10-Q 1 w52448e10-q.txt QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30,2001 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission File Number 333-34829 DELPHI INTERNATIONAL LTD. (Exact name of registrant as specified in its charter) Bermuda (441) 295-3688 98-0206924 (State or other (Registrant's (I.R.S. Employer Jurisdiction of telephone number, Identification incorporation or including area code) Number) organization) Chevron House, 11 Church Street, Hamilton, Bermuda HM 11 (Address of principal executive offices) (Zip Code) Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to filing requirements for the past 90 days: Yes [X] No [_] As of August 10, 2001, the Registrant had 4,079,014 Common Shares outstanding. 2 DELPHI INTERNATIONAL LTD. FORM 10-Q INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND OTHER INFORMATION

2 3 PART I. FINANCIAL INFORMATION DELPHI INTERNATIONAL LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED; IN U.S. DOLLARS)

See notes to consolidated financial statements. 3 4 DELPHI INTERNATIONAL LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED; IN U.S. DOLLARS)

See notes to consolidated financial statements. 4 5 DELPHI INTERNATIONAL LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED; IN U.S. DOLLARS)

See notes to consolidated financial statements. 5 6 DELPHI INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - SIGNIFICANT ACCOUNTING POLICIES The financial statements included herein were prepared in conformity with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Such principles were applied on a basis consistent with those reflected in the Company's report on Form 10-K for the year ended December 31, 2000. The information furnished includes all adjustments and accruals of a normal recurring nature which are, in the opinion of management, necessary for a fair presentation of results for the interim periods. Operating results for the six months ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. Certain reclassifications have been made in the 2000 financial statements to conform to the 2001 presentation. For further information refer to the consolidated financial statements and footnotes thereto included in the Company's report on Form 10-K for the year ended December 31, 2000. Capitalized terms used herein without definition have the meanings ascribed to them in the Company's report on Form 10-K for the year ended December 31, 2000. NOTE B - INVESTMENTS At June 30, 2001, the Company had fixed maturity securities available for sale with a carrying value of $93.9 million and an amortized cost of $94.3 million and balances with independent investment managers with a carrying value and a fair value of $21.1 million. At December 31, 2000, the Company had fixed maturity securities available for sale with a carrying value of $87.7 million and an amortized cost of $88.1 million and balances with independent investment managers with a carrying value and a fair value of $29.2 million. The amounts invested with independent investment managers are, with certain limited exceptions, withdrawable at least annually, subject to applicable notice requirements. During the first half of 2001 and 2000, the Company elected to receive $4.0 million and $5.3 million, respectively, of the dividend due on the preferred securities of the LLC in the form of additional preferred securities of the LLC in lieu of cash. NOTE C - CAPITAL SECURITIES AND LOAN FINANCING Pursuant to the terms of the Subordinated Notes, the Company may, at its option, pay interest due on such notes by the issuance of additional Subordinated Notes. During the first half of 2000, interest due on the Subordinated Notes of $1.5 million was paid by the issuance of additional Subordinated Notes. During the first half of 2001, interest due on the Subordinated Notes of $1.6 million was paid in cash. In June 2001, the Company repaid $2.5 million principal amount of the $35.8 million principal amount outstanding on the Subordinated Notes. The Company's Series A Preferred Shares (the "Preferred Shares") are entitled to receive, when and as declared by the Board of Directors out of funds legally available therefor, a cumulative dividend of 9.5% per annum on the shares' issue price payable in cash, additional Preferred Shares or a combination thereof. A provision for the dividend at June 30, 2001 has been recorded as an appropriation of additional paid-in capital. 6 7 DELPHI INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE D - COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE The following table sets forth the numerators and denominators used to calculate basic and diluted net income per share:

7 8 DELPHI INTERNATIONAL LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following is an analysis of the results of operations and financial condition of Delphi International Ltd. (the "Company" which term includes the Company and its consolidated subsidiaries unless the context indicates otherwise). This analysis should be read in conjunction with the Consolidated Financial Statements and related notes included in this document, as well as the Company's report on Form 10-K for the year ended December 31, 2000. Capitalized terms used herein without definition have the meanings ascribed to them in the Company's report on Form 10-K for the year ended December 31, 2000. RESULTS OF OPERATIONS Underwriting Income. The Company did not earn any premium income from reinsurance contracts during the six months ended June 30, 2001 and 2000. Due to excess capacity in the global reinsurance markets and the resulting lack of attractively priced reinsurance programs, the Company did not take on any new reinsurance business during either period. Investment Income. Investment income for the six months ended June 30, 2001 was $7.7 million as compared with $8.7 million for the six months ended June 30, 2000. Investment income for the first half of 2001 is primarily derived from preferred dividends from the LLC, which accrue at the annual rate of 13.5% to the extent supported by the underlying value of the assets of the LLC. This dividend rate represents a reduction from the 15.5% rate that had applied prior to 2001. Preferred dividend income in the first half of 2001 includes $2.1 million attributable to the recovery in the value of the assets of the LLC, which had experienced a temporary decline during the fourth quarter of 2000. Investment income for the first half of 2000 reflected strong investment results. Underwriting and Other Expenses. Losses and loss expenses for the six months ended June 30, 2001 and 2000 were $1.7 million in both periods. Losses and loss expenses primarily reflect the increase in discounted values of existing reserves, which accrete over time. Losses and loss expenses related to the group long term disability liabilities reinsured under the agreement with RSL decreased $0.3 million in the first half of 2001 as compared to the same period a year ago, primarily due to the recapture in the first half of 2000 of approximately 29% of the then remaining liabilities on this business. Losses and loss expenses for the first half of 2000 have been reduced by a $0.5 million gain realized on the recapture of this business. LIQUIDITY AND CAPITAL RESOURCES The Company's current liquidity needs at the holding company level include funding operating expenses and interest payments on the Subordinated Notes. At the Company's option, the Company may pay interest on the Subordinated Notes in additional Subordinated Notes in lieu of cash payments during any five-year period. Interest due on the Subordinated Notes of $3.0 million and $2.8 million in 2000 and 1999, respectively, was paid by the issuance of additional Subordinated Notes. Interest due on the Subordinated Notes of $1.6 million in the first half of 2001 was paid in cash. The Company repaid $2.5 million principal amount of the Subordinated Notes in June 2001. As of June 30, 2001, the Company had $11.2 million in financial assets at the holding company level. The Company's other source of liquidity at the holding company level consists of dividends from Oracle Re. Dividend payments by the Company's insurance subsidiary to the Company are subject to certain Bermuda regulatory restrictions as well as contractual restrictions. Under the LOC Agreement, dividends by Oracle Re in any fiscal year may generally not exceed the greater of (a) 50% of Oracle Re's statutory net income for the preceding fiscal year and (b) the lesser of (i) $3,000,000 and (ii) Oracle Re's statutory net income for the preceding fiscal year. 8 9 DELPHI INTERNATIONAL LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) The principal liquidity requirement of the Company's insurance subsidiary, Oracle Re, in addition to funding operating expenses, is the fulfillment of the obligations under its reinsurance agreements. The primary source of funding for these obligations, in addition to operating earnings, is the net cash flow from the investments included in Oracle Re's investment portfolio. Each of the Company's reinsurance agreements involved a one-time payment to Oracle Re at inception and does not provide for ongoing reinsurance premiums. In addition to Oracle Re's current liquidity requirements, Oracle Re is required to provide collateral security with respect to letters of credit outstanding under the LOC Agreement and otherwise. Under the LOC Agreement, the collateral maintenance requirement is equal to up to 150% of the amount of the outstanding letters of credit. In the event that sufficient collateral cannot be maintained relative to these requirements, Oracle Re may be required to negotiate with its reinsureds to reduce the size of the reinsurance transactions, thereby decreasing the amounts of letters of credit and related collateral requirements under the LOC Agreement. Moreover, if Oracle Re were unable to furnish sufficient collateral or otherwise were to fail to satisfy any covenant or requirement under the LOC Agreement, it may be required to liquidate all or a substantial portion of its investment portfolio or otherwise secure its obligations under its reinsurance agreements, which would likely have a material adverse effect on the business and operations of the Company. The banks under the LOC agreement have given notice to Oracle Re that they will not renew such agreement at its expiration in January 2002. The Company intends to negotiate a replacement letter of credit arrangement with such banks or an alternative group of banks and to negotiate with its ceding companies regarding the implementation of alternative security arrangements with respect to all or a portion of its liabilities or alternative arrangements for the satisfaction of such liabilities; however, there can be no assurance regarding the successful completion by the Company of such arrangements or the terms on which such arrangements can be concluded. Since letter of credit arrangements are presently required under the Company's reinsurance agreements with SNCC and RSL, the failure to complete such arrangements would likely have a material adverse effect on the Company. The Company believes that the sources of funding available at the holding company and insurance subsidiary levels, respectively, will be adequate to satisfy on both a short-term and long-term basis the companies' applicable liquidity requirements. MARKET RISK There have been no material changes in the Company's exposure to market risk or its management of such risk since December 31, 2000. 9 10 DELPHI INTERNATIONAL LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS In connection with and because it desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions its readers regarding certain forward-looking statements in the foregoing discussions and elsewhere in this Form 10-Q and in any other statement made by, or on behalf of, the Company, whether or not in future filings with the Securities and Exchange Commission. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Some forward-looking statements may be identified by the use of terms such as "expects," "believes," "anticipates," "intends," or "judgment." Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control and many of which, with respect to future business decisions, are subject to change. Examples of such uncertainties and contingencies include changes in global economic and financial conditions and markets, the Company's investment strategy and implementation thereof, the performance of the Company's investment portfolio, competitive conditions in the global reinsurance markets, the ability of the Company to generate new business opportunities and submissions and changes in insurance or other laws and regulations or governmental interpretations thereof. These uncertainties can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. The Company disclaims any obligation to update forward-looking information. 10 11 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual General Meeting of Shareholders on May 22, 2001. Three directors were elected at the meeting for a term of three years. The voting results for all matters at the meeting were as follows: 1) Election of Directors:

2) With regard to the adoption of the consolidated financial statements of the Company for the year ended December 31, 2000, this proposal received 1,681,471 votes for approval, 14,196 votes against approval and 715 votes abstaining. 3) With regard to the appointment of Ernst & Young as the Company's independent auditors for the fiscal year ending December 31, 2001, this proposal received 1,661,019 votes for approval, 35,363 votes against approval and no votes abstaining. 4) With regard to proposals to be considered by the Company, as the holder of all outstanding voting common shares of Oracle Reinsurance Company Ltd. and O.R. Investments Ltd., at the Annual General Meetings of Oracle Reinsurance Company Ltd. and O.R. Investments Ltd., this proposal received 1,651,515 votes for approval, 32,667 votes against approval and 12,200 votes abstaining. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 11 - Computation of Net Income (Loss) Per Common Share (incorporated herein by reference to Note D to the Consolidated Financial Statements included elsewhere herein) (b) Reports on Form 8-K None 11 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DELPHI INTERNATIONAL LTD. (Registrant) /s/ COLIN O'CONNOR ----------------------------------------- Colin O'Connor President and Chief Executive Officer (Principal Executive Officer) /s/ DAVID EZEKIEL ----------------------------------------- David Ezekiel Vice President and Director (Principal Accounting and Financial Officer) Date: August 14th, 2001 12

DELPHI INTERNATIONAL LTD 10-Q