per
share missed the Zacks consensus Estimate of 91 cents but compared
favorably with 79 cents reported in the prior-year quarter.
The earnings miss was driven by lower operating income at
Delphi’s Asset Accumulation segment, which was partly offset by
higher operating income at its Group Employee Benefit segment.
Delphi is trying to mitigate the top-line pressure at Reliance
Standard by selling excess workers’ compensation products through
Safety National. The subsidiary is expanding its leading market
share in providing coverage to self-insureds. Its market share
increased to 27% in 2010 from 25% in 2009 and 22% in 2008. Also,
the company increased premiums at a CAGR of 6% between 2006 and
2010.
Management expects an attractive market for the Excess Workers’
Compensation considering the positive trends in January 2011
renewals, with a 3% improvement in average rates and a hike in
average self-insured retention (Safety typically writes 25% to 30%
of its business in January and the pricing on these renewals
generally set the tone for the year). Again during the July 2011
renewal season, rates on excess workers’ compensation policies
increased 4% and SIRs on average upped 3% owing to new and renewed
policies.
The company’s retention of its existing excess workers’
compensation customers remained strong during the first half of
2011. Moreover, the long tail nature of this business with average
duration of 15+ years implies a large investable float. But, along
with it, comes a long-tail risk related to the uncertainty of claim
payments. Nevertheless, given the company’s use of reinsurance and
the increase in self-insured retentions, we believe the company can
effectively manage the long-tail claims exposure that provides it
with free cash to invest for long term. Management anticipates a
stronger growth at Safety, which continues to benefit from its
leadership position in excess workers' compensation and growing
contributions from assumed reinsurance.
At Reliance Standard, Delphi’s life insurance unit, second
quarter core premiums increased 5.9% year over year, while core
production declined 7.9%. The segment’s modest premium growth and
lower production in the quarter reflected management’s ongoing
commitment to pricing and underwriting discipline. The unit is
gradually benefiting from its strong position in the small case
market and its differentiated offering for larger cases with its
integrated employee benefit (IEB) program. The unit is expected to
gain from its niche focus on the small case segment (companies with
less than 500 employees).
Moreover, at Reliance Standard, voluntary products continue to
be a major growth driver as employers seek to control costs. Thus,
after declines of 1.6% and 1.1% in core premiums in 2010 and 2009,
respectively, the unit’s business modestly improved during the
first half of the year. Though we expect business growth, we
believe it will be somewhat offset by competitive pressures on
group employee benefits and an uncertain employment scenario.
Besides, high long-term disability claims incidence would act as
another headwind.
Net investment income in the first half of 2011 was $175.5
million, an increase of 8% from the comparable period last year.
This increase reflects a 14% improvement in average invested assets
to $6,678.0 million in 2011 from $5,852.3 million in 2010, a higher
level of investment income from the company’s fixed maturity
security portfolio, and a better performance of the company’s
investments in investment funds organized as limited partnerships
and limited liability companies as well as trading account
securities. The tax equivalent weighted average annualized yield on
invested assets was 5.7% and 6.0% in for the first half of 2011 and
2010, respectively. We, however, expect net investment income to be
suppressed for 2011 given low investment yields.
Combined ratio at Delphi inched up to 94.8% in 2010 from 93.3%
in 2009 and 92.2% in 2008. Given the expectations for a restricted
premium growth and a higher long-term claims disability incidence,
combined ratio is unlikely to trend down from the current levels.
Management expects combined ratio for 2011 to be in line with the
2010 level.
Delphi has been consistently returning value to its shareholders
via dividend payments and share repurchases. It has increased
dividend every year since 2001, when it initiated its dividend
payout. In May 2011, the company announced a 9% hike in its
quarterly dividend. The dividend growth rate averaged 16.7% over
the past five years, reflecting a solid balance sheet. Besides, the
reduction of debt-to-capital ratio to18% at 2010 end from 19% at
2009 end and 26% at 2008 end also contributed to the solidarity of
balance sheet.
Delphi, closely competing with FBL Financial Group
Inc. (FFG), Harleysville Group Inc.
(HGIC), HCC Insurance Holdings (HCC), and
Markel Corp.(MKL), carries strong ratings. Its
subsidiaries, Reliance Standard and Safety National, carry
financial strength ratings of "A”, “A-”, “A3” and “A” by A.M. Best,
Fitch, Moody’s, and Standard & Poor’s, respectively.
DELPHI FINL GRP (DFG): Free Stock Analysis Report
FBL FINL GRP-A (FFG): Free Stock Analysis Report
HCC INS HLDGS (HCC): Free Stock Analysis Report
HARLEYSVILLE GP (HGIC): Free Stock Analysis Report
MARKEL CORP (MKL): Free Stock Analysis Report
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