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Delphi Financial Group. (NYSE:DFG)

Q1 2010 Earnings Conference Call

April 28, 2010 11:00 AM. ET

Executives

Robert Rosenkranz - Chairman and Chief Executing Officer

Bernie Kilkelly - Vice President of Investor Relations

Donald Sherman - President and Chief Operating Officer

Analysts

Ryan Krueger – KBW

Beth Malone - (Wonder Leslie)

Paul Newsome – Sandler O'Neill

Michael Grasher - Piper Jaffray & Company

Kevin Barker - FBR Capital Markets

Sean Dargan – Wells Fargo Securities

Operator

Ladies and Gentlemen, thank you for standing by, and welcome to the first quarter 2010 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator instructions). And also as reminder today’s teleconference is being recorded.

And at this time, I will turn the conference call over to your host, Chairman, Mr. Robert Rosenkranz. Please, go ahead, sir.

Robert Rosenkranz

Thank you, and welcome to Delphi Financial’s first quarter 2010 conference call. The earnings release was distributed last evening and it’s posted on the company’s web site, along with the first quarter financial supplement. This call is also being broadcast live on our web site www.Delphifin.com.

Participating in the call this morning with me are Don Sherman, Delphi’s President and Chief Operating Officer, Nita Savage, Vice President of Finance, Bernie Kilkelly, Vice President of Investor Relations, and our colleagues at Reliance Standard Life, Safety National, and Matrix.

Before we get into the call, I want to take a moment to recognize Bob Smith. We announced last week he is retiring from Delphi. I know that many of you who known Bob over the year and join us and wishing him happy and fulfilling retirement. One of Bob’s many achievements with Delphi is the strong team he developed, overseeing investment and financial strategy, corporate development and investor relations.

Those executives include Nita and Bernie will now report to Don Sherman. Also participating with us in the call this morning is Rick Waldus [ph] who will now report to Don in our investment area. Now do I call and I am going to ask Bernie to read the Safe Harbor statement.

Bernie Kilkelly

Thanks, Bob and good morning, everyone. For those listening to a replay of this call that is being held on April 28, 2010. It contains time sensitive information that is current only as of this date. Statements made in this call relating to the future operations, performance goals, and expectations of the company, as opposed to historical facts, are forward-looking statements under the Federal Securities laws.

These statements are based on assumptions and estimates by the Company that are subject to various uncertainties and contingencies. Discussions of these risk factors can be found in our first quarter 2010 earnings release yesterday and our 2009 Form 10-K.

These factors could cause the company's actual results to differ materially from those expressed in any forward-looking statements made during this call and should be considered carefully. The company specifically disclaims any duty to update forward-looking statements made in this call.

In addition, certain non-GAAP financial measures will be discussed on this call. The comparable GAAP financial measures, along with reconciliations to such measures, are contained in our first quarter earnings release and financial supplement accessible on the company’s web site.

Now, I’ll turn the call back to Bob.

Robert Rosenkranz

Thanks Bernie. Delphi had an excellent first quarter, with strong growth and operating earnings and record high levels of shareholders' equity and book value per share. Operating earnings increased 22% from last year’s first quarter, driven by robust investment results and strong underwriting profits.

We more than offset the dilution from our equity offerings last year, and delivered EPS of $0.86 versus $0.81 in last year’s first quarter. We achieved operating return on beginning equity of 14% in the quarter, which is at the high end of our target range.

This morning we’re going to cover four main topics. First, I’m going to ask Don to review the performance of our insurance and asset accumulation businesses during the quarter. Second, I’ll discuss our investment performance. Third, I’ll be reviewing our balance sheet and the capital positioning. And final, I’ll discuss the outlook for the remainder of 2010 in longer term.

And of course, after our remarks we’ll be happy to answer your questions. So, now I would like to turn it over to Don.

Donald Sherman

Thanks, Bob and good morning, everyone. Underwriting profits in our insurance operations were inline with our expectations in the first quarter. Our combined ratio on the quarter was 94.1% compared with 93.2 in last year’s first quarter. Our loss ratio continued to improve in the quarter declining 80 basis points to 68.6%. Loss ratios that Reliance Standard Life improved and we have not seen any impact from the recession on disability claims, incidence or severity.

Expense ratio on the quarter increased to 25.5% from 23.8. This increase was mostly due to the impact of lower premiums in the quarter at Reliance Standard, as well as a modest amount for the investments we’ve made in new products or I should say continue to make a new product at Safety National which I’ll talk about shortly.

We continued to believe that the combine ratio level that we’ve achieved in 2009 in the range of 93% is achievable for the foreseeable future.

Turning now to premiums, our core employee benefit premium level declined 3% in the quarter to 333 million. Looking first at Safety National, we were pleased that Safety achieved to 7% increased in premiums. The increased was driven by 73% increase in our assumed to workers' compensation and casualty reinsurance line, which grew to a 11 million in premiums in the quarter.

We also had a solid first quarter in safeties largest product line excess workers compensation for self-insured employers. Excess workers comp premiums rose modestly to over 68 million. Production for the quarter was a healthy $13 million although comparisons with last years first quarter are little difficult because that was a record quarter for us in production growth.

The excess workers comp market remained current [ph] and the important January renewal season when renew typically 25 to 30% of our annual book of business. We had an average rate decreased of less than 1% and it was offset by an average 1% increased in self-insured retentions, which is the important attachment point where risk shifts from our client stuffs.

We had very strong renewals from our customer based and it was somewhat offset by modest payroll decreases have renewing customers. Continued payroll increases in municipalities healthcare and educational institutions, which make up 2/3 of our customer based.

We are not large enough to offset declines in other sectors that are been more impacted by the recession. Overall, we've seen those signs at the excess workers compensation market will soften significantly anytime soon and we continue to feel very good about the business we've written and are continuing to write.

The annual industry reporting for the full year 2009 is now completed and it shows the safety national expanded its leading market share and excess workers compensation to 24% from 22% in 2008. Safety also benefited from two additional growth initiatives where we are leveraging our underwriting expertise.

First we had lost portfolio transferred deposits of $5 million in the first quarter up from 3.7 last year these last portfolio transfers are not accounted for premiums but our deposits and add to our invested asset. We own underwriting profits by effective managing these blocks of known losses.

Secondly, as we've talked about on previous conference calls, Safety is successfully rolling out its large casualty program in which auto liability and general liability coverages are bundled with our large deductible worker’s compensation product. We've only written a small amount of the bundled product to-date but we've already seen the impact these capabilities will have an expanding Safety’s target market.

In the January renewals we were able to bid for the first time on workers compensation business of some prospects just because we now have the capability to offer a bundled product. In a few instances we were able to write the workers compensation piece and we will have change to add the auto and general liability coverages in the future. So, while we don’t expect this initiative to have a material impact in 2010, we believe that represents a very attractive long-term growth opportunity Safety National.

Turning now to Reliance Standard Life, core premiums that RSL declined 6% in first quarter. This reflects the continued impact of high unemployment levels and the weak economy on payrolls industry wide.

When faced with the declining payrolls the number of competitors have been aggressive on pricing. RSL has maintained our pricing and underwriting discipline to focus on meeting our profit objectives. Naturally, this has impacted our production. In an environment like this you have to be prepared to take some hits on the top line to maintain your bottom line.

We believe that RSL is well positioned in the group employee benefits market and will benefit when employment trends improve. Coding activity across all the market segments have remained relatively strong and we've some success in focusing on some of our higher margin products including voluntary and our IEB.

Looking at voluntary, RSL achieved solid production in the first quarter, which voluntary includes our limited benefit, healthcare product basic care. Premiums in production for this product are being broken out for the first time separately on Page 3 of our quarterly financial supplement. In the quarter, basic care premiums rose 35% to 9.9 million and production remains steady. Basic care as we believe our only product that may be directly impacted by the healthcare reform the legislation recently passed in Washington. We are reviewing the potential impact of the legislation. It is possible that a modified version of basic care will be feasible under the new framework but our final decision on how to proceed will have to consider the technical corrections and progress in congress and the effect of agency regulations that would be adopted implement to legislation.

In our larger case business that are in RSL, revenue from our integrated employee benefits programs has been steady as we continue to have a competitive advantage with value add services we offered with our metric subsidiary. Our coding activity remains strong and well competition has been difficult in the large case segment. We are receiving strong interest in our new product offering Reliance-one.

Reliance-one which is being rolled out this year adds an employee wellness component through a partnership with all one health a national leader in workforce health and productivity management. We expect this offering will help us continue to compete effectively in the large case market.

Before I turning the call back to Bob, I’ll review the results for asset accumulation segment at RSL. Operating profits for the quarter in this segment increased 30% to 10.4 million as we benefited from improved investment performance. In the phase of tighter spreads and given the high cash balances on our investment portfolio, we did not see the need to push for high annuity sales. As a result annuity sales decreased to 39 million from 60 million in the first quarter of last year.

Funds under management in this segment increased modestly from year end to reach 1.44 billion.

Now I will turn the call back to Bob to talk about our investment results.

Robert Rosenkranz

Well, thank you, Don. Well, we did have a very strong investment performance in the first quarter with investment income increasing 34% to $84 million. Our tax equivalent yield in the quarter was 6.2%, as we benefited from solid fixed income yields and excellent returns in our alternative investments.

We put about 300 million in cash in short-term investments to work longer term during the first quarter, and achieved new money yields in the 6% range on the tax equivalent basis. The new money want to work in our traditional asset classes high quality municipal's corporate, and mortgage backed securities.

The amount of cash we put to work in the quarter was about equal to the cash generated by insurance businesses and investment maturities and paid outs. So we ended the quarter with about the same in short-term position as at yearend, about 7% of our $6 billion portfolio.

Nevertheless our plan is to continue to reduce our short-term position over the next few months, which should help to boost investment yields and earnings growth. Alternative investments at the end of the first quarter around 270 million or 4.6% of invested assets. We achieved the 13% annualized return of these assets in the first quarter well above our budget.

We are committed to maintaining this allocation at around 5% invested assets. The point here being to reduce of raw [ph] portfolio volatility and provide enhanced investment income.

I want to turn now to realized losses, in the first quarter we had net after-tax realized losses of 9.8 million, which was the lowest number in the last eight quarters. After-tax losses from other than temporary impairments were less than half of what they were in the fourth quarter of 2009.

In our previous call, we said that we expected OTTI would diminish given the turnaround in economic activity and the normalization of capital markets, and that does seem to be happening. While it is reasonable to expect some additional write-downs in the future, we believe that the worse of the credit crisis is behind us, and that future write-down should not be a source of stress.

I want to turn now to our balance sheet and capital position. Both continued to improve in the quarter. Shareholders' equity increased to an all time high of 1.4 billion and book value per share was to all time high of $25.40.

As we discussed in our conference call in February, we enhanced our financial flexibility in January by issuing $250 million in 10 year senior unsecured notes. This enabled us to repay all of our outstanding short-term borrowings, but we still have a $350 million revolving bank facility available.

At the end of March, we had debt-to-capital ratio of 20%, no short-term debt and holding company financial resources at a very comfortable $112 million. The capital positions of our insurance subsidiaries are solid. RSL's statutory RBC ratio at the end of 2009 was 331 which was well above the 2008 yearend level of 270.

Safety National continues to score very high and individual rating agency capital models and in December AM Best raised its outlook on Safety National to stable. We don’t anticipate the need for additional capital contributions for insurance subsidiaries and currently we have more than sufficient financial flexibility to support our growth.

Finally, I want to turn to the outlook for the remainder of 2010. We’re maintaining the guidance we gave in February for operating earnings per share in a range of 320 to 350. So far, there have been no changes in our operating outlook, our investment outlook that would change the assumptions that went into our guidance.

Looking beyond 2010, assuming that employment trends improved, we expect that Delphi its operating earnings per share growth can return to historical levels which is average nearly 12% over the past five years.

We expect Safety National to continue building on its leadership position and excess workers’ comp and get growing contributions from its new product initiatives. We also expect Reliance Standard Life to benefit as the economy returns by capitalizing on its leading market position in its profitable small case niche. Well, also continuing to grow profitably in a large case in voluntary markets.

So, in closing, we achieved excellent financial performance in the first quarter, continue to enhance our strong capital position and balance sheet. We remained optimistic about our ability to hit our bottom-line targets this year and longer term.

And at this point, I would be happy to take any questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) We will take our first question from Ryan Krueger with KBW. Please go ahead.

Ryan Krueger – KBW

Thanks good morning guys. First question is on reliance why don't competitors posted record sales this quarter, they also talk a little bit about in some firming in the market. On your sales results in commentary since you suggest a little bit of different view, so I'm hoping and you can provide may be some additional color on what you're seeing in terms of competition high-end employer activity and things that change at all in your recent last quarter?

Robert Rosenkranz

I would like to turn that over to colleagues in Philadelphia to respond.

Larry Daurelle

Good morning Ryan, this is Larry Daurelle, how are you?

Ryan Krueger – KBW

Good morning.

Larry Daurelle

Well, we have as Don said we've continue to maintained price discipline in all of our production and we don’t see any firming in any of the markets. We just see a very, very highly competitive and I believe that’s the reason for the production decrease because we're just maintaining price discipline and we just won't sale anything below what we think as the target price in order to achieve our target margins which continue to be very good.

Ryan Krueger – KBW

Okay. And you came in to the year expecting, I guess roughly flat premiums that are accelerate as your outlook changed that all after the first quarter or is it still about the same?

Larry Daurelle

I think our outlook is still about the same, Ryan.

Ryan Krueger – KBW

Okay. Thank you.

Larry Daurelle

Good, thank you.

Operator

Thank you. Our next question in queue that will come from the line of Beth Malone with Wonder Leslie. And your line is open.

Beth Malone – Wonder Leslie

Thank you. Congratulations on the quarter. Couple of questions on the investment portfolio – the year was pretty competitively attractive compared to lot of other insurers that we follow and I was wondering is that anticipated to be maintained throughout the year?

Robert Rosenkranz

Well, I’d say that we’re probably a little higher than expectation on the alternatives. We certainly haven't budgeted a 13% annualized from that. We also had pretty decent income from prepayments during the quarter, but that was not out of line with our longer term expectations. So, I think it was a good quarter investment wise but not unsustainably so.

Beth Malone – Wonder Leslie

And then, along those lines, in your commentary in the past quarters, you've been fairly cautious about the outlook for the general economy and the opportunities, investment opportunities. Has that do you changed at all?

Robert Rosenkranz

Well, I’d say that the data that’s emerged during the first quarter certainly suggest that there is considerable strength in the economy. We’re seeing leading indicators doing well. We’re seeing lots and lots of evidence accumulating that the economy is developing some real strength. It hasn’t shown up in payrolls yet obviously. But that might be the next area to expect to see some positive results. So, yes, I would say the economic data is coming in very well during the quarter.

Now, it's also been a quarter where there was continued spread tightening at least in the first couple of months, which frankly the combination of spread tightening and lower interest rates makes it a pretty tough environment to commit investment funds in ways that we feel comfortable because we do see, we used to refer a green shoots of economic growth. We're now seeing may be some green shoots of inflations. So, it just – we’ve been frankly cautious about putting mind to work. We did deploy about $300 million and ways that we're pleased with but the cash balances in the portfolio are higher than I would thought might be at this point.

Beth Malone – Wonder Leslie

Okay. And then, on the excess workers comp market, indications are that the pricing there are seems to be more attractive than some other – certainly some other property cash or even workers comp market. But it doesn’t appear that there is an increased amount of competition. What would you attribute the fact that if it is improving that the desperation for premium in the market place wouldn't drive in companies to try and compete there. And will that competitive market place change as you move into the smart bundled product? Aren't there more competitors in that market?

Robert Rosenkranz

Okay. This is a business that is pretty difficult to enter. It requires data which is not in any of the generally available data basis, so you need a fair amount of expertise to underwrite this business successfully. Secondly, it's not a business that offers instant gratification. It’s a business that is very profitable if you've been in it for a decade because you built up the substantial amount of reserves on which you're collecting investment income. But as a new entrance you don’t have that. So really the -- and the final thing that it’s a pretty small line, I mean total amount of premium in excess workers' comp is probably on the [inaudible] billion dollars like little bit north of that. So to go into this business from scratch very hard to have the expertise, no instant gratification probably a decade before you start to put any real money. And it's not that bigger target of opportunity for the companies that are in the position to think that long term about their business.

In terms of your second question, the large deductible and the bundled products, yes, I would say that business is a little bit more competitive than the pure excess case. There are couple of more substantial companies that we will be competing with. But we been in the business for quite a long time and our profitability has been pretty much the same as it's been in our traditional excess products. So we still do not able to underwrite it profitably and think [ph] for the opportunity to expand that business to look large deductible business the bulk of which goes to people who are capable of writing bundled products.

Beth Malone – Wonder Leslie

Thank you. And then one last question on the absence management business. Is that economically sensitive to employers who choose to use that service more when they are trying to fight expenses and lower revenues or did they use it last?

Don Sherman

Larry, would you like to try to tackle that question?

Larry Daurelle

Sure, Don. Hi, Beth. It's Larry Daurelle.

Beth Malone – Wonder Leslie

Hi.

Larry Daurelle

I think the absence management business is continuing to grow because it's our foundation is Leave and FMLA, and we’re seeing a lot of traction on both cases coded with insured business and standalone Leave and FMLA. So it's an expanding business because it's one that it's very hard to manage internally within an employer.

Beth Malone – Wonder Leslie

Okay. And the fact, that the economy, the changes in the economy haven't really affected demand one way or the other?

Larry Daurelle

No, because it's a product that an employer has to have regardless of whether there are 50 lives or 5,000 or 50,000 lives the economy has had no impact on it.

Beth Malone – Wonder Leslie

Okay. Thank you.

Larry Daurelle

Thank you.

Operator

Thank you. Our next question in queue that will come from the line of Paul Newsome with Sandler O'Neill. Your line is open.

Paul Newsome – Sandler O'Neill

Thank you to you guys. So, moving in little bit more detail into the relatively weak production on your Life Standard, and maybe you could talk about what part of that you think is, you bifurcate what is you think is between a purely competitive issue? And what you think is just on the economy, and under the presumption that should the economy improve at least that part would improve as well?

Don Sherman

I think what we are seeing is in the voluntary and the IEB circumstances, we’re holding pretty steady there and have been able to continue the book at the level with that. I think it's been a little more weak in the sort of central case size of the market where we have seen combination of the declining payrolls and the competitive pricing make it difficult to rate the profitable business. And as we said and as Larry said earlier, we’re focused on profitability in that segment.

We do believe that as the economy picks up that will both have the opportunity to increase payrolls and I think typically has the impact of the competitors recognizing their ability to get revenue at a better price with the market expanding their back off on the pricing. So, we think those two typically go hand-in-hand.

Robert Rosenkranz

And even the third factor is in a soft labor market, the companies are not really incanted [ph] to add benefits. So that’s another thing that sort of gives you some what shrinking marketplace and there always will be some insurance companies that are more top line oriented than perhaps we are who are going to feel well in a shrinking market. I have got to maintain my top line and the only way I can do it is by cutting prices. And, it’s easy to talk about pricing discipline. We talk about all the time but its -- but the rubble really needs the road on discipline as when you’re willing to take some modest declines in your top line to protect your bottom-line.

Paul Newsome – Sandler O'Neill

Great. And more specifically, you mentioned the basic care medical product, what do you think the timeline is for resolving whether or not that product can continue to exist into the reform and are we really facing the situation where that revenue just could sort of disappear at some point with the reform?

Robert Rosenkranz

Well. Our best thinking at the moment is that it appears to be feasible, that modified, slightly modified to modified version of the product will could be remain available and we think that situation will need to be clarified over the next 4 to 5 months. So, we're working diligently to do that and keeping our eye on the yet to be known developments but exactly what’s going to be in technical corrections and the regulations that would be use to implement the lot.

Unidentified Company Speaker

I think it’s fair to say that over the next several years, we definitely going to have to rethink the strategy around that business. But I do want to mention it’s only about $38 million of premium based worth of a billion. So, if we have to show that down its not going to all that material.

Paul Newsome - Sandler O'Neill

Is it also material profit prospect?

Unidentified Company Speaker

The revenue component and the profit component are roughly hand-in-hand with the rest of our business so it’s not out of average profitability at all.

Paul Newsome - Sandler O'Neill

There will be a smart, if it disappears being a modest.

Unidentified Company Speaker

Being modest to that.

Unidentified Company Speaker

I think that’s fair, yes.

Paul Newsome - Sandler O'Neill

Okay. And but that sounds like that something that could be result, it should be result pretty, but like next year we try to figure out whether that’s going to be there or not?

Unidentified Company Speaker

I think, that’s a fair expectation.

Paul Newsome - Sandler O'Neill

Okay. Great. Thank you.

Operator

Thank you. Our next question in queue that will come from the line of Michael Grasher with Piper Jaffray & Company. Your line is open.

Michael Grasher - Piper Jaffray & Company

Thank you. Good morning everyone. I guess, first question just around the investment portfolio in the yield. Just looking at it, it looks like a nice 6.2% taxes as per yield and then yet Bob, I hear you speak, it sort of like maybe were – maybe we're sort of tapped out here. How much more leverage is there? And I understand you've got the whole notion of spreads in a lower rate environment being very difficult, but just given sort of the outlook throughout the rest of the year.

Robert Rosenkranz

Well, we do have about $400 million balance cash balances that are earning next to nothing. So, that’s really the upside in the portfolio was getting that money to work.

Michael Grasher - Piper Jaffray & Company

And then, that would be, once that's put to work, though it's sort of like your – free cash flows just continuously being put to work, is that fair?

Robert Rosenkranz

Yes.

Michael Grasher - Piper Jaffray & Company

Okay. And then with that, I mean, and then hearing Don talking about expectations for a 93 combined ratio, I guess, I’m trying to sort of square that combined with the investment yield with the guidance, sticking with the guidance of 320 to 350. Is that just simply being very conservative in this environment still? Because this seems like the opportunity is so much more.

Robert Rosenkranz

Well, I mean, if you – I mean this was the pretty good quarter on the investments side, and if you annualize the quarter, you’re still within that range. So, we've really haven't seem things develop in a way that would make us feel what the assumptions that went into that guidance in the first place and not, still valid.

Michael Grasher - Piper Jaffray & Company

Okay, fair enough. Final question then on the losses, on the paid losses, it looks like they were a bit higher. Just curious if there was any change in frequency or if there was sort of one time severity driven claim?

Robert Rosenkranz

We were looking at the last ratio as been a decline from the quarter-to-quarter. I don’t know the facts you’re comparing to last year.

Unidentified Company Speaker

I was looking at paid losses somewhere around 179 million, which seems to be running ahead of where it had been quarterly last year. Now, may be that paid loss number is not accurate. But that just looking at the model that seems to be the what was happening.

Michael Grasher - Piper Jaffray & Company

But we can get back in to that.

Robert Rosenkranz

I think we'll have to get back to you on that one because that wasn’t what we were thinking about in our trend analysis. So, let’s be sure we've figure out your question accurately and we can answer that offline if that's okay.

Michael Grasher - Piper Jaffray & Company

Yes, It's correct. I’ll check that.

Operator

Thank you. Our next in queue that will come from the line of William Squash [ph] with Lincoln Square Capital and your line is open.

William Squash – Lincoln Square Capital

Hi, guys. Just a quick question. So, the feedback of the alternative income in the quarter. I calculate about the 76 million in return on the traditional portfolio to that inline with the third quarter. So, increased over the fourth quarter run rate? Just given, but you have some investments rolling off some older investments as well as your assumptions for a new money rates and your plans on deploying the access cash? How should we think about that level of non alternative investment income going forward?

Robert Rosenkranz

Well. I think it’s identified the number to move in pieces. And they are kind a going in different directions. I mean, yes, that’s such that $0.60 from $1 and 15% yields when I’m going to be able to reinvest in today’s environment at those kind of rates. So you have that element in one direction but you have the potential good guy putting $400 million to work which could increase dollars, or so annualized on after-tax. Now there are lot of moving pieces here, which were we took into account with and the assumptions that over guidance in the first place and as I said before I don’t really see any changes in the first quarter that would -- I want to adjust that guidance one way or the other.

William Squash – Lincoln Square Capital

Okay. Thank you.

Operator

Thank you. Our next question in queue that will come from the line of Randy Binner with FBR Capital Markets. And your line is open.

Kevin Barker – FBR Capital Markets

Good morning, this is Kevin Barker filling in for Randy Binner. I had a quick question on; essentially you put 300 million at work and 300 million that was naturally turned that about a 6% new money yield. Given that do you expect that 6% to stay flat to static going forward? And what percent of that 300 million was MBS corporate annuities, you didn’t give a breakout for it, please. Thank you?

Robert Rosenkranz

I would like to turn that over to Rich Waldis, who works with Don on the investment side.

Richard Waldis

Kevin, we would expect to be able to maintain that 6% going forward in terms of the allocation of that 300 million that was spend during the quarter, it was roughly split evenly between MBS municipal and corporate.

Kevin Barker – FBR Capital Markets

Okay. And given that your tax rate came out was a 22% tax rate this quarter and given your, the amount of investments you put in munis [ph] would you expected to stay low or would you expect it to come back up closer to high 20%?

Don Sherman

Right now with our allocations that we made going towards munis, I think the tax rate will probably be stay in the zip code that it was in the quarter Kevin.

Kevin Barker - FBR Capital Markets

So low 20% give or take.

Don Sherman

There will be some fluctuations from quarter-to-quarter, you can imagine but that will be in range of that I think.

Unidentified Company Representative

Yes, on an operating earnings stage, it was around 25% if you are looking at it on a net.

Kevin Barker - FBR Capital Markets

Okay. And given that you have $112 million over the (inaudible) cash or capital available at (inaudible), and your 331% RSL, RBC ratio at year end, how much capital – would you manage that down the 270% as year goes along or would you expect that essential use that going forward?

Don Sherman

We were comfortable running RSL at 270% RBC. And I think, over time would like to stay focused on the capital efficiency of the business, but we’re also mindful that given the economic turmoil, the regulators and rating agencies have been, and I think appropriately so, paying attention to people’s capital levels. And so, I think it will be a slow process, if it a process at all over which we could try to get gravitate back toward the lower capital levels or I should say, lower RBC ratios, because the aggregate capital would remain increasing.

So, I don’t think we would forecast a time period in which we could get there. But we do think that 270 to 300 range is an appropriate ratio and would hope over a long period of time we could get back to that.

Kevin Barker - FBR Capital Markets

If you were to put an access capital number on above target RBC ratio for us sound safety, could you give a number of excess capital at the insurance stuffs?

Unidentified Company Speaker

Well, I think from the capital perspective, I mean we would consider the holding company resources to be excess capital, and I think you could also look at another 50 to 75 million in our cell, and another comparable number, perhaps slightly less in safety and you could appropriately describe those as excess capital, that like other things of course is a measurement that’s less precise than perhaps the people who want to push those numbers around. I think that would be the right area to think about.

Randy Binner - FBR Capital Markets

Ok, thank you very much.

Operator:

Thank you. Our next question in queue that will come form the line of Sean Dargan, with Wells Fargo Securities. And your line is open.

Sean Dargan – Wells Fargo Securities

Good morning. I have a question about, thinking about the combine ratio of 93 going forward as we Reliance Standard Premiums come under pressure. It seems that the expense ratio would creep up. Should we think that 93% will, going forward, have or lower loss ratio and higher expense ratio?

Unidentified Company Speaker

Well, I think the impact in the quarter on the Reliance Premiums was frankly a little larger than we expected now, safety had a little better performance than we expected. So, the net was something that was within our range. And, we have seen some trends as Bob talked about earlier and strengthen the economy. As he mentioned, it hasn’t shown up in payrolls, aggregate payroll yet. But, if we were to see discontinuing pressure on the payroll side, I think you wouldn’t see that expense ratio stay a little higher. And we would think the 93 be in a range, we would still be in that range. But to stay at a précised 93 would require a little more improvement on the last number. I think we're expecting this ago as it's early in the year, we'd like the position we have at RSL in the large case market and the voluntary markets. And we do think it's reasonable to I expect you will see some payroll growth with the economy staying at the strength level. So, we are not thinking that we have to redo any of that nor we thinking that the last ratio have to decline a lot to keep us at 93 as realistically we think there is a good chance the premiums may workout a little better than what the first quarter would indicate looking at it as a standalone period.

Sean Dargan – Wells Fargo Securities

Okay. Thank you.

Operator

Thank you. At this time, we have no additional questions in queue, please continue.

Unidentified Company Speaker

Well, then we've been lot of participants on this call. And we are grateful for your interest. And thank you for your questions. And wish you all good day.

Operator

Thank you. And ladies and gentlemen, that does then conclude our conference call for today. We thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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Source: Delphi Financial Group. Q1 2010 Earnings Call Transcript
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