<PAGE>

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

                                   FORM 10-K/A
                                 AMENDMENT NO. 1

(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, 2003

[ ]   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>
<C>                                                                          <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:

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

           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, 2003 was $816,164,154.

As of March 1, 2004, the Registrant had 27,051,750 shares of Class A Common
Stock and 4,177,357 shares of Class B Common Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Registrant's 2004 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.

<PAGE>

                                EXPLANATORY NOTE

This Annual Report on Form 10-K amends the Registrant's annual report on Form
10-K for the year ended December 31, 2003 as filed on March 12, 2004. The
purpose of this amendment is to delete from Management's Discussion and Analysis
of Financial Condition and Results of Operations and Selected Financial Data
certain financial measures which are considered to be non-GAAP financial
measures pursuant to Item 10 of Regulation S-K. The amendment also reflects
non-substantive, formatting changes which were made in light of the deletions.
This amendment does not change the Company's current or past reported earnings
or financial statements and the Company has not updated or modified the
disclosures therein to reflect any subsequent events.

                          ****************************

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 its shareholders' 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

                                      -1-
<PAGE>

financial strength rating of RSLIC as of February 2004 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 2004 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" and Note B to the
Consolidated Financial Statements.

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 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 114 sales representatives and managers. RSLIC
had 99 sales representatives and managers located in 25 sales offices nationwide
at December 31, 2003, up 41% from 70 sales representatives and managers at the
end of 2000. At December 31, 2003, SNCC had 12 sales representatives and
managers and Matrix had 3 sales representatives and managers. The Company's
three administrative offices and 25 sales offices also service existing
business.

                                      -2-
<PAGE>

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,
                                            ------------------------------------------------------------------------
                                                     2003                      2002                    2001
                                            -----------------------   ----------------------  ----------------------
                                                                      (dollars in thousands)
<S>                                         <C>          <C>          <C>         <C>         <C>          <C>
Insurance premiums:
   Core Products:
      Life ...............................  $ 241,902         35.9%   $ 210,030        37.6%  $ 170,772         37.8%
      Disability income ..................    233,437         34.7      195,052        34.9     162,602         36.0
      Excess workers' compensation .......    151,522         22.5      104,170        18.6      73,404         16.2
      Travel accident, dental and other ..     46,792          6.9       49,922         8.9      45,380         10.0
                                            ---------    ---------    ---------   ---------   ---------    ---------
                                            $ 673,653        100.0%   $ 559,174       100.0%  $ 452,158        100.0%
                                            ---------    =========    ---------   =========   ---------    =========
   Non-Core Products:
      Loss portfolio transfers ...........          -                    26,830                   4,340
      Reinsurance facilities .............        344                       771                   7,872
      Other ..............................     22,039                    21,724                  23,624
                                            ---------                 ---------               ---------
                                               22,383                    49,325                  35,836
                                            ---------                 ---------               ---------
        Total insurance premiums .........  $ 696,036                 $ 608,499               $ 487,994
                                            =========                 =========               =========

Sales (new annualized gross premiums):
   Core Products:
      Life ...............................  $  68,200         31.0%   $  70,900        35.2%  $  55,606         34.9%
      Disability income ..................     84,920         38.6       75,996        37.8      60,628         38.1
      Excess workers' compensation .......     45,058         20.5       30,796        15.3      18,110         11.4
      Travel accident, dental and other ..     21,933          9.9       23,454        11.7      24,774         15.6
                                            ---------    ---------    ---------   ---------   ---------    ---------
                                            $ 220,111        100.0%   $ 201,146       100.0%  $ 159,118        100.0%
                                            ---------    =========    ---------   =========   ---------    =========
   Non-Core Products:
      Loss portfolio transfers ...........          -                    26,830                   4,340
      Other ..............................     14,513                    13,171                  28,765
                                            ---------                 ---------               ---------
                                               14,513                    40,001                  33,105
                                            ---------                 ---------               ---------
        Total sales ......................  $ 234,624                 $ 241,147               $ 192,223
                                            =========                 =========               =========
</TABLE>

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 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."
Therefore, 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,
                                                              ------------------------------------------------
                                                                 2003              2002               2001
                                                              ----------        ----------        ------------
<S>                                                           <C>               <C>               <C>
Loss ratio............................................            6 8.2%            69.2%             75.0%(1)
Expense ratio.........................................             26.1             25.4              27.0
                                                              ---------         --------          --------
    Combined ratio....................................             94.3%            94.6%            102.0%(1)
                                                              =========         ========          ========
</TABLE>

      (1)   The loss ratio and combined ratio for 2001 excluding the reserve
            strengthening discussed in the following paragraph are 65.9% and
            92.9%, respectively.

The loss ratio for 2001 reflects a reserve strengthening charge which was
primarily related to an unusually high number of large losses in the Company's
excess workers' compensation business. Prior to 2001, SNCC's historical average
for losses exceeding $2.0 million in its excess workers' compensation products
was one to two per year. In 2001, however, the Company experienced seven such
losses, including two losses as a result of the terrorist attacks on the World
Trade

                                      -3-
<PAGE>

Center. The case reserves for these seven losses totaled $15.3 million,
including $6.3 million attributable to the World Trade Center attacks. Though
the Company believed that the high number of large losses was unlikely to recur,
the Company added $24.0 million to its reserve for incurred but not reported
("IBNR") losses since its method of estimating IBNR reserves is based on past
experience. In the years subsequent to 2001, the number of large losses
experienced by the Company returned to the Company's pre-2001 historical
average. The Company also added $5.0 million to its long-term disability IBNR
reserves in 2001 for potential mental and nervous disabilities related to the
World Trade Center attacks. The reserve strengthening charge reduced 2001 net
income by $28.8 million, or $0.91 per diluted share. The loss and expense ratios
are also 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.

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."

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 will reinsure 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."

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 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.

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 due to 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 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 and 2003, with increases
exceeding 25% and 15%, 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 and 13% in 2003. SNCC has continued to obtain price increases averaging
16% on its 2004 renewals and

                                      -4-
<PAGE>

SIR levels on average are up 7%. New business production for excess workers'
compensation products increased 70% in 2002 and 46% in 2003 and the retention of
existing customers was consistent with SNCC's goals. 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 policy 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 establishes 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,
and the U.S. Secretary of the Treasury (the "Secretary") has the option to
extend it through December 31, 2006. 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 2004 within the Terrorism Act deductible from
property and casualty products is approximately 1.4% of the Company's
shareholders' equity as of December 31, 2003. 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. The Company ceded 50% of its risk under dental policies with effective
dates prior to 2003 under a reinsurance arrangement and cedes 100% of its risk
under dental policies with effective dates in 2003 or later under such
arrangement. 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 $4.4 million in 2003.
In addition, non-core group employee benefit products include bail bond
insurance and workers' compensation and property catastrophe reinsurance. See
"Reinsurance."

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

                                      -5-
<PAGE>

31, 2003, the weighted average crediting rate on the Company's annuity products
as a group was 4.86%, 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 2003, the Company's SPDA products accounted
for $85.8 million of asset accumulation product deposits, of which $77.0 million
was attributable to the MVA annuity product, and $13.1 million was attributable
to FPA products, of which $11.6 million had an MVA feature. Four networks of
independent agents accounted for approximately 70% of the deposits from these
SPDA and FPA products during 2003, 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,
                                                                          -------------------------------------------------
                                                                               2003              2002              2001
                                                                          ------------      ------------      -------------
                                                                                        (dollars in thousands)
<S>                                                                       <C>               <C>               <C>
Asset accumulation product deposits (sales)...........................    $    100,636      $    135,046      $      90,159

Funds under management (at period end)................................         929,922           878,820            786,214
</TABLE>

At December 31, 2003, funds under management consisted of $829.3 million of SPDA
liabilities and $100.6 million of FPA liabilities. Of these liabilities, $621.4
million were subject to surrender charges averaging 6.58% at December 31, 2003.
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."

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" and Note B to the Consolidated Financial Statements. 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

                                      -6-
<PAGE>

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, C and J to the Consolidated
Financial Statements.

The following table sets forth for the periods indicated the Company's pretax
investment results:

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                 -------------------------------------------------------
                                                                      2003                 2002                2001
                                                                 ---------------     ----------------     --------------
                                                                                  (dollars in thousands)
<S>                                                              <C>                 <C>                  <C>
Average invested assets (1)................................      $    2,948,135      $     2,556,076      $   2,312,975
Net investment income (2)..................................             186,366              162,036            157,509
Tax equivalent weighted average annual yield (3)...........                 6.5%                 6.6%               7.0%
</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

                                      -7-
<PAGE>

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, which generally remain with the
reinsurer. See "Business - Group Employee Benefit Products" and Note Q to the
Consolidated Financial Statements.

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.

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 $1
million to $50 million. Aggregate exposures assumed under individual workers'
compensation treaties generally range from $1 million to $3 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 $20 billion, with an average attachment point of $2.75
billion. The Company's aggregate exposure under a single property treaty
generally ranges from $1 million to $2 million. The highest net exposure under a
single property treaty is $2 million. The probable maximum loss on property
reinsurance is estimated to be approximately $6.6 million, net of reinstatement
premium and taxes, or less than 1% of the Company's shareholders' equity.

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 is currently a
party to certain arbitration proceedings arising out of two such facilities. See
"Legal Proceedings." Premium income from all reinsurance

                                      -8-
<PAGE>

facilities was $0.3 million, $0.8 million and $7.9 million in 2003, 2002 and
2001, respectively, and incurred losses from these facilities were $5.1 million,
$4.7 million and $10.6 million in 2003, 2002 and 2001, respectively. The
reinsurance facilities did not constitute a significant part of the Company's
operations; accordingly, the Company's withdrawals from these facilities has 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. 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. In the fourth
quarter of 2001, the Company added $5.0 million to its long-term disability IBNR
reserves for potential mental and nervous disability claims related to the World
Trade Center attacks.

The life, annuity, disability and accident reserves carried in the Consolidated
Financial Statements are calculated based on accounting principles generally
accepted in the United States ("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.

EXCESS WORKERS' COMPENSATION 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 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 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.

                                      -9-
<PAGE>

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,
                                                                                 -------------------------------------------------
                                                                                      2003              2002              2001
                                                                                 -------------     -------------     -------------
                                                                                               (dollars in thousands)
<S>                                                                              <C>               <C>               <C>
Unpaid claims and claim expenses, net of reinsurance,
      beginning of period.....................................................   $     439,147     $     413,950     $     302,514

Add provision for claims and claim expenses incurred, net of reinsurance,
    occurring during:
       Current year (1).......................................................          82,372            82,197            73,782
       Prior years (2)........................................................          20,541            15,869            13,896
                                                                                 -------------     -------------     -------------
           Incurred claims and claim expenses, net of reinsurance,
                 during the current year......................................         102,913            98,066            87,678
                                                                                 -------------     -------------     -------------

Deduct claims and claim expenses paid, net of reinsurance, occurring during:
       Current year...........................................................           5,165            10,915             6,014
       Prior years (3)........................................................          57,235            61,954           (29,772)
                                                                                 -------------     -------------     -------------
           Total paid.........................................................          62,400            72,869           (23,758)
                                                                                 -------------     -------------     -------------

Unpaid claims and claim expenses, net of reinsurance, end of period...........         479,660           439,147           413,950
Reinsurance receivables, end of period........................................          93,030            95,709            92,828
                                                                                 -------------     -------------     -------------
      Unpaid claims and claim expenses, gross of reinsurance,
           end of period......................................................   $     572,690     $     534,856     $     506,778
                                                                                 =============     =============     =============
</TABLE>

      (1)   The provision for claims and claim expenses incurred in 2001
            includes a reserve strengthening charge of $39.3 million primarily
            related to an unusually high number of large losses in the Company's
            excess workers' compensation business. Prior to 2001, SNCC's
            historical average for losses exceeding $2.0 million in its excess
            workers' compensation products was one to two per year. In 2001,
            however, the Company experienced seven such losses, including two
            losses as a result of the terrorist attacks on the World Trade
            Center. The case reserves for these seven losses totaled $15.3
            million, including $6.3 million attributable to the World Trade
            Center attacks. Though the Company believed that the high number of
            large losses was unlikely to recur, the Company added $24.0 million
            to its reserve for IBNR losses since its method of estimating IBNR
            reserves is based on past experience. In the years subsequent to
            2001, the number of large losses experienced by the Company returned
            to the Company's pre-2001 historical average.

      (2)   In 2003 and 2002, the claims and claim expenses incurred related to
            prior years reflect accretion of discounted reserves offset by
            favorable claims development. In 2001, the claims and claim expenses
            incurred related to prior years reflect the accretion of discounted
            reserves and unfavorable claims development.

      (3)   In 2001, the payments of claims and claim expenses occurring in
            prior years reflect the Company's receipt of $74.3 million related
            to the commutation of the reinsurance agreements with Oracle Re. See
            "Business - Reinsurance."

                                      -10-
<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 2003, 2002 and
2001, $21.5 million, $17.2 million and $9.5 million, respectively, of discount
was amortized, and $44.9 million, $34.6 million and $32.1 million, respectively,
was accrued. The loss development table below illustrates the development of
reserves from March 5, 1996 to December 31, 2003 and is net of reinsurance.

<TABLE>
<CAPTION>
                                                                           December 31,
                           March 5,   ----------------------------------------------------------------------------------------------
                            1996(1)      1996         1997         1998         1999          2000        2001      2002      2003
                         -----------  -----------  ----------   ----------   -----------  ------------  --------  --------  --------
                                                                             (dollars in thousands)
<S>                      <C>          <C>          <C>          <C>          <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     $444,061      $638,191  $680,835  $744,760
Cumulative amount of
  liability paid:
    One year later......   23,467       28,162       98,365       40,815       40,660      (29,990)(2)    61,954    57,235
    Two years later.....   50,713      125,020      127,481       74,571        4,020(2)    26,398       112,639
    Three years later...  140,943      152,842      156,119       33,429(2)    54,846       71,938
    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
    Six years later.....  153,504(2)   170,405      182,281
    Seven years later...  188,719      197,318
    Eight years later...  214,715
Liability reestimated as
  of:
    One year later......  507,375      513,402      523,430      410,875      424,187      442,624       636,125   678,535
    Two years later.....  487,830      500,964      511,602      404,559      420,420      442,807       634,578
    Three years later...  476,854      488,432      503,906      401,475      417,869      446,948
    Four years later....  476,600      487,195      500,514      396,403      423,426
    Five years later....  476,890      478,206      492,280      399,311
    Six years later.....  470,283      468,142      493,586
    Seven years later...  460,670      472,492
    Eight years later...  463,015
Cumulative redundancy
  (deficiency).......... $ 57,355     $ 60,431     $ 47,694     $ 22,848     $ 11,087     $ (2,887)     $  3,613  $  2,300
</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 Re in 2001.

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 Company has not experienced significant adverse deviations from its
assumptions, except for the unusually high number of large losses in the
Company's excess workers' compensation business in 2001. 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, 2003.

                                      -11-
<PAGE>

The table below 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       2000       2001       2002       2003
                            --------   --------   --------   --------   --------   --------   --------   --------   --------
                                                                  (dollars in thousands)
<S>                         <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Reserve for unpaid claims
   and claim expenses
   before discount:
      Gross of reinsurance  $533,871   $549,653   $564,734   $586,984   $613,693   $650,765   $731,019   $776,544   $837,790
      Deduct reinsurance
        recoverable ......    13,501     16,730     23,454    164,825    179,180    206,704     92,828     95,709     93,030
                            --------   --------   --------   --------   --------   --------   --------   --------   --------
      Net of reinsurance .   520,370    532,923    541,280    422,159    434,513    444,061    638,191    680,835    744,760

Deduct discount for time
   value of money ........   164,000    168,827    176,683    113,507    127,357    141,547    224,241    241,688    265,100
                            --------   --------   --------   --------   --------   --------   --------   --------   --------

Unpaid claims and claim
   expenses as reported
   on balance sheets, net
   of discount and net of
   reinsurance ...........   356,370    364,096    364,597    308,652    307,156    302,514    413,950    439,147   $479,660
                            --------   --------   --------   --------   --------   --------   --------   --------   ========

Reestimated unpaid claims
   and claim expenses,
   net of discount, as
   of December 31, 2003:
      Gross of reinsurance   430,211    429,803    442,112    463,270    498,572    534,903    574,962    571,861
      Deduct reinsurance
           recoverable ...    41,054     42,355     48,416    118,553    145,487    178,003    125,038    112,173
                            --------   --------   --------   --------   --------   --------   --------   --------
      Net of reinsurance .   389,157    387,448    393,696    344,717    353,085    356,900    449,924    459,688
                            --------   --------   --------   --------   --------   --------   --------   --------

Discounted cumulative
   (deficiency) ..........   (32,787)   (23,352)   (29,099)   (36,065)   (45,929)   (54,386)   (35,974)   (20,541)

Add accretion of discount     90,142     83,783     76,793     58,913     57,016     51,499     39,587     22,841
                            --------   --------   --------   --------   --------   --------   --------   --------
Cumulative redundancy
(deficiency) before
discount .................  $ 57,355   $ 60,431   $ 47,694   $ 22,848   $ 11,087   $ (2,887)  $  3,613   $  2,300
                            ========   ========   ========   ========   ========   ========   ========   ========
</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 $111.6 million less than those reported by the
Company for statutory financial statement purposes at December 31, 2003. This
difference is primarily due to the use of different discount factors as 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.

                                      -12-
<PAGE>

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.

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.

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 financial strength and, in
most instances, may be offset against future state premium taxes. SNCC
recognized expenses of $1.6 million, $1.3 million and $1.2 million in 2003, 2002
and 2001, 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 1,045 persons at
December 31, 2003. The Company believes that it enjoys good relations with its
employees.

                                      -13-
<PAGE>

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

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. See Note B to the
Consolidated Financial Statements.

In April 1999, the Company completed the disposition of its Unicover Managers,
Inc. subsidiary and a related company (collectively, "Unicover"), which were
acquired in the fourth quarter of 1998, to certain of the former owners of
Unicover. In January 2000, the Company received from Unicover's pool and
facility members and the retrocessionaires of Unicover's facilities legal
releases relating to, among other things, the Company's former ownership of
Unicover. The releases were obtained in connection with a global
Unicover-related settlement involving Reliance Insurance Company, its
retrocessionaires and a group of ceding companies and brokers. The Company
contributed to this settlement by agreeing to rescind a quota share reinsurance
contract with Reliance Insurance Company.

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 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 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 E to the
Consolidated Financial Statements.

In May 2003, Delphi Financial Statutory Trust I (the "Trust"), a recently -
created Connecticut statutory trust and wholly owned 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 interest rate was 5.41% for the period from May 15,

                                      -14-
<PAGE>

2003 through August 15, 2003, 5.23% for the period from August 16, 2003 through
November 15, 2003, and 5.28% for the period from November 16, 2003 through
February 15, 2004. 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.

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. Results per share and
applicable share amounts for prior periods have been restated to reflect the
stock split.

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
intended for lease 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. Matrix leases its principal office at 5225 Hellyer
Avenue, Suite 210, San Jose, California under an operating lease expiring in
December 2006. 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
consolidated financial position. In addition, incident to its discontinued
products, the Company is currently a party to two separate arbitrations arising
out of two accident and health reinsurance arrangements in which it and other
companies formerly were participating reinsurers. At issue in both arbitrations,
among other things, is whether certain reinsurance risks were validly ceded to
the Company. The hearings in these arbitrations are scheduled to be held in the
current year. While management believes that in both cases the Company has
substantial legal grounds for avoiding the reinsurance risks at issue, it is not
at this time possible to predict the ultimate outcome of these arbitrations, nor
is it feasible to provide reasonable ranges of potential losses. In the opinion
of management, such arbitrations, when ultimately resolved, will not
individually or collectively have a material adverse effect on the Company's
consolidated financial position.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

                                      -15-
<PAGE>

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          61       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.       52       Director and Executive Vice President of the Company
Chad W. Coulter            41       Vice President, Secretary and General Counsel of the Company; Vice President,  General
                                    Counsel and Assistant Secretary of RSLIC
Thomas W. Burghart         45       Vice President and Treasurer of the Company and RSLIC
Lawrence E. Daurelle       52       Director of the Company and President and Chief Executive Officer of RSLIC
Harold F. Ilg              56       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, 2004.

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.

                                      -16-
<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 $39.25 on March 1,
2004. There were approximately 3,000 holders of record of the Company's Class A
Common Stock as of March 1, 2004.

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. Prior periods have
been restated to reflect the 3-for-2 common stock split distributed in the form
of a stock dividend on December 22, 2003.

<TABLE>
<CAPTION>
                                    High                 Low               Dividends
                                 ---------            ---------            ---------
<C>                              <C>                  <C>                  <C>
2002:  First Quarter             $   26.45            $   21.87            $    0.05
       Second Quarter                30.08                25.67                 0.05
       Third Quarter                 29.00                22.57                 0.05
       Fourth Quarter                27.42                21.94                 0.05

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
</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 2002 and 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 2004, the Company's Board of Directors declared a cash dividend of
$0.08 per share, which was paid on the Company's Class A Common Stock and Class
B Common Stock on March 10, 2004. 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 L 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."

                                      -17-
<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,
                                                      -------------------------------------------------------
                                                        2003       2002        2001        2000        1999
                                                      --------  ---------   ---------   ---------   ---------
                                                      (dollars and shares in thousands, except per share data)
<S>                                                   <C>       <C>         <C>         <C>         <C>
INCOME STATEMENT DATA:
  Insurance premiums and fee income:
    Core group employee benefit products ...........  $673,653  $ 559,174   $ 452,158   $ 400,405   $ 357,541
    Non-core group employee benefit products(1) ....    22,383     49,325      35,836      47,285     110,381
    Asset accumulation products ....................     4,158      2,645       3,088       2,551       2,126
    Other ..........................................    18,893     16,713      16,122      16,116      15,220
                                                      --------  ---------   ---------   ---------   ---------
                                                       719,087    627,857     507,204     466,357     485,268
  Net investment income(2) .........................   186,366    162,036     157,509     184,576     180,945
  Net realized investment gains (losses)(3) ........    12,724    (28,469)    (70,289)   (138,047)    (25,720)
  (Loss) gain on extinguishment of debt and
    capital securities(2) ..........................         -       (332)     11,456           -           -
                                                      --------  ---------   ---------   ---------   ---------
          Total revenue ............................   918,177    761,092     605,880     512,886     640,493

  Income (loss) from continuing operations(4) ......    98,916     60,652       6,505      (3,293)     64,132
  Net income (loss)(4) .............................    98,916     60,652       6,505      (3,293)     50,285

BASIC RESULTS PER SHARE(4)(5):
  Income (loss) from continuing operations .........  $   3.17  $    1.95   $    0.21   $   (0.11)  $    2.04
  Net income (loss) ................................      3.17       1.95        0.21       (0.11)       1.60
  Weighted average shares outstanding ..............    31,208     31,139      30,848      30,582      31,469

DILUTED RESULTS PER SHARE(4)(5):
  Income (loss) from continuing operations .........  $   3.09  $    1.90   $    0.21   $   (0.11)  $    1.97
  Net income (loss) ................................      3.09       1.90        0.21       (0.11)       1.55
  Weighted average shares outstanding ..............    32,023     31,887      31,629      30,582      32,511

CASH DIVIDENDS PAID PER SHARE(5)(6): ...............  $   0.23  $    0.20   $    0.20   $       -   $       -

OTHER DATA:
  Diluted book value per share(5)(7) ...............  $  25.49  $   21.83   $   19.00   $   17.91   $   16.35
</TABLE>

<TABLE>
<CAPTION>
                                                                                December 31,
                                                      --------------------------------------------------------------
                                                         2003         2002         2001         2000         1999
                                                      ----------   ----------   ----------   ----------   ----------
                                                                         (dollars in thousands)
<S>                                                   <C>          <C>          <C>          <C>          <C>
BALANCE SHEET DATA:
  Total investments ................................  $3,202,754   $2,816,051   $2,427,214   $2,475,945   $2,527,763
  Total assets .....................................   4,177,532    3,734,942    3,336,146    3,440,010    3,395,688
  Corporate debt(2) (8) ............................     143,750      118,139      125,675      267,770      283,938
  Company obligated mandatorily redeemable
    capital securities of subsidiaries(2)(9) .......      56,050       36,050       36,050      100,000      100,000
  Shareholders' equity .............................     798,440      681,655      581,994      538,193      501,417
  Corporate debt to total capitalization ratio(10) .        14.4%        14.1%        16.9%        29.6%        32.1%
</TABLE>

(1)   The Company in 1999 terminated its participations in the reinsurance
      facilities in which it had historically participated, resulting in lower
      premiums from non-core group employee benefit products in 2000, 2001, 2002
      and 2003. Premiums from non-core group employee benefit products also
      include premiums from LPTs, which are episodic in nature, of $44.0
      million, $13.9 million, $4.3 million, $26.8 million and $0, in 1999, 2000,
      2001, 2002 and 2003, 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 repurchase $8.0 million principal amount of the Matured Senior Notes.
      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

                                      -18-
<PAGE>

      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 2003, 2002 and 2001, the Company recognized pre-tax losses of $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 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.

      As of January 1, 2003, the Company adopted Statement of Financial
      Accounting Standards ("SFAS") No. 145, "Rescission of FASB Statements No.
      4, 44, and 62, Amendment of FASB Statement No. 13, and Technical
      Corrections." SFAS No. 145 rescinded SFAS No. 4, which required all gains
      and losses from extinguishment of debt and capital securities to be
      aggregated and classified as an extraordinary item, net of the related
      income tax effect. Under SFAS No. 145, gains or losses from extinguishment
      of debt and capital securities are classified as income or loss from
      operations in the income statement. In 2002 and 2001, the Company had an
      extraordinary (loss) gain, net of the related income tax effect, of $(0.2)
      million, or $(0.01) per diluted share, and $7.4 million, or $0.24 per
      diluted share, respectively, that was reclassified to ongoing operations
      upon the adoption of SFAS No. 145. In addition, in computing the diluted
      earnings per share amounts for 2001, equivalent shares attributable to
      in-the-money stock options, which totaled 0.8 million, were considered in
      the calculation of these per share amounts since the reclassification of
      the gain on extinguishment of debt and capital securities resulted in
      income from continuing operations.

      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,
                                                         -------------------------------------------------------------
                                                            2003        2002         2001         2000         1999
                                                         ----------  ----------   ----------   ----------   ----------
                                                               (dollars in thousands, except per share data)
<S>                                                      <C>         <C>          <C>          <C>          <C>
Realized investment gains (losses), net of income tax
  expense (benefit) ...................................  $    8,271  $  (18,505)  $  (45,688)  $  (89,731)  $  (16,718)
Basic per share amount ................................        0.26       (0.59)       (1.48)       (2.94)       (0.53)
Diluted per share amount ..............................        0.26       (0.58)       (1.44)       (2.94)       (0.52)

(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>

      In 1999, the Company disposed of Unicover and recognized an after-tax loss
      of $13.8 million on the disposition. See "Business - Other Transactions."

(5)   Prior periods have been restated to reflect the 3-for-2 common stock split
      effected in the form of a 50% stock dividend distributed on December 22,
      2003. 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 and 2002. In the fourth quarter of 2003, the Company's Board
      of Directors increased the cash dividend to $0.08 per share. During 2003,
      2002 and 2001, the Company paid cash dividends on its capital stock in the
      amount of $7.4 million, $6.0 million and $5.7 million, respectively. See
      Note L 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 E to the Consolidated
      Financial Statements.

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

(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, Company-obligated mandatorily redeemable capital securities of
      subsidiaries and shareholders' equity.

                                      -19-
<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 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. Therefore,
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 Company is currently experiencing particularly favorable
market conditions for its excess workers' compensation products, and believes
that this trend will continue for some time, due to the growing shift among
employers toward self-insuring their workers' compensation risks in light of
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 increasing 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

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) remained at the
same level as 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.

                                      -20-
<PAGE>

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. See "Business - Group Employee Benefit Products." 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 has continued to obtain significant
improvements in contract terms, in particular higher SIR levels, in these
renewals. On average, SIRs increased 13% in 2003. SNCC has continued to obtain
average price increases of 16% on its 2004 renewals and SIR levels on average
are up 7%. 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 reflects 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.
The Company continues 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 $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 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 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. The Company anticipates that the level of deposits attainable
for 2004 will be similar to the level of deposits achieved in 2003 since the
Company continues to add new networks and independent agents to its distribution
channel. The Company plans to maintain its discipline in setting the crediting
rates offered on its asset accumulation products in 2004 in order to achieve its
targeted interest rate spreads on these 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.

The losses of this type in 2003 ($8.5 million on an after-tax basis) resulted
primarily from credit quality-related deterioration in the corporate debt
markets and the impact of sustained low interest rates on certain interest only
securities, and the Company may recognize additional losses of this 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 $5 million to $10 million, on an
after-tax basis, with respect to the relevant securities. However, the

                                      -21-
<PAGE>

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 $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.

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 income tax expense (benefit) attributable to net
realized investment gains (losses) was $4.5 million and $(10.0) million in 2003
and 2002, respectively. The Company's effective tax rate excluding net realized
investment gains and losses and the loss on extinguishment of debt was 30.7% in
2003 and 31.0% in 2002.

2002 COMPARED TO 2001

Summary of Results. Net income was $60.7 million, or $1.90 per diluted share, in
2002 as compared to $6.5 million, or $0.21 per diluted share, in 2001. Net
income in 2002 and 2001 included realized investment losses (net of the related
income tax benefit) of $18.5 million, or $0.58 per diluted share, and $45.7
million, or $1.44 per diluted share, respectively. Net income in 2002 and 2001
also included a (loss) gain on extinguishment of debt and capital securities
(net of the related income tax effects) of $(0.2) million, or $(0.01) per
diluted share, and $7.4 million, or $0.24 per diluted share. The increase in net
income in 2002 was also attributable to a decrease in interest expense ($3.3
million after taxes), and charges in the 2001 period for goodwill amortization
($3.2 million after taxes) and reserve strengthening ($28.8 million after
taxes). Excluding the effects of the reserve strengthening and goodwill
amortization in 2001, income from group employee benefit products increased in
2002 as compared to 2001.

Premium and Fee Income. Premium and fee income in 2002 was $627.9 million as
compared to $507.2 million in 2001, an increase of 24%. Premiums from core group
employee benefit products increased 24% to $559.2 million in 2002 from $452.2
million in 2001. 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 42% to $104.2 million in 2002 from $73.4 million in 2001
primarily due to improvements in the pricing environment and demand for this
product as a result of higher primary workers' compensation rates. SNCC was able
to obtain significant price increases in connection with its renewals of
insurance coverage during 2002, with increases exceeding 25% on a substantial
portion of such renewals. SNCC also obtained significant improvements in
contract terms, in particular higher SIR levels, in these renewals. On average,
SIRs increased 10% in 2002. New business production, which represents the amount
of new annualized premium sold, for excess workers' compensation products
increased 70% to $30.8 million in 2002 from $18.1 million in 2001 and the
retention of existing customers was consistent with SNCC's goals. Premiums from
the Company's other core group employee benefit products increased 20% to $455.0
million in 2002 from $378.8 million in 2001, reflecting strong production growth
in 2001. New business production for the Company's other core group employee
benefit products increased 21% to $170.4 million in 2002 from $141.0 million in
2001 primarily due to the expansion of the Company's sales force during 2001 and
2002, and the opening of three new sales offices in 2002. The Company also
implemented price increases for certain disability customers.

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 increased 38% to $49.3 million in 2002 from
$35.8 million in 2001 primarily due to a higher level of premium from LPTs,
which are episodic in nature.

                                      -22-
<PAGE>

Deposits from the Company's asset accumulation products were $135.0 million in
2002 as compared to $90.2 million in 2001. These deposits consist of new annuity
sales, which are recorded as liabilities rather than as premiums. The Company
maintained its disciplined approach to setting the crediting rates offered on
its asset accumulation products since market interest rates and the resulting
interest rate spreads available to the Company on these products remained less
favorable throughout 2001 and 2002. The increase in deposits from the Company's
asset accumulation products in 2002 was higher than expected due to the pullback
of certain fixed annuity providers from the wholesale distribution chain and
heightened demand for fixed annuity products as a result of adverse conditions
in the equity markets.

Net Investment Income. Net investment income in 2002 was $162.0 million as
compared to $157.5 million in 2001, an increase of 3%. This increase primarily
reflects an increase in average invested assets in 2002, partially offset by a
decrease in the tax equivalent weighted average annual yield. The tax equivalent
weighted average annual yield on invested assets was 6.6% on average invested
assets of $2,556.1 million in 2002 and 7.0% on average invested assets of
$2,313.0 million in 2001.

Net Realized Investment Losses. Net realized investment losses were $28.5
million in 2002 as compared to $70.3 million in 2001. The Company's investment
strategy results in periodic sales of securities and, therefore, the recognition
of realized investment gains and losses. 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 2002 and 2001, the Company recognized $54.1 million and $79.3 million,
respectively, of losses due to the other than temporary declines in the market
values of certain fixed maturity and equity securities. During the same periods,
the Company recognized $26.4 million and $10.9 million, respectively, of net
gains on sales of securities.

(Loss) Gain on Extinguishment of Debt and Capital Securities. In the second
quarter of 2002, the Company repurchased $10.5 million aggregate principal
amount of the Matured Senior Notes, resulting in a loss on extinguishment of
debt of $0.3 million. During 2001, the Company repurchased $64.0 million
liquidation amount of the Capital Securities in the open market. In June 2001,
the Company also repurchased $8.0 million aggregate principal amount of the
Matured Senior Notes. In 2001, the Company recognized a gain on extinguishment
of debt and capital securities of $11.5 million in connection with the
repurchases of the Capital Securities and Matured Senior Notes.

Benefits and Expenses. Policyholder benefits and expenses were $662.4 million as
compared to $583.1 million in 2001, an increase of 14%. This increase primarily
reflects the increase in premiums from the Company's group employee benefit
products discussed above. Benefits and expenses in 2001 include a pre-tax charge
of $44.3 million for reserve strengthening primarily related to an unusually
high number of large losses in the Company's excess workers' compensation
business. Prior to 2001, SNCC's historical average for losses exceeding $2.0
million in its workers' compensation products was one to two per year. In 2001,
however, the Company experienced seven such losses, including two losses as a
result of the terrorist attacks on the World Trade Center. The case reserves for
these seven losses totaled $15.3 million, including $6.3 million attributable to
the World Trade Center attacks. Though the Company believed that the high number
of large losses in 2001 was unlikely to recur, the Company added $24.0 million
to its reserve for IBNR losses since its method of estimating IBNR reserves is
based on past experience. In the years subsequent to 2001, the number of large
losses experienced by the Company returned to the Company's pre-2001 historical
average. The Company also added $5.0 million to its long-term disability IBNR
reserves for potential mental and nervous disability claims related to the World
Trade Center attacks. This reserve strengthening charge reduced net income by
$28.8 million, or $0.91 per diluted share. The combined ratio (loss ratio plus
expense ratio) for the Company's group employee benefits segment was 94.6% in
2002 and 102.0% (92.9% excluding the reserve strengthening) in 2001. The
combined ratio in 2002 reflects the higher levels of reserves which were
established for the Company's excess workers' compensation products due to the
high number of large losses in 2001. This combined ratio also reflects the large
amount of new business production from the Company's other core group employee
benefit products, for which initial reserves have been set at higher levels
until actual loss experience emerges. The higher level of premium from LPTs,
which carry a higher loss ratio, also contributed to the higher combined ratio
in 2002.

Interest Expense. Interest expense was $12.4 million in 2002 as compared to
$17.4 million in 2001, a decrease of $5.0 million. This decrease was primarily a
result of the Company's repurchase of $64.0 million liquidation amount of the
Capital Securities in the open market, which occurred on various dates during
the first nine months of 2001, and a lower weighted average borrowing rate under
the Company's revolving credit facilities. In addition, the Company had a lower
amount of borrowings outstanding during the year ended 2002 under its Matured
Senior Notes and SIG's 8.5% Senior Notes (the "SIG Senior Notes") due May 2003.

Income Tax Expense (Benefit). Income tax expense was $25.6 million in 2002 as
compared to an income tax benefit of $1.1 million in 2001. The income tax
benefits attributable to net realized investment losses were $10.0 million and
$24.6

                                      -23-
<PAGE>

million in 2002 and 2001, respectively. The income tax (benefit) expense related
to the (loss) gain on extinguishment of debt and capital securities was $(0.1)
million and $4.0 million, respectively. The income tax benefit in 2001 was also
attributable to the reserve strengthening charge. The Company's effective tax
rate excluding net realized investment losses, the (loss) gain on extinguishment
of debt and capital securities and the reserve strengthening was 31.0% in 2002
and 32.2% in 2001.

LIQUIDITY AND CAPITAL RESOURCES

General. The Company had approximately $59.0 million of financial resources
available at the holding company level at December 31, 2003, 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.

On May 20, 2003, the Company issued $143.8 million of the 2033 Senior Notes in a
public offering pursuant to the Company's existing shelf registration. The
proceeds from this issuance were used to repay all of the then outstanding
borrowings under the Company's revolving credit facility and to repay at
maturity the Matured Senior Notes. See "Business - Other Transactions" and Note
E to the Consolidated Financial Statements. 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 Company did not
have any borrowings outstanding under the revolving credit facility at December
31, 2003.

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. See "Business - Other Transactions" and Note E to the Consolidated
Financial Statements.

In May 2003, the Company also issued $20.0 million liquidation amount of 2003
Capital Securities in a private placement. See Note K to the Consolidated
Financial Statements. The Company also made the final $9.0 million principal
payment on the SIG Senior Notes in May 2003 and repaid in full the $5.7 million
principal amount due on the Subordinated Notes in June 2003.

In December 2003, the Company and its existing lenders agreed to amend certain
terms of the Company's revolving credit facility, primarily the maturity date of
the Company's revolving credit facility, which was extended from December 16,
2005 to December 16, 2006.

Other sources of liquidity at the holding company level include dividends paid
from subsidiaries, primarily generated from operating cash flows and
investments. During 2004, the Company's insurance subsidiaries will be
permitted, without prior regulatory approval, to make dividend payments totaling
$54.0 million. The life insurance subsidiaries and SNCC 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, 2003, the Company
had $100.0 million of borrowings available to it under its revolving credit
facility.

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 dividends on the Capital Securities and the 2003 Capital Securities. 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 debentures underlying the
Capital Securities are not redeemable prior to March 25, 2007. The junior
subordinated debentures underlying the 2003 Capital Securities are redeemable,
in whole or in part, beginning May 15, 2008. See Notes E and K to the
Consolidated Financial Statements.

                                      -24-
<PAGE>

The following table summarizes the Company's significant contractual obligations
at December 31, 2003 and the future periods in which such obligations are
expected to be settled in cash. The 2033 Senior Notes and the junior
subordinated debentures underlying the capital securities 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>
Corporate debt (Note E)............................  $     143,750   $        -     $           -  $           -   $     143,750
Interest on corporate debt (Note E) (1)............        340,517       11,950            23,881         23,000         281,686
Advances from Federal Home Loan Bank (Note F)......        150,000       95,000                 -              -          55,000
Interest on advances from Federal
      Home Loan Bank (Note F)......................         72,233        8,593             8,212          8,212          47,216
Company-obligated mandatorily redeemable
      capital securities of subsidiaries (Note K)..         56,050            -                 -              -          56,050
Dividends on capital securities (Note K) (2).......        110,477        4,430             8,854          8,857          88,336
Operating lease obligations (Note N)...............         54,626       12,002            21,921         18,323           2,380
                                                     -------------   ----------     -------------  -------------   -------------
      Total contractual obligations................  $     927,653   $  131,975     $      62,868  $      58,392   $     674,418
                                                     =============   ==========     =============  =============   =============
</TABLE>

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

(2)   Includes dividends on the outstanding Capital Securities and the 2003
      Capital Securities. Interest on the 2003 Capital Securities was computed
      using the indexed rate in effect at December 31, 2003 of 5.28%.

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 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.

Cash Flows. Operating activities increased cash by $237.5 million and $208.5
million in 2003 and 2002, respectively. Operating activities in 2001, which
include $30.1 million of cash provided by the liquidation of trading account
securities and $84.0 million of funds received from Oracle Re for the
commutation of various reinsurance agreements that the Company had entered into
with Oracle Re in 1998, increased cash by $228.7 million. See Note Q to the
Consolidated Financial Statements.

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. During the
first quarter of 2003, the Company repurchased 302,100 shares of its Class A
Common Stock at a total cost of $7.5 million, for a volume-weighted average
price of $24.75. The Company did not repurchase any shares in the second, third
or fourth quarters of 2003. At December 31, 2003, the repurchase of
approximately 1.1 million shares remained authorized under this program.

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 $3,202.7 million at December
31, 2003, primarily consists of investments in fixed maturity securities and
short-term

                                      -25-
<PAGE>

investments. The market value of the Company's investment portfolio, in relation
to its amortized cost, improved by $46.1 million during 2003, before related
changes in the cost of business acquired of $5.5 million and the income tax
provision of $14.2 million. In addition, the Company recognized pre-tax net
investment gains of $12.7 million in 2003. The weighted average credit rating of
the Company's fixed maturity portfolio as rated by Standard & Poor's Corporation
was "AA" at December 31, 2003. 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, 2003, approximately 42% 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 - 6%, AA - 9%, A
- 34%, and BBB - 38%. 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 20% of the Company's total invested assets
at December 31, 2003. Ninety-five 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, 2003, the Company had outstanding advances of $150.0 million. The advances
were obtained at a fixed rate and have a weighted average term to maturity of
6.4 years. A total of $95.0 million of these advances will mature at various
times during 2004. In addition, the Company has utilized reverse repurchase
agreements, futures and option contracts and interest rate swap contracts from
time to time in connection with its investment strategy. These transactions
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 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 addition, the Company, at times,
has utilized exchange-traded futures and option contracts and interest rate swap
agreements to reduce the risk associated with changes in the value of its fixed
maturity portfolio due to changes in the interest rate environment and to reduce
the risk associated with changes in interest rates in connection with
anticipated securities purchases and debt refinancing. At December 31, 2003, the
Company had no outstanding futures or option contracts or interest rate 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 2003 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

                                      -26-
<PAGE>

investment-related liabilities, would decline by approximately $29.2 million at
December 31, 2003 as compared to a decline of approximately $30.9 million at
December 31, 2002. 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. The
Company's outstanding corporate debt at December 31, 2003 was issued at a fixed
interest rate. At December 31, 2003, a hypothetical 10% decrease in market
interest rates would cause a corresponding $13.5 million increase in the fair
value of the Company's fixed-rate corporate debt which matures in 2033. At
December 31, 2002, a hypothetical 10% decrease in market interest rates would
cause a corresponding $0.1 million increase in the fair value of the Company's
fixed-rate corporate debt which matured in 2003. In May 2003, the Company paid
$13.8 million upon the issuance of the 2033 Senior Notes to settle the treasury
rate lock agreement. At December 31, 2002, a hypothetical 10% decrease in market
interest rates would cause a corresponding $5.6 million increase in the fair
value of the treasury rate lock agreement. Because interest expense on the
Company's floating-rate corporate debt that was outstanding at December 31, 2002
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 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 will
reinsure risks in excess of $7,500 (compared to $2,500 previously) in benefits
per individual per month. These changes will reduce 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 is implementing 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."

SNCC Performance-Contingent Options. 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. The options, which have a
ten-year term and whose exercise price is equal to the fair market value of a
share of such stock on the grant date (as determined in accordance with the
Company option plan under which the options were granted), 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 the current year; otherwise, such options will be
forfeited. These targets, as described below, generally require that SIG'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 15% for any of the options to become
exercisable, and at an annual average rate of at least 20% for the options to
become fully exercisable.

112,500 of each executive's options will become exercisable if SIG's 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 PTOI
for such period exceeds $196.1 million, determined by interpolating between zero
and 112,500 according to where the 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 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 PTOI for such period exceeds $380.1 million, determined by
interpolating between zero and 225,000 according to where the PTOI amount falls
in the range between $380.1 million and $429.1 million.

                                      -27-
<PAGE>

Under the option agreements, the formula for determining PTOI incorporates
various pro forma adjustments and assumptions in order to focus on the
performance of SNCC's insurance operations; for example, the formula contains
certain assumptions relating to investment income and expenses for the relevant
periods, and 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 SIG'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 SNCC's attaining the specified targets,
thereby enhancing the Company's financial performance; however, no assurance can
be given that such results will be achieved. The Company will recognize
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.

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
$1,495.6 million at December 31, 2003, 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, 2003, disability and excess workers'
compensation reserves for unpaid claims and claim expenses with a carrying value
of $645.6 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. 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 other than those resulting from the unusually high
number of large losses in the Company's excess workers' compensation business in
2001. If the Company's actual loss experience from its current or

                                      -28-
<PAGE>

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 $133.1
million at December 31, 2003, 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 $9.8 million at December 31, 2003, are amortized over
the period in which the related premium is earned. Deferred acquisition costs
related to annuity products, which totaled $31.6 million at December 31, 2003,
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 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 $53.7 million, $43.2 million and $32.7 million in 2003, 2002 and 2001,
respectively. These amounts represented 31%, 30% and 26%, 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-nine 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 $19.7 million at
December 31, 2003. 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
2003, 2002 and 2001, the Company recognized losses totaling $13.0 million, $54.1
million and $79.3 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 83.1% and 6.3%, respectively, of the Company's total investment
portfolio at December 31, 2003. 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

                                      -29-
<PAGE>

fixed maturity securities totaled $114.6 million and $10.1 million,
respectively, at December 31, 2003. 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 $11.3 million and $4.6
million, respectively, at December 31, 2003. 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 (loss). 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 $7.5 million to $15 million pre-tax ($5 million to $10 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. Such adjustments resulted in reductions in value of $6.7
million and $1.8 million as of December 31, 2003 and December 31, 2002,
respectively. The Company believes that 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 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 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

                                      -30-
<PAGE>

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 - 2003 Compared to 2002."

      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. 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

                                      -31-
<PAGE>

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." It is likely that, in the
future, the Company's reinsurers will continue to seek price increases, although
the extent of 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, 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.

      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.

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.

                                      -32-
<PAGE>

      THE COMPANY MAY BE ADVERSELY IMPACTED BY A DECLINE IN THE RATINGS OF THE
COMPANY'S INSURANCE SUBSIDIARIES.

Ratings with respect to claims-paying ability and financial strength have become
an increasingly important factor impacting the competitive position of insurance
companies. Each of the rating agencies reviews its 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.

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 26 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 2003 that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.

                                    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 2004 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.

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 2004 Annual Meeting of
Stockholders, under the caption "Executive Compensation" and is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT AND RELATED
SHAREHOLDER MATTERS

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 2004 Annual Meeting of

                                      -33-
<PAGE>

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 2004 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 2004 Annual Meeting of
Stockholders, under the caption "Independent Auditors" and is incorporated
herein by reference.

                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(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 Company filed a report on Form 8-K on October 21, 2003, under Item 12,
      containing a press release announcing third quarter 2003 earnings. The
      information in such report was furnished pursuant to Item 12 of Form 8-K
      and shall not be deemed to have been "filed" for purposes of Section 18 of
      the Securities Exchange Act of 1934 or otherwise subject to the
      liabilities of that section.

      The Company filed a report on Form 8-K on November 24, 2003, under Item 9,
      containing a press release announcing a cash dividend in the amount of
      $0.08 per share and a 3-for-2 common stock split to be paid in the form of
      a stock dividend, such dividend to be distributed on December 22, 2003 to
      holders of record on December 8, 2003, and certain changes to the
      Company's Board of Directors. The information in such report was furnished
      pursuant to Item 9 of Form 8-K and shall not be deemed to have been
      "filed" for purposes of Section 18 of the Securities Exchange Act of 1934
      or otherwise subject to the liabilities of that section.

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

      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)

      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)

                                      -34-
<PAGE>

      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  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 (20)

      10.2  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)

      10.3  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 (Exhibit 10.1) (18)

      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 10.4) (18)

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

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

      10.18 Employment Agreement, dated March 18, 1994, for Robert M. Smith, Jr.
            (Exhibit 10.31) (4)

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

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

      10.21 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)

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

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

      10.24 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 (19)

      21.1  List of Subsidiaries of the Company (20)

                                      -35-
<PAGE>

      23.1  Consent of Ernst & Young LLP (22)

      24.1  Powers of Attorney (21)

      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)(22)

      31.2  Certification by the Vice President and Treasurer of Periodic Report
            Pursuant to Rule 13a-14(a) or 15d-14(a)(22)

      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
            (22)

----------

      (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 Note P to the Consolidated
            Financial Statements included elsewhere herein.

      (20)  Filed previously.

      (21)  Power of Attorney of Kevin R. Brine filed herewith. (all other
            Powers of Attorney filed previously).

      (22)  Filed herewith.
(d)   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 68
      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,             November 5, 2004
-----------------------------------     President and Chief Executive
        (Robert Rosenkranz)             Officer (Principal Executive
                                        Officer)

                 *                      Director                           November 5, 2004
-----------------------------------
         (Kevin R. Brine)

                 *                      Director                           November 5, 2004
-----------------------------------
      (Lawrence E. Daurelle)

                 *                      Director                           November 5, 2004
-----------------------------------
          (Edward A. Fox)

                 *                      Director                           November 5, 2004
-----------------------------------
          (Harold F. Ilg)

                 *                      Director                           November 5, 2004
-----------------------------------
         (James N. Meehan)

                 *                      Director                           November 5, 2004
-----------------------------------
       (Philip R. O'Connor)

                 *                      Director                           November 5, 2004
-----------------------------------
        (Donald A. Sherman)

/s/    ROBERT M. SMITH, JR.             Director and Executive             November 5, 2004
-----------------------------------     Vice President
      (Robert M. Smith, Jr.)

                 *                      Vice President and                 November 5, 2004
-----------------------------------     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, 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>

<TABLE>
<CAPTION>
                                                                                   Year Ended December 31, 2002
                                                               -------------------------------------------------------------------
                                                                    First            Second             Third            Fourth
                                                                   Quarter          Quarter            Quarter           Quarter
                                                               -------------     -------------     -------------     -------------
<S>                                                            <C>               <C>               <C>               <C>
Revenues excluding realized investment gains (losses)
   and loss on extinguishment of debt.....................     $     197,891     $     195,453     $     193,407     $     203,142
Realized investment gains (losses)........................                95               218           (10,825)          (17,957)
Loss on extinguishment of debt............................                 -              (332)                -                 -
                                                               -------------     -------------     -------------     -------------
Total revenues............................................           197,986           195,339           182,582           185,185
Operating income..........................................            31,832            31,454            20,531            14,847
Net income................................................            19,570            19,516            12,793             8,773

Basic results per share of common stock:
   Net income.............................................     $       0.63      $       0.63      $       0.41      $       0.28
Diluted results per share of common stock:
   Net income.............................................     $        0.62     $       0.61      $        0.40     $       0.27
</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. Prior period
results per share have been restated to reflect the 3-for-2 common stock split
distributed in the form of a 50% stock dividend on December 22, 2003.

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. Results for the first, second, third and fourth quarters of 2002
include pre-tax investment losses of $3.6 million, $5.9 million, $20.0 million
and $24.6 million, respectively, due to the other than temporary declines in the
market values of certain securities. In the second quarter of 2002, the Company
also repurchased $10.5 million aggregate principal amount of the Matured Senior
Notes. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Notes C and E 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 Auditors.............................................................................       40
      Consolidated Statements of Income - Years Ended December 31, 2003, 2002 and 2001...........................       41
      Consolidated Balance Sheets - December 31, 2003 and 2002...................................................       42
      Consolidated Statements of Shareholders' Equity - Years Ended December 31, 2003, 2002 and 2001.............       43
      Consolidated Statements of Cash Flows - Years Ended December 31, 2003, 2002 and 2001.......................       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...............................       68
      Schedule II, Condensed Financial Information of Registrant.................................................       69
      Schedule III, Supplementary Insurance Information..........................................................       73
      Schedule IV, Reinsurance...................................................................................       74
      Schedule VI, Supplemental Information Concerning Property-Casualty Insurance Operations....................       75
</TABLE>

                                      -39-
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

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, 2003 and 2002, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 2003. 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 auditing standards generally accepted
in the 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, 2003 and 2002, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003, 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 Notes A and O to the Consolidated Financial Statements, in 2003
the Company changed its method of accounting for stock options.

                                             /s/ ERNST & YOUNG LLP

Philadelphia, Pennsylvania
February 6, 2004

                                      -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,
                                                                    -----------------------------------
                                                                       2003        2002         2001
                                                                    ----------  ----------   ----------
<S>                                                                 <C>         <C>          <C>
Revenue:
    Premium and fee income .......................................  $  719,087  $  627,857   $  507,204
    Net investment income ........................................     186,366     162,036      157,509
    Net realized investment gains (losses) .......................      12,724     (28,469)     (70,289)
    (Loss) gain on extinguishment of debt and capital securities .           -        (332)      11,456
                                                                    ----------  ----------   ----------
                                                                       918,177     761,092      605,880
                                                                    ----------  ----------   ----------
Benefits and expenses:
    Benefits, claims and interest credited to policyholders ......     530,625     471,984      416,996
    Commissions ..................................................      52,380      43,169       39,636
    Amortization of cost of business acquired ....................      55,764      45,742       34,700
    Other operating expenses .....................................     117,809     101,533       91,729
                                                                    ----------  ----------   ----------
                                                                       756,578     662,428      583,061
                                                                    ----------  ----------   ----------

    Operating income .............................................     161,599      98,664       22,819

Interest expense:
    Corporate debt ...............................................      14,052       9,025       11,604
    Dividends on capital securities ..............................       4,035       3,356        5,808
                                                                    ----------  ----------   ----------
                                                                        18,087      12,381       17,412
                                                                    ----------  ----------   ----------

          Income before income tax expense (benefit) .............     143,512      86,283        5,407

Income tax expense (benefit) .....................................      44,596      25,631       (1,098)
                                                                    ----------  ----------   ----------

       Net income ................................................  $   98,916  $   60,652   $    6,505
                                                                    ==========  ==========   ==========

Basic results per share of common stock:
    Net income ...................................................  $     3.17  $     1.95   $     0.21

Diluted results per share of common stock:
    Net income ...................................................  $     3.09  $     1.90   $     0.21

Dividends paid per share of common stock .........................  $     0.23  $     0.20   $     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,
                                                                                    -------------------------
                                                                                       2003          2002
                                                                                    -----------   -----------
<S>                                                                                 <C>           <C>
Assets:
   Investments:
       Fixed maturity securities, available for sale .............................  $ 2,862,045   $ 2,495,629
       Short-term investments ....................................................      114,752       204,890
       Other investments .........................................................      225,957       115,532
                                                                                    -----------   -----------
                                                                                      3,202,754     2,816,051
   Cash ..........................................................................       18,733        27,669
   Cost of business acquired .....................................................      183,665       168,110
   Reinsurance receivables .......................................................      409,620       392,659
   Goodwill ......................................................................       93,929        93,929
   Other assets ..................................................................      176,170       163,371
   Assets held in separate account ...............................................       92,661        73,153
                                                                                    -----------   -----------
       Total assets ..............................................................  $ 4,177,532   $ 3,734,942
                                                                                    ===========   ===========

Liabilities and Shareholders' Equity:
   Future policy benefits:
       Life ......................................................................  $   246,634   $   229,743
       Disability and accident ...................................................      439,158       390,717
   Unpaid claims and claim expenses:
       Life ......................................................................       47,395        40,627
       Disability and accident ...................................................      189,740       175,271
       Casualty ..................................................................      572,690       534,856
   Policyholder account balances .................................................      961,356       909,961
   Corporate debt ................................................................      143,750       118,139
   Advances from Federal Home Loan Bank ..........................................      150,789       207,990
   Other liabilities and policyholder funds ......................................      492,117       346,900
   Liabilities related to separate account .......................................       79,413        63,033
                                                                                    -----------   -----------
       Total liabilities .........................................................    3,323,042     3,017,237
                                                                                    -----------   -----------

   Company-obligated mandatorily redeemable capital securities of subsidiaries ...       56,050        36,050
                                                                                    -----------   -----------

   Shareholders' equity:
       Preferred Stock, $.01 par; 10,000,000 shares authorized ...................            -             -
       Class A Common Stock, $.01 par; 40,000,000 shares authorized;
           29,457,024 and 18,927,855 shares issued and outstanding, respectively .          295           189
       Class B Common Stock, $.01 par; 20,000,000 shares authorized;
           4,177,357 and 3,194,905 shares issued and outstanding, respectively ...           42            32
       Additional paid-in capital ................................................      383,573       373,356
       Accumulated other comprehensive income ....................................       52,428        30,003
       Retained earnings .........................................................      421,080       329,574
       Treasury stock, at cost; 2,560,035 and 1,505,290 shares of
           Class A Common Stock, respectively ....................................      (58,978)      (51,499)
                                                                                    -----------   -----------
           Total shareholders' equity ............................................      798,440       681,655
                                                                                    -----------   -----------
               Total liabilities and shareholders' equity ........................  $ 4,177,532   $ 3,734,942
                                                                                    ===========   ===========
</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, 2001...............   $   168  $   48   $ 366,834   $    (53,622)  $ 274,060   $ (49,295)  $538,193
                                                                                                               --------
Net income.............................         -       -           -              -       6,505           -      6,505
Other comprehensive income:
   Decrease in net unrealized
      depreciation on investments......         -       -           -         42,637           -           -     42,637
                                                                                                               --------
Comprehensive income...................                                                                          49,142
Issuance of stock, exercise of
    stock options and share
    conversions........................        10      (7)      2,551              -           -           -      2,554
Acquisition of treasury stock..........         -       -           -              -           -      (2,204)    (2,204)
Cash dividends.........................         -       -           -              -      (5,691)          -     (5,691)
                                          -------  ------   ---------   ------------   ---------   ---------   --------
   Balance, December 31, 2001..........   $   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
                                          =======  ======   =========   ============   =========   =========   ========
</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,
                                                                        -------------------------------------
                                                                           2003          2002         2001
                                                                        -----------   -----------   ---------
<S>                                                                     <C>           <C>           <C>
Operating activities:
    Net income .......................................................  $    98,916   $    60,652   $   6,505
    Adjustments to reconcile net income to net cash provided
          by operating activities:
       Change in policy liabilities and policyholder accounts ........      177,282       107,359     105,904
       Net change in reinsurance receivables and payables ............      (21,336)       (8,599)     39,670
       Amortization, principally the cost of business acquired
          and investments ............................................       41,184        29,768      19,153
       Deferred costs of business acquired ...........................      (76,836)      (68,725)    (51,096)
       Net realized (gains) losses on investments ....................      (12,724)       28,469      70,289
       Loss (gain) on extinguishment of debt and capital securities ..            -           332     (11,456)
       Net change in trading account securities ......................       (5,821)        5,170      30,085
       Net change in federal income tax liability ....................       20,720        25,955      12,846
       Other .........................................................       16,110        28,162       6,772
                                                                        -----------   -----------   ---------
          Net cash provided by operating activities ..................      237,495       208,543     228,672
                                                                        -----------   -----------   ---------

Investing activities:
    Purchases of investments and loans made ..........................   (1,845,331)   (1,137,062)   (967,272)
    Sales of investments and receipts from repayment of loans ........    1,372,088       753,801     884,993
    Maturities of investments ........................................      147,428       183,050      87,077
    Net change in short-term investments .............................       90,373      (111,926)    (49,062)
    Business acquisitions ............................................            -             -      (2,613)
    Change in deposit in separate account ............................       (3,128)          202        (184)
                                                                        -----------   -----------   ---------
          Net cash used by investing activities ......................     (238,570)     (311,935)    (47,061)
                                                                        -----------   -----------   ---------

Financing activities:
    Deposits to policyholder accounts ................................      106,986       140,336      94,922
    Withdrawals from policyholder accounts ...........................      (88,081)      (56,104)    (62,733)
    Proceeds from issuance of 2033 Senior Notes ......................      139,222             -           -
    Borrowings under revolving credit facilities .....................       34,000        49,000     102,000
    Principal payments under revolving credit facilities .............      (71,000)      (37,000)   (227,000)
    Repayments or repurchase of other corporate debt .................      (81,150)      (19,874)    (17,284)
    Proceeds from issuance of 2003 Capital Securities ................       19,399             -           -
    Repurchase of Capital Securities .................................            -             -     (51,329)
    Change in liability for Federal Home Loan Bank advances ..........      (57,000)       45,000      13,500
    Change in liability for securities sold under agreements
       to repurchase .................................................            -             -     (29,008)
    Other financing activities .......................................      (10,237)       (1,979)     (5,341)
                                                                        -----------   -----------   ---------
          Net cash (used) provided by financing activities ...........       (7,861)      119,379    (182,273)
                                                                        -----------   -----------   ---------

(Decrease) increase in cash ..........................................       (8,936)       15,987        (662)
Cash at beginning of year ............................................       27,669        11,682      12,344
                                                                        -----------   -----------   ---------
       Cash at end of year ...........................................  $    18,733   $    27,669   $  11,682
                                                                        ===========   ===========   =========
</TABLE>

                 See notes to consolidated financial statements.

                                      -44-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2003

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 2002 and 2001 consolidated financial statements to conform with the 2003
presentation. As of December 31, 2003, 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 gains and losses on
extinguishment of debt and capital securities 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 equity securities and are carried at fair value with unrealized appreciation
and depreciation included in net investment income. Dividend income and realized
gains and losses from trading account securities are also included in net
investment 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, 2003

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
group life and disability 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. Any
impairment losses will 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, 2003. See Note I to the Consolidated Financial Statements.

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 excess
of separate account assets over the related liabilities represents the Company's
deposit in the separate account, which is maintained to support the operation of
the separate account program. 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.

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, 2003, disability and excess
workers' compensation reserves with a carrying value of $645.6 million have been
discounted at a weighted average rate of 5.4%, with the rates ranging from 3.7%
to 7.5%.

                                      -46-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2003

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

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.

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. Deposits for asset accumulation
products are recorded as liabilities rather than as premiums, since these
products generally do not involve mortality or morbidity risk.

(Loss) gain on extinguishment of debt and capital securities. As of January 1,
2003, the Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 145, "Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS No. 145 rescinded SFAS No. 4,
which required all gains or losses from extinguishment of debt to be aggregated
and classified as an extraordinary item, net of the related income tax effect.
Under SFAS No. 145, gains or losses from extinguishment of debt are classified
as income or loss from operations in the income statement. Prior year financial
statements have been reclassified to conform to the requirements of SFAS No.
145. In addition, in computing diluted earnings per share for 2001, equivalent
shares attributable to in-the-money stock options, which totaled 0.8 million,
were considered in the calculation of per share amounts since the
reclassification of the gain on extinguishment of debt resulted in income from
continuing operations.

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 O. 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 and 2001. 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 will be
applied to 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 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:

                                      -47-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2003

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

<TABLE>
<CAPTION>
                                                                                        Year Ended December 31,
                                                                          -------------------------------------------------
                                                                               2003              2002              2001
                                                                          -------------     -------------     -------------
                                                                             (dollars in thousands, except per share data)
<S>                                                                       <C>               <C>               <C>
Net income, as reported............................................       $      98,916     $      60,652     $       6,505
Add: Stock-based employee compensation expense included
    in reported net income, net of related tax effects.............               1,218                 -                 -
Deduct: Stock-based employee compensation expense
    determined under fair value based method for all awards,
    net of related tax effects.....................................              (2,229)           (2,462)           (2,539)
                                                                          -------------     -------------     -------------
Pro forma net income ..............................................       $      97,905     $      58,190     $       3,966
                                                                          =============     =============     =============

Earnings  per share:
    Basic, as reported.............................................       $       3.17      $       1.95      $       0.21
    Basic, pro forma...............................................               3.14              1.87              0.13

    Diluted, as reported...........................................       $       3.09      $       1.90      $       0.21
    Diluted, pro forma.............................................               3.03              1.81              0.12
</TABLE>

The weighted average per share fair value used to calculate compensation expense
for 2003 and pro forma compensation expense for 2002 and 2001 was $7.85, $8.81
and $7.91, 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 5.0%, volatility factors of the
expected market price of the Company's common stock ranging from 28% to 33%,
expected lives of the options of five years and dividend yields ranging from
0.6% to 0.8%.

Variable Interest Entities. As of July 1, 2003, the Company adopted Financial
Accounting Standards Board Interpretation ("FIN") No. 46, "Consolidation of
Variable Interest Entities," which provides new criteria for determining whether
consolidation accounting is required for a variable interest entity ("VIE"). FIN
46 under certain circumstances requires consolidation of a VIE's assets,
liabilities and results of operations, with a minority interest recorded for the
ownership share applicable to other investors. Where consolidation is required,
additional disclosures may be required. The adoption of FIN 46 did not have a
material effect on the financial position or results of operations of the
Company.

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 July 2003, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 03-1, "Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate
Accounts." SOP No. 03-1 is required to be adopted for fiscal years beginning
after December 15, 2003 and, therefore, the Company adopted the new requirements
effective January 1, 2004. Prior to SOP No. 03-1, the Company has been required
to report the aggregate of all separate account assets as a single caption on
its balance sheet, which has been titled "Assets held in separate account." SOP
03-1 requires that the Company allocate its proportionate interest in the
separate account's assets to the corresponding captions in the Company's balance
sheet. At December 31, 2003, the Company's proportionate interest in the
separate account's assets was $13.2 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 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 will not have a material effect on the financial position or results of
operations of the Company.

                                      -48-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2003

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

In December 2003, the Financial Accounting Standards Board revised FIN 46. The
revised interpretation changed the conceptual framework for determining if an
entity holds a controlling interest in a VIE and will require the Company to
deconsolidate its subsidiaries that hold junior subordinated deferrable interest
debentures of the Company. See Note K to the Consolidated Financial Statements.
Therefore, the Company will present in its consolidated financial statements the
junior subordinated deferrable interest debentures as a liability and its
interest in the subsidiaries that hold these debentures as a component of other
assets. The Company is required to adopt the provisions of the revised FIN 46
that are applicable to the Company at the end of the first reporting period that
ends after March 15, 2004. The adoption of the revised FIN 46 will not have a
material effect on the financial position, results of operations or compliance
with the debt covenants of the Company.

NOTE B - ACQUISITIONS

The consideration for the 1998 acquisition of Matrix included contingent
consideration of up to $5.2 million in cash if Matrix's earnings met specified
targets subsequent to the acquisition. Matrix met all of the specified targets,
and accordingly, the Company paid the remaining $2.6 million of contingent
consideration during 2001, which was included in goodwill. See Note I to the
Consolidated Financial Statements.

NOTE C - INVESTMENTS

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

<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>

                                      -49-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2003

NOTE C - INVESTMENTS - (CONTINUED)

<TABLE>
<CAPTION>
                                                                                         December 31, 2002
                                                               --------------------------------------------------------------------
                                                                                       Gross            Gross
                                                                  Amortized         Unrealized        Unrealized          Fair
                                                                    Cost               Gains            Losses            Value
                                                               --------------     -------------     -------------    --------------
                                                                                      (dollars in thousands)
<S>                                                            <C>                <C>               <C>              <C>
Mortgage-backed securities.................................    $      596,861     $      35,659     $      (4,187)   $      628,333
Corporate securities.......................................         1,141,540            38,267           (27,018)        1,152,789
U.S. Treasury and other U.S. Government
    guaranteed securities..................................           266,333            10,143              (493)          275,983
Obligations of U.S. states, municipalities and
    political subdivisions.................................           424,921            17,057            (3,454)          438,524
                                                               --------------     -------------     -------------    --------------
        Total fixed maturity securities....................    $    2,429,655     $     101,126     $     (35,152)   $    2,495,629
                                                               ==============     =============     =============    ==============
</TABLE>

The amortized cost and fair value of fixed maturity securities available for
sale at December 31, 2003, 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....................................................................    $      628,987    $      643,300

Other securities:
    Less than one year........................................................................            54,544            55,296
    Greater than 1, up to 5 years.............................................................           695,609           730,584
    Greater than 5, up to 10 years............................................................           712,385           754,073
    Greater than 10 years.....................................................................           659,356           678,792
                                                                                                  --------------    --------------
        Total.................................................................................    $    2,750,881    $    2,862,045
                                                                                                  ==============    ==============
</TABLE>

Net investment income was attributable to the following:

<TABLE>
<CAPTION>
                                                                                               Year Ended December 31,
                                                                                 -------------------------------------------------
                                                                                      2003              2002              2001
                                                                                 -------------     -------------     -------------
                                                                                               (dollars in thousands)
<S>                                                                              <C>               <C>               <C>
Gross investment income:
   Fixed maturity securities.................................................    $     169,457     $     167,109     $     158,065
   Other.....................................................................           46,019            11,130            15,311
                                                                                 -------------     -------------     -------------
                                                                                       215,476           178,239           173,376
Less: Investment expenses....................................................           29,110            16,203            15,867
                                                                                 -------------     -------------     -------------
                                                                                 $     186,366     $     162,036     $     157,509
                                                                                 =============     =============     =============
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                               Year Ended December 31,
                                                                                 -------------------------------------------------
                                                                                      2003              2002              2001
                                                                                 -------------     -------------     -------------
                                                                                               (dollars in thousands)
<S>                                                                              <C>               <C>               <C>
Fixed maturity securities....................................................    $      11,857     $     (15,668)    $     (67,647)
Equity securities............................................................              867           (12,024)             (843)
Other investments............................................................                -              (777)           (1,799)
                                                                                 -------------     -------------     -------------
                                                                                 $      12,724     $     (28,469)    $     (70,289)
                                                                                 =============     =============     =============
</TABLE>

                                      -50-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2003

NOTE C - INVESTMENTS - (CONTINUED)

Proceeds from sales of fixed maturity securities during 2003, 2002 and 2001 were
$853.1 million, $518.6 million and $551.4 million, respectively. Gross gains of
$29.1 million, $32.0 million and $17.3 million and gross losses of $3.4 million,
$4.3 million and $6.7 million, respectively, were realized on those sales. In
2003, 2002, and 2001, 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 $13.0 million, $43.3 million and $78.3 million,
respectively. In 2003, 2002 and 2001, losses on equity securities include a
provision for the other than temporary decline in the value of certain
securities of $0, $10.8 million and $1.0 million, respectively.

The following table shows 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, at December 31, 2003.

<TABLE>
<CAPTION>
                                                     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 the table above are attributable to
over two hundred fixed maturity security positions with no unrealized loss
attributable to any one security exceeding $1.6 million. Approximately 52% of
the 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 comprised 69% of the aggregate gross unrealized losses.
Unrealized losses attributable to non-investment grade fixed maturity securities
comprised 31% 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 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 swap agreements in connection with its investment strategy in order to
profit from short-term differences in price. These positions are carried at fair
value with gains and losses included in income. The Company recognized net
investment losses of $3.7 million in 2003 related to these instruments. The
Company had no outstanding futures and option contracts and interest rate swap
agreements related to its investment strategy at December 31, 2003. 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, 2003.

                                      -51-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2003

NOTE C - INVESTMENTS - (CONTINUED)

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 M to the Consolidated Financial Statements.
Unrealized (losses) gains on trading securities included in net investment
income totaled $(0.7) million, $1.0 million and $4.8 million for 2003, 2002 and
2001, respectively.

Bonds and short-term investments with amortized costs of $63.1 million and $57.1
million at December 31, 2003 and 2002, 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 $68.1
million and $68.8 million at December 31, 2003 and 2002, respectively.

At December 31, 2003 and 2002, approximately 42% 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 20% and 22% of the Company's total invested assets at
December 31, 2003 and 2002, 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 $200.5 million and $172.3 million
at December 31, 2003 and 2002, respectively. Non-investment grade securities
constituted 6.3% and 6.1% of total invested assets at December 31, 2003 and
2002, 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,
                                                              --------------------------------------
                                                                   2003                   2002
                                                              ---------------        ---------------
                                                                      (dollars in thousands)
<S>                                                           <C>                    <C>
Assets  ................................................      $     7,164,143        $     2,925,280
                                                              ===============        ===============

Liabilities.............................................      $       756,054        $       410,060
Partners' capital.......................................            6,408,089              2,515,220
                                                              ---------------        ---------------
Total liabilities and partners' capital.................      $     7,164,143        $     2,925,280
                                                              ===============        ===============

Net income..............................................      $     1,525,819        $       180,722
                                                              ===============        ===============
</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, 2003 was as follows: Bankers Trust Corporation Secured Portfolio
Notes, Series 1998-1 - $117.6 million.

                                      -52-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2003

NOTE D - 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,
                                                                        -------------------------------------------------
                                                                             2003              2002              2001
                                                                        -------------     -------------     -------------
                                                                                      (dollars in thousands)
<S>                                                                     <C>               <C>               <C>
Balance at beginning of year, net of reinsurance....................    $     862,355     $     801,225     $     657,565
Add provisions for claims and claim expenses incurred, net
   of reinsurance, occurring during:
      Current year..................................................          305,463           280,657           243,306
      Prior years...................................................            6,401             1,331             6,538
                                                                        -------------     -------------     -------------
   Incurred claims and claim expenses during the current
       year, net of reinsurance.....................................          311,864           281,988           249,844
                                                                        -------------     -------------     -------------
Deduct claims and claim expenses paid, net of reinsurance,
   occurring during:
      Current year..................................................           69,351            71,545            56,625
      Prior years...................................................          155,848           149,313            49,559
                                                                        -------------     -------------     -------------
                                                                              225,199           220,858           106,184
                                                                        -------------     -------------     -------------
Balance at end of year, net of reinsurance..........................          949,020           862,355           801,225
Reinsurance receivables at end of year..............................          252,568           238,489           221,448
                                                                        -------------     -------------     -------------
   Balance at end of year, gross of reinsurance.....................    $   1,201,588     $   1,100,844     $   1,022,673
                                                                        =============     =============     =============

Balance Sheets:
   Future policy benefits:
      Disability and accident.......................................    $     439,158     $     390,717

   Unpaid claims and claim expenses:
      Disability and accident.......................................          189,740           175,271
      Casualty......................................................          572,690           534,856
                                                                        -------------     -------------

                                                                        $   1,201,588     $   1,100,844
                                                                        =============     =============
</TABLE>

The provision for claims and claim expenses in 2001 includes a charge of $44.3
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 is an addition to excess workers' compensation case reserves of
$9.0 million and losses incurred but not reported 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 incurred but not reported reserves
attributable to the terrorist attacks on the World Trade Center.

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. In 2001, the change in the provision for claims
and claim expenses incurred in prior years reflects the accretion of discounted
reserves and unfavorable claims development. The Company's insurance policies do
not provide for the retrospective adjustment of premiums based on claim
experience.

                                      -53-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2003

NOTE E - 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 $0 and $37.0 million under the Credit Agreement at December 31,
2003 and 2002, 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, 2003, the Company was in
compliance in all material respects with the restrictions and covenants in the
Credit Agreement.

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, 2003, 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. In June 2001, the Company repurchased $8.0 million
principal amount of the Matured Senior Notes and recognized a loss on
extinguishment of debt of $0.2 million in connection with this repurchase.

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,
2003, the net loss on the treasury rate lock agreement included in accumulated
other comprehensive income was $7.4 million, net of an income tax benefit of
$4.0 million. At December 31, 2002, the net unrealized loss on the treasury rate
lock agreement included in accumulated other comprehensive income was $3.3
million, net of an income tax benefit of $1.8 million.

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.

                                      -54-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2003

NOTE E - CORPORATE DEBT -  (CONTINUED)

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

Interest paid by the Company on its corporate debt totaled $12.9 million, $8.9
million and $12.2 million during 2003, 2002 and 2001, respectively.

NOTE F - 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 the Federal Home Loan Banks
of Pittsburgh, Dallas and Des Moines (collectively, the "FHLB"). At December 31,
2003 and 2002, advances from the FHLB, including accrued interest, totaled
$150.8 million and $208.0 million, respectively. 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 6.6% and
5.9% at December 31, 2003 and 2002, respectively. The advances of $150.0
million, which were obtained at a fixed rate, have a weighted average term of
6.4 years at December 31, 2003. These advances are collateralized by fixed
maturity securities with a fair value of $161.7 million.

NOTE G - INCOME TAXES

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

<TABLE>
<CAPTION>
                                                           Year Ended December 31,
                                                       ------------------------------
                                                         2003       2002       2001
                                                       --------   --------   --------
                                                           (dollars in thousands)
<S>                                                    <C>        <C>        <C>
Federal income tax expense at statutory rate ........  $ 50,225   $ 30,199   $  1,894
Tax-exempt income and dividends received deduction ..    (6,324)    (6,206)    (5,104)
Other ...............................................       695      1,638      2,112
                                                       --------   --------   --------
                                                       $ 44,596   $ 25,631   $ (1,098)
                                                       ========   ========   ========
</TABLE>

All of the Company's current and deferred income tax expense (benefit) 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,
                                                                            ------------------------------
                                                                                2003              2002
                                                                            -------------     -------------
                                                                                 (dollars in thousands)
<S>                                                                         <C>               <C>
Cost of business acquired...............................................    $      62,241     $      54,777
Future policy benefits and unpaid claims and claim expenses.............           41,711            35,860
Investments.............................................................           25,708            13,110
Other...................................................................           10,116             9,302
                                                                            -------------     -------------
     Gross deferred tax liabilities.....................................          139,776           113,049
                                                                            -------------     -------------
Future policy benefits and unpaid claims and claim expenses.............           (9,551)           (8,303)
Other liabilities.......................................................           (6,570)           (6,570)
Cost of business acquired and other.....................................          (12,824)           (9,924)
Net operating loss carryforwards........................................          (13,736)          (11,261)
Minimum tax credit carryforwards........................................                -              (580)
                                                                            -------------     -------------
     Gross deferred tax assets..........................................          (42,681)          (36,638)
                                                                            -------------     -------------
     Net deferred tax liability.........................................    $      97,095     $      76,411
                                                                            =============     =============
</TABLE>

                                      -55-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2003

NOTE G - INCOME TAXES - (CONTINUED)

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

<TABLE>
<CAPTION>
                                                                 As of or for the Year Ended
                                                                        December 31,
                                                     -------------------------------------------------
                                                          2003              2002              2001
                                                     -------------     -------------     -------------
                                                                   (dollars in thousands)
<S>                                                  <C>               <C>               <C>
Current tax expense (benefit)....................    $      34,544     $      (5,579)    $      20,690
Deferred tax expense (benefit)...................           10,052            31,210           (21,788)
Current tax liability (recoverable)..............              817           (11,292)           (6,286)
Income taxes paid................................           21,800            17,765            23,074
Income tax refunds...............................                -            19,031            37,785
</TABLE>

At December 31, 2003, DFG, SNCC and the other non-life insurance subsidiaries
have net operating loss carryforwards of $39.2 million, which will expire in
2021. Tax years through 1996 are closed to further assessment by the Internal
Revenue Service ("IRS"). The IRS has completed the fieldwork for its examination
of the 1997 through 2002 tax years, and the proposed adjustments have not had a
material impact on the consolidated financial position, liquidity, or results of
operations of the Company. 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,
                                                        -------------------------------------------------
                                                             2003              2002              2001
                                                        -------------     -------------     -------------
                                                                      (dollars in thousands)
<S>                                                     <C>               <C>               <C>
Balance at beginning of year.......................     $      11,198     $      13,693     $      15,703
    Interest accrued...............................               189               182               287
    Amortization...................................            (2,300)           (2,677)           (2,297)
                                                        -------------     -------------     -------------
Balance at end of year.............................     $       9,087     $      11,198     $      13,693
                                                        =============     =============     =============
</TABLE>

An estimate of the percentage of the December 31, 2003 PVFP balance to be
amortized over each of the next five years is as follows: 2004 - 23.2%, 2005 -
23.3%, 2006 - 23.4%, 2007 - 17.5% and 2008 - 2.6%.

NOTE I - GOODWILL

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.

                                      -56-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2003

NOTE I - GOODWILL - (CONTINUED)

The following table provides a reconciliation of reported net income to adjusted
net income and the related earnings per share data for the year ended December
31, 2001 as if the provisions of SFAS No. 142 related to goodwill had been
adopted as of January 1, 2001 (dollars in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                                       2001
                                                                                   ------------
<S>                                                                                <C>
Net income, as reported.....................................................       $      6,505
Add back: goodwill amortization.............................................              3,198
                                                                                   ------------
    Adjusted net income.....................................................       $      9,703
                                                                                   ============

Basic results per share of common stock:
    Net income, as reported.................................................       $       0.21
    Add back: goodwill amortization.........................................               0.10
                                                                                   ------------
        Adjusted net income ................................................       $       0.31
                                                                                   ============

Diluted results per share of common stock:
    Net income, as reported.................................................       $       0.21
    Add back: goodwill amortization.........................................               0.10
                                                                                   ------------
        Adjusted net income ................................................       $       0.31
                                                                                   ============
</TABLE>

NOTE J - 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,
                                                       --------------------------------------------------------------------
                                                                     2003                                2002
                                                       --------------------------------    --------------------------------
                                                         Carrying              Fair            Carrying           Fair
                                                           Value               Value             Value            Value
                                                       --------------    --------------    --------------    --------------
                                                                               (dollars in thousands)
<S>                                                    <C>               <C>               <C>               <C>
Assets:
   Fixed maturity securities, available for sale....   $    2,862,045    $    2,862,045    $    2,495,629    $    2,495,629
   Short-term investments...........................          114,752           114,752           204,890           204,890
   Other investments................................          225,957           225,957           115,532           115,532
   Assets held in separate account..................           92,661            92,661            73,153            73,153

Liabilities:
   Policyholder account balances....................          896,526           888,183           847,125           852,227
   Corporate debt...................................          143,750           153,123           118,139           120,094
   Advances from Federal Home Loan Bank.............          150,789           167,014           207,990           228,847
   Liabilities related to separate account..........           79,413            79,413            63,033            63,033
</TABLE>

                                      -57-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2003

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

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 portfolio that are not actively
traded in a liquid market and do not have other mechanisms for their sale
totaled $19.7 million and $67.6 million at December 31, 2003 and 2002,
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 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 $34.7
million and $38.1 million at December 31, 2003 and 2002, 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.

The Company believes the fair value of its variable rate long-term debt and
variable rate advances from the FHLB are equal to their carrying value. The
Company pays variable rates of interest on this debt and these FHLB advances,
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 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 K - COMPANY-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF
SUBSIDIARIES

In 1997, Delphi Funding L.L.C. ("Delphi Funding"), a subsidiary of the Company,
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. The Company recognized a gain on extinguishment of the capital
securities of $11.7 million, in connection with these repurchases. 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 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.

                                      -58-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2003

NOTE K - COMPANY-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF
SUBSIDIARIES - (CONTINUED)

On May 15, 2003, Delphi Financial Statutory Trust I (the "Trust"), a recently -
created Connecticut statutory trust and wholly owned subsidiary of the Company,
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 interest rate was 5.41% for the period from May 15, 2003 through
August 15, 2003, 5.23% for the period from August 16, 2003 through November 15,
2003, and 5.28% for the period from November 16, 2003 through February 15, 2004.
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.

Dividends paid by the Company's subsidiaries on the outstanding
Company-obligated mandatorily redeemable capital securities totaled $3.9
million, $3.4 million and $7.2 million during 2003, 2002 and 2001, respectively.

NOTE L - 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. Results per
share and applicable share amounts for prior periods have been restated to
reflect the stock split.

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 and 2002. 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
2003, 2002 and 2001, the Company paid cash dividends on its capital stock in the
amounts of $7.4 million, $6.0 million and $5.7 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 2004 on
dividend payments and/or repurchases or redemptions of its capital stock by the
Company will be equal to $90.2 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 $293.8 million and $257.2 million at December 31, 2003 and 2002,
respectively. Consolidated statutory net income for the Company's life insurance
subsidiaries was $24.8 million, $29.5 million and $2.2 million, in 2003, 2002
and 2001, respectively. The consolidated statutory net income for the Company's
life insurance subsidiaries for 2003, 2002, and 2001 includes a charge of $16.0
million, $17.4 million and $39.9 million, respectively, for the other than
temporary decline in the value of certain

                                      -59-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2003

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

securities. The Company's casualty insurance subsidiary had statutory capital
and surplus of $252.2 million and $212.7 million at December 31, 2003 and 2002,
respectively, and statutory net income (loss) of $30.2 million, $15.2 million
and $(10.7) million in 2003, 2002 and 2001, respectively. The consolidated
statutory net loss in 2001 for the Company's casualty insurance subsidiary
includes a charge for reserve strengthening of $29.9 million, net of taxes,
primarily related to an unusually high number of large losses in the Company's
excess workers' compensation business, including losses attributable to the
terrorist attacks on the World Trade Center. 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 $54.0 million during 2004 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, 2003, 1.1 million shares remained authorized
for future purchases. During 2003, 2002 and 2001, the Company purchased 0.3
million, 0 and 0.1 million shares, respectively, of its Class A Common Stock for
a total cost of $7.5 million, $0 and $2.2 million, respectively, for a volume
weighted average price of $24.75 per share, $0 per share, and $21.03 per share,
respectively.

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

<TABLE>
<CAPTION>
                                                                                      Year Ended December 31,
                                                                         -------------------------------------------------
                                                                              2003              2002              2001
                                                                         -------------    --------------     -------------
                                                                                       (shares in thousands)
<S>                                                                      <C>              <C>                <C>
Class A Common Stock:
   Beginning balance.................................................           18,928            17,763            16,845
       Issuance of stock, exercise of stock options and
           conversion of shares......................................              710             1,165               918
       Three-for-two stock split.....................................            9,819                 -                 -
                                                                         -------------     -------------     -------------
         Ending balance..............................................           29,457            18,928            17,763
                                                                         =============     =============     =============
Class B Common Stock:
   Beginning balance.................................................            3,195             4,133             4,839
       Conversion of shares..........................................             (410)             (938)             (706)
       Three-for-two stock split.....................................            1,392                 -                 -
                                                                         -------------     -------------     -------------
           Ending balance............................................            4,177             3,195             4,133
                                                                         =============     =============     =============
Class A Treasury Stock:
   Beginning balance.................................................            1,505             1,505             1,435
       Acquisition of treasury stock.................................              202                 -                70
       Three-for-two stock split.....................................              853                 -                 -
                                                                         --------------    -------------     -------------
       Ending balance................................................            2,560             1,505             1,505
                                                                         =============     =============     =============
</TABLE>

                                      -60-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2003

NOTE M - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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, 2001......................................     $     (53,622)   $           -   $           -   $     (53,622)
                                                                   -------------    -------------   -------------   -------------

Unrealized depreciation on available for sale securities (1)..            (1,886)               -               -          (1,886)
Reclassification adjustment for losses included in
    net income (2)............................................            44,523                -               -          44,523
                                                                   -------------    -------------   -------------   -------------
Net change in unrealized depreciation on
    investments...............................................            42,637                -               -          42,637
                                                                   -------------    -------------   -------------   -------------
        Balance, December 31, 2001............................     $     (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
                                                                   =============    =============   =============   =============
</TABLE>

(1)   Net of an income tax (benefit) expense of $(1.0) million, $14.3 million
      and $18.9 million for the years ended December 31, 2001, 2002 and 2003,
      respectively. Also, net of related adjustment to cost of business acquired
      of $(4.1) million, $(23.8) million and $(5.5) million for the years ended
      December 31, 2001, 2002 and 2003, respectively.

(2)   Net of an income tax benefit (expense) of $24.0 million, $9.7 million and
      $(4.7) million for the years ended December 31, 2001, 2002 and 2003,
      respectively.

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

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

(5)   Net of an income tax benefit of $0.8 million for the year ended December
      31, 2003.

                                      -61-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2003

NOTE N - COMMITMENTS AND CONTINGENCIES

Total rental expense for operating leases, principally for administrative and
sales office space, was $7.8 million, $7.7 million and $6.7 million for the
years ended December 31, 2003, 2002, and 2001, respectively. As of December 31,
2003, future net minimum rental payments under non-cancelable operating leases
were approximately $54.6 million, payable as follows: 2004 - $12.0 million, 2005
- $11.5 million, 2006 - $10.4 million, 2007 - $9.7 million, 2008 - $8.6 million
and $2.4 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
consolidated financial position. In addition, incident to its discontinued
products, the Company is currently a party to two separate arbitrations arising
out of two accident and health reinsurance arrangements in which it and other
companies formerly were participating reinsurers. At issue in both arbitrations,
among other things, is whether certain reinsurance risks were validly ceded to
the Company. The hearings in these arbitrations are scheduled to be held in the
current year. While management believes that in both cases the Company has
substantial legal grounds for avoiding the reinsurance risks at issue, it is not
at this time possible to predict the ultimate outcome of these arbitrations, nor
is it feasible to provide reasonable ranges of potential losses. In the opinion
of management, such arbitrations, when ultimately resolved, will not
individually or collectively have a material adverse effect on the Company's
consolidated financial position.

NOTE O - 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 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 (the "2003 Employee Option
Plan"). Under the terms of the 2003 Employee Option Plan, a total of 1,500,000
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 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

                                      -62-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2003

NOTE O - STOCK OPTIONS - (CONTINUED)

become exercisable if SIG's aggregate consolidated Pre-Tax Operating Income, as
defined and computed under the related option agreements ("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 PTOI for such period
exceeds $196.1 million, determined by interpolating between zero and 112,500
according to where the 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 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 PTOI for such period exceeds $380.1
million, determined by interpolating between zero and 225,000 according to where
the 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. 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 years ended December 31, 2001 or 2002. No
compensation expense related to the predecessor plan was recognized for the
years ended December 31, 2001 or 2002. The Committee awarded the Company's chief
executive officer 67,010 deferred shares under the Amended Performance Plan in
February 2004 based on his performance during 2003. The Company recognized $2.6
million of compensation expense in 2003 related to this award.

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

<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                       ----------------------------------------------------------------------
                                                                2003                     2002                     2001
                                                       ----------------------   ---------------------   ---------------------
                                                         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...........       3,765,159    $ 21.69     3,827,609   $  21.45    3,871,425   $ 21.55
   Options granted...............................       1,250,050      28.73       114,615      27.14      226,191     23.67
   Options forfeited.............................         (39,419)     26.41       (41,308)     25.26     (195,024)    24.01
   Options expired...............................          (5,961)     37.58       (31,368)     22.54      (51,310)    28.65
   Options exercised.............................        (286,762)     18.39      (104,389)     17.13      (23,673)    22.83
                                                       ----------               ----------              ----------
Options outstanding, end of year.................       4,683,067      23.70     3,765,159      21.69    3,827,609     21.45
                                                       ==========               ==========              ==========

Exercisable options, end of year.................       3,140,626      21.91     3,152,793      21.55    2,942,022     21.33
</TABLE>

                                      -63-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2003

NOTE O - STOCK OPTIONS - (CONTINUED)

Information about options outstanding at December 31, 2003 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.......            183,276          1.4      $     8.83       183,276    $    8.83
$14.47 - $21.55.......          2,087,713          5.3           19.84     1,886,357        19.81
$22.00 - $32.53.......          2,387,223          7.4           28.07     1,050,306        27.66
$34.42 - $37.58.......             24,855          5.3           37.05        20,687        37.58
                               ----------     --------     -----------    ----------    ---------
                                4,683,067          6.2      $    23.70     3,140,626    $   21.91
                               ==========     ========      ==========    ==========    =========
</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, 2003, the weighted average contractual life of the outstanding SIG Options
was 2.8 years.

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

<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                        --------------------------------------------------------------------------------------
                                                     2003                          2002                        2001
                                        ----------------------------  ---------------------------- ---------------------------
                                           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.......      696,154        232,500      1,223,606        396,933      1,895,352       581,317
 Options exercised....................     (334,560)       104,707       (511,261)       172,779       (671,746)      234,300
 Options expired......................       (4,415)             -        (16,191)             -              -             -
                                           --------                     ---------                     ---------
SIG Options - end of year.............      357,179        107,045        696,154        232,500      1,223,606       396,933
                                           ========                     =========                     =========

Exercisable SIG Options - end of year.      301,493         91,360        475,976        163,996        649,719       210,766
</TABLE>

                                      -64-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2003

NOTE P - COMPUTATION OF RESULTS PER SHARE

<TABLE>
<CAPTION>
                                                                                              Year Ended December 31,
                                                                                      --------------------------------------
                                                                                         2003          2002          2001
                                                                                      ----------    ----------    ----------
                                                                                              (dollars in thousands,
                                                                                              except per share data)
<S>                                                                                   <C>           <C>           <C>
Numerator:
    Net income..................................................................      $  98,916     $   60,652    $   6,505
                                                                                      =========     ==========    =========

Denominator (restated to reflect the 3-for-2 common stock split):...............
    Weighted average common shares outstanding..................................         31,208         31,139       30,848
       Effect of dilutive securities............................................            815            748          781
                                                                                      ---------     ----------   ----------
    Weighted average common shares outstanding, assuming dilution...............         32,023         31,887       31,629
                                                                                      =========     ==========   ==========
Basic results per share of common stock:
       Net income...............................................................      $    3.17     $     1.95   $     0.21
                                                                                      =========     ==========   ==========

Diluted results per share of common stock:
       Net income...............................................................      $    3.09     $     1.90   $     0.21
                                                                                      =========     ==========   ==========
</TABLE>

NOTE Q - 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 risk 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, 2003, all of the Company's significant reinsurers were either rated "A-"
(Excellent) or higher by A.M. Best Company.

In October 2001, Oracle Reinsurance Company Ltd. ("Oracle Re"), a wholly owned
subsidiary of Delphi International Ltd. ("Delphi International"), and the
Company consummated the commutation of various reinsurance agreements which the
Company had previously entered into with Oracle Re. 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.

                                      -65-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2003

NOTE Q - REINSURANCE - (CONTINUED)

A summary of reinsurance activity follows:

<TABLE>
<CAPTION>
                                                                                           Year Ended December 31,
                                                                               ----------------------------------------------
                                                                                   2003             2002             2001
                                                                               -------------    -------------   -------------
                                                                                           (dollars in thousands)
<S>                                                                            <C>              <C>             <C>
Premium income assumed..................................................       $      16,660    $     38,172    $      23,099
Premium income ceded....................................................             100,678         109,198          126,698
Benefits, claims and interest credited ceded............................             132,788         134,875          150,885
</TABLE>

NOTE R - SEGMENT INFORMATION

<TABLE>
<CAPTION>
                                                                                          Year Ended December 31,
                                                                            -------------------------------------------------
                                                                                 2003              2002              2001
                                                                            -------------     -------------     -------------
                                                                                          (dollars in thousands)
<S>                                                                         <C>               <C>               <C>
Revenues:
    Group employee benefit products.....................................    $     796,374     $     698,396     $     570,852
    Asset accumulation products.........................................           82,555            70,109            72,746
    Other (1)...........................................................           26,524            21,388            21,115
                                                                            -------------     -------------     -------------
                                                                                  905,453           789,893           664,713
    Net realized investment gains (losses)..............................           12,724           (28,469)          (70,289)
    (Loss) gain on extinguishment of debt and capital securities........                -              (332)           11,456
                                                                            -------------     -------------     -------------
                                                                            $     918,177     $     761,092     $     605,880
                                                                            =============     =============     =============
Operating income(2)(4):
    Group employee benefit products.....................................    $     140,118     $     122,726     $      72,961
    Asset accumulation products.........................................           16,569            10,129            13,434
    Other (1)...........................................................           (7,812)           (5,390)           (4,743)
                                                                            -------------     -------------     -------------
                                                                                  148,875           127,465            81,652
    Net realized investment gains (losses)..............................           12,724           (28,469)          (70,289)
    (Loss) gain on extinguishment of debt and capital securities........                -              (332)           11,456
                                                                            -------------     -------------     -------------
                                                                            $     161,599     $      98,664     $      22,819
                                                                            =============     =============     =============
Net investment income(3):
    Group employee benefit products.....................................    $     100,338     $      89,897     $      82,858
    Asset accumulation products.........................................           78,397            67,464            69,658
    Other (1)...........................................................            7,631             4,675             4,993
                                                                            -------------     -------------     -------------
                                                                            $     186,366     $     162,036     $     157,509
                                                                            =============     =============     =============

Amortization of cost of business required:
    Group employee benefit products.....................................    $      51,100     $      41,608     $      30,415
    Asset accumulation products.........................................            4,664             4,134             4,285
                                                                            -------------     -------------     -------------
                                                                            $      55,764     $      45,742     $      34,700
                                                                            =============     =============     =============

Segment assets(3):
    Group employee benefit products.....................................    $   2,391,010     $   2,101,836     $   1,882,009
    Asset accumulation products.........................................        1,661,860         1,496,343         1,326,428
    Other(1)............................................................          124,662           136,763           127,709
                                                                            -------------     -------------     -------------
                                                                            $   4,177,532     $   3,734,942     $   3,336,146
                                                                            =============     =============     =============
</TABLE>

                                      -66-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2003

NOTE R - SEGMENT INFORMATION - (CONTINUED)

      (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)   Results for 2001 reflect the reserve strengthening. See Note D to
            the Consolidated Financial Statements.

      (3)   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.

      (4)   Operating income for group employee benefits and other operations
            includes amortization of goodwill of $1.8 million and $1.4 million,
            respectively, in 2001.

                                      -67-
<PAGE>

                                                                      SCHEDULE I

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                             SUMMARY OF INVESTMENTS
                    OTHER THAN INVESTMENTS IN RELATED PARTIES
                                DECEMBER 31, 2003
                             (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..........        $       374,559     $        382,495     $       382,495
   Other mortgage-backed securities...........................                254,428              260,805             260,805
   U.S. Treasury and other U.S. Government
       guaranteed securities..................................                380,139              385,417             385,417
   Obligations of U.S. states, municipalities and
       political subdivisions.................................                472,218              491,192             491,192
   Corporate securities.......................................              1,269,537            1,342,136           1,342,136
                                                                      ---------------     ----------------     ---------------
       Total fixed maturity securities........................              2,750,881            2,862,045           2,862,045
                                                                      ---------------     ----------------     ---------------

Equity securities:
   Common stocks..............................................                 21,361               22,091              22,091
   Non-redeemable preferred stocks............................                 13,168               14,403              14,403
                                                                      ---------------     ----------------     ---------------
       Total equity securities................................                 34,529               36,494              36,494
                                                                      ---------------     ----------------     ---------------

Short-term investments........................................                114,752              114,752             114,752
Other investments.............................................                186,286              189,463             189,463
                                                                      ---------------     ----------------     ---------------
       Total investments......................................        $     3,086,448     $      3,202,754     $     3,202,754
                                                                      ===============     ================     ===============
</TABLE>

                                      -68-
<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,
                                                                                  -------------------------
                                                                                      2003          2002
                                                                                  -----------   -----------
<S>                                                                               <C>           <C>
Assets:
   Fixed maturity securities, available for sale ...............................  $    12,898   $         -
   Short-term investments ......................................................       14,749         4,107
   Other invested assets .......................................................        1,260           181
   Investment in operating subsidiaries ........................................      977,654       831,150
   Investment in investment subsidiaries .......................................       22,322        53,646
   Investment in subsidiaries holding junior subordinated debt of the Company ..        3,712         3,093
   Cash ........................................................................          587           641
   Amounts due from subsidiaries ...............................................       22,168             -
   Other assets ................................................................       31,972        24,007
                                                                                  -----------   -----------
       Total assets ............................................................  $ 1,087,322   $   916,825
                                                                                  ===========   ===========

Liabilities:
   Corporate debt ..............................................................  $   143,750   $   109,111
   Junior subordinated debentures payable to subsidiaries ......................       59,762        39,143
   Amounts due to subsidiaries .................................................            -        10,597
   Other liabilities ...........................................................       85,370        76,319
                                                                                  -----------   -----------
                                                                                      288,882       235,170
                                                                                  -----------   -----------

Shareholders' Equity:
   Class A Common Stock ........................................................          295           189
   Class B Common Stock ........................................................           42            32
   Additional paid-in capital ..................................................      383,573       373,356
   Accumulated other comprehensive income ......................................       52,428        30,003
   Retained earnings ...........................................................      421,080       329,574
   Treasury stock ..............................................................      (58,978)      (51,499)
                                                                                  -----------   -----------
                                                                                      798,440       681,655
                                                                                  -----------   -----------
       Total liabilities and shareholders' equity ..............................  $ 1,087,322   $   916,825
                                                                                  ===========   ===========
</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 INCOME
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                         Year Ended December 31,
                                                                           -------------------------------------------------
                                                                                2003              2002              2001
                                                                           -------------     -------------     -------------
<S>                                                                        <C>               <C>               <C>
Revenue:
   Equity in undistributed earnings of subsidiaries....................    $     124,155     $      91,303     $       5,116
   Dividends from operating subsidiaries...............................            2,600            13,800            31,600
   Dividends from investment subsidiaries..............................           47,340                 -                 -
   Dividends from subsidiaries holding junior subordinated debt
      of the Company...................................................              309               288               288
   Other (loss) income.................................................           (5,498)           (1,653)              136
   Realized investment gains (losses)..................................            1,375               200           (21,853)
   (Loss) gain on extinguishment of debt...............................                -              (332)           11,456
                                                                           -------------     -------------     -------------
                                                                                 170,281           103,606            26,743
                                                                           -------------     -------------     -------------
Expenses:
   Operating expenses..................................................            6,958             2,598             1,436
   Interest expense....................................................           19,811            14,725            19,900
                                                                           -------------     -------------     -------------
                                                                                  26,769            17,323            21,336
                                                                           -------------     -------------     -------------

       Income  before income tax expense (benefit) ....................          143,512            86,283             5,407

Income tax expense (benefit)...........................................           44,596            25,631            (1,098)
                                                                           -------------     -------------     -------------
       Net income......................................................    $      98,916     $      60,652     $       6,505
                                                                           =============     =============     =============
</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)
                            STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                         Year Ended December 31,
                                                                          -------------------------------------------------
                                                                               2003              2002              2001
                                                                          -------------     -------------     -------------
<S>                                                                       <C>               <C>               <C>
Operating activities:
   Net income........................................................     $      98,916     $      60,652     $       6,505
   Adjustments to reconcile net income to net cash
           provided by operating activities:
       Equity in undistributed earnings of subsidiaries..............           (69,765)          (63,915)           (6,316)
       Change in other assets and other liabilities..................             2,022           (29,153)            3,341
       Change in current and deferred income taxes...................            10,984            15,995             8,275
       Amortization, principally of investments and debt
            issuance costs...........................................             1,103              (290)              868
       Net realized (gains) losses on investments....................            (1,375)             (200)           21,853
       Loss (gain) on extinguishment of debt.........................                 -               332           (11,456)
       Change in amounts due from/to subsidiaries....................           (32,765)           18,134           148,444
                                                                          -------------     -------------     -------------
           Net cash provided by operating activities.................             9,120             1,555           171,514
                                                                          -------------     -------------     -------------

Investing activities:
   Purchases of investments and loans made...........................           (58,523)          (14,348)           (1,195)
   Sales of investments and receipts from repayment of loans.........            45,624                 -            35,378
   Maturities of investments.........................................             2,379            15,024               400
   Net change in short-term investments..............................           (10,637)             (742)           (3,354)
   Purchases of investments in subsidiaries..........................           (20,002)                -            (2,613)
                                                                          -------------     -------------     -------------
   Net cash (used) provided by investing activities..................           (41,159)              (66)           28,616
                                                                          -------------     -------------     -------------

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......................            34,000            49,000           102,000
   Principal payments under revolving credit facilities..............           (71,000)          (37,000)         (227,000)
   Repayments or repurchase of other corporate debt..................           (72,150)          (10,874)           (8,284)
   Repurchase of junior subordinated debentures payable to
       Delphi Funding  L.L.C.........................................                 -                 -           (51,329)
   Change in liability for securities sold under agreements to
       repurchase....................................................                                   -           (10,571)
   Other financing activities........................................           (18,105)           (1,979)           (5,341)
                                                                          -------------     -------------     -------------
           Net cash provided (used) by financing activities..........            31,985              (853)         (200,525)
                                                                          -------------     -------------     -------------

(Decrease) increase in cash..........................................               (54)              636              (395)
Cash at beginning of year............................................               641                 5               400
                                                                          -------------     -------------     -------------
       Cash at end of year...........................................     $         587     $         641     $           5
                                                                          =============     =============     =============
</TABLE>

                  See notes to condensed financial statements.

                                      -71-
<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 $50.2 million, $13.3
million and $32.7 million in 2003, 2002 and 2001, respectively.

                                      -72-
<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>
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
                                                      =============     =============     =============     =============

2001
Group employee benefits products.................     $     113,554     $   1,122,338     $      44,655     $           -
Asset accumulation products......................            55,340            70,003                 -           786,214
Other............................................                 -            87,311                 -            31,329
                                                      -------------     -------------     -------------     -------------
    Total........................................     $     168,894     $   1,279,652     $      44,655     $     817,543
                                                      =============     =============     =============     =============
</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>
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
                                             =============     =============     =============     =============     =============

2001
Group employee benefits products........     $     487,994     $      82,858     $     365,811     $      30,415     $     101,665
Asset accumulation products.............             3,088            69,658            49,455             4,285             5,572
Other...................................            16,122             4,993             1,730                 -            24,128
                                             -------------     -------------     -------------     -------------     -------------
    Total...............................     $     507,204     $     157,509     $     416,996     $      34,700     $     131,365
                                             =============     =============     =============     =============     =============
</TABLE>

      (1)   Net written premiums for casualty insurance products totaled $194.8
            million, $162.6 million and $105.5 million for the years ended
            December 31, 2003, 2002 and 2001, 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.

                                      -73-
<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, 2003.................   $    110,759,243   $     11,017,535    $        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
                                         ================   ================    ===============    ================


Life insurance in force as of
    December 31, 2001.................   $     79,302,191   $      6,077,095    $        38,101    $     73,263,197           - %
                                         ================   ================    ===============    ================

Year ended December 31, 2001:
    Premium and fee income:
       Life insurance and annuity ....   $        194,851   $         21,828    $         3,420    $        176,443           2 %
       Accident and health insurance..            251,132             44,597              9,317             215,852           4 %
       Casualty insurance.............            150,684             60,273             10,362             100,773          10 %
       Other..........................             14,136                  -                  -              14,136
                                         ----------------   ----------------    ---------------    ----------------
Total premium and fee income..........   $        610,803   $        126,698    $        23,099    $        507,204
                                         ================   ================    ===============    ================
</TABLE>

                                      -74-
<PAGE>

                                                                     SCHEDULE VI

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

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                          -----------------------------------------
                                                                                 2003                   2002
                                                                          ------------------     ------------------
<S>                                                                       <C>                    <C>
Deferred policy acquisition costs.................................           $      9,828           $       6,999

Reserves for unpaid claims and claim expenses (1).................                572,690                 534,856

Discount, if any, deducted from above (2).........................                265,100                 241,688

Unearned premiums.................................................                 67,649                  43,904
</TABLE>

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                             ----------------------------------------------------------------
                                                                    2003                   2002                   2001
                                                             ------------------     ------------------     ------------------
<S>                                                          <C>                    <C>                    <C>
Earned premiums..........................................      $     173,535           $    152,724           $     100,773

Net investment income....................................             42,614                 42,602                  38,641

Claims and claim expenses incurred related to:
    Current year (1).....................................             82,372                 82,197                  73,782
    Prior years (3)......................................             20,541                 15,869                  13,896

Amortization of deferred policy acquisition costs........             22,272                 16,190                   8,094

Paid claims and claim adjustment expenses (4)............             62,400                 72,869                 (23,758)

Net premiums written.....................................            194,752                162,559                 105,511
</TABLE>

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

(1)   Claims and claim expenses for 2001 include a charge for reserve
      strengthening of $39.3 million primarily related to an unusually high
      number of large losses in the Company's excess workers' compensation
      business. See Note D to the Consolidated Financial Statements.

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

(3)   In 2003 and 2002, the claims and claim expenses incurred related to prior
      years reflect accretion of discounted reserves offset by favorable claims
      development. In 2001, the claims and claim expenses incurred related to
      prior years reflect the accretion of discounted reserves and unfavorable
      claims development.

(4)   In 2001, the paid claims and claim adjustment expenses reflect the
      Company's receipt of $74.3 million related to the commutation of the
      reinsurance agreements with Oracle Re.

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