Zacks_Analysts' Blog : Delphi Drives Ahead - Analyst Blog

Delphi Financial Group, Inc.'s (DFG) fourth quarter 2010 core operating income of 96 cents per share was a dime ahead of the Zacks Consensus Estimate of 86 cents. The company had reported earnings of 86 cents in the prior-year quarter. Operating earnings benefited from high sales of fixed annuities and a higher net investment income.

Delphi, an integrated employee benefits services company, reported FY10 core earnings of $3.50 per shares, falling in line with the upper end of its guidance range ($3.20–$3.50). Earnings also surpassed the Zacks Consensus Estimate of $3.41 as well. Last year, it had reported $3.41 in core earnings.

Delphi’s core Group Employee Benefit segment premiums increased 4% year over year to $348.6 million. This was led by a 13% hike in premiums at Safety National subsidiary, coupled with a 1% increase in Reliance Standard Life subsidiary. Combined ratio deteriorated 350 basis points to 96.7%.

Delphi’s Asset Accumulation segment revenues up-ticked 30.8% year over year to $37.8 million. The segment witnessed a huge growth of $106.9 million in fixed annuity sales during the quarter, compared with $16.4 million in the last year’s quarter. Funds under management, as of December 31, 2010, rose 21.4% to $1.7 billion from $1.4 billion at the end of 2009.

Investment income was up 37% year over year to $102.1 million due to higher invested assets and solid returns from alternative investments.

Delphi, which functions through three subsidiaries– Reliance Standard Life Insurance Company, Safety National Casualty Corporation and Matrix Absence Management, Inc., reported return on equity of 13.0% compared with 14.3% in the prior-year quarter. Diluted book value per share (excluding AOCI) was $27.64 at December 31, 2010, up 10.5% from December 31, 2009.

Delphi has maintained a low debt to capital ratio of 17.7% at 2010 end. The ratio stood at 18.9% at the end of 2009. 

Despite a challenging environment characterized by stagnant payrolls, low interest rates and increased disability claims incidence, Delphi posted earnings aligned with the high end of the management’s guidance led by strong growth in premiums and production, along with favorable underwriting margins at Safety National, which offset the impact of higher disability claims incidence at Reliance Standard Life. 

Going into 2011, though the near term headline in the form of high unemployment and low interest rate will persist; we believe the company will benefit from its niche position in the employee benefits business.

Based in Wilmington, Delaware, Delphi competes with Assurant Employee Benefits, a unit of Assurant Inc. (AIZ), Stancorp Financial Group Inc. (SFG) and American Equity Investment Life Holding Co. (AEL) among others. The stock carries a Zacks Rank #2, which translates into a short-term (1-3 months) Buy rating. However, given the weak market surrounding the company, we provide a Neutral recommendation over the long-term period (6+ months).