Neutral on Delphi Financial Group

Core fourth quarter 2007 operating results were a penny better than our expectations. The increase in earnings over the prior-year period is due to strong performance of Delphi Financial Group, Inc.'s (DFG - Analyst Report) insurance business and the leadership position achieved in niche markets.

In the coming years, we think this company has the potential to expand its ROE, driven by the re-deployment of capital, resulting from the sale of Delphi's reserve-intensive property catastrophe business, and potential to increase its premium-to-equity ratio.

While Delphi's niche markets have held up, the overall line remains a concern of ours. While the shares have retracted somewhat from the recent high, we think the positives have been generally factored into Delphi's valuation multiples.

Therefore, we believe the shares will perform in-line with the overall market over the coming months. Based on 4Q07 results and company guidance, we are maintaining our 2008 earnings expectation for this company at $3.60 per share and installing our early 2009 earnings expectation at $3.90 per share respectively.

At the current level, the shares of Delphi trade at 1.23 times its 4Q07 book value of $23.57 per share. We are lowering our six-month price target to $31.45 per share (down from $37.50 per share previously) which incorporates a price-to-book multiple of 1.25 times (down from 1.50 times per share previously) our estimated $25.15 per share at June 30, 2008.

In addition, the Zacks Rank for DFG is 3 (downgraded from 2 as on January 10, 2008), indicating no clear directional pressure on the shares over the near term. Short interest ratio reduced to 10.8 from 11.8 days previously.

Read the full analyst report on DFG.