DELPHI FINANCIAL GROUP INC/DE - 10-Q Quarterly Report

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

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2003
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[ ] 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
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DELPHI FINANCIAL GROUP, INC.
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(Exact name of registrant as specified in its charter)

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

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

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

Yes X No
----- -----

As of October 31, 2003, the Registrant had 17,844,467 shares of Class A Common
Stock and 2,784,905 shares of Class B Common Stock outstanding.

DELPHI FINANCIAL GROUP, INC.
FORM 10-Q
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER INFORMATION

-2-

PART I. FINANCIAL INFORMATION

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

See notes to consolidated financial statements.

-3-

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

See notes to consolidated financial statements.

-4-

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

See notes to consolidated financial statements.

-5-

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

See notes to consolidated financial statements.

-6-

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE A - SIGNIFICANT ACCOUNTING POLICIES

The financial statements of Delphi Financial Group, Inc. (the "Company," which
term includes the Company and its consolidated subsidiaries unless the context
indicates otherwise) included herein were prepared in conformity with accounting
principles generally accepted in the United States ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. The information
furnished includes all adjustments and accruals of a normal recurring nature
which are, in the opinion of management, necessary for a fair presentation of
results for the interim periods. Operating results for the nine months ended
September 30, 2003 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2003. For further information refer to
the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 2002.
Capitalized terms used herein without definition have the meanings ascribed to
them in the Company's annual report on Form 10-K for the year ended December 31,
2002.

Accounting Changes

Loss on extinguishment of debt. As of January 1, 2003, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 rescinded SFAS No. 4, which required all
gains and losses from extinguishment of debt to be aggregated and classified as
an extraordinary item, net of the related income tax effect. Under SFAS No. 145,
gains or losses from extinguishment of debt are classified as income or loss
from operations in the income statement. Prior year financial statements have
been reclassified to conform to the requirements of SFAS No. 145.

Stock options. Prior to the second quarter of 2003, the Company accounted for
its granted stock options according to Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. All options granted prior to 2003 had an intrinsic value of
zero on the date of grant under APB No. 25, and, therefore, no stock-based
employee compensation expense was recognized in the Company's financial
statements for the three and nine months ended September 30, 2002. During the
second quarter of 2003, the Company adopted, effective January 1, 2003, the fair
value recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under the prospective method provisions of SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure," the
recognition provisions of SFAS No. 123 will be applied to all option awards
granted, modified, or settled after January 1, 2003. The expense related to
stock-based compensation included in the determination of the Company's net
income for 2003 will be less than if these provisions had been applied to all
awards granted since the original January 1, 1995 effective date of SFAS No.
123. The following table illustrates the effect on net income and earnings per
share as if the Company had begun to apply the fair value recognition provisions
of SFAS No. 123 as of its original effective date:

-7-

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

NOTE A - SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

Company-obligated mandatorily redeemable capital securities of
subsidiaries. In May 2003, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity," which establishes standards
for how an issuer classifies and measures in its statement of financial
position certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability because that financial instrument embodies an
obligation of the issuer. SFAS No. 150 is effective immediately for financial
instruments entered into or modified after May 31, 2003, and is otherwise
effective at the beginning of the first interim period beginning after June 15,
2003. However, on October 29, 2003 the FASB voted to indefinitely defer the
application of certain provisions of SFAS No. 150. Therefore, the Company's
presentation of its Company-obligated mandatorily redeemable capital securities
of subsidiaries at September 30, 2003 is consistent with the presentation at
June 30, 2003 and prior periods and these securities have not been reclassified
to liabilities. With the exception of the deferred provisions, the Company
adopted the provisions of SFAS No. 150 effective July 1, 2003. The adoption of
SFAS No. 150 did not have a material effect on the Company's financial position
or results of operations.

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

Recently Issued Accounting Standards

In July 2003, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 03-1, "Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate
Accounts." SOP No. 03-1 is required to be adopted for fiscal years beginning
after December 15, 2003 and, therefore, the Company will adopt the new
requirements effective January 1, 2004. Prior to SOP No. 03-1, the Company has
been required to report the aggregate of all separate account assets as a single
caption on its balance sheet, which has been titled "Assets held in separate
account." SOP 03-1 requires that the Company allocate its proportionate interest
in the separate account's assets to the corresponding captions in the Company's
balance sheet. At September 30, 2003, the Company's proportionate interest in
the separate account's assets was $12.4 million. SOP No. 03-1 also provides
specific guidance for accounting for certain nontraditional long-duration
insurance contracts. Nontraditional long-duration insurance contracts are
annuity and life products which combine fixed and variable features and that are
not covered by specific accounting guidance in SFAS No. 60, "Accounting and
Reporting by Insurance Enterprises," or SFAS No. 97, "Accounting and Reporting
by Insurance Enterprises for Certain Long-Duration Contracts and for Realized
Gains and Losses from the Sale of Investments." The Company offers
nontraditional long-duration insurance contracts such as annuity products with a
market value adjustment feature and first year bonus interest rates. The
adoption of SOP No. 03-1 will not have a material effect on the financial
position or results of operations of the Company.

NOTE B - INVESTMENTS

At September 30, 2003, the Company had fixed maturity securities available for
sale with a carrying value and a fair value of $2,721.0 million and an amortized
cost of $2,617.4 million. At December 31, 2002, the Company had fixed maturity
securities available for sale with a carrying value and a fair value of $2,495.6
million and an amortized cost of $2,429.7 million.

NOTE C - CORPORATE DEBT

On May 20, 2003, the Company issued $143.8 million of 8.00% Senior Notes due
2033 (the "2033 Senior Notes") in a public offering. The proceeds from the 2033
Senior Notes were used to repay the outstanding borrowings under the Company's
revolving credit facility and to repay in full the principal amount of $66.5
million of the existing Senior Notes at their

-8-

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

NOTE C - CORPORATE DEBT - (CONTINUED)

maturity on October 1, 2003. The 2033 Senior Notes, which were issued at par
value, will mature on May 15, 2033 and are redeemable at par at the option of
the Company, in whole or in part, at any time on or after May 15, 2008. The 2033
Senior Notes are not redeemable at the option of any holder of the notes prior
to maturity nor are they entitled to any sinking fund. Interest on the 2033
Senior Notes is payable quarterly on February 15, May 15, August 15 and November
15 of each year. The 2033 Senior Notes are senior unsecured obligations of the
Company and, as such, are effectively subordinated to all claims of secured
creditors of the Company and its subsidiaries and to claims of unsecured
creditors of the Company's subsidiaries, including the insurance subsidiaries'
obligations to policyholders. The 2033 Senior Notes were issued in denominations
of $25 and multiples of $25 and are listed on the New York Stock Exchange.

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

NOTE D - COMPANY-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF
SUBSIDIARIES

On May 15, 2003, Delphi Financial Statutory Trust I (the "Trust"), a
recently-created Connecticut statutory trust and wholly owned subsidiary of the
Company, issued $20.0 million liquidation amount of Floating Rate Capital
Securities (the "2003 Capital Securities") in a private placement transaction.
In connection with the issuance of the 2003 Capital Securities and the related
purchase by the Company of all of the common securities of the Trust (the "2003
Common Securities" and, collectively with the 2003 Capital Securities, the
"Trust Securities"), the Company issued $20.6 million principal amount of
floating rate junior subordinated deferrable interest debentures, due 2033 (the
"2003 Junior Debentures").

Interest on the 2003 Junior Debentures is payable quarterly on February 15, May
15, August 15 and November 15 of each year. The interest rate on the 2003 Junior
Debentures resets quarterly to a rate equal to the London interbank offered
interest rate for three-month U.S. dollar deposits, plus 4.10% (not to exceed
12.50%). The interest rate for the period from May 15, 2003 through August 15,
2003 was 5.41% and for the period from August 16, 2003 through November 15, 2003
is 5.23%. The distribution and other payment dates on the Trust Securities
correspond to the interest and other payment dates on the 2003 Junior
Debentures. The 2003 Junior Debentures are unsecured and subordinated in right
of payment to all of the Company's existing and future senior indebtedness.
Beginning in May 2008, the Company will have the right to redeem the 2003 Junior
Debentures, in whole or in part, at a price equal to 100% of the principal
amount of the debentures, plus accrued and unpaid interest to the date of
redemption.

-9-

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

NOTE E - SEGMENT INFORMATION

(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.

NOTE F - COMPREHENSIVE INCOME

Total comprehensive income is comprised of net income and other comprehensive
income, which includes the change in unrealized gains and losses on securities
available for sale and the change in the loss on the cash flow hedge. Total
comprehensive income was $90.4 million and $104.8 million for the first nine
months of 2003 and 2002, respectively, and $15.7 million and $57.7 million for
the third quarters of 2003 and 2002, respectively.

NOTE G - COMPUTATION OF RESULTS PER SHARE

The following table sets forth the calculation of basic and diluted results per
share:

-10-

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

NOTE H - CONTINGENCIES

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.

-11-

DELPHI FINANCIAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The following is an analysis of the results of operations and financial
condition of the Company. This analysis should be read in conjunction with the
Consolidated Financial Statements and related notes included in this document,
as well as the Company's annual report on Form 10-K for the year ended December
31, 2002. Capitalized terms used herein without definition have the meanings
ascribed to them in the Company's annual report on Form 10-K for the year ended
December 31, 2002.

RESULTS OF OPERATIONS

Nine Months Ended September 30, 2003 Compared to
Nine Months Ended September 30, 2002

Premium and Fee Income. Premium and fee income for the first nine months of 2003
was $527.9 million as compared to $466.0 million for the first nine months of
2002, an increase of 13%. Premiums from core group employee benefit products
increased 21% to $495.1 million for the first nine months of 2003 from $407.6
million for the first nine months of 2002. This increase reflects normal growth
in employment and salary levels for the Company's existing customer base, price
increases, and strong production of new business. Within core group employee
benefit products, premiums from excess workers' compensation insurance for
self-insured employers increased 47% to $108.3 million for the first nine months
of 2003 from $73.7 million for the first nine months of 2002. This increase was
primarily due to the favorable pricing environment and strong demand for this
product driven by a growing shift among employers to self-insure their workers'
compensation risks due to higher primary workers' compensation rates. SNCC
obtained average price increases above 14% in connection with its renewals of
insurance coverage during the first nine months of 2003, and has continued to
obtain significant improvements in contract terms, in particular higher
self-insured retention levels, in these renewals. New business production, which
represents the amount of new annualized premium sold, for excess workers'
compensation products increased 42% to $35.7 million for the first nine months
of 2003 from $25.2 million in the first nine months of 2002. Despite SNCC's
price increases, retention of existing customers for excess workers'
compensation products for the first nine months of 2003 was higher than for the
first nine months of 2002. Premiums for the Company's other core group employee
benefit products increased 16% to $386.8 million for the first nine months of
2003 from $333.9 million for the first nine months of 2002, reflecting an
improvement in the retention of existing customers and strong production growth
in 2002. New business production for the Company's other core group employee
benefit products was $116.1 million for the first nine months of 2003 and $123.6
million for the first nine months of 2002. This decline is partially
attributable to the Company maintaining its underwriting discipline under
competitive market conditions for these products and across-the-board price
increases on new long-term disability business to reflect the lower discount
rates on reserves. The Company continues to implement price increases for
certain existing disability and group life customers.

Premiums from non-core group employee benefit products were $16.8 million for
the first nine months of 2003 as compared to $44.2 million for the first nine
months of 2002. Premiums from non-core group employee benefit products for the
first nine months of 2002 included a high level of premiums from loss portfolio
transfers, which are episodic in nature. The 2003 period did not include any
premiums from loss portfolio transfers.

Deposits from the Company's asset accumulation products were $78.4 million for
the first nine months of 2003 as compared to $82.0 million for the first nine
months of 2002. These deposits consist of new annuity sales, which are recorded
as liabilities rather than as premiums. The Company continues to maintain its
discipline in setting the crediting rates offered on its asset accumulation
products, since the interest rate spreads available on these products remained
below average throughout 2002 and the first nine months of 2003. The decrease in
deposits from the Company's asset accumulation products in the first nine months
of 2003 was primarily due to strong equity market performance during the third
quarter of 2003 and the continuing low interest rate environment which reduced
demand for fixed annuity products. The level of deposits achieved in the second
half of 2002 and the first half of 2003 reflects 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 and volatility in
the equity markets. Accordingly, the level of deposits achieved in the fourth
quarter of 2002 was exceptionally strong and may not be representative of the
level of deposits attainable for the fourth quarter of 2003.

Net Investment Income. Net investment income for the first nine months of 2003
was $141.2 million as compared to $120.8 million for the first nine months of
2002, an increase of 17%. This increase reflects an increase in average invested
assets in 2003. The tax equivalent weighted average annualized yield on invested
assets was 6.6% on average invested assets of $2,932.0 million for the first
nine months of 2003 and 6.6% on average invested assets of $2,533.6 million for
the first nine months of 2002.

-12-

Net Realized Investment Gains (Losses). Net realized investment gains were $7.8
million for the first nine months of 2003 as compared to net realized investment
losses of $10.5 million for the first nine months of 2002. The Company's
investment strategy results in periodic sales of securities and, therefore, the
recognition of realized investment gains and losses. During the first nine
months of 2003 and 2002, the Company recognized $20.2 million and $19.8 million,
respectively, of net gains on sales of securities. The Company monitors its
investments on an ongoing basis. When the market value of a security declines
below its cost, and management judges the decline to be other than temporary,
the security is written down to fair value, and the decline is reported as a
realized investment loss. In the first nine months of 2003 and 2002, the Company
recognized $12.4 million and $29.5 million, respectively, of losses due to the
other than temporary declines in the market values of certain fixed maturity
securities.

The losses in the first nine months of 2003 ($8.1 million on an after-tax basis)
resulted primarily from credit quality-related deterioration in the corporate
debt markets and the impact of low interest rates on certain interest only
securities, and the Company may recognize additional losses of this type in the
future. The Company anticipates that if certain other existing declines in
security values are determined to be other than temporary, it may recognize
additional investment losses in the range of $5 million to $10 million, on an
after-tax basis, with respect to the relevant securities. However, the extent of
any such losses will depend on future market developments and changes in
security values, and such losses may be outside this range. The Company
continuously evaluates the affected securities to judge other than temporary
impairment in valuation. 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" 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 for the first nine
months of 2003 were $559.3 million as compared to $492.1 million for the first
nine months of 2002, an increase of 14%. This increase primarily reflects the
increase in premiums from the Company's group employee benefit products
discussed above. The combined ratio (loss ratio plus expense ratio) for the
Company's group employee benefits segment was 94.8% for the first nine months of
2003 and 94.7% for the first nine months of 2002.

Interest Expense. Interest expense was $13.5 million for the first nine months
of 2003 as compared to $9.4 million for the first nine months of 2002, an
increase of $4.1 million. This increase primarily resulted from the Company's
issuance of the 2033 Senior Notes and the 2003 Capital Securities in May 2003.

Income Tax Expense. Income tax expense was $32.1 million for the first nine
months of 2003 as compared to $22.5 million for the first nine months of 2002.
The income tax expense (benefit) related to realized investment gains (losses)
was $2.7 million and $(3.7) million, respectively. The Company's effective tax
rate excluding realized investment gains (losses) was 30.5% for the first nine
months of 2003 and 30.9% for the first nine months of 2002.

Net Income. Net income was $72.1 million, or $3.39 per diluted share, for the
first nine months of 2003 as compared to $51.9 million, or $2.44 per diluted
share, for the first nine months of 2002. Net income for the first nine months
of 2003 and 2002 included realized investment gains (losses) (net of the related
income tax effects) of $5.1 million, or $0.24 per diluted share, and $(6.8)
million, or $(0.32) per diluted share, respectively. Net income for the first
nine months of 2002 also included a loss on extinguishment of debt (net of an
income tax benefit) of $0.2 million, or $0.01 per diluted share. The increase in
net income in the current period is also attributable to the growth in income
from group employee benefit products and net investment income partially offset
by the increase in interest expense.

Management believes the non-GAAP financial measure of "operating earnings" is
informative when analyzing the trends relating to the Company's insurance
operations. Operating earnings exclude realized investment gains and losses and
gains and losses on extinguishment of debt, because these items arise from
events that, to a significant extent, are within management's discretion and can
fluctuate significantly, thus distorting comparisons between periods. 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. Gains and losses on extinguishment of debt
may be realized based on management's decision to repay or repurchase debt.
Thus, realized investment gains and losses and gains and losses on
extinguishment of debt are not reflective of the Company's ongoing earnings
capacity, and trends in the earnings of the Company's underlying insurance
operations can be more clearly identified without the effects of these gains and
losses. For these reasons, management uses the measure of operating earnings to
assess performance and make operating decisions, and analysts and investors
typically utilize measures of this type when evaluating the financial
performance of insurers. However, gains and losses of these types, particularly
as to investments, are likely to occur periodically and should not be considered
as nonrecurring items. Further, 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.

-13-

Operating earnings for the Company, consisting of net income adjusted to exclude
realized investment gains (losses) and a loss on extinguishment of debt (both
net of the related income tax effects), were $67.0 million, or $3.15 per diluted
share, for the first nine months of 2003 as compared to $58.9 million, or $2.77
per diluted share, for the first nine months of 2002. The increase in operating
earnings in the current period is primarily attributable to the growth in income
from group employee benefit products and net investment income partially offset
by the increase in interest expense.

Three Months Ended September 30, 2003 Compared to
Three Months Ended September 30, 2002

Premium and Fee Income. Premium and fee income in the third quarter of 2003 was
$181.2 million as compared to $152.8 million in the third quarter of 2002, an
increase of 19%. Premiums from core group employee benefit products increased
20% to $170.1 million in the third quarter of 2003 from $142.0 million in the
third quarter of 2002. This increase reflects normal growth in employment and
salary levels for the Company's existing customer base, price increases, and
strong production of new business. Within core group employee benefit products,
premiums from excess workers' compensation insurance for self-insured employers
increased 43% to $39.5 million in the third quarter of 2003 from $27.5 million
in the third quarter of 2002. This increase was primarily due to the favorable
pricing environment and strong demand for this product driven by a growing shift
among employers to self-insure their workers' compensation risks due to higher
primary workers' compensation rates. SNCC obtained average price increases of
14% in connection with its renewals of insurance coverage during the third
quarter of 2003, and has continued to obtain significant improvements in
contract terms, in particular higher self-insured retention levels, in these
renewals. New business production, which represents the amount of new annualized
premium sold, for excess workers' compensation products increased 70% to $16.8
million in the third quarter of 2003 from $9.8 million in the third quarter of
2002. Despite SNCC's price increases, retention of existing customers for excess
workers' compensation products for the third quarter of 2003 was higher than for
the third quarter of 2002. Premiums for the Company's other core group employee
benefit products increased 14% to $130.6 million in the second quarter of 2003
from $114.4 million in the third quarter of 2002, reflecting an improvement in
the retention of existing customers and strong production growth in 2002. New
business production for the Company's other core group employee benefit products
increased 9% to $36.2 million in the third quarter of 2003 from $33.1 million in
the third quarter of 2002. This increase reflects the Company's continued strong
market position in the small employer market. The Company continues to implement
price increases for certain existing disability and group life customers.

Deposits from the Company's asset accumulation products were $25.3 million in
the third quarter of 2003 as compared to $44.9 million in the third quarter of
2002. These deposits consist of new annuity sales, which are recorded as
liabilities rather than as premiums. The Company continues to maintain its
discipline in setting the crediting rates offered on its asset accumulation
products, since the interest rate spreads available on these products remained
below average throughout 2002 and the first nine months of 2003. The decrease in
deposits from the Company's asset accumulation products in the third quarter of
2003 was primarily due to strong equity market performance and the continuing
low interest rate environment which reduced demand for fixed annuity products.
The level of deposits achieved in second half of 2002 was exceptionally strong
due to the heightened demand for fixed annuity products as a result of adverse
conditions in the equity markets. Accordingly, the level of deposits achieved in
the fourth quarter of 2002 was exceptionally strong and may not be
representative of the level of deposits attainable for the fourth quarter of
2003.

Net Investment Income. Net investment income in the third quarter of 2003 was
$46.2 million as compared to $40.6 million in the third quarter of 2002, an
increase of 14%. This increase reflects an increase in average invested assets
in 2003. The tax equivalent weighted average annualized yield on invested assets
was 6.1% on average invested assets of $3,127.4 million in the third quarter of
2003 and 6.3% on average invested assets of $2,683.2 million in the third
quarter of 2002.

Net Realized Investment Gains (Losses). Net realized investment gains were $3.2
million in the third quarter of 2003 as compared to net realized investment
losses of $10.8 million in the third quarter of 2002. The Company's investment
strategy results in periodic sales of securities and, therefore, the recognition
of realized investment gains and losses. During the third quarter of 2003 and
2002, the Company recognized $3.2 million and $10.0 million, respectively, of
net gains on sales of securities. The Company monitors its investments on an
ongoing basis. When the market value of a security declines below its cost, and
management judges the decline to be other than temporary, the security is
written down to fair value, and the decline is reported as a realized investment
loss. In the third quarter of 2002, the Company recognized $20.0 million of
losses due to the other than temporary declines in the market values of certain
fixed maturity securities. The Company did not recognize any losses due to the
other than temporary declines in the market values of fixed maturity securities
during the third quarter of 2003.

The Company may recognize losses from credit quality-related deterioration in
the corporate debt markets and the impact of low interest rates on certain
interest only securities 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

-14-

depend on future market developments and changes in security values, and such
losses may be outside this range. The Company continuously evaluates the
affected securities to judge other than temporary impairment in valuation. 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" 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 $188.1 million in
the third quarter of 2003 as compared to $162.1 million in the third quarter of
2002, an increase of 16%. This increase primarily reflects the increase in
premiums from the Company's group employee benefit products discussed above. The
combined ratio (loss ratio plus expense ratio) for the Company's group employee
benefits segment was 94.2% in the third quarter of 2003 and 95.1% in the third
quarter of 2002.

Interest Expense. Interest expense was $5.9 million in third quarter of 2003 as
compared to $2.9 million in third quarter of 2002, an increase of $3.0 million.
This increase primarily resulted from the Company's issuance of the 2033 Senior
Notes and the 2003 Capital Securities in May 2003.

Income Tax Expense. Income tax expense was $11.7 million in the third quarter of
2003 as compared to $4.8 million in the third quarter of 2002. The income tax
expense (benefit) related to realized investment gains (losses) was $1.1 million
and $(3.8) million, respectively. The Company's effective tax rate excluding
realized investment gains (losses) was 31.6% in the third quarter of 2003 and
30.2% in the third quarter of 2002. The higher effective tax rate in the 2003
period reflects a lower level of tax-exempt investment income.

Net Income. Net income was $24.9 million, or $1.16 per diluted share, for the
third quarter of 2003 and $12.8 million, or $0.60 per diluted share, for the
third quarter of 2002. Net income for the third quarters of 2003 and 2002
included realized investment gains (losses) (net of the related income tax
effects) of $2.1 million, or $0.09 per diluted share, and $(7.0) million, or
$(0.33) per diluted share, respectively. The increase in net income in the
current period is also attributable to the growth in income from group employee
benefit products and net investment income partially offset by the increase in
interest expense.

Management believes the non-GAAP financial measure of "operating earnings" is
informative when analyzing the trends relating to the Company's insurance
operations. Operating earnings exclude realized investment gains and losses and
gains and losses on extinguishment of debt, because these items arise from
events that, to a significant extent, are within management's discretion and can
fluctuate significantly, thus distorting comparisons between periods. 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. Gains and losses on extinguishment of debt
may be realized based on management's decision to repay or repurchase debt.
Thus, realized investment gains and losses and gains and losses on
extinguishment of debt are not reflective of the Company's ongoing earnings
capacity and trends in the earnings of the Company's underlying insurance
operations can be more clearly identified without the effects of these gains and
losses. For these reasons, management uses the measure of operating earnings to
assess performance and make operating decisions, and analysts and investors
typically utilize measures of this type when evaluating financial performance of
insurers. However, gains and losses of these types, particularly as to
investments, are likely to occur periodically and should not be considered as
nonrecurring items. Further, 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 net income adjusted to exclude
realized investment gains (losses) (net of the related income tax effects), were
$22.8 million, or $1.07 per diluted share, in the third quarter of 2003 as
compared to $19.8 million, or $0.93 per diluted share, in the third quarter of
2002. The increase in operating earnings in the current period is primarily
attributable to the growth in income from group employee benefit products and
net investment income partially offset by the increase in interest expense.

LIQUIDITY AND CAPITAL RESOURCES

General. The Company had approximately $120.2 million of financial resources
available at the holding company level at September 30, 2003, which was
primarily comprised of short-term investments, investments in the common stock
of its investment subsidiaries, and fixed maturity securities. Financial
resources available at the holding company level increased by $79.9 million from
December 31, 2002 primarily due to the issuance of the 2033 Senior Notes. The
Company used a portion of these financial resources and $5.0 million borrowed
under its revolving credit facility to repay in full the principal amount of
$66.5 million of the existing Senior Notes at their maturity on October 1, 2003.
The ratio of the Company's corporate debt to total capitalization (which is
calculated by dividing corporate debt by the sum of the Company's corporate
debt, the Company-

-15-

obligated mandatorily redeemable capital securities of subsidiaries and
shareholders' equity) was 20% at September 30, 2003. Following the repayment of
the existing Senior Notes on October 1, 2003, the ratio of the Company's
corporate debt to total capitalization was 15%. The assets of the investment
subsidiaries are primarily invested in balances with independent investment
managers. Other sources of liquidity at the holding company level include
dividends paid from subsidiaries, primarily generated from operating cash flows
and investments. The Company's insurance subsidiaries will be permitted,
without prior regulatory approval, to make dividend payments of up to $46.6
million during 2003, of which $2.6 million has been paid during the first nine
months of 2003. In general, dividends from the Company's non-insurance
subsidiaries are not subject to regulatory or other restrictions. The Company
had $95.0 million of borrowings available to it under its revolving credit
facility as of October 1, 2003. A shelf registration statement is also in
effect under which up to $106.2 million in securities may be issued by the
Company.

On May 20, 2003, the Company issued $143.8 million of 2033 Senior Notes in a
public offering pursuant to the Company's existing shelf registration. The
proceeds from this issuance were used to repay all of the then outstanding
borrowings under the Company's revolving credit facility and to repay at
maturity the existing Senior Notes. See Note C to the Consolidated Financial
Statements. As a result of the issuance of the 2033 Senior Notes, under the
terms of the Company's revolving credit facility, the maximum amount of
borrowings available to the Company thereunder was reduced from $150 million to
$100 million and the facility was converted to an unsecured facility, with
collateral being released to the Company.

To mitigate the risk of interest rates rising before the issuance of the 2033
Senior Notes could be completed, the Company entered into a treasury rate lock
agreement in September 2002, with a notional amount of $150.0 million and an
anticipated debt term of 10 years. The Company paid $13.8 million upon the
issuance of the 2033 Senior Notes in May 2003 to settle the treasury rate lock
agreement. See Note C to the Consolidated Financial Statements.

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

The Company's current liquidity needs, in addition to funding its operating
expenses, include principal and interest payments on any outstanding borrowings
under its revolving credit facility, interest payments on the 2033 Senior Notes
and distributions on the Capital Securities and the 2003 Capital Securities. The
2033 Senior Notes mature in their entirety in May 2033 and are not subject to
any sinking fund requirements, but are redeemable by the Company at par at any
time on or after May 15, 2008. The junior subordinated debentures underlying the
Capital Securities are not redeemable prior to March 25, 2007. The junior
subordinated debentures underlying the 2003 Capital Securities are redeemable,
in whole or in part, beginning May 15, 2008.

The Company's board of directors has authorized a share repurchase program.
Share repurchases are effected by the Company in the open market or in
negotiated transactions in compliance with the safe harbor provisions of Rule
10b-18 under the Securities Exchange Act of 1934. Execution of the share
repurchase program is based upon management's assessment of market conditions
for its common stock and other potential uses of capital. During the first
quarter of 2003, the Company repurchased 201,400 shares of its Class A Common
Stock at a total cost of $7.5 million, for a volume-weighted average price of
$37.13 per share. The Company did not repurchase any shares in the second or
third quarters of 2003. At September 30, 2003, approximately 728,700 shares were
remaining under the share repurchase program.

The Company and its subsidiaries expect available sources of liquidity to exceed
their current and long-term cash requirements.

Investments. The Company's overall investment strategy emphasizes safety and
liquidity, while seeking the best available return, by focusing on, among other
things, managing the Company's interest-sensitive assets and liabilities and
seeking to minimize the Company's exposure to fluctuations in interest rates.
The Company's investment portfolio, which totaled $3.2 billion at September 30,
2003, primarily consists of investments in fixed maturity securities and
short-term investments. The weighted average credit rating of the Company's
fixed maturity portfolio as rated by Standard & Poor's Corporation was "AA" at
September 30, 2003. While the investment grade rating of the Company's fixed
maturity portfolio addresses credit risk, it does not address other risks, such
as prepayment and extension risks. 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"
for a discussion of these and certain other risks relating to the Company's
investment portfolio.

Reinsurance. The Company cedes portions of the risks relating to its group
employee benefit products under indemnity reinsurance agreements with various
unaffiliated reinsurers. The Company pays reinsurance premiums generally based
upon percentages of the Company's premiums on the business reinsured. These
agreements expire at various intervals as to new risks, and replacement
agreements are negotiated on terms believed appropriate in light of current
market conditions. During the first nine months of 2003, the Company replaced
certain of its existing reinsurance arrangements for its excess workers'
compensation and long-term disability products. Under the replacement
arrangements for excess workers' compensation products, the Company will
reinsure excess workers' compensation risks between $5.0 million (compared to
$3.0 million

-16-

previously) and $50.0 million, and a majority in proportionate amount of the
risks between $50.0 million and $100.0 million, per policy per occurrence. For
long-term disability products, effective October 1, 2003 for new policies and,
for existing policies, the earlier of the next policy anniversary date or
October 1, 2004, the Company will reinsure risks in excess of $7,500 (compared
to $2,500 previously) in benefits per individual per month. These changes will
reduce the reinsurance premiums paid by the Company for these products. However,
in the case of long-term disability products, management does not believe that
this reduction is sufficient to compensate for the anticipated level of losses
in the $2,500 to $7,500 layer of monthly benefits for which the Company retains
the risk under the new reinsurance arrangement. The Company is implementing a
variety of initiatives, including pricing and underwriting initiatives, for
these products; however, there can be no assurance that such initiatives will be
successful. If such initiatives are not successful, the Company's operating
results could be adversely affected.

Also, during the third quarter of 2003, the U.S. Secretary of the Treasury
announced that coverage under the Terrorism Risk Insurance Act of 2002 (the
"Terrorism Act") will not be extended to group life insurance. The Terrorism Act
will continue to apply to all direct lines of property and casualty insurance
written by SNCC, including excess workers' compensation.

SNCC Performance-Contingent Options. In May 2003, the Company granted
performance-contingent incentive options to purchase 150,000 shares of the
Company's Class A Common Stock to each of the five members of executive
management of SNCC, for a total of 750,000 options. The options, which have a
ten-year term and whose exercise price is equal to the fair market value of a
share of such stock on the grant date (as determined in accordance with the
Company option plan under which the options were granted), will become
exercisable only to the extent that SIG, SNCC's parent company, meets specified
cumulative financial performance targets for the three or five fiscal year
periods beginning with the current year; otherwise, such options will be
forfeited. These targets, as described below, generally require that SIG's PTOI
(as defined below) increases during these periods at an annual average rate of
over 15% for any of the options to become exercisable, and at an annual average
rate of at least 20% for the options to become fully exercisable.

75,000 of each executive's options will become exercisable if SIG's aggregate
consolidated Pre-Tax Operating Income, as defined and computed under each of the
related option agreements ("PTOI"), for the three year performance period is at
least $216.7 million; otherwise, a reduced number of such options will become
exercisable to the extent that PTOI for such period exceeds $196.1 million,
determined by interpolating between zero and 75,000 according to where the PTOI
amount falls in the range between $196.1 million and $216.7 million.

150,000 of each executive's options (minus the number of any options that become
exercisable for the three year performance period) will become exercisable if
SIG's aggregate PTOI for the five year performance period is at least
$429.1 million; otherwise, a reduced number of such options will become
exercisable to the extent that PTOI for such period exceeds $380.1 million,
determined by interpolating between zero and 150,000 according to where the PTOI
amount falls in the range between $380.1 million and $429.1 million.

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

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

MARKET RISK

There have been no material changes in the Company's exposure to market risk or
its management of such risk since December 31, 2002.

CONTROLS AND PROCEDURES

As of the end of the period covered by this report, an evaluation was performed
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer ("CEO") and Vice President and
Treasurer (the individual who acts in the capacity of the Chief Financial
Officer), of the effectiveness of the design and operation of the

-17-

Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and
15d-15(e) 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 were no changes in the Company's internal control over financial reporting
during the fiscal quarter to which this report relates that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.

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-Q 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 establishes reserves for future policy benefits and unpaid claims
and claim expenses relating to its insurance products. These reserves are
calculated using various generally recognized actuarial methodologies and are
based upon assumptions that management believes are appropriate and which vary
by type of product. Annually, external actuarial experts also review the
Company's methodologies, assumptions and the resulting reserves. The 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 incurred but not reported
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. 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.

The Company's reserves for future policy benefits and unpaid claims and claim
expenses are estimates. These estimates are subject to variability, since the
factors and events affecting the ultimate liability have not all taken place,
and thus cannot be evaluated with certainty. Moreover, under the actuarial
methodologies discussed above, 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

-18-

assumptions or estimates, the Company's reserves could be inadequate. In such
event, the Company's results of operations, liquidity or financial condition
could be materially adversely affected.

THE MARKET VALUES OF THE COMPANY'S INVESTMENTS FLUCTUATE.

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

Declines in the fair value of investments that are considered in the judgment of
management to be other than temporary are reported as realized investment
losses. 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. 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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations."

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

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

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'
ability 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.

At September 30, 2003, mortgage-backed securities comprised 19% of the Company's
total invested assets. 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. At
September 30, 2003, the Company had outstanding advances of $160.0 million.
These advances, which were obtained at a fixed rate, have a weighted average
term to maturity of 6.3 years. A total of $10.0 million of these advances will
mature during the remainder of 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 the Company's investment
strategy. These transactions require the Company to maintain securities or cash
on deposit with the applicable counterparty as collateral. As the market value
of the collateral or contracts changes, the Company may be required to deposit
additional collateral or be entitled to have a portion of the collateral
returned to it.

The types and amounts of investments made by the Company's insurance
subsidiaries are subject to the insurance laws and regulations of their
respective states of domicile. Each of these states has comprehensive investment
regulations. In addition, the Company's revolving credit facility also contains
limitations, with which the Company is currently in compliance in all material
aspects, on the composition of the Company's investment portfolio.

-19-

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.

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

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

Some reinsurers experienced significant losses related to the terrorist events
of September 11, 2001. As a result of this and other market factors, higher
prices and less favorable terms and conditions are presently being offered in
the reinsurance market, and it is likely that, in the future, the Company's
reinsurers will continue to seek price increases, although the extent of such
increases cannot currently be predicted. Also, there has been significantly
reduced availability of reinsurance covering risks such as terrorist and
catastrophic events. Accordingly, substantially all of the Company's coverages
of this nature were discontinued in 2002, which may result in the Company
retaining a higher portion of such losses should they occur. 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 covered losses relating to acts of
international terrorism from property and casualty products directly written by
SNCC above SNCC's annual deductible.

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 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, risk-based capital
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 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.

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THE FINANCIAL SERVICES INDUSTRY IS HIGHLY COMPETITIVE.

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

THE COMPANY MAY BE ADVERSELY IMPACTED BY A DECLINE IN THE RATINGS OF 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.

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PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

11 Computation of Results per Share of Common Stock
(incorporated by reference to Note G to the Consolidated
Financial Statements included elsewhere herein)

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

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

32 Certification of Periodic Report Pursuant to 18 U.S.C.
Section 1350

(b) Reports on Form 8-K

The Company filed a report on Form 8-K on July 23, 2003, under Item
9, containing a press release announcing second quarter 2003
earnings. The information in such report was furnished pursuant to
Items 9 and 12 of Form 8-K and shall not be deemed to have been
"filed" for purposes of Section 18 of the Securities Exchange Act
of 1934 or otherwise subject to the liabilities of that section.

SIGNATURES

Pursuant to the requirements 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. (Registrant)

/s/ ROBERT ROSENKRANZ
--------------------------------------------
Robert Rosenkranz
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)

/s/ THOMAS W. BURGHART
--------------------------------------------
Thomas W. Burghart
Vice President and Treasurer
(Principal Accounting and Financial Officer)

Date: November 12, 2003

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