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

For the Quarterly Period Ended~~September~~June 30, ~~2009~~2010


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

For the transition period from to

Commission File Number001-11462

DELPHI FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)


Delaware ~~(302)~~	(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


Yesþ		Noo

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~~o


Yesþ		Noo

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

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

~~Yes~~o


Yeso		Noþ

As of ~~November 2, 2009,~~July 30, 2010, the Registrant had ~~48,161,591~~48,510,975 shares of Class A Common Stock
and 5,753,833 shares of Class B Common Stock outstanding.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Thousands, Except Per Share Data)
~~(Unaudited)~~

Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Revenue:
Premium and fee income $ 342,610 $ 345,028 $ 1,052,776 $ 1,028,092
Net investment income 88,682 19,407 243,560 112,494
Net realized investment losses:
Total other than temporary impairment losses (73,771 ) (28,173 ) (137,007 ) (52,479 )
Less: Portion of other than temporary impairment losses recognized in other comprehensive income 21,748 — 42,467 —

Net impairment losses recognized in earnings (52,023 ) (28,173 ) (94,540 ) (52,479 )
Other net realized investment gains (losses) 1,564 (5,567 ) (5,389 ) (7,196 )

(50,459 ) (33,740 ) (99,929 ) (59,675 )

Loss on redemption of junior subordinated deferrable interest debentures underlying company-obligated mandatorily redeemable capital securities issued by unconsolidated subsidiaries — (598 ) — (598 )

Total revenues 380,833 330,097 1,196,407 1,080,313

Benefits and expenses:
Benefits, claims and interest credited to policyholders 240,956 244,042 748,361 730,709
Commissions 21,886 22,254 67,046 64,374
Amortization of cost of business acquired 26,740 21,814 76,217 58,459
Other operating expenses 61,054 55,756 181,813 161,567

350,636 343,866 1,073,437 1,015,109

Operating income (loss) 30,197 (13,769 ) 122,970 65,204

Interest expense:
Corporate debt 3,806 4,427 11,667 12,940
Junior subordinated debentures 3,247 3,240 9,728 9,726
Junior subordinated deferrable interest debentures underlying company-obligated redeemable capital securities issued by unconsolidated subsidiaries — 177 — 934

7,053 7,844 21,395 23,600

Income (loss) before income tax expense (benefit) 23,144 (21,613 ) 101,575 41,604

Income tax expense (benefit) 2,321 (11,803 ) 19,261 3,395

Net income (loss) $ 20,823 $ (9,810 ) $ 82,314 $ 38,209

Basic results per share of common stock:
Net income (loss) $ 0.39 $ (0.20 ) $ 1.63 $ 0.79

Diluted results per share of common stock:
Net income (loss) $ 0.39 $ (0.20 ) $ 1.63 $ 0.78

Dividends paid per share of common stock $ 0.10 $ 0.10 $ 0.30 $ 0.29
(Unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Revenue:
Premium and fee income	$	352,566		$	352,445		$	700,329		$	710,166
Net investment income		78,234			92,023			162,284			154,878
Net realized investment losses:
Total other than temporary impairment losses		(21,659	)		(45,628	)		(48,932	)		(63,236	)
Less: Portion of other than temporary impairment losses recognized in other comprehensive income		826			20,719			5,101			20,719

Net impairment losses recognized in earnings		(20,833	)		(24,909	)		(43,831	)		(42,517	)
Other net realized investment gains (losses)		6,959			(2,562	)		14,851			(6,953	)

		(13,874	)		(27,471	)		(28,980	)		(49,470	)
Loss on redemption of senior notes		(212	)		—			(212	)		—

Total revenues		416,714			416,997			833,421			815,574


Benefits and expenses:
Benefits, claims and interest credited to policyholders		244,687			251,807			491,008			507,405
Commissions		23,794			22,456			45,190			45,160
Amortization of cost of business acquired		26,167			26,184			51,737			49,477
Other operating expenses		62,976			60,502			127,575			120,644

		357,624			360,949			715,510			722,686


Operating income		59,090			56,048			117,911			92,888

Interest expense:
Corporate debt		8,264			3,876			15,587			7,861
Junior subordinated debentures		3,248			3,241			6,489			6,481

		11,512			7,117			22,076			14,342


Income before income tax expense		47,578			48,931			95,835			78,546

Income tax expense		10,619			11,804			21,148			16,940


Net income		36,959			37,127			74,687			61,606

Less: Net income attributable to noncontrolling interest		8			120			73			115


Net income attributable to shareholders	$	36,951		$	37,007		$	74,614		$	61,491


Basic results per share of common stock:
Net income attributable to shareholders	$	0.67		$	0.74		$	1.35		$	1.25

Diluted results per share of common stock:
Net income attributable to shareholders	$	0.66		$	0.74		$	1.34		$	1.25

Dividends paid per share of common stock	$	0.10		$	0.10		$	0.20		$	0.20

See notes to consolidated financial statements.

-3-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Per Share Data)


	September 30,			December 31,			June 30,			December 31,
	2009			2008			2010			2009
Assets:
Investments:
Fixed maturity securities, available for sale	$	4,608,184		$	3,773,382		$	5,326,173		$	4,875,681
Short-term investments		572,802			401,620			351,093			406,782
Other investments		542,047			479,921			423,303			466,855

		5,723,033			4,654,923			6,100,569			5,749,318
Cash		82,269			63,837			67,885			65,464
Cost of business acquired		244,930			264,777			238,480			250,311
Reinsurance receivables		378,277			376,731			360,439			355,030
Goodwill		93,929			93,929			93,929			93,929
Other assets		320,428			409,103			311,050			293,835
Assets held in separate account		109,016			90,573			113,532			113,488

Total assets	$	6,951,882		$	5,953,873		$	7,285,884		$	6,921,375


Liabilities and Equity:
Future policy benefits:
Life	$	346,716		$	300,567		$	343,646		$	341,736
Disability and accident		775,320			743,690			789,790			781,701
Unpaid claims and claim expenses:
Life		64,110			70,076			55,293			58,665
Disability and accident		426,802			398,671			444,937			433,273
Casualty		1,158,937			1,061,046			1,245,408			1,187,814
Policyholder account balances		1,452,332			1,356,932			1,529,744			1,454,114
Corporate debt		365,750			350,750			388,750			365,750
Junior subordinated debentures		175,000			175,000			175,000			175,000
Other liabilities and policyholder funds		740,539			581,954			699,432			647,269
Liabilities related to separate account		109,016			90,573			113,532			113,488

Total liabilities		5,614,522			5,129,259			5,785,532			5,558,810


Equity:
Preferred Stock, $.01 par; 50,000,000 shares authorized, none issued		—			—			—			—
Class A Common Stock, $.01 par; 150,000,000 shares authorized; 55,922,807 and 48,946,432 shares issued, respectively		559			489
Class A Common Stock, $.01 par; 150,000,000 shares authorized; 56,186,193 and 55,995,995 shares issued, respectively								562			560
Class B Common Stock, $.01 par; 20,000,000 shares authorized; 5,981,049 shares issued		60			60			60			60
Additional paid-in capital		659,683			522,596			671,064			661,895
Accumulated other comprehensive loss		(46,303	)		(351,710	)
Accumulated other comprehensive income (loss)								33,264			(33,956	)
Retained earnings		916,309			846,390			991,266			927,706
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	)		(197,246	)		(197,246	)

Total shareholders’ equity		1,333,062			820,579			1,498,970			1,359,019
Noncontrolling interest		4,298			4,035			1,382			3,546

Total equity		1,337,360			824,614			1,500,352			1,362,565

Total liabilities and equity	$	6,951,882		$	5,953,873		$	7,285,884		$	6,921,375

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(Dollars in Thousands)
~~(Unaudited)~~

Accumulated
Class A Class B Additional Other Total Non-
Common Common Paid in Comprehensive Retained Treasury Shareholders’ controlling Total
Stock Stock Capital Income (Loss) Earnings Stock Equity Interest Equity
Balance, January 1, 2008 $ 487 $ 59 $ 509,742 $ (42,497 ) $ 828,116 $ (154,517 ) $ 1,141,390 $ 30,181 $ 1,171,571

Net income — — — — 38,209 — 38,209 1,697 39,906
Other comprehensive loss:
Increase in net unrealized depreciation on investments — — — (246,781 ) — — (246,781 ) (1,032 ) (247,813 )
Decrease in net loss on cash flow hedge — — — 589 — — 589 — 589
Change in net periodic pension cost — — — 35 — — 35 — 35

Comprehensive loss (207,948 ) 665 (207,283 )
Change in noncontrolling interest ownership — — — — — — — (491 ) (491 )
Exercise of stock options 2 1 7,197 — — — 7,200 — 7,200
Stock-based compensation — — 4,880 — — — 4,880 — 4,880
Acquisition of treasury stock — — — — — (42,729 ) (42,729 ) — (42,729 )
Cash dividends — — — — (13,716 ) — (13,716 ) — (13,716 )

Balance, September 30, 2008 $ 489 $ 60 $ 521,819 $ (288,654 ) $ 852,609 $ (197,246 ) $ 889,077` $ 30,355 $ 919,432

Balance, January 1, 2009 $ 489 $ 60 $ 522,596 $ (351,710 ) $ 846,390 $ (197,246 ) $ 820,579 $ 4,035 $ 824,614

Cumulative effect adjustment, April 1, 2009 — — — (2,372 ) 2,372 — — — —

Net income — — — — 82,314 — 82,314 226 82,540
Other comprehensive income:
Decrease in net unrealized depreciation on investments — — — 325,660 — — 325,660 — 325,660
Increase in other than temporary impairment losses recognized in other comprehensive income — — — (19,343 ) — — (19,343 ) — (19,343 )
Decrease in net loss on cash flow hedge — — — 589 — — 589 — 589
Change in net periodic pension cost — — — 873 — — 873 — 873

Comprehensive income — — — — — 390,093 226 390,319
Net contribution from noncontrolling interest — — — — — — — 37 37
Issuance of common stock 65 — 121,056 — — — 121,121 — 121,121
Exercise of stock options 5 — 9,189 — — — 9,194 — 9,194
Stock-based compensation — — 6,842 — — — 6,842 — 6,842
Cash dividends — — — — (14,767 ) (14,767 ) — (14,767 )

Balance, September 30, 2009 $ 559 $ 60 $ 659,683 $ (46,303 ) $ 916,309 $ (197,246 ) $ 1,333,062 $ 4,298 $ 1,337,360

(Unaudited)


							Accumulated
	Class A		Class B		Additional		Other									Total			Non-
	Common		Common		Paid in		Comprehensive			Retained			Treasury			Shareholders’			controlling			Total
	Stock		Stock		Capital		Income (Loss)			Earnings			Stock			Equity			Interest			Equity
Balance, January 1, 2009	$	489	$	60	$	522,596	$	(351,710	)	$	846,390		$	(197,246	)	$	820,579		$	4,035		$	824,614


Cumulative effect adjustment, April 1, 2009		—		—		—		(2,372	)		2,372			—			—			—			—
Net income		—		—		—		—			61,491			—			61,491			115			61,606

Other comprehensive income:
Decrease in net unrealized depreciation on investments		—		—		—		132,393			—			—			132,393			—			132,393
Increase in other than temporary impairment losses recognized in other comprehensive income		—		—		—		(12,038	)		—			—			(12,038	)		—			(12,038	)
Decrease in net loss on cash flow hedge		—		—		—		392			—			—			392			—			392
Change in net periodic pension cost		—		—		—		582			—			—			582			—			582


Comprehensive income																	182,820			115			182,935
Net distribution to noncontrolling interest		—		—		—		—			—			—			—			(64	)		(64	)
Issuance of common stock		30		—		51,017		—			—			—			51,047			—			51,047
Exercise of stock options		3				4,014		—			—			—			4,017			—			4,017
Stock-based compensation		—		—		4,592		—			—			—			4,592			—			4,592
Cash dividends		—		—		—		—			(10,922	)		—			(10,922	)		—			(10,922	)


Balance, June 30, 2009	$	522	$	60	$	582,219	$	(232,753	)	$	899,331		$	(197,246	)	$	1,052,133		$	4,086		$	1,056,219


Balance, January 1, 2010	$	560	$	60	$	661,895	$	(33,956	)	$	927,706		$	(197,246	)	$	1,359,019		$	3,546		$	1,362,565


Net income		—		—		—		—			74,614			—			74,614			73			74,687
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																	141,834			73 -			141,907
Net distribution to noncontrolling interest		—		—		—		—			—			—			—			(2,237	)		(2,237	)
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		$	991,266		$	(197,246	)	$	1,498,970		$	1,382		$	1,500,352

See notes to consolidated financial statements.

-5-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)
~~(Unaudited)~~

Nine Months Ended
September 30,
2009 2008
Operating activities:
Net income $ 82,314 $ 38,209
Adjustments to reconcile net income to net cash provided by operating activities:
Change in policy liabilities and policyholder accounts 225,538 194,967
Net change in reinsurance receivables and payables (4,613 ) 18,901
Amortization, principally the cost of business acquired and investments 38,295 46,601
Deferred costs of business acquired (97,936 ) (94,043 )
Net realized losses on investments 99,929 59,675
Net change in federal income tax liability 6,632 (53,654 )
Other (14,101 ) (56,828 )

Net cash provided by operating activities 336,058 267,484

Investing activities:
Purchases of investments and loans made (1,206,214 ) (1,012,307 )
Sales of investments and receipts from repayment of loans 177,957 348,569
Maturities of investments 637,166 311,840
Net change in short-term investments (171,162 ) (158,961 )
Change in deposit in separate account 4,845 10,547

Net cash used by investing activities (557,408 ) (500,312 )

Financing activities:
Deposits to policyholder accounts 242,614 335,082
Withdrawals from policyholder accounts (131,337 ) (83,382 )
Borrowings under revolving credit facility 17,000 79,000
Principal payments under revolving credit facility (2,000 ) (6,000 )
Redemption of junior subordinated deferrable interest debentures — (20,619 )
Proceeds from the issuance of common stock 121,121 —
Acquisition of treasury stock — (42,729 )
Cash dividends paid on common stock (14,767 ) (13,715 )
Other financing activities 7,151 3,200

Net cash provided by financing activities 239,782 250,837

Increase in cash 18,432 18,009
Cash at beginning of period 63,837 51,240

Cash at end of period $ 82,269 $ 69,249

(Unaudited)


	Six Months Ended
	June 30,
	2010			2009
Operating activities:
Net income attributable to shareholders	$	74,614		$	61,491
Adjustments to reconcile net income attributable to shareholders to net cash provided by operating activities:
Change in policy liabilities and policyholder accounts		84,646			137,172
Net change in reinsurance receivables and payables		(11,574	)		(6,663	)
Amortization, principally the cost of business acquired and investments		42,450			24,842
Deferred costs of business acquired		(57,386	)		(64,079	)
Net realized losses on investments		28,980			49,470
Net change in federal income taxes		(3,622	)		5,228
Other		(25,398	)		(15,428	)

Net cash provided by operating activities		132,710			192,033


Investing activities:
Purchases of investments and loans made		(936,660	)		(668,972	)
Sales of investments and receipts from repayment of loans		494,984			130,226
Maturities of investments		176,718			446,734
Net change in short-term investments		55,689			(225,154	)
Change in deposit in separate account		(2,965	)		4,845

Net cash used by investing activities		(212,234	)		(312,321	)


Financing activities:
Deposits to policyholder accounts		122,809			180,624
Withdrawals from policyholder accounts		(54,905	)		(102,969	)
Proceeds from issuance of 2020 Senior Notes		250,000			—
Borrowings under revolving credit facility		—			17,000
Principal payments under revolving credit facility		(222,000	)		(2,000	)
Redemption of senior notes		(5,000	)		—
Proceeds from issuance of common stock		—			51,017
Cash dividends paid on common stock		(11,054	)		(10,922	)
Other financing activities		2,095			2,895

Net cash provided by financing activities		81,945			135,645


Increase in cash		2,421			15,357
Cash at beginning of period		65,464			63,837

Cash at end of period	$	67,885		$	79,194

See notes to consolidated financial statements.

-6-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note A ~~— Significant~~–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 ~~September~~June 30, ~~2008~~2009 and December 31, 2009 consolidated financial statements to conform to the ~~September~~June 30, ~~2009~~2010 presentation. Operating results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2009~~2010 are not necessarily indicative of the results that may be expected for the year ended December 31, ~~2009.~~2010. 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, ~~2008, as amended by Amendment No. 1 thereto on Form 10-K/A~~2009 (the ~~“2008~~“2009 Form 10-K”). Capitalized terms used herein without definition have the meanings ascribed to them in the ~~2008~~2009 Form 10-K.

Accounting Changes

~~Basis of Accounting.~~In June 2009, the Financial Accounting Standards Board (“FASB”) adopted the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative GAAP recognized by the FASB for application by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under federal securities laws are also sources of authoritative GAAP for the SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009, with certain exceptions for nonpublic nongovernmental entities. Since the Codification primarily identifies the sources of authoritative accounting principles that are generally accepted and does not modify any accounting principles, its adoption did not have a material effect on the Company’s consolidated financial position or results of operations.

~~Business Combinations.~~Fair Value Measurements.As of January 1, ~~2009,~~2010, the Company adopted new guidance issued by the ~~FASB~~Financial Accounting Standards Board (“FASB”) requiring additional disclosures regarding fair value measurements. This guidance requires entities to disclose (1) the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy, (2) the reasons for any transfers into or out of Level 3 of the fair value hierarchy and (3) additional information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on ~~business combinations. This~~a gross basis. The new guidance ~~establishes principles~~also clarifies existing fair value measurement disclosure requirements concerning the level of disaggregation and ~~requirements~~the disclosure of valuation inputs and techniques. Except for ~~how~~ the ~~acquirer in~~requirement to separately disclose purchases, sales, issuances and settlements on a ~~business combination: (a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest~~gross basis in the ~~acquiree, (b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and (c) determines what information to disclose to enable users~~reconciliation of the financial statements to evaluate the nature and financial effects of the business combination. This new guidance requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with specified limited exceptions. The newrecurring Level 3 measurements, this guidance is effective for ~~business combinations for which the acquisition date is on or after the beginning of the first~~interim and annual reporting ~~period~~periods beginning ~~on or~~ after December 15, ~~2008. Assets~~2009. The requirement to separately disclose purchases, sales, issuances and ~~liabilities arising from~~settlements on a ~~business combination having an earlier acquisition date are not to be adjusted upon~~gross basis in the ~~effectiveness~~reconciliation of ~~this statement.~~recurring Level 3 measurements is effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of ~~the new~~this guidance did not have any effect on the Company’s consolidated financial position or results of operations.

In April 2009, the FASB issued new guidance for accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. This new guidance addresses application issues relating to initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. Acquirers are now required to recognize at fair value an asset acquired or liability assumed in a business combination that arises from a contingency if the acquisition date fair value of that asset or liability can be determined during the measurement period. If the acquisition date fair value cannot be determined during the measurement period, a contingency shall be recognized if information available before the end of the measurement period indicates that it is probable that an asset existed or liability had been incurred at the acquisition date and the amount thereof can be reasonably estimated. The new guidance is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after January 1, 2009. The adoption of the new guidance did not have any effect on the Company’s consolidated financial position or results of operations.

~~-7-~~

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

~~Note A — Significant Accounting Policies — (Continued)~~

~~Noncontrolling Interests.~~As of January 1, 2009, the Company adopted new guidance issued by the FASB on noncontrolling interests. This new guidance prescribes the accounting for and the financial reporting of a noncontrolling interest in a company’s subsidiary, which is the portion of the equity (residual interest) in the subsidiary attributable to owners thereof other than the parent and the parent’s affiliates. The new guidance requires that a noncontrolling interest in a consolidated subsidiary be presented in a consolidated statement of financial position as a separate component of equity and that changes in ownership interests in a consolidated subsidiary that does not result in a loss of control be recorded as an equity transaction with no gain or loss recognized. For a change in the ownership interests in a consolidated subsidiary that results in a loss of control or a deconsolidation, a gain or loss is recognized in the amount of the difference between the proceeds of that sale and the carrying amount of the interest sold. In the case of a deconsolidation, the new guidance requires the establishment of a new fair value basis for the remaining noncontrolling ownership interest, with a gain or loss recognized for the difference between that new basis and the historical cost basis of the remaining ownership interest. Upon adoption, the amounts of consolidated net income and consolidated comprehensive income attributable to the parent and the noncontrolling interest must be presented separately on the face of the consolidated financial statements. A detailed reconciliation of the changes in the equity of a noncontrolling interest during the period is also required. The adoption of the new guidance did not have a material effect on the Company’s consolidated financial position or results of operations.

~~Derivative Instruments.~~As of January 1, 2009, the Company adopted new guidance issued by the FASB concerning disclosures about derivative instruments and hedging activities. This new guidance requires entities to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. The new guidance requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and credit-risk-related contingent features in derivative instruments. The adoption of the new guidance did not have any effect on the Company’s consolidated financial position or results of operations.

The Company, at times, enters into futures and option contracts and interest rate and credit default swap agreements in connection with its investment strategy and indexed annuity program. These agreements are primarily utilized to reduce the risk associated with changes in the value of the Company’s fixed maturity portfolio and to fund the interest crediting obligations associated with the Company’s indexed annuity contracts. These positions are carried at fair value with gains and losses included in income. The Company recognized net investment income of $1.6 million during the nine months ended September 30, 2009 related to these instruments. The Company had no material outstanding futures and option contracts or interest rate and credit default swap agreements at September 30, 2009. 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 currency forward contracts outstanding at September 30, 2009.

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, of which $12.1 million was recorded in accumulated other comprehensive income and the remaining loss was deemed ineffective and recognized as a reduction of net investment income. This transaction was accounted for as a cash flow hedge; accordingly, $12.1 million of the loss on the treasury rate lock agreement is being amortized into interest expense ratably over 10 years. The Company will amortize $1.2 million of such loss into interest expense over the next twelve months. The Company recognized $0.9 million of such loss into interest expense during the first nine months of 2009 and 2008. The net loss on the treasury rate lock agreement included in accumulated other comprehensive loss was $2.9 million (net of an income tax benefit of $1.6 million) at September 30, 2009.

~~Earnings Per Share.~~As of January 1, 2009, the Company adopted new guidance issued by the FASB on determining whether instruments granted in share-based payment transactions are participating securities. This new guidance addresses whether unvested instruments granted in share-based payment transactions are participating

~~-8-~~

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

~~Note A — Significant Accounting Policies — (Continued)~~

securities which must be included in the earnings allocation in computing earnings per share. The new guidance provides guidance for the calculation of earnings per share for share-based payment awards with rights to dividends or dividend equivalents. The adoption of the new guidance did not have a material effect on the Company’s consolidated financial position or results of operations.

~~Fair Value Measurements.~~Effective April 1, 2009, the Company adopted new guidance issued by the FASB on interim disclosures about fair value of financial instruments. This new guidance requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. The adoption of the new guidance did not have a material effect on the Company’s consolidated financial position or results of operations.

Effective April 1, 2009, the Company adopted new guidance issued by the FASB on determining fair value which provides additional guidance for estimating fair value of financial instruments when the volume and level of activity for the asset or liability have significantly decreased. It also provides guidance on identifying circumstances indicating that a transaction is not orderly, and indicates that significant decreases in the volume and level of activity of an asset or liability in relation to normal market activity for the asset or liability require a company to further evaluate transactions or quoted prices and exercise significant judgment in arriving at the fair value. The adoption of the new guidance did not have a material effect on the Company’s consolidated financial position or results of operations

~~Other Than Temporary Impairments.~~Effective April 1, 2009, the Company adopted new guidance on the recognition and presentation of other than temporary impairments. Under this new guidance, which applies only to debt securities, companies are required to recognize in earnings only the credit component of an other than temporary impairment. The remainder of the impairment will continue to be recognized in other comprehensive income. The new guidance also modifies the existing requirement for a company to assert that it has both the intent and the ability to hold a security for a period of time sufficient to allow for an anticipated recovery in its fair value to its amortized cost basis. In lieu of this requirement, a company is only required to assert that it does not have the intent to sell the debt security and that it is more likely than not that it will not be required to sell the debt security before its anticipated recovery. Upon its adoption of the new guidance, the Company recorded an after-tax increase of $2.4 million in retained earnings and a decrease in the same amount in other comprehensive income to reclassify the non-credit related portion of previously recognized other than temporary impairments on fixed maturity securities held as of April 1, 2009.

~~Subsequent events.~~In May 2009, the FASB issued new guidance on subsequent events. This new guidance establishes principles for accounting and disclosure of events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. The new guidance requires an entity to (a) recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements, (b) disclose the nature and financial effect of subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but must be disclosed to keep the financial statements from being misleading, and (c) evaluate subsequent events for recognition and disclosure through the date the financial statements are issued or are available to be issued. The new guidance also requires entities to disclose the date through which subsequent events have been evaluated. The new guidance is effective for financial statements for interim and annual periods ending after June 15, 2009. Accordingly, the Company evaluated subsequent events for recognition and disclosure through the filing date of this Form 10-Q. The adoption of this new guidance did not have any effect on the Company’s consolidated financial position or results of operations.

~~-9-~~

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

~~Note A — Significant Accounting Policies — (Continued)~~

Recently Issued Accounting Standards

In ~~June 2009,~~April 2010, the FASB issued ~~new~~ guidance onclarifying that an insurance company should not consider any separate account interests in an investment held for the benefit of policy holders 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 a subsidiary for purposes of evaluating whether the retention of specialized accounting for ~~the transfers of financial assets.~~investments in consolidation is appropriate. This new guidance aims to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial reports about transfers of financial assets, the effects of a transfer of financial assets on its financial position, financial performance, and cash flows and a transferor’s continuing involvement in transferred financial assets. This new guidance removes the concept of a qualifying special-purpose entity from the existing guidance and removes the exception from applying applicable consolidation guidance to variable interest entities that were considered qualifying special-purpose entities. The new guidance is effective for ~~financial statements for~~fiscal years, and interim ~~and annual~~ periods ~~ending~~within those fiscal years, beginning after ~~November~~December 15, ~~2009 and the transfers occurring on or after the effective date.~~2010. Early adoption is permitted. The Company has not yet determined the impact, if any, that the adoption of ~~SFAS No. 166 will have on its consolidated financial position and results of operations.~~

In June 2009, the FASB issued new guidance on the accounting for variable interest entities (“VIEs”). This new guidance requires ongoing assessments of whether an enterprise is a primary beneficiary of a VIE and replaces the quantitative approach to identifying variable interest entities and determining a variable interest entity’s primary beneficiary with a qualitative method. The qualitative method is based on an enterprise’s (a) power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (b) obligation to absorb losses or right to receive benefits that could be potentially material to the VIE. The new guidance also requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a VIE. The new guidance is effective for financial statements for interim and annual periods ending after November 15, 2009. The Company has not yet determined the impact, if any, that the adoption of the newthis guidance will have on its consolidated financial position ~~and results of operations.~~

In August 2009, the FASB issued guidance clarifying that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value of a liability using techniques such as referring to the quoted price of the identical liability when traded as an asset, the quoted prices for similar liabilities, the quoted price of similar liabilities when traded as assets or a present value technique. The fair value of a liability is not adjusted to reflect the impact of contractual restrictions that prevent its transfer. The new guidance is effective for financial statements for interim and annual periods beginning after August 26, 2009, with early adoption permitted under certain conditions. The Company has not yet determined the impact, if any, that the adoption of the new guidance will have on its consolidated financial position and results of operations.

In September 2009, the FASB issued guidance on determining fair value for investments in certain entities that calculate net asset value per share or its equivalent. This new guidance permits the fair value of an investment in such an entity to be measured on the basis of the entity’s reported net asset value per share if the net asset value is calculated in a manner consistent with the measurement principles of GAAP for investment companies and requires enhanced disclosures about the nature and risks of investments in such entities. The standard is effective for interim and annual periods ending after December 15, 2009. The Company has not yet determined the impact, if any, that the adoption of the new guidance will have on its consolidated financial position and results of operations.

Note B—–Investments

At ~~September~~June 30, 2010, the Company had fixed maturity securities available for sale with an amortized cost of $5,263.4 million and a carrying value and a fair value of $5,326.2 million. At December 31, 2009, the Company had fixed maturity securities available for sale with an amortized cost of $4,933.4 million and a carrying value and a fair value of $4,608.2 million and an amortized cost of $4,666.8 million. At December 31, 2008, the Company had fixed maturity securities available for sale with a carrying value and a fair value of $3,773.4 million and an amortized cost of $4,322.0$4,875.7 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 ~~as further discussed below,~~and to represent credit losses are reflected as reductions in the amortized cost of such ~~securities.~~securities, as further discussed below.

~~-10-~~-7-

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

Note B – Investments – (Continued)


	Non-Agency Prime RMBS – Fair Value
									BB and
Vintage	AAA		AA		A		BBB		Below⁽¹⁾		Total
	(dollars in thousands)
2001 and prior	$	2,348	$	—	$	—	$	—	$	76	$	2,424
2002		8,823		1,692		3,365		—		696		14,576
2003		90,744		2,190		3,682		9,000		9,919		115,535
2004		44,753		1,346		—		2,060		9,634		57,793
2005		5,822		2,303		1,778		18,544		51,518		79,965
2006		15,060		503		—		—		27,703		43,266
2007		—		—		—		—		87,025		87,025
2008		1,103		—		—		599		—		1,702

Total	$	168,653	$	8,034	$	8,825	$	30,203	$	186,571	$	402,286


⁽¹⁾		The securities enumerated in this column include securities having a total of $162.7 million in fair value that have received the equivalent of an investment grade rating from the National Association of Insurance Commissioners (the “NAIC”) under the process initiated by the NAIC in 2009 which takes into account, among other things, the discounts at which the Company originally purchased the securities and modeling of the potential losses with respect to the securities’ underlying loans.


	Non-Agency Alt-A RMBS – Fair Value
									BB and
Vintage	AAA		AA		A		BBB		Below⁽¹⁾		Total
	(dollars in thousands)
2001 and prior	$	—	$	—	$	—	$	2,023	$	—	$	2,023
2002		383		1,999		—		—		—		2,382
2003		45,257		—		—		—		3,126		48,383
2004		19,885		920		145		706		1,939		23,595
2005		2,565		16,139		—		1,137		38,939		58,780
2006		11,072		31		6,212		9,000		65,542		91,857
2007		346		—		—		9		111,208		111,563

Total	$	79,508	$	19,089	$	6,357	$	12,875	$	220,754	$	338,583


⁽¹⁾		The securities enumerated in this column include securities having a total of $188.4 million in fair value that have received the equivalent of an investment grade rating from the NAIC under the process initiated by the NAIC in 2009 which takes into account, among other things, the discounts at which the Company originally purchased the securities and modeling of the potential losses with respect to the securities’ underlying loans.

-9-

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

Note B – Investments – (Continued)


	Non-Agency Subprime RMBS – Fair Value
									BB and
Vintage	AAA		AA		A		BBB		Below⁽¹⁾		Total
	(dollars in thousands)
2003	$	9,583	$	—	$	—	$	—	$	—	$	9,583
2004		13,201		—		808		3,578		835		18,422
2005		8,071		16,844		472		—		—		25,387
2006		—		—		—		3,345		78		3,423
2007		—		—		—		—		391		391

Total	$	30,855	$	16,844	$	1,280	$	6,923	$	1,304	$	57,206


⁽¹⁾		The securities enumerated in this column include securities having a total of $0.7 million in fair value that have received the equivalent of an investment grade rating from the NAIC under the process initiated by the NAIC in 2009 which takes into account, among other things, the discounts at which the Company originally purchased the securities and modeling of the potential losses with respect to the securities’ underlying loans.

The amortized cost and fair value of fixed maturity securities available for sale at ~~September~~June 30, ~~2009,~~2010, 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		Amortized		Fair
	Cost		Value		Cost		Value
	(dollars in thousands)				(dollars in thousands)
Residential mortgage-backed securities	$	1,493,735	$	1,464,027
Agency residential mortgage-backed securities					$	753,523	$	807,806
Non-agency residential mortgage-backed securities						807,633		798,075
Commercial mortgage-backed securities		34,962		27,685		34,503		34,138

Other fixed maturity securities:
One year or less		57,017		57,097		57,469		55,849
Greater than 1, up to 5 years		493,228		495,930		569,248		580,867
Greater than 5, up to 10 years		851,477		830,221		873,263		858,920
Greater than 10 years		1,736,375		1,733,224		2,167,805		2,190,518

Total	$	4,666,794	$	4,608,184	$	5,263,444	$	5,326,173

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:


	September 30, 2009															June 30, 2010
	Less Than 12 Months					12 Months or More					Total					Less Than 12 Months					12 Months or More					Total
			Gross					Gross					Gross					Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses
	(dollars in thousands)															(dollars in thousands)
Residential mortgage-backed securities	$	36,605	$	(139	)	$	446,865	$	(117,619	)	$	483,470	$	(117,758	)
Agency residential mortgage-backed securities																$	9,171	$	(39	)	$	283	$	(14	)	$	9,454	$	(53	)
Non-agency residential mortgage-backed securities																	54,187		(3,490	)		276,312		(70,221	)		330,499		(73,711	)
Commercial mortgage-backed securities		—		—			24,111		(7,441	)		24,111		(7,441	)		888		(1	)		8,689		(1,358	)		9,577		(1,359	)
Corporate securities		20,419		(180	)		313,002		(40,241	)		333,421		(40,421	)		88,670		(4,283	)		111,635		(19,301	)		200,305		(23,584	)
Collateralized debt obligations		—		—			112,854		(101,703	)		112,854		(101,703	)		16,216		(5,738	)		102,553		(84,054	)		118,769		(89,792	)
U.S. Treasury and other U.S. Government guaranteed securities		—		—			—		—			—		—			18,929		(433	)		—		—			18,929		(433	)
U.S. Government-sponsored enterprise securities		—		—			—		—			—		—			1,399		(1	)		—		—			1,399		(1	)
Obligations of U.S. states, municipalities & political subdivisions		37,128		(196	)		142,204		(10,843	)		179,332		(11,039	)
Obligations of U.S. states, municipalities and political subdivisions																	247,196		(3,043	)		142,802		(9,947	)		389,998		(12,990	)

Total fixed maturity securities	$	94,152	$	(515	)	$	1,039,036	$	(277,847	)	$	1,133,188	$	(278,362	)	$	436,656	$	(17,028	)	$	642,274	$	(184,895	)	$	1,078,930	$	(201,923	)

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,
	2010			2009			2010			2009
	(dollars in thousands)
Gross investment income:
Fixed maturity securities, available for sale	$	80,500		$	77,222		$	161,183		$	147,706
Mortgage loans		1,405			207			3,318			1,406
Short-term investments		17			74			37			322
Other		2,095			22,875			11,347			22,076

		84,017			100,378			175,885			171,510
Less: Investment expenses		(5,783	)		(8,355	)		(13,601	)		(16,632	)

	$	78,234		$	92,023		$	162,284		$	154,878

Net realized investment losses arose from the following:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
	(dollars in thousands)
Credit related other than temporary impairment losses:
Fixed maturity securities, available for sale	$	(9,395	)	$	(22,871	)	$	(26,962	)	$	(35,057	)
Mortgage loans		(10,210	)		(518	)		(15,101	)		(2,018	)
Other investments		(1,228	)		(1,520	)		(1,768	)		(5,442	)

		(20,833	)		(24,909	)		(43,831	)		(42,517	)


Other net realized investment gains (losses):
Fixed maturity securities, available for sale		5,628			(2,682	)		11,746			(8,953	)
Mortgage loans		345			—			419			—
Other investments		986			120			2,686			2,000

		6,959			(2,562	)		14,851			(6,953	)

Total	$	(13,874	)	$	(27,471	)	$	(28,980	)	$	(49,470	)

Proceeds from sales of fixed maturity securities during the first ~~nine~~six months of 2010 and 2009 ~~and 2008~~ were ~~$394.2~~$257.5 million and ~~$196.8~~$317.9 million, respectively. Gross gains of ~~$17.4~~$16.3 million and gross losses of ~~$(25.6)~~$4.6 million were realized on the ~~2009~~2010 sales and gross gains of ~~$2.6~~$13.7 million and gross losses of ~~$(9.9)~~$22.6 million were realized on the ~~2008~~2009 sales. Proceeds from sales of fixed maturity securities during the ~~third~~second quarters of 2010 and 2009 ~~and 2008~~ were ~~$76.2~~$153.9 million and ~~$90.7~~$94.8 million, respectively. Gross gains of ~~$3.7~~$6.9 million and gross losses of ~~$(3.1)~~$1.3 million were realized on the 2010 sales ~~during the third quarter~~and $5.8 million of ~~2009 and~~ gross gains ~~of $0.4 million~~ and gross losses of ~~$(5.6)~~$8.5 million were realized on ~~sales during~~ the ~~third quarter of 2008.~~2009 sales. Net realized investment gains and losses on investment sales are determined under the specific identification method and are included in income. In the first nine months of 2009 and 2008 the net losses realized on fixed maturity securities also include provisions for the other than temporary declines in the values of certain fixed maturity securities of $(77.7) million and $(41.4) million, respectively. 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, ~~changes in~~ the expected amount orand timing of ~~expected~~ future cash flows from the investment, ~~and~~ 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. ~~Management also considers~~In the ~~length~~case of ~~time~~structured securities such as RMBS, commercial mortgage-backed securities and ~~extent to which~~collateralized debt obligations, the ~~fair value~~ most significant factor in these evaluations is the expected amount and timing

-12-

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

Note B – Investments – (Continued)

of the ~~investment is lower than its~~future cash flows from the investment. In the case of fixed maturity securities, where management determines that a security’s amortized cost ~~and evaluates~~will be recovered during its remaining term to maturity, an additional component of this methodology is the Company’s evaluation of whether ~~the Company~~it intends to, or will more likely than not be required to, sell the ~~investment~~security before ~~the~~such anticipated recovery in the investment’s fair value. In addition, the Company evaluates loan to collateral value ratios, current levels of subordination and vintages of its residential and commercial mortgage-backed securities.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.~~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 ~~not~~ be required to do so, ~~declines~~a decline in ~~the~~its fair value that ~~are~~is considered in the judgment of management to be other than temporary ~~are~~is separated into the ~~amounts~~amount representing credit ~~losses~~loss and the ~~amounts~~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. ~~The amount of credit loss is determined by discounting the security’s expected cash flows at its effective interest rate, taking into account the security’s purchase price.~~ 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.~~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 2010 as a result of determinations that such securities were other than temporarily impaired, representative default frequency estimates ranged from 2.3% to 6.9% and representative default severity estimates ranged from 37.6% to 60.0%.

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 obtained from a nationally recognized pricing service. The credit loss is determined to be equal to the excess of the Company’s amortized cost over such market price for such security, as measured at the time of the impairment; as such, the entirety of the market depreciation in value is deemed to be reflective of credit loss in the income statement.

At June 30, 2010, the total amortized cost of the Company’s holdings of collateralized debt obligations was $209.1 million and their total fair value was $119.9 million. These holdings consist of a highly diversified portfolio of fifty-two different collateralized loan obligation (“CLO”) investments, substantially all of which are within senior tranches in the CLO structure and a substantial majority of which were issued in the 2004-2007 time frame. Substantially all of these CLOs are collateralized by an actively managed, highly diversified portfolio of floating rate senior secured loans to numerous public and private corporate borrowers. The recent global financial crisis has resulted in significant and ongoing dislocations in the market for securities of this type, resulting in the cessation of new issuances of such securities and decreased market liquidity for existing issues, such as those held by the Company, as well as widespread and significant declines in their market values. However, to date, the Company’s CLO holdings have performed in accordance with their contractual payment terms (with the exception of two securities, which management has determined to be other than temporarily impaired). Moreover, despite the extraordinarily challenging environment that has prevailed in recent years due to the global financial crisis, the defaults having occurred on the loans underlying these CLOs since their issuances, taking into account their incidence and severity, have been at levels at which losses to the holders of the CLOs would be borne solely by the securities in the subordinated tranches. Based upon this actual experience and upon the Company’s estimates of the future cash flows with respect to these CLOs, which take into account the estimated frequency and severity of future defaults on the underlying loans, as well as the senior positions of the individual CLOs in their securitization structures and the sizes of the subordinate tranches in these structures that would first absorb losses arising from such defaults, and taking into account that the Company does not intend to sell any of these securities and that it is not more likely than not that it will be required to do so before recovery of the security’s amortized cost basis in any instance, the Company concluded that the declines in the market values of these securities did not represent other than temporary impairments. The Company will continue to conduct evaluations of these securities for other than temporary

-13-

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

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.

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 1l 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.

~~Residential mortgage-backed securities and commercial mortgage-backed securities include U.S. agency securities and collateralized mortgage obligations.~~ The Company uses various valuation techniques and pricing models to measure the fair value of ~~these instruments,~~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 Company’s 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 varying numbers of non-binding broker quotes or a discount rate adjustment technique based on

-15-

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

~~Note C – Fair Value Measurements – (Continued)~~

Corporate securities primarily include fixed rate corporate bonds, floating and variable rate notes and securities acquired through private placements. ~~The Company uses~~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, ~~and~~ issuer spreads ~~to arrive at~~and, in the ~~fair value~~case of its investments in corporate securities and collateralized debt obligations. The majority of the corporate securities, other than securities acquired through private placements, are categorized in Level 2 of the fair value hierarchy. Collateralized debt obligations and private placement corporate securities, ~~are valued with~~cash flow models. These cash flow models ~~using~~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, which are described in more detail in Note B. Inputs utilized in connection with the Company’s valuation techniques relating to this class of securities include cash flow models which utilize yield curves, market spreads for similar securities, issuer-provided information and material events as key inputs, as well as market yields. As these inputs are generally unobservable, collateralized debt obligations ~~and private placement securities~~ are categorized in Level 3 of the fair value hierarchy.

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.

~~Other~~Inputs utilized in connection with the Company’s valuation techniques relating to its investments in other U.S. government guaranteed securities, ~~are valued based on observable inputs including~~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. ~~Accordingly, these securities are generally categorized in Level 2 of the fair value hierarchy.~~

U.S. government-sponsored enterprise securities include issues of medium term notes by U.S. government-sponsored enterprises. The Company uses recently executed transactions, market price quotations, benchmark yields and issuer spreads to arrive at the fair value of these 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. ~~The Company values these~~Inputs utilized in connection with the Company’s valuation techniques relating to this class of securities ~~using~~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 ~~trustee reports.~~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, ~~incorporating,~~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 ~~entities~~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.~~investment. 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. The Company 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. These investments are included in Level 3 of the fair value hierarchy.

-16-

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

Note C – Fair Value Measurements – (Continued)

Other liabilities measured at fair value include 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.

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


	June 30, 2010
	Total		Level 1		Level 2		Level 3
	(dollars in thousands)
Assets:
Fixed maturity securities, available for sale:
Agency residential mortgage-backed securities	$	807,806	$	—	$	770,524	$	37,282
Non-agency residential mortgage-backed securities		798,075		—		686,818		111,257
Commercial mortgage-backed securities		34,138		—		7,008		27,130
Corporate securities		1,288,680		—		1,220,901		67,779
Collateralized debt obligations		119,892		—		—		119,892
U.S. Treasury and other U.S. Government guaranteed securities		221,242		153,302		56,495		11,445
U.S. Government-sponsored enterprise securities		94,060		—		80,266		13,794
Obligations of U.S. states, municipalities and political subdivisions		1,962,280		—		1,962,280		—
Other investments		91,715		85,525		—		6,190
Assets held in separate account		113,532		—		—		113,532

Total	$	5,531,420	$	238,827	$	4,784,292	$	508,301


Liabilities:
Other liabilities	$	66,547	$	66,547	$	—	$	—

The following table provides reconciliations for Level 3 assets measured at fair value on a recurring basis. Transfers into Level 3 are recognized as of the end of the period.


	Three Months Ended June 30, 2010
						Total
						(Losses) Gains
						Included			Purchases
	Balance at		Included			in Other			Issuances			Transfers		Transfers			Balance at
	Beginning of		in			Comprehensive			and			Into		Out			End of the
	Quarter		Earnings			Income			Settlements			Level 3		Level 3			Period
	(dollars in thousands)
Agency residential mortgage-backed securities	$	36,102	$	(57	)	$	1,144		$	93		$	—	$	—		$	37,282
Non-agency residential mortgage- backed securities		118,111		(4,330	)		1,253			(3,642	)		—		(135	)		111,257
Commercial mortgage-backed securities		26,296		(189	)		1,155			(132	)		—		—			27,130
Corporate securities		88,468		(1,326	)		370			(11,893	)		—		(7,840	)		67,779
Collateralized debt obligations		115,029		1,164			4,027			(328	)		—		—			119,892
U.S. Treasury and other U.S. Government guaranteed securities		5,439		(2	)		(325	)		6,333			—		—			11,445
U.S. Government-sponsored enterprise securities		—		3			25			13,766			—		—			13,794
Other Investments		9,364		643			(191	)		(3,626	)		—		—			6,190
Assets held in separate account		115,277		—			—			(1,745	)		—		—			113,532

Total	$	514,086	$	(4,094	)	$	7,458		$	(1,174	)	$	—	$	(7,975	)	$	508,301

~~-16-~~-17-

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~~Net losses for the period included in earnings attributable to the ~~consolidated balance sheet on a recurring basis are summarized below:~~

September 30, 2009
Total Level 1 Level 2 Level 3
(dollars in thousands)
Assets:

Fixed maturity securities, available for sale:
Residential mortgage-backed securities $ 1,464,027 $ 761 $ 1,303,745 $ 159,521
Commercial mortgage-backed securities 27,685 — — 27,685
Corporate securities 1,253,530 2,958 1,131,255 119,317
Collateralized debt obligations 119,268 — — 119,268
U.S. Treasury and other U.S. Government guaranteed securities 105,982 74,135 29,110 2,737
U.S. Government-sponsored enterprise securities 7,351 — 7,351 —
Obligations of U.S. states, municipalities and political subdivisions 1,630,341 — 1,630,341 —
Other investments 128,041 111,574 — 16,467
Assets held in separate account 109,016 — — 109,016

Total $ 4,845,241 $ 189,428 $ 4,101,802 $ 554,011

Liabilities:

Other liabilities $ 58,695 $ 58,695 $ — $ —

~~The following table provides reconciliations for Level 3~~net change in unrealized losses of assets measured at fair value ~~on a recurring basis.~~using unobservable inputs and held at June 30, 2010 included non-agency residential mortgage-backed securities ($4.3 million), commercial mortgage-backed securities ($0.2 million) and corporate securities ($1.4 million). In the second quarter of 2010, net losses of $5.9 million were reported in the consolidated statements of income under the caption “net realized investment losses”.

Three Months Ended September 30, 2009
U.S.
Treasury and
Residential Commercial Other U.S. Assets
Mortgage- Mortgage- Collateralized Gov’t held in
backed backed Corporate Debt Guaranteed Other Separate
Total Securities Securities Securities Obligations Securities Investments Account
(dollars in thousands)
Balance at beginning of quarter $ 554,020 $ 180,356 $ 18,736 $ 131,745 $ 103,499 $ 2,185 $ 17,310 $ 100,189
Total (losses) gains
Included in earnings (29,829 ) (1,077 ) (4,794 ) (19,917 ) (3,095 ) — (946 ) —
Included in other comprehensive income 37,839 1,764 13,868 2,740 19,273 59 135 —
Purchases, issuances and settlements 26,326 10,307 (125 ) 7,265 (409 ) 493 (32 ) 8,827
Net transfer (out of) in to Level 3 (34,345 ) (31,829 ) — (2,516 ) — — — —

Balance at end of the period $ 554,011 $ 159,521 $ 27,685 $ 119,317 $ 119,268 $ 2,737 $ 16,467 $ 109,016

Net losses for the period included in earnings attributable to the net change in unrealized gains and losses of assets measured at fair value using unobservable inputs and held at September 30, 2009⁽¹⁾
$ (38,893 ) $ (8,826 ) $ (4,887 ) $ (19,933 ) $ (4,295 ) $ — $ (952 ) $ —


	Six Months Ended June 30, 2010
						Total
						(Losses) Gains
						Included			Purchases
	Balance at		Included			in Other			Issuances			Transfers		Transfers			Balance at
	Beginning of		in			Comprehensive			and			Into		Out			End of the
	Year		Earnings			Income			Settlements			Level 3		Level 3			Period
	(dollars in thousands)
Agency residential mortgage-backed securities	$	13,187	$	(197	)	$	1,124		$	23,168		$	—	$	—		$	37,282
Non-agency residential mortgage- backed securities		130,326		(14,142	)		3,348			(8,140	)		—		(135	)		111,257
Commercial mortgage-backed securities		26,009		(1,385	)		3,208			(702	)		—		—			27,130
Corporate securities		95,920		(3,558	)		208			(17,044	)		3,825		(11,572	)		67,779
Collateralized debt obligations		114,444		(2,101	)		11,674			(4,125	)		—		—			119,892
U.S. Treasury and other U.S. Government guaranteed securities		11,367		(24	)		(332	)		434			—		—			11,445
U.S. Government-sponsored enterprise securities		—		3			25			13,766			—		—			13,794
Other investments		9,707		466			(359	)		(3,624	)		—		—			6,190
Assets held in separate account		113,488		—			—			44			—		—			113,532

Total	$	514,448	$	(20,938	)	$	18,896		$	3,777		$	3,825	$	(11,707	)	$	508,301

Net losses for the period included in earnings attributable to the net change in unrealized losses of assets measured at fair value using unobservable inputs and held at June 30, 2010 included non-agency residential mortgage-backed securities ($14.2 million), commercial mortgage-backed securities ($1.4 million), corporate securities ($4.6 million), collateralized debt obligations ($2.2 million) and other investments ($0.2 million). In the first half of 2010, net losses of $0.2 million and $22.4 million were reported in the consolidated statements of income under the captions “net investment income” and “net realized investment losses”, respectively.


~~(1)~~		In the third quarter of 2009, net losses of $0.5 million and $38.4 million were reported in the consolidated statements of income under the captions “net investment income” and “net realized investment losses”, respectively.

~~-17-~~

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

~~Note C – Fair Value Measurements – (Continued)~~

Nine months Ended September 30, 2009
U.S.
Treasury and
Residential Commercial Other U.S. Assets
Mortgage- Mortgage- Collateralized Gov’t held in
backed backed Corporate Debt Guaranteed Other Separate
Total Securities Securities Securities Obligations Securities Investments Account
(dollars in thousands)
Balance at beginning of period $ 735,379 $ 163,004 $ 25,299 $ 323,043 $ 109,358 $ 2,608 $ 21,494 $ 90,573
Total (losses) gains
Included in earnings (61,614 ) (23,395 ) (4,305 ) (30,428 ) (3,993 ) — 507 —
Included in other comprehensive income 43,499 15,791 11,614 3,245 14,185 47 (1,383 ) —
Purchases, issuances and settlements (117,633 ) 19,444 (4,923 ) (146,246 ) (282 ) 82 (4,151 ) 18,443
Net transfer (out of) in to Level 3 (45,620 ) (15,323 ) — (30,297 ) — — — —

Balance at end of the period $ 554,011 $ 159,521 $ 27,685 $ 119,317 $ 119,268 $ 2,737 $ 16,467 $ 109,016

Net losses for the period included in earnings attributable to the net change in unrealized gains and losses of assets measured at fair value using unobservable inputs and held at September 30, 2009⁽¹⁾
$ (68,480 ) $ (32,057 ) $ (4,887 ) $ (21,530 ) $ (7,471 ) $ — $ (2,535 ) $ —


~~(1)~~		In the first nine months of 2009, net losses of $1.1 million and $67.4 million were reported in the consolidated statements of income under the captions “net investment income” and “net realized investment losses”, respectively.

The carrying value and estimated fair value of certain of the Company’s financial instruments ~~which are~~ not recorded ~~at fair value on the consolidated balance sheets are shown below, excluding financial instruments measured~~ at fair value in the consolidated balance sheets ~~on a recurring basis.~~are shown below. Because fair values for all balance sheet items are not included, the aggregate fair value amounts presented below are not reflective of the underlying value of the Company.


	September 30, 2009				December 31, 2008				June 30, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair		Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value		Value		Value		Value		Value
	(dollars in thousands)								(dollars in thousands)
Assets:
Short-term investments		572,802		572,802		401,620		401,620		351,093		351,093		406,782		406,782
Other investments		414,006		414,006		336,411		336,411		331,588		331,588		370,565		370,565

Liabilities:
Policyholder account balances		1,348,748		1,504,396		1,214,024		1,160,047		1,442,575		1,580,234		1,351,565		1,471,669
Corporate debt		365,750		351,375		350,750		289,168		388,750		415,202		365,750		361,754
Junior subordinated debentures		175,000		119,000		175,000		85,400		175,000		138,250		175,000		124,600
Advances from Federal Home Loan Bank		55,342		72,378		55,342		75,861		55,342		73,710		55,342		68,320
Liabilities related to separate account		109,016		109,016		90,573		90,573		113,532		113,532		113,488		113,488

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

Note C – Fair Value Measurements – (Continued)

The carrying values for short-term investments approximate fair values based on the nature of the investments. Other ~~invested assets~~investments primarily include investment funds organized as limited partnerships and limited liability companies and real estate investment held by limited liability companies which are reflected in the Company’s financial statements under the equity method of accounting. In determining the fair value of such investments for purposes of this footnote disclosure, the Company concluded that the value calculated using the equity method of accounting 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. The Company 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. The carrying values of all other invested assets and separate account liabilities approximate their fair value.

~~-18-~~

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

~~Note C – Fair Value Measurements – (Continued)~~

~~Policyholder~~The fair value of policyholder account balances are net of reinsurance receivables and the carrying values have been decreased for related acquisition costs of ~~$90.5~~$79.4 million and ~~$125.1~~$94.0 million at ~~September~~June 30, ~~2009~~2010 and December 31, ~~2008,~~2009, respectively. Fair values for policyholder account balances were determined by estimating future cash flows discounted at a current market rate.

The Company believes the fair value of its variable rate long-term debt is equal to its carrying value. The Company pays variable rates of interest on this debt, which are reflective of market conditions in effect from time to time. The fair values of the ~~8.00%~~2033 Senior Notes, 7.875% Senior Notes due ~~2033~~2020 (“~~2033~~2020 Senior Notes”) and the 7.376% fixed-to-floating rate junior subordinated debentures due 2067 (“Junior Subordinated 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 D – Corporate Debt

On January 20, 2010, the Company issued the 2020 Senior Notes pursuant to an effective registration statement. The 2020 Senior Notes were issued in an aggregate principal amount of $250 million with an interest rate of 7.875% and a maturity date of January 31, 2020. The interest on the 2020 Senior Notes will be paid semi-annually in arrears on January 31 and July 31, commencing on July 31, 2010. The 2020 Senior Notes may be redeemed in whole at any time or in part from time to time, at the Company’s option, at a redemption price equal to the greater of 100% of the principal amount of the 2020 Senior Notes being redeemed and the applicable make-whole amount (which, in general, would consist of the sum of the present values of the remaining scheduled payments of principal and interest on the 2020 Senior Notes being redeemed discounted to the redemption date by the applicable U.S. Treasury security yield plus an applicable spread), in each case plus any accrued and unpaid interest. The Company used the proceeds from the issuance of the 2020 Senior Notes to repay in full the $222.0 million of outstanding borrowings under the Amended Credit Agreement and for general corporate purposes.

During the second quarter of 2010, the Company repurchased $5.0 million principal amount of the 2033 Senior Notes and recognized a resulting loss of $0.1 million, net of an income tax benefit of $0.07 million. In addition, on July 14, 2010, the Company redeemed $20.0 million in aggregate principal amount of its 2033 Senior Notes. Finally on August 6, 2010, the Company gave notice of redemption of an additional $50.0 million in aggregate principal amount of the 2033 Senior Notes. Such redemption will occur on September 21, 2010. After giving effect to these redemptions, $68.8 million in aggregate principal amount of the notes will remain outstanding.

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

Note E — Segment Information


	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	September 30,						September 30,						June 30,						June 30,
	2009			2008			2009			2008			2010			2009			2010			2009
				(dollars in thousands)									(dollars in thousands)
Revenues:
Group employee benefit products	$	385,809		$	341,978		$	1,163,866		$	1,057,008		$	386,872		$	396,536		$	773,163		$	778,057
Asset accumulation products		32,775			10,518			95,740			50,418			30,490			35,464			62,087			62,965
Other⁽¹⁾		12,708			11,939			36,730			33,160			13,438			12,468			27,363			24,022

		431,292			364,435			1,296,336			1,140,586			430,800			444,468			862,613			865,044

Net realized investment losses		(50,459	)		(33,740	)		(99,929	)		(59,675	)		(13,874	)		(27,471	)		(28,980	)		(49,470	)
Loss on redemption of junior subordinated deferrable interest debentures underlying the Company-obligated mandatorily redeemable capital securities issued by unconsolidated subsidiaries		—			(598	)		—			(598	)
Loss on redemption of senior notes														(212	)		—			(212	)		—

	$	380,833		$	330,097		$	1,196,407		$	1,080,313		$	416,714		$	416,997		$	833,421		$	815,574

Operating income (loss):
Operating income:
Group employee benefit products	$	74,678		$	32,979		$	212,284		$	140,771		$	68,843		$	78,771		$	139,675		$	137,606
Asset accumulation products		13,792			(6,246	)		35,497			4,504			11,316			13,667			21,728			21,705
Other⁽¹⁾		(7,814	)		(6,164	)		(24,882	)		(19,798	)		(6,983	)		(8,919	)		(14,300	)		(16,953	)

		80,656			20,569			222,899			125,477			73,176			83,519			147,103			142,358

Net realized investment losses		(50,459	)		(33,740	)		(99,929	)		(59,675	)		(13,874	)		(27,471	)		(28,980	)		(49,470	)
Loss on redemption of junior subordinated deferrable interest debentures underlying the Company-obligated mandatorily redeemable capital securities issued by unconsolidated subsidiaries		—			(598	)		—			(598	)
Loss on redemption of senior notes														(212	)		—			(212	)		—

	$	30,197		$	(13,769	)	$	122,970		$	65,204		$	59,090		$	56,048		$	117,911		$	92,888

~~DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Unaudited)~~2010.

Note FG – Stock-Based Compensation

The Company recognized stock-based compensation expenses of ~~$7.7~~$4.5 million and ~~$7.4~~$4.9 million in the first ~~nine~~six months of ~~2009~~2010 and ~~2008,~~2009, respectively, of which ~~$2.8~~$2.3 million and ~~$2.1~~$2.5 million was recognized in the ~~third quarters~~second quarter of ~~2009~~2010 and ~~2008,~~2009, respectively. The remaining unrecognized compensation expense related to unvested awards at ~~September~~June 30, ~~2009~~2010 was ~~$27.6~~$20.2 million and the weighted average period of time over which this expense will be recognized is ~~3.6~~3.3 years.

The fair values of options were estimated at the grant date using the Black-Scholes option pricing model with the following weighted average assumptions for the first ~~nine months~~half of ~~2009:~~2010: expected volatility – ~~39.4%~~43.0%, expected dividends – ~~1.82%~~1.8%, expected lives of the options – ~~7.3~~6.1 years, and the risk free rate – ~~3.0%~~2.7%. The following weighted average assumptions were used for the first ~~nine months~~half of ~~2008:~~2009: expected volatility – ~~19.2%~~39.3%, expected dividends – ~~1.31%~~2.8%, expected lives of the options – ~~6.8~~6.1 years, and the risk free rate – ~~3.2%~~2.1%.

The expected volatility reflects the Company’s past monthly stock price volatility. The dividend yield is based on the Company’s historical dividend payments. The Company used the historical average period from the Company’s issuance of an option to its exercise or cancellation and the average remaining years until expiration for the Company’s outstanding options to estimate the expected life of options ~~granted in 2009 and 2008~~ for which the Company had sufficient historical exercise data. The Company used the “simplified method” ~~for~~to estimate the expected life of options ~~granted in 2009 and 2008,~~ for which sufficient historical data was not available due to significant differences in the vesting periods of these grants compared to previously issued grants. The risk-free rate is derived from public data sources at the time of each option grant. Compensation cost is recognized over the requisite service period of the option using the straight-line method.

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DELPHI FINANCIAL GROUP, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS


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 long-term and short-term disability, ~~group~~ life, ~~and~~ excess workers’ compensation insurance for self-insured employers, large casualty programs including large deductible workers’ compensation, travel accident, dental and limited benefit health 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 for existing customers and control administrative expenses. The Company transfers its exposure to a portion of its 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 those group employee benefit products for which reserves are discounted, in particular, the Company’s disability and primary and excess workers’ compensation products, is also significantly affected by the difference between the yield achieved on invested assets and the discount rate used to calculate the related reserves.

The Company continues to benefit from the favorable market conditions which have in recent years prevailed for its excess workers’ compensation products as to pricing and other contract terms for these products. However, due primarily to improvements in the primary workers’ compensation market resulting in lower premium rates in that market, conditions relating to new business production and growth in premiums for the Company’s excess workers’ compensation products have been less favorable in recent years. In response to these conditions, the Company has enhanced its focus on its sales and marketing function for these products and has ~~achieved~~been achieving significantly improved levels of new business production for these ~~products in the current year.~~products. In addition, based on the growth and development of the Company’s assumed workers’ compensation and casualty reinsurance product, the Company ~~is including~~included this product in its core products beginning with the third quarter of 2009.

For its other group employee benefit products, the Company is presently experiencing ~~more~~challenging market conditions from a competitive ~~market conditions,~~standpoint, particularly as to pricing. These conditions, in addition to the downward pressure on employment and wage levels exerted by the ~~current~~recent recession, are adversely impacting the Company’s ability to achieve levels of new business production and growth in premiums for these products commensurate with those achieved in prior years. For these products, the Company is continuing 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 the Company believes to offer opportunities for superior profitability. The Company is also emphasizing its suite of voluntary group insurance products, which includes, among others, its group limited benefit health insurance product. In response to the recently adopted federal health care reform legislation, the Company plans, beginning in September 2010, to issue all of its new and renewal limited benefit health policies under a fixed indemnity benefit structure that will be exempt from certain of the requirements of the legislation that will then become effective. However, since the legislation remains subject to implementing agency regulations and future legislative action, this plan is subject to change based on future developments. Moreover, it is uncertain whether this product can be effectively marketed once the minimum medical coverage requirements of the legislation become effective in 2014, since this product’s coverage will not satisfy these requirements. The Company markets its other group 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 other group employee benefit products to large employers.

The Company also operates an asset accumulation business that focuses primarily on offering fixed annuities to individuals. In addition, during the first quarter of 2006, the Company issued ~~$100.0~~$100 million in aggregate principal amount of fixed and floating rate funding agreements with maturities of three to five years in connection with the issuance by an unconsolidated special purpose vehicle of funding agreement-backed notes in a corresponding principal amount. In March 2009, the Company repaid $35.0 million in aggregate principal amount of the floating rate funding agreements at their maturity, resulting in a corresponding repayment of the funding agreement-backed notes. ~~Also, during the third quarter of 2008,~~From time to time, the Company ~~acquired a block~~acquires blocks of existing SPDA and FPA policies from ~~another insurer~~other insurers through an indemnity assumed reinsurance ~~transaction with such insurer that resulted in the assumption by the Company of policyholder account balances in the amount of $135.0 million.~~transactions. The Company believes that

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The management of the Company’s investment portfolio is an important component of its profitability. ~~Over~~Beginning in the second half of 2007, ~~and continuing through 2008 and into 2009,~~ due primarily to the extraordinary stresses affecting the banking system, the housing market and the financial markets generally, particularly the structured mortgage securities market, the financial markets have been the subject of extraordinary ~~volatility and dramatically widened credit spreads in numerous sectors.~~volatility. At the same time the overall level of risk-free interest rates has declined substantially. These market conditions resulted in a significant decrease in the Company’s level of net investment income infor 2008, due primarily to the adverse performance of those investments whose changes in value, positive or negative, are included in the Company’s net investment income, such as investment funds organized as limited partnerships and limited liability companies, trading account securities and hybrid financial instruments. In an effort to reduce fluctuations of this type in its net investment income, the Company has repositioned its investment portfolio to reduce its holdings of these types of investments and, in particular, those investments whose performance had demonstrated the highest levels of variability. As part of this effort, the Company has increased its investments in more traditional sectors of the fixed income market such as mortgage-backed securities and municipal bonds. In addition, in light of ~~the aforementioned~~these market conditions, the Company ~~is presently~~has been maintaining a significantly larger proportion of its portfolio in short-term investments, which totaled ~~$572.8~~$351.1 million and $406.8 million at ~~September~~June 30, ~~2009~~2010 and ~~$401.6 million at~~ December 31, ~~2008.~~2009, respectively. The Company has recently been engaged in efforts to deploy a significant portion of these short-term investments into longer-term fixed maturity securities which offer more attractive yields. However, especially since the recent market environment, in which low interest rates and tight credit spreads have been prevailing, has made it particularly challenging to make new investments on terms which the Company deems attractive, no assurance can be given as to the timing of the completion of these efforts or their ultimate outcome.

The Company achieved significantly improved levels of investment income in its repositioned investment portfolio in 2009 and in the ~~second and third quarters~~first half of ~~2009,~~2010, during which more favorable market conditions ~~prevailed.~~emerged, as compared to 2008. However, ~~these~~ market conditions may ~~worsen in the future~~continue to be volatile and may result in significant fluctuations in net investment income, and as a result, in the Company’s results of operations. Accordingly, there can be no assurance as to the impact of the Company’s investment repositioning on the level or variability of its future net investment income. In addition, while the total carrying value of the Company’s available for sale investment portfolio has increased ~~by $509.2 million during the first nine months of 2009,~~in recent quarters, the Company’s realized investment losses ~~during this period~~ from declines in market value relative to the amortized cost of ~~certain~~various securities that it determined to be other than temporary increased ~~significantly. In~~significantly during 2009. Investment losses of this type moderated during the first half of 2010; however, in light of the continuing effects of the market conditions discussed above, such investment losses ~~of this type and magnitude~~ may continue or increase in the ~~future.~~future and it is not possible to predict the timing or magnitude of such losses.

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 included in this document, as well as the Company’s annual report on Form 10-K for the year ended December 31, ~~2008 as amended by Amendment No. 1 thereto on Form 10-K/A~~2009 (the ~~“2008~~“2009 Form 10-K”). Capitalized terms used herein without definition have the meanings ascribed to them in the ~~2008~~2009 Form 10-K. 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 contained in the ~~2008~~2009 Form 10-K in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — 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 below under the caption “Forward-Looking Statements And Cautionary Statements Regarding Certain Factors That May Affect Future Results,” in Part I, Item 1A of the ~~2008~~2009 Form 10-K, “Risk Factors”.

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Results of Operations

~~Nine~~Six Months Ended ~~September~~June 30, ~~2009~~2010 Compared to
~~Nine~~Six Months Ended ~~September~~June 30, ~~2008~~2009

Summary of Results.Net income attributable to shareholders was ~~$82.3~~$74.6 million, or ~~$1.63~~$1.34 per diluted share, in the first ~~nine months~~half of ~~2009~~2010 as compared to ~~$38.2~~$61.5 million, or ~~$0.78~~$1.25 per diluted share, in the first ~~nine months~~half of ~~2008.~~2009. Net income in the first ~~nine months~~half of 2010 and 2009 ~~and 2008~~ included net realized investment losses, ~~(net~~net of the related income tax ~~benefit)~~benefit, of ~~$65.0~~$18.8 million, or ~~$1.28~~$0.34 per diluted share, and ~~$38.8~~$32.2 million, or ~~$0.78~~$0.65 per diluted share, respectively. Net income in the first ~~nine months~~half of 2010 as compared to the first half of 2009 benefited from ~~a significant~~an increase in net investment income, including increased investment spreads on the Company’s asset accumulation products, and growth in income from the Company’s core group employee benefit products, and, on a per-share basis, was adversely impacted by ~~an increased level of realized investment losses due to~~ the ~~continuing effects of the adverse market conditions discussed above. See “Introduction”.~~Company’s two Class A Common Stock offerings completed during 2009. Net investment income in the first ~~nine months~~half of 2010, which increased 5% from the first half of 2009, reflects ana 22% increase in average invested assets, partially offset by a decrease in the tax equivalent weighted average annualized yield to ~~7.0%~~6.0% from ~~3.5%~~6.9%. Realized investment losses in the first ~~nine~~six months of ~~2009~~2010 and ~~2008~~2009 included losses, net of the related income tax benefit, of ~~$61.5~~$28.5 million, or ~~$1.21~~$0.51 per

~~-23-~~

diluted share, and ~~$34.1~~$27.6 million, or ~~$0.69~~$0.56 per diluted share, respectively, due to the other than temporary declines in the market values of certain fixed maturity securities and other investments.

Operating earnings, which is a non-GAAP financial measure, consist of net income attributable to shareholders excluding after-tax realized investment gains and losses, losses on early retirement of senior notes and junior subordinated deferrable interest debentures and results from discontinued operations, as applicable. The Company believes that because these excluded items arise from events that are largely within management’s discretion and whose fluctuations can distort comparisons between periods, a measure excluding their impact is useful in analyzing the Company’s operating trends. Investment gains or losses are realized based on management’s decision to dispose of an investment, and investment losses are realized based on management’s judgment that a decline in the market value of an investment is other than temporary. Early retirement of senior notes and junior subordinated deferrable interest debentures occurs based on management’s decision to redeem or repurchase these notes and debentures. Discontinued operations result from management’s decision to exit or sell a particular business. Thus, these excluded items are not reflective of the Company’s ongoing earnings capacity, and trends in the earnings of the Company’s underlying insurance operations can be more clearly identified without their effects. For these reasons, management uses the measure of operating earnings to assess performance and make operating plans and decisions, and the Company believes that analysts and investors typically utilize measures of this type as one element of their evaluations of insurers’ financial performance. However, gains or losses from the excluded items, particularly as to investments, can occur frequently and should not be considered as nonrecurring items. Further, operating earnings should not be considered a substitute for net income attributable to shareholders, the most directly comparable GAAP measure, as an indication of the Company’s overall financial performance and may not be calculated in the same manner as similarly titled measures utilized by other companies.

Operating earnings were $93.6 million in both the first half of 2010 and 2009 and were $1.68 per diluted share in the first half of 2010 compared to $1.90 per diluted share in the first half of 2009, primarily due to the impact of the Company’s two Class A Common Stock offerings completed during 2009.

The following table reconciles the amount of operating earnings to the corresponding amount of net income attributable to shareholders for the indicated periods:


	Six Months Ended
	June 30,
	2010			2009
Operating earnings	$	93,589		$	93,647
Net realized investment losses, net of taxes^(A)		(18,837	)		(32,156	)
Loss on early retirement of senior notes^(B)		(138	)		—

Net income attributable to shareholders	$	74,614		$	61,491


Diluted results per share of common stock:
Operating earnings	$	1.68		$	1.90
Net realized investment losses, net of taxes^(A)		(0.34	)		(0.65	)
Loss on early retirement of senior notes^(B)		—			—

Net income attributable to shareholders	$	1.34		$	1.25

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(A)		Net of an income tax benefit of $10.1 million and $17.3 million, or $0.18 per diluted share and $0.35 per diluted share, for the six months ended June 30, 2010 and 2009, respectively. The tax effect is calculated using the Company’s statutory tax rate of 35%.

(B)		Net of an income tax benefit of $0.07 million or $0.00 per diluted share for the six months ended June 30, 2010. The tax effect is calculated using the Company’s statutory tax rate of 35%.

Premium and Fee Income.Premium and fee income in the first ~~nine months~~half of ~~2009~~2010 was ~~$1,052.8~~$700.3 million as compared to ~~$1,028.1~~$710.2 million in the first ~~nine months~~half of ~~2008, an increase of 2%.~~2009. Premiums from core group employee benefit products, which include short-term and long-term disability, ~~group~~ life, excess workers’ compensation, travel accident and dental insurance, ~~and~~ assumed workers’ compensation and casualty reinsurance ~~increased 2% to $1,013.4~~and limited benefit medical insurance, were $671.1 million and $683.6 million in ~~the~~ first ~~nine months~~half of 2010 and 2009, ~~from $991.4 million in the first nine months of 2008.~~respectively. Assumed workers’ compensation and casualty reinsurance is included in the Company’s core group employee benefit products beginning in the third quarter of 2009. Accordingly, to assist in comparability with prior periods, premiums from this product have also been included in premiums from core group employee benefit products for prior periods. Premiums from excess workers’ compensation insurance for self-insured employers were ~~$205.5~~$138.8 million in the first ~~nine months~~half of ~~2009~~2010 as compared to ~~$196.9~~$136.8 million in the first ~~nine months~~half of ~~2008, an increase of 4%. Excess workers’ compensation new~~2009. New business production, which represents the annualized amount of new ~~annualized~~ premium sold, ~~increased 111% to $41.0~~for excess workers’ compensation was $19.7 million and $25.3 million in the first ~~nine months~~half of 2010 and 2009, ~~from $19.4 million in the first nine months of 2008.~~respectively. Premiums from assumed workers’ compensation and casualty reinsurance increased ~~59%~~55% to ~~$25.4~~$23.4 million in the first ~~nine months~~half of ~~2009~~2010 from ~~$16.0~~$15.1 million in the first ~~nine months~~half of ~~2008. SNCC’s retention~~2009. Assumed workers’ compensation and casualty reinsurance production was $8.5 million in the first half of 2010 compared to $8.7 million in the first half of 2009. In the important July 2010 renewal season, the results of which are not reflected in the Company’s results for the first half of 2010, rates on excess workers’ compensation policies declined modestly and self-insured retentions were on average up modestly on new and renewal policies. Retention of its existing excess workers’ compensation customers in the first ~~nine months~~half of ~~2009~~2010 remained strong.

Premiums from the Company’s other core group employee benefit products ~~were $782.5 million and $778.5~~was $508.9 million in the first ~~nine months~~half of ~~2009 and 2008, respectively.~~2010 compared to $531.7 million in the first half of 2009. During the first ~~nine months~~half of ~~2009~~2010 and ~~2008,~~2009, premiums from the Company’s group life products were ~~$300.1~~$193.8 million and ~~$301.7~~$204.3 million, respectively, and premiums from the Company’s group disability products were ~~$422.8~~$271.1 million and ~~$425.5~~$287.2 million, respectively. ~~In the first nine months of 2009, premiums~~Premiums from the Company’s turnkey disability business ~~increased 12% to $41.0 million from $36.7~~were $25.2 million in the first ~~nine months~~half of ~~2008.~~2010 compared to $28.0 million in the first half of 2009. New business production for the Company’s other core group employee benefit products ~~declined to $141.0~~was $92.5 million and $92.2 million in the first ~~nine months~~half of 2010 and 2009, ~~as compared to $178.7 million in the first nine months of 2008.~~respectively. Beginning in the third quarter of 2009, production from the Company’s turnkey disability product is included in new business production for core group employee benefit ~~product production.~~products. Accordingly, to assist in comparability with prior periods, production from ~~turnkey disability~~this product has also been included in core production for prior periods. The level of production achieved from ~~the Company’s other core group employee benefit~~these products reflects the Company’s focus on the small case niche (insured groups of 10 to 500 individuals). The payments received by the Company ~~continued to implement price increases for certain existing group disability~~in connection with loss portfolio transfers, which are episodic in nature and ~~group life insurance customers during the first nine months of 2009. The Company’s deposits from LPT’s, which~~ are recorded as liabilities rather than as premiums, were ~~$30.9~~$6.9 million in the first ~~nine months~~half of ~~2009~~2010 as compared to ~~$1.2~~$23.7 million in the first ~~nine months~~half of ~~2008.~~2009.

Deposits from the Company’s asset accumulation products were ~~$232.2~~$116.8 million in the first ~~nine months~~half of ~~2009~~2010 as compared to ~~$195.8~~$174.7 million in the first ~~nine months~~half of 2008. This increase in deposits is primarily due to the decrease in short-term interest rates, which has caused fixed annuity products to be an attractive alternative to competing investment products such as certificates of deposit.2009. Deposits from the Company’s asset accumulation products, consisting of new annuity sales and issuances of funding agreements, are recorded as liabilities rather than as premiums. The Company is continuing to maintain its discipline in setting the crediting rates offered on its asset accumulation products in ~~2009~~2010 in an effort to achieve its targeted interest rate spreads on these products.

Net Investment Income.Net investment income in the first ~~nine months~~half of ~~2009~~2010 was ~~$243.6~~$162.3 million as compared to ~~$112.5~~$154.9 million in the first ~~nine months~~half of ~~2008.~~2009, an increase of 5%. This increase reflects an increase in the tax equivalent weighted average annualized yield on invested assets to 7.0% for the first nine months of 2009 from 3.5% for the first nine months of 2008, primarily attributable to the improved performance of the Company’s investments in investment funds organized as limited partnerships and limited liability companies and a higher level of investment income from the Company’s fixed maturity security portfolio resulting from the portfolio repositioning discussed above. See “Introduction”. ~~Average~~The level of net investment income in the first half of 2010 also reflects a 22% increase in average invested assets ~~were $4,962.3~~to $5,852.3 million ~~and $4,778.8~~in 2010 from $4,799.3 million in the first ~~nine months~~half of 2009, ~~and 2008, respectively.~~partially offset by a decrease in the tax equivalent weighted average annualized yield to 6.0% from 6.9%.

Net Realized Investment Losses.Net realized investment losses were ~~$99.9~~$29.0 million in the first ~~nine months~~half of ~~2009~~2010 compared to ~~$59.7~~$49.5 million in the first ~~nine months~~half of ~~2008.~~2009. The Company monitors its investments on an ongoing basis. When the market value of a security ~~classified as available for sale~~ declines below its amortized cost, the decline is included as a component of accumulated other comprehensive income or loss, net of the related income tax benefit and adjustment to cost of business acquired, on the Company’s balance sheet. IfIn the case of a fixed maturity security, if management judges the decline to be other than temporary, the portion of the decline ~~related to~~representing credit ~~losses~~loss is recognized as a realized investment loss in the Company’s income statement and the remaining portion of the decline continues to be included as a component of accumulated other comprehensive income or loss. For all other types of investments, the entire amount of the decline is recognized as a realized investment loss. Due to the continuing

-25-

~~“Introduction”~~ “Introduction”. The Company’s investment strategy results in periodic sales of securities and, therefore, the recognition of realized investment gains and losses. During the first ~~nine months~~half of ~~2009~~2010 and ~~2008,~~2009, the Company recognized ~~$5.4~~$14.9 million and ~~$7.2~~$(7.0) million, respectively, of net ~~losses~~gains (losses) on the sales of securities.

The Company may continue to recognize losses due to other than temporary declines in security ~~market~~fair values in the future, ~~particularly in light of the ongoing volatility in the financial markets,~~ and such losses may be significant. The extent of such losses will depend on, among other things, future developments in the United States and global ~~economy,~~economies, financial and credit markets, credit spreads, interest rates, expected future cash flows from structured securities, the outlook for the performance by the security issuers of their obligations ~~under such securities~~ and changes in security values. The Company continuously monitors its investments in securities whose fair values are below the Company’s amortized cost pursuant to its procedures for evaluation for other than temporary impairment in valuation. See Note B to the Consolidated Financial Statements and the section in the ~~2008~~2009 Form 10-K entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — 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. For further information concerning the Company’s investment portfolio, see “Liquidity and Capital Resources —– Investments.”

Benefits and Expenses.Policyholder benefits and expenses were ~~$1,073.4~~$715.5 million in the first ~~nine months~~half of ~~2009~~2010 as compared to ~~$1,015.1~~$722.7 million in the first ~~nine months~~half of ~~2008.~~2009. This decrease primarily reflects the decrease in premiums from the Company’s group employee benefit products and does not reflect significant additions to reserves for prior years’ claims and claim expenses. However, there can be no assurance that future periods will not include additions to reserves of this type, which will depend on the Company’s future loss development. If the Company were to experience significant adverse loss development in the future, the Company’s results of operations could be materially adversely affected. The combined ratio (loss ratio plus expense ratio) for group employee benefit products was 93.8% and 93.2% in the first half of 2010 and 2009, respectively. The increase in the combined ratio in the first half of 2010 resulted primarily from the lower level of premiums from the Company’s group employee benefit products in the current period, as well as expenses associated with new product development at SNCC. The weighted average annualized crediting rate on the Company’s asset accumulation products was 3.9% and 4.2% in the first half of 2010 and 2009, respectively.

Interest Expense. Interest expense was $22.1 million in the first half of 2010 as compared to $14.3 million in the first half of 2009. This increase primarily reflects interest expense associated with the 2020 Senior Notes, which were issued by the Company in the first quarter of 2010, partially offset by a decrease in the weighted average borrowings under the Amended Credit Agreement.

Income Tax Expense.Income tax expense was $21.1 million in the first half of 2010 as compared to $16.9 million in the first half of 2009, primarily due to the higher level of operating income. The Company’s effective tax rate was 22.1% in the first half of 2010 compared to 21.6% in the first half of 2009.

Three Months Ended June 30, 2010 Compared to
Three Months Ended June 30, 2009

Summary of Results.Net income attributable to shareholders was $37.0 million, or $0.66 per diluted share, for the second quarter of 2010 as compared to $37.0 million, or $0.74 per diluted share, for the second quarter of 2009. Net income in the second quarter of 2010 and 2009 included net realized investment losses, net of the related income tax benefit, of $9.0 million, or $0.17 per diluted share, and $17.9 million, or $0.35 per diluted share, respectively. Net income in the second quarter of 2010 benefited from a decrease in the level of realized losses recognized in earnings due to credit loss-related investment impairments and was adversely impacted by a decrease in net investment income, primarily attributable to performance in the Company’s investments in investment funds organized as limited partnerships and limited liability companies that was below the particularly strong performance of these investments in the prior year’s quarter. Investment losses in the second quarter of 2010 and 2009 included losses, net of the related income tax benefit, of $13.5 million, or $0.24 per diluted share, and $16.2 million, or $0.32 per diluted share, respectively, due to credit loss-related impairments in the values of certain investments.

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excluded items arise from events that are largely within management’s discretion and whose fluctuations can distort comparisons between periods, a measure excluding their impact is useful in analyzing the Company’s operating trends. Investment gains or losses are realized based on management’s decision to dispose of an investment, and investment losses are realized based on management’s judgment that a decline in the market value of an investment is other than temporary. Early retirement of senior notes and junior subordinated deferrable interest debentures occur based on management’s decision to redeem or repurchase these notes and debentures. Discontinued operations result from management’s decision to exit or sell a particular business. Thus, these excluded items are not reflective of the Company’s ongoing earnings capacity, and trends in the earnings of the Company’s underlying insurance operations can be more clearly identified without their effects. For these reasons, management uses the measure of operating earnings to assess performance and make operating plans and decisions, and the Company believes that analysts and investors typically utilize measures of this type as one element of their evaluations of insurers’ financial performance. However, gains or losses from the excluded items, particularly as to investments, can occur frequently and should not be considered as nonrecurring items. Further, operating earnings should not be considered a substitute for net income attributable to shareholders, the most directly comparable GAAP measure, as an indication of the Company’s overall financial performance and may not be calculated in the same manner as similarly titled measures utilized by other companies.

Operating earnings were $46.1 million in the second quarter of 2010 compared to $54.9 million in the second quarter of 2009. Operating earnings were $0.83 per diluted share in the second quarter of 2010 compared to $1.09 per diluted share in the second quarter of 2009, primarily due to the lower level of net investment income discussed above and the impact of the Company’s two Class A Common Stock offerings completed during 2009.

The following table reconciles the amount of operating earnings to the corresponding amount of net income attributable to shareholders for the indicated periods:


	Three Months Ended
	June 30,
	2010			2009
Operating earnings	$	46,107		$	54,864
Net realized investment losses, net of taxes^(A)		(9,018	)		(17,857	)
Loss on early retirement of senior notes^(B)		(138	)		—

Net income attributable to shareholders	$	36,951		$	37,007


Diluted results per share of common stock
Operating earnings	$	0.83		$	1.09
Net realized investment losses, net of taxes^(A)		(0.17	)		(0.35	)
Loss on early retirement of senior notes^(B)		—			—

Net income attributable to shareholders	$	0.66		$	0.74


(A)		Net of an income tax benefit of $4.9 million and $9.6 million, or $0.09 per diluted share and $0.19 per diluted share, for the three months ended June 30, 2010 and 2009, respectively. The tax effect is calculated using the Company’s statutory tax rate of 35%.

(B)		Net of an income tax benefit of $0.07 million or $0.00 per diluted share for the three months ended June 30, 2010. The tax effect is calculated using the Company’s statutory tax rate of 35%.

Premium and Fee Income.Premium and fee income for the second quarter of 2010 was $352.6 million as compared to $352.4 million for the second quarter of 2009. Premiums from core group employee benefit products were $337.7 million in the second quarter of 2010 as compared to $339.4 million in the second quarter of 2009. Premiums from excess workers’ compensation insurance for self-insured employers increased 3% to $70.8 million in the second quarter of 2010 from $69.0 million in the second quarter of 2009. Assumed workers’ compensation and casualty reinsurance is included in the Company’s core group employee benefit products beginning in the third quarter of 2009. Accordingly, to assist in comparability with prior periods, premiums from this product have been included in premiums from core group employee benefit products for prior periods. Excess workers’ compensation new business production, which represents the annualized amount of new premium sold, was $6.3 million in the second quarter of 2010 as compared to $10.2 million in the second quarter of 2009. Premiums from assumed workers’ compensation and casualty reinsurance increased 41% to $11.9 million in the second quarter of 2010 from $8.5 million in the second quarter of 2009. Assumed workers’ compensation and casualty reinsurance production increased 87% to $3.4 million in the second quarter of 2010 from $1.8 million in the second quarter of 2009. Rates increased modestly in the second quarter 2010 excess workers’ compensation renewals and self-insured retentions are on average up modestly in second quarter 2010 new and renewal policies. Retention of existing excess workers’ compensation

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customers in the second quarter of 2010 remained strong.

Premiums from the Company’s other core group employee benefit products were $255.0 million and $261.9 million in the second quarters of 2010 and 2009, respectively. During the second quarter of 2010 and 2009 premiums from the Company’s group life products were $95.9 million and $100.7 million, respectively, and premiums from the Company’s group disability products were $136.7 million and $140.8 million, respectively. Premiums from the Company’s turnkey disability business were $11.9 million during the second quarter of 2010 compared to $12.8 million during the second quarter of 2009. New business production for the Company’s other core group employee benefit products increased 15% to $52.5 million in the second quarter of 2010 from $45.6 million in the second quarter of 2009. Beginning in the third quarter of 2009, production from the Company’s turnkey disability product is included in core group employee benefit product production. Accordingly, to assist in comparability with prior periods, production from this product has also been included in core production for prior periods. 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).

Deposits from the Company’s asset accumulation products were $78.0 million in the second quarter of 2010 as compared to $115.0 million in the second quarter of 2009. Deposits from the Company’s asset accumulation products, consisting of new annuity sales and issuances of funding agreements, are recorded as liabilities rather than as premiums. The Company is continuing to maintain its discipline in setting the crediting rates offered on its asset accumulation products in 2010 in an effort to achieve its targeted interest rate spreads on these products.

Net Investment Income.Net investment income in the second quarter of 2010 was $78.2 million as compared to $92.0 million in the second quarter of 2009. This decrease reflects a decrease in the tax equivalent weighted average annualized yield on invested assets to 5.6% for the second quarter of 2010 from 7.9% for the second quarter of 2009, primarily attributable to a lower level of net investment income from the Company’s investments in investment funds organized as limited partnerships and limited liability companies, whose performance in the prior year’s quarter was particularly strong. This decrease was partially offset by a higher level of investment income from the Company’s fixed maturity security portfolio resulting from the portfolio repositioning discussed above and a 21% increase in average invested assets to $5,992.8 million in the second quarter of 2010 from $4,947.0 million in the second quarter of 2009.

Net Realized Investment Losses.Net realized investment losses were $13.9 million in the second quarter of 2010 compared to $27.5 million in the second quarter of 2009. The Company monitors its investments on an ongoing basis. When the market value of a security declines below its amortized cost, the decline is included as a component of accumulated other comprehensive income or loss, net of the related income tax benefit and adjustment to cost of business acquired, on the Company’s balance sheet. In the case of a fixed maturity security, if management judges the decline to be other than temporary, the portion of the decline related to credit loss is recognized as a realized investment loss in the Company’s income statement and the remaining portion of the decline continues to be included as a component of additional other comprehensive income or loss. For all other types of investments, the entire amount of the decline is recognized as a realized investment loss. The Company recognized $21.7 million of losses in the second quarter of 2010 due to the other than temporary declines in the market values of certain fixed maturity securities and other investments, of which $20.8 million was recognized as realized investment losses related to credit losses and $0.8 million remained as a component of accumulated other comprehensive income on the balance sheet related to non-credit losses. During the second quarter of 2009, the Company recognized $45.6 million of losses due to the other than temporary declines in the market values of certain fixed maturity securities and other investments, of which $24.9 million was recognized as realized investment losses related to credit losses and $20.7 million remained as a component of accumulated other comprehensive income on the balance sheet related to non-credit losses. The Company’s investment strategy results in periodic sales of securities and, therefore, the recognition of realized investment gains and losses. During the second quarters of 2010 and 2009, the Company recognized $7.0 million and $(2.6) million, respectively, of net gains (losses) on sales of securities.

The Company may recognize additional losses due to other than temporary declines in security market values in the future, and such losses may be significant. See “Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009 – Net Realized Investment Losses.”

Benefits and Expenses.Policyholder benefits and expenses were $357.6 million in the second quarter of 2010 as compared to $360.9 million in the second quarter of 2009. This decrease primarily reflects the decrease in premiums from the Company’s group employee benefit products discussed above, and does not reflect significant additions to reserves for prior years’ claims and claim expenses. However, there can be no assurance that future periods will not include additions to reserves of this type, which will depend on the Company’s future loss development. If the Company were to experience significant adverse loss development in the future, the Company’s results of operations could be materially adversely affected. The combined ratio (loss ratio plus expense ratio) for group employee benefit products was ~~93.3%~~93.5% and ~~91.8%~~93.1% in the ~~first nine months~~second quarters of 2010 and

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2009, ~~and 2008,~~ respectively. The increase in the combined ratio in the first nine months of 2009 resulted primarily from increased spending on new product development at SNCC. Amortization of cost of business acquired was accelerated by $1.2 million during the first nine months of 2009 primarily due to the increase in the Company’s tax equivalent weighted average annualized yield on invested assets. The weighted average annualized crediting rate on the Company’s asset accumulation products was ~~4.3%~~3.7% and 4.2% in the ~~first nine months~~second quarters of ~~2009~~2010 and ~~2008,~~2009, respectively.

Interest Expense. Interest expense was $11.5 million in the second quarter of 2010 as compared to $7.1 million in the second quarter of 2009. This increase primarily reflects interest expense associated with the 2020 Senior Notes, which were issued by the Company in the first quarter of 2010, partially offset by a decrease in the weighted average borrowings under the Amended Credit Agreement.

Income Tax Expense.Income tax expense was ~~$19.3~~$10.6 million in the ~~first nine months~~second quarter of ~~2009~~2010 as compared to ~~$3.4~~$11.8 million in the ~~first nine months~~second quarter of ~~2008, primarily due to the higher level of operating income.~~2009. The Company’s effective tax ~~rate increased to 19.0%~~rates were 22.3% and 24.1% in the ~~first nine months of 2009 from 8.2% in the first nine months of 2008 primarily due to the proportionately lower level of tax-exempt interest income earned on invested assets.~~

~~Three Months Ended September 30, 2009 Compared to~~
~~Three Months Ended September 30, 2008~~

~~Summary of Results.~~~~For the third~~second quarter of 2010 and 2009, net income was $20.8 million, or $0.39 per diluted share, as compared to a net loss of $(9.8) million, or $(0.20) per diluted share, for the third quarter of 2008. Net income (loss) in the third quarters of 2009 and 2008 included realized investment losses (net of the related income tax benefit) of $32.8 million, or $0.61 per diluted share, and $21.9 million, or $0.45 per diluted share, respectively. Net income in the third quarter of 2009 benefited from a significant increase in net investment income, including increased investment spreads on the Company’s asset accumulation products, and was adversely impacted by realized investment losses due to the continuing effects of the adverse market conditions discussed above. See “Introduction”. Net investment income in the third quarter of 2009, which increased 357% from the third quarter of 2008, reflects an increase in the tax equivalent weighted average annualized yield to 7.0% from 2.0%. Investment losses in the third quarter of 2009 and 2008 included losses, net of the related income tax benefit, of $33.8 million, or $0.63 per diluted share, and $18.3 million, or $0.38 per diluted share, respectively, due to the other than temporary declines in the market values of certain fixed maturity securities and other investments.

~~Premium and Fee Income.~~Premium and fee income for the third quarter of 2009 was $342.6 million and $345.0 million for the third quarters of 2009 and 2008, respectively. Premiums from core group employee benefit products were $329.8 million and $333.1 million in the third quarters of 2009 and 2008, respectively. Premiums from excess workers’ compensation insurance for self-insured employers increased 4% to $68.7 million in the third quarter of 2009 from $66.2 million in the third quarter of 2008. Excess workers’ compensation new business production, which represents the amount of new annualized premium sold, increased 37% to $15.7 million in the third quarter of 2009 from $11.4 million in the third quarter of 2008. Premium from the assumed workers’ compensation and casualty reinsurance product increased 72% to $10.4 million in the third quarter of 2009 from $6.0 million in the third quarter of 2008. SNCC’s rates declined modestly on its third quarter 2009 renewals and SIRs are up modestly for third quarter 2009 new and renewal policies. SNCC’s retention of its existing customers in the third quarter of 2009 remained strong.

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Premiums from the Company’s other core group employee benefit products were $250.8 million and $260.9 million in the third quarters of 2009 and 2008, respectively. During the third quarter of 2009 and 2008 premiums from the Company’s group life products were $95.8 million and $100.8 million, respectively, and premiums from the Company’s group disability products were $135.6 million and $142.7 million, respectively. Premiums from the Company’s turnkey disability business were $13.0 million during the third quarter of 2009 compared to $12.6 million during the third quarter of 2008. New business production for the Company’s other core group employee benefit products was $48.8 million and $62.7 million in the third quarters of 2009 and 2008, respectively. 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). The Company continued to implement price increases for certain existing disability and group life customers. The Company’s deposits from LPT’s, which are recorded as liabilities rather than as premiums, were $7.2 million in the third quarter of 2009. The Company had no deposits from LPT’s in the third quarter of 2008.

Deposits from the Company’s asset accumulation products increased 31% to $57.5 million in the third quarter of 2009 from $44.0 million in the third quarter of 2008. This increase in deposits is primarily attributable to the decrease in short-term interest rates, which has caused fixed annuity products to be an attractive alternative to other competing investment products such as certificates of deposit. Deposits from the Company’s asset accumulation products, consisting of new annuity sales and issuances of funding agreements, are recorded as liabilities rather than as premiums.

~~Net Investment Income.~~Net investment income in the third quarter of 2009 was $88.7 million as compared to $19.4 million in the third quarter of 2008, an increase of 357%. This increase reflects an increase in the tax equivalent weighted average annualized yield on invested assets to 7.0% for the third quarter of 2009 from 2.0% for the third quarter of 2008, primarily attributable to the improved performance of the Company’s investments in investment funds organized as limited partnerships and limited liability companies and a higher level of investment income from the Company’s fixed maturity security portfolio resulting from the portfolio repositioning discussed above. See “Introduction”. Average invested assets increased 14% to $5,417.7 million in the third quarter of 2009 from $4,756.2 million in the third quarter of 2008.

~~Net Realized Investment Losses.~~Net realized investment losses were $50.5 million in the third quarter of 2009 compared to $33.7 million in the third quarter of 2008. The Company monitors its investments on an ongoing basis. When the market value of a security classified as available for sale declines below its cost, the decline is included as a component of accumulated other comprehensive income or loss, net of the related income tax benefit and adjustment to cost of business acquired, on the Company’s balance sheet. If management judges the decline to be other than temporary, the portion of the decline related to credit losses is reported as a realized investment loss in the Company’s income statement and the remaining portion of the decline related to other factors continues to be included as a component of additional other comprehensive income or loss. Due to the continuing effects of the adverse market conditions for financial assets discussed above, the Company recognized $73.8 million of losses in the third quarter of 2009 due to the other than temporary declines in the market values of certain fixed maturity securities and other investments, of which $52.0 million was recognized as realized investment losses related to credit losses and $21.7 million remained as a component of accumulated other comprehensive income on the balance sheet related to noncredit losses. The Company recognized $28.2 million of realized losses due to other than temporary impairments in the third quarter of 2008. The Company’s investment strategy results in periodic sales of securities and, therefore, the recognition of realized investment gains and losses. During the third quarters of 2009 and 2008, the Company recognized $1.6 million and $(5.5) million, respectively, of net gains (losses) on sales of securities.

The Company may recognize additional losses due to other than temporary declines in security market values in the future, and such losses may be significant. See “Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008 — Net Realized Investment Losses.”

~~Benefits and Expenses.~~Policyholder benefits and expenses were $350.6 million in the third quarter of 2009 as compared to $343.9 million in the third quarter of 2008. This increase primarily reflects the increase in premiums from the Company’s group employee benefit products discussed above, and does not reflect significant additions to reserves for prior years’ claims and claim expenses. However, there can be no assurance that future periods will not include additions to reserves of this type, which will depend on the Company’s future loss development. If the Company were to experience significant adverse loss development in the future, the Company’s results of operations could be materially adversely affected. The combined ratio (loss ratio plus expense ratio) for group employee benefit products was 93.7% and 92.3% in the third quarters of 2009 and 2008, respectively. The increase in the combined ratio in the third quarter of 2009 primarily resulted from increased spending on new product development at SNCC. The weighted average annualized crediting rate on the Company’s asset accumulation products was 4.5% and 4.1% in the third quarters of 2009 and 2008, respectively.

~~Income Tax Expense (Benefit).~~Income tax expense (benefit) was $2.3 million in the third quarter of 2009 as compared to $(11.8) million in the third quarter of 2008, primarily due to the increased level of operating income. The Company’s effective tax rate was 10.0% in the third quarter of 2009 as compared to 54.6% in the third quarter of 2008.

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Liquidity and Capital Resources

General.The Company’s current liquidity needs include principal and interest payments on any outstanding borrowings under ~~its~~the Amended ~~and Restated~~ Credit Agreement ~~with Bank of America, N.A., as administrative agent, and a group of major banking institutions (the “Amended Credit Agreement”)~~ and interest payments on the 2020 Senior Notes, 2033 Senior Notes and 2007 Junior Debentures, as well as funding its operating expenses and dividends to stockholders. The 2033 Senior Notes mature in their entirety in May 2033 and are not subject to any sinking fund requirements. During the second quarter of 2010, the Company repurchased $5.0 million in aggregate principal amount of the 2033 Senior Notes and recognized a resulting loss of $0.1 million, net of an income tax benefit of $0.07 million. In addition, on July 14, 2010, the Company redeemed $20.0 million in aggregate principal amount of the 2033 Senior Notes. Finally, on August 6, 2010, the Company gave notice of redemption of an additional $50.0 million in aggregate principal amount of the 2033 Senior Notes. Such redemption will occur on September 21, 2010. After giving effect to these redemptions, $68.8 million in aggregate principal amount of the notes will remain outstanding. The 2007 Junior Debentures will become due on May 15, 2037, but only to the extent that the Company has received sufficient net proceeds from the sale of certain specified qualifying capital securities. Any remaining outstanding principal amount will be due on May 1, 2067. During the first quarter of 2010, the Company issued the 2020 Senior Notes, which will mature in January 2020 and pay interest semi-annually in arrears on January 31 and July 31, commencing on July 31, 2010. The 2020 Senior Notes are not subject to any sinking fund requirements and contain certain provisions permitting their early redemption by the Company. See Note D to the Consolidated Financial Statements. The 2033 Senior Notes and the 2007 Junior Debentures also contain certain provisions permitting their early redemption by the Company. For descriptions of these provisions, see Notes E and IH to the Consolidated Financial Statements included in the ~~2008~~2009 Form 10-K.

As a holding company that does not conduct business operations in its own right, substantially all of the assets of the Company are comprised of its ownership interests in its insurance subsidiaries. In addition, the Company ~~had~~held approximately ~~$94.7~~$96.4 million of financial resources available at the holding company level at ~~September~~June 30, ~~2009,~~2010, primarily comprised of short-term investments and ~~investments~~ in investment subsidiaries whose assets are primarily invested in investment funds organized as limited partnerships and limited liability companies. Other sources of liquidity at the holding company level include dividends paid from subsidiaries, primarily generated from operating cash flows and investments, and borrowings under the Amended Credit Agreement. The Company’s insurance subsidiaries would be permitted, without prior regulatory approval, to make dividend payments totaling ~~$100.1~~$112.8 million during ~~2009,~~2010, of which ~~$3.6~~$1.8 million has been paid to the Company during the first ~~nine~~six months of ~~2009.~~2010. However, the level of dividends that could be paid consistent with maintaining the insurance subsidiaries’ ~~risk-based capital~~RBC and other measures of capital adequacy at levels consistent with its current claims-paying and financial strength ratings from rating agencies is likely to be substantially lower than such amount. In general, dividends from the Company’s non-insurance subsidiaries are not subject to regulatory or other restrictions. In addition, the Company is presently categorized as a well known seasoned issuer under Rule 405 of the Securities Act. As such, the Company has the ability to file automatically effective shelf registration statements for unspecified amounts of different securities, allowing for immediate, on-demand offerings.

In October 2006, the Company entered into the Amended Credit Agreement, which, among other things, increased the maximum borrowings available to $250 million, improved the pricing terms and extended the maturity date from May 2010 to October 2011. On November 8, 2007, the amount of the facility was increased to the amount of $350 million, and certain financial institutions were added as new lenders, pursuant to a supplement to the Amended Credit Agreement. Borrowings under the Amended Credit Agreement bear interest at a rate equal to the LIBOR rate for the borrowing period selected by the Company, which is typically one month, plus a spread which varies based on the Company’s Standard & Poor’s and Moody’s credit ratings. Based on the current levels of such ratings, the spread is currently equal to 62.5 basis points. The Amended Credit Agreement contains various financial and other affirmative and negative covenants, along with various representations and warranties, considered ordinary for this type of credit agreement. The covenants include, among others, a maximum Company consolidated debt to capital ratio, a minimum Company consolidated net worth, minimum statutory risk-based capital requirements for RSLIC and SNCC, and certain limitations on investments and subsidiary indebtedness. As of ~~September~~June 30, ~~2009,~~

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2010, the Company was in compliance in all material respects with the financial and various other affirmative and negative covenants in the Amended Credit Agreement. At ~~September~~June 30, ~~2009,~~2010, the Company had ~~$222.0 million of~~no outstanding borrowings ~~and $128.0 million of borrowings remaining available~~ under the Amended Credit Agreement.

During the first quarter of 2006, the Company issued $100.0 million in aggregate principal amount of fixed and floating rate funding agreements with maturities of three to five years in connection with the issuance by an unconsolidated special purpose vehicle of funding agreement-backed notes in a corresponding principal amount. Based on the Company’s investment at risk compared to that of the holders of the funding agreement-backed notes, the Company has concluded that it is not the primary beneficiary of the special purpose vehicle that issued the funding agreement-backed notes. During the first ~~nine months~~quarter of 2009, the Company repaid $35.0 million in aggregate principal amount of floating rate funding agreements at their maturity. At ~~September~~June 30, ~~2009~~2010 and ~~2008,~~2009, the Company’s reserves related to the funding agreements were ~~$65.2 million and $100.2 million, respectively.~~$66.1 million.

On May 1, 2009, the Company sold 3.0 million shares of its Class A Common Stock in a public offering at a price to the public of $17.50 per share pursuant to an underwriting agreement dated April 28, 2009 with Barclays Capital Inc., as underwriter. On August 21, 2009, the Company sold an additional 3.5 million shares of its Class A Common Stock in a public offering at a price to the public of $21.00 per share pursuant to an underwriting agreement dated August 18, 2009 also with Barclays Capital Inc., as underwriter. The total proceeds to the Company from these two offerings was $120.6 million, net of related underwriting discounts, commissions and expenses. The Company intends to use the proceeds from these offerings for general corporate purposes.

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~~On November~~ 4, ~~2009,~~2010, the Company’s Board of Directors declared a cash dividend of ~~$.10~~$0.11 per share, which will be paid on the Company’s Class A Common Stock and Class B Common Stock ~~which will be paid~~ on ~~December 2, 2009.~~September 1, 2010.

The Company and its subsidiaries expect available sources of liquidity to exceed their current and long-term cash requirements.

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 ~~$5,723.0~~$6,100.6 million at ~~September~~June 30, ~~2009,~~2010, consists primarily of investments in fixed maturity securities, short-term investments, mortgage loans and equity securities. The Company’s investment portfolio also includes investments in investment funds organized as limited partnerships and limited liability companies and trading account securities which collectively totaled ~~$268.7~~$266.7 million at ~~September~~June 30, ~~2009.~~2010. At ~~September~~June 30, ~~2009,~~2010, the total carrying value of the portfolio of private placement corporate loans, mortgage loans, interests in limited partnerships and limited liability companies and equity securities ~~formerly~~ managed on the Company’s behalf by ~~D.B. Zwirn & Co., L.P. was $113.1 million. In connection with the assumption by~~ Fortress Investment Group LLC of D.B. Zwirn’s investment management functions with respect to the investment funds formerly managed by D.B. Zwirn, the Company has terminated its investment management arrangements with D.B. Zwirn and entered into new investment management arrangements with Fortress relating to such portfolio.was $44.3 million.

During the first ~~nine~~six months of ~~2009,~~2010, the market value of the Company’s available for sale investment portfolio, in relation to its amortized cost, increased by ~~$509.2~~$120.0 million from year-end ~~2008,~~2009, before the related ~~decreases~~decrease in the cost of business acquired of ~~$41.6~~$17.5 million and a decrease in the federal income tax provision of ~~$163.7~~$35.9 million. At ~~September~~June 30, ~~2009,~~2010, gross unrealized appreciation and gross unrealized depreciation, before the related income tax expense or benefit and the related adjustment to cost of business acquired, with respect to the Company’s fixed maturity ~~securities in the Company’s portfolio~~security holdings totaled ~~$219.8~~$264.7 million (of which ~~$197.5~~$235.3 million was attributable to investment grade securities) and ~~$278.4~~$201.9 million (of which ~~$142.1~~$79.6 million was attributable to investment grade securities), respectively. During the first ~~nine~~six months of ~~2009,~~2010, the Company recognized pre-tax net investment losses of ~~$99.9~~$29.0 million. The weighted average credit rating of the securities in the Company’s fixed maturity portfolio, ~~having~~based upon the highest of the ratings assigned to the respective securities by ~~nationally recognized statistical rating organizations~~Standard & Poor’s, Moody’s and Fitch, was ~~“A”~~“AA” at ~~September~~June 30, ~~2009.~~2010. While ratings of this type are intended to address credit risk, they do not address other risks, such as prepayment and extension risks.

See “Forward-Looking Statements and Cautionary Statements Regarding Certain Factors That May Affect Future Results,” and Part I, Item 1A of the ~~2008~~2009 Form 10-K, “Risk Factors”, for a discussion of various risks relating to the Company’s investment portfolio.

Reinsurance.The Company cedes portions of the risks relating to its group employee benefit products and variable life insurance products under indemnity reinsurance agreements with various unaffiliated reinsurers. The Company pays reinsurance premiums which are generally based upon specified 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 then-current market conditions. The Company currently cedes through indemnity reinsurance 100% of its excess workers’ compensation risks between $10.0 million and $50.0 million per occurrence, 100% of its excess workers’ compensation risks between $100.0 million and $150.0 million per occurrence, and 15% of its excess workers’ compensation risks between $200.0 million and $250.0 million, per occurrence. Effective in July 2010, the Company entered into a reinsurance agreement under which it cedes 100% (compared to 85% previously) of its excess workers’ compensation risks between $50.0 million and $100.0 million, per occurrence, and 100% of its excess workers’ compensation risks between $100.0 million and $150.0 million per occurrence. Effective July 1, 2009, the Company entered into a reinsurance agreement under which it cedes 50%65% (compared to ~~30%~~50% previously) of its excess workers’ compensation risks between $150.0 million and $200.0 million per occurrence.

In addition, effective ~~July 1, 2009,~~in March 2010, the Company ~~entered into a new reinsurance agreement under which it cedes 15% of its excess workers’ compensation risks between $200.0 million and $250.0 million, per occurrence. The Company also~~ currently cedes through indemnity reinsurance up to ~~$10~~$20 million of coverage (compared to $10 million previously) with respect to workers’ compensation losses resulting from certain naturally occurring catastrophic events. The Company also currently cedes through indemnity reinsurance risks in excess of $300,000 per individual and type of coverage for new and existing employer-paid group life insurance policies. Reductions in the Company’s reinsurance coverages will decrease the reinsurance premiums paid by the Company under these arrangements and

-30-

thus increase the Company’s premium income, and will also increase the Company’s risk of loss with respect to the relevant policies. Generally, increases in the Company’s reinsurance coverages will increase the reinsurance premiums paid by the Company under these arrangements and thus decrease the Company’s premium income, and will also decrease the Company’s risk of loss with respect to the relevant policies.

Cash Flows. Operating activities increased cash by ~~$336.1~~$132.7 million and ~~$267.5~~$192.0 million in the first ~~nine~~six months of ~~2009~~2010 and ~~2008,~~2009, respectively. Net investing activities used ~~$557.4~~$212.2 million and ~~$500.3~~$312.3 million of cash during the first ~~nine~~six months of ~~2009~~2010 and ~~2008,~~2009, respectively, primarily for ~~purchases~~the purchase of securities. Financing activities provided ~~$239.8~~$81.9 million of cash during the first ~~nine~~six months of 2010, principally from the issuance of the 2020 Senior Notes, partially offset by the full repayment of the then outstanding borrowings under the Amended Credit Agreement and the repurchase of $5.0 million in principal amount of the 2033 Senior Notes. During the first half of 2009, financing activities provided $135.6 million of cash, principally from deposits to policyholder accounts and proceeds from the issuance of ~~6.5~~3.0 million shares of its Class A Common Stock in ~~two separate~~a public ~~offerings,~~offering, partially offset by the repayment of $35.0 million in aggregate principal amount of floating rate funding agreements at their maturity. ~~During the first nine months of 2008, financing activities provided $250.8 million of cash, principally from deposits to policyholder accounts.~~

~~-28-~~

~~Item 3. Quantitative and Qualitative Disclosures About Market Risk~~


Item 3.		Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the Company’s exposure to market risk or its management of such risk since December 31, ~~2008.~~2009.

~~Item 4. Controls and Procedures~~


Item 4.		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 Senior 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 Senior 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 fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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 10-Q 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”~~“outlook,” “effort,” “attempt,” “achieve,” “project” 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, health care and tax laws and regulations, changes in accounting rules and interpretations thereof, 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 Part I, Item 1A of the ~~2008~~2009 Form 10-K, “Risk Factors”. The Company disclaims any obligation to update forward-looking information.

~~-29-~~-31-

PART II. OTHER INFORMATION

~~Item 1A. Risk Factors~~


Item 1.		Legal Proceedings

A putative class action, Moore v. Reliance Standard Life Insurance Company, was filed in the United States District Court for the Northern District of Mississippi in July 2008 against the Company’s subsidiary, RSLIC. The action challenges RSLIC’s ability to pay certain insurance policy benefits through a mechanism commonly known in the insurance industry as a retained asset account and contains related claims of breach of fiduciary duty and prohibited transactions under the federal Employee Retirement Income Security Act of 1974. The Company does not believe that the ultimate resolution of this action will have a material adverse effect on its financial condition.

In addition to this action, the Company is a party to various other litigation and proceedings in the course of its business, 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 litigation and proceedings is not expected to have a material adverse effect on the Company’s results of operations, liquidity or financial condition.


Item 1A.		Risk Factors

The following discussion, which supplements the significant factors that may affect ~~our~~the Company’s business and operations as described in Part I, Item 1A of the ~~2008~~2009 Form 10-K, “Risk ~~Factors,~~Factors.” updates and supersedes the discussion contained therein under the heading “The Company may be adversely impacted by a decline in the ratings of its insurance subsidiaries or its own credit ratings”:

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 August ~~2009~~2010 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 August ~~2009~~2010 as assigned by A.M. Best, Fitch, Moody’s and Standard & Poor’s were A (Excellent), A- (Strong), A3 (Good) and A (Strong), respectively. These ratings are significantly influenced by the risk-based capital ratios and levels of statutory capital and surplus of these subsidiaries. In addition, these rating agencies may implement changes to their internal models that have the effect of increasing or decreasing the amount of capital these subsidiaries must hold in order to maintain these ratings. Each of the rating agencies reviews its ratings of companies periodically and there can be no assurance that current ratings will be maintained in the future. In December 2009, A.M. Best revised the outlook on its rating relating to SNCC to stable from negative. In June ~~2009,~~2010, Moody’s revised the outlook on its ratings relating to RSLIC, ~~and~~ SNCC ~~as well as~~and the Company to ~~negative~~stable from ~~stable.~~negative. In April 2009, Fitch Ratings downgraded its ~~current~~ ratings relating to RSLIC and SNCC to A- (Good) from A (Good)~~, the Company’s senior unsecured debt to BBB- from BBB and the Company’s 2007 Junior Debentures to BB+ from BBB.~~. In December 2008, A.M. Best revised the outlook on its ratings relating to RSLIC, ~~and~~ SNCC ~~as well as~~and the Company to negative from stable. In October 2008, Standard & Poor’s revised the outlook on its ratings relating to RSLIC, ~~and~~ SNCC ~~as well as~~and the Company to negative from stable. Claims-paying and financial strength ratings relating to the Company’s insurance subsidiaries are based upon factors relevant to the policyholders of such subsidiaries and are not directed toward protection of investors in the Company. Downgrades in the ratings of the Company’s insurance subsidiaries could adversely affect sales of their products, increase policyholder withdrawals and could have a material adverse effect on the results of the Company’s operations. In addition, downgrades in the Company’s credit ratings, which are based on factors similar to those considered by the rating agencies in their evaluations of its insurance subsidiaries, could materially adversely affect its ability to access the capital markets and could increase the cost of its borrowings under the Amended Credit Agreement. The Company’s senior unsecured debt ratings as of ~~November 2009~~August 2010 from A.M. Best, Fitch, Moody’s and Standard & Poor’s were bbb, BBB-, Baa3 and ~~BBB+,~~BBB, respectively. The ratings for the Company’s 2007 Junior Debentures as of ~~November 2009~~August 2010 from A.M. Best, Fitch, Moody’s and Standard & Poor’s were bb+, ~~BB+,~~BB, Ba1 and ~~BBB-~~BB+, respectively. The ratings for RSLIC’s funding agreements as of ~~November 2009~~August 2010 from A.M. Best, Moody’s and Standard & Poor’s were a, A3, and A, respectively.

~~-30-~~-32-

~~Item 6. Exhibits~~


Item 6.		Exhibits

	10.1		Letter Agreement, dated April 22, 2010, with Robert M. Smith, Jr.

	11.1		Computation of Results per Share of Common Stock (incorporated by reference to Note GH to the Consolidated Financial Statements included elsewhere herein)

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

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

	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

	101.		The following financial information from the Company’s Quarterly Report on Form 10-Q for the six months ended June 30, 2010, formatted in XBRL: (i) Consolidated Statements of Income for the three and six months ended June 30, 2010 and 2009; (ii) Consolidated Balance Sheets at June 30, 2010 and December 31, 2009; (iii) Consolidated Statement of Equity for the six months ended June 30, 2010 and 2009; (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text.

SIGNATURES

Pursuant to the requirements 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. ~~(Registrant)~~
	/s/ ROBERT ROSENKRANZ
	Robert Rosenkranz
	Chairman of the Board and Chief Executive Officer ~~(Principal~~ (Principal Executive Officer)



	/s/ THOMAS W. BURGHART
	Thomas W. Burghart
	Senior Vice President and Treasurer (Principal Accounting and Financial Officer)

Date: ~~November~~August 9, ~~2009~~2010

~~-31-~~-33-


	Page
PART I. FINANCIAL INFORMATION (UNAUDITED)

Item 1. Financial Statements

Consolidated Statements of Income for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2009~~2010 and ~~2008~~2009		3

Consolidated Balance Sheets at ~~September~~June 30, ~~2009~~2010 and December 31, ~~2008~~2009		4

Consolidated Statements of Equity for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2009~~2010 and ~~2008~~2009		5

Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2009~~2010 and ~~2008~~2009		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		2931

Item 4. Controls and Procedures		2931

PART II. OTHER INFORMATION

Item ~~1A. Risk Factors~~1. Legal Proceedings		3032

Item ~~6. Exhibits~~1A. Risk Factors		3132

~~Signatures~~ Item 6. Exhibits		3133

Signatures		33


	December 31, 2008											December 31, 2009
			Gross Unrealized											Gross Unrealized
								Other Than											Other Than
	Amortized							Temporary		Fair		Amortized							Temporary			Fair
	Cost		Gains		Losses			Impairments		Value		Cost		Gains		Losses			Impairments			Value
	(dollars in thousands)											(dollars in thousands)
Residential mortgage-backed securities	$	1,367,041	$	40,489	$	(207,905	)	$	—	$	1,199,625
Agency residential mortgage-backed securities												$	699,257	$	33,417	$	(2,625	)	$	—		$	730,049
Non-agency residential mortgage-backed securities													842,947		48,235		(62,404	)		(29,450	)		799,328
Commercial mortgage-backed securities		44,190		—		(18,891	)		—		25,299		29,773		206		(3,682	)		(288	)		26,009
Corporate securities		1,339,519		9,688		(183,995	)		—		1,165,212		1,219,711		49,373		(30,918	)		—			1,238,166
Collateralized debt obligations		227,229		—		(116,268	)		—		110,961		215,301		868		(98,281	)		(3,444	)		114,444
U.S. Treasury and other U.S. Government guaranteed securities		51,826		5,905		—			—		57,731		108,114		3,036		(344	)		—			110,806
U.S. Government-sponsored enterprise securities		22,031		3,147		—			—		25,178		16,750		483		(231	)		—			17,002
Obligations of U.S. states, municipalities and political subdivisions		1,270,166		19,230		(100,020	)		—		1,189,376		1,801,595		59,108		(20,826	)		—			1,839,877

Total fixed maturity securities	$	4,322,002	$	78,459	$	(627,079	)	$	—	$	3,773,382	$	4,933,448	$	194,726	$	(219,311	)	$	(33,182	)	$	4,875,681

			��
	December 31, 2009
	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	$	126,097		$	(2,573	)	$	269	$	(51	)	$	126,366	$	(2,624	)
Non-agency residential mortgage-backed securities		109,508			(4,210	)		312,491		(87,645	)		421,999		(91,855	)
Commercial mortgage-backed securities		3,484			(17	)		18,466		(3,953	)		21,950		(3,970	)
Corporate securities		111,656			(3,739	)		200,186		(27,179	)		311,842		(30,918	)
Collateralized debt obligations		9,097			(4,179	)		95,651		(97,546	)		104,748		(101,725	)
U.S. Treasury and other U.S. Government guaranteed securities		56,693			(344	)		—		—			56,693		(344	)
U.S. Government-sponsored enterprise securities		9,769			(231	)		—		—			9,769		(231	)
Obligations of U.S. states, municipalities and political subdivisions		331,027			(5,128	)		160,359		(15,698	)		491,386		(20,826	)

Total fixed maturity securities	$	757,331		$	(20,421	)	$	787,422	$	(232,072	)	$	1,544,753	$	(252,493	)


	Three months ended			Nine months ended			Three Months Ended					Six Months Ended
	September 30, 2009			September 30, 2009			June 30,					June 30,
Balance at the beginning of period	$	59,420		$	—
							2010			2009		2010			2009
							(dollars in thousands)
Balance at the beginning of the period							$	86,092		$	43,045	$	89,658		$	—
Increases attributable to credit losses on securities for which an other than temporary impairment was not previously recognized		17,775			77,384			3,377			14,870		10,364			57,915
Increases attributable to credit losses on securities for which an other than temporary impairment was previously recognized		2,332			2,143			5,710			1,505		13,211			1,505
Reductions due to sales, maturities, pay downs or prepayments of securities for which an other than temporary impairment was previously recognized		(9,454	)		(9,454	)		(12,023	)		—		(30,077	)		—


Balance at the end of the period	$	70,073		$	70,073		$	83,156		$	59,420	$	83,156		$	59,420


						Weighted									Weighted
				Weighted		Average		Aggregate					Weighted		Average		Aggregate
	Number			Average		Remaining		Intrinsic		Number			Average		Remaining		Intrinsic
	of			Exercise		Contractual		Value		of			Exercise		Contractual		Value
Options	Options			Price		Term		($000)		Options			Price		Term		($000)
Outstanding at January 1, 2009		4,092,954		$	28.71
Outstanding at January 1, 2010											3,927,758		$	29.10
Granted		315,170			15.27						553,470			21.73
Exercised		(317,363	)		13.36						(227,810	)		13.73
Forfeited		(65,014	)		32.36						(187,975	)		28.85
Expired											(14,723	)		27.94

Outstanding at September 30, 2009		4,025,747			28.81		6.9	$	6,204
Outstanding at June 30, 2010											4,050,720			28.97		7.0	$	5,879


Exercisable at September 30, 2009		1,834,937		$	27.54		5.2	$	3,927
Exercisable at June 30, 2010											2,046,229		$	30.07		5.8	$	2,305


	Three Months Ended September 30, 2009
																U.S.
																Treasury and
				Residential			Commercial									Other U.S.					Assets
				Mortgage-			Mortgage-						Collateralized			Gov’t					held in
				backed			backed			Corporate			Debt			Guaranteed		Other			Separate
	Total			Securities			Securities			Securities			Obligations			Securities		Investments			Account
										(dollars in thousands)
Balance at beginning of quarter	$	554,020		$	180,356		$	18,736		$	131,745		$	103,499		$	2,185	$	17,310		$	100,189
Total (losses) gains
Included in earnings		(29,829	)		(1,077	)		(4,794	)		(19,917	)		(3,095	)		—		(946	)		—
Included in other comprehensive income		37,839			1,764			13,868			2,740			19,273			59		135			—
Purchases, issuances and settlements		26,326			10,307			(125	)		7,265			(409	)		493		(32	)		8,827
Net transfer (out of) in to Level 3		(34,345	)		(31,829	)		—			(2,516	)		—			—		—			—

Balance at end of the period	$	554,011		$	159,521		$	27,685		$	119,317		$	119,268		$	2,737	$	16,467		$	109,016


Net losses for the period included in earnings attributable to the net change in unrealized gains and losses of assets measured at fair value using unobservable inputs and held at September 30, 2009⁽¹⁾	$	(38,893	)	$	(8,826	)	$	(4,887	)	$	(19,933	)	$	(4,295	)	$	—	$	(952	)	$	—


	Nine months Ended September 30, 2009
																U.S.
																Treasury and
				Residential			Commercial									Other U.S.					Assets
				Mortgage-			Mortgage-						Collateralized			Gov’t					held in
				backed			backed			Corporate			Debt			Guaranteed		Other			Separate
	Total			Securities			Securities			Securities			Obligations			Securities		Investments			Account
	(dollars in thousands)
Balance at beginning of period	$	735,379		$	163,004		$	25,299		$	323,043		$	109,358		$	2,608	$	21,494		$	90,573
Total (losses) gains
Included in earnings		(61,614	)		(23,395	)		(4,305	)		(30,428	)		(3,993	)		—		507			—
Included in other comprehensive income		43,499			15,791			11,614			3,245			14,185			47		(1,383	)		—
Purchases, issuances and settlements		(117,633	)		19,444			(4,923	)		(146,246	)		(282	)		82		(4,151	)		18,443
Net transfer (out of) in to Level 3		(45,620	)		(15,323	)		—			(30,297	)		—			—		—			—

Balance at end of the period	$	554,011		$	159,521		$	27,685		$	119,317		$	119,268		$	2,737	$	16,467		$	109,016


Net losses for the period included in earnings attributable to the net change in unrealized gains and losses of assets measured at fair value using unobservable inputs and held at September 30, 2009⁽¹⁾	$	(68,480	)	$	(32,057	)	$	(4,887	)	$	(21,530	)	$	(7,471	)	$	—	$	(2,535	)	$	—


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

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