<PAGE>

                                                                    EXHIBIT 10.5

                                  July 8, 2003

Harold F. Ilg
Safety National Casualty Corporation
2043 Woodland Parkway, Suite 200
St. Louis, Missouri 63146

Re: Stock Option Award Agreement

Dear Mr. Ilg:

         We are pleased to inform you that, pursuant to action taken by the
Stock Option and Compensation Committee (the "Committee") of the Board of
Directors of Delphi Financial Group, Inc. ("Delphi") under Section 5 of the 2003
Employee Long-Term Incentive and Share Award Plan (the "Plan"), you have been
granted options to purchase up to 150,000 shares of Delphi's Class A Common
Stock (the "Stock") at the price of $43.45 per share (the "Options"), which was
the fair market value of the Stock as of May 28, 2003, the date of such action,
as determined under the Plan.

         Such option grant is subject to the terms and conditions described
herein, including but not limited to the condition to exercisability set forth
in the penultimate paragraph hereof. This notice, once countersigned by you,
shall constitute an "Award Agreement" as defined in Section 2(c) of the Plan.

         The Options will become exercisable, in accordance with the procedures
described herein, if and to the extent that SIG Holdings, Inc. and its
consolidated subsidiaries (collectively, "SIG") meet the following financial
performance goals, as measured and determined in accordance with the provisions
of Exhibit A hereto:

            (a) If SIG's aggregate Pre-Tax Operating Income (as such term is
defined in Exhibit A hereto) for the period consisting of Delphi's 2003, 2004
and 2005 fiscal years is at least $216,700,000, 75,000 Options shall become
exercisable.

<PAGE>

Harold F. Ilg
July 8, 2003
Page 2

Alternatively, if SIG's aggregate Pre-Tax Operating Income for such
period does not reach $216,700,000, but is greater than $196,134,656, a reduced
number of the Options shall become exercisable, to be determined by
interpolating between zero and 75,000 in relation to the point at which the
Pre-Tax Operating Income amount falls in the range between $196,134,656 and
$216,700,000. For example, if Pre-Tax Operating Income for such period were
exactly $206,417,328, 37,500 Options would become exercisable.

         (b) If SIG's aggregate Pre-Tax Operating Income for the period
consisting of Delphi's 2003, 2004, 2005, 2006 and 2007 fiscal years is at least
$429,085,000, 150,000 Options, less the number of Options, if any, as shall
previously have become exercisable pursuant to the preceding clause (a) (the
"Previously Vested Options"), shall become exercisable. Alternatively, if SIG's
aggregate Pre-Tax Operating Income for such period does not reach $429,085,000,
but is greater than $380,824,993, a reduced number of the Options shall become
exercisable, to be determined by interpolating between zero and 150,000 in
relation to the point at which the Pre-Tax Operating Income amount falls in the
range between $380,824,993 and $429,085,000, and subtracting the number of the
Previously Vested Options. For example, if Pre-Tax Operating Income for such
period was $404,954,997, and the number of the Previously Vested Options was
37,500, 37,500 Options would become exercisable. If, in such example, there were
no Previously Vested Options, 75,000 Options would become exercisable.

         (c) In addition, if your employment with Delphi's subsidiary, Safety
National Casualty Corporation ("SNCC"), terminates due to death or Disability or
is terminated by SNCC without Cause (other than a termination pursuant to the
Annual Termination Option) or by you for Good Reason, then, notwithstanding any
provisions hereof or of the Plan to the contrary, with respect to Options that
have not become exercisable prior to such termination pursuant to the provisions
of the preceding clauses (a) and/or (b), such Options will become exercisable at
such times, if any, as would have been the case pursuant to such clauses if not
for such termination; provided, however, that the number of Options that becomes
exercisable will, in each case, be reduced by a percentage equal

<PAGE>

Harold F. Ilg
July 8, 2003
Page 3

to the applicable percentage of the three-year period (in the case of clause
(a)) and the five-year period (in the case of clause (b)) during which you were
not employed by SNCC by reason of such termination. For purposes of this clause
(c), the terms "Disability," "Cause," "Annual Termination Option" and "Good
Reason" shall have the definitions set forth in the Employment Agreement between
SNCC and you dated as of the date first set forth above (the "Employment
Agreement").

         Options which do not become exercisable pursuant to the provisions of
the preceding clauses (a), (b) and/or (c) shall expire and terminate in their
entirety without becoming exercisable.

         For purposes of application of the foregoing provisions relating to the
exercisability of the Options, the following procedures shall apply:

         Each determination of Pre-Tax Operating Income shall be made by Delphi,
based upon a statement of operations of SIG for the applicable period in form
and substance reasonably acceptable to Delphi, applying the calculation
methodology set forth in Exhibit A to this Notice.

         Delphi shall notify you in writing, within 105 days following the close
of each of the multi-year periods referenced in the preceding clauses (a) and
(b) of its determination as to the level of aggregate Pre-Tax Operating Income
achieved and, based on such determination, the extent to which the Options have
become exercisable pursuant to the applicable provision of such clauses (a) and
(b) or, if applicable, clause (c). Options having become exercisable, as
described in such notice, shall for all purposes of the Plan be exercisable
immediately as of the date of such notice.

         Options that become exercisable as provided herein will, if not sooner
exercised or terminated pursuant to the provisions hereof, terminate at the
close of business on May 28, 2013. The Options are in all respects subject to
each of the terms and conditions of the Plan, a copy of which is attached hereto
as Exhibit B, except as otherwise provided herein and except that: (i) the
provisions of Sections 5(b)(iii), (iv), (vi) and (viii)

<PAGE>

Harold F. Ilg
July 8, 2003
Page 4

of the Plan will not limit your ability to exercise, following a termination of
your employment by SNCC or for the other reasons set forth therein, Options that
have become exercisable as of the date of such termination or that become
exercisable thereafter pursuant to the provisions of clause (c) above; subject,
however, to the provisions of Section 5.4 of the Employment Agreement; (ii) for
purposes of Section 5(b)(v) of the Plan, a determination that you have been
discharged for cause shall be made only where the Committee determines that the
discharge was based upon the commission of fraud or intentional
misrepresentation, embezzlement, misappropriation or conversion of assets or
opportunities of Delphi or any Subsidiary thereof, or any unauthorized
disclosure of confidential information or trade secrets of Delphi or any
Subsidiary thereof; (iii) notwithstanding the provisions of Section 5(b)(ix) of
the Plan, the exercise price for the Options may be paid by your directing that
Delphi withhold from the Option shares a number of shares having a market value,
at the time of exercise, equal to such exercise price, so long as such payment
method will not, in Delphi's judgment, result in adverse accounting consequences
for Delphi; and (iv) the provisions of Section 8(a) of the Plan shall not apply
to the Options.

         In addition, in accordance with Section 6(d) of the Plan, this will
confirm that you may, upon written notice to Delphi, transfer the Options, for
or without consideration, to members of your immediate family (as defined
below), to a partnership or limited liability company in which one or more of
your immediate family members are the only partners or members, or to a trust or
trusts established for your exclusive benefit or the exclusive benefit of one or
more members of your immediate family. Any Options held by the transferee will
continue to be subject to the same terms and conditions that were applicable to
the Options immediately prior to the transfer, except that the Options will be
transferable by the transferee only by will or the laws of descent and
distribution. For purposes hereof, "immediate family" means your children,
grandchildren, and spouse. You are further advised that, under existing rules of
the Securities and Exchange Commission, any Form S-8 registration statement
filed by Delphi relating to the Plan will not cover the exercise of Options
transferred for consideration, and therefore, such exercise would be required to
be covered by

<PAGE>

Harold F. Ilg
July 8, 2003
Page 5

an effective registration statement under the Securities Act of 1933, as amended
(the "1933 Act"), or otherwise be exempt from registration under the 1933 Act,
and shares of Stock acquired on such exercise would constitute "restricted
securities" within the meaning of Rule 144 under the 1933 Act. No assurance can
be given that, under such circumstances, registration under the 1933 Act with
respect to such exercise or such shares can or will be effected or that an
exemption from such registration will be available.

         If you are in agreement with and accept each of the terms and
conditions of the Options, as described above, please confirm such agreement and
acceptance by executing and dating both counterparts of this Stock Option Award
Agreement and returning one fully executed counterpart to me. The other
counterpart should be retained for your files.

                                Very truly yours,

                                /s/ CHAD W. COULTER
                                -------------------------
                                Chad W. Coulter
                                Vice President, Secretary
                                 and General Counsel

Agreed to and accepted:

/s/ HAROLD F. ILG                           Date: July 9, 2003
---------------------------
Harold F. Ilg

cc: Robert Rosenkranz

<PAGE>

EXHIBIT A
TO
STOCK OPTION AWARD AGREEMENT

General

This Exhibit A sets forth the definitions, methodology and assumptions to be
applied in determining the level of Pre-Tax Operating Income achieved for
purposes of the Stock Option Award Agreement to which this Exhibit A is attached
(the "Option Agreement"). Capitalized terms used but not defined herein shall
have the meanings set forth in the Option Agreement. It is intended that SIG's
Pre-Tax Operating Income will be adjusted, upward or downward, to eliminate the
effect of any items or transactions implemented, initiated, imposed or
determined by Delphi, its affiliates or related parties (collectively, "Excluded
Items"), including but not limited to the following: additional expenses imposed
by Delphi; structured settlement transactions; new affiliated reinsurance
arrangements; asset transfers; Federal Home Loan Bank-related activities and
affiliated and related party transactions. The determination of Pre-Tax
Operating Income will be made by Delphi annually within 90 days of the end of
each year.

For purposes of the Option Agreement, "Pre-Tax Operating Income" shall mean the
operating income of SIG, excluding realized investment gains and losses, net of
interest expense and before extraordinary gain or loss and federal income tax
expense, all as determined in accordance with Generally Accepted Accounting
Principles, as in effect as of January 1, 2003 ("GAAP").

Special Adjustments

For purposes of calculating Pre-Tax Operating Income, the following elements
thereof, as reflected in the applicable line items of SIG's income statement for
each fiscal year, the format for which is attached to and made part of this
Exhibit A, shall be adjusted as follows:

         Investment income: In lieu of actual investment income, shall be based
         on annual average assets available for investment (based on beginning
         of year and end of year balances) multiplied by the crediting rate.
         Average assets available for investment includes cash, investments,
         other investable balances and balances due from affiliates.

<PAGE>

         Fixed maturity investments will be included at amortized cost to
         eliminate any effects of classification for SFAS 115 purposes. Average
         assets available will be (a) increased or decreased, as applicable, to
         eliminate the effect of any Excluded Items, (b) increased (decreased)
         for dividends in excess of (lesser than) the following amounts:
         $10,000,000 in 2003, $1,000,000 in 2004, $1,000,000 in 2005, $4,000,000
         in 2006 and $4,000,000 in 2007, and (c) will be decreased for any
         capital contributed by Delphi. The crediting rate is based upon assumed
         investment yields of 6.32% in 2003, 6.39% in 2004, 6.43% in 2005, 6.47%
         in 2006 and 6.51% in 2007.

         Investment expenses: Shall be fixed at the following amounts for the
         following years: 2003 - $3,926,000; 2004 - $4,151,450; 2005 -
         $4,367,673; 2006 - $4,605,206; and 2007 - $4,854,616.

         Losses and loss adjustment expense (LAE) incurred: Per SIG's income
         statement. Tabular and non-tabular reserves established with respect to
         new or renewal excess workers' compensation and large deductible
         workers' compensation business written on or after January 1, 2003 are
         (to the extent permitted to be discounted under GAAP) to be discounted
         at a 5.5% discount rate. Safety National Casualty Corporation's
         ("SNCC") management will establish loss and LAE reserves, subject to
         audit thereof by Delphi's external auditors and certification thereof
         by PricewaterhouseCoopers.

         Interest on long-term debt: Fixed at $269,622 for 2003; otherwise zero.

         Employee option expenses: SFAS 123 expenses attributable to options
         granted under the SNCC Employee Stock Option Pool (and similar and
         successor programs) shall be included as items of expense.

         Expenses incurred/income generated due to Excluded Items: SIG's results
         will be adjusted to eliminate the effect of Excluded Items.

         Discontinued operations: Included for all purposes, per SIG's income
         statement.

<PAGE>

Arbitration

         Delphi shall provide each holder of Stock options whose terms contain
         goals relating to Pre-Tax Operating Income for the 2003-2007 period
         (collectively, the SIG Optionholders") with a detailed written
         calculation supporting Delphi's determination as to whether the
         applicable goal has been achieved (each, a "Delphi Determination") and,
         where such calculation indicates such goal having been achieved,
         confirming the number of Options having become exercisable as a result
         thereof, within ninety (90) days after the completion of each of the
         2005 and 2007 fiscal periods. If a majority of the SIG Optionholders
         shall disagree with any Delphi Determination, the SIG Optionholders
         shall give written notice of such disagreement to Delphi within ten
         (10) business days after receipt of the such Delphi Determination. If
         within twenty (20) business days after Delphi's receipt of the notice
         of disagreement from the SIG Optionholders referenced in the
         immediately preceding sentence, Delphi and the SIG Optionholders are
         unable to agree with regard to any Delphi Determination, the
         disagreement may be submitted to arbitration by either Delphi or the
         SIG Optionholders, which arbitration determination shall be final and
         binding on the parties. The party instituting the arbitration
         procedures shall give written notice to the other party of its desire
         to arbitrate and such notice shall specify the name and address of the
         person designated to act as an arbitrator on its behalf. Within twenty
         (20) business days after the service of this notice, the other party
         shall notify the first party of the appointment of its arbitrator
         within the twenty (20) business day period specified above, then the
         appointment of the second arbitrator shall be made in the same manner
         as hereinafter provided for the appointment of a third arbitrator in a
         case where the two appointed arbitrators are unable to agree upon a
         third arbitrator. The two arbitrators so chosen shall meet within 10
         business days after the second arbitrator is appointed and shall select
         the third arbitrator by mutual agreement. If the two arbitrators shall
         fail to appoint a third arbitrator within 10 business days after the
         second arbitrator is appointed, then the third arbitrator shall be
         appointed by the American Arbitration Association ("AAA"), or any
         organization successor thereto, in accordance with its prevailing
         rules. Each arbitrator chosen or appointed pursuant to the foregoing
         provisions shall be an active or

<PAGE>

         retired officer of an insurance or reinsurance company and shall be a
         disinterested person.

         The arbitrators shall review the provisions of this Exhibit A and the
         Option Agreement, as well as any other documents or materials supplied
         by either party supporting such party's position. The arbitrators shall
         render their decision with regard to the disputed Delphi Determination
         upon the concurrence of at least two of their number not later than
         thirty (30) business days after the appointment of the third
         arbitrator. The decision of the arbitrators shall be in writing and
         counterpart copies shall be delivered to each of Delphi and the SIG
         Optionholders. In rendering their decision, the arbitrators shall have
         no power to modify any of the provisions of this Agreement. All
         arbitration proceedings shall occur in St. Louis, Missouri. Judgment
         may be entered on the award of the arbitrators and may be enforced in
         accordance with the laws of the State of Missouri.

         Immediately upon a party hereto giving written notice of its desire to
         arbitrate hereunder, Delphi agrees upon request to provide the SIG
         Optionholders with access to the books and records of SIG which
         reasonably relate to the Delphi Determinations (including, without
         limitation, examination rights and the right to make abstracts or
         copies from such books and records) during the normal business hours of
         SIG.

         Each party shall pay the fees and expenses of the original arbitrator
         that it appointed (or in the case of the second party, the arbitrator
         appointed on its behalf if it should fail to appoint its own
         arbitrator). The fees and expenses of the third arbitrator and all
         other expenses of the arbitrators shall be borne by Delphi, on one
         hand, and the SIG Optionholders, on the other hand, equally. Each party
         shall bear the expense of its own counsel and the preparation and
         presentation of proof or supportive documentation.

<PAGE>

                                                                    EXHIBIT 10.5

                                    FORMAT OF
                       SIG HOLDINGS, INC. INCOME STATEMENT

<TABLE>
<CAPTION>
                                                                                 THREE YEAR                              FIVE YEAR
                                             2003         2004          2005     CUMULATIVE       2006         2007      CUMULATIVE
                                             ----         ----          ----     ----------       ----         ----      ----------
<S>                                       <C>          <C>          <C>          <C>           <C>         <C>          <C>
GROSS PREMIUMS WRITTEN

NET PREMIUMS WRITTEN

PREMIUMS EARNED

OTHER INCOME

LOSSES AND LAE INCURRED

OTHER INSURANCE EXPENSES

AMORTIZATION OF DAC - COMMISSIONS

OPERATING EXPENSES

SNCC EMPLOYEE OPTION EXPENSES

     UNDERWRITING INCOME

INVESTMENT INCOME

     LESS: INVESTMENT EXPENSES            $ 3,926,000  $ 4,141,450  $ 4,367,673  $ 12,435,123  $4,605,206  $ 4,854,616  $ 21,894,945

INTEREST ON LONG-TERM DEBT                $   269,622

POSITIVE OR NEGATIVE ADJUSTMENT FOR
     AGGREGATE OF EXCLUDED ITEMS

     OPERATING INCOME BEFORE FIT

     OPERATING INCOME BEFORE FIT,
        EXCLUDING
     CUMULATIVE EFFECT OF POST-1/1/03
        ACCOUNTING CHANGES
     AND EXTRAORDINARY ITEMS

     PRE-TAX OPERATING INCOME GOAL                                               $216,700,000                           $429,085,000

     OVER (UNDER) INCOME GOAL
</TABLE>