UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended~~September 30, 2011~~March 31, 2012

¨	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 Number)


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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to filing requirements for the past 90 days: Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files): Yes x No ¨

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):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of ~~October 31, 2011,~~April 30, 2012, the Registrant had ~~48,845,127~~50,529,529 shares of Class A Common Stock and ~~5,753,833~~6,111,557 shares of Class B Common Stock outstanding.

DELPHI FINANCIAL GROUP, INC.

FORM 10-Q

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND OTHER INFORMATION


			Page
~~PARTI.~~PART I.	FINANCIAL INFORMATION (UNAUDITED)

	Item 1.	Financial Statements

		Consolidated Statements of Income for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2012 and 2011 ~~and 2010~~		3

		Consolidated ~~Balance Sheets at September 30,~~Statements of Comprehensive Income for the Three Months Ended March 31, 2012 and 2011 ~~and December 31, 2010~~		4

		Consolidated ~~Statements of Equity for the Nine Months Ended September 30,~~Balance Sheets at March 31, 2012 and December 31, 2011 ~~and 2010~~		5

		Consolidated Statements of ~~Cash Flows~~Equity for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2012 and 2011 ~~and 2010~~		6

		Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011		7

		Notes to Consolidated Financial Statements		78

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		3129

	Item 4.	Controls and Procedures		3129

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings		3230

	Item 1A.	Risk Factors		3231

	~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~		33

	Item 6.	Exhibits		3431

	Signatures			3532

-2-

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 September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010			Three Months Ended March 31,
				(Restated)						(Restated)			2012			2011
Revenue:
Premium and fee income	$	398,619		$	357,019		$	1,160,030		$	1,057,348		$	418,385		$	376,399
Net investment income		80,102			86,886			255,587			249,170			105,780			92,294
Net realized investment (losses) gains:
Net realized investment gains (losses):
Total other than temporary impairment losses		(11,969	)		(13,886	)		(27,283	)		(62,818	)		(6,791	)		(7,539	)
Portion of other than temporary impairment losses recognized in other comprehensive income		2,617			7,498			3,570			12,599
Portion of other than temporary impairment losses recognized in (reclassified from) other comprehensive income														368			(1,479	)

Net impairment losses recognized in earnings		(9,352	)		(6,388	)		(23,713	)		(50,219	)		(6,423	)		(9,018	)
Other net realized investment gains		4,350			7,580			17,862			22,431			7,454			7,046

Net realized investment gains (losses)														1,031			(1,972	)
		(5,002	)		1,192			(5,851	)		(27,788	)
Loss on early retirement of senior notes		—			(3,760	)		—			(3,972	)
														525,196			466,721
Total revenues		473,719			441,337			1,409,766			1,274,758


Benefits and expenses:
Benefits, claims and interest credited to policyholders		290,033			250,594			834,461			741,602			311,531			271,265
Commissions		24,647			24,149			71,182			69,339			22,696			22,568
Amortization of cost of business acquired		21,418			20,062			59,404			53,973			21,333			18,961
Other operating expenses		79,093			75,392			235,147			226,080			116,243			77,909

		415,191			370,197			1,200,194			1,090,994			471,803			390,703


Operating income		58,528			71,140			209,572			183,764			53,393			76,018

Interest expense:
Corporate debt		6,049			7,783			18,066			23,370			6,130			6,010
Junior subordinated debentures		3,249			3,241			9,739			9,730			3,242			3,242

		9,298			11,024			27,805			33,100			9,372			9,252


Income before income tax expense		49,230			60,116			181,767			150,664			44,021			66,766

Income tax expense		7,995			15,266			40,152			34,563			10,923			16,395


Net income		41,235			44,850			141,615			116,101			33,098			50,371

Less: Net income attributable to noncontrolling interest		200			42			929			115
Less: Net (loss) income attributable to noncontrolling interest														(1,842	)		147


Net income attributable to shareholders	$	41,035		$	44,808		$	140,686		$	115,986		$	34,940		$	50,224


Basic results per share of common stock:
Net income attributable to shareholders	$	0.73		$	0.81		$	2.51		$	2.10		$	0.62		$	0.90

Diluted results per share of common stock:
Net income attributable to shareholders	$	0.73		$	0.80		$	2.48		$	2.08		$	0.60		$	0.89

Dividends paid per share of common stock	$	0.12		$	0.11		$	0.35		$	0.31		$	0.12		$	0.11

See notes to consolidated financial statements.

-3-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in Thousands)

(Unaudited)


	Three Months Ended March 31,
	2012			2011

Net income	$	33,098		$	50,371

Other comprehensive income, net of tax:
Increase in net unrealized appreciation on investments		83,618			5,804
Decrease in other than temporary impairment losses recognized in other comprehensive income		4,146			4,393
Change in net periodic pension cost		555			77

Change in other comprehensive income attributable to shareholders		88,319			10,274


Total comprehensive income		121,417			60,645

Less: Net (loss) income attributable to noncontrolling interest		(1,842	)		147


Total comprehensive income attributable to shareholders	$	123,259		$	60,498

See notes to consolidated financial statements.

-4-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Per Share Data)

(Unaudited)


	September 30, 2011			December 31, 2010
				(Restated)			March 31, 2012			December 31, 2011
Assets:
Investments:
Fixed maturity securities, available for sale	$	6,373,799		$	5,717,090		$	6,827,169		$	6,489,637
Short-term investments		201,529			334,215			141,521			277,552
Investment accounts receivable		87,159			45,645			77,189			24,406
Other investments		673,715			453,033			873,793			678,133

		7,336,202			6,549,983			7,919,672			7,469,728
Cash		91,055			72,806			109,180			93,898
Cost of business acquired		159,322			149,325			149,128			156,675
Reinsurance receivables		367,628			360,255			363,726			365,391
Premiums receivable		186,179			130,111			193,297			154,612
Accrued investment income		70,071			60,831			73,190			74,672
Goodwill		93,929			93,929			93,929			93,929
Other assets		117,745			120,635			113,950			108,138
Assets held in separate account		115,043			123,674			124,068			117,365

Total assets	$	8,537,174		$	7,661,549		$	9,140,140		$	8,634,408


Liabilities and Equity:
Future policy benefits:
Life	$	337,168		$	331,816		$	334,764		$	328,678
Disability and accident		835,511			812,258			858,442			845,750
Unpaid claims and claim expenses:
Life		55,285			53,763			53,728			57,049
Disability and accident		469,558			457,642			489,129			481,826
Casualty		1,452,338			1,314,910			1,571,758			1,506,129
Policyholder account balances		2,030,328			1,753,744			2,171,804			2,100,675
Unearned premium reserve		236,031			159,169			253,495			192,261
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
Investment accounts payable		138,232			27,667			85,627			41,719
Net deferred tax liability		130,052			75,545			193,316			135,559
Other liabilities and policyholder funds		404,128			410,889			448,904			442,172
Liabilities related to separate account		115,043			123,674			124,068			117,365

Total liabilities		6,809,016			6,126,419			7,190,377			6,854,525


Equity:
Preferred Stock, $.01 par; 50,000,000 shares authorized, none issued		—			—			—			—
Class A Common Stock, $.01 par; 150,000,000 shares authorized; 56,755,585 and 56,463,776 shares issued and outstanding, respectively		568			565
Class B Common Stock, $.01 par; 20,000,000 shares authorized; 5,981,049 shares issued and outstanding		60			60
Class A Common Stock, $.01 par; 150,000,000 shares authorized; 58,398,268 and 56,798,526 shares issued and outstanding, respectively								584			568
Class B Common Stock, $.01 par; 20,000,000 shares authorized; 6,338,773 shares issued and outstanding								63			63
Additional paid-in capital		697,751			682,816			759,980			705,036
Accumulated other comprehensive income		94,939			30,932			195,848			107,529
Retained earnings		1,134,442			1,013,369			1,193,968			1,165,756
Treasury stock, at cost; 8,182,716 and 7,761,216 shares of Class A Common Stock, and 227,216 shares of Class B Common Stock		(206,931	)		(197,246	)
Treasury stock, at cost; 8,182,716 shares of Class A Common Stock and 227,216 shares of Class B Common Stock								(206,931	)		(206,931	)

Total shareholders’ equity		1,720,829			1,530,496			1,943,512			1,772,021
Noncontrolling interest		7,329			4,634			6,251			7,862

Total equity		1,728,158			1,535,130			1,949,763			1,779,883

Total liabilities and equity	$	8,537,174		$	7,661,549		$	9,140,140		$	8,634,408

See notes to consolidated financial statements.

~~-4-~~-5-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(Dollars in Thousands)

(Unaudited)

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








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


Net income
   —         —         —         —      115,986    —      115,986    115    116,101
Other comprehensive income:

Increase in net unrealized appreciation on investments
   —         —         —         165,893    —      —      165,893    —      165,893
Decrease in other than temporary impairment losses recognized in other comprehensive income
   —         —         —         4,407    —      —      4,407    —      4,407
Decrease in net loss on cash flow hedge
   —         —         —         1,682    —      —      1,682    —      1,682
Change in net periodic pension cost
   —         —         —         154    —      —      154    154


Comprehensive income
            288,122    115    288,237
Net distribution to noncontrolling interest
   —         —         —         —      —      —      —      (2,239 ) (2,239 )
Issuance of deferred and restricted shares and exercise of stock options
   3       —         8,604       —      —      —      8,607    —      8,607
Stock-based compensation
   —         —         4,929       —      —      —      4,929    —      4,929
Cash dividends
   —         —         —         —      (17,150 ) —      (17,150 ) —      (17,150 )








Balance, September 30, 2010
   $ 563       $ 60       $ 675,428       $ 138,180    $ 966,540    $ (197,246 ) $ 1,583,525    $ 1,422    $ 1,584,947








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


Net income
   —         —         —         —      140,686    —      140,686    929    141,615
Other comprehensive income:

Increase in net unrealized appreciation on investments
   —         —         —         62,029    —      —      62,029    —      62,029
Decrease in other than temporary impairment losses recognized in other comprehensive income
   —         —         —         1,745    —      —      1,745    —      1,745
Change in net periodic pension cost
   —         —         —         233    —      —      233    —      233


Comprehensive income
            204,693    929    205,622
Net contribution from noncontrolling interest
   —         —         —         —      —      —      —      1,766    1,766
Issuance of deferred and restricted shares and exercise of stock options
   3       —         12,618       —      —      —      12,621    —      12,621
Stock-based compensation
   —         —         2,317       —      —      —      2,317    —      2,317
Acquisition of treasury stock
   —         —         —         —      —      (9,685 ) (9,685 ) —      (9,685 )
Cash dividends
   —         —         —         —      (19,613 ) —      (19,613 ) —      (19,613 )








Balance, September 30, 2011
   $ 568       $ 60       $ 697,751       $ 94,939    $ 1,134,442    $ (206,931 ) $ 1,720,829    $ 7,329    $ 1,728,158


	Class A Common Stock		Class B Common Stock		Additional Paid in Capital			Accumulated Other Comprehensive Income		Retained Earnings			Treasury Stock			Total Shareholders’ Equity			Non- controlling Interest			Total Equity
Balance, January 1, 2011	$	565	$	60	$	682,816		$	30,932	$	1,013,369		$	(197,246	)	$	1,530,496		$	4,634		$	1,535,130

Net income		—		—		—			—		50,224			—			50,224			147			50,371
Change in other comprehensive income		—		—		—			10,274		—			—			10,274			—			10,274
Change in noncontrolling interest ownership		—		—		—			—		—			—			—			774			774
Issuance of deferred and restricted shares and exercise of stock options		1		—		4,343			—		—			—			4,344			—			4,344
Stock-based compensation		—		—		1,141			—		—			—			1,141			—			1,141
Cash dividends		—		—		—			—		(6,158	)		—			(6,158	)		—			(6,158	)


Balance, March 31, 2011	$	566	$	60	$	688,300		$	41,206	$	1,057,435		$	(197,246	)	$	1,590,321		$	5,555		$	1,595,876


Balance, January 1, 2012	$	568	$	63	$	705,036		$	107,529	$	1,165,756		$	(206,931	)	$	1,772,021		$	7,862		$	1,779,883

Net income (loss)		—		—		—			—		34,940			—			34,940			(1,842	)		33,098
Change in other comprehensive income		—		—		—			88,319		—			—			88,319			—			88,319
Change in noncontrolling interest ownership		—		—		—			—		—			—			—			231			231
Issuance of deferred and restricted shares and exercise of stock options		16		—		62,281			—		—			—			62,297			—			62,297
Stock-based compensation		—		—		(7,337	)		—		—			—			(7,337	)		—			(7,337	)
Cash dividends		—		—		—			—		(6,728	)		—			(6,728	)		—			(6,728	)


Balance, March 31, 2012	$	584	$	63	$	759,980		$	195,848	$	1,193,968		$	(206,931	)	$	1,943,512		$	6,251		$	1,949,763

See notes to consolidated financial statements.

~~-5-~~-6-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)


	Nine Months Ended September 30,
	2011			2010			Three Months Ended March 31,
				(Restated)			2012			2011
Operating activities:
Net income attributable to shareholders	$	140,686		$	115,986		$	34,940		$	50,224
Adjustments to reconcile net income attributable to shareholders to net cash provided by operating activities:
Change in policy liabilities and policyholder accounts		268,982			180,506			161,289			123,648
Net change in reinsurance receivables and payables		(9,007	)		(9,657	)		1,232			1,017
Net change in premiums receivable		(56,068	)		(30,045	)		(38,685	)		(33,471	)
Amortization, principally the cost of business acquired and investments		29,819			37,376			8,808			13,912
Deferred costs of business acquired		(78,908	)		(65,782	)		(29,364	)		(26,032	)
Net realized losses on investments		5,851			27,788
Net realized (gains) losses on investments								(1,031	)		1,972
Net change in federal income taxes		26,145			9,630			(1,250	)		23,875
Other		(3,754	)		(12,804	)
Other operating activities								(41,909	)		(37,706	)

Net cash provided by operating activities		323,746			252,998			94,030			117,439


Investing activities:
Purchases of investments and loans made		(2,416,481	)		(1,599,851	)		(1,482,137	)		(826,996	)
Sales of investments and receipts from repayment of loans		1,429,610			1,057,614			1,052,706			592,455
Maturities of investments		308,805			70,801			114,336			71,970
Net change in short-term investments		132,686			46,367			136,031			66,826

Net cash used by investing activities		(545,380	)		(425,069	)		(179,064	)		(95,745	)


Financing activities:
Deposits to policyholder accounts		433,239			277,854			89,101			99,076
Withdrawals from policyholder accounts		(169,258	)		(82,832	)		(29,590	)		(97,028	)
Proceeds from issuance of 2020 Senior Notes		—			250,000
Borrowings under revolving credit facility		—			50,000
Principal payments under bank credit facility		—			(222,000	)
Early retirement of senior notes		—			(75,000	)
Acquisition of treasury stock		(9,685	)		—
Proceeds from the issuance of common stock under share-based compensation plans								43,301			3,907
Cash dividends paid on common stock		(19,613	)		(17,150	)		(6,728	)		(6,158	)
Other financing activities		5,200			2,983			4,232			(1,272	)

Net cash provided by financing activities		239,883			183,855
Net cash provided (used) by financing activities								100,316			(1,475	)


Increase in cash		18,249			11,784			15,282			20,219
Cash at beginning of year		72,806			65,464			93,898			72,806

Cash at end of period	$	91,055		$	77,248		$	109,180		$	93,025

See notes to consolidated financial statements.

~~-6-~~-7-

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 ~~September 30, 2010 and December~~March 31, ~~2010~~2011 consolidated financial statements to conform to the ~~September 30, 2011~~March 31, 2012 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 new accounting principles.~~ Operating results for the three ~~and nine~~ months ended ~~September 30, 2011~~March 31, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, ~~2011.~~2012. 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~~2011, as amended by Amendment No. 1 on Form 10-K/A (the ~~“2010~~“2011 Form 10-K”). Capitalized terms used herein without definition have the meanings ascribed to them in the ~~2010~~2011 Form 10-K.

Accounting Changes

The Company defers certain costs relating to the acquisition of new insurance business, such as commissions, certain costs associated with policy issuance and underwriting and certain sales support expenses, when incurred. On January 1, 2011, the Company adopted, on a retrospective basis, guidance issued by the Financial Accounting Standards Board (“FASB”) limiting the extent to which an insurer may capitalize costs incurred in the acquisition of an insurance contract. The guidance provides that, in order to be capitalized, such costs must be incremental and directly related to the acquisition of a new or renewal insurance contract. Insurers may only capitalize costs related to successful efforts in attaining a contract and advertising costs may only be capitalized if certain direct response advertising criteria are met. As a result of adopting this guidance, the Company made an after-tax reduction to its retained earnings at January 1, 2010 in the amount of $60.0 million, net of an income tax benefit of $32.3 million, which represents the net reduction in deferred policy acquisition cost included in cost of business acquired on the consolidated balance sheet, and net income attributable to shareholders was reduced by $0.03 per diluted share and $0.09 per diluted share for the three and nine months ended September 30, 2010, respectively. This adoption also resulted in the restatement of certain financial information for 2010.

~~On January 1, 2011,~~2012, the Company adopted new guidance issued by the FASB clarifying that an insurance company should not consider any interests of its separate accounts in an investment to be the insurer’s own interests and should not combine those interests with any interest of its general account in the same investment when assessing the investment for consolidation. Insurance companies are also required to consider a separate account as a subsidiary for purposes of evaluating whether the application of specialized accounting for investments in consolidation is appropriate. The adoption of this guidance did not have any effect on the Company’s consolidated financial position or results of operations.

On January 1, 2011, the Company adopted new guidance issued by the FASB requiring additional disclosures regarding fair value measurements. The guidance applies to all entities that are required to make disclosures about recurring or nonrecurring fair value measurements and requires separate disclosure of the activity in the Level 3 category related to purchases, sales, issuances and settlements on a gross basis. The requirement became 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 became 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~~did not have any effect on ~~its~~the Company’s consolidated financial position or results of operations.

~~In June 2011,~~On January 1, 2012, the ~~FASB~~Company adopted new guidance issued ~~new guidance~~by the FASB 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~~2011. The adoption ~~permitted. Because the new~~of this guidance ~~affects financial statement presentation only, it will~~did not have ~~no impact~~any effect on the Company’s consolidated financial position or results of operations.

~~In September 2011,~~On January 1, 2012, the ~~FASB~~Company adopted new guidance issued ~~new guidance~~by the FASB addressing the valuation process for goodwill. This guidance provides the ability to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under this guidance, an entity will no longer be required to calculate the fair value of a reporting unit unless it determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. ~~Early adoption is permitted.~~ The ~~Company has not yet determined the impact, if any, that the~~ adoption of this guidance ~~will~~did not have any impact on ~~its~~the Company’s consolidated financial position or results of operations.

Note B – Investments

At ~~September 30,~~March 31, 2012, the Company had fixed maturity securities available for sale with a carrying value and a fair value of $6,827.2 million and an amortized cost of $6,468.1 million. At December 31, 2011, the Company had fixed maturity securities available for sale with a carrying value and a fair value of ~~$6,373.8~~$6,489.6 million and an amortized cost of ~~$6,195.1 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~~$6,274.6 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.

-8-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Note B – Investments – (Continued)

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

   September 30, 2011
      Gross Unrealized
         Other Than
   Amortized       Temporary Fair
   Cost    Gains    Losses Impairments Value
   (dollars in thousands)
Agency residential mortgage-backed securities
   $ 629,779       $ 65,816       $ (108 ) $ —      $ 695,487
Non-agency residential mortgage-backed securities
   816,842       61,182       (20,439 ) (21,048 ) 836,537
Commercial mortgage-backed securities
   70,062       653       (2,181 ) (55 ) 68,479
Corporate securities
   1,885,056       82,492       (63,742 ) (847 ) 1,902,959
Collateralized debt obligations
   251,824       2,464       (34,663 ) (2,125 ) 217,500
U.S. Treasury and other U.S. Government guaranteed securities
   95,533       7,710       (431 ) —      102,812
U.S. Government-sponsored enterprise securities
   50,585       137       (29 ) —      50,693
Obligations of U.S. states, municipalities and political subdivisions
   2,395,399       113,745       (9,812 ) —      2,499,332






Total fixed maturity securities
   $ 6,195,080       $ 334,199       $ (131,405 ) $ (24,075 ) $ 6,373,799


	December 31, 2010
			Gross Unrealized											$6,274,590		$6,274,590		$6,274,590			$6,274,590			$6,274,590
								Other Than					March 31, 2012
	Amortized							Temporary			Fair				Gross Unrealized
	Cost		Gains		Losses			Impairments			Value		Amortized Cost		Gains		Losses			Other Than Temporary Impairments			Fair Value
	(dollars in thousands)												(dollars in thousands)

Agency residential mortgage-backed securities	$	626,494	$	38,586	$	(1,379	)	$	—		$	663,701	$	520,634	$	54,259	$	(68	)	$	—		$	574,825
Non-agency residential mortgage-backed securities		800,380		77,742		(27,518	)		(24,896	)		825,708		957,752		66,292		(14,435	)		(17,439	)		992,170
Commercial mortgage-backed securities		35,863		300		(3,020	)		(139	)		33,004		190,530		11,172		(3,466	)		(39	)		198,197
Corporate securities		1,466,561		81,919		(18,761	)		—			1,529,719		1,738,458		102,003		(14,889	)		(378	)		1,825,194
Collateralized debt obligations		199,594		3,652		(26,337	)		(1,725	)		175,184		289,437		12,744		(19,088	)		(22	)		283,071
Foreign government securities														137,802		11,083		(2,861	)		—			146,024
U.S. Treasury and other U.S. Government guaranteed securities		269,264		6,001		(3,362	)		—			271,903		119,478		5,586		(606	)		—			124,458
U.S. Government-sponsored enterprise securities		113,446		107		(2,012	)		—			111,541		38,089		106		(249	)		—			37,946
Obligations of U.S. states, municipalities and political subdivisions		2,138,994		36,421		(69,085	)		—			2,106,330		2,475,876		174,828		(5,420	)		—			2,645,284

Total fixed maturity securities	$	5,650,596	$	244,728	$	(151,474	)	$	(26,760	)	$	5,717,090	$	6,468,056	$	438,073	$	(61,082	)	$	(17,878	)	$	6,827,169

		$6,274,590		$6,274,590		$6,274,590			$6,274,590			$6,274,590
	December 31, 2011
			Gross Unrealized
	Amortized Cost		Gains		Losses			Other Than Temporary Impairments			Fair Value
	(dollars in thousands)

Agency residential mortgage-backed securities	$	606,678	$	61,928	$	(22	)	$	—		$	668,584
Non-agency residential mortgage-backed securities		819,027		50,256		(27,009	)		(21,637	)		820,637
Commercial mortgage-backed securities		96,251		2,135		(1,665	)		(38	)		96,683
Corporate securities		1,668,160		82,377		(42,269	)		(771	)		1,707,497
Collateralized debt obligations		284,667		6,582		(31,368	)		(1,810	)		258,071
Foreign government securities		258,578		12,557		(13,854	)		—			257,281
U.S. Treasury and other U.S. Government guaranteed securities		96,281		8,043		(487	)		—			103,837
U.S. Government-sponsored enterprise securities		42,229		156		(6	)		—			42,379
Obligations of U.S. states, municipalities and political subdivisions		2,402,719		140,851		(8,902	)		—			2,534,668

Total fixed maturity securities	$	6,274,590	$	364,885	$	(125,582	)	$	(24,256	)	$	6,489,637

-9-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Note B – Investments – (Continued)

The following table contains information, as of September 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 September 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 (38.3%), New York (7.8%) and Florida (6.7%).

   Non-Agency Prime RMBS – Fair Value
Vintage    AAA    AA    A    BBB    BB and
Below⁽¹⁾    Total
   (dollars in thousands)
2001 and prior
   $ 1,706       $ —         $ —         $ —         $ —         $ 1,706
2002
   5,619       —         2,514       —         1,406       9,539
2003
   63,395       1,407       —         3,593       10,920       79,315
2004
   16,406       15,577       —         10,404       6,105       48,492
2005
   10,952       5,661       1,453       17,017       87,164       122,247
2006
   14,372       —         —         —         26,250       40,622
2007
   4,637       —         —         —         88,951       93,588
2008
   729       —         —         —         445       1,174












Total
   $ 117,816       $ 22,645       $ 3,967       $ 31,014       $ 221,241       $ 396,683

⁽¹⁾

The securities enumerated in this column include securities having a total of $182.1 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.

   Non-Agency Alt-A RMBS – Fair Value
Vintage    AAA    AA    A    BBB    BB and
Below⁽¹⁾    Total
   (dollars in thousands)
2001 and prior
   $ —         $ —         $ —         $ 1,561       $ —         $ 1,561
2002
   183       1,512       —         —         —         1,695
2003
   42,676       —         —         —         971       43,647
2004
   18,927       1,834       1,341       —         1,732       23,834
2005
   6,497       17,057       —         —         64,499       88,053
2006
   9,928       —         50       7,676       73,117       90,771
2007
   252       —         —         —         127,474       127,726
2010
   —         —         3,879       —         —         3,879












Total
   $ 78,463       $ 20,403       $ 5,270       $ 9,237       $ 267,793       $ 381,166

⁽¹⁾

The securities enumerated in this column include securities having a total of $ 203.5 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.

~~-10-~~

~~DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

~~(Unaudited)~~

~~Note B – Investments – (Continued)~~

   Non-Agency Subprime RMBS – Fair Value
Vintage    AAA    AA    A    BBB    BB and
Below⁽¹⁾    Total
   (dollars in thousands)
2003
   $ 9,943       $ —         $ 1,010       $ —         $ —         $ 10,953
2004
   9,344       —         —         —         3,260       12,604
2005
   11,339       —         —         —         21,030       32,369
2006
   —         —         —         1,072       737       1,809
2007
   —         —         —         —         953       953












Total
   $ 30,626       $ —         $ 1,010       $ 1,072       $ 25,980       $ 58,688

⁽¹⁾

The securities enumerated in this column include securities having a total of $23.3 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.

~~The~~ amortized cost and fair value of fixed maturity securities available for sale at ~~September 30, 2011,~~March 31, 2012, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations, with or without prepayment penalties.

   Amortized
Cost    Fair
Value
   (dollars in thousands)
Agency residential mortgage-backed securities
   $ 629,779       $ 695,487
Non-agency residential mortgage-backed securities
   816,842       836,537
Commercial mortgage-backed securities
   70,062       68,479
Other fixed maturity securities:

One year or less
   92,032       82,246
Greater than 1, up to 5 years
   650,026       654,513
Greater than 5, up to 10 years
   1,228,058       1,214,880
Greater than 10 years
   2,708,281       2,821,657




Total
   $ 6,195,080       $ 6,373,799


	Amortized Cost		Fair Value
	(dollars in thousands)

Agency residential mortgage-backed securities	$	520,634	$	574,825
Non-agency residential mortgage-backed securities		957,752		992,170
Commercial mortgage-backed securities		190,530		198,197

Other fixed maturity securities:
One year or less		79,904		77,358
Greater than 1, up to 5 years		684,167		707,749
Greater than 5, up to 10 years		1,210,076		1,251,704
Greater than 10 years		2,824,993		3,025,166

Total	$	6,468,056	$	6,827,169

Net investment income was attributable to the following:

~~-11-~~


	Three Months Ended
	March 31,
	2012			2011
	(dollars in thousands)
Gross investment income:
Fixed maturity securities, available for sale	$	96,264		$	86,112
Mortgage loans		1,031			233
Other		18,903			14,210

		116,198			100,555
Less: Investment expenses		(10,418	)		(8,261	)

	$	105,780		$	92,294

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


	Three Months Ended
	March 31,
	2012			2011
	(dollars in thousands)

Credit related other than temporary impairment losses:
Fixed maturity securities, available for sale	$	(6,423	)	$	(9,018	)


Other net realized investment gains:
Fixed maturity securities, available for sale	$	6,814		$	6,799
Other investments		640			247

		7,454			7,046

Total	$	1,031		$	(1,972	)

Proceeds from sales of fixed maturity securities during the first three months of 2012 and 2011 were $806.1 million and $520.0 million, respectively. Gross gains of $25.7 million and gross losses of $18.9 million were realized on the 2012 sales and gross gains of $10.6 million and gross losses of $3.8 million were realized on the 2011 sales. Net realized investment gains and losses on investment sales are determined under the specific identification method and are included in income. The change in unrealized appreciation and depreciation on investments, primarily relating to fixed maturity securities, is included as a component of accumulated other comprehensive income or loss.

-10-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Note B – Investments – (Continued)

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

   September 30, 2011
   Less Than 12 Months 12 Months or More Total
   Fair
Value    Gross
Unrealized
Losses Fair
Value    Gross
Unrealized
Losses Fair
Value    Gross
Unrealized
Losses


   (dollars in thousands)
Agency residential mortgage-backed securities
   $ 19,940       $ (88 ) $ 218       $ (20 ) $ 20,158       $ (108 )
Non-agency residential mortgage-backed securities
   124,169       (4,942 ) 192,712       (36,545 ) 316,881       (41,487 )
Commercial mortgage-backed securities
   47,946       (1,779 ) 4,607       (457 ) 52,553       (2,236 )
Corporate securities
   737,495       (48,990 ) 42,626       (15,599 ) 780,121       (64,589 )
Collateralized debt obligations
   130,274       (11,396 ) 62,385       (25,392 ) 192,659       (36,788 )
U.S. Treasury and other U.S. Government guaranteed securities
   21,997       (431 ) —         —      21,997       (431 )
U.S. Government-sponsored enterprise securities
   10,306       (11 ) 4,982       (18 ) 15,288       (29 )
Obligations of U.S. states, municipalities and political subdivisions
   86,888       (1,668 ) 122,912       (8,144 ) 209,800       (9,812 )








Total fixed maturity securities
   $ 1,179,015       $ (69,305 ) $ 430,442       $ (86,175 ) $ 1,609,457       $ (155,480 )


	December 31, 2010
	Less Than 12 Months					12 Months or More					Total						$1,067,809		$1,067,809			$1,067,809		$1,067,809			$1,067,809		$1,067,809
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			March 31, 2012
																Less Than 12 Months					12 Months or More					Total
																Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
						(dollars in thousands)															(dollars in thousands)
Agency residential mortgage-backed securities	$	52,300	$	(1,329	)	$	233	$	(50	)	$	52,533	$	(1,379	)	$	7,489	$	(41	)	$	194	$	(27	)	$	7,683	$	(68	)
Non-agency residential mortgage-backed securities		56,290		(1,584	)		230,655		(50,830	)		286,945		(52,414	)		141,479		(5,295	)		167,360		(26,579	)		308,839		(31,874	)
Commercial mortgage-backed securities		12,500		(447	)		5,188		(2,712	)		17,688		(3,159	)		45,937		(3,466	)		5		(39	)		45,942		(3,505	)
Corporate securities		301,150		(9,005	)		61,904		(9,756	)		363,054		(18,761	)		298,662		(8,855	)		40,417		(6,412	)		339,079		(15,267	)
Collateralized debt obligations		5,451		(587	)		130,104		(27,475	)		135,555		(28,062	)		82,953		(3,115	)		76,582		(15,995	)		159,535		(19,110	)
Foreign government securities																	60,391		(2,861	)		—		—			60,391		(2,861	)
U.S. Treasury and other U.S. Government guaranteed securities		81,442		(3,362	)		—		—			81,442		(3,362	)		30,384		(206	)		7,281		(400	)		37,665		(606	)
U.S. Government-sponsored enterprise securities		61,277		(2,012	)		—		—			61,277		(2,012	)		28,199		(249	)		—		—			28,199		(249	)
Obligations of U.S. states, municipalities and political subdivisions		1,169,724		(57,589	)		65,337		(11,496	)		1,235,061		(69,085	)		88,668		(1,578	)		24,259		(3,842	)		112,927		(5,420	)

Total fixed maturity securities	$	1,740,134	$	(75,915	)	$	493,421	$	(102,319	)	$	2,233,555	$	(178,234	)	$	784,162	$	(25,666	)	$	316,098	$	(53,294	)	$	1,100,260	$	(78,960	)

		$1,067,809		$1,067,809			$1,067,809		$1,067,809			$1,067,809			$1,067,809
	December 31, 2011
	Less Than 12 Months					12 Months or More					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value			Gross Unrealized Losses
						(dollars in thousands)
Agency residential mortgage-backed securities	$	2,489	$	(7	)	$	217	$	(15	)	$	2,706		$	(22	)
Non-agency residential mortgage-backed securities		236,953		(10,510	)		165,137		(38,136	)		402,090			(48,646	)
Commercial mortgage-backed securities		23,116		(1,480	)		4,829		(223	)		27,945			(1,703	)
Corporate securities		440,672		(23,617	)		69,933		(19,423	)		510,605	��		(43,040	)
Collateralized debt obligations		132,496		(9,397	)		64,410		(23,781	)		196,906			(33,178	)
Foreign government securities		160,615		(13,854	)		—		—			160,615			(13,854	)
U.S. Treasury and other U.S. Government guaranteed securities		15,178		(487	)		—		—			15,178			(487	)
U.S. Government-sponsored enterprise securities		8,232		(6	)		—		—			8,232			(6	)
Obligations of U.S. states, municipalities and political subdivisions		48,058		(2,766	)		82,220		(6,136	)		130,278			(8,902	)

Total fixed maturity securities	$	1,067,809	$	(62,124	)	$	386,746	$	(87,714	)	$	1,454,555		$	(149,838	)

-11-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Note B – Investments – (Continued)

The following table contains information, as of March 31, 2012, 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 sub-prime, 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, 2012. 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 (38.8%), New York (8.0%) and Florida (6.7%).


	Non-Agency Prime RMBS – Fair Value
Vintage	AAA		AA		A		BBB		BB and Below⁽¹⁾		Total
	(dollars in thousands)

2001 and prior	$	—	$	1,121	$	—	$	—	$	207	$	1,328
2002		5,579		—		2,269		—		1,375		9,223
2003		69,764		1,235		—		2,084		10,739		83,822
2004		19,876		8,354		17,184		9,103		6,312		60,829
2005		5,327		85		6,387		—		117,464		129,263
2006		13,737		—		—		—		59,169		72,906
2007		4,106		—		—		—		118,476		122,582
2008		—		687		—		—		366		1,053

Total	$	118,389	$	11,482	$	25,840	$	11,187	$	314,108	$	481,006

⁽¹⁾

The securities enumerated in this column include securities having a total of $277.6 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.


	Non-Agency Alt-A RMBS – Fair Value
Vintage	AAA		AA		A		BBB		BB and Below⁽¹⁾		Total
	(dollars in thousands)

2001 and prior	$	—	$	—	$	—	$	1,525	$	—	$	1,525
2002		184		—		1,249		—		—		1,433
2003		39,060		—		—		—		747		39,807
2004		13,514		3,473		665		1,149		5,323		24,124
2005		1,934		—		4,412		—		85,346		91,692
2006		7,430		—		38		—		83,540		91,008
2007		224		—		—		—		138,663		138,887
2010		—		—		3,960		—		—		3,960

Total	$	62,346	$	3,473	$	10,324	$	2,674	$	313,619	$	392,436

⁽¹⁾

The securities enumerated in this column include securities having a total of $279.5 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.

-12-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Note B – Investments – (Continued)

~~Net investment income was attributable to the following:~~


	Non-Agency Subprime RMBS – Fair Value
Vintage	AAA		AA		A		BBB		BB and Below⁽¹⁾		Total
	(dollars in thousands)

2003	$	9,235	$	—	$	885	$	—	$	—	$	10,120
2004		8,768		—		—		—		2,665		11,433
2005		10,771		1,143		6,276		—		25,677		43,867
2006		—		—		456		1,171		45,301		46,928
2007		—		—		—		—		6,380		6,380

Total	$	28,774	$	1,143	$	7,617	$	1,171	$	80,023	$	118,728

   Three Months Ended
September 30, Nine Months Ended
September 30,
   2011 2010 2011 2010
   (dollars in thousands)
Gross investment income (loss):

Fixed maturity securities, available for sale
   $ 88,808    $ 82,926    $ 261,815    $ 244,109
Mortgage loans
   1,184    630    2,765    3,948
Short-term investments
   86    32    181    69
Other
   (2,166 ) 10,130    14,530    21,477


   87,912    93,718    279,291    269,603
Less: Investment expenses
   (7,810 ) (6,832 ) (23,704 ) (20,433 )


   $ 80,102    $ 86,886    $ 255,587    $ 249,170

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

   Three Months Ended
September 30, Nine Months Ended
September 30,
   2011 2010 2011 2010
   (dollars in thousands)
Credit related other than temporary impairment losses:

Fixed maturity securities, available for sale
   $ (9,300 ) $ (5,840 ) $ (23,314 ) $ (32,802 )
Mortgage loans
   —      (57 ) —      (15,159 )
Other investments
   (52 ) (491 ) (399 ) (2,258 )


   (9,352 ) (6,388 ) (23,713 ) (50,219 )


Other net realized investment gains (losses):

Fixed maturity securities, available for sale
   8,509    7,544    20,140    19,290
Mortgage loans
   —      (1 ) 290    418
Other investments
   (4,159 ) 37    (2,568 ) 2,723


   4,350    7,580    17,862    22,431


Total
   $ (5,002 ) $ 1,192    $ (5,851 ) $ (27,788 )

Proceeds from sales of fixed maturity securities during the first nine months of 2011 and 2010 were $1,000.9 million and $357.5 million, respectively. Gross gains, including mortgage loans and other, of $39.8 million and gross losses of $(21.9) million were realized on the 2011 sales and gross gains of $24.8 million and gross losses of $(5.5) million were realized on the 2010 sales. Proceeds from sales of fixed maturity securities during the third quarters of 2011 and 2010 were $299.5 million and $100.0 million, respectively. Gross gains, including mortgage loans and other, of $17.4 million and gross losses of $(13.1) million were realized on sales during the third quarter of 2011 and gross gains of $8.5 million and gross losses of $(1.0) million were realized on sales during the third quarter of 2010. Net realized investment gains and losses on investment sales are determined under the specific identification method and are included in income. The change in unrealized appreciation and depreciation on investments, primarily relating to fixed maturity securities, is included as a component of accumulated other comprehensive income or loss.

(1)

The securities enumerated in this column include securities having a total of $77.3 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.

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

~~-13-~~

~~DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

~~(Unaudited)~~

~~Note B – Investments – (Continued)~~

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

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

In the case of structured securities such as RMBS, commercial mortgage-backed securities and collateralized debt obligations as to which a decline in fair value is judged to be other than temporary, the amount of the credit loss arising from the impairment of the security is determined by discounting such security’s expected cash flows at its effective interest rate, taking into account the security’s purchase price. The key inputs relating to such expected cash flows consist of the future scheduled payments on the underlying loans and the estimated frequency and severity of future defaults on these loans. For those securities as to which the Company recognized credit losses in ~~2011~~2012 as a result of determinations that such securities were other than temporarily impaired, representative default frequency estimates ranged from ~~2.2%~~2.6% to ~~5.3%~~4.5% and representative default severity estimates ranged from ~~45.8%~~43.3% to ~~62.6%~~60.1%.

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

-13-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Note B – Investments – (Continued)

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 ~~nine~~three months of ~~2011,~~2012, the Company recognized ~~$17.7~~$4.4 million of after-tax other than temporary impairment losses, of which ~~$15.4~~$4.2 million was recognized as after-tax realized investment losses in the income statement related to credit losses and ~~$2.3~~$0.2 million was recognized, net of the related income tax benefit, as a component of accumulated other comprehensive income on the balance sheet related to noncredit losses. ~~Impairment losses were offset by $11.6 million of after-tax other realized investment gains, resulting in a net of $3.8 million after-tax realized investment losses being recognized during the period.~~

~~-14-~~

~~DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

~~(Unaudited)~~

~~Note B – Investments – (Continued)~~

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

   Three Months Ended
September 30, Nine Months Ended
September 30,
   2011 2010 2011 2010
   (dollars in thousands)
Balance at the beginning of the period
   $ 75,594    $ 83,156    $ 79,602    $ 89,658
Increases attributable to credit losses on securities for which an other than temporary impairment was not previously recognized
   1,822    1,995    3,567    12,359
Increases attributable to credit losses on securities for which an other than temporary impairment was previously recognized
   5,236    3,548    16,886    16,759
Reductions due to sales, maturities, pay downs or prepayments of securities for which an other than temporary impairment was previously recognized
   (5,475 ) (7,997 ) (22,878 ) (38,074 )


Balance at the end of the period
   $ 77,177    $ 80,702    $ 77,177    $ 80,702


	Three Months Ended
	March 31
	2012			2011

Balance at the beginning of the period	$	76,623		$	79,602
Increases attributable to credit losses on securities for which an other than temporary impairment was not previously recognized		484			732
Increases attributable to credit losses on securities for which an other than temporary impairment was previously recognized		4,066			7,666
Reductions due to sales, maturities, pay downs or prepayments of securities for which an other than temporary impairment was previously recognized		(5,398	)		(7,826	)

Balance at the end of the period	$	75,775		$	80,174

The gross unrealized losses at ~~September 30, 2011~~March 31, 2012 are attributable to ~~840~~604 fixed maturity security positions, with the largest unrealized loss associated with any one security equal to ~~$7.4~~$4.1 million. At ~~September 30, 2011~~March 31, 2012, approximately ~~27.8%~~29.0% of these aggregate gross unrealized losses were attributable to fixed maturity security positions as to which the unrealized loss represented ~~10%~~10.0% 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 ~~44.7%~~35.0% of the aggregate gross unrealized losses at ~~September 30, 2011,~~March 31, 2012, with the remainder of such losses being attributable to non-investment grade fixed maturity securities.

At ~~September 30, 2011,~~March 31, 2012, the Company held approximately ~~$861.8~~$883.2 million of insured municipal fixed maturity securities, which represented approximately ~~12%~~11.2% of the Company’s total invested assets. ~~These~~Based upon the highest of the ratings assigned to the respective securities by nationally recognized statistical rating organizations, these securities had a weighted average credit rating of “A” ~~by nationally recognized statistical rating organizations~~ at ~~September 30, 2011. For the portion of these securities having ratings by nationally recognized statistical rating organizations without giving effect to the credit enhancement~~March 31, 2012. Credit enhancements provided by the insurance ~~which totaled $807.7 million at September 30, 2011,~~did not impact the weighted average credit rating at such date by such ~~organizations was “AA”.~~organizations. Insurers of significant portions of the municipal fixed maturity securities held by the Company at ~~September 30, 2011~~March 31, 2012 included Assured Guaranty ($304.8 million), National Public Finance Guarantee Corp. ($~~285.1 million), Assured Guaranty ($282.6~~298.6 million), Ambac Financial Group, Inc. ($~~156.7~~153.4 million), Texas Permanent School Fund ($~~52.4 million), Financial Guaranty Insurance Company ($28.9~~53.8 million) and Radian ($~~25.9~~25.0 million). At ~~September 30, 2011,~~March 31, 2012, 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.

-14-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Note C – Fair Value Measurements

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

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

~~-15-~~

~~DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

~~(Unaudited)~~

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

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

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

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

The 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, from time-to-time, surveys its external pricing service providers to better understand the process performed in determining fair value. The Company administers meetings with these external parties, speaking directly with the individuals who are involved in the valuation process. Certain pricing service providers also have policies in place, along with committees, that evaluate the reasonability of its valuations given the information available. The Company requests to understand these policies and the involvement of the committees to determine the process in arriving at fair value.

The assumptions underlying the valuations from external service providers, including unobservable inputs, is generally not readily available as this information is often deemed proprietary. Accordingly, the Company is unable to obtain comprehensive results of these assumptions and methodologies.

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, securities issued by foreign governments 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. If sufficient information is not generated from market transactions involving identical or comparable assets, the Company uses an income approach to valuation. The majority of the instruments included in fixed maturity securities available for sale are valued utilizing observable inputs; accordingly, they are categorized in either Level l or Level 2 of the fair value hierarchy described above. However, in instances where significant inputs utilized are unobservable, the securities are categorized in Level 3 of the fair value hierarchy.

-15-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Note C – Fair Value Measurements – (Continued)

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.

~~-16-~~

~~DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

~~(Unaudited)~~

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

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.

Foreign government securities consist of bonds that are issued by a foreign government. Inputs utilized in connection with the Company's valuation techniques relating to this class of securities include recently executed transactions, interest rate yield curves, maturity dates, foreign currency exchange rates, and market price quotations relating to similar instruments. These inputs are generally observable and accordingly, these securities are generally categorized in Level 2 of the fair value hierarchy.

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

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

Assets held in the separate account represent funds invested in a separately administered variable life insurance product for which the policyholder, rather than the Company, bears the investment risk. These assets are invested in interests in a limited

-16-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Note C – Fair Value Measurements – (Continued)

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.~~investment. The investment portfolios of the funds in which the fund investments are maintained vary from fund to fund, but are generally comprised of liquid, publicly traded securities that have readily determinable market values and which are carried at fair value on the financial statements of such funds, substantially all of which are audited annually. The amount that an investor is entitled to receive upon the redemption of its investment from the applicable fund is determined by reference to such security values. 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, 2012
	Total		Level 1		Level 2		Level 3
	(dollars in thousands)
Assets:
Fixed maturity securities, available for sale:
Agency residential mortgage-backed securities	$	574,825	$	—	$	557,509	$	17,316
Non-agency residential mortgage-backed securities		992,170		—		968,336		23,834
Commercial mortgage-backed securities		198,197		—		190,849		7,348
Corporate securities		1,825,194		—		1,646,088		179,106
Collateralized debt obligations		283,071		—		126		282,945
Foreign government securities		146,024		—		144,813		1,211
U.S. Treasury and other U.S. Government guaranteed securities		124,458		93,222		18,624		12,612
U.S. Government-sponsored enterprise securities		37,946		—		37,946		—
Obligations of U.S. states, municipalities and political subdivisions		2,645,284		—		2,637,957		7,327
Other investments		542,143		517,072		10,193		14,878
Assets held in separate account		124,068		—		—		124,068

Total	$	7,493,380	$	610,294	$	6,212,441	$	670,645


Liabilities:
Other liabilities	$	84,933	$	84,933	$	—	$	—

-17-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Note C – Fair Value Measurements – (Continued)

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


	September 30, 2011								December 31, 2011
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
	(dollars in thousands)								(dollars in thousands)
Assets:
Fixed maturity securities, available for sale:
Agency residential mortgage-backed securities	$	695,487	$	—	$	687,077	$	8,410	$	668,584	$	—	$	660,632	$	7,952
Non-agency residential mortgage-backed securities		836,537		—		801,100		35,437		820,637		—		796,243		24,394
Commercial mortgage-backed securities		68,479		—		67,620		859		96,683		—		95,981		702
Corporate securities		1,902,959		—		1,770,038		132,921		1,707,497		—		1,539,274		168,223
Collateralized debt obligations		217,500		—		—		217,500		258,071		—		157		257,914
Foreign government securities										257,281		—		256,015		1,266
U.S. Treasury and other U.S. Government guaranteed securities		102,812		67,945		27,086		7,781		103,837		69,867		26,330		7,640
U.S. Government-sponsored enterprise securities		50,693		—		47,567		3,126		42,379		—		40,531		1,848
Obligations of U.S. states, municipalities and political subdivisions		2,499,332		—		2,498,034		1,298		2,534,668		—		2,527,370		7,298
Other investments		316,125		310,236		—		5,889		359,624		353,729		—		5,895
Assets held in separate account		115,043		—		—		115,043		117,365		—		—		117,365

Total	$	6,804,967	$	378,181	$	5,898,522	$	528,264	$	6,966,626	$	423,596	$	5,942,533	$	600,497


Liabilities:
Other liabilities	$	83,993	$	83,993	$	—	$	—	$	85,123	$	85,123	$	—	$	—

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 September 30, 2011
   Balance at
Beginning
of Quarter    Total Gains
(Losses)
Included in
Earnings Total Gains
(Losses)
Included in
Other Com-
prehensive
Income Purchases    Issuances    Settlements Transfers
Into
Level 3    Transfers
Out of
Level 3 Balance
End of the
Period
   (dollars in thousands)
Agency residential mortgage-backed securities
   $ 9,578       $ (18 ) $ 121    $ —         $ —         $ (1,271 ) $ —         $ —      $ 8,410
Non-agency residential mortgage-backed securities
   34,344       182    (349 ) 13,548       —         (1,043 ) —         (11,245 ) 35,437
Commercial mortgage-backed securities
   1,405       (12 ) (3 ) —         —         (531 ) —         —      859
Corporate securities
   114,984       1,071    (1,822 ) 31,600       —         (6,935 ) 1,041       (7,018 ) 132,921
Collateralized debt obligations
   219,458       1,421    (21,669 ) 20,658       —         (3,030 ) 662       —      217,500
U.S. Treasury and other U.S. Government guaranteed securities
   7,847       (3 ) 25    —         —         (88 ) —         —      7,781
U.S. Government-sponsored enterprise securities
   4,036       5    121    —         —         (1,040 ) 4       —      3,126
Obligations of U.S. states, municipalities and political subdivisions
   2,911       17    238    —         —         (1 ) —         (1,867 ) 1,298
Other investments
   5,895       60    (6 ) —         —         (60 ) —         —      5,889
Assets held in separate account ⁽¹⁾
   126,213       (10,534 ) —      6,904       —         (7,540 ) —         —      115,043










Total
   $ 526,671       $ (7,811 ) $ (23,344 ) $ 72,710       $ —         $ (21,539 ) $ 1,707       $ (20,130 ) $ 528,264


	Three Months Ended March 31, 2012
	Balance at Beginning of Year		Total Gains (Losses) Included in Earnings			Total Gains (Losses) Included in Other Comprehensive Income⁽²⁾			Purchases		Issuances		Settlements			Transfers Into Level 3 ⁽³⁾		Transfers Out of Level 3 ⁽⁴⁾			Balance End of the Period
	(dollars in thousands)
Agency residential mortgage-backed securities	$	7,952	$	(18	)	$	(27	)	$	10,366	$	—	$	(957	)	$	—	$	—		$	17,316
Non-agency residential mortgage-backed securities		24,394		74			381			—		—		(1,015	)		—		—			23,834
Commercial mortgage-backed securities		702		22			555			6,222		—		(153	)		—		—			7,348
Corporate securities		168,223		184			3,435			22,911		—		(8,185	)		411		(7,873	)		179,106
Collateralized debt obligations		257,914		(2,001	)		20,229			17,610		—		(10,807	)		—		—			282,945
Foreign government securities		1,266		19			—			1,171		—		(1,245	)		—		—			1,211
U.S. Treasury and other U.S. Government guaranteed securities		7,640		(3	)		77			254		—		(99	)		4,743		—			12,612
U.S. Government-sponsored enterprise securities		1,848		10			(8	)		—		—		(1,850	)		—		—			—
Obligations of U.S. states, municipalities and political subdivisions		7,298		5			24			—		—		—			—		—			7,327
Other investments		5,895		159			2			9,561		—		(739	)		—		—			14,878
Assets held in separate account⁽¹⁾		117,365		7,299			—			15,891		—		(16,487	)		—		—			124,068

Total	$	600,497	$	5,750		$	24,668		$	83,986	$	—	$	(41,537	)	$	5,154	$	(7,873	)	$	670,645

(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 ~~and~~ 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.

(2)	Other comprehensive income includes $14.8 million, net of an income tax expense of $8.1 million, in increases to net unrealized appreciation on investments and $1.2 million, net of an income tax expense of $0.6 million, in decreases in other than temporary impairments.

(3)	In the case of each transfer into Level 3 for the period, an independent service dropped coverage of pricing the security and such pricing was replaced with broker quotes.

-18-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Note C – Fair Value Measurements – (Continued)

   Nine Months Ended September 30, 2011
   Balance at
Beginning
of Year    Total Gains
(Losses)
Included in
Earnings Total Gains
(Losses)
Included in
Other Com-
prehensive
Income Purchases    Issuances    Settlements Transfers
Into
Level 3    Transfers
Out of
Level 3 Balance
End of the
Period
   (dollars in thousands)
Agency residential mortgage-backed securities
   $ 11,266       $ (56 ) $ 138    $ 365       $ —         $ (3,303 ) $ —         $ —      $ 8,410
Non-agency residential mortgage-backed securities
   37,520       453    (1,521 ) 17,421       —         (3,316 ) —         (15,120 ) 35,437
Commercial mortgage-backed securities
   1,327       (13 ) (37 ) 396       —         (814 ) —         —      859
Corporate securities
   60,968       2,274    (2,474 ) 107,637       —         (15,845 ) 2,686       (22,325 ) 132,921
Collateralized debt obligations
   175,184       5,204    (9,873 ) 64,913       —         (18,590 ) 662       —      217,500
U.S. Treasury and other U.S. Government guaranteed securities
   9,015       (27 ) (845 ) —         —         (362 ) —         —      7,781
U.S. Government-sponsored enterprise securities
   4,020       140    131    23,272       —         (26,104 ) 2,037       (370 ) 3,126
Obligations of U.S. states, municipalities and political subdivisions
   2,855       17    178    1,606       —         (1 ) 1,302       (4,659 ) 1,298
Other investments
   6,449       60    59    334       —         (60 ) —         (953 ) 5,889
Assets held in separate account⁽¹⁾
   123,674       (6,695 ) —      30,107       —         (32,043 ) —         —      115,043










Total
   $ 432,278       $ 1,357    $ (14,244 ) $ 246,051       $ —         $ (100,438 ) $ 6,687       $ (43,427 ) $ 528,264

~~(1)~~(4)

~~Because~~In the ~~positive or negative investment performance~~case of ~~these assets accrues to policyholders, who bear~~each transfer out of Level 3 for the ~~investment risk of these assets, net investment income~~period, an independent pricing service initiated coverage in pricing the security and capital gains and losses arising from these assets and 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.such pricing replaced broker quotes.

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.

   September 30, 2011    December 31, 2010
   Carrying
Value    Fair
Value    Carrying
Value    Fair
Value
   (dollars in thousands)
Assets:

Short-term investments
   $ 201,529       $ 201,529       $ 334,215       $ 334,215
Investment accounts receivable
   87,159       87,159       45,645       45,645 ��
Other investments
   357,590       357,590       306,033       306,033
Liabilities:

Policyholder account balances
   $ 1,936,520       $ 2,004,997       $ 1,662,932       $ 1,761,795
Corporate debt
   375,000       424,575       375,000       402,618
Junior subordinated debentures
   175,000       166,339       175,000       161,541
Advances from Federal Home Loan Bank
   55,342       76,982       55,342       70,046
Investment accounts payable
   138,232       138,232       27,667       27,667
Liabilities related to separate account
   115,043       115,043       123,674       123,674


	March 31, 2012
	Carrying Value		Fair Value Total		Fair Value Level 2		Fair Value Level 3
	(dollars in thousands)
Assets:
Short-term investments	$	141,521	$	141,521	$	141,521	$	—
Investment accounts receivable		77,189		77,189		—		77,189
Other investments		331,650		331,650		—		331,650

Liabilities:
Policyholder account balances	$	2,092,555	$	2,170,052	$	—	$	2,170,052
Corporate debt		375,000		418,808		418,808		—
Junior subordinated debentures		175,000		173,390		173,390		—
Advances from Federal Home Loan Bank		55,342		74,365		74,365		—
Investment accounts payable		85,627		85,627		—		85,627
Liabilities related to separate account		124,068		124,068		—		124,068


	December 31, 2011
	Carrying Value		Fair Value
	(dollars in thousands)
Assets:
Short-term investments	$	277,552	$	277,552
Investment accounts receivable		24,406		24,406
Other investments		318,509		318,509

Liabilities:
Policyholder account balances	$	2,008,285	$	2,066,609
Corporate debt		375,000		415,310
Junior subordinated debentures		175,000		166,617
Advances from Federal Home Loan Bank		55,342		75,352
Investment accounts payable		41,719		41,719
Liabilities related to separate account		117,365		117,365

The carrying values for short-term investments approximate fair values based on the nature of the investments. The carrying values of investment accounts receivable and investment accounts payable approximate fair values based on the short-term nature of the expected cash receipt. Other investments primarily include investment funds organized as limited partnerships and limited liability companies and real estate ~~investments~~investment held by limited liability companies, which are reflected in the Company’s financial statements under the equity method of accounting. In determining the fair ~~values~~value of such investments for purposes of this footnote disclosure, the

~~-19-~~

~~DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

~~(Unaudited)~~

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

Company concluded that the ~~values~~value calculated using the equity method of accounting ~~were~~was reflective of the fair market ~~values~~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 are carried at fair value on the financial statements of such funds, substantially all of which are audited annually. The amount that an investor is entitled to receive upon the redemption of its investment from the applicable fund is determined by reference to such security values. The Company utilizes the financial statements furnished by the funds to determine the values of its investments in such funds and the carrying value of each such investment, which is based on its

-19-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Note C – Fair Value Measurements – (Continued)

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 ~~values.~~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 ~~$87.2~~$73.1 million and ~~$82.1~~$87.1 million at ~~September 30, 2011~~March 31, 2012 and December 31, ~~2010,~~2011, 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 (“2020 Senior Notes”), 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 (“2007 Junior Debentures”) are based on the expected cash flows discounted to net present value. The fair values for fixed rate advances from the FHLB were calculated using discounted cash flow analyses based on the interest rates for the advances at the balance sheet date.

Note D – Segment Information

   Three Months Ended
September 30, Nine Months Ended
September 30,
   2011 2010 2011 2010
   (dollars in thousands)
Revenues:

Group employee benefit products
   $ 432,970    $ 399,976    $ 1,275,550    $ 1,173,139
Asset accumulation products
   32,017    32,020    99,291    94,107
Other⁽¹⁾
   13,734    11,909    40,776    39,272


   478,721    443,905    1,415,617    1,306,518
Net realized investment (losses) gains
   (5,002 ) 1,192    (5,851 ) (27,788 )
Loss on early retirement of senior notes
   —      (3,760 ) —      (3,972 )


   $ 473,719    $ 441,337    $ 1,409,766    $ 1,274,758


Operating income:

Group employee benefit products
   $ 64,199    $ 71,026    $ 213,359    $ 205,414
Asset accumulation products
   9,207    10,596    28,538    32,324
Other⁽¹⁾
   (9,876 ) (7,914 ) (26,474 ) (22,214 )


   63,530    73,708    215,423    215,524
Net realized investment (losses) gains
   (5,002 ) 1,192    (5,851 ) (27,788 )
Loss on early retirement of senior notes
   —      (3,760 ) —      (3,972 )


   $ 58,528    $ 71,140    $ 209,572    $ 183,764


	Three Months Ended March 31,
	2012			2011
	(dollars in thousands)
Revenues:
Group employee benefit products	$	470,013		$	421,293
Asset accumulation products		42,360			34,112
Other⁽¹⁾		11,792			13,288

		524,165			468,693
Net realized investment gains (losses)		1,031			(1,972	)

	$	525,196		$	466,721

Operating income (loss):
Group employee benefit products	$	79,127		$	76,078
Asset accumulation products		15,300			9,703
Other⁽¹⁾		(42,065	)		(7,791	)

		52,362			77,990
Net realized investment gains (losses)		1,031			(1,972	)

	$	53,393		$	76,018

(1)	Primarily consists of operations from integrated disability and absence management services and certain corporate activities. Operating income results for the three months ended March 31, 2012 includes $30.7 million of merger-related corporate expenses.

~~Note E – Comprehensive Income~~

Total comprehensive income attributable to common shareholders is comprised of net income attributable to shareholders and other comprehensive income, which includes the change in unrealized gains and losses on securities available for sale, the change in other than temporary impairments recognized in other comprehensive income and the change in net periodic pension cost. Total comprehensive income attributable to common shareholders was $204.7 million and $288.1 million for the first nine months of 2011 and 2010, respectively, and $57.7 million and $149.7 million for the third quarters of 2011 and 2010,

-20-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Note E – ~~Comprehensive Income – (Continued)~~

~~respectively. Net unrealized gains on securities available for sale increased $62.0 million and $165.9 million in the first nine months of 2011 and 2010, respectively.~~

~~Note F –~~ Stock-Based Compensation

The Company recognized stock-based compensation expenses of ~~$6.2~~$4.1 million and ~~$6.5~~$2.2 million in the first ~~nine months~~quarters of 2012 and 2011, ~~and 2010, respectively, of which $2.2 million and $2.1 million was recognized in~~respectively.

The Company did not grant any options during the ~~third~~first quarter of 2011 and 2010, respectively. The remaining unrecognized compensation expense related to unvested awards at September 30, 2011 was $15.7 million and the weighted average period of time over which this expense will be recognized is 3.0 years.

2012. The fair values of options granted during the first quarter of 2011 were ~~estimated~~calculated at the grant date using the Black-Scholes option pricing model with the following weighted average assumptions:

   Nine Months Ended
September 30,
   2011 2010
Expected volatility
   44.7 % 43.0 %
Expected dividends
   1.5 % 1.8 %
Expected lives of options (in years)
   5.8    6.1
Risk-free rate
   2.4 % 2.7 %


Expected volatility	43.9	%
Expected dividends	1.4	%
Expected lives of options (in years)	6.0
Risk-free rate	2.6	%

The expected volatility reflects the Company’s past monthly stock price volatility. The dividend yield is based on the Company’s historical dividend payments. The Company used the historical average period from the Company’s issuance of an option to its exercise or cancellation and the average remaining years until expiration for the Company’s outstanding options to estimate the expected life of options granted in 2011 ~~and 2010~~ for which the Company had sufficient historical exercise data.

The Company used the “simplified method” to estimate the expected life of certain options granted in 2011 ~~and 2010~~ for which sufficient historical data was not available. The risk-free rate is derived from public data sources at the time of each option grant. Compensation cost is recognized over the requisite service period of the option using the straight-line method.

Option activity with respect to the Company’s plans, excluding the performance-contingent incentive options referenced further below, was as follows:

Options
   Number
of
Options Weighted
Average
Exercise
Price    Weighted
Average
Remaining
Contractual
Term    Aggregate
Intrinsic
Value
($000)
Outstanding at January 1, 2011
   3,989,995    $ 29.10
Granted
   592,389    30.58
Exercised
   (184,841 ) 23.66
Forfeited
   (26,150 ) 25.05
Expired
   (16,877 ) 35.09



Outstanding at September 30, 2011
   4,354,516    29.53       6.4       $ 2,242



Exercisable at September 30, 2011
   2,618,029    $ 30.78       5.3       $ 1,192


Options	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value ($000)
Outstanding at January 1, 2012		4,256,785		$	29.61
Exercised		(276,220	)		30.09
Expired		(2,225	)		35.16

Outstanding at March 31, 2012		3,978,340			29.57		6.0	$	60,475


Exercisable at March 31, 2012		2,685,333		$	30.60		5.2	$	38,064

The weighted average grant date fair value of options granted during the first ~~nine months of 2011 and 2010 was $11.95 and $8.22, respectively. The Company did not grant any options during the third~~ quarter of 2011 ~~or 2010.~~was $12.19. The cash proceeds from stock options exercised were ~~$4.9~~$42.2 million and ~~$1.8~~$2.8 million in the first ~~nine months~~quarters of ~~2011~~2012 and ~~2010,~~2011, respectively. The total intrinsic value of options exercised during the first ~~nine months~~quarters of 2012 and 2011 ~~and 2010~~ was ~~$1.3~~$27.1 million and ~~$2.5~~$0.8 million, respectively. The Company’s actual benefits from the tax deductions realized in excess of recognized compensation cost were ~~$0.8~~$5.7 million and ~~$0.5~~$0.2 million in the first ~~nine months~~quarters of ~~2011~~2012 and ~~2010,~~2011, respectively, and are included as a component of additional paid in capital.

At March 31, 2012, 3,018,000 performance-contingent incentive options were outstanding with a weighted average exercise price of $25.12, a weighted average contractual term of 3.5 years and an intrinsic value of $59.3 million. 2,325,000 of such options with a weighted average exercise price of $24.68, a weighted average contractual term of 2.5 years and an intrinsic value of $46.7 million were exercisable at March 31, 2012. At March 31, 2012, a total of 251,035 performance-contingent restricted shares were outstanding.

-21-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Note F – ~~Stock-Based Compensation – (Continued)~~

At September 30, 2011, 4,296,250 performance-contingent incentive options were outstanding with a weighted average exercise price of $25.49, a weighted average contractual term of 3.6 years and an intrinsic value of $3.0 million. 3,603,250 of such options with a weighted average exercise price of $25.32, a weighted average contractual term of 2.9 years and an intrinsic value of $3.0 million were exercisable at September 30, 2011. At September 30, 2011, a total of 251,029 performance-contingent restricted shares were outstanding.

~~Note G –~~ Computation of Results per Share

The following table sets forth the calculation of basic and diluted results per ~~share:~~share (amounts in thousands, except per share data):

   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2011    2010    2011    2010
   (amounts in thousands, except per share data)
Numerator:

Net income attributable to shareholders
   $ 41,035       $ 44,808       $ 140,686       $ 115,986








Denominator:

Weighted average common shares outstanding
   56,004       55,404       56,006       55,284
Effect of dilutive securities
   401       396       663       390








Weighted average common shares outstanding, assuming dilution
   56,405       55,800       56,669       55,674








Basic results per share of common stock:

Net income attributable to shareholders
   $ 0.73       $ 0.81       $ 2.51       $ 2.10








Diluted results per share of common stock:

Net income attributable to shareholders
   $ 0.73       $ 0.80       $ 2.48       $ 2.08


	Three Months Ended March 31,
	2012		2011
Numerator:
Net income attributable to shareholders	$	34,940	$	50,224

Denominator:
Weighted average common shares outstanding		56,543		55,921
Effect of dilutive securities		2,017		813

Weighted average common shares outstanding, assuming dilution		58,560		56,734

Basic results per share of common stock:
Net income attributable to shareholders	$	0.62	$	0.90

Diluted results per share of common stock:
Net income attributable to shareholders	$	0.60	$	0.89

Note G – Merger Agreement

On December 21, 2011, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) among the Company, Tokio Marine Holdings, Inc., a Japanese corporation (“Tokio Marine”), and TM Investment (Delaware) Inc., a Delaware corporation and wholly owned subsidiary of Tokio Marine (“TM Sub”). The Merger Agreement provides that at the effective time of the merger, TM Sub will be merged with and into the Company, with the Company continuing as the surviving corporation and becoming an indirect wholly owned subsidiary of Tokio Marine. Pursuant to the Merger Agreement, at the effective time of the merger (1) each share of the Company’s Class A Common Stock (other than (a) shares of our Class A Common Stock owned by the Company, Tokio Marine or any of their respective wholly owned subsidiaries, in each case not held on behalf of third parties, and (b) shares in respect of which appraisal rights have been properly demanded and those demands not effectively withdrawn) will be converted into the right to receive $43.875 in cash, without interest and less any applicable withholding taxes, and (2) each share of the Company’s Class B Common Stock (other than (a) shares of the Company’s Class B Common Stock owned by the Company, Tokio Marine or any of their respective wholly owned subsidiaries, in each case not held on behalf of third parties, and (b) shares in respect of which appraisal rights have been properly demanded and those demands not effectively withdrawn) will be converted into the right to receive $52.875 in cash, without interest and less any applicable withholding taxes. In addition, the Merger Agreement provides that record holders of common stock immediately prior to the effective time of the merger will be entitled to receive a special dividend of $1.00 in cash per share that is contingent upon the completion of the merger and will be paid shortly after closing. The acquisition has been approved by the Company’s stockholders and by the relevant regulatory authorities in Japan and in the U.S. The closing of the merger, which remains subject to the satisfaction of other customary closing conditions, is expected to occur on or about May 15, 2012.

On February 21, 2012, the Company filed a definitive proxy statement with the Securities and Exchange Commission which contains detailed information about the merger and the board and special committee process conducted in connection with the merger.

-22-

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, workers’ compensation and casualty treaty reinsurance, 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 ~~large deductible 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~~which prevailed for its excess workers’ compensation products as to pricing and other contract ~~terms.~~terms and has enhanced its leadership position in the market for these products. 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 and its aftereffects 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 ~~nine~~three months of ~~2011,~~2012, 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.~~standpoint, particularly as to pricing. 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 nine 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. This 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. Beginning in the second half of 2010, the Company has experienced particularly advantageous conditions in the fixed annuity marketplace resulting from various competitors having terminated their marketing of comparable fixed annuity products and, in some cases, having experienced ratings downgrades. From time to time, the Company acquires blocks of existing SPDA and FPA policies from other insurers through indemnity assumed reinsurance transactions and issues funding agreements. The Company believes that 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 its 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 return on investments and the interest credited with respect to these products. The Company sets the crediting rates offered on its asset accumulation products in an effort to achieve its targeted

-23-

interest rate spreads on these products, and is willing to accept lower levels of sales on these products when market conditions make these targeted spreads more difficult to achieve.

~~-23-~~

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~~reducing 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 and trading account ~~securities and hybrid financial instruments; in particular, those investments whose performance had demonstrated the highest levels of variability.~~securities. As part of this effort, the Company has increased its investments in more traditional sectors of the fixed income market such as mortgage-backed securities and municipal bonds. In addition, while in ~~light of the market conditions of~~ recent years the Company has been maintaining a significant ~~proportion~~portion of its portfolio in short-term investments, which totaled ~~$201.5 million and $334.2~~$277.6 million at ~~September 30, 2011 and~~ December 31, ~~2010, respectively. The~~2011, 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~~At March 31, 2012, the ~~market environment continues~~Company’s short-term investments had decreased 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 or variability of its future net investment income.$141.5 million.

The Company ~~has achieved~~continued to achieve improved levels of investment income in its repositioned investment portfolio ~~in 2010 and in~~during the first ~~nine months~~quarter of ~~2011.~~2012. However, in light of the continuing volatility in financial market conditions, significant fluctuations in the Company’s net investment income, and as a result, in its results of operations may occur. 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 the first ~~nine months~~quarter of ~~2011~~2012 as compared to ~~2010 and 2009,~~the same period of 2011, 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~~2011, as amended by Amendment No. 1 on Form 10-K/A (the ~~“2010~~“2011 Form 10-K”). Capitalized terms used herein without definition have the meanings ascribed to them in the ~~2010~~2011 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~~2011 Form 10-K in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations—~~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~~2011 Form 10-K, “Risk Factors”.

Recent Developments

On December 21, 2011, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) among the Company, Tokio Marine Holdings, Inc., a Japanese corporation (“Tokio Marine”), and TM Investment (Delaware) Inc., a Delaware corporation and wholly owned subsidiary of Tokio Marine (“TM Sub”). The Merger Agreement provides that at the effective time of the merger, TM Sub will be merged with and into the Company, with the Company continuing as the surviving corporation and becoming an indirect wholly owned subsidiary of Tokio Marine. Pursuant to the Merger Agreement, at the effective time of the merger (1) each share of the Company’s Class A Common Stock (other than (a) shares of the Company’s Class A Common Stock owned by the Company, Tokio Marine or any of their respective wholly owned subsidiaries, in each case not held on behalf of third parties, and (b) shares in respect of which appraisal rights have been properly demanded and those demands not effectively withdrawn) will be converted into the right to receive $43.875 in cash, without interest and less any applicable withholding taxes, and (2) each share of the Company’s Class B Common Stock (other than (a) shares of the Company’s Class B Common Stock owned by the Company, Tokio Marine or any of their respective wholly owned subsidiaries, in each case not held on behalf of third parties, and (b) shares in respect of which appraisal rights have been properly demanded and those demands not effectively withdrawn) will be converted into the right to receive $52.875 in cash, without interest and less any applicable withholding taxes. In addition, the Merger Agreement provides that record holders of common stock immediately prior to the effective time of the merger will be entitled to receive a special dividend of $1.00 in cash per share that is contingent upon the completion of the merger and will be paid shortly after closing. The acquisition has been approved by the Company’s stockholders and by the relevant regulatory authorities in Japan and in the U.S. The closing of the merger, which remains subject to the satisfaction of other customary closing conditions, is expected to occur on or about May 15, 2012.

-24-

Results of Operations

~~Nine~~Three Months Ended ~~September 30, 2011~~March 31, 2012 Compared to ~~Nine~~

Three Months Ended ~~September 30, 2010~~March 31, 2011

Summary of Results.Net income attributable to shareholders was ~~$140.7~~$34.9 million, or ~~$2.48~~$0.60 per diluted share, for the first ~~nine months~~quarter of ~~2011~~2012 as compared to ~~$116.0~~$50.2 million, or ~~$2.08~~$0.89 per diluted share, for the first ~~nine months~~quarter of ~~2010.~~2011. Net income in the first ~~nine months~~quarter of 2012 compared to the first quarter of 2011 benefited from an increase in net investment income, a decreased level of realized investment losses and ~~2010~~growth in income from the Company’s core group employee benefit products. Net income in the first quarter of 2012 was adversely impacted by merger-related corporate expenses, net of related income tax, of $23.0 million or $0.39 per diluted share. Net income in the first quarter of 2012 and 2011 included net realized investment ~~losses,~~gains (losses), net of the related income tax ~~benefit,~~(expense) benefits, of ~~$3.8~~$0.7 million, or ~~$0.07~~$0.01 per diluted share, and ~~$18.1~~$(1.3) million, or ~~$0.32~~$(0.02) per diluted share, respectively. Net income in the first nine months of 2011 as compared to the prior period benefited from growth in income from the Company’s 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 ~~nine months~~quarter of ~~2011~~2012 and ~~2010~~2011 included losses, net of the related income tax benefit, of ~~$15.4~~$4.2 million, or ~~$0.27~~$0.07 per diluted share, and ~~$32.6~~$5.9 million, or ~~$0.59~~$0.10 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 during 2010.~~

~~-24-~~

analyzing the ~~Company’s~~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~~market 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. Merger-related corporate expenses represent costs incurred during the first quarter of 2012 relating to the pending merger with Tokio Marine. Discontinued operations ~~result~~results 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 ~~$144.5~~$57.2 million, or ~~$2.55~~$0.98 per diluted share, ~~for~~in the first ~~nine months~~quarter of ~~2011~~2012 compared to ~~$136.6~~$51.5 million, or ~~$2.45~~$0.91 per diluted share, ~~for~~in the first ~~nine months~~quarter of ~~2010. 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.~~2011.

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


	Nine Months Ended September 30,						Three Months Ended March 31,
	2011			2010			2012			2011
Operating earnings	$	144,489		$	136,630		$	57,237		$	51,506
Net realized investment losses, net of taxes⁽¹⁾		(3,803	)		(18,062	)
Loss on early retirement of senior notes⁽²⁾		—			(2,582	)
Net realized investment gains (losses), net of taxes^(A)								670			(1,282	)
Merger-related corporate expenses, net of taxes^(B)								(22,967	)		—

Net income attributable to shareholders	$	140,686		$	115,986		$	34,940		$	50,224


Diluted results per share of common stock
Operating earnings	$	2.55		$	2.45		$	0.98		$	0.91
Net realized investment losses, net of taxes⁽¹⁾		(0.07	)		(0.32	)
Loss on early retirement of senior notes⁽²⁾		—			(0.05	)
Net realized investment gains (losses), net of taxes^(A)								0.01			(0.02	)
Merger-related corporate expenses, net of taxes^(B)								(0.39	)		—

Net income attributable to shareholders	$	2.48		$	2.08		$	0.60		$	0.89

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⁽¹⁾(A)

Net of an income tax (expense) benefit of ~~$2.0~~$(0.4) million and ~~$9.7~~$0.7 million, or ~~$0.04~~$(0.01) per diluted share and ~~$0.17~~$0.01 per diluted share, for the ~~nine~~three months ended ~~September 30,~~March 31, 2012 and 2011, ~~and 2010,~~ respectively. The tax effect is calculated using the ~~Company’s~~Company's statutory tax rate of 35%.

⁽²⁾(B)

Net of an income tax benefit of ~~$1.4~~$7.7 million or ~~$0.02~~$0.13 per diluted share for the ~~nine~~three months ended ~~September 30, 2010. The tax effect is calculated using~~March 31, 2012. These expenses are included in the ~~Company’s statutory tax rate~~"Other Operating Expenses" line of ~~35%.~~

the Consolidated Statements of Income.

Premium and Fee Income. Premium and fee income for the first ~~nine months~~quarter of ~~2011~~2012 was ~~$1,160.0~~$418.4 million as compared to ~~$1,057.3~~$376.4 million for the first ~~nine months~~quarter of ~~2010,~~2011, an increase of 1011%.Premiums from core group employee benefit products, which include disability, life, excess workers’ compensation, travel accident and dental insurance ~~limited benefit health insurance~~ and workers’ compensation and casualty treaty reinsurance, increased 9%11% to ~~$1,105.5~~$399.0 million for the first ~~nine months~~quarter of ~~2011~~2012 from ~~$1,012.6~~$359.4 million for the first ~~nine months~~quarter of ~~2010,~~2011, 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 $237.6~~was $80.0 million and $82.5 million in the first ~~nine months~~quarter of 2012 and 2011, ~~from $192.8 million in the first nine months of 2010.~~respectively. Premiums from excess workers’ compensation insurance for self-insured employers increased ~~13%~~20% to ~~$241.0~~$89.7 million in the first ~~nine months~~quarter of ~~2011~~2012 from ~~$213.3~~$74.9 million in the first ~~nine months~~quarter of ~~2010.~~2011. Excess workers’ compensation new business production, which represents the annualized amount of new premium sold, was ~~$61.0~~$16.9 million in the first ~~nine months~~quarter of ~~2011~~2012 as compared to ~~$39.0~~$19.1 million in the first ~~nine months~~quarter of ~~2010, an increase of 56%.~~2011. Premiums from workers’ compensation and casualty treaty reinsurance increased ~~46%~~27% to ~~$53.5~~$21.9 million in the first ~~nine months~~quarter of ~~2011~~2012 from ~~$36.8~~$17.3 million in the first ~~nine months~~quarter of ~~2010. This product was recently renamed by the Company and was previously known as assumed workers’ compensation and casualty reinsurance.~~2011. Workers’ compensation and casualty treaty reinsurance production was ~~$18.8~~$14.3 million in the first ~~nine months~~quarter of ~~2011~~2012 as compared to ~~$12.2~~$7.3 million in the first ~~nine months~~quarter of ~~2010,~~2011, an increase of ~~54%~~96%. ~~The Company’s~~SNCC’s retention of its existing excess workers’ compensation customers remained strong in the first ~~nine months~~quarter of ~~2011.~~2012.

~~During the first nine months of 2011, premiums~~Premiums from the Company’s other core group employee benefit products increased 6%8% to ~~$810.9 million from $762.5~~$287.4 million in the first ~~nine months~~quarter of ~~2010. Premiums from the Company’s group life products~~

~~-25-~~

~~increased 7%~~2012 as compared to ~~$312.5~~$267.2 million in the first ~~nine months~~quarter of ~~2011 from $291.8 million in the first nine months of 2010.~~2011. Premiums from the Company’s group disability products increased 6%10% to ~~$430.9~~$154.5 million in the first ~~nine months~~quarter of ~~2011~~2012 from ~~$406.2~~$140.8 million in the first ~~nine months~~quarter of ~~2010.~~2011. Premiums from the Company’s turnkey disability business were ~~$37.0~~$15.1 million during the first ~~nine months~~quarter of ~~2011~~2012 as compared to ~~$37.2~~$12.2 million during the first ~~nine months~~quarter of ~~2010.~~2011. Premiums from the Company’s group life products increased 5% to $108.4 million in the first quarter of 2012 from $103.4 million in the first quarter of 2011. New business production for the Company’s other core group employee benefit products ~~increased 11% to $157.8~~was $48.8 million in the first ~~nine months~~quarter of ~~2011 from $141.6~~2012 as compared to $56.1 million in the first ~~nine months~~quarters 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).~~2011. 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 ~~$39.4~~$27.7 million in the first ~~nine months~~quarter of ~~2011~~2012 as compared to ~~$11.4~~$25.0 million in the first ~~nine months~~quarter of ~~2010.~~2011.

Deposits from the Company’s asset accumulation products were ~~$422.2~~$87.5 million in the first ~~nine months~~quarter of ~~2011~~2012 as compared to ~~$270.4~~$97.6 million in the first ~~nine months~~quarter of 2010, an increase of 56%. This increase reflects the continuation in the current year of the advantageous conditions for the Company in the fixed annuity marketplace which emerged during the second half 2010.2011. 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~~2012 in an effort to achieve its targeted interest rate spreads on these products. The Company’s funds under management increased ~~23%~~24% to ~~$2,002.8~~$2,144.4 million at ~~September 30, 2011~~March 31, 2012 from ~~$1,634.3~~$1,728.4 million at ~~September 30, 2010.~~March 31, 2011.

Net Investment Income. Net investment income in the first ~~nine months~~quarter of ~~2011~~2012 was ~~$255.6~~$105.8 million as compared to ~~$249.2~~$92.3 million in the first ~~nine months~~quarter of ~~2010,~~2011, an increase of 3%15%. This increase reflects a ~~14%~~16% increase in average invested assets to ~~$6,774.4~~$7,637.6 million in 2012 from $6,598.3 million in 2011 ~~from $5,960.7 million in 2010,~~and a higher level of investment income from the Company’s fixed maturity security portfolio and trading account securities, partially offset by adverse performance on the part of the Company’s investments in investment funds organized as limited partnerships and limited liability companies.portfolio. The tax equivalent weighted average annualized yield on invested assets was ~~5.5% and~~ 6.0% in for the first ~~nine months~~quarters of ~~2011~~both 2012 and ~~2010, respectively.~~2011.

Net Realized Investment ~~Losses.~~Gains (Losses).Net realized investment ~~losses~~gains were ~~$5.9~~$1.0 million in the first ~~nine months~~quarter of ~~2011~~2012 as compared to ~~$27.8~~net realized investment losses of $(2.0) million in the first ~~nine months~~quarter of ~~2010.~~2011. The Company monitors its investments on an ongoing basis. When the fair value of an available for sale 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~~loss is recognized as a realized investment loss in the Company’s income statement and the remaining portion of the decline continues to be included as a component of accumulated other comprehensive income or loss. For all other types of investments, the entire amount of the decline is recognized as a realized investment loss. ~~The~~During the first quarter of 2012, the Company recognized ~~$27.3 million and $62.8~~$6.8 million of losses ~~in the first nine months of 2011 and 2010, respectively,~~ due to the other than temporary declines in the fair values of certain fixed maturity securities available for sale and other investments, of which ~~respectively, $23.7 million and $50.2~~$6.4 million was recognized as credit-related realized investment losses and ~~$3.6 million and $12.6~~$0.4 million remained as a component of accumulated other comprehensive income. The Company recognized $7.5 million of credit losses in the first quarter of 2011 due to the other than temporary declines in the fair values of certain fixed maturity securities available for sale

-26-

and other investments. In total, $9.0 million of impairment losses were recognized, including an additional $1.5 million of losses previously recognized as a component of accumulated other comprehensive income on the balance sheet that became credit losses during the first three months of 2011. The Company’s investment strategy results in periodic sales of securities and, therefore, the recognition of realized investment gains and losses. During the first ~~nine months~~quarters of ~~2011~~2012 and ~~2010,~~2011, the Company recognized ~~$17.8~~$7.5 million and ~~$22.4~~$7.0 million, respectively, of net gains on sales of ~~investments.~~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, foreign currency exchange 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~~2011 Form 10-K entitled “Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations—~~Operations - Critical Accounting Policies and Estimates” for a description of these procedures, which take into account a number of factors. It is not possible to predict the extent of any future changes in value, positive or negative, or the results of the future application of these procedures, with respect to these securities. For further information concerning the Company’s investment portfolio, see “Liquidity and Capital Resources – Investments.”

Benefits and Expenses. Policyholder benefits and expenses were ~~$1,200.2~~$471.8 million in the first ~~nine months~~quarter of ~~2011~~2012 as compared to ~~$1,091.0~~$390.7 million in the first ~~nine months~~quarter of ~~2010.~~2011. This increase ~~primarily~~ reflects ~~the~~an increase in premiums from the

~~-26-~~

Company’s group employee benefit products discussed ~~above.~~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. This increase also reflects $30.7 million of merger-related corporate expenses incurred during the first quarter of 2012 relating to the pending merger with Tokio Marine. The combined ratio (loss ratio plus expense ratio) for group employee benefit products was ~~95.0%~~96.7% and ~~94.9%~~95.2% in the first ~~nine months~~quarters of ~~2011~~2012 and ~~2010,~~2011, respectively. The weighted average annualized crediting rate on the Company’s asset accumulation products was ~~3.6% and 3.8%~~4.0% in the first ~~nine months~~quarters of ~~2011~~2012 and ~~2010, respectively.~~2011.

Interest Expense. Interest expense was ~~$27.8~~$9.4 million and $9.3 million in the first ~~nine months~~quarters of 2012 and 2011, as compared to $33.1 million in the first nine months 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.respectively.

Income Tax Expense. Income tax expense was ~~$40.2~~$10.9 million in the first ~~nine months~~quarter of ~~2011~~2012 as compared to ~~$34.6~~$16.4 million in the first ~~nine months~~quarter of ~~2010.~~2011. This ~~increase~~decrease primarily reflects ~~the decrease in the income tax benefit resulting from realized investment losses due to the~~a lower level of ~~such losses, as well as a higher level~~operating income during the first quarter of ~~taxable income.~~2012. The Company’s effective tax rate was ~~22.2% and 23.0%~~23.8% in the first ~~nine months~~quarter of ~~2011 and 2010, respectively.~~

~~Three Months Ended September, 30, 2011 Compared~~2012 as compared to ~~Three Months Ended September 30, 2010~~

~~Summary of Results.~~ ~~Net income attributable to shareholders was $41.0 million, or $0.73 per diluted share, for~~24.6% in the ~~third~~first quarter of 2011, as compared to $44.8 million, or $0.80 per diluted share, for the third quarter of 2010. Net income in the third quarter of 2011 and 2010 included net realized investment (losses) gains (net of the related income tax benefit (expense)) of $(3.3) million, or $(0.06) per diluted share, and $0.8 million, or $0.01 per diluted share, respectively. Net income in the third quarter of 2011 was adversely impacted by a significant decrease in net investment income as compared to the prior period, partially offset by a decrease in interest expense. Net investment income decreased due to a lower tax equivalent weighted average annualized yield on invested assets of 5.0% during the third quarter of 2011 as compared with 6.0% in the prior period. Net realized investment (losses) gains in the third quarter of 2011 and 2010 included losses, net of the related income tax benefit, of $(6.1) million, or $(0.11) per diluted share, and $(4.2) million, or $(0.07) 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 $44.3 million, or $0.79 per diluted share, in the third quarter of 2011 compared to $46.5 million, or $0.83 per diluted share. This decrease was primarily due to a decrease in net investment income, partially offset by a decrease in interest expense.

~~-27-~~

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

   Three months Ended
September 30,
   2011 2010
Operating earnings
   $ 44,286    $ 46,477
Net realized investment (losses) gains, net of taxes⁽¹⁾
   (3,251 ) 775
Loss on early retirement of senior notes⁽²⁾
   —      (2,444 )


Net income attributable to shareholders
   $ 41,035    $ 44,808


Diluted results per share of common stock

Operating earnings
   $ 0.79    $ 0.83
Net realized investment (losses) gains, net of taxes⁽¹⁾
   (0.06 ) 0.01
Loss on early retirement of senior notes⁽²⁾
   —      (0.04 )


Net income attributable to shareholders
   $ 0.73    $ 0.80

~~(1)~~

Net of an income tax benefit (expense) of $1.8 million and $(0.4) million, or $0.03 per diluted share and $(0.01) per diluted share, for the three months ended September 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 $1.3 million or $0.02 per diluted share for the three months ended September 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 third quarter of 2011 was $398.6 million as compared to $357.0 million for the third quarter of 2010, an increase of 12~~%.Premiums from core group employee benefit products, which include disability, life, excess workers’ compensation, travel accident and dental insurance, limited benefit health insurance and workers’ compensation and casualty treaty reinsurance, increased 11% to $379.6 million for the third quarter of 2011 from $341.6 million for the third 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 24% to $89.6 million in the third quarter of 2011 from $72.1 million in the third quarter of 2010. Premiums from excess workers’ compensation insurance for self-insured employers increased 17% to $87.1 million in the third quarter of 2011 from $74.4 million in the third quarter of 2010. Excess workers’ compensation new business production, which represents the annualized amount of new premium sold, was $29.5 million in the third quarter of 2011 as compared to $19.3 million in the third quarter of 2010, an increase of 53%. Premiums from workers’ compensation and casualty treaty reinsurance increased 40% to $18.8 million in the third quarter of 2011 from $13.4 million in the third quarter of 2010. This product was recently renamed by the Company and was previously known as assumed workers compensation and casualty reinsurance. Workers’ compensation and casualty treaty reinsurance production was $6.7 million in the third quarter of 2011 as compared to $3.7 million in the third quarter of 2010, an increase of 81%. Rates increased 3.9% in the third quarter of 2011 on excess workers’ compensation renewals and self-insured retentions were on average up 5.5% in such quarter on new and renewal policies. The Company’s retention of its existing excess workers’ compensation customers remained strong in the third quarter of 2011.

During the third quarter of 2011, premiums from the Company’s other core group employee benefit products increased 8% to $273.7 million in the third quarter of 2011 from $253.8 million in the third quarter of 2010. Premiums from the Company’s group life products increased 7% to $105.0 million in the third quarter of 2011 from $97.9 million in the third quarter of 2010. Premiums from the Company’s group disability products increased 9% to $147.6 million in the third quarter of 2011 from $135.1 million in the third quarter of 2010. Premiums from the Company’s turnkey disability business were $12.6 million during the third quarter of 2011 compared to $12.0 million during the third quarter of 2010, an increase of 5%. New business production for the Company’s other core group employee benefit products increased 9% to $53.4 million in the third quarter of 2011 compared to $49.1 million in the third 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 $2.4 million in the third quarter of 2011 as compared to $4.5 million in the third quarter of 2010.

Deposits from the Company’s asset accumulation products were $175.6 million in the third quarter of 2011 as compared to $153.6 million in the third quarter of 2010, an increase of 14%. This increase reflects the advantageous conditions for the Company in the fixed annuity marketplace which emerged during the second half of 2010 and have continued into 2011. 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

~~-28-~~

~~rates offered on its asset accumulation products in 2011 in an effort to achieve its targeted interest rate spreads on these products.~~

~~Net Investment Income.~~ ~~Net investment income in the third quarter of 2011 was $80.1 million as compared to $86.9 million in the third quarter of 2010. This decrease was~~ primarily due to the unfavorable performance of the Company’s investments in investment funds organized as limited partnerships and limited liability companies. This decrease was partially offset by a 14% increase in average invested assets to $7,135.9 million in 2011 from $6,283.9 million in 2010 and a higher level of investment income from the Company’s fixed maturity security portfolio resulting from the portfolio repositioning discussed above. The tax equivalent weighted average annualized yield on invested assets was 5.0% and 6.0% for the third quarter of 2011 and 2010, respectively.

~~Net Realized Investment (Losses) Gains.~~Net realized investment (losses) gains were $(5.0) million in the third quarter of 2011 as compared to $1.2 million in the third quarter of 2010. The Company monitors its investments on an ongoing basis. When the fair value of an available for sale 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 $12.0 million of losses in the third quarter of 2011 due to the other than temporary declines in the fair values of certain fixed maturity securities and other investments, of which $9.4 million was recognized as realized investment losses related to credit losses and $2.6 million remained as a component of accumulated other comprehensive income on the balance sheet related to non-credit losses. During the third quarter of 2010, the Company recognized $13.9 million of losses due to the other than temporary declines in the fair values of certain fixed maturity securities and other investments, of which $6.4 million was recognized as realized investment losses related to credit losses and $7.5 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 third quarters of 2011 and 2010, the Company recognized $4.4 million and $7.6 million, respectively, of net gains on sales of investments.

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.”

~~Benefits and Expenses.~~ Policyholder benefits and expenses were $415.2 million in the third quarter of 2011 as compared to $370.2 million in the third quarter 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 95.9% and 95.5% in the third quarters of 2011 and 2010, respectively. The weighted average annualized crediting rate on the Company’s asset accumulation products was 3.3% and 3.7% in the third quarters of 2011 and 2010, respectively.

~~Interest Expense~~. Interest expense was $9.3 million in the third quarter of 2011 as compared to $11.0 million in the third 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 Company’s new bank credit facility.

~~Income Tax Expense.~~ Income tax expense was $8.0 million in the third quarter of 2011 as compared to $15.3 million in the third quarter of 2010 primarily due to a lower level of operating income. The Company’s effective tax rate was 16.3% and 25.4% in the third quarter of 2011 and 2010, respectively, primarily due to a significantly higher proportion of ~~its~~ net investment income ~~consisting of~~represented by tax-exempt interest income.

~~-29-~~

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~~2011 Form 10-K. The Company announced on April 27, 2012 that it plans to voluntarily delist from the New York Stock Exchange the 2007 Junior Debentures and to terminate the registration of 2007 Junior Debentures and the 2020 Senior Notes and its reporting obligations with respect to the 2007 Junior Debentures and the 2020 Senior Notes under the Securities Exchange Act of 1934, as amended. If the closing of the merger with Tokio Marine does not occur, the Company does not expect to proceed with such delisting and deregistration.

~~In December 2010, the~~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”) providing for a revolving loan facility of ~~$175~~$205.0 million which matures on December 22, 2013 and a term loan facility of ~~$125~~$125.0 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

-27-

certain limitations on subsidiary indebtedness. As of ~~September 30, 2011,~~March 31, 2012, the Company was in compliance in all material respects with the financial and various other affirmative and negative covenants in the Credit Agreement. At ~~September 30, 2011,~~March 31, 2012, the Company had ~~$125~~$125.0 million of outstanding borrowings and ~~$205~~$205.0 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 ~~$135.0~~$169.8 million of financial resources available at the holding company level at ~~September 30, 2011,~~March 31, 2012, primarily comprised of short-term investments, equity securities 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,~~2012, the Company’s insurance subsidiaries will be permitted, without prior regulatory approval, to make dividend payments totaling ~~$99.8~~$91.1 million, in addition to the dividend payments of ~~$52.0~~$58.0 million made during the first ~~nine~~three months of ~~2011.~~2012. 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~~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. 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 November 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 December 1, 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. During the third quarter of 2011, the Company repurchased 421,500 shares at a total cost of $9.7 million.

~~-30-~~

Investments. The Company’s overall investment strategy emphasizes safety and liquidity, while seeking the best available return, by focusing on, among other things, managing the Company’s interest-sensitive assets and liabilities and seeking to minimize the Company’s exposure to fluctuations in interest rates. The Company’s investment portfolio, which totaled ~~$7,336.2~~$7,919.7 million at ~~September 30, 2011,~~March 31, 2012, consists primarily of investments in fixed maturity securities available for sale, 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 ~~$305.0~~$321.9 million at ~~September 30, 2011.~~March 31, 2012.

During the first ~~nine~~three months of ~~2011,~~2012, the ~~market~~fair value of the Company’s available for sale fixed maturity investment portfolio, in relation to its amortized cost, increased by ~~$107.6~~$150.6 million from year-end ~~2010,~~2011, before the related decrease in the cost of business acquired of ~~$9.5~~$15.6 million and ~~an increase~~a decrease in the federal income tax provision of ~~$34.3~~$47.3 million. At ~~September 30, 2011,~~March 31, 2012, 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 available for sale fixed maturity securities in the Company’s portfolio totaled ~~$334.2~~$438.1 million (of which ~~$292.0~~$367.6 million was attributable to investment grade securities) and ~~$155.5~~$79.0 million (of which ~~$69.4~~$27.6 million was attributable to investment grade securities), respectively. During the first ~~nine~~three months of ~~2011,~~2012, the Company recognized pre-tax net investment ~~losses~~gains of ~~$5.9~~$1.0 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 ~~September 30, 2011.~~March 31, 2012. 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 ~~$323.7~~$94.0 million and ~~$253.0~~$117.4 million in the first ~~nine~~three months of ~~2011~~2012 and ~~2010,~~2011, respectively. Net investing activities used ~~$545.4~~$179.1 million and ~~$425.1~~$95.7 million of cash during the first ~~nine~~three months of ~~2011~~2012 and ~~2010,~~2011, respectively, primarily for the purchase of securities. Financing activities provided ~~$239.9~~$100.3 million of cash during the first ~~nine~~three months of ~~2011,~~2012, principally from deposits to policyholder ~~accounts, partially offset by~~accounts. During the first three months of 2011, financing activities used $1.5 million of cash, reflecting, among other things, the repayment of $65.0 million in aggregate principal amount of fixed rate funding agreements at their maturity. During the first nine months of 2010, financing activities provided $183.9 million of cash, principally from the issuance of the 2020 Senior Notes, partially offset by the full repayment of the then outstanding borrowings under the Prior Credit Agreement.

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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.~~2011.

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 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 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

~~-31-~~

are beyond the Company’s control and many of which, with respect to future business decisions, are subject to change. Examples of such uncertainties and contingencies include, among other important factors, those affecting the insurance industry generally, such as the economic and interest rate environment, federal and state legislative and regulatory developments, including but not limited to changes in financial services, employee benefit and tax laws and regulations, 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~~2011 Form 10-K, “Risk Factors”. The Company disclaims any obligation to update forward-looking information.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company, Mr. Rosenkranz, certain other members of the Company’s management, members of the Company’s board of directors, Tokio Marine and TM Sub have been named as defendants in four lawsuits brought by and on behalf of the Company’s stockholders in the Court of Chancery of the State of Delaware (the “Court”) challenging certain aspects of the merger. These lawsuits have been consolidated by the Court into a single action known asIn re Delphi Financial Group Shareholder Litigation, Consolidated C.A. No. 7144-VCG. On February 16, 2012, plaintiffs filed a second amended complaint in the consolidated action, which alleges, among other things, that Mr. Rosenkranz has breached his fiduciary duties by (1) engaging in improper related-party transactions and using the Company’s resources to run a competing business, and (2) appropriating for himself a disproportionate amount of the merger consideration through (a) an incremental premium being paid to Class B stockholders and (b) an alleged agreement with Tokio Marine to compensate Mr. Rosenkranz in connection with the related-party transactions referred to above. The second amended complaint further alleges that the Company’s directors have breached their fiduciary duties by (1) approving the merger agreement, which the plaintiffs allege to be unfair to the Company’s public stockholders, (2) approving the payment of additional consideration to the Class B stockholders, and (3) structuring the vote on a proposed amendment to the Company’s certificate of incorporation in an improperly coercive manner. In addition, the complaint alleges that members of the Company’s management breached their fiduciary duties to the Company’s public stockholders by aiding Mr. Rosenkranz in seeking additional merger consideration. The complaint alleges that Mr. Rosenkranz and the Company breached the implied covenant of good faith allegedly inherent in the Company’s certificate of incorporation. The second amended complaint also alleges that Tokio Marine and TM Sub aided and abetted these alleged breaches. Finally, the second amended complaint alleges that the preliminary proxy statement omitted material information and provided materially misleading information. Based on these allegations, the second amended complaint in the consolidated action seeks, among other relief, certain injunctive relief, including enjoining the merger, and damages. It also purports to seek recovery of the costs of the actions, including attorneys’ fees.

In a memorandum opinion, issued March 6, 2012, the Court denied plaintiffs’ motion for a preliminary injunction in the consolidated action.

On April 9, 2012, the Company announced that a settlement in principle had been reached, contingent on, among other things, definitive documentation and Court approval. If the settlement is finalized and approved, Delphi’s Class A ~~putative class~~stockholders and certain option holders as of the effective time of the merger, other than the defendants to the consolidated action ~~Moore v. Reliance Standard Life Insurance~~and their affiliates, will receive a payment equal to $49 million less plaintiffs’ counsel fees and expenses, which have not yet been determined, and less other administrative expenses such as the costs of providing notice to stockholders and option holders. The payment will be made after and subject to approval of the settlement by the Court. A hearing to consider the settlement is expected to occur subsequent to the closing of the merger. The amount of plaintiffs’ counsel fees and expenses will be determined at or after the time the Court decides whether to approve the settlement agreement.

The settlement is contingent upon, among other things, completion of the merger and approval by the Court. In the event the court does not approve the settlement or the other conditions are not satisfied, the Delphi defendants will continue to vigorously defend all claims. The payment described above is separate and distinct from the merger consideration payable to Delphi’s Class A stockholders.

On April 24, 2012, pursuant to a stipulation among the parties to the action, Harold F. Ilg, a former director of the 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 industrydismissed as a ~~retained asset account and contains related claims of breach of fiduciary duty and prohibited transactions under~~defendant from the federal Employee Retirement Income Security Act of 1974. The parties have entered into an agreement to settle this litigation, and the settlement has been preliminarily approved by the court. It is not anticipated that this settlement will have a material adverse effect on the Company’s results of operations, liquidity or financial condition.action with prejudice.

In addition, the Company is a party to various ~~other~~ litigation and proceedings in the ordinary course of its business, primarily involving its subsidiaries’ 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.

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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~~ 2011.

Form 10-K, “Risk Factors”, updates and ~~supercedes~~supersedes the discussion contained therein relating to ~~these~~this risk ~~factors.~~factor.

Certain risks and uncertainties are associated with the pending merger with Tokio Marine.

On December 21, 2011, the Company entered into a merger agreement with Tokio Marine and TM Sub pursuant to which all of the Company’s outstanding shares will be acquired by Tokio Marine. While the Company expects that the merger with Tokio Marine will close on or about May 15, 2012, certain risks and uncertainties remain associated with the merger. For example, the merger may not be consummated in the time frame or manner currently anticipated or at all, as a result of several factors, including, among other things, the failure of one or more of the merger agreement’s closing conditions to be satisfied. There can be no assurance that the closing conditions will be satisfied or, to the extent permitted, waived or that other events will not intervene to delay or result in the termination of the merger. If the merger is not completed, the price of the Company’s Class A Common Stock may decrease to the extent that the current market price of such stock reflects an assumption that the merger will be consummated. Pending the closing of the merger, the merger agreement also restricts the Company from engaging in certain actions without Tokio Marine’s consent, which could prevent the Company from pursuing opportunities that may arise prior to the closing of the merger. Any delay in closing or a failure to close could have a negative impact on the Company’s business and the Company’s stock price as well as the relationships of the Company’s subsidiaries with customers or employees, as well as a negative impact on the Company’s ability to pursue alternative strategic transactions and/or the Company’s ability to implement alternative business plans. In addition, if the merger agreement is terminated under certain circumstances, the Company would be required to pay a termination fee of $82 million to Tokio Marine.

The Company’s ~~financial position and~~business could be adversely impacted as a result of uncertainty related to the pending merger.

The pending merger with Tokio Marine could cause disruptions to the Company’s business or business relationships, which could have an adverse impact on the Company’s results of operations, liquidity and financial condition. For example, the attention of the Company’s management may be ~~adversely impacted by changes in accounting rules and in~~directed to merger-related considerations; the ~~interpretations of such rules.~~

~~The~~ Company’s ~~financial position and results of operations are reported in accordance~~employees may experience uncertainty about their future roles 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,which may adversely affect the Company’s ability to hire and ~~such subsidiaries’ reported financial positions~~retain key personnel; and ~~results of operations.~~

~~On January 1, 2011,~~parties with which the Company ~~adopted, on a retrospective basis, guidance issued by the Financial Accounting Standards Board limiting the extent to which an insurer~~has business relationships 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~~experience uncertainty as to the ~~acquisition~~future of ~~a new~~such relationships and seek alternative relationships with third parties or ~~renewal insurance contract. Insurers may only capitalize costs related~~seek 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,~~alter their present business relationships with the Company. In addition, the Company ~~made an after-tax reduction~~has incurred, and will continue to ~~its retained earnings at January 1, 2010~~incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the ~~amount~~merger, and many of ~~$60.0 million, net~~these fees and costs are payable regardless of ~~an income tax benefit of $32.3 million, which represents~~whether or not the net reduction in deferred policy acquisition cost included in cost of business acquired on the consolidated balance sheet, net income attributable to shareholders was reduced by $0.03 per diluted share and $0.09 per diluted share for the three and nine months ended September 30, 2010, respectively. This adoption also resulted in the restatement of certain other financial information for 2010.

merger is consummated.

~~-32-~~

~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.~~

~~There were no unregistered sales of equity securities during the period covered by this report.~~

~~Issuer Purchases of Registered Equity Securities.~~

~~The following table shows the purchases of registered equity securities under the Company’s existing repurchase authorization during the three months ended September 30, 2011:~~

   Number
of Shares
Purchased    Total
Average
Price
Paid per
Share    Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs ⁽¹⁾    Maximum
Dollar Value of
Shares that May
Yet Be
Purchased Under
the Plans or
Programs ⁽²⁾
July 1 – 31, 2011
   —         $ —         —         —
August 1 – 31, 2011
   421,500       $ 22.96       421,500       $ 40,314,199
September 1 – 30, 2011
   —         $ —         —         —





Total
   421,500       $ 22.96       421,500       —

⁽¹⁾

The Company had previously purchased 7,741,452 shares of its Class A Common Stock, at a total cost of $187.8 million, in the open market under previous share repurchase authorizations and had received 19,764 shares of the Company’s Class A Common Stock with an aggregate value of $0.3 million in liquidation of a partnership interest, resulting in a total number of shares of treasury stock outstanding on December 31, 2010 of 7,761,216.

⁽²⁾

On August 3, 2011, the Board authorized the repurchase of an aggregate value of $50.0 million of the Company’s Class A Common Stock, which replaced an existing share repurchase authorization having 1.0 million shares remaining. During the third quarter of 2011, the Company repurchased 421,500 shares of its Class A Common Stock at a total cost of $9.7 million in the open market, resulting in a total number of shares of treasury stock outstanding on September 30, 2011 of 8,182,716. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” in Part I, Item 2 of this Quarterly Report.

~~-33-~~

Item 6.

Exhibits


	~~3.1~~			~~Amendment to Amended and Restated By-laws of Delphi Financial Group, Inc.~~

	11.1			Computation of Results per Share of Common Stock (incorporated by reference to Note GF 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 Executive Vice President and 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 Form 10-Q for the ~~nine~~three months ended ~~September 30, 2011,~~March 31, 2012, formatted in XBRL: (i) Consolidated Statements of Income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2012 and 2011; (ii) Consolidated Statements of Other Comprehensive Income for the three months ended March 31, 2012 and 2011 ~~and 2010; (ii)~~(iii) Consolidated Balance Sheets at ~~September 30, 2011~~March 31, 2012 and December 31, ~~2010; (iii)~~2011; (iv) Consolidated Statement of Equity for the ~~nine~~three months ended ~~September 30, 2011~~March 31, 2012 and ~~2010; (iv)~~2011; (v) Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30, 2011~~March 31, 2012 and ~~2010;~~2011; and ~~(v)~~(vi) Notes to Consolidated Financial Statements.

~~-34-~~-31-

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DELPHI FINANCIAL GROUP, INC.

/s/ ROBERT ROSENKRANZ

Robert Rosenkranz

Chairman of the Board and Chief Executive Officer

(Principal Executive Officer)

/s/ STEPHAN KIRATSOUS

Stephan Kiratsous

Executive Vice President and Chief Financial Officer

Date: ~~November 8, 2011~~May 09, 2012

~~-35-~~-32-


	Three Months Ended September 30, 2011
	Balance at Beginning of Quarter		Total Gains (Losses) Included in Earnings			Total Gains (Losses) Included in Other Com- prehensive Income			Purchases		Issuances		Settlements			Transfers Into Level 3		Transfers Out of Level 3			Balance End of the Period
	(dollars in thousands)
Agency residential mortgage-backed securities	$	9,578	$	(18	)	$	121		$	—	$	—	$	(1,271	)	$	—	$	—		$	8,410
Non-agency residential mortgage-backed securities		34,344		182			(349	)		13,548		—		(1,043	)		—		(11,245	)		35,437
Commercial mortgage-backed securities		1,405		(12	)		(3	)		—		—		(531	)		—		—			859
Corporate securities		114,984		1,071			(1,822	)		31,600		—		(6,935	)		1,041		(7,018	)		132,921
Collateralized debt obligations		219,458		1,421			(21,669	)		20,658		—		(3,030	)		662		—			217,500
U.S. Treasury and other U.S. Government guaranteed securities		7,847		(3	)		25			—		—		(88	)		—		—			7,781
U.S. Government-sponsored enterprise securities		4,036		5			121			—		—		(1,040	)		4		—			3,126
Obligations of U.S. states, municipalities and political subdivisions		2,911		17			238			—		—		(1	)		—		(1,867	)		1,298
Other investments		5,895		60			(6	)		—		—		(60	)		—		—			5,889
Assets held in separate account ⁽¹⁾		126,213		(10,534	)		—			6,904		—		(7,540	)		—		—			115,043

Total	$	526,671	$	(7,811	)	$	(23,344	)	$	72,710	$	—	$	(21,539	)	$	1,707	$	(20,130	)	$	528,264


	Nine Months Ended September 30, 2011
	Balance at Beginning of Year		Total Gains (Losses) Included in Earnings			Total Gains (Losses) Included in Other Com- prehensive Income			Purchases		Issuances		Settlements			Transfers Into Level 3		Transfers Out of Level 3			Balance End of the Period
	(dollars in thousands)
Agency residential mortgage-backed securities	$	11,266	$	(56	)	$	138		$	365	$	—	$	(3,303	)	$	—	$	—		$	8,410
Non-agency residential mortgage-backed securities		37,520		453			(1,521	)		17,421		—		(3,316	)		—		(15,120	)		35,437
Commercial mortgage-backed securities		1,327		(13	)		(37	)		396		—		(814	)		—		—			859
Corporate securities		60,968		2,274			(2,474	)		107,637		—		(15,845	)		2,686		(22,325	)		132,921
Collateralized debt obligations		175,184		5,204			(9,873	)		64,913		—		(18,590	)		662		—			217,500
U.S. Treasury and other U.S. Government guaranteed securities		9,015		(27	)		(845	)		—		—		(362	)		—		—			7,781
U.S. Government-sponsored enterprise securities		4,020		140			131			23,272		—		(26,104	)		2,037		(370	)		3,126
Obligations of U.S. states, municipalities and political subdivisions		2,855		17			178			1,606		—		(1	)		1,302		(4,659	)		1,298
Other investments		6,449		60			59			334		—		(60	)		—		(953	)		5,889
Assets held in separate account⁽¹⁾		123,674		(6,695	)		—			30,107		—		(32,043	)		—		—			115,043

Total	$	432,278	$	1,357		$	(14,244	)	$	246,051	$	—	$	(100,438	)	$	6,687	$	(43,427	)	$	528,264


Options	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value ($000)
Outstanding at January 1, 2011		3,989,995		$	29.10
Granted		592,389			30.58
Exercised		(184,841	)		23.66
Forfeited		(26,150	)		25.05
Expired		(16,877	)		35.09

Outstanding at September 30, 2011		4,354,516			29.53		6.4	$	2,242


Exercisable at September 30, 2011		2,618,029		$	30.78		5.3	$	1,192


	Number of Shares Purchased		Total Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ⁽¹⁾		Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs ⁽²⁾
July 1 – 31, 2011		—	$	—		—		—
August 1 – 31, 2011		421,500	$	22.96		421,500	$	40,314,199
September 1 – 30, 2011		—	$	—		—		—

Total		421,500	$	22.96		421,500		—

Large accelerated filer

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Non-accelerated filer

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Smaller reporting company