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 ~~March 31,~~June 30, 2011


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) 478-5142	13-3427277

(State or other jurisdiction of ~~incorporation or organization)~~	(Registrant’s telephone number, ~~including area code)~~	(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:

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):

Yesþ Noo

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


Large accelerated filerþ	Accelerated filero	~~Accelerated~~Non-accelerated filero	~~Non-accelerated filer~~Smaller reporting companyo
		(Do not check if a smaller reporting company)	~~Smaller reporting company~~o

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

Yeso Noþ

As of ~~May 4,~~July 29, 2011, the Registrant had ~~49,157,414~~49,263,977 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						Three Months Ended						Six Months Ended
	March 31,						June 30,						June 30,
	2011			2010			2011			2010			2011			2010
				(Restated)						(Restated)						(Restated)
Revenue:
Premium and fee income	$	376,399		$	347,763		$	385,012		$	352,566		$	761,411		$	700,329
Net investment income		92,294			84,050			83,191			78,234			175,485			162,284
Net realized investment losses:
Net realized investment gains (losses):
Total other than temporary impairment losses		(7,539	)		(27,273	)		(7,775	)		(21,659	)		(15,314	)		(48,932	)
Portion of other than temporary impairment losses (reclassified from) recognized in other comprehensive income		(1,479	)		4,275
Portion of other than temporary impairment losses recognized in other comprehensive income								2,432			826			953			5,101

Net impairment losses recognized in earnings		(9,018	)		(22,998	)		(5,343	)		(20,833	)		(14,361	)		(43,831	)
Other net realized investment gains		7,046			7,892			6,466			6,959			13,512			14,851

Net realized investment losses		(1,972	)		(15,106	)
								1,123			(13,874	)		(849	)		(28,980	)
Loss on early retirement of senior notes								—			(212	)		—			(212	)

Total revenues		466,721			416,707			469,326			416,714			936,047			833,421


Benefits and expenses:
Benefits, claims and interest credited to policyholders		271,265			246,321			273,163			244,687			544,428			491,008
Commissions		22,568			21,396			23,967			23,794			46,535			45,190
Amortization of cost of business acquired		18,961			17,063			19,025			16,848			37,986			33,911
Other operating expenses		77,909			74,870			78,145			75,818			156,054			150,688

		390,703			359,650			394,300			361,147			785,003			720,797


Operating income		76,018			57,057			75,026			55,567			151,044			112,624

Interest expense:
Corporate debt		6,010			7,323			6,007			8,264			12,017			15,587
Junior subordinated debentures		3,242			3,241			3,248			3,248			6,490			6,489

		9,252			10,564			9,255			11,512			18,507			22,076


Income before income tax expense		66,766			46,493			65,771			44,055			132,537			90,548

Income tax expense		16,395			9,912			15,762			9,385			32,157			19,297


Net income		50,371			36,581			50,009			34,670			100,380			71,251

Less: Net income attributable to noncontrolling interest		147			65			582			8			729			73


Net income attributable to shareholders	$	50,224		$	36,516		$	49,427		$	34,662		$	99,651		$	71,178


Basic results per share of common stock:
Net income attributable to shareholders	$	0.90		$	0.66		$	0.88		$	0.63		$	1.78		$	1.29

Diluted results per share of common stock:
Net income attributable to shareholders	$	0.89		$	0.66		$	0.87		$	0.62		$	1.75		$	1.28

Dividends paid per share of common stock	$	0.11		$	0.10		$	0.12		$	0.10		$	0.23		$	0.20

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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


	March 31,			December 31,			June 30,			December 31,
	2011			2010			2011			2010
				(Restated)						(Restated)
Assets:
Investments:
Fixed maturity securities, available for sale	$	5,865,382		$	5,717,090		$	6,181,482		$	5,717,090
Short-term investments		267,389			334,215			228,486			334,215
Other investments		613,343			498,678			614,180			498,678

		6,746,114			6,549,983			7,024,148			6,549,983
Cash		93,025			72,806			90,271			72,806
Cost of business acquired		151,777			149,325			140,872			149,325
Reinsurance receivables		355,241			360,255			357,010			360,255
Goodwill		93,929			93,929			93,929			93,929
Other assets		335,536			311,577			337,274			311,577
Assets held in separate account		129,428			123,674			126,213			123,674

Total assets	$	7,905,050		$	7,661,549		$	8,169,717		$	7,661,549


Liabilities and Equity:
Future policy benefits:
Life	$	338,324		$	331,816		$	338,545		$	331,816
Disability and accident		820,387			812,258			822,360			812,258
Unpaid claims and claim expenses:
Life		57,217			53,763			54,362			53,763
Disability and accident		460,083			457,642			462,648			457,642
Casualty		1,371,942			1,314,910			1,420,822			1,314,910
Policyholder account balances		1,756,144			1,753,744			1,884,029			1,753,744
Corporate debt		375,000			375,000			375,000			375,000
Junior subordinated debentures		175,000			175,000			175,000			175,000
Advances from Federal Home Loan Bank		55,342			55,342			55,342			55,342
Other liabilities and policyholder funds		770,307			673,270			774,815			673,270
Liabilities related to separate account		129,428			123,674			126,213			123,674

Total liabilities		6,309,174			6,126,419			6,489,136			6,126,419


Equity:
Preferred Stock, $.01 par; 50,000,000 shares authorized, none issued		—			—			—			—
Class A Common Stock, $.01 par; 150,000,000 shares authorized; 56,606,884 and 56,463,776 shares issued and outstanding, respectively		566			565
Class A Common Stock, $.01 par; 150,000,000 shares authorized; 56,676,218 and 56,463,776 shares issued and outstanding, respectively								567			565
Class B Common Stock, $.01 par; 20,000,000 shares authorized; 5,981,049 shares issued and outstanding		60			60			60			60
Additional paid-in capital		688,300			682,816			692,696			682,816
Accumulated other comprehensive income		41,206			30,932			78,231			30,932
Retained earnings		1,057,435			1,013,369			1,100,128			1,013,369
Treasury stock, at cost; 7,761,216 shares of Class A Common Stock, and 227,216 shares of Class B Common Stock		(197,246	)		(197,246	)		(197,246	)		(197,246	)

Total shareholders’ equity		1,590,321			1,530,496			1,674,436			1,530,496
Noncontrolling interest		5,555			4,634			6,145			4,634

Total equity		1,595,876			1,535,130			1,680,581			1,535,130

Total liabilities and equity	$	7,905,050		$	7,661,549		$	8,169,717		$	7,661,549

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(Dollars in Thousands)

(Unaudited)


																																Accumulated
								Accumulated																								Other
	Class A		Class B			Additional		Other									Total			Non-						Class A		Class B		Additional		Comprehensive									Total			Non-
	Common		Common			Paid in		Comprehensive			Retained			Treasury			Shareholders’			controlling			Total			Common		Common		Paid in		Income			Retained			Treasury			Shareholders’			controlling			Total
	Stock		Stock			Capital		Income (Loss)			Earnings			Stock			Equity			Interest			Equity			Stock		Stock		Capital		(Loss)			Earnings			Stock			Equity			Interest			Equity
Balance, January 1, 2010	$	560	$	60		$	661,895	$	(33,956	)	$	927,706		$	(197,246	)	$	1,359,019		$	3,546		$	1,362,565		$	560	$	60	$	661,895	$	(33,956	)	$	927,706		$	(197,246	)	$	1,359,019		$	3,546		$	1,362,565
Cumulative effect adjustment		—		—			—		—			(60,002	)		—			(60,002	)		—			(60,002	)		—		—		—		—			(60,002	)		—			(60,002	)		—			(60,002	)

Adjusted balance January 1, 2010		560		60			661,895		(33,956	)		867,704			(197,246	)		1,299,017			3,546			1,302,563			560		60		661,895		(33,956	)		867,704			(197,246	)		1,299,017			3,546			1,302,563


Net income		—		—			—		—			36,516			—			36,516			65			36,581			—		—		—		—			71,178			—			71,178			73			71,251
Other comprehensive income:
Decrease in net unrealized depreciation on investments		—		—			—		24,050			—			—			24,050			—			24,050
Increase in other than temporary impairment losses recognized in other comprehensive income		—		—			—		(1,437	)		—			—			(1,437	)		—			(1,437	)
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		—		—			—		196			—			—			196			—			196			—		—		—		473			—			—			473			—			473
Change in net periodic pension cost		—		—			—		51			—			—			51			—			51			—		—		—		102			—			—			102			—			102

Comprehensive income												—						59,376			65			59,441																		138,398			73			138,471
Change in noncontrolling interest ownership		—		—			—		—			—			—			—			(2,053	)		(2,053	)
Exercise of stock options		1		—			4,044		—			—			—			4,045			—			4,045
Net distribution to noncontrolling interest																											—		—		—		—			—			—			—			(2,237	)		(2,237	)
Issuance of deferred and restricted shares and exercise of stock options																											2		—		5,741		—			—			—			5,743			—			5,743
Stock-based compensation		—		—			1,788		—			—			—			1,788			—			1,788			—		—		3,428		—			—			—			3,428			—			3,428
Cash dividends		—		—	��		—		—			(5,524	)		—			(5,524	)		—			(5,524	)		—		—		—		—			(11,054	)		—			(11,054	)		—			(11,054	)


Balance, March 31, 2010	$	561	$	60		$	667,727	$	(11,096	)	$	898,696		$	(197,246	)	$	1,358,702		$	1,558		$	1,360,260
Balance, June 30, 2010																										$	562	$	60	$	671,064	$	33,264		$	927,828		$	(197,246	)	$	1,435,532		$	1,382		$	1,436,914


Balance, January 1, 2011	$	565	$	60		$	682,816	$	30,932		$	1,013,369		$	(197,246	)	$	1,530,496		$	4,634		$	1,535,130		$	565	$	60	$	682,816	$	30,932		$	1,013,369		$	(197,246	)	$	1,530,496		$	4,634		$	1,535,130


Net income		—		—			—		—			50,224			—			50,224			147			50,371			—		—		—		—			99,651			—			99,651			729			100,380
Other comprehensive income:
Increase in net unrealized appreciation on investments		—		—			—		5,804			—			—			5,804			—			5,804			—		—		—		44,462			—			—			44,462			—			44,462
Decrease in other than temporary impairment losses recognized in other comprehensive income		—		—			—		4,393			—			—			4,393			—			4,393			—		—		—		2,682			—			—			2,682			—			2,682
Change in net periodic pension cost		—		—			—		77			—			—			77			—			77			—		—		—		155			—			—			155			—			155

Comprehensive income												—						60,498			147			60,645																		146,950			729			147,679
Change in noncontrolling interest ownership		—		—			—		—			—			—			—			774			774
Exercise of stock options		1		—			4,343		—			—			—			4,344			—			4,344
Net contribution from noncontrolling interest																											—		—		—		—			—			—			—			782			782
Issuance of deferred and restricted shares and exercise of stock options																											2		—		9,116		—			—			—			9,118			—			9,118
Stock-based compensation		—		—			1,141		—			—			—			1,141			—			1,141			—		—		764		—			—			—			764			—			764
Cash dividends		—		—			—		—			(6,158	)		—			(6,158	)		—			(6,158	)		—		—		—		—			(12,892	)		—			(12,892	)		—			(12,892	)


Balance, March 31, 2011	$	566	$	60		$	688,300	$	41,206		$	1,057,435		$	(197,246	)	$	1,590,321		$	5,555		$	1,595,876
Balance, June 30, 2011																										$	567	$	60	$	692,696	$	78,231		$	1,100,128		$	(197,246	)	$	1,674,436		$	6,145		$	1,680,581

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)


	Three Months Ended						Six Months Ended
	March 31,						June 30,
	2011			2010			2011			2010
				(Restated)						(Restated)
Operating activities:
Net income attributable to shareholders	$	50,224		$	36,516		$	99,651		$	71,178
Adjustments to reconcile net income attributable to shareholders to net cash provided by operating activities:
Change in policy liabilities and policyholder accounts		123,648			94,640			149,619			84,646
Net change in reinsurance receivables and payables		1,017			(7,428	)		(4,016	)		(11,574	)
Amortization, principally the cost of business acquired and investments		13,912			6,906			16,626			24,624
Deferred costs of business acquired		(26,032	)		(20,630	)		(45,230	)		(34,273	)
Net realized losses on investments		1,972			15,106			849			28,980
Net change in federal income taxes		23,875			9,138			25,534			(5,473	)
Other		(71,177	)		(32,743	)		(45,373	)		(25,398	)

Net cash provided by operating activities		117,439			101,505			197,660			132,710


Investing activities:
Purchases of investments and loans made		(826,996	)		(435,672	)		(1,574,882	)		(936,660	)
Sales of investments and receipts from repayment of loans		592,455			165,711			1,002,719			494,984
Maturities of investments		71,970			139,323			171,331			176,718
Net change in short-term investments		66,826			(13,510	)		105,729			55,689
Change in deposit in separate account								—			(2,965	)

Net cash used by investing activities		(95,745	)		(144,148	)		(295,103	)		(212,234	)


Financing activities:
Deposits to policyholder accounts		99,076			40,332			252,096			122,809
Withdrawals from policyholder accounts		(97,028	)		(26,138	)		(129,235	)		(54,905	)
Proceeds from issuance of 2020 Senior Notes		—			250,000			—			250,000
Principal payments under bank credit facility		—			(222,000	)		—			(222,000	)
Early retirement of senior notes								—			(5,000	)
Cash dividends paid on common stock		(6,158	)		(5,524	)		(12,892	)		(11,054	)
Other financing activities		2,635			2,292			4,939			2,095

Net cash (used) provided by financing activities		(1,475	)		38,962
Net cash provided by financing activities								114,908			81,945


Increase (decrease) in cash		20,219			(3,681	)
Cash at beginning of period		72,806			65,464
Increase in cash								17,465			2,421
Cash at beginning of year								72,806			65,464

Cash at end of period	$	93,025		$	61,783		$	90,271		$	67,885

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note A —Significant Accounting Policies

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

Accounting Changes

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

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

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

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

-7-

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

Note A —Significant Accounting Policies — (Continued)

Recently Issued Accounting Standards

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

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

Note B—Investments

At ~~March 31,~~June 30, 2011, the Company had fixed maturity securities available for sale with a carrying value and a fair value of ~~$5,865.4~~$6,181.5 million and an amortized cost of ~~$5,779.0~~$6,027.7 million. At December 31, 2010, the Company had fixed maturity securities available for sale with a carrying value and a fair value of $5,717.1 million and an amortized cost of $5,650.6 million. Declines in market value relative to such securities’ amortized cost which are determined to be other than temporary pursuant to the Company’s methodology for such determinations and to represent credit losses are reflected as reductions in the amortized cost of such securities, as further discussed below.

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


	March 31, 2011												June 30, 2011
			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)
Agency residential mortgage-backed securities	$	649,441	$	36,148	$	(1,816	)	$	—		$	683,773	$	640,888	$	42,324	$	(1,158	)	$	—		$	682,054
Non-agency residential mortgage-backed securities		773,428		79,459		(18,913	)		(18,016	)		815,958		777,566		68,734		(19,865	)		(20,555	)		805,880
Commercial mortgage-backed securities		38,642		703		(2,289	)		(139	)		36,917		83,492		977		(1,078	)		(61	)		83,330
Corporate securities		1,583,511		79,187		(19,039	)		(389	)		1,643,270		1,701,008		87,531		(20,374	)		(390	)		1,767,775
Collateralized debt obligations		192,099		9,399		(18,208	)		(1,458	)		181,832		232,771		7,993		(19,012	)		(1,628	)		220,124
U.S. Treasury and other U.S. Government guaranteed securities		178,224		3,816		(4,194	)		—			177,846		129,348		4,709		(1,385	)		—			132,672
U.S. Government-sponsored enterprise securities		113,439		65		(2,053	)		—			111,451		109,853		213		(1,309	)		—			108,757
Obligations of U.S. states, municipalities and political subdivisions		2,250,217		33,823		(69,705	)		—			2,214,335		2,352,794		57,326		(29,230	)		—			2,380,890

Total fixed maturity securities	$	5,779,001	$	242,600	$	(136,217	)	$	(20,002	)	$	5,865,382	$	6,027,720	$	269,807	$	(93,411	)	$	(22,634	)	$	6,181,482

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

Note B — Investments — (Continued)


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

Total fixed maturity securities	$	5,650,596	$	244,728	$	(151,474	)	$	(26,760	)	$	5,717,090

The following table contains information, as of ~~March 31,~~June 30, 2011, regarding the portions of the Company’s investments in non-agency residential mortgage-backed securities (“RMBS”) represented by securities whose underlying mortgage loans are categorized as prime, Alt-A and subprime, respectively, and the distributions of the securities within these categories by the years in which they were issued (vintages) and the highest of their ratings from Standard & Poor’s, Moody’s and Fitch. All dollar amounts in this table are based upon the fair values of these securities as of ~~March 31,~~June 30, 2011. As of this date, based upon the most recently available data regarding the concentrations by state of the mortgage loans underlying these securities, the states having loan concentrations in excess of 5% were as follows: California (38.0%), New York ~~(7.2%~~(7.4%) and Florida ~~(6.7%~~(6.9%).

~~-8-~~

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:


	March 31, 2011															June 30, 2011
	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)
Agency residential mortgage-backed securities	$	90,460	$	(1,782	)	$	230	$	(34	)	$	90,690	$	(1,816	)	$	60,682	$	(1,142	)	$	227	$	(16	)	$	60,909	$	(1,158	)
Non-agency residential mortgage-backed securities		20,898		(1,070	)		221,691		(35,859	)		242,589		(36,929	)
Non-agency residential mortgage- backed securities																	74,521		(2,694	)		204,665		(37,726	)		279,186		(40,420	)
Commercial mortgage-backed securities		10,272		(240	)		5,747		(2,188	)		16,019		(2,428	)		23,141		(582	)		4,484		(557	)		27,625		(1,139	)
Corporate securities		384,712		(11,581	)		51,989		(7,847	)		436,701		(19,428	)		381,991		(12,129	)		45,576		(8,635	)		427,567		(20,764	)
Collateralized debt obligations		24,755		(794	)		72,702		(18,872	)		97,457		(19,666	)		82,560		(1,703	)		68,710		(18,937	)		151,270		(20,640	)
U.S. Treasury and other U.S. Government guaranteed securities		98,643		(4,194	)		—		—			98,643		(4,194	)		47,236		(1,385	)		—		—			47,236		(1,385	)
U.S. Government-sponsored enterprise securities		74,364		(2,053	)		—		—			74,364		(2,053	)		54,455		(1,309	)		—		—			54,455		(1,309	)
Obligations of U.S. states, municipalities & political subdivisions		1,234,088		(57,659	)		62,396		(12,046	)		1,296,484		(69,705	)
Obligations of U.S. states, municipalities and political subdivisions																	741,361		(19,413	)		62,611		(9,817	)		803,972		(29,230	)

Total fixed maturity securities	$	1,938,192	$	(79,373	)	$	414,755	$	(76,846	)	$	2,352,947	$	(156,219	)	$	1,465,947	$	(40,357	)	$	386,273	$	(75,688	)	$	1,852,220	$	(116,045	)

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

~~Note B — Investments — (Continued)~~

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

In the case of structured securities such as RMBS, commercial mortgage-backed securities and collateralized debt obligations as to which a decline in fair value is judged to be other than temporary, the amount of the credit loss arising from the impairment of the security is determined by discounting such security’s expected cash flows at its effective interest rate, taking into account the security’s purchase price. The key inputs relating to such expected cash flows consist of the future scheduled payments on the underlying loans and the estimated frequency and severity of future defaults on these loans. For those securities as to which the Company recognized credit losses in 2011 as a result of determinations that such securities were other than temporarily impaired, representative default frequency estimates ranged from 2.4% to ~~4.4%~~5.3% and representative default severity estimates ranged from 45.8% to ~~59.3%~~62.6%.

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

During the first ~~three months~~half of 2011, the Company recognized ~~$4.9~~$10.0 million of after-tax other than temporary impairment ~~credit losses. A total~~losses, of ~~$5.9~~which $9.3 million ~~of after-tax impairment losses~~ was recognized ~~including an additional $1.0~~as after-tax realized investment losses in the income statement related to credit losses and $0.7 million was recognized, net of ~~after-tax losses previously recognized~~the related income tax benefit, as a component of accumulated other comprehensive income on the balance sheet ~~that became credit losses during the first three months of 2011.~~related to noncredit losses. Impairment losses were offset by ~~$4.6~~$8.8 million of after-tax other realized investment gains, resulting in a net of ~~$1.3~~$0.6 million after-tax realized investment losses being recognized during the period.

-13-

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

~~Note B — Investments — (Continued)~~


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

Balance at the end of the period	$	75,594		$	83,156		$	75,594		$	83,156

The gross unrealized losses at ~~March 31,~~June 30, 2011 are attributable to ~~1,254~~912 fixed maturity security positions, with the largest unrealized loss associated with any one security equal to ~~$3.4~~$4.0 million. At ~~March 31,~~June 30, 2011 approximately ~~48.2%~~34.9% of these aggregate gross unrealized losses were attributable to fixed maturity security positions as to which the unrealized loss represented 10% or less of the amortized cost for such security. Unrealized losses attributable to fixed maturity securities having investment grade ratings by a nationally recognized statistical rating organization comprised ~~59.6%~~40.9% of the aggregate gross unrealized losses at ~~March 31,~~June 30, 2011, with the remainder of such losses being attributable to non-investment grade fixed maturity securities.

At ~~March 31,~~June 30, 2011, the Company held approximately ~~$755.3~~$834.9 million of insured municipal fixed maturity securities, which represented approximately ~~11%~~12% of the Company’s total invested assets. These securities had a weighted average credit rating of “A” by nationally recognized statistical rating organizations at ~~March 31,~~June 30, 2011. For the portion of these securities having ratings by nationally recognized statistical rating organizations without giving effect to the credit enhancement provided by the insurance, which totaled ~~$715.6~~$785.2 million at ~~March 31,~~June 30, 2011, the weighted average credit rating at such date by such organizations was “AA”. Insurers of significant portions of the municipal fixed maturity securities held by the Company at ~~March 31,~~June 30, 2011 included National Public Finance Guarantee Corp. ($~~279.6~~303.8 million), Assured Guaranty ($~~215.1~~265.1 million), Ambac Financial Group, Inc. ($~~151.9~~157.1 million), Financial Guaranty Insurance Company ($~~35.9~~32.9 million) and Radian ($~~24.7~~25.3 million). At ~~March 31,~~June 30, 2011, the Company did not have significant holdings of credit enhanced asset-backed or mortgage-backed securities, nor did it have any significant direct investments in the guarantors of the municipal fixed maturity securities held by the Company.

Note C — Fair Value Measurements

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

Level ~~1 —~~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.

-14-

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

Note C — Fair Value Measurements — (Continued)

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

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

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

Instruments included in fixed maturity securities available for sale include mortgage-backed and corporate securities, U.S. Treasury and other U.S. government guaranteed securities, securities issued by U.S. government-sponsored enterprises, and obligations of U.S. states, municipalities and political subdivisions. The market liquidity of each security is taken into consideration in the valuation technique used to value such security. For securities where market transactions involving identical or comparable assets generate sufficient relevant information, the Company employs a market approach to valuation. If sufficient information is not generated from market transactions involving identical or comparable assets, the Company uses an income approach to valuation. The majority of the instruments included in fixed maturity securities available for sale are

~~-14-~~

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

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

valued utilizing observable inputs; accordingly, they are categorized in either Level l or Level 2 of the fair value hierarchy described above. However, in instances where significant inputs utilized are unobservable, the securities are categorized in Level 3 of the fair value hierarchy.

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

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

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

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

-15-

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

Note C — Fair Value Measurements — (Continued)

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

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

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

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

~~-15-~~

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

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

investments are included in Level 3 of the fair value hierarchy.

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

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

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

March 31, 2011
Total Level 1 Level 2 Level 3
(dollars in thousands)
Assets:

Fixed maturity securities, available for sale:
Agency residential mortgage-backed securities $ 683,773 $ — $ 673,574 $ 10,199
Non-agency residential mortgage-backed securities 815,958 — 775,893 40,065
Commercial mortgage-backed securities 36,917 — 35,745 1,172
Corporate securities 1,643,270 907 1,569,339 73,024
Collateralized debt obligations 181,832 — — 181,832
U.S. Treasury and other U.S. Government guaranteed securities 177,846 126,126 43,605 8,115
U.S. Government-sponsored enterprise securities 111,451 — 82,133 29,318
Obligations of U.S. states, municipalities and political subdivisions 2,214,335 1,343 2,212,992 —
Other investments 154,738 149,174 — 5,564
Assets held in separate account 129,428 — — 129,428

Total $ 6,149,548 $ 277,550 $ 5,393,281 $ 478,717

Liabilities:

Other liabilities $ 85,598 $ 85,598 $ — $ —

-16-

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

Note C — Fair Value Measurements — (Continued)

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


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

Total	$	6,536,554	$	304,169	$	5,705,714	$	526,671


Liabilities:
Other liabilities	$	85,254	$	85,254	$	—	$	—

The following table provides reconciliations for Level 3 assets measured at fair value on a recurring basis. Transfers into and out of Level 3 are recognized as of the end of the quarter in which they occur.


	Three Months Ended March 31, 2011																							Three Months Ended June 30, 2011
						Total Gains																							Total Gains
						(Losses)																							(Losses)
			Total Gains			Included in																		Balance at Beginning		Total Gains (Losses) Included in			Included in Other Com- prehensive										Transfers Into		Transfers Out of			Balance End of the
	Balance at		(Losses)			Other Com-											Transfers		Transfers			Balance		of Quarter		Earnings			Income			Purchases		Issuances		Settlements			Level 3		Level 3			Period
	Beginning		Included in			prehensive											Into		Out of			End of the		(dollars in thousands)
	of Year		Earnings			Income			Purchases			Issuances		Settlements			Level 3		Level 3			Period
												(dollars in thousands)
Agency residential mortgage- backed securities	$	11,266	$	(19	)	$	(60	)	$	—		$	—	$	(988	)	$	—	$	—		$	10,199
Non-agency residential mortgage- backed securities		37,520		139			(283	)		3,871			—		(1,182	)		—		—			40,065
Agency residential mortgage-backed securities																								$	10,199	$	(19	)	$	77		$	365	$	—	$	(1,044	)	$	—	$	—		$	9,578
Non-agency residential mortgage-backed securities																									40,065		132			(888	)		—		—		(1,090	)		—		(3,875	)		34,344
Commercial mortgage-backed securities		1,327		—			(14	)		—			—		(141	)		—		—			1,172		1,172		(1	)		(20	)		396		—		(142	)		—		—			1,405
Corporate securities		60,968		(26	)		(1,063	)		18,576			—		(3,573	)		1,645		(3,503	)		73,024		73,024		1,228			411			57,462		—		(5,337	)		—		(11,804	)		114,984
Collateralized debt obligations		175,184		2,201			14,144			—	��		—		(9,697	)		—		—			181,832		181,832		1,581			(2,348	)		44,257		—		(5,864	)		—		—			219,458
U.S. Treasury and other U.S. Government guaranteed securities		9,015		(3	)		(791	)		—			—		(106	)		—		—			8,115		8,115		(21	)		(79	)		—		—		(168	)		—		—			7,847
U.S. Government-sponsored enterprise securities		4,020		6			(10	)		23,269			—		—			2,033		—			29,318		29,318		129			19			4		—		(25,063	)		—		(371	)		4,036
Obligations of U.S. states, municipalities and political subdivisions		2,855		—			(63	)		—			—		—			—		(2,792	)		—		—		—			3			1,606		—		—			1,302		—			2,911
Other investments		6,449		—			65			3			—		—			—		(953	)		5,564		5,564		—			—			331		—		—			—		—			5,895
Assets held in separate account		123,674		—			—			5,754			—		—			—		—			129,428
Assets held in separate account⁽¹⁾																									129,428		(2,546	)		—			7,225		—		(7,894	)		—		—			126,213

Total	$	432,278	$	2,298		$	11,925		$	51,473		$	—	$	(15,687	)	$	3,678	$	(7,248	)	$	478,717	$	478,717	$	483		$	(2,825	)	$	111,646	$	—	$	(46,602	)	$	1,302	$	(16,050	)	$	526,671

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

Note C — Fair Value Measurements — (Continued)


	Six Months Ended June 30, 2011
						Total Gains
						(Losses)
	Balance at Beginning		Total Gains (Losses) Included in			Included in Other Com- prehensive										Transfers Into		Transfers Out of			Balance End of the
	of Year		Earnings			Income			Purchases		Issuances		Settlements			Level 3		Level 3			Period
	(dollars in thousands)
Agency residential mortgage-backed securities	$	11,266	$	(38	)	$	17		$	365	$	—	$	(2,032	)	$	—	$	—		$	9,578
Non-agency residential mortgage-backed securities		37,520		271			(1,172	)		3,873		—		(2,273	)		—		(3,875	)		34,344
Commercial mortgage-backed securities		1,327		(1	)		(34	)		396		—		(283	)		—		—			1,405
Corporate securities		60,968		1,203			(652	)		76,037		—		(8,910	)		1,645		(15,307	)		114,984
Collateralized debt obligations		175,184		3,783			11,796			44,255		—		(15,560	)		—		—			219,458
U.S. Treasury and other U.S. Government guaranteed securities		9,015		(24	)		(870	)		—		—		(274	)		—		—			7,847
U.S. Government-sponsored enterprise securities		4,020		135			10			23,272		—		(25,064	)		2,033		(370	)		4,036
Obligations of U.S. states, municipalities and political subdivisions		2,855		—			(60	)		1,606		—		—			1,302		(2,792	)		2,911
Other investments		6,449		—			65			334		—		—			—		(953	)		5,895
Assets held in separate account⁽¹⁾		123,674		3,839			—			23,203		—		(24,503	)		—		—			126,213

Total	$	432,278	$	9,168		$	9,100		$	173,341	$	—	$	(78,899	)	$	4,980	$	(23,297	)	$	526,671


(1)		Because the positive or negative investment performance of these assets accrues to policyholders, who bear the investment risk of these assets, net investment income and capital gains and losses arising from these assets are not included in the Company’s consolidated investment earnings. In addition, purchases and settlements relating to the separate account are not included in the Company’s consolidated statements of cash flows.

The carrying values and estimated fair values of certain of the Company’s financial instruments not recorded at fair value in the consolidated balance sheets are shown below. Because fair values for all balance sheet items are not required to be disclosed, the aggregate fair value amounts presented below are not reflective of the underlying value of the Company.


	March 31, 2011				December 31, 2010				June 30, 2011				December 31, 2010
	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	$	267,389	$	267,389	$	334,215	$	334,215	$	228,486	$	228,486	$	334,215	$	334,215
Other investments		458,605		458,605		351,678		351,678		385,321		385,321		351,678		351,678

Liabilities:
Policyholder account balances	$	1,667,250	$	1,767,406	$	1,662,932	$	1,761,795	$	1,801,139	$	1,892,500	$	1,662,932	$	1,761,795
Corporate debt		375,000		408,450		375,000		402,618		375,000		408,058		375,000		402,618
Junior subordinated debentures		175,000		167,491		175,000		161,541		175,000		169,381		175,000		161,541
Advances from Federal Home Loan Bank		55,342		70,006		55,342		70,046		55,342		71,858		55,342		70,046
Liabilities related to separate account		129,428		129,428		123,674		123,674		126,213		126,213		123,674		123,674

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

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

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.

The fair values of policyholder account balances are net of reinsurance receivables and the carrying values have been decreased for related acquisition costs of ~~$80.0~~$74.2 million and $82.1 million at ~~March 31,~~June 30, 2011 and December 31, 2010, respectively. Fair values for policyholder account balances were determined by estimating future cash flows discounted at a current market rate.

The Company believes that the fair value of its variable rate long-term debt is equal to its carrying value, since the variable rates of interest on this debt are reflective of market conditions in effect from time to time. The fair values of the 7.875% Senior Notes due 2020, the outstanding borrowings under the Company’s Credit Agreement with Bank of America, N.A., as administrative agent, and a group of lenders and the 7.376% fixed-to-floating rate junior subordinated debentures due 2067 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 — Segment Information


	Three Months Ended						Three Months Ended						Six Months Ended
	March 31,						June 30,						June 30,
	2011			2010			2011			2010			2011			2010
	dollars in thousands)									(dollars in thousands)
Revenues:
Group employee benefit products	$	421,293		$	386,291		$	421,287		$	386,872		$	842,580		$	773,163
Asset accumulation products		34,112			31,597			33,162			30,490			67,274			62,087
Other⁽¹⁾		13,288			13,925			13,754			13,438			27,042			27,363

		468,693			431,813			468,203			430,800			936,896			862,613
Net realized investment losses		(1,972	)		(15,106	)
Net realized investment gains (losses)								1,123			(13,874	)		(849	)		(28,980	)
Loss on early retirement of senior notes								—			(212	)		—			(212	)

	$	466,721		$	416,707		$	469,326		$	416,714		$	936,047		$	833,421

Operating income (loss):
Operating income:
Group employee benefit products	$	76,078		$	69,068		$	73,082		$	65,320		$	149,160		$	134,388
Asset accumulation products		9,703			10,412			9,628			11,316			19,331			21,728
Other⁽¹⁾		(7,791	)		(7,317	)		(8,807	)		(6,983	)		(16,598	)		(14,300	)

		77,990			72,163			73,903			69,653			151,893			141,816
Net realized investment losses		(1,972	)		(15,106	)
Net realized investment gains (losses)								1,123			(13,874	)		(849	)		(28,980	)
Loss on early retirement of senior notes								—			(212	)		—			(212	)

	$	76,018		$	57,057		$	75,026		$	55,567		$	151,044		$	112,624

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, life, 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.

In recent years, the Company has benefited from the stable market conditions prevailing for its excess workers’ compensation products as to pricing and other contract terms. However, because pricing in the primary workers’ compensation market has been increasingly competitive, the demand for excess workers’ compensation products has not significantly increased. In addition, the downward pressure on employment and wage levels exerted by the recent recession has negatively affected premium levels for insurance products which are based upon employers’ payrolls, such as the Company’s excess workers’ compensation products. This effect has been ameliorated by the Company’s emphasis on municipalities, hospitals and schools; sectors whose payroll levels generally have been less adversely affected by the recent recession. The Company has enhanced its focus on its sales and marketing function for these products. During the first ~~three~~six months of 2011, the Company achieved significantly improved levels of new business production, as well as improvements in pricing, for these products.

For its other group employee benefit products, the Company is continuing to experience challenging market conditions from a competitive standpoint. These conditions, in addition to the continuing effects of the recent recession on employment and wage levels have, in recent years, adversely impacted the Company’s ability to achieve higher levels of new business production and growth in premiums for these products. 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. During the first ~~three~~six months of 2011, the Company achieved significantly improved levels of new business production, as well as improvements in pricing, for these products. The Company is also emphasizing its suite of voluntary group insurance products, which includes, among others, its group limited benefit health insurance product. The Company is generally marketing this product with a fixed indemnity benefit structure that is exempt from certain of the requirements of the federal health care reform legislation; however, 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, the Company has issued 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 corresponding principal amounts. At their maturity in March 2011, the Company repaid the remaining $65.0 million in aggregate principal amount of these funding agreements, resulting in a corresponding repayment of the funding agreement-backed notes, and no such funding agreements remain outstanding. From time to time, the Company acquires blocks of existing SPDA and FPA policies from other insurers through indemnity assumed reinsurance ~~transactions.~~transactions and issues funding agreements. The Company believes that ~~funding agreements and~~ annuity reinsurance arrangements and funding agreements enhance the Company’s asset accumulation business by providing alternative sources of funds for this business. The Company’s liabilities for ~~funding agreements and~~ annuity reinsurance arrangements and funding agreements are recorded in policyholder account balances. Deposits from the Company’s asset accumulation business are recorded as liabilities rather than as premiums. Revenues from the Company’s asset accumulation business are primarily comprised of investment income earned on the funds under management. The profitability of asset accumulation products is primarily dependent on the spread achieved between the

~~-21-~~

The management of the Company’s investment portfolio is an important component of its profitability. In recent years, the Company has repositioned its investment portfolio to reduce its holdings 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 particular, those investments whose performance had demonstrated the highest levels of variability. As part of this effort, the Company 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 market conditions of recent years, the Company ~~has~~had been maintaining a significant proportion of its portfolio in short-term investments, which totaled ~~$267.4~~$228.5 million and $334.2 million at ~~March~~June 30, 2011 and December 31, 2010, respectively. The Company has made progress in its recent efforts to deploy a significant portion of these short-term investments into longer-term fixed maturity securities which offer more attractive yields. However, since the recent market environment, in which low interest rates and tight credit spreads have been prevailing, continues to be challenging from the standpoint of making new investments on attractive terms, 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 2010 and in the first ~~three~~six months of ~~2011, during which favorable market conditions prevailed.~~2011. However, market conditions may worsen 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 levels of the Company’s realized investment losses from declines in market value relative to the amortized cost of various securities that it determined to be other than temporary decreased significantly in ~~2010 and~~ the first ~~quarter~~half of 2011 as compared to 2010 and 2009, investment losses may recur in the 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, 2010 (the “2010 Form 10-K”). Capitalized terms used herein without definition have the meanings ascribed to them in the 2010 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 2010 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 2010 Form 10-K, “Risk Factors”.

~~-22-~~

Results of Operations

~~Three~~Six Months Ended ~~March 31,~~June 30, 2011 Compared to
~~Three~~Six Months Ended ~~March 31,~~June 30, 2010

Summary of Results.Net income attributable to shareholders was ~~$50.2~~$99.7 million, or ~~$0.89~~$1.75 per diluted share, for the first ~~quarter~~half of 2011 as compared to ~~$36.5~~$71.2 million, or ~~$0.66~~$1.28 per diluted share, for the first ~~quarter~~half of 2010. Net income in the first ~~quarter~~half of 2011 and 2010 included net realized investment losses, net of the related income tax ~~expense,~~benefit, of ~~$1.3~~$0.6 million, or ~~$0.02~~$0.01 per diluted share, and ~~$9.8~~$18.8 million, or ~~$0.18~~$0.34 per diluted share, respectively. Net income in the first half of 2011 as compared to the prior period benefited from growth in income from the Company’s core group employee benefit products, an increase in net investment income and decreases in the levels of realized investment losses and interest expense. Net realized investment losses in the first half of 2011 and 2010 included losses, net of the related income tax benefit, of $9.3 million, or $0.16 per diluted share, and $28.5 million, or $0.51 per diluted share, respectively, due to credit loss-related impairments in the values of certain investments. The decrease in interest expense was primarily due to the early retirement of the 2033 Senior Notes.

-23-

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 fair value of an investment is other than temporary. Early retirement of senior notes occurs based on management’s decision to redeem or repurchase these notes prior to maturity. 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 the 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 $100.2 million, or $1.76 per diluted share, in the first half of 2011 compared to $90.2 million, or $1.62 per diluted share. This increase is primarily due to growth in income from the Company’s core group employee benefit products, an increase in net investment income and a decrease in interest expense.

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,
	2011			2010
Operating earnings	$	100,203		$	90,153
Net realized investment losses, net of taxes⁽¹⁾		(552	)		(18,837	)
Loss on early retirement of senior notes⁽²⁾		—			(138	)

Net income attributable to shareholders	$	99,651		$	71,178


Diluted results per share of common stock
Operating earnings	$	1.76		$	1.62
Net realized investment losses, net of taxes⁽¹⁾		(0.01	)		(0.34	)
Loss on early retirement of senior notes⁽²⁾		—			(0.00	)

Net income attributable to shareholders	$	1.75		$	1.28


(1)		Net of an income tax benefit of $0.3 million and $10.1 million, or $0.01 per diluted share and $0.18 per diluted share, for the six months ended June 30, 2011 and 2010, respectively. The tax effect is calculated using the Company’s statutory tax rate of 35%.

(2)		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 for the first half of 2011 was $761.4 million as compared to $700.3 million for the first half of 2010, an increase of 9%.Premiums from core group employee benefit products, which include disability, life, excess workers’ compensation, travel accident and dental insurance, limited benefit health insurance and assumed workers’ compensation and casualty reinsurance, increased 8% to $725.9 million for the first half of 2011 from $671.1 million for the first half of 2010, reflecting higher new business production, price increases and improved persistency. New business production for the Company’s core group employee benefit products increased 23% to $148.0 million in the first half of 2011 from $120.7 million in the first half of 2010. Premiums from excess workers’ compensation insurance for self-insured employers increased 11% to $153.9 million in the first half of 2011 from $138.8 million in the first half of 2010. Excess workers’ compensation new business production, which represents the annualized amount of new premium sold, was $31.5 million in the first half of 2011 as compared to $19.7 million in the first half of 2010, an increase of 60%. Premiums from assumed workers’ compensation and casualty reinsurance increased 49% to $34.7 million in the first half of 2011 from $23.4 million in the first half of 2010. Assumed workers’ compensation and casualty reinsurance production was $12.1 million in the first half of 2011 as compared to $8.5 million in the first half of 2010, an increase of 42%. In its important July 2011 renewal season, the results of which are not reflected in the Company’s results for the first half of 2011, rates on excess workers’ compensation policies increased 4% and SIRs were on average up 3% on new and renewal policies. The Company’s retention of its existing excess workers’ compensation customers remained strong in the first half of 2011.

-24-

During the first half of 2011, premiums from the Company’s other core group employee benefit products increased 6% to $537.3 million in the first half of 2011 from $508.9 million in the first half of 2010. Premiums from the Company’s group life products increased 7% to $207.6 million in the first half of 2011 from $193.8 million in the first half of 2010. Premiums from the Company’s group disability products increased 5% to $283.3 million in the first half of 2011 from $271.1 million in the first half of 2010. Premiums from the Company’s turnkey disability business were $24.4 million during the first half of 2011 compared to $25.2 million during the first half of 2010. New business production for the Company’s other core group employee benefit products increased 13% to $104.4 million in the first half of 2011 from $92.5 million in the first half of 2010. 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 continues to implement price increases for certain group disability and group life insurance customers; in particular, where warranted in particular instances due to adverse claims experience. In addition, the Company has increased pricing levels for new long-term disability insurance customers as a result of the decrease in the discount rate for its disability reserves that was implemented in 2010. The payments received by the Company in connection with LPT’s, which are episodic in nature and are recorded as liabilities rather than as premiums, were $37.0 million in the first half of 2011 as compared to $6.9 million in the first half of 2010.

Deposits from the Company’s asset accumulation products were $246.6 million in the first half of 2011 as compared to $116.8 million in the first half of 2010, an increase of 111%. This increase reflects the continuation during the first half of 2011 of the advantageous conditions for the Company in the fixed annuity marketplace which emerged during the second half of 2010. 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 2011 in an effort to achieve its targeted interest rate spreads on these products. The Company’s funds under management increased 24% to $1,856.4 million at June 30, 2011 from $1,501.7 million at June 30, 2010.

Net Investment Income.Net investment income in the first half of 2011 was $175.5 million as compared to $162.3 million in the first half of 2010, an increase of 8%. This increase reflects a 14% increase in average invested assets to $6,678.0 million in 2011 from $5,852.3 million in 2010, a higher level of investment income from the Company’s fixed maturity security portfolio and improved performance on the part of the Company’s investments in investment funds organized as limited partnerships and limited liability companies and trading account securities. The tax equivalent weighted average annualized yield on invested assets was 5.7% and 6.0% in for the first half of 2011 and 2010, respectively.

Net Realized Investment Losses.Net realized investment losses were $0.8 million in the first half of 2011 as compared to $29.0 million in the first half of 2010. The Company monitors its investments on an ongoing basis. When the fair 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 representing credit losses 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. The Company recognized $15.3 million and $48.9 million of losses in the first half of 2011 and 2010, respectively, due to the other than temporary declines in the fair values of certain fixed maturity securities and other investments, of which, respectively, $14.4 million and $43.8 million was recognized as credit-related realized investment losses and $1.0 million and $5.1 million remained as a component of accumulated other comprehensive income. The Company’s investment strategy results in periodic sales of securities and, therefore, the recognition of realized investment gains and losses. During the first half of 2011 and 2010, the Company recognized $13.5 million and $14.9 million, respectively, of net gains on sales of securities.

The Company may continue to recognize losses due to other than temporary declines in security fair values in the future, 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 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 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 2010 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.”

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Benefits and Expenses.Policyholder benefits and expenses were $785.0 million in the first half of 2011 as compared to $720.8 million in the first half of 2010. This increase primarily reflects the increase in premiums from the Company’s group employee benefit products discussed above. The combined ratio (loss ratio plus expense ratio) for group employee benefit products was 94.5% and 94.6% in the first half of 2011 and 2010, respectively. The weighted average annualized crediting rate on the Company’s asset accumulation products was 3.8% and 3.9% in the first half of 2011 and 2010, respectively.

Interest Expense. Interest expense was $18.5 million in the first half of 2011 as compared to $22.1 million in the first half of 2010. This decrease primarily reflects a decrease in interest expense resulting from the early retirement of the 2033 Senior Notes during 2010, partially offset by an increase in interest expense associated with the 2020 Senior Notes, which were issued by the Company in the first quarter of 2010, as well as increased interest paid on the Company’s new bank credit facility.

Income Tax Expense.Income tax expense was $32.2 million in the first half of 2011 as compared to $19.3 million in the first half of 2010. This increase primarily reflects the decrease in the income tax benefit resulting from realized investment losses, as well as a higher level of taxable income. The Company’s effective tax rate was 24.4% and 21.3% in the first half of 2011 and 2010, respectively.

Three Months Ended June 30, 2011 Compared to
Three Months Ended June 30, 2010

Summary of Results.Net income attributable to shareholders was $49.4 million, or $0.87 per diluted share, for the second quarter of 2011 as compared to $34.7 million, or $0.62 per diluted share, for the second quarter of 2010. Net income in the second quarter of 2011 and 2010 included net realized investment gains (losses) (net of the related income tax expense (benefit)) of $0.7 million, or $0.01 per diluted share, and $(9.0) million, or $(0.17) per diluted share, respectively. Net income in the second quarter of 2011 as compared to the prior period benefited from growth in income from the Company’s core group employee benefit products, an increase in net investment income and ~~a decrease~~decreases in the ~~level~~levels of realized investment ~~losses.~~losses and interest expense. Net realized investment ~~losses~~gains (losses) in the ~~first~~second quarter of 2011 and 2010 included losses, net of the related income tax benefit, of ~~$5.9~~$(3.5) million, or ~~$0.10~~$(0.06) per diluted share, and ~~$15.0~~$(13.5) million, or ~~$0.27~~$(0.24) per diluted share, respectively, due to credit loss-related impairments in the values of certain investments. The decrease in interest expense primarily reflects a decrease in interest expense associated with the 2033 Senior Notes, which were redeemed during 2010.

The Company believes the non-GAAP financial measure of “operating earnings” is informative when analyzing the trends relating to the Company’s insurance operations. Operating earnings consist of net income attributable to shareholders excluding after-tax realized investment gains and losses, losses on early retirement of senior notes 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 fair value of an investment is other than temporary. Early retirement of senior notes occurs based on management’s decision to redeem or repurchase these notes prior to maturity. 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 the 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 ~~$51.5~~$48.7 million, or ~~$0.91~~$0.86 per diluted share, in the ~~first~~second quarter of 2011 compared to ~~$46.3~~$43.8 million, or ~~$0.84~~$0.79 per diluted share. This increase is primarily due to ~~an increase in net investment income and~~ growth in income from the Company’s core group employee benefit ~~products.~~products, an increase in net investment income and a decrease in interest expense.

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Premium and Fee Income.Premium and fee income for the ~~first~~second quarter of 2011 was ~~$376.4~~$385.0 million as compared to ~~$347.8~~$352.6 million for the ~~first~~second quarter of 2010, an increase of 89%.Premiums from core group employee benefit products, which include disability, life, excess workers’ compensation, travel accident and dental insurance and assumed workers’ compensation and casualty reinsurance, increased 8%9% to ~~$359.4~~$366.5 million for the ~~first~~second quarter of 2011 from ~~$333.3~~$337.7 million for the ~~first~~second quarter of 2010, reflecting higher new business production, price increases and improved persistency. New business production for the Company’s core group employee benefit products increased ~~41%~~5% to ~~$82.5~~$65.5 million in the ~~first~~second quarter of 2011 from ~~$58.5~~$62.2 million in the ~~first~~second quarter of 2010. Premiums from excess workers’ compensation insurance for self-insured employers increased ~~10%~~12% to ~~$74.9~~$79.0 million in the ~~first~~second quarter of 2011 from ~~$68.0~~$70.8 million in the ~~first~~second quarter of 2010. Excess workers’ compensation new business production, which represents the annualized amount of new premium sold, was ~~$19.1~~$12.4 million in the ~~first~~second quarter of 2011 as compared to ~~$13.4~~$6.3 million in the ~~first~~second quarter of 2010, an increase of ~~42%~~97%. Premiums from assumed workers’ compensation and casualty reinsurance increased ~~51%~~46% to ~~$17.3~~$17.5 million in the ~~first~~second quarter of 2011 from ~~$11.4~~$11.9 million in the ~~first~~second quarter of 2010. Assumed workers’ compensation and casualty reinsurance production was ~~$7.3~~$4.8 million in the ~~first~~second quarter of 2011 as compared to ~~$5.1~~$3.4 million in the ~~first~~second quarter of 2010, an increase of ~~43%~~40%. ~~SNCC’s rates for its 2011 renewal policies~~Rates increased 3% in the second quarter 2011 on excess workers’ compensation renewals and ~~SIRs~~self-insured retentions are on average ~~are~~ up 2%6% in second quarter 2011 ~~for~~on new and renewal policies. ~~SNCC’s~~The Company’s retention of its existing excess workers’ compensation customers remained strong in the ~~first~~second quarter of 2011.

During the ~~first~~second quarter of 2011, premiums from the Company’s other core group employee benefit products increased 5%6% to ~~$267.2~~$270.0 million in the ~~first~~second quarter of 2011 from ~~$253.9~~$255.0 million in the ~~first~~second quarter of 2010. Premiums from the Company’s group life products increased 6%9% to ~~$103.4~~$104.2 million in the ~~first~~second quarter of 2011 from ~~$97.9~~$95.9 million in the ~~first~~second quarter of 2010. Premiums from the Company’s group disability products increased 5%4% to ~~$140.8~~$142.5 million in the ~~first~~second quarter of 2011 from ~~$134.4~~$136.7 million in the ~~first~~second quarter of 2010. Premiums from the Company’s turnkey disability business were $12.2 million during the ~~first~~second quarter of 2011 compared to ~~$13.3~~$11.9 million during the ~~first~~second quarter of ~~2010.~~2010, an increase of 3%. New business production for the Company’s other core group employee benefit products ~~increased 40% to $56.1~~were $48.3 million in the ~~first~~second quarter of 2011 ~~from $40.0~~compared to $52.5 million in the ~~first quarters~~second quarter of 2010. 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 continues to implement price increases for certain group disability and group life insurance customers; in particular, where warranted in particular instances due to adverse claims experience. In addition, the Company has increased pricing levels for new long-term disability insurance customers as a result of the decrease in the discount rate for its disability reserves that was implemented in 2010. The payments received by the Company in connection with LPT’s, which are episodic in nature and are recorded as liabilities rather than as premiums, were ~~$25.0~~$12.0 million in the ~~first~~second quarter of 2011 as compared to ~~$5.1~~$1.8 million in the ~~first~~second quarter of 2010.

Deposits from the Company’s asset accumulation products were ~~$97.6~~$149.0 million in the ~~first~~second quarter of 2011 as compared to ~~$38.8~~$78.0 million in the ~~first~~second quarter of 2010, an increase of ~~152%~~91%. This increase reflects the continuation during the ~~first~~second quarter of 2011 of the advantageous conditions for the Company in the fixed annuity marketplace which emerged during the second half of 2010. 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 2011 in an effort to achieve its targeted interest rate spreads on these products. ~~The Company’s funds under management increased 20% to $1,728.4 million at March 31, 2011 up from $1,440.9 million at March 31, 2010.~~

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Net Investment Income.Net investment income in the ~~first~~second quarter of 2011 was ~~$92.3~~$83.2 million as compared to ~~$84.1~~$78.2 million in the ~~first~~second quarter of 2010, an increase of ~~10%~~6%. This increase reflects a ~~13%~~14% increase in average invested assets to ~~$6,598.3~~$6,836.7 million in 2011 from ~~$5,814.3~~$5,992.8 million in 2010, a higher level of investment income from the Company’s fixed maturity security portfolio ~~and strong~~resulting from the portfolio repositioning. This increase was partially offset by unfavorable performance ~~on the part~~ of the Company’s investments in investment funds organized as limited partnerships and limited liability ~~companies.~~companies and trading account securities. The tax equivalent weighted average annualized yield on invested assets was ~~6.0%~~5.3% and ~~6.2% in~~5.6% for the ~~first~~second quarter of 2011 and 2010, respectively.

Net Realized Investment ~~Losses.~~Gains (Losses).Net realized investment ~~losses~~gains (losses) were ~~$2.0~~$1.1 million in the ~~first~~second quarter of 2011 as compared to ~~$15.1~~$(13.9) million in the ~~first~~second quarter of 2010. The Company monitors its investments on an ongoing basis. When the fair 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 representing credit losses 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. The Company recognized ~~$7.5~~$7.8 million of ~~new credit~~ losses in the ~~first~~second quarter of 2011 due to the other than temporary declines in the fair values of certain fixed maturity securities and other ~~investments. In total, $9.0~~investments, of which $5.3 million ~~of impairment~~was recognized as realized investment losses ~~were recognized, including an additional $1.5~~related to credit losses and $2.4 million ~~of losses previously recognized~~remained as a component of accumulated other comprehensive income on the balance sheet ~~that became credit losses during the first three months of 2011.~~related to non-credit losses. During the ~~first~~second quarter of 2010, the Company recognized ~~$27.3~~$21.7 million of losses due to the other than temporary declines in the fair values of certain fixed maturity securities

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and other investments, of which ~~$23.0~~$20.8 million was recognized as realized investment losses related to credit losses and ~~$4.3~~$0.8 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 ~~first~~second quarters of 2011 and 2010, the Company recognized ~~$7.0~~$6.5 million and ~~$7.9~~$7.0 million, respectively, of net gains on sales of securities.

Benefits and Expenses.Policyholder benefits and expenses were ~~$390.7~~$394.3 million in the ~~first~~second quarter of 2011 as compared to ~~$359.7~~$361.1 million in the ~~first~~second quarter of 2010. 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.above. The combined ratio (loss ratio plus expense ratio) for group employee benefit products was ~~95.2%~~93.8% and 94.6% in the ~~first~~second quarters of 2011 and 2010, respectively. The weighted average annualized crediting rate on the Company’s asset accumulation products was ~~4.0%~~3.8% and ~~4.2%~~3.7% in the ~~first~~second quarters of 2011 and 2010, respectively.

Interest Expense. Interest expense was $9.3 million in the ~~first~~second quarter of 2011 as compared to ~~$10.6~~$11.5 million in the ~~first~~second quarter of 2010. This decrease primarily reflects a decrease in interest expense associated with the 2033 Senior Notes, which were redeemed during 2010, partially offset by an increase in interest expense associated with the ~~2020 Senior Notes, which were issued by the Company in the first quarter of 2010.~~Company’s new bank credit facility.

Income Tax Expense.Income tax expense was ~~$16.4~~$15.8 million in the ~~first~~second quarter of 2011 as compared to ~~$9.9~~$9.4 million in the ~~first~~second quarter of 2010. This increase primarily reflects the decrease in the income tax benefit resulting from realized investment losses, as well as a higher level of operating income. The Company’s effective tax rate was ~~24.6%~~24.2% and 21.3% in the ~~first~~second quarter of 2011 and 2010, respectively.

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Liquidity and Capital Resources

General.The Company’s current liquidity needs include principal and interest payments on outstanding borrowings under its bank credit facility and interest payments on the 2020 Senior Notes and 2007 Junior Debentures, as well as funding its operating expenses and dividends to stockholders. 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. The 2020 Senior Notes and 2007 Junior Debentures are not subject to any sinking fund requirements and contain certain provisions permitting their early redemption by the Company. For descriptions of these provisions, see Notes E and H to the Consolidated Financial Statements included in the 2010 Form 10-K.

In December 2010, the Company entered into a Credit Agreement with Bank of America, N.A. as administrative agent and a group of banking institutions (the “Credit Agreement”)~~, which provides~~ providing for a revolving loan facility of $175 million which matures on December 22, 2013 and a term loan facility of $125 million which matures on December 22, 2015. Concurrently with the consummation of the Credit Agreement, the Company terminated the Prior Credit Agreement, which was scheduled to expire in October 2011. On June 7, 2011, a new lender was added to the revolving loan facility and its amount was increased to $205 million. Interest on borrowings under the Credit Agreement is payable, at the Company’s election, either at a floating rate based on LIBOR plus a specified margin which varies based upon the specified ratings of the Company’s senior unsecured debt, as in effect from time to time, or a base rate equal to the highest of Bank of America’s prime rate, LIBOR plus a specified margin or the federal funds rate plus a specified margin. The Credit Agreement contains various financial and other affirmative and negative covenants, along with various representations and warranties. 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 subsidiary indebtedness. As of ~~March 31,~~June 30, 2011, the

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Company was in compliance in all material respects with the financial and various other affirmative and negative covenants in the Credit Agreement. At ~~March 31,~~June 30, 2011, the Company had ~~$125.0~~$125 million of outstanding borrowings, and ~~$175.0~~$205 million of borrowings remaining available, under the Credit Agreement.

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 approximately ~~$152.5~~$139.9 million of financial resources available at the holding company level at ~~March 31,~~June 30, 2011, 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 Credit Agreement. During 2011, the Company’s insurance subsidiaries will be permitted, without prior regulatory approval, to make dividend payments totaling ~~$98.0~~$100.8 million, in addition to the dividend payments of ~~$53.8~~$51.0 million made during the first ~~three~~six months of 2011. However, the level of dividends that could be paid consistent with maintaining the insurance subsidiaries’ 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.

During the first quarter of 2006, the Company issued $100.0 million in aggregate principal amount of fixed and floating rate funding agreements which had 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 concluded that it was not the primary beneficiary of the special purpose vehicle that issued the funding agreement-backed notes. During the first quarter of 2009, the Company repaid $35.0 million in aggregate principal amount of floating rate funding agreements at their maturity. During the first quarter of 2011, the Company repaid the remaining $65.0 million in aggregate principal amount of fixed rate funding agreements at their maturity.

On August 3, 2011, the Company’s Board of Directors declared a cash dividend of $0.12 per share, which will be paid on the Company’s Class A Common Stock and Class B Common Stock on August 31, 2011.

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

Share Repurchase Authorization.On August 3, 2011, the Company’s Board of Directors authorized repurchases of the Company’s outstanding Class A Common Stock in a total amount of up to $50 million. Such repurchases may be effected in the open market or in privately negotiated transactions in compliance with applicable laws, rules and regulations, including Rule 10b-18 under the Securities Exchange Act of 1934. Repurchases pursuant to this authorization will depend upon management’s assessment of market and business conditions, the Company’s stock price, alternative uses of capital and other factors. The authorization replaces an existing share repurchase authorization which had 1.0 million shares remaining.

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

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Company’s exposure to fluctuations in interest rates. The Company’s investment portfolio, which totaled ~~$6,746.1~~$7,024.1 million at ~~March 31,~~June 30, 2011, 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 ~~$321.0~~$330.4 million at ~~March 31,~~June 30, 2011. At March 31, 2011, the total carrying value of the portfolio of private placement corporate loans, mortgage loans, real estate and interests in limited partnerships and limited liability companies managed on the Company’s behalf by Fortress Investment Group LLC was $37.7 million.

During the first ~~three~~six months of 2011, the market value of the Company’s available for sale investment portfolio, in relation to its amortized cost, increased by ~~$20.3~~$88.2 million from year-end 2010, before the related decrease in the cost of business acquired of ~~$4.6~~$15.7 million and a decrease in the federal income tax provision of ~~$5.5~~$25.4 million. At ~~March 31,~~June 30, 2011, 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 fixed maturity securities in the Company’s portfolio totaled ~~$242.6~~$269.8 million (of which ~~$186.1~~$220.0 million was attributable to investment grade securities) and ~~$156.2~~$116.0 million (of which ~~$93.1~~$47.5 million was attributable to investment grade securities), respectively. During the first ~~three~~six months of 2011, the Company recognized pre-tax net investment losses of ~~$2.0~~$0.8 million. The weighted average credit rating of the securities in the Company’s fixed maturity portfolio having ratings by nationally recognized statistical rating organizations, based upon the highest of the ratings assigned to the respective securities, was “A” at ~~March 31,~~June 30, 2011. 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 2010 Form 10-K, “Risk Factors”, for a discussion of various risks relating to the Company’s investment portfolio.

Cash Flows. Operating activities increased cash by ~~$117.4~~$197.7 million and ~~$101.5~~$132.7 million in the first ~~three~~six months of 2011 and 2010, respectively. Net investing activities used ~~$95.7~~$295.1 million and ~~$144.1~~$212.2 million of cash during the first ~~three~~six months of 2011 and 2010, respectively, primarily for the purchase of securities. Financing activities ~~used $1.5~~provided $114.9 million of cash during the first ~~three~~six months of 2011, ~~reflecting, among other things,~~principally from deposits to policyholder accounts, partially offset by the repayment of $65.0 million in aggregate principal amount of fixed rate funding agreements at their maturity. During the first ~~three~~six months of 2010, financing activities provided ~~$39.0~~$81.9 million of cash,

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principally from the issuance of the 2020 Senior Notes, partially offset by the full repayment of the then outstanding borrowings under the ~~Amended~~Prior Credit Agreement.

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, 2010.

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)~~Chief Financial Officer (“CFO”), 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,~~CFO, 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,” “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,

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including but not limited to changes in financial services, employee benefit 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 2010 Form 10-K, “Risk Factors”. The Company disclaims any obligation to update forward-looking information.

PART II. OTHER INFORMATION

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 parties have entered into an agreement to settle this litigation, ~~which is subject to~~and the ~~approval of~~settlement has been preliminarily approved by the ~~court, and have filed a motion with the court seeking such approval.~~court. It is not anticipated that this settlement ~~if approved and effectuated,~~ will have a material adverse effect on the Company’s results of operations, liquidity or financial condition.

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In addition, 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 business and operations described in Part I, Item 1A of the 2010 Form 10-K, “Risk Factors”, updates and supercedes the discussion contained therein relating to ~~this~~these risk ~~factor.~~factors.

The Company’s financial position and results of operations may be adversely impacted by changes in accounting rules and in the interpretations of such rules.

The Company’s financial position and results of operations are reported in accordance with GAAP, in the case of the Company, and in accordance with statutory accounting principles, in the case of the statutory financial statements of its insurance subsidiaries. Changes in the applicable GAAP or statutory accounting rules, or in the interpretations of such rules, may adversely affect the Company’s and such subsidiaries’ reported financial positions and results of operations.

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

-31-

Item 6. Exhibits

	11.1		Computation of Results per Share of Common Stock (incorporated by reference to Note G 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~~Executive Vice President and ~~Treasurer~~Chief Financial Officer 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 ~~From~~Form 10-Q for the ~~three~~six months ended ~~March 31,~~June 30, 2011, formatted in XBRL: (i) Consolidated Statements of Income for the three and six months ended ~~March 31,~~June 30, 2011 and 2010; (ii) Consolidated Balance Sheets at ~~March 31,~~June 30, 2011 and December 31, 2010; (iii) Consolidated ~~Statements~~Statement of Equity for the ~~three~~six months ended ~~March 31,2011~~June 30, 2011 and 2010; (iv) Consolidated Statements of Cash Flows for the ~~three~~six months ended ~~March 31,~~June 30, 2011 and 2010; and (v) Notes to Consolidated Financial ~~Statements, tagged as blocks of text.~~Statements.

~~-28-~~


	Page
PART I. FINANCIAL INFORMATION (UNAUDITED)

Item 1. Financial Statements

Consolidated Statements of Income for the Three and Six Months Ended ~~March 31,~~June 30, 2011 and 2010		3

Consolidated Balance Sheets at ~~March 31,~~June 30, 2011 and December 31, 2010		4

Consolidated Statements of Equity for the ~~Three~~Six Months Ended ~~March 31,~~June 30, 2011 and 2010		5

Consolidated Statements of Cash Flows for the ~~Three~~Six Months Ended ~~March 31,~~June 30, 2011 and 2010		6

Notes to Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		2122

Item 3. Quantitative and Qualitative Disclosures About Market Risk		2730

Item 4. Controls and Procedures		2730

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		2731

Item 1A. Risk Factors		2831

Item 6. Exhibits		2832

Signatures		2932
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT


	Non-Agency Prime RMBS— Fair Value												Non-Agency Prime RMBS – Fair Value
									BB and												BB and
Vintage	AAA		AA		A		BBB		Below⁽¹⁾		Total		AAA		AA		A		BBB		Below⁽¹⁾		Total
					(dollars in thousands)												(dollars in thousands)
2001 and prior	$	1,999	$	—	$	—	$	—	$	—	$	1,999	$	1,861	$	—	$	—	$	—	$	—	$	1,861
2002		11,269		202		2,073		—		659		14,203		8,186		187		3,892		—		603		12,868
2003		72,265		1,952		2,574		3,899		10,024		90,714		67,561		1,404		2,528		3,152		10,154		84,799
2004		40,532		1,399		—		4,817		6,733		53,481		25,029		16,006		—		4,739		6,013		51,787
2005		11,796		5,869		1,556		18,205		65,155		102,581		11,639		5,893		1,511		17,970		67,131		104,144
2006		15,173		627		—		—		25,216		41,016		14,367		564		—		—		22,836		37,767
2007		5,552		—		—		—		80,685		86,237		5,085		—		—		—		69,900		74,985
2008		921		—		—		—		511		1,432		820		—		—		—		487		1,307

Total	$	159,507	$	10,049	$	6,203	$	26,921	$	188,983	$	391,663	$	134,548	$	24,054	$	7,931	$	25,861	$	177,124	$	369,518


	Non-Agency Alt-A RMBS—Fair Value
									BB and
Vintage	AAA		AA		A		BBB		Below⁽¹⁾		Total
					(dollars in thousands)
2001 and prior	$	—	$	—	$	—	$	1,722	$	—	$	1,722
2002		149		1,614		—		—		—		1,763
2003		45,568		—		—		—		1,691		47,259
2004		20,971		1,756		1,482		—		1,737		25,946
2005		7,348		17,936		—		1,130		39,017		65,431
2006		13,202		—		—		8,073		69,960		91,235
2007		279		—		—		—		119,652		119,931
2010		—		—		3,892		—		—		3,892

Total	$	87,517	$	21,306	$	5,374	$	10,925	$	232,057	$	357,179


	Non-Agency Subprime RMBS—Fair Value												Non-Agency Alt-A RMBS – Fair Value
									BB and												BB and
Vintage	AAA		AA		A		BBB		Below⁽¹⁾		Total		AAA		AA		A		BBB		Below⁽¹⁾		Total
					(dollars in thousands)												(dollars in thousands)
2001 and prior													$	—	$	—	$	—	$	1,679	$	—	$	1,679
2002														176		1,551		—		—		—		1,727
2003	$	11,064	$	—	$	1,155	$	—	$	—	$	12,219		44,466		—		—		—		1,100		45,566
2004		10,528		—		—		211		3,517		14,256		19,835		1,892		1,413		—		1,810		24,950
2005		18,875		—		—		—		17,822		36,697		7,083		17,811		—		1,039		43,840		69,773
2006		—		—		—		1,777		910		2,687		11,377		—		—		7,808		78,954		98,139
2007		—		—		—		—		1,257		1,257		275		—		—		—		126,219		126,494
2010														—		—		3,875		—		—		3,875

Total	$	40,467	$	—	$	1,155	$	1,988	$	23,506	$	67,116	$	83,212	$	21,254	$	5,288	$	10,526	$	251,923	$	372,203


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

Total fixed maturity securities	$	1,740,134	$	(75,915	)	$	493,421	$	(102,319	)	$	2,233,555	$	(178,234	)	$	1,740,134	$	(75,915	)	$	493,421	$	(102,319	)	$	2,233,555	$	(178,234	)


⁽¹⁾		The securities enumerated in this column include securities having a total of ~~$169.6~~$160.2 million in fair value that have received the equivalent of an investment grade rating from the National Association of Insurance Commissioners (the “NAIC”) under its process 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.


⁽¹⁾		~~The securities enumerated in this column include securities having a total of $194.7 million in fair value that have received the equivalent of an investment grade rating from the NAIC~~ under its process 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 Subprime RMBS – Fair Value
									BB and
Vintage	AAA		AA		A		BBB		Below⁽¹⁾		Total
					(dollars in thousands)
2003	$	10,511	$	—	$	1,096	$	—	$	—	$	11,607
2004		9,912		—		—		184		3,347		13,443
2005		18,087		—		—		—		17,672		35,759
2006		—		—		—		1,411		820		2,231
2007		—		—		—		—		1,119		1,119

Total	$	38,510	$	—	$	1,096	$	1,595	$	22,958	$	64,159


	Three Months Ended
	March 31
	2011			2010
Balance at the beginning of the period	$	79,602		$	89,658
Increases attributable to credit losses on securities for which an other than temporary impairment was not previously recognized		732			6,987
Increases attributable to credit losses on securities for which an other than temporary impairment was previously recognized		7,666			7,501
Reductions due to sales, maturities, pay downs or prepayments of securities for which an other than temporary impairment was previously recognized		(7,826	)		(18,054	)

Balance at the end of the period	$	80,174		$	86,092


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


						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, 2011		3,989,995		$	29.10						3,989,995		$	29.10
Granted		494,012			30.94						592,389			30.58
Exercised		(117,701	)		23.78						(181,891	)		23.82
Forfeited		(1,800	)		21.24						(10,800	)		24.20
Expired		—			—						(8,952	)		35.27

Outstanding at March 31, 2011		4,364,506			29.45		6.7	$	14,496
Outstanding at June 30, 2011											4,380,741			29.52		6.6	$	10,529


Exercisable at March 31, 2011		2,395,130		$	30.50		5.6	$	7,037
Exercisable at June 30, 2011											2,449,698		$	30.53		5.5	$	5,168


~~(A)~~(1)		Net of an income tax ~~benefit~~expense (benefit) of ~~$0.7~~$0.4 million and ~~$5.3~~$(4.9) million, or $0.01 per diluted share and ~~$0.10~~$(0.09) per diluted share, for the three months ended ~~March 31,~~June 30, 2011 and 2010, respectively. The tax effect is calculated using the Company’s statutory tax rate of 35%.

(2)		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%.


		DELPHI FINANCIAL GROUP, INC.

	~~DELPHI FINANCIAL GROUP, INC.~~	/s/ ROBERT ROSENKRANZ Robert Rosenkranz
	~~/s/ ROBERT ROSENKRANZ~~
	~~Robert Rosenkranz~~
	Chairman of the Board and Chief Executive Officer ~~(Principal Executive Officer)~~
		(Principal Executive Officer)

		/s/ ~~THOMAS W. BURGHART~~STEPHAN KIRATSOUS Stephan Kiratsous
	~~Thomas W. Burghart~~	Executive Vice President and Chief Financial Officer
	~~Senior Vice President and Treasurer~~ ~~(Principal Accounting and Financial Officer)~~


	Three Months Ended						Six Months Ended
	March 31,						June 30,
	2011			2010			2011			2010
Expected volatility		43.9	%		42.8	%		44.7	%		43.0	%
Expected dividends		1.4	%		1.9	%		1.5	%		1.8	%
Expected lives of options (in years)		6.0			6.1			5.8			6.1
Risk-free rate		2.6	%		2.7	%		2.4	%		2.7	%