##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 30, 2008
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 001-11462
 DELPHI FINANCIAL GROUP, INC.
  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)
  þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  o þ




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##### 



DELPHI FINANCIAL GROUP, INC.
FORM 10-Q
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER INFORMATION
 PagePART I. FINANCIAL INFORMATION (UNAUDITED)Item 1. Financial StatementsConsolidated Statements of Income for the Three and
Nine Months Ended September 30, 2008 and 2007
    
    
    3Consolidated Balance Sheets at September 30, 2008 and
December 31, 2007
    
    
    4Consolidated Statements of Shareholders Equity for the
Nine Months Ended September 30, 2008 and 2007
    
    
    5Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2008 and 2007
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    26Item 1A. Risk Factors
    
    
    26Item 6. Exhibits
    
    
    27Signatures
    
    
    27
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Thousands, Except Per Share Data)

(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue:Premium and fee income
    
    $
    345,028
    
    
    $
    325,944
    
    
    $
    1,028,092
    
    
    $
    972,528Net investment income
    
    
    19,407
    
    
    
    62,768
    
    
    
    112,494
    
    
    
    203,178Net realized investment losses
    
    
    (33,740
    )
    
    
    (1,480
    )
    
    
    (59,675
    )
    
    
    (925
    )Loss on redemption of junior subordinated deferrable
interest debentures underlying company-obligated
mandatorily redeemable capital securities issued
by unconsolidated subsidiaries
    
    
    (598
    )
    
    
    
    
    
    
    (598
    )
    
    
    (2,192
    )330,097
    
    
    
    387,232
    
    
    
    1,080,313
    
    
    
    1,172,589Benefits and expenses:Benefits, claims and interest credited to policyholders
    
    
    244,042
    
    
    
    234,525
    
    
    
    730,709
    
    
    
    708,220Commissions
    
    
    22,254
    
    
    
    20,044
    
    
    
    64,374
    
    
    
    60,638Amortization of cost of business acquired
    
    
    21,814
    
    
    
    17,426
    
    
    
    58,459
    
    
    
    58,377Other operating expenses
    
    
    55,756
    
    
    
    50,162
    
    
    
    161,567
    
    
    
    149,982343,866
    
    
    
    322,157
    
    
    
    1,015,109
    
    
    
    977,217Operating (loss) income
    
    
    (13,769
    )
    
    
    65,075
    
    
    
    65,204
    
    
    
    195,372Interest expense:Corporate debt
    
    
    4,427
    
    
    
    3,328
    
    
    
    12,940
    
    
    
    12,973Junior subordinated debentures
    
    
    3,240
    
    
    
    3,246
    
    
    
    9,726
    
    
    
    4,652Junior subordinated deferrable interest debentures
underlying company-obligated redeemable capital
securities issued by unconsolidated subsidiaries
    
    
    177
    
    
    
    488
    
    
    
    934
    
    
    
    2,2517,844
    
    
    
    7,062
    
    
    
    23,600
    
    
    
    19,876(Loss) income before income tax (benefit) expense
    
    
    (21,613
    )
    
    
    58,013
    
    
    
    41,604
    
    
    
    175,496Income tax (benefit) expense
    
    
    (11,803
    )
    
    
    17,284
    
    
    
    3,395
    
    
    
    52,659Net (loss) income
    
    $
    (9,810
    )
    
    $
    40,729
    
    
    $
    38,209
    
    
    $
    122,837Basic results per share of common stock:Net (loss) income
    
    $
    (0.20
    )
    
    $
    0.80
    
    
    $
    0.79
    
    
    $
    2.44Diluted results per share of common stock:Net (loss) income
    
    $
    (0.20
    )
    
    $
    0.79
    
    
    $
    0.78
    
    
    $
    2.38Dividends paid per share of common stock
    
    $
    0.10
    
    
    $
    0.09
    
    
    $
    0.29
    
    
    $
    0.26
  - 3 -




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##### Table of Contents



DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Per Share Data)
 September 30,
    
    
    December 31,2008
    
    
    2007Assets:Investments:Fixed maturity securities, available for sale
    
    $
    3,733,054
    
    
    $
    3,691,694Short-term investments
    
    
    444,994
    
    
    
    286,033Other investments
    
    
    588,422
    
    
    
    1,010,1414,766,470
    
    
    
    4,987,868Cash
    
    
    69,249
    
    
    
    51,240Cost of business acquired
    
    
    237,641
    
    
    
    174,430Reinsurance receivables
    
    
    378,671
    
    
    
    402,785Goodwill
    
    
    93,929
    
    
    
    93,929Other assets
    
    
    288,887
    
    
    
    260,602Assets held in separate account
    
    
    104,062
    
    
    
    123,956Total assets
    
    $
    5,938,909
    
    
    $
    6,094,810Liabilities and Shareholders Equity:Future policy benefits:Life
    
    $
    298,671
    
    
    $
    290,775Disability and accident
    
    
    731,931
    
    
    
    688,023Unpaid claims and claim expenses:Life
    
    
    70,345
    
    
    
    69,161Disability and accident
    
    
    374,075
    
    
    
    341,442Casualty
    
    
    1,035,552
    
    
    
    963,974Policyholder account balances
    
    
    1,340,825
    
    
    
    1,083,121Corporate debt
    
    
    290,750
    
    
    
    217,750Junior subordinated debentures
    
    
    175,000
    
    
    
    175,000Junior subordinated deferrable interest debentures underlying
company-obligated mandatorily redeemable capital
securities issued by unconsolidated subsidiaries
    
    
    
    
    
    
    20,619Other liabilities and policyholder funds
    
    
    628,621
    
    
    
    979,599Liabilities related to separate account
    
    
    104,062
    
    
    
    123,956Total liabilities
    
    
    5,049,832
    
    
    
    4,953,420Shareholders equity:Preferred Stock, $.01 par; 50,000,000 shares authorized, none issued
    
    
    
    
    
    
    Class A Common Stock, $.01 par; 150,000,000 shares authorized;
48,946,432 and 48,717,899 shares issued and outstanding, respectively
    
    
    489
    
    
    
    487Class B Common Stock, $.01 par; 20,000,000 shares authorized;
5,981,049 and 5,934,183 shares issued and outstanding, respectively
    
    
    60
    
    
    
    59Additional paid-in capital
    
    
    521,819
    
    
    
    509,742Accumulated other comprehensive loss
    
    
    (288,654
    )
    
    
    (42,497
    )Retained earnings
    
    
    852,609
    
    
    
    828,116Treasury stock, at cost; 7,761,216 and 6,227,416 shares of Class A
Common Stock, respectively, and 227,216 shares of
Class B Common Stock
    
    
    (197,246
    )
    
    
    (154,517
    )Total shareholders equity
    
    
    889,077
    
    
    
    1,141,390Total liabilities and shareholders equity
    
    $
    5,938,909
    
    
    $
    6,094,810
  - 4 -




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##### Table of Contents



DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

(Dollars in Thousands)

(Unaudited)
 AccumulatedClass A
    
    
    Class B
    
    
    Additional
    
    
    OtherCommon
    
    
    Common
    
    
    Paid-in
    
    
    Comprehensive
    
    
    Retained
    
    
    TreasuryStock
    
    
    Stock
    
    
    Capital
    
    
    Income (Loss)
    
    
    Earnings
    
    
    Stock
    
    
    TotalBalance, January 1, 2007
    
    $
    480
    
    
    $
    57
    
    
    $
    474,722
    
    
    $
    19,133
    
    
    $
    763,386
    
    
    $
    (82,970
    )
    
    $
    1,174,808Cumulative effect adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (82,553
    )
    
    
    
    
    
    
    (82,553
    )Adjusted balance, January 1, 2007
    
    
    480
    
    
    
    57
    
    
    
    474,722
    
    
    
    19,133
    
    
    
    680,833
    
    
    
    (82,970
    )
    
    
    1,092,255Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    122,837
    
    
    
    
    
    
    
    122,837Other comprehensive income:Decrease in net unrealized
appreciation on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (44,921
    )
    
    
    
    
    
    
    
    
    
    
    (44,921
    )Decrease in net loss on
cash flow hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    589
    
    
    
    
    
    
    
    
    
    
    
    589Change in net periodic
pension cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    803
    
    
    
    
    
    
    
    
    
    
    
    803Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79,308Issuance of stock, exercise of stock
options and share conversions
    
    
    7
    
    
    
    2
    
    
    
    23,247
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,256Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    5,129
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,129Acquisition of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,930
    )
    
    
    (10,930
    )Cash dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,853
    )
    
    
    
    
    
    
    (12,853
    )Balance, September 30, 2007
    
    $
    487
    
    
    $
    59
    
    
    $
    503,098
    
    
    $
    (24,396
    )
    
    $
    790,817
    
    
    $
    (93,900
    )
    
    $
    1,176,165Balance, January 1, 2008
    
    $
    487
    
    
    $
    59
    
    
    $
    509,742
    
    
    $
    (42,497
    )
    
    $
    828,116
    
    
    $
    (154,517
    )
    
    $
    1,141,390Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,209
    
    
    
    
    
    
    
    38,209Other comprehensive loss:Increase in net unrealized
depreciation on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (246,781
    )
    
    
    
    
    
    
    
    
    
    
    (246,781
    )Decrease in net loss on
cash flow hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    589
    
    
    
    
    
    
    
    
    
    
    
    589Change in net periodic
pension cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    35Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (207,948
    )Issuance of stock, exercise of stock
options and share conversions
    
    
    2
    
    
    
    1
    
    
    
    7,197
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,200Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    4,880
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,880Acquisition of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42,729
    )
    
    
    (42,729
    )Cash dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,716
    )
    
    
    
    
    
    
    (13,716
    )Balance, September 30, 2008
    
    $
    489
    
    
    $
    60
    
    
    $
    521,819
    
    
    $
    (288,654
    )
    
    $
    852,609
    
    
    $
    (197,246
    )
    
    $
    889,077
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##### Table of Contents



DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
 Nine Months EndedSeptember 30,2008
    
    
    2007Operating activities:Net income
    
    $
    38,209
    
    
    $
    122,837Adjustments to reconcile net income to net cash provided
by operating activities:Change in policy liabilities and policyholder accounts
    
    
    194,967
    
    
    
    219,478Net change in reinsurance receivables and payables
    
    
    18,901
    
    
    
    (7,428
    )Amortization, principally the cost of business acquired and investments
    
    
    46,601
    
    
    
    53,353Deferred costs of business acquired
    
    
    (94,043
    )
    
    
    (84,042
    )Net realized losses on investments
    
    
    59,675
    
    
    
    925Net change in federal income tax liability
    
    
    (53,654
    )
    
    
    16,440Other
    
    
    56,828
    
    
    
    (41,451
    )Net cash provided by operating activities
    
    
    267,484
    
    
    
    280,112Investing activities:Purchases of investments and loans made
    
    
    (1,012,307
    )
    
    
    (861,814
    )Sales of investments and receipts from repayment of loans
    
    
    348,569
    
    
    
    328,176Maturities of investments
    
    
    311,840
    
    
    
    120,486Net change in short-term investments
    
    
    (158,961
    )
    
    
    138,805Change in deposit in separate account
    
    
    10,547
    
    
    
    8,536Net cash used by investing activities
    
    
    (500,312
    )
    
    
    (265,811
    )Financing activities:Deposits to policyholder accounts
    
    
    335,082
    
    
    
    90,388Withdrawals from policyholder accounts
    
    
    (83,382
    )
    
    
    (123,802
    )Borrowings under revolving credit facility
    
    
    79,000
    
    
    
    42,000Principal payments under revolving credit facility
    
    
    (6,000
    )
    
    
    (158,000
    )Proceeds from the issuance of 2007 Junior Debentures
    
    
    
    
    
    
    172,309Redemption of junior subordinated deferrable interest debentures
    
    
    (20,619
    )
    
    
    (37,728
    )Acquisition of treasury stock
    
    
    (42,729
    )
    
    
    (1,800
    )Other financing activities
    
    
    (10,515
    )
    
    
    (188
    )Net cash provided (used) by financing activities
    
    
    250,837
    
    
    
    (16,821
    )Increase (decrease) in cash
    
    
    18,009
    
    
    
    (2,520
    )Cash at beginning of period
    
    
    51,240
    
    
    
    48,204Cash at end of period
    
    $
    69,249
    
    
    $
    45,684
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##### Table of Contents



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

(Unaudited)
 Note A  Significant Accounting Policies
  Accounting Changes
 Fair Value Measurements.
      Fair Value Option
 - 7 -




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##### Table of Contents



DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Note A  Significant Accounting Policies  (Continued)
  Stock-Based Compensation.
 Recently Issued Accounting Standards
    - 8 -




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##### Table of Contents



DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Note A  Significant Accounting Policies  (Continued)
    Note B Investments
   September 30, 2008Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(dollars in thousands)Mortgage-backed securities
    
    $
    1,345,254
    
    
    $
    13,839
    
    
    $
    (134,213
    )
    
    $
    1,224,880Corporate securities
    
    
    1,582,808
    
    
    
    11,345
    
    
    
    (195,319
    )
    
    
    1,398,834U.S. Treasury and other U.S. Government
guaranteed securities
    
    
    44,373
    
    
    
    2,910
    
    
    
    (68
    )
    
    
    47,215U.S. Government-sponsored enterprise securities
    
    
    22,036
    
    
    
    464
    
    
    
    (40
    )
    
    
    22,460Obligations of U.S. states, municipalities and
political subdivisions
    
    
    1,105,376
    
    
    
    6,127
    
    
    
    (71,838
    )
    
    
    1,039,665Total fixed maturity securities
    
    $
    4,099,847
    
    
    $
    34,685
    
    
    $
    (401,478
    )
    
    $
    3,733,054
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##### Table of Contents



DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Note B Investments  (Continued)
 December 31, 2007Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(dollars in thousands)Mortgage-backed securities
    
    $
    1,105,518
    
    
    $
    16,306
    
    
    $
    (55,342
    )
    
    $
    1,066,482Corporate securities
    
    
    1,533,671
    
    
    
    22,985
    
    
    
    (52,519
    )
    
    
    1,504,137U.S. Treasury and other U.S. Government
guaranteed securities
    
    
    49,454
    
    
    
    2,704
    
    
    
    
    
    
    
    52,158U.S. Government-sponsored enterprise securities
    
    
    153,138
    
    
    
    1,112
    
    
    
    
    
    
    
    154,250Obligations of U.S. states, municipalities and
political subdivisions
    
    
    905,176
    
    
    
    16,370
    
    
    
    (6,879
    )
    
    
    914,667Total fixed maturity securities
    
    $
    3,746,957
    
    
    $
    59,477
    
    
    $
    (114,740
    )
    
    $
    3,691,694
  September 30, 2008Less Than 12 Months
    
    
    12 Months or More
    
    
       TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses(dollars in thousands)Mortgage-backed securities
    
    $
    673,444
    
    
    $
    (66,763
    )
    
    $
    191,206
    
    
    $
    (67,450
    )
    
    $
    864,650
    
    
    $
    (134,213
    )Corporate securities
    
    
    623,008
    
    
    
    (78,895
    )
    
    
    289,625
    
    
    
    (116,424
    )
    
    
    912,633
    
    
    
    (195,319
    )U.S. Treasury and other U.S. Government
guaranteed securities
    
    
    4,283
    
    
    
    (68
    )
    
    
    
    
    
    
    
    
    
    
    4,283
    
    
    
    (68
    )U.S. Government-sponsored enterprise
securities
    
    
    4,953
    
    
    
    (40
    )
    
    
    
    
    
    
    
    
    
    
    4,953
    
    
    
    (40
    )Obligations of U.S. states, municipalities
& political subdivisions
    
    
    618,653
    
    
    
    (46,153
    )
    
    
    148,629
    
    
    
    (25,685
    )
    
    
    767,282
    
    
    
    (71,838
    )Total fixed maturity securities
    
    $
    1,924,341
    
    
    $
    (191,919
    )
    
    $
    629,460
    
    
    $
    (209,559
    )
    
    $
    2,553,801
    
    
    $
    (401,478
    )
 December 31, 2007Less Than 12 Months
    
    
    12 Months or More
    
    
       TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses(dollars in thousands)Mortgage-backed securities
    
    $
    285,684
    
    
    $
    (26,938
    )
    
    $
    240,650
    
    
    $
    (28,404
    )
    
    $
    526,334
    
    
    $
    (55,342
    )Corporate securities
    
    
    449,456
    
    
    
    (33,191
    )
    
    
    229,845
    
    
    
    (19,328
    )
    
    
    679,301
    
    
    
    (52,519
    )U.S. Treasury and other U.S. Government
guaranteed securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    U.S. Government-sponsored enterprise
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Obligations of U.S. states, municipalities
& political subdivisions
    
    
    264,460
    
    
    
    (6,711
    )
    
    
    2,586
    
    
    
    (168
    )
    
    
    267,046
    
    
    
    (6,879
    )Total fixed maturity securities
    
    $
    999,600
    
    
    $
    (66,840
    )
    
    $
    473,081
    
    
    $
    (47,900
    )
    
    $
    1,472,681
    
    
    $
    (114,740
    )
 - 10 -




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##### Table of Contents



DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Note B  Investments  (Continued)
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(dollars in thousands)Gross investment income:Fixed maturity securities, available for sale
    
    $
    35,476
    
    
    $
    65,026
    
    
    $
    142,526
    
    
    $
    176,718Mortgage loans
    
    
    3,072
    
    
    
    5,449
    
    
    
    10,274
    
    
    
    17,180Short-term investments
    
    
    1,953
    
    
    
    2,610
    
    
    
    7,114
    
    
    
    9,432Other
    
    
    (14,042
    )
    
    
    (12,032
    )
    
    
    (24,877
    )
    
    
    17,80926,459
    
    
    
    61,053
    
    
    
    135,037
    
    
    
    221,139Less: Investment expenses
    
    
    (7,052
    )
    
    
    1,715
    
    
    
    (22,543
    )
    
    
    (17,961
    )$
    19,407
    
    
    $
    62,768
    
    
    $
    112,494
    
    
    $
    203,178
 Note C  Fair Value Measurements
   - 11 -




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##### Table of Contents



DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Note C  Fair Value Measurements  (Continued)
         - 12 -




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##### Table of Contents



DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Note C  Fair Value Measurements  (Continued)
     September 30, 2008Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3(dollars in thousands)Assets:Fixed maturity securities, available for sale:Mortgage-backed securities
    
    $
    1,224,880
    
    
    $
    
    
    
    $
    1,003,818
    
    
    $
    221,062Corporate securities
    
    
    1,398,834
    
    
    
    
    
    
    
    868,346
    
    
    
    530,488U.S. Treasury and other U.S. Government
guaranteed securities
    
    
    47,215
    
    
    
    21,333
    
    
    
    23,408
    
    
    
    2,474U.S. Government-sponsored enterprise
securities
    
    
    22,460
    
    
    
    
    
    
    
    22,460
    
    
    
    Obligations of U.S. states, municipalities
and political subdivisions
    
    
    1,039,665
    
    
    
    
    
    
    
    1,039,665
    
    
    
    Other investments
    
    
    153,339
    
    
    
    129,168
    
    
    
    
    
    
    
    24,171Assets held in separate account
    
    
    104,062
    
    
    
    
    
    
    
    
    
    
    
    104,062Total
    
    $
    3,990,455
    
    
    $
    150,501
    
    
    $
    2,957,697
    
    
    $
    882,257Liabilities:Other liabilities
    
    $
    73,600
    
    
    $
    73,600
    
    
    $
    
    
    
    $
    
  Three Months Ended September 30, 2008U.S.Treasury and
    
    
    U.S.Other U.S.
    
    
    Government-
    
    
    
    
    
    
    AssetsMortgage-
    
    
    
    
    
    
    Government
    
    
    sponsored
    
    
    
    
    
    
    held inbacked
    
    
    Corporate
    
    
    Guaranteed
    
    
    Enterprise
    
    
    Other
    
    
    SeparateTotal
    
    
    Securities
    
    
    Securities
    
    
    Securities
    
    
    Securities
    
    
    Investments
    
    
    Account(dollars in thousands)Balance, beginning of quarter
    
    $
    718,926
    
    
    $
    38,137
    
    
    $
    532,520
    
    
    $
    1,744
    
    
    $
    
    
    
    $
    27,933
    
    
    $
    118,592Total (losses) gainsIncluded in earnings
    
    
    (51,395
    )
    
    
    (9,605
    )
    
    
    (27,549
    )
    
    
    
    
    
    
    
    
    
    
    289
    
    
    
    (14,530
    )Included in other comprehensive loss
    
    
    19,651
    
    
    
    17,645
    
    
    
    4,577
    
    
    
    
    
    
    
    51
    
    
    
    (2,622
    )
    
    
    Purchases, issuances and settlements
    
    
    66,521
    
    
    
    60,158
    
    
    
    7,792
    
    
    
    
    
    
    
    
    
    
    
    (1,429
    )
    
    
    Net transfer in (out) of Level 3
    
    
    128,554
    
    
    
    114,727
    
    
    
    13,148
    
    
    
    730
    
    
    
    (51
    )
    
    
    
    
    
    
    Balance at end of the period
    
    $
    882,257
    
    
    $
    221,062
    
    
    $
    530,488
    
    
    $
    2,474
    
    
    $
    
    
    
    $
    24,171
    
    
    $
    104,062Net (losses) gains for the period included in
earnings attributable to the net change
in unrealized gains and losses of assets
measured at fair value using unobservable
inputs and held at September 30, 2008
    
    $
    (51,862
    )
    
    $
    (16,501
    )
    
    $
    (35,624
    )
    
    $
    
    
    
    $
    
    
    
    $
    263
    
    
    $
    
 
 (1)
    
    Net losses of $25.7 million and $26.2 million were reported in the Consolidated Statements
of Income as net investment income and net realized investment losses, respectively. - 13 -




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##### Table of Contents



DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Note C  Fair Value Measurements  (Continued)
 Nine Months Ended September 30, 2008U.S.Treasury and
    
    
    U.S.Other U.S.
    
    
    Government-
    
    
    
    
    
    
    AssetsMortgage-
    
    
    
    
    
    
    Government
    
    
    sponsored
    
    
    
    
    
    
    held inbacked
    
    
    Corporate
    
    
    Guaranteed
    
    
    Enterprise
    
    
    Other
    
    
    SeparateTotal
    
    
    Securities
    
    
    Securities
    
    
    Securities
    
    
    Securities
    
    
    Investments
    
    
    Account(dollars in thousands)Balance at beginning of year
    
    $
    1,060,154
    
    
    $
    302,852
    
    
    $
    476,299
    
    
    $
    
    
    
    $
    129,993
    
    
    $
    27,054
    
    
    $
    123,956Total (losses) gainsIncluded in earnings
    
    
    (71,162
    )
    
    
    (20,617
    )
    
    
    (31,056
    )
    
    
    
    
    
    
    42
    
    
    
    363
    
    
    
    (19,894
    )Included in other
comprehensive loss
    
    
    (38,526
    )
    
    
    (7,119
    )
    
    
    (29,936
    )
    
    
    
    
    
    
    (42
    )
    
    
    (1,429
    )
    
    
    Purchases, issuances and settlements
    
    
    50,388
    
    
    
    69,191
    
    
    
    108,014
    
    
    
    
    
    
    
    (125,000
    )
    
    
    (1,817
    )
    
    
    Net transfer (out) in of Level 3
    
    
    (118,597
    )
    
    
    (123,245
    )
    
    
    7,167
    
    
    
    2,474
    
    
    
    (4,993
    )
    
    
    
    
    
    
    Balance at end of the period
    
    $
    882,257
    
    
    $
    221,062
    
    
    $
    530,488
    
    
    $
    2,474
    
    
    $
    
    
    
    $
    24,171
    
    
    $
    104,062Net losses for the period included in earnings
attributable to the net change in unrealized
gains and losses of assets measured at fair
value using unobservable inputs and held
at September 30, 2008 (1)
    
    $
    (72,686
    )
    
    $
    (30,343
    )
    
    $
    (40,303
    )
    
    $
    
    
    
    $
    
    
    
    $
    (2,040
    )
    
    $
    
 
 (1)
    
    Net losses of $29.4 million and $43.3 million were reported in the Consolidated Statements
of Income as net investment income and net realized investment losses, respectively. Note D  Redemption of Junior Subordinated Deferrable Interest Debentures underlying the
Company-Obligated Mandatorily Redeemable Capital Securities of Unconsolidated Subsidiaries
   - 14 -




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##### Table of Contents



DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Note E  Segment InformationThree Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(dollars in thousands)Revenues:Group employee benefit products
    
    $
    341,978
    
    
    $
    358,426
    
    
    $
    1,057,008
    
    
    $
    1,070,159Asset accumulation products
    
    
    10,518
    
    
    
    19,944
    
    
    
    50,418
    
    
    
    74,523Other(1)
    
    
    11,939
    
    
    
    10,342
    
    
    
    33,160
    
    
    
    31,024364,435
    
    
    
    388,172
    
    
    
    1,140,586
    
    
    
    1,175,706Net realized investment losses
    
    
    (33,740
    )
    
    
    (1,480
    )
    
    
    (59,675
    )
    
    
    (925
    )Loss on redemption of junior subordinated deferrable
interest debentures underlying the Company-obligated
mandatorily redeemable capital securities issued
by unconsolidated subsidiaries
    
    
    (598
    )
    
    
    
    
    
    
    (598
    )
    
    
    (2,192
    )$
    330,097
    
    
    $
    387,232
    
    
    $
    1,080,313
    
    
    $
    1,172,589Operating income (loss):Group employee benefit products
    
    $
    32,979
    
    
    $
    67,234
    
    
    $
    140,771
    
    
    $
    195,308Asset accumulation products
    
    
    (6,246
    )
    
    
    6,946
    
    
    
    4,504
    
    
    
    24,112Other(1)
    
    
    (6,164
    )
    
    
    (7,625
    )
    
    
    (19,798
    )
    
    
    (20,931
    )20,569
    
    
    
    66,555
    
    
    
    125,477
    
    
    
    198,489Net realized investment losses
    
    
    (33,740
    )
    
    
    (1,480
    )
    
    
    (59,675
    )
    
    
    (925
    )Loss on redemption of junior subordinated deferrable
interest debentures underlying the Company-obligated
mandatorily redeemable capital securities issued
by unconsolidated subsidiaries
    
    
    (598
    )
    
    
    
    
    
    
    (598
    )
    
    
    (2,192
    )$
    (13,769
    )
    
    $
    65,075
    
    
    $
    65,204
    
    
    $
    195,372
 
 (1)
    
    Primarily consists of operations from integrated disability and absence management
services and certain corporate activities. Note F Comprehensive (Loss) Income
  - 15 -




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##### Table of Contents



DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Note G  Stock-Based Compensation
     WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateNumber
    
    
    Average
    
    
    Contractual
    
    
    Intrinsicof
    
    
    Exercise
    
    
    Term
    
    
    ValueOptions
    
    Options
    
    
    Price
    
    
    (In Years)
    
    
    ($000)Outstanding at January 1, 2008
    
    
    3,260,251
    
    
    $
    27.15Granted
    
    
    1,490,231
    
    
    
    29.15Exercised
    
    
    (607,853
    )
    
    
    21.22Forfeited
    
    
    (24,345
    )
    
    
    34.35Expired
    
    
    (18,455
    )
    
    
    27.16Outstanding at September 30, 2008
    
    
    4,099,829
    
    
    
    28.72
    
    
    
    7.2
    
    
    $
    11,994Exercisable at September 30, 2008
    
    
    1,567,734
    
    
    $
    22.79
    
    
    
    4.4
    
    
    $
    11,820
   - 16 -




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##### Table of Contents



DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Note H Computation of Results per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(amounts in thousands, except per share data)Numerator:Net (loss) income
    
    $
    (9,810
    )
    
    $
    40,729
    
    
    $
    38,209
    
    
    $
    122,837Denominator:Weighted average common shares outstanding
    
    
    47,936
    
    
    
    50,596
    
    
    
    48,379
    
    
    
    50,405Effect of dilutive securities
    
    
    
    
    
    
    1,126
    
    
    
    880
    
    
    
    1,236Weighted average common shares outstanding, assuming dilution
    
    
    47,936
    
    
    
    51,722
    
    
    
    49,259
    
    
    
    51,641Basic results per share of common stock:Net (loss) income
    
    $
    (0.20
    )
    
    $
    0.80
    
    
    $
    0.79
    
    
    $
    2.44Diluted results per share of common stock:Net (loss) income
    
    $
    (0.20
    )
    
    $
    0.79
    
    
    $
    0.78
    
    
    $
    2.38
  - 17 -




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##### Table of Contents



DELPHI FINANCIAL GROUP, INC.
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Introduction
    - 18 -




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##### Table of Contents



Results of Operations
 Nine Months Ended September 30, 2008 Compared to
Nine Months Ended September 30, 2007
 Summary of Results.
 Premium and Fee Income.
 - 19 -




---



##### Table of Contents



Net Investment Income.
 Net Realized Investment Losses.
  - 20 -




---



##### Table of Contents



Loss on Redemption of Junior Subordinated Deferrable Interest Debentures.
  Benefits and Expenses.
 Interest Expense
 Income Tax Expense.
 Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
 Summary of Results.
 Premium and Fee Income. .
 - 21 -




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##### Table of Contents



Net Investment Income.
 Net Realized Investment Losses.
  Loss on Redemption of Junior Subordinated Deferrable Interest Debentures.
 - 22 -




---



##### Table of Contents



Benefits and Expenses.
 Income Tax (Benefit) Expense.
 Liquidity and Capital Resources
 General.
   - 23 -




---



##### Table of Contents



Share Repurchase Program.
 Investments.
 Reinsurance.
 - 24 -




---



##### Table of Contents



Cash Flows
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
  Forward-Looking Statements And Cautionary Statements Regarding Certain Factors That May Affect
Future Results
  - 25 -




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  The market values of the Companys investments fluctuate.
  -
 The Company may be adversely impacted by a decline in the ratings of its insurance
subsidiaries or its own credit ratings.
  - 26 -




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##### Table of Contents



Item 6. Exhibits
 11.1
    
    
    Computation of Results per Share of Common Stock (incorporated by reference to
Note H to the Consolidated
Financial Statements included elsewhere herein)31.1
    
    
    Certification by the Chairman of the Board and Chief Executive Officer of
Periodic Report Pursuant to Rule 13a-14(a) or 15d-14(a)31.2
    
    
    Certification by the Senior Vice President and Treasurer of Periodic Report
Pursuant to Rule 13a-14(a) or 15d-14(a)32.1
    
    
    Certification of Periodic Report Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 SIGNATURES
  DELPHI FINANCIAL GROUP, INC. (Registrant)/s/   ROBERT ROSENKRANZRobert RosenkranzChairman of the Board and Chief Executive Officer
(Principal Executive Officer)/s/   THOMAS W. BURGHARTThomas W. BurghartSenior Vice President and Treasurer
(Principal Accounting and Financial Officer)  - 27 -