Edgar Filing: DELPHI FINANCIAL GROUP INC/DE

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the Fiscal Year Ended December 31, 2005

[ ] 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 001-11462

DELPHI FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)

Delaware (302) 478-5142 13-3427277
(State or other (Registrant's telephone number, (I.R.S. Employer
jurisdiction of including area code) Identification Number)
incorporation or
organization)

1105 North Market Street, Suite 1230,
P.O. Box 8985, Wilmington, Delaware 19899
(Address of principal executive offices) (Zip Code)

Securities registered pursuant to Section 12(b) of the Act:

Class A Common Stock, $.01 par value New York Stock Exchange
------------------------------------ ------------------------
(Title of each class) (Name of each exchange
on which registered)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.

Yes X No
--- ---

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.

Yes No X
--- ---

Indicate by check mark whether the 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
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Act).

Large accelerated filer X Accelerated filer Non-accelerated filer
--- --- ---

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).

Yes No X
--- ---

The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of June 30, 2005 was $1,240,110,056.

As of March 1, 2006, the Registrant had 28,616,435 shares of Class A Common
Stock and 3,781,163 shares of Class B Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Registrant's 2006 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.

This document contains certain forward-looking statements as defined in the
Securities Exchange Act of 1934, some of which may be identified by the use of
terms such as "expects," "believes," "anticipates," "intends," "judgment,"
"outlook" or other similar expressions. These statements are subject to various
uncertainties and contingencies, which could cause actual results to differ
materially from those expressed in such statements. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Forward-Looking
Statements and Cautionary Statements Regarding Certain Factors That May Affect
Future Results."

PART I

ITEM 1. BUSINESS

Delphi Financial Group, Inc. (the "Company," which term includes the Company and
its consolidated subsidiaries unless the context indicates otherwise), is a
holding company whose subsidiaries provide integrated employee benefit services.
The Company was organized as a Delaware corporation in 1987 and completed the
initial public offering of its Class A common stock in 1990. The Company manages
all aspects of employee absence to enhance the productivity of its clients and
provides the related insurance coverages: long-term and short-term disability,
excess and primary workers' compensation, group life, travel accident and
dental. The Company's asset accumulation business emphasizes individual fixed
annuity products. The Company offers its products and services in all fifty
states and the District of Columbia. The Company's two reportable segments are
group employee benefit products and asset accumulation products. See Notes A and
R to the Consolidated Financial Statements included in this Form 10-K for
additional information regarding the Company's segments.

The Company makes available free of charge on its website at www.delphifin.com
its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and all amendments to these reports as soon as reasonably possible
after such material has been filed with or furnished to the Securities and
Exchange Commission.

OPERATING STRATEGY

The Company's operating strategy is to offer financial products and services
which have the potential for significant growth, which require specialized
expertise to meet the individual needs of its customers and which provide the
Company the opportunity to achieve superior operating earnings growth and
returns on capital.

The Company has concentrated its efforts within certain niche insurance markets,
primarily group employee benefits for small to mid-sized employers, where data
from the Bureau of Labor Statistics indicate nearly all of the employment growth
in the American economy has occurred in recent years. The Company also markets
its group employee benefit products and services to large employers, emphasizing
unique programs that integrate both employee benefit insurance coverages and
absence management services. The Company also operates an asset accumulation
business that focuses primarily on offering fixed annuities to individuals
planning for retirement.

The Company's primary operating subsidiaries are as follows:

Reliance Standard Life Insurance Company ("RSLIC"), founded in 1907 and having
administrative offices in Philadelphia, Pennsylvania, and its subsidiary, First
Reliance Standard Life Insurance Company ("FRSLIC"), underwrite a diverse
portfolio of group life, disability and accident insurance products targeted
principally to the employee benefits market. RSLIC also markets asset
accumulation products, primarily fixed annuities, to individuals and groups. The
financial strength rating of RSLIC as of February 2006 as assigned by A.M. Best
was A (Excellent). Financial strength ratings are based upon factors relevant to
policyholders and are not directed toward protection of investors. The Company,
through Reliance Standard Life Insurance Company of Texas ("RSLIC-Texas"),
acquired RSLIC and FRSLIC in November 1987.

Safety National Casualty Corporation ("SNCC") focuses primarily on providing
excess workers' compensation insurance to the self-insured market. Founded in
1942 and located in St. Louis, Missouri, SNCC is one of the oldest continuous
writers of excess workers' compensation insurance in the United States. The
financial strength rating of SNCC as of February 2006 as assigned by A.M. Best
was A (Excellent). The Company, through SIG Holdings, Inc. ("SIG"), acquired
SNCC in March 1996. In 2001, SNCC formed an insurance subsidiary, Safety First
Insurance Company, which also focuses on selling excess workers' compensation
products to the self-insured market.

-2-

Matrix Absence Management, Inc. ("Matrix"), founded in 1987, provides integrated
disability and absence management services to the employee benefits market
across the United States. Headquartered in San Jose, California, Matrix was
acquired by the Company in June 1998.

GROUP EMPLOYEE BENEFIT PRODUCTS

The Company is a leading provider of group life, disability and excess workers'
compensation insurance products to small and mid-sized employers, with more than
20,000 policies in force. The Company also offers travel accident, voluntary
accidental death and dismemberment and group dental insurance. The Company
markets its group products to employer-employee groups and associations in a
variety of industries. The Company insures groups ranging from 2 to more than
5,000 individuals, although the size of an insured group generally ranges from
10 to 1,000 individuals. The Company markets its employee benefit products on an
unbundled basis and as part of an Integrated Employee Benefit program that
combines employee benefit insurance coverages and absence management services.
The Integrated Employee Benefit program, which the Company believes helps to
differentiate itself from competitors by offering clients improved productivity
from reduced employee absence, has enhanced the Company's ability to market its
group employee benefit products to large employers. In 2003, the Company
introduced a suite of voluntary group life, disability and accidental death and
dismemberment products that are sold to employees at their worksite. This suite
of voluntary benefits allows the employees of the Company's clients to choose
the type and amount of benefit. In underwriting its group employee benefit
products, the Company attempts to avoid concentrations of business in any
particular industry segment or geographic area.

The Company's group employee benefit products are sold to employer groups
primarily through independent brokers and agents. The Company's products are
marketed to brokers and agents by 129 sales representatives and managers. RSLIC
had 117 sales representatives and managers located in 26 sales offices
nationwide at December 31, 2005, up 9% from 107 sales representatives and
managers at the end of 2004. At December 31, 2005, SNCC had 11 sales
representatives and managers. The Company's three administrative offices and 26
sales offices also service existing business.

The following table sets forth for the periods indicated selected financial data
concerning the Company's group employee benefit products:

Year Ended December 31,
------------------------------------------------------
2005 2004 2003
---------------- ---------------- ----------------
(dollars in thousands)

Insurance premiums:
Core Products:
Disability income ..................... $392,959 42.0% $290,743 37.0% $233,437 34.7%
Life .................................. 281,915 30.1 261,797 33.4 241,902 35.9
Excess workers' compensation .......... 220,312 23.5 190,794 24.3 151,522 22.5
Travel accident, dental and other ..... 41,058 4.4 41,656 5.3 46,792 6.9
-------- ----- -------- ----- -------- -----
$936,244 100.0% $784,990 100.0% $673,653 100.0%
======== ===== ======== ===== ======== =====
Non-Core Products:
Loss portfolio transfers .............. 10,377 5,300 --
Other ................................. 14,541 10,766 14,908
-------- -------- --------
24,918 16,066 14,908
-------- -------- --------
Total insurance premiums .............. $961,162 $801,056 $688,561
======== ======== ========
Sales (new annualized gross premiums):
Core Products:
Disability income ..................... $103,515 42.4% $ 95,799 45.8% $ 84,920 38.6%
Life .................................. 72,814 29.8 64,555 30.8 68,200 31.0
Excess workers' compensation .......... 46,044 18.9 28,408 13.6 45,058 20.5
Travel accident, dental and other ..... 21,728 8.9 20,547 9.8 21,933 9.9
-------- ----- -------- ----- -------- -----
$244,101 100.0% $209,309 100.0% $220,111 100.0%
======== ===== ======== ===== ======== =====
Non-Core Products:
Loss portfolio transfers .............. 10,377 5,300 --
Other ................................. 9,448 7,069 8,337
-------- -------- --------
19,825 12,369 8,337
-------- -------- --------
Total sales ........................... $263,926 $221,678 $228,448
======== ======== ========

-3-

The profitability of group employee benefit products is affected by, among other
things, differences between actual and projected claims experience, the
retention of existing customers, product mix and the Company's ability to
attract new customers, change premium rates and contract terms and control
administrative expenses. The Company transfers its exposure to some group
employee benefit risks through reinsurance ceded arrangements with other
insurance and reinsurance companies. Under these arrangements, another insurer
assumes a specified portion of the Company's losses and loss adjustment expenses
in exchange for a specified portion of policy premiums. See "Reinsurance."
Accordingly, the profitability of group employee benefit products is affected by
the amount, cost and terms of reinsurance obtained by the Company. Profitability
of certain group employee benefit products is also affected by the difference
between the yield achieved on invested assets and the discount rate used to
calculate the related reserves.

The table below shows the loss and expense ratios as a percent of premium income
for the Company's group employee benefit products for the periods indicated.

Year Ended December 31,
-----------------------
2005 2004 2003
---- ---- ----

Loss ratio ......... 70.1% 70.3% 68.9%
Expense ratio ...... 24.0 24.7 26.1
---- ---- ----
Combined ratio .. 94.1% 95.0% 95.0%
==== ==== ====

The loss and expense ratios are affected by, among other things, claims
development related to prior years and the results with respect to the Company's
non-core group employee benefit products. Such ratios can also be affected by
changes in the Company's mix of products, such as the level of premium from loss
portfolio transfers ("LPTs"), from year to year. LPTs, which are classified as a
non-core product due to the episodic nature of sales, carry a higher loss ratio
and a significantly lower expense ratio as compared to the Company's other group
employee benefit products.

Group disability products offered by the Company, principally long-term
disability insurance, generally provide a specified level of periodic benefits
for a specified period to persons who, because of sickness or injury, are unable
to work. The Company's group long-term disability coverages are spread across
many industries. Typically, long-term disability benefits are paid monthly and
are limited for any one employee to two-thirds of the employee's earned income
up to a specified maximum benefit. Long-term disability benefits are usually
offset by income the claimant receives from other sources, primarily Social
Security disability benefits. The Company actively manages its disability
claims, working with claimants to help them return to work as quickly as
possible. When claimants' disabilities prevent them from returning to their
original occupations, the Company, in appropriate cases, may provide assistance
in developing new productive skills for an alternative career. Premiums are
generally determined annually for disability insurance and are based upon
expected morbidity and the insured group's emerging experience, as well as
assumptions regarding operating expenses and future interest rates. Effective
October 1, 2003 for new policies and, for policies that were in effect on such
date, the earlier of the next policy anniversary date or October 1, 2004, the
Company reinsures risks in excess of $7,500 (compared to $2,500 previously) in
long-term disability benefits per individual per month. See "Reinsurance" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Reinsurance."

The Company's group life insurance products provide for the payment of a stated
amount upon the death of a member of the insured group. Policy terms are
generally one year. Accidental death and dismemberment insurance, which provides
for the payment of a stated amount upon the accidental death or dismemberment of
a member of the insured group, is frequently sold in conjunction with group life
policies and is included in premiums charged for group life insurance. The
Company reinsures risks in excess of $150,000 per individual and type of
coverage for employer-provided group life insurance policies and $100,000 per
individual for voluntary group term life policies. See "Reinsurance."

Excess workers' compensation insurance products provide coverage to employers
and groups who self-insure their workers' compensation risks. The coverage
applies to losses in excess of the applicable self-insured retentions ("SIRs" or
deductibles) of employers and groups, whose workers' compensation claims are
generally handled by third-party administrators ("TPAs"). These products are
principally targeted to mid-sized companies and other employers, particularly
small municipalities, hospitals and schools. These employers are believed to be
less prone to catastrophic workers' compensation exposures and less price
sensitive than larger account business. Because excess workers' compensation
claim payments do not begin until after the self-insured's total loss payments
equal the SIR, the period from when the claim is incurred to the time the
Company's claim payments begin averages 15 years. At that point, the payments
are primarily for wage replacement, similar to the benefit provided under
long-term disability coverage, and any medical payments tend to be stable and
predictable. This family of products also includes large deductible workers'
compensation insurance, which provides coverage similar to excess workers'
compensation insurance, and a complementary product, workers' compensation
self-insurance bonds.

-4-

The pricing environment and demand for excess workers' compensation
insurance has improved substantially since 2000 due to high primary workers'
compensation rates and disruption in the excess workers' compensation
marketplace resulting from difficulties experienced by some competitors,
particularly during 2000. These trends accelerated during the second half of
2001 as sharply higher primary workers' compensation rates and rising
reinsurance costs due to the September 11th terrorist attacks increased the
demand for alternatives to primary workers' compensation. As a result, the
demand for excess workers' compensation products and the rates for such
products continued to increase. SNCC was able to obtain significant price
increases in connection with its renewals of insurance coverage during 2003 and
2004, with average increases of 15% and 9%, respectively, on a substantial
portion of such renewals. SNCC was able to maintain its pricing in its renewals
of insurance coverage during 2005 while also obtaining significant improvements
in contract terms, in particular higher SIR levels, in these renewals. On
average, SIRs increased 13% in 2003, 8% in 2004 and 8% in 2005. SNCC has
continued to maintain its pricing on its 2006 renewals and SIR levels on
average are up 9% in these renewals. New business production, which represents
the amount of new annualized premium sold, for excess workers' compensation
products was $45.1 million in 2003, $28.4 million in 2004 and $46.0 million in
2005 and the retention of existing customers remains strong. Excess workers'
compensation new business production for the important January renewal season
increased 129% to $20.4 million in 2006 from $8.9 million in 2005. New business
production for 2005 and 2006 benefited from a renewal rights agreement that
SNCC entered into in July 2005. Under the agreement, SNCC acquired, among other
things, the right to offer renewal quotes to expiring excess workers'
compensation policies of a former competitor. During 2003, the Company replaced
certain of its existing reinsurance arrangements for its excess workers'
compensation products. Under the replacement arrangements, the Company
reinsures excess workers' compensation risks between $5.0 million (compared to
$3.0 million previously) and $50.0 million, and a substantial majority in
proportionate amount of the risks between $50.0 million and $100.0 million, per
policy per occurrence. In addition, during 2005, the Company entered into a
reinsurance arrangement under which the Company cedes 30% of its excess
workers' compensation risks between $100.0 million and $150.0 million, per
policy per occurrence. See "Reinsurance" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources - Reinsurance."

As a result of the September 11th terrorist attacks, a number of the
Company's reinsurers have excluded coverage for losses resulting from
terrorism. In November 2002, the Terrorism Risk Insurance Act of 2002 (the
"Terrorism Act") was enacted. The Terrorism Act established a program under
which the federal government will share with the insurance industry the risk of
loss from covered acts of international terrorism. In December 2005, Congress
passed the Terrorism Risk Insurance Extension Act of 2005 extending, with
certain modifications, the Terrorism Act, which otherwise would have expired at
the end of 2005, for an additional two-year term through December 31, 2007. The
Terrorism Act applies to lines of property and casualty insurance directly
written by SNCC, including excess workers' compensation. SNCC's surety line of
business will not be covered under the Terrorism Act after December 31, 2005.
The federal government would pay 90% of each covered loss in 2006 and 85% of
each covered loss in 2007 and the insurer would pay the remaining 10% and 15%,
respectively. Each insurer has a separate deductible before federal assistance
becomes available for a covered act of terrorism. The deductible is based on a
percentage of the insurer's direct earned premiums from the previous calendar
year. Such percentage will be 17.5% in 2006 and 20.0% in 2007. The maximum
after-tax loss to the Company for 2006 within the Terrorism Act deductible from
property and casualty products is approximately 2.6% of the Company's
shareholders' equity as of December 31, 2005. Any payments made by the
government under the Terrorism Act would be subject to recoupment via
surcharges to policyholders when future premiums are billed. The Terrorism Act
does not apply to the lines of insurance written by the Company's life
insurance subsidiaries.

Business travel accident as well as voluntary accidental death and dismemberment
insurance policies pay a stated amount based on a predetermined schedule in the
event of the accidental death or dismemberment of a member of the insured group.
The Company reinsures risks in excess of $150,000 per individual and type of
coverage. Group dental insurance provides coverage for preventive, restorative
and specialized dentistry up to a stated maximum benefit per individual per
year. Under a reinsurance arrangement, the Company ceded 50% of its risk under
dental policies with effective dates prior to 2003, ceded 100% of its risk under
dental policies with effective dates in 2003 through June 30, 2004 and cedes 75%
of its risk under dental policies with effective dates after June 30, 2004. See
"Reinsurance."

The Company's suite of voluntary group life, disability and accidental death and
dismemberment products are sold to employees at the worksite. Trends in the U.S.
employment market, particularly the increasing cost of employer-provided medical
benefits, are leading an increasing number of employers to offer new or
additional benefits on a voluntary basis. The Company's suite of voluntary
products allows the employees of the Company's clients to choose the type and
amount of benefit, the premiums for which are paid through payroll deductions.
Because these products are convenient to purchase and maintain, the Company
believes that they are appealing to employees who might have little opportunity
or inclination to purchase similar coverage on an individual basis. The Company
believes that these voluntary products complement the Company's core group
employee benefit products and represent a significant growth opportunity.

-5-

Non-core group employee benefit products include certain products that have been
discontinued, such as reinsurance facilities and excess casualty insurance,
newer products which have not demonstrated their financial potential, products
which are not expected to comprise a significant percentage of earned premiums
and products for which sales are episodic in nature, such as LPTs. Pursuant to
an LPT, the Company, in exchange for a specified one-time payment, assumes
responsibility for an existing block of disability or self-insured workers'
compensation claims that are in the course of being paid over time. These
products are typically marketed to the same types of clients who have
historically purchased the Company's disability and excess workers' compensation
products. Non-core group employee benefit products also include primary workers'
compensation for which the Company primarily receives fee income since a
significant portion of the risk is reinsured. Excess casualty insurance consists
of a discontinued excess umbrella liability program. This program entails
exposure to excess of loss liability claims from past years, including
environmental and asbestos-related claims. Net incurred losses and loss
adjustment expenses relating to this program totaled $6.5 million, $8.0 million
and $4.4 million in 2005, 2004 and 2003, respectively. In addition, non-core
group employee benefit products include bail bond insurance and workers'
compensation reinsurance. See "Reinsurance."

ASSET ACCUMULATION PRODUCTS

The Company's asset accumulation products consist of fixed annuities, primarily
single premium deferred annuities ("SPDAs") and flexible premium annuities
("FPAs"). An SPDA provides for a single payment by an annuity holder to the
Company and the crediting of interest by the Company on the annuity contract at
the applicable crediting rate. An FPA provides for periodic payments by an
annuity holder to the Company, the timing and amount of which are at the
discretion of the annuity holder, and the crediting of interest by the Company
on the annuity contract at the applicable crediting rate. Interest credited on
SPDAs and FPAs is not paid currently to the annuity holder but instead
accumulates and is added to the annuity contract's account value. This
accumulation is tax deferred. The crediting rate may be increased or decreased
by the Company subject to specified guaranteed minimum crediting rates, which
currently range from 2.3% to 5.5%. For most of the Company's annuity products,
the crediting rate may be reset by the Company annually, typically on the policy
anniversary. The Company's annuity products also include multi-year interest
guarantee products, in which the crediting rate is fixed at a stated rate for a
specified period of years, such periods ranging from three to eight years. At
December 31, 2005, the weighted average crediting rate on the Company's annuity
products as a group was 4.41%, which includes the effects of the first year
crediting rate bonus on certain newly issued products. Withdrawals may be made
by the annuity holder at any time, but some withdrawals may result in the
assessment of surrender charges, taxes, and/or tax penalties on the withdrawn
amount. In addition, for annuity products containing a market value adjustment
("MVA") provision, the accumulated value of the annuity may be increased or
decreased under such provision if it is surrendered during the surrender charge
period. Under this provision, the accumulated value is guaranteed to be at least
equal to the annuity premium paid, plus credited interest at the specified
minimum guaranteed crediting rate. The Company does not market variable annuity
products.

These fixed annuity products are sold predominantly to individuals through
networks of independent agents. In 2005, the Company's SPDA products accounted
for $82.2 million of asset accumulation product deposits, of which $65.7 million
was attributable to the MVA annuity product, and $5.4 million was attributable
to FPA products, of which $5.3 million had an MVA feature. Three networks of
independent agents accounted for approximately 40% of the deposits from these
SPDA and FPA products during 2005, with no other network of independent agents
accounting for more than 10% of these deposits. The Company believes that it has
a good relationship with these networks.

The following table sets forth for the periods indicated selected financial data
concerning the Company's asset accumulation products:

Year Ended December 31,
--------------------------------
2005 2004 2003
---------- -------- --------
(dollars in thousands)

Asset accumulation product deposits (sales)... $ 95,021 $133,096 $100,636
Funds under management (at period end)........ 1,008,787 993,346 929,922

At December 31, 2005, funds under management consisted of $874.1 million of SPDA
liabilities and $134.7 million of FPA liabilities. Of these liabilities, $677.6
million were subject to surrender charges averaging 6.26% at December 31, 2005.
Annuity liabilities not subject to surrender charges have been in force, on
average, for 20 years.

-6-

The Company prices its annuity products based on assumptions concerning
prevailing and expected interest rates and other factors to achieve a positive
spread between its expected return on investments and the crediting rate. The
Company attempts to achieve this spread by active portfolio management focusing
on matching invested assets and related liabilities to minimize the exposure to
fluctuations in market interest rates and by the adjustment of the crediting
rate on its annuity products. In response to changes in interest rates, the
Company increases or decreases the crediting rates on its annuity products.

In light of the annuity holder's ability to withdraw funds and the volatility of
market interest rates, it is difficult to predict the timing of the Company's
payment obligations under its SPDAs and FPAs. Consequently, the Company
maintains a portfolio of investments which are readily marketable and expected
to be sufficient to satisfy liquidity requirements. See "Investments."

OTHER PRODUCTS AND SERVICES

The Company provides integrated disability and absence management services on a
nationwide basis through Matrix, which was acquired in June 1998.
The Company's comprehensive disability and absence management services are
designed to assist clients in identifying and minimizing lost productivity and
benefit payment costs resulting from employee absence due to illness, injury or
personal leave. The Company offers services including event reporting, leave of
absence management, claims and case management and return to work management.
These services' goal is to enhance employee productivity and provide more
efficient benefit delivery and enhanced cost containment. The Company provides
these services on an unbundled basis or in a unique Integrated Employee Benefit
program that combines these services with various group employee benefit
insurance coverages. The Company believes that these integrated disability and
absence management services complement the Company's core group employee
benefit products, enhancing the Company's ability to market these core products
and providing the Company with a competitive advantage in the market for these
products.

In 1991, the Company introduced a variable flexible premium universal life
insurance policy under which the related assets are segregated in a separate
account not subject to claims of general creditors of the Company. Policyholders
may elect to deposit amounts in the account from time to time, subject to
underwriting limits and a minimum initial deposit of $1.0 million. Both the cash
values and death benefits of these policies fluctuate according to the
investment experience of the assets in the separate account; accordingly, the
investment risk with respect to these assets is borne by the policyholders. The
Company earns fee income from the separate account in the form of charges for
management and other administrative fees. The Company is not presently actively
marketing this product. The Company reinsures risks in excess of $200,000 per
individual under indemnity reinsurance arrangements with various reinsurance
companies. See "Reinsurance."

UNDERWRITING PROCEDURES

Premiums charged on insurance products are based in part on assumptions about
the incidence, severity and timing of insurance claims. The Company has adopted
and follows detailed underwriting procedures designed to assess and qualify
insurance risks before issuing its policies. To implement these procedures, the
Company employs a professional underwriting staff.

In underwriting group coverage, the Company focuses on the overall risk
characteristics of the group to be insured and the geographic concentration of
its new and renewal business. A prospective group client is evaluated with
particular attention paid to the claims experience of the group with prior
carriers, the occupations of the insureds, the nature of the business of the
client, the current economic outlook of the client in relation to others in its
industry and of the industry as a whole, the appropriateness of the benefits or
SIR applied for and income from other sources during disability. The Company's
products generally afford it the flexibility to seek, on an annual basis, to
adjust premiums charged to its policyholders in order to reflect emerging
mortality or morbidity experience.

INVESTMENTS

The Company's management of its investment portfolio is an important component
of its profitability since a substantial portion of its operating income is
generated from the difference between the yield achieved on invested assets and,
in the case of asset accumulation products, the interest credited on
policyholder funds and, in the case of certain of the

-7-

Company's other products, the discount rate used to calculate the related
reserves. 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, matching of the Company's interest-sensitive assets and
liabilities and seeking to minimize the Company's exposure to fluctuations in
interest rates.

For information regarding the composition and diversification of the Company's
investment portfolio and asset/liability management, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and Notes A, B and I to the Consolidated
Financial Statements.

The following table sets forth for the periods indicated the Company's pretax
investment results:

Year Ended December 31,
------------------------------------
2005 2004 2003
---------- ---------- ----------
(dollars in thousands)

Average invested assets (1)........................ $3,621,608 $3,272,978 $2,948,150
Net investment income (2).......................... 223,569 202,444 186,337
Tax equivalent weighted average annual yield (3)... 6.4% 6.4% 6.5%

(1) Average invested assets are computed by dividing the total of invested
assets as reported on the balance sheet at the beginning of each year plus
the individual quarter-end balances by five and deducting one-half of net
investment income.

(2) Consists principally of interest and dividend income less investment
expenses.

(3) The tax equivalent weighted average annual yield on the Company's
investment portfolio for each period is computed by dividing net investment
income, increased to reflect tax exempt interest income and similar tax
savings, by average invested assets for the period. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations."

REINSURANCE

The Company participates in various reinsurance arrangements both as the ceding
insurer and as the assuming insurer. Arrangements in which the Company is the
ceding insurer afford various levels of protection against excessive loss by
assisting the Company in diversifying its risks and by limiting its maximum loss
on risks that exceed retention limits. Under indemnity reinsurance transactions
in which the Company is the ceding insurer, the Company remains liable for
policy claims if the assuming company fails to meet its obligations. To limit
this risk, the Company monitors the financial position of its reinsurers,
including, among other things, the companies' financial ratings, and in certain
cases receives collateral security from the reinsurer. Also, certain of the
Company's reinsurance agreements require the reinsurer to set up security
arrangements for the Company's benefit in the event of certain ratings
downgrades. In addition, the U.S. federal government presently provides certain
protections for insurers who issue certain property and casualty insurance
coverages, including SNCC. See "Business - Group Employee Benefit Products."

The Company cedes portions of the risks relating to its group employee benefit
and variable life insurance products under indemnity reinsurance agreements with
various unaffiliated reinsurers. The terms of these agreements, which management
believes are typical for agreements of this type, provide, among other things,
for the automatic acceptance by the reinsurer of ceded risks in excess of the
Company's retention limits stated in the agreements. The Company pays
reinsurance premiums to these reinsurers which are, in general, based upon
percentages of premiums received by the Company on the business reinsured less,
in certain cases, ceding commissions and experience refunds paid by the
reinsurer to the Company. These agreements are generally terminable as to new
risks by either the Company or the reinsurer on appropriate notice; however,
termination does not affect risks ceded during the term of the agreement, for
which the reinsurer generally remains liable. See "Business - Group Employee
Benefit Products" and Note P to the Consolidated Financial Statements. As a
result of the terrorist attacks on the World Trade Center, a number of the
Company's reinsurers have excluded coverage for losses resulting from terrorism.
See "The Company's ability to reduce its exposure to risks depends on the
availability and cost of reinsurance" in Item 1A, Risk Factors. The Company
assumes certain workers' compensation risks through reinsurance. In these
arrangements, the Company provides coverage for losses in excess of specified
amounts, subject to specified maximums. Coverage for losses as a result of
terrorism is generally excluded from these reinsurance treaties. The attachment
points for workers' compensation reinsurance range from $250,000 to $1.6
billion, with an average attachment point of $64 million. Aggregate exposures
assumed under individual workers' compensation treaties generally range from
$500,000 to $5 million, with the highest net exposure pursuant to any such
treaty equal to $5 million. The Company underwrites workers' compensation
reinsurance assumed pursuant to procedures similar to those utilized in
connection with its excess workers' compensation products.

-8-

In the fourth quarter of 2004, the Company entered into an indemnity reinsurance
arrangement under which it assumes certain newly issued group disability
insurance policies on an ongoing basis. Under this arrangement, the Company is
responsible for underwriting and claims management with respect to the reinsured
business. The Company provides coverage primarily on a quota share basis up to a
maximum Company share of $7,500 in benefits per individual per month. The
Company did not recognize any premium income or incurred losses from this
arrangement in 2004. Premium income and incurred losses from this arrangement
were $37.9 million and $32.3 million, respectively, in 2005.

The Company had in the past participated as an assuming insurer in a number of
reinsurance facilities. These reinsurance facilities generally are administered
by TPAs or managing underwriters who underwrite risks, coordinate premiums
charged and process claims. During 1999 and 2000, the Company terminated, on a
prospective basis, its participations in all of these reinsurance facilities.
However, the terms of such facilities provide for the continued assumption of
risks by, and payments of premiums to, facility participants with respect to
business written in the periods during which they participated in such
facilities. The Company has been and is currently a party to certain arbitration
proceedings arising out of such facilities. See "Legal Proceedings." Premium
income from all reinsurance facilities was $0.3 million, $0.1 million and $0.3
million in 2005, 2004 and 2003, respectively, and incurred losses from these
facilities were $3.8 million, $5.5 million and $5.1 million in 2005, 2004 and
2003, respectively.

LIFE, ANNUITY, DISABILITY AND ACCIDENT RESERVES

The Company carries as liabilities actuarially determined reserves for its life,
annuity, disability and accident policy and contract obligations. These
reserves, together with premiums to be received on policies in force and
interest thereon at certain assumed rates, are calculated and established at
levels believed to be sufficient to satisfy policy and contract obligations. The
Company performs periodic studies to compare current experience for mortality,
morbidity, interest and lapse rates with the experience reflected in the reserve
assumptions to determine future policy benefit reserves for these products.
Reserves for future policy benefits and unpaid claims and claim expenses are
estimated based on individual loss data, historical loss data and industry
averages and indices and include amounts determined on the basis of individual
and actuarially determined estimates of future losses. Therefore, the ultimate
liability could deviate from the amounts of the reserves currently reflected in
the Consolidated Financial Statements. Under United States generally accepted
accounting principles ("GAAP") these policy and claim reserves are permitted to
be discounted to reflect the time value of money. Such reserve discounting,
which is common industry practice, is based on interest rate assumptions
reflecting projected portfolio yield rates for the assets supporting the
liabilities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Critical Accounting Policies and Estimates" and Note
A to the Consolidated Financial Statements for certain additional information
regarding reserve assumptions under GAAP. The assets selected to support these
liabilities produce cash flows that are intended to match the timing and amount
of anticipated claim and claim expense payments. Differences between actual and
expected claims experience are reflected currently in earnings for each period.
The Company does not believe it has experienced significant adverse deviations
from its assumptions.

The life, annuity, disability and accident reserves carried in the Consolidated
Financial Statements are calculated based on GAAP and differ from those reported
by the Company for statutory financial statement purposes. These differences
arise from, among other things, the use of different mortality and morbidity
tables and interest assumptions, the introduction of lapse assumptions into the
reserve calculation and the use of the net level method on all insurance
business.

PROPERTY AND CASUALTY INSURANCE RESERVES

The Company carries as liabilities actuarially determined reserves for
anticipated claims and claim expenses for its excess workers' compensation
insurance and other casualty and property insurance products. Reserves for claim
expenses represent the estimated probable costs of investigating those claims
and, when necessary, defending lawsuits in connection with those claims.
Reserves for claims and claim expenses are estimated based on individual loss
data, historical loss data and industry averages and indices and include amounts
determined on the basis of individual and actuarially determined

-9-

estimates of future losses. Therefore, the ultimate liability could deviate from
the amounts of the reserves currently reflected in the Consolidated Financial
Statements.

Reserving practices under GAAP allow discounting of claim reserves related to
excess workers' compensation losses to reflect the time value of money. Reserve
discounting for these types of claims is common industry practice, and the
discount factors used are less than the annual tax-equivalent investment yield
earned by the Company on its invested assets. The discount factors are based on
the expected duration and payment pattern of the claims at the time the claims
are settled and the risk-free rate of return for U.S. government securities with
a comparable duration. Reserves for claim expenses are not discounted.

The following table provides a reconciliation of beginning and ending unpaid
claims and claim expenses for the periods indicated:

Year Ended December 31,
------------------------------
2005 2004 2003
-------- -------- --------
(dollars in thousands)

Unpaid claims and claim expenses, net of reinsurance,
beginning of period ............................................ $541,682 $479,660 $439,147
Add provision for claims and claim expenses incurred, net
of reinsurance, occurring during:
Current year ................................................... 141,785 103,444 82,372
Prior years .................................................... 56,698 30,868 20,541
-------- -------- --------
Incurred claims and claim expenses, net of reinsurance,
during the current year .................................. 198,483 134,312 102,913
-------- -------- --------
Deduct claims and claim expenses paid, net of reinsurance,
occurring during:
Current year ................................................... 14,853 8,120 5,165
Prior years .................................................... 81,847 64,170 57,235
-------- -------- --------
Total paid .................................................. 96,700 72,290 62,400
-------- -------- --------
Unpaid claims and claim expenses, net of reinsurance, end of
period ......................................................... 643,465 541,682 479,660
Reinsurance receivables, end of period ............................ 103,014 104,266 93,030
-------- -------- --------
Unpaid claims and claim expenses, gross of reinsurance,
end of period (1) ........................................... $746,479 $645,948 $572,690
======== ======== ========

(1) All years include the results from the Company's discontinued non-core
property catastrophe reinsurance business. See "Other Transactions" and
Note S to the Consolidated Financial Statements.

Provisions for claims and claim expenses incurred in prior years, as reflected
in the above table, reflect the periodic accretion of the claims reserve amounts
previously discounted with respect to the Company's excess workers' compensation
line of business. During 2005, 2004 and 2003, $21.1 million, $18.1 million and
$21.5 million, respectively, of such discount was accreted. Accordingly, of the
Company's provisions for prior years' claims and claim expenses incurred, net of
reinsurance, in 2005, 2004 and 2003, $35.6 million, $12.8 million and $(1.0)
million, respectively, of such provisions were made based on new loss experience
data that emerged during the respective years. In 2005, the additional provision
arose primarily from adverse loss experience in the Company's excess workers'
compensation line, principally due to moderately increased claim frequency,
relative to prior periods, relating to policies written during the competitive
market cycle years from 1997 to 2001. In 2004, the additional provision arose
primarily from adverse loss experience in the Company's excess workers'
compensation line, principally due to moderately increased claim frequency,
relative to prior periods, relating to policies written during the competitive
market cycle years from 1997 to 2000. These additional provisions did not in
either year result from specific changes in the Company's key assumptions used
to estimate the reserves since the preceding period end. Rather, in both years,
they resulted from the Company's application of the same estimating processes it
has historically utilized to emerging experience data, including premium, loss
and expense information, and the impact of these factors on inception-to-date
experience. In each period, the Company makes its best estimate of reserves
based on all of the information available to it at that time, which necessarily
takes into account new experience emerging during the period. See "Critical
Accounting Policies and Estimates - Future Policy Benefits and Unpaid Claims and
Claim Expenses" in Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations.

-10-

The effects of the amortization and accrual, as applicable, of discount to
reflect the time value of money have been removed from the amounts set forth in
the loss development table which follows in order to present the gross loss
development, net of reinsurance. During 2005, 2004 and 2003, $21.1 million,
$18.1 million and $21.5 million, respectively, of previous years' discount was
amortized, and $77.5 million, $64.9 million and $44.9 million, respectively, of
new discount was accrued.

The loss development table below illustrates the development of reserves from
March 5, 1996 to December 31, 2005 and is net of reinsurance.

December 31,
March 5, ---------------------------------------------------------
1996(1) 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- ---------
(dollars in thousands)

Reserve for unpaid
claims and claim
expenses, net of
reinsurance ........ $520,370 $532,923 $541,280 $422,159 $434,513 $ 444,061
Cumulative amount of
liability paid:
One year later ..... 23,467 28,162 98,365 40,815 40,660 (29,990)(2)
Two years later .... 50,713 125,020 127,481 74,571 4,020(2) 26,398
Three years later .. 140,943 152,842 156,119 33,429(2) 54,846 71,938
Four years later ... 167,811 179,705 111,253(2) 78,981 94,899 123,330
Five years later ... 193,363 133,228(2) 150,772 114,295 139,949 178,852
Six years later .... 153,504(2) 170,405 182,281 154,101 187,952
Seven years later .. 188,719 197,318 217,649 196,599
Eight years later .. 214,715 230,278 256,444
Nine years later ... 246,714 266,087
Ten years later .... 280,181

Liability reestimated
as of:
One year later ..... 507,375 513,402 523,430 410,875 424,187 442,624
Two years later .... 487,830 500,964 511,602 404,559 420,420 442,807
Three years later .. 476,854 488,432 503,906 401,475 417,869 446,948
Four years later ... 476,600 487,195 500,514 396,403 423,426 502,140
Five years later ... 476,890 478,206 492,280 399,311 466,975 568,993
Six years later .... 470,283 468,142 493,586 437,913 522,592
Seven years later .. 460,670 472,492 531,603 488,849
Eight years later .. 463,015 507,670 580,714
Nine years later ... 501,208 554,029
Ten years later .... 546,203

Cumulative
deficiency(3) ...... $(25,833) $(21,106) $(39,434) $(66,690) $(88,079) $(124,932)

December 31,
----------------------------------------------------
2001 2002 2003 2004 2005
--------- --------- -------- -------- ----------
(dollars in thousands)

Reserve for unpaid
claims and claim
expenses, net of
reinsurance ........ $ 638,191 $ 680,835 $744,760 $853,515 $1,011,699
Cumulative amount of
liability paid:
One year later ..... 61,954 57,235 64,170 81,847
Two years later .... 112,639 118,685 134,981
Three years later .. 169,890 187,303
Four years later ... 231,870
Five years later ...
Six years later ....
Seven years later ..
Eight years later ..
Nine years later ...
Ten years later ....

Liability reestimated
as of:
One year later ..... 636,125 678,535 766,886 908,162
Two years later .... 634,578 714,303 838,458
Three years later .. 678,009 790,941
Four years later ... 754,717
Five years later ...
Six years later ....
Seven years later ..
Eight years later ..
Nine years later ...
Ten years later ....

Cumulative
deficiency(3) ...... $(116,526) $(110,106) $(93,698) $(54,647)

(1) Amounts are as of or for the periods subsequent to March 5, 1996, the date
the Company acquired its workers' compensation business.

(2) The cumulative amount of liability paid through December 31, 2001 reflects
the Company's receipt of $74.3 million related to the commutation of the
reinsurance agreements with Oracle Reinsurance Company Ltd. in 2001. See
"Other Transactions."

(3) Full years 2000 through 2005 include the results from the Company's
discontinued non-core property catastrophe reinsurance business. See "Other
Transactions" and Note S to the Consolidated Financial Statements.

The "Reserve for unpaid claims and claim expenses, net of reinsurance" line in
the table above shows the estimated reserve for unpaid claims and claim expenses
recorded at the end of each of the periods indicated. These net liabilities
represent the estimated amount of losses and expenses for claims arising in the
current year and all prior years that are unpaid at the end of each period. The
"Cumulative amount of liability paid" lines of the table represent the
cumulative amounts paid with respect to the liability previously recorded as of
the end of each succeeding period. The "Liability reestimated" lines of the
table show the reestimated amount relating to the previously recorded liability
and is based upon experience as of the end of each succeeding period. This
estimate is either increased or decreased as additional information about the
frequency and severity of claims for each succeeding period becomes available
and is reviewed. The Company periodically reviews the estimated reserves for
claims and claim expenses and any changes are reflected currently in earnings
for each period. See "Critical Accounting Policies and Estimates - Future Policy
Benefits and Unpaid Claims and Claim Expenses" in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations. The
"Cumulative deficiency" line in the table represents the aggregate change in the
net estimated claim reserve liabilities from the dates indicated through
December 31, 2005.

-11-

The table below is gross of reinsurance and illustrates the effects of the
discount to reflect the time value of money that was removed from the amounts
set forth in the loss development table above.

December 31,
March 5, -----------------------------------------------------
1996(1) 1996 1997 1998 1999 2000
--------- --------- --------- --------- --------- ---------
(dollars in thousands)

Reserve for unpaid claims
and claim expenses before
discount:
Net of reinsurance ..... $ 520,370 $ 532,923 $ 541,280 $ 422,159 $ 434,513 $ 444,061
Add reinsurance
recoverable ......... 13,501 16,730 23,454 164,825 179,180 206,704
Deduct discount for time
value of money ...... 164,000 168,827 176,683 180,770 192,220 203,710
--------- --------- --------- --------- --------- ---------
Unpaid claims and claim
expenses as reported
on balance sheets ......... 369,871 380,826 388,051 406,214 421,473 447,055
--------- --------- --------- --------- --------- ---------
Reestimated unpaid claims
and claim expenses, gross
of reinsurance, net of
discount, as of December
31, 2005 .................. 517,185 517,228 537,083 563,654 610,573 671,031
--------- --------- --------- --------- --------- ---------
Discounted cumulative
deficiency, gross of
reinsurance ............... (147,314) (136,402) (149,032) (157,440) (189,100) (223,976)

Add accretion of discount
and change in reinsurance
recoverable ............... 121,481 115,296 109,598 90,750 101,021 99,044
--------- --------- --------- --------- --------- ---------

Cumulative deficiency,
before discount, net of
reinsurance (2) ........... $ (25,833) $ (21,106) $ (39,434) $ (66,690) $ (88,079) $(124,932)
--------- ========= ========= ========= ========= =========

December 31,
----------------------------------------------------
2001 2002 2003 2004 2005
--------- --------- --------- -------- ---------
(dollars in thousands)

Reserve for unpaid claims
and claim expenses before
discount:
Net of reinsurance ..... $ 638,191 $ 680,835 $ 744,760 $853,515 1,011,699
Add reinsurance
recoverable ......... 92,828 95,709 93,030 104,266 103,014
Deduct discount for time
value of money ...... 224,241 241,688 265,100 311,833 368,234
--------- --------- --------- -------- ---------
Unpaid claims and claim
expenses as reported
on balance sheets ......... 506,778 534,856 572,690 645,948 746,479
--------- --------- --------- -------- ---------
Reestimated unpaid claims
and claim expenses, gross
of reinsurance, net of
discount, as of December
31, 2005 .................. 722,741 722,539 708,690 714,843
--------- --------- --------- --------
Discounted cumulative
deficiency, gross of
reinsurance ............... (215,963) (187,683) (136,000) (68,895)

Add accretion of discount
and change in reinsurance
recoverable ............... 99,437 77,577 42,302 14,248
--------- --------- --------- --------

Cumulative deficiency,
before discount, net of
reinsurance (2) ........... $(116,526) $(110,106) $ (93,698) $(54,647)
========= ========= ========= ========

(1) Amounts are as of or for the periods subsequent to March 5, 1996, the date
the Company acquired its workers' compensation business.

(2) Full years 2000 through 2005 include the results from the Company's
discontinued non-core property catastrophe reinsurance business. See "Other
Transactions" and Note S to the Consolidated Financial Statements.

The excess workers' compensation insurance reserves carried in the Consolidated
Financial Statements are calculated in accordance with GAAP and, net of
reinsurance, are approximately $162.0 million less than those reported by the
Company for statutory financial statement purposes at December 31, 2005. This
difference is primarily due to the use of different discount factors between
GAAP and statutory accounting principles and differences in the bases against
which such discount factors are applied. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Critical Accounting
Policies and Estimates - Future Policy Benefits and Unpaid Claims and Claim
Expenses" and Note A to the Consolidated Financial Statements for certain
additional information regarding reserve assumptions under GAAP.

COMPETITION

The financial services industry is highly competitive. The Company competes with
numerous other insurance and financial services companies both in connection
with sales of insurance and asset accumulation products and integrated
disability and absence management services and in acquiring blocks of business
and companies. Many of these organizations have substantially greater asset
bases, higher ratings from ratings agencies, larger and more diversified
portfolios of insurance products and larger sales operations. Competition in
asset accumulation product markets is also encountered from banks, securities
brokerage firms and other financial intermediaries marketing alternative savings
products, such as mutual funds, traditional bank investments and retirement
funding alternatives.

The Company believes that its reputation in the marketplace, quality of service,
unique programs which integrate employee benefit products and absence management
services and investment returns have enabled it to compete effectively for new
business in its targeted markets. The Company reacts to changes in the
marketplace generally by focusing on products with adequate margins and
attempting to avoid those with low margins. The Company believes that its
smaller size, relative to some of its competitors, enables it to more easily
tailor its products to the demands of customers.

-12-

REGULATION

The Company's insurance subsidiaries are regulated by state insurance
authorities in the states in which they are domiciled and the states in which
they conduct business. These regulations, among other things, limit the amount
of dividends and other payments that can be made by the Company's insurance
subsidiaries without prior regulatory approval and impose restrictions on the
amount and type of investments these subsidiaries may have. These regulations
also affect many other aspects of the Company's insurance subsidiaries'
business, including, for example, risk-based capital ("RBC") requirements,
various reserve requirements, the terms, conditions and manner of sale and
marketing of insurance products and the form and content of required financial
statements. These regulations are intended to protect policyholders rather than
investors. The Company's insurance subsidiaries are required under these
regulations to file detailed annual financial reports with the supervisory
agencies in the various states in which they do business, and their business and
accounts are subject to examination at any time by these agencies. To date, no
examinations have produced any significant adverse findings or adjustments. The
ability of the Company's insurance subsidiaries to continue to conduct their
businesses is dependent upon the maintenance of their licenses in these various
states.

In April 2004, the New York State Attorney General ("NYAG") initiated an
investigation into certain insurance broker compensation arrangements and other
aspects of dealings between insurance brokers and insurance companies, and, in
connection therewith, filed a civil complaint in October 2004 against a major
insurance brokerage firm, Marsh & McLennan, based on certain of such firm's
compensation arrangements with insurers and alleged misconduct in connection
with the placement of insurance business. Other state regulators subsequently
announced the commencement of similar investigations and reviews. As previously
disclosed, the Company has received administrative subpoenas or similar requests
for information from the Illinois Division of Insurance, the Missouri Department
of Insurance, the NYAG's office and the North Carolina Department of Insurance
in connection with their investigations. The Company anticipates that additional
regulatory inquiries may be received by its insurance subsidiaries as the
various investigations continue. The Company has fully cooperated with inquiries
it has received to date, and it intends to fully cooperate with any future
inquiries of this type.

As also previously disclosed, based on an internal review in 2004 relating to
the Company's insurance subsidiaries, the Company had identified certain
potential issues concerning past insurance solicitation practices involving SNCC
and Marsh & McLennan. The instances that the Company was able to specifically
identify in this regard were limited in number and involved modest amounts of
premium. The Company reported on these issues to the NYAG's office and to the
Missouri Department of Insurance. In 2005, SNCC was the subject of a targeted
market conduct examination by the Missouri Department of Insurance relating to
these issues, which did not result in any significant adverse findings. The
Company will fully cooperate with these and any other regulatory agencies
relating to these issues. It is not possible to predict the future impact of
this matter on the Company or of the various investigations, or any regulatory
changes or litigation resulting from such investigations, on the insurance
industry or on the Company and its insurance subsidiaries.

From time to time, increased scrutiny has been placed upon the insurance
regulatory framework, and a number of state legislatures have considered or
enacted legislative measures that alter, and in many cases increase, state
authority to regulate insurance companies. In addition to legislative
initiatives of this type, the National Association of Insurance Commissioners
(the "NAIC") and insurance regulators are continuously involved in a process of
reexamining existing laws and regulations and their application to insurance
companies. Furthermore, while the federal government currently does not directly
regulate the insurance business, federal legislation and administrative policies
in a number of areas, such as employee benefits regulation, age, sex and
disability-based discrimination, financial services regulation and federal
taxation, can significantly affect the insurance business. It is not possible to
predict the future impact of changing regulation on the operations of the
Company and its insurance subsidiaries.

The NAIC's RBC requirements for insurance companies take into account asset
risks, insurance risks, interest rate risks and other relevant risks with
respect to the insurer's business and specify varying degrees of regulatory
action to occur to the extent that an insurer does not meet the specified RBC
thresholds, with increasing degrees of regulatory scrutiny or intervention
provided for companies in categories of lesser RBC compliance. The Company
believes that its insurance subsidiaries are adequately capitalized under the
RBC requirements and that the thresholds will not have any significant
regulatory effect on the Company. However, were the insurance subsidiaries' RBC
position to materially decline in the future, the insurance subsidiaries'
continued ability to pay dividends and the degree of regulatory supervision or
control to which they are subjected may be affected.

-13-

The Company's insurance subsidiaries can also be required, under solvency or
guaranty laws of most states in which they do business, to pay assessments to
fund policyholder losses or liabilities of insurance companies that become
insolvent. These assessments may be deferred or forgiven under most solvency or
guaranty laws if they would threaten an insurer's financial strength and, in
most instances, may be offset against future state premium taxes. SNCC did not
recognize any expense in 2005 and recognized expense of $0.8 million and $1.6
million in 2004 and 2003, respectively, for these types of assessments. None of
the Company's life insurance subsidiaries has ever incurred any significant
costs of this nature.

EMPLOYEES

The Company and its subsidiaries employed approximately 1,170 persons at
December 31, 2005. The Company believes that it enjoys good relations with its
employees.

OTHER SUBSIDIARIES

The Company conducts certain of its investment management activities through its
wholly-owned subsidiary, Delphi Capital Management, Inc. ("DCM"), and makes
certain investments through other wholly-owned non-insurance subsidiaries.

OTHER TRANSACTIONS

During 1998, the Company entered into various reinsurance agreements with Oracle
Reinsurance Company Ltd. ("Oracle Re"), a wholly owned subsidiary of Delphi
International Ltd. ("Delphi International"), an independent Bermuda insurance
holding company. In October 2001, Oracle Re and the Company effected the
commutation of these reinsurance agreements, pursuant to which Oracle Re paid
approximately $84.0 million to the Company (net of $11.5 million which had been
held by the Company) related to the reserves ceded to Oracle Re under such
agreements. These transactions did not have a material impact on the Company's
consolidated financial position, liquidity or net income. In furtherance of the
commutation of the reinsurance agreements, the Company agreed to waive a portion
of the amounts due to the Company under certain subordinated notes issued by
Delphi International. As a result of this waiver, the Company recognized a
pre-tax loss of $7.5 million in 2001 for the other than temporary decline in the
value of these notes. In March 2002, Delphi International repaid the adjusted
amounts due under the subordinated notes and the Company did not realize any
significant additional loss in connection with such repayment.

In the fourth quarter of 2000, the Company liquidated a substantial majority of
the investments of its investment subsidiaries. The proceeds from these sales
were used in 2001 to repay $150.0 million of outstanding borrowings under its
revolving credit facilities, to repurchase $64.0 million liquidation amount of
the Capital Securities of its subsidiary, Delphi Funding L.L.C. (the "Capital
Securities"), and to repurchase $8.0 million principal amount of its 8% Senior
Notes which matured in October 2003 (the "Matured Senior Notes").

In May 2003, the Company issued $143.8 million in principal amount of 8.00%
Senior Notes due 2033 (the "2033 Senior Notes") in a public offering. The
proceeds from the 2033 Senior Notes were used to repay the outstanding
borrowings under the Company's revolving credit facility and to repay in full
the principal amount of $66.5 million of the Matured Senior Notes. The 2033
Senior Notes, which were issued at par value, will mature on May 15, 2033 and
are redeemable at par at the option of the Company, in whole or in part, at any
time on or after May 15, 2008. The 2033 Senior Notes are not redeemable at the
option of any holder of the notes prior to maturity nor are they entitled to any
sinking fund redemptions. Interest on the 2033 Senior Notes is payable quarterly
on February 15, May 15, August 15 and November 15 of each year. The 2033 Senior
Notes are senior unsecured obligations of the Company and, as such, are
effectively subordinated to all claims of secured creditors of the Company and
its subsidiaries and to claims of unsecured creditors of the Company's
subsidiaries, including the insurance subsidiaries' obligations to
policyholders. As a result of the issuance of the 2033 Senior Notes, under the
terms of the Company's previous revolving credit facility, the maximum amount of
borrowings available to the Company thereunder was reduced from $150 million to
$100 million and the facility was converted to an unsecured facility, with
collateral being released to the Company. The 2033 Senior Notes were issued in
denominations of $25 and multiples of $25 and are listed on the New York Stock
Exchange. See Note D to the Consolidated Financial Statements.

-14-

In May 2003, Delphi Financial Statutory Trust I (the "Trust"), a
subsidiary of the Company, issued $20.0 million liquidation amount of Floating
Rate Capital Securities (the "2003 Capital Securities") in a private placement.
In connection with the issuance of the 2003 Capital Securities and the related
purchase by the Company of all of the common securities of the Trust (the "2003
Common Securities" and, collectively with the 2003 Capital Securities, the
"Trust Securities"), the Company issued $20.6 million principal amount of
floating rate junior subordinated deferrable interest debentures, due 2033 (the
"2003 Junior Debentures"). Interest on the 2003 Junior Debentures is payable
quarterly on February 15, May 15, August 15 and November 15 of each year. The
interest rate on the 2003 Junior Debentures resets quarterly to a rate equal to
the London interbank offered interest rate ("LIBOR") for three-month U.S.
dollar deposits, plus 4.10% (not to exceed 12.50%). The weighted average
interest rate on the outstanding advances was 7.40%, 5.56% and 5.31% for the
years ended December 31, 2005, 2004 and 2003, respectively. The distribution
and other payment dates on the Trust Securities correspond to the interest and
other payment dates on the 2003 Junior Debentures. The 2003 Junior Debentures
are unsecured and subordinated in right of payment to all of the Company's
existing and future senior indebtedness. Beginning in May 2008, the Company
will have the right to redeem the 2003 Junior Debentures, in whole or in part,
at a price equal to 100% of the principal amount of the debentures, plus
accrued and unpaid interest to the date of redemption.

In May 2005, the Company entered into a new $200 million revolving credit
facility with Bank of America, N.A. as administrative agent, and a group of
major banking institutions (the "Credit Agreement"), which replaced the existing
$100 million revolving credit facility scheduled to expire in December 2006. The
Company had outstanding borrowings of $91.0 million under the Credit Agreement
at December 31, 2005 and $14.0 million of outstanding borrowings under the
previous revolving credit facility at December 31, 2004. Interest on borrowings
under the Credit Agreement is payable, at the Company's election, either at a
floating rate based on LIBOR plus a specified margin which varies depending on
the level of the specified ratings of the Company's senior unsecured debt, as in
effect from time to time, or at Bank of America's prime rate. Certain commitment
and utilization fees are also payable under the Credit Agreement. The Credit
Agreement contains certain financial and various other affirmative and negative
covenants considered ordinary for this type of credit agreement. They include,
among others, the maintenance of a specified debt to capital ratio, minimum
consolidated net worth of the Company, minimum risk-based capital requirements
for the Company's insurance subsidiaries, RSLIC and SNCC, and certain
limitations on investments and subsidiary indebtedness. As of December 31, 2005,
the Company was in compliance in all material respects with the financial and
various other affirmative and negative covenants in the Credit Agreement. The
maturity date of the Credit Agreement is May 26, 2010.

During the fourth quarter of 2005, the Company decided to exit its non-core
property catastrophe reinsurance business, due to the volatility associated with
such business and other strategic considerations, and has not thereafter entered
into or renewed any assumed property reinsurance contracts. The Company has
classified the operating results of this business as discontinued operations.
See Note S to the Consolidated Financial Statements. A substantial majority of
these reinsurance contracts expired on or before December 31, 2005 and all of
the remaining contracts will expire prior to the end of the third quarter of
2006. Although the Company will continue to collect modest amounts of premium
and pay losses under the terms of the remaining contracts until their
expiration, these amounts are not expected to be material to the Company's
results of operations. For the years ended December 31, 2005, 2004 and 2003, the
Company recognized premium income of $17.4 million, $9.5 million, and $7.5
million, respectively, and incurred losses of $37.9 million, $4.7 million, and
$0.3 million, respectively, from this line of business. For the years ended
December 31, 2005, 2004 and 2003, the Company recognized operating (loss) income
of $(13.4) million, $2.1 million, and $3.6 million, respectively, net of income
tax (benefit) expense of $(7.2) million, $1.2 million, and $2.0 million,
respectively, from this business. The assets and liabilities related to the
property catastrophe reinsurance business were not material to the Company's
consolidated financial position.

-15-

ITEM 1A. RISK FACTORS.

RESERVES ESTABLISHED FOR FUTURE POLICY BENEFITS AND CLAIMS MAY PROVE
INADEQUATE.

The Company's reserves for future policy benefits and unpaid claims and claim
expenses are estimates. See "Critical Accounting Policies and Estimates - Future
Policy Benefits and Unpaid Claims and Claim Expenses." in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations for a
description of the most significant assumptions used in the estimation process.
These estimates are subject to variability, since the factors and events
affecting the ultimate liability for claims have not all taken place, and thus
cannot be evaluated with certainty. Moreover, under the actuarial methodologies
discussed previously, these estimates are subject to reevaluation based on
developing trends with respect to the Company's loss experience. Such trends may
emerge over longer periods of time, and changes in such trends cannot
necessarily be identified or predicted at any given time by reference to current
claims experience, whether favorable or unfavorable. If the Company's actual
loss experience from its current or discontinued products is different from the
Company's assumptions or estimates, the Company's reserves could be inadequate.
In such event, the Company's results of operations, liquidity or financial
condition could be materially adversely affected.

THE MARKET VALUES OF THE COMPANY'S INVESTMENTS FLUCTUATE.

The market values of the Company's investments vary depending on economic and
market conditions, including interest rates, and such values can decline as a
result of changes in such conditions. Increasing interest rates or a widening in
the spread between interest rates available on U.S. Treasury securities and
corporate debt, for example, will typically have an adverse impact on the market
values of the fixed maturity securities in the Company's investment portfolio.
If interest rates decline, the Company generally achieves a lower overall rate
of return on investments of cash generated from the Company's operations. In
addition, in the event that investments are called or mature in a declining
interest rate environment, the Company may be unable to reinvest the proceeds in
securities with comparable interest rates. The Company may also in the future be
required or determine to sell certain investments, whether to meet contractual
obligations to its policyholders, or otherwise, at a price and a time when the
market value of such investments is less than the book value of such
investments.

Declines in the fair value of investments that are considered in the judgment of
management to be other than temporary are reported as realized investment
losses. See "Critical Accounting Policies and Estimates - Investments." in Item
7, Management's Discussion and Analysis of Financial Condition and Results of
Operations, for a description of management's evaluation process. The Company
has experienced and may in the future experience losses from other than
temporary declines in security values. Such losses are recorded as realized
investment losses in the income statement. See "Results of Operations - 2005
Compared to 2004" in Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations. In addition, the Company invests in certain
limited partnerships and limited liability companies that invest in various
financial instruments. These investments are reflected in the Company's
financial statements under the equity method; accordingly, positive or negative
changes in the value of the investees' financial instruments are included in net
investment income. Thus, the Company's results of operations, in addition to its
liquidity and financial condition, could be materially adversely affected if
these entities were to experience significant losses in the values of their
financial assets.

THE COMPANY'S INVESTMENT STRATEGY EXPOSES THE COMPANY TO DEFAULT AND OTHER
RISKS.

The management of the Company's investment portfolio is an important component
of the Company's profitability since a substantial portion of the Company's
operating income is generated from the difference between the yield achieved on
invested assets and, in the case of asset accumulation products, the interest
credited on policyholder funds and, in the case of the Company's other products
for which reserves are discounted, the discount rate used to calculate the
related reserves. See "Liquidity and Capital Resources - Investments." in Item
7, Management's Discussion and Analysis of Financial Condition and Results of
Operations, for a description of the Company's investment portfolio and
strategy.

The Company is subject to the risk, among others, that the issuers of the fixed
maturity securities the Company owns will default on principal and interest
payments. A major economic downturn or any of the various other factors that
affect issuers' abilities to pay could result in issuer defaults. Because the
Company's investments consist primarily of fixed maturity securities and
short-term investments, such defaults could materially adversely affect the
Company's results of operations, liquidity or financial condition. The Company
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.

-16-

THE COMPANY'S FINANCIAL POSITION EXPOSES THE COMPANY TO INTEREST RATE
RISKS.

Because the Company's primary assets and liabilities are financial in nature,
the Company's consolidated financial position and earnings are subject to risks
resulting from changes in interest rates. The Company manages this risk by
active portfolio management focusing on minimizing its exposure to fluctuations
in interest rates by matching its invested assets and related liabilities and by
periodically adjusting the crediting rates on its annuity products. See
"Liquidity and Capital Resources - Asset/Liability Management and Market Risk."
in Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations. Profitability of certain group employee benefit products
is also affected by the difference between the yield achieved on invested assets
and the discount rate used to calculate the related reserves. The Company
manages this risk by seeking to adjust the prices charged for these products.

THE COMPANY'S ABILITY TO REDUCE ITS EXPOSURE TO RISKS DEPENDS ON THE
AVAILABILITY AND COST OF REINSURANCE.

The Company transfers its exposure to some risks through reinsurance
arrangements with other insurance and reinsurance companies. Under the Company's
reinsurance arrangements, another insurer assumes a specified portion of the
Company's losses and loss adjustment expenses in exchange for a specified
portion of policy premiums. At December 31, 2005 and 2004, the Company had
reinsurance receivables of $413.1 million and $428.7 million, respectively. The
availability, amount, cost and terms of reinsurance may vary significantly based
on market conditions. Any decrease in the amount of the Company's reinsurance
will increase the Company's risk of loss and any increase in the cost of
reinsurance will, absent a decrease in the reinsurance amount, reduce the
Company's premium income. In either case, the Company's operating results could
be adversely affected unless it is able to accordingly adjust the prices or
other terms of its insurance policies or successfully implement other
operational initiatives, as to which no assurance can be given. Furthermore, the
Company is subject to credit risk with respect to reinsurance. The Company
obtains reinsurance primarily through indemnity reinsurance transactions in
which the Company is still liable for the transferred risks if the reinsurers
fail to meet their financial obligations. Such failures could materially affect
the Company's results of operations, liquidity or financial condition.

Some reinsurers experienced significant losses related to the terrorist events
of September 11, 2001. As a result of this and other market factors, higher
prices and less favorable terms and conditions continue to be offered in the
reinsurance market. These market conditions are reflected in the terms of the
replacement reinsurance arrangements entered into during 2003 and remaining in
effect for the Company's excess workers' compensation and long-term disability
products. See "Liquidity and Capital Resources - Reinsurance." in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations. In the future, the Company's reinsurers may continue to seek price
increases, although the extent of any such increases cannot currently be
predicted. Also, there has been significantly reduced availability of
reinsurance covering risks such as terrorist and catastrophic events.
Accordingly, substantially all of the Company's coverages of this nature were
discontinued during 2002, which would result in the Company retaining a higher
portion of losses from such events if they occur. The Company has not been able
to replace such coverages on acceptable terms due to present market conditions,
and there can be no assurance that the Company will be able to do so in the
future. However, under the Terrorism Act, which terminates on December 31, 2007,
the federal government will pay 90% of the Company's covered losses during 2006
and 85% of the Company's covered losses during 2007, relating to acts of
international terrorism from property and casualty products directly written by
SNCC above the Company's annual deductible. See "Business - Group Employee
Benefit Products." The occurrence of a significant catastrophic event could have
a material adverse effect on the Company's results of operations, liquidity or
financial condition.

THE INSURANCE BUSINESS IS A HEAVILY REGULATED INDUSTRY.

The Company's insurance subsidiaries, like other insurance companies, are highly
regulated by state insurance authorities in the states in which they are
domiciled and the other states in which they conduct business. Such regulations,
among other things, limit the amount of dividends and other payments that can be
made by such subsidiaries without prior regulatory approval and impose
restrictions on the amount and type of investments such subsidiaries may have.
These regulations also affect many other aspects of the Company's insurance
subsidiaries' businesses, including, for example, RBC requirements, various
reserve requirements, the terms, conditions and manner of sale and marketing of
insurance products, claims-handling practices and the form and content of
required financial statements. These regulations are intended to protect
policyholders rather than investors. The ability of the Company's insurance
subsidiaries to continue to conduct their businesses is dependent upon the
maintenance of their licenses in these various states.

In April 2004, the New York Attorney General ("NYAG") initiated an investigation
into certain insurance broker compensation arrangements and other aspects of
dealings between insurance brokers and insurance companies, and, in connection
therewith, filed a civil complaint in October 2004 against a major insurance
brokerage firm based on certain of such firm's compensation arrangements with
insurers and alleged misconduct in connection with the placement of

-17-

insurance business. Other state regulators subsequently announced the
commencement of similar investigations and reviews. The Company has received
administrative subpoenas or similar requests for information from the Illinois
Division of Insurance, the Missouri Department of Insurance, the NYAG's office
and the North Carolina Department of Insurance in connection with their
investigations. The Company anticipates that additional regulatory inquiries may
be received by its insurance subsidiaries as the various investigations
continue. The Company has fully cooperated with inquiries it has received to
date, and it intends to fully cooperate with any future inquiries of this type.

From time to time, increased scrutiny has been placed upon the insurance
regulatory framework, and a number of state legislatures have considered or
enacted legislative measures that alter, and in many cases increase, state
authority to regulate insurance companies. In addition to legislative
initiatives of this type, the NAIC and insurance regulators are continuously
involved in a process of reexamining existing laws and regulations and their
application to insurance companies. Furthermore, while the federal government
currently does not directly regulate the insurance business, federal legislation
and administrative policies (and court interpretations thereof) in a number of
areas, such as employee benefits regulation, age, sex and disability-based
discrimination, financial services regulation and federal taxation, can
significantly affect the insurance business. It is not possible to predict the
future impact of changing regulation on the operations of the Company and those
of its insurance subsidiaries.

THE FINANCIAL SERVICES INDUSTRY IS HIGHLY COMPETITIVE.

The Company competes with numerous other insurance and financial services
companies. Many of these organizations have substantially greater assets, higher
ratings from rating agencies, larger and more diversified portfolios of
insurance products and larger agency sales operations than the Company.
Competition in asset accumulation product markets is also encountered from
banks, securities brokerage firms and other financial intermediaries marketing
alternative savings products, such as mutual funds, traditional bank investments
and retirement funding alternatives.

THE COMPANY MAY BE ADVERSELY IMPACTED BY A DECLINE IN THE RATINGS OF ITS
INSURANCE SUBSIDIARIES OR ITS OWN CREDIT RATINGS.

Ratings with respect to claims-paying ability and financial strength have become
an increasingly important factor impacting the competitive position of insurance
companies. The financial strength ratings of RSLIC as of February 2006 as
assigned by A.M. Best, Fitch, Moody's and Standard & Poor's were A (Excellent),
A (Strong), A3 (Good) and A (Strong), respectively. The financial strength
ratings of SNCC as of February 2006 as assigned by A.M. Best, Fitch and Standard
& Poor's were A (Excellent), A (Strong) and A (Strong), respectively. Each of
the rating agencies reviews its ratings of companies periodically and there can
be no assurance that current ratings will be maintained or improved in the
future. Claims-paying and financial strength ratings are based upon factors
relevant to policyholders and are not directed toward protection of investors.
Downgrades in the ratings of the Company's insurance subsidiaries could
adversely affect sales of their products and could have a material adverse
effect on the results of the Company's operations. In addition, downgrades in
the Company's credit ratings could materially adversely affect its ability to
access the capital markets. The Company's senior unsecured debt ratings as of
February 2006 from A.M. Best, Fitch, Moody's and Standard & Poor's were bbb,
BBB, Baa3 and BBB, respectively.

ALMOST HALF OF THE VOTING POWER OF DELPHI IS CONTROLLED BY ROBERT
ROSENKRANZ, WHOSE INTERESTS MAY DIFFER FROM THOSE OF OTHER SECURITYHOLDERS.

Each share of our Class A Common Stock entitles the holder to one vote and each
share of our Class B Common Stock entitles the holder to a number of votes per
share equal to the lesser of (1) the number of votes such that the aggregate of
all outstanding shares of Class B Common Stock will be entitled to cast 49.9% of
all of the votes represented by the aggregate of all outstanding shares of Class
A Common Stock and Class B Common Stock or (2) ten votes. Each share of

-18-

Class B Common Stock is convertible at any time into one share of Class A Common
Stock. The holders of the Class A Common Stock vote as a separate class to elect
one director of the Company. As of March 1, 2006, Mr. Robert Rosenkranz, our
Chairman, President and Chief Executive Officer, by means of beneficial
ownership of the general partner of Rosenkranz & Company and direct or
beneficial ownership, had the power to vote all of the outstanding shares of
Class B Common Stock, which as of such date represented 49.9% of the aggregate
voting power of the Common Stock. Holders of a majority of the combined voting
power of our stockholders have the power to elect all of the members of our
Board of Directors (other than the director elected by the holders of Class A
Common Stock) and to determine the outcome of fundamental corporate
transactions, including mergers and acquisitions, consolidations and sales of
all or substantially all of our assets. We are a party to consulting and other
agreements with certain affiliates of Mr. Rosenkranz which are expected to
continue in accordance with their terms.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 2. PROPERTIES

The Company leases its principal executive office at 1105 North Market Street,
Suite 1230, Wilmington, Delaware under an operating lease expiring in October
2009. RSLIC leases its administrative office at 2001 Market Street, Suite 1500,
Philadelphia, Pennsylvania, under an operating lease expiring in December 2015.
SNCC owns its home office building at 2043 Woodland Parkway, Suite 200, St.
Louis, Missouri, which consists of approximately 58,000 square feet. SNCC also
owns a neighboring office building located at 2029 Woodland Parkway, St. Louis,
Missouri. The building consists of approximately 17,000 square feet and is
largely occupied by SNCC with a small portion leased to third parties. During
2005, SNCC bought land with the intended use for construction of a new home
office. It is located at 1832 Schuetz Road, St. Louis, Missouri. During 2005,
DCM and FRSLIC relocated their offices to the 29th and 30th floors of 590
Madison Avenue, New York, New York and are under an operating lease expiring in
November 2010. A substantial portion of the former office space that DCM and
FRSLIC leased at 153 East 53rd Street, 49th Floor, New York, New York, which is
under an operating lease expiring in July 2008, has been sublet to third
parties. Matrix leases its principal office at 5225 Hellyer Avenue, Suite 210,
San Jose, California under an operating lease expiring in December 2010. The
Company also maintains sales and administrative offices throughout the country
to provide nationwide sales support and service existing business.

ITEM 3. LEGAL PROCEEDINGS

In the course of its business, the Company is a party to litigation and other
proceedings, primarily involving its insurance operations. In some cases, these
proceedings entail claims against the Company for punitive damages and similar
types of relief. The ultimate disposition of such pending litigation and
proceedings is not expected to have a material adverse effect on the Company's
financial position. In addition, incident to its discontinued products, the
Company has been and is currently a party to various arbitrations arising out of
accident and health reinsurance arrangements in which it and other companies
formerly were participating reinsurers. During the second quarter of 2004, the
Company, along with other former participants, reached a settlement resolving
the matters in dispute in one of these arbitrations, and a favorable
determination in another such arbitration was rendered during the third quarter
of 2005. The Company increased its reserves related to the reinsurance business
in dispute in the settled arbitration by a total of $5.5 million during the year
ended December 31, 2004. The Company believes that it has substantial defenses
upon which to contest the claims made in the remaining arbitration, although it
is not possible to predict its ultimate outcome. In the opinion of management,
such arbitration, when ultimately resolved, will not have an adverse effect on
the Company's financial position.

-19-

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

Executive Officers of the Company

The table below presents certain information concerning each of the executive
officers of the Company:

Name Age Position
---- --- --------

Robert Rosenkranz 63 Director of the Company; Chairman of the Board,
President and Chief Executive Officer of the
Company; Chairman of the Board of RSLIC

Robert M. Smith, Jr. 54 Director and Executive Vice President of the
Company

Chad W. Coulter 43 Vice President, Secretary and General Counsel of
the Company; Vice President, General Counsel and
Assistant Secretary of RSLIC

Thomas W. Burghart 47 Vice President and Treasurer of the Company and
RSLIC

Lawrence E. Daurelle 54 Director of the Company and President and Chief
Executive Officer of RSLIC

Harold F. Ilg 58 Director of the Company and Chairman of the Board
of SNCC

Mr. Rosenkranz has served as the President and Chief Executive Officer of the
Company since May 1987 and has served as Chairman of the Board of Directors of
the Company since April 1989. He also serves as Chairman of the Board or as a
Director of the Company's principal subsidiaries. Mr. Rosenkranz, by means of
beneficial ownership of the general partner of Rosenkranz & Company and direct
or beneficial ownership, has the power to vote all of the outstanding shares of
Class B Common Stock, which represent 49.9% of the aggregate voting power of the
Company's common stock as of March 1, 2006.

Mr. Smith has served as Executive Vice President of the Company and DCM since
November 1999 and as a Director of the Company since January 1995. He has also
served as the Chief Investment Officer of RSLIC and FRSLIC since April 2001.
From July 1994 to November 1999, he served as Vice President of the Company and
DCM. Mr. Smith also serves as a Director of the Company's principal
subsidiaries.

Mr. Coulter has served as Vice President and General Counsel of the Company and
as Vice President, General Counsel and Assistant Secretary of RSLIC, FRSLIC and
RSLIC-Texas since January 1998, and has served as Secretary of the Company since
May 2003. He also served for RSLIC in similar capacities from February 1994 to
August 1997, and in various capacities from January 1991 to February 1994. From
August 1997 to December 1997, Mr. Coulter was Vice President and General Counsel
of National Life of Vermont.

Mr. Burghart has served as Vice President and Treasurer of the Company since
April 2001 and as Vice President and Treasurer of RSLIC, FRSLIC and RSLIC-Texas
since October 2000. From March 1992 to September 2000, he served as the Second
Vice President, Actuarial Statements, of RSLIC.

Mr. Daurelle has served as a Director of the Company since August 2002. He also
has served as President and Chief Executive Officer of RSLIC, FRSLIC and
RSLIC-Texas since October 2000. He served as Vice President and Treasurer of the
Company from August 1998 to April 2001. He also serves on the Board of Directors
of RSLIC, FRSLIC and RSLIC-Texas. From May 1995 to October 2000, Mr. Daurelle
was Vice President and Treasurer of RSLIC, FRSLIC and RSLIC-Texas.

Mr. Ilg has served as a Director of the Company since August 2002. He also has
served as Chairman of the Board of SNCC since January 1999, as well as the
President and a Director of Safety National Re since 1997. He serves on the
Board of Directors of RSLIC, FRSLIC and RSLIC-Texas. From April 1999 until
October 2000, he served as President and Chief Executive Officer of RSLIC,
FRSLIC, and RSLIC-Texas. Prior to January 1999, he served as Vice Chairman of
the Board of SNCC, where he has been employed in various capacities since 1978.

-20-

PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES

The closing price of the Company's Class A Common Stock was $52.20 on March 1,
2006. There were approximately 3,900 holders of record of the Company's Class A
Common Stock as of March 1, 2006.

The Company's Class A Common Stock is listed on the New York Stock Exchange
under the symbol DFG. The following table sets forth the high and low sales
prices for the Company's Class A Common Stock and the cash dividends paid per
share for the Company's Class A and Class B Common Stock.

High Low Dividends
------ ------ ---------

2004: First Quarter $42.30 $35.99 $0.08
Second Quarter 44.53 36.29 0.08
Third Quarter 44.85 38.82 0.08
Fourth Quarter 47.60 37.66 0.08

2005: First Quarter $47.10 $40.63 $0.09
Second Quarter 44.90 39.05 0.09
Third Quarter 49.48 43.95 0.09
Fourth Quarter 49.06 42.98 0.09

In 2001, the Company's Board of Directors approved the initiation of a quarterly
cash dividend payable on the Company's Class A Common Stock and Class B Common
Stock. The quarterly cash dividend was $0.08 per share during 2004. In the first
quarter of 2005, the Company's Board of Directors increased the cash dividend by
12.5% to $0.09 per share. In the first quarter of 2006, the cash dividend
declared by the Company's Board of Directors was increased by 11.1% to $0.10 per
share, and was paid on the Company's Class A Common Stock and Class B Common
Stock on March 8, 2006. The Company intends to continue to pay a quarterly
dividend at this level. However, the declaration and payment of such dividends,
including the amount and frequency of such dividends, is at the discretion of
the Board and depends upon many factors, including the Company's consolidated
financial position, liquidity requirements, operating results and such other
factors as the Board may deem relevant. Cash dividend payments are permitted
under the respective terms of the Company's $200.0 million revolving credit
facility and the 2033 Senior Notes.

In addition, dividend payments by the Company's insurance subsidiaries to the
Company are subject to certain regulatory restrictions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and "Business - Regulation."

The following table shows the purchases of equity securities under the Company's
existing repurchase program during the three months ended December 31, 2005:

Total Number
of Shares Maximum
Purchased Number of
as Part Shares that
Total of Publicly May Yet Be
Number of Average Announced Purchased Under
Shares Price Paid Plans the Plans
Purchased per Share or Programs(1) or Programs(2)
--------- ---------- -------------- ---------------

October 1 - 31, 2005 -- -- -- --
November 1 - 30, 2005 15,000 $47.60 15,000 1,078,050
December 1 - 31, 2005 135,000 $47.15 135,000 943,050
------- -------
Total 150,000 $47.19 150,000 943,050
======= =======

(1) As of December 31, 2005, the Company had purchased 2,710,035 shares, at a
total cost of $66.4 million in the open market. In addition, during 2004,
the Company received 13,176 shares of the Company's Class A Common Stock
with an aggregate value of $0.3 million in liquidation of a partnership
interest, which increased the total number of shares of treasury stock
outstanding to 2,723,211, as of December 31, 2005.

-21-

(2) On August 31, 1998, the Company's Board of Directors authorized the
purchase of 1,591,812 outstanding shares of the Company's Class A Common
Stock from time to time on the open market. In August 1999 and February
2001, the Board of Directors increased the number of outstanding shares
authorized for repurchase by 1,530,000 and 531,273, respectively. The
program has no expiration date.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data below 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.

Year Ended December 31,
--------------------------------------------------------
2005 2004 2003 2002 2001
---------- ---------- -------- -------- --------
(dollars and shares in thousands, except per share data)

INCOME STATEMENT DATA(1):
Insurance premiums and fee income:
Core group employee benefit
products .......................... $ 936,244 $ 784,990 $673,653 $559,174 $452,158
Non-core group employee benefit
products(2) ....................... 24,918 16,066 14,908 44,883 32,555
Asset accumulation products .......... 3,220 3,335 4,158 2,645 3,088
Other ................................ 25,829 23,686 18,893 16,713 16,122
---------- ---------- -------- -------- --------
990,211 828,077 711,612 623,415 503,923
Net investment income (3) ............... 223,569 202,444 186,337 161,983 157,394
Net realized investment gains
(losses)(4) .......................... 9,003 15,460 12,724 (28,469) (70,289)
(Loss) gain on extinguishment of debt
and capital securities(3) ............ -- -- -- (332) 11,456
---------- ---------- -------- -------- --------
Total revenue ........................ 1,222,783 1,045,981 910,673 756,597 602,484

Income from continuing operations(5) .... 126,684 121,400 95,295 58,965 5,743

Net income (5) .......................... 113,334 123,543 98,916 60,652 6,505

BASIC RESULTS PER SHARE(1) (5):

Income from continuing operations ....... $ 3.88 $ 3.80 $ 3.05 $ 1.89 $ 0.19
Net income .............................. 3.47 3.87 3.17 1.95 0.21
Weighted average shares outstanding ..... 32,672 31,952 31,208 31,139 30,848

DILUTED RESULTS PER SHARE(1) (5):

Income from continuing operations ....... $ 3.78 $ 3.68 $ 2.98 $ 1.85 $ 0.18
Net income .............................. 3.38 3.75 3.09 1.90 0.21
Weighted average shares outstanding ..... 33,511 32,941 32,023 31,887 31,629

OTHER DATA:

Cash dividends paid per share(6): ....... $ 0.36 $ 0.32 $ 0.23 $ 0.20 $ 0.20
Diluted book value per share(7) ......... 31.46 29.36 25.49 21.83 19.00

December 31,
--------------------------------------------------------------
2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
(dollars in thousands)

BALANCE SHEET DATA:
Total investments ....................... $3,912,604 $3,541,076 $3,202,754 $2,816,051 $2,427,214
Total assets ............................ 5,276,170 4,829,467 4,177,532 3,734,942 3,336,146
Corporate debt(3) (8) ................... 234,750 157,750 143,750 118,139 125,675
Junior subordinated deferrable interest
debentures underlying company-
obligated mandatorily redeemable
capital securities issued by
unconsolidated subsidiaries(9) ....... 59,762 59,762 -- -- --
Company-obligated mandatorily redeemable
capital securities of
subsidiaries(3)(9) ................... -- -- 56,050 36,050 36,050
Shareholders' equity .................... 1,033,039 939,848 798,440 681,655 581,994
Corporate debt to total capitalization
ratio(10) ............................ 17.7% 13.6% 14.4% 14.1% 16.9%

-22-

(1) During the fourth quarter of 2005, the Company decided to exit its non-core
property catastrophe reinsurance business, due to the volatility associated
with such business and other strategic considerations, and has not
thereafter entered into or renewed any assumed property reinsurance
contracts. A substantial majority of these reinsurance contracts expired on
or before December 31, 2005 and all of the remaining contracts will expire
prior to the end of the third quarter of 2006. The Company has classified
the operating results of this business as discontinued operations. Prior
period information has been reclassified to conform to the current period
presentation. See "Other Transactions" and Note S to the Consolidated
Financial Statements.

Net income includes (loss) income from discontinued operations, net of
federal income tax (benefit) expense, as follows:

Year Ended December 31,
-------------------------------------------
2005 2004 2003 2002 2001
-------- ------ ------ ------ -----
(dollars in thousands,
except per share data)

(Loss) income from discontinued
operations, net of income tax
(benefit) expense............... $(13,350) $2,143 $3,621 $1,687 $ 762
Basic per share amount............. (0.41) 0.07 0.12 0.06 0.02
Diluted per share amount........... (0.40) 0.07 0.11 0.05 0.03

(2) Non-core group employee benefit products include LPTs, primary workers'
compensation, bail bond insurance, workers' compensation reinsurance and
reinsurance facilities. Premiums from non-core group employee benefit
products include premiums from LPTs, which are episodic in nature, of $4.3
million, $26.8 million, $0, $5.3 million and $10.4 million, in 2001, 2002,
2003, 2004 and 2005, respectively. See "Business - Group Employee Benefit
Products" and "Business - Reinsurance."

(3) In 2001, the Company used the proceeds from the sales of a substantial
majority of investments of its investment subsidiaries during the fourth
quarter of 2000 to repay $150.0 million of outstanding borrowings under its
revolving credit facilities, to repurchase $64.0 million liquidation amount
of the Capital Securities and to repurchase $8.0 million principal amount
of the Matured Senior Notes. See "Business - Other Transactions." The
Company recognized a gain on extinguishment of debt and capital securities
of $11.5 million in connection with these repurchases. In the second
quarter of 2002, the Company repurchased $10.5 million aggregate principal
amount of the Matured Senior Notes and recognized a loss on extinguishment
of debt of $0.3 million in connection with this repurchase.

(4) In 2005, 2004, 2003, 2002 and 2001, the Company recognized pre-tax losses
of $4.2 million, $3.9 million, $13.0 million, $54.1 million and $79.3
million, respectively, due to the other than temporary declines in the
market values of certain securities, which are reported as net realized
investment losses.

(5) Results for 2001 include a charge of $0.91 per diluted share or $28.8
million, net of an income tax benefit of $15.5 million and reinsurance
coverages of $21.8 million, for reserve strengthening primarily related to
an unusually high number of large losses in the Company's excess workers'
compensation business. Included in this charge, on a pre-tax basis, are
additions to excess workers' compensation case reserves of $9.0 million and
incurred but not reported ("IBNR") reserves of $24.0 million. This charge
also includes reported workers' compensation losses of $6.3 million and a
$5.0 million addition to long-term disability IBNR reserves attributable to
the terrorist attacks on the World Trade Center. In the years subsequent to
2001, the number of large losses experienced by the Company returned to the
Company's pre-2001 historical average.

During the second half of 2004, the Company's income taxes payable was
reduced by $6.6 million primarily from the favorable resolution of Internal
Revenue Service ("IRS") audits of the 1998 through 2002 tax years. This
reduction represented the release of previous accruals for potential audit
adjustments which were subsequently settled or eliminated and the further
refinement of existing tax exposures.

Income from continuing operations and net income include realized
investment gains (losses), net of federal income tax expense (benefit) and
the (loss) gain on extinguishment of debt and capital securities, net of
federal income tax (benefit) expense, as follows:

Year Ended December 31,
-----------------------------------------------
2005 2004 2003 2002 2001
------ ------- ------ -------- --------
(dollars in thousands, except per share data)

Realized investment gains (losses),
net of income tax expense
(benefit) ...................... $5,852 $10,049 $8,271 $(18,505) $(45,688)
Basic per share amount ............ 0.18 0.32 0.26 (0.59) (1.48)
Diluted per share amount .......... 0.17 0.30 0.26 (0.58) (1.44)

(Loss) gain on extinguishment of
debt and capital securities, net
of income tax (benefit)
expense ........................ -- -- -- (216) 7,446

Basic per share amount ............ -- -- -- (0.01) 0.24
Diluted per share amount .......... -- -- -- (0.01) 0.23

(6) In 2001, the Company's Board of Directors approved the initiation of a
quarterly cash dividend payable on the Company's outstanding Class A and
Class B Common Stock. The quarterly cash dividend was $0.05 per share
during 2001, 2002 and the first three quarters of 2003. In the fourth
quarter of 2003, the Company's Board of Directors increased the cash
dividend to $0.08 per share. In the first quarter of 2005, the Company's
Board of Directors increased the cash dividend to $0.09 per share. During
2005, 2004, 2003, 2002 and 2001, the Company paid cash dividends on its
capital stock in the amount of $11.6 million, $10.1 million, $7.4 million,
$6.0 million and $5.7 million, respectively. See Note K to the Consolidated
Financial Statements.

(7) Diluted book value per share is calculated by dividing shareholders' equity
(as determined in accordance with GAAP), as increased by the proceeds and
tax benefit from the assumed exercise of outstanding in-the-money stock
options, by total shares outstanding, also increased by shares issued upon
the assumed exercise of the options and deferred shares.

(8) In May 2003, the Company issued $143.8 million of the 2033 Senior Notes.
See "Business - Other Transactions" and Note D to the Consolidated
Financial Statements.

-23-

(9) In May 2003, the Trust issued $20.0 million liquidation amount of 2003
Capital Securities in a private placement. See "Business - Other
Transactions" and Note J to the Consolidated Financial Statements.

As of March 31, 2004, the Company adopted revised Financial Accounting
Standards Board Interpretation ("FIN") No. 46, "Consolidation of Variable
Interest Entities." The revised interpretation changed the conceptual
framework for determining if an entity holds a controlling interest in a
variable interest entity and required the Company to deconsolidate its
subsidiaries that hold junior subordinated deferrable interest debentures
of the Company which underlie the Company-obligated mandatorily redeemable
capital securities of these subsidiaries. Therefore, the Company presented
in its consolidated financial statements the junior subordinated deferrable
interest debentures of $59.8 million as a liability and its interest of
$3.7 million in the subsidiaries that hold these debentures as a component
of other assets.

(10) The corporate debt to total capitalization ratio is calculated by dividing
long-term corporate debt by the sum of the Company's long-term corporate
debt, junior subordinated deferrable interest debentures underlying
company-obligated mandatorily redeemable capital securities issued by
unconsolidated subsidiaries/Company-obligated mandatorily redeemable
capital securities of subsidiaries and shareholders' equity.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

INTRODUCTION

The Company, through its subsidiaries, underwrites a diverse portfolio of group
employee benefit products, primarily group life, disability, and excess workers'
compensation insurance. Revenues from this group of products are primarily
comprised of earned premiums and investment income. The profitability of group
employee benefit products is affected by, among other things, differences
between actual and projected claims experience, the retention of existing
customers, product mix and the Company's ability to attract new customers,
change premium rates and contract terms and control administrative expenses. The
Company transfers its exposure to some group employee benefit risks through
reinsurance ceded arrangements with other insurance and reinsurance companies.
Accordingly, the profitability of the Company's group employee benefit products
is affected by the amount, cost and terms of reinsurance it obtains. The
profitability of certain group employee benefit products is also affected by the
difference between the yield achieved on invested assets and the discount rate
used to calculate the related reserves. The Company is continuing to experience
favorable market conditions for its excess workers' compensation products due to
high primary workers' compensation rates. For its other group employee benefit
products, the Company is maintaining its underwriting discipline under
competitive market conditions and is continuing to increase the size of its
sales force in order to enhance its focus on the small case niche (insured
groups of 10 to 500 individuals), including employers which are first-time
providers of these employee benefits, which it believes to offer opportunities
for superior profitability. In the fourth quarter of 2005, the Company decided
to exit its non-core property catastrophe reinsurance business, due to the
volatility associated with such business and other strategic considerations, and
has not thereafter renewed or written any new reinsurance contracts in this
business. Accordingly, the Company reclassified the operating results of this
business as discontinued operations. Prior period information has been
reclassified to conform to the current period presentation. See "Results of
Operations - 2005 Compared to 2004 - (Loss) Income from Discontinued
Operations."

The Company also operates an asset accumulation business that focuses primarily
on offering fixed annuities to individuals. Deposits from the Company's asset
accumulation business consist of new annuity sales, which are recorded as
liabilities rather than as premiums. Revenues from the Company's asset
accumulation business are primarily comprised of investment income earned on the
funds under management. The profitability of asset accumulation products is
primarily dependent on the spread achieved between the return on investments and
the interest credited to annuity holders. The Company is disciplined in setting
the crediting rates offered on its asset accumulation products in an effort to
achieve its targeted interest rate spreads on these products, and is willing to
accept lower levels of sales on these products when market conditions make these
targeted spreads more difficult to achieve.

The following discussion and analysis of the results of operations and financial
condition of the Company should be read in conjunction with the Consolidated
Financial Statements and related notes. The preparation of financial statements
in conformity with GAAP requires management, in some instances, to make
judgments about the application of these principles. The amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period could differ materially from
the amounts reported if different conditions existed or different judgments were
utilized. A discussion of how management applies certain critical accounting
policies and makes certain estimates is presented below under the caption
"Critical Accounting Policies and Estimates" and should be read in conjunction
with the following discussion and analysis of results of operations and
financial condition of the Company. In addition, a discussion of uncertainties
and contingencies which can affect actual results and could cause future results
to differ materially from those expressed in certain forward-looking statements
contained in this Management's Discussion and Analysis of Financial Condition
and Results of Operations can be found in Item 1A. "Risk Factors." See
"Forward-Looking Statements And Cautionary Statements Regarding Certain factors
That May Affect Future Results."

-24-

RESULTS OF OPERATIONS

2005 COMPARED TO 2004

Summary of Results. Net income was $113.3 million, or $3.38 per diluted share,
in 2005 as compared to $123.5 million, or $3.75 per diluted share, in 2004. Net
income in 2005 and 2004 included realized investment gains (net of the related
income tax expense) of $5.9 million, or $0.17 per diluted share, and $10.0
million, or $0.30 per diluted share, respectively. Net income in 2005 benefited
from growth in income from the Company's core group employee benefit products,
increased product spreads on the Company's asset accumulation products and an
increase in net investment income, and was adversely impacted by losses from
discontinued operations and an increase in interest expense. Core group employee
benefit products include group life, disability, excess workers' compensation,
travel accident and dental insurance. See "Business - Group Employee Benefit
Products." Premiums from these core group employee benefit products increased
19% in 2005 and the combined ratio (loss ratio plus expense ratio) for these
products was modestly lower than in 2004. Net investment income in 2005, which
increased 10% from 2004, reflects an 11% increase in average invested assets.
During 2005 and 2004, the Company had (losses) income from discontinued
operations (net of the related income tax (benefit) expense) of $(13.4) million,
or $(0.40) per diluted share, and $2.1 million, or $0.07 per diluted share,
respectively, attributable its non-core property catastrophe reinsurance
business which it decided to exit during the fourth quarter of 2005. The
increase in interest expense was primarily due to the increases in the Company's
weighted average borrowings and the weighted average borrowing rate due to
increases in the levels of the short-term interest indices referenced under the
Company's revolving credit facility during 2005 as compared to the full year of
2004. In addition, net income for the 2004 period included a reduction of income
tax expense of $6.6 million primarily resulting from the favorable resolution of
IRS audits of the 1998 through 2002 tax years. This reduction represented the
release of previous accruals for potential audit adjustments which were
subsequently settled or eliminated and the further refinement of existing tax
exposures.

Premium and Fee Income. Premium and fee income in 2005 was $990.2 million as
compared to $828.1 million in 2004, an increase of 20%. Premiums from core group
employee benefit products increased 19% to $936.2 million in 2005 from $785.0
million in 2004. This increase reflects normal growth in employment and salary
levels for the Company's existing customer base, price increases, new business
production and an increase in premium income related to an indemnity reinsurance
arrangement which the Company entered into in the fourth quarter 2004. Under
this arrangement, the Company assumes certain group disability insurance
policies on an ongoing basis and is responsible for underwriting, pricing and
claims management with respect to the reinsured business. The increase also
reflects a decrease in premiums ceded by the Company to reinsurers for these
products. Premiums from excess workers' compensation insurance for self-insured
employers increased 15% to $220.3 million in 2005 from $190.8 million in 2004.
This increase was primarily due to the demand for this product as a result of
high primary workers' compensation rates. SNCC continued to obtain significant
improvements in contract terms, in particular higher SIR levels, while
maintaining its pricing in connection with its renewals of insurance coverage
during 2005. On average, SIR levels increased approximately 8% in 2005. SNCC has
continued to maintain its pricing on its 2006 renewals and SIRs are up 9% in
these renewals. Excess workers' compensation new business production, which
represents the amount of new annualized premium sold, increased 62% to $46.0
million in 2005 from $28.4 million in 2004 and the retention of existing
customers in 2005 remained strong. New business production for 2005 and 2006
benefited from a renewal rights agreement that SNCC entered into in July 2005.
Under the agreement, SNCC acquired, among other things, the right to offer
renewal quotes to expiring excess workers' compensation policies of a former
competitor. Premiums from the Company's other core group employee benefit
products increased 20% to $715.9 million in 2005 from $594.2 million in 2004,
reflecting new business production and a decrease in premiums ceded by the
Company to reinsurers for these products. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources - Reinsurance." New business production for the Company's
other core group employee benefit products was $198.1 million in 2005 and $180.9
million in 2004. New business production includes only directly written
business, and does not include business reinsured under the Company's indemnity
reinsurance arrangement discussed above. The level of production achieved from
these products reflects the Company's focus on the small case niche (insured
groups of 10 to 500 individuals) which resulted in a 14% increase in production
based on the number of cases sold as compared to 2004. The Company continues to
maintain its underwriting discipline under competitive market conditions for
these products and to implement price increases for certain existing disability
and group life customers.

-25-

Non-core group employee benefit products include LPTs, primary workers'
compensation, bail bond insurance, workers' compensation reinsurance and
reinsurance facilities. See "Business - Group Employee Benefit Products" and
"Business - Reinsurance." Premiums from non-core group employee benefit products
were $24.9 million in 2005 as compared to $16.1 million in 2004. Premiums from
the non-core group employee benefit products in 2005 included a higher level of
premiums from LPTs, which are episodic in nature.

Deposits from the Company's asset accumulation products were $95.0 million in
2005 as compared to $133.1 million in 2004. These deposits consist of new
annuity sales, which are recorded as liabilities rather than as premiums. The
Company continues to maintain its discipline in setting the crediting rates
offered on its asset accumulation products. The decrease in deposits was
attributable to the increase in short-term interest rates, which has caused
other short-term investment products such as certificates of deposits to be an
attractive alternative to fixed annuity products, and to increased market
performance of equity-indexed annuities during 2005, which reduced demand for
fixed annuity products. The Company is continuing to maintain its discipline in
setting the crediting rates offered on its asset accumulation products in 2006
in an effort to achieve its targeted interest rate spreads on these products.

Net Investment Income. Net investment income in 2005 was $223.6 million as
compared to $202.4 million in 2004, an increase of 10%. The level of net
investment income in the 2005 period reflects an 11% increase in average
invested assets to $3,621.6 million in 2005 from $3,273.0 million in 2004. The
tax equivalent weighted average annual yield on invested assets was 6.4% in 2005
and 2004.

Net Realized Investment Gains. Net realized investment gains were $9.0 million
in 2005 as compared to $15.5 million in 2004. The Company's investment strategy
results in periodic sales of securities and, therefore, the recognition of
realized investment gains and losses. During 2005 and 2004, the Company
recognized $13.2 million and $19.4 million, respectively, of net gains on the
sales of securities. The Company monitors its investments on an ongoing basis.
When the market value of a security declines below its cost, and management
judges the decline to be other than temporary, the security is written down to
fair value, and the decline is reported as a realized investment loss. In 2005
and 2004, the Company recognized $4.2 million and $3.9 million, respectively, of
losses due to the other than temporary declines in the market values of certain
fixed maturity securities.

Such losses in 2005 ($2.7 million on an after-tax basis) resulted primarily from
credit quality-related deterioration in certain corporate securities and the
Company may recognize additional losses of this type in the future. The Company
anticipates that if certain other existing declines in security values are
determined to be other than temporary, it may recognize additional investment
losses in the range of $5 million to $10 million, on an after-tax basis, with
respect to the relevant securities. However, the extent of any such losses will
depend on future market developments and changes in security values, and such
losses may be outside this range. The Company continuously monitors the affected
securities pursuant to its procedures for evaluation for other than temporary
impairment in valuation. See "Critical Accounting Policies and Estimates" for a
description of these procedures, which take into account a number of factors. It
is not possible to predict the extent of any future changes in value, positive
or negative, or the results of the future application of these procedures, with
respect to these securities. There can be no assurance that the Company will
realize investment gains in the future in an amount sufficient to offset any
such losses.

Benefits and Expenses. Policyholder benefits and expenses were $1,018.8 million
as compared to $863.1 million in 2004, an increase of 18%. This increase
primarily reflects the increase in premiums from the Company's group employee
benefit products discussed above, and also reflects an addition to reserves for
prior years' claims and claim expenses in the amount of $32.9 million, which
arose primarily from adverse loss experience in the Company's excess workers'
compensation line, principally due to moderately increased claim frequency,
relative to prior periods, relating to policies written during the competitive
market cycle years from 1997 to 2001. If this experience trend were to continue
in the future, absent favorable loss developments in other policy years, the
Company's results of operations could be materially adversely affected. The
combined ratio (loss ratio plus expense ratio) for the Company's group employee
benefits products decreased to 94.1% in 2005 from 95.0% in 2004. The weighted
average annual crediting rate on the Company's asset accumulation products,
which reflects the effects of the first year bonus crediting rate on certain
newly issued products, was 4.6% and 4.7% in 2005 and 2004, respectively.

Interest Expense. Interest expense was $20.5 million in 2005 as compared to
$18.5 million in 2004, an increase of $2.0 million. This increase primarily
resulted from the increases in the weighted average borrowings and the weighted
average borrowing rate due to increases in the levels of short-term interest
indices referenced under the Company's revolving credit facility during 2005 as
compared to 2004. The increase was also attributable to the write-off of $0.5
million of capitalized debt issuance costs related to the Company's previous
$100 million revolving credit facility scheduled to expire in December 2006,
which was terminated in May 2005 when the Company entered into a new $200
million revolving credit facility.

-26-

Income Tax Expense. Income tax expense was $56.9 million in 2005 as compared to
$43.0 million in 2004. The Company's effective tax rate was 31.0% in 2005 and
26.2% in 2004. The Company's lower effective tax rate during 2004 reflects a
$6.6 million reduction in federal income tax expense primarily resulting from
the favorable resolution of IRS audits of the 1998 through 2002 tax years. This
reduction represents the release of previous accruals for potential audit
adjustments which were subsequently settled or eliminated and further refinement
of existing tax exposures.

(Loss) Income from Discontinued Operations. During the fourth quarter of 2005,
the Company decided to exit its non-core property catastrophe reinsurance
business, due to the volatility associated with such business and other
strategic considerations, and has not thereafter entered into or renewed any
assumed property reinsurance contracts. In 2005 and 2004, the Company recognized
after-tax operating (loss) income of $(13.4) million, or $(0.40) per diluted
share, and $2.1 million, or $0.07 per diluted share, respectively, net of income
tax (benefit) expense of $(7.2) million and $1.2 million, respectively, from
this business. See Note S to the Consolidated Financial Statements.

2004 COMPARED TO 2003

Summary of Results. Net income was $123.5 million, or $3.75 per diluted share,
in 2004 as compared to $98.9 million, or $3.09 per diluted share, in 2003. Net
income in 2004 and 2003 included realized investment gains (net of the related
income tax expense) of $10.0 million, or $0.30 per diluted share, and $8.3
million, or $0.26 per diluted share, respectively. The increase in net income in
2004 is attributable to growth in income from group employee benefit products,
net investment income and a reduction in income tax expense. Premiums from the
Company's core group employee benefit products increased 17% in 2004 and the
combined ratio (loss ratio plus expense ratio) was 95.0% in 2004 and 2003. The
weighted average annual crediting rate on the Company's asset accumulation
products, which reflects the effects of the first year bonus crediting rate on
certain newly issued products, decreased from 5.5% in 2003 to 4.7% in 2004. Net
investment income in 2004, which increased 9% from 2003, reflects an 11%
increase in average invested assets. In addition, income tax expense was reduced
by $6.6 million during 2004 primarily resulting from the favorable resolution of
IRS audits of the 1998 through 2002 tax years. This reduction represented the
release of previous accruals for potential audit adjustments which were
subsequently settled or eliminated and the further refinement of existing tax
exposures. Net income in 2004 and 2003 also included income from discontinued
operations (net of the related income tax expense) of $2.1 million, or $0.07 per
diluted share, and $3.6 million, or $0.11 per diluted share, respectively.

Premium and Fee Income. Premium and fee income in 2004 was $828.1 million as
compared to $711.6 million in 2003, an increase of 16%. Premiums from core group
employee benefit products increased 17% to $785.0 million in 2004 from $673.7
million in 2003. This increase reflected normal growth in employment and salary
levels for the Company's existing customer base, price increases, new business
production and a decrease in premiums ceded by the Company to reinsurers for
these products. Core group employee benefit products include group life,
disability, excess workers' compensation, travel accident and dental insurance.
Premiums from excess workers' compensation insurance for self-insured employers
increased 26% to $190.8 million in 2004 from $151.5 million in 2003. This
increase was primarily due to the favorable pricing environment and demand for
this product as a result of high primary workers' compensation rates. SNCC
obtained average price increases of 9% in connection with its renewals of
insurance coverage during 2004, and has continued to obtain significant
improvements in contract terms, in particular higher SIR levels, in these
renewals. On average, SIRs increased 8% in 2004. In addition, retention of
existing customers for excess workers' compensation products in 2004 was higher
than in 2003. Excess workers' compensation new business production, which
represents the amount of new annualized premium sold, was $28.4 million in 2004
as compared with exceptionally strong production in 2003 of $45.1 million. The
significantly higher renewal ratio and rate increases offset the decline in new
business production as the Company focused on achieving rate increases on its
existing business and maintained pricing and underwriting discipline as to new
sales. Premiums from the Company's other core group employee benefit products
increased 14% to $594.2 million in 2004 from $522.1 million in 2003, reflecting
new business production and a decrease in premiums ceded by the Company to
reinsurers for these products. New business production for the Company's other
core group employee benefit products was $180.9 million in 2004 and $175.1
million in 2003. The 2004 production level for these products reflects the
Company's focus on the small case niche (insured groups of 10 to 500
individuals) which resulted in a 22% increase in production based on the number
of cases sold as compared to 2003. The Company continued to maintain its
underwriting discipline under competitive market conditions for these products
and implemented price increases for certain existing disability and group life
customers.

-27-

Deposits from the Company's asset accumulation products were $133.1 million in
2004 as compared to $100.6 million in 2003. These deposits consist of new
annuity sales, which are recorded as liabilities rather than as premiums. The
Company continued to maintain its discipline in setting the crediting rates
offered on its asset accumulation products, since the interest rate spreads
available on these products remained below average throughout 2003 and 2004. The
increase in deposits from the Company's asset accumulation products in 2004 was
primarily due to an increase in the number of independent agents and marketing
companies distributing the Company's annuity products.

Net Investment Income. Net investment income in 2004 was $202.4 million as
compared to $186.3 million in 2003, an increase of 9%. The level of net
investment income in the 2004 period reflects an increase in average invested
assets in 2004 partially offset by a decrease in the tax equivalent weighted
average annual yield. The tax equivalent weighted average annual yield on
invested assets was 6.4% on average invested assets of $3,273.0 million in 2004
and 6.5% on average invested assets of $2,948.2 million in 2003.

Net Realized Investment Gains. Net realized investment gains were $15.5 million
in 2004 as compared to $12.7 million in 2003. The Company's investment strategy
results in periodic sales of securities and, therefore, the recognition of
realized investment gains and losses. During 2004 and 2003, the Company
recognized $19.4 million and $25.7 million, respectively, of net gains on the
sales of securities. The Company monitors its investments on an ongoing basis.
When the market value of a security declines below its cost, and management
judges the decline to be other than temporary, the security is written down to
fair value, and the decline is reported as a realized investment loss. In 2004
and 2003, the Company recognized $3.9 million and $13.0 million, respectively,
of losses due to the other than temporary declines in the market values of
certain fixed maturity securities.

Benefits and Expenses. Policyholder benefits and expenses were $863.1 million as
compared to $754.6 million in 2003, an increase of 14%. This increase primarily
reflects the increase in premiums from the Company's group employee benefit
products discussed above, and also reflects an addition to reserves for prior
years' claims and claim expenses in the amount of $12.8 million, which arose
primarily from adverse loss experience in the Company's excess workers'
compensation line, principally due to moderately increased claim frequency,
relative to prior periods, relating to policies written during the competitive
market cycle years from 1997 to 2000. If this experience trend were to continue
in the future, absent favorable loss developments in other policy years, the
Company's results of operations could be materially adversely affected. The
combined ratio (loss ratio plus expense ratio) for the Company's group employee
benefits products was 95.0% in 2004 and 2003. Benefits and expenses related to
the Company's asset accumulation products decreased $3.0 million primarily due
to a decrease in the weighted average annual crediting rate on these products,
which reflected the effects of the first year bonus crediting rate on certain
newly issued products, from 5.5% in 2003 to 4.7% in 2004.

Income Tax Expense. Income tax expense was $43.0 million in 2004 as compared to
$42.6 million in 2003. The Company's effective tax rate was 26.2% in 2004 and
30.9% in 2003. The decrease in the Company's effective tax rate during 2004
reflects a $6.6 million reduction in federal income tax expense primarily
resulting from the favorable resolution of IRS audits of the 1998 through 2002
tax years. This reduction represents the release of previous accruals for
potential audit adjustments which were subsequently settled or eliminated and
further refinement of existing tax exposures.

Income from Discontinued Operations. After-tax operating income from the
Company's discontinued property catastrophe reinsurance business in 2004 and
2003 was $2.1 million, or $0.07 per diluted share, and $3.6 million, or $0.11
per diluted share, respectively, net of related income tax expense of $1.2
million and $2.0 million, respectively. During the fourth quarter of 2005, the
Company decided to exit its non-core property catastrophe reinsurance business,
due to the volatility associated with such business and other strategic
considerations, and has not thereafter entered into or renewed any assumed
property reinsurance contracts. See Note S to the Consolidated Financial
Statements.

LIQUIDITY AND CAPITAL RESOURCES

General. The Company held approximately $104.7 million of financial resources at
the holding company level at December 31, 2005, primarily comprised of
investments in the common stock of its investment subsidiaries, investments in
limited partnerships and limited liability companies and short-term investments.
The assets of the investment subsidiaries are primarily invested in limited
partnerships and limited liability companies. A shelf registration statement is
also in effect under which securities yielding proceeds of up to $106.2 million
may be issued by the Company.

-28-

agreement. They include, among others, the maintenance of a specified debt to
capital ratio, minimum consolidated net worth of the Company, minimum risk-based
capital requirements for the Company's insurance subsidiaries, RSLIC and SNCC,
and certain limitations on investments and subsidiary indebtedness. At December
31, 2005, the Company had $109.0 million of borrowings available under the
Credit Agreement.

Other sources of liquidity at the holding company level include dividends paid
from subsidiaries, primarily generated from operating cash flows and
investments. During 2006, the Company's insurance subsidiaries will be
permitted, without prior regulatory approval, to make dividend payments totaling
$72.5 million. The Company's insurance subsidiaries may also pay additional
dividends with the requisite regulatory approvals. See "Business - Regulation."
In general, dividends from the Company's non-insurance subsidiaries are not
subject to regulatory or other restrictions.

The Company's current liquidity needs, in addition to funding its operating
expenses, include principal and interest payments on outstanding borrowings
under the Credit Agreement, interest payments on the 2033 Senior Notes, and
distributions on the Capital Securities and the 2003 Capital Securities. The
maximum amount of borrowings available under the Company's Credit Agreement is
$200.0 million. The 2033 Senior Notes mature in their entirety in May 2033 and
are not subject to any sinking fund requirements but are redeemable by the
Company at par at any time on or after May 15, 2008. The junior subordinated
deferrable interest debentures underlying the Capital Securities are not
redeemable prior to March 25, 2007. The junior subordinated deferrable interest
debentures underlying the 2003 Capital Securities are redeemable, in whole or in
part, beginning May 15, 2008. See Notes D and J to the Consolidated Financial
Statements.

The following table summarizes the Company's significant contractual obligations
at December 31, 2005 and the future periods in which such obligations are
expected to be settled in cash. The 2033 Senior Notes and the junior
subordinated deferrable interest debentures underlying company-obligated
mandatorily redeemable capital securities issued by unconsolidated subsidiaries
are assumed to be repaid on their respective maturity dates. Additional details
regarding these obligations are provided in the notes to the consolidated
financial statements, as referenced in the table:

CONTRACTUAL OBLIGATIONS

Payments Due by Period
---------------------------------------------------------
Less than 1 -3 3 - 5 More than
Total 1 Year Years Years 5 Years
---------- --------- -------- -------- ----------
(dollars in thousands)

Other long-term liabilities (1) ...................... $3,414,684 $522,100 $671,464 $505,084 $1,716,036
Corporate debt (Note D) .............................. 234,750 91,000 -- -- 143,750
Interest on corporate debt (Note D) (2) .............. 318,906 12,497 24,015 23,708 258,686
Advances from Federal Home Loan Bank (Note E) ........ 55,000 -- -- -- 55,000
Interest on advances from Federal
Home Loan Bank (Note E) ........................... 59,271 4,106 8,211 8,211 38,743
Junior subordinated deferrable interest debentures
underlying company-obligated mandatorily
redeemable capital securities issued
by unconsolidated subsidiaries (Note J) .......... 59,762 -- -- -- 59,762
Interest on junior subordinated deferrable interest
debentures (Note J) (3) ........................... 119,207 5,066 10,137 10,133 93,871
Operating lease obligations (Note M) ................. 64,327 11,480 20,343 13,847 18,657
---------- -------- -------- -------- ----------
Total contractual obligations ..................... $4,325,907 $646,249 $734,170 $560,983 $2,384,505
========== ======== ======== ======== ==========

(1) Other long-term liabilities consist of future policy benefits and unpaid
claims and claim expenses relating to the Company's insurance products, as
well as policyholder account balances. Substantially all of the amounts
reflected in this table with respect to such liabilities consist of
estimates by the Company's management based on various actuarial and other
assumptions relating to the Company's insurance products and, as to
policyholder account balances, the periods for which the related annuity
and other contracts will remain in force and the crediting rates to be
applied thereto in the future. In accordance with GAAP, a substantial
portion of such liabilities, as they relate to the Company's insurance
products, are carried on a discounted basis on its consolidated balance
sheet; however, the amounts contained in this table are presented on an
undiscounted basis. The actual payments relating to these liabilities will
differ, both in amount and timing, from those indicated in this table. See
"Critical Accounting Policies and Estimates - Future Policy Benefits and
Unpaid Claims and Claim Expenses."

(2) Primarily includes interest on the 2033 Senior Notes.

(3) Includes interest on the outstanding junior subordinated debentures
underlying the Capital Securities and the 2003 Junior Subordinated
Debentures underlying the 2003 Capital Securities. Interest on the 2003
Junior Subordinated Debentures was computed using the indexed rate in
effect at December 31, 2005 of 8.43%.

-29-

Sources of liquidity available to the Company on a parent company-only basis,
including the undistributed earnings of its subsidiaries and additional
borrowings available under the Credit Agreement, are expected to exceed the
Company's current and long-term cash requirements. The Company from time to time
engages in discussions with respect to acquiring blocks of business and
insurance and financial services companies, any of which could, if consummated,
be material to the Company's operations.

The principal liquidity requirements of the Company's insurance subsidiaries are
their contractual obligations to policyholders and other financing sources. The
primary sources of funding for these obligations, in addition to operating
earnings, are the marketable investments included in the investment portfolios
of these subsidiaries. The Company actively manages its investment portfolio to
match its invested assets and related liabilities. The Company regularly
analyzes the results of its asset/liability matching through cash flow analysis
and duration matching under multiple interest rate scenarios. See
"Asset/Liability Management and Market Risk." Therefore, the Company believes
that these sources of funding will be adequate for its insurance subsidiaries to
satisfy on both a short-term and long-term basis these contractual obligations
throughout their estimated or stated period. However, if such contractual
obligations were to arise more rapidly or in greater amounts than anticipated in
the Company's asset/liability matching analysis, the Company could be required
to sell securities earlier than anticipated, potentially resulting in the
realization of capital losses (particularly, as regards fixed income securities,
in a rising interest rate environment), or to borrow funds from available credit
sources, in order to fund the payment of such obligations. In any of such
events, the Company's results of operations, liquidity and financial condition
could be materially adversely affected.

Cash Flows. Operating activities increased cash by $309.4 million, $264.1
million and $237.5 million in 2005, 2004 and 2003, respectively. Net investing
activities used $362.1 million of cash during 2005 primarily for the purchase of
securities, and financing activities provided $56.9 million of cash principally
due to the increase in borrowings under the Credit Agreement, partially offset
by the repayment of certain Federal Home Loan Bank advances.

Share Repurchase Program. The Company's board of directors has authorized a
share repurchase program. Share repurchases are effected by the Company in the
open market or in negotiated transactions in compliance with the safe harbor
provisions of Rule 10b-18 under the Securities Exchange Act of 1934. Execution
of the share repurchase program is based on management's assessment of market
conditions for its common stock and other potential uses of capital. During
2005, the Company repurchased 150,000 shares of its Class A Common Stock for a
total cost of $7.1 million with a volume weighted average price of $47.19 per
share. At December 31, 2005, the repurchase of approximately 0.9 million shares
remained authorized under this program.

Investments. The Company's overall investment strategy emphasizes safety and
liquidity, while seeking the best available return, by focusing on, among other
things, managing the Company's interest-sensitive assets and liabilities and
seeking to minimize the Company's exposure to fluctuations in interest rates.
The Company's investment portfolio, which totaled $3,912.6 million at December
31, 2005, primarily consists of investments in fixed maturity securities,
mortgage loans, investments in limited partnerships and short-term investments.
During 2005, the market value of the Company's investment portfolio, in relation
to its amortized cost, decreased by $72.5 million from year-end 2004, before
related changes in the cost of business acquired of $15.3 million and the income
tax provision of $20.0 million. In addition, the Company recognized pre-tax net
investment gains of $9.0 million in 2005. The weighted average credit rating of
the Company's fixed maturity portfolio as rated by Standard & Poor's Corporation
was "AA" at December 31, 2005. 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.

At December 31, 2005, approximately 35% of the Company's total invested assets
were comprised of corporate fixed maturity securities. Eighty-two percent of the
Company's corporate fixed maturity portfolio, based on fair values, has been
rated investment grade by nationally recognized statistical rating
organizations. Investment grade corporate fixed maturity securities are
distributed among the various rating categories as follows: AAA - 4%, AA - 6%, A
- 31%, and BBB - 41%. Corporate fixed maturity securities subject the Company to
credit risk and, to a lesser extent, interest rate risk. To reduce its exposure
to corporate credit risk, the Company diversifies its investments across
economic sectors, industry classes and issuers.

Mortgage-backed securities comprised 22% of the Company's total invested assets
at December 31, 2005. Ninety-seven percent of the Company's mortgage-backed
securities portfolio, based on fair values, has been rated as investment grade
by nationally recognized statistical rating organizations. Mortgage-backed
securities subject the Company to a degree of interest rate risk, including
prepayment and extension risk, which is generally a function of the sensitivity
of each security's underlying collateral to prepayments under varying interest
rate environments and the repayment priority of the securities in the particular
securitization structure. The Company seeks to limit the extent of this risk by
emphasizing the more predictable payment classes and securities with stable
collateral.

-30-

The Company, through its insurance subsidiaries, maintains a program in which
investments are financed using advances from various Federal Home Loan Banks.
The Company has utilized this program to manage the duration of its liabilities
and to earn spread income, which is the difference between the financing cost
and the earnings from the investments purchased with those funds. At December
31, 2005, the Company had an outstanding advance of $55.0 million. The advance
was obtained at a fixed rate and has a term to maturity of 14.5 years. During
2005, $30.0 million of Federal Home Loan Bank advances matured and were repaid
by the Company. In addition, the Company has from time to time utilized reverse
repurchase agreements, futures and option contracts and interest rate and credit
default swaps in connection with its investment strategy. These transactions may
require the Company to maintain securities or cash on deposit with the
applicable counterparty as collateral. As the market value of the collateral or
contracts changes, the Company may be required to deposit additional collateral
or be entitled to have a portion of the collateral returned to it. The Company
also maintains a securities lending program under which certain securities from
its portfolio are loaned to other institutions for short periods of time. The
Company maintains full ownership rights to the securities loaned and continues
to earn interest and dividends on them. The collateral received for securities
loaned is recorded at the fair value of the collateral, which is generally in an
amount in excess of the market value of the securities loaned. The Company's
institutional lending agent monitors the market value of the securities loaned
and obtains additional collateral as necessary. See Note F to the Consolidated
Financial Statements.

The types and amounts of investments made by the Company's insurance
subsidiaries are subject to the insurance laws and regulations of their
respective states of domicile. Each of these states has comprehensive investment
regulations. In addition, the Company's Credit Agreement also contains
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.

Asset/Liability Management and Market Risk. Because the Company's primary assets
and liabilities are financial in nature, the Company's consolidated financial
position and earnings are subject to risks resulting from changes in interest
rates. The Company manages this risk by active portfolio management focusing on
minimizing its exposure to fluctuations in interest rates by matching its
invested assets and related liabilities and by periodically adjusting the
crediting rates on its annuity products and the discount rate used to calculate
reserves on the Company's other products. In its asset/liability matching
process, the Company determines and monitors on a quarterly basis the duration
of its insurance liabilities in the aggregate and the duration of the investment
portfolio supporting such liabilities in order to ensure that the difference
between such durations, or the "duration gap," remains below an internally
specified maximum, and similarly determines and monitors the duration gap as
between its interest-sensitive liabilities, substantially all of which consist
of its asset accumulation products, and the components of its investment
portfolio supporting such liabilities in relation to a separate internally
specified maximum. As of December 31, 2005, the Company maintained these
duration gaps within the aforementioned maximums. In addition, the Company, at
times, has utilized futures and option contracts and interest rate or credit
default swap agreements primarily to reduce the risk associated with changes in
the value of its fixed maturity portfolio. At December 31, 2005, the Company had
no material outstanding futures or option contracts or interest rate or credit
default swap agreements. The Company, at times, may also invest in non-dollar
denominated fixed maturity securities that expose it to fluctuations in foreign
currency rates, and therefore, may hedge such exposure by using currency forward
contracts. The Company's investment in non-dollar denominated fixed maturity
securities during 2005 was less than 0.3% of total invested assets.

The Company regularly analyzes the results of its asset/liability matching
through cash flow analysis and duration matching under multiple interest rate
scenarios. These analyses enable the Company to measure the potential gain or
loss in fair value of its interest-rate sensitive financial instruments due to
hypothetical changes in interest rates. Based on these analyses, if interest
rates were to immediately increase by 10% from their year-end levels, the fair
value of the Company's interest-sensitive assets, net of corresponding changes
in the fair value of cost of business acquired and insurance and
investment-related liabilities, would decline by approximately $61.0 million at
December 31, 2005 as compared to a decline of approximately $49.8 million at
December 31, 2004. These analyses incorporate numerous assumptions and estimates
and assume no changes in the composition of the Company's investment portfolio
in reaction to such interest rate changes. Consequently, the results of this
analysis will likely be materially different from the actual changes in the
value of the Company's assets that will be experienced under given interest rate
scenarios.

The Company manages the composition of its borrowed capital by considering
factors such as the ratio of borrowed capital to total capital, future debt
requirements, the interest rate environment and other market conditions. At
December 31, 2005, a hypothetical 10% decrease in market interest rates would
cause a corresponding $9.3 million increase in the fair value of the Company's
fixed-rate corporate debt which matures in 2033 as compared to an increase of
$11.0 million at December 31, 2004. Because interest expense on the Company's
floating-rate corporate debt that was outstanding at

-31-

December 31, 2005 would have fluctuated as prevailing interest rates changed,
changes in market interest rates would not have materially affected its fair
value.

Reinsurance. The Company cedes portions of the risks relating to its
group employee benefit products under indemnity reinsurance agreements with
various unaffiliated reinsurers. The Company pays reinsurance premiums
generally based upon percentages of the Company's premiums on the business
reinsured. These agreements expire at various intervals as to new risks, and
replacement agreements are negotiated on terms believed appropriate in light of
current market conditions. During 2003, the Company replaced certain of its
existing reinsurance arrangements for its excess workers' compensation and
long-term disability products. Under the replacement arrangements for excess
workers' compensation products, the Company reinsures excess workers'
compensation risks between $5.0 million (compared to $3.0 million previously)
and $50.0 million, and a substantial majority in proportionate amount of the
risks between $50.0 million and $100.0 million, per policy per occurrence. In
addition, during 2005, the company entered into a reinsurance arrangement under
which the Company cedes 30% of its excess workers' compensation risks between
$100.0 million and $150.0 million, per policy per occurrence. For long-term
disability products (effective October 1, 2003 for new policies and, for
existing policies, the earlier of the next policy anniversary date or October
1, 2004) the Company reinsures risks in excess of $7,500 (compared to $2,500
previously) in benefits per individual per month. These changes have reduced
the reinsurance premiums paid by the Company for these products.

RSLIC Performance-Contingent Options. In December 2005, the Stock Option and
Compensation Committee (the "Committee") of the Board of Directors of the
Company granted additional performance-contingent incentive options to purchase
50,000 shares of the Company's Class A Common Stock to each of Lawrence E.
Daurelle, President and Chief Executive Officer of RSLIC, and the other six
members of executive management of RSLIC. Such options have a ten-year term and
an exercise price equal to the fair market value of a share of the Stock at the
date of grant. The options have the same five-year financial performance target
and performance period as the performance-contingent incentive options that were
granted in April 2004. The options will become exercisable if the specified
target is met; otherwise a reduced number of such options will become
exercisable according to where the performance target falls within a specified
range, as defined and computed under the related option agreements for the
five-year performance period consisting of fiscal years 2004 through 2008. See
Note N to the Consolidated Financial Statements.

SNCC Performance-Contingent Options. Also, in December 2005, the Committee
approved the amendment of the respective performance-contingent incentive
options to purchase 225,000 shares of the Company's Class A Common Stock
previously granted to each of Harold F. Ilg, Chairman of the Company's
subsidiary, SNCC, and the other four members of executive management of SNCC.
Pursuant to such amendment, such options will become exercisable if the
aggregate consolidated Pre-Tax Operating Income of SIG Holdings, Inc., SNCC's
intermediate parent company, as defined and computed under the related option
agreements ("SIG PTOI"), for the five-year performance period consisting of
fiscal years 2003 through 2007 is at least $417.2 million; otherwise, a reduced
number of such options will become exercisable to the extent that the aggregate
SIG PTOI for such period exceeds $370.4 million, determined by interpolating
between zero and 225,000 according to where the SIG PTOI amount falls in the
range between $370.4 million and $417.2 million. None of such options became
exercisable for the three-year performance period consisting of fiscal years
2003 through 2005. See Note N to the Consolidated Financial Statements.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements (as defined in the rules and
regulations of the Securities and Exchange Commission) that have or are
reasonably likely to have a material current or future effect on its financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.

-32-

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with GAAP requires the
Company's management, in some instances, to make judgments about the application
of these principles. The amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period could differ materially from the amounts reported if
different conditions existed or different judgments were utilized. Management's
judgment is most critical in the estimation of its liabilities for future policy
benefits and unpaid claims and claim expenses and its assets for cost of
business acquired and in the valuation of its investments. A discussion of how
management applies these critical accounting policies follows.

Future Policy Benefits and Unpaid Claims and Claim Expenses. The Company
establishes reserves that are intended to be sufficient to fund the future
policy benefits and unpaid claims and claim expenses relating to its insurance
products. These reserves, which totaled $1,862.9 million at December 31, 2005,
represent management's best estimate of future policy benefits and unpaid claims
and claim expenses. The reserves are calculated using various generally
recognized actuarial methodologies and are based upon assumptions and estimates
that management believes are appropriate and which vary by type of product.
Annually, external actuarial experts also review the Company's methodologies,
assumptions and the resulting reserves. The Company's projected ultimate
insurance liabilities and associated reserves are estimates, which are subject
to variability. This variability arises because the factors and events affecting
the ultimate liability for claims have not all taken place, and thus cannot be
evaluated with certainty. As a result, actual future ultimate losses will not
develop exactly as projected and may vary significantly from the projections.
The estimation process is complex and involves information obtained from
company-specific and industry-wide data, as well as general economic
information. The Company's insurance reserves are based upon management's
informed estimates and judgments using currently available data. As additional
experience emerges and other data become available, these estimates and
judgments are reviewed and may be revised. The methods and assumptions used to
establish the Company's insurance reserves are continually reviewed and updated
based on current circumstances, and any resulting adjustments may result in
reserve increases or decreases that would be reflected in the Company's results
of operations for the periods in which such revisions are made. There were no
material changes in the current year in the actuarial methods and/or assumptions
from those used in the previous periods; however, in 2005 and 2004, the Company
experienced a degree of adverse variance in loss experience from its past
projections. See Item 1, "Business - Property and Casualty Insurance Reserves."

The most significant assumptions made in the estimation process for future
policy benefits and unpaid claims and claim expenses for the Company's
disability and accident products relate to mortality, morbidity, claim
termination and discount rates. Mortality and morbidity assumptions are based on
various actuarial tables that are generally utilized in the industry, modified
as believed to be necessary for possible variations. The claim termination rate
represents the probability that a disability claim will close or change due to
maximum benefits being paid under the policy, the recovery or death of the
claimant, or a change in status in any given period. Establishing claim
termination rates is complex and involves many factors, including the cause of
disability, the claimant's age and the type of contractual benefits provided.
The Company uses its extensive claim experience database to develop its claim
termination rate assumptions, which are applied as an average to its large
population of active claims. A one percent increase or decrease in the group
long-term disability claim termination rate established by the Company, which
the Company believes is a reasonable range of variance in this regard, would
have decreased or increased, respectively, the reserves established for claims
incurred in 2005 by approximately $0.6 million, which would have increased or
decreased, respectively, its 2005 net income by $0.4 million. Disability
reserves are discounted using interest rate assumptions based upon projected
portfolio yield rates for the assets supporting the liabilities. The Company's
discount rate assumptions are discussed in further detail below.

-33-

The Company's reserves for unpaid claims and claim expenses are determined on an
individual basis for reported claims, for which case reserves are established,
and estimates of incurred but not reported ("IBNR") losses are developed on the
basis of past experience. The unpaid claims and claim expense reserves carried
for the Company's property and casualty insurance products represent the
difference between the selected ultimate loss amount and the loss amount paid to
date. The unpaid claims and claim expense reserves carried for the Company's
disability and accident insurance products are established by the incurred loss
development method utilizing various mathematic tools in order to project future
loss experience based on the Company's historical loss experience. The
difference between total unpaid claims and claim expense reserves and case
unpaid claims and claim expense reserves represent the IBNR reserve. The
following table summarizes the composition of the Company's total reserves for
disability, accident and casualty claims and claim expenses, as between case and
IBNR reserves, as of December 31, 2005 (dollars in millions):

Balance, net of reinsurance:
Case reserves
Disability and accident $ 481.7
Property and casualty 248.0
IBNR reserves
Disability and accident 159.2
Property and casualty 395.5
--------
Total reserves 1,284.4
Reinsurance receivables 249.1
--------
Balance, gross of reinsurance $1,533.5
========
Balance Sheets:
Future policy benefits:
Disability and accident $ 539.9
Unpaid claims and claim expenses:
Disability and accident 247.1
Property and casualty 746.5
--------
$1,533.5
========

The most significant assumptions made in the estimation process for unpaid
claims and claim expenses for the Company's property and casualty insurance
products are the trend in loss costs, the expected frequency and severity of
claims, changes in the timing of the reporting of losses from the loss date to
the notification date, and expected costs to settle unpaid claims. Other
assumptions include that the coverages under these insurance products will not
be expanded by future legislative action or judicial interpretation and that
extraordinary classes of losses not previously in existence will not arise in
the future. The assumptions vary based on the year the claim is incurred. At
December 31, 2005, disability and primary and excess workers' compensation
reserves for unpaid claims and claim expenses with a carrying value of $844.1
million have been discounted at a weighted average rate of 5.5%, with the rates
ranging from 3.7% to 7.5%. Disability reserves for unpaid claims and claim
expenses are discounted using interest rate assumptions based upon projected
portfolio yield rates for the assets supporting the liabilities. The assets
selected to support these liabilities produce cash flows that are intended to
match the timing and amount of anticipated claim and claim expense payments.
Primary and excess workers' compensation claim reserves are discounted using
interest rate assumptions based on the risk-free rate of return for U.S.
Government securities with a duration comparable to the expected duration and
payment pattern of the claims at the time the claims are settled. The rates used
to discount reserves are determined annually. The level of the rate utilized to
discount reserves in a particular period directly impacts the level of the
reserves established for such period. For example, a 25 basis point increase in
the discount rates the Company applied to disability and primary and excess
workers' compensation claims incurred in 2005 would have decreased the amount of
the reserves it established with respect to such claims by approximately $2.2
million, and a 25 basis point decrease in such rates would have increased the
amount of the reserves so established by the same amount. In both cases,
discount rate changes of this type and magnitude would reasonably reflect
corresponding changes in market interest rates. These levels of change to the
Company's discount rate would have increased, in the first case or decreased, in
the second, its 2005 net income by $1.4 million.

The primary actuarial methods used to establish the Company's reserves for
unpaid claims and claim expenses for its property and casualty insurance
products are the incurred loss development method and the Bornhuetter-Ferguson
expected loss method. Under the incurred loss development method, various
mathematic tools are utilized in order to project future loss experience based
on the Company's historical loss experience. This method is utilized for
accident

-34-

years as to which management believes a sufficient level of historical loss
experience exists. For more recent years for which this level of experience does
not exist, management utilizes the Bornhuetter-Ferguson expected loss method to
establish loss reserves. Under this method, in addition to historical loss
experience, the Company also takes into account an expected loss ratio based on
information determined during the initial pricing of the business, including,
among other factors, rate increases and changes in terms and conditions.

The Company's actuaries select an ultimate loss reserve amount for its property
and casualty insurance products by reviewing the results of the actuarial
methods described above, as well as other tertiary methods which serve to
provide supplemental data points, and applying judgments to achieve a point
estimate for the ultimate loss amount, rather than calculating ranges around the
reserves. Reserves for unpaid claims and claim expenses for such products
represent management's best estimate and are based upon this actuarially derived
point estimate. In reviewing and determining the adequacy of this estimate,
management considers several factors such as historical results, changes to
policy pricing, terms and conditions, deductibles and attachment points,
claims-handling staffing, practices and procedures, effects of claim inflation,
industry loss trends, reinsurance coverages, underwriting initiatives, and
changes in state legislative and regulatory environments.

For the Company's property and casualty insurance products, a review of the
seven most recent years' historical loss development variation reflects an
annual range of -3.4% to + 6.6%. The average annual increase reflected in such
review was +3.6% and the average decrease was -1.7%. If the Company were to
assume subsequent loss development of + 3.6% or -1.7%, each of which are within
historical variation, the estimated unpaid claims and claims expense reserves,
net of reinsurance, established for such products as of December 31, 2005 would
be increased by $22.9 million in the first case, which would have decreased its
2005 net income by $14.9 million, or decreased by $10.8 million in the second,
which would have increased its 2005 net income by $7.0 million. Management
believes that while fluctuations of this magnitude could have a material impact
on the Company's results of operations, they would not be likely to materially
affect its financial condition or liquidity. However, it is possible that, using
other assumptions or variables that are outside of the range of historical
variation, the level of the Company's unpaid claims and claim expenses could be
changed by an amount that could be material to the Company's results of
operations, financial condition and liquidity.

For the reasons described above, if the Company's actual loss experience from
its current or discontinued products is different from the Company's assumptions
or estimates, the Company's reserves could be inadequate. In such event, the
Company's results of operations, liquidity and financial condition could be
materially adversely affected.

Deferred Acquisition Costs. Costs related to the acquisition of new insurance
business, such as commissions, certain costs of policy issuance and
underwriting, and certain sales office expenses, are deferred when incurred. The
unamortized balance of these deferred acquisition costs is included in cost of
business acquired on the consolidated balance sheet. Deferred acquisition costs
related to group life, disability and accident products, which totaled $171.2
million at December 31, 2005, are amortized over the anticipated premium-paying
period of the related policies in proportion to the ratio of the present value
of annual expected premium income to the present value of the total expected
premium income. Deferred acquisition costs related to casualty insurance
products, which totaled $13.4 million at December 31, 2005, are amortized over
the period in which the related premium is earned. Deferred acquisition costs
related to annuity products, which totaled $58.5 million at December 31, 2005,
are amortized over the anticipated lives of the policies in relation to the
present value of estimated gross profits from such policies' anticipated
surrender charges and mortality, investment and expense margins. The
amortization is a constant percentage of estimated gross profits based on the
ratio of the present value of amounts deferred as compared to the present value
of estimated gross profits. Adjustments are made each year to reflect the actual
gross profits to date as compared to assumed experience and any changes in the
remaining expected future gross profits. The unamortized balance of deferred
policy acquisition costs related to certain asset accumulation products is
adjusted for the impact on estimated future gross profits as if net unrealized
appreciation and depreciation on available for sale securities had been realized
at the balance sheet date. The impact of this adjustment, net of the related
income tax expense or benefit, is included in net unrealized appreciation and
depreciation as a component of other comprehensive income in shareholders'
equity. Deferred acquisition costs are charged to current earnings to the extent
that it is determined that future premiums or estimated gross profits will not
be adequate to cover the amounts deferred. The amortization of deferred
acquisition costs totaled $67.2 million, $61.1 million and $53.7 million in
2005, 2004 and 2003, respectively. These amounts represented 31% of the total
amounts of the deferred acquisition cost balances outstanding at the beginning
of the respective periods.

Investments. Investments are primarily carried at fair value with unrealized
appreciation and depreciation included as a component of other comprehensive
income in shareholders' equity, net of the related income tax benefit or expense
and the related adjustment to cost of business acquired. Ninety seven percent of
the Company's fixed maturity and equity securities portfolio are actively traded
in a liquid market or have other liquidity mechanisms. Securities acquired
through

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private placements, which are not actively traded in a liquid market and do not
have other mechanisms for their liquidation, totaled $110.2 million at December
31, 2005. The Company estimates the fair value for these securities primarily by
comparison to similar securities with quoted market prices. If quotes are not
available on similar securities, the Company estimates fair value based on
recent purchases or sales of similar securities or other internally prepared
valuations. Key assumptions used in this process include the level of risk-free
interest rates, risk premiums, and performance of underlying collateral, if
applicable. All such investments are classified as available for sale. The
Company's ability to liquidate these investments in a timely manner, if
necessary, may be adversely impacted by the lack of an actively traded market.
Historically, the Company has not realized amounts on dispositions of
non-marketable investments that varied materially from the amounts estimated by
the Company under this valuation methodology. The Company believes that its
estimates reasonably reflect the fair value of these securities; however, had
there been an active market for these securities during the applicable reporting
period, the market prices may have been materially different than the amounts
reported.

Declines in the fair value of investments that are considered in the judgment of
management to be other than temporary are reported as realized investment
losses. The Company evaluates, among other things, the financial position and
prospects of the issuer, conditions in the issuer's industry and geographic
area, liquidity of the investment, changes in the amount or timing of expected
future cash flows from the investment, and recent downgrades of the issuer by a
rating agency to determine if and when a decline in the fair value of an
investment below amortized cost is other than temporary. The length of time and
extent to which the fair value of the investment is lower than its amortized
cost and the Company's ability and intent to retain the investment to allow for
any anticipated recovery in the investment's fair value are also considered. In
2005, 2004 and 2003, the Company recognized losses totaling $4.2 million, $3.9
million and $13.0 million, respectively, for the other than temporary decline in
the value of certain fixed maturity securities. These losses were recognized as
a result of events that occurred in the respective periods, such as downgrades
in an issuer's credit ratings, deteriorating financial results of issuers,
adverse changes in the amount and timing of estimated future cash flows from
securities and the impact of adverse economic conditions on issuers' financial
positions. Investment grade and non-investment grade fixed maturity securities
comprised 75.9% and 7.1%, respectively, of the Company's total investment
portfolio at December 31, 2005. Gross unrealized appreciation and gross
unrealized depreciation, before the related income tax expense or benefit and
the related adjustment to cost of business acquired, attributable to investment
grade fixed maturity securities totaled $70.4 million and $24.0 million,
respectively, at December 31, 2005. Gross unrealized appreciation and gross
unrealized depreciation, before the related income tax expense or benefit and
the related adjustment to cost of business acquired, attributable to
non-investment grade fixed maturity securities totaled $3.2 million and $13.5
million, respectively, at December 31, 2005. Unrealized appreciation and
depreciation, net of the related income tax expense or benefit and the related
adjustment to cost of business acquired, has been reflected on the Company's
balance sheet as a component of other comprehensive income. The Company
anticipates that if certain existing declines in security values are determined
to be other than temporary, it may recognize additional investment losses in the
range of $7 million to $15 million pre-tax ($5 million to $10 million on an
after-tax basis) with respect to the relevant securities. However, the extent of
any such losses will depend on future market developments and changes in
security values, and such losses may exceed or be lower than such range. It is
not possible to predict the extent of any future changes in value, positive or
negative, or the results of the future application of the Company's procedures
for the evaluation of other than temporary impairment in valuation. There can be
no assurance that the Company will realize investment gains in the future in an
amount sufficient to offset any such losses.

The Company also invests in certain limited partnerships and limited liability
companies which invest in various financial instruments. These investments are
reflected in the Company's financial statements under the equity method;
accordingly, positive or negative changes in the value of the investees'
underlying investments are included in net investment income. For this purpose,
the Company estimates the values of its investments in these entities based on
values provided by their managers, as adjusted based on available information
concerning the underlying investment portfolios. As of December 31, 2005 and
2004, there were no adjustments in such values, as compared with a reduction in
value of $6.7 million as of December 31, 2003. The Company believes that its
estimates reasonably reflect the values of its investments in these entities;
however, there can be no assurance that such values will ultimately be realized
upon liquidation of such investments.

FORWARD-LOOKING STATEMENTS AND CAUTIONARY STATEMENTS REGARDING CERTAIN FACTORS
THAT MAY AFFECT FUTURE RESULTS

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
above "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and elsewhere in this Form

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10-K and in any other statement made by, or on behalf of, the Company, whether
in future filings with the Securities and Exchange Commission or otherwise.
Forward-looking statements are statements not based on historical information
and which relate to future operations, strategies, financial results, prospects,
outlooks or other developments. Some forward-looking statements may be
identified by the use of terms such as "expects," "believes," "anticipates,"
"intends," "judgment," "outlook" or other similar expressions. Forward-looking
statements are necessarily based upon estimates and assumptions that are
inherently subject to significant business, economic, competitive and other
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 the
economic and interest rate environment, federal and state legislative and
regulatory developments, including but not limited to changes in financial
services, employee benefit and tax laws and regulations, market pricing and
competitive trends relating to insurance products and services, acts of
terrorism or war, and the availability and cost of reinsurance, and those
relating specifically to the Company's business, such as the level of its
insurance premiums and fee income, the claims experience, persistency and other
factors affecting the profitability of its insurance products, the performance
of its investment portfolio and changes in the Company's investment strategy,
acquisitions of companies or blocks of business, and ratings by major rating
organizations of the Company and its insurance subsidiaries. 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. Certain of these uncertainties and
contingencies are described in more detail in "Item 1A, Risk Factors." The
Company disclaims any obligation to update forward-looking information.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by Item 7A is included in this Form 10-K under the
heading "Liquidity and Capital Resources - Asset/Liability Management and Market
Risk" beginning on page 31 of this Form 10-K.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by Item 8 is included in this Form 10-K beginning on
page 44 of this Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, an evaluation was performed
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer ("CEO") and Vice President and
Treasurer (the individual who acts in the capacity of chief financial officer),
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in the rules and regulations of the
Securities and Exchange Commission). Based on that evaluation, the Company's
management, including the CEO and Vice President and Treasurer, concluded that
the Company's disclosure controls and procedures were effective. There were no
changes in the Company's internal control over financial reporting during the
fourth fiscal quarter of 2005 that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting. The Company filed its annual certifications by the Chief Executive
Officer and the Vice President and Treasurer required by Section 302 of the
Sarbanes-Oxley Act of 2002 as exhibits to this Form 10-K.

Management's annual report on internal control over financial reporting and the
attestation report of the Company's registered public accounting firm are
included below.

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MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the
participation of our management, including our Chief Executive Officer and Vice
President and Treasurer (the individual who acts in the capacity of chief
financial officer), we conducted an evaluation of the effectiveness of our
internal control over financial reporting as of December 31, 2005 based on the
framework in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on that evaluation,
our management concluded that our internal control over financial reporting was
effective as of December 31, 2005.

A company's internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements. Because of inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

Management's assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2005 has been audited by Ernst & Young
LLP, an independent registered public accounting firm, as stated in such firm's
report which is included elsewhere herein.

-38-

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Directors
Delphi Financial Group, Inc.

We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Delphi
Financial Group, Inc. and its subsidiaries (collectively, the "Company")
maintained effective internal control over financial reporting as of December
31, 2005, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the "COSO Criteria"). The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on the COSO Criteria. Also, in our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2005, based on the COSO
Criteria.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
the Company as of December 31, 2005 and 2004, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 2005 of the Company and our report dated
February 23, 2006 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Philadelphia, Pennsylvania
February 23, 2006

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ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 is included in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with the Company's 2006 Annual Meeting of
Stockholders, under the captions "Election of Directors," "Section 16(a)
Beneficial Ownership Reporting Compliance," and "Code of Ethics" and is
incorporated herein by reference, and in Item 4 in Part I of this Form 10-K.

On June 23, 2005, Robert Rosenkranz, the Company's Chairman, President and Chief
Executive Officer, submitted to the NYSE the Written Affirmation required by the
rules of the NYSE certifying that he was not aware of any violations by the
Company of NYSE corporate governance listing standards.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 is included in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with the Company's 2006 Annual Meeting of
Stockholders, under the caption "Executive Compensation" and is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 is included in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with the Company's 2006 Annual Meeting of
Stockholders, under the captions "Security Ownership of Certain Beneficial
Owners and Management" and "Equity Compensation Plan Information" and is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is included in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with the Company's 2006 Annual Meeting of
Stockholders, under the caption "Certain Relationships and Related Party
Transactions" and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 is included in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with the Company's 2006 Annual Meeting of
Stockholders, under the caption "Independent Auditors" and is incorporated
herein by reference.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) The financial statements and financial statement schedules filed as part of
this report are listed in the Index to Consolidated Financial Statements
and Financial Statement Schedules on page 45 of this Form 10-K.

(b) The following Exhibits are numbered in accordance with the Exhibit Table of
Item 601 of Regulation S-K:

2.1 Agreement and Plan of Merger, dated October 5, 1995, among the
Company, SIG Holdings Acquisition Corp., and SIG Holdings, Inc. (6)

2.2 Agreement and Plan of Merger, dated June 11, 1998, by and among Delphi
Financial Group, Inc., Matrix Absence Management, Inc. and the
Shareholders named therein (10)

2.3 Stock Purchase Agreement, dated as of October 1, 1998, by and among
Delphi Financial Group, Inc., Unicover Managers, Inc., Unicover
Intermediaries, LLC and the Shareholders named therein (10)

2.4 Merger, Exchange and Release Agreement, dated April 30, 1999, by and
among Delphi Financial Group, Inc., Unicover Managers, Inc., Unicover
Intermediaries, LLC, Unicover Management Partners, LLC and the Buyers
named therein (11)

3.1 Amendment to Restated Certificate of Incorporation of Delphi Financial
Group, Inc. (Exhibit 3.2) (2)

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3.2 Certificate of Amendment of Restated Certificate of Incorporation of
Delphi Financial Group, Inc. (Exhibit 3.1) (7)

3.3 Certificate of Amendment of Restated Certificate of Incorporation of
Delphi Financial Group, Inc. (Exhibit 3.1) (23)

3.4 Amended and Restated By-laws of Delphi Financial Group, Inc. (2)

3.5 Amendment to the Amended and Restated By-laws of Delphi Financial
Group, Inc. dated August 4, 2005 (Exhibit 3.1) (24)

4.1 Indenture, dated as of October 8, 1993, between Delphi Financial
Group, Inc. and State Street Bank of Connecticut (formerly Shawmut
Bank Connecticut, N.A.) as Trustee (matured 8.0% Senior Notes due
2003) (3)

4.2 Indenture, dated as of May 20, 2003, between Delphi Financial Group,
Inc. and Wilmington Trust Company, as Trustee (Exhibit 4(a)) (16)

4.3 First Supplemental Indenture, dated as of May 20, 2003, between Delphi
Financial Group, Inc. and Wilmington Trust Company, as Trustee
(Exhibit 4(b)) (16)

4.4 Amended and Restated Limited Liability Agreement of Delphi Funding
L.L.C. dated as of March 25, 1997, among Delphi Financial Group, Inc.,
as Managing Member, Chestnut Investors III, Inc., as Resigning Member,
and the Holders of Capital Securities described therein, as Members
(Exhibit 4(a)) (8)

4.5 Subordinated Indenture, dated as of March 25, 1997, between Delphi
Financial Group, Inc. and Wilmington Trust Company as Trustee (Exhibit
4(b)) (8)

4.6 Guarantee Agreement dated March 25, 1997, between Delphi Financial
Group, Inc., as Guarantor, and Wilmington Trust Company, as Trustee
(Exhibit 4(c)) (8)

4.7 Amended and Restated Declaration of Delphi Financial Statutory Trust
I, dated as of May 15, 2003, by and among U.S. Bank National
Association, as Institutional Trustee, Delphi Financial Group, Inc.,
as Sponsor, and the Administrators named therein (Exhibit 4.1) (17)

4.8 Indenture, dated as of May 15, 2003, between Delphi Financial Group,
Inc. and U.S. Bank National Association, as Trustee (Exhibit 4.2) (17)

4.9 Guarantee Agreement, dated as of May 15, 2003, by and between Delphi
Financial Group, Inc., as Guarantor, and U.S. Bank National
Association, as Trustee (Exhibit 4.3) (17)

10.1 Credit Agreement, dated as of May 26, 2005, among Delphi Financial
Group, Inc. as the Borrower, Bank of America, N.A., as Administrative
Agent, and the Other Lenders Party Thereto (Exhibit 10.1) (22)

10.2 Delphi Financial Group, Inc. Second Amended and Restated Nonqualified
Employee Stock Option Plan, as amended May 23, 2001 (Exhibit 10.1)
(12)

10.3 Delphi Financial Group, Inc. 2003 Employee Long-Term Incentive and
Share Award Plan, as amended (Exhibit 10.1) (18)

10.4 The Delphi Capital Management, Inc. Pension Plan for Robert Rosenkranz
(1)

10.5 Second Amendment to the Delphi Capital Management, Inc. Pension Plan
for Robert Rosenkranz (Exhibit 10.2) (14)

10.6 Investment Consulting Agreement, dated as of November 10, 1988,
between Rosenkranz Asset Managers, LLC (as assignee of Rosenkranz,
Inc.) and the Company (Exhibit 10.8) (2)

10.7 Investment Consulting Agreement, dated as of November 6, 1988, between
Rosenkranz Asset Managers, LLC (as assignee of Rosenkranz, Inc.) and
Reliance Standard Life Insurance Company (Exhibit 10.9) (2)

10.8 Delphi Financial Group, Inc. Amended and Restated Long-Term
Performance-Based Incentive Plan (Exhibit 10.3) (17)

10.9 Amendment to Delphi Financial Group, Inc. Amended and Restated
Long-Term Performance-Based Incentive Plan (Exhibit 10.1)(21)

10.10 2003 Bonus Criteria for Chairman, President and Chief Executive
Officer of Delphi Financial Group, Inc. (Exhibit 10.1) (15)

10.11 SIG Holdings, Inc. 1992 Long-Term Incentive Plan (Exhibit 10.12) (5)

10.12 Stockholders Agreement, dated as of October 5, 1995, among the
Company and the affiliate stockholders named therein (Exhibit 10.30)
(6)

10.13 Reliance Standard Life Insurance Company Nonqualified Deferred
Compensation Plan (Exhibit 10.14)(6)

10.14 Reliance Standard Life Insurance Company Supplemental Executive
Retirement Plan (Exhibit 10.15) (6)

10.15 Reliance Standard Life Insurance Company Management Incentive
Compensation Plan (Exhibit 10.2) (19)

10.16 Stock Option Award Agreement, dated July 8, 2003, for Harold F. Ilg
(Exhibit 10.5) (17)

10.17 Amendment of Stock Option Award Agreement, dated January 4, 2006, for
Harold F. Ilg (26)

10.18 Stock Option Award Agreement, dated May 19, 2004, for Lawrence E.
Daurelle (Exhibit 10.1) (19)

10.19 Stock Option Award Agreement, dated January 4, 2006, for Lawrence E.
Daurelle (26)

10.20 Delphi Financial Group, Inc. Second Amended and Restated Directors
Stock Option Plan, as amended May 28, 2003 (Exhibit 10.2) (17)

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10.21 Delphi Financial Group, Inc. Annual Incentive Compensation Plan
(Exhibit 10.2) (18)

10.22 Employment Agreement, dated March 18, 1994, for Robert M. Smith, Jr.
(Exhibit 10.31) (4)

10.23 Employment Agreement, dated July 8, 2003, between Safety National
Casualty Corporation and Harold F. Ilg (Exhibit 10.6) (17)

10.24 Form of Restricted Share Unit Award Agreement (Exhibit 99.1) (20)

10.25 SIG Holdings, Inc. Note Agreement, dated as of May 20, 1994 (8.5%
Senior Secured Notes due 2003) (5)

10.26 Borrower Pledge Agreement, dated as of May 20, 1994, between SIG
Holdings, Inc. and the Chase Manhattan Bank, N.A., as collateral agent
(5)

10.27 Reinsurance Agreement, dated January 27, 1998, between Reliance
Standard Life Insurance Company and Oracle Reinsurance Company Ltd.
(9)

10.28 Casualty Excess of Loss Reinsurance Agreement, dated January 27,
1998, between Safety National Casualty Corporation and Oracle
Reinsurance Company Ltd. (9)

10.29 Commutation, Prepayment and Redemption Agreement, dated September 14,
2001, between Delphi Financial Group, Inc., Safety National Casualty
Corporation, Reliance Standard Life Insurance Company, Delphi
International Ltd. and Oracle Reinsurance Company Ltd. (Exhibit 10.1)
(13)

11.1 Computation of Results per Share of Common Stock (25)

21.1 List of Subsidiaries of the Company (26)

23.1 Consent of Ernst & Young LLP (26)

24.1 Powers of Attorney (26)

31.1 Certification by the Chairman of the Board, President and Chief
Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) or
15d-14(a) (26)

31.2 Certification by the Vice President and Treasurer of Periodic Report
Pursuant to Rule 13a-14(a) or 15d-14(a) (26)

32.1 Certification of Periodic Report Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (26)

----------
(1) Incorporated herein by reference to the designated exhibit to the Company's
Form 10-K for the year ended December 31, 1992.

(2) Incorporated herein by reference to the designated exhibit to the Company's
Registration Statement on Form S-1 dated March 13, 1990 (Registration No.
33-32827).

(3) Incorporated herein by reference to the designated exhibit to the Company's
Form 10-K for the year ended December 31, 1993.

(4) Incorporated herein by reference to the designated exhibit to the Company's
Form 10-K for the year ended December 31, 1994.

(5) Incorporated herein by reference to the designated exhibit to the Company's
Form 10-K for the year ended December 31, 1995.

(6) Incorporated herein by reference to the designated exhibit to the Company's
Registration Statement on Form S-4 dated January 30, 1996 (Registration No.
33-99164).

(7) Incorporated herein by reference to the designated exhibit to the Company's
Form 10-Q for the quarter ended June 30, 1997.

(8) Incorporated herein by reference to the designated exhibit to the Company's
Current Report on Form 8-K dated March 21, 1997.

(9) Incorporated herein by reference to the designated exhibit to the Company's
Form 10-K for the year ended December 31, 1997.

(10) Incorporated herein by reference to the designated exhibit to the Company's
Form 10-K for the year ended December 31, 1998.

(11) Incorporated herein by reference to the designated exhibit to the Company's
Form 10-Q for the quarter ended March 31, 1999.

(12) Incorporated herein by reference to the designated exhibit to the Company's
Form 10-Q for the quarter ended June 30, 2001.

(13) Incorporated herein by reference to the designated exhibit to the Company's
Form 10-Q for the quarter ended September 30, 2001.

(14) Incorporated herein by reference to the designated exhibit to the Company's
Form 10-Q for the quarter ended September 30, 2002.

(15) Incorporated herein by reference to the designated exhibit to the Company's
Form 10-Q for the quarter ended March 31, 2003.

(16) Incorporated herein by reference to the designated exhibit to the Company's
Current Report on Form 8-K dated May 20, 2003.

(17) Incorporated herein by reference to the designated exhibit to the Company's
Form 10-Q for the quarter ended June 30, 2003.

(18) Incorporated herein by reference to the designated exhibit to the Company's
Form 10-Q for the quarter ended March 31, 2004.

(19) Incorporated herein by reference to the designated exhibit to the Company's
Form 10-Q for the quarter ended June 30, 2004.

(20) Incorporated herein by reference to the designated exhibit to the Company's
Current Report on Form 8-K dated February 9, 2005.

(21) Incorporated herein by reference to the designated exhibit to the Company's
Form 10-Q for the quarter ended March 31, 2005.

(22) Incorporated herein by reference to the designated exhibit to the Company's
Current Report on Form 8-K dated May 26, 2005.

(23) Incorporated herein by reference to the designated exhibit to the Company's
Form 10-Q for the quarter ended June 30, 2005.

(24) Incorporated herein by reference to the designated exhibit to the Company's
Current Report on Form 8-K dated August 4, 2005.

(25) Incorporated herein by reference to Note O to the Consolidated Financial
Statements included elsewhere herein.

(26) Filed herewith.

(c) The financial statement schedules listed in the Index to Consolidated
Financial Statements and Financial Statement Schedules on page 45 of this
Form 10-K are included under Item 8 and are presented beginning on page 75
of this Form 10-K. All other schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are inapplicable, and
therefore have been omitted.

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DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 Financial Group, Inc.

By: /s/ ROBERT ROSENKRANZ
------------------------------------
Chairman of the Board, President and
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.

Name Capacity Date
---- -------- ----

/s/ ROBERT ROSENKRANZ Chairman of the Board, March 15, 2006
------------------------ President and Chief Executive
(Robert Rosenkranz) Officer (Principal Executive
Officer)

* Director March 15, 2006
------------------------
(Kevin R. Brine)

* Director March 15, 2006
------------------------
(Lawrence E. Daurelle)

* Director March 15, 2006
------------------------
(Edward A. Fox)

* Director March 15, 2006
------------------------
(Steven A. Hirsh)

* Director March 15, 2006
------------------------
(Harold F. Ilg)

* Director March 15, 2006
------------------------
(James M. Litvack)

* Director March 15, 2006
------------------------
(James N. Meehan)

* Director March 15, 2006
------------------------
(Philip R. O'Connor)

* Director March 15, 2006
------------------------
(Donald A. Sherman)

/s/ ROBERT M. SMITH, JR. Director and Executive March 15, 2006
------------------------ Vice President
(Robert M. Smith, Jr.)

* Director March 15, 2006
------------------------
(Robert F. Wright)

* Vice President and March 15, 2006
----------------------- Treasurer (Principal
(Thomas W. Burghart) Accounting and Financial
Officer)

* BY: /s/ ROBERT ROSENKRANZ
-------------------------------
Attorney-in-Fact

-43-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL RESULTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Year Ended December 31, 2005
-----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------

Revenues excluding realized investment gains .. $289,240 $301,164 $304,492 $318,884
Realized investment gains ..................... 1,817 3,320 3,397 469
-------- -------- -------- --------
Total revenues ................................ 291,057 304,484 307,889 319,353
Operating income .............................. 47,363 50,402 52,455 53,801
Income from continuing operations ............. 29,247 30,990 32,838 33,609
Net income .................................... 30,107 31,977 22,032 29,218

Basic results per share of common stock:
Income from continuing operations .......... $ 0.91 $ 0.96 $ 1.00 $ 1.02
Net income ................................. 0.93 0.99 0.67 0.88

Diluted results per share of common stock:
Income from continuing operations .......... $ 0.88 $ 0.93 $ 0.97 $ 1.00
Net income ................................. 0.91 0.96 0.65 0.87

Year Ended December 31, 2004
-----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------

Revenues excluding realized investment gains .. $251,230 $252,660 $256,751 $269,880
Realized investment gains ..................... 5,221 1,941 1,433 6,865
-------- -------- -------- --------
Total revenues ................................ 256,451 254,601 258,184 276,745
Operating income .............................. 47,257 40,976 45,679 49,018
Income from continuing operations ............. 29,750 25,641 33,201 32,808
Net income .................................... 30,621 27,133 32,179 33,610

Basic results per share of common stock:
Income from continuing operations .......... $ 0.94 $ 0.80 $ 1.04 $ 1.02
Net income ................................. 0.97 0.85 1.00 1.05

Diluted results per share of common stock:
Income from continuing operations .......... $ 0.91 $ 0.78 $ 1.01 $ 0.99
Net income ................................. 0.94 0.82 0.98 1.01

Computations of results per share for each quarter are made independently of
results per share for the year. Due to transactions affecting the weighted
average number of shares outstanding in each quarter, the sum of quarterly
results per share does not equal results per share for the year.

In the fourth quarter of 2005, the Company decided to exit its non-core property
catastrophe reinsurance business and has classified the operating results of
this business as discontinued operations. Results prior to the fourth quarter of
2005 have been reclassified to conform to the current period presentation. Net
income for the first, second, third and fourth quarters of 2005 include
after-tax income (loss) from discontinued operations of $0.8 million, $1.0
million $(10.8) million and $(4.4) million, respectively. Net income for the
first, second, third and fourth quarters of 2004 include after-tax income (loss)
from discontinued operations of $0.9 million, $1.4 million, $(1.0) million and
$0.8 million, respectively. See "Other Transactions" and Note S to the
Consolidated Financial Statements. Results for the first, second, third and
fourth quarters of 2005 include pre-tax investment losses of $0.5 million, $0.7
million $3.0 million and $0, respectively, due to the other than temporary
declines in the market values of certain fixed maturity securities. Results for
the first, second, third and fourth quarters of 2004 include pre-tax investment
losses of $2.4 million, $0.1 million, $0.6 million and $0.8 million,
respectively, due to the other than temporary declines in the market values of
certain fixed maturity securities. Results for the third and fourth quarters of
2004 also include a reduction of federal income tax expense of $4.6 million and
$2.0 million, respectively, primarily resulting from the favorable resolution of
IRS audits of the 1998 through 2002 tax years. This reduction represents the
release of previous accruals for potential audit adjustments which were
subsequently settled or eliminated and further refinement of existing tax
exposures. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Notes B and G to the Consolidated Financial
Statements.

-44-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES

Page
----

Audited Consolidated Financial Statements of Delphi Financial Group, Inc.
and Subsidiaries:

Report of Independent Registered Public Accounting Firm............... 46
Consolidated Statements of Income - Years Ended December 31, 2005,
2004 and 2003...................................................... 47
Consolidated Balance Sheets - December 31, 2005 and 2004.............. 48
Consolidated Statements of Shareholders' Equity - Years Ended
December 31, 2005, 2004 and 2003................................... 49
Consolidated Statements of Cash Flows - Years Ended
December 31, 2005, 2004 and 2003................................... 50
Notes to Consolidated Financial Statements............................ 51

Financial Statement Schedules of Delphi Financial Group, Inc. and
Subsidiaries:

Schedule I, Summary of Investments Other Than Investments in Related
Parties............................................................ 75
Schedule II, Condensed Financial Information of Registrant............ 76
Schedule III, Supplementary Insurance Information..................... 80
Schedule IV, Reinsurance.............................................. 81
Schedule VI, Supplemental Information Concerning Property-Casualty
Insurance Operations............................................... 82

-45-

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Directors
Delphi Financial Group, Inc.

We have audited the accompanying consolidated balance sheets of Delphi Financial
Group, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 2005. Our audits also
included the financial statement schedules listed in the Index to Consolidated
Financial Statements and Financial Statement Schedules. These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion,the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Delphi
Financial Group, Inc. and subsidiaries at December 31, 2005 and 2004, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2005, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated February 23, 2006 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Philadelphia, Pennsylvania
February 23, 2006

-46-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Year Ended December 31,
----------------------------------
2005 2004 2003
---------- ---------- --------

Revenue:
Premium and fee income ........................................... $ 990,211 $ 828,077 $711,612
Net investment income ............................................ 223,569 202,444 186,337
Net realized investment gains .................................... 9,003 15,460 12,724
---------- ---------- --------
1,222,783 1,045,981 910,673
---------- ---------- --------
Benefits and expenses:
Benefits, claims and interest credited to policyholders .......... 725,207 614,488 530,350
Commissions ...................................................... 66,677 60,796 52,380
Amortization of cost of business acquired ........................ 69,281 62,043 54,994
Other operating expenses ......................................... 157,597 125,724 116,921
---------- ---------- --------
1,018,762 863,051 754,645
---------- ---------- --------
Income from continuing operations before interest and income
tax expense ................................................ 204,021 182,930 156,028
Interest expense:
Corporate debt ................................................... 15,607 14,040 14,052
Junior subordinated deferrable interest debentures ............... 4,855 4,486 4,035
---------- ---------- --------
20,462 18,526 18,087
---------- ---------- --------

Income from continuing operations before income tax expense ... 183,559 164,404 137,941
Income tax expense .................................................. 56,875 43,004 42,646
---------- ---------- --------
Income from continuing operations ............................. 126,684 121,400 95,295
(Loss) income from discontinued operations, net of income tax
(benefit) expense ................................................ (13,350) 2,143 3,621
---------- ---------- --------
Net income .................................................... $ 113,334 $ 123,543 $ 98,916
========== ========== ========
Basic results per share of common stock:
Income from continuing operations ................................ $ 3.88 $ 3.80 $ 3.05
Net income ....................................................... 3.47 3.87 3.17
Diluted results per share of common stock:
Income from continuing operations ................................ $ 3.78 $ 3.68 $ 2.98
Net income ....................................................... 3.38 3.75 3.09
Dividends paid per share of common stock ............................ $ 0.36 $ 0.32 $ 0.23

See notes to consolidated financial statements.

-47-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

December 31,
-----------------------
2005 2004
---------- ----------

Assets:
Investments:
Fixed maturity securities, available for sale ............................. $3,244,764 $3,049,013
Short-term investments .................................................... 94,308 95,761
Other investments ......................................................... 573,532 396,302
---------- ----------
3,912,604 3,541,076
Cash ......................................................................... 28,493 24,324
Cost of business acquired .................................................... 248,138 212,549
Reinsurance receivables ...................................................... 413,113 428,707
Goodwill ..................................................................... 93,929 93,929
Securities lending collateral ................................................ 244,821 236,900
Other assets ................................................................. 235,644 203,777
Assets held in separate account .............................................. 99,428 88,205
---------- ----------
Total assets .............................................................. $5,276,170 $4,829,467
========== ==========
Liabilities and Shareholders' Equity:
Future policy benefits:
Life ...................................................................... $ 273,486 $ 261,289
Disability and accident ................................................... 539,929 488,909
Unpaid claims and claim expenses:
Life ...................................................................... 55,885 49,441
Disability and accident ................................................... 247,093 218,316
Casualty .................................................................. 746,479 645,948
Policyholder account balances ................................................ 1,039,610 1,024,577
Corporate debt ............................................................... 234,750 157,750
Junior subordinated deferrable interest debentures underlying
company-obligated mandatorily redeemable capital
securities issued by unconsolidated subsidiaries .......................... 59,762 59,762
Securities lending payable ................................................... 244,821 236,900
Advances from Federal Home Loan Bank ......................................... 55,342 85,395
Other liabilities and policyholder funds ..................................... 646,546 573,127
Liabilities related to separate account ...................................... 99,428 88,205
---------- ----------
Total liabilities ......................................................... 4,243,131 3,889,619
---------- ----------
Shareholders' equity:
Preferred Stock, $.01 par; 50,000,000 shares authorized ................... -- --
Class A Common Stock, $.01 par; 150,000,000 shares authorized;
31,274,166 and 30,418,291 shares issued and outstanding, respectively .. 313 304
Class B Common Stock, $.01 par; 20,000,000 shares authorized;
3,904,481 shares issued and outstanding ................................ 39 39
Additional paid-in capital ................................................ 442,531 406,908
Accumulated other comprehensive income .................................... 20,264 57,371
Retained earnings ......................................................... 636,285 534,540
Treasury stock, at cost; 2,723,211 and 2,573,211 shares of
Class A Common Stock, respectively ..................................... (66,393) (59,314)
---------- ----------
Total shareholders' equity ............................................. 1,033,039 939,848
---------- ----------
Total liabilities and shareholders' equity .......................... $5,276,170 $4,829,467
========== ==========

See notes to consolidated financial statements.

-48-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

Accumulated
Class A Class B Additional Other
Common Common Paid-in Comprehensive Retained Treasury
Stock Stock Capital Income Earnings Stock Total
------- ------- ---------- ------------- -------- -------- ----------

Balance, January 1, 2003 .............. $189 $32 $373,356 $ 30,003 $329,574 $(51,499) $ 681,655
----------
Net income ............................ -- -- -- -- 98,916 -- 98,916

Other comprehensive income:
Increase in net unrealized
appreciation on investments ..... -- -- -- 26,395 -- -- 26,395
Increase in net loss on cash
flow hedge ...................... -- -- -- (4,106) -- -- (4,106)
Net change in minimum pension
liability adjustment ............ -- -- -- 136 -- -- 136
----------
Comprehensive income .................. 121,341
Issuance of stock, exercise of stock
options and share conversions ...... 8 (4) 8,865 -- -- -- 8,869
Stock-based compensation .............. -- -- 1,465 -- -- -- 1,465
Acquisition of treasury stock ......... -- -- -- -- -- (7,479) (7,479)
Cash dividends ........................ -- -- -- -- (7,410) -- (7,410)
Three-for-two stock split ............. 98 14 (113) -- -- -- (1)
---- --- -------- -------- -------- -------- ----------
Balance, December 31, 2003 ......... $295 $42 $383,573 $ 52,428 $421,080 $(58,978) $ 798,440

Net income ............................ -- -- -- -- 123,543 -- 123,543

Other comprehensive income:
Increase in net unrealized
appreciation on investments ..... -- -- -- 4,716 -- -- 4,716
Decrease in net loss on
cash flow hedge ................. -- -- -- 786 -- -- 786
Net change in minimum pension
liability adjustment ............ -- -- -- (559) -- -- (559)
----------
Comprehensive income .................. 128,486
Issuance of stock, exercise of stock
options and share conversions ...... 9 (3) 20,596 -- -- -- 20,602
Stock-based compensation .............. -- -- 2,739 -- -- -- 2,739
Acquisition of treasury stock ......... -- -- -- -- -- (336) (336)
Cash dividends ........................ -- -- -- -- (10,083) -- (10,083)
---- --- -------- -------- -------- -------- ----------
Balance, December 31, 2004 ......... $304 $39 $406,908 $ 57,371 $534,540 $(59,314) $ 939,848

Net income ............................ -- -- -- -- 113,334 -- 113,334

Other comprehensive income:
Decrease in net unrealized
appreciation on investments ..... -- -- -- (37,193) -- -- (37,193)
Decrease in net loss on
cash flow hedge ................. -- -- -- 785 -- -- 785
Net change in minimum pension
liability adjustment ............ -- -- -- (699) -- -- (699)
----------
Comprehensive income .................. 76,227
Issuance of stock, exercise of stock
options and share conversions ...... 9 -- 27,697 -- -- -- 27,706
Stock-based compensation .............. -- -- 7,926 -- -- -- 7,926
Acquisition of treasury stock ......... -- -- -- -- -- (7,079) (7,079)
Cash dividends ........................ -- -- -- -- (11,589) -- (11,589)
---- --- -------- -------- -------- -------- ----------
Balance, December 31, 2005 ......... $313 $39 $442,531 $ 20,264 $636,285 $(66,393) $1,033,039
==== === ======== ======== ======== ======== ==========

See notes to consolidated financial statements.

-49-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

Year Ended December 31,
---------------------------------------
2005 2004 2003
----------- ----------- -----------

Operating activities:
Net income ............................................... $ 113,334 $ 123,543 $ 98,916
Adjustments to reconcile net income to net cash provided
by operating activities:
Change in policy liabilities and policyholder
accounts ........................................... 227,188 201,571 177,282
Net change in reinsurance receivables and payables .... 13,818 (16,568) (21,336)
Amortization, principally the cost of business acquired
and investments .................................... 62,014 49,325 41,184
Deferred costs of business acquired ................... (89,601) (84,627) (76,836)
Net realized gains on investments ..................... (9,003) (15,460) (12,724)
Net change in federal income tax liability ............ 16,924 24,057 20,720
Other ................................................. (25,274) (17,746) 10,289
----------- ----------- -----------
Net cash provided by operating activities .......... 309,400 264,095 237,495
----------- ----------- -----------

Investing activities:
Purchases of investments and loans made .................. (1,946,034) (1,881,235) (1,845,331)
Sales of investments and receipts from repayment of loans 1,408,018 1,390,290 1,372,088
Maturities of investments ................................ 180,292 211,483 147,428
Net change in short-term investments ..................... 1,484 18,991 90,373
Change in deposit in separate account .................... (5,876) (5,090) (3,128)
----------- ----------- -----------
Net cash used by investing activities .............. (362,116) (265,561) (238,570)
----------- ----------- -----------

Financing activities:
Deposits to policyholder accounts ........................ 102,708 140,173 106,986
Withdrawals from policyholder accounts ................... (101,701) (88,251) (88,081)
Proceeds from issuance of 2033 Senior Notes .............. -- -- 139,222
Borrowings under revolving credit facility ............... 88,000 38,000 34,000
Principal payments under revolving credit facility ....... (11,000) (24,000) (71,000)
Repayments or repurchase of other corporate debt ......... -- -- (81,150)
Proceeds from issuance of 2003 Capital Securities ........ -- -- 19,399
Change in liability for Federal Home Loan Bank advances .. (30,000) (65,000) (57,000)
Other financing activities ............................... 8,878 6,135 (10,237)
----------- ----------- -----------
Net cash provided (used) by financing activities ... 56,885 7,057 (7,861)
----------- ----------- -----------

Increase (decrease) in cash ................................. 4,169 5,591 (8,936)
Cash at beginning of year ................................... 24,324 18,733 27,669
----------- ----------- -----------
Cash at end of year ................................... $ 28,493 $ 24,324 $ 18,733
=========== =========== ===========

See notes to consolidated financial statements.

-50-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation. The consolidated financial statements include the
accounts of Delphi Financial Group, Inc. ("DFG") and all of its wholly-owned
subsidiaries, including, among others, Reliance Standard Life Insurance Company
("RSLIC"), Safety National Casualty Corporation ("SNCC"), First Reliance
Standard Life Insurance Company ("FRSLIC"), Reliance Standard Life Insurance
Company of Texas ("RSLIC-Texas"), Safety First Insurance Company ("SFIC"), SIG
Holdings, Inc. ("SIG") and Matrix Absence Management, Inc. ("Matrix"). The term
"Company" shall refer herein collectively to DFG and its subsidiaries, unless
the context indicates otherwise. All significant intercompany accounts and
transactions have been eliminated. Certain reclassifications have been made in
the 2004 and 2003 consolidated financial statements to conform with the 2005
presentation. As of December 31, 2005, Mr. Robert Rosenkranz, Chairman of the
Board, President and Chief Executive Officer of DFG, by means of beneficial
ownership of the general partner of Rosenkranz & Company and direct or
beneficial ownership, had the power to vote all of the outstanding shares of
Class B Common Stock, which represents 49.9% of the aggregate voting power of
the Company's common stock.

Nature of Operations. The Company manages all aspects of employee absence to
enhance the productivity of its clients and provides the related insurance
coverages: short-term and long-term disability, primary and excess workers'
compensation, group life and travel accident. The Company's asset accumulation
business emphasizes fixed annuity products. The Company offers its products and
services in all fifty states and the District of Columbia. The Company's two
reportable segments are group employee benefit products and asset accumulation
products. The Company's reportable segments are strategic operating divisions
that offer distinct types of products with different marketing strategies. The
Company evaluates the performance of its segments on the basis of income from
continuing operations excluding realized investment gains and losses and before
interest and income tax expense. The accounting policies of the Company's
segments are the same as those used in the consolidated financial statements.

Use of Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.

Investments. Fixed maturity securities available for sale are carried at fair
value with unrealized appreciation and depreciation included as a component of
accumulated other comprehensive income, net of the related income tax expense or
benefit and the related adjustment to cost of business acquired. Short-term
investments are carried at fair value. Other investments consist primarily of
mortgage loans, investments in limited partnerships, equity securities, trading
account securities, investments in limited liability companies and amounts
receivable from investment sales. At December 31, 2005 and 2004, the Company had
mortgage loans of $148.0 million and $80.2 million, respectively. Mortgage loans
are carried at unpaid principal balances, including any unamortized premium or
discount. Net realized investment gains and losses on investment sales are
determined under the specific identification method and are included in income.
At December 31, 2005 and 2004, the Company had investments in limited
partnerships of $108.4 million and $81.4 million, respectively. Investments in
limited partnerships are reflected on the equity method, with earnings included
in net investment income. Equity securities are carried at fair value with
unrealized appreciation and depreciation included as a component of accumulated
other comprehensive income, net of the related income tax expense or benefit.
Investments in limited liability companies are primarily reflected on the equity
method, with earnings included in net investment income. Trading account
securities consist primarily of bonds, common stocks and preferred stocks and
are carried at fair value with unrealized appreciation and depreciation included
in net investment income. Interest and dividend income and realized gains and
losses from trading account securities are also included in income.

-51-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2005

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

Declines in the fair value of investments which are considered to be other than
temporary are reported as realized losses. The Company evaluates, among other
things, the financial position and prospects of the issuer, conditions in the
issuer's industry and geographic area, liquidity of the investment, changes in
the amount or timing of expected future cash flows from the investment, and
recent downgrades of the issuer by a rating agency to determine if and when a
decline in the fair value of an investment below amortized cost is other than
temporary. The length of time and extent to which the fair value of the
investment is lower than amortized cost and the Company's ability and intent to
retain the investment to allow for any anticipated recovery in the investment's
fair value are also considered.

During the fourth quarter of 2005, the Company adopted the Financial Accounting
Standards Board ("FASB") Staff Position ("FSP") on Statement of Financial
Accounting Standard ("SFAS") 115-1 and SFAS 124-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments." The
FSP was issued in November 2005 and replaced the impairment recognition and
measurement guidance set forth in Emerging Issues Task Force ("EITF") Issue 03-1
and superceded EITF Topic No. D-44, "Recognition of Other-Than-Temporary
Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value."
The FSP also amended SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," SFAS No. 124, "Accounting for Certain Investments Held
by Not-for-Profit Organizations," and APB Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stock." The FSP clarifies that an
other-than-temporary impairment loss should be recognized when the investor has
decided to sell an available for sale security that is other than temporarily
impaired and the investor does not expect the security's fair value to fully
recover prior to the expected sale. Such impairment loss should be recognized as
other-than-temporary in the period in which the decision to sell is made. The
adoption of the FSP did not have a material effect on the financial position or
results of operations of the Company.

Cost of Business Acquired. Costs relating to the acquisition of new insurance
business, such as commissions, certain costs of policy issuance and underwriting
and certain sales office expenses, are deferred when incurred. For certain
annuity products, these costs are amortized over the anticipated lives of the
policies in relation to the present value of estimated gross profits from such
policies' anticipated surrender charges and mortality, investment and expense
margins. Deferred acquisition costs for life, disability and accident products
are amortized over the anticipated premium-paying period of the related policies
in proportion to the ratio of the present value of annual expected premium
income to the present value of the total expected premium income. Deferred
acquisition costs for casualty insurance products are amortized over the period
in which the related premium is earned. The present value of estimated future
profits ("PVFP"), which was recorded in connection with the acquisition of RSLIC
and FRSLIC in 1987, is included in cost of business acquired. The PVFP related
to annuities is subject to accrual of interest on the unamortized balance at the
credited rate and amortization is a constant percentage of the present value of
estimated future gross profits on the business. Amortization of the PVFP for
disability and group life insurance is at the discount rate established at the
time of the acquisition. The unamortized balance of cost of business acquired
related to certain asset accumulation products is also adjusted for the impact
on estimated future gross profits as if net unrealized appreciation and
depreciation on available for sale securities had been realized at the balance
sheet date. The impact of this adjustment, net of the related income tax expense
or benefit, is included in net unrealized appreciation and depreciation as a
component of accumulated other comprehensive income.

Receivables from Reinsurers. Receivables from reinsurers for future policy
benefits, unpaid claims and claim expenses and policyholder account balances are
estimated in a manner consistent with the related liabilities associated with
the reinsured policies.

Goodwill. Goodwill and intangible assets deemed to have indefinite lives are
required to be periodically reviewed for impairment. Other intangible assets
with finite lives are required to be amortized over their useful lives. At
January 1, 2003, unamortized goodwill of $60.9 million was attributable to the
acquisition of SNCC, whose operations are included in the group employee
benefits segment, and $33.0 million was attributable to the acquisition of
Matrix, whose operations are reported in the "other" segment. Any impairment
losses would be reflected within operating results in the income statement. The
impairment test is performed annually unless events suggest an impairment may
have occurred in the

-52-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2005

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

interim. Based on these tests, the Company determined that no impairment of
goodwill had occurred during the years ended December 31, 2005, 2004, or 2003,
respectively.

Separate Account. The separate account assets and liabilities represent funds
invested in a separately administered variable life insurance product for which
the policyholder, rather than the Company, bears the investment risk. The
Company receives a proportionate share of the income or loss of the assets of
the separate account, and income is generally reinvested in the separate
account. The Company allocates its proportionate interest in the separate
account's assets to the corresponding captions in the Company's balance sheet.

Future Policy Benefits. The liabilities for future policy benefits for
traditional nonparticipating business, excluding annuity business, have been
computed using a net level method. Mortality, morbidity and other assumptions
are based either on the Company's past experience or various actuarial tables,
modified as necessary for possible variations. Changes in these assumptions
could result in changes in these liabilities.

Unpaid Claims and Claim Expenses. The liability for unpaid claims and claim
expenses includes amounts determined on an individual basis for reported losses
and estimates of incurred but not reported losses developed on the basis of past
experience. The methods of making these estimates and establishing the resulting
reserves are continually reviewed and updated, with any resulting adjustments
reflected in earnings currently. At December 31, 2005, disability and primary
and excess workers' compensation reserves with a carrying value of $844.1
million have been discounted at a weighted average rate of 5.5%, with the rates
ranging from 3.7% to 7.5%.

Policyholder Account Balances. Policyholder account balances are comprised of
the Company's reserves for interest-sensitive insurance products, including
annuities. Reserves for annuity products are equal to the policyholders'
aggregate accumulated value.

Junior Subordinated Deferrable Interest Debentures underlying Company-obligated
Mandatorily Redeemable Capital Securities issued by Unconsolidated Subsidiaries.
Pursuant to revised Financial Accounting Standards Board Interpretation ("FIN")
No. 46, "Consolidation of Variable Interest Entities," the Company does not
consolidate its subsidiaries that hold junior subordinated deferrable interest
debentures of the Company which underlie the Company-obligated mandatorily
redeemable capital securities of these subsidiaries. Instead, the Company has
presented in its consolidated financial statements the junior subordinated
deferrable interest debentures of $59.8 million as a liability and its interest
of $3.7 million in the subsidiaries that hold these debentures as a component of
other assets.

Income Taxes. The Company files a life/non-life consolidated federal tax return,
pursuant to an election made with the 2001 tax return. RSLIC-Texas and RSLIC are
taxed as life insurance companies and comprise the life subgroup. The non-life
subgroup includes DFG, SNCC, FRSLIC, SFIC and the non-insurance subsidiaries of
the Company. The Company computes a balance sheet amount for deferred income
taxes, which is included in other assets or other liabilities, at the rates
expected to be in effect when the underlying differences will be reported in the
Company's income tax returns.

Premium Recognition. The Company's group insurance products consist primarily of
short-duration contracts, and, accordingly, premiums for these products are
reported as earned over the contract period and recognized in proportion to the
amount of insurance protection provided. All insurance-related revenue is
reported net of premiums ceded under reinsurance arrangements. A reserve is
provided for the portion of premiums written which relates to unexpired contract
terms. Deposits for asset accumulation products are recorded as liabilities
rather than as premiums, since these products generally do not involve mortality
or morbidity risk. Revenue from asset accumulation products consists of policy
charges for the cost of insurance, policy administration charges and surrender
charges assessed against the policyholder account balances during the period.

Stock Options. Prior to 2003, the Company accounted for stock options according
to Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. The Company's stock option
plans are more fully described in Note N. All options granted prior to 2003 had
an intrinsic value of zero on the date of grant under APB No. 25, and,
therefore, no stock-based employee compensation expense is recognized in the

-53-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2005

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

Company's financial statements for these options. Effective January 1, 2003, the
Company adopted the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under the prospective method
provisions of SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure," the recognition provisions of SFAS No. 123 are
applied to all option awards granted, modified, or settled after January 1,
2003. The amount of expense related to stock-based compensation included in the
determination of the Company's net income for 2003, 2004 and 2005 is lower than
if these provisions had been applied to all awards granted since the original
January 1, 1995 effective date of SFAS No. 123. The following table illustrates
the effect on net income and earnings per share as if the Company had begun to
apply the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation as of its original effective date:

Year Ended December 31,
-----------------------------
2005 2004 2003
-------- -------- -------
(dollars in thousands, except
per share data)

Net income, as reported ................................... $113,334 $123,543 $98,916
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects ..... 5,701 2,222 1,218
Deduct: Stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects ............................. (5,964) (2,955) (2,229)
-------- -------- -------
Pro forma net income ...................................... $113,071 $122,810 $97,905
======== ======== =======

Earnings per share:
Basic, as reported ..................................... $ 3.47 $ 3.87 $ 3.17
Basic, pro forma ....................................... 3.46 3.84 3.14

Diluted, as reported ................................... $ 3.38 $ 3.75 $ 3.09
Diluted, pro forma ..................................... 3.35 3.70 3.03

The weighted average per share fair value used to calculate compensation expense
for 2005, 2004 and 2003 was $14.77, $11.46 and $7.85, respectively. These fair
values were estimated at the grant date using the Black-Scholes option pricing
model with the following assumptions: risk-free interest rates ranging from 2.3%
to 4.4%, volatility factors of the expected market price of the Company's common
stock ranging from 10% to 29%, expected lives of the options of two to five
years and dividend yields from 0.6% to 0.9%. Compensation expense is recognized
over the expected life of the option using the straight-line method.

Statements of Cash Flows. The Company uses short-term, highly liquid debt
instruments purchased with maturities of three months or less as part of its
investment management program and, as such, classifies these investments under
the caption "short-term investments" in its Consolidated Balance Sheets and
Consolidated Statements of Cash Flows.

-54-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2005

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

Recently Issued Accounting Standards

In December 2004, the FASB issued SFAS No. 123 (Revised) ("123R"), "Share-Based
Payment," a revision of SFAS No. 123, which requires all share-based payments to
employees, including grants of employee stock options, to be recognized as
expense in the income statement based on their fair values and prohibits pro
forma disclosure as an alternative. SFAS No. 123R was scheduled to be effective
no later than the first interim or annual period beginning after June 15, 2005
with early adoption also permitted. However, in April 2005 the United States
Securities and Exchange Commission delayed the effective date for registrants
that are not small business issuers to adopt SFAS No. 123R no later than the
beginning of the first fiscal year beginning after June 15, 2005. Upon adoption
of SFAS No. 123R, the Company is required to select a transition method between
two permitted alternatives, a "modified prospective" transition method or a
"modified retrospective" transition method. Under the "modified prospective"
method, compensation cost is recognized for all new awards granted after the
date of adoption and any previously granted awards that are not fully vested.
Under the "modified retrospective" method, compensation cost is recognized based
on the requirements of the modified prospective method described above, but this
method also permits the restatement of financial statements, either for all
prior periods presented or prior interim periods in the year of adoption, based
on the amounts previously recognized under SFAS No. 123 for purposes of pro
forma disclosures. Effective January 1, 2006, the Company adopted FAS No. 123R
using the "modified prospective" transition method.

Since FAS No. 123R must be applied not only to new awards but to previously
granted awards that are not fully vested on the effective date, and the Company
has already adopted SFAS No. 123 using the prospective transition method,
compensation cost for some previously granted awards that were not recognized
under SFAS No. 123 will be recognized under SFAS No. 123R. However, had the
Company adopted SFAS No. 123R in prior periods, the impact of that standard
would have approximated the impact of SFAS No. 123 as described in the
disclosure of pro forma net income and earnings per share above in "Stock
Options." In addition, SFAS No. 123R requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a financing cash flow,
rather than as an operating cash flow as previously required under GAAP. The
Company's benefits of tax deductions in excess of recognized compensation cost
were $7.5 million, $4.6 million and $2.3 million in 2005, 2004 or 2003,
respectively. The adoption of SFAS No. 123R will not have a material effect on
the financial position or results of operations of the Company.

NOTE B - INVESTMENTS

The amortized cost and fair value of investments in fixed maturity securities
available for sale are as follows:

December 31, 2005
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
(dollars in thousands)

Mortgage-backed securities.................... $ 839,889 $14,589 $(11,936) $ 842,542
Corporate securities.......................... 1,349,205 39,422 (21,760) 1,366,867
U.S. Treasury and other U.S. Government
guaranteed securities...................... 422,618 2,173 (3,053) 421,738
Obligations of U.S. states, municipalities and
political subdivisions..................... 596,944 17,415 (742) 613,617
---------- ------- -------- ----------
Total fixed maturity securities......... $3,208,656 $73,599 $(37,491) $3,244,764
========== ======= ======== ==========

-55-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2005

NOTE B - INVESTMENTS - (CONTINUED)

December 31, 2004
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
(dollars in thousands)

Mortgage-backed securities.................... $ 761,406 $ 19,713 $ (4,051) $ 777,068
Corporate securities.......................... 1,356,314 75,123 (6,066) 1,425,371
U.S. Treasury and other U.S. Government
guaranteed securities...................... 330,856 3,721 (314) 334,263
Obligations of U.S. states, municipalities and
political subdivisions..................... 489,942 22,637 (268) 512,311
---------- -------- -------- ----------
Total fixed maturity securities......... $2,938,518 $121,194 $(10,699) $3,049,013
========== ======== ======== ==========

The amortized cost and fair value of fixed maturity securities available for
sale at December 31, 2005, by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because issuers may have the
right to call or prepay obligations, with or without prepayment penalties.

Amortized Fair
Cost Value
---------- ----------
(dollars in thousands)

Mortgage-backed securities ......... $ 839,889 $ 842,542
Other securities:
Less than one year .............. 98,040 97,691
Greater than 1, up to 5 years ... 696,215 706,925
Greater than 5, up to 10 years .. 804,742 810,156
Greater than 10 years ........... 769,770 787,450
---------- ----------
Total ........................ $3,208,656 $3,244,764
========== ==========

Net investment income was attributable to the following:

Year Ended December 31,
------------------------------
2005 2004 2003
-------- -------- --------
(dollars in thousands)

Gross investment income:
Fixed maturity securities .. $189,814 $185,765 $169,428
Mortgage loans ............. 14,764 8,133 4,676
Other ...................... 44,012 35,463 41,343
-------- -------- --------
248,590 229,361 215,447
Less: Investment expenses ..... 25,021 26,917 29,110
-------- -------- --------
$223,569 $202,444 $186,337
======== ======== ========

Net realized investment gains arose from the following:

Year Ended December 31,
--------------------------
2005 2004 2003
------ ------- -------
(dollars in thousands)

Fixed maturity securities .... $2,656 $13,178 $11,857
Other investments ............ 6,347 2,282 867
------ ------- -------
$9,003 $15,460 $12,724
====== ======= =======

-56-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2005

NOTE B - INVESTMENTS - (CONTINUED)

Proceeds from sales of fixed maturity securities during 2005, 2004 and 2003 were
$1,084.3 million, $1,126.1 million and $853.1 million, respectively. Gross gains
of $12.2 million, $22.1 million and $29.1 million and gross losses of $5.3
million, $5.0 million and $3.4 million, respectively, were realized on those
sales. In 2005, 2004 and 2003, the net gains realized on fixed maturity
securities also include a provision for the other than temporary decline in the
value of certain fixed maturity securities of $4.2 million, $3.9 million and
$13.0 million, respectively. The change in unrealized appreciation and
depreciation on investments, primarily fixed maturity securities, is included as
a component of accumulated other comprehensive income. See Note L to the
Consolidated Financial Statements.

The gross unrealized losses and fair value of fixed maturity securities
available for sale, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, are as
follows:

December 31, 2005
-------------------------------------------------------------------------
Less Than 12 Months 12 Months or More Total
----------------------- --------------------- -----------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
---------- ---------- -------- ---------- ---------- ----------
(dollars in thousands)

Mortgage-backed securities ............... $ 334,682 $ (7,416) $114,051 $(4,520) $ 448,733 $(11,936)
Corporate securities ..................... 393,949 (16,759) 68,666 (5,001) 462,615 (21,760)
U.S. Treasury and other U.S. Government
guaranteed securities ................. 365,767 (2,958) 7,400 (95) 373,167 (3,053)
Obligations of U.S. states, municipalities
& political subdivisions .............. 68,877 (716) 1,846 (26) 70,723 (742)
---------- -------- -------- ------- ---------- --------
Total fixed maturity securities .... $1,163,275 $(27,849) $191,963 $(9,642) $1,355,238 $(37,491)
========== ======== ======== ======= ========== ========

December 31, 2004
---------------------------------------------------------------------
Less Than 12 Months 12 Months or More Total
--------------------- --------------------- ---------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
-------- ---------- -------- ---------- -------- ----------
(dollars in thousands)

Mortgage-backed securities ............... $216,549 $(3,298) $ 40,607 $ (753) $257,156 $ (4,051)
Corporate securities ..................... 106,619 (2,000) 58,207 (4,066) 164,826 (6,066)
U.S. Treasury and other U.S. Government
guaranteed securities ................. 42,028 (314) -- -- 42,028 (314)
Obligations of U.S. states, municipalities
and political subdivisions ............ 10,187 (79) 7,302 (189) 17,489 (268)
-------- ------- -------- ------- -------- --------
Total fixed maturity securities .... $375,383 $(5,691) $106,116 $(5,008) $481,499 $(10,699)
======== ======= ======== ======= ======== ========

The Company regularly evaluates its investment portfolio for factors that may
indicate that a decline in the fair value of an investment is other than
temporary. The gross unrealized losses in 2005 are attributable to over five
hundred seventy fixed maturity security positions with no unrealized loss
attributable to any one security exceeding $1.8 million. At December 31, 2005
approximately 62% of these aggregate gross unrealized losses relate to fixed
maturity security positions as to which such losses represent 10% or less of the
amortized cost for the applicable security. Unrealized losses attributable to
investment grade fixed maturity securities as determined by nationally
recognized statistical rating organizations at December 31, 2005 comprised 64%
of the aggregate gross unrealized losses. Unrealized losses attributable to
non-investment grade fixed maturity securities at December 31, 2005 comprised
36% of the aggregate gross unrealized losses. For non-investment grade fixed
maturity securities, management evaluated the financial position and prospects
of the issuers, conditions in the issuers' industries and geographic areas, and
liquidity of the investments. Based on an evaluation of these factors and the
other factors described in Note A to the Consolidated Financial Statements and
the Company's ability and intent to retain the investments to allow for the
anticipated recovery in the investments' fair value, management believes that
the unrealized losses in the table above are temporary.

-57-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2005

NOTE B - INVESTMENTS - (CONTINUED)

The Company, at times, enters into futures and option contracts and interest
rate and credit default swap agreements in connection with its investment
strategy primarily to reduce the risk associated with changes in the value of
its fixed maturity portfolio. These positions are carried at fair value with
gains and losses included in income. The Company recognized net investment gains
(losses) of $0.6 million, $(0.6) million and $(3.7) million in 2005, 2004 and
2003, respectively, related to these instruments. The Company had no material
outstanding futures and option contracts or interest rate and credit default
swap agreements at December 31, 2005 or 2004. The Company, at times, may also
invest in non-dollar denominated fixed maturity securities that expose it to
fluctuations in foreign currency rates, and, therefore, may hedge such exposure
by using currency forward contracts. The Company had no material outstanding
currency forward contracts at December 31, 2005 or 2004.

Bonds and short-term investments with amortized costs of $93.0 million and $73.1
million at December 31, 2005 and 2004, respectively, are on deposit with various
states' insurance departments in compliance with statutory requirements.
Additionally, certain assets of the Company are restricted under the terms of
reinsurance agreements. These agreements provide for the distribution of assets
to the reinsured companies covered under the agreements prior to any general
distribution to policyholders in the event of the Company's insolvency or
bankruptcy. The amount of assets restricted for this purpose was $102.7 million
and $65.1 million at December 31, 2005 and 2004, respectively.

At December 31, 2005 and 2004, approximately 35% and 40%, respectively, of the
Company's total invested assets were comprised of corporate fixed maturity
securities, which are diversified across economic sectors and industry classes.
Mortgage-backed securities comprised 22% of the Company's total invested assets
at December 31, 2005 and 2004. The Company's mortgage-backed securities are
diversified with respect to size and geographic distribution of the underlying
mortgage loans. The Company also invests in certain debt securities that are
rated by nationally recognized statistical rating organizations as below
investment grade or that are not rated. Such securities, which are included in
fixed maturity securities, had fair values of $276.6 million and $201.2 million
at December 31, 2005 and 2004, respectively, and constituted 7.1% and 5.7% of
total invested assets at December 31, 2005 and 2004, respectively.

Summarized aggregate unaudited financial information for the limited
partnerships and limited liability companies in which the Company maintained
investments as of the date is set forth below:

December 31,
-------------------------
2005 2004
----------- -----------
(dollars in thousands)

Assets ........................... $29,627,216 $24,523,835
=========== ===========
Liabilities ...................... $ 8,609,460 $ 6,131,594
Capital .......................... 21,017,756 18,392,241
----------- -----------
Total liabilities and capital .... $29,627,216 $24,523,835
=========== ===========
Net income ....................... $ 3,669,431 $ 3,246,081
=========== ===========

The fair value of the Company's investment in the securities of any one issuer
or securities backed by a single pool of assets, excluding U.S. Government
obligations, whose value represented 10% or more of the Company's shareholders'
equity at December 31, 2005 was as follows: Bankers Trust Corporation Secured
Portfolio Notes, Series 1998-1 - $155.1 million.

-58-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2005

NOTE C - DISABILITY, ACCIDENT AND CASUALTY FUTURE POLICY BENEFITS AND UNPAID
CLAIMS AND CLAIM EXPENSES

The following table provides a reconciliation of the beginning and ending
disability, accident and casualty future policy benefits and unpaid claims and
claim expenses:

Year Ended December 31,
------------------------------------
2005 2004 2003
---------- ---------- ----------
(dollars in thousands)

Balance at beginning of year, net of reinsurance ......... $1,088,984 $ 949,020 $ 862,355
Add provisions for claims and claim expenses incurred, net
of reinsurance, occurring during:
Current year ....................................... 486,752 370,618 305,463
Prior years ........................................ 31,735 13,960 6,401
---------- ---------- ----------
Incurred claims and claim expenses during the current
year, net of reinsurance ........................... 518,487 384,578 311,864
---------- ---------- ----------
Deduct claims and claim expenses paid, net of reinsurance,
occurring during:
Current year ....................................... 98,247 61,742 69,351
Prior years ........................................ 224,824 182,872 155,848
---------- ---------- ----------
323,071 244,614 225,199
---------- ---------- ----------
Balance at end of year, net of reinsurance ............... 1,284,400 1,088,984 949,020
Reinsurance receivables at end of year ................... 249,101 264,189 252,568
---------- ---------- ----------
Balance at end of year, gross of reinsurance (1) ...... $1,533,501 $1,353,173 $1,201,588
========== ========== ==========

Balance Sheets:
Future policy benefits:
Disability and accident ............................ $ 539,929 $ 488,909

Unpaid claims and claim expenses:
Disability and accident ............................ 247,093 218,316
Casualty(1) ........................................ 746,479 645,948
---------- ----------
$1,533,501 $1,353,173
========== ==========

(1) All years include the results from the Company's discontinued non-core
property catastrophe reinsurance business. See Note S to the Consolidated
Financial Statements.

In 2005 and 2004, the change in the provision for claims and claims expenses
incurred in prior years reflects the accretion of discounted reserves and
unfavorable claims development. In 2003, the change in the provision for claims
and claim expenses incurred in prior years reflects the accretion of discounted
reserves offset by favorable claims development. The Company's insurance
policies do not provide for the retrospective adjustment of premiums based on
claim experience.

NOTE D - CORPORATE DEBT

In May 2005, the Company entered into a new $200.0 million revolving credit
facility with Bank of America, N.A. as administrative agent, and a group of
major banking institutions (the "Credit Agreement"), which replaced the existing
$100.0 million revolving credit facility scheduled to expire in December 2006.
The Company had outstanding borrowings of $91.0 million under the Credit
Agreement at December 31, 2005 and $14.0 million of outstanding borrowings under
the previous revolving credit facility at December 31, 2004. Interest on
borrowings under the Credit Agreement is payable, at the Company's election,
either at a floating rate based on LIBOR plus a specified margin which varies
depending on the level of the specified ratings of the Company's senior
unsecured debt, as in effect from time to time, or at Bank of America, N.A.'s
prime rate. Certain commitment and utilization fees are also payable under the
Credit Agreement. The Credit Agreement contains certain financial and various
other affirmative and negative covenants

-59-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2005

NOTE D - CORPORATE DEBT - (CONTINUED)

considered ordinary for this type of credit agreement. They include, among
others, the maintenance of a specified debt to capital ratio, minimum
consolidated net worth of the Company, minimum risk-based capital requirements
for the Company's insurance subsidiaries, RSLIC and SNCC, and certain
limitations on investments and subsidiary indebtedness. The maturity date of the
Credit Agreement is May 26, 2010. As of December 31, 2005, the Company was in
compliance in all material respects with the financial and various other
affirmative and negative covenants in the Credit Agreement.

On May 20, 2003, the Company issued $143.8 million of 8.00% Senior Notes due
2033 (the "2033 Senior Notes") in a public offering. The proceeds from the 2033
Senior Notes were used to repay the outstanding borrowings under the Company's
previous revolving credit facility and to repay in full the principal amount of
$66.5 million of existing 8.00% senior notes at their maturity on October 1,
2003. The 2033 Senior Notes, which were issued at par value, will mature on May
15, 2033 and are redeemable at par at the option of the Company, in whole or in
part, at any time on or after May 15, 2008. The 2033 Senior Notes are not
redeemable at the option of any holder of the notes prior to maturity nor are
they entitled to any sinking fund redemptions. Interest on the 2033 Senior Notes
is payable quarterly on February 15, May 15, August 15 and November 15 of each
year. The 2033 Senior Notes are senior unsecured obligations of the Company and,
as such, are effectively subordinated to all claims of secured creditors of the
Company and its subsidiaries and to claims of unsecured creditors of the
Company's subsidiaries, including the insurance subsidiaries' obligations to
policyholders. The 2033 Senior Notes were issued in denominations of $25 and
multiples of $25 and are listed on the New York Stock Exchange. As of December
31, 2005, the Company was in compliance in all material respects with the terms
of the related indenture.

To mitigate the risk of interest rates rising before the issuance of the 2033
Senior Notes could be completed, the Company entered into a treasury rate lock
agreement in September 2002, with a notional amount of $150.0 million, and an
anticipated debt term of 10 years. The Company paid $13.8 million upon the
issuance of the 2033 Senior Notes in May 2003 to settle the treasury rate lock
agreement. This transaction was accounted for as a cash flow hedge under the
provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." Accordingly, $12.1 million of the loss on the treasury rate lock
agreement was recorded in accumulated other comprehensive income in May 2003 and
is being amortized into interest expense ratably over 10 years. The Company will
amortize $1.2 million of such $12.1 million loss into interest expense over the
next twelve months. The remaining $1.7 million of loss on the treasury rate lock
agreement was deemed ineffective and, therefore, was recognized as a reduction
of net investment income during the second quarter of 2003. At December 31,
2005, 2004 and 2003 the net loss on the treasury rate lock agreement included in
accumulated other comprehensive income was $5.8 million, $6.6 million and $7.4
million, respectively, net of an income tax benefit of $3.1 million, $3.6
million and $4.0 million, respectively.

In May 2003, the Company made the final $9.0 million principal payment on the
$45.0 million of SIG's 8.5% senior secured notes, which the Company had assumed
in 1996.

The Company also repaid in full the $5.7 million principal amount due on the
8.00% subordinated notes in June 2003, which the Company had issued in
conjunction with the acquisition of Matrix in 1998.

Interest paid by the Company on its corporate debt totaled $13.6 million, $12.4
million and $12.9 million during 2005, 2004 and 2003, respectively.

NOTE E - ADVANCES FROM THE FEDERAL HOME LOAN BANK

The Company, through its insurance subsidiaries, maintains a program in which
various investments are financed using advances from various Federal Home Loan
Banks (collectively, the "FHLB"). At December 31, 2005 and 2004, advances from
the FHLB, including accrued interest, totaled $55.3 million and $85.4 million,
respectively. During 2005, $30.0 million of advances from the FHLB matured and
were repaid. Interest expense on the advances is included as an offset to
investment income on the financed securities. The average interest rate on the
outstanding advances was 7.5% and 5.7% at December 31, 2005 and 2004,
respectively. The advance of $55.0 million, which was obtained at a fixed rate,
has a term of 14.5 years at December 31, 2005. This advance is collateralized by
fixed maturity securities with a fair value of $57.8 million.

-60-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2005

NOTE F - SECURITIES LENDING

The Company maintains a securities lending program under which certain
securities from its portfolio are loaned to other institutions for short periods
of time. The Company maintains full ownership rights to the securities loaned
and continues to earn interest and dividends on them. Accordingly, such
securities are included in invested assets. The Company obtains collateral for
such loans at approximately 102% of the market value of a loaned security. The
Company's institutional lending agent monitors the market value of the
securities loaned and obtains additional collateral as necessary. The collateral
is deposited by the borrower with, and held by, such agent. Cash collateral is
invested by such agent to generate additional income according to specified
guidelines. The securities lending collateral is reported as an asset with a
corresponding liability reflected for the obligation to return the collateral.
At December 31, 2005 and 2004, the Company had securities on loan with a market
value of $238.7 million and $231.8 million and cash collateral of $244.8 million
and $236.9 million, respectively.

NOTE G - INCOME TAXES

Income tax expense is reconciled to the amount computed by applying the
statutory federal income tax rate to income before income tax expense:

Year Ended December 31,
---------------------------
2005 2004 2003
------- ------- -------
(dollars in thousands)

Federal income tax expense at statutory rate ................ $64,245 $57,543 $48,275
Tax-exempt income and dividends received deduction .......... (7,753) (6,693) (6,324)
Favorable resolution of federal income tax audits and other.. 383 (7,846) 695
------- ------- -------
$56,875 $43,004 $42,646
======= ======= =======

All of the Company's current and deferred income tax expense is due to federal
income taxes as opposed to state income taxes.

Deferred tax assets and liabilities are determined based on the difference
between the book basis and tax basis of assets and liabilities using tax rates
in effect for the year in which the differences are expected to reverse. The
components of the net deferred tax liability are as follows:

December 31,
----------------------
2005 2004
-------- ---------
(dollars in thousands)

Cost of business acquired ................................... $ 78,083 $ 66,171
Future policy benefits and unpaid claims and claim expenses.. 58,743 47,240
Investments ................................................. 26,986 43,790
Other ....................................................... 10,120 7,835
-------- --------
Gross deferred tax liabilities ........................... 173,932 165,036
-------- --------
Future policy benefits and unpaid claims and claim expenses.. (6,916) (9,819)
Cost of business acquired and other ......................... (25,181) (23,300)
Net operating loss carryforwards ............................ (18,977) (12,550)
-------- --------
Gross deferred tax assets ................................ (51,074) (45,669)
-------- --------
Net deferred tax liability ............................... $122,858 $119,367
======== ========

-61-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2005

NOTE G - INCOME TAXES - (CONTINUED)

Current tax expense, deferred tax expense, current tax (recoverable) liability
and income taxes paid and refunded are as follows:

As of or for the Year Ended
December 31,
---------------------------
2005 2004 2003
------- ------- -------
(dollars in thousands)

Current tax expense .................. $28,565 $20,675 $32,546
Deferred tax expense ................. 28,310 22,329 10,100
Current tax (recoverable) liability .. (1,283) 5,265 817
Income taxes paid .................... 25,608 21,098 21,800
Income tax refunds ................... -- 6,017 --

At December 31, 2005, DFG, SNCC and the other non-life insurance subsidiaries
have net operating loss carryforwards of $54.2 million, which will begin
expiring in 2020. The Company's federal tax returns are routinely audited by the
Internal Revenue Service ("IRS"). During 2004, the Company's income taxes
payable was reduced by $6.6 million primarily from the favorable resolution of
IRS audits of the 1998 through 2002 tax years. This reduction represented the
release of previous accruals for potential audit adjustments which were
subsequently settled or eliminated and further refinement of existing tax
exposures. Tax years through 2002 are closed to further assessment by the IRS.
Management believes any future adjustments that may result from IRS examinations
of tax returns will not have a material impact on the consolidated financial
position, liquidity, or results of operations of the Company.

NOTE H - PRESENT VALUE OF FUTURE PROFITS

A summary of the activity related to the PVFP asset, which is included in cost
of business acquired on the consolidated balance sheet, is shown below:

Year Ended December 31,
---------------------------
2005 2004 2003
------- ------- -------
(dollars in thousands)

Balance at beginning of year.. $ 7,058 $ 9,087 $11,198
Interest accrued........... 141 161 189
Amortization............... (2,216) (2,190) (2,300)
------- ------- -------
Balance at end of year........ $ 4,983 $ 7,058 $ 9,087
======= ======= =======

An estimate of the percentage of the December 31, 2005 PVFP balance to be
amortized over each of the next five years is as follows: 2006 - 42.5%, 2007
-37.0%, 2008 -10.1%, 2009 -5.4% and 2010 - 5.0%.

-62-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2005

NOTE I- FAIR VALUES OF FINANCIAL INSTRUMENTS

The fair values of the Company's financial instruments are shown below. Because
fair values for all balance sheet items are not required to be disclosed by SFAS
No. 107, "Disclosures about Fair Value of Financial Instruments," the aggregate
fair value amounts presented below do not necessarily represent the underlying
value of the Company.

December 31,
-------------------------------------------------
2005 2004
----------------------- -----------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ---------- ---------- ----------
(dollars in thousands)

Assets:
Fixed maturity securities, available for sale..... $3,244,764 $3,244,764 $3,049,013 $3,049,013
Short-term investments............................ 94,308 94,308 95,761 95,761
Other investments................................. 573,532 573,532 396,302 396,302
Securities lending collateral..................... 244,821 244,821 236,900 236,900
Assets held in separate account................... 99,428 99,428 88,205 88,205

Liabilities:
Policyholder account balances..................... 959,446 927,140 948,847 929,490
Corporate debt.................................... 234,750 241,018 157,750 170,688
Junior subordinated deferrable interest debentures
underlying company-obligated mandatorily
redeemable capital securities issued by
unconsolidated subsidiaries.................... 59,762 61,565 59,762 61,745
Securities lending payable........................ 244,821 244,821 236,900 236,900
Advances from Federal Home Loan Bank.............. 55,342 68,046 85,395 98,946
Liabilities related to separate account........... 99,428 99,428 88,205 88,205

The fair values for fixed maturity securities and short-term investments have
been obtained from broker-dealers, nationally recognized statistical
organizations and, in the case of certain structured notes, by reference to the
fair values of the underlying investments. Securities acquired through private
placements in the Company's fixed maturity and equity securities portfolio that
are not actively traded in a liquid market and do not have other mechanisms for
their sale totaled $110.2 million and $76.6 million at December 31, 2005 and
2004, respectively. The Company estimates the fair value of these securities
primarily by comparison to similar securities with quoted market prices. If
quotes are not available on similar securities, the Company estimates fair value
based on recent purchases or sales of similar securities or other internally
prepared valuations. Key assumptions used in this process include the level of
risk-free interest rates, risk premiums, and performance of underlying
collateral, if applicable. All such investments are classified as available for
sale. The Company's ability to liquidate these investments in a timely manner,
if necessary, may be adversely impacted by the lack of an actively traded
market. Historically, the Company has not realized amounts on dispositions of
non-marketable investments materially in excess of the gain or loss amounts
estimated by the Company under this valuation methodology. The Company believes
that its estimates reasonably reflect the fair values of these securities;
however, had there been an active market for these securities during the
applicable reporting periods, the market prices may have been materially
different than the amounts reported. The carrying values for all other invested
assets approximate fair values based on the nature of the investments. The
carrying values for securities lending collateral and payable approximate fair
value as the asset and the liability are very short-term in nature. The carrying
values of separate account assets and liabilities are equal to fair value.

Policyholder account balances are net of reinsurance receivables and the
carrying values have been decreased for related acquisition costs of $60.6
million and $46.2 million at December 31, 2005 and 2004, respectively. Fair
values for policyholder account balances were determined by deducting an
estimate of the future profits to be realized from the business, discounted at a
current interest rate, from the adjusted carrying values.

-63-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2005

NOTE I - FAIR VALUES OF FINANCIAL INSTRUMENTS - (CONTINUED)

The Company believes the fair value of its variable rate long-term debt and
variable rate junior subordinated deferrable interest debentures are equal to
their carrying value. The Company pays variable rates of interest on this debt
and these debentures, which reflect changed market conditions since the time the
terms were negotiated. The fair values of the 2033 Senior Notes and the fixed
rate junior subordinated deferrable interest debentures are based on the
expected cash flows discounted to net present value. The fair values for fixed
rate advances from the FHLB were calculated using discounted cash flow analyses
based on the interest rates for the advances at the balance sheet date.

NOTE J - JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES UNDERLYING THE
COMPANY-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF UNCONSOLIDATED
SUBSIDIARIES

In 1997, Delphi Funding L.L.C. ("Delphi Funding"), a consolidated subsidiary of
the Company prior to the adoption of revised FIN No. 46 in 2004, issued $100.0
million liquidation amount of 9.31% Capital Securities, Series A (the "Capital
Securities") in a public offering. During 2001, the Company repurchased $64.0
million liquidation amount of the Capital Securities in the open market. In
connection with the issuance of the Capital Securities and the related purchase
by the Company of all of the common limited liability company interests in
Delphi Funding, the Company issued to Delphi Funding $103.1 million principal
amount of 9.31% junior subordinated deferrable interest debentures, Series A,
due 2027 (the "Junior Debentures"). Interest on the outstanding Junior
Debentures is payable semiannually, but 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 dividends 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. The
distribution and other payment dates on the Capital Securities correspond to the
interest and other payment dates on the Junior Debentures. The Junior Debentures
are not redeemable prior to March 25, 2007, but the Company has the right to
dissolve Delphi Funding at any time and distribute the Junior Debentures to the
holders of the Capital Securities. Pursuant to the related transaction
documents, the Company has, on a subordinated basis, guaranteed all payments due
on the Capital Securities.

On May 15, 2003, Delphi Financial Statutory Trust I (the "Trust"), a Connecticut
statutory trust and consolidated subsidiary of the Company prior to the adoption
of revised FIN No. 46 in 2004, issued $20.0 million liquidation amount of
Floating Rate Capital Securities (the "2003 Capital Securities") in a private
placement transaction. In connection with the issuance of the 2003 Capital
Securities and the related purchase by the Company of all of the common
securities of the Trust (the "2003 Common Securities" and, collectively with the
2003 Capital Securities, the "Trust Securities"), the Company issued $20.6
million principal amount of floating rate junior subordinated deferrable
interest debentures, due 2033 (the "2003 Junior Debentures"). Interest on the
2003 Junior Debentures is payable quarterly on February 15, May 15, August 15
and November 15 of each year. The interest rate on the 2003 Junior Debentures
resets quarterly to a rate equal to the London interbank offered interest rate,
LIBOR, for three-month U.S. dollar deposits, plus 4.10% (not to exceed 12.50%).
The weighted average interest rate on the 2003 Junior Debentures was 7.40%,
5.56%, and 5.31% for the years ended December 31, 2005, 2004 and 2003,
respectively. The distribution and other payment dates on the Trust Securities
correspond to the interest and other payment dates on the 2003 Junior
Debentures. The 2003 Junior Debentures are unsecured and subordinated in right
of payment to all of the Company's existing and future senior indebtedness.
Beginning in May 2008, the Company will have the right to redeem the 2003 Junior
Debentures, in whole or in part, at a price equal to 100% of the principal
amount of the debentures, plus accrued and unpaid interest to the date of
redemption.

As a result of the adoption of revised FIN No. 46 in 2004, the Company was
required to deconsolidate its subsidiaries that hold junior subordinated
deferrable interest debentures of the Company which underlie the
Company-obligated mandatorily redeemable capital securities of these
subsidiaries. Therefore, at December 31, 2005 and 2004, the Company presented in
its consolidated financial statements the junior subordinated deferrable
interest debentures of $59.8 million as a liability and its interest of $3.7
million in the subsidiaries that hold these debentures as a component of other
assets.

Interest paid by the Company on the outstanding junior subordinated deferrable
interest debentures totaled $4.8 million, $4.5 million and $3.9 million during
2005, 2004 and 2003, respectively.

-64-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2005

NOTE K - SHAREHOLDERS' EQUITY AND RESTRICTIONS

The holders of the Company's Class A Common Stock are entitled to one vote per
share, and the holders of the Company's Class B Common Stock are entitled to the
number of votes per share equal to the lesser of (1) the number of votes such
that the aggregate of all outstanding shares of Class B Common Stock will be
entitled to cast 49.9% of all votes represented by the aggregate of all
outstanding shares of Class A Common Stock and Class B Common Stock or (2) ten
votes per share. On November 21, 2003, the Company's Board of Directors declared
a 3-for-2 common stock split effected in the form of a 50% stock dividend, which
was distributed on December 22, 2003 to stockholders of record on December 8,
2003. A total of 11,211,435 shares of common stock were issued in connection
with the split, and the aggregate amount of $0.1 million, equal to the par value
of the common stock issued, was reclassified from additional paid-in capital to
common stock. The stated par value of each share remained at $0.01.

In 2001, the Company's Board of Directors approved the initiation of a quarterly
cash dividend, payable on the Company's outstanding Class A and Class B Common
Stock. The quarterly cash dividend was $0.05 per share during the first three
quarters of 2003. In the fourth quarter of 2003, the Company's Board of
Directors approved an increase in the Company's quarterly cash dividend to $0.08
per share. In the first quarter of 2005, the quarterly cash dividend declared by
the Company's Board of Directors was increased by 12.5% to $0.09 per share.
During 2005, 2004 and 2003, the Company paid cash dividends on its capital stock
in the amounts of $11.6 million, $10.1 million and $7.4 million, respectively.
Under the Company's Credit Agreement, it is permitted to pay cash dividends on
its capital stock and repurchase or redeem its capital stock without limitation,
as long as the Company is in pro forma compliance with the requirements of the
agreement.

The Company's life insurance subsidiaries had consolidated statutory capital and
surplus of $375.0 million and $330.9 million at December 31, 2005 and 2004,
respectively. Consolidated statutory net income for the Company's life insurance
subsidiaries was $56.8 million, $30.7 million and $24.8 million, in 2005, 2004
and 2003, respectively. The consolidated statutory net income for the Company's
life insurance subsidiaries for 2005, 2004 and 2003 includes a pre-tax charge of
$4.2 million, $2.1 million and $16.0 million, respectively, for the other than
temporary decline in the value of certain securities. The Company's casualty
insurance subsidiary had statutory capital and surplus of $359.1 million and
$286.2 million at December 31, 2005 and 2004, respectively, and consolidated
statutory net income of $17.2 million, $34.9 million and $30.2 million in 2005,
2004 and 2003, respectively. The consolidated statutory net income for the
Company's casualty insurance subsidiary included after-tax (loss) income of
$(13.4) million, $2.0 million and $3.6 million attributable to its non-core
property catastrophe reinsurance business that it decided to exit in the fourth
quarter of 2005. Payment of dividends by the Company's insurance subsidiaries is
regulated by insurance laws and is permitted based on, among other things, the
level of prior-year statutory surplus and net income. The Company's insurance
subsidiaries will be permitted to make dividend payments totaling $72.5 million
during 2006 without prior regulatory approval.

The Company's Board of Directors has authorized the Company to purchase up to
3.7 million shares of its outstanding Class A Common Stock from time to time on
the open market. At December 31, 2005, 0.9 million shares remained authorized
for future purchases. During 2005, 2004 and 2003, the Company purchased 0.2
million shares, 0 and 0.3 million shares, respectively, of its Class A Common
Stock for a total cost of $7.1 million, $0, and $7.5 million with a volume
weighted average price of $47.19 per share, $0 and $24.75 per share,
respectively. During 2004, the Company received 13,176 shares of the Company's
Class A Common Stock with an aggregate value of $0.3 million in liquidation of a
partnership interest.

-65-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2005

NOTE K - SHAREHOLDERS' EQUITY AND RESTRICTIONS - (CONTINUED)

The following table provides a reconciliation of beginning and ending shares:

Year Ended December 31,
------------------------
2005 2004 2003
------ ------ ------
(shares in thousands)

Class A Common Stock:
Beginning balance ................................. 30,418 29,457 18,928
Issuance of stock, exercise of stock options and
conversion of shares ....................... 856 961 710
Three-for-two stock split ...................... -- -- 9,819
------ ------ ------
Ending balance .................................... 31,274 30,418 29,457
====== ====== ======
Class B Common Stock:
Beginning balance ................................. 3,904 4,177 3,195
Conversion of shares ........................... -- (273) (410)
Three-for-two stock split ...................... -- -- 1,392
------ ------ ------
Ending balance .................................... 3,904 3,904 4,177
====== ====== ======
Class A Treasury Stock:
Beginning balance ................................. 2,573 2,560 1,505
Acquisition of treasury stock .................. 150 13 202
Three-for-two stock split ...................... -- -- 853
------ ------ ------
Ending balance .................................... 2,723 2,573 2,560
====== ====== ======

-66-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2005

NOTE L - ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of other comprehensive income are as follows:

Net
Unrealized
Appreciation
(Depreciation) Net Minimum
on Available Loss on Pension
for Sale Cash Flow Liability
Securities Hedge Adjustment Total
------------- --------- ---------- --------
(dollars in thousands)

Balance, January 1, 2003 ..................................... $ 33,572 $(3,290) $ (279) $ 30,003
-------- ------- ------- --------
Unrealized appreciation on available for sale securities (1).. 35,186 -- -- 35,186
Reclassification adjustment for gains included in net
income (2) ................................................ (8,791) -- -- (8,791)
-------- ------- ------- --------
Net change in unrealized appreciation on
investments ............................................... 26,395 -- -- 26,395
--------
Net loss on cash flow hedge(3) ............................... -- (5,671) -- (5,671)
Reclassification adjustment for losses included
in net income(4) .......................................... -- 1,565 -- 1,565
------- --------
Increase in net loss on cash flow hedge ...................... -- (4,106) -- (4,106)
Net change in minimum pension liability adjustment (5) ....... -- -- 136 136
-------- ------- ------- --------
Balance, December 31, 2003 ................................ $ 59,967 $(7,396) $ (143) $ 52,428
-------- ------- ------- --------
Unrealized appreciation on available for sale securities (1).. 13,760 -- -- 13,760
Reclassification adjustment for gains included in net
income (2) ................................................ (9,044) -- -- (9,044)
-------- ------- ------- --------
Net change in unrealized appreciation on
investments ............................................... 4,716 -- -- 4,716
--------
Reclassification adjustment for losses included
in net income(4) .......................................... -- 786 -- 786
Net change in minimum pension liability adjustment (5) ....... -- -- (559) (559)
-------- ------- ------- --------
Balance, December 31, 2004 ................................ $ 64,683 $(6,610) $ (702) $ 57,371
-------- ------- ------- --------
Unrealized depreciation on available for sale securities (1).. (35,803) (35,803)
Reclassification adjustment for gains included in net
income (2) ................................................ (1,390) (1,390)
-------- ------- ------- --------
Net change in unrealized depreciation on
investments .............................................. (37,193) -- -- (37,193)
--------
Reclassification adjustment for losses included
in net income(4) .......................................... -- 785 -- 785
Net change in minimum pension liability adjustment (5) ....... -- -- (699) (699)
-------- ------- ------- --------
Balance, December 31, 2005 ................................ $ 27,490 $(5,825) $(1,401) $ 20,264
======== ======= ======= ========

(1) Net of an income tax expense (benefit) of $18.9 million, $7.4 million and
$(19.3) million for the years ended December 31, 2003, 2004 and 2005,
respectively. Also, net of related adjustment to cost of business acquired
of $(5.5) million, $7.4 million and $15.3 million for the years ended
December 31, 2003, 2004 and 2005, respectively.

(2) Net of an income tax expense of $4.7 million, $4.9 million and $0.7 million
for the years ended December 31, 2003, 2004 and 2005, respectively.

(3) Net of an income tax benefit of $3.0 million for the year ended December
31, 2003.

(4) Net of an income tax benefit of $0.8 million, $0.4 million and $0.4 million
for the years ended December 31, 2003, 2004 and 2005, respectively.

(5) Net of an income tax expense (benefit) of $0.1 million, $(0.3) million and
$(0.4) million for the years ended December 31, 2003, 2004 and 2005,
respectively.

-67-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2005

NOTE M - COMMITMENTS AND CONTINGENCIES

Total rental expense for operating leases, principally for administrative and
sales office space, was $10.0 million, $9.2 million and $7.8 million for the
years ended December 31, 2005, 2004, and 2003, respectively. As of December 31,
2005, future net minimum rental payments under non-cancelable operating leases
were approximately $64.3 million, payable as follows: 2006 - $11.5 million, 2007
- $10.8 million, 2008 - $9.6 million, 2009 - $7.1 million, 2010 - $6.8 million
and $18.5 million thereafter.

In the course of its business, the Company is a party to litigation and other
proceedings, primarily involving its insurance operations. In some cases, these
proceedings entail claims against the Company for punitive damages and similar
types of relief. The ultimate disposition of such pending litigation and
proceedings is not expected to have a material adverse effect on the Company's
financial position. In addition, incident to its discontinued products, the
Company has been and is currently a party to various arbitrations arising out of
accident and health reinsurance arrangements in which it and other companies
formerly were participating reinsurers. During the second quarter of 2004, the
Company, along with other former participants, reached a settlement resolving
the matters in dispute in one of these arbitrations, and a favorable
determination in another such arbitration was rendered during the third quarter
of 2005. The Company increased its reserves relating to the reinsurance business
in dispute in the settled arbitration by a total of $5.5 million during the year
ended December 31, 2004. The Company believes that it has substantial defenses
upon which to contest the claims made in the remaining arbitration, although it
is not possible to predict the ultimate outcome of this arbitration. In the
opinion of management, such arbitration, when ultimately resolved, will not have
a material adverse effect on the Company's financial position.

NOTE N - STOCK OPTIONS

Under the terms of the Company's outside director's stock plan and two employee
stock option plans, a total of 5,775,000 shares of Class A Common Stock have
been reserved for issuance. The exercise price for options granted under these
plans is the fair market value of the underlying stock as of the date of the
grant and the maximum term of an option is ten years. The stock options granted
under these plans expire at various dates between 2006 and 2015.

In 2003, the Company's Board of Directors approved a long-term incentive and
share award plan (the "2003 Employee Award Plan") for the granting of restricted
shares, restricted share units (the receipt of shares or cash at the end of the
specified deferral period), other share-based awards, or options to purchase
shares of Class A Common Stock to employees and other individuals who, in the
judgment of the Stock Option and Compensation Committee of the Company's Board
of Directors (the "Committee"), can make substantial contributions to the
long-term profitability and the value of the Company, its subsidiaries or
affiliates. In 2004, the Committee amended the 2003 Employee Award Plan, to
increase the aggregate number of shares by 1,000,000, which amendment was
approved by the Company's stockholders at the 2004 Annual Meeting. Under the
terms of the 2003 Employee Award Plan, a total of 2,500,000 shares of Class A
Common Stock have been reserved for issuance. Awards of restricted shares and
restricted share units are subject to restrictions on transferability and other
restrictions, if any, as the Committee may impose. The Committee may determine
that an award of restricted shares or restricted share units or an other
share-based award to be granted under this plan qualifies as qualified
performance-based compensation. The grant, vesting, and/or settlement of this
type of performance-based award is contingent upon achievement of
pre-established performance objectives, which may vary from individual to
individual and based on performance criteria as the Committee may deem
appropriate. The exercise price of options granted under this plan is determined
by the Committee provided that the exercise price may not be less than the fair
market value of the underlying stock as of the date of the grant. The maximum
term of an option is ten years.

In February 2006, 2005 and 2004, the Company granted a total of 12,226, 10,750
and 12,887 restricted share units of Class A Common Stock, respectively, under
the 2003 Employee Award Plan to two executive officers of the Company based on
their performance during 2005, 2004 and 2003, respectively. The Company
recognized $0.6 million, $0.5 million and $0.5 million of compensation expense
in 2005, 2004 and 2003, respectively, related to these awards.

-68-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2005

NOTE N - STOCK OPTIONS - (CONTINUED)

In May 2005, the Company granted restricted shares of 1,197 Class A Common Stock
under the outside director's stock plan to a director of the Company, at such
director's option, in lieu of his cash retainer for services as a member of the
Company's Board of Directors for the term of service through the Company's
Annual Meeting of Stockholders in May 2006. As of December 31, 2005, 598 of
these shares had vested with the remainder of the shares to vest by the
director's continued service through May 2006. Compensation expense related to
the grant was not material in 2005 and is included in the stock based
compensation expense disclosed in Note A under the caption "Stock Options."

In April 2004, the Company granted performance-contingent incentive options to
purchase 150,000 shares of the Company's Class A Common Stock to each of the
seven members of executive management of RSLIC, for a total of 1,050,000
options, under the 2003 Employee Award Plan. The options, which have a ten-year
term and whose exercise price is equal to the fair market value of the
underlying stock on the grant date, will become exercisable only to the extent
that RSLIC-Texas, RSLIC's parent company, meets specified cumulative financial
performance targets for the three or five year periods beginning with 2004;
otherwise, such options will be forfeited. 75,000 of each executive's options
will become exercisable if RSLIC-Texas's aggregate consolidated Pre-Tax
Operating Income, as defined and computed under the related option agreements
("RSLT PTOI"), for the three year performance period is at least $329.4 million;
otherwise, a reduced number of such options will become exercisable to the
extent that RSLT PTOI for such periods exceeds $300.5 million, determined by
interpolating between zero and 75,000 according to where the RSLT PTOI amount
falls in the range between $300.5 million and $329.4 million. 150,000 of each
executive's options (minus the number of any options that become exercisable for
the three year performance period) will become exercisable if RSLIC-Texas's
aggregate RSLT PTOI for the five year performance period is at least $646.2
million; otherwise, a reduced number of such options will become exercisable to
the extent that RSLT PTOI for such period exceeds $559.9 million, determined by
interpolating between zero and 150,000 according to where the RSLT PTOI amount
falls in the range between $559.9 million and $646.2 million.

In December 2005, the Company granted additional performance-contingent
incentive options to purchase 50,000 of the Company's Class A Common Stock to
each of seven members of executive management of RSLIC, for a total of 350,000
options, under the 2003 Employee Award Plan and the Second Amended and Restated
Employee Stock Option Plan. The options have the same financial performance
targets for the five-year performance period as the performance-contingent
incentive options described above.

In May 2003, the Company granted performance-contingent incentive options to
purchase 225,000 shares of the Company's Class A Common Stock to each of the
five members of executive management of SNCC, for a total of 1,125,000 options,
under the 2003 Employee Award Plan and, in December 2005, approved the amendment
to the performance targets under such options for the five-year performance
period. The options, which have a ten-year term and whose exercise price is
equal to the fair market value of the underlying stock on the grant date, will
become exercisable only to the extent that SIG, SNCC's parent company, meets
specified cumulative financial performance targets for the three or five fiscal
year periods beginning with 2003; otherwise, such options will be forfeited.
112,500 of each executive's options will become exercisable if SIG's aggregate
consolidated Pre-Tax Operating Income, as defined and computed under the related
option agreements ("SIG PTOI"), for the three year performance period is at
least $216.7 million; otherwise, a reduced number of such options will become
exercisable to the extent that SIG PTOI for such period exceeds $196.1 million,
determined by interpolating between zero and 112,500 according to where the SIG
PTOI amount falls in the range between $196.1 million and $216.7 million. Under
the option terms, as amended, 225,000 of each executive's options (minus the
number of any options that become exercisable for the three year performance
period) will become exercisable if SIG's aggregate SIG PTOI for the five year
performance period is at least $417.2 million; otherwise, a reduced number of
such options will become exercisable to the extent that SIG PTOI for such period
exceeds $370.4 million, determined by interpolating between zero and 225,000
according to where the SIG PTOI amount falls in the range between $370.4 million
and $417.2 million. As of December 31, 2005, SNCC did not meet the specified
cumulative performance target for the three-year performance period ending
December 31, 2005, therefore, no options to purchase shares of the Company's
Class A Common Stock became exercisable.

In 2003, the Committee amended and restated the long-term performance-based
incentive plan for the Company's chief executive officer (the "Amended
Performance Plan"). Under the terms of the Amended Performance Plan, the
Committee has the authority to grant awards annually as deemed appropriate, to
determine the number of shares subject to any award and to interpret the plan.
The Amended Performance Plan provides for the award of up to 238,482 shares
measured by

-69-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2005

NOTE N - STOCK OPTIONS - (CONTINUED)

reference to Stock Units, plus the Carryover Award Amount, as then in effect,
per year over a ten-year term. A Stock Unit consists of restricted or deferred
shares of the Company's Class B Common Stock, each of which individual shares
represent one Stock Unit, and options to purchase shares of Class B Common Stock
represent one-third of one Stock Unit. The Carryover Award Amount consists of
476,964 restricted or deferred shares and options to purchase 1,430,886 shares
of Class B Common Stock, representing the number of shares as to which awards
were available but not granted under the predecessor plan for the performance
period consisting of the 1999 through 2002 calendar years, and all or a portion
of the Carryover Award Amount may be applied to increase the award amount for
any calendar year of the Plan, with the Carryover Award Amount to be decreased
by any portions applied for purposes of future calendar years of the Plan. The
restricted or deferred shares may not be sold or otherwise disposed of until the
earliest of the individual's retirement, disability or death or a change of
ownership of the Company, subject to such additional restrictions on sale or
disposal as the Committee may determine to impose in connection with a
particular award. The exercise price of the options awarded under the Amended
Performance Plan is the fair market value of the underlying stock as of the date
of the grant and the maximum term of the options is ten years. The options
become exercisable 30 days following the date of grant. Under the predecessor
plan, 357,723 deferred shares and 1,073,166 options were granted to the
Company's chief executive officer prior to 1999. In February 2006, 2005 and
2004, the Committee awarded the Company's chief executive officer 48,904
deferred shares, 52,095 deferred shares and 67,010 deferred shares,
respectively, under the Amended Performance Plan based on his performance during
2005, 2004 and 2003, respectively. The Company recognized $2.0 million, $0.8
million and $2.6 million of compensation expense relating to such awards in
2005, 2004 and 2003, respectively.

Option activity with respect to the above plans was as follows:

Year Ended December 31,
------------------------------------------------------------------
2005 2004 2003
-------------------- -------------------- --------------------
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Options Price Options Price Options Price
--------- -------- --------- -------- --------- --------

Options outstanding, beginning of year .. 5,306,946 $28.26 4,683,067 $23.70 3,765,159 $21.69
Options granted ...................... 573,115 45.61 1,207,736 41.47 1,250,050 28.73
Options forfeited .................... (11,150) 32.27 (10,753) 38.56 (39,419) 26.41
Options expired ...................... (1,203) 25.75 -- -- (5,961) 37.58
Options exercised .................... (777,510) 19.26 (573,104) 18.61 (286,762) 18.39
--------- --------- ---------
Options outstanding, end of year ........ 5,090,198 31.58 5,306,946 28.26 4,683,067 23.70
========= ========= =========

Exercisable options, end of year ........ 2,144,326 24.23 2,743,918 22.70 3,140,626 21.91

Information about options outstanding at December 31, 2005 was as follows:

Outstanding Exercisable
---------------------------------- --------------------
Number Average Average Number Average
Range of of Remaining Exercise of Exercise
Exercise Prices Options Life Price Options Price
------------------ --------- ----------- -------- --------- --------

$ 0.00 - $14.47 .. 7,454 0.4 $14.47 7,454 $14.47
$18.33 - $26.29 .. 1,723,865 3.6 21.67 1,638,618 21.57
$28.97 - $41.81 .. 2,848,719 7.2 35.03 496,990 33.11
$44.15 - $47.41 .. 510,160 9.7 46.08 1,264 47.41
--------- ---------
Total ......... 5,090,198 6.2 31.58 2,144,326 24.23
========= =========

-70-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
DECEMBER 31, 2005

NOTE N - STOCK OPTIONS - (CONTINUED)

During 1996, the Company assumed 6.0 million SIG stock options (the "SIG
Options") in connection with SIG's merger into the Company (the "SIG Merger").
Upon the exercise of the SIG Options, the holder is entitled to receive (i)
..2099 of a share of the Company's Class A Common Stock for each SIG Option; plus
(ii) an additional number of shares of the Company's Class A Common Stock equal
to the quotient of (a) $1.90 multiplied by the number of SIG Options being
exercised increased by an interest component from the time of the SIG Merger to
the exercise date, divided by (b) the average closing share price for the
Company's Class A Common Stock for the ten days prior to the exercise date. The
SIG Options were granted annually from 1992 to 1996, have an exercise price of
$0.02 and each grant vests over five years beginning in the fourth year after
the grant date. All of the SIG Options expire on October 1, 2006. As of December
31, 2005, the weighted average contractual life of the outstanding SIG Options
was 0.8 years.

Activity with respect to the outstanding SIG Options was as follows:

Year Ended December 31,
--------------------------------------------------------------------
2005 2004 2003
-------------------- --------------------- ---------------------
Number Equivalent Number Equivalent Number Equivalent
of SIG Class A of SIG Class A of SIG Class A
Options Shares Options Shares Options Shares
------- ---------- -------- ---------- -------- ----------

SIG Options - beginning of year ........ 144,270 40,749 357,179 107,045 696,154 232,500
Options exercised ................... (96,945) 27,442 (212,050) 61,842 (334,560) 104,707
Options expired ..................... -- -- (859) -- (4,415) --
------- ------- -------
SIG Options - end of year .............. 47,325 13,455 144,270 40,749 357,179 107,045
======= ======= =======
Exercisable SIG Options - end of year .. 47,325 13,455 144,270 40,749 301,493 91,360

NOTE O - COMPUTATION OF RESULTS PER SHARE

Year Ended December 31,
-----------------------------
2005 2004 2003
-------- -------- -------
(dollars in thousands, except
per share data)

Numerator:
Income from continuing operations .............................. $126,684 $121,400 $95,295
(Loss) income from discontinued operations, net of income tax
(benefit) expense ........................................... (13,350) 2,143 3,621
-------- -------- -------
Net income ..................................................... $113,334 $123,543 $98,916
======== ======== =======

Denominator:
Weighted average common shares outstanding ..................... 32,672 31,952 31,208
Effect of dilutive securities ............................... 839 989 815
-------- -------- -------
Weighted average common shares outstanding, assuming dilution .. 33,511 32,941 32,023
======== ======== =======

Basic results per share of common stock:
Income from continuing operations .............................. $ 3.88 $ 3.80 $ 3.05
(Loss) income from discontinued operations, net of income tax
(benefit) expense ........................................... (0.41) 0.07 0.12
-------- -------- -------
Net income ..................................................... $ 3.47 $ 3.87 $ 3.17
======== ======== =======

Diluted results per share of common stock:
Income from continuing operations .............................. $ 3.78 $ 3.68 $ 2.98
(Loss) income from discontinued operations, net of income tax
(benefit) expense ........................................... (0.40) 0.07 0.11
-------- -------- -------
Net income ..................................................... $ 3.38 $ 3.75 $ 3.09
======== ======== =======

-71-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
DECEMBER 31, 2005

NOTE P - REINSURANCE

The Company assumes and cedes reinsurance from and to other insurers and
reinsurers. The Company uses reinsurance to limit its maximum loss, provide
greater diversification of risk and in connection with the exiting of certain
lines of business. Reinsurance coverages are tailored to the specific risk
characteristics of each type of product and the Company's retained amount varies
by type of coverage. Generally, group life, disability and accident policies are
reinsured on a coinsurance and risk premium basis. Property and casualty
policies are reinsured on an excess of loss, per occurrence basis under general
reinsurance agreements, or, in some instances, on an individual risk basis.
Indemnity reinsurance treaties do not provide absolute protection to the Company
since the ceding insurer remains responsible for policy claims to the extent
that the reinsurer fails to pay such claims. To reduce this risk, the Company
monitors the financial position of its reinsurers, including, among other
things, the companies' financial ratings, and in certain cases receives
collateral security from the reinsurer. Also, certain of the Company's
reinsurance agreements require the reinsurer to set up security arrangements for
the Company's benefit in the event of certain ratings downgrades. As of December
31, 2005, the individual or group ratings of all of the Company's significant
reinsurers were either "B++" (Very Good) or higher by A.M. Best Company or had
supplied collateral in an amount sufficient to support the amounts receivable.

At December 31, 2005 and 2004, the Company had reinsurance receivables of $413.1
million and $428.7 million, respectively. The Company's reinsurance payables
were not material at December 31, 2005 and 2004. A summary of reinsurance
activity follows:

Year Ended December 31,
-----------------------------
2005 2004 2003
------- -------- --------
(dollars in thousands)

Premium income assumed........................ $58,852 $ 11,666 $ 9,046
Premium income ceded.......................... 95,688 98,637 100,539
Benefits, claims and interest credited ceded.. 95,088 127,862 132,788

NOTE Q - OTHER OPERATING EXPENSES

The Company's other operating expenses are comprised primarily of employee
compensation expenses, premium taxes, licenses and fees and all other general
and administrative expenses. Employee compensation expenses, principally
consisting of salaries, bonuses, and costs associated with other employee
benefits and stock-based compensation, were $76.0 million, $62.8 million, and
$56.1 million for the years ended December 31, 2005, 2004, and 2003,
respectively. Premium taxes, licenses and fees were $30.9 million, $24.5
million, and $23.7 million for the years ended December 31, 2005, 2004 and 2003,
respectively. All other general and administrative expenses were $50.7 million,
$38.4 million, and $37.1 million for the years ended December 31, 2005, 2004 and
2003, respectively.

-72-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
DECEMBER 31, 2005

NOTE R - SEGMENT INFORMATION

Year Ended December 31,
------------------------------------
2005 2004 2003
---------- ---------- ----------
(dollars in thousands)

Revenues:
Group employee benefit products (1) ... $1,091,875 $ 916,883 $ 788,870
Asset accumulation products ........... 87,797 82,694 82,555
Other (2) ............................. 34,108 30,944 26,524
---------- ---------- ----------
1,213,780 1,030,521 897,949
Net realized investment gains ......... 9,003 15,460 12,724
---------- ---------- ----------
$1,222,783 $1,045,981 $ 910,673
========== ========== ==========

Operating income
Group employee benefit products (1) ... $ 187,279 $ 155,976 $ 134,547
Asset accumulation products ........... 23,565 19,711 16,569
Other (2) ............................. (15,826) (8,217) (7,812)
---------- ---------- ----------
195,018 167,470 143,304
Net realized investment gains ......... 9,003 15,460 12,724
---------- ---------- ----------
$ 204,021 $ 182,930 $ 156,028
========== ========== ==========

Net investment income (3):
Group employee benefit products (1) ... $ 130,713 $ 115,827 $ 100,309
Asset accumulation products ........... 84,577 79,359 78,397
Other (2) ............................. 8,279 7,258 7,631
---------- ---------- ----------
$ 223,569 $ 202,444 $ 186,337
========== ========== ==========

Amortization of cost of business required:
Group employee benefit products (1) .. $ 62,120 $ 57,155 $ 50,330
Asset accumulation products .......... 7,161 4,888 4,664
---------- ---------- ----------
$ 69,281 $ 62,043 $ 54,994
========== ========== ==========

Segment assets (3):
Group employee benefit products ...... $3,229,640 $2,857,714 $2,391,010
Asset accumulation products .......... 1,860,875 1,818,098 1,661,860
Other (2) ............................ 185,655 153,655 124,662
---------- ---------- ----------
$5,276,170 $4,829,467 $4,177,532
========== ========== ==========

(1) During the fourth quarter of 2005, the Company decided to exit its non-core
property catastrophe reinsurance business. See Note S to the Consolidated
Financial Statements. Prior period information has been restated to conform
to the current period presentation.

(2) Primarily consists of operations from integrated disability and absence
management services and certain corporate activities.

(3) Net investment income includes income earned on the assets of the insurance
companies as well as on the assets of the holding company and is allocated
among business lines in proportion to average reserves and the capital
placed at risk for each segment. Segment assets include assets of the
insurance companies as well as the assets of the holding company, which are
allocated across business lines in proportion to average reserves and the
capital placed at risk for each segment.

-73-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
DECEMBER 31, 2005

NOTE S - DISCONTINUED OPERATIONS

During the fourth quarter of 2005, the Company decided to exit its non-core
property catastrophe reinsurance business, due to the volatility associated with
such business and other strategic considerations, and has not thereafter entered
into or renewed any assumed property reinsurance contracts. A substantial
majority of these reinsurance contracts expired on or before December 31, 2005
and all of the remaining contracts will expire prior to the end of the third
quarter of 2006. Although the Company will continue to collect modest amounts of
premium and pay losses under terms of the the remaining contracts until their
expiration, these amounts are not expected to be material to the Company's
results of operations. For the years ended December 31, 2005, 2004 and 2003, the
Company recognized premium income of $17.4 million, $9.5 million, and $7.5
million, respectively, and incurred losses of $37.9 million, $4.7 million, and
$0.3 million, respectively, from this line of business. For the years ended
December 31, 2005, 2004 and 2003, the Company recognized operating (loss) income
of $(13.4) million, $2.1 million, and $3.6 million, respectively, net of income
tax (benefit) expense of $(7.2) million, $1.2 million, and $2.0 million,
respectively, from this line of business. The assets and liabilities related to
the property catastrophe business were not material to the Company's
consolidated financial position.

-74-

SCHEDULE I

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2005
(DOLLARS IN THOUSANDS)

Amount
Shown in
Amortized Fair Balance
Type of Investment Cost Value Sheet
------------------ ---------- ---------- ----------

Fixed maturity securities available for sale:
U.S. Government backed mortgage-backed securities... $ 606,517 $ 606,779 $ 606,779
Other mortgage-backed securities.................... 233,372 235,763 235,763
U.S. Treasury and other U.S. Government
guaranteed securities............................ 422,618 421,738 421,738
Obligations of U.S. states, municipalities and
political subdivisions........................... 596,944 613,617 613,617
Corporate securities................................ 1,349,205 1,366,867 1,366,867
---------- ---------- ----------
Total fixed maturity securities.................. 3,208,656 3,244,764 3,244,764
---------- ----------- ----------

Equity securities:
Common stocks....................................... 22,684 24,485 24,485
Non-redeemable preferred stocks..................... 21,547 22,548 22,548
---------- ---------- ----------
Total equity securities.......................... 44,231 47,033 47,033
---------- ---------- ----------

Short-term investments................................. 94,283 94,308 94,308
Other investments...................................... 522,579 526,499 526,499
---------- ---------- ----------
Total investments................................ $3,869,749 $3,912,604 $3,912,604
========== ========== ==========

-75-

SCHEDULE II

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
DELPHI FINANCIAL GROUP, INC. (PARENT COMPANY)
BALANCE SHEETS
(DOLLARS IN THOUSANDS)

December 31,
-----------------------
2005 2004
---------- ----------

Assets:
Fixed maturity securities, available for sale....... $ 254 $ 719
Short-term investments.............................. 3,690 4,176
Other invested assets............................... 47,246 31,984
Investment in operating subsidiaries................ 1,263,956 1,121,455
Investment in investment subsidiaries............... 37,220 32,758
Cash................................................ 270 233
Amounts due from subsidiaries....................... 1,923 12,466
Other assets........................................ 45,011 36,499
---------- ----------
Total assets..................................... $1,399,570 $1,240,290
========== ==========

Liabilities:
Corporate debt...................................... $ 234,750 $ 157,750
Junior subordinated deferrable interest debentures.. 59,762 59,762
Other liabilities................................... 72,019 82,930
---------- ----------
366,531 300,442
---------- ----------

Shareholders' Equity:
Class A Common Stock................................ 313 304
Class B Common Stock................................ 39 39
Additional paid-in capital.......................... 442,531 406,908
Accumulated other comprehensive income.............. 20,264 57,371
Retained earnings................................... 636,285 534,540
Treasury stock...................................... (66,393) (59,314)
----------- ----------
1,033,039 939,848
---------- ----------
Total liabilities and shareholders' equity....... $1,399,570 $1,240,290
========== ==========

See notes to condensed financial statements.

-76-

SCHEDULE II (CONTINUED)

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
DELPHI FINANCIAL GROUP, INC. (PARENT COMPANY)
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)

Year Ended December 31,
------------------------------
2005 2004 2003
-------- -------- --------

Revenue:
Equity in undistributed earnings of subsidiaries.... $192,650 $190,700 $124,155
Dividends from operating subsidiaries............... 1,600 1,600 2,600
Dividends from investment subsidiaries.............. -- -- 47,340
Other income (loss)................................. 8,524 3,366 (5,189)
Realized investment (losses) gains.................. (1,193) 1,628 1,375
-------- -------- --------
201,581 197,294 170,281
-------- -------- --------
Expenses:
Operating expenses.................................. 16,446 9,555 6,958
Interest expense.................................... 22,114 20,038 19,811
-------- -------- --------
38,560 29,593 26,769
-------- -------- --------

Income before income tax expense................. 163,021 167,701 143,512

Income tax expense..................................... 49,687 44,158 44,596
-------- -------- --------
Net income....................................... $113,334 $123,543 $ 98,916
======== ======== ========

See notes to condensed financial statements.

-77-

SCHEDULE II (CONTINUED)

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
DELPHI FINANCIAL GROUP, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

Year Ended December 31,
--------------------------------
2005 2004 2003
--------- --------- --------

Operating activities:
Net income ................................................. $ 113,334 $ 123,543 $ 98,916
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
Equity in undistributed earnings of subsidiaries ........ (132,593) (138,493) (69,765)
Change in other assets and other liabilities ............ 3,986 (9,107) 2,022
Change in current and deferred income taxes ............. (11,833) 1,999 10,984
Amortization, principally of investments and debt
issuance costs ....................................... 1,249 1,438 1,103
Net realized losses (gains) on investments .............. 1,193 (1,628) (1,375)
Change in amounts due from/to subsidiaries .............. 2,043 9,702 (32,765)
--------- --------- --------
Net cash (used) provided by operating activities ..... (22,621) (12,546) 9,120
--------- --------- --------
Investing activities:
Purchases of investments and loans made .................... (26,453) (53,823) (58,523)
Sales of investments and receipts from repayment of loans .. 2,362 43,119 45,624
Maturities of investments .................................. -- 1,904 2,379
Net change in short-term investments ....................... 486 10,573 (10,637)
Purchases of investments in subsidiaries ................... (37,000) (11,000) (20,002)
--------- --------- --------
Net cash used by investing activities ................ (60,605) (9,227) (41,159)
--------- --------- --------
Financing activities:
Proceeds from issuance of 2033 Senior Notes ................ -- -- 139,222
Proceeds from issuance of 2003 Junior Debentures ........... -- -- 20,018
Borrowings under revolving credit facility ................. 88,000 38,000 34,000
Principal payments under revolving credit facility ......... (11,000) (24,000) (71,000)
Repayments or repurchase of other corporate debt ........... -- -- (72,150)
Other financing activities ................................. 6,263 7,419 (18,105)
--------- --------- --------
Net cash provided by financing activities ............ 83,263 21,419 31,985
--------- --------- --------
Increase (decrease) in cash ................................... 37 (354) (54)
Cash at beginning of year ..................................... 233 587 641
--------- --------- --------
Cash at end of year ..................................... $ 270 $ 233 $ 587
========= ========= ========

See notes to condensed financial statements.

-78-

SCHEDULE II (CONTINUED)

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
DELPHI FINANCIAL GROUP, INC. (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS

The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and related notes of Delphi Financial
Group, Inc. and Subsidiaries.

The Company received cash dividends from subsidiaries of $1.6 million, $1.6
million and $50.2 million in 2005, 2004 and 2003, respectively.

-79-

SCHEDULE III

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN THOUSANDS)

Future Policy
Benefits and
Cost of Unpaid Claim Policyholder
Business and Claim Unearned Account
Acquired Expenses Premiums Balances
-------- ------------- -------- ------------

2005
Group employee benefits products .. $187,541 $1,702,950 $109,289 $ --
Asset accumulation products ....... 60,597 84,534 -- 1,008,787
Other ............................. -- 75,388 -- 30,823
-------- ---------- -------- ----------
Total .......................... $248,138 $1,862,872 $109,289 $1,039,610
======== ========== ======== ==========
2004
Group employee benefits products .. $166,337 $1,506,348 $ 95,145 $ --
Asset accumulation products ....... 46,212 80,722 -- 993,346
Other ............................. -- 76,833 -- 31,231
-------- ---------- -------- ----------
Total .......................... $212,549 $1,663,903 $ 95,145 $1,024,577
======== ========== ======== ==========
2003
Group employee benefits products .. $148,990 $1,339,382 $ 74,067 $ --
Asset accumulation products ....... 34,675 74,801 -- 929,922
Other ............................. -- 81,434 -- 31,434
-------- ---------- -------- ----------
Total .......................... $183,665 $1,495,617 $ 74,067 $ 961,356
======== ========== ======== ==========

Benefits,
Claims and Amortization
Premium Net Interest of Cost of Other
and Fee Investment Credited to Business Operating
Income (1) Income (2) Policyholders Acquired Expenses (3)
---------- ---------- ------------- ------------ ------------

2005
Group employee benefits products .. $961,162 $130,713 $674,118 $62,120 $168,358
Asset accumulation products ....... 3,220 84,577 49,856 7,161 7,215
Other ............................. 25,829 8,279 1,233 -- 48,701
-------- -------- -------- ------- --------
Total .......................... $990,211 $223,569 $725,207 $69,281 $224,274
======== ======== ======== ======= ========
2004
Group employee benefits products .. $801,056 $115,827 $563,277 $57,155 $140,475
Asset accumulation products ....... 3,335 79,359 51,836 4,888 6,259
Other ............................. 23,686 7,258 (625) -- 39,786
-------- -------- -------- ------- --------
Total .......................... $828,077 $202,444 $614,488 $62,043 $186,520
======== ======== ======== ======= ========
2003
Group employee benefits products .. $688,561 $100,309 $474,472 $50,330 $129,521
Asset accumulation products ....... 4,158 78,397 54,841 4,664 6,481
Other ............................. 18,893 7,631 1,037 -- 33,299
-------- -------- -------- ------- --------
Total .......................... $711,612 $186,337 $530,350 $54,994 $169,301
======== ======== ======== ======= ========

(1) Net written premiums for casualty insurance products totaled $257.7
million, $225.5 million and $187.2 million for the years ended December 31,
2005, 2004, and 2003, respectively.

(2) Net investment income includes income earned on the assets of the insurance
companies as well as on the assets of the holding company and is allocated
among business lines in proportion to average reserves and the capital
placed at risk for each segment.

(3) Other operating expenses include commissions.

-80-

SCHEDULE IV

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
REINSURANCE
(DOLLARS IN THOUSANDS)

Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed
Amount Companies Companies Amount to Net
------------ ----------- ---------- ------------ ----------

Life insurance in force as of
December 31, 2005 ................. $132,847,822 $20,236,656 $30,495 $112,641,661 --%
============ =========== ======= ============
Year ended December 31, 2005:
Premium and fee income:
Life insurance and annuity ..... $ 319,889 $ 32,562 $ 511 $ 287,838 --%
Accident and health insurance .. 433,699 38,560 39,565 434,704 9%
Casualty insurance ............. 250,319 24,566 18,790 244,543 8%
Other .......................... 23,126 -- -- 23,126
------------ ----------- ------- ------------
Total premium and fee income ......... $ 1,027,033 $ 95,688 $58,866 $ 990,211
============ =========== ======= ============
Life insurance in force as of
December 31, 2004 ................. $119,624,420 $14,582,230 $32,057 $105,074,247 --%
============ =========== ======= ============
Year ended December 31, 2004:
Premium and fee income:
Life insurance and annuity ..... $ 303,603 $ 37,007 $ 586 $ 267,182 --%
Accident and health insurance .. 372,142 40,741 1,278 332,679 --%
Casualty insurance ............. 217,655 20,889 9,819 206,585 5%
Other .......................... 21,631 -- -- 21,631
------------ ----------- ------- ------------
Total premium and fee income ......... $ 915,031 $ 98,637 $11,683 $ 828,077
============ =========== ======= ============
Life insurance in force as of
December 31, 2003 ................. $110,707,743 $10,966,035 $34,150 $ 99,775,858 --%
============ =========== ======= ============
Year ended December 31, 2003:
Premium and fee income:
Life insurance and annuity ..... $ 274,892 $ 27,100 $ 1,122 $ 248,914 --%
Accident and health insurance .. 334,989 55,988 1,601 280,602 1%
Casualty insurance ............. 177,118 17,451 6,393 166,060 4%
Other .......................... 16,036 -- -- 16,036
------------ ----------- ------- ------------
Total premium and fee income ......... $ 803,035 $ 100,539 $ 9,116 $ 711,612
============ =========== ======= ============

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SCHEDULE VI

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS(1)
(DOLLARS IN THOUSANDS)

December 31,
-------------------
2005 2004
-------- --------

Deferred policy acquisition costs .............. $ 13,379 $ 11,379
Reserves for unpaid claims and claim expenses .. 746,479 645,948
Discount, if any, deducted from above (2) ...... 368,234 311,833
Unearned premiums .............................. 101,980 89,843

Year Ended December 31,
------------------------------
2005 2004 2003
-------- -------- --------

Earned premiums .................................... $261,903 $216,105 $173,535
Net investment income .............................. 65,065 57,759 42,614
Claims and claim expenses incurred related to:
Current year .................................... 141,785 103,444 82,372
Prior years (3) ................................. 56,698 30,868 20,541
Amortization of deferred policy acquisition costs .. 26,601 25,449 22,272
Paid claims and claim adjustment expenses .......... 96,700 72,290 62,400
Net premiums written ............................... 273,219 236,675 194,752

(1) All years include the results from the Company's discontinued non-core
property catastrophe reinsurance business.

(2) Based on discount rates ranging from 3.7% to 7.5%.

(3) In 2005 and 2004, the change in the provision for claims and claim
expenses incurred in prior years reflects the accretion of discounted
reserves and unfavorable claims development. In 2003, the change in the
provision for claims and claim expenses incurred in prior years reflects
the accretion of discounted reserves offset by favorable claims
development. The Company's insurance policies do not provide for the
retrospective adjustment of premiums based on claim experience.

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