The Long View : Delphi’s CEO Hopes the Worst Is Over in Market for Specialized Computer Systems

Last July, three months before the stock market crash, Delphi Information Systems, a maker of computer systems for insurance agencies, raised $3.5 million by going public. If nothing else, the company’s timing was good, because now it really needs the cash.

In a coincidence that Delphi’s new stockholders could have done without, the 12-year-old Westlake Village company began piling up losses just as it was selling its shares for $7.50 apiece. Now the stock is about half as valuable, closing Monday at $3.375 a share in over-the-counter trading.

Despite the problems, Delphi Chairman Walter F. Bauer remains confident. In an interview last week, he noted that the stock offering enabled Delphi to pay off its long-term debt and to weather the current losses.

In the quarter ended Dec. 31, Delphi lost $848,000, contrasted with a profit of $297,000 a year earlier, leaving Delphi a $929,000 loss for the first nine months of its fiscal year. The company expects a “small loss” for the full year ending March 31, Bauer said.

“We hope the worst of it is over,” he said.

Bauer, 63, is used to taking the long view. Before coming to Delphi in April, 1986, he spent 23 years building Informatics General, a software company he founded, into a $200-million-a-year business. His reign abruptly ended in June, 1985, when Informatics was seized by Sterling Software in a hostile takeover.

Delphi is a small player in the $40-billion office-automation market. It designs computer systems that automate the offices of independent insurance agents and brokers who sell property-casualty insurance business on behalf of several insurance companies.

A Delphi system helps computerize an agency’s bookkeeping, billing and correspondence. It also keeps track of payments between the agencies and the insurance companies.

Electronic Link

But the system’s key feature is the electronic link it provides between an agency and the big insurance companies it represents, like Aetna, CIGNA, the Hartford and Kemper. It enables an agency to print out a 25-page policy instantly for a customer instead of ordering it from the home office by mail.

Customers also can then change the policy by phone, with the agent sending the new information to the carrier electronically. It’s a system similar to those that link travel agents and the airlines.

Indeed, it was the growing use of computers in travel agencies that prompted Delphi’s founders to focus on the insurance-agency market in the early 1980s.

Delphi was founded in 1976 with $10,000 by Richard R. Janssen and Kenneth W. Bitticks, two accountants who also had a flair for computers. Both remain on Delphi’s board, and Janssen is president and chief operating officer.

They opened the firm to act as consultants for businesses that were automating their bookkeeping and provided customized computer programs for enterprises ranging from tobacco shops to sanitation districts.

But by 1980 Delphi had narrowed its focus largely to property-casualty insurance agents, betting that insurance agents would become as automated as travel agents.

Since then Delphi has grown rapidly. Revenue climbed from $6.7 million in fiscal 1983 to $22.3 million in fiscal 1987, and profit jumped from $99,000 to $1.1 million.

Flopped in ’86

Delphi stumbled in 1986, however, when it lost $1.5 million as it flopped in a brief attempt to sell similar computer systems to the mortgage-banking industry.

That same year, Bitticks, 40, then the president, recalled that he decided “to go on and do other things” after running the company for 10 years, and that he “thought the company could improve with more experienced management.” So Delphi’s directors replaced him with Janssen, and named Bauer chairman and chief executive.

Delphi buys computers made by International Business Machines and Concurrent Computer, fits them with its specialized software and re-sells the package to independent insurance agencies. The systems cost between $70,000 and $1 million, depending on how many people the equipment serves and what features they want.

Delphi, with 175 employees, claims to be the largest independent supplier of such equipment, but it has plenty of competition from other vendors that are owned by insurance companies. One such rival is Insurnet based in Emeryville, Calif., whose majority owner is Continental Corp., an insurance holding company. Insurnet’s sales last year were “close to $30 million,” said Insurnet spokesman Seth Kaplan.

But Delphi doesn’t see competition as its main problem. Instead it blames its recent losses mostly on price-cutting in the property-casualty insurance industry. The drop in premiums shaved the commissions earned by the agencies peddling the policies, prompting the agencies to put off buying Delphi’s systems.

Wait and See

“Until the changes shake out, the agents and brokers just aren’t making big investment decisions, and a new data-processing system represents a very substantial investment for them,” Bauer said.

The property-casualty insurance business runs in price cycles, with the insurance companies, and therefore their agents, posting healthy earnings for a few years, then slumping, then recovering again. The slumps often start when the insurance companies start trying to grab market share by cutting prices, or when an unexpected series of catastrophes eat up profits.

Bauer said that during the last slump in the property-casualty industry, from 1982 to 1985, several major insurance companies bought computer systems and then sold them to their favorite independent agencies on easy terms. The idea was to encourage the agencies to keep writing their policies even though other carriers were cutting prices.

Delphi expects such company-sponsored purchases to occur again--but it doesn’t know when. When it happens, Bauer said, “we could have a real floodgate of business.”

But some in the industry wouldn’t bet on that. Vita Marino, a vice president for research at Firemark Insurance Review, a research firm in Morristown, N.J., said many of the company-sponsored programs in the early 1980s, including providing computers, “not only were not profitable but were tremendous losers.”

Jim Hackbarth, president of Leader Systems, a maker of automation systems for insurance agents and a unit of insurance giant USF&G;, predicted that the major insurance companies “are not going to go down that path as rapidly as before because their return on investment the last time was not as expected. Plus, most agents have a computer already.”

Bauer is unruffled. “People still need automation systems,” he said. “We think we’ll do very well long term.”

As Delphi’s chairman, Bauer serves mostly as an adviser, leaving the day-to-day operations to Janssen, 38, who remains Delphi’s biggest stockholder with a 16% stake. Bauer, who owns 3% of the stock, has a three-year contract that calls for him to work 104 days a year for $80,000.

Bauer certainly didn’t need the work; when Informatics was bought he made several million dollars in severance compensation and by selling his Informatics stock. But “I was striking around for something interesting to do,” he said. “I didn’t want to completely retire.”

Yet Bauer hints he will leave Delphi in April, 1989, when his contract expires. “I think there should be a change,” he said. “It happens to coincide very closely with my 65th birthday, a traditional age when you start thinking about a few different things.”