<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K
                                   (Mark One)
[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the Fiscal Year Ended December 31, 1997

[ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

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>


1105 North Market Street, Suite 1230, Wilmington, Delaware             19899
--------------------------------------------------------------------------------
     (Address of principal executive offices)                        (Zip Code)


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


<TABLE>
<CAPTION>
 Class A Common Stock, $.01 par value                New York Stock Exchange
 ------------------------------------                -----------------------
<S>                                                  <C>
       (Title of Each Class)                          (Name of Each Exchange
                                                       On Which Registered)
</TABLE>

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

                                      None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to filing requirements
for the past 90 days.

                          Yes   X         No ___

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

The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, based upon the closing price for the Registrant's Class A Common
Stock on February 26, 1998, was $562,225,000.

As of February 26, 1998, the Registrant had 12,925,733 shares of Class A Common
Stock and 6,156,787 shares of Class B Common Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Registrant's 1998 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
<PAGE>   2
                                     PART I

ITEM 1. BUSINESS

Delphi Financial Group, Inc. (the "Company," which term includes the Company and
its consolidated subsidiaries unless the context specifies otherwise), organized
as a Delaware corporation in 1987, is an insurance holding company engaged
through its subsidiaries in offering a diverse portfolio of group employee
benefit products including life, disability, excess workers' compensation and
personal accident insurance. The Company also offers asset accumulation
products, primarily annuities, to individuals and groups. The Company's two
product categories are group employee benefit products and asset accumulation
products. The Company offers its insurance products in all fifty states and the
District of Columbia. Pennsylvania, California, New Jersey, Illinois, New York
and Florida collectively accounted for approximately 46% of the Company's direct
written premiums determined in accordance with statutory accounting principles
("SAP"), with no state representing more than approximately 10% of these
premiums for the year ended December 31, 1997.


OPERATING STRATEGY

The Company's operating strategy is to offer financial products and services
which have the potential for significant growth or which require expertise to
meet the specialized needs of its customers. 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 the last few years. It has also
developed complementary investment management skills which, together with its
insurance business, are aimed at achieving above average returns on the capital
of the Company. The Company's operating strategy has also emphasized the
acquisition of blocks of insurance business and financial services companies and
the active management of its investment portfolio.

The Company's operating strategy has contributed to an average annual return on
shareholders' equity of 22% during the period from January 1988 to December
1997. Over this same period, net income and shareholder's equity have grown at a
compound annual rate of 36%, and book value per share has grown at a compound
annual rate of 28%. This strategy has also contributed to a 12% compound annual
growth rate in insurance premiums and policyholder fees during the period from
January 1988 through December 1997 and an increase in total assets from $819.1
million at December 31, 1987 to $3,203.7 million at December 31, 1997, a
compound annual growth rate of 15%.

The Company acquired Reliance Standard Life Insurance Company ("RSLIC") and its
subsidiary, First Reliance Standard Life Insurance Company ("FRSLIC") in
November 1987. RSLIC, founded in 1907, and FRSLIC underwrite a diverse portfolio
of life and accident and health insurance products targeted principally to the
employee benefits market and also market asset accumulation products, primarily
annuities, to individuals and groups.

SIG Holdings, Inc. ("SIG"), the parent company of Safety National Casualty
Corporation ("SNCC"), was merged into the Company in March 1996 (the "SIG
Merger"). See "Other Transactions." SNCC is an insurance specialist providing
excess workers' compensation insurance products to the self-insured market.
Founded in 1942, SNCC is one of the oldest continuous writers of excess workers'
compensation insurance in the United States.

The Company's management of its investment portfolio is an important component
of its profitability. The Company's strategy emphasizes liquidity and yield,
while seeking to limit risks associated with interest rate fluctuations and
credit quality. The Company's average yield on invested assets (excluding
realized and unrealized investment gains and losses) was 7.8%, 8.5% and 8.3% for
the years ended December 31, 1997, 1996 and 1995, respectively. See
"Investments."


GROUP EMPLOYEE BENEFIT PRODUCTS

The Company emphasizes the origination of specialty insurance products directed
to the employee benefits market, primarily group life, disability, excess
workers' compensation and personal accident insurance. The Company also offers
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 10 to more than 1,000 individuals, although
the average size of insured groups currently ranges from 100 to 300 individuals.
In underwriting its group employee benefit products, the Company attempts to
avoid concentrations of business in any industry segment or geographic area.


                                       -1-
<PAGE>   3
The following table sets forth, for the periods indicated, selected financial
and statistical data concerning the Company's group employee benefit products:

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                     --------------------------------------------
                                                                         1997             1996            1995
                                                                     ------------    ------------     -----------
                                                                               (dollars in thousands)
<S>                                                                  <C>             <C>              <C>
Insurance premiums:
  Life............................................................   $    146,485    $    135,806     $   127,760
  Disability income...............................................         96,469          92,024          85,849
  Excess workers' compensation (1)................................         64,499          56,200               -
  Personal accident and other.....................................         48,439          47,348          43,470
                                                                     ------------    ------------     -----------
    Total insurance premiums......................................   $    355,892    $    331,378     $   257,079
                                                                     ============    ============     ===========

Group life insurance policy data: Group life insurance in force:
      Balance, beginning of period................................   $ 49,156,630    $ 43,468,174     $45,547,840
      Sales.......................................................      7,482,524       6,969,825       6,412,543
      Lapses......................................................     (7,236,287)     (8,201,918)     (8,430,816)
      Other increases (decreases) (2).............................      7,552,486       6,920,549         (61,393)
                                                                     ------------    ------------     -----------
      Balance, end of period......................................   $ 56,955,353    $ 49,156,630     $43,468,174
                                                                     ============    ============     ===========

    Policy count .................................................          7,106           6,976           6,652
</TABLE>

     (1) Reflects the acquisition of excess workers' compensation business in
     March 1996.

     (2) Represents net increases (decreases) due to changes in the face amounts
     of policies issued.

The profitability of group employee benefit products is affected by, among other
things, differences between actual and projected claims experience and the
ability to control administrative expenses. The table below sets forth for the
periods indicated the loss and expense ratios as a percent of premium income for
the Company's group employee benefit products.

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                           ------------------------------------
                                                                            1997 (1)      1996 (1)          1995
                                                                           ------         ------          -----
<S>                                                                        <C>            <C>            <C>
Loss ratio...........................................................        68.3  %        70.0  %        74.4   %
Expense ratio........................................................        27.6           26.7           24.5
                                                                           ------         ------          -----
    Combined ratio...................................................        95.9  %        96.7  %        98.9   %
                                                                           ======         ======          =====
</TABLE>

     (1) Reflects the acquisition of excess workers' compensation business in
March 1996.

The Company's group life insurance products, which include voluntary group term
life, provide for the payment of a stated amount upon the death of a member of
the insured group and 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 for employer provided group life insurance policies
and $100,000 for voluntary group term life policies under indemnity reinsurance
arrangements with various reinsurers. See "Reinsurance."

Group disability products offered by the Company, principally long-term
disability insurance, generally provide a specified level of benefits to persons
who, because of sickness or injury, are unable to work for a specified period of
time. The Company focuses group long-term disability sales toward employers
engaged principally in service industries such as accounting, architecture and
engineering, as well as certain retailing and manufacturing fields. 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. The Company actively manages its disability claims, working
with claimants to help them return to work as quickly as possible. When
insureds' disabilities prevent them from returning to their original jobs, the
Company, in appropriate cases, provides 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 emerging
experience of the insured group, as well as assumptions regarding operating
expenses and future interest rates. The Company reinsures risks in excess of
$2,500 per individual per month under an indemnity reinsurance arrangement. See
"Reinsurance."


                                       -2-
<PAGE>   4
The Company's excess workers' compensation business was acquired in March 1996
as a result of the SIG Merger. This product provides 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"). This product is
principally targeted to mid-sized companies and association groups, particularly
small municipalities, hospitals and schools. These companies and groups tend to
be less prone to catastrophic workers' compensation exposures and less price
sensitive than larger account business. Because claim payments do not begin
until after the SIR is met, it takes an average of 13 years from the date the
claim is incurred to the time claim payments begin. At that point, the payments
are primarily for wage replacement, similar to the benefit provided under
disability coverage. Medical payments, if any, tend to be stable and
predictable. The Company reinsures risks between $500,000 and $50.0 million per
policy per occurrence. See "Reinsurance."

The Company's personal accident insurance products include business travel and
"all risk" accidental death and dismemberment insurance. These policies pay a
stated amount based on a predetermined schedule in the event of accidental
dismemberment or death of a member of the insured group. The Company reinsures
risks in excess of $150,000 per individual under indemnity reinsurance
arrangements with pools of reinsurers through managing reinsurance underwriters.
In addition, under a catastrophe reinsurance agreement, the amount of the
Company's loss arising from any one occurrence is limited to $500,000. See
"Reinsurance."

The Company's group employee benefit products are sold primarily by independent
brokers, agents and TPAs. The Company's home offices and 23 sales offices
located throughout the country provide nationwide sales support and service
existing business. The Company believes that its national sales network
minimizes expenses traditionally associated with large insurance company captive
marketing systems.


ASSET ACCUMULATION PRODUCTS

The Company's asset accumulation products consist primarily of annuity products,
principally single premium deferred annuities ("SPDAs") and flexible premium
annuities ("FPAs"). The Company consummated five separate annuity block
acquisitions between 1988 and 1992 that resulted in the assumption of $967.1
million in liabilities in the form of policyholder account balances. The first
acquisition was an assumption reinsurance transaction, and the others were
indemnity reinsurance transactions. In the case of each acquisition, assets
supporting the related reserves were transferred to, and are managed by, the
Company. Pursuant to the assumption reinsurance acquisition, the Company has the
right to establish the crediting rate with respect to the business acquired. The
Company has the right under each indemnity reinsurance transaction to recommend
to the ceding company crediting rates with respect to the business acquired. The
ceding company is solely responsible for payment of crediting rates to the
extent that these rates exceed the greater of the recommended rate and certain
benchmark rates. A substantial portion of the Company's profitability on asset
accumulation products is generated from spread income, which is the difference
between the net yield achieved on invested assets and the interest credited on
policyholder account balances. As a result of the Company's ability to recommend
increases or decreases to applicable crediting rates annually, it believes that
it can manage the spread income on the annuity business acquired. The aggregate
lapse rates experienced on the annuity acquisitions have been consistent with
the levels assumed in pricing the transactions and consequently have not
adversely affected the Company's liquidity or results of operations.

In the fall of 1995, the Company began to market its new SPDA annuity products,
including a product with a market value adjustment ("MVA") feature that provides
for an adjustment to the accumulated value of the policy if it is surrendered
during the surrender charge period. These new products are sold predominantly
through networks of independent agents. For the year ended December 31, 1997,
these new products accounted for $55.5 million of asset accumulation product
deposits, of which $43.8 million was attributable to the new MVA annuity
product. One network of independent agents accounted for approximately 70% of
the deposits from these new products during 1997. The Company believes that it
has a good relationship with this network.


                                       -3-
<PAGE>   5
The following table sets forth for the periods indicated selected financial and
statistical data concerning the Company's asset accumulation products:

<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                                     --------------------------------------------
                                                                         1997             1996            1995
                                                                     ------------    ------------     -----------
                                                                              (dollars in thousands)
<S>                                                                  <C>             <C>              <C>
Asset accumulation product deposits..............................    $    57,926     $     59,460     $    13,580
                                                                     ============    ============     ===========

Funds under management (at period end):
    Annuities....................................................    $    657,882    $    689,952     $   695,737
    GICs (1).....................................................           1,046           1,046          18,997
                                                                     ------------    ------------     -----------
       Total funds under management..............................    $    658,928    $    690,998     $   714,734
                                                                     ============    ============     ===========

Policy count.....................................................          34,943          37,288          38,119
</TABLE>

    (1) The Company no longer actively markets guaranteed investment contracts
        ("GICs") and the remaining contract matures in 1998.

An SPDA provides for a single payment by an annuity holder to the Company, and
the crediting of interest by the Company 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 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 holder's account value. This
accumulation is tax deferred. The crediting rate may be increased or decreased
by the Company annually, typically on the policy anniversary, subject to
specified guaranteed minimum crediting rates. Minimum guaranteed crediting rates
currently range from 3.0% to 5.5%. Withdrawals may be made at any time, but some
withdrawals may result in the assessment of surrender charges, market value
adjustments, taxes, and/or tax penalties on the withdrawn amount.

At December 31, 1997, annuity liabilities were composed of $482.8 million of
SPDA liabilities and $175.1 million of FPA liabilities, for a total of $657.9
million of annuity liabilities with a weighted average crediting rate of 5.5%.
Of these liabilities, $214.0 million were subject to surrender charges averaging
7.4% at December 31, 1997. Annuity liabilities not subject to surrender charges
have been in force, on average, for 16 years.

The Company prices its annuity products based on assumptions concerning
prevailing and expected interest rates and other factors to achieve a positive
difference, or spread, between its expected return on investments and the
crediting rate. The Company achieves this spread by active portfolio management
focusing on matching the durations of 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. Although the Company believes that these strategies will
continue to permit it to achieve a positive spread, a significant decline in the
yield on the Company's investments could adversely affect the results of
operations and financial condition of the Company.

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."


VARIABLE LIFE INSURANCE 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. At December
31, 1997, these deposits, excluding the Company's deposit, totaled $63.3
million. Pursuant to the investment option that is available to policyholders,
the assets of the separate account have been invested with independent
investment managers employing a variety of diversified investment strategies.
Both the cash values and death benefits of these policies fluctuate according to
the investment experience of the assets in the separate account; accordingly,
the investment risk with respect to these assets is borne by the policyholders
and any adverse investment experience with respect


                                       -4-
<PAGE>   6
to these investments would not have a material adverse effect on the Company's
results of operations and financial condition. The Company earns fee income from
the separate account in the form of charges for management and other
administrative fees. 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 and timing of insurance claims. The Company has adopted and
follows detailed underwriting procedures designed to assess and qualify
insurance risks before issuing policies to groups and individuals. To implement
these procedures, the Company employs a professional underwriting staff.

In underwriting group coverage, the Company focuses on the risk characteristics
of the group to be insured as a whole. A prospective group 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
group, the current economic outlook of the group 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
policies 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
the interest credited on policyholder funds and 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, managing the
durations of the Company's interest-sensitive assets and liabilities and
minimizing the Company's exposure to fluctuations in interest rates.

For information regarding the composition and diversification of the Company's
investment portfolio, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources -
Investments" and Notes A, C, D, and J to the Consolidated Financial Statements.

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

<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                  -------------------------------------------------
                                                                       1997             1996              1995
                                                                  -------------     ------------     --------------
                                                                             (dollars in thousands)
<S>                                                               <C>               <C>              <C>
Average investments (1) (2)...............................        $   2,049,274     $  1,823,223     $    1,417,472
Net investment income (2) (3).............................              160,194          154,750            117,112
Weighted average annual yield (4).........................                  7.8%             8.5%               8.3%
Net realized investment gains (losses)....................        $      14,568     $     (2,651)    $          704
</TABLE>

     (1)  Average investments are computed by dividing the total of the
          amortized cost of investments at the beginning of the period reduced
          by advances from the Federal Home Loan Bank of Pittsburgh ("FHLB"),
          reverse repurchase agreement liabilities and short securities
          positions plus the individual quarter-end balances by five and
          deducting one-half of net investment income.

     (2)  The increases in 1996 reflect the impact of the SIG Merger.

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

     (4)  The weighted average annual yield on the Company's investment
          portfolio for each period is computed by dividing net investment
          income (exclusive of realized and unrealized gains and losses) by
          average investments for the period. The 1996 and 1995 investment
          yields reflect strong performance by the Company's independent
          investment managers program. See "Management's Discussion and Analysis
          of Financial Condition and Results of Operations - Results of
          Operations."


                                       -5-
<PAGE>   7
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 reinsurer, the Company is exposed to a degree
of risk if the assuming company becomes insolvent. To limit this risk, the
Company reevaluates each of these reinsurance arrangements on a periodic basis
focusing principally on the ratings and claims-paying abilities of the
respective reinsurers.

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 at any time 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, subject, in certain cases, to specified rights on the part of the
Company to recapture these risks. At December 31, 1997, all of the Company's
significant reinsurers were rated "A-" (Excellent) or higher by A.M. Best
Company. See Notes D and P to the Consolidated Financial Statements.

As of December 31, 1997, reinsured amounts with the Company's reinsurers are as
follows:

<TABLE>
<CAPTION>
                                                                                      Policy              Amounts
                                                                                   Reserves and         Recoverable
                                                                Premium            Policyholder       from Reinsurers
                                                                Income           Account Balances      for Paid and
                                                                 Ceded                Ceded            Unpaid Claims
                                                              ----------          ----------          -------------
                                                                             (dollars in thousands)
<S>                                                           <C>                 <C>                   <C>
Protective Life Insurance Company.........................    $   13,891          $  134,972            $    1,049
Cologne Life Reinsurance Company..........................             -              16,694                 8,627
TAURUS....................................................         7,590                   -                     -
Sun Life Assurance of Canada..............................         8,913              20,008                 9,499
All other reinsurers......................................        36,665              10,474                25,282
                                                              ----------          ----------            ----------
    Total.................................................    $   67,059          $  182,148            $   44,457
                                                              ==========          ==========            ==========
</TABLE>

The Company currently participates as an assuming insurer in a number of
reinsurance pools. These reinsurance pools generally are administered by TPAs or
managing underwriters which underwrite risks, coordinate premiums charged and
process claims. The Company has the right, generally exercisable annually, to
terminate or change its participation in any of these pools as to new business.
For the year ended December 31, 1997, these reinsurance pools represented, in
the aggregate, $50.6 million of premiums and policyholder fees and $47.3 million
of benefits, and the Company's five largest participations in these reinsurance
pools represented $41.5 million of earned premiums and $39.4 million of
benefits. The Company has also acquired blocks of annuity business through
indemnity and assumption reinsurance agreements. See "Asset Accumulation
Products."

In January 1998, the Company entered into various reinsurance agreements with
Oracle Reinsurance Company Ltd. ("Oracle Re"), a wholly-owned subsidiary of
Delphi International Ltd. ("Delphi International"), a newly-formed, independent
Bermuda insurance holding company. See "Other Transactions." Pursuant to these
agreements, approximately $100.0 million of group employee benefit reserves
($35.0 million of long-term disability insurance reserves and $65.0 million of
excess workers' compensation and casualty insurance reserves) were ceded to
Oracle Re. The Company has received collateral security from Oracle Re in an
amount sufficient to support the ceded reserves. These agreements are not
expected to have a material effect on the Company's financial condition,
liquidity or results of operations.


                                       -6-
<PAGE>   8
LIFE AND ACCIDENT AND HEALTH INSURANCE RESERVES

The Company carries as liabilities actuarially determined reserves to satisfy
its life, accident and health and annuity 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 to be sufficient to
satisfy policy and contract obligations. The Company performs periodic studies
to compare current experience for mortality, interest and lapse rates with
expected experience in the reserve assumptions to determine future policy
benefit reserves for these products. Differences are reflected currently in
earnings for each period. The Company has not experienced significant adverse
deviations from its assumptions.

The life and accident and health insurance reserves carried in the Consolidated
Financial Statements are calculated based on generally accepted accounting
principles ("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 level-premium
reserve method on all insurance business. See Note A to 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 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. At December 31,
1997, over 93% of these reserves related to excess workers' compensation
insurance, and the balance consisted of reserves for workers' compensation
insurance, excess unemployment compensation insurance, self-insurance bonds and
an excess umbrella liability insurance product that was discontinued in 1985.

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. Reserves for claim expenses are
not discounted.

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

<TABLE>
<CAPTION>
                                                                                                              Period from
                                                                                            Year Ended        March 5 (1)
                                                                                             December 31,    to December 31,
                                                                                                1997              1996
                                                                                             ---------        ----------
                                                                                               (dollars in thousands)
<S>                                                                                         <C>               <C>
     Unpaid claims and claim expenses, beginning of period........................          $  380,826        $  369,871

     Provision for claims and claim expenses incurred in the current year.........              41,221            28,290
     (Decrease) increase in estimated claims and claim expenses incurred in 
      prior years.................................................................              (2,419)            7,358
                                                                                             ---------        ----------
         Incurred claims and claim expenses during the current year...............              38,802            35,648
                                                                                            ----------        ----------

     Deduct claims and claim expenses paid, occurring during:
         Current year.............................................................               1,498               249
         Prior years..............................................................              30,079            24,444
                                                                                            ----------        ----------
              Total paid..........................................................              31,577            24,693
                                                                                            ----------        ----------

     Unpaid claims and claim expenses, end of period..............................          $  388,051        $  380,826
                                                                                            ==========        ==========
</TABLE>

     (1)  The date of the SIG Merger.


                                       -7-
<PAGE>   9
The 1997 decrease in estimated claims and claim expenses incurred in prior years
is principally due to favorable claims development during the year. The 1996
increase in estimated claims and claim expenses incurred in prior years is
primarily due to the accretion of interest on discounted claim reserves. The
effects of the discount to reflect the time value of money of $164.0 million,
$168.8 million and $176.7 million at March 5, 1996, December 31, 1996 and
December 31, 1997, respectively, have been removed from the loss development
table which follows in order to present the gross loss development. The loss
development table below illustrates the development of reserves from March 5,
1996 to December 31, 1997.

<TABLE>
<CAPTION>
                                                                     March 5,        December 31,      December 31,
                                                                     1996 (1)           1996              1997
                                                                     --------           ----              ----
                                                                              (dollars in thousands)
<S>                                                               <C>               <C>              <C>
     Reserve for unpaid claims and claim expenses.............    $     533,871     $    549,653     $     564,734
     Cumulative amount of liability paid:
         One year later.......................................           24,444           30,079
         Two years later......................................           53,605
     Liability reestimated as of :
         One year later.......................................          524,423          531,118
         Two years later......................................          506,024
     Cumulative redundancy....................................           27,847           18,535
</TABLE>

     (1)  The "One year later" amounts are for the period from March 5, 1996,
          the date of the SIG Merger, to December 31, 1996. The "Two years
          later" amounts are for the period from March 5, 1996 to December 31,
          1997.

The "Reserve for unpaid claims and claim expenses" line of the table shows the
estimated reserve for unpaid claims and claim expenses recorded at the end of
each of the periods indicated. These 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" line of the table represents the cumulative amounts paid with
respect to the liability previously recorded as of the end of each succeeding
period. The "Liability reestimated" line of the table shows 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. The "Cumulative redundancy" line of the table represents the
aggregate change in the estimated claim reserve liabilities over the prior
period.

The excess workers' compensation insurance reserves carried in the Consolidated
Financial Statements are calculated in accordance with GAAP and, excluding the
effects of reinsurance, are approximately $34.8 million less than those reported
by the Company for statutory financial statement purposes at December 31, 1997.
This difference is primarily due to the use of different discount factors under
GAAP and SAP. See Note A to Consolidated Financial Statements for certain
additional information regarding reserve assumptions under GAAP.


COMPETITION

The insurance 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 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 agency sales operations. Competition
in asset accumulation product markets is also encountered from the expanding
number of banks, securities brokerage firms and other financial intermediaries
marketing alternative savings products, such as mutual funds, traditional bank
investments and retirement funding alternatives.

The Company believes that its reputation in the marketplace, quality of service
and investment returns have enabled it to compete effectively for new insurance
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.


                                       -8-
<PAGE>   10
REGULATION

The Company's insurance subsidiaries are highly regulated by state insurance
authorities in the states in which they are domiciled and the other 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 and the terms and conditions and
manner of sale and marketing of the these subsidiaries' insurance products.
These regulations are intended to protect policyholders rather than investors.
The Company's insurance subsidiaries are required under these regulations to
file detailed annual 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. Under state insurance laws and the
rules of the National Association of Insurance Commissioners ("NAIC"), the
Company's insurance subsidiaries may be examined periodically, usually at three-
to five-year intervals, by the supervisory agencies of the states in which they
do business. To date, no examinations have produced any significant adverse
findings or adjustments.

The ability of the Company to receive dividends from its insurance subsidiaries
is governed by the insurance laws of the subsidiaries' respective states of
domicile. These insurance laws require, among other things, that the statutory
surplus of the domiciled insurance company, following any dividend or
distribution, be reasonable in relation to its outstanding liabilities and
adequate to its financial needs, as determined under standards contained
therein. The insurance commissioners of these states may bring an action to
enjoin or rescind the payment of a dividend or distribution by an insurer
domiciled in its state that would cause the insurer's statutory surplus to be
unreasonable or inadequate under this standard. For further information on state
limitations on dividends by insurers, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources - General" and Note L to the Consolidated Financial Statements.

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 their application to
insurance companies. Among other things, this reexamination has focused on
insurance company investment and financial regulatory issues and, more recently,
issues relating to the manner in which insurance products are sold and marketed.
In some instances, it has resulted in new interpretations of existing law, the
development of new laws and the implementation of nonstatutory guidelines. In
addition, the NAIC is currently in the process of comprehensively codifying
(and, in certain respects, revising) SAP, which process, when complete, may
affect the manner in which insurance companies, including the Company's
insurance subsidiaries, report their statutory financial condition and operating
results. It is not possible to predict the future impact of changing regulation
or accounting practices 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 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. The amount of
any future assessments under these laws cannot reasonably be estimated and thus
is not included in the Company's reserves, although none of the Company's
insurance subsidiaries has ever incurred any significant costs of this nature.

The federal government currently does not directly regulate the insurance
business. However, 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.


                                       -9-
<PAGE>   11
From time to time, federal legislative proposals have been made that would, if
enacted, have an adverse impact on the federal income tax treatment of certain
annuity contracts. There can be no assurance that such legislation will not be
adopted in the future. Any legislation adopted, depending on its nature, could
have a positive or adverse effect on the persistency of the Company's SPDAs and
FPAs and the Company's ability to market or acquire additional blocks of these
types of products.


EMPLOYEES

The Company and its subsidiaries employed 534 persons at December 31, 1997. The
Company believes that it enjoys good relations with its employees.


OTHER SUBSIDIARIES

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


OTHER TRANSACTIONS

In February 1993, the Company entered into an $85.0 million revolving credit
facility with a group of institutional lenders (the "Credit Agreement") and used
a portion of the facility to refinance a term loan with an institutional lender.
Beginning in July 1993, the Company implemented a recapitalization plan (the
"Recapitalization") designed to enhance its financial condition by increasing
shareholders' equity, reducing leverage and decreasing interest expense. In
addition, the Recapitalization was designed to increase the liquidity of the
Company's Class A Common Stock. The first step of the Recapitalization occurred
in July 1993 and included (i) increasing the principal amount available under
the Credit Agreement from $85.0 million to $120.0 million and (ii) using $30.0
million of the additional available funds to redeem $29.0 million aggregate
principal amount of the Company's 11 3/4% Senior Subordinated Debentures due
1999 (the "Senior Subordinated Debentures") at 103.42% of par value. In October
1993, the Company completed the second step of the Recapitalization, which
included (i) the public offering of $85.0 million of 8.0% Senior Notes due 2003
(the "Senior Notes"), for net proceeds of $82.4 million and (ii) the public
offering of 3.4 million shares of Class A Common Stock (of which 1.2 million
shares were sold by selling shareholders) for net proceeds to the Company of
$35.8 million. The Recapitalization was completed in November 1993, when the
Company redeemed all of the remaining $87.8 million par value Senior
Subordinated Debentures at 103.42% of par value.

In July 1994, the Company's shelf registration statement was declared effective
by the Securities and Exchange Commission. The shelf registration statement
provides for the sale, from time to time, of up to $150.0 million of securities.
To date, the Company has issued $100.8 million of the total amount of securities
available for issuance.

In December 1995, the Company and its existing lenders, along with additional
lenders, agreed to amend and restate the terms of the Credit Agreement to
increase the maximum amount available under the facility at any one time to
$200.0 million. Of the total facility, $98.0 million is restricted for use in
connection with, among other things, acquisitions or the redemption of the SIG
Senior Notes (as defined below).

On March 5, 1996, SIG was merged into the Company for consideration of
approximately $54.5 million of cash, net of approximately $1.0 million payable
upon the exercise of certain SIG stock options, which was funded from additional
borrowings under the Credit Agreement, and approximately 5.3 million shares of
the Company's Class A Common Stock, including shares of Class A Common Stock
reserved for issuance upon the exercise of stock options of SIG assumed by the
Company in connection with the merger, plus additional contingent consideration
of up to $20.0 million. In connection with the merger, the Company also assumed
$45.0 million of SIG's 8.5% Senior Secured Notes due 2003 (the "SIG Senior
Notes"). The contingent consideration will be payable in shares of the Company's
Class A Common Stock or, at the option of the Company, in cash. No contingent
consideration is due unless SIG's cumulative net income exceeds $41.8 million
for the two years ending December 31, 1997, $62.6 million for the three years
ending December 31, 1998, or $83.5 million for the four years ending December
31, 1999, and the maximum amount is triggered at cumulative net income levels of
$75.3 million for the three-year period or $104.4 million for the four-year
period. Because SIG's cumulative net income exceeded the income goal for the two
years ended December 31, 1997, the Company accrued $10.0 million of the
contingent consideration and recorded $10.0 million of additional goodwill in
1997.


                                      -10-
<PAGE>   12
The Company's Board of Directors declared a 20% stock dividend on August 30,
1996, which was distributed to stockholders on September 30, 1996, and a 2%
stock dividend on May 13, 1997, which was distributed to stockholders on June
10, 1997. Results per share and applicable share amounts have been restated to
reflect the stock dividends.

In December 1996, the Company and its existing lenders agreed to amend and
restate the terms of the Credit Agreement to, among other things, reduce the
Company's borrowing costs. Under the amended terms, the maximum amount available
will be reduced incrementally over a four and one-half year period beginning in
October 1999. See Note F to the Consolidated Financial Statements.

During 1997, the Company disposed of its long-term care insurance business,
which was discontinued in 1996. This business was purchased in December 1994 and
was expected to become a significant part of the Company's operations. The
Company exited this business due to its continued losses attributable to lower
than expected sales and profit levels and decided to concentrate its resources
on other opportunities such as product and distribution enhancements for the
Company's group employee benefit products. See Note Q to the Consolidated
Financial Statements.

In March 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. 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 distributions 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.

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, a newly-formed, independent Bermuda insurance holding
company. Delphi International will provide, through its wholly-owned subsidiary,
Oracle Re, reinsurance primarily for group employee benefit insurance products,
including group long-term disability and excess workers' compensation insurance
offered by RSLIC and SNCC. Delphi International will also seek to expand its
customer base and to develop additional products and services. Delphi
International was organized to take advantage of reinsurance and alternative
risk market opportunities that are believed to exist in the Bermuda market.
Subsequent to the completion of the rights offering, the Company entered into
certain reinsurance agreements with Oracle Re. See "Reinsurance." These
agreements are not expected to have a material effect on the Company's financial
condition, liquidity or results of operations.


ITEM 2. PROPERTIES

The Company's principal executive offices are located at 1105 North Market
Street, Suite 1230, Wilmington, Delaware 19899. This office space is leased
through an operating lease expiring in November 1999. RSLIC owns its home office
building at 2501 Parkway, Philadelphia, Pennsylvania, which consists of
approximately 100,000 square feet. SNCC also owns its home office building at
2043 Woodland Parkway, Suite 200, St. Louis, Missouri which consists of
approximately 58,000 square feet. The Company also maintains 23 sales offices
throughout the country to provide nationwide sales support and service existing
business.


ITEM 3. LEGAL PROCEEDINGS

In the normal course of business, the Company's insurance subsidiaries are
defendants in litigation principally involving insurance policy claims and agent
disputes, including claims for compensatory and punitive damages. In the opinion
of management, the ultimate disposition of such pending litigation will not have
a material adverse effect on the Company's financial condition, liquidity or
results of operations.


                                      -11-
<PAGE>   13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.


ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY, RSLIC AND SNCC

The table below presents certain information concerning each of the executive
officers of the Company, RSLIC and SNCC.

<TABLE>
<CAPTION>
         Name                       Age     Position
         ----                       ---     --------
<S>                                 <C>     <C>
         Robert Rosenkranz           55     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.        46     Director and Vice President of the Company
         Charles P. O'Brien          61     Director of the Company; President and Chief Executive Officer of RSLIC
         B.K. Werner                 64     Director of the Company; Chairman of the Board and Chief Executive
                                            Officer of SNCC
         Chad W. Coulter             35     Vice President and General Counsel of the Company; Vice President, General
                                            Counsel and Assistant Secretary of RSLIC
         Louis C. Lucido             49     Vice President, Investments of the Company
         Lawrence E. Daurelle        46     Vice President and Treasurer of RSLIC
</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 is also Chairman of the Board of RSLIC, FRSLIC
and Reliance Standard Life Insurance Company of Texas ("RSLIC-Texas") and serves
on the Board of Directors of SNCC. Mr. Rosenkranz, by means of beneficial
ownership of the corporate general partner of Rosenkranz & Company, an
irrevocable proxy and direct or beneficial ownership, has 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 as of February 26, 1998.

Mr. Smith has served as Vice President of the Company and as Vice President of
DCM since July 1994 and as a Director of the Company since January 1995. Mr.
Smith also serves as a Director of RSLIC-Texas, RSLIC, FRSLIC and SNCC. Prior to
July 1994, Mr. Smith was Director, Investment Banking for Merrill Lynch &
Company in New York, New York.

Mr. O'Brien has served as a Director of the Company since November 1987. Since
August 1976, Mr. O'Brien has served as President, Chief Executive Officer and a
Director of RSLIC. Mr. O'Brien also serves as President and Chief Executive
Officer and a Director of RSLIC-Texas and FRSLIC and as a Director of SNCC.

Mr. Werner has served as a Director of the Company since the SIG Merger in March
1996. He has served as Chairman of the Board of SNCC since June 1987 and as
Chief Executive Officer since June 1990. Mr. Werner has served as a Director of
and has been employed in various capacities by SNCC since 1959.

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. 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. Lucido has served as Vice President, Investments of the Company since July
1997 and as a Director of FRSLIC since August 1997. Prior to July 1997, Mr.
Lucido was Managing Director, Chief Operating Officer and Corporate Secretary of
Hyperion Capital Management, Inc. in New York, New York.

Mr. Daurelle has served as Vice President and Treasurer of RSLIC, FRSLIC and
RSLIC-Texas since May 1995. From October 1994 to April 1995, he was Senior Vice
President and Chief Financial Officer for Mutual Assurance Company, and from
September 1993 to October 1994 he was Senior Vice President, Strategic Planning
for The Fidelity Mutual Life Insurance Company. Prior to September 1993, Mr.
Daurelle was Vice President of United Pacific Life Insurance Company.


                                      -12-
<PAGE>   14
                                     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 $43.50 on February
26, 1998. There were approximately 1,700 holders of record of the Company's
Class A Common Stock as of February 26, 1998.

The following table sets forth high and low closing prices for the Company's
Class A Common Stock. The Company's Class A Common Stock is listed on the New
York Stock Exchange under the symbol DFG and, prior to October 31, 1996, was
traded on the NASDAQ National Market under the symbol DLFI. Prior periods have
been restated to reflect the 20% stock dividend distributed September 30, 1996
and the 2% stock dividend distributed June 10, 1997.

<TABLE>
<CAPTION>
                                                                   High              Low
                                                                   ----              ---
<S>               <C>                                         <C>               <C>
         1996:    First Quarter                               $  20 5/8         $  17 17/64
                  Second Quarter                                 23 57/64          19 3/32
                  Third Quarter                                  28 7/16           20 5/8
                  Fourth Quarter                                 28 59/64          26 23/32

         1997:    First Quarter                               $  35 19/64       $  28 59/64
                  Second Quarter                                 42 3/4            29 19/64
                  Third Quarter                                  45 3/8            38
                  Fourth Quarter                                 45                38 1/8
</TABLE>

Cash dividends have not been declared or paid on the Class A Common Stock or the
Class B Common Stock. Dividend payments are permitted under the terms of the
Senior Notes subject to certain restrictions and covenants. Under the Credit
Agreement, dividends on, together with any repurchases or redemptions by the
Company of, its capital stock, may not, during any fiscal year, exceed 4% of the
Company's Consolidated Equity (as defined in the Credit Agreement) as of the end
of the preceding fiscal year. The Credit Agreement also permits additional
repurchases by the Company of its capital stock in an aggregate amount of up to
$20.0 million over the term of the Credit Agreement.

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." The Company
presently intends to retain earnings to finance the development and growth of
its business. Accordingly, the Company does not anticipate payment of any cash
dividends in the foreseeable future.


                                      -13-
<PAGE>   15
ITEM 6. SELECTED FINANCIAL DATA

The selected financial data of the Company set forth below were derived from the
Consolidated Financial Statements included elsewhere herein or previously filed
by the Company. This information 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,
                                                   -------------------------------------------------------------------
                                                    1997 (1)      1996 (1)         1995          1994          1993
                                                   -----------   -----------   -----------   -----------    ----------
INCOME STATEMENT DATA:                                      (dollars in thousands, except per share data)
<S>                                                <C>           <C>           <C>           <C>            <C>
   Insurance premiums and policyholder fees:
      Group employee benefit products......        $  355,892    $  331,378    $  257,079    $  233,697     $  206,587
      Annuities............................             3,072         2,122         2,121         1,716          6,285
      Other insurance products (2).........             1,907         1,733         1,702        13,099         22,047
   Net investment income...................           160,194       154,750       117,112       106,576        177,374
   Net realized investment gains (losses)..            14,568        (2,651)          704        10,213         13,963
                                                   ----------    ----------    ----------    ----------     ----------
      Total revenue........................           535,633       487,332       378,718       365,301        426,256
   Benefits and expenses...................           402,739       387,713       314,549       315,407        335,685
                                                   ----------    ----------    ----------    ----------     ----------
   Income from continuing operations before
      interest and income tax expense and
      dividends on Capital Securities of
      Delphi Funding.......................           132,894        99,619        64,169        49,894         90,571
   Interest expense........................            15,030        18,269        13,257        12,252         17,720
   Income taxes............................            38,226        27,496        18,170        11,698         26,098
   Dividends on Capital Securities of
      Delphi Funding (3)...................             4,656             -             -             -              -
                                                   ----------    ----------    ----------    ----------     ----------
   Income from continuing operations.......        $   74,982    $   53,854    $   32,742    $   25,944     $   46,753
                                                   ==========    ==========    ==========    ==========     ==========
   Net income (4) .........................        $   74,982    $   47,253    $   30,464    $   25,818     $   34,746
                                                   ==========    ==========    ==========    ==========     ==========

BASIC RESULTS PER SHARE (5):
   Income from continuing operations excluding
      realized investment gains (losses)...        $     3.50    $     3.15    $     2.25    $     1.37     $     3.42
   Income from continuing operations.......        $     4.00    $     3.06    $     2.28    $     1.83     $     3.79
   Net income (4)..........................        $     4.00    $     2.68    $     2.12    $     1.83     $     2.81
   Weighted average shares
      outstanding (000's) (6)..............            18,731        17,622        14,374        14,141         12,344

DILUTED RESULTS PER SHARE (5):
   Income from continuing operations excluding
      realized investment gains (losses)...        $     3.32    $     2.95    $     2.20    $     1.33     $     3.28
   Income from continuing operations.......        $     3.80    $     2.86    $     2.23    $     1.78     $     3.64
   Net income (4)..........................        $     3.80    $     2.51    $     2.08    $     1.77     $     2.71
   Weighted average shares
      outstanding (000's) (6)..............            19,740        18,853        14,666        14,559         12,843

OTHER DATA:
   Diluted book value per share (7) (8)....        $    26.07    $    18.86    $    15.20    $    11.66     $    14.05
   Return on average shareholders' equity (9)            15.0%         18.5%         16.6%         10.4%          25.5%
   Interest coverage ratio (10)............              8.84x         5.83x         4.84x         4.07x          5.11x
</TABLE>


<TABLE>
<CAPTION>
                                                                        December 31,
                                               -------------------------------------------------------------------------
                                                 1997 (1)       1996 (1)         1995            1994           1993
                                               ------------   -------------   ------------   ------------    -----------
BALANCE SHEET DATA:                                                      (dollars in thousands)
<S>                                            <C>            <C>             <C>            <C>             <C>
   Total investments..................         $ 2,480,402    $  2,295,007    $ 1,791,531    $ 1,965,154     $ 2,041,774
   Total assets.......................           3,203,713       2,857,906      2,323,010      2,472,776       2,344,321
   Long-term debt.....................             178,769         231,004        134,611        159,577         159,545
   Capital Securities of Delphi Funding (3)        100,000               -              -              -               -
   Shareholders' equity (8)...........             509,486         366,965        222,815        170,382         200,968
   Debt to total capitalization ratio (11)            22.7%           38.6%          37.7%          48.4%           44.3%
</TABLE>


                                      -14-
<PAGE>   16
(1)  Includes excess workers' compensation business acquired as a result of the
     SIG Merger.

(2)  Amounts for 1994 and 1993 include individual life insurance business, which
     the Company exited in July 1994.

(3)  Reflects the issuance of and the payment of dividends on $100.0 million of
     Capital Securities by Delphi Funding. See "Business - Other Transactions"
     and Note K to the Consolidated Financial Statements.

(4)  The Company discontinued its long-term care business in 1996 and recorded a
     one-time after-tax charge of $5.8 million in 1996 attributable to this
     discontinuance. After-tax operating losses on this business were $0.8
     million, $2.3 million and $0.1 million for the years ended December 31,
     1996, 1995 and 1994, respectively. Additionally, the Company incurred an
     after-tax extraordinary loss of $12.0 million for the year ended December
     31, 1993 associated with the early extinguishment of debt.

(5)  Prior periods have been restated to reflect the adoption of Statement of
     Financial Accounting Standard No. 128, "Earnings Per Share," the 20% stock
     dividend distributed September 30, 1996 and the 2% stock dividend
     distributed June 10, 1997.

(6)  Weighted average shares outstanding reflect the issuance of 2.1 million
     shares of Class A Common Stock in October 1993.

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

(8)  In 1994, the Company adopted the provisions of Statement of Financial
     Accounting Standards No. 115, "Accounting for Certain Investments in Debt
     and Equity Securities" ("SFAS No. 115"). Equity was increased (decreased)
     by net unrealized appreciation (depreciation) on investments of $40.5
     million, $(17.9) million, $(34.8) and $(57.9) million as of December 31,
     1997, 1996, 1995 and 1994, respectively, due to the impact of SFAS No. 115.

(9)  Return on average shareholders' equity is calculated by dividing income
     from continuing operations, excluding after-tax realized investment gains
     and losses, by average shareholders' equity, excluding after-tax realized
     investment gains and losses, discontinued operations, extraordinary items
     and changes in accounting principles, as determined as of the beginning and
     end of each year.

(10) The interest coverage ratio is calculated by dividing income from
     continuing operations before interest and income tax expense by interest
     expense (1996 excludes interest paid in connection with the settlement of
     prior-year federal income taxes).

(11) The debt to total capitalization ratio is calculated by dividing long-term
     debt by the sum of the Company's long-term debt, Capital Securities of
     Delphi Funding and shareholders' equity.


                                      -15-
<PAGE>   17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The analysis of the results of operations and financial condition of the Company
below should be read in conjunction with the Consolidated Financial Statements
and related notes.


RESULTS OF OPERATIONS

Year Ended December 31, 1997
Compared to Year Ended December 31, 1996

Insurance Premium and Policyholder Fees. Insurance premiums and policyholder
fees in 1997 were $360.9 million as compared to $335.2 million in 1996, an
increase of 8%. Premiums from the Company's group employee benefit products,
excluding excess workers' compensation insurance, increased by $16.2 million
primarily due to the impact of certain price increases, growth and development
of the Company's distribution system and normal growth in employment and salary
levels for the Company's existing customer base. Premiums from the Company's
excess workers' compensation insurance product, which was acquired in March 1996
and included in the Company's results from the date of the acquisition, totaled
$64.5 million in 1997 as compared to $56.2 million in 1996. Excess workers'
compensation insurance premiums have decreased from full-year 1996 levels
primarily due to state mandated reductions in workers' compensation premium
rates and increased competition. The Company does not expect this reduction in
premiums to have a material impact on the underwriting results for this product
as decreased workers' compensation benefit levels, also mandated by the states,
are expected to offset the decline in premiums. Deposits from the Company's SPDA
products, including the Company's MVA annuity product, were $55.5 million in
1997 as compared to $57.5 million in 1996. Deposits for these products, which
are long-term in nature, are not recorded as premiums; instead, the deposits are
recorded as a liability.

Net Investment Income. Net investment income in 1997 was $160.2 million as
compared to $154.8 million in 1996, an increase of 3%. The increase is primarily
due to an increase in average invested assets as a result of the SIG Merger and
the investment of a portion of the proceeds from the issuance of the Capital
Securities and net cash provided by operating activities, partially offset by a
decrease in the weighted average yield. The 1996 investment results reflect
strong performance by the Company's independent investment managers program. The
weighted average annual yield on invested assets, excluding realized and
unrealized investment gains and losses, was 7.8% on average invested assets of
$2,049.3 million in 1997 and 8.5% on average invested assets of $1,823.2 million
in 1996.

Net Realized Investment Gains (Losses). The Company's investment strategy
results in periodic sales of securities and the recognition of realized
investment gains and losses. Net realized investment gains were $14.6 million in
1997 as compared to net realized investment losses of $2.7 million in 1996.
During 1997, the Company reevaluated the amortization period for deferred
futures losses associated with its mortgage-backed securities portfolio due to a
decline in market interest rates to record low levels and accelerated the
amortization by $9.9 million.

Benefits and Expenses. Policyholder benefits and expenses were $402.7 million in
1997 as compared to $387.7 million in 1996, an increase of 4%. During 1997,
benefits and expenses for group employee benefit products increased by $20.8
million as compared to 1996, primarily due to growth in these product lines.
Also contributing to the increase was the inclusion of the Company's excess
workers' compensation insurance product, which was acquired in March 1996, for
the full year of 1997. The combined ratio (loss ratio plus expense ratio) for
group employee benefit products was 95.9% and 96.7% for 1997 and 1996,
respectively. While amortization of cost of business acquired related to asset
accumulation products was accelerated by $4.8 million during 1996 due to better
than expected investment results, there was no net acceleration or deceleration
during 1997. The weighted average annual crediting rate on asset accumulation
products for 1997 and 1996 was 5.3% and 5.2%, respectively.

Operating Income. Income from continuing operations before interest and income
tax expense and dividends in 1997 was $132.9 million as compared to $99.6
million in 1996, an increase of 33%. The increase was primarily due to the
inclusion of excess workers' compensation insurance results for the entire year
of 1997 and realized investment gains in 1997 as compared to realized investment
losses in 1996.


                                      -16-
<PAGE>   18
Interest Expense. Interest expense in 1997 was $15.0 million as compared to
$18.3 million in 1996. This decrease is primarily due to the repayment of $50.0
million of borrowings under the Credit Agreement with a portion of the proceeds
from the issuance of the Capital Securities, partially offset by the inclusion
of a full year of interest expense on the SIG Senior Notes in 1997. In addition,
the 1996 period includes interest paid in connection with the settlement of
prior year federal income taxes.

Income Taxes. Income tax expense in 1997 was $38.2 million as compared to $27.5
million in 1996. The increase was primarily due to the $33.3 million increase in
operating income partially offset by a decrease in the effective tax rate from
33.8% in 1996 to 32.4% in 1997 due to tax-exempt interest income.

Dividends on Capital Securities. In March 1997, Delphi Funding issued $100.0
million of Capital Securities in a public offering. See "Business - Other
Transactions" and Note K to the Consolidated Financial Statements.

Discontinued Operations. During 1997, the Company disposed of its long-term care
business, which was discontinued in 1996. The proceeds from the disposal were
not material and the actual results for this business subsequent to its
discontinuance did not materially differ from the loss of $5.8 million, net of a
tax benefit of $3.2 million, provided for in 1996 in connection with the
discontinuance of this business. See Note Q to the Consolidated Financial
Statements.


Year Ended December 31, 1996
Compared to Year Ended December 31, 1995

Insurance Premiums and Policyholder Fees. Insurance premiums and policyholder
fees in 1996 were $335.2 million as compared to $260.9 million in 1995, an
increase of 28%. Contributing to this increase was $56.2 million in premiums
from the Company's excess workers' compensation business which was acquired as a
result of the SIG Merger. Also contributing to the increase was growth in
premiums from the Company's other group employee benefit products, including the
impact of certain price increases, growth and development of the Company's sales
force and normal growth in employment and salary levels for the Company's
existing customer base. Deposits from the Company's SPDA products, including the
Company's MVA annuity product, which it began marketing in the fall of 1995,
were $57.5 million during 1996 as compared to $11.4 million in 1995. Deposits
for the Company's asset accumulation products, which are long-term in nature,
are not recorded as premiums; instead, the deposits are recorded as a liability.

Net Investment Income. Net investment income in 1996 was $154.8 million as
compared to $117.1 million in 1995, an increase of 32%. The increase is
principally due to an increase in average invested assets as a result of the SIG
Merger. The weighted average annual yield on invested assets, excluding realized
and unrealized investment gains and losses, was 8.5% on average invested assets
of $1,823.2 million and 8.3% on average invested assets of $1,417.5 million in
1996 and 1995, respectively.

Net Realized Investment (Losses) Gains. The Company's investment strategy
results in periodic sales of securities and the recognition of realized
investment gains and losses arising from those sales. Net realized investment
losses were $2.7 million in 1996 as compared to net realized investment gains of
$0.7 million in 1995.

Benefits and Expenses. Policyholder benefits and expenses in 1996 were $387.7
million as compared to $314.5 million in 1995, an increase of 23%. During 1996,
benefits and expenses for group employee benefit products increased by $66.2
million as compared to 1995. Of this increase, $51.7 million was attributable to
the Company's excess workers' compensation business which was acquired as a
result of the SIG Merger. The remaining increase was primarily attributable to
growth in the Company's other group employee benefit product lines. The combined
ratio for group insurance lines, excluding excess workers' compensation
insurance, decreased from 98.9% in 1995 to 97.7% in 1996. This decrease reflects
the impact of certain price increases and the expansion of the Company's loss
management capabilities during 1995. Amortization of cost of business acquired
related to asset accumulation products was accelerated by $4.8 million during
1996 primarily due to better than anticipated investment results. Benefits and
interest credited on asset accumulation products decreased by $4.0 million in
1996 as compared to 1995, principally due to the scheduled maturities during
1995 of guaranteed investment contracts with crediting rates that were generally
higher than the Company's other asset accumulation products. Primarily due to
these maturities, average funds under management decreased by $87.1 million and
the weighted average annual crediting rate on asset accumulation products
declined from 5.6% to 5.2%.


                                      -17-
<PAGE>   19
Operating Income. Income from continuing operations before interest and taxes in
1996 was $99.6 million as compared to $64.2 million in 1995, an increase of 55%.
The increase was primarily due to the acquisition of the excess workers'
compensation business through the SIG Merger, partially offset by net realized
investment losses in 1996.

Interest Expense. Interest expense in 1996 was $18.3 million as compared to
$13.3 million in 1995. The increase was primarily due to interest expense on the
SIG Senior Notes, which were assumed in conjunction with the SIG Merger, and
additional borrowings under the Credit Agreement in 1996 to fund the SIG Merger
partially offset by a decline in the weighted average borrowing rate on the
Credit Agreement. Also contributing to the increase was interest paid in 1996 in
connection with the settlement of prior-year federal income taxes.

Income Taxes. Income tax expense in 1996 was $27.5 million as compared to $18.2
million in 1995. The increase was primarily due to the $35.4 million increase in
operating income partially offset by a decrease in the effective tax rate from
35.7% in 1995 to 33.8% in 1996 due to tax-exempt interest income.

Discontinued Operations. The Company recorded the discontinuance of its
long-term care insurance business in 1996. Operating losses on this business
totaled $0.8 million and $2.3 million, net of a tax benefit of $0.4 million and
$1.2 million, in 1996 and 1995, respectively. The Company also recorded a
one-time charge in 1996 of $5.8 million, net of a tax benefit of $3.2 million,
as a result of the discontinuance of this business. See Note Q to the
Consolidated Financial Statements.


LIQUIDITY AND CAPITAL RESOURCES

General. In March 1997, Delphi Funding issued $100.0 million liquidation amount
of Capital Securities in a public offering under the Company's existing shelf
registration statement. See "Business - Other Transactions" and Note K to the
Consolidated Financial Statements. Of the net proceeds from the offering, $50.0
million was used to repay borrowings under the Credit Agreement, and the
remainder was invested with selected independent investment managers.

The Company had approximately $216.8 million of financial resources available at
the holding company level at December 31, 1997, as compared to $117.2 million at
December 31, 1996. The increase in available financial resources was primarily
due to funds received from the Capital Securities offering and earnings from the
Company's non-insurance subsidiaries. The financial resources available at the
holding company level are primarily comprised of investments in the common stock
of its non-insurance subsidiaries and fixed maturity securities. The assets of
these non-insurance subsidiaries are primarily invested in balances with
independent investment managers and fixed maturity and other marketable
securities. Substantially all of the amounts invested with independent
investment managers are withdrawable at least annually, subject to applicable
notice requirements. A shelf registration is also in effect under which up to
$49.2 million in securities may be issued by the Company.

Other sources of liquidity at the holding company level include interest and
principal payments made on a surplus debenture (the "Surplus Debenture") issued
by RSLIC-Texas to the Company, dividends paid from insurance subsidiaries,
primarily generated from operating cash flows and investments, and borrowings
available under the Credit Agreement. At December 31, 1997, the unpaid principal
balance of the Surplus Debenture, which is payable in quarterly installments
through December 31, 1999, was $43.0 million. RSLIC-Texas generates less than 1%
of the Company's premiums, policyholder fees and deposits; therefore, payments
on the Surplus Debenture are generally funded by dividend payments made by RSLIC
to RSLIC-Texas. These dividends are subject to regulatory restrictions and, in
the absence of regulatory approval, are generally limited within any 12-month
period, in the aggregate, to the greater of RSLIC's statutory net income for the
preceding calendar year, or 10% of RSLIC's statutory surplus as of the preceding
December 31, determined in accordance with state regulations. RSLIC will be
permitted to make dividend payments of $30.1 million during 1998 without prior
regulatory approval. SNCC's ability to pay dividends is subject to regulatory
and certain other contractual restrictions and, in the absence of the requisite
approvals, dividends are generally limited within any 12-month period, in the
aggregate, to the lesser of 10% of SNCC's statutory surplus as of the preceding
December 31, or SNCC's statutory net investment income for the preceding
calendar year, determined in accordance with state regulations. SNCC will be
permitted to make dividend payments totaling $16.9 million during 1998 without
prior approval. Additional dividends may also be paid by RSLIC and SNCC with the
requisite approvals. See "Business - Regulation." The Credit Agreement permits
the Company to borrow up to $200.0 million at any one time. Of the $152.0
million unused portion of the Credit Agreement facility, $98.0 million is
restricted for use in connection with, among other things, acquisitions or the
redemption of the SIG Senior Notes.


                                      -18-
<PAGE>   20
The Company's current liquidity needs, in addition to funding operating
expenses, include distributions on the Capital Securities and principal and
interest payments on outstanding borrowings under the Credit Agreement, the
Senior Notes and the SIG Senior Notes. The Junior Debentures underlying the
Capital Securities are not redeemable prior to March 25, 2007, and interest on
the Junior Debentures 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 distributions 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. Beginning in
1999, the maximum amount available to the Company under the Credit Agreement
will be reduced on October 1 of each year with the balance due on April 1, 2003.
At the Company's current level of borrowing, no principal repayments would be
required until April 1, 2003. The Senior Notes mature in their entirety on
October 1, 2003 and are not subject to any sinking fund requirements nor are
they redeemable prior to maturity. The SIG Senior Notes amortize in $9.0 million
annual installments beginning in May 1999. See Note F to the Consolidated
Financial Statements.

The Company actively pursues acquisitions of blocks of business and insurance
and financial services companies that complement or may otherwise be
strategically consistent with its existing business. The Company routinely
engages in discussions with respect to certain potential transactions, any of
which could, if consummated, be material to the Company's operations.

Sources of liquidity available to the Company on a parent company-only basis,
including the undistributed earnings of its subsidiaries, scheduled payments
under the Surplus Debenture and additional borrowings available under the Credit
Agreement, are expected to exceed the Company's current and long-term cash
requirements.

The principal liquidity requirements of the Company's insurance subsidiaries
are, in the cases of RSLIC, FRSLIC and SNCC, their contractual obligations to
policyholders and contractholders, and in the case of RSLIC-Texas, its payments
to the Company on the Surplus Debenture. The primary sources of funding for
these obligations, in addition to operating earnings, are the marketable
investments included in the investment portfolios of RSLIC, FRSLIC and SNCC. 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.

Investments. 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, managing the durations of the Company's interest-sensitive
assets and liabilities and minimizing the Company's exposure to fluctuations in
interest rates. The Company's investment portfolio primarily consists of
investments in fixed maturity securities. The weighted average credit rating of
the Company's fixed maturity portfolio as rated by Standard & Poor's Corporation
was "AA" at December 31, 1997. 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.

Thirty-nine percent of the Company's total invested assets were comprised of
mortgage-backed securities, of which 52% are guaranteed by U.S. Government
sponsored entities as to the full amount of principal and interest and the
remaining 48% consists of investments in trusts created by banks and finance and
mortgage companies. Ninety-nine percent of the Company's mortgage-backed
securities portfolio, based on fair value, have been rated as investment grade
by nationally recognized statistical rating organizations. The single largest
investment in mortgage-backed securities backed by a single mortgage pool
totaled $42.8 million, or 2% of total invested assets, at December 31, 1997.

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 maintains an investment program in which securities were purchased
using advances from the FHLB. 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 securities
purchased with those funds. The advances from the FHLB, which are at a fixed
rate, had an average term to maturity of 2.8 years. This program requires the
Company to maintain securities on deposit with the FHLB as collateral for the
advances outstanding. As the fair value of those securities increases or
decreases, the Company may be allowed to retake possession of securities or be
required to deposit additional securities.


                                      -19-
<PAGE>   21
The ability of the Company's insurance subsidiaries to make investments is
subject to the insurance laws and regulations of their respective state of
domicile. Each of these states has comprehensive investment regulations. In
addition, the Credit Agreement and, as to SNCC, the SIG Senior Notes also
contain 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. A significant aspect of the Company's continued
profitability is its ability to manage risks associated with interest-sensitive
assets and liabilities. The Company prices its annuity products based on
assumptions concerning prevailing and expected interest rates and other factors
to achieve a positive difference, or spread, between its expected return on
investments and the crediting rate. The Company achieves this spread by active
portfolio management focusing on matching the durations of invested assets and
related liabilities to minimize the exposure to fluctuations in interest rates
and by the adjustment of the crediting rate on annuity products. The results of
this asset/liability matching are analyzed periodically through cash flow
analysis under multiple interest rate scenarios. The Company believes that it
will continue to achieve a positive spread and that the amount of lapses and
surrender rates will remain consistent with those assumed in the pricing of the
products.

Impact of Year 2000. The Company has completed an assessment of its computer
related systems and is in the process of modifying portions of its software so
that its computer systems will function properly with respect to dates in the
year 2000 and thereafter. These modifications, the cost of which is not expected
to be material to the Company's financial condition, liquidity or results of
operations, are being accomplished utilizing both external and internal
resources and are expected to be completed during the fourth quarter of 1998,
which is prior to any anticipated material impact of the year 2000 issue on the
Company's computer systems. The Company believes that, with the scheduled
alterations to its computer systems, this issue will not have a material effect
on its operations. However, if such modifications are not effectively
implemented, or not completed on a timely basis, the year 2000 issue could have
a material adverse impact on the operations of the Company.


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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
foregoing discussion and elsewhere in this Form 10-K and in any other statement
made by, or on behalf of, the Company, whether or not in future filings with the
Securities and Exchange Commission. Forward-looking statements are statements
not based on historical information and which relate to future operations,
strategies, financial results or other developments. Some forward-looking
statements may be identified by the use of terms such as "expects," "believes,"
"anticipates," "intends" or "judgment." Forward-looking statements are
necessarily based upon estimates and assumptions that are inherently subject to
significant business, economic and competitive 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 legislative and regulatory
developments and market pricing and competitive trends, and those relating
specifically to the Company's business, such as the level of its insurance
premium production, the claims experience of its insurance products and the
performance of its investment portfolio. 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. The Company disclaims any obligation to update forward-looking
information.


                                      -20-
<PAGE>   22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by Item 8 is included in this Form 10-K beginning on
page 25 of this Form 10-K.


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

None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 is included in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with the Company's 1998 Annual Meeting of
Stockholders, under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" 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 1998 Annual Meeting of
Stockholders, under the caption "Executive Compensation" and is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT

The information required by Item 12 is included in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with the Company's 1998 Annual Meeting of
Stockholders, under the caption "Security Ownership of Certain Beneficial Owners
and Management" 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 1998 Annual Meeting of
Stockholders, under the caption "Certain Relationships and Related Party
Transactions" and is incorporated herein by reference.

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)  The response to this portion of Item 14 is submitted as a separate section
     of this report (see page 25 of this Form 10-K).

(b)  No reports on Form 8-K were filed during the fourth quarter of 1997.

(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.
              (Exhibit 2.1) (8)

       3.1    Restated Certificate of Incorporation of Delphi Financial Group,
              Inc. (Exhibit 3.2) (3)

       3.2    Certificate of Amendment of Restated Certificate of Incorporation
              of Delphi Financial Group, Inc. (Exhibit 3.1) (10)

       3.3    Restated Certificate of Incorporation of Delphi Financial Group,
              Inc. (Exhibit 3.2) (10)

       3.4    Amended and Restated By-laws of Delphi Financial Group, Inc.
              (Exhibit 3.4) (3)

       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 (8.0% Senior Notes due 2003).
              (Exhibit 4.1) (4)


                                      -21-
<PAGE>   23
ITEM 14.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. - (CONTINUED)

       4.2    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)) (11)

       4.3    Subordinated Indenture, dated as of March 25, 1997, between Delphi
              Financial Group, Inc. and Wilmington Trust Company as Trustee.
              (Exhibit 4(b)) (11)

       4.3    Guarantee Agreement dated March 25, 1997, between Delphi Financial
              Group, as Guarantor, and Wilmington Trust Company, as Trustee.
              (Exhibit 4(c)) (11)

       10.1   Senior Management Incentive Plan of Reliance Standard Life
              Insurance Company. (13)

       10.2   Second Amended and Restated Employee Nonqualified Stock Option
              Plan of the Company. (Exhibit 4.1) (5)

       10.3   The Delphi Capital Management, Inc. Pension Plan for Robert
              Rosenkranz. (Exhibit 10.4) (2)

       10.4   Third Amended and Restated Credit Agreement dated as of December
              5, 1996, among the Company, the Lenders named therein, The Bank of
              New York, NationsBank, N.A. (South) and Fleet National Bank, as
              Co-Agents for the lenders, and Bank of America National Trust and
              Savings Association, as Administrative Agent for the lenders.
              (Exhibit 10.4) (9)

       10.5   Borrower Pledge Agreement, dated as of February 23, 1993, between
              the Company and Bank of America Illinois. (Exhibit 10.6) (2)

       10.6   Investment Consulting Agreement, dated as of November 10, 1988,
              between Rosenkranz, Inc. and the Company. (Exhibit 10.8) (3)

       10.7   Investment Consulting Agreement, dated as of November 6, 1988,
              between Rosenkranz, Inc. and Reliance Standard Life Insurance
              Company. (Exhibit 10.9) (3)

       10.8   Assumption Reinsurance Agreement, dated as of December 5, 1988,
              between John Alden Life Insurance Company and Reliance Standard
              Life Insurance Company. (Exhibit 10.11) (3)

       10.9   Delphi Financial Group, Inc. Long-Term Performance-Based Incentive
              Plan. (13)

       10.10  Settlement Agreement and Release of February 1988 among Insurers
              Service Corporation, Frank B. Hall & Co. Inc., Reliance Group
              Holdings Inc. and Safety National Casualty Corporation, as
              supplemented and amended by letter agreement dated March 4, 1996.
              (Exhibit 10.11) (7)

       10.11  SIG Holdings, Inc. 1992 Long-Term Incentive Plan. (Exhibit 10.12)
              (7)

       10.12  Stockholders Agreement, dated as of October 5, 1995, among the
              Company and the affiliate stockholders named therein. (Exhibit
              10.30) (8)

       10.13  Reliance Standard Life Insurance Company Non-Qualified Deferred
              Compensation Plan. (Exhibit 10.14) (8)

       10.14  Reliance Standard Life Insurance Company Supplemental Executive
              Retirement Plan. (Exhibit 10.15) (8)

       10.15  Amended and Consolidated Surplus Debenture, in the amount of
              $58,000,000, dated December 1, 1996, issued by Reliance Standard
              Life Insurance Company of Texas to Delphi Financial Group, Inc.
              (Exhibit 10.15) (9)

       10.16  Indemnity Coinsurance Agreement and Administrative Services
              Agreement, dated as of October 3, 1994, between Reliance Standard
              Life Insurance Company and Protective Life Insurance Company.
              (Exhibit 10.21) (6)

       10.17  Indemnity Coinsurance Agreement, dated as of June 30, 1990,
              between Reliance Standard Life Insurance Company and John Alden
              Life Insurance Company (with exhibit 1 thereto). (Exhibit (10.22)
              (1)

       10.18  Indemnity Coinsurance Agreement, dated as of October 31, 1990,
              between Reliance Standard Life Insurance Company and John Alden
              Life Insurance Company (with exhibit 1 thereto). (Exhibit 10.23)
              (1)

       10.19  Indemnity Coinsurance Agreement, dated as of March 31, 1992,
              between Reliance Standard Life Insurance Company and Washington
              National Life Insurance Company of New York (filed with the Trust
              Agreement dated as of April 27, 1992, between Reliance Standard
              Life Insurance Company and Washington National Life Insurance
              Company of New York). (Exhibit 10.24) (1)

       10.20  Indemnity Coinsurance Agreement, dated as of December 31, 1992,
              between Reliance Standard Life Insurance Company and Lamar Life
              Insurance Company. (Exhibit 10.25) (1)

       10.21  Employment Agreement, dated March 18, 1994, for Robert M. Smith,
              Jr. (Exhibit 10.31) (6)

       10.22  Employment Agreement, dated December 22, 1995, for B.K. Werner.
              (Exhibit 10.22) (9)

       10.23  SIG Holdings, Inc. Note Agreement, dated as of May 20, 1994 (8.5%
              Senior Secured Notes due 2003). (Exhibit 10.25) (7)

       10.24  Borrower Pledge Agreement, dated as of May 20, 1994, between SIG
              Holdings, Inc., and the Chase Manhattan Bank, N.A., as collateral
              agent. (Exhibit 10.26) (7)

       10.25  Subsidiary Pledge Agreement, dated as of March 5, 1996, between
              SIG Holdings, Inc. and Bank of America National Trust and Savings
              Association, as Administrative Agent. (Exhibit 10.27) (7)


                                      -22-
<PAGE>   24
ITEM 14.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. - (CONTINUED)

       10.26  Delphi Financial Group, Inc. Amended and Restated Directors Stock
              Option Plan. (13)

       10.27  Reinsurance Agreement, dated January 27, 1998, between Reliance
              Standard Life Insurance Company and Oracle Reinsurance Company
              Ltd. (13)

       10.28  Casualty Excess of Loss Reinsurance Agreement, dated January 27,
              1998, between Safety National Casualty Corporation and Oracle
              Reinsurance Company Ltd. (13)

       11.1   Computation of Results per Share of Common Stock. (12)

       21.1   List of Subsidiaries of the Company. (13)

       23.1   Consent of Ernst & Young LLP. (13)

       24.1   Powers of Attorney. (13)

       27     Financial Data Schedule (13)

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

      (1)   Incorporated herein by reference to the designated exhibit to the
            Company's Registration Statement on Form S-1 dated September 30,
            1993 (Registration No. 33-65828).

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

      (3)   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).

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

      (5)   Incorporated herein by reference to the designated exhibit to the
            Company's Registration Statement on Form S-8 dated August 6, 1997
            (Registration No. 333-32961).

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

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

      (8)   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).

      (9)   Incorporated herein by reference to the designated exhibit to the
            Company's Form 10-K for the year ended December 31, 1996.

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

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

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

      (13)  Filed herewith.


(d)  The following consolidated financial statement schedules of Delphi
     Financial Group, Inc. and subsidiaries are included under Item 8 and are
     presented beginning on page 47 of this Form 10-K:

     Schedule I - Summary of Investments Other Than Investments in Related
                  Parties 
     Schedule II - Condensed Financial Information of Registrant
     Schedule IV - Reinsurance
     Schedule VI - Supplemental Information Concerning Property-Casualty
                   Operations

     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.


                                      -23-
<PAGE>   25
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                 Delphi Financial Group, Inc.

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

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

<TABLE>
<CAPTION>
Name                                                          Capacity                            Date
----                                                          --------                            ----
<S>                                                           <C>                                 <C>
 /S/              ROBERT ROSENKRANZ                           Chairman of the Board,              March 17, 1998
----------------------------------------------------------    President and Chief Executive
                 (Robert Rosenkranz)                          Officer (Principal Executive
                                                              Officer)

                          *                                   Director                            March 17, 1998
----------------------------------------------------------
                   (Edward A. Fox)

                          *                                   Director                            March 17, 1998
----------------------------------------------------------
                (Charles P. O'Brien)

                          *                                   Director                            March 17, 1998
----------------------------------------------------------
                 (Lewis S. Ranieri)

                          *                                   Director                            March 17, 1998
----------------------------------------------------------
                 (Thomas L. Rhodes)

 /S/            ROBERT M. SMITH, JR.                          Director and                        March 17, 1998
----------------------------------------------------------    Vice President
               (Robert M. Smith, Jr.)

                          *                                   Director                            March 17, 1998
----------------------------------------------------------
                (Thomas A. Sullivan)

                          *                                   Director                            March 17, 1998
----------------------------------------------------------
                    (B.K. Werner)

                          *                                   Vice President and                  March 17, 1998
----------------------------------------------------------    Treasurer of RSLIC
                Lawrence E. Daurelle                          (Principal Accounting and
                                                              Financial Officer)
</TABLE>


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


                                      -24-
<PAGE>   26
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                SELECTED QUARTERLY FINANCIAL RESULTS (UNAUDITED)
                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                        Year Ended December 31, 1997
                                                          --------------------------------------------------------
                                                             First         Second           Third         Fourth
                                                            Quarter        Quarter         Quarter        Quarter
                                                          ----------     ----------     ----------      ----------
<S>                                                       <C>            <C>            <C>             <C>
Revenues.............................................     $  139,071     $  127,622     $  135,490      $  133,450
Income from continuing operations, excluding realized
   investment gains (losses).........................         17,545         15,934         16,450          15,584
Income from continuing operations....................         20,298         16,017         19,839          18,828
Net income...........................................         20,298         16,017         19,839          18,828

Basic results per share of common stock:
   Income from continuing operations excluding
      realized investment gains (losses).............     $     0.94     $     0.86     $     0.88      $     0.82
   Income from continuing operations.................           1.09           0.86           1.06            0.99
   Net income........................................           1.09           0.86           1.06            0.99

Diluted results per share of common stock:
   Income from continuing operations excluding
      realized investment gains (losses).............     $     0.89     $     0.81     $     0.83      $     0.79
   Income from continuing operations.................           1.03           0.81           1.01            0.95
   Net income........................................           1.03           0.81           1.01            0.95
</TABLE>

<TABLE>
<CAPTION>
                                                                        Year Ended December 31, 1996
                                                          --------------------------------------------------------
                                                             First         Second           Third         Fourth
                                                            Quarter        Quarter         Quarter        Quarter
                                                          ----------     ----------     ----------      ----------
<S>                                                       <C>            <C>            <C>             <C>
Revenues.............................................     $  101,868     $  120,731     $  128,730      $  136,003
Income from continuing operations, excluding realized
   investment gains (losses).........................         11,025         15,978         14,945          13,629
Income from continuing operations....................         10,246         13,333         14,512          15,763
Net income...........................................          9,875          7,103         14,512          15,763

Basic results per share of common stock:
   Income from continuing operations excluding
      realized investment gains (losses).............     $     0.71     $     0.88     $     0.82      $     0.74
   Income from continuing operations.................           0.66           0.73           0.79            0.86
   Net income........................................           0.63           0.39           0.79            0.86

Diluted results per share of common stock:
   Income from continuing operations excluding
      realized investment gains (losses).............     $     0.68     $     0.81     $     0.76      $     0.69
   Income from continuing operations.................           0.63           0.67           0.74            0.80
   Net income........................................           0.61           0.36           0.74            0.80
</TABLE>

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

Results reflect the inclusion of SIG from the date of the SIG Merger. Prior
period results per share have been restated to reflect the adoption of Statement
of Financial Accounting Standard No. 128, "Earnings Per Share," the 20% stock
dividend distributed September 30, 1996 and the 2% stock dividend distributed
June 10, 1997. The Company discontinued its long-term care insurance business
during 1996 (see Note Q to the Consolidated Financial Statements).

Reporting the results of operations on a quarterly basis requires the use of
numerous estimates throughout the year, primarily in the computation of
insurance reserves and the effective rate for federal income taxes. The Company
reviews estimates at the end of each quarter and, if necessary, makes
appropriate adjustments, with the effect of these adjustments being reported in
current operations. The Company is able to assess the accuracy of its previous
quarterly estimates only at year-end. The Company's fourth quarter results
include the effect of the difference between previous estimates and actual
year-end results. Therefore, the results of an interim period may not be
indicative of the results for the entire year.


                                      -25-
<PAGE>   27
                  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......................................................................   27

   Consolidated Statements of Income - Years Ended December 31, 1997, 1996 and 1995....................   28

   Consolidated Balance Sheets - December 31, 1997 and 1996 ...........................................   29

   Consolidated Statements of Shareholders' Equity - Years Ended December 31, 1997, 1996 and 1995......   30

   Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1996 and 1995................   31

   Notes to Consolidated Financial Statements..........................................................   32

The following Consolidated Financial Statement Schedules of Delphi Financial Group, Inc. and
   Subsidiaries are included under Item 14(d):

   Schedule I, Summary of Investments Other Than Investments in Related Parties........................   47

   Schedule II, Condensed Financial Information of Registrant..........................................   48

   Schedule IV, Reinsurance............................................................................   52

   Schedule VI, Supplemental Information Concerning Property-Casualty Insurance Operations.............   53
</TABLE>


                                      -26-
<PAGE>   28
                         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, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedules listed in the Index at Item 14(d).
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 generally accepted auditing
standards. 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. 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.


                                                 /s/ ERNST & YOUNG LLP

Philadelphia, Pennsylvania
February 9, 1998


                                      -27-
<PAGE>   29
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                 Year Ended December 31,
                                                                         -----------------------------------------
                                                                            1997            1996           1995
                                                                         ----------     ----------      ----------
<S>                                                                      <C>            <C>             <C>
Revenue:
   Insurance premiums and policyholder fees.......................       $  360,871     $  335,233      $  260,902
   Net investment income..........................................          160,194        154,750         117,112
   Net realized investment gains (losses).........................           14,568         (2,651)            704
                                                                         ----------     ----------      ----------
                                                                            535,633        487,332         378,718
                                                                         ----------     ----------      ----------
Benefits and expenses:
   Benefits, claims and interest credited to policyholders........          290,761        280,620         241,165
   Commissions....................................................           27,270         24,550          21,304
   Amortization of cost of business acquired......................           27,883         31,221          17,045
   Other operating expenses.......................................           56,825         51,322          35,035
                                                                         ----------     ----------      ----------
                                                                            402,739        387,713         314,549
                                                                         ----------     ----------      ----------
      Income from continuing operations before
        interest and income tax expense and dividends
        on Capital Securities of Delphi Funding L.L.C.............          132,894         99,619          64,169

Interest expense..................................................           15,030         18,269          13,257
                                                                         ----------     ----------      ----------

      Income from continuing operations before
        income tax expense and dividends on Capital
        Securities of Delphi Funding L.L.C........................          117,864         81,350          50,912

Income tax expense................................................           38,226         27,496          18,170
                                                                         ----------     ----------      ----------

      Income from continuing operations before dividends
        on Capital Securities of Delphi Funding L.L.C.............           79,638         53,854          32,742

Dividends on Capital Securities of Delphi Funding L.L.C...........            4,656              -               -
                                                                         ----------     ----------      ----------

      Income from continuing operations...........................           74,982         53,854          32,742

Discontinued operations, net of income tax benefit:
   Loss from operations...........................................                -           (765)         (2,278)
   Loss on disposal...............................................                -         (5,836)              -
                                                                         ----------     ----------      ----------

      Net income..................................................       $   74,982     $   47,253      $   30,464
                                                                         ==========     ==========      ==========


Basic results per share of common stock:
   Income from continuing operations..............................       $     4.00     $     3.06      $     2.28
   Net income.....................................................       $     4.00     $     2.68      $     2.12


Diluted results per share of common stock:
   Income from continuing operations..............................       $     3.80     $     2.86      $     2.23
   Net income.....................................................       $     3.80     $     2.51      $     2.08
</TABLE>


                See notes to consolidated financial statements.


                                      -28-
<PAGE>   30
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                      ----------------------------
                                                                                          1997             1996
                                                                                      -----------      -----------
<S>                                                                                   <C>              <C>
Assets:
   Investments:
      Fixed maturity securities, available for sale ............................      $ 2,165,069      $ 1,891,512
      Cash and cash equivalents.................................................           50,580           89,711
      Other investments.........................................................          264,753          313,784
                                                                                      -----------      -----------
                                                                                        2,480,402        2,295,007
   Cost of business acquired....................................................           92,931           94,594
   Reinsurance receivables......................................................          234,746          214,529
   Other assets.................................................................          322,985          174,157
   Assets held in separate account..............................................           72,649           79,619
                                                                                      -----------      -----------
      Total assets..............................................................      $ 3,203,713      $ 2,857,906
                                                                                      ===========      ===========


Liabilities and Shareholders' Equity:
   Future policy benefits.......................................................      $   436,021      $   416,854
   Unpaid claims and claim expenses.............................................          531,409          509,720
   Policyholder account balances................................................          689,542          719,229
   Corporate debt...............................................................          178,769          231,004
   Advances from Federal Home Loan Bank.........................................          201,057          201,055
   Other liabilities and policyholder funds.....................................          494,082          341,181
   Liabilities related to separate account......................................           63,347           71,898
                                                                                      -----------      -----------
      Total liabilities                                                                 2,594,227        2,490,941
                                                                                      -----------      -----------

   Company-obligated mandatorily redeemable Capital Securities of Delphi
      Funding L.L.C. holding solely junior subordinated deferrable interest
      debentures of the Company.................................................          100,000                -
                                                                                      -----------      -----------

   Shareholders' equity:
      Preferred Stock, $.01 par; 10,000,000 shares authorized...................                -                -
      Class A Common Stock, $.01 par; 40,000,000 shares authorized;
         12,884,188 and 11,813,064 shares issued and outstanding, respectively..              129              118
      Class B Common Stock, $.01 par; 20,000,000 shares authorized;
         6,156,787 and 6,258,944 shares issued and outstanding, respectively....               62               63
      Additional paid-in capital................................................          262,963          240,203
      Net unrealized appreciation (depreciation) on investments.................           40,545          (17,949)
      Retained earnings.........................................................          205,787          144,530
                                                                                      -----------      -----------
         Total shareholders' equity.............................................          509,486          366,965
                                                                                      -----------      -----------
             Total liabilities and shareholders' equity.........................      $ 3,203,713      $ 2,857,906
                                                                                      ===========      ===========
</TABLE>


                See notes to consolidated financial statements.

                                      -29-
<PAGE>   31
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                        (DOLLARS AND SHARES IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                -----------------------------------------------------------------------
                                                         1997                    1996                      1995
                                                ----------------------   ----------------------    --------------------
                                                  Shares      Amounts      Shares      Amounts      Shares      Amounts
<S>                                               <C>       <C>             <C>       <C>            <C>       <C>
Class A Common Stock:
    Beginning balance..................           11,813    $     118       6,696     $     67       5,901     $      59
       Issuance of stock, exercise
          of stock options and
          conversion of shares.........              832            9       3,303           33         795             8
       Stock dividend..................              239            2       1,941           19           -             -
       Retirement of Treasury Stock....                -            -        (127)          (1)          -             -
                                                --------    ---------    --------     --------     -------     ---------
    Ending balance ....................           12,884    $     129      11,813     $    118       6,696     $      67
                                                ========    =========    ========     ========     =======     =========

Class B Common Stock:
    Beginning balance..................            6,259    $      63       5,216     $     52       5,866     $      59
       Conversion of shares............             (226)          (2)          -            -        (650)           (7)
       Stock dividend..................              124            1       1,043           11           -             -
                                                --------    ---------    --------     --------     -------     ---------
    Ending balance ....................            6,157    $      62       6,259     $     63       5,216     $      52
                                                ========    =========    ========     ========     =======     =========

Class A Treasury Stock:
    Beginning balance..................                -    $       -         127     $ (2,342)          -     $       -
       Retirement of Treasury Stock....                -            -        (127)       2,342           -             -
       Receipt of Treasury Stock.......                -            -           -            -         127        (2,342)
                                                --------    ---------    --------     --------     -------     ---------
    Ending balance ....................                -    $       -           -     $      -         127     $  (2,342)
                                                ========    =========    ========     ========     =======     =========

Additional Paid-in Capital:
    Beginning balance..................                     $ 240,203                 $ 87,734                 $  86,481
       Issuance of stock and
           exercise of stock options...                         9,040                   79,982                     1,253
       Stock dividend..................                        13,720                   74,579                         -
       Retirement of Treasury Stock....                             -                   (2,092)                        -
                                                            ---------                 --------                 ---------
    Ending balance.....................                     $ 262,963                 $240,203                 $  87,734
                                                            =========                 ========                 =========

Net Unrealized Appreciation (Depreciation)
    on Investments:
    Beginning balance..................                     $ (17,949)                $(34,832)                $ (57,889)
       Change in net unrealized
          appreciation (depreciation)..                        58,494                   16,883                    23,057
                                                            ---------                 --------                 ---------
    Ending balance.....................                     $  40,545                 $(17,949)                $ (34,832)
                                                            =========                 ========                 =========

Retained Earnings:
    Beginning balance..................                     $ 144,530                 $172,136                 $ 141,672
       Net income......................                        74,982                   47,253                    30,464
       Stock dividend..................                       (13,725)                 (74,610)                        -
       Retirement of Treasury Stock....                             -                     (249)                        -
                                                            ---------                 --------                 ---------
    Ending balance.....................                     $ 205,787                 $144,530                 $ 172,136
                                                            =========                 ========                 =========

Total Shareholders' Equity.............                     $ 509,486                 $366,965                 $ 222,815
                                                            =========                 ========                 =========
</TABLE>


                 See notes to consolidated financial statements.


                                      -30-
<PAGE>   32
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                 Year Ended December 31,
                                                                         -----------------------------------------
                                                                            1997            1996           1995
                                                                         ----------     ----------      ----------
<S>                                                                      <C>            <C>             <C>
Operating activities:
   Net income.....................................................       $   74,982     $   47,253      $   30,464
   Adjustments to reconcile net income to net cash
        provided by operating activities:
      Change in future policy benefits, unpaid claims and claim
        expenses, reinsurance receivables and policyholder accounts          10,493         28,614           3,744
      Amortization, principally the cost of business acquired
        and investments...........................................           14,540         26,978          19,099
      Deferred costs of business acquired.........................          (32,727)       (28,718)        (19,624)
      Net realized (gains) losses on investments..................          (14,568)         2,651            (704)
      Net change in trading account securities....................          (21,793)        (6,995)        (32,285)
      Other.......................................................           21,624         28,042          25,593
                                                                         ----------     ----------      ----------
        Net cash provided by operating activities.................           52,551         97,825          26,287
                                                                         ----------     ----------      ----------
Investing activities:
   Securities available for sale:
      Purchases of investments and loans made.....................       (1,662,213)    (1,445,664)       (500,866)
      Sales of investments and receipts from repayment of loans...        1,429,752      1,475,106         770,963
      Maturities of investments...................................           35,429         35,722          44,806
   Securities held to maturity:
      Purchases of investments....................................                -              -         (10,327)
      Maturities of investments...................................                -              -          15,165
   Cash acquired in SIG Merger, net of consideration paid.........                -          37,313              -
   Change in deposit in separate account..........................           (1,580)        (1,506)          1,077
                                                                         ----------     ----------      ----------
        Net cash (used) provided by investing activities..........         (198,612)       100,971         320,818
                                                                         ----------     ----------      ----------
Financing activities:
   Deposits to policyholder accounts..............................           57,931         59,460          13,580
   Withdrawals from policyholder accounts.........................          (78,132)       (78,435)       (172,876)
   Proceeds from issuance of common stock
      and exercise of stock options...............................            9,045            530           1,254
   Net proceeds from issuance of Capital Securities of Delphi
      Funding L.L.C...............................................           98,750              -               -
   Borrowings under Credit Agreement..............................           20,000         64,000               -
   Principal payments under Credit Agreement......................          (72,000)       (14,000)        (25,000)
   Change in amounts due to brokers and other
      short-term financing........................................                -         (5,000)        (10,000)
   Change in liability under reverse repurchase agreements........           71,336       (152,325)       (138,821)
                                                                         ----------     ----------      ----------
        Net cash provided (used) by financing activities..........          106,930       (125,770)       (331,863)
                                                                         ----------     ----------      ----------
(Decrease) increase in cash and cash equivalents..................          (39,131)        73,026          15,242

Cash and cash equivalents at beginning of year....................           89,711         16,685           1,443
                                                                         ----------     ----------      ----------
   Cash and cash equivalents at end of year.......................       $   50,580     $   89,711      $   16,685
                                                                         ==========     ==========      ==========
</TABLE>


                 See notes to consolidated financial statements.


                                      -31-
<PAGE>   33
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1997

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") and Reliance Standard Life Insurance
Company of Texas ("RSLIC-Texas"). DFG and its subsidiaries are herein
collectively referred to as the "Company." All significant intercompany accounts
and transactions have been eliminated. Certain reclassifications have been made
in the 1996 and 1995 consolidated financial statements to conform with the 1997
presentation. As of December 31, 1997, 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, an
irrevocable proxy 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 is an insurance holding company engaged
through its subsidiaries in offering a diverse portfolio of group employee
benefit products including life, disability, excess workers' compensation and
personal accident insurance. The Company also offers asset accumulation
products, primarily annuities, to individuals and groups. The Company offers its
insurance products in all fifty states and the District of Columbia. The
Company's two product categories are group employee benefit products and asset
accumulation products, which represented approximately 99% and 1%, respectively,
of total insurance premiums and policyholder fees of $360.9 million for the year
ended December 31, 1997 and 48% and 44%, respectively, of the Company's reserves
and policyholder account balances of $1,657.0 million.

Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles 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. Securities available for sale are carried at fair value with
changes in unrealized appreciation and depreciation charged directly to
shareholders' equity. For the years ended December 31, 1997, 1996 and 1995,
respectively, the change in net unrealized appreciation (depreciation) related
to available for sale securities was $58.5 million, $16.9 million and $23.0
million, net of deferred income tax expense of $31.5 million, $9.1 million and
$12.4 million and a decrease (increase) in cost of business acquired of $6.5
million, $(1.6) million and $21.4 million.

As of June 30, 1995, certain fixed maturity securities classified as held to
maturity, and therefore carried at amortized cost, were transferred to the
available for sale category. The transferred securities had an amortized cost of
$450.3 million and a fair value of $422.7 million; accordingly, shareholders'
equity was reduced by net unrealized depreciation of $15.3 million, net of a
deferred tax benefit of $8.3 million and an increase in cost of business
acquired of $4.0 million, related to the transferred securities. This transfer
was made in anticipation of future reductions of mortgage-backed securities in
response to concerns of rating agencies and insurance regulators regarding
mortgage-backed securities based upon unfavorable publicity about this category
of securities and, in particular, their higher risk classes. Although the
Company's mortgage-backed securities portfolio emphasized the more predictable
payment classes, the Company reduced its mortgage-backed securities holdings as
a result of such concerns.

Other investments consist primarily of trading account securities, balances with
independent investment managers and equity securities. Trading account
securities include bonds, common stocks and preferred stocks and are carried at
fair value with any changes in fair value included in net investment income.
Interest income, dividend income and realized gains and losses from trading
account securities are also included in net investment income. 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. Equity securities are stated at fair value, with
unrealized appreciation or depreciation charged to shareholders' equity.

Net realized investment gains and losses, determined under the specific
identification method, are included in income. Declines in fair value of
investments which are considered to be other than temporary are reported as
realized losses.


                                      -32-
<PAGE>   34
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 1997

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

Cost of Business Acquired. Costs relating to the acquisition of new business,
such as commissions and policy issue costs, are deferred when incurred. For
certain asset accumulation products, these costs are amortized in relation to
the incidence of expected gross profits over the life of the policies and
products. Deferred acquisition costs for life, accident and health and excess
workers' compensation insurance policies are amortized over the premium-paying
period or the expected life of the related policies. The present value of
estimated future profits, which was recorded in connection with the acquisition
of RSLIC and FRSLIC in 1987, is amortized in relation to premium income on life
and health lines of business and gross profits on annuity business. The
amortization of cost of business acquired was accelerated by $4.8 million before
taxes in 1996, primarily due to better than anticipated investment results. The
effect of the accelerated amortization was to decrease net income by $3.1
million, or $0.18 per share ($0.16 per share assuming dilution), for the year
ended December 31, 1996.

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.

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 earned by the assets of the separate account, which it generally
reinvests 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, withdrawals 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, and any resulting adjustments are
reflected in earnings currently. Reserves with a carrying value of $479.1
million have been discounted at rates ranging from 3.7% to 7.0%.

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 policyholder's
accumulated value at any point in time.

Income Taxes. RSLIC-Texas and RSLIC are taxed as life insurance companies and
file a consolidated federal tax return. FRSLIC does not qualify as a life
insurance company for federal income tax purposes and files a separate federal
tax return. DFG, SNCC and the non-insurance subsidiaries of the Company file as
a separate subgroup. 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 federal income tax returns.

Insurance Premiums and Policyholder Fees. 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. The liabilities
for unearned premiums, included in other liabilities and policyholder funds,
represent the portion of the premiums written which applies to the unexpired
terms of the policies in force. Revenues from certain asset accumulation
products consist of policy charges for the cost of insurance, policy
administration and surrender fees. Deposits for asset accumulation products are
not recorded as premiums; instead the account balance is recorded as a
liability, since these products generally do not involve mortality or morbidity
risk.


                                      -33-
<PAGE>   35
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 1997

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

Statements of Cash Flows. For purposes of the Statements of Cash Flows, the
Company defines cash equivalents as highly liquid debt instruments purchased
with maturities of three months or less. In 1995, the Company received 126,568
shares (not adjusted for stock dividends) of the Company's Class A Common Stock
with an aggregate market value of $2.3 million in exchange for liquidating its
entire limited partnership interest in RSL Partners, L.P., a limited partnership
whose primary asset is a limited partnership interest in Rosenkranz & Company.
This treasury stock was retired in 1996.

Recently Adopted Accounting Standards. In June 1997, the Financial Accounting
Standards Board issued Statement of Accounting Standard ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
is effective for financial statements for fiscal years beginning after December
15, 1997, and therefore, the Company will adopt the new requirements
retroactively in 1998. Management has not completed its review of SFAS No. 131
and, accordingly, has not yet determined the effect of adopting this accounting
standard.


NOTE B - SIG MERGER

On March 5, 1996, SIG Holdings, Inc. ("SIG") was merged into the Company (the
"SIG Merger") for consideration of approximately $131.9 million consisting of
$54.5 million of cash, net of approximately $1.0 million payable upon the
exercise of certain SIG stock options, which was funded from additional
borrowings under the Credit Agreement, and approximately 5.3 million shares of
the Company's Class A Common Stock, including shares of Class A Common Stock
reserved for issuance upon the exercise of stock options of SIG assumed by the
Company in connection with the merger (the "SIG Options"), plus additional
contingent consideration of up to $20.0 million. In connection with the merger,
the Company also assumed $45.0 million of SIG's corporate debt. The contingent
consideration will be payable in shares of the Company's Class A Common Stock
or, at the option of the Company, in cash. No contingent consideration is due
unless SIG's cumulative net income exceeds $41.8 million for the two years
ending December 31, 1997, $62.6 million for the three years ending December 31,
1998, or $83.5 million for the four years ending December 31, 1999, and the
maximum amount is triggered at cumulative net income levels of $75.3 million for
the three-year period or $104.4 million for the four-year period. Because SIG's
cumulative net income exceeded the income goal for the two years ended December
31, 1997, the Company accrued $10.0 million of the contingent consideration and
recorded $10.0 million of additional goodwill in 1997. As of March 5, 1996, SIG
had total assets of $572.5 million, and shareholders' equity was $96.8 million.
The SIG Merger was accounted for using the purchase accounting method with the
results of SIG included in the Company's results from the date of the SIG
Merger. Goodwill recorded in connection with the SIG Merger is being amortized
on a straight-line basis over 40 years.

The unaudited pro forma operating results, which assume the SIG Merger had
occurred at the beginning of each period, are as follows: total revenue of
$505.6 million and $487.2 million, which includes realized investment (losses)
gains of $(2.7) million, or $(0.09) per share after taxes (basic and assuming
dilution), and $3.3 million, or $0.11 per share after taxes (basic and assuming
dilution), income from continuing operations of $56.3 million and $50.7 million
and earnings per share from continuing operations of $2.85 and $2.58 ($2.81 and
$2.54 per share assuming dilution) for the years ended December 31, 1996 and
1995, respectively. Unaudited pro forma net income, after losses from
discontinued operations of $6.6 million, or $0.33 per share (basic and assuming
dilution), and $2.3 million, or $0.11 per share (basic and assuming dilution),
would be $49.7 million, or $2.52 per share ($2.48 per share assuming dilution),
and $48.4 million, or $2.47 per share ($2.43 per share assuming dilution), for
the years ended December 31, 1996 and 1995, respectively. In preparing the
unaudited pro forma data, adjustments have been made to reflect the purchase
accounting adjustments and interest expense on the additional borrowings under
the Credit Agreement that would have occurred. The pro forma weighted average
numbers of shares outstanding of 19.7 million and 19.6 million (20.0 million and
19.9 million, assuming dilution) for the years ended December 31, 1996 and 1995,
respectively, used in calculating the unaudited pro forma per share data assume
that all of the outstanding SIG Options were exercised at the beginning of each
period. The unaudited pro forma information does not purport to be indicative of
the operating results that actually would have been achieved had the SIG Merger
been consummated as of the respective dates indicated and should not be
construed as representative of future operating results.


                                      -34-
<PAGE>   36
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 1997

NOTE C - INVESTMENTS IN SECURITIES

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


<TABLE>
<CAPTION>
                                                                              December 31, 1997
                                                        ----------------------------------------------------------
                                                                           Gross           Gross
                                                           Amortized     Unrealized      Unrealized        Fair
                                                             Cost           Gains          Losses          Value
                                                        ------------     ----------     ----------     -----------
                                                                           (dollars in thousands)
<S>                                                     <C>              <C>            <C>            <C>
Available for sale:
   Mortgage-backed securities........................   $    818,835     $   18,176     $  (10,695)    $   826,316
   Corporate securities..............................        147,414          4,076         (1,819)        149,671
   U.S. Treasury and other U.S. Government
      guaranteed securities..........................        715,914         32,867           (862)        747,919
   Obligations of U.S. states, municipalities and
      political subdivisions.........................        287,889         12,815         (1,724)        298,980
   Securities held under reverse repurchase agreements       126,968          9,279              -         136,247
   Other fixed maturity securities...................          4,835          1,101              -           5,936
                                                        ------------     ----------     ----------     -----------
      Total fixed maturity securities................   $  2,101,855     $   78,314     $  (15,100)    $ 2,165,069
                                                        ============     ==========     ==========     ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                              December 31, 1996
                                                        ----------------------------------------------------------
                                                                            Gross           Gross
                                                          Amortized      Unrealized      Unrealized       Fair
                                                            Cost            Gains          Losses         Value
                                                        ------------     ----------     ----------     -----------
                                                                           (dollars in thousands)
<S>                                                     <C>              <C>            <C>            <C>
Available for sale:
   Mortgage-backed securities........................   $    819,353     $    2,419     $  (46,805)    $   774,967
   Corporate securities..............................        127,154          4,749         (2,865)        129,038
   U.S. Treasury and other U.S. Government
      guaranteed securities..........................        678,541          7,060         (2,971)        682,630
   Obligations of U.S. states, municipalities and
      political subdivisions.........................        222,867          3,487         (8,262)        218,092
   Securities held under reverse repurchase agreements        57,183              -         (2,666)         54,517
   Other fixed maturity securities...................         31,151          1,196            (79)         32,268
                                                        ------------     ----------     ----------     -----------
      Total fixed maturity securities................   $  1,936,249     $   18,911     $  (63,648)    $ 1,891,512
                                                        ============     ==========     ==========     ===========
</TABLE>

The amortized cost and fair value of fixed maturity securities at December 31,
1997, 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>
Available for sale:
    Mortgage-backed securities                                                         $   945,803     $   962,563
    Other securities:
       Less than one year                                                                   81,494          81,847
       Greater than 1, up to 5 years                                                       310,396         313,247
       Greater than 5, up to 10 years                                                      155,772         160,677
       Greater than 10 years                                                               608,390         646,735
                                                                                       -----------     -----------
          Total                                                                        $ 2,101,855     $ 2,165,069
                                                                                       ===========     ===========
</TABLE>


                                      -35-
<PAGE>   37
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 1997

NOTE C - INVESTMENTS IN SECURITIES - (CONTINUED)

Net investment income was attributable to the following:

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                         -----------------------------------------
                                                                            1997            1996           1995
                                                                         ----------     ----------      ----------
                                                                                 (dollars in thousands)
<S>                                                                      <C>            <C>             <C>
Gross investment income:
   Fixed maturity securities......................................       $  120,628     $  116,170      $   91,277
   Other..........................................................           53,956         55,018          37,404
                                                                         ----------     ----------      ----------
                                                                            174,584        171,188         128,681
      Less: Investment expenses...................................           14,390         16,438          11,569
                                                                         ----------     ----------      ----------
                                                                         $  160,194     $  154,750      $  117,112
                                                                         ==========     ==========      ==========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                         -----------------------------------------
                                                                            1997            1996           1995
                                                                         ----------     ----------      ----------
                                                                                 (dollars in thousands)
<S>                                                                      <C>            <C>             <C>
Fixed maturity securities.........................................       $    1,911     $   (5,947)     $     (401)
Other investments.................................................           12,657          3,296           1,105
                                                                         ----------     ----------      ----------
                                                                         $   14,568     $   (2,651)     $      704
                                                                         ==========     ==========      ==========
</TABLE>

Proceeds from sales of investments in fixed maturity securities during 1997,
1996 and 1995 were $1,199.6 million, $1,114.9 million and $338.8 million,
respectively. Gross gains of $34.3 million, $17.1 million and $13.8 million and
gross losses of $21.1 million, $21.7 million and $13.7 million, respectively,
were realized on those sales during the years ended December 31, 1997, 1996 and
1995, respectively. Sales of fixed maturity securities and gross gains and
losses from such sales do not include sales of securities classified as trading
account securities. During 1997, the Company reevaluated the amortization period
for deferred futures losses associated with its mortgage-backed securities
portfolio due to a decline in market interest rates to record low levels and
accelerated the amortization by $9.9 million.

The change in net unrealized appreciation (depreciation) in fair value was as
follows:

<TABLE>
<CAPTION>
                                                                                 Year Ended December 31,
                                                                         -----------------------------------------
                                                                            1997            1996           1995
                                                                         ----------     ----------      ----------
                                                                                 (dollars in thousands)
<S>                                                                      <C>            <C>             <C>
   Fixed maturity securities......................................       $  107,951     $   13,684      $  126,482
   Equity securities..............................................          (10,717)        10,756           2,307
   Trading account securities.....................................           (1,436)         5,365          10,779
</TABLE>

Bonds and short-term investments with amortized costs of $25.2 million at
December 31, 1997 and 1996, respectively, are on deposit with various states'
insurance departments in compliance with statutory regulations. Additionally,
certain assets of the Company were 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 $129.5 million
and $153.4 million at December 31, 1997 and 1996, respectively.

Other investments at December 31, 1997 and 1996 principally include trading
account securities of $134.5 million and $115.4 million, balances with
independent investment managers of $47.4 million and $110.6 million and equity
securities of $62.3 million and $74.0 million, respectively. Included in other
assets are amounts receivable from brokers for investment sales totaling $185.6
million and $48.1 million at December 31, 1997 and 1996, respectively.


                                      -36-
<PAGE>   38
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 1997

NOTE C - INVESTMENTS IN SECURITIES - (CONTINUED)

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,
                                                                                  --------------------------------
                                                                                      1997                1996
                                                                                  ------------       -------------
                                                                                       (dollars in thousands)
<S>                                                                               <C>                <C>
Assets.......................................................................     $ 13,006,724       $  13,859,317
                                                                                  ============       =============

Liabilities .................................................................     $  6,985,778       $   8,643,569
Partners' capital............................................................        6,020,946           5,215,748
                                                                                  ------------       -------------
Total liabilities and partners' capital......................................     $ 13,006,724       $  13,859,317
                                                                                  ============       =============

Net income...................................................................     $  1,929,201       $   1,239,305
                                                                                  ============       =============
</TABLE>

NOTE D - CONCENTRATIONS OF CREDIT RISK

As of December 31, 1997 and 1996, approximately 39% and 36%, respectively, of
the Company's total invested assets were comprised of mortgage-backed
securities. 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 agencies. Non-investment
grade securities included in fixed maturity securities had fair values of $84.2
million and $104.2 million at December 31, 1997 and 1996, respectively. Trading
account securities include additional non-investment grade securities with fair
values of $59.5 million and $52.9 million at December 31, 1997 and 1996,
respectively. In the aggregate, non-investment grade securities constituted 6%
and 7% of total invested assets at December 31, 1997 and 1996, respectively.

The Company's only significant non-investment assets subject to credit risk are
its reinsurance receivables. To reduce its exposure to significant losses from
reinsurer insolvency, the Company monitors the financial condition 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 trust
arrangements for the Company's benefit in the event of certain ratings
downgrades. The receivable from the Company's largest reinsurer at December 31,
1997 was $136.0 million, or 58% of total reinsurance receivables. This reinsurer
is rated "A+" (Superior) by A.M. Best Company.

At December 31, 1997, the fair value of the Company's investment in a
mortgage-backed security backed by a single mortgage pool issued by Prudential
Home Mortgage Securities Corp. totaled $42.8 million. The Company had no other
investments in any one issuer, excluding U.S. Government obligations, whose
value represents 10% or more of shareholders' equity at December 31, 1997.


                                      -37-
<PAGE>   39
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 1997

NOTE E - ACCIDENT AND HEALTH AND CASUALTY FUTURE POLICY BENEFITS AND UNPAID
CLAIMS AND CLAIM EXPENSES

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

<TABLE>
<CAPTION>
                                                                                   Year Ended December 31,
                                                                         ----------------------------------------
                                                                            1997           1996           1995
                                                                         ----------     ----------      ---------
                                                                                  (dollars in thousands)
<S>                                                                      <C>            <C>             <C>
Balance at beginning of year, net of reinsurance..................       $  630,485     $  245,323      $ 219,405
SNCC reserves at merger, net of reinsurance.......................                -        356,370              -
Add:..............................................................
   Provisions for claims and claim expenses incurred in the
      current year, net of reinsurance............................          140,393        133,111         98,804
   Decrease in estimated claims and claim expenses incurred
      in prior years, net of reinsurance..........................           (9,102)        (3,461)        (1,441)
                                                                         ----------     ----------      ---------
   Incurred claims and claim expenses during the current
      year, net of reinsurance....................................          131,291        129,650         97,363
                                                                         ----------     ----------      ---------
Deduct claims and claim expenses paid, net of reinsurance,
   occurring during:
      Current year................................................           24,454         23,870         20,586
      Prior year..................................................           87,303         76,988         50,859
                                                                         ----------     ----------      ---------
                                                                            111,757        100,858         71,445
                                                                         ----------     ----------      ---------
Balance at end of year, net of reinsurance........................          650,019        630,485        245,323
Reinsurance receivables at end of year............................           84,446         66,172         41,840
                                                                         ----------     ----------      ---------
Balance at end of year, gross of reinsurance......................       $  734,465     $  696,657      $ 287,163
                                                                         ==========     ==========      =========
</TABLE>

NOTE F - CORPORATE DEBT

The Company has outstanding borrowings pursuant to a Credit Agreement with Bank
of America National Trust and Savings Association and a group of lenders named
therein (the "Credit Agreement") which permits it to borrow up to $200.0 million
under a revolving loan arrangement. The amount of the outstanding borrowings was
$48.0 million and $100.0 million at December 31, 1997 and 1996, respectively. Of
the unused portion of the facility at December 31, 1997, $98.0 million is
restricted for use in, among other things, acquisitions or the redemption of the
SIG Senior Notes (as defined herein). The borrowings under the Credit Agreement
accrue interest at a floating rate which is indexed to various published
interest indices. In addition to interest on the outstanding borrowings, a
non-use fee is charged on the remaining unused commitment. The maximum amount of
borrowings available under the Credit Agreement will be reduced to the following
amounts in October of each year: 1999 - $180.0 million, 2000 - $150.0 million,
2001 - $110.0 million and 2002 - $60.0 million. The final maturity of the Credit
Agreement is on April 1, 2003. The debt is secured by a security interest in all
of the common stock and the surplus debenture of RSLIC-Texas, the issued and
outstanding common stock of substantially all of the Company's non-insurance
subsidiaries and, on a subordinated basis, the common stock of SNCC. The debt is
also subject to certain restrictions and financial covenants considered ordinary
for this type of borrowing. They include, among others, the maintenance of
certain financial ratios, minimum statutory surplus requirements for RSLIC and
SNCC, minimum consolidated equity requirements for the Company and certain
investment and dividend limitations. As of December 31, 1997, the Company was in
compliance in all material respects with all restrictions and covenants in the
Credit Agreement.

In 1993, the Company issued $85.0 million of 8.0% Senior Notes due 2003 (the
"Senior Notes"). The Senior Notes are not redeemable prior to maturity or
entitled to any sinking fund. Interest on the Senior Notes is payable
semiannually on April 1 and October 1 of each year. In certain instances,
holders of the Senior Notes have the right to require the Company to repurchase
any or all of the Senior Notes owned by such holder at 101% of the principal
amount thereof, plus accrued and unpaid interest. The Senior Notes are senior
unsecured obligations of the Company and, as such, are effectively subordinated
to all existing and future obligations of the Company's subsidiaries, including
the insurance subsidiaries' obligations to policyholders. The terms of the
indenture pursuant to which the Senior Notes were issued contain certain
covenants and


                                      -38-
<PAGE>   40
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 1997

NOTE F - CORPORATE DEBT - (CONTINUED)

restrictions which set forth, among other things, limitations on incurrence of
indebtedness by the Company and its subsidiaries, limitations on payments of
dividends on and repurchases of stock of the Company and limitations on
transactions with stockholders and affiliates. As of December 31, 1997, the
Company was in compliance in all material respects with the terms of the
indenture.

In conjunction with the SIG Merger, the Company assumed $45.0 million of SIG's
8.5% senior secured notes (the "SIG Senior Notes"). The SIG Senior Notes mature
in $9.0 million annual installments beginning in May 1999 and are collateralized
by all of the common stock of SNCC. The terms of the note agreement pursuant to
which the SIG Senior Notes were issued contain certain covenants and
restrictions which set forth, among others, minimum statutory requirements for
SNCC, minimum consolidated equity requirements for SIG, as well as the
maintenance of certain financial ratios. As of December 31, 1997, SIG was in
compliance in all material respects with the terms of the note agreement.

Interest paid during the years ended December 31, 1997, 1996 and 1995 totaled
$14.5 million, $17.2 million and $12.8 million, respectively.


NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK

The Company maintains an investment program in which securities were purchased
using advances from the Federal Home Loan Bank of Pittsburgh ("FHLB"). As of
December 31, 1997 and 1996, advances from the FHLB, including accrued interest,
totaled $201.1 million. Interest expense on the advances is included as an
offset to investment income on the financed securities. For the years ended
December 31, 1997 and 1996, the average interest rate on the outstanding
advances was 6.2%. The advances had a weighted average term of 2.8 years at
December 31, 1997 and were collateralized by mortgage-backed securities with a
fair value of $246.6 million.


NOTE H - INCOME TAXES

Federal income tax expense is reconciled to the amount computed by applying the
statutory federal income tax rate to income from continuing operations before
federal income taxes as follows:

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                         -----------------------------------------
                                                                            1997            1996           1995
                                                                         ----------     ----------      ----------
                                                                                 (dollars in thousands)
<S>                                                                      <C>            <C>             <C>
   Federal income tax at statutory rate ..........................       $   41,252     $   28,473      $   17,819
   Dividends received deduction and tax-exempt income.............           (3,026)        (2,747)         (1,274)
   Other..........................................................                -          1,770           1,625
                                                                         ----------     ----------      ----------
                                                                         $   38,226     $   27,496      $   18,170
                                                                         ==========     ==========      ==========
</TABLE>


                                      -39-
<PAGE>   41
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 1997

NOTE H - INCOME TAXES - (CONTINUED)

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,
                                                                                        --------------------------
                                                                                            1997           1996
                                                                                        ----------      ----------
                                                                                          (dollars in thousands)
<S>                                                                                     <C>             <C>
Cost of business acquired.........................................................      $   23,895      $   25,152
Investments.......................................................................          53,873          30,882
Future policy benefits and unpaid claims and claim expenses.......................          13,867           8,846
Other.............................................................................             702             951
                                                                                        ----------      ----------
    Gross deferred tax liabilities................................................          92,337          65,831
                                                                                        ----------      ----------
Future policy benefits and unpaid claims and claim expenses.......................          (6,674)         (8,246)
Investments.......................................................................          (9,455)        (13,169)
Other liabilities.................................................................         (17,653)        (18,423)
Other.............................................................................          (1,651)         (1,775)
                                                                                        ----------      ----------
    Gross deferred tax assets.....................................................         (35,433)        (41,613)
                                                                                        ----------      ----------
    Net deferred tax liability....................................................      $   56,904      $   24,218
                                                                                        ==========      ==========
Deferred tax expense .............................................................      $    7,759      $    3,537
                                                                                        ==========      ==========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                     As of or for the Year Ended
                                                                                             December 31,
                                                                              -----------------------------------------
                                                                                 1997            1996           1995
                                                                              ----------     ----------      ----------
                                                                                             (dollars in thousands)
<S>                                                                           <C>            <C>             <C>
Current tax expense (benefit) ....................................            $   27,960     $   23,959      $   (9,123)
Current tax liability (recoverable) ..............................                 9,097            272         (16,419)
Income taxes paid (net of refunds of $0, $12,465 and $783, respectively)          18,856          4,887           7,589
</TABLE>

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

NOTE I - PRESENT VALUE OF FUTURE PROFITS

In connection with the acquisition of RSLIC and FRSLIC in 1987, the Company
recorded the present value of the estimated future profits of the business
acquired ("PVFP"). This PVFP, which is included in cost of business acquired on
the consolidated balance sheet, relates to all of the business acquired,
including group life and disability insurance, annuities and individual life
insurance. The PVFP related to the 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. Changes in the estimates of future gross profits are accounted for
prospectively as adjustments to amortization and are included as amortization in
the table below. Amortization of PVFP for group life and disability insurance is
at the discount rate established at the time of the acquisition of RSLIC.


                                      -40-
<PAGE>   42
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 1997

NOTE I - PRESENT VALUE OF FUTURE PROFITS - (CONTINUED)

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

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                         ------------------------------------------
                                                                            1997            1996           1995
                                                                         ----------     ----------      -----------
                                                                                  (dollars in thousands)
<S>                                                                      <C>            <C>             <C>
Balance at beginning of year......................................       $   23,653     $   26,898      $   29,404
    Interest accrued..............................................              506            639             522
    Amortization..................................................           (2,547)        (3,884)         (3,028)
                                                                         ----------     ----------      -----------
Balance at end of year............................................       $   21,612     $   23,653      $   26,898
                                                                         ==========     ==========      ==========
</TABLE>

An estimate of the percentage of the December 31, 1997 PVFP balance to be
amortized over each of the next five years is as follows: 1998 - 13%, 1999 -
11%, 2000 - 11%, 2001 - 11% and 2002 - 9%.


NOTE J - FAIR VALUES OF FINANCIAL INSTRUMENTS

The fair values of the Company's financial instruments are shown below using a
summarized version of the Company's assets and liabilities at December 31, 1997
and 1996. Because fair values for all balance sheet items are not required to be
disclosed pursuant to 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,
                                                        ----------------------------------------------------------
                                                                    1997                          1996
                                                        ---------------------------    ---------------------------
                                                          Carrying          Fair          Carrying        Fair
                                                            Value           Value           Value         Value
                                                        ------------    -----------    -----------     -----------
                                                                          (dollars in thousands)
<S>                                                     <C>             <C>            <C>             <C>
Assets:
   Fixed maturity securities, available for sale.       $  2,165,069    $ 2,165,069    $ 1,891,512     $ 1,891,512
   Cash and cash equivalents.....................             50,580         50,580         89,711          89,711
   Other investments.............................            264,753        264,753        313,784         313,784
   Assets held in separate account...............             72,649         72,649         79,619          79,619

Liabilities:
   Policyholder account balances:
      Annuities .................................            640,395        638,952        665,245         658,840
      GICs.......................................              1,046          1,046          1,046           1,055
   Corporate debt................................            178,769        183,340        231,004         231,588
   Advances from Federal Home Loan Bank..........            201,057        205,954        201,055         205,754
   Securities sold under agreements to repurchase            121,506        121,506         50,170          50,170
   Liabilities related to separate account.......             63,347         63,347         71,898          71,898
</TABLE>

The fair values for fixed maturity securities have been obtained from
broker-dealers and from nationally recognized statistical rating organizations.
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 $26.7
million and $33.2 million at December 31, 1997 and 1996, respectively. Fair
values for annuity liabilities 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. Fair value for the GIC
liabilities represents the present value of future cash flows discounted at
current interest crediting rates.


                                      -41-
<PAGE>   43
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 1997

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

The Company believes the fair value of its variable rate long-term debt is equal
to its carrying value. The Company pays a variable rate of interest on the debt
which reflects changed market conditions since the time the terms were
negotiated. The fair values of the Senior Notes and the SIG Senior Notes are
based on the expected cash flows discounted to net present value. The fair
values for advances from the FHLB were calculated using discounted cash flow
analyses based on the interest rates for the advances at the balance sheet date.
The fair value of the liability for securities sold under agreements to
repurchase approximates carrying value as the liability is very short-term in
nature, with amounts normally due in one month or less.


NOTE K - CAPITAL SECURITIES OF DELPHI FUNDING L.L.C.

In March 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. 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
"Common Securities" and, collectively with the Capital Securities, the "L.L.C.
Securities"), 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 distributions 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.


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 Class B Common Stock will be entitled to
cast 49.9% of all votes represented by the aggregate of all Class A Common Stock
and Class B Common Stock or (2) ten votes per share. The Company's Board of
Directors declared a 20% stock dividend on August 30, 1996, which was
distributed to stockholders on September 30, 1996, and a 2% stock dividend on
May 13, 1997, which was distributed to stockholders on June 10, 1997. Results
per share and applicable share amounts have been restated to reflect the stock
dividends.

The Company's life insurance subsidiaries had consolidated statutory capital and
surplus of $192.5 million and $180.3 million at December 31, 1997 and 1996,
respectively. Consolidated statutory net income for the Company's life insurance
subsidiaries, after interest expense of $4.9 million, $6.6 million and $8.4
million, respectively, on the surplus debenture payable to DFG, was $27.8
million, $19.9 million and $28.2 million for the years ended December 31, 1997,
1996 and 1995, respectively. The Company's casualty insurance subsidiary, which
was acquired as a result of the SIG Merger, had statutory capital and surplus of
$168.9 million and $139.8 million at December 31, 1997 and 1996, respectively,
and statutory net income of $34.8 million and $23.5 million for the years ended
December 31, 1997 and 1996, respectively. Payment of shareholder dividends is
regulated by insurance laws. Dividends are 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
$47.0 million during 1998 without prior regulatory approval.


                                      -42-
<PAGE>   44
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 1997

NOTE M - COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company's insurance subsidiaries are
defendants in litigation principally involving insurance company policy claims
and agent disputes, including compensatory and punitive damages. In the opinion
of management, the ultimate disposition of such pending litigation will not have
a material adverse effect upon the Company's financial condition, liquidity or
results of operations.


NOTE N - STOCK OPTIONS

The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock option plans because the alternative
fair value approach provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation," requires the use of option valuation models that were not
developed for use in valuing employee stock options. Accordingly, no
compensation expense has been recognized in the accompanying financial
statements for the Company's stock option plans because the exercise price of
the options granted equaled the market price of the underlying stock on the date
of grant.

The Company's employee stock option plan provides for the granting of options to
key employees to purchase shares of the Company's Class A Common Stock (the
"Employee Option Plan"). Under the terms of the Employee Option Plan, a total of
2,019,600 shares of Class A Common Stock have been reserved for issuance under
the plan. The exercise price for options granted under this plan 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. The stock options granted under the Employee
Option Plan expire at various dates between 2002 and 2007. As of December 31,
1997, 602,533 options are remaining to be granted under the Employee Option
Plan.

The Company also has a stock option plan for the outside directors of the
Company (the "Directors Option Plan"). Under the Directors Option Plan, a
maximum of 122,400 shares of Class A Common Stock will be issuable upon the
exercise of options. The exercise price for options granted under this 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 stock options granted under
the Directors Option Plan expire at various dates between 2004 and 2007. As of
December 31, 1997, 75,738 options are remaining to be granted under the
Directors Option Plan.

In 1996, the Stock Option and Compensation Committee of the Company's Board of
Directors approved a long-term performance-based incentive plan for the
Company's chief executive officer (the "Performance Plan"), which provides for
the award of up to 293,760 shares or options for shares of the Company's Class B
Common Stock (73,440 restricted or deferred shares and options to purchase
220,320 shares) per year over a ten-year term contingent upon the Company
meeting specified annual performance goals. The restricted or deferred shares do
not vest 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 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. For
each of the years ended December 31, 1997 and 1996, 73,440 deferred shares and
220,320 options were awarded under the Performance Plan. The Company recognized
$3.1 million and $2.1 million of compensation expense for the years ended
December 31, 1997 and 1996, respectively, related to the deferred shares.


                                      -43-
<PAGE>   45
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 1997

NOTE N - STOCK OPTIONS - (CONTINUED)

Activity with respect to the options granted under the above plans for the years
ended December 31, 1997, 1996 and 1995 was as follows:

<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                               --------------------------------------------------------------------
                                                      1997                     1996                    1995
                                               -------------------    --------------------    ---------------------
                                                           Weighted               Weighted                Weighted
                                               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...     952,196     $13.15       690,688    $ 6.13       750,236    $  5.02
Options granted...........................     272,606      41.44       279,888     29.78        89,964      14.45
Options forfeited.........................           -          -             -         -        (3,978)     14.50
Options exercised.........................    (473,394)      3.10       (18,380)     2.21      (145,534)      5.37
                                             ---------                ---------               ---------
Options outstanding - end of year.........     751,408      29.75       952,196     13.15       690,688       6.13
                                             =========                =========               =========

Exercisable options - end of year.........     353,826      24.65       561,771      4.66       526,251       3.62
</TABLE>

The weighted average grant-date fair value of options granted during 1997, 1996
and 1995 was $19.71, $14.88 and $5.07, respectively. As of December 31, 1997,
the weighted average remaining contractual life of options under the above
option plans by range of exercise price was as follows: 12,240 options
outstanding and exercisable with an exercise price of $7.46 have a remaining
contractual life of 4.4 years, 186,674 options outstanding, of which 106,983 are
exercisable, with exercise prices ranging from $13.68 to $14.71 (weighted
average exercise price of $14.09) have a weighted average contractual life of
7.0 years, 279,888 options outstanding, of which 232,233 are exercisable, with
exercise prices ranging from $23.49 to $30.52 (weighted average exercise price
of $29.78) have a weighted average contractual life of 9.0 years and 272,606
options, of which 2,370 are exercisable with exercise prices ranging from $37.99
to $43.75 (weighted average exercise price of $41.44) have a contractual life of
9.9 years.

 In connection with the SIG Merger, the Company assumed 7,341,205 SIG Options.
Upon the exercise of the SIG Options, the holder is entitled to receive (i)
 .1056 of a share of Class A Common Stock for each SIG Option; plus (ii) an
additional number of shares of Class A Common Stock equal to (a) $1.552
multiplied by the number of SIG Options being exercised increased from time to
time by an interest component (the 90-day U.S. Treasury Bill rate) 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. Pursuant to the terms of the SIG Merger, the exercise price of
$0.016 per SIG Option remained the same. The SIG Options were granted annually
from 1992 to 1996 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, 1997, the weighted average contractual life of the outstanding
SIG Options was 8.8 years.

Activity with respect to the SIG Options for 1997 and 1996 was as follows:

<TABLE>
<CAPTION>
                                                                    Year Ended            Period March 5, 1996 to
                                                                 December 31, 1997           December 31, 1996
                                                             -------------------------   -----------------------
                                                               Number       Equivalent      Number       Equivalent
                                                               of SIG         Class A       of SIG        Class A
                                                               Options        Shares        Options        Shares
                                                             ----------     ----------   ----------     ----------
<S>                                                          <C>            <C>          <C>            <C>
SIG Options outstanding - beginning of period..........       5,802,671       943,113     7,341,205      1,550,726
Options exercised......................................        (677,206)      102,861    (1,464,481)       251,226
Options forfeited......................................         (23,982)            -       (74,053)             -
                                                             ----------                  ----------
SIG options outstanding - end of year..................       5,101,483       743,681     5,802,671        943,113
                                                             ==========                  ==========

Exercisable options - end of year......................         375,920        54,801       144,390         23,468
</TABLE>


                                      -44-
<PAGE>   46
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 1997

NOTE N - STOCK OPTIONS - (CONTINUED)

Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 and has been determined as if the Company had accounted for its
stock options under the fair value method of that statement. The fair value for
these options was estimated at the date of grant using the Black-Scholes option
pricing model with the following assumptions for 1997 and 1996: risk-free
interest rates ranging from 5.2% to 6.5%, volatility factors of the expected
market price of the Company's common stock ranging from 25% to 26%, expected
lives of the options ranging from five to ten years and dividend yields of 0%.
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting period.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different than
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock options.

Had the provisions of SFAS No. 123 been adopted, the Company's pro forma
information for the years ended December 31, 1997, 1996 and 1995 would be as
follows: net income of $71.6 million, $44.7 million and $30.4 million and
earnings per share of $3.82, $2.54 and $2.12 ($3.62, $2.37 and $2.08 , assuming
dilution), respectively. This information may not be representative of the
effects on pro forma net income in future years.

NOTE O - COMPUTATION OF RESULTS PER SHARE

Prior period results per share and applicable share amounts have been restated
to reflect the adoption in 1997 of SFAS No. 128, "Earnings Per Share." The
following table sets forth the computation of basic and diluted results per
share:

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                           ---------------------------------------
                                                                               1997          1996          1995
                                                                           ----------    ----------     ----------
                                                                          (dollars in thousands, except per share data)
<S>                                                                        <C>           <C>            <C>
Numerator:
    Income from continuing operations..................................    $   74,982    $   53,854     $   32,742
    Discontinued operations, net of income tax benefit:
        Loss from operations...........................................             -          (765)        (2,278)
        Loss on disposal...............................................             -        (5,836)             -
                                                                           ----------    ----------     ----------
    Net income.........................................................    $   74,982    $   47,253     $   30,464
                                                                           ==========    ==========     ----------

Denominator:
    Weighted average common shares outstanding ........................        18,731        17,622         14,374
    Effect of dilutive securities......................................         1,009         1,231            292
                                                                           ----------    ----------     ----------
    Weighted average common shares outstanding, assuming dilution......        19,740        18,853         14,666
                                                                           ==========    ==========     ==========

Basic results per share of common stock:
    Income from continuing operations..................................    $     4.00    $     3.06     $     2.28
    Discontinued operations, net of income tax benefit:
        Loss from operations...........................................             -         (0.05)         (0.16)
        Loss on disposal...............................................             -         (0.33)             -
                                                                           ----------    ----------     ----------
    Net income.........................................................    $     4.00    $     2.68     $     2.12
                                                                           ==========    ==========     ----------

Diluted results per share of common stock:
    Income from continuing operations..................................    $     3.80    $     2.86     $     2.23
    Discontinued operations, net of income tax benefit:
        Loss from operations...........................................             -         (0.04)         (0.15)
        Loss on disposal...............................................             -         (0.31)             -
                                                                           ----------    ----------     ----------
    Net income.........................................................    $     3.80    $     2.51     $     2.08
                                                                           ==========    ==========     ==========
</TABLE>


                                      -45-
<PAGE>   47
                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 1997

NOTE P - REINSURANCE

The Company assumes and cedes reinsurance on both a coinsurance and a risk
premium basis. The Company obtains reinsurance for amounts above certain
retention limits which vary with age, plan of insurance and underwriting
classification. Amounts of standard risks in excess of those limits are
reinsured. Indemnity reinsurance treaties do not provide absolute protection to
the Company since the ceding insurer remains responsible for policy claims to
the extent the reinsurer fails to pay such claims.

 A summary of reinsurance activity follows:

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                         -----------------------------------------
                                                                            1997            1996           1995
                                                                         ----------     ----------      ----------
                                                                                  (dollars in thousands)
<S>                                                                      <C>            <C>             <C>
Premium income assumed............................................       $   67,469     $   62,626      $   49,850
Premium income ceded..............................................           67,059         61,516          57,507
Benefits, claims, and interest credited ceded.....................           68,442         63,525          48,206
</TABLE>

NOTE Q - DISCONTINUED OPERATIONS

During 1997, the Company disposed of its long-term care insurance business,
which was discontinued in 1996. This business was purchased in December 1994 and
was expected to become a significant part of the Company's operations. The
Company exited this business due to its continued losses attributable to lower
than expected sales and profit levels and decided to concentrate its resources
on other opportunities such as product and distribution enhancements for the
Company's group employee benefit products. The loss on the disposal of this
business is primarily attributable to the write-off of deferred acquisition
costs and goodwill associated with the business and a provision of $1.4 million,
net of a tax benefit of $0.8 million, for operating losses during the phase-out
period. The proceeds from the disposal were not material and the actual results
for this business subsequent to its discontinuance did not materially differ
from the loss provided for. Operating losses from this business are presented
net of a tax benefit of $0.4 million and $1.2 million for the years ended
December 31, 1996 and 1995, respectively. Revenues from the long-term care
insurance business totaled $1.6 million and $1.1 million for the years ended
December 31, 1996 and 1995, respectively.


                                      -46-
<PAGE>   48
                                                                      SCHEDULE I

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                             SUMMARY OF INVESTMENTS
                    OTHER THAN INVESTMENTS IN RELATED PARTIES
                                DECEMBER 31, 1997
                             (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........      $     484,257     $    499,754     $     499,754
   Other mortgage-backed securities.........................            461,546          462,809           462,809
   U.S. Treasury and other U.S. Government
      guaranteed securities.................................            715,914          747,919           747,919
   Obligations of U.S. states, municipalities and political
       subdivisions.........................................            287,889          298,980           298,980
   Corporate securities.....................................            147,414          149,671           149,671
   Other fixed maturity securities..........................              4,835            5,936             5,936
                                                                  -------------     ------------     -------------

      Total fixed maturity securities.......................          2,101,855        2,165,069         2,165,069

Equity securities (primarily common stock)..................             62,288           62,307            62,307
Cash and cash equivalents...................................             50,580           50,580            50,580
Other investments. . .......................................            196,550          202,446           202,446
                                                                  -------------     ------------     -------------
      Total investments.....................................      $   2,411,273     $  2,480,402     $   2,480,402
                                                                  =============     ============     =============
</TABLE>


                                      -47-
<PAGE>   49
                                                                     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,
                                                                                        --------------------------
                                                                                            1997           1996
                                                                                        ----------      ----------
<S>                                                                                     <C>             <C>
ASSETS:
   Fixed maturity securities, available for sale..................................      $  145,638      $   54,517
   Cash and other invested assets (including cash and
      cash equivalents of $801 and $1,035 at December 31,
      1997 and 1996, respectively)................................................           5,816           1,142
   Investment in subsidiaries.....................................................         618,889         481,283
   Surplus debenture due from subsidiary..........................................          43,000          58,000
   Amounts due from subsidiaries..................................................          65,792          10,858
   Other assets...................................................................           9,436           6,348
                                                                                        ----------      ----------
      Total assets................................................................      $  888,571      $  612,148
                                                                                        ==========      ==========

LIABILITIES:
   Corporate debt.................................................................      $  132,690      $  184,649
   Junior subordinated debentures payable to Delphi Funding, L.L.C................         103,093               -
   Securities sold under agreements to repurchase.................................         121,506          50,170
   Other liabilities..............................................................          21,796          10,364
                                                                                        ----------      ----------
                                                                                           379,085         245,183
                                                                                        ----------      ----------
SHAREHOLDERS' EQUITY:
   Class A Common Stock...........................................................             129             118
   Class B Common Stock...........................................................              62              63
   Additional paid-in capital.....................................................         262,963         240,203
   Net unrealized appreciation (depreciation) on investments, net of deferred taxes         40,545         (17,949)
   Retained earnings..............................................................         205,787         144,530
                                                                                        ----------      ----------
                                                                                           509,486         366,965
                                                                                        ----------      ----------
      Total liabilities and shareholders' equity..................................      $  888,571      $  612,148
                                                                                        ==========      ==========
</TABLE>


                  See notes to condensed financial statements.


                                      -48-
<PAGE>   50
                                                         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,
                                                                         -----------------------------------------
                                                                            1997            1996           1995
                                                                         ----------     ----------      ----------
<S>                                                                      <C>            <C>             <C>
Revenue:
   Equity in undistributed earnings of subsidiaries...............       $  129,287     $   84,872      $   52,999
   Interest from subsidiaries.....................................            4,853          6,981           8,747
   Dividends from subsidiaries....................................            4,322          1,600           1,600
   Other net investment income (loss).............................              707         (2,365)            (61)
   Realized investment losses.....................................           (5,357)             -            (572)
                                                                         ----------     ----------      ----------
                                                                            133,812         91,088          62,713
                                                                         ----------     ----------      ----------
Expenses:
   Operating expenses.............................................            4,245          5,661           1,978
   Interest expense...............................................           18,866         14,232          13,328
                                                                         ----------     ----------      ----------
                                                                             23,111         19,893          15,306
                                                                         ----------     ----------      ----------
         Income before income tax expense.........................          110,701         71,195          47,407
Income tax expense................................................           35,719         23,942          16,943
                                                                         ----------     ----------      ----------
         Net income ..............................................       $   74,982     $   47,253      $   30,464
                                                                         ==========     ==========      ==========
</TABLE>


                  See notes to condensed financial statements.


                                      -49-
<PAGE>   51
                                                         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,
                                                                         -----------------------------------------
                                                                            1997            1996           1995
                                                                         ----------     ----------      ----------
<S>                                                                      <C>            <C>             <C>
Operating activities:
   Net income.....................................................       $   74,982     $   47,253      $   30,464
   Adjustments to reconcile net income to net cash
         (used) provided by operating activities:
      Equity in undistributed earnings of subsidiaries............          (86,189)       (56,143)        (34,099)
      Change in accrued investment income.........................              342            286           3,384
      Change in other assets and other liabilities................            4,341          4,119             (61)
      Change in current and deferred income taxes.................             (748)         8,025           5,818
      Amortization, principally of investments and debt
          issuance costs..........................................           (2,399)         1,341             749
      Net realized losses on investments..........................            5,357              -             572
      Change in amounts due from/to subsidiaries..................          (54,934)       (21,865)         10,338
                                                                         ----------     ----------      ----------
         Net cash (used) provided by operating activities.........          (59,248)       (16,984)         17,165
                                                                         ----------     ----------      ----------

Investing activities:
   Purchases of investments.......................................         (187,411)       (24,604)       (123,068)
   Sales of investments...........................................          100,194         24,343         218,800
   Maturities of investments......................................            4,100            200             665
   Purchases of investments in subsidiaries.......................           (3,093)       (54,534)         (4,600)
                                                                         ----------     ----------      ----------
      Net cash (used) provided by investing activities............          (86,210)       (54,595)         91,797
                                                                         ----------     ----------      ----------

Financing activities:
   Proceeds from issuance of common stock and exercise of
      stock options...............................................            9,045            530           1,254
   Net proceeds from issuance of Junior Debentures................          101,843              -               -
   Borrowings under Credit Agreement..............................           20,000         64,000               -
   Principal payments under Credit Agreement......................          (72,000)       (14,000)        (25,000)
   Payments received on surplus debenture.........................           15,000          7,000          18,739
   Change in borrowings under reverse repurchase agreements ......           71,336          6,291         (96,636)
                                                                         ----------     ----------      ----------
      Net cash provided (used) by financing activities............          145,224         63,821        (101,643)
                                                                         ----------     ----------      ----------

(Decrease) increase in cash and cash equivalents..................             (234)        (7,758)          7,319
Cash and cash equivalents at beginning of year....................            1,035          8,793           1,474
                                                                         ----------     ----------      ----------
      Cash and cash equivalents at end of year....................       $      801     $    1,035      $    8,793
                                                                         ==========     ==========      ==========
</TABLE>


                  See notes to condensed financial statements.


                                      -50-
<PAGE>   52
                                                         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 $4.2 million, $1.6
million and $1.6 million for the years ended December 31, 1997, 1996 and 1995,
respectively.


                                      -51-
<PAGE>   53
                                                                     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, 1997...........      $ 50,380,657    $  4,647,109     $ 11,261,038    $ 56,994,586          19.8 %
                                      ============    ============     ============    ============          ====
Year ended December 31, 1997:
    Insurance premiums and
    policyholder fees:
       Life insurance and annuity     $    139,311    $     21,709     $     33,862    $    151,464          22.4 %
       Accident and health insurance       154,439          35,318           25,787         144,908          17.8 %
       Casualty insurance (1)...            66,711          10,032            7,820          64,499          12.1 %
                                      ------------    ------------     ------------    ------------
Total insurance premiums and
    policyholder fees...........      $    360,461    $     67,059     $     67,469    $    360,871
                                      ============    ============     ============    ============


Life insurance in force as of
    December 31, 1996...........      $ 45,013,763    $  6,611,333     $ 10,788,577    $ 49,191,007          21.9 %
                                      ============    ============     ============    ============          ====
Year ended December 31, 1996:
    Insurance premiums and
    policyholder fees:
       Life insurance and annuity     $    124,955    $     21,679     $     36,385    $    139,661          26.1 %
       Accident and health insurance       150,396          37,265           26,241         139,372          18.8 %
       Casualty insurance (1)...            58,772           2,572                -          56,200             - %
                                      ------------    ------------     ------------    ------------
Total insurance premiums and
    policyholder fees...........      $    334,123    $     61,516     $     62,626    $    335,233
                                      ============    ============     ============    ============

Life insurance in force as of
    December 31, 1995...........      $ 36,929,009    $  4,944,355     $ 11,516,374    $ 43,501,028          26.5 %
                                      ============    ============     ============    ============          ====
Year ended December 31, 1995:
    Insurance premiums and
    policyholder fees:
       Life insurance and annuity     $    125,283    $     25,400     $     32,689    $    132,572          24.7 %
       Accident and health insurance       144,101          31,869           16,098         128,330          12.5 %
                                      ------------    ------------     ------------    ------------
Total insurance premiums and
    policyholder fees...........      $    269,384    $     57,269     $     48,787    $    260,902
                                      ============    ============     ============    ============
</TABLE>

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

(1)    Reflects the acquisition of excess workers' compensation business
       acquired as a result of the merger with SIG Holdings, Inc. on March 5,
       1996.


                                      -52-
<PAGE>   54
                                                                     SCHEDULE VI

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

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                  -----------------------------
                                                                                     1997                1996
                                                                                  ----------         ----------
<S>                                                                               <C>                <C>
Deferred policy acquisition costs........................................         $    1,921         $    2,397

Reserves for unpaid claims and claim expenses............................            388,051            380,826

Discount, if any, deducted from above (1)................................            176,683            168,827

Unearned premiums........................................................             14,404             17,865
</TABLE>

<TABLE>
<CAPTION>
                                                                                                     Period from
                                                                                  Year Ended       March 5, 1996 to
                                                                                 December 31,        December 31,
                                                                                     1997                1996
                                                                                ---------------   ------------------
<S>                                                                             <C>                <C>
Earned premiums..........................................................         $   64,499         $   56,200

Net investment income....................................................             33,748             25,028

Claims and claim expenses incurred related to:

    Current year.........................................................             41,221             28,290
    Prior years..........................................................             (2,419)             7,358

Amortization of deferred policy acquisition costs........................              8,896              7,998

Paid claims and claim adjustment expenses................................             31,577             24,693

Premiums written.........................................................             71,070             45,480
</TABLE>

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

(1) Based on interest rates ranging from 3.7% to 6.2%.


                                      -53-