The Company's principal executive offices are located at 1105 North Market Street, Suite 1230, Wilmington, Delaware 19899. This office space is leased through an operating lease expiring in November 1999. RSLIC owns its home office building at 2501 Parkway, Philadelphia, Pennsylvania, which consists of approximately 100,000 square feet. SNCC also owns its home office building at 2043 Woodland Parkway, Suite 200, St. Louis, Missouri which consists of approximately 58,000 square feet. The Company also maintains 23 sales offices throughout the country to provide nationwide sales support and service existing business.
The selected financial data of the Company set forth below were derived from the Consolidated Financial Statements included elsewhere herein or previously filed by the Company. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related notes.
(1) Includes excess workers' compensation business acquired as a result of the SIG Merger.
(2) Amounts for 1994 and 1993 include individual life insurance business, which the Company exited in July 1994.
(5) Prior periods have been restated to reflect the adoption of Statement of Financial Accounting Standard No. 128, "Earnings Per Share," the 20% stock dividend distributed September 30, 1996 and the 2% stock dividend distributed June 10, 1997.
(9) Return on average shareholders' equity is calculated by dividing income from continuing operations, excluding after-tax realized investment gains and losses, by average shareholders' equity, excluding after-tax realized investment gains and losses, discontinued operations, extraordinary items and changes in accounting principles, as determined as of the beginning and end of each year.
(11) The debt to total capitalization ratio is calculated by dividing long-term debt by the sum of the Company's long-term debt, Capital Securities of Delphi Funding and shareholders' equity.
The analysis of the results of operations and financial condition of the Company below should be read in conjunction with the Consolidated Financial Statements and related notes.
Income Taxes. Income tax expense in 1997 was $38.2 million as compared to $27.5 million in 1996. The increase was primarily due to the $33.3 million increase in operating income partially offset by a decrease in the effective tax rate from 33.8% in 1996 to 32.4% in 1997 due to tax-exempt interest income.
Dividends on Capital Securities. In March 1997, Delphi Funding issued $100.0 million of Capital Securities in a public offering. See "Business - Other Transactions" and Note K to the Consolidated Financial Statements.
Net Realized Investment (Losses) Gains. The Company's investment strategy results in periodic sales of securities and the recognition of realized investment gains and losses arising from those sales. Net realized investment losses were $2.7 million in 1996 as compared to net realized investment gains of $0.7 million in 1995.
Income Taxes. Income tax expense in 1996 was $27.5 million as compared to $18.2 million in 1995. The increase was primarily due to the $35.4 million increase in operating income partially offset by a decrease in the effective tax rate from 35.7% in 1995 to 33.8% in 1996 due to tax-exempt interest income.
Other sources of liquidity at the holding company level include interest and principal payments made on a surplus debenture (the "Surplus Debenture") issued by RSLIC-Texas to the Company, dividends paid from insurance subsidiaries, primarily generated from operating cash flows and investments, and borrowings available under the Credit Agreement. At December 31, 1997, the unpaid principal balance of the Surplus Debenture, which is payable in quarterly installments through December 31, 1999, was $43.0 million. RSLIC-Texas generates less than 1% of the Company's premiums, policyholder fees and deposits; therefore, payments on the Surplus Debenture are generally funded by dividend payments made by RSLIC to RSLIC-Texas. These dividends are subject to regulatory restrictions and, in the absence of regulatory approval, are generally limited within any 12-month period, in the aggregate, to the greater of RSLIC's statutory net income for the preceding calendar year, or 10% of RSLIC's statutory surplus as of the preceding December 31, determined in accordance with state regulations. RSLIC will be permitted to make dividend payments of $30.1 million during 1998 without prior regulatory approval. SNCC's ability to pay dividends is subject to regulatory and certain other contractual restrictions and, in the absence of the requisite approvals, dividends are generally limited within any 12-month period, in the aggregate, to the lesser of 10% of SNCC's statutory surplus as of the preceding December 31, or SNCC's statutory net investment income for the preceding calendar year, determined in accordance with state regulations. SNCC will be permitted to make dividend payments totaling $16.9 million during 1998 without prior approval. Additional dividends may also be paid by RSLIC and SNCC with the requisite approvals. See "Business - Regulation." The Credit Agreement permits the Company to borrow up to $200.0 million at any one time. Of the $152.0 million unused portion of the Credit Agreement facility, $98.0 million is restricted for use in connection with, among other things, acquisitions or the redemption of the SIG Senior Notes.
The Company's current liquidity needs, in addition to funding operating expenses, include distributions on the Capital Securities and principal and interest payments on outstanding borrowings under the Credit Agreement, the Senior Notes and the SIG Senior Notes. The Junior Debentures underlying the Capital Securities are not redeemable prior to March 25, 2007, and interest on the Junior Debentures may, subject to certain exceptions, be deferred at any time or from time to time for a period not exceeding five years with respect to each deferral period, in which event distributions on the Capital Securities will also be deferred and the Company will not be permitted to pay cash dividends or make payments on any junior indebtedness. No interest payments on the Junior Debentures have been deferred since their issuance. Beginning in 1999, the maximum amount available to the Company under the Credit Agreement will be reduced on October 1 of each year with the balance due on April 1, 2003. At the Company's current level of borrowing, no principal repayments would be required until April 1, 2003. The Senior Notes mature in their entirety on October 1, 2003 and are not subject to any sinking fund requirements nor are they redeemable prior to maturity. The SIG Senior Notes amortize in $9.0 million annual installments beginning in May 1999. See Note F to the Consolidated Financial Statements.
The Company actively pursues acquisitions of blocks of business and insurance and financial services companies that complement or may otherwise be strategically consistent with its existing business. The Company routinely engages in discussions with respect to certain potential transactions, any of which could, if consummated, be material to the Company's operations.
Sources of liquidity available to the Company on a parent company-only basis, including the undistributed earnings of its subsidiaries, scheduled payments under the Surplus Debenture and additional borrowings available under the Credit Agreement, are expected to exceed the Company's current and long-term cash requirements.
Investments. The Company's overall investment strategy to achieve its objectives of safety and liquidity, while seeking the best available return, focuses on, among other things, managing the durations of the Company's interest-sensitive assets and liabilities and minimizing the Company's exposure to fluctuations in interest rates. The Company's investment portfolio primarily consists of investments in fixed maturity securities. The weighted average credit rating of the Company's fixed maturity portfolio as rated by Standard & Poor's Corporation was "AA" at December 31, 1997. While the investment grade rating of the Company's fixed maturity portfolio addresses credit risk, it does not address other risks, such as prepayment and extension risks, which are discussed below.
The ability of the Company's insurance subsidiaries to make investments is subject to the insurance laws and regulations of their respective state of domicile. Each of these states has comprehensive investment regulations. In addition, the Credit Agreement and, as to SNCC, the SIG Senior Notes also contain limitations, with which the Company is currently in compliance in all material respects, on the composition of the Company's investment portfolio. The Company also 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.
Impact of Year 2000. The Company has completed an assessment of its computer related systems and is in the process of modifying portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. These modifications, the cost of which is not expected to be material to the Company's financial condition, liquidity or results of operations, are being accomplished utilizing both external and internal resources and are expected to be completed during the fourth quarter of 1998, which is prior to any anticipated material impact of the year 2000 issue on the Company's computer systems. The Company believes that, with the scheduled alterations to its computer systems, this issue will not have a material effect on its operations. However, if such modifications are not effectively implemented, or not completed on a timely basis, the year 2000 issue could have a material adverse impact on the operations of the Company.
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 readers regarding certain forward-looking statements in the foregoing discussion and elsewhere in this Form 10-K 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, among other important factors, those affecting the insurance industry generally, such as legislative and regulatory developments and market pricing and competitive trends, and those relating specifically to the Company's business, such as the level of its insurance premium production, the claims experience of its insurance products and the performance of its investment portfolio. These uncertainties and contingencies 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.