UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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 jurisdiction of		(Registrant’s telephone number,		(I.R.S. Employer Identification
incorporation or organization)		including area code)		Number)

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

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files):

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting entity. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting entity” in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

Yes o No þ

As of July 29, 2011, the Registrant had 49,263,977 shares of Class A Common Stock
and 5,753,833 shares of Class B Common Stock outstanding.

 

 

DELPHI FINANCIAL GROUP, INC.
FORM 10-Q
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER INFORMATION

		Page
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2011 and 2010			3
Consolidated Balance Sheets at June 30, 2011 and December 31, 2010			4
Consolidated Statements of Equity for the Six Months Ended June 30, 2011 and 2010			5
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures About Market Risk			30
Item 4. Controls and Procedures			30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			31
Item 1A. Risk Factors			31
Item 6. Exhibits			32
Signatures			32
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
						(Restated)								(Restated)
Revenue:
Premium and fee income		$	385,012			$	352,566			$	761,411			$	700,329
Net investment income			83,191				78,234				175,485				162,284
Net realized investment gains (losses):
Total other than temporary impairment losses			(7,775	)			(21,659	)			(15,314	)			(48,932	)
Portion of other than temporary impairment losses recognized in other comprehensive income			2,432				826				953				5,101
Net impairment losses recognized in earnings			(5,343	)			(20,833	)			(14,361	)			(43,831	)
Other net realized investment gains			6,466				6,959				13,512				14,851
			1,123				(13,874	)			(849	)			(28,980	)
Loss on early retirement of senior notes			—				(212	)			—				(212	)
Total revenues			469,326				416,714				936,047				833,421
Benefits and expenses:
Benefits, claims and interest credited to policyholders			273,163				244,687				544,428				491,008
Commissions			23,967				23,794				46,535				45,190
Amortization of cost of business acquired			19,025				16,848				37,986				33,911
Other operating expenses			78,145				75,818				156,054				150,688
			394,300				361,147				785,003				720,797
Operating income			75,026				55,567				151,044				112,624
Interest expense:
Corporate debt			6,007				8,264				12,017				15,587
Junior subordinated debentures			3,248				3,248				6,490				6,489
			9,255				11,512				18,507				22,076
Income before income tax expense			65,771				44,055				132,537				90,548
Income tax expense			15,762				9,385				32,157				19,297
Net income			50,009				34,670				100,380				71,251
Less: Net income attributable to noncontrolling interest			582				8				729				73
Net income attributable to shareholders		$	49,427			$	34,662			$	99,651			$	71,178
Basic results per share of common stock:
Net income attributable to shareholders		$	0.88			$	0.63			$	1.78			$	1.29
Diluted results per share of common stock:
Net income attributable to shareholders		$	0.87			$	0.62			$	1.75			$	1.28
Dividends paid per share of common stock		$	0.12			$	0.10			$	0.23			$	0.20

See notes to consolidated financial statements.

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

		June 30,				December 31,
		2011				2010
						(Restated)
Assets:
Investments:
Fixed maturity securities, available for sale		$	6,181,482			$	5,717,090
Short-term investments			228,486				334,215
Other investments			614,180				498,678
			7,024,148				6,549,983
Cash			90,271				72,806
Cost of business acquired			140,872				149,325
Reinsurance receivables			357,010				360,255
Goodwill			93,929				93,929
Other assets			337,274				311,577
Assets held in separate account			126,213				123,674
Total assets		$	8,169,717			$	7,661,549
Liabilities and Equity:
Future policy benefits:
Life		$	338,545			$	331,816
Disability and accident			822,360				812,258
Unpaid claims and claim expenses:
Life			54,362				53,763
Disability and accident			462,648				457,642
Casualty			1,420,822				1,314,910
Policyholder account balances			1,884,029				1,753,744
Corporate debt			375,000				375,000
Junior subordinated debentures			175,000				175,000
Advances from Federal Home Loan Bank			55,342				55,342
Other liabilities and policyholder funds			774,815				673,270
Liabilities related to separate account			126,213				123,674
Total liabilities			6,489,136				6,126,419
Equity:
Preferred Stock, $.01 par; 50,000,000 shares authorized, none issued			—				—
Class A Common Stock, $.01 par; 150,000,000 shares authorized; 56,676,218 and 56,463,776 shares issued and outstanding, respectively			567				565
Class B Common Stock, $.01 par; 20,000,000 shares authorized; 5,981,049 shares issued and outstanding			60				60
Additional paid-in capital			692,696				682,816
Accumulated other comprehensive income			78,231				30,932
Retained earnings			1,100,128				1,013,369
Treasury stock, at cost; 7,761,216 shares of Class A Common Stock, and 227,216 shares of Class B Common Stock			(197,246	)			(197,246	)
Total shareholders’ equity			1,674,436				1,530,496
Noncontrolling interest			6,145				4,634
Total equity			1,680,581				1,535,130
Total liabilities and equity		$	8,169,717			$	7,661,549

See notes to consolidated financial statements.

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

														Accumulated
														Other
		Class A				Class B				Additional				Comprehensive												Total				Non-
		Common				Common				Paid in				Income				Retained				Treasury				Shareholders’				controlling				Total
		Stock				Stock				Capital				(Loss)				Earnings				Stock				Equity				Interest				Equity
Balance, January 1, 2010		$	560			$	60			$	661,895			$	(33,956	)		$	927,706			$	(197,246	)		$	1,359,019			$	3,546			$	1,362,565
Cumulative effect adjustment			—				—				—				—				(60,002	)			—				(60,002	)			—				(60,002	)
Adjusted balance January 1, 2010			560				60				661,895				(33,956	)			867,704				(197,246	)			1,299,017				3,546				1,302,563
Net income			—				—				—				—				71,178				—				71,178				73				71,251
Other comprehensive income:
Increase in net unrealized appreciation on investments			—				—				—				62,715				—				—				62,715				—				62,715
Decrease in other than temporary impairment losses recognized in other comprehensive income			—				—				—				3,930				—				—				3,930				—				3,930
Decrease in net loss on cash flow hedge			—				—				—				473				—				—				473				—				473
Change in net periodic pension cost			—				—				—				102				—				—				102				—				102
Comprehensive income																											138,398				73				138,471
Net distribution to noncontrolling interest			—				—				—				—				—				—				—				(2,237	)			(2,237	)
Issuance of deferred and restricted shares and exercise of stock options			2				—				5,741				—				—				—				5,743				—				5,743
Stock-based compensation			—				—				3,428				—				—				—				3,428				—				3,428
Cash dividends			—				—				—				—				(11,054	)			—				(11,054	)			—				(11,054	)
Balance, June 30, 2010		$	562			$	60			$	671,064			$	33,264			$	927,828			$	(197,246	)		$	1,435,532			$	1,382			$	1,436,914
Balance, January 1, 2011		$	565			$	60			$	682,816			$	30,932			$	1,013,369			$	(197,246	)		$	1,530,496			$	4,634			$	1,535,130
Net income			—				—				—				—				99,651				—				99,651				729				100,380
Other comprehensive income:
Increase in net unrealized appreciation on investments			—				—				—				44,462				—				—				44,462				—				44,462
Decrease in other than temporary impairment losses recognized in other comprehensive income			—				—				—				2,682				—				—				2,682				—				2,682
Change in net periodic pension cost			—				—				—				155				—				—				155				—				155
Comprehensive income																											146,950				729				147,679
Net contribution from noncontrolling interest			—				—				—				—				—				—				—				782				782
Issuance of deferred and restricted shares and exercise of stock options			2				—				9,116				—				—				—				9,118				—				9,118
Stock-based compensation			—				—				764				—				—				—				764				—				764
Cash dividends			—				—				—				—				(12,892	)			—				(12,892	)			—				(12,892	)
Balance, June 30, 2011		$	567			$	60			$	692,696			$	78,231			$	1,100,128			$	(197,246	)		$	1,674,436			$	6,145			$	1,680,581

See notes to consolidated financial statements.

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

		Six Months Ended
		June 30,
		2011				2010
						(Restated)
Operating activities:
Net income attributable to shareholders		$	99,651			$	71,178
Adjustments to reconcile net income attributable to shareholders to net cash provided by operating activities:
Change in policy liabilities and policyholder accounts			149,619				84,646
Net change in reinsurance receivables and payables			(4,016	)			(11,574	)
Amortization, principally the cost of business acquired and investments			16,626				24,624
Deferred costs of business acquired			(45,230	)			(34,273	)
Net realized losses on investments			849				28,980
Net change in federal income taxes			25,534				(5,473	)
Other			(45,373	)			(25,398	)
Net cash provided by operating activities			197,660				132,710
Investing activities:
Purchases of investments and loans made			(1,574,882	)			(936,660	)
Sales of investments and receipts from repayment of loans			1,002,719				494,984
Maturities of investments			171,331				176,718
Net change in short-term investments			105,729				55,689
Change in deposit in separate account			—				(2,965	)
Net cash used by investing activities			(295,103	)			(212,234	)
Financing activities:
Deposits to policyholder accounts			252,096				122,809
Withdrawals from policyholder accounts			(129,235	)			(54,905	)
Proceeds from issuance of 2020 Senior Notes			—				250,000
Principal payments under bank credit facility			—				(222,000	)
Early retirement of senior notes			—				(5,000	)
Cash dividends paid on common stock			(12,892	)			(11,054	)
Other financing activities			4,939				2,095
Net cash provided by financing activities			114,908				81,945
Increase in cash			17,465				2,421
Cash at beginning of year			72,806				65,464
Cash at end of period		$	90,271			$	67,885

See notes to consolidated financial statements.

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note A —Significant Accounting Policies

The financial statements of Delphi Financial Group, Inc. (the “Company,” which term includes the Company and its consolidated subsidiaries unless the context indicates otherwise) included herein were prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. Certain reclassifications have been made in the June 30, 2010 consolidated financial statements to conform to the June 30, 2011 presentation. In addition, as discussed below under the caption “Accounting Changes,” certain 2010 financial information has been restated as a result of the Company’s adoption of a new accounting principle. Operating results for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ended December 31, 2011. For further information refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2010 (the “2010 Form 10-K”). Capitalized terms used herein without definition have the meanings ascribed to them in the 2010 Form 10-K.

Accounting Changes

The Company defers certain costs relating to the acquisition of new insurance business, such as commissions, certain costs associated with policy issuance and underwriting and certain sales support expenses, when incurred. On January 1, 2011, the Company adopted, on a retrospective basis, guidance issued by the Financial Accounting Standards Board (“FASB”) limiting the extent to which an insurer may capitalize costs incurred in the acquisition of an insurance contract. The guidance provides that, in order to be capitalized, such costs must be incremental and directly related to the acquisition of a new or renewal insurance contract. Insurers may only capitalize costs related to successful efforts in attaining a contract and advertising costs may only be capitalized if certain direct response advertising criteria are met. As a result of adopting this guidance, the Company made an after-tax reduction to its retained earnings at January 1, 2010 in the amount of $60.0 million, net of an income tax benefit of $32.3 million, which represents the net reduction in deferred policy acquisition cost included in cost of business acquired on the consolidated balance sheet, and net income attributable to shareholders was reduced by $0.04 per diluted share and $0.06 per diluted share for the three and six months ended June 30, 2010, respectively. This adoption also resulted in the restatement of certain other financial information for 2010.

On January 1, 2011, the Company adopted new guidance issued by the FASB clarifying that an insurance company should not consider any interests of its separate accounts in an investment to be the insurer’s own interests and should not combine those interests with any interest of its general account in the same investment when assessing the investment for consolidation. Insurance companies are also required to consider a separate account as a subsidiary for purposes of evaluating whether the application of specialized accounting for investments in consolidation is appropriate. The adoption of this guidance did not have any effect on the Company’s consolidated financial position or results of operations.

On January 1, 2011, the Company adopted new guidance issued by the FASB requiring additional disclosures regarding fair value measurements. The guidance applies to all entities that are required to make disclosures about recurring or nonrecurring fair value measurements and requires separate disclosure of the activity in the Level 3 category related to purchases, sales, issuances and settlements on a gross basis. The requirement is effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of this guidance did not have any effect on the Company’s consolidated financial position or results of operations.

In December 2010, the FASB issued guidance providing clarification relating to the testing of goodwill for impairment for entities carrying goodwill as an asset which have one or more reporting units whose carrying amount for purposes of performing the first step of the goodwill impairment test is zero or negative. For those reporting units, an entity is required to perform the second step of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2010. The adoption of this guidance did not have any effect on the Company’s consolidated financial position or results of operations.

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note A —Significant Accounting Policies — (Continued)

Recently Issued Accounting Standards

In May 2011, the FASB issued new guidance regarding fair value measurements in order to have a common fair value measurement and disclosure requirement for purposes of both GAAP and International Financial Reporting Standards. This guidance further elaborates upon techniques used in measuring fair value. It does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. Early adoption is not permitted. The Company has not yet determined the impact, if any, that the adoption of this guidance will have on its consolidated financial position or results of operations.

In June 2011, the FASB issued new guidance regarding the presentation of comprehensive income. This guidance eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and requires that all changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance does not change the items that must be reported in other comprehensive income or the calculation or presentation of earnings per share. This guidance is effective retrospectively for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011 with early adoption permitted. Because the new guidance affects financial statement presentation only, it will have no impact on the Company’s consolidated financial position or results of operations.

Note B — Investments

At June 30, 2011, the Company had fixed maturity securities available for sale with a carrying value and a fair value of $6,181.5 million and an amortized cost of $6,027.7 million. At December 31, 2010, the Company had fixed maturity securities available for sale with a carrying value and a fair value of $5,717.1 million and an amortized cost of $5,650.6 million. Declines in market value relative to such securities’ amortized cost which are determined to be other than temporary pursuant to the Company’s methodology for such determinations and to represent credit losses are reflected as reductions in the amortized cost of such securities, as further discussed below.

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

		June 30, 2011
						Gross Unrealized
														Other Than
		Amortized												Temporary				Fair
		Cost				Gains				Losses				Impairments				Value
		(dollars in thousands)
Agency residential mortgage-backed securities		$	640,888			$	42,324			$	(1,158	)		$	—			$	682,054
Non-agency residential mortgage-backed securities			777,566				68,734				(19,865	)			(20,555	)			805,880
Commercial mortgage-backed securities			83,492				977				(1,078	)			(61	)			83,330
Corporate securities			1,701,008				87,531				(20,374	)			(390	)			1,767,775
Collateralized debt obligations			232,771				7,993				(19,012	)			(1,628	)			220,124
U.S. Treasury and other U.S. Government guaranteed securities			129,348				4,709				(1,385	)			—				132,672
U.S. Government-sponsored enterprise securities			109,853				213				(1,309	)			—				108,757
Obligations of U.S. states, municipalities and political subdivisions			2,352,794				57,326				(29,230	)			—				2,380,890
Total fixed maturity securities		$	6,027,720			$	269,807			$	(93,411	)		$	(22,634	)		$	6,181,482

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note B — Investments — (Continued)

		December 31, 2010
						Gross Unrealized
														Other Than
		Amortized												Temporary				Fair
		Cost				Gains				Losses				Impairments				Value
		(dollars in thousands)
Agency residential mortgage-backed securities		$	626,494			$	38,586			$	(1,379	)		$	—			$	663,701
Non-agency residential mortgage-backed securities			800,380				77,742				(27,518	)			(24,896	)			825,708
Commercial mortgage-backed securities			35,863				300				(3,020	)			(139	)			33,004
Corporate securities			1,466,561				81,919				(18,761	)			—				1,529,719
Collateralized debt obligations			199,594				3,652				(26,337	)			(1,725	)			175,184
U.S. Treasury and other U.S. Government guaranteed securities			269,264				6,001				(3,362	)			—				271,903
U.S. Government-sponsored enterprise securities			113,446				107				(2,012	)			—				111,541
Obligations of U.S. states, municipalities and political subdivisions			2,138,994				36,421				(69,085	)			—				2,106,330
Total fixed maturity securities		$	5,650,596			$	244,728			$	(151,474	)		$	(26,760	)		$	5,717,090

The following table contains information, as of June 30, 2011, regarding the portions of the Company’s investments in non-agency residential mortgage-backed securities (“RMBS”) represented by securities whose underlying mortgage loans are categorized as prime, Alt-A and subprime, respectively, and the distributions of the securities within these categories by the years in which they were issued (vintages) and the highest of their ratings from Standard & Poor’s, Moody’s and Fitch. All dollar amounts in this table are based upon the fair values of these securities as of June 30, 2011. As of this date, based upon the most recently available data regarding the concentrations by state of the mortgage loans underlying these securities, the states having loan concentrations in excess of 5% were as follows: California (38.0%), New York (7.4%) and Florida (6.9%).

		Non-Agency Prime RMBS – Fair Value
																		BB and
Vintage		AAA				AA				A				BBB				Below (1)				Total
										(dollars in thousands)
2001 and prior		$	1,861			$	—			$	—			$	—			$	—			$	1,861
2002			8,186				187				3,892				—				603				12,868
2003			67,561				1,404				2,528				3,152				10,154				84,799
2004			25,029				16,006				—				4,739				6,013				51,787
2005			11,639				5,893				1,511				17,970				67,131				104,144
2006			14,367				564				—				—				22,836				37,767
2007			5,085				—				—				—				69,900				74,985
2008			820				—				—				—				487				1,307
Total		$	134,548			$	24,054			$	7,931			$	25,861			$	177,124			$	369,518

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note B — Investments — (Continued)

		Non-Agency Alt-A RMBS – Fair Value
																		BB and
Vintage		AAA				AA				A				BBB				Below (1)				Total
										(dollars in thousands)
2001 and prior		$	—			$	—			$	—			$	1,679			$	—			$	1,679
2002			176				1,551				—				—				—				1,727
2003			44,466				—				—				—				1,100				45,566
2004			19,835				1,892				1,413				—				1,810				24,950
2005			7,083				17,811				—				1,039				43,840				69,773
2006			11,377				—				—				7,808				78,954				98,139
2007			275				—				—				—				126,219				126,494
2010			—				—				3,875				—				—				3,875
Total		$	83,212			$	21,254			$	5,288			$	10,526			$	251,923			$	372,203

		Non-Agency Subprime RMBS – Fair Value
																		BB and
Vintage		AAA				AA				A				BBB				Below (1)				Total
										(dollars in thousands)
2003		$	10,511			$	—			$	1,096			$	—			$	—			$	11,607
2004			9,912				—				—				184				3,347				13,443
2005			18,087				—				—				—				17,672				35,759
2006			—				—				—				1,411				820				2,231
2007			—				—				—				—				1,119				1,119
Total		$	38,510			$	—			$	1,096			$	1,595			$	22,958			$	64,159

The amortized cost and fair value of fixed maturity securities available for sale at June 30, 2011, 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)
Agency residential mortgage-backed securities		$	640,888			$	682,054
Non-agency residential mortgage-backed securities			777,566				805,880
Commercial mortgage-backed securities			83,492				83,330
Other fixed maturity securities:
One year or less			116,999				112,272
Greater than 1, up to 5 years			628,028				652,335
Greater than 5, up to 10 years			1,127,762				1,146,070
Greater than 10 years			2,652,985				2,699,541
Total		$	6,027,720			$	6,181,482

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note B — Investments — (Continued)

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:

		June 30, 2011
		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)
Agency residential mortgage-backed securities		$	60,682			$	(1,142	)		$	227			$	(16	)		$	60,909			$	(1,158	)
Non-agency residential mortgage- backed securities			74,521				(2,694	)			204,665				(37,726	)			279,186				(40,420	)
Commercial mortgage-backed securities			23,141				(582	)			4,484				(557	)			27,625				(1,139	)
Corporate securities			381,991				(12,129	)			45,576				(8,635	)			427,567				(20,764	)
Collateralized debt obligations			82,560				(1,703	)			68,710				(18,937	)			151,270				(20,640	)
U.S. Treasury and other U.S. Government guaranteed securities			47,236				(1,385	)			—				—				47,236				(1,385	)
U.S. Government-sponsored enterprise securities			54,455				(1,309	)			—				—				54,455				(1,309	)
Obligations of U.S. states, municipalities and political subdivisions			741,361				(19,413	)			62,611				(9,817	)			803,972				(29,230	)
Total fixed maturity securities		$	1,465,947			$	(40,357	)		$	386,273			$	(75,688	)		$	1,852,220			$	(116,045	)

		December 31, 2010
		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)
Agency residential mortgage-backed securities		$	52,300			$	(1,329	)		$	233			$	(50	)		$	52,533			$	(1,379	)
Non-agency residential mortgage- backed securities			56,290				(1,584	)			230,655				(50,830	)			286,945				(52,414	)
Commercial mortgage-backed securities			12,500				(447	)			5,188				(2,712	)			17,688				(3,159	)
Corporate securities			301,150				(9,005	)			61,904				(9,756	)			363,054				(18,761	)
Collateralized debt obligations			5,451				(587	)			130,104				(27,475	)			135,555				(28,062	)
U.S. Treasury and other U.S. Government guaranteed securities			81,442				(3,362	)			—				—				81,442				(3,362	)
U.S. Government-sponsored enterprise securities			61,277				(2,012	)			—				—				61,277				(2,012	)
Obligations of U.S. states, municipalities and political subdivisions			1,169,724				(57,589	)			65,337				(11,496	)			1,235,061				(69,085	)
Total fixed maturity securities		$	1,740,134			$	(75,915	)		$	493,421			$	(102,319	)		$	2,233,555			$	(178,234	)

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note B — Investments — (Continued)

Net investment income was attributable to the following:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(dollars in thousands)
Gross investment income:
Fixed maturity securities, available for sale		$	86,895			$	80,500			$	173,007			$	161,183
Mortgage loans			1,348				1,405				1,581				3,318
Short-term investments			47				17				95				37
Other			2,534				2,095				16,696				11,347
			90,824				84,017				191,379				175,885
Less: Investment expenses			(7,633	)			(5,783	)			(15,894	)			(13,601	)
		$	83,191			$	78,234			$	175,485			$	162,284

Net realized investment gains (losses) arose from the following:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(dollars in thousands)
Credit related other than temporary impairment losses:
Fixed maturity securities, available for sale		$	(4,996	)		$	(9,395	)		$	(14,014	)		$	(26,962	)
Mortgage loans			—				(10,210	)			—				(15,101	)
Other investments			(347	)			(1,228	)			(347	)			(1,768	)
			(5,343	)			(20,833	)			(14,361	)			(43,831	)
Other net realized investment gains:
Fixed maturity securities, available for sale			4,832				5,628				11,631				11,746
Mortgage loans			53				345				290				419
Other investments			1,581				986				1,591				2,686
			6,466				6,959				13,512				14,851
Total		$	1,123			$	(13,874	)		$	(849	)		$	(28,980	)

Proceeds from sales of fixed maturity securities during the first six months of 2011 and 2010 were $701.5 million and $257.5 million, respectively. Gross gains of $20.0 million and gross losses of $8.4 million were realized on the 2011 sales and gross gains of $16.3 million and gross losses of $4.6 million were realized on the 2010 sales. Proceeds from sales of fixed maturity securities during the second quarters of 2011 and 2010 were $181.5 million and $153.9 million, respectively. Gross gains of $9.4 million and gross losses of $4.6 million were realized on sales during the second quarter of 2011 and gross gains of $6.9 million and gross losses of $1.3 million were realized on sales during the second quarter of 2010. Net realized investment gains and losses on investment sales are determined under the specific identification method and are included in income. The change in unrealized appreciation and depreciation on investments, primarily relating to fixed maturity securities, is included as a component of accumulated other comprehensive income or loss.

The Company regularly evaluates its investment portfolio utilizing its established methodology to determine whether declines in the fair values of its investments below the Company’s amortized cost are other than temporary. Under this methodology, management evaluates whether and when the Company will recover an investment’s amortized cost, taking into account, among other things, the financial position and prospects of the issuer, conditions in the issuer’s industry and geographic area, liquidity of the investment, the expected amount and timing of future cash flows from the investment, recent changes in credit ratings of the issuer by nationally recognized rating agencies and the length of time and extent to which the fair value of the investment has been lower than its amortized cost to determine if and when a decline in the fair value of an investment below amortized cost is other than temporary. In the case of structured securities such as RMBS, commercial mortgage-backed

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note B — Investments — (Continued)

securities and collateralized debt obligations, the most significant factor in these evaluations is the expected amount and timing of the future cash flows from the investment. In the case of fixed maturity securities, in instances where management determines that a security’s amortized cost will be recovered during its remaining term to maturity, an additional component of this methodology is the Company’s evaluation of whether it intends to, or will more likely than not be required to, sell the security before such anticipated recovery.

If the fair value of a fixed maturity security declines in value below the Company’s amortized cost and the Company intends to sell, or determines that it will more likely than not be required to sell, the security before recovery of its amortized cost basis, management considers the security to be other than temporarily impaired and reports its decline in fair value as a realized investment loss in the income statement. If, however, the Company does not intend to sell the security and determines that it is not more likely than not that it will be required to do so, a decline in its fair value that is considered in the judgment of management to be other than temporary is separated into the amount representing credit loss and the amount related to other factors. Amounts representing credit losses are reported as realized investment losses in the income statement and amounts related to other factors are included as a component of accumulated other comprehensive income or loss, net of the related income tax benefit and the related adjustment to cost of business acquired. Declines in the fair value of all other investments below the Company’s amortized cost that are considered in the judgment of management to be other than temporary are reported as realized investment losses in the income statement.

In the case of structured securities such as RMBS, commercial mortgage-backed securities and collateralized debt obligations as to which a decline in fair value is judged to be other than temporary, the amount of the credit loss arising from the impairment of the security is determined by discounting such security’s expected cash flows at its effective interest rate, taking into account the security’s purchase price. The key inputs relating to such expected cash flows consist of the future scheduled payments on the underlying loans and the estimated frequency and severity of future defaults on these loans. For those securities as to which the Company recognized credit losses in 2011 as a result of determinations that such securities were other than temporarily impaired, representative default frequency estimates ranged from 2.4% to 5.3% and representative default severity estimates ranged from 45.8% to 62.6%.

In the case of corporate securities as to which a decline in fair value is determined to be other than temporary, the key input utilized to establish the amount of credit loss arising from the impairment of the security is the market price for such security. For each such security, the Company obtains such market price from a single independent nationally recognized pricing service. The Company has not in any instance adjusted the market price so obtained; however, management reviews these prices for reasonableness, taking into account both security-specific factors and its knowledge and understanding of the pricing methodologies used by the service. The credit loss for such security is determined to be equal to the excess of the Company’s amortized cost over such market price, as measured at the time of the impairment; as such, the entirety of the depreciation in market value is deemed to be reflective of credit loss.

During the first half of 2011, the Company recognized $10.0 million of after-tax other than temporary impairment losses, of which $9.3 million was recognized as after-tax realized investment losses in the income statement related to credit losses and $0.7 million was recognized, net of the related income tax benefit, as a component of accumulated other comprehensive income on the balance sheet related to noncredit losses. Impairment losses were offset by $8.8 million of after-tax other realized investment gains, resulting in a net of $0.6 million after-tax realized investment losses being recognized during the period.

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note B — Investments — (Continued)

The following table provides a reconciliation of the beginning and ending balances of other than temporary impairments on fixed maturity securities held by the Company for which a portion of the other than temporary impairment was recognized in accumulated other comprehensive income or loss:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(dollars in thousands)
Balance at the beginning of the period		$	80,174			$	86,092			$	79,602			$	89,658
Increases attributable to credit losses on securities for which an other than temporary impairment was not previously recognized			1,013				3,377				1,745				10,364
Increases attributable to credit losses on securities for which an other than temporary impairment was previously recognized			3,984				5,710				11,650				13,211
Reductions due to sales, maturities, pay downs or prepayments of securities for which an other than temporary impairment was previously recognized			(9,577	)			(12,023	)			(17,403	)			(30,077	)
Balance at the end of the period		$	75,594			$	83,156			$	75,594			$	83,156

The gross unrealized losses at June 30, 2011 are attributable to 912 fixed maturity security positions, with the largest unrealized loss associated with any one security equal to $4.0 million. At June 30, 2011 approximately 34.9% of these aggregate gross unrealized losses were attributable to fixed maturity security positions as to which the unrealized loss represented 10% or less of the amortized cost for such security. Unrealized losses attributable to fixed maturity securities having investment grade ratings by a nationally recognized statistical rating organization comprised 40.9% of the aggregate gross unrealized losses at June 30, 2011, with the remainder of such losses being attributable to non-investment grade fixed maturity securities.

At June 30, 2011, the Company held approximately $834.9 million of insured municipal fixed maturity securities, which represented approximately 12% of the Company’s total invested assets. These securities had a weighted average credit rating of “A” by nationally recognized statistical rating organizations at June 30, 2011. For the portion of these securities having ratings by nationally recognized statistical rating organizations without giving effect to the credit enhancement provided by the insurance, which totaled $785.2 million at June 30, 2011, the weighted average credit rating at such date by such organizations was “AA”. Insurers of significant portions of the municipal fixed maturity securities held by the Company at June 30, 2011 included National Public Finance Guarantee Corp. ($303.8 million), Assured Guaranty ($265.1 million), Ambac Financial Group, Inc. ($157.1 million), Financial Guaranty Insurance Company ($32.9 million) and Radian ($25.3 million). At June 30, 2011, the Company did not have significant holdings of credit enhanced asset-backed or mortgage-backed securities, nor did it have any significant direct investments in the guarantors of the municipal fixed maturity securities held by the Company.

Note C — Fair Value Measurements

The Company measures its assets and liabilities recorded at fair value in the consolidated balance sheet based on the framework set forth in the GAAP fair value accounting guidance. This framework establishes a fair value hierarchy of three levels based upon the transparency and availability of information used in measuring the fair value of assets or liabilities as of the measurement date. The levels are categorized as follows:

Level 1- Valuation is based upon quoted prices for identical assets or liabilities in active markets. Level 1 fair value is not subject to valuation adjustments or block discounts.

Level 2 — Valuation is based upon quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar instruments in markets that are not active. In addition, a company may use various valuation techniques or pricing models that use observable inputs to measure fair value.

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note C — Fair Value Measurements — (Continued)

Level 3 — Valuation is generated from techniques in which one or more of the significant inputs for valuing such assets or liabilities are not observable. These inputs may reflect the Company’s best estimates of the various assumptions that market participants would use in valuing the financial assets and financial liabilities.

For these purposes, the Company determines the existence of an active market for an asset or liability based on its judgment as to whether transactions for the asset or liability occur in such market with sufficient frequency and volume to provide reliable pricing information. If the Company concludes that there has been a significant decrease in the volume and level of activity for an investment in relation to normal market activity for such investment, adjustments to transactions and quoted prices are made to estimate fair value.

The Company’s investments in fixed maturity securities available for sale, equity securities available for sale, trading account securities, assets held in the separate account and its liabilities for securities sold, not yet purchased are carried at fair value. The methodologies and valuation techniques used by the Company to value its assets and liabilities measured at fair value are described below.

Instruments included in fixed maturity securities available for sale include mortgage-backed and corporate securities, U.S. Treasury and other U.S. government guaranteed securities, securities issued by U.S. government-sponsored enterprises, and obligations of U.S. states, municipalities and political subdivisions. The market liquidity of each security is taken into consideration in the valuation technique used to value such security. For securities where market transactions involving identical or comparable assets generate sufficient relevant information, the Company employs a market approach to valuation. If sufficient information is not generated from market transactions involving identical or comparable assets, the Company uses an income approach to valuation. The majority of the instruments included in fixed maturity securities available for sale are valued utilizing observable inputs; accordingly, they are categorized in either Level l or Level 2 of the fair value hierarchy described above. However, in instances where significant inputs utilized are unobservable, the securities are categorized in Level 3 of the fair value hierarchy.

The inputs used in the valuation techniques employed by the Company are provided by nationally recognized pricing services, external investment managers and internal resources. To assess these inputs, the Company’s review process includes, but is not limited to, quantitative analysis including benchmarking, initial and ongoing evaluations of methodologies used by external parties to calculate fair value, and ongoing evaluations of fair value estimates based on the Company’s knowledge and monitoring of market conditions.

The Company uses various valuation techniques and pricing models to measure the fair value of its investments in residential mortgage-backed securities and commercial mortgage-backed securities, including option-adjusted spread models, volatility-driven multi-dimensional single cash flow stream models and matrix correlation to comparable securities. Residential mortgage-backed securities include U.S. agency securities and collateralized mortgage obligations. Inputs utilized in connection with the valuation techniques relating to this class of securities include monthly payment and performance information with respect to the underlying loans, including prepayments, default severity, delinquencies, market indices and the amounts of the tranches in the particular structure which are senior or subordinate, as applicable, to the tranche represented by the Company’s investment. A portion of the Company’s investments in mortgage-backed securities are valued using observable inputs and therefore categorized in Level 2 of the fair value hierarchy. The remaining mortgage-backed securities are valued using non-binding broker quotes. These methodologies rely on unobservable inputs and thus these securities are categorized in Level 3 of the fair value hierarchy.

Corporate securities primarily include fixed rate corporate bonds, floating and variable rate notes and securities acquired through private placements. Inputs utilized in connection with the Company’s valuation techniques relating to this class of securities include recently executed transactions, market price quotations, benchmark yields, issuer spreads and, in the case of private placement corporate securities, cash flow models. These cash flow models utilize yield curves, issuer-provided information and material events as key inputs. Corporate securities are categorized in Level 2 of the fair value hierarchy, other than securities acquired through private placements, which are categorized in Level 3 of the fair value hierarchy.

Collateralized debt obligations consist of collateralized loan obligations. The Company’s valuation techniques relating to this class of securities utilize non-binding broker quotes as the key input. As this input is generally unobservable, collateralized debt obligations are categorized in Level 3 of the fair value hierarchy.

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note C — Fair Value Measurements — (Continued)

U.S. Treasury and other U.S. government guaranteed securities include U.S. Treasury bonds and notes, Treasury Inflation Protected Securities (“TIPS”) and other U.S. government guaranteed securities. The fair values of the U.S. Treasury securities and TIPS are based on quoted prices in active markets and are generally categorized in Level 1 of the fair value hierarchy.

Inputs utilized in connection with the Company’s valuation techniques relating to its investments in other U.S. government guaranteed securities, as well as its investments in U.S. government-sponsored enterprise securities, which consist of medium term notes issued by these enterprises, include recently executed transactions, interest rate yield curves, maturity dates, market price quotations and credit spreads relating to similar instruments. These inputs are generally observable and accordingly, these securities are generally categorized in Level 2 of the fair value hierarchy.

Obligations of U.S. states, municipalities and political subdivisions primarily include bonds or notes issued by U.S municipalities. Inputs utilized in connection with the Company’s valuation techniques relating to this class of securities include recently executed transactions and other market data, spreads, benchmark curves including treasury and other benchmarks, trustee reports, material event notices, new issue data, and issuer financial statements. These inputs are generally observable and these securities are generally categorized in Level 2 of the fair value hierarchy.

Other investments held at fair value primarily consist of equity securities available for sale and trading account securities. These investments are primarily valued at quoted active market prices and are therefore categorized in Level 1 of the fair value hierarchy. For private equity investments, since quoted market prices are not available, the transaction price is used as the best estimate of fair value at inception. When evidence is believed to support a change to the carrying value from the transaction price, adjustments are made to reflect expected exit values. Ongoing reviews by Company management are based on assessments of each underlying investment and the inputs utilized in these reviews include, among other things, the evaluation of financing and sale transactions with third parties, expected cash flows, material events and market-based information. These investments are included in Level 3 of the fair value hierarchy.

Assets held in the separate account represent funds invested in a separately administered variable life insurance product for which the policyholder, rather than the Company, bears the investment risk. These assets are invested in interests in a limited liability company that invests in funds which trade in various financial instruments. This limited liability company, all of whose interests are owned by the Company’s separate account, utilizes the financial statements furnished by the funds to determine the values of its investments in such funds and the carrying value of each such investment, which is based on its proportionate interest in the relevant fund as of the balance sheet date. As such, these funds’ financial statements constitute the key input in the Company’s valuation of its investment in this limited liability company. The Company concluded that the value calculated using the equity method of accounting on its investment in this limited liability company was reflective of the fair market value of such investments. The investment portfolios of the funds in which the fund investments are maintained vary from fund to fund, but are generally comprised of liquid, publicly traded securities that have readily determinable market values and which are carried at fair value on the financial statements of such funds, substantially all of which are audited annually. The amount that an investor is entitled to receive upon the redemption of its investment from the applicable fund is determined by reference to such security values. These investments are included in Level 3 of the fair value hierarchy.

Other liabilities measured at fair value consist of securities sold, not yet purchased. These securities are valued using the quoted active market prices of the securities sold and are categorized in Level 1 of the fair value hierarchy.

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note C — Fair Value Measurements — (Continued)

Assets and liabilities measured at fair value in the consolidated balance sheet on a recurring basis are summarized below:

		June 30, 2011
		Total				Level 1				Level 2				Level 3
						(dollars in thousands)
Assets:
Fixed maturity securities, available for sale:
Agency residential mortgage-backed securities		$	682,054			$	—			$	672,476			$	9,578
Non-agency residential mortgage-backed securities			805,880				—				771,536				34,344
Commercial mortgage-backed securities			83,330				—				81,925				1,405
Corporate securities			1,767,775				—				1,652,791				114,984
Collateralized debt obligations			220,124				—				666				219,458
U.S. Treasury and other U.S. Government guaranteed securities			132,672				81,205				43,620				7,847
U.S. Government-sponsored enterprise securities			108,757				—				104,721				4,036
Obligations of U.S. states, municipalities and political subdivisions			2,380,890				—				2,377,979				2,911
Other investments			228,859				222,964				—				5,895
Assets held in separate account			126,213				—				—				126,213
Total		$	6,536,554			$	304,169			$	5,705,714			$	526,671
Liabilities:
Other liabilities		$	85,254			$	85,254			$	—			$	—