<PAGE>
================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(Mark One)
[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2004

[ ]     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.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                    <C>                                         <C>
            Delaware                            (302) 478-5142                                13-3427277
-------------------------------         -------------------------------             -------------------------------
 (State or other jurisdiction of        (Registrant's telephone number,             (I.R.S. Employer Identification
 incorporation or organization)               including area code)                                 Number)
</TABLE>

<TABLE>
<S>                                                                                         <C>
   1105 North Market Street, Suite 1230, P. O. Box 8985, Wilmington, Delaware                     19899
-------------------------------------------------------------------------------------------------------------------
                    (Address of principal executive offices)                                   (Zip Code)
</TABLE>

          Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<S>                                                              <C>
                    Class A Common Stock, $.01 par value               New York Stock Exchange
                  ----------------------------------------           ----------------------------
                           (Title of each class)                        (Name of each exchange
                                                                          on which registered)
</TABLE>

          Securities registered pursuant to Section 12(g) of the Act:

                                      None

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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).

                               Yes X      No ____

The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of June 30, 2004 was $1,213,648,990.

As of March 1, 2005, the Registrant had 27,949,539 shares of Class A Common
Stock and 3,904,481 shares of Class B Common Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Registrant's 2005 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.


================================================================================
<PAGE>
This document contains certain forward-looking statements as defined in the
Securities Exchange Act of 1934, some of which may be identified by the use of
terms such as "expects," "believes," "anticipates," "intends," "judgment" or
other similar expressions. These statements are subject to various uncertainties
and contingencies, which could cause actual results to differ materially from
those expressed in such statements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Forward-Looking Statements and
Cautionary Statements Regarding Certain Factors That May Affect Future Results."

                                     PART I

ITEM 1. BUSINESS

Delphi Financial Group, Inc. (the "Company," which term includes the Company and
its consolidated subsidiaries unless the context indicates otherwise), is a
holding company whose subsidiaries provide integrated employee benefit services.
The Company was organized as a Delaware corporation in 1987 and completed the
initial public offering of its Class A common stock in 1990. The Company manages
all aspects of employee absence to enhance the productivity of its clients and
provides the related insurance coverages: long-term and short-term disability,
excess and primary workers' compensation, group life, travel accident and
dental. The Company's asset accumulation business emphasizes individual fixed
annuity products. The Company offers its products and services in all fifty
states and the District of Columbia. The Company's two reportable segments are
group employee benefit products and asset accumulation products. See Notes A and
R to the Consolidated Financial Statements included in this Form 10-K for
additional information regarding the Company's segments.

The Company makes available free of charge on its website at www.delphifin.com
its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and all amendments to these reports as soon as reasonably possible
after such material has been filed with or furnished to the Securities and
Exchange Commission.

OPERATING STRATEGY

The Company's operating strategy is to offer financial products and services
which have the potential for significant growth, which require specialized
expertise to meet the individual needs of its customers and which provide the
Company the opportunity to achieve superior operating earnings growth and
returns on capital.

The Company has concentrated its efforts within certain niche insurance markets,
primarily group employee benefits for small to mid-sized employers, where nearly
all of the employment growth in the American economy has occurred in recent
years. The Company also markets its group employee benefit products and services
to large employers, emphasizing unique programs that integrate both employee
benefit insurance coverages and absence management services. The Company also
operates an asset accumulation business that focuses primarily on offering fixed
annuities to individuals planning for retirement.

The Company's primary operating subsidiaries are as follows:

Reliance Standard Life Insurance Company ("RSLIC"), founded in 1907 and having
administrative offices in Philadelphia, Pennsylvania, and its subsidiary, First
Reliance Standard Life Insurance Company ("FRSLIC"), underwrite a diverse
portfolio of group life, disability and accident insurance products targeted
principally to the employee benefits market. RSLIC also markets asset
accumulation products, primarily fixed annuities, to individuals and groups. The
financial strength rating of RSLIC as of February 2005 as rated by A.M. Best was
A- (Excellent). The Company, through Reliance Standard Life Insurance Company of
Texas ("RSLIC-Texas"), acquired RSLIC and FRSLIC in November 1987.

Safety National Casualty Corporation ("SNCC") focuses primarily on providing
excess workers' compensation insurance to the self-insured market. Founded in
1942 and located in St. Louis, Missouri, SNCC is one of the oldest continuous
writers of excess workers' compensation insurance in the United States. The
financial strength rating of SNCC as of February 2005 as rated by A.M. Best was
A (Excellent). The Company, through SIG Holdings, Inc. ("SIG"), acquired SNCC in
March 1996. In 2001, SNCC formed an insurance subsidiary, Safety First Insurance
Company, which also focuses on selling excess workers' compensation products to
the self-insured market.

Matrix Absence Management, Inc. ("Matrix"), founded in 1987, provides integrated
disability and absence management services to the employee benefits market
across the United States. Headquartered in San Jose, California, Matrix was
acquired by the Company in June 1998. See "Other Transactions."


                                       -1-
<PAGE>
GROUP EMPLOYEE BENEFIT PRODUCTS

The Company is a leading provider of group life, disability and excess workers'
compensation insurance products to small and mid-sized employers, with more than
20,000 policies in force. The Company also offers travel accident, voluntary
accidental death and dismemberment and group dental insurance. The Company
markets its group products to employer-employee groups and associations in a
variety of industries. The Company insures groups ranging from 2 to more than
5,000 individuals, although the size of an insured group generally ranges from
10 to 1,000 individuals. The Company markets unbundled employee benefit products
and absence management services as well as an Integrated Employee Benefit
program that combines both employee benefit insurance coverages and absence
management services. The Integrated Employee Benefit program, which the Company
believes helps to differentiate itself from competitors by offering clients
improved productivity from reduced employee absence, has enhanced the Company's
ability to market its group employee benefit products to large employers. In
2003, the Company introduced a suite of voluntary group life, disability and
accidental death and dismemberment products that are sold to employees at their
worksite. This suite of voluntary benefits allows the employees of the Company's
clients to choose the type and amount of benefit. In underwriting its group
employee benefit products, the Company attempts to avoid concentrations of
business in any industry segment or geographic area.

The Company's group employee benefit products are sold to employer groups
primarily through independent brokers and agents. The Company's products are
marketed to brokers and agents by 118 sales representatives and managers. RSLIC
had 107 sales representatives and managers located in 25 sales offices
nationwide at December 31, 2004, up 8% from 99 sales representatives and
managers at the end of 2003. At December 31, 2004, SNCC had 10 sales
representatives and managers. The Company's three administrative offices and 25
sales offices also service existing business.

The following table sets forth for the periods indicated selected financial data
concerning the Company's group employee benefit products:

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                               ------------------------------------------------------------------------
                                                        2004                    2003                      2002
                                               --------------------    --------------------      ----------------------
                                                                       (dollars in thousands)
<S>                                            <C>           <C>       <C>           <C>         <C>            <C>
Insurance premiums:
   Core Products:

     Disability income......................   $ 290,743      37.0%    $  233,437     34.7%      $  195,052      34.9%
     Life...................................     261,797      33.4        241,902     35.9          210,030      37.6
     Excess workers' compensation...........     190,794      24.3        151,522     22.5          104,170      18.6
     Travel accident, dental and other......      41,656       5.3         46,792      6.9           49,922       8.9
                                               ---------     ------    ----------    ------      ----------     ------
                                               $ 784,990     100.0%    $  673,653    100.0%      $  559,174     100.0%
                                               ---------     ======    ----------    ======      ----------     ======
   Non-Core Products:.......................
     Loss portfolio transfers...............       5,300                        -                    26,830
     Other..................................      20,286                   22,383                    22,495
                                               ---------               ----------                ----------
                                                  25,586                   22,383                    49,325
                                               ---------               ----------                ----------
       Total insurance premiums.............   $ 810,576               $  696,036                $  608,499
                                               =========               ==========                ==========

Sales (new annualized gross premiums):
   Core Products:

     Disability income......................   $  95,799      45.8%    $   84,920     38.6%      $   75,996       37.8%
     Life...................................      64,555      30.8         68,200     31.0           70,900       35.2
     Excess workers' compensation...........      28,408      13.6         45,058     20.5           30,796       15.3
     Travel accident, dental and other......      20,547       9.8         21,933      9.9           23,454       11.7
                                               ---------    ------     ----------   -------      ----------     -------
                                               $ 209,309     100.0%    $  220,111    100.0%      $  201,146      100.0%
                                               ---------    =======    ----------   =======      ----------     =======
   Non-Core Products:
     Loss portfolio transfers...............       5,300                        -                    26,830
     Other..................................      11,381                   14,513                    13,171
                                               ---------               ----------                ----------
                                                  16,681                   14,513                    40,001
                                               ---------               ----------                ----------
       Total sales..........................   $ 225,990               $  234,624                $  241,147
                                               =========               ==========                ==========
</TABLE>


                                      -2-
<PAGE>
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 and control
administrative expenses. The Company transfers its exposure to some group
employee benefit risks through reinsurance ceded arrangements with other
insurance and reinsurance companies. Under these arrangements, another insurer
assumes a specified portion of the Company's losses and loss adjustment expenses
in exchange for a specified portion of policy premiums. See "Reinsurance."
Accordingly, the profitability of group employee benefit products is affected by
the amount, cost and terms of reinsurance obtained by the Company. Profitability
of certain group employee benefit products is also affected by the difference
between the yield achieved on invested assets and the discount rate used to
calculate the related reserves.

The table below shows the loss and expense ratios as a percent of premium income
for the Company's group employee benefit products for the periods indicated.

<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                           ----------------------------------------
                                                                              2004           2003           2002
                                                                           ---------      ---------       ---------
<S>                                                                        <C>            <C>             <C>
Loss ratio...........................................................         70.1%           68.2%          69.2%
Expense ratio........................................................         24.6            26.1           25.4
                                                                           -------        --------        -------
    Combined ratio...................................................         94.7%           94.3%          94.6%
                                                                           =======        ========        =======
</TABLE>

The loss and expense ratios are affected by, among other things, claims
development related to prior years and the results with respect to the Company's
non-core group employee benefit products. Such ratios can also be affected by
changes in the Company's mix of products, such as the level of premium from loss
portfolio transfers ("LPTs"), from year to year. LPTs, which are classified as a
non-core product due to the episodic nature of sales, carry a higher loss ratio
and a significantly lower expense ratio as compared to the Company's other group
employee benefit products.

Group disability products offered by the Company, principally long-term
disability insurance, generally provide a specified level of periodic benefits
for a specified period to persons who, because of sickness or injury, are unable
to work. The Company's group long-term disability coverages are spread across
many industries. Long-term disability benefits generally are paid monthly and
typically are limited for any one employee to two-thirds of the employee's
earned income up to a specified maximum benefit. Long-term disability benefits
are usually offset by income the claimant receives from other sources, primarily
Social Security disability benefits. The Company actively manages its disability
claims, working with claimants to help them return to work as quickly as
possible. When claimants' disabilities prevent them from returning to their
original occupations, the Company, in appropriate cases, may provide assistance
in developing new productive skills for an alternative career. Premiums are
generally determined annually for disability insurance and are based upon
expected morbidity and the insured group's emerging experience, as well as
assumptions regarding operating expenses and future interest rates. Effective
October 1, 2003 for new policies and, for existing policies, the earlier of the
next policy anniversary date or October 1, 2004, the Company reinsures risks in
excess of $7,500 (compared to $2,500 previously) in long-term disability
benefits per individual per month. See "Reinsurance" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - Reinsurance."

The Company's group life insurance products provide for the payment of a stated
amount upon the death of a member of the insured group. Policy terms are
generally one year. Accidental death and dismemberment insurance, which provides
for the payment of a stated amount upon the accidental death or dismemberment of
a member of the insured group, is frequently sold in conjunction with group life
policies and is included in premiums charged for group life insurance. The
Company reinsures risks in excess of $150,000 per individual and type of
coverage for employer-provided group life insurance policies and $100,000 per
individual for voluntary group term life policies. See "Reinsurance."

Excess workers' compensation insurance products provide coverage to employers
and groups who self-insure their workers' compensation risks. The coverage
applies to losses in excess of the applicable self-insured retentions ("SIRs" or
deductibles) of employers and groups, whose workers' compensation claims are
generally handled by third-party administrators ("TPAs"). These products are
principally targeted to mid-sized companies and other groups, particularly small
municipalities, hospitals and schools. These employers and groups are believed
to be less prone to catastrophic workers' compensation exposures and less price
sensitive than larger account business. Because excess workers' compensation
claim payments do not begin until after the self-insured's total loss payments
equal the SIR, the period from when the claim is incurred to the time the
Company's claim payments begin averages 15 years. At that point, the payments
are primarily for wage replacement, similar to the benefit provided under
long-term disability coverage, and any medical payments tend to be stable and
predictable. This family of products also includes large deductible workers'
compensation insurance, which provides coverage similar to excess workers'
compensation insurance, and a complementary product, workers' compensation
self-insurance bonds.


                                      -3-
<PAGE>
The pricing environment and demand for excess workers' compensation insurance
has improved substantially since 2000 due to higher primary workers'
compensation rates and disruption in the excess workers' compensation
marketplace resulting from difficulties experienced by some competitors,
particularly during 2000. These trends accelerated during the second half of
2001 as sharply higher primary workers' compensation rates and rising
reinsurance costs due to the terrorist attacks on the World Trade Center in
September of that year increased the demand for alternatives to primary workers'
compensation. As a result, the demand for excess workers' compensation products
and the rates for such products continued to increase. SNCC was able to obtain
significant price increases in connection with its renewals of insurance
coverage during 2002, 2003 and 2004, with average increases of 25%, 15% and 9%,
respectively, on a substantial portion of such renewals. SNCC has also been
obtaining significant improvements in contract terms, in particular higher SIR
levels, in these renewals. On average, SIRs increased 10% in 2002, 13% in 2003
and 8% in 2004. SNCC has continued to obtain moderate price increases on its
2005 renewals and SIR levels on average are up 8%. New business production,
which represents the amount of new annualized premium sold, for excess workers'
compensation products was $30.8 million in 2002, $45.1 million in 2003 and $28.4
million in 2004 and the retention of existing customers was higher in 2004 than
in 2003. Excess workers' compensation new business production for the important
January renewal season increased 53% to $8.9 million in 2005 from $5.8 million
in 2004. During 2003, the Company replaced certain of its existing reinsurance
arrangements for its excess workers' compensation products. Under the
replacement arrangements, the Company reinsures excess workers' compensation
risks between $5.0 million (compared to $3.0 million previously) and $50.0
million, and a majority in proportionate amount of the risks between $50.0
million and $100.0 million, per occurrence. See "Reinsurance" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - Reinsurance."

As a result of the terrorist attacks on the World Trade Center, a number of the
Company's reinsurers have excluded coverage for losses resulting from terrorism.
In November 2002, the Terrorism Risk Insurance Act of 2002 (the "Terrorism Act")
was enacted. The Terrorism Act established a program under which the federal
government will share with the insurance industry the risk of loss from covered
acts of international terrorism. The program terminates on December 31, 2005.
While efforts have been pending in Congress to pass a bill extending the
Terrorism Act for an additional two-year term, no assurance can be given that
such an extension will occur, or as to the duration of any such extension. The
Terrorism Act applies to all direct lines of property and casualty insurance
written by SNCC, including excess workers' compensation. The federal government
would pay 90% of each covered loss and the insurer would pay the remaining 10%.
Each insurer has a separate deductible before federal assistance becomes
available in the event of an act of terrorism. The deductible is based on a
percentage of the insurer's direct earned premiums from the previous calendar
year. The deductible is 7%, 10% and 15% of direct earned premiums in 2003, 2004
and 2005, respectively. The maximum after-tax loss to the Company for 2005
within the Terrorism Act deductible from property and casualty products is
approximately 2.3% of the Company's shareholders' equity as of December 31,
2004. Any payments made by the government under the Terrorism Act would be
subject to recoupment via surcharges to policyholders when future premiums are
billed. The Terrorism Act does not apply to the lines of insurance written by
the Company's life insurance subsidiaries.

Business travel accident as well as voluntary accidental death and dismemberment
insurance policies pay a stated amount based on a predetermined schedule in the
event of the accidental death or dismemberment of a member of the insured group.
The Company reinsures risks in excess of $150,000 per individual and type of
coverage. Group dental insurance provides coverage for preventive, restorative
and specialized dentistry up to a stated maximum benefit per individual per
year. Under a reinsurance arrangement, the Company ceded 50% of its risk under
dental policies with effective dates prior to 2003, ceded 100% of its risk under
dental policies with effective dates in 2003 through June 30, 2004 and cedes 75%
of its risk under dental policies with effective dates after June 30, 2004. See
"Reinsurance."

Non-core group employee benefit products include products that have been
discontinued, such as reinsurance facilities and excess casualty insurance,
newer products which have not demonstrated their financial potential, products
which are not expected to comprise a significant percentage of earned premiums
and products for which sales are episodic in nature, such as LPTs. Pursuant to
an LPT, the Company, in exchange for a specified one-time payment, assumes
responsibility for an existing block of disability or self-insured workers'
compensation claims. These products are typically marketed to the same types of
clients who have historically purchased the Company's disability and excess
workers' compensation products. Non-core group employee benefit products also
include primary workers' compensation for which the Company primarily receives
fee income since a significant portion of the risk is reinsured. Excess casualty
insurance consists of a discontinued excess umbrella liability program. This
program entails exposure to excess of loss liability claims from past years,
including environmental and asbestos-related claims. Net incurred losses and
loss adjustment expenses relating to this program totaled $8.0 million in 2004.
In addition, non-core group employee benefit products include bail bond
insurance, workers' compensation reinsurance and property catastrophe
reinsurance. See "Reinsurance."


                                      -4-
<PAGE>
ASSET ACCUMULATION PRODUCTS

The Company's asset accumulation products consist of fixed annuities, primarily
single premium deferred annuities ("SPDAs") and flexible premium annuities
("FPAs"). An SPDA provides for a single payment by an annuity holder to the
Company and the crediting of interest by the Company on the annuity contract at
the applicable crediting rate. An FPA provides for periodic payments by an
annuity holder to the Company, the timing and amount of which are at the
discretion of the annuity holder, and the crediting of interest by the Company
on the annuity contract at the applicable crediting rate. Interest credited on
SPDAs and FPAs is not paid currently to the annuity holder but instead
accumulates and is added to the annuity contract's account value. This
accumulation is tax deferred. The crediting rate may be increased or decreased
by the Company subject to specified guaranteed minimum crediting rates, which
currently range from 3.0% to 5.5%. For most of the Company's annuity products,
the crediting rate may be reset by the Company annually, typically on the policy
anniversary. The Company's annuity products also include multi-year interest
guarantee products, in which the crediting rate is fixed at a stated rate for a
specified period of years, such periods ranging from three to eight years. At
December 31, 2004, the weighted average crediting rate on the Company's annuity
products as a group was 4.67%, which includes the effects of the first year
crediting rate bonus on certain newly issued products. Withdrawals may be made
by the annuity holder at any time, but some withdrawals may result in the
assessment of surrender charges, taxes, and/or tax penalties on the withdrawn
amount. In addition, the accumulated value of the annuity may be increased or
decreased under a market value adjustment ("MVA") provision if it is surrendered
during the surrender charge period. The Company does not market variable annuity
products.

These fixed annuity products are sold predominantly to individuals through
networks of independent agents. In 2004, the Company's SPDA products accounted
for $118.5 million of asset accumulation product deposits, of which $94.0
million was attributable to the MVA annuity product, and $10.5 million was
attributable to FPA products, of which $10.1 million had an MVA feature. Three
networks of independent agents accounted for approximately 42% of the deposits
from these SPDA and FPA products during 2004, with no other network of
independent agents accounting for more than 10% of these deposits. The Company
believes that it has a good relationship with these networks.

The following table sets forth for the periods indicated selected financial data
concerning the Company's asset accumulation products:

<TABLE>
<CAPTION>
                                                                                   Year Ended December 31,
                                                                         -----------------------------------------
                                                                            2004            2003           2002
                                                                         ----------     ----------      ----------
                                                                                   (dollars in thousands)
<S>                                                                      <C>            <C>             <C>
Asset accumulation product deposits (sales)...........................   $   133,096    $   100,636     $  135,046

Funds under management (at period end)................................       993,346        929,922        878,820

Product spread (1).....................................................         1.62%          1.22%          1.22%
</TABLE>

      (1)   The product spread for each period is computed by subtracting the
            weighted average crediting rate on the Company's annuity products as
            a group from the sum of net investment income earned on the assets
            supporting the liability balances divided by the average liability
            balance for the period.

At December 31, 2004, funds under management consisted of $860.8 million of SPDA
liabilities and $132.5 million of FPA liabilities. Of these liabilities, $678.0
million were subject to surrender charges averaging 6.51% at December 31, 2004.
Annuity liabilities not subject to surrender charges have been in force, on
average, for 20 years.

The Company prices its annuity products based on assumptions concerning
prevailing and expected interest rates and other factors to achieve a positive
spread between its expected return on investments and the crediting rate. The
Company achieves this spread by active portfolio management focusing on matching
invested assets and related liabilities to minimize the exposure to fluctuations
in market interest rates and by the adjustment of the crediting rate on its
annuity products. In response to changes in interest rates, the Company
increases or decreases the crediting rates on its annuity products.

In light of the annuity holder's ability to withdraw funds and the volatility of
market interest rates, it is difficult to predict the timing of the Company's
payment obligations under its SPDAs and FPAs. Consequently, the Company
maintains a portfolio of investments which are readily marketable and expected
to be sufficient to satisfy liquidity requirements. See "Investments."


                                      -5-
<PAGE>
OTHER PRODUCTS AND SERVICES

The Company provides integrated disability and absence management services on a
nationwide basis through Matrix, which was acquired in June 1998. See "Other
Transactions." The Company's comprehensive disability and absence management
services are designed to assist clients in identifying and minimizing lost
productivity and benefit payment costs resulting from employee absence due to
illness, injury or personal leave. The Company offers services including event
reporting, leave of absence management, claims and case management and return to
work management. These services' goal is to enhance employee productivity and
provide more efficient benefit delivery and enhanced cost containment. The
Company provides these services on an unbundled basis or in a unique Integrated
Employee Benefit program that combines these services with various group
employee benefit insurance coverages. The Company believes that these integrated
disability and absence management services complement the Company's core group
employee benefit products, enhancing the Company's ability to market these core
products and providing the Company with a competitive advantage in the market
for these products.

In 1991, the Company introduced a variable flexible premium universal life
insurance policy under which the related assets are segregated in a separate
account not subject to claims of general creditors of the Company. Policyholders
may elect to deposit amounts in the account from time to time, subject to
underwriting limits and a minimum initial deposit of $1.0 million. Both the cash
values and death benefits of these policies fluctuate according to the
investment experience of the assets in the separate account; accordingly, the
investment risk with respect to these assets is borne by the policyholders. The
Company earns fee income from the separate account in the form of charges for
management and other administrative fees. The Company is not presently actively
marketing this product. The Company reinsures risks in excess of $200,000 per
individual under indemnity reinsurance arrangements with various reinsurance
companies. See "Reinsurance."

UNDERWRITING PROCEDURES

Premiums charged on insurance products are based in part on assumptions about
the incidence, severity and timing of insurance claims. The Company has adopted
and follows detailed underwriting procedures designed to assess and qualify
insurance risks before issuing its policies. To implement these procedures, the
Company employs a professional underwriting staff.

In underwriting group coverage, the Company focuses on the overall risk
characteristics of the group to be insured and the geographic concentration of
its new and renewal business. A prospective group client is evaluated with
particular attention paid to the claims experience of the group with prior
carriers, the occupations of the insureds, the nature of the business of the
client, the current economic outlook of the client in relation to others in its
industry and of the industry as a whole, the appropriateness of the benefits or
SIR applied for and income from other sources during disability. The Company's
products generally afford it the flexibility to adjust premiums charged annually
to its policyholders in order to reflect emerging mortality or morbidity
experience.

INVESTMENTS

The Company's management of its investment portfolio is an important component
of its profitability since a substantial portion of its operating income is
generated from the difference between the yield achieved on invested assets and,
in the case of asset accumulation products, the interest credited on
policyholder funds and, in the case of certain of the Company's other products,
the discount rate used to calculate the related reserves. The Company's overall
investment strategy to achieve its objectives of safety and liquidity, while
seeking the best available return, focuses on, among other things, matching of
the Company's interest-sensitive assets and liabilities and seeking to minimize
the Company's exposure to fluctuations in interest rates.

For information regarding the composition and diversification of the Company's
investment portfolio and asset/liability management, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and Notes A, B and I to the Consolidated
Financial Statements.


                                      -6-
<PAGE>
The following table sets forth for the periods indicated the Company's pretax
investment results:

<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                  -------------------------------------------------
                                                                       2004             2003              2002
                                                                  --------------    -------------    -------------
                                                                               (dollars in thousands)
<S>                                                               <C>               <C>              <C>
Average invested assets (1)...................................    $    3,272,813    $   2,948,135    $    2,556,076
Net investment income (2).....................................           202,774          186,366           162,036
Tax equivalent weighted average annual yield (3)..............               6.4%             6.5%              6.6%
</TABLE>

      (1)   Average invested assets are computed by dividing the total of
            invested assets as reported on the balance sheet at the beginning of
            each year plus the individual quarter-end balances by five and
            deducting one-half of net investment income.

      (2)   Consists principally of interest and dividend income less investment
            expenses.

      (3)   The tax equivalent weighted average annual yield on the Company's
            investment portfolio for each period is computed by dividing net
            investment income, increased to reflect tax exempt interest income
            and similar tax savings, by average invested assets for the period.
            See "Management's Discussion and Analysis of Financial Condition and
            Results of Operations - Results of Operations."

REINSURANCE

The Company participates in various reinsurance arrangements both as the ceding
insurer and as the assuming insurer. Arrangements in which the Company is the
ceding insurer afford various levels of protection against excessive loss by
assisting the Company in diversifying its risks and by limiting its maximum loss
on risks that exceed retention limits. Under indemnity reinsurance transactions
in which the Company is the ceding insurer, the Company remains liable for
policy claims if the assuming company fails to meet its obligations. To limit
this risk, the Company monitors the financial position of its reinsurers,
including, among other things, the companies' financial ratings, and in certain
cases receives collateral security from the reinsurer. Also, certain of the
Company's reinsurance agreements require the reinsurer to set up security
arrangements for the Company's benefit in the event of certain ratings
downgrades. In addition, the U.S. federal government presently provides certain
protections for insurers who issue certain property and casualty insurance
coverages. See "Business - Group Employee Benefit Products."

The Company cedes portions of the risks relating to its group employee benefit
and variable life insurance products under indemnity reinsurance agreements with
various unaffiliated reinsurers. The terms of these agreements, which are
typical for agreements of this type, provide, among other things, for the
automatic acceptance by the reinsurer of ceded risks in excess of the Company's
retention limits stated in the agreements. The Company pays reinsurance premiums
to these reinsurers which are, in general, based upon percentages of premiums
received by the Company on the business reinsured less, in certain cases, ceding
commissions and experience refunds paid by the reinsurer to the Company. These
agreements are generally terminable as to new risks by either the Company or the
reinsurer on appropriate notice; however, termination does not affect risks
ceded during the term of the agreement, for which the reinsurer generally
remains liable. See "Business - Group Employee Benefit Products" and Note P to
the Consolidated Financial Statements.

The Company assumes certain workers' compensation and property risks through
reinsurance. In these arrangements, the Company provides coverage for losses in
excess of specified amounts, subject to specified maximums. Coverage for losses
as a result of terrorism is generally excluded from these reinsurance treaties.
The attachment points for workers' compensation reinsurance range from $250,000
to $1.6 billion, with an average attachment point of $96 million. Aggregate
exposures assumed under individual workers' compensation treaties generally
range from $1 million to $4 million, with the highest net exposure pursuant to
any such treaty equal to $5 million. The Company underwrites workers'
compensation reinsurance assumed pursuant to procedures similar to those
utilized in connection with its excess workers' compensation product. The
majority of the Company's property reinsurance provides coverage in the event of
a catastrophe, generally excluding losses resulting from terrorism. The Company
underwrites its property reinsurance to mitigate its risk by diversifying
geographically and limiting its exposure on any one treaty. On property
reinsurance, the Company's risk attachment points range from $1 million to $27.5
billion, with an average attachment point of $2.1 billion. The Company's
aggregate exposure under a single property treaty generally ranges from $200,000
to $2 million. The highest net exposure under a single property treaty is $3
million. The probable maximum loss on property reinsurance is estimated to be
approximately $9.7 million, net of reinstatement premium and taxes, or
approximately 1% of the Company's shareholders' equity. Premium income from
property reinsurance was $9.5 million, $7.5 million and $4.4 million in 2004,
2003 and 2002, respectively, and incurred losses from property reinsurance were
$4.7 million, $0.3 million and $0.9 million, respectively. In the fourth quarter
of 2004, the Company entered into an indemnity reinsurance arrangement under
which it will assume certain newly issued group disability insurance policies on
an ongoing basis.


                                      -7-
<PAGE>
Under this arrangement, the Company is responsible for underwriting and claims
management with respect to the reinsured business. The Company provides coverage
primarily on a quota share basis up to a maximum Company share of $7,500 in
benefits per individual per month. The Company did not recognize any premium
income in 2004 from this arrangement.

The Company had in the past participated as an assuming insurer in a number of
reinsurance facilities. These reinsurance facilities generally are administered
by TPAs or managing underwriters who underwrite risks, coordinate premiums
charged and process claims. During 1999 and 2000, the Company terminated, on a
prospective basis, its participations in all of the reinsurance facilities in
which the Company had participated. However, the terms of such facilities
provide for the continued assumption of risks by, and payments of premiums to,
facility participants with respect to business written in the periods during
which they formerly participated in such facilities. The Company has been and is
currently a party to certain arbitration proceedings arising out of such
facilities. See "Legal Proceedings." Premium income from all reinsurance
facilities was $0.1 million, $0.3 million and $0.8 million in 2004, 2003 and
2002, respectively, and incurred losses from these facilities were $5.5 million,
$5.1 million and $4.7 million in 2004, 2003 and 2002, respectively. The
reinsurance facilities did not constitute a significant part of the Company's
operations; accordingly, the Company's withdrawals from these facilities have
not had a material impact on its consolidated financial position, liquidity or
results of operations.

LIFE, ANNUITY, DISABILITY AND ACCIDENT RESERVES

The Company carries as liabilities actuarially determined reserves for its life,
annuity, disability and accident policy and contract obligations. These
reserves, together with premiums to be received on policies in force and
interest thereon at certain assumed rates, are calculated and established at
levels believed to be sufficient to satisfy policy and contract obligations. The
Company performs periodic studies to compare current experience for mortality,
morbidity, interest and lapse rates with the experience reflected in the reserve
assumptions to determine future policy benefit reserves for these products.
Reserves for future policy benefits and unpaid claims and claim expenses are
estimated based on individual loss data, historical loss data and industry
averages and indices and include amounts determined on the basis of individual
and actuarially determined estimates of future losses. Therefore, the ultimate
liability could deviate from the amounts currently reflected in the Consolidated
Financial Statements. Under accounting principles generally accepted in the
United States ("GAAP") these policy and claim reserves are permitted to be
discounted to reflect the time value of money. Such reserve discounting, which
is common industry practice, is based on interest rate assumptions reflecting
projected portfolio yield rates for the assets supporting the liabilities. The
assets selected to support these liabilities produce cash flows that are
intended to match the timing and amount of anticipated claim and claim expense
payments. Differences between actual and expected claims experience are
reflected currently in earnings for each period. The Company has not experienced
significant adverse deviations from its assumptions.

The life, annuity, disability and accident reserves carried in the Consolidated
Financial Statements are calculated based on GAAP and differ from those reported
by the Company for statutory financial statement purposes. These differences
arise from the use of different mortality and morbidity tables and interest
assumptions, the introduction of lapse assumptions into the reserve calculation
and the use of the net level method on all insurance business. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Critical Accounting Policies" and Note A to the Consolidated Financial
Statements for certain additional information regarding reserve assumptions
under GAAP.

PROPERTY AND CASUALTY INSURANCE RESERVES

The Company carries as liabilities actuarially determined reserves for
anticipated claims and claim expenses for its excess workers' compensation
insurance and other casualty and property insurance products. Reserves for claim
expenses represent the estimated probable costs of investigating those claims
and, when necessary, defending lawsuits in connection with those claims.
Reserves for claims and claim expenses are estimated based on individual loss
data, historical loss data and industry averages and indices and include amounts
determined on the basis of individual and actuarially determined estimates of
future losses. Therefore, the ultimate liability could deviate from the amounts
currently reflected in the Consolidated Financial Statements.

Reserving practices under GAAP allow discounting of claim reserves related to
excess workers' compensation losses to reflect the time value of money. Reserve
discounting for these types of claims is common industry practice, and the
discount factors used are less than the annual tax-equivalent investment yield
earned by the Company on its invested


                                      -8-
<PAGE>
assets. The discount factors are based on the expected duration and payment
pattern of the claims at the time the claims are settled and the risk-free rate
of return for U.S. government securities with a comparable duration. Reserves
for claim expenses are not discounted.

The following table provides a reconciliation of beginning and ending unpaid
claims and claim expenses for the periods indicated:

<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                         ------------------------------------------
                                                                            2004            2003           2002
                                                                         -----------    -----------     -----------
                                                                                   (dollars in thousands)
<S>                                                                      <C>            <C>             <C>
Unpaid claims and claim expenses, net of reinsurance,
     beginning of period..............................................   $   479,660    $   439,147     $   413,950

Add provision for claims and claim expenses incurred, net of
    reinsurance, occurring during:

      Current year....................................................       103,444         82,372          82,197
      Prior years (1).................................................        30,868         20,541          15,869
                                                                         -----------    -----------     -----------
         Incurred claims and claim expenses, net of reinsurance,
               during the current year................................       134,312        102,913          98,066
                                                                         -----------    -----------     -----------

Deduct claims and claim expenses paid, net of reinsurance, occurring
during:

      Current year....................................................         8,120          5,165          10,915
      Prior years ....................................................        64,170         57,235          61,954
                                                                         -----------    -----------     -----------
         Total paid...................................................        72,290         62,400          72,869
                                                                         -----------    -----------     -----------

Unpaid claims and claim expenses, net of reinsurance, end of period...       541,682        479,660         439,147
Reinsurance receivables, end of period................................       104,266         93,030          95,709
                                                                         -----------    -----------     -----------
     Unpaid claims and claim expenses, gross of reinsurance,
         end of period................................................   $   645,948    $   572,690     $   534,856
                                                                         ===========    ===========     ===========
</TABLE>

            (1)   In 2004, the change in the provision for claims and claim
                  expenses incurred in prior years reflects the accretion of
                  discounted reserves and unfavorable claims development. In
                  2003 and 2002, the change in the provision for claims and
                  claim expenses incurred in prior years reflects the accretion
                  of discounted reserves offset by favorable claims development.


                                      -9-
<PAGE>
The effects of the discount to reflect the time value of money have been removed
from the amounts set forth in the loss development table which follows in order
to present the gross loss development, net of reinsurance. During 2004, 2003 and
2002, $18.1 million, $21.5 million and $17.2 million, respectively, of discount
was amortized, and $64.9 million, $44.9 million and $34.6 million, respectively,
was accrued.

The loss development table below illustrates the development of reserves from
March 5, 1996 to December 31, 2004 and is net of reinsurance.

<TABLE>
<CAPTION>
                                                                  December 31,
                                ----------------------------------------------------------------------------------
                                  March 5,
                                   1996(1)          1996            1997            1998            1999
                                ------------    ------------    ------------    ------------     ------------
                                                             (dollars in thousands)
<S>                             <C>             <C>             <C>             <C>              <C>
Reserve for unpaid
    claims and claim
    expenses, net of
    reinsurance................ $ 520,370       $ 532,923       $ 541,280       $ 422,159        $ 434,513
Cumulative amount of
    liability paid:
     One year later............    23,467          28,162          98,365          40,815           40,660
     Two years later...........    50,713         125,020         127,481          74,571            4,020(2)
     Three years later.........   140,943         152,842         156,119          33,429(2)        54,846
     Four years later..........   167,811         179,705         111,253(2)       78,981           94,899
     Five years later..........   193,363         133,228(2)      150,772         114,295          139,949
     Six years later...........   153,504(2)      170,405         182,281         154,101
     Seven years later.........   188,719         197,318         217,649
     Eight years later.........   214,715         230,278
     Nine years later..........   246,714
Liability reestimated as of:
     One year later............   507,375         513,402         523,430         410,875          424,187
     Two years later...........   487,830         500,964         511,602         404,559          420,420
     Three years later.........   476,854         488,432         503,906         401,475          417,869
     Four years later..........   476,600         487,195         500,514         396,403          423,426
     Five years later..........   476,890         478,206         492,280         399,311          466,975
     Six years later...........   470,283         468,142         493,586         437,913
     Seven years later.........   460,670         472,492         531,603
     Eight years later.........   463,015         507,670
     Nine years later..........   501,208
Cumulative redundancy
    (deficiency)............... $  19,162       $  25,253       $   9,677       $ (15,754)       $ (32,462)
</TABLE>

<TABLE>
<CAPTION>
                                                            December 31,
                                --------------------------------------------------------------------

                                    2000            2001          2002          2003         2004
                                -------------    ----------    ----------    ----------    ---------
                                                      (dollars in thousands)
<S>                             <C>             <C>            <C>           <C>           <C>
Reserve for unpaid
    claims and claim
    expenses, net of
    reinsurance................ $ 444,061        $ 638,191     $ 680,835     $ 744,760     $ 853,515
Cumulative amount of
    liability paid:
     One year later............   (29,990)(2)       61,954        57,235        64,170
     Two years later...........    26,398          112,639       118,685
     Three years later.........    71,938          169,890
     Four years later..........   123,330
     Five years later..........
     Six years later...........
     Seven years later.........
     Eight years later.........
     Nine years later..........
Liability reestimated as of:
     One year later............   442,624          636,125       678,535       766,886
     Two years later...........   442,807          634,578       714,303
     Three years later.........   446,948          678,009
     Four years later..........   502,140
     Five years later..........
     Six years later...........
     Seven years later.........
     Eight years later.........
     Nine years later..........
Cumulative redundancy
    (deficiency)............... $ (58,079)       $ (39,818)    $ (33,468)    $ (22,126)
</TABLE>

            (1)   Amounts are as of or for the periods subsequent to March 5,
                  1996, the date the Company acquired its workers' compensation
                  business.

            (2)   The cumulative amount of liability paid through December 31,
                  2001 reflects the Company's receipt of $74.3 million related
                  to the commutation of the reinsurance agreements with Oracle
                  Reinsurance Company Ltd. in 2001. See "Other Transactions."

The "Reserve for unpaid claims and claim expenses, net of reinsurance" line in
the table above shows the estimated reserve for unpaid claims and claim expenses
recorded at the end of each of the periods indicated. These net liabilities
represent the estimated amount of losses and expenses for claims arising in the
current year and all prior years that are unpaid at the end of each period. The
"Cumulative amount of liability paid" lines of the table represent the
cumulative amounts paid with respect to the liability previously recorded as of
the end of each succeeding period. The "Liability reestimated" lines of the
table show the reestimated amount relating to the previously recorded liability
and is based upon experience as of the end of each succeeding period. This
estimate is either increased or decreased as additional information about the
frequency and severity of claims for each period becomes available and is
reviewed. The Company periodically reviews the estimated reserves for claims and
claim expenses and any changes are reflected currently in earnings for each
period. The "Cumulative redundancy (deficiency)" line in the table represents
the aggregate change in the net estimated claim reserve liabilities from the
dates indicated through December 31, 2004.


                                      -10-
<PAGE>
The table below is gross of reinsurance and illustrates the effects of the
discount to reflect the time value of money that was removed from the amounts
set forth in the loss development table above.

<TABLE>
<CAPTION>
                                                               December 31,
                                 ----------------------------------------------------------------------
                                  March 5,
                                   1996(1)        1996         1997          1998           1999
                                 ---------     ---------     ---------     ---------     ---------
                                                         (dollars in thousands)
<S>                              <C>           <C>           <C>           <C>           <C>
Reserve for unpaid claims and
   claim expenses before
   discount:

     Net of reinsurance......... $ 520,370     $ 532,923     $ 541,280     $ 422,159     $ 434,513
     Add reinsurance
       recoverable..............    13,501        16,730        23,454       164,825       179,180
     Deduct discount for time
       value of money...........   164,000       168,827       176,683       180,770       192,220
                                 ---------     ---------     ---------     ---------     ---------

Unpaid claims and claim
   expenses as reported
   on balance sheets............   369,871       380,826       388,051       406,214       421,473
                                 ---------     ---------     ---------     ---------     ---------

Reestimated unpaid claims
   and claim expenses, gross
   of reinsurance, net of
   discount, as of December
   31, 2004.....................   472,869       471,041       486,013       510,138       550,755
                                 ---------     ---------     ---------     ---------     ---------

Discounted cumulative
   deficiency, gross of
   reinsurance..................  (102,998)      (90,215)      (97,962)     (103,924)     (129,282)

Add accretion of discount
   and change in reinsurance
   recoverable..................   122,160       115,468       107,639        88,170        96,820
                                 ---------     ---------     ---------     ---------     ---------

Cumulative redundancy
   (deficiency) before
   discount, net of
   reinsurance.................. $  19,162     $  25,253     $   9,677     $ (15,754)    $ (32,462)
                                 =========     =========     =========     =========     =========
</TABLE>

<TABLE>
<CAPTION>
                                                             December 31,
                                ------------------------------------------------------------------

                                   2000          2001          2002          2003          2004
                                 ---------     ---------     ---------     ---------     ---------
                                                      (dollars in thousands)
<S>                              <C>           <C>           <C>           <C>           <C>
Reserve for unpaid claims and
   claim expenses before
   discount:

     Net of reinsurance......... $ 444,061     $ 638,191     $ 680,835     $ 744,760     $ 853,515
     Add reinsurance
       recoverable..............   206,704        92,828        95,709        93,030       104,266
     Deduct discount for time
       value of money...........   203,710       224,241       241,688       265,100       311,833
                                 ---------     ---------     ---------     ---------     ---------

Unpaid claims and claim
   expenses as reported
   on balance sheets............   447,055       506,778       534,856       572,690      $645,948
                                 ---------     ---------     ---------     ---------     =========

Reestimated unpaid claims
   and claim expenses, gross
   of reinsurance, net of
   discount, as of December
   31, 2004.....................   599,411       644,161       638,425       628,557
                                 ---------     ---------     ---------     ---------

Discounted cumulative
   deficiency, gross of
   reinsurance..................  (152,356)     (137,383)     (103,569)      (55,867)

Add accretion of discount
   and change in reinsurance
   recoverable..................    94,277        97,565        70,101        33,741
                                 ---------     ---------     ---------     ---------

Cumulative redundancy
   (deficiency) before
   discount, net of
   reinsurance.................. $ (58,079)    $ (39,818)    $ (33,468)    $ (22,126)
                                 =========     =========     =========     =========
</TABLE>

            (1)   Amounts are as of or for the periods subsequent to March 5,
                  1996, the date the Company acquired its workers' compensation
                  business.

The excess workers' compensation insurance reserves carried in the Consolidated
Financial Statements are calculated in accordance with GAAP and, net of
reinsurance, are approximately $134.0 million less than those reported by the
Company for statutory financial statement purposes at December 31, 2004. This
difference is primarily due to the use of different discount factors between
GAAP and statutory accounting principles and differences in the bases against
which such discount factors are applied. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Critical Accounting
Policies" and Note A to the Consolidated Financial Statements for certain
additional information regarding reserve assumptions under GAAP.

COMPETITION

The financial services industry is highly competitive. The Company competes with
numerous other insurance and financial services companies both in connection
with sales of insurance and asset accumulation products and integrated
disability and absence management services and in acquiring blocks of business
and companies. Many of these organizations have substantially greater asset
bases, higher ratings from ratings agencies, larger and more diversified
portfolios of insurance products and larger sales operations. Competition in
asset accumulation product markets is also encountered from the expanding number
of banks, securities brokerage firms and other financial intermediaries
marketing alternative savings products, such as mutual funds, traditional bank
investments and retirement funding alternatives.

The Company believes that its reputation in the marketplace, quality of service,
unique programs which integrate employee benefit products and absence management
services and investment returns have enabled it to compete effectively for new
business in its targeted markets. The Company reacts to changes in the
marketplace generally by focusing on products with adequate margins and
attempting to avoid those with low margins. The Company believes that its
smaller size, relative to some of its competitors, enables it to more easily
tailor its products to the demands of customers.


                                      -11-
<PAGE>
REGULATION

The Company's insurance subsidiaries are regulated by state insurance
authorities in the states in which they are domiciled and the states in which
they conduct business. These regulations, among other things, limit the amount
of dividends and other payments that can be made by the Company's insurance
subsidiaries without prior regulatory approval and impose restrictions on the
amount and type of investments these subsidiaries may have. These regulations
also affect many other aspects of the Company's insurance subsidiaries'
business, including, for example, risk-based capital ("RBC") requirements,
various reserve requirements, the terms, conditions and manner of sale and
marketing of insurance products and the form and content of required financial
statements. These regulations are intended to protect policyholders rather than
investors. The Company's insurance subsidiaries are required under these
regulations to file detailed annual financial reports with the supervisory
agencies in the various states in which they do business, and their business and
accounts are subject to examination at any time by these agencies. To date, no
examinations have produced any significant adverse findings or adjustments. The
ability of the Company's insurance subsidiaries to continue to conduct their
businesses is dependent upon the maintenance of their licenses in these various
states.

In April 2004, the New York State Attorney General ("NYAG") initiated an
investigation into certain insurance broker compensation arrangements and other
aspects of dealings between insurance brokers and insurance companies, and, in
connection therewith, filed a civil complaint in October 2004 against a major
insurance brokerage firm, Marsh & McLennan, based on certain of such firm's
compensation arrangements with insurers and alleged misconduct in connection
with the placement of insurance business. Other state regulators subsequently
announced the commencement of similar investigations and reviews. As previously
disclosed, the Company has received administrative subpoenas or similar requests
for information from the Illinois Division of Insurance, the Missouri Department
of Insurance, the NYAG's office and the North Carolina Department of Insurance
in connection with their investigations. The Company anticipates that additional
regulatory inquiries may be received by its insurance subsidiaries as the
various investigations continue. The Company will fully cooperate with inquiries
it has received to date, as well as any future inquiries of this type.

As also previously disclosed, based on an internal review relating to the
Company's insurance subsidiaries, the Company has identified certain potential
issues concerning past insurance solicitation practices involving SNCC and Marsh
& McLennan. The instances that the Company has been able to specifically
identify in this regard are limited in number and involved modest amounts of
premium. The Company has reported on these issues to the NYAG's office and to
the Missouri Department of Insurance, and will fully cooperate with these and
any other regulatory agencies relating to these issues. It is not possible to
predict the future impact of this matter on the Company or of the various
investigations, or any regulatory changes or litigation resulting from such
investigations, on the insurance industry or on the Company and its insurance
subsidiaries.

From time to time, increased scrutiny has been placed upon the insurance
regulatory framework, and a number of state legislatures have considered or
enacted legislative measures that alter, and in many cases increase, state
authority to regulate insurance companies. In addition to legislative
initiatives of this type, the National Association of Insurance Commissioners
(the "NAIC") and insurance regulators are continuously involved in a process of
reexamining existing laws and regulations and their application to insurance
companies. Furthermore, while the federal government currently does not directly
regulate the insurance business, federal legislation and administrative policies
in a number of areas, such as employee benefits regulation, age, sex and
disability-based discrimination, financial services regulation and federal
taxation, can significantly affect the insurance business. It is not possible to
predict the future impact of changing regulation on the operations of the
Company and its insurance subsidiaries.

The NAIC's RBC requirements for insurance companies take into account asset
risks, insurance risks, interest rate risks and other relevant risks with
respect to the insurer's business and specify varying degrees of regulatory
action to occur to the extent that an insurer does not meet the specified RBC
thresholds, with increasing degrees of regulatory scrutiny or intervention
provided for companies in categories of lesser RBC compliance. The Company
believes that its insurance subsidiaries are adequately capitalized under the
RBC requirements and that the thresholds will not have any significant
regulatory effect on the Company. However, were the insurance subsidiaries' RBC
position to materially decline in the future, the insurance subsidiaries'
continued ability to pay dividends and the degree of regulatory supervision or
control to which they are subjected may be affected.

The Company's insurance subsidiaries can also be required, under solvency or
guaranty laws of most states in which they do business, to pay assessments to
fund policyholder losses or liabilities of insurance companies that become
insolvent. These assessments may be deferred or forgiven under most solvency or
guaranty laws if they would threaten an insurer's


                                      -12-
<PAGE>
financial strength and, in most instances, may be offset against future state
premium taxes. SNCC recognized expenses of $0.8 million, $1.6 million and $1.3
million in 2004, 2003 and 2002, respectively, for these types of assessments.
None of the Company's life insurance subsidiaries has ever incurred any
significant costs of this nature.

EMPLOYEES

The Company and its subsidiaries employed approximately 1,100 persons at
December 31, 2004. The Company believes that it enjoys good relations with its
employees.

OTHER SUBSIDIARIES

The Company conducts certain of its investment management activities through its
wholly-owned subsidiary, Delphi Capital Management, Inc. ("DCM"), and makes
certain investments through other wholly-owned non-insurance subsidiaries.

OTHER TRANSACTIONS

In January 1998, an offering was completed whereby shareholders and
optionholders of the Company received, at no cost, rights to purchase shares of
Delphi International Ltd. ("Delphi International"), a newly-formed, independent
Bermuda insurance holding company. During 1998, the Company entered into various
reinsurance agreements with Oracle Reinsurance Company Ltd. ("Oracle Re"), a
wholly owned subsidiary of Delphi International. Pursuant to these agreements,
approximately $101.5 million of group employee benefit reserves ($35.0 million
of long-term disability insurance reserves and $66.5 million of net excess
workers' compensation and casualty insurance reserves) were ceded to Oracle Re.
The Company received collateral security from Oracle Re in an amount sufficient
to support the ceded reserves. During 2000 and 1999, Oracle Re and the Company
effected the partial recaptures of approximately $4.6 million and $10.0 million,
respectively, of the group long-term disability liabilities ceded to Oracle Re.
In October 2001, Oracle Re and the Company effected the commutation of their
reinsurance agreements, pursuant to which Oracle Re paid approximately $84.0
million to the Company (net of $11.5 million which had been held by the Company)
related to the reserves ceded to Oracle Re under such agreements. These
transactions did not have a material impact on the Company's consolidated
financial position, liquidity or net income. In furtherance of the commutation
of the reinsurance agreements, the Company agreed to waive a portion of the
amounts due to the Company under certain subordinated notes issued by Delphi
International. As a result of this waiver, the Company recognized a pre-tax loss
of $7.5 million in 2001 for the other than temporary decline in the value of
these notes. In March 2002, Delphi International repaid the adjusted amounts due
under the subordinated notes and the Company did not realize any significant
additional loss in connection with such repayment.

On June 30, 1998, the Company acquired Matrix, a provider of integrated
disability and absence management services to the employee benefits market. The
purchase price of $33.8 million consisted of 614,136 shares of the Company's
Class A Common Stock, $7.9 million of cash and $5.7 million of 8% subordinated
notes which matured in June 2003 (the "Subordinated Notes"). Under the terms of
the purchase agreement, additional consideration of up to $5.2 million in cash
was payable if Matrix's earnings met specified targets over the four-year period
subsequent to the acquisition. Because Matrix met all of the specified targets,
the Company paid the $5.2 million of contingent consideration in two equal
installments of $2.6 million during 2000 and 2001.

In the fourth quarter of 2000, the Company liquidated a substantial majority of
the investments of its investment subsidiaries. The proceeds from these sales
were used in 2001 to repay $150.0 million of outstanding borrowings under its
revolving credit facilities, to repurchase $64.0 million liquidation amount of
the Capital Securities of its subsidiary, Delphi Funding L.L.C. (the "Capital
Securities"), and to repurchase $8.0 million principal amount of its 8% Senior
Notes which matured in October 2003 (the "Matured Senior Notes").

In May 2003, the Company issued $143.8 million in principal amount of 8.00%
Senior Notes due 2033 (the "2033 Senior Notes") in a public offering. The
proceeds from the 2033 Senior Notes were used to repay the outstanding
borrowings under the Company's revolving credit facility and to repay in full
the principal amount of $66.5 million of the Matured Senior Notes. The 2033
Senior Notes, which were issued at par value, will mature on May 15, 2033 and
are redeemable at par at the option of the Company, in whole or in part, at any
time on or after May 15, 2008. The 2033 Senior Notes are


                                      -13-
<PAGE>
not redeemable at the option of any holder of the notes prior to maturity nor
are they entitled to any sinking fund redemptions. Interest on the 2033 Senior
Notes is payable quarterly on February 15, May 15, August 15 and November 15 of
each year. The 2033 Senior Notes are senior unsecured obligations of the Company
and, as such, are effectively subordinated to all claims of secured creditors of
the Company and its subsidiaries and to claims of unsecured creditors of the
Company's subsidiaries, including the insurance subsidiaries' obligations to
policyholders. As a result of the issuance of the 2033 Senior Notes, under the
terms of the Company's revolving credit facility, the maximum amount of
borrowings available to the Company thereunder was reduced from $150 million to
$100 million and the facility was converted to an unsecured facility, with
collateral being released to the Company. The 2033 Senior Notes were issued in
denominations of $25 and multiples of $25 and are listed on the New York Stock
Exchange. See Note D to the Consolidated Financial Statements.

In May 2003, Delphi Financial Statutory Trust I (the "Trust"), a subsidiary of
the Company, issued $20.0 million liquidation amount of Floating Rate Capital
Securities (the "2003 Capital Securities") in a private placement. In connection
with the issuance of the 2003 Capital Securities and the related purchase by the
Company of all of the common securities of the Trust (the "2003 Common
Securities" and, collectively with the 2003 Capital Securities, the "Trust
Securities"), the Company issued $20.6 million principal amount of floating rate
junior subordinated deferrable interest debentures, due 2033 (the "2003 Junior
Debentures"). Interest on the 2003 Junior Debentures is payable quarterly on
February 15, May 15, August 15 and November 15 of each year. The interest rate
on the 2003 Junior Debentures resets quarterly to a rate equal to the London
interbank offered interest rate for three-month U.S. dollar deposits, plus 4.10%
(not to exceed 12.50%). The weighted average interest rate on the outstanding
advances was 5.56% and 5.31% for the years ended December 31, 2004 and 2003,
respectively. The distribution and other payment dates on the Trust Securities
correspond to the interest and other payment dates on the 2003 Junior
Debentures. The 2003 Junior Debentures are unsecured and subordinated in right
of payment to all of the Company's existing and future senior indebtedness.
Beginning in May 2008, the Company will have the right to redeem the 2003 Junior
Debentures, in whole or in part, at a price equal to 100% of the principal
amount of the debentures, plus accrued and unpaid interest to the date of
redemption.

ITEM 2. PROPERTIES

The Company leases its principal executive office at 1105 North Market Street,
Suite 1230, Wilmington, Delaware under an operating lease expiring in October
2009. RSLIC leases its administrative office at 2001 Market Street, Suite 1500,
Philadelphia, Pennsylvania, under an operating lease expiring in June 2009. SNCC
owns its home office building at 2043 Woodland Parkway, Suite 200, St. Louis,
Missouri, which consists of approximately 58,000 square feet. SNCC also owns a
neighboring office building located at 2029 Woodland Parkway, St. Louis,
Missouri. The building consists of approximately 17,000 square feet and is
largely occupied by SNCC with a small portion leased to third parties. DCM and
FRSLIC lease their offices at 153 East 53rd Street, 49th Floor, New York, New
York under an operating lease expiring in July 2008. In the fourth quarter of
2004, the Company entered into a lease expiring in November 2010 for
approximately 36,000 square feet in New York, New York to which space DCM and
FRSLIC will relocate their offices during 2005. DCM and FRSLIC intend to sublet
their existing office space to third parties in 2005. Matrix leases its
principal office at 5225 Hellyer Avenue, Suite 210, San Jose, California under
an operating lease expiring in December 2005. The Company also maintains sales
and administrative offices throughout the country to provide nationwide sales
support and service existing business.

ITEM 3. LEGAL PROCEEDINGS

In the course of its business, the Company is a party to litigation and other
proceedings, primarily involving its insurance operations. In some cases, these
proceedings entail claims against the Company for punitive damages and similar
types of relief. The ultimate disposition of such pending litigation and
proceedings is not expected to have a material adverse effect on the Company's
financial position. In addition, incident to its discontinued products, the
Company has been and is currently a party to various arbitrations arising out of
accident and health reinsurance arrangements in which it and other companies
formerly were participating reinsurers. During the second quarter of 2004, the
Company, along with other former participants, reached a settlement resolving
the matters in dispute in one of these arbitrations, and a hearing in another is
scheduled to be held in the second quarter of 2005. The Company increased its
reserves related to the reinsurance business in dispute in the settled
arbitration by a total of $5.5 million during the year ended December 31, 2004.
The Company believes that it has substantial defenses upon which to contest the
claims made in the remaining arbitration, although it is not possible to predict
the ultimate outcome of this arbitration. In the opinion of management, such
arbitration, when ultimately resolved, will not have an adverse effect on the
Company's financial position.


                                      -14-
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.


ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY

The table below presents certain information concerning each of the executive
officers of the Company:

<TABLE>
<CAPTION>
     Name                        Age      Position
     --------------------------------------------------------------------------------------------------------------
<S>                             <C>       <C>
     Robert Rosenkranz            62      Director of the Company; Chairman of the Board, President and Chief
                                          Executive Officer of the Company; Chairman of the Board of RSLIC
     Robert M. Smith, Jr.         53      Director and Executive Vice President of the Company
     Chad W. Coulter              42      Vice President, Secretary and General Counsel of the Company; Vice
                                          President, General Counsel and Assistant Secretary of RSLIC
     Thomas W. Burghart           46      Vice President and Treasurer of the Company and RSLIC
     Lawrence E. Daurelle         53      Director of the Company and President and Chief Executive Officer of RSLIC
     Harold F. Ilg                57      Director of the Company and Chairman of the Board of SNCC
</TABLE>

Mr. Rosenkranz has served as the President and Chief Executive Officer of the
Company since May 1987 and has served as Chairman of the Board of Directors of
the Company since April 1989. He also serves as Chairman of the Board or as a
Director of the Company's principal subsidiaries. Mr. Rosenkranz, by means of
beneficial ownership of the corporate general partner of Rosenkranz & Company
and direct or beneficial ownership, has the power to vote all of the outstanding
shares of Class B Common Stock, which represent 49.9% of the voting power of the
Company's common stock as of March 1, 2005.

Mr. Smith has served as Executive Vice President of the Company and DCM since
November 1999 and as a Director of the Company since January 1995. He has also
served as the Chief Investment Officer of RSLIC and FRSLIC since April 2001.
From July 1994 to November 1999, he served as Vice President of the Company and
DCM. Mr. Smith also serves as a Director of the Company's principal
subsidiaries.

Mr. Coulter has served as Vice President and General Counsel of the Company and
as Vice President, General Counsel and Assistant Secretary of RSLIC, FRSLIC and
RSLIC-Texas since January 1998, and has served as Secretary of the Company since
May 2003. He also served for RSLIC in similar capacities from February 1994 to
August 1997, and in various capacities from January 1991 to February 1994. From
August 1997 to December 1997, Mr. Coulter was Vice President and General Counsel
of National Life of Vermont.

Mr. Burghart has served as Vice President and Treasurer of the Company since
April 2001 and as Vice President and Treasurer of RSLIC, FRSLIC and RSLIC-Texas
since October 2000. From March 1992 to September 2000, he served as the Second
Vice President, Actuarial Statements, of RSLIC.

Mr. Daurelle has served as a Director of the Company since August 2002. He also
has served as President and Chief Executive Officer of RSLIC, FRSLIC and
RSLIC-Texas since October 2000. He served as Vice President and Treasurer of the
Company from August 1998 to April 2001. He also serves on the Board of Directors
of RSLIC, FRSLIC and RSLIC-Texas. From May 1995 to October 2000, Mr. Daurelle
was Vice President and Treasurer of RSLIC, FRSLIC and RSLIC-Texas.

Mr. Ilg has served as a Director of the Company since August 2002. He also has
served as Chairman of the Board of SNCC since January 1999. He serves on the
Board of Directors of RSLIC and FRSLIC. From April 1999 until October 2000, he
served as President and Chief Executive Officer of RSLIC, FRSLIC, and
RSLIC-Texas. Prior to January 1999, he served as Vice Chairman of the Board of
SNCC, where he has been employed in various capacities since 1978.


                                      -15-
<PAGE>
                                     PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

The closing price of the Company's Class A Common Stock was $45.25 on March 1,
2005. There were approximately 3,400 holders of record of the Company's Class A
Common Stock as of March 1, 2005.

The Company's Class A Common Stock is listed on the New York Stock Exchange
under the symbol DFG. The following table sets forth the high and low sales
prices for the Company's Class A Common Stock and the cash dividends paid per
share for the Company's Class A and Class B Common Stock.

<TABLE>
<CAPTION>
                                                                   High              Low           Dividends
                                                              ------------      ------------     ------------
<S>                                                           <C>               <C>              <C>
         2003:    First Quarter.............................. $  26.46          $  21.73         $   0.05
                  Second Quarter.............................    31.77             25.67             0.05
                  Third Quarter..............................    33.63             30.33             0.05
                  Fourth Quarter.............................    36.88             31.08             0.08

         2004:    First Quarter.............................. $  42.30          $  35.99         $   0.08
                  Second Quarter.............................    44.53             36.29             0.08
                  Third Quarter..............................    44.85             38.82             0.08
                  Fourth Quarter.............................    47.60             37.66             0.08
</TABLE>


In 2001, the Company's Board of Directors approved the initiation of a quarterly
cash dividend payable on the Company's Class A Common Stock and Class B Common
Stock. The quarterly cash dividend was $0.05 per share during the first three
quarters of 2003. In the fourth quarter of 2003, the Company's Board of
Directors increased the cash dividend by 50% to $0.08 per share. In the first
quarter of 2005, the cash dividend declared by the Company's Board of Directors
was increased by 12.5% to $0.09 per share, and was paid on the Company's Class A
Common Stock and Class B Common Stock on March 9, 2005. The Company intends to
continue to pay a quarterly dividend at this level. However, the declaration and
payment of such dividends, including the amount and frequency of such dividends,
is at the discretion of the Board and depends upon many factors, including the
Company's consolidated financial position, liquidity requirements, operating
results and such other factors as the Board may deem relevant. Cash dividend
payments are permitted under the respective terms of the Company's $100.0
million revolving credit facility subject to certain restrictions and covenants
and the 2033 Senior Notes. See Note K to the Consolidated Financial Statements.

In addition, dividend payments by the Company's insurance subsidiaries to the
Company are subject to certain regulatory restrictions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and "Business - Regulation."


                                      -16-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

The selected financial data below should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and related notes.

<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                   --------------------------------------------------------------------
                                                       2004          2003         2002           2001           2000
                                                   ----------    ----------    ----------     ----------     ----------
INCOME STATEMENT DATA:                                   (dollars and shares in thousands, except per share data)
<S>                                                <C>           <C>           <C>            <C>            <C>
  Insurance premiums and fee income:
    Core group employee benefit products........   $  784,990    $  673,653    $  559,174     $  452,158     $  400,405
    Non-core group employee benefit products(1).       25,586        22,383        49,325         35,836         47,285
    Asset accumulation products.................        3,335         4,158         2,645          3,088          2,551
    Other.......................................       23,686        18,893        16,713         16,122         16,116
                                                   ----------    ----------    ----------     ----------     ----------
                                                      837,597       719,087       627,857        507,204        466,357
  Net investment income(2)......................      202,774       186,366       162,036        157,509        184,576
  Net realized investment gains (losses)(3).....       15,460        12,724       (28,469)       (70,289)      (138,047)
  (Loss) gain on extinguishment of debt and
    capital securities(2).......................           --            --          (332)        11,456             --
                                                   ----------    ----------    ----------     ----------     ----------
    Total revenue...............................    1,055,831       918,177       761,092        605,880        512,886

  Income (loss) from continuing operations(4) ..      123,543        98,916        60,652          6,505         (3,293)

  Net income (loss)(4)..........................      123,543        98,916        60,652          6,505         (3,293)

BASIC RESULTS PER SHARE(4)(5):

  Income (loss) from continuing operations......   $     3.87    $     3.17    $     1.95     $     0.21     $    (0.11)
  Net income (loss).............................         3.87          3.17          1.95           0.21          (0.11)
  Weighted average shares outstanding...........       31,952        31,208        31,139         30,848         30,582

DILUTED RESULTS PER SHARE(4)(5):

  Income (loss) from continuing operations......   $     3.75    $     3.09    $     1.90     $     0.21     $    (0.11)
  Net income (loss).............................         3.75          3.09          1.90           0.21          (0.11)
  Weighted average shares outstanding...........       32,941        32,023        31,887         31,629         30,582

OTHER DATA:

  Cash dividends paid per share(6):.............   $     0.32    $     0.23    $     0.20     $     0.20     $       --
  Diluted book value per share(7)...............        29.36         25.49         21.83          19.00          17.91
</TABLE>

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                      ----------------------------------------------------------------------
                                                         2004           2003           2002           2001           2000
                                                      ----------     ----------     ----------     ----------     ----------
BALANCE SHEET DATA:                                                           (dollars in thousands)
<S>                                                   <C>            <C>            <C>            <C>            <C>
  Total investments.............................      $3,541,076     $3,202,754     $2,816,051     $2,427,214     $2,475,945
  Total assets..................................       4,829,467      4,177,532      3,734,942      3,336,146      3,440,010
  Corporate debt(2)(8)..........................         157,750        143,750        118,139        125,675        267,770
  Junior subordinated deferrable interest
    debentures underlying company-obligated
    mandatorily redeemable capital securities
    issued by unconsolidated subsidiaries(9)....          59,762             --             --             --             --
  Company-obligated mandatorily redeemable
    capital securities of subsidiaries(2)(9)....              --         56,050         36,050         36,050        100,000
  Shareholders' equity..........................         939,848        798,440        681,655        581,994        538,193
  Corporate debt to total capitalization
    ratio(10)...................................           13.6%          14.4%          14.1%          16.9%          29.6%

</TABLE>

(1)   Non-core group employee benefit products include LPTs, primary workers'
      compensation, bail bond insurance, workers' compensation and property
      catastrophe reinsurance, and reinsurance facilities. Premiums from
      non-core group employee benefit products include premiums from LPTs, which
      are episodic in nature, of $13.9 million, $4.3 million, $26.8 million, $0
      and $5.3 million, in 2000, 2001, 2002, 2003 and 2004, respectively. See
      "Business - Group Employee Benefit Products" and "Business - Reinsurance."

(2)   Net investment income declined in 2001 and 2002 primarily due to the
      Company's liquidation during the fourth quarter of 2000 of a substantial
      majority of the investments of its investment subsidiaries. In 2001, the
      Company used the proceeds from these sales to repay $150.0 million of
      outstanding borrowings under its revolving credit facilities, to
      repurchase $64.0 million liquidation amount of the Capital Securities and
      to


                                      -17-
<PAGE>
      repurchase $8.0 million principal amount of the Matured Senior Notes. See
      "Business - Other Transactions." The Company recognized a gain on
      extinguishment of debt and capital securities of $11.5 million in
      connection with these repurchases. In the second quarter of 2002, the
      Company repurchased $10.5 million aggregate principal amount of the
      Matured Senior Notes and recognized a loss on extinguishment of debt of
      $0.3 million in connection with this repurchase.

(3)   In 2004, 2003, 2002 and 2001, the Company recognized pre-tax losses of
      $3.9 million, $13.0 million, $54.1 million and $79.3 million,
      respectively, due to the other than temporary declines in the market
      values of certain securities, which are reported as net realized
      investment losses. In 2000, the Company realized losses of $72.5 million,
      related to the liquidation of a substantial majority of the investments of
      its investment subsidiaries, and $58.5 million, on closed U.S. Treasury
      futures and option contracts.

(4)   Results for 2001 include a charge of $0.91 per diluted share or $28.8
      million, net of an income tax benefit of $15.5 million and reinsurance
      coverages of $21.8 million, for reserve strengthening primarily related to
      an unusually high number of large losses in the Company's excess workers'
      compensation business. Included in this charge, on a pre-tax basis, are
      additions to excess workers' compensation case reserves of $9.0 million
      and incurred but not reported ("IBNR") reserves of $24.0 million. This
      charge also includes reported workers' compensation losses of $6.3 million
      and a $5.0 million addition to long-term disability IBNR reserves
      attributable to the terrorist attacks on the World Trade Center. In the
      years subsequent to 2001, the number of large losses experienced by the
      Company returned to the Company's pre-2001 historical average.

      During the second half of 2004, the Company's income taxes payable was
      reduced by $6.6 million primarily from the favorable resolution of
      Internal Revenue Service ("IRS") audits of the 1998 through 2002 tax
      years. This reduction represented the release of previous accruals for
      potential audit adjustments which were subsequently settled or eliminated
      and the further refinement of existing tax exposures.

      Income (loss) from continuing operations and net income (loss) include
      realized investment gains (losses), net of federal income tax expense
      (benefit) and the (loss) gain on extinguishment of debt and capital
      securities, net of federal income tax (benefit) expense, as follows:

<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                    -------------------------------------------------------------------
                                                       2004         2003          2002           2001           2000
                                                    ----------    ---------    ----------     ----------     ----------
                                                                (dollars in thousands, except per share data)
<S>                                                 <C>           <C>          <C>            <C>            <C>
Realized investment gains (losses), net of
  income tax expense (benefit)....................  $   10,049    $   8,271    $  (18,505)    $  (45,688)    $  (89,731)
Basic per share amount............................        0.32         0.26         (0.59)         (1.48)         (2.94)
Diluted per share amount..........................        0.30         0.26         (0.58)         (1.44)         (2.94)

(Loss) gain on extinguishment of debt and capital
  securities, net of income tax (benefit) expense.          --           --          (216)         7,446             --
Basic per share amount............................          --           --         (0.01)          0.24             --
Diluted per share amount..........................          --           --         (0.01)          0.24             --
</TABLE>

(5)   In computing the earnings per share amount for 2000, equivalent shares
      attributable to in-the-money stock options, which totaled 1.0 million,
      were not considered in the calculation of these per share amounts since
      the inclusion of these equivalent shares would have diluted the loss from
      continuing operations.

(6)   In 2001, the Company's Board of Directors approved the initiation of a
      quarterly cash dividend payable on the Company's outstanding Class A and
      Class B Common Stock. The quarterly cash dividend was $0.05 per share
      during 2001, 2002 and the first three quarters of 2003. In the fourth
      quarter of 2003, the Company's Board of Directors increased the cash
      dividend to $0.08 per share. During 2004, 2003, 2002 and 2001, the Company
      paid cash dividends on its capital stock in the amount of $10.1 million,
      $7.4 million, $6.0 million and $5.7 million, respectively. See Note K to
      the Consolidated Financial Statements.

(7)   Diluted book value per share is calculated by dividing shareholders'
      equity (as determined in accordance with GAAP), as increased by the
      proceeds and tax benefit from the assumed exercise of outstanding
      in-the-money stock options, by total shares outstanding, also increased by
      shares issued upon the assumed exercise of the options and deferred
      shares.

(8)   In May 2003, the Company issued $143.8 million of the 2033 Senior Notes.
      See "Business - Other Transactions" and Note D to the Consolidated
      Financial Statements.

(9)   In May 2003, the Trust issued $20.0 million liquidation amount of 2003
      Capital Securities in a private placement. See "Business - Other
      Transactions" and Note J to the Consolidated Financial Statements.

      As of March 31, 2004, the Company adopted revised Financial Accounting
      Standards Board Interpretation ("FIN") No. 46, "Consolidation of Variable
      Interest Entities." The revised interpretation changed the conceptual
      framework for determining if an entity holds a controlling interest in a
      variable interest entity and required the Company to deconsolidate its
      subsidiaries that hold junior subordinated deferrable interest debentures
      of the Company which underlie the Company-obligated mandatorily redeemable
      capital securities of these subsidiaries. Therefore, the Company presented
      in its consolidated financial statements the junior subordinated
      deferrable interest debentures of $59.8 million as a liability and its
      interest of $3.7 million in the subsidiaries that hold these debentures as
      a component of other assets. The adoption of revised FIN No. 46 did not
      have a material effect on the Company's financial position, results of
      operations or ability to comply with its debt covenants.

(10)  The corporate debt to total capitalization ratio is calculated by dividing
      long-term corporate debt by the sum of the Company's long-term corporate
      debt, junior subordinated deferrable interest debentures underlying
      company-obligated mandatorily redeemable capital securities issued by
      unconsolidated subsidiaries/Company-obligated mandatorily redeemable
      capital securities of subsidiaries and shareholders' equity.


                                      -18-
<PAGE>
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 group life, disability, and excess workers'
compensation 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 and control administrative expenses. The
Company transfers its exposure to some group employee benefit risks through
reinsurance ceded arrangements with other insurance and reinsurance companies.
Accordingly, the profitability of group employee benefit products is affected by
the amount, cost and terms of reinsurance obtained by the Company. The
profitability of certain group employee benefit products is also affected by the
difference between the yield achieved on invested assets and the discount rate
used to calculate the related reserves. The Company is continuing to experience
favorable market conditions for its excess workers' compensation products, due
to higher primary workers' compensation rates. For its other group employee
benefit products, the Company is maintaining its underwriting discipline under
competitive market conditions, and is continuing to increase the size of its
sales force in order 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 it believes to offer opportunities
for superior profitability.

The Company also operates an asset accumulation business that focuses primarily
on offering fixed annuities to individuals. Deposits from the Company's asset
accumulation business consist of new annuity sales, which 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 to annuity holders. The Company is disciplined in setting
the crediting rates offered on its asset accumulation products in order to
achieve its targeted 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.

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. 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 is presented below under the caption "Critical Accounting Policies" 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 actual results to ultimately differ materially from those
described below can be found under the caption "Forward-Looking Statements And
Cautionary Statements Regarding Certain Factors That May Affect Future Results."

RESULTS OF OPERATIONS

2004 COMPARED TO 2003

Summary of Results. Net income was $123.5 million, or $3.75 per diluted share,
in 2004 as compared to $98.9 million, or $3.09 per diluted share, in 2003. Net
income in 2004 and 2003 included realized investment gains (net of the related
income tax expense) of $10.0 million, or $0.30 per diluted share, and $8.3
million, or $0.26 per diluted share, respectively. The increase in net income in
2004 is attributable to growth in income from group employee benefit products,
net investment income and a reduction in income tax expense. Premiums from the
Company's core group employee benefit products increased 17% in 2004 and the
combined ratio (loss ratio plus expense ratio) was modestly higher than in 2003.
The weighted average annual crediting rate on the Company's asset accumulation
products, which reflects the effects of the first year bonus crediting rate on
certain newly issued products, decreased from 5.5% in 2003 to 4.7% in 2004. Net
investment income in 2004, which increased 9% from 2003, reflects an 11%
increase in average invested assets. In addition, income tax expense was reduced
by $6.6 million during 2004 primarily resulting from the favorable resolution of
IRS audits of the 1998 through 2002 tax years. This reduction represented the
release of previous accruals for potential audit adjustments which were
subsequently settled or eliminated and the further refinement of existing tax
exposures.


                                      -19-
<PAGE>
Premium and Fee Income. Premium and fee income in 2004 was $837.6 million as
compared to $719.1 million in 2003, an increase of 16%. Premiums from core group
employee benefit products increased 17% to $785.0 million in 2004 from $673.7
million in 2003. This increase reflects normal growth in employment and salary
levels for the Company's existing customer base, price increases, new business
production and a decrease in premiums ceded by the Company to reinsurers for
these products. Core group employee benefit products include group life,
disability, excess workers' compensation, travel accident and dental insurance.
See "Business - Group Employee Benefit Products." Premiums from excess workers'
compensation insurance for self-insured employers increased 26% to $190.8
million in 2004 from $151.5 million in 2003. This increase was primarily due to
the favorable pricing environment and demand for this product as a result of
higher primary workers' compensation rates. SNCC obtained average price
increases of 9% in connection with its renewals of insurance coverage during
2004, and has continued to obtain significant improvements in contract terms, in
particular higher SIR levels, in these renewals. On average, SIRs increased 8%
in 2004. SNCC has continued to obtain moderate price increases on its 2005
renewals and SIR levels on average are up 8%. In addition, retention of existing
customers for excess workers' compensation products in 2004 was higher than in
2003. Excess workers' compensation new business production, which represents the
amount of new annualized premium sold, was $28.4 million in 2004 as compared
with exceptionally strong production in 2003 of $45.1 million. The significantly
higher renewal ratio and rate increases offset the decline in new business
production as the Company focused on achieving rate increases on its existing
business and maintained pricing and underwriting discipline as to new sales.
Excess workers' compensation new business production for the important January
renewal season increased 53% to $8.9 million in 2005 from $5.8 million in 2004.
Premiums from the Company's other core group employee benefit products increased
14% to $594.2 million in 2004 from $522.1 million in 2003, reflecting new
business production and a decrease in premiums ceded by the Company to
reinsurers for these products. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources
- Reinsurance." New business production for the Company's other core group
employee benefit products was $180.9 million in 2004 and $175.1 million in 2003.
The 2004 production level for these products reflects the Company's focus on the
small case niche (insured groups of 10 to 500 individuals) which resulted in a
22% increase in production based on the number of cases sold as compared to
2003. The Company continues to maintain its underwriting discipline under
competitive market conditions for these products and to implement price
increases for certain existing disability and group life customers.

Non-core group employee benefit products include LPTs, primary workers'
compensation, bail bond insurance, workers' compensation and property
catastrophe reinsurance, and reinsurance facilities. See "Business - Group
Employee Benefit Products" and "Business - Reinsurance." Premiums from non-core
group employee benefit products were $25.6 million in 2004 as compared to $22.4
million in 2003.

Deposits from the Company's asset accumulation products were $133.1 million in
2004 as compared to $100.6 million in 2003. These deposits consist of new
annuity sales, which are recorded as liabilities rather than as premiums. The
Company continues to maintain its discipline in setting the crediting rates
offered on its asset accumulation products, since the interest rate spreads
available on these products remained below average throughout 2003 and 2004. The
increase in deposits from the Company's asset accumulation products in 2004 was
primarily due to an increase in the number of independent agents and marketing
companies distributing the Company's annuity products. The Company plans to
maintain its discipline in setting the crediting rates offered on its asset
accumulation products in 2005 in order to achieve its targeted interest rate
spreads on these products.

Net Investment Income. Net investment income in 2004 was $202.8 million as
compared to $186.4 million in 2003, an increase of 9%. The level of net
investment income in the 2004 period reflects an increase in average invested
assets in 2004 partially offset by a decrease in the tax equivalent weighted
average annual yield. The tax equivalent weighted average annual yield on
invested assets was 6.4% on average invested assets of $3,272.8 million in 2004
and 6.5% on average invested assets of $2,948.1 million in 2003.

Net Realized Investment Gains. Net realized investment gains were $15.5 million
in 2004 as compared to $12.7 million in 2003. The Company's investment strategy
results in periodic sales of securities and, therefore, the recognition of
realized investment gains and losses. During 2004 and 2003, the Company
recognized $19.4 million and $25.7 million, respectively, of net gains on the
sales of securities. The Company monitors its investments on an ongoing basis.
When the market value of a security declines below its cost, and management
judges the decline to be other than temporary, the security is written down to
fair value, and the decline is reported as a realized investment loss. In 2004
and 2003, the Company recognized $3.9 million and $13.0 million, respectively,
of losses due to the other than temporary declines in the market values of
certain fixed maturity securities.

The losses of this type in 2004 ($2.5 million on an after-tax basis) resulted
primarily from credit quality-related deterioration in certain municipal and
asset-backed securities and the Company may recognize additional losses of this


                                      -20-
<PAGE>
type in the future. The Company anticipates that if certain other existing
declines in security values are determined to be other than temporary, it may
recognize additional investment losses in the range of $2 million to $5 million,
on an after-tax basis, with respect to the relevant securities. However, the
extent of any such losses will depend on future market developments and changes
in security values, and such losses may be outside this range. The Company
continuously monitors the affected securities pursuant to its procedures for
evaluation for other than temporary impairment in valuation. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Critical Accounting Policies" 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. There can be
no assurance that the Company will realize investment gains in the future in an
amount sufficient to offset any such losses.

Benefits and Expenses. Policyholder benefits and expenses were $869.6 million as
compared to $756.6 million in 2003, an increase of 15%. 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
the Company's group employee benefits segment was 94.7% in 2004 and 94.3% in
2003. Benefits and expenses related to the Company's asset accumulation products
decreased $3.0 million primarily due to a decrease in the weighted average
annual crediting rate on these products, which reflects the effects of the first
year bonus crediting rate on certain newly issued products, from 5.5% in 2003 to
4.7% in 2004.

Income Tax Expense. Income tax expense was $44.2 million in 2004 as compared to
$44.6 million in 2003. The Company's effective tax rate was 26.3% in 2004 and
31.1% in 2003. The decrease in the Company's effective tax rate during 2004
reflects a $6.6 million reduction in federal income tax expense primarily
resulting from the favorable resolution of IRS audits of the 1998 through 2002
tax years. This reduction represents the release of previous accruals for
potential audit adjustments which were subsequently settled or eliminated and
further refinement of existing tax exposures.

2003 COMPARED TO 2002

Summary of Results. Net income was $98.9 million, or $3.09 per diluted share, in
2003 as compared to $60.7 million, or $1.90 per diluted share, in 2002. Net
income in 2003 and 2002 included realized investment gains (losses) (net of the
related income tax effects) of $8.3 million, or $0.26 per diluted share, and
$(18.5) million, or $(0.58) per diluted share, respectively. Net income in 2002
also included a loss on extinguishment of debt (net of an income tax benefit) of
$0.2 million, or $0.01 per diluted share. The increase in net income in 2003 is
also attributable to growth in income from group employee benefit products and
net investment income partially offset by an increase in interest expense.
Premiums from the Company's core group employee benefit products increased 20%
in 2003 and the combined ratio (loss ratio plus expense ratio) was modestly
lower than in 2002. Net investment income increased 15% in 2003 primarily due to
a 15% increase in average invested assets. The increase in interest expense
resulted from the Company's issuance of the 2033 Senior Notes and the 2003
Capital Securities.

Premium and Fee Income. Premium and fee income in 2003 was $719.1 million as
compared to $627.9 million in 2002, an increase of 15%. Premiums from core group
employee benefit products increased 20% to $673.7 million in 2003 from $559.2
million in 2002. This increase reflects normal growth in employment and salary
levels for the Company's existing customer base, price increases, and strong
production of new business. Core group employee benefit products include group
life, disability, excess workers' compensation, travel accident and dental
insurance. Premiums from excess workers' compensation insurance for self-insured
employers increased 45% to $151.5 million in 2003 from $104.2 million in 2002.
This increase was primarily due to the favorable pricing environment and strong
demand for this product driven by a growing shift among employers toward
self-insuring their workers' compensation risks due to higher primary workers'
compensation rates. SNCC obtained average price increases above 15% in
connection with its renewals of insurance coverage during 2003, and continued to
obtain significant improvements in contract terms, in particular higher SIR
levels, in these renewals. On average, SIRs increased 13% in 2003. New business
production, which represents the amount of new annualized premium sold, for
excess workers' compensation products increased 46% to $45.1 million in 2003
from $30.8 million in 2002. In addition, retention of existing customers for
excess workers' compensation products in 2003 was higher than in 2002. Premiums
from the Company's other core group employee benefit products increased 15% to
$522.1 million in 2003 from $455.0 million in 2002, reflecting an improvement in
the retention of existing customers and strong production growth in 2002. New
business production for the Company's other core group employee benefit products
was $175.1 million in 2003 and $170.4 million in 2002. The level of production
achieved in 2003 reflected the Company's maintaining its underwriting discipline
under competitive market conditions for these products and across-the-board
price increases on new long-term disability business to reflect the lower
discount rates on reserves implemented in 2003.


                                      -21-
<PAGE>
Non-core group employee benefit products include LPTs, primary workers'
compensation, bail bond insurance, workers' compensation and property
catastrophe reinsurance, and reinsurance facilities. Premiums from non-core
group employee benefit products were $22.4 million in 2003 as compared to $49.3
million in 2002. Premiums from non-core group employee benefit products in 2002
included a high level of premiums from LPTs, which are episodic in nature. The
2003 period did not include any premiums from LPTs.

Deposits from the Company's asset accumulation products were $100.6 million in
2003 as compared to $135.0 million in 2002. These deposits consist of new
annuity sales, which are recorded as liabilities rather than as premiums. The
Company continued to maintain its discipline in setting the crediting rates
offered on its asset accumulation products, since the interest rate spreads
available on these products remained below average throughout 2002 and 2003. The
decrease in deposits from the Company's asset accumulation products in 2003 was
primarily due to strong equity market performance during the second half of 2003
and the continuing low interest rate environment which reduced demand for fixed
annuity products.

Net Investment Income. Net investment income in 2003 was $186.4 million as
compared to $162.0 million in 2002, an increase of 15%. This increase reflects
an increase in average invested assets in 2003. The tax equivalent weighted
average annual yield on invested assets was 6.5% on average invested assets of
$2,948.1 million in 2003 and 6.6% on average invested assets of $2,556.1 million
in 2002.

Net Realized Investment Gains (Losses). Net realized investment gains were $12.7
million in 2003 as compared to net realized investment losses of $28.5 million
in 2002. The Company's investment strategy results in periodic sales of
securities and, therefore, the recognition of realized investment gains and
losses. During 2003 and 2002, the Company recognized $25.7 million and $26.4
million, respectively, of net gains on the sales of securities. The Company
monitors its investments on an ongoing basis. When the market value of a
security declines below its cost, and management judges the decline to be other
than temporary, the security is written down to fair value, and the decline is
reported as a realized investment loss. In 2003 and 2002, the Company recognized
$13.0 million and $54.1 million, respectively, of losses due to the other than
temporary declines in the market values of certain fixed maturity and equity
securities.

Benefits and Expenses. Policyholder benefits and expenses were $756.6 million as
compared to $662.4 million in 2002, an increase of 14%. 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
the Company's group employee benefits segment was 94.3% in 2003 and 94.6% in
2002. Benefits and expenses related to the Company's asset accumulation products
increased by $5.4 million primarily due to an increase in average funds under
management from $799.8 million in 2002 to $891.2 million in 2003.

Interest Expense. Interest expense was $18.1 million in 2003 as compared to
$12.4 million in 2002, an increase of $5.7 million. This increase primarily
resulted from the Company's issuance of the 2033 Senior Notes and the 2003
Capital Securities in May 2003 and the fact that the 2033 Senior Notes and the
Matured Senior Notes were simultaneously outstanding until the Matured Senior
Notes could be repaid at their maturity in October 2003.

Income Tax Expense. Income tax expense was $44.6 million in 2003 as compared to
$25.6 million in 2002. The Company's effective tax rate was 31.1% in 2003 and
29.7% in 2002. The increase in the Company's effective tax rate during 2003 was
primarily due to an increase in income taxed at the Company's marginal tax rate
as a result of net realized investment gains in 2003 as compared to net realized
investment losses in 2002.

LIQUIDITY AND CAPITAL RESOURCES

General. The Company had approximately $79.1 million of financial resources
available at the holding company level at December 31, 2004, which was primarily
comprised of short-term investments, investments in the common stock of its
investment subsidiaries, and fixed maturity securities. The assets of the
investment subsidiaries are primarily invested in balances with independent
investment managers. A shelf registration statement is also in effect under
which securities yielding proceeds of up to $106.2 million may be issued by the
Company.

Other sources of liquidity at the holding company level include dividends paid
from subsidiaries, primarily generated from operating cash flows and
investments. During 2005, the Company's insurance subsidiaries will be
permitted, without prior regulatory approval, to make dividend payments totaling
$61.4 million. The Company's insurance subsidiaries may also pay additional
dividends with the requisite regulatory approvals. See "Business - Regulation."
In general, dividends from the Company's non-insurance subsidiaries are not
subject to regulatory or other restrictions. At December 31, 2004, the Company
had $86.0 million of borrowings available under its revolving credit facility.


                                      -22-
<PAGE>
The Company's current liquidity needs, in addition to funding its operating
expenses, include principal and interest payments on outstanding borrowings
under its revolving credit facility, interest payments on the 2033 Senior Notes,
and distributions on the Capital Securities and the 2003 Capital Securities. The
maximum amount of borrowings available under the Company's revolving credit
facility, which expires in December 2006, is $100.0 million. The Company intends
to obtain an extension of, or replace, the revolving credit facility prior to
its maturity. The 2033 Senior Notes mature in their entirety in May 2033 and are
not subject to any sinking fund requirements but are redeemable by the Company
at par at any time on or after May 15, 2008. The junior subordinated deferrable
interest debentures underlying the Capital Securities are not redeemable prior
to March 25, 2007. The junior subordinated deferrable interest debentures
underlying the 2003 Capital Securities are redeemable, in whole or in part,
beginning May 15, 2008. See Notes D and J to the Consolidated Financial
Statements.

The following table summarizes the Company's significant contractual obligations
at December 31, 2004 and the future periods in which such obligations are
expected to be settled in cash. The 2033 Senior Notes and the junior
subordinated deferrable interest debentures underlying company-obligated
mandatorily redeemable capital securities issued by unconsolidated subsidiaries
are assumed to be repaid on their respective maturity dates. Additional details
regarding these obligations are provided in the notes to the consolidated
financial statements, as referenced in the table:

                             CONTRACTUAL OBLIGATIONS

<TABLE>
<CAPTION>
                                                                          Payments Due by Period
                                                     ----------------------------------------------------------------
                                                                  Less than        1 - 3        3 - 5      More than
                                                         Total       1 Year        Years        Years       5 Years
                                                     -----------  ---------     ----------   -----------  -----------
                                                                           (dollars in thousands)
<S>                                                  <C>          <C>           <C>          <C>          <C>
Other long-term liabilities (1)....................  $ 3,166,317  $ 433,515     $  596,119   $   436,014  $ 1,700,669
Corporate debt (Note D)............................      157,750     14,000              -             -      143,750
Interest on corporate debt (Note D) (2)............      328,596     11,972         23,438        23,000      270,186
Advances from Federal Home Loan Bank (Note E)......       85,000     30,000              -             -       55,000
Interest on advances from Federal
     Home Loan Bank (Note E).......................       63,962      4,690          8,212         8,212       42,848
Junior subordinated deferrable interest debentures
     underlying company-obligated mandatorily
     redeemable capital securities issued
     by unconsolidated  subsidiaries (Note J)......       59,762          -              -             -       59,762
Interest on junior subordinated deferrable interest
     debentures (Note J) (3).......................      112,385      4,649          9,299         9,302       89,135
Operating lease obligations (Note M)...............       42,208      9,953         18,986        11,407        1,862
                                                     -----------  ---------     ----------   -----------  -----------
     Total contractual obligations.................  $ 4,015,980  $ 508,779     $  656,054   $   487,935  $ 2,363,212
                                                     ===========  =========     ==========   ===========  ===========
</TABLE>

(1)   Other long-term liabilities consist of future policy benefits and unpaid
      claims and claim expenses relating to the Company's insurance products, as
      well as policyholder account balances. Substantially all of the amounts
      contained in this table with respect to such liabilities consist of
      estimates by the Company's management based on various actuarial and other
      assumptions relating to mortality, morbidity, claim termination and, as to
      policyholder account balances, the periods for which the related annuity
      and other contracts will remain in force and the crediting rates to be
      applied thereto in the future. In accordance with GAAP, a substantial
      portion of such liabilities, as they relate to the Company's insurance
      products, are carried on a discounted basis on its consolidated balance
      sheet; however, the amounts contained in this table are presented on an
      undiscounted basis. The actual payments relating to these liabilities will
      differ, both in amount and timing, from those indicated in this table. See
      "Critical Accounting Policies."

(2)   Primarily includes interest on the 2033 Senior Notes.

(3)   Includes interest on the outstanding junior subordinated debentures
      underlying the Capital Securities and the 2003 Junior Subordinated
      Debentures underlying the 2003 Capital Securities. Interest on the 2003
      Junior Subordinated Debentures was computed using the indexed rate in
      effect at December 31, 2004 of 6.38%.

Sources of liquidity available to the Company on a parent company-only basis,
including the undistributed earnings of its subsidiaries and additional
borrowings available under the Company's revolving credit facility, are expected
to exceed the Company's current and long-term cash requirements. The Company
from time to time engages in discussions with respect to acquiring blocks of
business and insurance and financial services companies, any of which could, if
consummated, be material to the Company's operations.

The principal liquidity requirements of the Company's insurance subsidiaries are
their contractual obligations to policyholders and other financing sources. The
primary sources of funding for these obligations, in addition to operating
earnings, are the marketable investments included in the investment portfolios
of these subsidiaries. The Company


                                      -23-
<PAGE>
actively manages its investment portfolio to match its invested assets and
related liabilities. The Company regularly analyzes the results of its
asset/liability matching through cash flow analysis and duration matching under
multiple interest rate scenarios. See "Asset/Liability Management and Market
Risk." Therefore, the Company believes that these sources of funding will be
adequate for its insurance subsidiaries to satisfy on both a short-term and
long-term basis these contractual obligations throughout their estimated or
stated period. However, if such contractual obligations were to arise more
rapidly or in greater amounts than anticipated in the Company's asset/liability
matching analysis, the Company could be required to sell securities earlier than
anticipated, potentially resulting in the realization of capital losses
(particularly, as regards fixed income securities, in a rising interest rate
environment), or to borrow funds from available credit sources, in order to fund
the payment of such obligations. In any of such events, the Company's results of
operations, liquidity or financial condition could be materially adversely
affected.

Cash Flows. Operating activities increased cash by $264.1 million, $237.5
million and $208.5 million in 2004, 2003, and 2002, respectively. Net investing
activities used $265.6 million of cash during 2004 primarily for the purchase of
securities, and financing activities provided $7.1 million of cash principally
due to deposits from asset accumulation products partially offset by the
repayment of certain advances from the Federal Home Loan Bank.

Share Repurchase Program. The Company's board of directors has authorized a
share repurchase program. Share repurchases are effected by the Company in the
open market or in negotiated transactions in compliance with the safe harbor
provisions of Rule 10b-18 under the Securities Exchange Act of 1934. Execution
of the share repurchase program is based on management's assessment of market
conditions for its common stock and other potential uses of capital. The Company
did not repurchase any shares in 2004. At December 31, 2004, the repurchase of
approximately 1.1 million shares remained authorized under this program. During
2004, the Company received 13,176 shares of the Company's Class A Common Stock
with an aggregate value of $0.3 million in liquidation of a partnership
interest.

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 $3,541.1 million at December
31, 2004, primarily consists of investments in fixed maturity securities and
short-term investments. During 2004, the market value of the Company's
investment portfolio, in relation to its amortized cost, remained at the same
level as in 2003, before related changes in the cost of business acquired of
$7.4 million and the income tax provision of $2.5 million. In addition, the
Company recognized pre-tax net investment gains of $15.5 million in 2004. The
weighted average credit rating of the Company's fixed maturity portfolio as
rated by Standard & Poor's Corporation was "AA" at December 31, 2004. While the
investment grade rating of the Company's fixed maturity portfolio addresses
credit risk, it does not address other risks, such as prepayment and extension
risks, which are discussed below.

At December 31, 2004, approximately 40% of the Company's total invested assets
were comprised of corporate fixed maturity securities. Eighty-seven percent of
the Company's corporate fixed maturity portfolio, based on fair values, has been
rated investment grade by nationally recognized statistical rating
organizations. Investment grade corporate fixed maturity securities are
distributed among the various rating categories as follows: AAA - 5%, AA - 8%, A
- 32%, and BBB - 42%. Corporate fixed maturity securities subject the Company to
credit risk and, to a lesser extent, interest rate risk. To reduce its exposure
to corporate credit risk, the Company diversifies its investments across
economic sectors, industry classes and issuers.

Mortgage-backed securities comprised 22% of the Company's total invested assets
at December 31, 2004. Ninety-eight percent of the Company's mortgage-backed
securities portfolio, based on fair values, has been rated as investment grade
by nationally recognized statistical rating organizations. Mortgage-backed
securities subject the Company to a degree of interest rate risk, including
prepayment and extension risk, which is generally a function of the sensitivity
of each security's underlying collateral to prepayments under varying interest
rate environments and the repayment priority of the securities in the particular
securitization structure. The Company seeks to limit the extent of this risk by
emphasizing the more predictable payment classes and securities with stable
collateral.

The Company, through its insurance subsidiaries, maintains a program in which
investments are financed using advances from various Federal Home Loan Banks.
The Company has utilized this program to manage the duration of its liabilities
and to earn spread income, which is the difference between the financing cost
and the earnings from the investments purchased with those funds. At December
31, 2004, the Company had outstanding advances of $85.0 million. The advances
were obtained at a fixed rate and have a weighted average term to maturity of
10.3 years. A total of $30.0 million of these advances will mature at various
times during 2005. During 2004, $95.0 million of Federal Home Loan Bank advances
matured and were repaid and $30.0 million of advances were obtained by the
Company. In addition, the Company has from time to time utilized reverse
repurchase agreements, futures and option contracts and interest rate and


                                      -24-
<PAGE>
credit default swaps in connection with its investment strategy. These
transactions may require the Company to maintain securities or cash on deposit
with the applicable counterparty as collateral. As the market value of the
collateral or contracts changes, the Company may be required to deposit
additional collateral or be entitled to have a portion of the collateral
returned to it. The Company also maintains a securities lending program under
which certain securities from its portfolio are loaned to other institutions for
short periods of time. The Company maintains full ownership rights to the
securities loaned and continues to earn interest and dividends on them. The
collateral received for securities loaned is recorded at the fair value of the
collateral, which is generally in an amount in excess of the market value of the
securities loaned. The Company's institutional lending agent monitors the market
value of the securities loaned and obtains additional collateral as necessary.
See Note F to the Consolidated Financial Statements.

The types and amounts of investments made by the Company's insurance
subsidiaries are subject to the insurance laws and regulations of their
respective states of domicile. Each of these states has comprehensive investment
regulations. In addition, the Company's revolving credit facility also contains
limitations, with which the Company is currently in compliance in all material
respects, on the composition of the Company's investment portfolio. The Company
also continually monitors its investment portfolio and attempts to ensure that
the risks associated with concentrations of investments in either a particular
sector of the market or a single entity are limited.

Asset/Liability Management and Market Risk. Because the Company's primary assets
and liabilities are financial in nature, the Company's consolidated financial
position and earnings are subject to risks resulting from changes in interest
rates. The Company manages this risk by active portfolio management focusing on
minimizing its exposure to fluctuations in interest rates by matching its
invested assets and related liabilities and by periodically adjusting the
crediting rates on its annuity products and the discount rate used to calculate
reserves on the Company's other products. In its asset/liability matching
process, the Company determines and monitors on a quarterly basis the duration
of its insurance liabilities in the aggregate and the duration of the investment
portfolio supporting such liabilities in order to ensure that the difference
between such durations, or the "duration gap," remains below an internally
specified maximum, and similarly determines and monitors the duration gap as
between its interest-sensitive liabilities, substantially all of which consist
of its asset accumulation products, and the components of its investment
portfolio supporting such liabilities in relation to a separate internally
specified maximum. As of December 31, 2004, the Company maintained these
duration gaps within the aforementioned maximums. In addition, the Company, at
times, has utilized futures and option contracts and interest rate or credit
default swaps agreements to reduce the risk associated with changes in the value
of its fixed maturity portfolio. At December 31, 2004, the Company had no
material outstanding futures or option contracts or interest rate or credit
default swap agreements. The Company, at times, may also invest in non-dollar
denominated fixed maturity securities that expose it to fluctuations in foreign
currency rates, and therefore, may hedge such exposure by using currency forward
contracts. The Company's investment in non-dollar denominated fixed maturity
securities during 2004 was less than 0.1% of total invested assets.

The Company regularly analyzes the results of its asset/liability matching
through cash flow analysis and duration matching under multiple interest rate
scenarios. These analyses enable the Company to measure the potential gain or
loss in fair value of its interest-rate sensitive financial instruments due to
hypothetical changes in interest rates. Based on these analyses, if interest
rates were to immediately increase by 10% from their year-end levels, the fair
value of the Company's interest-sensitive assets, net of corresponding changes
in the fair value of cost of business acquired and insurance and
investment-related liabilities, would decline by approximately $49.8 million at
December 31, 2004 as compared to a decline of approximately $29.2 million at
December 31, 2003. These analyses incorporate numerous assumptions and estimates
and assume no changes in the composition of the Company's investment portfolio
in reaction to such interest rate changes. Consequently, the results of this
analysis will likely be materially different from the actual changes experienced
under given interest rate scenarios.

The Company manages the composition of its borrowed capital by considering
factors such as the ratio of borrowed capital to total capital, future debt
requirements, the interest rate environment and other market conditions. At
December 31, 2004, a hypothetical 10% decrease in market interest rates would
cause a corresponding $11.0 million increase in the fair value of the Company's
fixed-rate corporate debt which matures in 2033 as compared to an increase of
$13.5 million at December 31, 2003. Because interest expense on the Company's
floating-rate corporate debt that was outstanding at December 31, 2004 would
have fluctuated as prevailing interest rates changed, changes in market interest
rates would not have materially affected its fair value.

Reinsurance. The Company cedes portions of the risks relating to its group
employee benefit products under indemnity reinsurance agreements with various
unaffiliated reinsurers. The Company pays reinsurance premiums generally based
upon percentages of the Company's premiums on the business reinsured. These
agreements expire at various intervals as to new risks, and replacement
agreements are negotiated on terms believed appropriate in light of current
market


                                      -25-
<PAGE>
conditions. During 2003, the Company replaced certain of its existing
reinsurance arrangements for its excess workers' compensation and long-term
disability products. Under the replacement arrangements for excess workers'
compensation products, the Company reinsures excess workers' compensation risks
between $5.0 million (compared to $3.0 million previously) and $50.0 million,
and a majority in proportionate amount of the risks between $50.0 million and
$100.0 million, per policy per occurrence. For long-term disability products
(effective October 1, 2003 for new policies and, for existing policies, the
earlier of the next policy anniversary date or October 1, 2004) the Company
reinsures risks in excess of $7,500 (compared to $2,500 previously) in benefits
per individual per month. These changes have reduced the reinsurance premiums
paid by the Company for these products. However, in the case of long-term
disability products, management does not believe that this reduction is
sufficient to compensate for the anticipated level of losses in the $2,500 to
$7,500 layer of monthly benefits for which the Company retains the risk under
the new reinsurance arrangement. The Company has implemented a variety of
initiatives, including pricing and underwriting initiatives, for these products;
however, there can be no assurance that such initiatives will be successful. If
such initiatives are not successful, the Company's results of operations could
be adversely affected. See "Forward-Looking Statements And Cautionary Statements
Regarding Certain Factors That May Affect Future Results."

RSLIC Performance-Contingent Options. In April 2004, the Company granted
performance-contingent incentive options to purchase 150,000 shares of the
Company's Class A Common Stock to each of the seven members of executive
management of RSLIC, for a total of 1,050,000 options, subject to approval by
the Company's stockholders at the 2004 annual meeting of the proposed increase
in the number of shares reserved for issuance under the Company's option plan
under which the options were granted by 1,000,000 shares. This approval has been
received. The options, which have a ten-year term and whose exercise price
equals the fair market value of a share of such stock (as determined in
accordance with the Company option plan under which the options were granted) on
the grant date, will become exercisable only to the extent that RSLIC - Texas,
RSLIC's parent company, meets specified cumulative financial performance targets
for the three or five fiscal year periods beginning with the current year;
otherwise, such options will be forfeited. These targets, as described below,
generally require that RSLIC Texas's aggregate consolidated Pre-Tax Operating
Income, as defined and computed under each of the related option agreements
("PTOI"), increases during these periods at an annual average rate of over 11%
for any of the options to become exercisable, and at an annual average rate of
at least 16% for the options to become fully exercisable.

75,000 of each executive's options will become exercisable if RSLIC Texas's
PTOI, for the three year performance period is at least $329.4 million;
otherwise, a reduced number of such options will become exercisable to the
extent that PTOI for such period exceeds $300.5 million, determined by
interpolating between zero and 75,000 according to where the PTOI amount falls
in the range between $300.5 million and $329.4 million.

150,000 of each executive's options (minus the number of any options that become
exercisable for the three year performance period) will become exercisable if
RSLIC-Texas's aggregate PTOI for the five year performance period is at least
$646.2 million; otherwise, a reduced number of such options will become
exercisable to the extent that PTOI for such period exceeds $559.9 million,
determined by interpolating between zero and 150,000 according to where the PTOI
amount falls in the range between $559.9 million and $646.2 million.

Under the option agreements, the formula for determining PTOI incorporates
certain adjustments in order to focus on the performance of RSLIC-Texas's
insurance operations; in particular, the formula excludes realized investment
gains and losses. Accordingly, the PTOI amounts that would result in the
applicable financial performance targets being met will not be the same as
RSLIC-Texas's income before income tax expense, calculated in accordance with
GAAP, for the relevant periods.

The Company believes that these options will provide substantial incentives for
these executives to contribute toward RSLIC-Texas's attaining the specified
targets, thereby enhancing the Company's financial performance; however, no
assurance can be given that such results will be achieved. During the second
quarter of 2004, the Company began recognizing compensation expense for these
options under the fair value recognition provisions of SFAS No. 123 over the
performance period. The compensation expense associated with these options will
not have a material effect on the Company's financial position or results of
operations.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements (as defined in the rules and
regulations of the Securities and Exchange Commission) that have or are
reasonably likely to have a material current or future effect on its financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.


                                      -26-
<PAGE>
CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with GAAP requires the
Company's 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. Management's
judgment is most critical in the estimation of its liabilities for future policy
benefits and unpaid claims and claim expenses and its assets for cost of
business acquired and in the valuation of its investments. A discussion of how
management applies these critical accounting policies follows.

Future Policy Benefits and Unpaid Claims and Claim Expenses. The Company
establishes reserves for future policy benefits and unpaid claims and claim
expenses relating to its insurance products. These reserves, which totaled
$1,663.9 million at December 31, 2004, represent management's best estimate of
future policy benefits and unpaid claims and claim expenses. The reserves are
calculated using various generally recognized actuarial methodologies and are
based upon assumptions that management believes are appropriate and which vary
by type of product. Annually, external actuarial experts also review the
Company's methodologies, assumptions and the resulting reserves. The Company's
projected ultimate insurance liabilities and associated reserves are estimates,
which are subject to variability. This variability arises because the factors
and events affecting the ultimate liability for claims have not all taken place,
and thus cannot be evaluated with certainty. The estimation process is complex
and involves information obtained from company-specific and industry-wide data,
as well as general economic information.

The most significant assumptions made in the estimation process for future
policy benefits relate to mortality, morbidity, claim termination and discount
rates. The reserves for unpaid claims and claim expenses are determined on an
individual basis for reported claims and estimates of IBNR losses are developed
on the basis of past experience. The most significant assumptions made in the
estimation process for unpaid claims and claim expenses are the trend in loss
costs, the expected frequency and severity of claims, changes in the timing of
the reporting of losses from the loss date to the notification date, and
expected costs to settle unpaid claims. The assumptions vary based on the year
the claim is incurred. At December 31, 2004, disability and primary and excess
workers' compensation reserves for unpaid claims and claim expenses with a
carrying value of $750.6 million have been discounted at a weighted average rate
of 5.4%, with the rates ranging from 3.7% to 7.5%. Disability reserves for
unpaid claims and claim expenses are discounted using interest rate assumptions
based upon projected portfolio yield rates for the assets supporting the
liabilities. The assets selected to support these liabilities produce cash flows
that are intended to match the timing and amount of anticipated claim and claim
expense payments. Primary and excess workers' compensation claim reserves are
discounted using interest rate assumptions based on the risk-free rate of return
for U.S. Government securities with a duration comparable to the expected
duration and payment pattern of the claims at the time the claims are settled.
The rates used to discount reserves are determined annually. The methods and
assumptions used to establish reserves for future policy benefits and unpaid
claims and claim expenses are continually reviewed and updated based on current
circumstances, and any resulting adjustments are reflected in earnings
currently. There have been no material changes in the actuarial assumptions
and/or methods from those used in the previous periods. If the Company's actual
loss experience from its current or discontinued products is different from the
Company's assumptions or estimates, the Company's reserves could be inadequate.
In such event, the Company's results of operations, liquidity or financial
condition could be materially adversely affected.

Deferred Acquisition Costs. Costs related to the acquisition of new insurance
business, such as commissions, certain costs of policy issuance and
underwriting, and certain sales office expenses, are deferred when incurred. The
unamortized balance of these deferred acquisition costs is included in cost of
business acquired on the consolidated balance sheet. Deferred acquisition costs
related to group life, disability and accident products, which totaled $150.4
million at December 31, 2004, are amortized over the anticipated premium-paying
period of the related policies in proportion to the ratio of the present value
of annual expected premium income to the present value of the total expected
premium income. Deferred acquisition costs related to casualty insurance
products, which totaled $11.4 million at December 31, 2004, are amortized over
the period in which the related premium is earned. Deferred acquisition costs
related to annuity products, which totaled $43.6 million at December 31, 2004,
are amortized over the anticipated lives of the policies in relation to the
present value of estimated gross profits from such policies' surrender charges
and mortality, investment and expense margins. The amortization is a constant
percentage of estimated gross profits based on the ratio of the present value of
amounts deferred as compared to the present value of estimated gross profits.
Adjustments are made each year to reflect the actual gross profits to date as
compared to assumed experience and any changes in the remaining expected future
gross profits. The unamortized balance of deferred policy acquisition costs
related to certain asset accumulation products is adjusted for the impact on
estimated future gross profits as if net unrealized appreciation and
depreciation on available for sale securities had been realized at the balance
sheet date. The impact of this adjustment, net of the related income tax expense
or benefit, is included in net unrealized appreciation and depreciation as a
component of other comprehensive


                                      -27-
<PAGE>
income in shareholders' equity. Deferred acquisition costs are charged to
current earnings to the extent that it is determined that future premiums or
estimated gross profits will not be adequate to cover the amounts deferred. The
amortization of deferred acquisition costs totaled $61.1 million, $53.7 million
and $43.2 million in 2004, 2003 and 2002, respectively. These amounts
represented 31%, 31% and 30%, respectively, of the total amounts of the deferred
acquisition cost balances outstanding at the beginning of the respective
periods.

Investments. Investments are primarily carried at fair value with unrealized
appreciation and depreciation included as a component of other comprehensive
income in shareholders' equity, net of the related income tax benefit or expense
and the related adjustment to cost of business acquired. Ninety eight percent of
the Company's fixed maturity and equity securities portfolio are actively traded
in a liquid market or have other liquidity mechanisms. Securities acquired
through private placements, which are not actively traded in a liquid market and
do not have other mechanisms for their liquidation, totaled $76.6 million at
December 31, 2004. The Company estimates the fair value for these securities
primarily by comparison to similar securities with quoted market prices. If
quotes are not available on similar securities, the Company estimates fair value
based on recent purchases or sales of similar securities or other internally
prepared valuations. Key assumptions used in this process include the level of
risk-free interest rates, risk premiums, and performance of underlying
collateral, if applicable. All such investments are classified as available for
sale. The Company's ability to liquidate these investments in a timely manner,
if necessary, may be adversely impacted by the lack of an actively traded
market. Historically, the Company has not realized amounts on dispositions of
non-marketable investments that varied materially from the amounts estimated by
the Company under this valuation methodology. The Company believes that its
estimates reasonably reflect the fair value of these securities; however, had
there been an active market for these securities during the applicable reporting
period, the market prices may have been materially different than the amounts
reported.

Declines in the fair value of investments that are considered in the judgment of
management to be other than temporary are reported as realized investment
losses. The Company evaluates, among other things, the financial position and
prospects of the issuer, conditions in the issuer's industry and geographic
area, liquidity of the investment, changes in the amount or timing of expected
future cash flows from the investment, and recent downgrades of the issuer by a
rating agency to determine if and when a decline in the fair value of an
investment below amortized cost is other than temporary. The length of time and
extent to which the fair value of the investment is lower than its amortized
cost and the Company's ability and intent to retain the investment to allow for
any anticipated recovery in the investment's fair value are also considered. In
2004, 2003 and 2002, the Company recognized losses totaling $3.9 million, $13.0
million and $54.1 million, respectively, for the other than temporary decline in
the value of certain securities. These losses were recognized as a result of
events that occurred in the respective periods, such as downgrades in an
issuer's credit ratings, deteriorating financial results of issuers, adverse
changes in the amount and timing of estimated future cash flows from securities
and the impact of the recessionary economic environment on issuers' financial
positions. Investment grade and non-investment grade fixed maturity securities
comprised 80.4% and 5.7%, respectively, of the Company's total investment
portfolio at December 31, 2004. Gross unrealized appreciation and gross
unrealized depreciation, before the related income tax expense or benefit and
the related adjustment to cost of business acquired, attributable to investment
grade fixed maturity securities totaled $113.5 million and $6.6 million,
respectively, at December 31, 2004. Gross unrealized appreciation and gross
unrealized depreciation, before the related income tax expense or benefit and
the related adjustment to cost of business acquired, attributable to
non-investment grade fixed maturity securities totaled $7.7 million and $4.1
million, respectively, at December 31, 2004. Unrealized appreciation and
depreciation, net of the related income tax expense or benefit and the related
adjustment to cost of business acquired, has been reflected on the Company's
balance sheet as a component of other comprehensive income. The Company
anticipates that if certain existing declines in security values are determined
to be other than temporary, it may recognize additional investment losses in the
range of $3 million to $8 million pre-tax ($2 million to $5 million on an
after-tax basis) with respect to the relevant securities. However, the extent of
any such losses will depend on future market developments and changes in
security values, and such losses may exceed or be lower than such range. 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 the Company's procedures
for the evaluation of other than temporary impairment in valuation. There can be
no assurance that the Company will realize investment gains in the future in an
amount sufficient to offset any such losses.

The Company also invests in balances with independent investment managers,
consisting primarily of investments in limited partnerships which invest in
various financial instruments. These investments are reflected in the Company's
financial statements under the equity method; accordingly, positive or negative
changes in the value of the partnerships' underlying investments are included in
net investment income. For this purpose, the Company estimates the values of its
balances with independent investment managers based on values provided by the
managers, as adjusted based on available information concerning the underlying
investment portfolios. As of December 31, 2004, there were no adjustments in
such values, as compared with a reduction in value of $6.7 million as of
December 31, 2003. The Company believes that


                                      -28-
<PAGE>
its estimates reasonably reflect the values of its balances with independent
investment managers; however, there can be no assurance that such values will
ultimately be realized upon liquidation of such balances.


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-K 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" or other similar
expressions. Forward-looking statements are necessarily based upon estimates and
assumptions that are inherently subject to significant business, economic,
competitive and other uncertainties and contingencies, many of which are beyond
the Company's control and many of which, with respect to future business
decisions, are subject to change. Examples of such uncertainties and
contingencies include, among other important factors, those affecting the
insurance industry generally, such as the economic and interest rate
environment, federal and state legislative and regulatory developments,
including but not limited to changes in financial services, employee benefit and
tax laws and regulations, 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 the
remainder of this section. The Company disclaims any obligation to update
forward-looking information.

      RESERVES ESTABLISHED FOR FUTURE POLICY BENEFITS AND CLAIMS MAY PROVE
INADEQUATE.

The Company's reserves for future policy benefits and unpaid claims and claim
expenses are estimates. See "Critical Accounting Policies - Future Policy
Benefits and Unpaid Claims and Claim Expenses" for a description of the most
significant assumptions used in the estimation process. These estimates are
subject to variability, since the factors and events affecting the ultimate
liability for claims have not all taken place, and thus cannot be evaluated with
certainty. Moreover, under the actuarial methodologies discussed previously,
these estimates are subject to reevaluation based on developing trends with
respect to the Company's loss experience. Such trends may emerge over longer
periods of time, and changes in such trends cannot necessarily be identified or
predicted at any given time by reference to current claims experience, whether
favorable or unfavorable. If the Company's actual loss experience from its
current or discontinued products is different from the Company's assumptions or
estimates, the Company's reserves could be inadequate. In such event, the
Company's results of operations, liquidity or financial condition could be
materially adversely affected.

      THE MARKET VALUES OF THE COMPANY'S INVESTMENTS FLUCTUATE.

The market values of the Company's investments vary depending on economic and
market conditions, including interest rates, and such values can decline as a
result of changes in such conditions. Increasing interest rates or a widening in
the spread between interest rates available on U.S. Treasury securities and
corporate debt, for example, will typically have an adverse impact on the market
values of the fixed maturity securities in the Company's investment portfolio.
If interest rates decline, the Company generally achieves a lower overall rate
of return on investments of cash generated from the Company's operations. In
addition, in the event that investments are called or mature in a declining
interest rate environment, the Company may be unable to reinvest the proceeds in
securities with comparable interest rates. The Company may also in the future be
required or determine to sell certain investments at a price and a time when the
market value of such investments is less than the book value of such
investments.

Declines in the fair value of investments that are considered in the judgment of
management to be other than temporary are reported as realized investment
losses. See "Critical Accounting Policies - Investments" for a description of
management's evaluation process. The Company has experienced and may in the
future experience losses from other than temporary declines in security values.
Such losses are recorded as realized investment losses in the income statement.
See "Results of Operations - 2004 Compared to 2003."


                                      -29-
<PAGE>
      THE COMPANY'S INVESTMENT STRATEGY EXPOSES THE COMPANY TO DEFAULT AND OTHER
RISKS.

The management of the Company's investment portfolio is an important component
of the Company's profitability since a substantial portion of the Company's
operating income is generated from the difference between the yield achieved on
invested assets and, in the case of asset accumulation products, the interest
credited on policyholder funds and, in the case of the Company's other products
for which reserves are discounted, the discount rate used to calculate the
related reserves. See "Liquidity and Capital Resources - Investments" for a
description of the Company's investment portfolio and strategy.

The Company is subject to the risk, among others, that the issuers of the fixed
maturity securities the Company owns will default on principal and interest
payments. A major economic downturn or any of the various other factors that
affect issuers' abilities to pay could result in issuer defaults. Because the
Company's investments consist primarily of fixed maturity securities and
short-term investments, such defaults could materially adversely affect the
Company's results of operations, liquidity or financial condition. The Company
continually monitors its investment portfolio and attempts to ensure that the
risks associated with concentrations of investments in either a particular
sector of the market or a single entity are limited.

      THE COMPANY'S FINANCIAL POSITION EXPOSES THE COMPANY TO INTEREST RATE
RISKS.

Because the Company's primary assets and liabilities are financial in nature,
the Company's consolidated financial position and earnings are subject to risks
resulting from changes in interest rates. The Company manages this risk by
active portfolio management focusing on minimizing its exposure to fluctuations
in interest rates by matching its invested assets and related liabilities and by
periodically adjusting the crediting rates on its annuity products. See
"Liquidity and Capital Resources - Asset/Liability Management and Market Risk."
Profitability of certain group employee benefit products is also affected by the
difference between the yield achieved on invested assets and the discount rate
used to calculate the related reserves. The Company manages this risk by
adjusting the prices charged for these products.

      THE COMPANY'S ABILITY TO REDUCE ITS EXPOSURE TO RISKS DEPENDS ON THE
AVAILABILITY AND COST OF REINSURANCE.

The Company transfers its exposure to some risks through reinsurance
arrangements with other insurance and reinsurance companies. Under the Company's
reinsurance arrangements, another insurer assumes a specified portion of the
Company's losses and loss adjustment expenses in exchange for a specified
portion of policy premiums. At December 31, 2004 and 2003, the Company had
reinsurance receivables of $428.7 million and $409.6 million, respectively. The
availability, amount, cost and terms of reinsurance may vary significantly based
on market conditions. Any decrease in the amount of the Company's reinsurance
will increase the Company's risk of loss and any increase in the cost of
reinsurance will, absent a decrease in the reinsurance amount, reduce the
Company's premium income. In either case, the Company's operating results could
be adversely affected unless it is able to accordingly adjust the prices or
other terms of its insurance policies or successfully implement other
operational initiatives, as to which no assurance can be given. Furthermore, the
Company is subject to credit risk with respect to reinsurance. The Company
obtains reinsurance primarily through indemnity reinsurance transactions in
which the Company is still liable for the transferred risks if the reinsurers
fail to meet their financial obligations. Such failures could materially affect
the Company's results of operations, liquidity or financial condition.

Some reinsurers experienced significant losses related to the terrorist events
of September 11, 2001. As a result of this and other market factors, higher
prices and less favorable terms and conditions are presently being offered in
the reinsurance market. These market conditions are reflected in the terms of
the replacement reinsurance arrangements entered into during 2003 for the
Company's excess workers' compensation and long-term disability products. See
"Liquidity and Capital Resources - Reinsurance." In the future, the Company's
reinsurers may continue to seek price increases, although the extent of any such
increases cannot currently be predicted. Also, there has been significantly
reduced availability of reinsurance covering risks such as terrorist and
catastrophic events. Accordingly, substantially all of the Company's coverages
of this nature were discontinued during 2002, which would result in the Company
retaining a higher portion of losses from such events if they occur. The Company
has not been able to replace such coverages on acceptable terms due to present
market conditions, and there can be no assurance that the Company will be able
to do so in the future. However, under the Terrorism Act, which terminates on
December 31, 2005, the federal government will pay 90% of the Company's covered
losses relating to acts of international terrorism from property and casualty
products directly written by SNCC above the Company's annual deductible. See
"Business - Group Employee Benefit Products." The occurrence of a significant
catastrophic event could have a material adverse effect on the Company's results
of operations, liquidity or financial condition.


                                      -30-
<PAGE>
      THE INSURANCE BUSINESS IS A HEAVILY REGULATED INDUSTRY.

The Company's insurance subsidiaries, like other insurance companies, are highly
regulated by state insurance authorities in the states in which they are
domiciled and the other states in which they conduct business. Such regulations,
among other things, limit the amount of dividends and other payments that can be
made by such subsidiaries without prior regulatory approval and impose
restrictions on the amount and type of investments such subsidiaries may have.
These regulations also affect many other aspects of the Company's insurance
subsidiaries' businesses, including, for example, RBC requirements, various
reserve requirements, the terms, conditions and manner of sale and marketing of
insurance products, claims-handling practices and the form and content of
required financial statements. These regulations are intended to protect
policyholders rather than investors. The ability of the Company's insurance
subsidiaries to continue to conduct their businesses is dependent upon the
maintenance of their licenses in these various states.

In April 2004, the New York Attorney General ("NYAG") initiated an investigation
into certain insurance broker compensation arrangements and other aspects of
dealings between insurance brokers and insurance companies, and, in connection
therewith, filed a civil complaint in October 2004 against a major insurance
brokerage firm based on certain of such firm's compensation arrangements with
insurers and alleged misconduct in connection with the placement of insurance
business. Other state regulators subsequently announced the commencement of
similar investigations and reviews. The Company has received administrative
subpoenas or similar requests for information from the Illinois Division of
Insurance, the Missouri Department of Insurance, the NYAG's office and the North
Carolina Department of Insurance in connection with their investigations. The
Company anticipates that additional regulatory inquiries may be received by its
insurance subsidiaries as the various investigations continue. The Company will
fully cooperate with inquiries it has received to date, as well as any future
inquiries of this type.

As previously disclosed, based on an internal review relating to the Company's
insurance subsidiaries, the Company has identified certain potential issues
concerning past insurance solicitation practices involving SNCC and Marsh &
McLennan. The instances that the Company has been able to specifically identify
in this regard are limited in number and involved modest amounts of premium. The
Company has reported on these issues to the NYAG's office and to the Missouri
Department of Insurance, and will fully cooperate with these and any other
regulatory agencies relating to these issues. It is not possible to predict the
future impact of this matter on the Company or of the various investigations, or
any regulatory changes or litigation resulting from such investigations, on the
insurance industry or on the Company and its insurance subsidiaries.

From time to time, increased scrutiny has been placed upon the insurance
regulatory framework, and a number of state legislatures have considered or
enacted legislative measures that alter, and in many cases increase, state
authority to regulate insurance companies. In addition to legislative
initiatives of this type, the NAIC and insurance regulators are continuously
involved in a process of reexamining existing laws and regulations and their
application to insurance companies. Furthermore, while the federal government
currently does not directly regulate the insurance business, federal legislation
and administrative policies (and court interpretations thereof) in a number of
areas, such as employee benefits regulation, age, sex and disability-based
discrimination, financial services regulation and federal taxation, can
significantly affect the insurance business. It is not possible to predict the
future impact of changing regulation on the operations of the Company and those
of its insurance subsidiaries.

The Company's insurance subsidiaries can also be required, under solvency or
guaranty laws of most states in which they do business, to pay assessments to
fund policyholder losses or liabilities of insurance companies that become
insolvent.

      THE FINANCIAL SERVICES INDUSTRY IS HIGHLY COMPETITIVE.

The Company competes with numerous other insurance and financial services
companies. Many of these organizations have substantially greater assets, higher
ratings from rating agencies, larger and more diversified portfolios of
insurance products and larger agency sales operations than the Company.
Competition in asset accumulation product markets is also encountered from the
expanding number of banks, securities brokerage firms and other financial
intermediaries marketing alternative savings products, such as mutual funds,
traditional bank investments and retirement funding alternatives.

      THE COMPANY MAY BE ADVERSELY IMPACTED BY A DECLINE IN THE RATINGS OF ITS
INSURANCE SUBSIDIARIES OR ITS OWN CREDIT RATINGS.

Ratings with respect to claims-paying ability and financial strength have become
an increasingly important factor impacting the competitive position of insurance
companies. The financial strength ratings of RSLIC as of February 2005 as rated
by A.M. Best, Fitch, Moody's and Standard & Poor's were A- (Excellent), A
(Strong), A3 (Good) and A (Strong), respectively. The financial strength ratings
of SNCC as of February 2005 as rated by A.M. Best, Fitch and Standard & Poor's
were A (Excellent), A (Strong), and A (Strong), respectively. Each of the rating
agencies reviews its


                                      -31-
<PAGE>
ratings of companies periodically and there can be no assurance that current
ratings will be maintained or improved in the future. Claims-paying and
financial strength ratings are based upon factors relevant to policyholders and
are not directed toward protection of investors. Downgrades in the ratings of
the Company's insurance subsidiaries could adversely affect sales of their
products and could have a material adverse effect on the results of the
Company's operations. In addition, downgrades in the Company's credit ratings
could materially adversely affect its ability to access the capital markets. The
Company's senior unsecured debt ratings as of February 2005 from A.M. Best,
Fitch, Moody's and Standard & Poor's were bbb-, BBB, Baa3 and BBB, respectively.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by Item 7A is included in this Form 10-K under the
heading "Liquidity and Capital Resources - Asset/Liability Management and Market
Risk" beginning on page 25 of this Form 10-K.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by Item 8 is included in this Form 10-K beginning on
page 38 of this Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 9A. 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 Vice President and
Treasurer (the individual who acts in the capacity of chief financial officer),
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in the rules and regulations of the
Securities and Exchange Commission). Based on that evaluation, the Company's
management, including the CEO and Vice President and Treasurer, concluded that
the Company's disclosure controls and procedures were effective. There were no
changes in the Company's internal control over financial reporting during the
fourth fiscal quarter of 2004 that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting. The Company filed its annual certifications by the Chief Executive
Officer and the Vice President and Treasurer required by Section 302 of the
Sarbanes-Oxley Act of 2002 as exhibits in Item 15(b) in Part IV of this Form
10-K.

Management's annual report on internal control over financial reporting and the
attestation report of the Company's registered public accounting firm are
included below.


        MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the
participation of our management, including our Chief Executive Officer and Vice
President and Treasurer (the individual who acts in the capacity of chief
financial officer), we conducted an evaluation of the effectiveness of our
internal control over financial reporting as of December 31, 2004 based on the
framework in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on that evaluation,
our management concluded that our internal control over financial reporting was
effective as of December 31, 2004.

Because of inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

Management's assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2004 has been audited by Ernst & Young
LLP, an independent registered public accounting firm, as stated in their report
which is included elsewhere herein.


                                      -32-
<PAGE>
             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Shareholders and Directors
Delphi Financial Group, Inc.


We have audited the assessment, included in the accompanying "Management's
Report on Internal Control Over Financial Reporting," that Delphi Financial
Group, Inc and its subsidiaries (collectively, the "Company"), maintained
effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control -- Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the
"COSO Criteria"). The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on the COSO Criteria. Also, in our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004, based on the COSO
Criteria.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
the Company as of December 31, 2004 and 2003, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 2004 of the Company and our report dated
February 21, 2005 expressed an unqualified opinion thereon.


                                                          /s/ ERNST & YOUNG LLP

Philadelphia, Pennsylvania
February 21, 2005


                                      -33-
<PAGE>
ITEM 9B. OTHER INFORMATION

None.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 is included in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with the Company's 2005 Annual Meeting of
Stockholders, under the captions "Election of Directors," "Section 16(a)
Beneficial Ownership Reporting Compliance," and "Code of Ethics" and is
incorporated herein by reference, and in Item 4A in Part I of this Form 10-K.

On June 1, 2004, Robert Rosenkranz, the Company's Chairman, President and Chief
Executive Officer, submitted to the NYSE the Written Affirmation required by the
rules of the NYSE certifying that he was not aware of any violations by the
Company of NYSE corporate governance listing standards.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 is included in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with the Company's 2005 Annual Meeting of
Stockholders, under the caption "Executive Compensation" and is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 is included in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with the Company's 2005 Annual Meeting of
Stockholders, under the captions "Security Ownership of Certain Beneficial
Owners and Management" and "Equity Compensation Plan Information" and is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is included in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with the Company's 2005 Annual Meeting of
Stockholders, under the caption "Certain Relationships and Related Party
Transactions" and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 is included in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with the Company's 2005 Annual Meeting of
Stockholders, under the caption "Independent Auditors" and is incorporated
herein by reference.


                                     PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)   The financial statements and financial statement schedules filed as part
      of this report are listed in the Index to Consolidated Financial
      Statements and Financial Statement Schedules on page 39 of this Form 10-K.

(b)   The following Exhibits are numbered in accordance with the Exhibit Table
      of Item 601 of Regulation S-K:

<TABLE>
<S>          <C>
    2.1      Agreement and Plan of Merger, dated October 5, 1995, among the
             Company, SIG Holdings Acquisition Corp., and SIG Holdings, Inc. (6)

    2.2      Agreement and Plan of Merger, dated June 11, 1998, by and among
             Delphi Financial Group, Inc., Matrix Absence Management, Inc. and
             the Shareholders named therein (10)

    2.3      Stock Purchase Agreement, dated as of October 1, 1998, by and among
             Delphi Financial Group, Inc., Unicover Managers, Inc., Unicover
             Intermediaries, LLC and the Shareholders named therein (10)
</TABLE>


                                      -34-
<PAGE>
<TABLE>
<S>          <C>
    2.4      Merger, Exchange and Release Agreement, dated April 30, 1999, by
             and among Delphi Financial Group, Inc., Unicover Managers, Inc.,
             Unicover Intermediaries, LLC, Unicover Management Partners, LLC and
             the Buyers named therein (11)

    3.1      Amendment to Restated Certificate of Incorporation of Delphi
             Financial Group, Inc. (Exhibit 3.2) (2)

    3.2      Certificate of Amendment of Restated Certificate of Incorporation
             of Delphi Financial Group, Inc. (Exhibit 3.1) (7)

    3.3      Amended and Restated By-laws of Delphi Financial Group, Inc.
             (Exhibit 3.4) (2)

    4.1      Indenture, dated as of October 8, 1993, between Delphi Financial
             Group, Inc. and State Street Bank of Connecticut (formerly Shawmut
             Bank Connecticut, N.A.) as Trustee (matured 8.0% Senior Notes due
             2003) (3)

    4.2      Indenture, dated as of May 20, 2003, between Delphi Financial
             Group, Inc. and Wilmington Trust Company, as Trustee (Exhibit 4(a))
             (17)

    4.3      First Supplemental Indenture, dated as of May 20, 2003, between
             Delphi Financial Group, Inc. and Wilmington Trust Company, as
             Trustee (Exhibit 4(b)) (17)

    4.4      Amended and Restated Limited Liability Agreement of Delphi Funding
             L.L.C. dated as of March 25, 1997, among Delphi Financial Group,
             Inc., as Managing Member, Chestnut Investors III, Inc., as
             Resigning Member, and the Holders of Capital Securities described
             therein, as Members (Exhibit 4(a)) (8)

    4.5      Subordinated Indenture, dated as of March 25, 1997, between Delphi
             Financial Group, Inc. and Wilmington Trust Company as Trustee
             (Exhibit 4(b)) (8)

    4.6      Guarantee Agreement dated March 25, 1997, between Delphi Financial
             Group, Inc., as Guarantor, and Wilmington Trust Company, as Trustee
             (Exhibit 4(c)) (8)

    4.7      Amended and Restated Declaration of Delphi Financial Statutory
             Trust I, dated as of May 15, 2003, by and among U.S. Bank National
             Association, as Institutional Trustee, Delphi Financial Group,
             Inc., as Sponsor, and the Administrators named therein (Exhibit
             4.1) (18)

    4.8      Indenture, dated as of May 15, 2003, between Delphi Financial
             Group, Inc. and U.S. Bank National Association, as Trustee (Exhibit
             4.2) (18)

    4.9      Guarantee Agreement, dated as of May 15, 2003, by and between
             Delphi Financial Group, Inc., as Guarantor, and U.S. Bank National
             Association, as Trustee (Exhibit 4.3) (18)

    10.1     Credit Agreement, dated as of December 16, 2002, among the Company,
             Bank of America, N.A., as Administrative Agent, and the Other
             Lenders Party Thereto (Exhibit 10.1) (15)

    10.2     First Amendment to Credit Agreement, dated as of December 15, 2003,
             among Delphi Financial Group, Inc., the various financial
             institutions parties thereto (collectively, the "Lenders"), and
             Bank of America, N.A., as Administrative Agent (Exhibit 10.1) (19)

    10.3     Delphi Financial Group, Inc. Second Amended and Restated
             Nonqualified Employee Stock Option Plan, as amended May 23, 2001
             (Exhibit 10.1) (12)

    10.4     Delphi Financial Group, Inc. 2003 Employee Long-Term Incentive and
             Share Award Plan, as amended (Exhibit 10.1) (20)

    10.5     The Delphi Capital Management, Inc. Pension Plan for Robert
             Rosenkranz (Exhibit 10.4) (1)

    10.6     Second Amendment to the Delphi Capital Management, Inc. Pension
             Plan for Robert Rosenkranz (Exhibit 10.2) (14)

    10.7     Investment Consulting Agreement, dated as of November 10, 1988,
             between Rosenkranz Asset Managers, LLC (as assignee of Rosenkranz,
             Inc.) and the Company (Exhibit 10.8) (2)

    10.8     Investment Consulting Agreement, dated as of November 6, 1988,
             between Rosenkranz Asset Managers, LLC (as assignee of Rosenkranz,
             Inc.) and Reliance Standard Life Insurance Company (Exhibit 10.9)
             (2)

    10.9     Delphi Financial Group, Inc. Amended and Restated Long-Term
             Performance-Based Incentive Plan (Exhibit 10.3) (18)

    10.10    2003 Bonus Criteria for Chairman, President and Chief Executive
             Officer of Delphi Financial Group, Inc. (Exhibit 10.1) (16)

    10.11    SIG Holdings, Inc. 1992 Long-Term Incentive Plan (Exhibit 10.12)
             (5)

    10.12    Stockholders Agreement, dated as of October 5, 1995, among the
             Company and the affiliate stockholders named therein (Exhibit
             10.30) (6)

    10.13    Reliance Standard Life Insurance Company Nonqualified Deferred
             Compensation Plan (Exhibit 10.14) (6)

    10.14    Reliance Standard Life Insurance Company Supplemental Executive
             Retirement Plan (Exhibit 10.15) (6)

    10.15    Reliance Standard Life Insurance Company Management Incentive
             Compensation Plan (Exhibit 10.2) (21)

    10.16    Stock Option Award Agreement, dated July 8, 2003, for Harold F. Ilg
             (Exhibit 10.5) (18)

    10.17    Stock Option Award Agreement, dated May 19, 2004, for Lawrence E.
             Daurelle (Exhibit 10.1) (21)

    10.18    Delphi Financial Group, Inc. Second Amended and Restated Directors
             Stock Option Plan, as amended May 28, 2003 (Exhibit 10.2) (18)

    10.19    Delphi Financial Group, Inc. Annual Incentive Compensation Plan
             (Exhibit 10.2) (20)
</TABLE>


                                      -35-
<PAGE>
<TABLE>
<S>          <C>
    10.20    Employment Agreement, dated March 18, 1994, for Robert M. Smith,
             Jr. (Exhibit 10.31) (4)

    10.21    Employment Agreement, dated July 8, 2003, between Safety National
             Casualty Corporation and Harold F. Ilg (Exhibit 10.6) (18)

    10.22    Form of Restricted Share Unit Award Agreement (Exhibit 99.1) (22)

    10.23    SIG Holdings, Inc. Note Agreement, dated as of May 20, 1994 (8.5%
             Senior Secured Notes due 2003) (Exhibit 10.25) (5)

    10.24    Borrower Pledge Agreement, dated as of May 20, 1994, between SIG
             Holdings, Inc. and the Chase Manhattan Bank, N.A., as collateral
             agent (Exhibit 10.26) (5)

    10.25    Reinsurance Agreement, dated January 27, 1998, between Reliance
             Standard Life Insurance Company and Oracle Reinsurance Company Ltd.
             (Exhibit 10.27) (9)

    10.26    Casualty Excess of Loss Reinsurance Agreement, dated January 27,
             1998, between Safety National Casualty Corporation and Oracle
             Reinsurance Company Ltd. (Exhibit 10.28) (9)

    10.27    Commutation, Prepayment and Redemption Agreement, dated September
             14, 2001, between Delphi Financial Group, Inc., Safety National
             Casualty Corporation, Reliance Standard Life Insurance Company,
             Delphi International Ltd. and Oracle Reinsurance Company Ltd.
             (Exhibit 10.1) (13)

    11.1     Computation of Results per Share of Common Stock (23)

    21.1     List of Subsidiaries of the Company (24)

    23.1     Consent of Ernst & Young LLP (24)

    24.1     Powers of Attorney (24)

    31.1     Certification by the Chairman of the Board, President and Chief
             Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) or
             15d-14(a) (24)

    31.2     Certification by the Vice President and Treasurer of Periodic
             Report Pursuant to Rule 13a-14(a) or 15d-14(a) (24)

    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 (24)
</TABLE>

----------
       (1)  Incorporated herein by reference to the designated exhibit to the
            Company's Form 10-K for the year ended December 31, 1992.

       (2)  Incorporated herein by reference to the designated exhibit to the
            Company's Registration Statement on Form S-1 dated March 13, 1990
            (Registration No. 33-32827).

       (3)  Incorporated herein by reference to the designated exhibit to the
            Company's Form 10-K for the year ended December 31, 1993.

       (4)  Incorporated herein by reference to the designated exhibit to the
            Company's Form 10-K for the year ended December 31, 1994.

       (5)  Incorporated herein by reference to the designated exhibit to the
            Company's Form 10-K for the year ended December 31, 1995.

       (6)  Incorporated herein by reference to the designated exhibit to the
            Company's Registration Statement on Form S-4 dated January 30, 1996
            (Registration No. 33-99164).

       (7)  Incorporated herein by reference to the designated exhibit to the
            Company's Form 10-Q for the quarter ended June 30, 1997.

       (8)  Incorporated herein by reference to the designated exhibit to the
            Company's Current Report on Form 8-K dated March 21, 1997.

       (9)  Incorporated herein by reference to the designated exhibit to the
            Company's Form 10-K for the year ended December 31, 1997.

      (10)  Incorporated herein by reference to the designated exhibit to the
            Company's Form 10-K for the year ended December 31, 1998.

      (11)  Incorporated herein by reference to the designated exhibit to the
            Company's Form 10-Q for the quarter ended March 31, 1999.

      (12)  Incorporated herein by reference to the designated exhibit to the
            Company's Form 10-Q for the quarter ended June 30, 2001.

      (13)  Incorporated herein by reference to the designated exhibit to the
            Company's Form 10-Q for the quarter ended September 30, 2001.

      (14)  Incorporated herein by reference to the designated exhibit to the
            Company's Form 10-Q for the quarter ended September 30, 2002.

      (15)  Incorporated herein by reference to the designated exhibit to the
            Company's Form 10-K for the year ended December 31, 2002.

      (16)  Incorporated herein by reference to the designated exhibit to the
            Company's Form 10-Q for the quarter ended March 31, 2003.

      (17)  Incorporated herein by reference to the designated exhibit to the
            Company's Current Report on Form 8-K dated May 20, 2003.

      (18)  Incorporated herein by reference to the designated exhibit to the
            Company's Form 10-Q for the quarter ended June 30, 2003.

      (19)  Incorporated herein by reference to the designated exhibit to the
            Company's Form 10-K for the year ended December 31, 2003.

      (20)  Incorporated herein by reference to the designated exhibit to the
            Company's Form 10-Q for the quarter ended March 31, 2004.

      (21)  Incorporated herein by reference to the designated exhibit to the
            Company's Form 10-Q for the quarter ended June 30, 2004.

      (22)  Incorporated herein by reference to the designated exhibit to the
            Company's Current Report on Form 8-K dated February 9, 2005.

      (23)  Incorporated herein by reference to Note O to the Consolidated
            Financial Statements included elsewhere herein.

      (24)  Filed herewith.


(c)   The financial statement schedules listed in the Index to Consolidated
      Financial Statements and Financial Statement Schedules on page 39 of this
      Form 10-K are included under Item 8 and are presented beginning on page 67
      of this Form 10-K. All other schedules for which provision is made in the
      applicable accounting regulations of the Securities and Exchange
      Commission are not required under the related instructions or are
      inapplicable, and therefore have been omitted.


                                      -36-
<PAGE>
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

                                     By:  /s/ ROBERT ROSENKRANZ
                                         -------------------------------------
                                         Chairman of the Board, President and
                                         Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Name                                       Capacity                          Date
----                                       --------                          ----
<S>                                        <C>                               <C>
 /s/       ROBERT ROSENKRANZ               Chairman of the Board,            March 15, 2005
---------------------------------------    President and Chief Executive
          (Robert Rosenkranz)              Officer (Principal Executive
                                           Officer)


                 *                         Director                          March 15, 2005
---------------------------------------
           (Kevin R. Brine)

                   *                       Director                          March 15, 2005
---------------------------------------
        (Lawrence E. Daurelle)

                   *                       Director                          March 15, 2005
---------------------------------------
            (Edward A. Fox)

                   *                       Director                          March 15, 2005
---------------------------------------
            (Harold F. Ilg)

                   *                       Director                          March 15, 2005
---------------------------------------
           (James N. Meehan)

                   *                       Director                          March 15, 2005
---------------------------------------
         (Philip R. O'Connor)

                   *                       Director                          March 15, 2005
---------------------------------------
          (Donald A. Sherman)

/s/    ROBERT M. SMITH, JR.                Director and Executive            March 15, 2005
---------------------------------------    Vice President
        (Robert M. Smith, Jr.)

                   *                       Vice President and                March 15, 2005
---------------------------------------    Treasurer (Principal
         (Thomas W. Burghart)              Accounting and Financial
                                           Officer)
</TABLE>



* BY:  /s/     ROBERT ROSENKRANZ
      ---------------------------------
               Attorney-in-Fact


                                      -37-
<PAGE>
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                SELECTED QUARTERLY FINANCIAL RESULTS (UNAUDITED)
                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                     Year Ended December 31, 2004
                                               -----------------------------------------
                                                First      Second      Third     Fourth
                                               Quarter    Quarter    Quarter    Quarter
                                               --------   --------   --------   --------
<S>                                            <C>        <C>        <C>        <C>
Revenues excluding realized investment gains   $253,253   $255,754   $258,512   $272,852
Realized investment gains                         5,221      1,941      1,433      6,865
                                               --------   --------   --------   --------
Total revenues                                  258,474    257,695    259,945    279,717
Operating income                                 48,597     43,272     44,106     50,252
Net income                                       30,621     27,133     32,179     33,610
Basic results per share of common stock:
   Net income                                  $   0.97   $   0.85   $   1.00   $   1.05
Diluted results per share of common stock:
   Net income                                  $   0.94   $   0.82   $   0.98   $   1.01
</TABLE>

<TABLE>
<CAPTION>
                                                      Year Ended December 31, 2003
                                               ----------------------------------------
                                                First      Second      Third     Fourth
                                               Quarter    Quarter    Quarter    Quarter
                                               --------   --------   --------   --------
<S>                                            <C>        <C>        <C>        <C>
Revenues excluding realized investment gains   $217,466   $224,274   $227,401   $236,312
Realized investment gains                         1,215      3,464      3,170      4,875
                                               --------   --------   --------   --------
Total revenues                                  218,681    227,738    230,571    241,187
Operating income                                 35,235     40,020     42,479     43,865
Net income                                       22,496     24,692     24,892     26,836
Basic results per share of common stock:
   Net income                                  $   0.72   $   0.80   $   0.80   $   0.86
Diluted results per share of common stock:
   Net income                                  $   0.71   $   0.77   $   0.78   $   0.83
</TABLE>

Computations of results per share for each quarter are made independently of
results per share for the year. Due to transactions affecting the weighted
average number of shares outstanding in each quarter, the sum of quarterly
results per share does not equal results per share for the year.

Results for the first, second, third and fourth quarters of 2004 include pre-tax
investment losses of $2.4 million, $0.1 million, $0.6 million and $0.8 million,
respectively, due to the other than temporary declines in the market values of
certain securities. Results for the third and fourth quarters of 2004 also
include a reduction of federal income tax expense of $4.6 million and $2.0
million, respectively, primarily resulting from the favorable resolution of IRS
audits of the 1998 through 2002 tax years. This reduction represents the release
of previous accruals for potential audit adjustments which were subsequently
settled or eliminated and further refinement of existing tax exposures. Results
for the first, second, and fourth quarters of 2003 include pre-tax investment
losses of $5.1 million, $7.2 million and $0.7 million, respectively, due to the
other than temporary declines in the market values of certain securities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Notes B and G to the Consolidated Financial Statements.


                                      -38-
<PAGE>
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>
                                                                                                            Page
                                                                                                            ----
<S>                                                                                                         <C>
Audited Consolidated Financial Statements of Delphi Financial Group, Inc. and Subsidiaries:

     Report of Independent Registered Public Accounting Firm...........................................       40

     Consolidated Statements of Income - Years Ended December 31, 2004, 2003 and 2002..................       41

     Consolidated Balance Sheets - December 31, 2004 and 2003..........................................       42

     Consolidated Statements of Shareholders' Equity - Years Ended December 31, 2004, 2003 and 2002....       43

     Consolidated Statements of Cash Flows - Years Ended December 31, 2004, 2003 and 2002..............       44

     Notes to Consolidated Financial Statements........................................................       45


Financial Statement Schedules of Delphi Financial Group, Inc. and Subsidiaries:

     Schedule I, Summary of Investments Other Than Investments in Related Parties......................       67

     Schedule II, Condensed Financial Information of Registrant........................................       68

     Schedule III, Supplementary Insurance Information.................................................       72

     Schedule IV, Reinsurance..........................................................................       73

     Schedule VI, Supplemental Information Concerning Property-Casualty Insurance Operations...........       74
</TABLE>


                                      -39-
<PAGE>
             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Shareholders and Directors
Delphi Financial Group, Inc.


We have audited the accompanying consolidated balance sheets of Delphi Financial
Group, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 2004. Our audits also
included the financial statement schedules listed in the Index to Consolidated
Financial Statements and Financial Statement Schedules. These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Delphi
Financial Group, Inc. and subsidiaries at December 31, 2004 and 2003, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.

As discussed in Note A to the Consolidated Financial Statements, in 2004 the
Company changed its method of accounting for variable interest entities, and in
2003 changed its method of accounting for stock options.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated February 21, 2005 expressed an unqualified opinion thereon.



                                                    /s/ ERNST & YOUNG LLP

Philadelphia, Pennsylvania
February 21, 2005


                                      -40-
<PAGE>
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                                ------------------------------------------
                                                                   2004            2003           2002
                                                                -----------    -----------     -----------
<S>                                                             <C>            <C>             <C>
Revenue:
   Premium and fee income....................................   $   837,597    $   719,087     $   627,857
   Net investment income.....................................       202,774        186,366         162,036
   Net realized investment gains (losses)....................        15,460         12,724         (28,469)
   Loss on extinguishment of debt ..........................              -              -            (332)
                                                                -----------    -----------     -----------
                                                                  1,055,831        918,177         761,092
                                                                -----------    -----------     -----------
Benefits and expenses:
   Benefits, claims and interest credited to policyholders...       619,140        530,625         471,984
   Commissions...............................................        60,796         52,380          43,169
   Amortization of cost of business acquired.................        63,132         55,764          45,742
   Other operating expenses..................................       126,536        117,809         101,533
                                                                -----------    -----------     -----------
                                                                    869,604        756,578         662,428
                                                                -----------    -----------     -----------

   Operating income..........................................       186,227        161,599          98,664

Interest expense:
   Corporate debt............................................        14,040         14,052           9,025
   Junior subordinated deferrable interest debentures........         4,486          4,035           3,356
                                                                -----------    ------------    -----------
                                                                     18,526         18,087          12,381
                                                                -----------    -----------     -----------

        Income before income tax expense.....................       167,701        143,512          86,283

Income tax expense...........................................        44,158         44,596          25,631
                                                                -----------    -----------     -----------

      Net income.............................................   $   123,543    $    98,916     $    60,652
                                                                ===========    ===========     ===========

Basic results per share of common stock:
   Net income ...............................................   $      3.87    $      3.17     $     1.95

Diluted results per share of common stock:
   Net income ...............................................   $      3.75    $      3.09     $     1.90

Dividends paid per share of common stock.....................   $      0.32    $      0.23     $     0.20
</TABLE>


                See notes to consolidated financial statements.


                                      -41-
<PAGE>
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                                 --------------------------
                                                                                    2004            2003
                                                                                 -----------    -----------
<S>                                                                              <C>            <C>
Assets:
   Investments:
      Fixed maturity securities, available for sale ..........................   $ 3,049,013    $ 2,862,045
      Short-term investments .................................................        95,761        114,752
      Other investments ......................................................       396,302        225,957
                                                                                 -----------    -----------
                                                                                   3,541,076      3,202,754
   Cash ......................................................................        24,324         18,733
   Cost of business acquired .................................................       212,549        183,665
   Reinsurance receivables ...................................................       428,707        409,620
   Goodwill ..................................................................        93,929         93,929
   Securities lending collateral .............................................       236,900             --
   Other assets ..............................................................       203,777        176,170
   Assets held in separate account ...........................................        88,205         92,661
                                                                                 -----------    -----------
      Total assets ...........................................................   $ 4,829,467    $ 4,177,532
                                                                                 ===========    ===========


Liabilities and Shareholders' Equity:
   Future policy benefits:
      Life ...................................................................   $   261,289    $   246,634
      Disability and accident ................................................       488,909        439,158
   Unpaid claims and claim expenses:
      Life ...................................................................        49,441         47,395
      Disability and accident ................................................       218,316        189,740
      Casualty ...............................................................       645,948        572,690
   Policyholder account balances .............................................     1,024,577        961,356
   Corporate debt ............................................................       157,750        143,750
   Junior subordinated deferrable interest debentures underlying
      company-obligated mandatorily redeemable capital
      securities issued by unconsolidated subsidiaries .......................        59,762             --
   Securities lending payable ................................................       236,900             --
   Advances from Federal Home Loan Bank ......................................        85,395        150,789
   Other liabilities and policyholder funds ..................................       573,127        492,117
   Liabilities related to separate account ...................................        88,205         79,413
                                                                                 -----------    -----------
      Total liabilities ......................................................     3,889,619      3,323,042
                                                                                 -----------    -----------

   Company-obligated mandatorily redeemable capital securities of subsidiaries            --         56,050
                                                                                 -----------    -----------

   Shareholders' equity:
      Preferred Stock, $.01 par; 10,000,000 shares authorized ................            --             --
      Class A Common Stock, $.01 par; 40,000,000 shares authorized;
      30,418,291 and 29,457,024 shares issued and outstanding, respectively ..           304            295
      Class B Common Stock, $.01 par; 20,000,000 shares authorized;
      3,904,481 and 4,177,357 shares issued and outstanding, respectively ....            39             42
      Additional paid-in capital .............................................       406,908        383,573
      Accumulated other comprehensive income .................................        57,371         52,428
      Retained earnings ......................................................       534,540        421,080
      Treasury stock, at cost; 2,573,211 and 2,560,035 shares of
         Class A Common Stock, respectively ..................................       (59,314)       (58,978)
                                                                                 -----------    -----------
         Total shareholders' equity ..........................................       939,848        798,440
                                                                                 -----------    -----------
             Total liabilities and shareholders' equity ......................   $ 4,829,467    $ 4,177,532
                                                                                 ===========    ===========
</TABLE>


                See notes to consolidated financial statements.


                                      -42-
<PAGE>
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                              Accumulated
                                                                                 Other
                                         Class A    Class B     Additional    Comprehensive
                                         Common     Common        Paid-in        (Loss)        Retained     Treasury
                                          Stock      Stock        Capital        Income        Earnings       Stock        Total
                                        ---------   ---------    ---------      ---------      ---------    ---------    ---------
<S>                                     <C>         <C>          <C>          <C>              <C>          <C>          <C>
Balance, January 1, 2002 ............   $     178   $      41    $ 369,385      $ (10,985)     $ 274,874    $ (51,499)   $ 581,994
                                                                                                                         ---------

Net income ..........................          --          --           --             --         60,652           --       60,652
Other comprehensive income:
   Increase in net unrealized
     appreciation on investments ....          --          --           --         44,557             --           --       44,557
   Net unrealized loss on cash
     flow hedge .....................          --          --           --         (3,290)            --           --       (3,290)
   Minimum pension liability
     adjustment .....................          --          --           --           (279)            --           --         (279)
                                                                                                                         ---------
Comprehensive income ................                                                                                      101,640

Issuance of stock, exercise of stock
   options and share conversions ....          11          (9)       3,971             --             --           --        3,973
Cash dividends ......................          --          --           --             --         (5,952)          --       (5,952)
                                        ---------   ---------    ---------      ---------      ---------    ---------    ---------
   Balance, December 31, 2002 .......   $     189   $      32    $ 373,356      $  30,003      $ 329,574    $ (51,499)   $ 681,655

Net income ..........................          --          --           --             --         98,916           --       98,916
Other comprehensive income:
   Increase in net unrealized
     appreciation on investments ....          --          --           --         26,395             --           --       26,395
   Increase in net loss on cash flow
     hedge ..........................          --          --           --         (4,106)            --           --       (4,106)
   Net change in minimum pension
     liability adjustment ...........          --          --           --            136             --           --          136
                                                                                                                         ---------
Comprehensive income ................                                                                                      121,341

Issuance of stock, exercise of stock
    options and share conversions ...           8          (4)       8,865             --             --           --        8,869
Stock-based compensation ............          --          --        1,465             --             --           --        1,465
Acquisition of treasury stock .......          --          --           --             --             --       (7,479)      (7,479)
Cash dividends ......................          --          --           --             --         (7,410)          --       (7,410)
Three-for-two stock split ...........          98          14         (113)            --             --           --           (1)
                                        ---------   ---------    ---------      ---------      ---------    ---------    ---------
   Balance, December 31, 2003 .......   $     295   $      42    $ 383,573      $  52,428      $ 421,080    $ (58,978)   $ 798,440

Net income ..........................          --          --           --             --        123,543           --      123,543
Other comprehensive income:
   Increase in net unrealized
     appreciation on investments ....          --          --           --          4,716             --           --        4,716
   Decrease in net loss on
     cash flow hedge ................          --          --           --            786             --           --          786
   Net change in minimum pension
     liability adjustment ...........          --          --           --           (559)            --           --         (559)
                                                                                                                         ---------
Comprehensive income ................                                                                                      128,486

Issuance of stock, exercise of stock
    options and share conversions ...           9          (3)      20,596             --             --           --       20,602
Stock-based compensation ............          --          --        2,739             --             --           --        2,739
Acquisition of treasury stock .......          --          --           --             --             --         (336)        (336)
Cash dividends ......................          --          --           --             --        (10,083)          --      (10,083)
                                        ---------   ---------    ---------      ---------      ---------    ---------    ---------
   Balance, December 31, 2004 .......   $     304   $      39    $ 406,908      $  57,371      $ 534,540    $ (59,314)   $ 939,848
                                        =========   =========    =========      =========      =========    =========    =========
</TABLE>


                See notes to consolidated financial statements.


                                      -43-
<PAGE>
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                   Year Ended December 31,
                                                                         ------------------------------------------
                                                                            2004            2003           2002
                                                                         -----------    -----------     -----------
<S>                                                                      <C>            <C>             <C>
Operating activities:
   Net income ........................................................   $   123,543    $    98,916     $    60,652
   Adjustments to reconcile net income to net cash provided
        by operating activities:
      Change in policy liabilities and policyholder accounts..........       201,571        177,282         107,359
      Net change in reinsurance receivables and payables..............       (16,568)       (21,336)         (8,599)
      Amortization, principally the cost of business acquired
        and investments...............................................        49,325         41,184          29,768
      Deferred costs of business acquired.............................       (84,627)       (76,836)        (68,725)
      Net realized (gains) losses on investments......................       (15,460)       (12,724)         28,469
      Loss on extinguishment of debt..................................             -              -             332
      Net change in federal income tax liability......................        24,057         20,720          25,955
      Other...........................................................       (17,746)        10,289          33,332
                                                                         -----------    -----------     -----------
        Net cash provided by operating activities.....................       264,095        237,495         208,543
                                                                         -----------    -----------     ------------

Investing activities:
   Purchases of investments and loans made............................    (1,881,235)    (1,845,331)     (1,137,062)
   Sales of investments and receipts from repayment of loans..........     1,390,290      1,372,088         753,801
   Maturities of investments..........................................       211,483        147,428         183,050
   Net change in short-term investments...............................        18,991         90,373        (111,926)
   Change in deposit in separate account..............................        (5,090)        (3,128)            202
                                                                         -----------    -----------     -----------
        Net cash used by investing activities.........................      (265,561)      (238,570)       (311,935)
                                                                         -----------    -----------     -----------

Financing activities:
   Deposits to policyholder accounts..................................       140,173        106,986         140,336
   Withdrawals from policyholder accounts.............................       (88,251)       (88,081)        (56,104)
   Proceeds from issuance of 2033 Senior Notes........................             -        139,222               -
   Borrowings under revolving credit facilities.......................        38,000         34,000          49,000
   Principal payments under revolving credit facilities...............       (24,000)       (71,000)        (37,000)
   Repayments or repurchase of other corporate debt...................             -        (81,150)        (19,874)
   Proceeds from issuance of 2003 Capital Securities..................             -         19,399               -
   Change in liability for Federal Home Loan Bank advances............       (65,000)       (57,000)         45,000
   Other financing activities.........................................         6,135        (10,237)         (1,979)
                                                                         -----------    -----------     -----------
        Net cash provided (used) by financing activities                       7,057         (7,861)        119,379
                                                                         -----------    -----------     -----------

Increase (decrease) in cash...........................................         5,591         (8,936)         15,987
Cash at beginning of year.............................................        18,733         27,669          11,682
                                                                         -----------    -----------     -----------
      Cash at end of year.............................................   $    24,324    $    18,733     $    27,669
                                                                         ===========    ===========     ===========
</TABLE>

                See notes to consolidated financial statements.


                                      -44-
<PAGE>
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation. The consolidated financial statements include the
accounts of Delphi Financial Group, Inc. ("DFG") and all of its wholly-owned
subsidiaries, including, among others, Reliance Standard Life Insurance Company
("RSLIC"), Safety National Casualty Corporation ("SNCC"), First Reliance
Standard Life Insurance Company ("FRSLIC"), Reliance Standard Life Insurance
Company of Texas ("RSLIC-Texas"), Safety First Insurance Company ("SFIC"), SIG
Holdings, Inc. ("SIG") and Matrix Absence Management, Inc. ("Matrix"). The term
"Company" shall refer herein collectively to DFG and its subsidiaries, unless
the context indicates otherwise. All significant intercompany accounts and
transactions have been eliminated. Certain reclassifications have been made in
the 2003 and 2002 consolidated financial statements to conform with the 2004
presentation. As of December 31, 2004, Mr. Robert Rosenkranz, Chairman of the
Board, President and Chief Executive Officer of DFG, by means of beneficial
ownership of the corporate general partner of Rosenkranz & Company and direct or
beneficial ownership, had the power to vote all of the outstanding shares of
Class B Common Stock, which represents 49.9% of the voting power of the
Company's common stock.

Nature of Operations. The Company manages all aspects of employee absence to
enhance the productivity of its clients and provides the related insurance
coverages: short-term and long-term disability, primary and excess workers'
compensation, group life and travel accident. The Company's asset accumulation
business emphasizes fixed annuity products. The Company offers its products and
services in all fifty states and the District of Columbia. The Company's two
reportable segments are group employee benefit products and asset accumulation
products. The Company's reportable segments are strategic operating divisions
that offer distinct types of products with different marketing strategies. The
Company evaluates the performance of its segments on the basis of net income
excluding realized investment gains and losses and losses on extinguishment of
debt and before interest and income tax expense. The accounting policies of the
Company's segments are the same as those used in the consolidated financial
statements.

Use of Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.

Investments. Fixed maturity securities available for sale are carried at fair
value with unrealized appreciation and depreciation included as a component of
accumulated other comprehensive income or loss, net of the related income tax
expense or benefit and the related adjustment to cost of business acquired.
Short-term investments are carried at fair value. Other investments consist
primarily of equity securities, balances with independent investment managers,
trading account securities, mortgage loans, and amounts receivable from
investment sales. Equity securities are carried at fair value with unrealized
appreciation and depreciation included as a component of accumulated other
comprehensive income or loss, net of the related income tax expense or benefit.
Balances with independent investment managers principally represent investments
in limited partnerships and are reflected on the equity method, with earnings
included in net investment income. Trading account securities consist primarily
of bonds, common stocks and preferred stocks and are carried at fair value with
unrealized appreciation and depreciation included in net investment income.
Interest and dividend income and realized gains and losses from trading account
securities are also included in income. Mortgage loans are carried at unpaid
principal balances, including any unamortized premium or discount. Net realized
investment gains and losses on investment sales are determined under the
specific identification method and are included in income. Declines in the fair
value of investments which are considered to be other than temporary are
reported as realized losses. The Company evaluates, among other things, the
financial position and prospects of the issuer, conditions in the issuer's
industry and geographic area, liquidity of the investment, changes in the amount
or timing of expected future cash flows from the investment, and recent
downgrades of the issuer by a rating agency to determine if and when a decline
in the fair value of an investment below amortized cost is other than temporary.
The length of time and extent to which the fair value of the investment is lower
than amortized cost and the Company's ability and intent to retain the
investment to allow for any anticipated recovery in the investment's fair value
are also considered.


                                      -45-
<PAGE>


                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2004

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

Cost of Business Acquired. Costs relating to the acquisition of new insurance
business, such as commissions, certain costs of policy issuance and underwriting
and certain sales office expenses, are deferred when incurred. For certain
annuity products, these costs are amortized over the anticipated lives of the
policies in relation to the present value of estimated gross profits from such
policies' surrender charges and mortality, investment and expense margins.
Deferred acquisition costs for life, disability and accident products are
amortized over the anticipated premium-paying period of the related policies in
proportion to the ratio of the present value of annual expected premium income
to the present value of the total expected premium income. Deferred acquisition
costs for casualty insurance products are amortized over the period in which the
related premium is earned. The present value of estimated future profits
("PVFP"), which was recorded in connection with the acquisition of RSLIC and
FRSLIC in 1987, is included in cost of business acquired. The PVFP related to
annuities is subject to accrual of interest on the unamortized balance at the
credited rate and amortization is a constant percentage of the present value of
estimated future gross profits on the business. Amortization of the PVFP for
disability and group life insurance is at the discount rate established at the
time of the acquisition. The unamortized balance of cost of business acquired
related to certain asset accumulation products is also adjusted for the impact
on estimated future gross profits as if net unrealized appreciation and
depreciation on available for sale securities had been realized at the balance
sheet date. The impact of this adjustment, net of the related income tax expense
or benefit, is included in net unrealized appreciation and depreciation as a
component of accumulated other comprehensive income or loss.

Receivables from Reinsurers. Receivables from reinsurers for future policy
benefits, unpaid claims and claim expenses and policyholder account balances are
estimated in a manner consistent with the related liabilities associated with
the reinsured policies.

Goodwill. Since January 1, 2002, goodwill and intangible assets deemed to have
indefinite lives are no longer amortized over a pre-determined period, but are
required to be periodically reviewed for impairment. Other intangible assets
with finite lives continue to be amortized over their useful lives. At January
1, 2002, unamortized goodwill of $60.9 million was attributable to the
acquisition of SNCC, whose operations are included in the group employee
benefits segment, and $33.0 million was attributable to the acquisition of
Matrix, whose operations do not meet the quantitative threshold for reportable
segments and, therefore, are reported in the "other" segment. Any impairment
losses would be reflected within operating results in the income statement. The
impairment test is performed annually unless events suggest an impairment may
have occurred in the interim. Based on these tests, the Company determined that
no impairment of goodwill had occurred during the year ended December 31, 2004,
2003, or 2002, respectively.

Separate Account. The separate account assets and liabilities represent funds
invested in a separately administered variable life insurance product for which
the policyholder, rather than the Company, bears the investment risk. The
Company receives a proportionate share of the income or loss of the assets of
the separate account; income is generally reinvested in the separate account.
Effective January 1, 2004, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position ("SOP") No. 03-1,
"Accounting and Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts." Prior to adoption of SOP No.
03-1, the Company was required to report the aggregate of all separate account
assets as a single caption on its balance sheet, which was titled "Assets held
in separate account." Under the provisions of SOP No. 03-1, the Company is
required to allocate its proportionate interest in the separate account's assets
to the corresponding captions in the Company's balance sheet. At December 31,
2004, the Company's proportionate interest in the separate account's assets was
$18.3 million. SOP No. 03-1 also provides specific guidance for accounting for
certain nontraditional long-duration insurance contracts. Nontraditional
long-duration insurance contracts are annuity and life products which combine
fixed and variable features and that are not covered by specific accounting
guidance in Statement of Financial Accounting Standard ("SFAS") No. 60,
"Accounting and Reporting by Insurance Enterprises," or SFAS No. 97, "Accounting
and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and
for Realized Gains and Losses from the Sale of Investments." The Company offers
nontraditional long-duration insurance contracts such as annuity products with a
market value adjustment feature and first year bonus interest rates. The
adoption of SOP No. 03-1 did not have a material effect on the financial
position or results of operations of the Company.


                                      -46-
<PAGE>


                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2004

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

Future Policy Benefits. The liabilities for future policy benefits for
traditional nonparticipating business, excluding annuity business, have been
computed using a net level method. Mortality, morbidity and other assumptions
are based either on the Company's past experience or various actuarial tables,
modified as necessary for possible variations. Changes in these assumptions
could result in changes in these liabilities.

Unpaid Claims and Claim Expenses. The liability for unpaid claims and claim
expenses includes amounts determined on an individual basis for reported losses
and estimates of incurred but not reported losses developed on the basis of past
experience. The methods of making these estimates and establishing the resulting
reserves are continually reviewed and updated, with any resulting adjustments
reflected in earnings currently. At December 31, 2004, disability and primary
and excess workers' compensation reserves with a carrying value of $750.6
million have been discounted at a weighted average rate of 5.4%, with the rates
ranging from 3.7% to 7.5%.

Policyholder Account Balances. Policyholder account balances are comprised of
the Company's reserves for interest-sensitive insurance products, including
annuities. Reserves for annuity products are equal to the policyholders'
aggregate accumulated value.

Junior Subordinated Deferrable Interest Debentures underlying Company-obligated
Mandatorily Redeemable Capital Securities issued by Unconsolidated Subsidiaries.
The Company adopted revised Financial Accounting Standards Board Interpretation
("FIN") No. 46, "Consolidation of Variable Interest Entities," as of March 31,
2004. The revised interpretation changed the conceptual framework for
determining if an entity holds a controlling interest in a variable interest
entity and required the Company to deconsolidate its subsidiaries that hold
junior subordinated deferrable interest debentures of the Company which underlie
the Company-obligated mandatorily redeemable capital securities of these
subsidiaries. Therefore, at December 31, 2004, the Company presented in its
consolidated financial statements the junior subordinated deferrable interest
debentures of $59.8 million as a liability and its interest of $3.7 million in
the subsidiaries that hold these debentures as a component of other assets. The
adoption of revised FIN No. 46 did not have a material effect on the Company's
financial position, results of operations or ability to comply with its debt
covenants.

Income Taxes. The Company files a life/non-life consolidated federal tax return,
pursuant to an election made with the 2001 tax return. RSLIC-Texas and RSLIC are
taxed as life insurance companies and comprise the life subgroup. The non-life
subgroup includes DFG, SNCC, FRSLIC, SFIC and the non-insurance subsidiaries of
the Company. The Company computes a balance sheet amount for deferred income
taxes, which is included in other assets or other liabilities, at the rates
expected to be in effect when the underlying differences will be reported in the
Company's income tax returns.

Premium Recognition. The Company's group insurance products consist primarily of
short-duration contracts, and, accordingly, premiums for these products are
reported as earned over the contract period and recognized in proportion to the
amount of insurance protection provided. All insurance-related revenue is
reported net of premiums ceded under reinsurance arrangements. A reserve is
provided for the portion of premiums written which relates to unexpired contract
terms. Deposits for asset accumulation products are recorded as liabilities
rather than as premiums, since these products generally do not involve mortality
or morbidity risk. Revenue from asset accumulation products consists of policy
charges for the cost of insurance, policy administration charges and surrender
charges assessed against the policyholder account balances during the period.

Stock Options. Prior to the second quarter of 2003, the Company accounted for
stock options according to Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. The
Company's stock option plans are more fully described in Note N. All options
granted prior to 2003 had an intrinsic value of zero on the date of grant under
APB No. 25, and, therefore, no stock-based employee compensation expense was
recognized in the Company's financial statements for the year ended December 31,
2002. During the second quarter of 2003, the Company adopted, effective January
1, 2003, the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." Under the prospective method provisions of SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure," the
recognition provisions of SFAS No. 123 are applied to


                                      -47-
<PAGE>


                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2004

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

all option awards granted, modified, or settled after January 1, 2003. The
expense related to stock-based compensation included in the determination of the
Company's net income for 2003 and 2004 is less than if these provisions had been
applied to all awards granted since the original January 1, 1995 effective date
of SFAS No. 123. The following table illustrates the effect on net income and
earnings per share as if the Company had begun to apply the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation as
of its original effective date:

<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                                 --------------------------------------------
                                                                    2004              2003            2002
                                                                 -----------      -----------     -----------
                                                                 (dollars in thousands, except per share data)
<S>                                                              <C>              <C>             <C>
Net income, as reported ....................................     $   123,543      $    98,916     $    60,652
Add: Stock-based employee compensation expense included
    in reported net income, net of related tax effects .....           2,222            1,218              --
Deduct: Stock-based employee compensation expense
    determined under fair value based method for all awards,
    net of related tax effects .............................          (2,955)          (2,229)         (2,462)
                                                                 -----------      -----------     -----------
Pro forma net income .......................................     $   122,810      $    97,905     $    58,190
                                                                 ===========      ===========     ===========

Earnings per share:
    Basic, as reported .....................................     $      3.87      $      3.17     $      1.95
    Basic, pro forma .......................................            3.84             3.14            1.87

    Diluted, as reported ...................................     $      3.75      $      3.09     $      1.90
    Diluted, pro forma .....................................            3.70             3.03            1.81
</TABLE>

The weighted average per share fair value used to calculate compensation expense
for 2004 and 2003 and pro forma compensation expense for 2002 was $11.46, $7.85
and $8.81, respectively. These fair values were estimated at the grant date
using the Black-Scholes option pricing model with the following assumptions:
risk-free interest rates ranging from 2.3% to 4.8%, volatility factors of the
expected market price of the Company's common stock ranging from 27% to 31%,
expected lives of the options of five years and dividend yields from 0.6% to
0.8%. Compensation expense is recognized over the expected life of the option
using the straight-line method.

Statements of Cash Flows. The Company uses short-term, highly liquid debt
instruments purchased with maturities of three months or less as part of its
investment management program and, as such, classifies these investments under
the caption "short-term investments" in its Consolidated Balance Sheets and
Consolidated Statements of Cash Flows.

Recently Issued Accounting Standards

In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus on
the guidance provided in EITF Issue 03-1, "The Meaning of Other-Than-Temporary
Impairments and Its Application to Certain Investments," as applicable to debt
and equity securities that are within the scope of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," and equity securities that
are accounted for using the cost method specified in APB No. 18, "The Equity
Method of Accounting for Investments in Common Stock." The new guidance for
determining whether an impairment in the value of a security is
other-than-temporary was scheduled to become effective for reporting periods
beginning after June 15, 2004. In September 2004, however, the FASB issued FASB
Staff Position EITF Issue 03-1-1, "Effective Date of Paragraphs 10-20 of EITF
Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments," which delayed the effective date for the impairment
recognition and measurement guidance of EITF Issue 03-1 until certain
implementation issues are addressed. The FASB is expected to issue finalized
guidance in 2005. Pending a final resolution by the FASB, the Company, as
required, will continue to apply existing authoritative literature with respect
to the recognition of losses related to the other-than-temporary impairment of
securities. In the absence of such final resolution, the Company is unable to
determine the impact, if any, that the impairment provisions of EITF Issue 03-1
will have on the Company's consolidated financial statements.


                                      -48-
<PAGE>


                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2004

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

In December 2004, the FASB issued SFAS No. 123 (Revised) ("123R"), "Share-Based
Payment," a revision of SFAS No. 123, which requires all share-based payments to
employees, including grants of employee stock options, to be recognized as
expense in the income statement based on their fair values and prohibits pro
forma disclosure as an alternative. SFAS No. 123R is required to be adopted no
later than the first interim or annual period beginning after June 15, 2005 with
early adoption also permitted. Upon adoption, the Company will be required to
select a transition method between two permitted alternatives, a "modified
prospective" method or a "modified retrospective" method. Under the "modified
prospective" method, compensation cost is recognized for all new awards granted
after the date of adoption and any previously granted awards that are not fully
vested. Under the "modified retrospective" method, compensation cost is
recognized based on the requirements of the modified prospective method
described above, but this method also permits the restatement of financial
statements, either for all prior periods presented or prior interim periods in
the year of adoption, based on the amounts previously recognized under SFAS No.
123 for purposes of pro forma disclosures.

Since FAS No. 123R must be applied not only to new awards but to previously
granted awards that are not fully vested on the effective date, and the Company
has already adopted SFAS No. 123 using the prospective transition method,
compensation cost for some previously granted awards that were not recognized
under SFAS No. 123 will be recognized under the revised statement. However, had
we adopted SFAS No. 123R in prior periods, the impact of that standard would
have approximated the impact of SFAS No. 123 as described in the disclosure of
pro forma net income and earnings per share above in "Stock Options." In
addition, SFAS No. 123R requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as required under current literature. The
Company's benefits of tax deductions in excess of recognized compensation cost
were not material in 2004, 2003 or 2002. The Company has not yet determined
which method of adoption it will use nor what the effects of SFAS No. 123R will
be on the future earnings and financial position of the Company.

NOTE B - INVESTMENTS

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

<TABLE>
<CAPTION>
                                                                      December 31, 2004
                                                   --------------------------------------------------------
                                                                     Gross         Gross
                                                   Amortized      Unrealized     Unrealized        Fair
                                                      Cost           Gains         Losses          Value
                                                   ----------     ----------     ----------      ----------
                                                                    (dollars in thousands)
<S>                                                <C>            <C>            <C>             <C>
Mortgage-backed securities ...................     $  761,406     $   19,713     $   (4,051)     $  777,068
Corporate securities .........................      1,356,314         75,123         (6,066)      1,425,371
U.S. Treasury and other U.S. Government
   guaranteed securities .....................        330,856          3,721           (314)        334,263
Obligations of U.S. states, municipalities and
   political subdivisions ....................        489,942         22,637           (268)        512,311
                                                   ----------     ----------     ----------      ----------
      Total fixed maturity securities ........     $2,938,518     $  121,194     $  (10,699)     $3,049,013
                                                   ==========     ==========     ==========      ==========
</TABLE>


                                      -49-
<PAGE>


                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2004

NOTE B - INVESTMENTS - (CONTINUED)

<TABLE>
<CAPTION>
                                                                      December 31, 2003
                                                   --------------------------------------------------------
                                                                    Gross         Gross
                                                   Amortized      Unrealized     Unrealized         Fair
                                                      Cost          Gains          Losses           Value
                                                   ----------     ----------     ----------      ----------
                                                                    (dollars in thousands)
<S>                                                <C>            <C>            <C>             <C>
Mortgage-backed securities ...................     $  628,987     $   16,860     $   (2,547)     $  643,300
Corporate securities .........................      1,269,537         81,929         (9,330)      1,342,136
U.S. Treasury and other U.S. Government
   guaranteed securities .....................        380,139          5,318            (40)        385,417
Obligations of U.S. states, municipalities and
   political subdivisions ....................        472,218         21,760         (2,786)        491,192
                                                   ----------     ----------     ----------      ----------
      Total fixed maturity securities ........     $2,750,881     $  125,867     $  (14,703)     $2,862,045
                                                   ==========     ==========     ==========      ==========
</TABLE>

The amortized cost and fair value of fixed maturity securities available for
sale at December 31, 2004, 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.

<TABLE>
<CAPTION>
                                      Amortized         Fair
                                         Cost           Value
                                      ----------     ----------
                                        (dollars in thousands)
<S>                                   <C>            <C>
Mortgage-backed securities .........  $  761,406     $  777,068

Other securities:
   Less than one year ..............      33,996         34,168
   Greater than 1, up to 5 years ...     675,587        700,875
   Greater than 5, up to 10 years ..     733,237        772,756
   Greater than 10 years ...........     734,292        764,146
                                      ----------     ----------
      Total ........................  $2,938,518     $3,049,013
                                      ==========     ==========
</TABLE>

Net investment income was attributable to the following:

<TABLE>
<CAPTION>
                                             Year Ended December 31,
                                   ------------------------------------------
                                      2004            2003           2002
                                   -----------    -----------     -----------
                                             (dollars in thousands)
<S>                                <C>            <C>             <C>
Gross investment income:
   Fixed maturity securities....   $   186,095    $   169,457     $   167,109
   Other........................        43,596         46,019          11,130
                                   -----------    -----------     -----------
                                       229,691        215,476         178,239
Less: Investment expenses.......        26,917         29,110          16,203
                                   -----------    -----------     -----------
                                   $   202,774    $   186,366     $   162,036
                                   ===========    ===========     ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                          Year Ended December 31,
                                ------------------------------------------
                                   2004            2003           2002
                                -----------    -----------     -----------
                                        (dollars in thousands)
<S>                             <C>            <C>             <C>
Fixed maturity securities....   $    13,178    $    11,857     $   (15,668)
Equity securities............           741            867         (12,024)
Other investments............         1,541             --            (777)
                                -----------    -----------     -----------
                                $    15,460    $    12,724     $   (28,469)
                                ===========    ===========     ===========
</TABLE>


                                      -50-
<PAGE>


                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2004

NOTE B - INVESTMENTS - (CONTINUED)

Proceeds from sales of fixed maturity securities during 2004, 2003 and 2002 were
$1,126.1 million, $853.1 million and $518.6 million, respectively. Gross gains
of $22.1 million, $29.1 million and $32.0 million and gross losses of $5.0
million, $3.4 million and $4.3 million, respectively, were realized on those
sales. In 2004, 2003, and 2002, the net gains (losses) realized on fixed
maturity securities also include a provision for the other than temporary
decline in the value of certain securities of $3.9 million, $13.0 million and
$43.3 million, respectively. In 2002, losses on equity securities included a
provision for the other than temporary decline in the value of certain
securities of $10.8 million. The change in unrealized appreciation and
depreciation on investments, primarily fixed maturity securities, is included as
a component of accumulated other comprehensive income. See Note L to the
Consolidated Financial Statements.

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:

<TABLE>
<CAPTION>
                                                                            December 31, 2004
                                               ----------------------------------------------------------------------------
                                                 Less Than 12 Months        12 Months or More                 Total
                                               ----------------------     ----------------------     ----------------------
                                                             Gross                      Gross                      Gross
                                                Fair       Unrealized      Fair       Unrealized      Fair       Unrealized
                                                Value        Losses        Value        Losses        Value        Losses
                                               --------     --------      --------     --------      --------     --------
<S>                                            <C>         <C>            <C>         <C>            <C>         <C>
Mortgage-backed securities ...............     $216,549     $ (3,298)     $ 40,607     $   (753)     $257,156     $ (4,051)
Corporate securities .....................      106,619       (2,000)       58,207       (4,066)      164,826       (6,066)
U.S. Treasury & other U.S. Government
  guaranteed securities ..................       42,028         (314)           --           --        42,028         (314)
Obligations of U.S. states, municipalities
  & political subdivisions ...............       10,187          (79)        7,302         (189)       17,489         (268)
                                               --------     --------      --------     --------      --------     --------
    Total fixed maturity securities ......     $375,383     $ (5,691)     $106,116     $ (5,008)     $481,499     $(10,699)
                                               ========     ========      ========     ========      ========     ========
</TABLE>

<TABLE>
<CAPTION>
                                                                            December 31, 2003
                                               ----------------------------------------------------------------------------
                                                 Less Than 12 Months        12 Months or More                 Total
                                               ----------------------     ----------------------     ----------------------
                                                             Gross                      Gross                      Gross
                                                Fair       Unrealized      Fair       Unrealized      Fair       Unrealized
                                                Value        Losses        Value        Losses        Value        Losses
                                               --------     --------      --------     --------      --------     --------
<S>                                            <C>         <C>            <C>         <C>            <C>         <C>
Mortgage-backed securities ...............     $196,573     $ (2,443)     $  6,183     $   (104)     $202,756     $ (2,547)
Corporate securities .....................       88,950       (1,969)       79,445       (7,361)      168,395       (9,330)
U.S. Treasury & other U.S. Government
  guaranteed securities ..................      242,848          (40)           --           --       242,848          (40)
Obligations of U.S. states, municipalities
  & political subdivisions ...............       17,264         (259)       11,930       (2,527)       29,194       (2,786)
                                               --------     --------      --------     --------      --------     --------
    Total fixed maturity securities ......     $545,635     $ (4,711)     $ 97,558     $ (9,992)     $643,193     $(14,703)
                                               ========     ========      ========     ========      ========     ========
</TABLE>

The Company regularly evaluates its investment portfolio for factors that may
indicate that a decline in the fair value of an investment is other than
temporary. The gross unrealized losses in 2004 are attributable to over two
hundred fifty fixed maturity security positions with no unrealized loss
attributable to any one security exceeding $1.1 million. The gross unrealized
losses in 2003 are attributable to over two hundred fixed maturity security
positions with no unrealized loss attributable to any one security exceeding
$1.6 million. At December 31, 2004 and 2003, approximately 73% and 52%,
respectively, of these aggregate gross unrealized losses relate to fixed
maturity security positions as to which such losses represent 10% or less of the
amortized cost for the applicable security. Unrealized losses attributable to
investment grade fixed maturity securities as determined by nationally
recognized statistical rating organizations at December 31, 2004 and 2003,
comprised 62% and 69%, respectively, of the aggregate gross unrealized losses.
Unrealized losses attributable to non-investment grade fixed maturity securities
at December 31, 2004 and 2003 comprised 38% and 31%, respectively, of the
aggregate gross unrealized losses. For non-investment grade fixed maturity
securities, management evaluated the financial position and prospects of the
issuers, conditions in the issuers' industries and geographic areas, and
liquidity of the investments. Based on an evaluation of these factors and the
other factors described in Note A to the Consolidated


                                      -51-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2004

NOTE B - INVESTMENTS - (CONTINUED)

Financial Statements and the Company's ability and intent to retain the
investments to allow for any anticipated recovery in the investments' fair
value, management believes that the unrealized losses in the table above are
temporary.

The Company, at times, enters into futures and option contracts and interest
rate and credit default swap agreements in connection with its investment
strategy to reduce the risk associated with changes in the value of its fixed
maturity portfolio. These positions are carried at fair value with gains and
losses included in income. The Company recognized net investment losses of $0.6
million and $3.7 million in 2004 and 2003, respectively, related to these
instruments. The Company had no material outstanding futures and option
contracts or interest rate and credit default swap agreements at December 31,
2004. The Company, at times, may also invest in non-dollar denominated fixed
maturity securities that expose it to fluctuations in foreign currency rates,
and, therefore, may hedge such exposure by using currency forward contracts. The
Company had no material outstanding currency forward contracts at December 31,
2004 or 2003.

Bonds and short-term investments with amortized costs of $73.1 million and $63.1
million at December 31, 2004 and 2003, respectively, are on deposit with various
states' insurance departments in compliance with statutory requirements.
Additionally, certain assets of the Company are restricted under the terms of
annuity reinsurance agreements. These agreements provide for the distribution of
assets to the reinsured companies covered under the agreements prior to any
general distribution to policyholders in the event of the Company's insolvency
or bankruptcy. The amount of assets restricted for this purpose was $65.1
million and $68.1 million at December 31, 2004 and 2003, respectively.

At December 31, 2004 and 2003, approximately 40% and 42%, respectively, of the
Company's total invested assets were comprised of corporate fixed maturity
securities, which are diversified across economic sectors and industry classes.
Mortgage-backed securities comprised 22% and 20% of the Company's total invested
assets at December 31, 2004 and 2003, respectively. The Company's
mortgage-backed securities are diversified with respect to size and geographic
distribution of the underlying mortgage loans. The Company also invests in
certain non-investment grade securities as determined by nationally recognized
statistical rating organizations. Non-investment grade securities included in
fixed maturity securities had fair values of $201.2 million and $200.5 million
at December 31, 2004 and 2003, respectively. Non-investment grade securities
constituted 5.7% and 6.3% of total invested assets at December 31, 2004 and
2003, respectively.

Summarized aggregate unaudited financial information for the entities in which
the balances with independent investment managers have been invested is shown
below:

<TABLE>
<CAPTION>
                                                    December 31,
                                            ---------------------------
                                                2004            2003
                                            -----------     -----------
                                               (dollars in thousands)
<S>                                         <C>             <C>
Assets ................................     $10,307,391     $ 8,059,997
                                            ===========     ===========

Liabilities ...........................     $ 2,108,503     $ 1,044,971
Partners' capital .....................       8,198,888       7,015,026
                                            -----------     -----------
Total liabilities and partners' capital     $10,307,391     $ 8,059,997
                                            ===========     ===========

Net income ............................     $ 1,700,618     $ 2,188,095
                                            ===========     ===========
</TABLE>

The fair value of the Company's investment in the securities of any one issuer
or securities backed by a single pool of assets, excluding U.S. Government
obligations, whose value represented 10% or more of shareholders' equity at
December 31, 2004 was as follows: Bankers Trust Corporation Secured Portfolio
Notes, Series 1998-1 - $135.5 million.


                                      -52-
<PAGE>


                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2004

NOTE C - DISABILITY, ACCIDENT AND CASUALTY FUTURE POLICY BENEFITS AND UNPAID
         CLAIMS AND CLAIM EXPENSES

The following table provides a reconciliation of the beginning and ending
disability, accident and casualty future policy benefits and unpaid claims and
claim expenses:

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                               ----------------------------------------
                                                                  2004           2003           2002
                                                               ----------     ----------     ----------
                                                                       (dollars in thousands)
<S>                                                            <C>            <C>            <C>
Balance at beginning of year, net of reinsurance .........     $  949,020     $  862,355     $  801,225
Add provisions for claims and claim expenses incurred, net
   of reinsurance, occurring during:
     Current year ........................................        370,618        305,463        280,657
     Prior years .........................................         13,960          6,401          1,331
                                                               ----------     ----------     ----------
   Incurred claims and claim expenses during the current
      year, net of reinsurance ...........................        384,578        311,864        281,988
                                                               ----------     ----------     ----------
Deduct claims and claim expenses paid, net of reinsurance,
   occurring during:
      Current year .......................................         61,742         69,351         71,545
      Prior years ........................................        182,872        155,848        149,313
                                                               ----------     ----------     ----------
                                                                  244,614        225,199        220,858
                                                               ----------     ----------     ----------
Balance at end of year, net of reinsurance ...............      1,088,984        949,020        862,355
Reinsurance receivables at end of year ...................        264,189        252,568        238,489
                                                               ----------     ----------     ----------
   Balance at end of year, gross of reinsurance ..........     $1,353,173     $1,201,588     $1,100,844
                                                               ==========     ==========     ==========

Balance Sheets:
   Future policy benefits:
     Disability and accident .............................     $  488,909     $  439,158

   Unpaid claims and claim expenses:

     Disability and accident .............................        218,316        189,740
     Casualty ............................................        645,948        572,690
                                                               ----------     ----------

                                                               $1,353,173     $1,201,588
                                                               ==========     ==========
</TABLE>

In 2004, the change in the provision for claims and claims expenses incurred in
prior years reflects the accretion of discounted reserves and unfavorable claims
development. In 2003 and 2002, the change in the provision for claims and claim
expenses incurred in prior years reflects the accretion of discounted reserves
offset by favorable claims development. The Company's insurance policies do not
provide for the retrospective adjustment of premiums based on claim experience.

NOTE D - CORPORATE DEBT

In December 2002, the Company entered into a $150.0 million revolving credit
facility with a group of lenders comprised of major banking institutions (the
"Credit Agreement"), which replaced the existing $140.0 million revolving credit
facilities scheduled to expire in April 2003. The Company had outstanding
borrowings of $14.0 million and $0 under the Credit Agreement at December 31,
2004 and 2003, respectively. The borrowings under the Credit Agreement accrue
interest at floating rates, which are indexed to various market interest
indices, and non-use fees are charged on unused portions of the commitments. The
final maturity of the Credit Agreement is December 16, 2006. As a result of the
May 2003 issuance of the $143.8 million of 8.00% Senior Notes due 2033 (the
"2033 Senior Notes"), under the terms of the Company's Credit Agreement, the
maximum amount of borrowings available to the Company thereunder was reduced
from $150.0 million to $100.0 million and the facility was converted to an
unsecured facility, with collateral being released to the Company. The debt is
subject to certain restrictions and financial covenants considered ordinary for
this type of credit agreement. They include, among others, the maintenance of
certain financial ratios, minimum statutory surplus and risk-based capital
requirements for RSLIC and SNCC, and certain investment, indebtedness, dividend
and stock repurchase limitations. As of December 31, 2004, the Company was in
compliance in all material respects with the restrictions and covenants in the
Credit Agreement.


                                      -53-
<PAGE>


                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2004

NOTE D - CORPORATE DEBT - (CONTINUED)

On May 20, 2003, the Company issued $143.8 million of the 2033 Senior Notes in a
public offering. The proceeds from the 2033 Senior Notes were used to repay the
outstanding borrowings under the Company's Credit Agreement and to repay in full
the principal amount of $66.5 million of existing senior notes at their maturity
on October 1, 2003. The 2033 Senior Notes, which were issued at par value, will
mature on May 15, 2033 and are redeemable at par at the option of the Company,
in whole or in part, at any time on or after May 15, 2008. The 2033 Senior Notes
are not redeemable at the option of any holder of the notes prior to maturity
nor are they entitled to any sinking fund redemptions. Interest on the 2033
Senior Notes is payable quarterly on February 15, May 15, August 15 and November
15 of each year. The 2033 Senior Notes are senior unsecured obligations of the
Company and, as such, are effectively subordinated to all claims of secured
creditors of the Company and its subsidiaries and to claims of unsecured
creditors of the Company's subsidiaries, including the insurance subsidiaries'
obligations to policyholders. The 2033 Senior Notes were issued in denominations
of $25 and multiples of $25 and are listed on the New York Stock Exchange. As of
December 31, 2004, the Company was in compliance in all material respects with
the terms of the related indenture.

On October 1, 2003, the Company repaid in full the principal amount of $66.5
million of the existing 8.00% senior notes at their maturity (the "Matured
Senior Notes"). At various times during the second quarter of 2002, the Company
repurchased $10.5 million aggregate principal amount of the Matured Senior Notes
and recognized a loss on extinguishment of debt of $0.3 million, in connection
with these repurchases.

To mitigate the risk of interest rates rising before the issuance of the 2033
Senior Notes could be completed, the Company entered into a treasury rate lock
agreement in September 2002, with a notional amount of $150.0 million, and an
anticipated debt term of 10 years. The Company paid $13.8 million upon the
issuance of the 2033 Senior Notes in May 2003 to settle the treasury rate lock
agreement. This transaction was accounted for as a cash flow hedge under the
provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." Accordingly, $12.1 million of the loss on the treasury rate lock
agreement was recorded in accumulated other comprehensive income and is being
amortized into interest expense ratably over 10 years. The Company will amortize
$1.2 million of such $12.1 million loss into interest expense over the next
twelve months. The remaining $1.7 million of loss on the treasury rate lock
agreement was deemed ineffective and, therefore, was recognized as a reduction
of net investment income during the second quarter of 2003. At December 31, 2004
and 2003, the net loss on the treasury rate lock agreement included in
accumulated other comprehensive income was $6.6 million and $7.4 million,
respectively, net of an income tax benefit of $3.6 million and $4.0 million,
respectively.

In May 2003, the Company made the final $9.0 million principal payment on the
$45.0 million of SIG's 8.5% senior secured notes (the "SIG Senior Notes"), which
the Company had assumed in 1996.

The Company also repaid in full the $5.7 million principal amount due on the
8.00% subordinated notes (the "Subordinated Notes") in June 2003, which the
Company had issued in conjunction with the acquisition of Matrix in 1998.

Interest paid by the Company on its corporate debt totaled $12.4 million, $12.9
million and $8.9 million during 2004, 2003 and 2002, respectively.

NOTE E - ADVANCES FROM THE FEDERAL HOME LOAN BANK

The Company, through its insurance subsidiaries, maintains a program in which
various investments are financed using advances from various Federal Home Loan
Banks (collectively, the "FHLB"). At December 31, 2004 and 2003, advances from
the FHLB, including accrued interest, totaled $85.4 million and $150.8 million,
respectively. During 2004, $95.0 million of advances from the FHLB matured and
were repaid and $30.0 million of advances were obtained by the Company. Interest
expense on the advances is included as an offset to investment income on the
financed securities. The average interest rate on the outstanding advances was
5.7% and 6.6% at December 31, 2004 and 2003, respectively. The advances of $85.0
million, which were obtained at a fixed rate, have a weighted average term of
10.3 years at December 31, 2004. These advances are collateralized by fixed
maturity securities with a fair value of $85.2 million.


                                      -54-

<PAGE>
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2004

NOTE F - SECURITIES LENDING

The Company maintains a securities lending program under which certain
securities from its portfolio are loaned to other institutions for short periods
of time. The Company maintains full ownership rights to the securities loaned
and continues to earn interest and dividends on them. Accordingly, such
securities are included in invested assets. The Company obtains collateral for
such loans at approximately 102% of the market value of a loaned security. The
Company's institutional lending agent monitors the market value of the
securities loaned and obtains additional collateral as necessary. The collateral
is deposited by the borrower with, and held by, such agent. Cash collateral is
invested by such agent to generate additional income according to specified
guidelines. The securities lending collateral is reported as an asset with a
corresponding liability reflected for the obligation to return the collateral.
At December 31, 2004, the Company had securities on loan with a market value of
$231.8 million and cash collateral of $236.9 million. At December 31, 2003,
there were no securities on loan related to this program.

NOTE G - INCOME TAXES

Income tax expense is reconciled to the amount computed by applying the
statutory federal income tax rate to income before income tax expense:

<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                                      -----------------------------------------
                                                                         2004            2003           2002
                                                                      -----------    -----------     ----------
                                                                                (dollars in thousands)
<S>                                                                   <C>            <C>             <C>
Federal income tax expense at statutory rate ......................   $    58,697    $    50,225     $    30,199
Tax-exempt income and dividends received deduction.................        (6,693)        (6,324)         (6,206)
Favorable resolution of federal income tax audits and other........        (7,846)           695           1,638
                                                                      -----------    -----------     -----------
                                                                      $    44,158    $    44,596     $    25,631
                                                                      ===========    ===========     ===========
</TABLE>

All of the Company's current and deferred income tax expense is due to federal
income taxes as opposed to state income taxes.

Deferred tax assets and liabilities are determined based on the difference
between the book basis and tax basis of assets and liabilities using tax rates
in effect for the year in which the differences are expected to reverse. The
components of the net deferred tax liability are as follows:

<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                                        ---------------------------
                                                                                            2004           2003
                                                                                        -----------     -----------
                                                                                          (dollars in thousands)
<S>                                                                                     <C>             <C>
Cost of business acquired............................................................   $    66,171     $    62,241
Future policy benefits and unpaid claims and claim expenses..........................        47,240          41,711
Investments..........................................................................        43,790          25,708
Other................................................................................         7,835          10,116
                                                                                        -----------     -----------
    Gross deferred tax liabilities...................................................       165,036         139,776
                                                                                        -----------     -----------
Future policy benefits and unpaid claims and claim expenses..........................        (9,819)         (9,551)
Cost of business acquired and other..................................................       (23,300)        (19,394)
Net operating loss carryforwards.....................................................       (12,550)        (13,736)
                                                                                        -----------     -----------
    Gross deferred tax assets........................................................       (45,669)        (42,681)
                                                                                        -----------     -----------
    Net deferred tax liability.......................................................   $   119,367     $    97,095
                                                                                        ===========     ===========
</TABLE>


                                      -55-
<PAGE>


                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2004

NOTE G -  INCOME TAXES - (CONTINUED)

Current tax expense (benefit), deferred tax expense, current tax liability
(recoverable) and income taxes paid and refunded are as follows:

<TABLE>
<CAPTION>
                                                                                 As of or for the Year Ended
                                                                                        December 31,
                                                                         ------------------------------------------
                                                                            2004            2003           2002
                                                                         -----------    -----------     -----------
                                                                                   (dollars in thousands)
<S>                                                                      <C>            <C>             <C>
Current tax expense (benefit).........................................   $    21,736    $    34,544     $    (5,579)
Deferred tax expense..................................................        22,422         10,052          31,210
Current tax liability (recoverable)...................................         5,265            817         (11,292)
Income taxes paid.....................................................        21,098         21,800          17,765
Income tax refunds....................................................         6,017             --          19,031
</TABLE>

At December 31, 2004, DFG, SNCC and the other non-life insurance subsidiaries
have net operating loss carryforwards of $35.9 million, which will expire in
2021. The Company's federal tax returns are routinely audited by the Internal
Revenue Service ("IRS"). During 2004, the Company's income taxes payable was
reduced by $6.6 million primarily from the favorable resolution of IRS audits of
the 1998 through 2002 tax years. This reduction represents the release of
previous accruals for potential audit adjustments which were subsequently
settled or eliminated and further refinement of existing tax exposures. Tax
years through 2002 are closed to further assessment by the IRS. Management
believes any future adjustments that may result from IRS examinations of tax
returns will not have a material impact on the consolidated financial position,
liquidity, or results of operations of the Company.

NOTE H - PRESENT VALUE OF FUTURE PROFITS

A summary of the activity related to the PVFP asset, which is included in cost
of business acquired on the consolidated balance sheet, is shown below:

<TABLE>
<CAPTION>
                                                                                   Year Ended December 31,
                                                                         ------------------------------------------
                                                                            2004            2003           2002
                                                                         -----------    -----------     -----------
                                                                                   (dollars in thousands)
<S>                                                                      <C>            <C>             <C>
Balance at beginning of year.........................................    $     9,087    $    11,198     $    13,693
    Interest accrued.................................................            161            189             182
    Amortization.....................................................         (2,190)        (2,300)         (2,677)
                                                                         -----------    ------------    -----------
Balance at end of year...............................................    $     7,058    $     9,087     $    11,198
                                                                         ===========    ===========     ===========
</TABLE>

An estimate of the percentage of the December 31, 2004 PVFP balance to be
amortized over each of the next five years is as follows: 2005 - 30.1%, 2006 -
30.4%, 2007 - 23.3%, 2008 - 4.1% and 2009 - 3.9%.


                                      -56-
<PAGE>


                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2004

NOTE I - FAIR VALUES OF FINANCIAL INSTRUMENTS

The fair values of the Company's financial instruments are shown below. Because
fair values for all balance sheet items are not required to be disclosed by SFAS
No. 107, "Disclosures about Fair Value of Financial Instruments," the aggregate
fair value amounts presented below do not necessarily represent the underlying
value of the Company.

<TABLE>
<CAPTION>
                                                                                December 31,
                                                        -----------------------------------------------------------
                                                                    2004                          2003
                                                        ----------------------------   ----------------------------
                                                          Carrying          Fair          Carrying        Fair
                                                            Value           Value           Value         Value
                                                        -------------   ------------   ------------    ------------
                                                                           (dollars in thousands)
<S>                                                     <C>             <C>            <C>             <C>
Assets:
   Fixed maturity securities, available for sale......  $   3,049,013   $  3,049,013   $  2,862,045    $  2,862,045
   Short-term investments.............................         95,761         95,761        114,752         114,752
   Other investments..................................        396,302        396,302        225,957         225,957
   Securities lending collateral......................        236,900        236,900             --              --
   Assets held in separate account....................         88,205         88,205         92,661          92,661

Liabilities:
   Policyholder account balances......................        948,847        929,490        896,526         888,183
   Corporate debt.....................................        157,750        170,688        143,750         153,123
   Junior subordinated deferrable interest debentures
      underlying company-obligated mandatorily
      redeemable capital securities issued by
      unconsolidated subsidiaries.....................         59,762         61,745             --              --
   Securities lending payable.........................        236,900        236,900             --              --
   Advances from Federal Home Loan Bank...............         85,395         98,946        150,789         167,014
   Liabilities related to separate account............         88,205         88,205         79,413          79,413
</TABLE>

The fair values for fixed maturity securities and short-term investments have
been obtained from broker-dealers, nationally recognized statistical
organizations and, in the case of certain structured notes, by reference to the
fair values of the underlying investments. Securities acquired through private
placements in the Company's fixed maturity and equity securities portfolio that
are not actively traded in a liquid market and do not have other mechanisms for
their sale totaled $76.6 million and $19.7 million at December 31, 2004 and
2003, respectively. The Company estimates the fair value of these securities
primarily by comparison to similar securities with quoted market prices. If
quotes are not available on similar securities, the Company estimates fair value
based on recent purchases or sales of similar securities or other internally
prepared valuations. Key assumptions used in this process include the level of
risk-free interest rates, risk premiums, and performance of underlying
collateral, if applicable. All such investments are classified as available for
sale. The Company's ability to liquidate these investments in a timely manner,
if necessary, may be adversely impacted by the lack of an actively traded
market. Historically, the Company has not realized amounts on dispositions of
non-marketable investments materially in excess of the gain or loss amounts
estimated by the Company under this valuation methodology. The Company believes
that its estimates reasonably reflect the fair values of these securities;
however, had there been an active market for these securities during the
applicable reporting periods, the market prices may have been materially
different than the amounts reported. The carrying values for all other invested
assets approximate fair values based on the nature of the investments. The
carrying values for securities lending collateral and payable approximate fair
value as the asset and the liability are very short-term in nature. The carrying
values of separate account assets and liabilities are equal to fair value.

Policyholder account balances are net of reinsurance receivables and the
carrying values have been decreased for related acquisition costs of $46.2
million and $34.7 million at December 31, 2004 and 2003, respectively. Fair
values for policyholder account balances were determined by deducting an
estimate of the future profits to be realized from the business, discounted at a
current interest rate, from the adjusted carrying values.


                                      -57-
<PAGE>


                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2004

NOTE I - FAIR VALUES OF FINANCIAL INSTRUMENTS - (CONTINUED)

The Company believes the fair value of its variable rate long-term debt and
variable rate junior subordinated deferrable interest debentures are equal to
their carrying value. The Company pays variable rates of interest on this debt
and these junior subordinated deferrable interest debentures, which reflect
changed market conditions since the time the terms were negotiated. The fair
values of the 2033 Senior Notes, the Matured Senior Notes, the SIG Senior Notes
and the Subordinated Notes and the fixed rate junior subordinated deferrable
interest 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 J - JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES UNDERLYING THE
         COMPANY-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF
         UNCONSOLIDATED SUBSIDIARIES

In 1997, Delphi Funding L.L.C. ("Delphi Funding"), a consolidated subsidiary of
the Company prior to the adoption of revised FIN No. 46 in 2004, issued $100.0
million liquidation amount of 9.31% Capital Securities, Series A (the "Capital
Securities") in a public offering. During 2001, the Company repurchased $64.0
million liquidation amount of the Capital Securities in the open market. In
connection with the issuance of the Capital Securities and the related purchase
by the Company of all of the common limited liability company interests in
Delphi Funding, the Company issued to Delphi Funding $103.1 million principal
amount of 9.31% junior subordinated deferrable interest debentures, Series A,
due 2027 (the "Junior Debentures"). Interest on the outstanding Junior
Debentures is payable semiannually, but may, subject to certain exceptions, be
deferred at any time or from time to time for a period not exceeding five years
with respect to each deferral period, in which event dividends on the Capital
Securities will also be deferred and the Company will not be permitted to pay
cash dividends or make payments on any junior indebtedness. No interest payments
on the Junior Debentures have been deferred since their issuance. The
distribution and other payment dates on the Capital Securities correspond to the
interest and other payment dates on the Junior Debentures. The Junior Debentures
are not redeemable prior to March 25, 2007, but the Company has the right to
dissolve Delphi Funding at any time and distribute the Junior Debentures to the
holders of the Capital Securities. Pursuant to the related transaction
documents, the Company has, on a subordinated basis, guaranteed all payments due
on the Capital Securities.

On May 15, 2003, Delphi Financial Statutory Trust I (the "Trust"), a recently -
created Connecticut statutory trust and consolidated subsidiary of the Company
prior to the adoption of revised FIN No. 46 in 2004, issued $20.0 million
liquidation amount of Floating Rate Capital Securities (the "2003 Capital
Securities") in a private placement transaction. In connection with the issuance
of the 2003 Capital Securities and the related purchase by the Company of all of
the common securities of the Trust (the "2003 Common Securities" and,
collectively with the 2003 Capital Securities, the "Trust Securities"), the
Company issued $20.6 million principal amount of floating rate junior
subordinated deferrable interest debentures, due 2033 (the "2003 Junior
Debentures"). Interest on the 2003 Junior Debentures is payable quarterly on
February 15, May 15, August 15 and November 15 of each year. The interest rate
on the 2003 Junior Debentures resets quarterly to a rate equal to the London
interbank offered interest rate for three-month U.S. dollar deposits, plus 4.10%
(not to exceed 12.50%). The weighted average interest rate on the 2003 Junior
Debentures was 5.56% and 5.31% for the years ended December 31, 2004 and 2003,
respectively. The distribution and other payment dates on the Trust Securities
correspond to the interest and other payment dates on the 2003 Junior
Debentures. The 2003 Junior Debentures are unsecured and subordinated in right
of payment to all of the Company's existing and future senior indebtedness.
Beginning in May 2008, the Company will have the right to redeem the 2003 Junior
Debentures, in whole or in part, at a price equal to 100% of the principal
amount of the debentures, plus accrued and unpaid interest to the date of
redemption.

As of March 31, 2004, the Company adopted revised FIN No. 46 which changed the
conceptual framework for determining if an entity holds a controlling interest
in a variable interest entity and required the Company to deconsolidate its
subsidiaries that hold junior subordinated deferrable interest debentures of the
Company which underlie the Company-obligated mandatorily redeemable capital
securities of these subsidiaries. Therefore, at December 31, 2004, the Company
presented in its consolidated financial statements the junior subordinated
deferrable interest debentures of $59.8 million as a liability and its interest
of $3.7 million in the subsidiaries that hold these debentures as a component of
other assets.

Interest paid by the Company on the outstanding junior subordinated deferrable
interest debentures totaled $4.5 million, $3.9 million and $3.4 million during
2004, 2003 and 2002, respectively.


                                      -58-
<PAGE>


                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2004

NOTE K - SHAREHOLDERS' EQUITY AND RESTRICTIONS

The holders of the Company's Class A Common Stock are entitled to one vote per
share, and the holders of the Company's Class B Common Stock are entitled to the
number of votes per share equal to the lesser of (1) the number of votes such
that the aggregate of all outstanding shares of Class B Common Stock will be
entitled to cast 49.9% of all votes represented by the aggregate of all
outstanding shares of Class A Common Stock and Class B Common Stock or (2) ten
votes per share. On November 21, 2003, the Company's Board of Directors declared
a 3-for-2 common stock split effected in the form of a 50% stock dividend, which
was distributed on December 22, 2003 to stockholders of record on December 8,
2003. A total of 11,211,435 shares of common stock were issued in connection
with the split, and the aggregate amount of $0.1 million, equal to the par value
of the common stock issued, was reclassified from additional paid-in capital to
common stock. The stated par value of each share remained at $0.01.

In 2001, the Company's Board of Directors approved the initiation of a quarterly
cash dividend, payable on the Company's outstanding Class A and Class B Common
Stock. The quarterly cash dividend was $0.05 per share during 2002 and the first
three quarters of 2003. In the fourth quarter of 2003, the Company's Board of
Directors approved an increase in the Company's quarterly cash dividend to $0.08
per share. During 2004, 2003 and 2002, the Company paid cash dividends on its
capital stock in the amounts of $10.1 million, $7.4 million and $6.0 million,
respectively. Under the Credit Agreement, cash dividends on, together with any
repurchases or redemptions by the Company of, its capital stock, may not, during
any fiscal year, exceed 5% of the Company's Consolidated Equity (as defined in
the Credit Agreement) as of the end of the preceding fiscal year, with unused
amounts carrying over to subsequent fiscal years. The aggregate limitation for
2005 on dividend payments and/or repurchases or redemptions of its capital stock
by the Company will be equal to $127.0 million. The Credit Agreement also
permits additional repurchases by the Company of its capital stock in an
aggregate amount of up to $12.5 million over the term of the Credit Agreement.

The Company's life insurance subsidiaries had consolidated statutory capital and
surplus of $326.1 million and $293.8 million at December 31, 2004 and 2003,
respectively. Consolidated statutory net income for the Company's life insurance
subsidiaries was $30.7 million, $24.8 million and $29.5 million, in 2004, 2003
and 2002, respectively. The consolidated statutory net income for the Company's
life insurance subsidiaries for 2004, 2003, and 2002 includes a charge of $2.1
million, $16.0 million and $17.4 million, respectively, for the other than
temporary decline in the value of certain securities. The Company's casualty
insurance subsidiary had statutory capital and surplus of $286.2 million and
$252.2 million at December 31, 2004 and 2003, respectively, and statutory net
income of $34.9 million, $30.2 million and $15.2 million in 2004, 2003 and 2002,
respectively. Payment of dividends by the Company's insurance subsidiaries is
regulated by insurance laws and is permitted based on, among other things, the
level of prior-year statutory surplus and net income. The Company's insurance
subsidiaries will be permitted to make dividend payments totaling $61.4 million
during 2005 without prior regulatory approval.

The Company's Board of Directors has authorized the Company to purchase up to
3.7 million shares of its outstanding Class A Common Stock from time to time on
the open market. At December 31, 2004, 1.1 million shares remained authorized
for future purchases. The Company did not purchase any of its Class A Common
Stock during 2004 and 2002. During 2003, the Company purchased 0.3 million
shares of its Class A Common Stock for a total cost of $7.5 million with a
volume weighted average price of $24.75 per share. During 2004, the Company
received 13,176 shares of the Company's Class A Common Stock with an aggregate
value of $0.3 million in liquidation of a partnership interest.


                                      -59-
<PAGE>


                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2004

NOTE K - SHAREHOLDERS' EQUITY AND RESTRICTIONS - (CONTINUED)

The following table provides a reconciliation of beginning and ending shares:

<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                           ---------------------------------
                                                            2004         2003         2002
                                                           -------      -------      -------
                                                                (shares in thousands)
<S>                                                        <C>          <C>          <C>
Class A Common Stock:
   Beginning balance .................................      29,457       18,928       17,763
      Issuance of stock, exercise of stock options and
          conversion of shares .......................         961          710        1,165
      Three-for-two stock split ......................          --        9,819           --
                                                           -------      -------      -------
        Ending balance ...............................      30,418       29,457       18,928
                                                           =======      =======      =======
Class B Common Stock:
   Beginning balance .................................       4,177        3,195        4,133
      Conversion of shares ...........................        (273)        (410)        (938)
      Three-for-two stock split ......................          --        1,392           --
                                                           -------      -------      -------
        Ending balance ...............................       3,904        4,177        3,195
                                                           =======      =======      =======
Class A Treasury Stock:
   Beginning balance .................................       2,560        1,505        1,505
      Acquisition of treasury stock ..................          13          202           --
      Three-for-two stock split ......................          --          853           --
                                                           -------      -------      -------
        Ending balance ...............................       2,573        2,560        1,505
                                                           =======      =======      =======
</TABLE>


                                      -60-
<PAGE>


                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2004

NOTE L - ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of other comprehensive (loss) income are as follows:

<TABLE>
<CAPTION>
                                                                     Net
                                                                  Unrealized
                                                                 Appreciation
                                                                (Depreciation)         Net           Minimum
                                                                 on Available        Loss on         Pension
                                                                   for Sale         Cash Flow       Liability
                                                                   Securities         Hedge          Adjustment          Total
                                                                    --------         --------         --------         --------
                                                                                       (dollars in thousands)
<S>                                                             <C>                 <C>             <C>                <C>
Balance, January 1, 2002 ...................................        $(10,985)        $     --         $     --         $(10,985)
                                                                    --------         --------         --------         --------

Unrealized appreciation on available for sale securities(1)           26,556               --               --           26,556
Reclassification adjustment for losses included in net
    income(2) ..............................................          18,001               --               --           18,001
                                                                    --------         --------         --------         --------
Net change in unrealized appreciation on investments .......          44,557               --               --           44,557
Net unrealized loss on cash flow hedge(3) ..................              --           (3,290)              --           (3,290)
Minimum pension liability adjustment(4) ....................              --               --             (279)            (279)
                                                                    --------         --------         --------         --------
       Balance, December 31, 2002 ..........................        $ 33,572         $ (3,290)        $   (279)        $ 30,003
                                                                    --------         --------         --------         --------

Unrealized appreciation on available for sale securities(1)           35,186               --               --           35,186
Reclassification adjustment for gains included in net
    income(2) ..............................................          (8,791)              --               --           (8,791)
                                                                    --------         --------         --------         --------
Net change in unrealized appreciation on investments .......          26,395               --               --           26,395
                                                                                                                       --------
Net loss on cash flow hedge(3) .............................              --           (5,671)              --           (5,671)
Reclassification adjustment for losses included
    in net income(5) .......................................              --            1,565               --            1,565
                                                                                     --------                          --------
Increase in net loss on cash flow hedge ....................              --           (4,106)              --           (4,106)
Net change in minimum pension liability adjustment(4) ......              --               --              136              136
                                                                    --------         --------         --------         --------
       Balance, December 31, 2003 ..........................        $ 59,967         $ (7,396)        $   (143)        $ 52,428
                                                                    --------         --------         --------         --------

Unrealized appreciation on available for sale securities(1)           13,760               --               --           13,760
Reclassification adjustment for gains included in net
    income(2) ..............................................          (9,044)              --               --           (9,044)
                                                                    --------         --------         --------         --------
Net change in unrealized appreciation on
    investments ............................................           4,716               --               --            4,716
                                                                                                                       --------
Reclassification adjustment for losses included
    in net income(5) .......................................              --              786               --              786
Net change in minimum pension liability adjustment(4) ......              --               --             (559)            (559)
                                                                    --------         --------         --------         --------
       Balance, December 31, 2004 ..........................        $ 64,683         $ (6,610)        $   (702)        $ 57,371
                                                                    ========         ========         ========         ========
</TABLE>

(1)   Net of an income tax expense of $14.3 million, $18.9 million and $7.4
      million for the years ended December 31, 2002, 2003 and 2004,
      respectively. Also, net of related adjustment to cost of business acquired
      of $(23.8) million, $(5.5) million and $7.4 million for the years ended
      December 31, 2002, 2003 and 2004, respectively.

(2)   Net of an income tax benefit (expense) of $9.7 million, $(4.7) million and
      $(4.9) million for the years ended December 31, 2002, 2003 and 2004,
      respectively.

(3)   Net of an income tax benefit of $1.8 million, $3.0 million and $0 for the
      years ended December 31, 2002, 2003 and 2004, respectively.

(4)   Net of an income tax (benefit) expense of $(0.1) million, $0.1 million and
      $(0.3) million for the years ended December 31, 2002, 2003 and 2004,
      respectively.

(5)   Net of an income tax benefit of $0.8 million and $0.4 million for the
      years ended December 31, 2003 and 2004, respectively.


                                      -61-
<PAGE>


                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2004

NOTE M - COMMITMENTS AND CONTINGENCIES

Total rental expense for operating leases, principally for administrative and
sales office space, was $9.2 million, $7.8 million and $7.7 million for the
years ended December 31, 2004, 2003, and 2002, respectively. As of December 31,
2004, future net minimum rental payments under non-cancelable operating leases
were approximately $42.2 million, payable as follows: 2005 - $9.9 million, 2006
- $9.8 million, 2007 - $9.1 million, 2008 - $7.9 million, 2009 - $ 3.6 million
and $1.9 million thereafter.

In the course of its business, the Company is a party to litigation and other
proceedings, primarily involving its insurance operations. In some cases, these
proceedings entail claims against the Company for punitive damages and similar
types of relief. The ultimate disposition of such pending litigation and
proceedings is not expected to have a material adverse effect on the Company's
financial position. In addition, incident to its discontinued products, the
Company has been and is currently a party to various arbitrations arising out of
accident and health reinsurance arrangements in which it and other companies
formerly were participating reinsurers. During the second quarter of 2004, the
Company, along with other former participants, reached a settlement resolving
the matters in dispute in one of these arbitrations, and a hearing in another is
scheduled to be held in the second quarter of 2005. The Company increased its
reserves relating to the reinsurance business in dispute in the settled
arbitration by a total of $5.5 million during the year ended December 31, 2004.
The Company believes that it has substantial defenses upon which to contest the
claims made in the remaining arbitration, although it is not possible to predict
the ultimate outcome of this arbitration. In the opinion of management, such
arbitration, when ultimately resolved, will not have an adverse effect on the
Company's financial position.

NOTE N - STOCK OPTIONS

Under the terms of the Company's employee stock option plans and outside
directors' stock option plan, a total of 5,775,000 shares of Class A Common
Stock have been reserved for issuance. The exercise price for options granted
under these plans is the fair market value of the underlying stock as of the
date of the grant and the maximum term of an option is ten years.

In 2003, the Company's Board of Directors approved a long-term incentive and
share award plan (the "2003 Employee Option Plan") for the granting of
restricted shares, restricted share units (the receipt of shares or cash at the
end of the specified deferral period), other share-based awards, or options to
purchase shares of Class A Common Stock to employees and other individuals who,
in the judgment of the Stock Option and Compensation Committee of the Company's
Board of Directors (the "Committee"), can make substantial contributions to the
long-term profitability and the value of the Company, its subsidiaries or
affiliates. In 2004, the Committee amended the 2003 Employee Option Plan, to
increase the aggregate number of shares by 1,000,000, which amendment was
approved by the Company's stockholders at the 2004 Annual Meeting. Under the
terms of the 2003 Employee Option Plan, a total of 2,500,000 shares of Class A
Common Stock have been reserved for issuance. Awards of restricted shares and
restricted share units are subject to restrictions on transferability and other
restrictions, if any, as the Committee may impose. The Committee may determine
that an award of restricted shares or restricted share units or an other
share-based award to be granted under this plan qualifies as qualified
performance-based compensation. The grant, vesting, and/or settlement of this
type of performance-based award is contingent upon achievement of
pre-established performance objectives, which may vary from individual to
individual and based on performance criteria as the Committee may deem
appropriate. The exercise price of options granted under this plan is determined
by the Committee provided that the exercise price may not be less than the fair
market value of the underlying stock as of the date of the grant. The maximum
term of an option is ten years.

In February 2005 and 2004, the Company granted a total of 10,750 and 12,887
Class A Common Stock restricted share units, respectively, to two executive
officers of the Company based on their performance during 2004 and 2003,
respectively. The Company recognized $0.5 million of compensation expense in
2004 and 2003 related to these awards.

In April 2004, the Company granted performance-contingent incentive options to
purchase 150,000 shares of the Company's Class A Common Stock to each of the
seven members of executive management of RSLIC, for a total of 1,050,000
options, under the 2003 Employee Option Plan. The options, which have a ten-year
term and whose exercise price is equal to the fair market value of the
underlying stock on the grant date, will become exercisable only to the extent
that RSLIC-Texas, RSLIC's parent company, meets specified cumulative financial
performance targets for the three or


                                      -62-
<PAGE>


                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2004

NOTE N - STOCK OPTIONS - (CONTINUED)

five year periods beginning with 2004; otherwise, such options will be
forfeited. 75,000 of each executive's options will become exercisable if
RSLIC-Texas's aggregate consolidated Pre-Tax Operating Income, as defined and
computed under the related option agreements ("RSLT PTOI"), for the three year
performance period is at least $329.4 million; otherwise, a reduced number of
such options will become exercisable to the extent that RSLT PTOI for such
periods exceeds $300.5 million, determined by interpolating between zero and
75,000 according to where the RSLT PTOI amount falls in the range between $300.5
million and $329.4 million. 150,000 of each executive's options (minus the
number of any options that become exercisable for the three year performance
period) will become exercisable if RSLIC-Texas's aggregate RSLT PTOI for the
five year performance period is at least $646.2 million; otherwise, a reduced
number of such options will become exercisable to the extent that RSLT PTOI for
such period exceeds $559.9 million, determined by interpolating between zero and
150,000 according to where the RSLT PTOI amount falls in the range between
$559.9 million and $646.2 million.

In May 2003, the Company granted performance-contingent incentive options to
purchase 225,000 shares of the Company's Class A Common Stock to each of the
five members of executive management of SNCC, for a total of 1,125,000 options,
under the 2003 Employee Option Plan. The options, which have a ten-year term and
whose exercise price is equal to the fair market value of the underlying stock
on the grant date, will become exercisable only to the extent that SIG, SNCC's
parent company, meets specified cumulative financial performance targets for the
three or five fiscal year periods beginning with 2003; otherwise, such options
will be forfeited. 112,500 of each executive's options will become exercisable
if SIG's aggregate consolidated Pre-Tax Operating Income, as defined and
computed under the related option agreements ("SIG PTOI"), for the three year
performance period is at least $216.7 million; otherwise, a reduced number of
such options will become exercisable to the extent that SIG PTOI for such period
exceeds $196.1 million, determined by interpolating between zero and 112,500
according to where the SIG PTOI amount falls in the range between $196.1 million
and $216.7 million. 225,000 of each executive's options (minus the number of any
options that become exercisable for the three year performance period) will
become exercisable if SIG's aggregate SIG PTOI for the five year performance
period is at least $429.1 million; otherwise, a reduced number of such options
will become exercisable to the extent that SIG PTOI for such period exceeds
$380.1 million, determined by interpolating between zero and 225,000 according
to where the SIG PTOI amount falls in the range between $380.1 million and
$429.1 million.

Also in 2003, the Committee amended and restated the long-term performance-based
incentive plan for the Company's chief executive officer (the "Amended
Performance Plan"). Under the terms of the Amended Performance Plan, the
Committee has the authority to grant awards annually as deemed appropriate, to
determine the number of shares subject to any award and to interpret the plan.
The Amended Performance Plan provides for the award of up to 238,482 shares
measured by reference to Stock Units, plus the Carryover Award Amount, as then
in effect, per year over a ten-year term. A Stock Unit consists of restricted or
deferred shares of the Company's Class B Common Stock, each of which individual
shares represent one Stock Unit, and options to purchase shares of Class B
Common Stock represent one-third of one Stock Unit. The Carryover Award Amount
consists of 476,964 restricted or deferred shares and options to purchase
1,430,886 shares of Class B Common Stock, representing the number of shares as
to which awards were available but not granted under the predecessor plan for
the performance period consisting of the 1999 through 2002 calendar years, and
all or a portion of the Carryover Award Amount may be applied to increase the
award amount for any calendar year of the Plan, with the Carryover Award Amount
to be decreased by any portions applied for purposes of future calendar years of
the Plan. The restricted or deferred shares may not be sold or otherwise
disposed of until the earliest of the individual's retirement, disability or
death or a change of ownership of the Company, subject to such additional
restrictions on sale or disposal as the Committee may determine to impose in
connection with a particular award. The exercise price of the options awarded
under the Amended Performance Plan is the fair market value of the underlying
stock as of the date of the grant and the maximum term of the options is ten
years. The options become exercisable 30 days following the date of grant. Under
the predecessor plan, 357,723 deferred shares and 1,073,166 options were granted
to the Company's chief executive officer prior to 1999. No deferred shares or
options were awarded for the year ended December 31, 2002. No compensation
expense related to the predecessor plan was recognized for the year ended
December 31, 2002. In February 2005 and 2004, the Committee awarded the
Company's chief executive officer 52,095 deferred shares and 67,010 deferred
shares, respectively, under the Amended Performance Plan based on his
performance during 2004 and 2003. The Company recognized $0.8 million and $2.6
million of compensation expense in 2004 and 2003, respectively.


                                      -63-
<PAGE>


                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2004

NOTE N - STOCK OPTIONS - (CONTINUED)

Option activity with respect to the above plans was as follows:

<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                             ----------------------------------------------------------------------
                                                      2004                     2003                    2002
                                             ---------------------    --------------------    ---------------------
                                               Number      Average      Number     Average      Number     Average
                                                 of       Exercise        of      Exercise        of      Exercise
                                               Options      Price       Options     Price       Options     Price
                                             ----------   --------     ---------  --------     ---------  ---------
<S>                                         <C>          <C>         <C>         <C>        <C>          <C>
Options outstanding, beginning of year....    4,683,067    $23.70      3,765,159   $21.69      3,827,609   $21.45
   Options granted........................    1,207,736     41.47      1,250,050    28.73        114,615    27.14
   Options forfeited......................      (10,753)    38.56        (39,419)   26.41        (41,308)   25.26
   Options expired........................            -         -         (5,961)   37.58        (31,368)   22.54
   Options exercised......................     (573,104)    18.61       (286,762)   18.39       (104,389)   17.13
                                            -----------              -----------             -----------
Options outstanding, end of year..........    5,306,946     28.26      4,683,067    23.70      3,765,159    21.69
                                            ===========              ===========             ===========

Exercisable options, end of year..........    2,743,918     22.70      3,140,626    21.91      3,152,793    21.55
</TABLE>

Information about options outstanding at December 31, 2004 was as follows:

<TABLE>
<CAPTION>
                                                         Outstanding                      Exercisable
                                            ------------------------------------    ----------------------
                                               Number      Average      Average       Number       Average
      Range of                                   of       Remaining    Exercise         of         Exercise
  Exercise Prices                             Options        Life        Price       Options         Price
------------------                          -----------   ---------    ---------    ----------    ---------
<S>                                         <C>           <C>          <C>          <C>           <C>
$ 0.00 - $ 9.06 .........................        49,620        0.8     $    9.06        49,620    $    9.06
$14.47 - $21.55 .........................     1,759,777        4.2         19.69     1,656,339        19.65
$22.00 - $32.53 .........................     2,277,307        6.4         28.26     1,008,189        27.91
$34.42 - $41.81 .........................     1,220,242        9.2         41.41        29,770        37.95
                                            -----------                              ---------
     Total ..............................     5,306,946        6.3         28.26     2,743,918        22.70
                                            ===========                              =========
</TABLE>

During 1996, the Company assumed 6.0 million SIG stock options (the "SIG
Options") in connection with SIG's merger into the Company (the "SIG Merger").
Upon the exercise of the SIG Options, the holder is entitled to receive (i)
..2099 of a share of the Company's Class A Common Stock for each SIG Option; plus
(ii) an additional number of shares of the Company's Class A Common Stock equal
to the quotient of (a) $1.90 multiplied by the number of SIG Options being
exercised increased by an interest component from the time of the SIG Merger to
the exercise date, divided by (b) the average closing share price for the
Company's Class A Common Stock for the ten days prior to the exercise date. The
SIG Options were granted annually from 1992 to 1996, have an exercise price of
$0.02 and each grant vests over five years beginning in the fourth year after
the grant date. All of the SIG Options expire on October 1, 2006. As of December
31, 2004, the weighted average contractual life of the outstanding SIG Options
was 1.8 years.

Activity with respect to the outstanding SIG Options was as follows:

<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                          ----------------------------------------------------------------------------------------
                                                      2004                           2003                            2002
                                          --------------------------     --------------------------     --------------------------
                                            Number        Equivalent      Number         Equivalent      Number         Equivalent
                                            of SIG         Class A        of SIG          Class A        of SIG           Class A
                                            Options         Shares        Options          Shares        Options           Shares
                                          ----------      ----------     ----------      ----------     ----------      ----------
<S>                                       <C>             <C>            <C>             <C>            <C>             <C>
SIG Options - beginning of year .....        357,179         107,045        696,154         232,500      1,223,606         396,933
   Options exercised ................       (212,050)         61,842       (334,560)        104,707       (511,261)        172,779
   Options expired ..................           (859)             --         (4,415)             --        (16,191)             --
                                          ----------                     ----------                     ----------
SIG Options - end of year ...........        144,270          40,749        357,179         107,045        696,154         232,500
                                          ==========                     ==========                     ==========
Exercisable SIG Options - end of year        144,270          40,749        301,493          91,360        475,976         163,996
</TABLE>


                                      -64-
<PAGE>


                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2004

NOTE O - COMPUTATION OF RESULTS PER SHARE

<TABLE>
<CAPTION>
                                                                                       Year Ended December 31,
                                                                                  ---------------------------------
                                                                                    2004        2003        2002
                                                                                  --------    ---------   ---------
                                                                                       (dollars in thousands,
                                                                                       except per share data)
<S>                                                                               <C>         <C>         <C>
Numerator:
    Net income...............................................................     $123,543    $  98,916   $  60,652
                                                                                  ========    =========   =========

Denominator:
    Weighted average common shares outstanding...............................       31,952       31,208      31,139
      Effect of dilutive securities..........................................          989          815         748
                                                                                  --------    ---------   ---------
    Weighted average common shares outstanding, assuming dilution............       32,941       32,023      31,887
                                                                                  ========    =========   =========
Basic results per share of common stock:
      Net income.............................................................     $   3.87    $    3.17   $    1.95

Diluted results per share of common stock:
      Net income.............................................................     $   3.75    $    3.09   $    1.90
</TABLE>

NOTE P - REINSURANCE

The Company assumes and cedes reinsurance from and to other insurers and
reinsurers. The Company uses reinsurance to limit its maximum loss, provide
greater diversification of risk and in connection with the exiting of certain
lines of business. Reinsurance coverages are tailored to the specific risk
characteristics of each type of product and the Company's retained amount varies
by type of coverage. Generally, group life, disability and accident policies are
reinsured on a coinsurance and risk premium basis. Property and casualty
policies are reinsured on an excess of loss, per occurrence basis under general
reinsurance agreements, or, in some instances, on an individual risk basis.
Indemnity reinsurance treaties do not provide absolute protection to the Company
since the ceding insurer remains responsible for policy claims to the extent
that the reinsurer fails to pay such claims. To reduce this risk, the Company
monitors the financial position of its reinsurers, including, among other
things, the companies' financial ratings, and in certain cases receives
collateral security from the reinsurer. Also, certain of the Company's
reinsurance agreements require the reinsurer to set up security arrangements for
the Company's benefit in the event of certain ratings downgrades. As of December
31, 2004, the individual or group ratings of all of the Company's significant
reinsurers were either "B+" (Very Good) or higher by A.M. Best Company or had
supplied collateral in an amount sufficient to support the amounts receivable.

At December 31, 2004 and 2003, the Company had reinsurance receivables of $428.7
million and $409.6 million, respectively. The Company's reinsurance payables
were not material at December 31, 2004 and 2003. A summary of reinsurance
activity follows:

<TABLE>
<CAPTION>
                                                             Year Ended December 31,
                                                    ----------------------------------------
                                                        2004          2003          2002
                                                    -----------   -----------    -----------
                                                             (dollars in thousands)
<S>                                                 <C>           <C>            <C>
Premium income assumed.........................     $    22,036   $    16,660    $    38,172
Premium income ceded...........................          99,487       100,678        109,198
Benefits, claims and interest credited ceded...         127,862       132,788        134,875
</TABLE>


                                      -65-
<PAGE>


                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2004

NOTE Q - OTHER OPERATING EXPENSES

The Company's other operating expenses are comprised primarily of employee
compensation expenses, premium taxes, licenses and fees and all other general
and administrative expenses. Employee compensation expenses, principally
consisting of salaries, bonuses and costs associated with other employee
benefits, were $63.5 million, $56.6 million, and $48.1 million for the years
ended December 31, 2004, 2003, and 2002, respectively. Premium taxes, licenses
and fees were $24.6 million, $23.8 million, and $21.2 million for the years
ended December 31, 2004, 2003 and 2002, respectively. All other general and
administrative expenses were $38.4 million, $37.4 million, and $32.2 million for
the years ended December 31, 2004, 2003 and 2002, respectively.

NOTE R - SEGMENT INFORMATION

<TABLE>
<CAPTION>
                                                            Year Ended December 31,
                                               ---------------------------------------------
                                                   2004             2003            2002
                                               -----------      -----------      -----------
                                                          (dollars in thousands)
<S>                                            <C>              <C>              <C>
Revenues:
    Group employee benefit products ......     $   926,733      $   796,374      $   698,396
    Asset accumulation products ..........          82,694           82,555           70,109
    Other (1) ............................          30,944           26,524           21,388
                                               -----------      -----------      -----------
                                                 1,040,371          905,453          789,893

    Net realized investment gains (losses)          15,460           12,724          (28,469)
    Loss on extinguishment of debt .......              --               --             (332)
                                               -----------      -----------      -----------
                                               $ 1,055,831      $   918,177      $   761,092
                                               ===========      ===========      ===========
Operating income:
    Group employee benefit products ......     $   159,273      $   140,118      $   122,726
    Asset accumulation products ..........          19,711           16,569           10,129
    Other (1) ............................          (8,217)          (7,812)          (5,390)
                                               -----------      -----------      -----------
                                                   170,767          148,875          127,465

    Net realized investment gains (losses)          15,460           12,724          (28,469)
    Loss on extinguishment of debt .......              --               --             (332)
                                               -----------      -----------      -----------
                                               $   186,227      $   161,599      $    98,664
                                               ===========      ===========      ===========

Net investment income (2):
    Group employee benefit products ......     $   116,157      $   100,338      $    89,897
    Asset accumulation products ..........          79,359           78,397           67,464
    Other (1) ............................           7,258            7,631            4,675
                                               -----------      -----------      -----------
                                               $   202,774      $   186,366      $   162,036
                                               ===========      ===========      ===========

Amortization of cost of business required:
    Group employee benefit products ......     $    58,244      $    51,100      $    41,608
    Asset accumulation products ..........           4,888            4,664            4,134
                                               -----------      -----------      -----------
                                               $    63,132      $    55,764      $    45,742
                                               ===========      ===========      ===========

Segment assets (2):
    Group employee benefit products ......     $ 2,857,714      $ 2,391,010      $ 2,101,836
    Asset accumulation products ..........       1,818,098        1,661,860        1,496,343
    Other (1) ............................         153,655          124,662          136,763
                                               -----------      -----------      -----------
                                               $ 4,829,467      $ 4,177,532      $ 3,734,942
                                               ===========      ===========      ===========
</TABLE>

(1)   Consists of operations that do not meet the quantitative thresholds for
      determining reportable segments and includes integrated disability and
      absence management services and certain corporate activities.

(2)   Net investment income includes income earned on the assets of the
      insurance companies as well as on the assets of the holding company and is
      allocated among business lines in proportion to average reserves and the
      capital placed at risk for each segment. Segment assets include assets of
      the insurance companies as well as the assets of the holding company,
      which are allocated across business lines in proportion to average
      reserves and the capital placed at risk for each segment.


                                      -66-

<PAGE>
                                                                      SCHEDULE I

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                             SUMMARY OF INVESTMENTS
                    OTHER THAN INVESTMENTS IN RELATED PARTIES
                                DECEMBER 31, 2004
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                 Amount
                                                                                                Shown in
                                                            Amortized           Fair             Balance
Type of Investment                                            Cost              Value             Sheet
------------------                                         ----------        ----------        ----------
<S>                                                        <C>               <C>               <C>
Fixed maturity securities available for sale:

  U.S. Government backed mortgage-backed securities        $  537,015        $  546,239        $  546,239
  Other mortgage-backed securities ................           224,391           230,829           230,829
  U.S. Treasury and other U.S. Government
    guaranteed securities .........................           330,856           334,263           334,263
  Obligations of U.S. states, municipalities and
    political subdivisions ........................           489,942           512,311           512,311
  Corporate securities ............................         1,356,314         1,425,371         1,425,371
                                                           ----------        ----------        ----------
    Total fixed maturity securities ...............         2,938,518         3,049,013         3,049,013
                                                           ----------        ----------        ----------

Equity securities:
  Common stocks ...................................            15,955            17,874            17,874
  Non-redeemable preferred stocks .................             8,633             9,425             9,425
                                                           ----------        ----------        ----------
    Total equity securities .......................            24,588            27,299            27,299
                                                           ----------        ----------        ----------

Short-term investments ............................            95,761            95,761            95,761
Other investments .................................           363,409           369,003           369,003
                                                           ----------        ----------        ----------
    Total investments .............................        $3,422,276        $3,541,076        $3,541,076
                                                           ==========        ==========        ==========
</TABLE>




                                      -67-
<PAGE>
                                                                     SCHEDULE II

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                  DELPHI FINANCIAL GROUP, INC. (PARENT COMPANY)
                                 BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                      December 31,
                                                            -------------------------------
                                                                2004                2003
                                                            -----------         -----------
<S>                                                         <C>                 <C>
Assets:
  Fixed maturity securities, available for sale ....        $       719         $    12,898
  Short-term investments ...........................              4,176              14,749
  Other invested assets ............................             31,984               1,260
  Investment in operating subsidiaries .............          1,121,455             977,654
  Investment in investment subsidiaries ............             32,758              22,322
  Cash .............................................                233                 587
  Amounts due from subsidiaries ....................             12,466              22,168
  Other assets .....................................             36,499              35,684
                                                            -----------         -----------
    Total assets ...................................        $ 1,240,290         $ 1,087,322
                                                            ===========         ===========

Liabilities:
  Corporate debt ...................................        $   157,750         $   143,750
  Junior subordinated deferrable interest debentures             59,762              59,762
  Other liabilities ................................             82,930              85,370
                                                            -----------         -----------
                                                                300,442             288,882
                                                            -----------         -----------

Shareholders' Equity:
  Class A Common Stock .............................                304                 295
  Class B Common Stock .............................                 39                  42
  Additional paid-in capital .......................            406,908             383,573
  Accumulated other comprehensive income ...........             57,371              52,428
  Retained earnings ................................            534,540             421,080
  Treasury stock ...................................            (59,314)            (58,978)
                                                            -----------         -----------
                                                                939,848             798,440
                                                            -----------         -----------
    Total liabilities and shareholders' equity .....        $ 1,240,290         $ 1,087,322
                                                            ===========         ===========
</TABLE>




                  See notes to condensed financial statements.


                                      -68-
<PAGE>
                                                         SCHEDULE II (CONTINUED)

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
                  DELPHI FINANCIAL GROUP, INC. (PARENT COMPANY)
                              STATEMENTS OF INCOME
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                          --------------------------------------------
                                                             2004             2003              2002
                                                          ---------        ---------         ---------
<S>                                                       <C>              <C>               <C>
Revenue:
  Equity in undistributed earnings of subsidiaries        $ 190,700        $ 124,155         $  91,303
  Dividends from operating subsidiaries ..........            1,600            2,600            13,800
  Dividends from investment subsidiaries .........               --           47,340                --
  Other income (loss) ............................            3,366           (5,189)           (1,365)
  Realized investment gains ......................            1,628            1,375               200
  Loss on extinguishment of debt .................               --               --              (332)
                                                          ---------        ---------         ---------
                                                            197,294          170,281           103,606
                                                          ---------        ---------         ---------
Expenses:
  Operating expenses .............................            9,555            6,958             2,598
  Interest expense ...............................           20,038           19,811            14,725
                                                          ---------        ---------         ---------
                                                             29,593           26,769            17,323
                                                          ---------        ---------         ---------

    Income before income tax expense .............          167,701          143,512            86,283

Income tax expense ...............................           44,158           44,596            25,631
                                                          ---------        ---------         ---------

    Net income ...................................        $ 123,543        $  98,916         $  60,652
                                                          =========        =========         =========
</TABLE>




                  See notes to condensed financial statements.


                                      -69-
<PAGE>
                                                         SCHEDULE II (CONTINUED)

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
                  DELPHI FINANCIAL GROUP, INC. (PARENT COMPANY)
                            STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                                   ---------------------------------------------
                                                                      2004              2003              2002
                                                                   ---------         ---------         ---------
<S>                                                                <C>               <C>               <C>
Operating activities:
  Net income ..............................................        $ 123,543         $  98,916         $  60,652
  Adjustments to reconcile net income to net cash
      (used) provided by operating activities:
    Equity in undistributed earnings of subsidiaries ......         (138,493)          (69,765)          (63,915)
    Change in other assets and other liabilities ..........           (9,107)            2,022           (29,153)
    Change in current and deferred income taxes ...........            1,999            10,984            15,995
    Amortization, principally of investments and debt
      issuance costs ......................................            1,438             1,103              (290)
    Net realized gains on investments .....................           (1,628)           (1,375)             (200)
    Loss on extinguishment of debt ........................               --                --               332
    Change in amounts due from/to subsidiaries ............            9,702           (32,765)           18,134
                                                                   ---------         ---------         ---------
      Net cash (used) provided by operating activities ....          (12,546)            9,120             1,555
                                                                   ---------         ---------         ---------

Investing activities:
  Purchases of investments and loans made .................          (53,823)          (58,523)          (14,348)
  Sales of investments and receipts from repayment of loans           43,119            45,624                --
  Maturities of investments ...............................            1,904             2,379            15,024
  Net change in short-term investments ....................           10,573           (10,637)             (742)
  Purchases of investments in subsidiaries ................          (11,000)          (20,002)               --
                                                                   ---------         ---------         ---------
  Net cash used by investing activities ...................           (9,227)          (41,159)              (66)
                                                                   ---------         ---------         ---------

Financing activities:
  Proceeds from issuance of 2033 Senior Notes .............               --           139,222                --
  Proceeds from issuance of 2003 Junior Debentures ........               --            20,018                --
  Borrowings under revolving credit facilities ............           38,000            34,000            49,000
  Principal payments under revolving credit facilities ....          (24,000)          (71,000)          (37,000)
  Repayments or repurchase of other corporate debt ........               --           (72,150)          (10,874)

  Other financing activities ..............................            7,419           (18,105)           (1,979)
                                                                   ---------         ---------         ---------
      Net cash provided (used) by financing activities ....           21,419            31,985              (853)
                                                                   ---------         ---------         ---------

(Decrease) increase in cash ...............................             (354)              (54)              636
Cash at beginning of year .................................              587               641                 5
                                                                   ---------         ---------         ---------
    Cash at end of year ...................................        $     233         $     587         $     641
                                                                   =========         =========         =========
</TABLE>




                  See notes to condensed financial statements.


                                      -70-
<PAGE>
                                                         SCHEDULE II (CONTINUED)

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
                  DELPHI FINANCIAL GROUP, INC. (PARENT COMPANY)
                     NOTES TO CONDENSED FINANCIAL STATEMENTS

The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and related notes of Delphi Financial
Group, Inc. and Subsidiaries.

The Company received cash dividends from subsidiaries of $1.6 million, $50.2
million and $13.3 million in 2004, 2003 and 2002, respectively.



                                      -71-
<PAGE>
                                                                    SCHEDULE III

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                       SUPPLEMENTARY INSURANCE INFORMATION
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                         Future Policy
                                                         Benefits and
                                         Cost of         Unpaid Claim                        Policyholder
                                         Business          and Claim         Unearned          Account
                                         Acquired          Expenses          Premiums          Balances
                                         --------          --------          --------          --------
<S>                                     <C>              <C>                <C>              <C>
2004
----
Group employee benefits products        $  166,337        $1,506,348        $   95,145        $       --
Asset accumulation products ....            46,212            80,722                --           993,346
Other ..........................                --            76,833                --            31,231
                                        ----------        ----------        ----------        ----------
   Total .......................        $  212,549        $1,663,903        $   95,145        $1,024,577
                                        ==========        ==========        ==========        ==========

2003
----
Group employee benefits products        $  148,990        $1,339,382        $   74,067        $       --
Asset accumulation products ....            34,675            74,801                --           929,922
Other ..........................                --            81,434                --            31,434
                                        ----------        ----------        ----------        ----------
   Total .......................        $  183,665        $1,495,617        $   74,067        $  961,356
                                        ==========        ==========        ==========        ==========

2002
----
Group employee benefits products        $  130,050        $1,214,399        $   48,171        $       --
Asset accumulation products ....            38,060            72,043                --           878,820
Other ..........................                --            84,772                --            31,141
                                        ----------        ----------        ----------        ----------
   Total .......................        $  168,110        $1,371,214        $   48,171        $  909,961
                                        ==========        ==========        ==========        ==========
</TABLE>


<TABLE>
<CAPTION>
                                                                          Benefits,
                                                                         Claims and        Amortization
                                         Premium            Net           Interest          of Cost of         Other
                                         and Fee         Investment      Credited to         Business        Operating
                                        Income (1)       Income (2)     Policyholders        Acquired       Expenses (3)
                                        ----------       ----------     -------------        --------       ------------
<S>                                     <C>              <C>              <C>               <C>              <C>
2004
----
Group employee benefits products        $ 810,576        $ 116,157        $ 567,929         $  58,244        $ 141,287
Asset accumulation products ....            3,335           79,359           51,836             4,888            6,259
Other ..........................           23,686            7,258             (625)               --           39,786
                                        ---------        ---------        ---------         ---------        ---------
   Total .......................        $ 837,597        $ 202,774        $ 619,140         $  63,132        $ 187,332
                                        =========        =========        =========         =========        =========

2003
----
Group employee benefits products        $ 696,036        $ 100,338        $ 474,747         $  51,100        $ 130,409
Asset accumulation products ....            4,158           78,397           54,841             4,664            6,481
Other ..........................           18,893            7,631            1,037                --           33,299
                                        ---------        ---------        ---------         ---------        ---------
   Total .......................        $ 719,087        $ 186,366        $ 530,625         $  55,764        $ 170,189
                                        =========        =========        =========         =========        =========

2002
----
Group employee benefits products        $ 608,499        $  89,897        $ 420,992         $  41,608        $ 113,070
Asset accumulation products ....            2,645           67,464           49,464             4,134            6,382
Other ..........................           16,713            4,675            1,528                --           25,250
                                        ---------        ---------        ---------         ---------        ---------
   Total .......................        $ 627,857        $ 162,036        $ 471,984         $  45,742        $ 144,702
                                        =========        =========        =========         =========        =========
</TABLE>

      (1)   Net written premiums for casualty insurance products totaled $236.7
            million, $194.8 million and $162.6 million for the years ended
            December 31, 2004, 2003, and 2002, respectively.

      (2)   Net investment income includes income earned on the assets of the
            insurance companies as well as on the assets of the holding company
            and is allocated among business lines in proportion to average
            reserves and the capital placed at risk for each segment.

      (3)   Other operating expenses include commissions.

                                      -72-
<PAGE>
                                                                     SCHEDULE IV

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                                   REINSURANCE
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                                          Percentage
                                                                 Ceded to            Assumed                              of Amount
                                              Gross                Other            from Other             Net             Assumed
                                              Amount             Companies          Companies             Amount            to Net
                                           ------------        ------------        ------------        ------------       ----------
<S>                                        <C>                 <C>                 <C>                 <C>                <C>
Life insurance in force as of
   December 31, 2004 ..............        $119,624,420        $ 14,582,230        $     32,057        $105,074,247          --%
                                           ============        ============        ============        ============

Year ended December 31, 2004:
   Premium and fee income:
      Life insurance and annuity ..        $    303,603        $     37,007        $        586        $    267,182          --%
      Accident and health insurance             372,142              40,741               1,278             332,679          --%
      Casualty insurance ..........             217,655              21,739              20,189             216,105           9%
      Other .......................              21,631                  --                  --              21,631
                                           ------------        ------------        ------------        ------------
Total premium and fee income ......        $    915,031        $     99,487        $     22,053        $    837,597
                                           ============        ============        ============        ============


Life insurance in force as of
   December 31, 2003 ..............        $110,707,743        $ 10,966,035        $     34,150        $ 99,775,858          --%
                                           ============        ============        ============        ============

Year ended December 31, 2003:
   Premium and fee income:
      Life insurance and annuity ..        $    274,892        $     27,100        $      1,122        $    248,914          --%
      Accident and health insurance             334,989              55,988               1,601             280,602           1%
      Casualty insurance ..........             177,118              17,590              14,007             173,535           8%
      Other .......................              16,036                  --                  --              16,036
                                           ------------        ------------        ------------        ------------
Total premium and fee income ......        $    803,035        $    100,678        $     16,730        $    719,087
                                           ============        ============        ============        ============


Life insurance in force as of
   December 31, 2002 ..............        $ 95,624,554        $  7,219,005        $     36,403        $ 88,441,952          --%
                                           ============        ============        ============        ============

Year ended December 31, 2002:
   Premium and fee income:
      Life insurance and annuity ..        $    238,020        $     24,364        $      1,029        $    214,685          --%
      Accident and health insurance             292,323              48,725               2,146             245,744           1%
      Casualty insurance ..........             153,654              36,109              35,179             152,724          23%
      Other .......................              14,704                  --                  --              14,704
                                           ------------        ------------        ------------        ------------
Total premium and fee income ......        $    698,701        $    109,198        $     38,354        $    627,857
                                           ============        ============        ============        ============
</TABLE>




                                      -73-
<PAGE>
                                                                     SCHEDULE VI

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                       SUPPLEMENTAL INFORMATION CONCERNING
                     PROPERTY-CASUALTY INSURANCE OPERATIONS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              December 31,
                                                        ------------------------
                                                          2004            2003
                                                        --------        --------
<S>                                                     <C>             <C>
Deferred policy acquisition costs ..............        $ 11,379        $  9,828

Reserves for unpaid claims and claim expenses ..         645,948         572,690

Discount, if any, deducted from above (1) ......         311,833         265,100

Unearned premiums ..............................          89,843          67,649
</TABLE>


<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                                         ----------------------------------------
                                                           2004            2003            2002
                                                         --------        --------        --------
<S>                                                      <C>             <C>             <C>
Earned premiums .................................        $216,105        $173,535        $152,724

Net investment income ...........................          57,759          42,614          42,602

Claims and claim expenses incurred related to:

   Current year .................................         103,444          82,372          82,197
   Prior years (2) ..............................          30,868          20,541          15,869

Amortization of deferred policy acquisition costs          25,449          22,272          16,190

Paid claims and claim adjustment expenses .......          72,290          62,400          72,869

Net premiums written ............................         236,675         194,752         162,559
</TABLE>

-----------------

(1)   Based on interest rates ranging from 3.7% to 7.5%.

(2)   In 2004, the claims and claim expenses incurred related to prior years
      reflect the accretion of discounted reserves and unfavorable claims
      development. In 2003 and 2002, the claims and claim expenses incurred
      related to prior years reflect the accretion of discounted reserves offset
      by favorable claims development.




                                      -74-