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

                                    FORM 10-K
(Mark One)

|X|   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934

For the Fiscal Year Ended December 31, 2002

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

      For the transition period from __________ to __________

Commission File Number 001-11462

                          DELPHI FINANCIAL GROUP, INC.
             (Exact name of registrant as specified in its charter)

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

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

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

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

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

                                      None

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

                                 Yes |X| No |_|

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

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

                                 Yes |X| No |_|

The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of June 30, 2002 was $741,445,612.

As of March 20, 2003, the Registrant had 17,245,268 shares of Class A Common
Stock and 3,194,905 shares of Class B Common Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Registrant's 2003 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.


<PAGE>

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

                                     PART I

ITEM 1. BUSINESS

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

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

OPERATING STRATEGY

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

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

The Company's primary operating subsidiaries are as follows:

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

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

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


                                      -1-
<PAGE>

GROUP EMPLOYEE BENEFIT PRODUCTS

The Company is a leading provider of group life, disability and excess workers'
compensation insurance products to small and mid-sized employers, with more than
20,000 policies in force. The Company also offers travel accident, voluntary
accidental death and dismemberment and group dental insurance. The Company
markets its group products to employer-employee groups and associations in a
variety of industries. The Company insures groups ranging from 2 to more than
5,000 individuals, although the typical size of an insured group ranges from 10
to 500 individuals. The Company markets unbundled employee benefit products and
absence management services as well as an Integrated Employee Benefit program
that combines both employee benefit insurance coverages and absence management
services. The Integrated Employee Benefit program, which the Company believes
helps to differentiate itself from competitors by offering clients improved
productivity from reduced employee absence, has enhanced the Company's ability
to market its group employee benefit products to large employers. In
underwriting its group employee benefit products, the Company attempts to avoid
concentrations of business in any industry segment or geographic area.

The Company's group employee benefit products are sold to employer groups
primarily through independent brokers and agents. The Company's products are
marketed to brokers and agents by 100 sales representatives and managers, who
are located in 24 sales offices nationwide. The Company's three administrative
offices and 24 sales offices also service existing business. The Company
believes that its national sales network minimizes expenses traditionally
associated with large insurance company captive marketing systems.

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

<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                            ----------------------------------
                                                               2002       2001          2000
                                                            ---------   ---------    ---------
                                                                  (dollars in thousands)
<S>                                                         <C>         <C>          <C>
Insurance premiums:
  Core Products:
    Life.................................................   $ 210,030   $ 170,772    $ 156,594
    Disability income....................................     195,052     162,602      145,031
    Excess workers' compensation.........................     104,170      73,404       56,015
    Travel accident, dental and other....................      49,922      45,380       42,765
                                                            ---------   ---------    ---------
                                                              559,174     452,158      400,405
                                                            ---------   ---------    ---------
  Non-Core Products:
    Loss portfolio transfers.............................      26,830       4,340       13,939
    Reinsurance facilities...............................         771       7,872       20,885
    Other................................................      21,724      23,624       12,461
                                                            ---------   ---------    ---------
                                                               49,325      35,836       47,285
                                                            ---------   ---------    ---------
      Total insurance premiums...........................   $ 608,499   $ 487,994    $ 447,690
                                                            =========   =========    =========

Sales (new annualized gross premiums):
  Core Products:
    Life.................................................   $  70,900   $  55,606    $  38,241
    Disability income....................................      75,996      60,628       56,251
    Excess workers' compensation.........................      30,796      18,110       19,835
    Travel accident, dental and other....................      23,454      24,774       26,694
                                                            ---------   ---------    ---------
                                                              201,146     159,118      141,021
                                                            ---------   ---------    ---------
  Non-Core Products:
    Loss portfolio transfers.............................      26,830       4,340       14,647
    Other................................................      13,171      28,765       51,885
                                                            ---------   ---------    ---------
                                                               40,001      33,105       66,532
                                                            ---------   ---------    ---------
      Total sales........................................   $ 241,147   $ 192,223    $ 207,553
                                                            =========   =========    =========
</TABLE>


                                      -2-
<PAGE>

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

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                              ---------------------------------
                                               2002        2001           2000
                                              ------      ------         ------
<S>                                           <C>         <C>            <C>
Loss ratio ..............................       69.2%       75.0%(1)       66.0%
Expense ratio ...........................       25.4        27.0           26.3
                                              ------      ------         ------
   Combined ratio .......................       94.6%      102.0%(1)       92.3%
                                              ======      ======         ======
</TABLE>

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

The profitability of group employee benefit products is affected by, among other
things, differences between actual and projected claims experience, the
retention of existing customers and the ability to attract new customers, change
premium rates and contract terms and control administrative expenses. The
reserve strengthening charge in 2001 was primarily related to an unusually high
number of large losses in the Company's excess workers' compensation business.
Prior to 2001, SNCC's historical average for losses exceeding $2.0 million in
its excess workers' compensation products was one to two per year. In 2001,
however, the Company experienced seven such losses, including two losses as a
result of the terrorist attacks on the World Trade Center. The case reserves for
these seven losses totaled $15.3 million, including $6.3 million attributable to
the World Trade Center attacks. Though the Company believed that the high number
of large losses was unlikely to recur, the Company added $24.0 million to its
reserve for incurred but not reported ("IBNR") losses since its method of
estimating IBNR reserves is based on past experience. The Company experienced
only one loss in excess of $2.0 million in 2002. The Company also added $5.0
million to its long-term disability IBNR reserves in 2001 for potential mental
and nervous disabilities related to the World Trade Center attacks. The reserve
strengthening charge reduced 2001 net income by $28.8 million, or $1.40 per
share. The loss ratio for 2002 reflects the higher levels of reserves which have
been established for the Company's excess workers' compensation products due to
the high number of large losses in 2001. This loss ratio also reflects the large
amount of new business production from the Company's other group employee
benefit products, for which initial reserves have been set at higher levels
until actual loss experience emerges. The loss and expense ratios are also
affected by the level of premium from loss portfolio transfers ("LPTs") in each
year. LPTs carry a higher loss ratio and a significantly lower expense ratio as
compared to the Company's other group employee benefit products.

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

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

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


                                      -3-
<PAGE>

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

The pricing environment and demand for excess workers' compensation insurance
has improved since 2000 due to higher primary workers' compensation rates and
disruption in the excess workers' compensation marketplace due to difficulties
experienced by some competitors, particularly during 2000. These trends
accelerated during the second half of 2001 as sharply higher primary workers'
compensation rates and rising reinsurance costs due to the terrorist attacks on
the World Trade Center increased the demand for alternatives to primary workers'
compensation. As a result, the demand for excess workers' compensation products
and the rates for such products continued to increase. SNCC was able to obtain
significant price increases in connection with its renewals of insurance
coverage during 2002, with increases exceeding 25% on a substantial portion of
such renewals. SNCC has also been obtaining significant improvements in contract
terms, in particular higher SIR levels, in these renewals. SNCC has continued to
obtain price increases in the range of 10% to 15% on its 2003 renewals. New
business production for excess workers' compensation products increased 70% in
2002 and the retention of existing customers was consistent with SNCC's goals.
The Company reinsures excess workers' compensation risks between $3.0 million
and $50.0 million per policy per occurrence. See "Reinsurance."

As a result of the terrorist attacks on the World Trade Center, a number of the
Company's reinsurers have excluded coverage for losses resulting from terrorism.
In November 2002, the Terrorism Risk Insurance Act of 2002 (the "Terrorism Act")
was enacted. The Terrorism Act establishes a program under which the federal
government will share with the insurance industry the risk of loss from covered
acts of international terrorism. The program terminates on December 31, 2005,
and the U.S. Secretary of the Treasury (the "Secretary") has the option to
extend it through December 31, 2006. The Terrorism Act applies to all direct
lines of property and casualty insurance written by SNCC, including excess
workers' compensation. The federal government would pay 90% of each covered loss
and the insurer would pay the remaining 10%. Each insurer has a separate
deductible before federal assistance becomes available in the event of an act of
terrorism. The deductible is based on a percentage of the insurer's direct
earned premiums from the previous calendar year. The deductible is 7%, 10% and
15% of direct earned premiums in 2003, 2004 and 2005, respectively. The maximum
after-tax loss to the Company for 2003 within the Terrorism Act deductible from
property and casualty products is approximately 1% of the Company's
shareholders' equity as of December 31, 2002. Any payments made by the
government under the Terrorism Act would be subject to recoupment via surcharges
to policyholders when future premiums are billed.

The Terrorism Act also directs the Secretary to study the availability of
terrorism reinsurance for group life insurers as well as the availability of
group life insurance in the marketplace. The Secretary is empowered to include
group life insurance in the Terrorism Act program if he finds that the
availability of group life insurance in the marketplace has or is likely to be
affected by the lack of terrorism reinsurance. The Secretary has the discretion
to include group life insurance within the property and casualty program
described above, or to create a separate and distinct program for group life
insurers with separate limits and deductibles. There can be no assurance that
the Secretary will in the future include group life insurance in the Terrorism
Act program.

Non-core group employee benefit products include products that have been
discontinued, such as reinsurance facilities and excess casualty insurance,
newer products which have not demonstrated their financial potential, products
which are not expected to comprise a significant percentage of earned premiums
and products for which sales are episodic in nature, such as LPTs. Pursuant to
an LPT, the Company, in exchange for a specified one-time payment, assumes
responsibility for an existing block of disability or self-insured workers'
compensation claims. These products are typically marketed to the same types of
clients who have historically purchased the Company's disability and excess
workers' compensation products. Non-core group employee benefit products also
include primary workers' compensation for which the Company primarily receives
fee income since a significant portion of the risk is reinsured. In addition,
non-core group employee benefit products include bail bond insurance and
workers' compensation and property reinsurance.


                                      -4-
<PAGE>

ASSET ACCUMULATION PRODUCTS

The Company's asset accumulation products consist of fixed annuities, primarily
single premium deferred annuities ("SPDAs") and flexible premium annuities
("FPAs"). An SPDA provides for a single payment by an annuity holder to the
Company and the crediting of interest by the Company on the annuity contract at
the applicable crediting rate. An FPA provides for periodic payments by an
annuity holder to the Company, the timing and amount of which are at the
discretion of the annuity holder, and the crediting of interest by the Company
on the annuity contract at the applicable crediting rate. Interest credited on
SPDAs and FPAs is not paid currently to the annuity holder but instead
accumulates and is added to the annuity contract's account value. This
accumulation is tax deferred. The crediting rate may be increased or decreased
by the Company subject to specified guaranteed minimum crediting rates, which
currently range from 3.0% to 5.5%. For most of the Company's annuity products,
the crediting rate may be reset by the Company annually, typically on the policy
anniversary. The Company's annuity products also include multi-year interest
guarantee products, in which the crediting rate is fixed at a stated rate for a
specified period of years, such periods ranging from three to eight years. At
December 31, 2002, the weighted average crediting rate on the Company's annuity
products as a group was 5.45%. Withdrawals may be made by the annuity holder at
any time, but some withdrawals may result in the assessment of surrender
charges, taxes, and/or tax penalties on the withdrawn amount. In addition, the
accumulated value of the annuity may be increased or decreased under a market
value adjustment ("MVA") provision if it is surrendered during the surrender
charge period. The Company does not market variable annuity products.

These fixed annuity products are sold predominantly to individuals through
networks of independent agents. In 2002, the Company's SPDA products accounted
for $119.3 million of asset accumulation product deposits, of which $98.0
million was attributable to the MVA annuity product and $13.0 million was
attributable to FPA products with the MVA feature. Two networks of independent
agents accounted for approximately 42% of the deposits from these SPDA and FPA
products during 2002, with no other network of independent agents accounting for
more than 10% of these deposits. The Company believes that it has a good
relationship with these networks.

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

<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                            ----------------------------------
                                                              2002         2001         2000
                                                            ---------   ---------    ---------
                                                                  (dollars in thousands)
<S>                                                         <C>         <C>          <C>
Asset accumulation product deposits (sales)..............   $ 135,046   $  90,159    $ 160,523

Funds under management (at period end)...................     878,820     786,214      751,311
</TABLE>

At December 31, 2002, funds under management consisted of $803.0 million of SPDA
liabilities and $75.8 million of FPA liabilities. Of these liabilities, $587.2
million were subject to surrender charges averaging 6.75% at December 31, 2002.
Annuity liabilities not subject to surrender charges have been in force, on
average, for 20 years.

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

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

OTHER PRODUCTS AND SERVICES

The Company provides integrated disability and absence management services on a
nationwide basis through Matrix, which was acquired in June 1998. See "Other
Transactions" and Note B to the Consolidated Financial Statements. The Company's
comprehensive disability and absence management services are designed to assist
clients in identifying and minimizing lost productivity and benefit payment
costs resulting from employee absence due to illness, injury or personal leave.
The Company offers services including event reporting, leave of absence
management, claims and case management and return to work management. These
services' goal is to enhance employee productivity and provide more


                                      -5-
<PAGE>

efficient benefit delivery and enhanced cost containment. The Company provides
these services on an unbundled basis or in a unique Integrated Employee Benefit
program that combines these services with various group employee benefit
insurance coverages. The Company believes that these integrated disability and
absence management services complement the Company's core group employee benefit
products, enhancing the Company's ability to market these core products and
providing the Company with a competitive advantage in the market for these
products.

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

UNDERWRITING PROCEDURES

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

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

INVESTMENTS

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

In the fourth quarter of 2000, the Company liquidated a substantial majority of
the investments of its investment subsidiaries. The proceeds from these sales
were used in 2001 to repay $150.0 million of outstanding borrowings under its
revolving credit facilities, to repurchase $64.0 million liquidation amount of
the Capital Securities of its subsidiary, Delphi Funding L.L.C. (the "Capital
Securities"), and to repurchase $8.0 million principal amount of its 8% Senior
Notes due October 2003 (the "Senior Notes"). For information regarding the
composition and diversification of the Company's investment portfolio and
asset/liability management, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
and Notes A, C and J to the Consolidated Financial Statements.

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

<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                      ----------------------------------------
                                                          2002          2001           2000
                                                      -----------    -----------   -----------
                                                               (dollars in thousands)
<S>                                                   <C>            <C>           <C>
Average invested assets (1)........................   $ 2,556,076    $ 2,312,975   $ 2,508,272
Net investment income (2)..........................       162,036        157,509       184,576
Tax equivalent weighted average annual yield (3)...          6.6%           7.0%          7.6%
</TABLE>


                                      -6-
<PAGE>

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

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

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

REINSURANCE

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

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

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

The Company assumes workers' compensation and property risks through
reinsurance. In these arrangements, the Company provides coverage for losses in
excess of specified amounts, subject to specified maximums. Coverage for losses
as a result of terrorism is generally excluded from these reinsurance treaties.
The attachment points for workers' compensation reinsurance range from $1
million to $100 million. Aggregate exposures assumed under individual workers'
compensation treaties generally range from $1 million to $2 million, with the
highest net exposure pursuant to any such treaty equal to $5 million. The
Company underwrites workers' compensation reinsurance assumed pursuant to
procedures similar to those utilized in connection with its excess workers'
compensation product. The majority of the Company's property reinsurance
provides coverage in the event of a catastrophe, generally excluding losses
resulting from terrorism. The Company underwrites its property reinsurance to
mitigate its risk by diversifying geographically and


                                      -7-
<PAGE>

limiting its exposure on any one treaty. On property reinsurance, the Company's
risk attachment points range from $0.3 million to $30 billion. The Company's
aggregate exposure on any one property treaty generally ranges from $1 million
to $2 million. The highest net exposure on a single property treaty is $2
million. The probable maximum loss on property reinsurance is estimated to be
approximately $6.1 million, net of reinstatement premium and taxes, or less than
1% of shareholders' equity.

The Company had in the past participated as an assuming insurer in a number of
reinsurance facilities. These reinsurance facilities generally are administered
by TPAs or managing underwriters who underwrite risks, coordinate premiums
charged and process claims. During 1999 and 2000, the Company terminated, on a
prospective basis, its participations in all of the reinsurance facilities in
which the Company had participated. However, the terms of such facilities
provide for the continued assumption of risks by, and payments of premiums to,
facility participants with respect to business written in the periods during
which they formerly participated in such facilities. Premium income from all
reinsurance facilities was $0.8 million, $7.9 million and $20.9 million in 2002,
2001 and 2000, respectively, and incurred losses from these facilities were $4.7
million, $10.6 million and $20.5 million in 2002, 2001 and 2000, respectively.
The reinsurance facilities did not constitute a significant part of the
Company's operations; therefore, the Company does not expect its withdrawals
from these facilities to have a material impact on its consolidated financial
position, liquidity or results of operations.

LIFE, ANNUITY, DISABILITY AND ACCIDENT RESERVES

The Company carries as liabilities actuarially determined reserves for its life,
annuity, disability and accident policy and contract obligations. These
reserves, together with premiums to be received on policies in force and
interest thereon at certain assumed rates, are calculated and established at
levels believed to be sufficient to satisfy policy and contract obligations. The
Company performs periodic studies to compare current experience for mortality,
morbidity, interest and lapse rates with the experience reflected in the reserve
assumptions to determine future policy benefit reserves for these products.
Reserves for future policy benefits and unpaid claims and claim expenses are
estimated based on individual loss data, historical loss data and industry
averages and indices and include amounts determined on the basis of individual
and actuarially determined estimates of future losses. Therefore, the ultimate
liability could deviate from the amounts currently reflected in the Consolidated
Financial Statements. Differences between actual and expected claims experience
are reflected currently in earnings for each period. The Company has not
experienced significant adverse deviations from its assumptions. In the fourth
quarter of 2001, the Company added $5.0 million to its long-term disability IBNR
reserves for potential mental and nervous disability claims related to the World
Trade Center attacks.

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


                                      -8-
<PAGE>

EXCESS WORKERS' COMPENSATION INSURANCE RESERVES

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

Reserving practices under GAAP allow discounting of claim reserves related to
excess workers' compensation losses to reflect the time value of money. Reserve
discounting for these types of claims is common industry practice, and the
discount factors used are less than the annual tax-equivalent investment yield
earned by the Company on its invested assets. The discount factors are based on
the expected duration and payment pattern of the claims at the time the claims
are settled and the risk-free rate of return for U.S. government securities with
a comparable duration. Reserves for claim expenses are not discounted.

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

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                                      ----------------------------------
                                                                         2002        2001         2000
                                                                      ---------   ---------    ---------
                                                                            (dollars in thousands)
<S>                                                                   <C>         <C>          <C>
Unpaid claims and claim expenses, net of reinsurance,
    beginning of period ...........................................   $ 413,950   $ 302,514    $ 307,156

Add provision for claims and claim expenses incurred, net
  of reinsurance, occurring during:
     Current year (1) .............................................      82,197      73,782       41,716
     Prior years (2) ..............................................      15,869      13,896       (1,584)
                                                                      ---------   ---------    ---------
        Incurred claims and claim expenses, net of reinsurance,
            during the current year ...............................      98,066      87,678       40,132
                                                                      ---------   ---------    ---------

Deduct claims and claim expenses paid, net of reinsurance,
   occurring during:
     Current year .................................................      10,915       6,014        3,881
     Prior years (3) ..............................................      61,954     (29,772)      40,893
                                                                      ---------   ---------    ---------
        Total paid ................................................      72,869     (23,758)      44,774
                                                                      ---------   ---------    ---------

Unpaid claims and claim expenses, net of reinsurance, end of period     439,147     413,950      302,514
Reinsurance receivables, end of period ............................      95,709      92,828      144,541
                                                                      ---------   ---------    ---------
    Unpaid claims and claim expenses, gross of reinsurance,
        end of period .............................................   $ 534,856   $ 506,778    $ 447,055
                                                                      =========   =========    =========
</TABLE>

(1)   The provision for claims and claim expenses incurred in 2001 includes a
      reserve strengthening charge of $39.3 million primarily related to an
      unusually high number of large losses in the Company's excess workers'
      compensation business. Prior to 2001, SNCC's historical average for losses
      exceeding $2.0 million in its excess workers' compensation products was
      one to two per year. In 2001, however, the Company experienced seven such
      losses, including two losses as a result of the terrorist attacks on the
      World Trade Center. The case reserves for these seven losses totaled $15.3
      million, including $6.3 million attributable to the World Trade Center
      attacks. Though the Company believed that the high number of large losses
      was unlikely to recur, the Company added $24.0 million to its reserve for
      IBNR losses since its method of estimating IBNR reserves is based on past
      experience. The Company experienced one claim in excess of $2.0 million in
      2002.

(2)   In 2002, the claims and claim expenses incurred related to prior years
      reflect accretion of discounted reserves offset by favorable claims
      development. In 2001, the claims and claim expenses incurred related to
      prior years reflect the accretion of discounted reserves and unfavorable
      claims development. In 2000, the claims and claim expenses incurred
      reflect favorable claims development offset by the accretion of discounted
      reserves.

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


                                      -9-
<PAGE>

The effects of the discount to reflect the time value of money have been removed
from the amounts set forth in the loss development table which follows in order
to present the gross loss development, net of reinsurance. During 2002, 2001 and
2000, $17.2 million, $9.5 million and $9.0 million, respectively, of discount
was amortized, and $34.6 million, $32.1 million and $23.2 million, respectively,
was accrued. The loss development table below illustrates the development of
reserves from March 5, 1996 to December 31, 2002 and is net of reinsurance.

<TABLE>
<CAPTION>
                                                                               December 31,
                                March 5,    ---------------------------------------------------------------------------------------
                                1996(1)       1996         1997          1998         1999         2000           2001       2002
                               --------     --------     --------      --------     --------     ---------      --------   --------
                                                                       (dollars in thousands)
<S>                            <C>          <C>          <C>           <C>          <C>          <C>            <C>        <C>
Reserve for unpaid
   claims and claim
   expenses, net of
   reinsurance .............   $520,370     $532,923     $541,280      $422,159     $434,513     $ 444,061      $638,191   $680,835
Cumulative amount of
   liability paid:
    One year later .........     23,467       28,162       98,365        40,815       40,660       (29,990)(2)    61,954
    Two years later ........     50,713      125,020      127,481        74,571        4,020(2)     26,398
    Three years later ......    140,943      152,842      156,119        33,429(2)    54,846
    Four years later .......    167,811      179,705      111,253(2)     78,981
    Five years later .......    193,363      133,228(2)   150,772
    Six years later ........    153,504(2)   170,405
    Seven years later ......    188,719
Liability reestimated as of:
    One year later .........    507,375      513,402      523,430       410,875      424,187       442,624       636,125
    Two years later ........    487,830      500,964      511,602       404,559      420,420       442,807
    Three years later ......    476,854      488,432      503,906       401,475      417,869
    Four years later .......    476,600      487,195      500,514       396,403
    Five years later .......    476,890      478,206      492,280
    Six years later ........    470,283      468,142
    Seven years later ......    460,670
Cumulative
   redundancy ..............   $ 59,700     $ 64,781     $ 49,000      $ 25,756     $ 16,644     $   1,254      $  2,066
</TABLE>

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

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

The "Reserve for unpaid claims and claim expenses, net of reinsurance" line in
the table above shows the estimated reserve for unpaid claims and claim expenses
recorded at the end of each of the periods indicated. These net liabilities
represent the estimated amount of losses and expenses for claims arising in the
current year and all prior years that are unpaid at the end of each period. The
"Cumulative amount of liability paid" lines of the table represent the
cumulative amounts paid with respect to the liability previously recorded as of
the end of each succeeding period. The "Liability reestimated" lines of the
table show the reestimated amount relating to the previously recorded liability
and is based upon experience as of the end of each succeeding period. This
estimate is either increased or decreased as additional information about the
frequency and severity of claims for each period becomes available and is
reviewed. The Company periodically reviews the estimated reserves for claims and
claim expenses and any changes are reflected currently in earnings for each
period. The Company has not experienced significant adverse deviations from its
assumptions, except for the unusually high number of large losses in the
Company's excess workers' compensation business in 2001. The "Cumulative
redundancy" line in the table represents the aggregate change in the net
estimated claim reserve liabilities from the dates indicated through December
31, 2002.


                                      -10-
<PAGE>

The table below illustrates the effects of the discount to reflect the time
value of money that was removed from the amounts set forth in the loss
development table above.

<TABLE>
<CAPTION>
                                                                               December 31,
                                March 5,      --------------------------------------------------------------------------------
                                1996(1)         1996        1997        1998        1999        2000        2001       2002
                               ---------      ---------   ---------   ---------   ---------   ---------   ---------   --------
                                                                     (dollars in thousands)
<S>                            <C>            <C>         <C>         <C>         <C>         <C>         <C>         <C>
Reserve for unpaid claims and
  claim expenses before
  discount:
    Gross of reinsurance ....  $ 533,871      $ 549,653   $ 564,734   $ 586,984   $ 613,693   $ 650,765   $ 731,019   $776,544
    Deduct reinsurance
      recoverable ...........     13,501         16,730      23,454     164,825     179,180     206,704      92,828     95,709
                               ---------      ---------   ---------   ---------   ---------   ---------   ---------   --------
    Net of reinsurance ......    520,370        532,923     541,280     422,159     434,513     444,061     638,191    680,835

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

Unpaid claims and claim
  expenses as reported
  on balance sheets, net
  of discount and net of
  reinsurance ...............    356,370        364,096     364,597     308,652     307,156     302,514     413,950    439,147
                               ---------      ---------   ---------   ---------   ---------   ---------   ---------   --------
Reestimated unpaid claims
  and claim expenses, net of
  discount, as of December
  31, 2002:
    Gross of reinsurance ....    411,713        408,938     421,008     440,110     470,924     501,926     533,523
    Deduct reinsurance
        recoverable .........     35,426         36,170      42,523     112,326     138,252     167,095     103,704
                               ---------      ---------   ---------   ---------   ---------   ---------   ---------
    Net of reinsurance ......    376,287        372,768     378,485     327,784     332,672     334,831     429,819
                               ---------      ---------   ---------   ---------   ---------   ---------   ---------

Discounted cumulative
  (deficiency) ..............    (19,917)        (8,672)    (13,888)    (19,132)    (25,516)    (32,317)    (15,869)

Add accretion of discount ...     79,617         73,453      62,888      44,888      42,160      33,571      17,935
                               ---------      ---------   ---------   ---------   ---------   ---------   ---------

Cumulative redundancy
before discount .............  $  59,700      $  64,781   $  49,000   $  25,756   $  16,644   $   1,254   $   2,066
                               =========      =========   =========   =========   =========   =========   =========
</TABLE>

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

The excess workers' compensation insurance reserves carried in the Consolidated
Financial Statements are calculated in accordance with GAAP and, net of
reinsurance, are approximately $100.1 million less than those reported by the
Company for statutory financial statement purposes at December 31, 2002. This
difference is primarily due to the use of different discount factors as between
GAAP and statutory accounting principles and differences in the bases against
which such discount factors are applied. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Critical Accounting
Policies" and Note A to the Consolidated Financial Statements for certain
additional information regarding reserve assumptions under GAAP.

COMPETITION

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

The Company believes that its reputation in the marketplace, quality of service,
unique programs which integrate employee benefit products and absence management
services, and investment returns have enabled it to compete


                                      -11-
<PAGE>

effectively for new business in its targeted markets. The Company reacts to
changes in the marketplace generally by focusing on products with adequate
margins and attempting to avoid those with low margins. The Company believes
that its smaller size, relative to some of its competitors, enables it to more
easily tailor its products to the demands of customers.

REGULATION

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

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

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

The Company's insurance subsidiaries can also be required, under solvency or
guaranty laws of most states in which they do business, to pay assessments to
fund policyholder losses or liabilities of insurance companies that become
insolvent. These assessments may be deferred or forgiven under most solvency or
guaranty laws if they would threaten an insurer's financial strength and, in
most instances, may be offset against future state premium taxes. SNCC
recognized expenses of $1.3 million, $1.2 million and $0.2 million in 2002, 2001
and 2000, respectively, for these types of assessments. None of the Company's
life insurance subsidiaries has ever incurred any significant costs of this
nature.

EMPLOYEES

The Company and its subsidiaries employed approximately 960 persons at December
31, 2002. The Company believes that it enjoys good relations with its employees.


                                      -12-
<PAGE>

OTHER SUBSIDIARIES

The Company conducts certain of its investment management activities through its
wholly-owned subsidiary, Delphi Capital Management, Inc. ("DCM"), and makes
certain investments through other wholly-owned non-insurance subsidiaries. In
the fourth quarter of 2000, the Company liquidated a substantial majority of the
investments of its investment subsidiaries. The proceeds from these sales were
used in 2001 to repay $150.0 million of outstanding borrowings under its
revolving credit facilities, to repurchase $64.0 million liquidation amount of
the Capital Securities and to repurchase $8.0 million principal amount of the
Senior Notes.

OTHER TRANSACTIONS

On June 30, 1998, the Company acquired Matrix, a provider of integrated
disability and absence management services to the employee benefits market. The
purchase price of $33.8 million consisted of 409,424 shares of the Company's
Class A Common Stock, $7.9 million of cash and $5.7 million of 8% subordinated
notes due June 2003 (the "Subordinated Notes"). Under the terms of the purchase
agreement, additional consideration of up to $5.2 million in cash was payable if
Matrix's earnings met specified targets over the four-year period subsequent to
the acquisition. Because Matrix met all of the specified targets, the Company
paid the $5.2 million of contingent consideration in two equal installments of
$2.6 million during 2000 and 2001. See Note B to the Consolidated Financial
Statements.

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

ITEM 2. PROPERTIES

The Company leases its principal executive office at 1105 North Market Street,
Suite 1230, Wilmington, Delaware under an operating lease expiring in October
2003. RSLIC leases its administrative office at 2001 Market Street, Suite 1500,
Philadelphia, Pennsylvania, under an operating lease expiring in June 2009. SNCC
owns its home office building at 2043 Woodland Parkway, Suite 200, St. Louis,
Missouri, which consists of approximately 58,000 square feet. SNCC also owns a
neighboring office building located at 2029 Woodland Parkway, St. Louis,
Missouri. The building consists of approximately 17,000 square feet and is
intended for lease to third parties. DCM and FRSLIC lease their offices at 153
East 53rd Street, 49th Floor, New York, New York under an operating lease
expiring in July 2008. Matrix leases its principal office at 5225 Hellyer
Avenue, Suite 210, San Jose, California under an operating lease expiring in
December 2006. The Company also maintains sales and administrative offices
throughout the country to provide nationwide sales support and service existing
business.

ITEM 3. LEGAL PROCEEDINGS

In the course of its business, the Company is a party to litigation and other
proceedings, primarily involving its insurance operations. In some cases, these
proceedings entail claims against the Company for punitive damages and similar
types of relief. The ultimate disposition of such pending litigation and
proceedings is not expected to have a material adverse effect on the Company's
consolidated financial position. In addition, incident to its discontinued
products, the Company is currently a party to two separate arbitrations arising
out of two accident and health reinsurance arrangements in which it and other
companies formerly were participating reinsurers. At issue in both arbitrations,
among other things, is whether certain reinsurance risks were validly ceded to
the Company. The ultimate resolutions of these arbitrations are likely to
require extended periods of time. While management believes that in both cases
the Company has substantial legal grounds for avoiding the reinsurance risks at
issue, it is not at this time possible to predict the ultimate outcome of these
arbitrations, nor is it feasible to provide reasonable ranges of potential
losses. In the opinion of management, such arbitrations, when ultimately
resolved, will not individually or collectively have a material adverse effect
on the Company's consolidated financial position.


                                      -13-
<PAGE>

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

None.

ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY

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

<TABLE>
<CAPTION>
    Name                   Age     Position
    ----                   ---     --------
<S>                         <C>    <C>
    Robert Rosenkranz       60     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.    51     Director and Executive Vice President of the Company

    Chad W. Coulter         40     Vice President and General Counsel of the Company; Vice President,
                                   General Counsel and Assistant Secretary of RSLIC

    Thomas W. Burghart      44     Vice  President  and  Treasurer of the Company and RSLIC

    Lawrence E. Daurelle    51     Director of the Company  and  President  and Chief
                                   Executive Officer of RSLIC

    Harold F. Ilg           55     Director of the Company and  Chairman of the Board of SNCC
</TABLE>

Mr. Rosenkranz has served as the President and Chief Executive Officer of the
Company since May 1987 and has served as Chairman of the Board of Directors of
the Company since April 1989. He also serves as Chairman of the Board or as a
Director of the Company's principal subsidiaries. Mr. Rosenkranz, by means of
beneficial ownership of the corporate general partner of Rosenkranz & Company
and direct or beneficial ownership, has the power to vote all of the outstanding
shares of Class B Common Stock, which represent 49.9% of the voting power of the
Company's common stock as of March 20, 2003.

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

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

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

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

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


                                      -14-
<PAGE>

                                     PART II

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

The closing price of the Company's Class A Common Stock was $38.90 on March 20,
2003. There were approximately 2,500 holders of record of the Company's Class A
Common Stock as of March 20, 2003.

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

<TABLE>
<CAPTION>
                                                     High          Low         Dividends
                                                   --------      --------      ---------
<S>                                                <C>           <C>            <C>
        2002:  First Quarter                       $  39.67      $  32.80       $  0.07
               Second Quarter                         45.12         38.50          0.07
               Third Quarter                          43.50         33.86          0.07
               Fourth Quarter                         41.13         32.91          0.08

        2001:  First Quarter                       $  42.25      $  28.30       $  0.07
               Second Quarter                         38.50         26.45          0.07
               Third Quarter                          38.40         29.92          0.07
               Fourth Quarter                         34.90         29.80          0.07
</TABLE>

In 2001, the Company's Board of Directors began declaring quarterly cash
dividends of $0.07 per share, which are paid on the Company's Class A Common
Stock and Class B Common Stock. In the fourth quarter of 2002, the Company's
Board of Directors increased the cash dividend to $0.08 per share. In the first
quarter of 2003, the Company's Board of Directors declared a cash dividend of
$0.08 per share, which was paid on the Company's Class A Common Stock and Class
B Common Stock on March 6, 2003. The Company intends to continue to pay a
quarterly dividend at this level. However, the declaration and payment of such
dividends, including the amount and frequency of such dividends, is at the
discretion of the Board and depends upon many factors, including the Company's
consolidated financial position, liquidity requirements, operating results and
such other factors as the Board may deem relevant. Cash dividend payments are
permitted under the respective terms of the Company's $150.0 million revolving
credit facility and $66.5 million Senior Notes subject to certain restrictions
and covenants. See Note L to the Consolidated Financial Statements.

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


                                      -15-
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                  -----------------------------------------------------------------------
                                                     2002           2001           2000           1999           1998
                                                  -----------    -----------    -----------    -----------    -----------
<S>                                               <C>            <C>            <C>            <C>            <C>
INCOME STATEMENT DATA:                                    (dollars and shares in thousands, except per share data)
 Insurance premiums and fee income:
   Core group employee benefit products ........  $   559,174    $   452,158    $   400,405    $   357,541    $   326,770
   Non-core group employee benefit products(1) .       49,325         35,836         47,285        110,381         89,641
   Asset accumulation products .................        2,645          3,088          2,551          2,126          2,583
   Other(2) ....................................       16,713         16,122         16,116         15,220          7,880
                                                  -----------    -----------    -----------    -----------    -----------
                                                      627,857        507,204        466,357        485,268        426,874
 Net investment income(3) ......................      162,036        157,509        184,576        180,945        168,692
 Net realized investment (losses) gains ........      (28,469)       (70,289)      (138,047)       (25,720)         8,060
                                                  -----------    -----------    -----------    -----------    -----------
   Total revenue ...............................      761,424        594,424        512,886        640,493        603,626

 Income (loss) from continuing operations(4) ...       60,868           (941)        (3,293)        64,132         73,802

 Net income (loss)(4)(5) .......................       60,652          6,505         (3,293)        50,285         87,035

BASIC RESULTS PER SHARE(4)(5)(6):
 Income (loss) from continuing operations ......  $      2.93    $     (0.04)   $     (0.16)   $      3.06    $      3.50
 Net income (loss) .............................         2.92           0.32          (0.16)          2.40           4.13
 Weighted average shares outstanding ...........       20,759         20,565         20,388         20,979         21,095

DILUTED RESULTS PER SHARE(4)(5)(6):
 Income (loss) from continuing operations ......  $      2.86    $     (0.04)   $     (0.16)   $      2.96    $      3.37
 Net income (loss) .............................         2.85           0.32          (0.16)          2.32           3.97
 Weighted average shares outstanding ...........       21,258         20,565         20,388         21,674         21,920

CASH DIVIDENDS PAID PER SHARE(7): ..............  $      0.29    $      0.28    $        --    $        --    $        --

OTHER DATA(8):
 Operating income(9) ...........................  $   127,465    $    81,652    $   157,371    $   144,995    $   124,960
 Operating earnings(9) .........................       79,373         44,747         86,438         80,850         68,564
 Diluted book value per share(10) ..............  $     32.75    $     28.50    $     26.87    $     24.52    $     26.59
 Return on average shareholders' equity(11) ....         12.6%           8.0%          16.6%          15.1%          12.7%
</TABLE>

<TABLE>
<CAPTION>
                                                                               December 31,
                                                  -----------------------------------------------------------------------
                                                      2002           2001           2000           1999           1998
                                                  -----------    -----------    -----------    -----------    -----------
BALANCE SHEET DATA:                                                       (dollars in thousands)
<S>                                               <C>            <C>            <C>            <C>            <C>
 Total investments .............................  $ 2,816,051    $ 2,427,214    $ 2,475,945    $ 2,527,763    $ 2,511,387
 Total assets ..................................    3,734,942      3,336,146      3,440,010      3,395,688      3,287,057
 Corporate debt(3) .............................      118,139        125,675        267,770        283,938        265,165
 Capital Securities(3) .........................       36,050         36,050        100,000        100,000        100,000
 Shareholders' equity ..........................      681,655        581,994        538,193        501,417        566,440
 Debt to total capitalization ratio(12) ........         14.1%          16.9%          29.6%          32.1%          28.5%
</TABLE>


                                      -16-
<PAGE>

(1)   The Company in 1999 terminated its participations in the reinsurance
      facilities in which it had historically participated, resulting in lower
      premiums from non-core group employee benefit products in 2000, 2001 and
      2002. Premiums from non-core group employee benefit products also include
      premiums from LPTs, which are episodic in nature, of $27.3 million, $44.0
      million, $13.9 million, $4.3 million and $26.8 million, in 1998, 1999,
      2000, 2001 and 2002, respectively. See "Business - Group Employee Benefit
      Products" and "Business - Reinsurance."

(2)   Reflects the acquisition of Matrix in 1998. See "Business - Other
      Transactions" and Note B to the Consolidated Financial Statements.

(3)   Net investment income declined in 2001 and 2002 primarily due to the
      Company's liquidation during the fourth quarter of 2000 of a substantial
      majority of the investments of its investment subsidiaries. In 2001, the
      Company used the proceeds from these sales to repay $150.0 million of
      outstanding borrowings under its revolving credit facilities, to
      repurchase $64.0 million liquidation amount of the Capital Securities and
      to repurchase $8.0 million principal amount of the Senior Notes. The
      Company recognized an extraordinary gain of $0.36 per share, or $7.4
      million, net of income tax expense of $4.0 million, in connection with
      these repurchases. In the second quarter of 2002, the Company repurchased
      $10.5 million aggregate principal amount of the Senior Notes and
      recognized an extraordinary loss of $0.01 per share, or$0.2 million, net
      of an income tax benefit of $0.1 million, in connection with this
      repurchase.

(4)   Results for 2001 include a charge of $1.40 per share or $28.8 million, net
      of an income tax benefit of $15.5 million and reinsurance coverages of
      $21.8 million, for reserve strengthening primarily related to an unusually
      high number of large losses in the Company's excess workers' compensation
      business. Included in this charge, on a pre-tax basis, are additions to
      excess workers' compensation case reserves of $9.0 million and IBNR
      reserves of $24.0 million. This charge also includes reported workers'
      compensation losses of $6.3 million and a $5.0 million addition to
      long-term disability IBNR reserves attributable to the terrorist attacks
      on the World Trade Center. The Company experienced one large loss in its
      excess workers' compensation business in 2002.

      Income (loss) from continuing operations and net income (loss) include
      realized investment (losses) gains, net of federal income tax (benefit)
      expense, as follows:

<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                ------------------------------------------------------------------
                                                                   2002          2001          2000          1999          1998
                                                                ----------    ----------    ----------    ----------    ----------
                                                                           (dollars in thousands, except per share data)
<S>                                                             <C>           <C>           <C>           <C>           <C>
      Realized investment (losses) gains, net of income tax
        (benefit) expense ...................................   $  (18,505)   $  (45,688)   $  (89,731)   $  (16,718)   $    5,238
      Basic per share amount ................................        (0.89)        (2.22)        (4.40)        (0.79)         0.25
      Diluted per share amount ..............................        (0.87)        (2.22)        (4.40)        (0.77)         0.24
</TABLE>

(5)   In 2002 and 2001, the Company recognized losses of $35.2 million, net of
      an income tax benefit of $18.9 million, and $51.5 million, net of an
      income tax benefit of $27.8 million, respectively, due to the other than
      temporary declines in the market values of certain securities. In 2000,
      the Company realized losses of $47.1 million, net of an income tax benefit
      of $25.4 million, related to the liquidation of a substantial majority of
      the investments of its investment subsidiaries and $38.0 million, net of
      an income tax benefit of $20.5 million, on closed U.S. Treasury futures
      and option contracts.

      In 1999, the Company disposed of Unicover and recognized an after-tax loss
      of $13.8 million on the disposition. After-tax income from this
      discontinued operation totaled $13.2 million in 1998. See "Business -
      Other Transactions."

(6)   In computing the earnings per share amounts for 2001 and 2000, equivalent
      shares attributable to in-the-money stock options, which totaled 0.5
      million and 0.7 million for 2001 and 2000, respectively, were not
      considered in the calculation of these per share amounts since the
      inclusion of these equivalent shares would have diluted the loss from
      continuing operations.

(7)   In 2001, the Company's Board of Directors approved the initiation of a
      quarterly cash dividend of $0.07 per share, payable on the Company's
      outstanding Class A and Class B Common Stock. In the fourth quarter of
      2002, the Company's Board of Directors increased the cash dividend to
      $0.08 per share. During 2002 and 2001, the Company paid cash dividends on
      its capital stock in the amount of $6.0 million and $5.7 million,
      respectively. See Note L to the Consolidated Financial Statements.

(8)   Management believes that it is informative to exclude discretionary or
      nonrecurring income or loss items such as realized investment gains and
      losses, discontinued operations and extraordinary items when analyzing the
      Company's operating trends and in comparing the Company's results to those
      of other companies in its industry. Investment gains and losses may be
      realized based on management's decision to dispose of an investment or
      management's judgment that a decline in the market value of an investment
      is other than temporary. Therefore, realized investment gains and losses
      do not represent elements of the Company's ongoing earnings capacity.
      However, these alternative measures of the Company's performance should
      not be considered a substitute for net income as an indication of the
      Company's overall performance and may not be calculated in the same manner
      as similarly titled captions in other companies' financial statements.

(9)   Operating income is comprised of income from continuing operations
      excluding realized investment gains and losses and before interest and
      income tax expense or benefit. Operating earnings are comprised of net
      income excluding realized investment gains and losses (net of the related
      income tax expense or benefit), discontinued operations and extraordinary
      items. Results for 2001 include a charge of $28.8 million, net of taxes
      and reinsurance coverages, for reserve strengthening primarily related to
      an unusually high number of large losses in the Company's excess workers'
      compensation business. See note 4 above.

(10)  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 in-the-money stock options, by total shares
      outstanding, also increased by shares issued upon the assumed exercise of
      the options and deferred shares.

(11)  Return on average shareholders' equity is calculated by dividing operating
      earnings by average shareholders' equity, as determined as of the
      beginning and end of each year. Return on average shareholders' equity for
      2001 excluding losses related to the reserve strengthening was 13.1%.

(12)  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 and
      shareholders' equity.


                                      -17-
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The discussion and 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

2002 COMPARED TO 2001

Premium and Fee Income. Premium and fee income in 2002 was $627.9 million as
compared to $507.2 million in 2001, an increase of 24%. Premiums from core group
employee benefit products increased 24% to $559.2 million in 2002 from $452.2
million in 2001. This increase reflects normal growth in employment and salary
levels for the Company's existing customer base, price increases, and strong
production of new business. Core group employee benefit products include group
life, disability, excess and large deductible workers' compensation, travel
accident and dental insurance and self-insurance workers' compensation bonds.
See "Business - Group Employee Benefit Products." Excess workers' compensation
premiums increased 42% to $104.2 million in 2002 from $73.4 million in 2001
primarily due to improvements in the pricing environment and demand for this
product as a result of higher primary workers' compensation rates. SNCC was able
to obtain significant price increases in connection with its renewals of
insurance coverage during 2002, with increases exceeding 25% on a substantial
portion of such renewals. SNCC has also been obtaining significant improvements
in contract terms, in particular higher SIR levels, in these renewals. SNCC has
continued to obtain price increases in the range of 10% to 15% on its 2003
renewals. New business production for excess workers' compensation products
increased 70% to $30.8 million in 2002 from $18.1 million in 2001 and the
retention of existing customers was consistent with SNCC's goals. New business
production for the Company's other core group employee benefit products
increased 21% to $170.4 million in 2002 from $141.0 million in 2001 primarily
due to the expansion of the Company's sales force during 2001 and 2002, and the
opening of three new sales offices in 2002. Retention of existing customers for
these products also improved during 2002 and price increases were implemented
for certain disability customers. Non-core group employee benefit products
include LPTs, primary workers' compensation, bail bond insurance, workers'
compensation and property reinsurance, and reinsurance facilities. See "Business
- Group Employee Benefit Products" and "Business - Reinsurance." Premiums from
non-core group employee benefit products increased 38% to $49.3 million in 2002
from $35.8 million in 2001 primarily due to a higher level of premium from LPTs,
which are episodic in nature. Deposits from the Company's asset accumulation
products were $135.0 million in 2002 as compared to $90.2 million in 2001.
Deposits for these products, which are long-term in nature, are recorded as
liabilities rather than as premiums. The Company has maintained its disciplined
approach to setting the crediting rates offered on its asset accumulation
products since market interest rates and the resulting interest rate spreads
available to the Company on these products remained less favorable throughout
2001 and 2002. The increase in deposits from the Company's asset accumulation
products in 2002 was higher than expected due to the pullback of certain fixed
annuity providers from the wholesale distribution chain and heightened demand
for fixed annuity products as a result of adverse conditions in the equity
markets. Accordingly, the level of deposits achieved in 2002 may not be
representative of the level of deposits attainable in 2003.

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

Net Realized Investment Losses. Net realized investment losses were $28.5
million in 2002 as compared to $70.3 million in 2001. The Company's investment
strategy results in periodic sales of securities and, therefore, the recognition
of realized investment gains and losses. The Company monitors its investments on
an ongoing basis. When the market value of a security declines below its cost,
and such decline is determined in the judgment of management to be other than
temporary, the security is written down to fair value, and the decline is
reported as a realized investment loss. In 2002 and 2001, the Company recognized
$54.1 million and $79.3 million, respectively, of losses due to the other than
temporary declines in the market values of certain fixed maturity and equity
securities. During the same periods, the Company recognized $26.4 million and
$10.9 million, respectively, of net gains on sales of securities. Realized
investment losses, net of the related tax benefit, reduced net income by $18.5
million, or $0.87 per share, in 2002 and by $45.7 million, or $2.22 per share,
in 2001.

The losses due to the other than temporary declines in the market values of
fixed maturity and equity securities recognized during 2002, which totaled $35.2
million on an after-tax basis, resulted primarily from credit quality-related
deterioration


                                      -18-
<PAGE>

in the corporate debt markets, and the Company may recognize additional losses
of this type in the future. The Company anticipates that if certain other
existing declines in security values are determined to be other than temporary,
it may recognize additional investment losses in the range of $5 million to $10
million, on an after-tax basis, with respect to the relevant securities.
However, the extent of any such losses will depend on future market developments
and changes in security values, and such losses may exceed or be lower than such
range. The Company continuously monitors the affected securities pursuant to its
procedures for evaluation for other than temporary impairment in valuation. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies" for a description of these
procedures, which take into account a number of factors. It is not possible to
predict the extent of any future changes in value, positive or negative, or the
results of the future application of these procedures, with respect to these
securities. There can be no assurance that the Company will realize investment
gains in the future in an amount sufficient to offset any such losses.

Benefits and Expenses. Policyholder benefits and expenses were $662.4 million as
compared to $583.1 million in 2001, an increase of 14%. This increase primarily
reflects the increase in premiums from the Company's group employee benefit
products discussed above. Benefits and expenses in 2001 include a pre-tax charge
of $44.3 million for reserve strengthening primarily related to an unusually
high number of large losses in the Company's excess workers' compensation
business. See "2001 Compared to 2000 - Benefits and Expenses." The combined
ratio (loss ratio plus expense ratio) for the Company's group employee benefits
segment was 94.6% in 2002 and 102.0% (92.9% excluding the reserve strengthening)
in 2001. The combined ratio in 2002 reflects the higher levels of reserves which
have been established for the Company's excess workers' compensation products
due to the high number of large losses in 2001. This combined ratio also
reflects the large amount of new business production from the Company's other
core group employee benefit products, for which initial reserves have been set
at higher levels until actual loss experience emerges. The higher level of
premium from LPTs, which carry a higher loss ratio, also contributed to the
higher combined ratio in 2002.

Interest Expense and Extraordinary (Loss) Gain. Interest expense was $12.4
million in 2002 as compared to $17.4 million in 2001, a decrease of $5.0
million. This decrease was primarily a result of the Company's repurchase of
$64.0 million liquidation amount of the Capital Securities in the open market,
which occurred on various dates during the first nine months of 2001, and a
lower weighted average borrowing rate under the Company's revolving credit
facilities. In addition, the Company had a lower amount of borrowings
outstanding during the year ended 2002 under its Senior Notes and SIG's 8.5%
Senior Notes (the "SIG Senior Notes") due May 2003. In June 2001, the Company
also repurchased $8.0 million aggregate principal amount of the Senior Notes.
The Company recognized an extraordinary gain of $7.4 million, net of income tax
expense of $4.0 million, in connection with the repurchases of the Capital
Securities and Senior Notes. In the second quarter of 2002, the Company
repurchased $10.5 million aggregate principal amount of the Senior Notes,
resulting in an extraordinary loss of $0.2 million, net of an income tax benefit
of $0.1 million.

Income Tax Expense (Benefit). Income tax expense was $25.7 million in 2002 as
compared to an income tax benefit of $5.1 million in 2001. The income tax
benefits attributable to net realized investment losses were $10.0 million and
$24.6 million in 2002 and 2001, respectively. The income tax benefit in 2001 was
also attributable to the reserve strengthening charge. The Company's effective
tax rate excluding net realized investment losses and the reserve strengthening
was 31.0% in 2002 and 32.2% in 2001.

Income before Extraordinary (Loss) Gain. Management believes the concept of
"operating earnings" is informative when analyzing the Company's operating
trends and in comparing the Company's performance with that of other companies
in its industry. Operating earnings exclude discretionary or nonrecurring income
or loss items such as realized investment gains and losses and extraordinary
items. Investment gains and losses may be realized based on management's
decision to dispose of an investment or management's judgment that a decline in
the market value of an investment is other than temporary. Therefore, realized
investment gains and losses do not represent elements of the Company's ongoing
earnings capacity. However, operating earnings should not be considered a
substitute for net income as an indication of the Company's overall performance
and may not be calculated in the same manner as similarly titled captions in
other companies' financial statements. Operating earnings for the Company,
consisting of income before extraordinary (loss) gain adjusted to exclude
realized investment losses (net of the related income tax benefit), were $79.4
million, or $3.73 per share, in 2002 as compared to $44.7 million, or $2.18 per
share, in 2001. The increase in operating earnings in the current period is
attributable to the decrease in interest expense ($3.3 million after taxes), and
charges in the 2001 period for goodwill amortization ($3.2 million after taxes)
and reserve strengthening ($28.8 million after taxes) (see "2001 Compared to
2000 - Benefits and Expenses"). Excluding the effects of the reserve
strengthening and goodwill amortization in 2001, income from group employee
benefit products increased in 2002 as compared to 2001. Equivalent shares
attributable to in-the-money stock options, which totaled 0.5 million for 2001,
were not considered in the


                                      -19-
<PAGE>

calculation of the per share amount since the inclusion of these equivalent
shares would have diluted the loss before extraordinary gain.

2001 COMPARED TO 2000

Premium and Fee Income. Premium and fee income in 2001 was $507.2 million as
compared to $466.4 million in 2000. Premiums from core group employee benefit
products increased 13% to $452.2 million in 2001 from $400.4 million in 2000.
This increase reflects normal growth in employment and salary levels for the
Company's existing customer base, price increases, production of new business
and improved persistency. Core group employee benefit products include group
life, disability, excess and large deductible workers' compensation, travel
accident and dental insurance and self-insurance workers' compensation bonds.
Excess workers' compensation premiums increased 31% to $73.4 million in 2001
from $56.0 million in 2000 primarily due to increases in the pricing environment
and demand for this product due to higher primary workers' compensation rates
and disruption in the workers' compensation marketplace as a result of
difficulties experienced by some competitors, particularly during 2000. These
trends accelerated during the second half of 2001 as sharply higher primary
workers' compensation rates and rising reinsurance costs due to the terrorist
attacks on the World Trade Center increased the demand for self-insurance. As a
result, the demand for excess workers' compensation products and the rates for
such products increased. New business production for the Company's other group
employee benefit products was very strong during 2001, particularly during the
fourth quarter, primarily due to a 16% increase in the Company's sales force
during 2001. Retention of existing customers for these products also improved
during 2001 and price increases were implemented for certain disability
customers. Non-core group employee benefit products include LPTs, primary
workers' compensation, bail bond insurance, workers' compensation and property
reinsurance, and reinsurance facilities. Premiums from non-core group employee
benefit products decreased to $35.8 million in 2001 from $47.3 million in 2000
primarily due to the Company's termination of its participations in the
reinsurance facilities in which it had historically participated and a lower
level of premium from LPTs, which are episodic in nature. Deposits from the
Company's asset accumulation products were $90.2 million in 2001 as compared to
$160.5 million in 2000. Deposits for these products, which are long-term in
nature, are recorded as liabilities rather than as premiums. In the first
quarter of 2001, the Company reduced the crediting rates offered on its asset
accumulation products due to the decline in market interest rates and the
resulting interest rate spreads available to the Company on these products.
Accordingly, the Company experienced a lower level of production from its asset
accumulation business in 2001 as compared to 2000.

Net Investment Income. Net investment income in 2001 was $157.5 million as
compared to $184.6 million in 2000. The tax equivalent weighted average annual
yield on invested assets was 7.0% on average invested assets of $2,313.0 million
in 2001 and 7.6% on average invested assets of $2,508.3 million in 2000. The
decrease in investment income reflects the Company's liquidation during the
fourth quarter of 2000 of a substantial majority of the investments of its
investment subsidiaries. The proceeds from these sales were used to repay $150.0
million of outstanding borrowings under the Company's revolving credit
facilities in the first half of 2001, to repurchase $64.0 million liquidation
amount of the Capital Securities during the first nine months of 2001 and to
repurchase $8.0 million principal amount of the Senior Notes in June 2001.

Net Realized Investment Losses. Net realized investment losses were $70.3
million in 2001 as compared to $138.0 million in 2000. The Company's investment
strategy results in periodic sales of securities and, therefore, the recognition
of realized investment gains and losses. The Company monitors its investments on
an ongoing basis. When the market value of a security declines below its cost,
and such decline is determined in the judgment of management to be other than
temporary, the security is written down to fair value. In 2001, the Company
recognized $79.3 million of losses due to the other than temporary declines in
the market value of certain fixed maturity and equity securities. In 2000, the
Company realized losses of $72.5 million related to the liquidation of the
investments of its investment subsidiaries and $58.5 million on closed U.S.
Treasury futures and option contracts. See Note C to the Consolidated Financial
Statements. Realized investment losses, net of the related tax benefit, reduced
net income by $45.7 million, or $2.22 per share, in 2001 and by $89.7 million,
or $4.40 per share, in 2000.

Benefits and Expenses. Policyholder benefits and expenses were $583.1 million as
compared to $493.6 million in 2000, an increase of 18%. Benefits and expenses in
2001 include a pre-tax charge of $44.3 million for reserve strengthening
primarily related to an unusually high number of large losses in the Company's
excess workers' compensation business. Prior to 2001, SNCC's historical average
for losses exceeding $2.0 million in its excess workers' compensation products
was one to two per year. In 2001, however, the Company experienced seven such
losses, including two losses as a result of the terrorist attacks on the World
Trade Center. The case reserves for these seven losses totaled $15.3 million,
including $6.3 million attributable to the World Trade Center attacks. Though
the Company believed that the high number of large losses in 2001 was unlikely
to recur, the Company added $24.0 million to its reserve for IBNR losses since
its method of estimating IBNR reserves is based on past experience. The Company
experienced only one large loss


                                      -20-
<PAGE>

from its excess workers' compensation business in 2002. The Company also added
$5.0 million to its long-term disability IBNR reserves for potential mental and
nervous disability claims related to the World Trade Center attacks. This
reserve strengthening charge reduced net income in 2001 by $28.8 million, or
$1.40 per share. The increase in premiums from the Company's core group employee
benefit products also contributed to the increase in benefits and expenses in
2001. The combined ratio (loss ratio plus expense ratio) for the Company's group
employee benefits segment was 102.0% (92.9% excluding the reserve strengthening)
in 2001 and 92.3% in 2000. Benefits and interest credited on asset accumulation
products increased by $3.9 million in 2001 principally due to an increase in
average funds under management from $674.5 million in 2000 to $748.6 million in
2001, partially offset by a decrease in the weighted average annual crediting
rate on asset accumulation products from 5.7% in 2000 to 5.5% in 2001.

Interest Expense and Extraordinary Gain. Interest expense was $17.4 million in
2001 as compared to $30.8 million in 2000, a decrease of $13.4 million. This
decrease was primarily a result of the Company's repayment of $150.0 million of
outstanding borrowings under its revolving credit facilities during the first
half of 2001 and the repurchase of $64.0 million liquidation amount of the
Capital Securities in the open market, which occurred on various dates during
the first nine months of 2001. In addition, the Company repurchased $8.0 million
principal amount of the Senior Notes in June 2001. The Company recognized an
extraordinary gain of $7.4 million, net of income tax expense of $4.0 million,
in connection with these repurchases.

Income Tax Benefit. The income tax benefit was $5.1 million in 2001 and $8.2
million in 2000 and was primarily attributable to the recognition of investment
losses and, in 2001, the reserve strengthening. The Company's effective tax rate
excluding net realized investment losses and the reserve strengthening was 32.2%
in 2001 and 31.7% in 2000.

Loss before Extraordinary Gain. Management believes the concept of "operating
earnings" is informative when analyzing the Company's operating trends and in
comparing the Company's performance with that of other companies in its
industry. Operating earnings exclude discretionary or nonrecurring income or
loss items such as realized investment gains and losses and extraordinary items.
Investment gains and losses may be realized based on management's decision to
dispose of an investment or management's judgment that a decline in the market
value of an investment is other than temporary. Therefore, realized investment
gains and losses do not represent elements of the Company's ongoing earnings
capacity. However, operating earnings should not be considered a substitute for
net income as an indication of the Company's overall performance and may not be
calculated in the same manner as similarly titled captions in other companies'
financial statements. Operating earnings for the Company, consisting of income
before extraordinary gain adjusted to exclude realized investment losses (net of
the related income tax benefit), were $44.7 million, or $2.18 per share, in 2001
as compared to $86.4 million, or $4.24 per share, in 2000. The decrease in
operating earnings is primarily attributable to the after-tax charge for reserve
strengthening totaling $28.8 million, or $1.40 per share (see "2001 Compared to
2000 - Benefits and Expenses"). Equivalent shares attributable to in-the-money
stock options, which totaled 0.5 million and 0.7 million for 2001 and 2000,
respectively, were not considered in the calculation of these per share amounts
since the inclusion of these equivalent shares would have diluted the loss from
continuing operations. The decrease in operating earnings is also attributable
to the liquidation during the fourth quarter of 2000 of investments of the
Company's investment subsidiaries (see "2001 Compared to 2000 - Net Investment
Income").

LIQUIDITY AND CAPITAL RESOURCES

General. The Company had approximately $40.3 million of financial resources
available at the holding company level at December 31, 2002, which was primarily
comprised of investments in the common stock of its investment subsidiaries. The
assets of the investment subsidiaries are primarily invested in fixed maturity
securities and balances with independent investment managers.

In December 2002, the Company obtained a new $150.0 million revolving credit
facility with a group of lenders comprised of major banking institutions, which
replaced the existing $140.0 million revolving credit facilities scheduled to
expire in April 2003. This facility, which expires in December 2005, is subject
to certain restrictions and financial covenants considered ordinary for this
type of credit agreement. They include, among others, the maintenance of certain
financial ratios, minimum statutory surplus and RBC requirements for RSLIC and
SNCC, and certain investment, indebtedness, dividend and stock repurchase
limitations. At December 31, 2002, the Company had $113.0 million of borrowings
available to it under its new revolving credit facility.

Other sources of liquidity at the holding company level include dividends paid
from subsidiaries, primarily generated from operating cash flows and
investments. During 2003, the Company's life insurance subsidiaries and SNCC
will be permitted, without prior regulatory approval, to make dividend payments
of $25.3 million and $21.3 million, respectively. The life insurance
subsidiaries and SNCC may also pay additional dividends with the requisite
regulatory approvals. See


                                      -21-
<PAGE>

"Business - Regulation." In general, dividends from the Company's non-insurance
subsidiaries are not subject to regulatory or other restrictions.

The Company's current liquidity needs, in addition to funding its operating
expenses, include principal and interest payments on outstanding borrowings
under its revolving credit facility, the Senior Notes, the SIG Senior Notes and
the Subordinated Notes and distributions on the Capital Securities. During the
second quarter of 2002, the Company repurchased $10.5 million aggregate
principal amount of the Senior Notes. The Senior Notes mature in their entirety
in October 2003 and are not subject to any sinking fund requirements nor are
they redeemable prior to maturity. A $9.0 million annual principal installment
was paid on the SIG Senior Notes in May 2002, and the remaining $9.0 million of
such notes will mature in their entirety in May 2003. The Subordinated Notes
mature in their entirety in June 2003. The junior subordinated debentures
underlying the Capital Securities are not redeemable prior to March 25, 2007.
See Note E to the Consolidated Financial Statements.

The Company's shelf registration statement for the sale, from time to time, of
securities was declared effective by the Securities and Exchange Commission on
May 6, 2002. This shelf registration increased the Company's existing $49.2
million shelf registration to an amount of up to $250.0 million of proceeds.
Subject to market conditions, the Company may refinance its revolving credit
facility and its Senior Notes prior to maturity through the issuance of debt
securities covered by the shelf registration. However, no assurance can be given
that such an offering will be commenced or completed. To mitigate the risk of
interest rates rising before such refinancing could be completed, the Company
entered into a treasury rate lock agreement, with a notional amount of $150.0
million, pursuant to which the Company will receive (or make) a single payment
at the conclusion of the agreement, depending on the extent to which the market
yield on the specified U.S. Treasury security rises (or falls) over the term of
the agreement. The agreement was entered into in September 2002 with a term of
one year. Any gains or losses on the treasury rate lock agreement would be
deferred and amortized as a component of interest expense over the term of any
debt securities issued in the refinancing, or recognized in income if, and at
the time, the Company concludes the refinancing is improbable.

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

The principal liquidity requirements of the Company's insurance subsidiaries are
their contractual obligations to policyholders and other financing sources. The
primary sources of funding for these obligations, in addition to operating
earnings, are the marketable investments included in the investment portfolios
of these subsidiaries. The Company believes that these sources of funding will
be adequate for its insurance subsidiaries to satisfy on both a short-term and
long-term basis these contractual obligations throughout their estimated or
stated period.

Cash Flows. Operating activities increased cash by $208.5 million in 2002.
Operating activities in 2001, which include $30.1 million of cash provided by
the liquidation of trading account securities and $84.0 million of funds
received from Oracle Re for the commutation of various reinsurance agreements
that the Company had entered into with Oracle Re in 1998, increased cash by
$228.7 million. See Note Q to the Consolidated Financial Statements. Operating
activities increased cash by $12.4 million in 2000 and are net of $58.1 million
of funds returned to a ceding insurer in connection with the rescission of a
reinsurance transaction, $16.0 million of cash used by trading account
activities, and a net cash payment of $19.7 million related to the cession by
the Company of group employee benefit product reserves.

Investments. The Company's overall investment strategy emphasizes safety and
liquidity, while seeking the best available return, by focusing on, among other
things, managing the Company's interest-sensitive assets and liabilities and
seeking to minimize the Company's exposure to fluctuations in interest rates.
The Company's investment portfolio, which totaled $2,816.1 million at December
31, 2002, primarily consists of investments in fixed maturity securities and
short-term investments. The market value of the Company's investment portfolio,
in relation to its amortized cost, improved by $92.3 million during 2002, before
related changes in the cost of business acquired of $23.8 million and the income
tax provision of $24.0 million. The net investment losses recognized during
2002, which are discussed above, contributed to the improvement in the net
unrealized appreciation in the investment portfolio. The weighted average credit
rating of the Company's fixed maturity portfolio as rated by Standard & Poor's
Corporation was "AA" at December 31, 2002. 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.


                                      -22-
<PAGE>

At December 31, 2002, approximately 41% of the Company's total invested assets
were comprised of corporate fixed maturity securities. Eighty-seven percent of
the Company's corporate fixed maturity portfolio, based on fair values, has been
rated investment grade by nationally recognized statistical organizations.
Investment grade corporate fixed maturity securities are distributed among the
various rating categories as follows: AAA - 7%, AA - 20%, A - 29%, and BBB -
31%. Corporate fixed maturity securities subject the Company to credit risk and,
to a lesser extent, interest rate risk. To reduce its exposure to corporate
credit risk, the Company diversifies its investments across economic sectors,
industry classes and issuers.

Mortgage-backed securities comprised 22% of the Company's total invested assets
at December 31, 2002. Ninety-seven percent of the Company's mortgage-backed
securities portfolio, based on fair values, has been rated as investment grade
by nationally recognized statistical organizations. Mortgage-backed securities
subject the Company to a degree of interest rate risk, including prepayment and
extension risk, which is generally a function of the sensitivity of each
security's underlying collateral to prepayments under varying interest rate
environments and the repayment priority of the securities in the particular
securitization structure. The Company seeks to limit the extent of this risk by
emphasizing the more predictable payment classes and securities with stable
collateral.

The Company, through its insurance subsidiaries, maintains a program in which
investments are financed using advances from various Federal Home Loan Banks.
The Company has utilized this program to manage the duration of its liabilities
and to earn spread income, which is the difference between the financing cost
and the earnings from the investments purchased with those funds. At December
31, 2002, the Company had outstanding advances of $207.0 million, of which $45.0
million were obtained during 2002. The advances, of which $195.0 million were
obtained at a fixed rate and $12.0 million were obtained at a variable rate,
have a weighted average term to maturity of 5.5 years. A total of $57.0 million
of these advances will mature at various times during 2003. In addition, the
Company has utilized reverse repurchase agreements, futures and option contracts
and interest rate swap contracts from time to time in connection with its
investment strategy. These transactions require the Company to maintain
securities or cash on deposit with the applicable counterparty as collateral. As
the market value of the collateral or contracts changes, the Company may be
required to deposit additional collateral or be entitled to have a portion of
the collateral returned to it.

The types and amounts of investments made by the Company's insurance
subsidiaries are subject to the insurance laws and regulations of their
respective states of domicile. Each of these states has comprehensive investment
regulations. In addition, the Company's revolving credit facility 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 and Market Risk. Because the Company's primary assets
and liabilities are financial in nature, the Company's consolidated financial
position and earnings are subject to risks resulting from changes in interest
rates. The Company manages this risk by active portfolio management focusing on
minimizing its exposure to fluctuations in interest rates by matching its
invested assets and related liabilities and by periodically adjusting the
crediting rates on its annuity products. In addition, the Company, at times, has
utilized exchange-traded futures and option contracts to reduce the risk
associated with changes in the value of its fixed maturity portfolio due to
changes in the interest rate environment and to reduce the risk associated with
changes in interest rates in connection with anticipated securities purchases
and debt refinancing. At December 31, 2002, the Company had no outstanding
futures and option contracts or interest rate swap agreements other than the
treasury rate lock agreement discussed above (see "Liquidity and Capital
Resources - General").

The Company regularly analyzes the results of its asset/liability matching
through cash flow analysis and duration matching under multiple interest rate
scenarios. These analyses enable the Company to measure the potential gain or
loss in fair value of its interest-rate sensitive financial instruments due to
hypothetical changes in interest rates. Based on these analyses, if interest
rates were to immediately increase by 10% from their year-end levels, the fair
value of the Company's interest-sensitive assets, net of corresponding changes
in the fair value of cost of business acquired and insurance and
investment-related liabilities, would decline by approximately $30.9 million at
December 31, 2002 as compared to a decline of approximately $38.0 million at
December 31, 2001. These analyses incorporate numerous assumptions and estimates
and assume no changes in the composition of the Company's investment portfolio
in reaction to such interest rate changes. Consequently, the results of this
analysis will likely be materially different from the actual changes experienced
under given interest rate scenarios.

The Company manages the composition of its borrowed capital by considering
factors such as the ratio of borrowed capital to total capital, future debt
requirements, the interest rate environment and other market conditions.
Approximately 69% of the Company's corporate debt was issued at fixed interest
rates. A hypothetical 10% decrease in


                                      -23-
<PAGE>

market interest rates would cause a corresponding $0.1 million increase in the
fair value of the Company's fixed-rate corporate debt at December 31, 2002 as
compared to an increase of $0.4 million at December 31, 2001. In addition, a
hypothetical 10% decrease in market interest rates would cause a corresponding
$5.6 million increase in the fair value of the Company's treasury rate lock
agreement, which was entered into in 2002 in anticipation of refinancing the
Company's credit facility and its Senior Notes. An increase in the fair value of
such agreement would increase the Company's unrealized loss thereon. Because
interest expense on the Company's floating-rate corporate debt fluctuates as
prevailing interest rates change, changes in market interest rates would not
materially affect its fair value.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the Company's management, in
some instances, to make judgments about the application of these principles. The
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period could
differ materially from the amounts reported if different conditions existed or
different judgments were utilized. Management's judgment is most critical in the
estimation of its liabilities for future policy benefits and unpaid claims and
claim expenses and its assets for cost of business acquired and in the valuation
of its investments. A discussion of how management applies these critical
accounting policies follows.

Future Policy Benefits and Unpaid Claims and Claim Expenses. The Company
establishes reserves for future policy benefits and unpaid claims and claim
expenses relating to its insurance products. These reserves, which totaled
$1,371.2 million at December 31, 2002, are calculated using various generally
recognized actuarial methodologies and are based upon assumptions that
management believes are appropriate and which vary by type of product. External
actuarial experts also review the Company's methodologies, assumptions and the
resulting reserves. The Company's projected ultimate insurance liabilities and
associated reserves are estimates, which are subject to variability. This
variability arises because the factors and events affecting the ultimate
liability for claims have not all taken place, and thus cannot be evaluated with
certainty. The estimation process is complex and involves information obtained
from company-specific and industry-wide data, as well as general economic
information.

The most significant assumptions made in the estimation process for future
policy benefits relate to mortality, morbidity, claim termination and discount
rates. The reserves for unpaid claims and claim expenses are determined on an
individual basis for reported claims and estimates of IBNR losses are developed
on the basis of past experience. The most significant assumptions made in the
estimation process for unpaid claims and claim expenses are the trend in loss
costs, the expected frequency and severity of claims, changes in the timing of
the reporting of losses from the loss date to the notification date, and
expected costs to settle unpaid claims. The assumptions vary based on the year
the claim is incurred. At December 31, 2002, disability and excess workers'
compensation reserves for unpaid claims and claim expenses with a carrying value
of $609.4 million have been discounted at a weighted average rate of 5.4%, with
the rates ranging from 3.7% to 7.5%. Disability reserves for unpaid claims and
claim expenses are discounted using interest rate assumptions based upon
projected portfolio yield rates for the assets supporting the liabilities. The
assets selected to support these liabilities produce cash flows that are
intended to match the timing and amount of anticipated claim and claim expense
payments. Excess workers' compensation claim reserves are discounted using
interest rate assumptions based on the risk-free rate of return for U.S.
Government securities with a duration comparable to the expected duration and
payment pattern of the claims at the time the claims are settled. The rates used
to discount reserves are determined annually. The methods and assumptions used
to establish reserves for future policy benefits and unpaid claims and claim
expenses are continually reviewed and updated based on current circumstances,
and any resulting adjustments are reflected in earnings currently. There have
been no material changes in the actuarial assumptions and/or methods from those
used in the previous periods other than those resulting from the unusually high
number of large losses in the Company's excess workers' compensation business in
2001.

Deferred Acquisition Costs. Costs related to the acquisition of new insurance
business, such as commissions, certain costs of policy issuance and
underwriting, and certain sales office expenses, are deferred when incurred. The
unamortized balance of these deferred acquisition costs is included in cost of
business acquired on the consolidated balance sheet. Deferred acquisition costs
related to group life, disability and accident products, which totaled $115.5
million at December 31, 2002, are amortized over the anticipated premium-paying
period of the related policies in proportion to the ratio of the present value
of annual expected premium income to the present value of the total expected
premium income. Deferred acquisition costs related to casualty insurance
products, which totaled $7.0 million at December 31, 2002, are amortized over
the period in which the related premium is earned. Deferred acquisition costs
related to annuity products, which totaled $34.5 million at December 31, 2002,
are amortized over the anticipated lives of the policies in relation to the
present value of estimated gross profits from such policies' surrender charges
and mortality, investment and expense


                                      -24-
<PAGE>

margins. The amortization is a constant percentage of estimated gross profits
based on the ratio of the present value of amounts deferred as compared to the
present value of estimated gross profits. Adjustments are made each year to
reflect the actual gross profits to date as compared to assumed experience and
any changes in the remaining expected future gross profits. The unamortized
balance of deferred policy acquisition costs related to certain asset
accumulation products is adjusted for the impact on estimated future gross
profits as if net unrealized appreciation and depreciation on available for sale
securities had been realized at the balance sheet date. The impact of this
adjustment, net of the related income tax expense or benefit, is included in net
unrealized appreciation and depreciation as a component of other comprehensive
income in shareholders' equity. Deferred acquisition costs are charged to
current earnings to the extent that it is determined that future premiums or
estimated gross profits will not be adequate to cover the amounts deferred. The
amortization of deferred acquisition costs totaled $43.2 million, $32.7 million
and $27.1 million in 2002, 2001 and 2000, respectively.

Investments. Investments are primarily carried at fair value with unrealized
appreciation and depreciation included as a component of other comprehensive
income in shareholders' equity, net of the related income tax benefit or expense
and the related adjustment to cost of business acquired. Ninety-seven percent of
the Company's fixed maturity and equity securities portfolio are actively traded
in a liquid market or have other liquidity mechanisms. Securities acquired
through private placements, which are not actively traded in a liquid market and
do not have other mechanisms for their sale, totaled $67.6 million at December
31, 2002. The Company estimates the fair value for these securities primarily by
comparison to similar securities with quoted market prices. If quotes are not
available on similar securities, the Company estimates fair value based on
recent purchases or sales of similar securities or other internally prepared
valuations. Key assumptions used in this process include the level of risk-free
interest rates, risk premiums, and performance of underlying collateral, if
applicable. All such investments are classified as available for sale. The
Company's ability to liquidate these investments in a timely manner, if
necessary, may be adversely impacted by the lack of an actively traded market.
Historically, the Company has not realized amounts on dispositions of
non-marketable investments that varied materially from the amounts estimated by
the Company under this valuation methodology. The Company believes that its
estimates reasonably reflect the fair value of these securities; however, had
there been an active market for these securities during the applicable reporting
period, the market prices may have been materially different than the amounts
reported.

Declines in the fair value of investments that are considered in the judgment of
management to be other than temporary are reported as realized investment
losses. The Company evaluates, among other things, the financial position and
prospects of the issuer, conditions in the issuer's industry and geographic
area, liquidity of the investment, changes in the amount or timing of expected
future cash flows from the investment, and recent downgrades of the issuer by a
rating agency to determine if and when a decline in the fair value of an
investment below amortized cost is other than temporary. The length of time and
extent to which the fair value of the investment is lower than its amortized
cost and the Company's ability and intent to retain the investment to allow for
any anticipated recovery in the investment's fair value are also considered. In
2002 and 2001, the Company recognized losses totaling $54.1 million and $79.3
million, respectively, for the other than temporary decline in the value of
certain securities. These losses were recognized as a result of events that
occurred in the respective periods, such as downgrades in an issuer's credit
ratings, deteriorating financial results of issuers, adverse changes in the
amount and timing of estimated future cash flows from securities and the impact
of the recessionary economic environment on issuers' financial positions.
Investment grade and non-investment grade fixed maturity securities comprised
82.5% and 6.1%, respectively, of the Company's total investment portfolio at
December 31, 2002. Gross unrealized appreciation and gross unrealized
depreciation, before the related income tax expense or benefit and the related
adjustment to cost of business acquired, attributable to investment grade fixed
maturity securities totaled $96.1 million and $22.9 million, respectively, at
December 31, 2002. Gross unrealized appreciation and gross unrealized
depreciation, before the related income tax expense or benefit and the related
adjustment to cost of business acquired, attributable to non-investment grade
fixed maturity securities totaled $5.0 million and $12.2 million, respectively,
at December 31, 2002. Unrealized appreciation and depreciation, net of the
related income tax expense or benefit and the related adjustment to cost of
business acquired, has been reflected on the Company's balance sheet as a
component of other comprehensive income (loss). The Company anticipates that if
certain existing declines in security values are determined to be other than
temporary, it may recognize additional investment losses in the range of $7.5
million to $15 million pre-tax ($5 million to $10 million on an after-tax basis)
with respect to the relevant securities. However, the extent of any such losses
will depend on future market developments and changes in security values, and
such losses may exceed or be lower than such range. It is not possible to
predict the extent of any future changes in value, positive or negative, or the
results of the future application of the Company's procedures for the evaluation
of other than temporary impairment in valuation. There can be no assurance that
the Company will realize investment gains in the future in an amount sufficient
to offset any such losses.


                                      -25-
<PAGE>

FORWARD-LOOKING STATEMENTS AND CAUTIONARY STATEMENTS REGARDING CERTAIN FACTORS
THAT MAY AFFECT FUTURE RESULTS

In connection with, and because it desires to take advantage of, the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, the
Company cautions readers regarding certain forward-looking statements in the
above "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and elsewhere in this Form 10-K and in any other statement made
by, or on behalf of, the Company, whether in future filings with the Securities
and Exchange Commission or otherwise. Forward-looking statements are statements
not based on historical information and which relate to future operations,
strategies, financial results, prospects, outlooks or other developments. Some
forward-looking statements may be identified by the use of terms such as
"expects," "believes," "anticipates," "intends," "judgment" or other similar
expressions. Forward-looking statements are necessarily based upon estimates and
assumptions that are inherently subject to significant business, economic,
competitive and other uncertainties and contingencies, many of which are beyond
the Company's control and many of which, with respect to future business
decisions, are subject to change. Examples of such uncertainties and
contingencies include, among other important factors, those affecting the
insurance industry generally, such as the economic and interest rate
environment, federal and state legislative and regulatory developments,
including but not limited to changes in financial services and tax laws and
regulations, market pricing and competitive trends relating to insurance
products and services, acts of terrorism or war, and the availability and cost
of reinsurance, and those relating specifically to the Company's business, such
as the level of its insurance premiums and fee income, the claims experience,
persistency and other factors affecting the profitability of its insurance
products, the performance of its investment portfolio and changes in the
Company's investment strategy, acquisitions of companies or blocks of business,
and ratings by major rating organizations of its insurance subsidiaries. These
uncertainties and contingencies can affect actual results and could cause actual
results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company. Certain of these uncertainties
and contingencies are described in more detail in the remainder of this section.
The Company disclaims any obligation to update forward-looking information.

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

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

      THE MARKET VALUES OF THE COMPANY'S INVESTMENTS FLUCTUATE.

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

Declines in the fair value of investments that are considered in the judgment of
management to be other than temporary are reported as realized investment
losses. See "Critical Accounting Policies - Investments" for a description of
management's evaluation process. The Company has experienced and may in the
future experience losses from other than temporary declines in security values.
Such losses are recorded as realized investment losses in the income statement.
See "Results of Operations - 2002 Compared to 2001."


                                      -26-
<PAGE>

      THE COMPANY'S INVESTMENT STRATEGY EXPOSES THE COMPANY TO DEFAULT AND OTHER
      RISKS.

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

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

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

Because the Company's primary assets and liabilities are financial in nature,
the Company's consolidated financial position and earnings are subject to risks
resulting from changes in interest rates. The Company manages this risk by
active portfolio management focusing on minimizing its exposure to fluctuations
in interest rates by matching its invested assets and related liabilities and by
periodically adjusting the crediting rates on its annuity products. See
"Liquidity and Capital Resources - Asset/Liability Management and Market Risk."

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

The Company transfers its exposure to some risks through reinsurance
arrangements with other insurance and reinsurance companies. Under the Company's
reinsurance arrangements, another insurer assumes a specified portion of the
Company's losses and loss adjustment expenses in exchange for a specified
portion of policy premiums. The availability, amount, cost and terms of
reinsurance may vary significantly based on market conditions. Any decrease in
the amount of the Company's reinsurance will increase the Company's risk of
loss. Furthermore, the Company is subject to credit risk with respect to
reinsurance. The Company obtains reinsurance primarily through indemnity
reinsurance transactions in which the Company is still liable for the
transferred risks if the reinsurers fail to meet their financial obligations.
Such failures could materially affect the Company's results of operations,
liquidity or financial condition.

Some reinsurers experienced significant losses related to the terrorist events
of September 11, 2001. As a result, higher prices and less favorable terms and
conditions are presently being offered in the reinsurance market. Also, there
has been significantly reduced availability of reinsurance covering risks such
as terrorist and catastrophic events. Accordingly, substantially all of the
Company's coverages of this nature were discontinued during 2002. There can be
no assurance that the Company will be able to obtain such coverages on
acceptable terms, if at all, in the future. However, under the Terrorism Act,
the federal government will pay 90% of the Company's insured loss from property
and casualty products above the Company's annual deductible. See "Business -
Group Employee Benefit Products."

    THE INSURANCE BUSINESS IS A HEAVILY REGULATED INDUSTRY.

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

From time to time, increased scrutiny has been placed upon the insurance
regulatory framework, and a number of state legislatures have considered or
enacted legislative measures that alter, and in many cases increase, state
authority to regulate insurance companies. In addition to legislative
initiatives of this type, the National Association of Insurance Commissioners
and insurance regulators are continuously involved in a process of reexamining
existing laws and regulations and their application to insurance companies.
Furthermore, while the federal government currently does not


                                      -27-
<PAGE>

directly regulate the insurance business, federal legislation and administrative
policies in a number of areas, such as employee benefits regulation, age, sex
and disability-based discrimination, financial services regulation and federal
taxation, can significantly affect the insurance business. It is not possible to
predict the future impact of changing regulation on the operations of the
Company and those of its insurance subsidiaries.

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

     THE FINANCIAL SERVICES INDUSTRY IS HIGHLY COMPETITIVE.

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

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

Ratings with respect to claims-paying ability and financial strength have become
an increasingly important factor impacting the competitive position of insurance
companies. Each of the rating agencies reviews its ratings of companies
periodically and there can be no assurance that current ratings will be
maintained in the future. Claims-paying and financial strength ratings are based
upon factors relevant to policyowners and are not directed toward protection of
investors. Downgrades in the ratings of the Company's insurance subsidiaries
could adversely affect sales of their products and could have a material adverse
effect on the results of the Company's operations.

ITEM 7A. MARKET RISK DISCLOSURE

The information required by Item 7A is included in this Form 10-K under the
heading "Asset/Liability Management and Market Risk" beginning on page 23 of
this Form 10-K.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by Item 8 is included in this Form 10-K beginning on
page 35 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 2003 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 2003 Annual Meeting of
Stockholders, under the caption "Executive Compensation" and is incorporated
herein by reference.


                                      -28-
<PAGE>

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

The information required by Item 12 is included in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with the Company's 2003 Annual Meeting of
Stockholders, under the captions "Security Ownership of Certain Beneficial
Owners and Management" and "Equity Compensation Plan Information" and is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is included in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with the Company's 2003 Annual Meeting of
Stockholders, under the caption "Certain Relationships and Related Party
Transactions" and is incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

Within the 90-day period preceding the date of this report, an evaluation was
performed under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer ("CEO") and Vice
President and Treasurer (the individual who acts in the capacity of the Chief
Financial Officer), of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rule 13a-14(c) under
the Securities Exchange Act of 1934). Based on that evaluation, the Company's
management, including the CEO and Vice President and Treasurer, concluded that
the Company's disclosure controls and procedures were effective. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect internal controls subsequent to the date of such
evaluation.


                                      -29-
<PAGE>

                                     PART IV

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

    (a)     The financial statements and financial statement schedules filed as
            part of this report are listed in the Index to Consolidated
            Financial Statements and Financial Statement Schedules on page 36 of
            this Form 10-K.

    (b)     No reports on Form 8-K were filed during the fourth quarter of 2002.

    (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. (7)

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

      2.3   Stock Purchase Agreement, dated as of October 1, 1998, by and among
            Delphi Financial Group, Inc., Unicover Managers, Inc., Unicover
            Intermediaries, LLC and the Shareholders named therein (11)

      2.4   Merger, Exchange and Release Agreement, dated April 30, 1999, by and
            among Delphi Financial Group, Inc., Unicover Managers, Inc.,
            Unicover Intermediaries, LLC, Unicover Management Partners, LLC and
            the Buyers named therein (12)

      3.1   Amendment to 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) (8)

      3.3   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) (4)

      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))(9)

      4.3   Subordinated Indenture, dated as of March 25, 1997, between Delphi
            Financial Group, Inc. and Wilmington Trust Company as Trustee
            (Exhibit 4(b)) (9)

      4.4   Guarantee Agreement dated March 25, 1997, between Delphi Financial
            Group, Inc., as Guarantor, and Wilmington Trust Company, as Trustee
            (Exhibit 4(c)) (9)

      10.1  Credit Agreement, dated as of December 16, 2002, among the Company,
            Bank of America, N.A., as Administrative Agent, and the Other
            Lenders Party Thereto (18)

      10.2  Borrower Pledge Agreement, dated as of December 16, 2002, between
            the Company and Bank of America, N.A., as Collateral Agent (18)

      10.3  SIG Holdings Pledge Agreement, dated as of December 16, 2002,
            between SIG Holdings, Inc. and Bank of America, N.A, as Collateral
            Agent (18)

      10.4  Delphi Financial Group, Inc. Second Amended and Restated Employee
            Nonqualified Stock Option Plan, as amended May 23, 2001 (Exhibit
            10.1) (13)

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

      10.6  Second Amendment to the Delphi Capital Management, Inc. Pension Plan
            for Robert Rosenkranz (Exhibit 10.2) (16)

      10.7  Investment Consulting Agreement, dated as of November 10, 1988,
            between Rosenkranz Asset Managers, LLC (as assignee of Rosenkranz,
            Inc.) and the Company (Exhibit 10.6) (3)

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

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

      10.10 Delphi Financial Group, Inc. Long-Term Performance-Based Incentive
            Plan (Exhibit 10.9) (10)

      10.11 2002 Bonus Criteria for Chairman, President and Chief Executive
            Officer of Delphi Financial Group, Inc. (Exhibit 10.1) (16)

      10.12 SIG Holdings, Inc. 1992 Long-Term Incentive Plan (Exhibit 10.11) (6)

      10.13 Stockholders Agreement, dated as of October 5, 1995, among the
            Company and the affiliate stockholders named therein (Exhibit 10.12)
            (7)

      10.14 Reliance Standard Life Insurance Company Nonqualified Deferred
            Compensation Plan (Exhibit 10.13)(7)

      10.15 Reliance Standard Life Insurance Company Supplemental Executive
            Retirement Plan (Exhibit 10.14) (7)


                                      -30-
<PAGE>

      10.16 Delphi Financial Group, Inc. Amended and Restated Directors Stock
            Option Plan, as amended May 14, 2002 (Exhibit 10.1) (15)

      10.17 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 10.16) (5)

      10.18 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 10.17) (1)

      10.19 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 10.18) (1)

      10.20 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 10.19) (1)

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

      10.22 Employment Agreement, dated March 18, 1994, for Robert M. Smith, Jr.
            (Exhibit 10.21) (5)

      10.23 SIG Holdings, Inc. Note Agreement, dated as of May 20, 1994 (8.5%
            Senior Secured Notes due 2003) (Exhibit 10.22) (6)

      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 10.23) (6)

      10.25 Reinsurance Agreement, dated January 27, 1998, between Reliance
            Standard Life Insurance Company and Oracle Reinsurance Company Ltd.
            (Exhibit 10.25) (10)

      10.26 Casualty Excess of Loss Reinsurance Agreement, dated January 27,
            1998, between Safety National Casualty Corporation and Oracle
            Reinsurance Company Ltd. (Exhibit 10.26) (10)

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

      11.1  Computation of Results per Share of Common Stock (17)

      21.1  List of Subsidiaries of the Company (18)

      23.1  Consent of Ernst & Young LLP (18)

      24.1  Powers of Attorney (18)

      99.1  Certification of Chief Executive Officer Pursuant to 18 U.S.C.
            Section 1350, as Adopted Pursuant to Section 906 of the
            Sarbanes-Oxley Act of 2002 (18)

      99.2  Certification of Vice President and Treasurer Pursuant to 18 U.S.C.
            Section 1350, as Adopted Pursuant to Section 906 of the
            Sarbanes-Oxley Act of 2002 (18)

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

      (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 Form 10-K for the year ended December 31, 1994.

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

      (7)   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).

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

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

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

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

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

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

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

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

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

      (17)  Incorporated herein by reference to Note P to the Consolidated
            Financial Statements included elsewhere herein.

      (18)  Filed herewith.

    (d)     The financial statement schedules listed in the Index to
            Consolidated Financial Statements and Financial Statement Schedules
            on page 36 of this Form 10-K are included under Item 8 and are
            presented beginning on page 60 of this Form 10-K. All other
            schedules for which provision is made in the applicable accounting
            regulations of the Securities and Exchange Commission are not
            required under the related instructions or are inapplicable, and
            therefore have been omitted.


                                      -31-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

                                   SIGNATURES

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

                                        Delphi Financial Group, Inc.

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

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

<TABLE>
<CAPTION>
Name                                               Capacity                              Date
----                                               --------                              ----
<S>                                                <C>                                   <C>
 /s/         ROBERT ROSENKRANZ                     Chairman of the Board,                March 28, 2003
-----------------------------------------------    President and Chief Executive
            (Robert Rosenkranz)                    Officer (Principal Executive
                                                   Officer)

                     *                             Director                              March 28, 2003
-----------------------------------------------
          (Lawrence E. Daurelle)

                     *                             Director                              March 28, 2003
-----------------------------------------------
              (Edward A. Fox)

                     *                             Director                              March 28, 2003
-----------------------------------------------
              (Harold F. Ilg)

                     *                             Director                              March 28, 2003
-----------------------------------------------
            (Lewis S. Ranieri)

                     *                             Director                              March 28, 2003
-----------------------------------------------
            (Thomas L. Rhodes)

                     *                             Director                              March 28, 2003
-----------------------------------------------
            (Donald A. Sherman)

/s/        ROBERT M. SMITH, JR.                    Director and Executive                March 28, 2003
-----------------------------------------------    Vice President
          (Robert M. Smith, Jr.)

                     *                             Vice President and                    March 28, 2003
-----------------------------------------------    Treasurer (Principal
            Thomas W. Burghart                     Accounting and Financial
                                                   Officer)
</TABLE>


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


                                      -32-
<PAGE>

                          DELPHI FINANCIAL GROUP, INC.

                           CERTIFICATIONS PURSUANT TO
                                 SECTION 302 OF
                         THE SARBANES-OXLEY ACT OF 2002

                                  CERTIFICATION

I, Robert Rosenkranz, certify that:

      1.    I have reviewed this annual report on Form 10-K of Delphi Financial
            Group, Inc. (the "registrant");

      2.    Based on my knowledge, this annual report does not contain any
            untrue statement of a material fact or omit to state a material fact
            necessary to make the statements made, in light of the circumstances
            under which such statements were made, not misleading with respect
            to the period covered by this annual report;

      3.    Based on my knowledge, the financial statements, and other financial
            information included in this annual report, fairly present in all
            material respects the financial condition, results of operations and
            cash flows of the registrant as of, and for, the periods presented
            in this annual report;

      4.    The registrant's other certifying officer and I are responsible for
            establishing and maintaining disclosure controls and procedures (as
            defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
            and have:

            a.    designed such disclosure controls and procedures to ensure
                  that material information relating to the registrant,
                  including its consolidated subsidiaries, is made known to us
                  by others within those entities, particularly during the
                  period in which this annual report is being prepared;

            b.    evaluated the effectiveness of the registrant's disclosure
                  controls and procedures as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

            c.    presented in this annual report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

      5.    The registrant's other certifying officer and I have disclosed,
            based on our most recent evaluation, to the registrant's auditors
            and the audit committee of registrant's board of directors (or
            persons performing the equivalent functions):

            a.    all significant deficiencies in the design or operation of
                  internal controls which could adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial data and have identified for the registrant's
                  auditors any material weaknesses in internal controls; and

            b.    any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal controls; and

      6.    The registrant's other certifying officer and I have indicated in
            this annual report whether or not there were significant changes in
            internal controls or in other factors that could significantly
            affect internal controls subsequent to the date of our most recent
            evaluation, including any corrective actions with regard to
            significant deficiencies and material weaknesses.

Date: March 28, 2003

                                    /s/ ROBERT ROSENKRANZ
                                    ----------------------------------------

                                    Robert Rosenkranz
                                    Chairman of the Board, President and Chief
                                    Executive Officer


                                      -33-
<PAGE>

                                  CERTIFICATION

I, Thomas W. Burghart, certify that:

      1.    I have reviewed this annual report on Form 10-K of Delphi Financial
            Group, Inc. (the "registrant");

      2.    Based on my knowledge, this annual report does not contain any
            untrue statement of a material fact or omit to state a material fact
            necessary to make the statements made, in light of the circumstances
            under which such statements were made, not misleading with respect
            to the period covered by this annual report;

      3.    Based on my knowledge, the financial statements, and other financial
            information included in this annual report, fairly present in all
            material respects the financial condition, results of operations and
            cash flows of the registrant as of, and for, the periods presented
            in this annual report;

      4.    The registrant's other certifying officer and I are responsible for
            establishing and maintaining disclosure controls and procedures (as
            defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
            and have:

            a.    designed such disclosure controls and procedures to ensure
                  that material information relating to the registrant,
                  including its consolidated subsidiaries, is made known to us
                  by others within those entities, particularly during the
                  period in which this annual report is being prepared;

            b.    evaluated the effectiveness of the registrant's disclosure
                  controls and procedures as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

            c.    presented in this annual report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

      5.    The registrant's other certifying officer and I have disclosed,
            based on our most recent evaluation, to the registrant's auditors
            and the audit committee of registrant's board of directors (or
            persons performing the equivalent functions):

            a.    all significant deficiencies in the design or operation of
                  internal controls which could adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial data and have identified for the registrant's
                  auditors any material weaknesses in internal controls; and

            b.    any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal controls; and

      6.    The registrant's other certifying officer and I have indicated in
            this annual report whether or not there were significant changes in
            internal controls or in other factors that could significantly
            affect internal controls subsequent to the date of our most recent
            evaluation, including any corrective actions with regard to
            significant deficiencies and material weaknesses.

Date: March 28, 2003

                                 /s/ THOMAS W. BURGHART
                                 --------------------------------------------

                                 Thomas W. Burghart
                                 Vice President and Treasurer


                                      -34-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                    Year Ended December 31, 2002
                                                          ------------------------------------------------------
                                                             First        Second         Third         Fourth
                                                            Quarter       Quarter       Quarter        Quarter
                                                          -----------   -----------   -----------    -----------
<S>                                                       <C>           <C>           <C>            <C>
Revenues excluding realized investment gains (losses) .   $   197,891   $   195,453   $   193,407    $   203,142
Realized investment gains (losses) ....................            95           218       (10,825)       (17,957)
                                                          -----------   -----------   -----------    -----------
Total revenues ........................................       197,986       195,671       182,582        185,185
Operating income ......................................        31,832        31,786        20,531         14,847
Income before extraordinary loss ......................        19,570        19,732        12,793          8,773
Net income ............................................        19,570        19,516        12,793          8,773
Basic results per share of common stock:
  Income before extraordinary loss ....................   $      0.95   $      0.95   $      0.62    $      0.42
  Net income ..........................................          0.95          0.94          0.62           0.42
Diluted results per share of common stock:
  Income before extraordinary loss ....................   $      0.93   $      0.93   $      0.60    $      0.41
  Net income ..........................................          0.93          0.92          0.60           0.41
</TABLE>

<TABLE>
<CAPTION>
                                                                        Year Ended December 31, 2001
                                                          ------------------------------------------------------
                                                             First        Second         Third         Fourth
                                                            Quarter       Quarter       Quarter        Quarter
                                                          -----------   -----------   -----------    -----------
<S>                                                       <C>           <C>           <C>            <C>
Revenues excluding realized investment gains (losses) .   $   162,371   $   161,946   $   165,465    $   174,931
Realized investment gains (losses) ....................           451           225        (6,926)       (64,039)
                                                          -----------   -----------   -----------    -----------
Total revenues ........................................       162,822       162,171       158,539        110,892
Operating income ......................................        32,056        31,321        20,264        (72,278)
Income (loss) before extraordinary gain ...............        17,628        18,472        11,572        (48,613)
Net income (loss) .....................................        20,645        21,668        12,805        (48,613)
Basic results per share of common stock:
  Income (loss) before extraordinary gain .............   $      0.85   $      0.90   $      0.56    $     (2.36)
  Net income (loss) ...................................          1.01          1.06          0.62          (2.36)
Diluted results per share of common stock:
  Income (loss) before extraordinary gain .............   $      0.83   $      0.88   $      0.55    $     (2.36)
  Net income (loss) ...................................          0.98          1.03          0.61          (2.36)
</TABLE>

The results of interim periods may not be indicative of the results for the
entire year. Computations of results per share for each quarter are made
independently of results per share for the year. Due to transactions affecting
the weighted average number of shares outstanding in each quarter, the sum of
quarterly results per share does not equal results per share for the year. The
calculation of loss before extraordinary gain per share and net loss per share
in the fourth quarter of 2001 excludes equivalent shares attributable to
in-the-money stock options which totaled 0.4 million since the inclusion of
these equivalent shares would have diluted the loss before extraordinary gain.

Results for the first, second, third and fourth quarters of 2002 include pre-tax
investment losses of $3.6 million, $5.9 million, $20.0 million and $24.6
million, respectively, due to the other than temporary declines in the market
values of certain securities. In the second quarter of 2002, the Company also
repurchased $10.5 million aggregate principal amount of the Senior Notes.
Results for the third quarter of 2001 include an after-tax charge of $2.5
million, or $0.12 per share, for losses attributable to the terrorist attacks on
the World Trade Center. Results for the fourth quarter of 2001 include an
after-tax charge of $26.3 million, or $1.28 per share, for losses attributable
to the reserve strengthening primarily related to an unusually high number of
large losses in the Company's excess workers' compensation business. This
reserve strengthening charge also included after-tax losses of $4.9 million, or
$0.24 per share, related to the World Trade Center attacks. The Company also
recognized pre-tax investment losses of $0.6 million, $12.5 million and $66.2
million in the second, third and fourth quarters, respectively, of 2001, due to
the other than temporary declines in the market values of certain securities. In
2001, the Company also repurchased $64.0 million liquidation amount of the
Capital Securities and $8.0 million principal amount of the Senior Notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Notes C, D, E and K to the Consolidated Financial Statements.


                                      -35-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULES

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

    Report of Independent Auditors ...............................................................      37

    Consolidated Statements of Income (Loss) - Years Ended December 31, 2002, 2001 and 2000 ......      38

    Consolidated Balance Sheets - December 31, 2002 and 2001 .....................................      39

    Consolidated Statements of Shareholders' Equity - Years Ended December 31, 2002, 2001 and 2000      40

    Consolidated Statements of Cash Flows - Years Ended December 31, 2002, 2001 and 2000 .........      41

    Notes to Consolidated Financial Statements ...................................................      42

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

    Schedule I, Summary of Investments Other Than Investments in Related Parties .................      60

    Schedule II, Condensed Financial Information of Registrant ...................................      61

    Schedule III, Supplementary Insurance Information ............................................      65

    Schedule IV, Reinsurance .....................................................................      66

    Schedule VI, Supplemental Information Concerning Property-Casualty Insurance Operations ......      67
</TABLE>


                                      -36-
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

Shareholders and Directors
Delphi Financial Group, Inc.

We have audited the accompanying consolidated balance sheets of Delphi Financial
Group, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of income (loss), shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 2002. Our audits
also included the financial statement schedules listed in the Index to
Consolidated Financial Statements and Financial Statement Schedules. These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Delphi
Financial Group, Inc. and subsidiaries at December 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.

As discussed in Notes A and I to the Consolidated Financial Statements, in 2002
the Company changed its method of accounting for goodwill.


                                                           /s/ ERNST & YOUNG LLP

Philadelphia, Pennsylvania
February 5, 2003


                                      -37-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF INCOME (LOSS)
                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                                 -----------------------------------
                                                                    2002         2001         2000
                                                                 ---------    ---------    ---------
<S>                                                              <C>          <C>          <C>
Revenue:
   Premium and fee income ....................................   $ 627,857    $ 507,204    $ 466,357
   Net investment income .....................................     162,036      157,509      184,576
   Net realized investment losses ............................     (28,469)     (70,289)    (138,047)
                                                                 ---------    ---------    ---------
                                                                   761,424      594,424      512,886
                                                                 ---------    ---------    ---------
Benefits and expenses:
   Benefits, claims and interest credited to policyholders ...     471,984      416,996      342,758
   Commissions ...............................................      43,169       39,636       40,327
   Amortization of cost of business acquired .................      45,742       34,700       29,726
   Other operating expenses ..................................     101,533       91,729       80,751
                                                                 ---------    ---------    ---------
                                                                   662,428      583,061      493,562
                                                                 ---------    ---------    ---------

   Operating income ..........................................      98,996       11,363       19,324

Interest expense:
   Corporate debt ............................................       9,025       11,604       21,457
   Dividends on Capital Securities of Delphi Funding L.L.C ...       3,356        5,808        9,311
                                                                 ---------    ---------    ---------
.. ............................................................      12,381       17,412       30,768
                                                                 ---------    ---------    ---------

     Income (loss) before income tax expense (benefit)
       and extraordinary (loss) gain .........................      86,615       (6,049)     (11,444)

Income tax expense (benefit) .................................      25,747       (5,108)      (8,151)
                                                                 ---------    ---------    ---------

     Income (loss) before extraordinary (loss) gain ..........      60,868         (941)      (3,293)

Extraordinary (loss) gain, net of income tax (benefit) expense        (216)       7,446           --
                                                                 ---------    ---------    ---------

     Net income (loss) .......................................   $  60,652    $   6,505    $  (3,293)
                                                                 =========    =========    =========

Basic results per share of common stock:
   Income (loss) before extraordinary (loss) gain ............   $    2.93    $   (0.04)   $   (0.16)
   Net income (loss) .........................................        2.92         0.32        (0.16)

Diluted results per share of common stock:
   Income (loss) before extraordinary (loss) gain ............   $    2.86    $   (0.04)   $   (0.16)
   Net income (loss) .........................................        2.85         0.32        (0.16)

Dividends paid per share of common stock .....................   $    0.29    $    0.28    $      --
</TABLE>

                 See notes to consolidated financial statements.


                                      -38-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                       December 31,
                                                                                --------------------------
                                                                                    2002           2001
                                                                                -----------    -----------
<S>                                                                             <C>            <C>
Assets:
  Investments:
     Fixed maturity securities, available for sale ..........................   $ 2,495,629    $ 2,223,789
     Short-term investments .................................................       204,890         92,862
     Other investments ......................................................       115,532        110,563
                                                                                -----------    -----------
                                                                                  2,816,051      2,427,214
  Cash ......................................................................        27,669         11,682
  Cost of business acquired .................................................       168,110        168,894
  Reinsurance receivables ...................................................       392,659        388,910
  Goodwill ..................................................................        93,929         93,929
  Other assets ..............................................................       163,371        171,834
  Assets held in separate account ...........................................        73,153         73,683
                                                                                -----------    -----------
     Total assets ...........................................................   $ 3,734,942    $ 3,336,146
                                                                                ===========    ===========

Liabilities and Shareholders' Equity:
  Future policy benefits:
     Life ...................................................................   $   229,743    $   222,363
     Disability and accident ................................................       390,717        348,267
  Unpaid claims and claim expenses:
     Life ...................................................................        40,627         34,616
     Disability and accident ................................................       175,271        167,628
     Casualty ...............................................................       534,856        506,778
  Policyholder account balances .............................................       909,961        817,543
  Corporate debt ............................................................       118,139        125,675
  Advances from Federal Home Loan Bank ......................................       207,990        162,909
  Other liabilities and policyholder funds ..................................       346,900        268,962
  Liabilities related to separate account ...................................        63,033         63,361
                                                                                -----------    -----------
     Total liabilities ......................................................     3,017,237      2,718,102
                                                                                -----------    -----------

  Company-obligated mandatorily redeemable Capital Securities of Delphi
     Funding L.L.C. holding solely junior subordinated deferrable interest
     debentures of the Company ..............................................        36,050         36,050
                                                                                -----------    -----------

  Shareholders' equity:
     Preferred Stock, $.01 par; 10,000,000 shares authorized ................            --             --
     Class A Common Stock, $.01 par; 40,000,000 shares authorized;
        18,927,855 and 17,763,428 shares issued and outstanding, respectively           189            178
     Class B Common Stock, $.01 par; 20,000,000 shares authorized;
        3,194,905 and 4,132,688 shares issued and outstanding, respectively .            32             41
     Additional paid-in capital .............................................       373,356        369,385
     Accumulated other comprehensive income (loss) ..........................        30,003        (10,985)
     Retained earnings ......................................................       329,574        274,874
     Treasury stock, at cost; 1,505,290 shares of Class A Common Stock ......       (51,499)       (51,499)
                                                                                -----------    -----------
        Total shareholders' equity ..........................................       681,655        581,994
                                                                                -----------    -----------
          Total liabilities and shareholders' equity ........................   $ 3,734,942    $ 3,336,146
                                                                                ===========    ===========
</TABLE>

                 See notes to consolidated financial statements.


                                      -39-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                           Accumulated
                                                                              Other
                                     Class A     Class B     Additional   Comprehensive
                                     Common      Common       Paid-in         (Loss)      Retained     Treasury
                                      Stock       Stock       Capital         Income      Earnings       Stock        Total
                                    ---------   ---------   -----------   -------------   ---------    ---------    ---------
<S>                                 <C>         <C>         <C>           <C>             <C>          <C>          <C>
Balance, January 1, 2000 ........   $     163   $      52    $ 364,390       $(101,465)   $ 277,353    $ (39,076)   $ 501,417
                                                                                                                    ---------
Net loss ........................          --          --           --              --       (3,293)          --       (3,293)
Other comprehensive income:
  Decrease in net unrealized
    depreciation on investments .          --          --           --          47,843           --           --       47,843
                                                                                                                    ---------
Comprehensive income ............                                                                                      44,550

Issuance of stock, exercise of
    stock options and share
    conversions .................           5          (4)       2,444              --           --           --        2,445
Acquisition of treasury stock ...          --          --           --              --           --      (10,219)     (10,219)
                                    ---------   ---------    ---------       ---------    ---------    ---------    ---------
Balance, December 31, 2000  .....   $     168   $      48    $ 366,834       $ (53,622)   $ 274,060    $ (49,295)   $ 538,193
                                                                                                                    ---------

Net income ......................          --          --           --              --        6,505           --        6,505
Other comprehensive income:
  Decrease in net unrealized
    depreciation on investments .          --          --           --          42,637           --           --       42,637
                                                                                                                    ---------
Comprehensive income ............                                                                                      49,142

Issuance of stock, exercise of
    stock options and share
    conversions .................          10          (7)       2,551              --           --           --        2,554
Acquisition of treasury stock ...          --          --           --              --           --       (2,204)      (2,204)
Cash dividends ..................          --          --           --              --       (5,691)          --       (5,691)
                                    ---------   ---------    ---------       ---------    ---------    ---------    ---------

Balance, December 31, 2001  .....   $     178   $      41    $ 369,385       $ (10,985)   $ 274,874    $ (51,499)   $ 581,994
                                                                                                                    ---------

Net income ......................          --          --           --              --       60,652           --       60,652

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

Issuance of stock, exercise of
   stock options and share
   conversions ..................          11          (9)       3,971              --           --           --        3,973
Cash dividends ..................          --          --           --              --       (5,952)          --       (5,952)
                                    ---------   ---------    ---------       ---------    ---------    ---------    ---------

Balance, December 31, 2002  .....   $     189   $      32    $ 373,356       $  30,003    $ 329,574    $ (51,499)   $ 681,655
                                    =========   =========    =========       =========    =========    =========    =========
</TABLE>

                 See notes to consolidated financial statements.


                                      -40-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                                        -----------------------------------------
                                                                            2002           2001           2000
                                                                        -----------    -----------    -----------
<S>                                                                     <C>            <C>            <C>
Operating activities:
   Net income (loss) ................................................   $    60,652    $     6,505    $    (3,293)
   Adjustments to reconcile net income (loss) to net cash provided
       by operating activities:
     Change in policy liabilities and policyholder accounts .........       107,359        105,904         71,934
     Net change in reinsurance receivables and payables .............        (8,599)        39,670        (93,905)
     Amortization, principally the cost of business acquired
       and investments ..............................................        29,768         19,153          5,730
     Deferred costs of business acquired ............................       (68,725)       (51,096)       (51,840)
     Net realized losses on investments .............................        28,469         70,289        138,047
     Net change in trading account securities .......................         5,170         30,085        (15,957)
     Net change in federal income tax liability .....................        26,071          8,836           (107)
     Extraordinary loss (gain) ......................................           216         (7,446)            --
     Other ..........................................................        28,162          6,772        (38,205)
                                                                        -----------    -----------    -----------
       Net cash provided by operating activities ....................       208,543        228,672         12,404
                                                                        -----------    -----------    -----------

Investing activities:
   Purchases of investments and loans made ..........................    (1,137,062)      (967,272)    (1,013,044)
   Sales of investments and receipts from repayment of loans ........       753,801        884,993        463,625
   Maturities of investments ........................................       183,050         87,077         72,494
   Net change in short-term investments .............................      (111,926)       (49,062)       311,649
   Sale of real estate ..............................................            --             --         16,656
   Business acquisitions ............................................            --         (2,613)        (2,610)
   Change in deposit in separate account ............................           202           (184)          (631)
                                                                        -----------    -----------    -----------
       Net cash used by investing activities ........................      (311,935)       (47,061)      (151,861)
                                                                        -----------    -----------    -----------

Financing activities:
   Deposits to policyholder accounts ................................       140,336         94,922        164,203
   Withdrawals from policyholder accounts ...........................       (56,104)       (62,733)       (83,376)
   Proceeds from issuance of common stock
     and exercise of stock options ..................................         3,973          2,554          2,445
   Dividends paid on common stock ...................................        (5,952)        (5,691)            --
   Acquisition of treasury stock ....................................            --         (2,204)       (10,219)
   Borrowings under revolving credit facilities .....................        49,000        102,000         19,000
   Principal payments under revolving credit facilities .............       (37,000)      (227,000)       (26,000)
   Principal payment under SIG Senior Notes .........................        (9,000)        (9,000)        (9,000)
   Repurchase of Senior Notes .......................................       (10,874)        (8,284)            --
   Change in liability for Federal Home Loan Bank advances ..........        45,000         13,500         73,500
   Repurchase of Capital Securities .................................            --        (51,329)            --
   Change in liability for securities loaned or sold under agreements
     to repurchase ..................................................            --        (29,008)        13,440
                                                                        -----------    -----------    -----------
     Net cash provided (used) by financing activities ...............       119,379       (182,273)       143,993
                                                                        -----------    -----------    -----------

Increase (decrease) in cash .........................................        15,987           (662)         4,536
Cash at beginning of year ...........................................        11,682         12,344          7,808
                                                                        -----------    -----------    -----------
     Cash at end of year ............................................   $    27,669    $    11,682    $    12,344
                                                                        ===========    ===========    ===========
</TABLE>

                 See notes to consolidated financial statements.


                                      -41-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2002

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation. The consolidated financial statements include the
accounts of Delphi Financial Group, Inc. ("DFG") and all of its wholly-owned
subsidiaries, including, among others, Reliance Standard Life Insurance Company
("RSLIC"), Safety National Casualty Corporation ("SNCC"), First Reliance
Standard Life Insurance Company ("FRSLIC"), Reliance Standard Life Insurance
Company of Texas ("RSLIC-Texas"), Safety First Insurance Company ("SFIC"), SIG
Holdings, Inc. ("SIG") and Matrix Absence Management, Inc. ("Matrix"). The term
"Company" shall refer herein collectively to DFG and its subsidiaries, unless
the context indicates otherwise. All significant intercompany accounts and
transactions have been eliminated. Certain reclassifications have been made in
the 2001 and 2000 consolidated financial statements to conform with the 2002
presentation. As of December 31, 2002, Mr. Robert Rosenkranz, Chairman of the
Board, President and Chief Executive Officer of DFG, by means of beneficial
ownership of the corporate general partner of Rosenkranz & Company and direct or
beneficial ownership, had the power to vote all of the outstanding shares of
Class B Common Stock, which represents 49.9% of the voting power of the
Company's common stock.

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

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

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

Cost of Business Acquired. Costs relating to the acquisition of new insurance
business, such as commissions, certain costs of policy issuance and underwriting
and certain sales office expenses, are deferred when incurred. For certain
annuity products, these costs are amortized over the anticipated lives of the
policies in relation to the present value of estimated gross profits from such
policies' surrender charges and mortality, investment and expense margins.
Deferred acquisition costs for life, disability and accident products are
amortized over the anticipated premium-paying period of the related


                                      -42-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2002

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

policies in proportion to the ratio of the present value of annual expected
premium income to the present value of the total expected premium income.
Deferred acquisition costs for casualty insurance products are amortized over
the period in which the related premium is earned. The present value of
estimated future profits ("PVFP"), which was recorded in connection with the
acquisition of RSLIC and FRSLIC in 1987, is included in cost of business
acquired. The PVFP related to annuities is subject to accrual of interest on the
unamortized balance at the credited rate and amortization is a constant
percentage of the present value of estimated future gross profits on the
business. Amortization of the PVFP for group life and disability insurance is at
the discount rate established at the time of the acquisition. The unamortized
balance of cost of business acquired related to certain asset accumulation
products is also adjusted for the impact on estimated future gross profits as if
net unrealized appreciation and depreciation on available for sale securities
had been realized at the balance sheet date. The impact of this adjustment, net
of the related income tax expense or benefit, is included in net unrealized
appreciation and depreciation as a component of accumulated other comprehensive
income or loss.

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

Goodwill. Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite
lives are no longer amortized over a pre-determined period, but are required to
be periodically reviewed for impairment. Other intangible assets with finite
lives continue to be amortized over their useful lives. An impairment loss
resulting from the adoption of SFAS No. 142 must be accounted for as a
cumulative effect of a change in accounting principle and recognized in the
entity's first interim period financial statements following the effective date
regardless of the interim period in which the measurement is completed. Any
subsequent impairment losses will be reflected within operating results in the
income statement. In accordance with SFAS No. 142, the Company during the first
half of 2002 completed its transitional tests for impairment of goodwill, and
based on these tests, the Company determined that no impairment of goodwill had
occurred. See Note I to the Consolidated Financial Statements.

Separate Account. The separate account assets and liabilities represent funds
invested in a separately administered variable life insurance product for which
the policyholder, rather than the Company, bears the investment risk. The excess
of separate account assets over the related liabilities represents the Company's
deposit in the separate account, which is maintained to support the operation of
the separate account program. The Company receives a proportionate share of the
income or loss 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, morbidity and other assumptions
are based either on the Company's past experience or various actuarial tables,
modified as necessary for possible variations. Changes in these assumptions
could result in changes in these liabilities.

Unpaid Claims and Claim Expenses. The liability for unpaid claims and claim
expenses includes amounts determined on an individual basis for reported losses
and estimates of incurred but not reported losses developed on the basis of past
experience. The methods of making these estimates and establishing the resulting
reserves are continually reviewed and updated, with any resulting adjustments
reflected in earnings currently. At December 31, 2002, disability and excess
workers' compensation reserves with a carrying value of $609.4 million have been
discounted at a weighted average rate of 5.4%, with the rates ranging from 3.7%
to 7.5%.

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

Income Taxes. The Company files a life/non-life consolidated federal tax return,
pursuant to an election made with the 2001 tax return. RSLIC-Texas and RSLIC are
taxed as life insurance companies and comprise the life subgroup. The


                                      -43-
<PAGE>
         DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                       DECEMBER 31, 2002

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

non-life subgroup includes DFG, SNCC, FRSLIC, SFIC and the non-insurance
subsidiaries of the Company. The Company computes a balance sheet amount for
deferred income taxes, which is included in other assets or other liabilities,
at the rates expected to be in effect when the underlying differences will be
reported in the Company's income tax returns.

Premium Recognition. The Company's group insurance products consist primarily of
short-duration contracts, and, accordingly, premiums for these products are
reported as earned over the contract period. Deposits for asset accumulation
products are recorded as liabilities rather than as premiums, since these
products generally do not involve mortality or morbidity risk.

Stock Options. The Company accounts for stock options in accordance with
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Accordingly, no compensation expense
has been recognized in the accompanying financial statements for the Company's
stock option plans, because, in each case, the exercise price of the options
granted equaled the market price of the underlying stock on the date of grant.
The Company's stock option plans are more fully described in Note O. On December
31, 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No.
148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to SFAS No. 123's fair
value method of accounting for stock-based compensation. The Company has not yet
determined whether it will adopt SFAS No. 123. The following table illustrates
the effect on net income (loss) and earnings (loss) per share as if the Company
had applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation:

<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                                 --------------------------------------------
                                                                    2002             2001             2000
                                                                 ----------       ----------       ----------
                                                                 (dollars in thousands, except per share data)
<S>                                                              <C>              <C>              <C>
Net income (loss), as reported ............................      $   60,652       $    6,505       $   (3,293)
Deduct: Total stock-based employee compensation expense
   determined under fair value based method for all awards,
   net of related tax effects .............................          (2,462)          (2,539)          (4,611)
                                                                 ----------       ----------       ----------
Pro forma net income (loss) ...............................      $   58,190       $    3,966       $   (7,904)
                                                                 ==========       ==========       ==========

Earnings (loss) per share:
   Basic, as reported .....................................      $     2.92       $     0.32       $    (0.16)
   Basic, pro forma .......................................            2.80             0.19            (0.39)

   Diluted, as reported ...................................      $     2.85       $     0.32       $    (0.16)
   Diluted, pro forma .....................................            2.72             0.19            (0.39)
</TABLE>

The weighted average per share fair value used to calculate pro forma
compensation expense for 2002, 2001 and 2000 was $13.22, $11.87 and $12.17,
respectively. These fair values were estimated at the grant date using the
Black-Scholes option pricing model with the following assumptions: risk-free
interest rates ranging from 3.1% to 6.7%, volatility factors of the expected
market price of the Company's common stock ranging from 31% to 33%, expected
lives of the options ranging from five to ten years and dividend yields ranging
from 0.0% to 0.8%.

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

Recently Adopted Accounting Standards. In April 2002, the FASB issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS No. 145 is required to be
adopted for fiscal years beginning after May 15, 2002, and therefore, the
Company will adopt the new requirements effective January 1, 2003. SFAS No. 145
rescinds SFAS No. 4, which required all gains and losses from


                                      -44-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2002

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

extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect. Accordingly, gains or
losses from extinguishment of debt will be classified as income or loss from
continuing operations in the income statement unless the extinguishment
qualifies as an extraordinary item under the provisions of APB No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." Events or transactions that are both unusual in nature
or infrequent in occurrence are classified as extraordinary items under APB No.
30. Upon adoption, any gain or loss on extinguishment of debt previously
classified as an extraordinary item in prior periods presented that does not
meet the criteria of APB No. 30 for such classification will be reclassified as
required by SFAS No. 145. For the twelve month period ending December 31, 2002
and 2001, the Company had an extraordinary (loss) gain, net of the related
income tax effect, of $(0.2) million, or $(0.01) per diluted share, and $7.4
million, or $0.36 per diluted share, respectively, that would be reclassified to
ongoing operations if SFAS No. 145 had been adopted early.

In January 2003, the FASB issued Interpretation ("FIN") No. 46, "Consolidation
of Variable Interest Entities," which provides new criteria for determining
whether or not consolidation accounting is required for a variable interest
entity ("VIE"). If applicable, FIN 46 would require consolidation of a VIE's
assets, liabilities and results of operations, with minority interest recorded
for the ownership share applicable to other investors. Where consolidation is
not required, additional disclosures may be required. The consolidation
provisions of FIN 46 are effective for VIEs established subsequent to January
31, 2003 and for pre-existing VIEs as of July 1, 2003. The Company has not yet
determined the impact, if any, the adoption of FIN 46 will have on the Company's
consolidated financial statements.

NOTE B - ACQUISITIONS

The consideration for the 1998 acquisition of Matrix included contingent
consideration of up to $5.2 million in cash if Matrix's earnings met specified
targets subsequent to the acquisition. Matrix met all of the specified targets,
and accordingly, the Company paid the $5.2 million of contingent consideration
in two equal installments of $2.6 million during 2000 and 2001, which has been
included in goodwill. See Note I to the Consolidated Financial Statements.

NOTE C - INVESTMENTS

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

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


                                      -45-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2002

NOTE C - INVESTMENTS - (CONTINUED)

<TABLE>
<CAPTION>
                                                                            December 31, 2001
                                                      ---------------------------------------------------------------
                                                                          Gross           Gross
                                                       Amortized       Unrealized       Unrealized           Fair
                                                         Cost             Gains           Losses             Value
                                                      -----------      -----------      -----------       -----------
                                                                          (dollars in thousands)
<S>                                                   <C>              <C>              <C>               <C>
  Mortgage-backed securities ...................      $   607,599      $    15,935      $   (10,034)      $   613,500
  Corporate securities .........................          996,720           16,827          (17,460)          996,087
  U.S. Treasury and other U.S. Government
     guaranteed securities .....................          251,925            1,410          (12,621)          240,714
  Obligations of U.S. states, municipalities and
     political subdivisions ....................          393,087            2,149          (21,748)          373,488
                                                      -----------      -----------      -----------       -----------
        Total fixed maturity securities ........      $ 2,249,331      $    36,321      $   (61,863)      $ 2,223,789
                                                      ===========      ===========      ===========       ===========
</TABLE>

The amortized cost and fair value of fixed maturity securities available for
sale at December 31, 2002, by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because issuers may have the
right to call or prepay obligations, with or without prepayment penalties.

<TABLE>
<CAPTION>
                                                     Amortized           Fair
                                                        Cost            Value
                                                     ----------       ----------
                                                        (dollars in thousands)
<S>                                                  <C>              <C>
Mortgage-backed securities ...................       $  596,861       $  628,333

Other securities:
   Less than one year ........................           86,460           86,948
   Greater than 1, up to 5 years .............          429,592          439,021
   Greater than 5, up to 10 years ............          666,582          683,929
   Greater than 10 years .....................          650,160          657,398
                                                     ----------       ----------
      Total ..................................       $2,429,655       $2,495,629
                                                     ==========       ==========
</TABLE>

Net investment income was attributable to the following:

<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                          --------------------------------------
                                            2002           2001           2000
                                          --------       --------       --------
                                                  (dollars in thousands)
<S>                                       <C>            <C>            <C>
Gross investment income:
  Fixed maturity securities .......       $167,109       $158,065       $161,973
  Other ...........................         11,130         15,311         37,607
                                          --------       --------       --------
                                           178,239        173,376        199,580
Less: Investment expenses .........         16,203         15,867         15,004
                                          --------       --------       --------
                                          $162,036       $157,509       $184,576
                                          ========       ========       ========
</TABLE>

The decline in net investment income from 2000 reflects the Company's
liquidation during the fourth quarter of 2000 of a substantial majority of the
investments in its investment subsidiaries. The proceeds from these sales were
used in 2001 to repay $150.0 million of outstanding borrowings under the
Company's revolving credit facilities, to repurchase $64.0 million liquidation
amount of the Capital Securities of Delphi Funding L.L.C. and to repurchase $8.0
million principal amount of the 8% Senior Notes due October 2003.


                                      -46-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2002

NOTE C - INVESTMENTS - (CONTINUED)

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

<TABLE>
<CAPTION>
                                              Year Ended December 31,
                                      ---------------------------------------
                                         2002           2001           2000
                                      ---------      ---------      ---------
                                               (dollars in thousands)
<S>                                   <C>            <C>            <C>
Fixed maturity securities .......     $ (15,668)     $ (67,647)     $(103,318)
Equity securities ...............       (12,024)          (843)         2,005
Other investments ...............          (777)        (1,799)       (36,734)
                                      ---------      ---------      ---------
                                      $ (28,469)     $ (70,289)     $(138,047)
                                      =========      =========      =========
</TABLE>

Proceeds from sales of fixed maturity securities during 2002, 2001 and 2000 were
$734.7 million, $633.9 million and $581.6 million, respectively. Gross gains of
$32.0 million, $17.3 million and $8.9 million and gross losses of $4.3 million,
$6.7 million and $49.2 million, respectively, were realized on those sales. In
2002 and 2001, the net losses realized on fixed maturity securities also include
a provision for the other than temporary decline in the value of certain
securities of $43.3 million and $78.3 million, respectively. In 2000, the net
losses realized on fixed maturity securities included a provision of $4.5
million for the other than temporary decline in the value of certain securities
and $58.5 million of losses on closed U.S. Treasury futures and options
contracts, which were used to reduce the risk associated with changes in the
value of the Company's fixed maturity portfolio. The fair value of these
contracts declined during 2000 due to a decrease in market interest rates. The
market value of the Company's fixed maturity portfolio did not correspondingly
increase due to a widening of the spread between yields on corporate and other
non-government fixed maturity securities and yields on U.S. Treasury securities,
which resulted from extraordinary market conditions. Sales of fixed maturity
securities and gross gains and losses from such sales do not include sales of
securities classified as trading account securities. In 2002 and 2001, losses on
equity securities include a provision for the other than temporary decline in
the value of certain securities of $10.8 million and $1.0 million, respectively.
Losses realized on other investments include $0 million, $1.8 million and $40.7
million of losses associated with trading account securities in 2002, 2001 and
2000, respectively.

The Company, at times, enters into futures and option contracts and interest
rate swap agreements in connection with its investment strategy in order to
profit from short-term differences in price. These positions are carried at fair
value with gains and losses included in income. The Company recognized net
investment losses of $5.5 million in 2000 related to these instruments. The
Company had no outstanding futures and option contracts and interest rate swap
agreements related to its investment strategy at December 31, 2002.

The change in unrealized appreciation and depreciation on investments, primarily
fixed maturity securities is included as a component of accumulated other
comprehensive income. See Note M to the Consolidated Financial Statements.
Unrealized gains (losses) on trading securities included in net investment
income totaled $1.0 million, $4.8 million and $(4.5) million for 2002, 2001 and
2000, respectively.

Bonds and short-term investments with amortized costs of $57.1 million and $41.4
million at December 31, 2002 and 2001, respectively, are on deposit with various
states' insurance departments in compliance with statutory requirements.
Additionally, certain assets of the Company are restricted under the terms of
annuity reinsurance agreements. These agreements provide for the distribution of
assets to the reinsured companies covered under the agreements prior to any
general distribution to policyholders in the event of the Company's insolvency
or bankruptcy. The amount of assets restricted for this purpose was $68.8
million and $73.7 million at December 31, 2002 and 2001, respectively.

At December 31, 2002 and 2001, approximately 41% of the Company's total invested
assets were comprised of corporate fixed maturity securities, which are
diversified across economic sectors and industry classes. Mortgage-backed
securities comprised 22% and 25% of the Company's total invested assets at
December 31, 2002 and 2001, respectively. The Company's mortgage-backed
securities are diversified with respect to size and geographic distribution of
the underlying mortgage loans. The Company also invests in certain
non-investment grade securities as determined by nationally recognized
statistical rating agencies. Non-investment grade securities included in fixed
maturity securities had fair values of $172.3 million and $206.4 million at
December 31, 2002 and 2001, respectively. Non-investment grade securities
constituted 6.1% and 8.6% of total invested assets at December 31, 2002 and
2001, respectively.


                                      -47-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2002

NOTE C - INVESTMENTS - (CONTINUED)

The fair value of the Company's investment in the securities of any one issuer
or securities backed by a single pool of assets, excluding U.S. Government
obligations, whose value represented 10% or more of shareholders' equity at
December 31, 2002 was as follows: Tersk LLC - $100.1 million and Bankers Trust
Corporation Secured Portfolio Notes, Series 1998-1 - $88.5 million. The
Company's investment in Tersk LLC consisted of senior notes of $50.0 million and
redeemable preferred securities of $50.1 million at December 31, 2002.

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

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

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                               -------------------------------------------
                                                                   2002            2001            2000
                                                               -----------     -----------     -----------
                                                                          (dollars in thousands)
<S>                                                            <C>             <C>             <C>
Balance at beginning of year, net of reinsurance .........     $   801,225     $   657,565     $   655,179
Add provisions for claims and claim expenses incurred, net
  of reinsurance, occurring during:
    Current year .........................................         280,657         243,306         201,062
    Prior years ..........................................           1,331           6,538          (9,703)
                                                               -----------     -----------     -----------
  Incurred claims and claim expenses during the current
     year, net of reinsurance ............................         281,988         249,844         191,359
                                                               -----------     -----------     -----------
Deduct claims and claim expenses paid, net of reinsurance,
  occurring during:
     Current year ........................................          71,545          56,625          50,290
     Prior years .........................................         149,313          49,559         138,683
                                                               -----------     -----------     -----------
                                                                   220,858         106,184         188,973
                                                               -----------     -----------     -----------
Balance at end of year, net of reinsurance ...............         862,355         801,225         657,565
Reinsurance receivables at end of year ...................         238,489         221,448         276,275
                                                               -----------     -----------     -----------
  Balance at end of year, gross of reinsurance ...........     $ 1,100,844     $ 1,022,673     $   933,840
                                                               ===========     ===========     ===========

Balance Sheets:
  Future policy benefits:
    Disability and accident ..............................     $   390,717     $   348,267
  Unpaid claims and claim expenses:
    Disability and accident ..............................         175,271         167,628
    Casualty .............................................         534,856         506,778
                                                               -----------     -----------
                                                               $ 1,100,844     $ 1,022,673
                                                               ===========     ===========
</TABLE>

The provision for claims and claim expenses in 2001 includes a charge of $44.3
million for reserve strengthening primarily related to an unusually high number
of large losses in the Company's excess workers' compensation business. Included
in this charge is an addition to excess workers' compensation case reserves of
$9.0 million and losses incurred but not reported of $24.0 million. This charge
also includes reported workers' compensation losses of $6.3 million and a $5.0
million addition to long-term disability incurred but not reported reserves
attributable to the terrorist attacks on the World Trade Center.

In 2002, the change in the provision for claims and claim expenses incurred in
prior years reflects the accretion of discounted reserves offset by favorable
claims development. In 2001, the change in the provision for claims and claim
expenses incurred in prior years reflects the accretion of discounted reserves
and unfavorable claims development. In 2000, the change in the provision for
claims and claim expenses incurred in prior years reflects favorable claims
development offset by the accretion of discounted reserves. The Company's
insurance policies do not provide for the retrospective adjustment of premiums
based on claim experience.


                                      -48-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2002

NOTE E - CORPORATE DEBT

In December 2002, the Company obtained a new $150.0 million revolving credit
facility with a group of lenders comprised of major banking institutions (the
"Credit Agreement"), which replaced the existing $140.0 million revolving credit
facilities scheduled to expire in April 2003. The Company had outstanding
borrowings of $37.0 million under its Credit Agreement and $25.0 million under
its revolving credit facilities at December 31, 2002 and 2001, respectively. The
borrowings under the Credit Agreement accrue interest at floating rates, which
are indexed to various market interest indices, and non-use fees are charged on
unused portions of the commitments. The final maturity of the Credit Agreement
is December 16, 2005. The Credit Agreement is secured by a security interest in
all of the common stock of RSLIC-Texas, the common stocks 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 credit agreement. They
include, among others, the maintenance of certain financial ratios, minimum
statutory surplus and risk-based capital requirements for RSLIC and SNCC, and
certain investment, indebtedness, dividend and stock repurchase limitations. As
of December 31, 2002, the Company was in compliance in all material respects
with the restrictions and covenants in the Credit Agreement.

At December 31, 2002, the Company had $66.5 million of 8% senior notes due
October 2003 (the "Senior Notes") outstanding. 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 Senior Notes are
not redeemable prior to maturity or entitled to any sinking fund. 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 holders at 101% of the
principal amount thereof, plus accrued and unpaid interest. At various times
during the second quarter of 2002, the Company repurchased $10.5 million
aggregate principal amount of the Senior Notes. The Company recognized an
extraordinary loss of $0.2 million, net of an income tax benefit of $0.1
million, in connection with these repurchases. In June 2001, the Company
repurchased $8.0 million principal amount of the Senior Notes and recognized an
extraordinary loss of $0.1 million, net of an income tax benefit of $0.1
million, in connection with this repurchase. The terms of the indenture pursuant
to which the Senior Notes were issued contain certain covenants and 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, 2002, the Company was in
compliance in all material respects with the terms of the indenture.

Subject to market conditions, the Company may refinance its outstanding
borrowings under the Credit Agreement and its Senior Notes prior to maturity
through the issuance of debt securities covered by the Company's shelf
registration. However, no assurance can be given that such an offering will be
commenced. To mitigate the risk of interest rates rising before such refinancing
could be completed, the Company entered into a treasury rate lock agreement,
with a notional amount of $150.0 million, pursuant to which the Company will
receive (or make) a single payment at the conclusion of the agreement, depending
on the amount by which the market yield on the specified U.S. Treasury security
rises (or falls), and the extent of such change, over the term of the agreement.
The agreement was entered into in September 2002 with a term of one year. At
December 31, 2002, the net unrealized loss on the treasury rate lock agreement
included in accumulated other comprehensive income was $3.3 million, net of an
income tax benefit of $1.8 million. Under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," any gains or losses realized on
the treasury rate lock agreement would be deferred and amortized as a component
of interest expense over the term of any debt securities issued in the
refinancing, or recognized in income, if, and at the time, the Company concludes
the refinancing is improbable.

In 1996, the Company assumed $45.0 million of SIG's 8.5% senior secured notes
(the "SIG Senior Notes"), which are collateralized by all of the common stock of
SNCC. The SIG Senior Notes began maturing in $9.0 million annual installments in
1999 with a final maturity in May 2003 and have an outstanding principal balance
of $9.0 million at December 31, 2002. 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 surplus
requirements for SNCC, minimum consolidated equity requirements for SIG, as well
as the maintenance of certain financial ratios. As of December 31, 2002, SIG was
in compliance in all material respects with the terms of the note agreement.


                                      -49-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2002

NOTE E - CORPORATE DEBT - (CONTINUED)

In conjunction with the acquisition of Matrix, the Company issued $5.7 million
of 8% subordinated notes due June 2003 (the "Subordinated Notes"). The
Subordinated Notes are unsecured obligations of the Company, and payments of
principal and interest on the notes are subordinated to all of the Company's
senior debt obligations.

Interest paid by the Company on its corporate debt totaled $8.9 million, $12.2
million and $21.0 million during 2002, 2001 and 2000, respectively.

NOTE F - ADVANCES FROM THE FEDERAL HOME LOAN BANK

The Company, through its insurance subsidiaries, maintains a program in which
various investments are financed using advances from the Federal Home Loan Banks
of Pittsburgh, Dallas and Des Moines (collectively, the "FHLB"). At December 31,
2002 and 2001, advances from the FHLB, including accrued interest, totaled
$208.0 million and $162.9 million, respectively. Interest expense on the
advances is included as an offset to investment income on the financed
securities. The average interest rate on the outstanding advances was 5.9% and
6.6% at December 31, 2002 and 2001, respectively. The advances, of which $195.0
million were issued at a fixed rate and $12.0 million were issued at a variable
rate, have a weighted average term of 5.5 years at December 31, 2002. These
advances are collateralized by fixed maturity securities with a fair value of
$239.3 million.

NOTE G - INCOME TAXES

Income tax expense (benefit) is reconciled to the amount computed by applying
the statutory federal income tax rate to income before income tax expense
(benefit) and extraordinary (loss) gain as follows:

<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                           ------------------------------------
                                                             2002          2001          2000
                                                           --------      --------      --------
                                                                  (dollars in thousands)
<S>                                                        <C>           <C>           <C>
Federal income tax expense (benefit) at statutory rate     $ 30,315      $ (2,116)     $ (4,003)
Dividends received deduction and tax-exempt income ...       (6,206)       (5,104)       (6,160)
Other ................................................        1,638         2,112         2,012
                                                           --------      --------      --------
                                                           $ 25,747      $ (5,108)     $ (8,151)
                                                           ========      ========      ========
</TABLE>

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

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

<TABLE>
<CAPTION>
                                                                       December 31,
                                                                ------------------------
                                                                   2002           2001
                                                                ---------      ---------
                                                                 (dollars in thousands)
<S>                                                             <C>            <C>
Cost of business acquired .................................     $  54,777      $  46,764
Future policy benefits and unpaid claims and claim expenses        35,860         36,831
Investments ...............................................        15,853             --
Other .....................................................         9,302          6,147
                                                                ---------      ---------
    Gross deferred tax liabilities ........................       115,792         89,742
                                                                ---------      ---------
Future policy benefits and unpaid claims and claim expenses        (8,303)        (8,769)
Investments ...............................................            --         (4,296)
Other liabilities .........................................        (6,570)        (6,570)
Cost of business acquired and other .......................        (9,924)        (9,182)
Net operating loss carryforwards ..........................       (11,261)       (29,151)
Minimum tax credit carryforwards ..........................        (3,323)        (8,393)
                                                                ---------      ---------
    Gross deferred tax assets .............................       (39,381)       (66,361)
                                                                ---------      ---------
    Net deferred tax liability ............................     $  76,411      $  23,381
                                                                =========      =========
Deferred tax expense (benefit) ............................     $  31,210      $ (21,788)
                                                                =========      =========
</TABLE>


                                      -50-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2002

NOTE G - INCOME TAXES - (CONTINUED)

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

<TABLE>
<CAPTION>
                                                                As of or for the Year Ended
                                                                        December 31,
                                                            ----------------------------------
                                                              2002         2001         2000
                                                            ---------   ---------    ---------
                                                                 (dollars in thousands)

<S>                                                         <C>         <C>          <C>
Current tax (benefit) expense............................   $  (5,463)  $  16,680    $ (20,807)
Current tax recoverable..................................      11,292       6,286       41,038
Income taxes paid........................................      17,765      23,074       20,734
Income tax refunds.......................................      19,031      37,785       29,722
</TABLE>

At December 31, 2002, DFG, SNCC and the other non-life insurance subsidiaries
have net operating loss carryforwards of $32.2 million, which will expire in
2021, and alternative minimum tax credit carryforwards of $3.3 million, which do
not expire.

Tax years through 1996 are closed to further assessment by the Internal Revenue
Service ("IRS"). In 2002, the IRS began its examination of the 1997 through 2000
tax years. Management believes any future adjustments that may result from IRS
examinations of tax returns will not have a material impact on the consolidated
financial position, liquidity, or results of operations of the Company.

NOTE H - PRESENT VALUE OF FUTURE PROFITS

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

<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                            ----------------------------------
                                                              2002         2001         2000
                                                            ---------   ---------    ---------
                                                                  (dollars in thousands)
<S>                                                         <C>         <C>          <C>
Balance at beginning of year............................    $  13,693   $  15,703    $  18,422
   Interest accrued.....................................          182         287          337
   Amortization.........................................       (2,677)     (2,297)      (3,056)
                                                            ---------   ---------    ---------
Balance at end of year..................................    $  11,198   $  13,693    $  15,703
                                                            =========   =========    =========
</TABLE>

An estimate of the percentage of the December 31, 2002 PVFP balance to be
amortized over each of the next five years is as follows: 2003 - 20%, 2004 -
20%, 2005 - 20%, 2006 - 19% and 2007 - 15%.

NOTE I - GOODWILL

At January 1, 2002, unamortized goodwill of $60.9 million was attributable to
the acquisition of SNCC, whose operations are included in the group employee
benefits segment, and $33.0 million was attributable to the acquisition of
Matrix, whose operations do not meet the quantitative threshold for reportable
segments and, therefore, are reported in the "other" segment.

Income before extraordinary loss was $60.9 million, or $2.93 per share ($2.86
per share assuming dilution), for the year ended December 31, 2002. Income
(loss) before extraordinary gain, excluding the effects of goodwill
amortization, for the years ended December 31, 2001 and 2000 would have been
$2.3 million, or $0.11 per share ($0.11 per share assuming dilution) and $(0.2)
million, or $(0.01) per share ($(0.01) per share assuming dilution),
respectively. The following table provides a reconciliation of reported net
income to adjusted net income and the related earnings per share data as if the
provisions of SFAS No. 142 related to goodwill had been adopted as of January 1,
2000:


                                      -51-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2002

NOTE I - GOODWILL - (CONTINUED)

<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                            ----------------------------------
                                                              2002         2001         2000
                                                            ---------   ---------    ---------
                                                                  (dollars in thousands,
                                                                   except per share data)
<S>                                                         <C>         <C>          <C>
Net income (loss), as reported........................      $  60,652   $   6,505    $  (3,293)
Add back: goodwill amortization.......................              -       3,198        3,112
                                                            ---------   ---------    ---------
   Adjusted net income (loss).........................      $  60,652   $   9,703    $    (181)
                                                            =========   =========    =========

Basic results per share of common stock:
   Net income (loss), as reported.....................      $    2.92   $     0.32   $   (0.16)
   Add back: goodwill amortization....................             --         0.16        0.15
                                                            ---------   ----------   ---------
      Adjusted net income (loss)......................      $    2.92   $     0.48   $   (0.01)
                                                            =========   ==========   =========

Diluted results per share of common stock:
   Net income (loss), as reported.....................      $    2.85   $     0.32   $   (0.16)
   Add back: goodwill amortization....................             --         0.16        0.15
                                                            ---------   ----------   ---------
      Adjusted net income (loss)......................      $    2.85   $     0.48   $   (0.01)
                                                            =========   ==========   =========
</TABLE>

NOTE J - FAIR VALUES OF FINANCIAL INSTRUMENTS

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

<TABLE>
<CAPTION>
                                                                         December 31,
                                                    -------------------------------------------------------
                                                              2002                          2001
                                                    -------------------------     -------------------------
                                                     Carrying         Fair         Carrying         Fair
                                                      Value          Value          Value          Value
                                                    ----------     ----------     ----------     ----------
                                                                    (dollars in thousands)
<S>                                                 <C>            <C>            <C>            <C>
Assets:
  Fixed maturity securities, available for sale     $2,495,629     $2,495,629     $2,223,789     $2,223,789
  Short-term investments ......................        204,890        204,890         92,862         92,862
  Other investments ...........................        115,532        115,532        110,563        110,563
  Assets held in separate account .............         73,153         73,153         73,683         73,683

Liabilities:
  Policyholder account balances ...............        847,125        852,227        735,557        731,904
  Corporate debt ..............................        118,139        120,094        125,675        128,337
  Advances from Federal Home Loan Bank ........        207,990        228,847        162,909        172,511
  Liabilities related to separate account .....         63,033         63,033         63,361         63,361
</TABLE>

The fair values for fixed maturity securities and short-term investments have
been obtained from broker-dealers, nationally recognized statistical
organizations and, in the case of certain structured notes, by reference to the
fair values of the underlying investments. Securities acquired through private
placements in the Company's fixed maturity portfolio that are not actively
traded in a liquid market and do not have other mechanisms for their sale
totaled $67.6 million and $97.8 million at December 31, 2002 and 2001,
respectively. The Company estimates the fair value of these securities primarily
by comparison to similar securities with quoted market prices. If quotes are not
available on similar securities, the Company estimates fair value based on
recent purchases or sales of similar securities or other internally prepared
valuations. Key assumptions used in this process include the level of risk-free
interest rates, risk premiums, and performance of underlying collateral, if
applicable. All such investments are classified as available for sale. The
Company's ability to liquidate these investments in a timely manner, if
necessary, may be adversely impacted by the lack of an actively traded market.
Historically, the Company has not realized amounts on dispositions of
non-marketable investments materially in excess of the gain or loss amounts
estimated by the Company under this valuation methodology. The Company believes
that its estimates reasonably reflect the fair values of these securities;
however, had


                                      -52-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2002

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

there been an active market for these securities during the applicable reporting
periods, the market prices may have been materially different than the amounts
reported. The carrying values for all other invested assets approximate fair
values based on the nature of the investments. The carrying values of separate
account assets and liabilities are equal to fair value.

Policyholder account balances are net of reinsurance receivables and the
carrying values have been decreased for related acquisition costs of $38.1
million and $55.3 million at December 31, 2002 and 2001, respectively. Fair
values for policyholder account balances were determined by deducting an
estimate of the future profits to be realized from the business, discounted at a
current interest rate, from the adjusted carrying values.

The Company believes the fair value of its variable rate long-term debt and
variable rate advances from the FHLB are equal to their carrying value. The
Company pays variable rates of interest on this debt and these FHLB advances,
which reflect changed market conditions since the time the terms were
negotiated. The fair values of the Senior Notes, the SIG Senior Notes and the
Subordinated Notes are based on the expected cash flows discounted to net
present value. The fair values for fixed rate advances from the FHLB were
calculated using discounted cash flow analyses based on the interest rates for
the advances at the balance sheet date.

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

In 1997, Delphi Funding L.L.C. ("Delphi Funding"), a subsidiary of the Company,
issued $100.0 million liquidation amount of 9.31% Capital Securities, Series A
(the "Capital Securities") in a public offering. During 2001, the Company
repurchased $64.0 million liquidation amount of the Capital Securities in the
open market. The Company recognized an extraordinary gain of $7.6 million, net
of income tax expense of $4.1 million, in connection with these repurchases. In
connection with the issuance of the Capital Securities and the related purchase
by the Company of all of the common limited liability company interests in
Delphi Funding, the Company issued to Delphi Funding $103.1 million principal
amount of 9.31% junior subordinated deferrable interest debentures, Series A,
due 2027 (the "Junior Debentures"). Interest on the Junior Debentures is payable
semiannually, but may, subject to certain exceptions, be deferred at any time or
from time to time for a period not exceeding five years with respect to each
deferral period, in which event 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.

Dividends paid by Delphi Funding on the outstanding Capital Securities totaled
$3.4 million, $7.2 million and $9.3 million during 2002, 2001 and 2000,
respectively.

NOTE L - SHAREHOLDERS' EQUITY AND RESTRICTIONS

The holders of the Company's Class A Common Stock are entitled to one vote per
share, and the holders of the Company's Class B Common Stock are entitled to the
number of votes per share equal to the lesser of (1) the number of votes such
that the aggregate of all outstanding shares of Class B Common Stock will be
entitled to cast 49.9% of all votes represented by the aggregate of all
outstanding shares of Class A Common Stock and Class B Common Stock or (2) ten
votes per share. In 2001, the Company's Board of Directors approved the
initiation of a quarterly cash dividend of $0.07 per share, payable on the
Company's outstanding Class A and Class B Common Stock. In the fourth quarter of
2002, the Company's Board of Directors approved an increase in the Company's
quarterly cash dividend to $0.08 per share. During 2002 and 2001, the Company
paid cash dividends on its capital stock in the amount of $6.0 million and $5.7
million, respectively. Under the Credit Agreement, cash dividends on, together
with any repurchases or redemptions by the Company of, its capital stock, may
not, during any fiscal year, exceed 5% of the Company's Consolidated Equity (as


                                      -53-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2002

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

defined in the Credit Agreement) as of the end of the preceding fiscal year,
with unused amounts carrying over to subsequent fiscal years. The aggregate
limitation for 2003 on dividend payments and/or repurchases or redemptions of
its capital stock by the Company will be equal to $57.5 million. 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. The Company's life insurance subsidiaries had consolidated statutory
capital and surplus of $257.2 million and $248.1 million at December 31, 2002
and 2001, respectively. Consolidated statutory net income for the Company's life
insurance subsidiaries was $29.5 million, $2.2 million and $56.6 million, in
2002, 2001 and 2000, respectively. The consolidated statutory net income for the
Company's life insurance subsidiaries for 2002 and 2001 includes a charge of
$17.4 million and $39.9 million, respectively, for the other than temporary
decline in the value of certain securities. The Company's casualty insurance
subsidiary had statutory capital and surplus of $212.7 million and $198.0
million at December 31, 2002 and 2001, respectively, and statutory net income
(loss) of $15.2 million, $(10.7) million and $32.3 million in 2002, 2001 and
2000, respectively. The consolidated statutory net loss in 2001 for the
Company's casualty insurance subsidiary includes a charge for reserve
strengthening of $29.9 million, net of taxes, primarily related to an unusually
high number of large losses in the Company's excess workers' compensation
business, including losses attributable to the terrorist attacks on the World
Trade Center. Payment of dividends by the Company's insurance subsidiaries is
regulated by insurance laws and is permitted based on, among other things, the
level of prior-year statutory surplus and net income. The Company's insurance
subsidiaries will be permitted to make dividend payments totaling $46.6 million
during 2003 without prior regulatory approval.

The Company's Board of Directors has authorized the Company to purchase up to
2.4 million shares of its outstanding Class A Common Stock from time to time on
the open market. At December 31, 2002, 0.9 million shares remained authorized
for future purchases. During 2001 and 2000, the Company purchased 0.1 million
and 0.3 million shares, respectively, of its Class A Common Stock for a total
cost of $2.2 million and $10.2 million, respectively. There were no Class A
Common Stock repurchases during 2002.

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

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                                            ----------------------------------
                                                              2002         2001         2000
                                                            ---------   ---------   ----------
                                                                   (shares in thousands)
<S>                                                            <C>         <C>          <C>
Class A Common Stock:
  Beginning balance......................................      17,763      16,845       16,285
     Issuance of stock, exercise of stock options and
         conversion of shares............................       1,165         918          560
                                                            ---------   ---------   ----------
     Ending balance......................................      18,928      17,763       16,845
                                                            =========   =========   ==========
Class B Common Stock:
  Beginning balance......................................       4,133       4,839        5,180
     Conversion of shares................................        (938)       (706)        (341)
                                                            ---------   ---------   ----------
     Ending balance......................................       3,195       4,133        4,839
                                                            =========   =========   ==========
Class A Treasury Stock:
  Beginning balance......................................       1,505       1,435        1,110
     Acquisition of treasury stock.......................          --          70          325
                                                            ---------   ---------   ----------
     Ending balance......................................       1,505       1,505        1,435
                                                            =========   =========   ==========
</TABLE>


                                      -54-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2002

NOTE M - ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

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

<TABLE>
<CAPTION>
                                                                     Net
                                                                 Unrealized
                                                                 Appreciation          Net
                                                                (Depreciation)      Unrealized        Minimum
                                                                 on Available        Loss on          Pension
                                                                   for Sale         Cash Flow         Liability
                                                                  Securities           Hedge         Adjustment           Total
                                                                 ------------      ------------      ------------      ------------
                                                                                       (dollars in thousands)
<S>                                                              <C>               <C>               <C>               <C>
Balance, January 1, 2000 ...................................     $   (101,465)     $         --      $         --      $   (101,465)
                                                                 ------------      ------------      ------------      ------------

Unrealized depreciation on available for sale securities (1)          (18,700)               --                --           (18,700)
Reclassification adjustment for losses included in
      net income (2) .......................................           66,543                --                --            66,543
                                                                 ------------      ------------      ------------      ------------

Net change in unrealized depreciation on
   investments .............................................           47,843                --                --            47,843
                                                                 ------------      ------------      ------------      ------------
Balance, December 31, 2000 .................................     $    (53,622)     $         --      $         --      $    (53,622)
                                                                 ------------      ------------      ------------      ------------

Unrealized depreciation on available for sale securities (1)           (1,886)               --                --            (1,886)
Reclassification adjustment for losses included in
   net income (2) ..........................................           44,523                --                --            44,523
                                                                 ------------      ------------      ------------      ------------
Net change in unrealized depreciation on
   investments .............................................           42,637                --                --            42,637
                                                                 ------------      ------------      ------------      ------------
Balance, December 31, 2001 .................................     $    (10,985)     $         --      $         --      $    (10,985)
                                                                 ------------      ------------      ------------      ------------

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

(1)   Net of an income tax benefit (expense) of $10.1 million, $1.0 million and
      $(14.3) million for the years ended December 31, 2000, 2001 and 2002,
      respectively. Also, net of related adjustment to cost of business acquired
      of $(9.7) million, $(4.1) million and $(23.8) million for the years ended
      December 31, 2000, 2001 and 2002, respectively.

(2)   Net of an income tax benefit of $35.8 million, $24.0 million and $9.7
      million for the years ended December 31, 2000, 2001 and 2002,
      respectively.

(3)   Net of an income tax benefit of $1.8 million.

(4)   Net of an income tax benefit of $0.1 million.

NOTE N - COMMITMENTS AND CONTINGENCIES

Total rental expense for operating leases, principally for administrative and
sales office space, was $7.7 million, $6.7 million, and $5.7 million for the
years ended December 31, 2002, 2001, and 2000, respectively. As of December 31,
2002, future net minimum rental payments under non-cancelable operating leases
were approximately $36.4 million, payable as follows: 2003 - $7.6 million, 2004
- $7.1 million, 2005 - $6.7 million, 2006 - $5.5 million, 2007 - $4.8 million
and $4.7 million thereafter.


                                      -55-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2002

NOTE N - COMMITMENTS AND CONTINGENCIES - (CONTINUED)

In the course of its business, the Company is a party to litigation and other
proceedings, primarily involving its insurance operations. In some cases, these
proceedings entail claims against the Company for punitive damages and similar
types of relief. The ultimate disposition of such pending litigation and
proceedings is not expected to have a material adverse effect on the Company's
consolidated financial position. In addition, incident to its discontinued
products, the Company is currently a party to two separate arbitrations arising
out of two accident and health reinsurance arrangements in which it and other
companies formerly were participating reinsurers. At issue in both arbitrations,
among other things, is whether certain reinsurance risks were validly ceded to
the Company. The ultimate resolutions of these arbitrations are likely to
require extended periods of time. While management believes that in both cases
the Company has substantial legal grounds for avoiding the reinsurance risks at
issue, it is not at this time possible to predict the ultimate outcome of these
arbitrations, nor is it feasible to provide reasonable ranges of potential
losses. In the opinion of management, such arbitrations, when ultimately
resolved, will not individually or collectively have a material adverse effect
on the Company's consolidated financial position.

NOTE O - STOCK OPTIONS

Under the terms of the Company's employee stock option plan and outside
directors' stock option plan, a total of 3,750,000 shares of Class A Common
Stock have been reserved for issuance. The exercise price for options granted
under these plans is the fair market value of the underlying stock as of the
date of the grant and the maximum term of an option is ten years.

The Company's long-term performance-based incentive plan for its chief executive
officer (the "Performance Plan") provides for the award of up to 317,975 shares
or options for shares of the Company's Class B Common Stock (79,494 restricted
or deferred shares and options to purchase 238,481 shares) per year over a
ten-year term contingent upon the Company meeting specified annual performance
goals. The restricted or deferred shares may not be sold or otherwise disposed
of until the earliest of the individual's retirement, disability or death or a
change of ownership of the Company. The exercise price of the options awarded
under the 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. No deferred
shares or options were awarded for the years ended December 31, 2000, 2001 or
2002. No compensation expense related to the Performance Plan was recognized for
the years ended December 31, 2000, 2001 or 2002.

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

<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                            ---------------------------------------------------------------------------------------
                                                       2002                           2001                          2000
                                            --------------------------     --------------------------     -------------------------
                                              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 ..    2,551,739      $    32.17      2,580,950      $    32.32      1,837,616     $    33.09
   Options granted ......................       76,410           40.71        150,794           35.50        769,204          30.00
   Options forfeited ....................      (27,539)          37.89       (130,016)          36.01         (8,620)         30.27
   Options expired ......................      (20,912)          33.81        (34,207)          42.98             --             --
   Options exercised ....................      (69,593)          25.70        (15,782)          34.24        (17,250)         12.13
                                            ----------                     ----------                     ----------
Options outstanding, end of year ........    2,510,105           32.53      2,551,739           32.17      2,580,950          32.32
                                            ==========                     ==========                     ==========

Exercisable options, end of year ........    2,101,862           32.33      1,961,348           31.99      1,711,693          32.08
</TABLE>


                                      -56-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2002

NOTE O - STOCK OPTIONS - (CONTINUED)

Information about options outstanding at December 31, 2002 was as follows:

<TABLE>
<CAPTION>
                                        Outstanding                       Exercisable
                            ------------------------------------     -----------------------
                            Number        Average       Average       Number        Average
      Range of                of         Remaining     Exercise         of         Exercise
 Exercise Prices            Options        Life          Price        Options        Price
----------------------     ---------     ---------     ---------     ---------     ---------
<S>                        <C>           <C>           <C>           <C>           <C>
$ 0.00 - $13.59 ......       175,757           2.1     $   13.07       175,757     $   13.07
$21.70 - $32.32 ......     1,450,507           6.4         29.73     1,219,830         29.68
$33.00 - $48.60 ......       866,076           6.2         40.68       691,425         41.41
$56.36 - $56.36 ......        17,765           5.4         56.36        14,850         56.36
                           ---------     ---------     ---------     ---------     ---------
                           2,510,105           6.0     $   32.53     2,101,862     $   32.33
                           =========     =========     =========     =========     =========
</TABLE>

During 1996, the Company assumed 6.0 million SIG stock options (the "SIG
Options") in connection with SIG's merger into the Company (the "SIG Merger").
Upon the exercise of the SIG Options, the holder is entitled to receive (i)
..1399 of a share of the Company's Class A Common Stock for each SIG Option; plus
(ii) an additional number of shares of the Company's Class A Common Stock equal
to the quotient of (a) $1.90 multiplied by the number of SIG Options being
exercised increased by an interest component from the time of the SIG Merger to
the exercise date, divided by (b) the average closing share price for the
Company's Class A Common Stock for the ten days prior to the exercise date. The
SIG Options were granted annually from 1992 to 1996, have an exercise price of
$0.02 and each grant vests over five years beginning in the fourth year after
the grant date. All of the SIG Options expire on October 1, 2006. As of December
31, 2002, the weighted average contractual life of the outstanding SIG Options
was 3.8 years.

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

<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                          ----------------------------------------------------------------------------------------
                                                     2002                           2001                           2000
                                          -------------------------      --------------------------     --------------------------
                                            Number        Equivalent       Number        Equivalent       Number        Equivalent
                                            of SIG         Class A         of SIG         Class A         of SIG         Class A
                                           Options          Shares        Options          Shares        Options          Shares
                                          ----------     ----------      ----------      ----------     ----------      ----------
<S>                                        <C>               <C>          <C>               <C>          <C>               <C>
SIG Options - beginning of period ...      1,223,606         264,622      1,895,352         387,545      2,590,259         571,483
   Options exercised ................       (511,261)        115,186       (671,746)        156,200       (694,907)        152,229
   Options forfeited ................        (16,191)             --             --              --             --              --
                                          ----------              -      ----------                     ----------
   SIG Options - end of year ........        696,154         155,000      1,223,606         264,622      1,895,352         387,545
                                          ==========                     ==========                     ==========

Exercisable SIG Options - end of year        475,976         109,331        649,719         140,511        716,923         146,590
</TABLE>


                                      -57-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2002

NOTE P - COMPUTATION OF RESULTS PER SHARE

<TABLE>
<CAPTION>
                                                                                 Year Ended December 31,
                                                                       --------------------------------------------
                                                                          2002             2001             2000
                                                                       ----------       ----------       ----------
                                                                       (dollars in thousands, except per share data)
<S>                                                                    <C>              <C>              <C>
Numerator:
   Income (loss) before extraordinary (loss) gain ...............      $   60,868       $     (941)      $   (3,293)
   Extraordinary (loss) gain, net of income tax (benefit) expense            (216)           7,446               --
                                                                       ----------       ----------       ----------
     Net income (loss) ..........................................      $   60,652       $    6,505       $   (3,293)
                                                                       ==========       ==========       ==========

Denominator:
   Weighted average common shares outstanding ...................          20,759           20,565           20,388
     Effect of dilutive securities ..............................             499               --               --
                                                                       ----------       ----------       ----------
   Weighted average common shares outstanding, assuming dilution           21,258           20,565           20,388
                                                                       ==========       ==========       ==========

Basic results per share of common stock:
   Income (loss) before extraordinary (loss) gain ...............      $     2.93       $    (0.04)      $    (0.16)
   Extraordinary (loss) gain, net of income tax (benefit) expense           (0.01)            0.36               --
                                                                       ----------       ----------       ----------
     Net income (loss) ..........................................      $     2.92       $     0.32       $    (0.16)
                                                                       ==========       ==========       ==========

Diluted results per share of common stock:
   Income (loss) before extraordinary (loss) gain ...............      $     2.86       $    (0.04)      $    (0.16)
   Extraordinary (loss) gain, net of income tax (benefit) expense           (0.01)            0.36               --
                                                                       ----------       ----------       ----------
     Net income (loss) ..........................................      $     2.85       $     0.32       $    (0.16)
                                                                       ==========       ==========       ==========
</TABLE>

NOTE Q - REINSURANCE

The Company assumes and cedes reinsurance from and to other insurers and
reinsurers. The Company uses reinsurance to limit its maximum loss, provide
greater diversification of risk and in connection with the exiting of certain
lines of business. Reinsurance coverages are tailored to the specific risk
characteristics of each type of product and the Company's retained amount varies
by type of coverage. Generally, group life, disability and accident policies are
reinsured on a coinsurance and risk premium basis. Property and casualty
policies are reinsured on an excess of loss, per risk basis under general
reinsurance agreements, or, in some instances, on an individual risk basis.
Indemnity reinsurance treaties do not provide absolute protection to the Company
since the ceding insurer remains responsible for policy claims to the extent
that the reinsurer fails to pay such claims. To reduce this risk, the Company
monitors the financial position of its reinsurers, including, among other
things, the companies' financial ratings, and in certain cases receives
collateral security from the reinsurer. Also, certain of the Company's
reinsurance agreements require the reinsurer to set up security arrangements for
the Company's benefit in the event of certain ratings downgrades. As of December
31, 2002, all of the Company's significant reinsurers were either rated "A-"
(Excellent) or higher by A.M. Best Company.

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


                                      -58-
<PAGE>

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                DECEMBER 31, 2002

NOTE Q - REINSURANCE - (CONTINUED)

a result of this waiver, the Company recognized a pre-tax loss of $7.5 million
in 2001 for the other than temporary decline in the value of these notes. In
March 2002, Delphi International repaid the adjusted amounts due under the
subordinated notes and the Company did not realize any significant additional
loss in connection with such repayment.

A summary of reinsurance activity follows:

<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                                              --------------------------------
                                                                2002        2001        2000
                                                              ---------  ---------   ---------
                                                                   (dollars in thousands)

<S>                                                           <C>        <C>         <C>
Premium income assumed...................................     $  38,172  $  23,099   $  41,047
Premium income ceded.....................................       109,198    126,698     111,390
Benefits, claims and interest credited ceded.............       134,875    150,885     113,367
</TABLE>

NOTE R - SEGMENT INFORMATION

<TABLE>
<CAPTION>
                                                        Group
                                                       Employee         Asset
                                                        Benefit       Accumulation
                                                        Products        Products       Other (1)          Total
                                                       ----------     ------------     ----------       ----------
                                                                         (dollars in thousands)
<S>                                                    <C>             <C>             <C>              <C>
2002
Revenues excluding net realized investment losses      $  698,396      $   70,109      $   21,388       $  789,893
Operating income (loss) (2) .....................         122,726          10,129          (5,390)         127,465
Net investment income (3) .......................          89,897          67,464           4,675          162,036
Amortization of cost of business acquired .......          41,608           4,134              --           45,742
Segment assets (3) ..............................       2,101,836       1,496,343         136,763        3,734,942

2001
Revenues excluding net realized investment losses         570,852          72,746          21,115          664,713
Operating income (loss) (2) (4) .................          72,961          13,434          (4,743)          81,652
Net investment income (3) .......................          82,858          69,658           4,993          157,509
Amortization of cost of business acquired .......          30,415           4,285              --           34,700
Segment assets (3) ..............................       1,882,009       1,326,428         127,709        3,336,146

2000
Revenues excluding net realized investment losses         547,614          81,870          21,449          650,933
Operating income (loss) (2) (4) .................         134,654          26,456          (3,739)         157,371
Net investment income (3) .......................          99,924          79,319           5,333          184,576
Amortization of cost of business acquired .......          25,307           4,419              --           29,726
Segment assets (3) ..............................       1,963,114       1,353,874         123,022        3,440,010
</TABLE>

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

(2)   Income (loss) excluding net realized investment losses and before interest
      and income tax expense and extraordinary (loss) gain. Results for 2001
      reflect the reserve strengthening and liquidation of a substantial
      majority of the investments of the Company's investment subsidiaries. See
      Notes C and D to the Consolidated Financial Statements.

(3)   Net investment income includes income earned on the assets of the
      insurance companies as well as on the assets of the holding company and is
      allocated among business lines in proportion to average reserves and the
      capital placed at risk for each segment. Segment assets include assets of
      the insurance companies as well as assets of the holding company, which
      are allocated across business lines in proportion to average reserves and
      the capital placed at risk for each segment. The decline in investment
      income and segment assets during 2001 reflects the liquidation of a
      substantial majority of the investments of the Company's investment
      subsidiaries. See Note C to the Consolidated Financial Statements.

(4)   Operating income for group employee benefits and other operations includes
      amortization of goodwill of $1.8 million and $1.4 million, respectively,
      in 2001 and $1.8 million and $1.3 million, respectively, in 2000.


                                      -59-
<PAGE>

                                                                      SCHEDULE I

                  DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
                             SUMMARY OF INVESTMENTS
                    OTHER THAN INVESTMENTS IN RELATED PARTIES
                                DECEMBER 31, 2002
                             (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      $  279,150      $  293,177      $  293,177
  Other mortgage-backed securities ................         317,711         335,156         335,156
  U.S. Treasury and other U.S. Government
     guaranteed securities ........................         266,333         275,983         275,983
  Obligations of U.S. states, municipalities and
     political subdivisions .......................         424,921         438,524         438,524
  Corporate securities ............................       1,141,540       1,152,789       1,152,789
                                                         ----------      ----------      ----------
     Total fixed maturity securities ..............       2,429,655       2,495,629       2,495,629
                                                         ----------      ----------      ----------

Equity securities:
  Common stocks ...................................          17,469          18,247          18,247
  Non-redeemable preferred stocks .................          14,805          14,933          14,933
                                                         ----------      ----------      ----------
     Total equity securities ......................          32,274          33,180          33,180
                                                         ----------      ----------      ----------

Short-term investments ............................         204,890         204,890         204,890
Other investments .................................          93,466          82,352          82,352
                                                         ----------      ----------      ----------
     Total investments ............................      $2,760,285      $2,816,051      $2,816,051
                                                         ==========      ==========      ==========
</TABLE>


                                      -60-
<PAGE>

                                                                     SCHEDULE II

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

<TABLE>
<CAPTION>
                                                                             December 31,
                                                                      -------------------------
                                                                         2002            2001
                                                                      ---------       ---------
<S>                                                                   <C>             <C>
Assets:
  Fixed maturity securities, available for sale ................      $      --       $  14,824
  Other invested assets ........................................          4,288           3,541
  Investment in operating subsidiaries .........................        831,150         714,438
  Investment in investment subsidiaries ........................         53,646         142,130
  Investment in Delphi Funding L.L.C ...........................          3,093           3,093
  Cash .........................................................            641               5
  Other assets .................................................         24,007          20,282
                                                                      ---------       ---------
     Total assets ..............................................      $ 916,825       $ 898,313
                                                                      =========       =========

Liabilities:
  Corporate debt ...............................................      $ 109,111       $ 107,550
  Junior subordinated debentures payable to Delphi Funding L.L.C         39,143          39,143
  Amounts due to subsidiaries ..................................         10,597          86,692
  Other liabilities ............................................         76,319          82,934
                                                                      ---------       ---------
                                                                        235,170         316,319
                                                                      ---------       ---------

Shareholders' Equity:
  Class A Common Stock .........................................            189             178
  Class B Common Stock .........................................             32              41
  Additional paid-in capital ...................................        373,356         369,385
  Accumulated other comprehensive income (loss) ................         30,003         (10,985)
  Retained earnings ............................................        329,574         274,874
  Treasury stock ...............................................        (51,499)        (51,499)
                                                                      ---------       ---------
                                                                        681,655         581,994
                                                                      ---------       ---------
     Total liabilities and shareholders' equity ................      $ 916,825       $ 898,313
                                                                      =========       =========
</TABLE>

                  See notes to condensed financial statements.


                                      -61-
<PAGE>

                                                         SCHEDULE II (CONTINUED)

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

<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                                    --------------------------------------------
                                                                       2002             2001             2000
                                                                    ----------       ----------       ----------
<S>                                                                 <C>              <C>              <C>
Revenue:
  Equity in undistributed earnings of subsidiaries ...........      $   91,303       $    5,116       $   11,385
  Dividends from subsidiaries ................................          14,088           31,888            9,588
  Other (loss) income ........................................          (1,653)             136             (809)
  Realized investment gains (losses) .........................             200          (21,853)             427
                                                                    ----------       ----------       ----------
                                                                       103,938           15,287           20,591
                                                                    ----------       ----------       ----------
Expenses:
  Operating expenses .........................................           2,598            1,436            2,143
  Interest expense ...........................................          14,725           19,900           29,892
                                                                    ----------       ----------       ----------
                                                                        17,323           21,336           32,035
                                                                    ----------       ----------       ----------

     Income (loss) before income tax expense (benefit) and
        extraordinary (loss) gain ............................          86,615           (6,049)         (11,444)

Income tax expense (benefit) .................................          25,747           (5,108)          (8,151)
                                                                    ----------       ----------       ----------
     Income (loss) before extraordinary (loss) gain ..........          60,868             (941)          (3,293)

Extraordinary (loss) gain, net of income tax (benefit) expense            (216)           7,446               --
                                                                    ----------       ----------       ----------

     Net income (loss) .......................................      $   60,652       $    6,505       $   (3,293)
                                                                    ==========       ==========       ==========
</TABLE>

                  See notes to condensed financial statements.


                                      -62-
<PAGE>

                                                         SCHEDULE II (CONTINUED)

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

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                                     -----------------------------------------
                                                                        2002            2001            2000
                                                                     ---------       ---------       ---------
<S>                                                                  <C>             <C>             <C>
Operating activities:
  Net income (loss) ...........................................      $  60,652       $   6,505       $  (3,293)
  Adjustments to reconcile net income (loss) to net cash (used)
        provided by operating activities:
     Equity in undistributed earnings of subsidiaries .........        (63,915)         (6,316)        (11,546)
     Change in other assets and other liabilities .............        (29,153)          3,341           1,093
     Change in current and deferred income taxes ..............         16,111           4,265          12,017
     Amortization, principally of investments and debt
         issuance costs .......................................           (290)            868             390
     Net realized (gains) losses on investments ...............           (200)         21,853            (427)
     Change in amounts due from/to subsidiaries ...............         18,134         148,444          18,506
     Extraordinary loss (gain) ................................            216          (7,446)             --
                                                                     ---------       ---------       ---------
Net cash (used) provided by operating activities ..............          1,555         171,514          16,740
                                                                     ---------       ---------       ---------

Investing activities:
  Purchases of investments and loans made .....................        (14,348)         (1,195)        (18,672)
  Sales of investments and receipts from repayment of loans ...             --          35,378          17,511
  Maturities of investments ...................................         15,024             400             724
  Net change in short-term investments ........................           (742)         (3,354)          7,069
     Purchases of investments in subsidiaries .................             --          (2,613)        (15,610)
                                                                     ---------       ---------       ---------
  Net cash provided (used) by investing activities ............            (66)         28,616          (8,978)
                                                                     ---------       ---------       ---------

Financing activities:
  Proceeds from issuance of common stock and exercise of
     stock options ............................................          3,973           2,554           2,445
  Dividends paid on common stock ..............................         (5,952)         (5,691)             --
  Acquisition of treasury stock ...............................             --          (2,204)         (5,493)
  Borrowings under revolving credit facilities ................         49,000         102,000          19,000
  Principal payments under revolving credit facilities ........        (37,000)       (227,000)        (26,000)
  Repurchase of Senior Notes ..................................        (10,874)         (8,284)             --
  Repurchase of junior subordinated debentures payable to
     Delphi Funding  L.L.C ....................................             --         (51,329)             --
  Change in liability for securities sold under agreements to
     repurchase ...............................................             --         (10,571)         (4,308)
  Payments received on surplus debenture ......................             --              --           6,990
                                                                     ---------       ---------       ---------
        Net cash used by financing activities .................           (853)       (200,525)         (7,366)
                                                                     ---------       ---------       ---------

Increase (decrease) in cash ...................................            636            (395)            396
Cash at beginning of year .....................................              5             400               4
                                                                     ---------       ---------       ---------
     Cash at end of year ......................................      $     641       $       5       $     400
                                                                     =========       =========       =========
</TABLE>

                  See notes to condensed financial statements.


                                      -63-
<PAGE>

                                                         SCHEDULE II (CONTINUED)

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

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

The Company received cash dividends from subsidiaries of $13.3 million, $32.7
million and $9.6 million in 2002, 2001 and 2000, respectively.


                                      -64-
<PAGE>

                                                                    SCHEDULE III

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

<TABLE>
<CAPTION>
                                                      Future Policy
                                                      Benefits and
                                       Cost of        Unpaid Claim                     Policyholder
                                       Business        and Claim         Unearned        Account
                                       Acquired         Expenses         Premiums        Balances
                                      ----------      ------------      ----------    -------------
<S>                                   <C>             <C>               <C>           <C>
2002
Group employee benefits products      $  130,050      $  1,214,399      $   48,171      $       --
Asset accumulation products ....          38,060            72,043              --         878,820
Other ..........................              --            84,772              --          31,141
                                      ----------      ------------      ----------      ----------
   Total .......................      $  168,110      $  1,371,214      $   48,171      $  909,961
                                      ==========      ============      ==========      ==========

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

2000
Group employee benefits products      $  100,701      $  1,026,307      $   46,725      $       --
Asset accumulation products ....          55,855            53,097              --         751,311
Other ..........................              --            90,740              --          31,141
                                      ----------      ------------      ----------      ----------
   Total .......................      $  156,556      $  1,170,144      $   46,725      $  782,452
                                      ==========      ============      ==========      ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                   Benefits,
                                                                 Claims and      Amortization
                                      Premium         Net          Interest       of Cost of        Other
                                      and Fee      Investment     Credited to       Business      Operating
                                     Income (1)    Income (2)    Policyholders      Acquired       Expenses
                                     ----------    ----------    -------------   ------------     --------
<S>                                  <C>           <C>           <C>             <C>              <C>
2002
Group employee benefits products      $608,499      $ 89,897      $    420,992      $ 41,608      $113,070
Asset accumulation products ....         2,645        67,464            49,464         4,134         6,382
Other ..........................        16,713         4,675             1,528            --        25,250
                                      --------      --------      ------------      --------      --------
   Total .......................      $627,857      $162,036      $    471,984      $ 45,742      $144,702
                                      ========      ========      ============      ========      ========

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

2000
Group employee benefits products      $447,690      $ 99,924      $    295,321      $ 25,307      $ 92,332
Asset accumulation products ....         2,551        79,319            45,563         4,419         5,432
Other ..........................        16,116         5,333             1,874            --        23,314
                                      --------      --------      ------------      --------      --------
   Total .......................      $466,357      $184,576      $    342,758      $ 29,726      $121,078
                                      ========      ========      ============      ========      ========
</TABLE>

(1)   Net written premiums for casualty insurance products totaled $162.6
      million, $105.5 million and $93.4 million for the years ended December 31,
      2002, 2001 and 2000, respectively.

(2)   Net investment income includes income earned on the assets of the
      insurance companies as well as on the assets of the holding company and is
      allocated among business lines in proportion to average reserves and the
      capital placed at risk for each segment. The decline in investment income
      in 2001 and 2002 reflects the liquidation of a substantial majority of the
      investments of the Company's investment subsidiaries. See Note C to the
      Consolidated Financial Statements.


                                      -65-
<PAGE>

                                                                     SCHEDULE IV

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

<TABLE>
<CAPTION>
                                                                                                              Percentage
                                                           Ceded to          Assumed                           of Amount
                                            Gross            Other          from Other           Net            Assumed
                                           Amount          Companies        Companies          Amount           to Net
                                         -----------      -----------      ------------      -----------      -----------
<S>                                      <C>              <C>              <C>               <C>              <C>
Life insurance in force as of
   December 31, 2002 ..............      $95,624,554      $ 7,219,005      $     36,403      $88,441,952               --%
                                         ===========      ============      ===========      ===========

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

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

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

Life insurance in force as of
   December 31, 2000 ..............      $71,047,412      $ 4,418,697      $     41,460      $66,670,175               --%
                                         ===========      ============      ===========      ===========

Year ended December 31, 2000:
   Premium and fee income:
      Life insurance and annuity ..      $   180,910      $    20,240      $      1,716      $   162,386                1%
      Accident and health insurance          231,676           45,390            21,162          207,448               10%
      Casualty insurance ..........          110,006           45,760            18,169           82,415               22%
      Other .......................           14,108               --                --           14,108
                                         -----------      ------------      -----------      -----------
Total premium and fee income ......      $   536,700      $   111,390      $     41,047      $   466,357
                                         ===========      ============      ===========      ===========
</TABLE>


                                      -66-
<PAGE>

                                                                     SCHEDULE VI

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

<TABLE>
<CAPTION>
                                                                          December 31,
                                                                 -------------   -------------
                                                                      2002            2001
                                                                 -------------   -------------
<S>                                                              <C>             <C>
Deferred policy acquisition costs...........................       $   6,999       $   5,566

Reserves for unpaid claims and claim expenses (1)...........         534,856         506,778

Discount, if any, deducted from above (2)...................         241,688         224,241

Unearned premiums...........................................          43,904          40,499
</TABLE>

<TABLE>
<CAPTION>
                                                             Year Ended December 31,
                                                       --------------------------------------
                                                         2002           2001           2000
                                                       --------      ---------       --------
<S>                                                    <C>           <C>             <C>
Earned premiums .................................      $152,724      $ 100,773       $ 82,415

Net investment income ...........................        42,602         38,641         38,318

Claims and claim expenses incurred related to:

   Current year (1) .............................        82,197         73,782         41,716
   Prior years (3) ..............................        15,869         13,896         (1,584)

Amortization of deferred policy acquisition costs        16,190          8,094          4,862

Paid claims and claim adjustment expenses (4) ...        72,869        (23,758)        44,774

Net premiums written ............................       162,559        105,511         93,383
</TABLE>

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

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

(3)   In 2002, the claims and claim expenses incurred related to prior years
      reflect accretion of discounted reserves offset by favorable claims
      development. In 2001, the claims and claim expenses incurred related to
      prior years reflect the accretion of discounted reserves and unfavorable
      claims development. In 2000, the claims and claim expenses incurred
      related to prior years reflect favorable claims development offset by the
      accretion of discounted reserves.

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


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