Summary of DELPHI FINANCIAL GROUP INC/DE

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The Company, through its subsidiaries, underwrites a diverse portfolio of group employee benefit products, primarily disability, group life and excess workers' compensation insurance. Revenues from this group of products are primarily comprised of earned premiums and investment income. The profitability of group employee benefit products is affected by, among other things, differences between actual and projected claims experience, the retention of existing customers, product mix and the Company's ability to attract new customers, change premium rates and contract terms for existing customers and control administrative expenses. The Company transfers its exposure to a portion of its group employee benefit risks through reinsurance ceded arrangements with other insurance and reinsurance companies. Accordingly, the profitability of the Company's group employee benefit products is affected by the amount, cost and terms of reinsurance it obtains. The profitability of those group employee benefit products for which reserves are discounted, in particular, the Company's disability and primary and excess workers' compensation products, is also significantly affected by the difference between the yield achieved on invested assets and the discount rate used to calculate the related reserves. The Company continues to benefit from the favorable market conditions which have in recent years prevailed for its excess workers' compensation products as to pricing and other contract terms for these products; however, due primarily to improvements in the primary workers' compensation market resulting in lower premium rates in that market, conditions relating to new business production and growth in premiums for these products have been less favorable in recent years. In response to these conditions, the Company has enhanced its focus on its sales and marketing function for these products and has achieved improved levels of new business production for these products in the current year. In addition, the Company is presently experiencing more competitive market conditions, particularly as to pricing, for its other group employee benefit products. These conditions, in addition to the downward pressure on employment and wage levels exerted by the current recession, are adversely impacting the Company's ability to achieve levels of new business production and growth in premiums for these products commensurate with those achieved in prior years. For these products, the Company is continuing to enhance its focus on the small case niche (insured groups of 10 to 500 individuals), including employers which are first-time providers of these employee benefits, which the Company believes to offer opportunities for superior profitability. The Company is also emphasizing its suite of voluntary group insurance products, which includes, among others, its group limited benefit health insurance product. The Company markets its other group employee benefit products on an unbundled basis and as part of an integrated employee benefit program that combines 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 other group employee benefit products to large employers.
The Company also operates an asset accumulation business that focuses primarily on offering fixed annuities to individuals. In addition, during the first quarter of 2006, the Company issued $100.0 million in aggregate principal amount of fixed and floating rate funding agreements with maturities of three to five years in connection with the issuance by an unconsolidated special purpose vehicle of funding agreement-backed notes in a corresponding principal amount. In March 2009, the Company repaid $35.0 million in aggregate principal amount of the floating rate funding agreements at their maturity, resulting in a corresponding repayment of the funding agreement-backed notes. Also, during the third quarter of 2008, the Company acquired a block of existing SPDA and FPA policies from another insurer through an indemnity assumed reinsurance transaction with such insurer that resulted in the assumption by the Company of policyholder account balances in the amount of $135.0 million. The Company believes that its funding agreement program and annuity reinsurance arrangements enhance the Company's asset accumulation business by providing alternative sources of funds for this business. The Company's liabilities for its funding agreements and annuity reinsurance arrangements are recorded in policyholder account balances. Deposits from the Company's asset accumulation business are recorded as liabilities rather than as premiums. Revenues from the Company's asset accumulation business are primarily comprised of investment income earned on the funds under management. The profitability of asset accumulation products is primarily dependent on the spread achieved between the return on investments and the interest credited with respect to these products. The Company sets the crediting rates offered on its asset accumulation products in an effort to achieve its targeted interest rate spreads on these products, and is willing to accept lower levels of sales on these products when market conditions make these targeted spreads more difficult to achieve.
The management of the Company's investment portfolio is an important component of its profitability. Over the second half of 2007 and continuing through 2008 and into 2009, due primarily to the extraordinary stresses affecting the banking system, the housing market and the financial markets generally, particularly the structured mortgage securities market, the financial

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markets have been the subject of extraordinary volatility and dramatically widened credit spreads in numerous sectors. At the same time, the overall level of risk-free interest rates declined substantially. These market conditions resulted in a significant decrease in the Company's level of net investment income in 2008, due primarily to the adverse performance of those investments whose changes in value, positive or negative, are included in the Company's net investment income, such as investment funds organized as limited partnerships and limited liability companies, trading account securities and hybrid financial instruments. In an effort to reduce fluctuations of this type in its net investment income, the Company has repositioned its investment portfolio to reduce its holdings of these types of investments and, in particular, those investments whose performance had demonstrated the highest levels of variability. As part of this effort, the Company has increased its investments in more traditional sectors of the fixed income market such as mortgage-backed securities and municipal bonds, whose present spreads have widened to historically high levels due to the market conditions discussed above. In addition, in light of the aforementioned market conditions, the Company is presently maintaining a significantly larger proportion of its portfolio in short-term investments, which totaled $626.8 million at June 30, 2009 and $401.6 million at December 31, 2008.
The Company achieved improved levels of investment income in its repositioned investment portfolio in the second quarter of 2009, during which more favorable market conditions prevailed. However, these market conditions may worsen in the future and may result in significant fluctuations in net investment income, and as a result, in the Company's results of operations. Accordingly, there can be no assurance as to the impact of the Company's investment repositioning on the level or variability of its future net investment income. While the total carrying value of the Company's portfolio increased $119.0 million during the first six months of 2009, the Company experienced substantial declines in the carrying values of certain portions of its investment portfolio in 2008, as well as significantly increased levels of realized investment losses from declines in market value relative to the amortized cost of certain securities that it determined to be other than temporary. In light of the aforementioned market conditions, losses of this type and magnitude may continue or increase in the future.
The following discussion and analysis of the results of operations and financial condition of the Company should be read in conjunction with the Consolidated Financial Statements and related notes included in this document, as well as the Company's annual report on Form 10-K for the year ended December 31, 2008 as amended by Amendment No. 1 thereto on Form 10-K/A (the "2008 Form 10-K"). Capitalized terms used herein without definition have the meanings ascribed to them in the 2008 Form 10-K. The preparation of financial statements in conformity with GAAP requires management, in some instances, to make judgments about the application of these principles. The amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period could differ materially from the amounts reported if different conditions existed or different judgments were utilized. A discussion of how management applies certain critical accounting policies and makes certain estimates is contained in the 2008 Form 10-K in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" and should be read in conjunction with the following discussion and analysis of results of operations and financial condition of the Company. In addition, a discussion of uncertainties and contingencies which can affect actual results and could cause future results to differ materially from those expressed in certain forward-looking statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations can be found below under the caption "Forward-Looking Statements And Cautionary Statements Regarding Certain Factors That May Affect Future Results," in Part I, Item 1A of the 2008 Form 10-K, "Risk Factors".
Results of Operations
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
Summary of Results. Net income was $61.5 million, or $1.25 per diluted share, in the first half of 2009 as compared to $48.0 million, or $0.97 per diluted share, in the first half of 2008. Net income in the first half of 2009 and 2008 included realized investment losses (net of the related income tax benefit) of $32.2 million, or $0.65 per diluted share, and $16.9 million, or $0.34 per diluted share, respectively. Net income in the first half of 2009 benefited from a significant increase in net investment income, including increased investment spreads on the Company's asset accumulation products, and was adversely impacted by an increased level of realized investment losses due to the adverse market conditions discussed above. See "Introduction". Net investment income in the first half of 2009, which increased 66% from the first half of 2008, reflects an increase in the tax equivalent weighted average annualized yield to 6.9% from 4.2%. Realized investment losses in the first six months of 2009 and 2008 included losses, net of the related income tax benefit, of $27.6 million, or $0.56 per diluted share, and $15.8 million, or $0.32 per diluted share, respectively, due to the other than temporary declines in the market values of certain fixed maturity securities and other investments.

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Premium and Fee Income. Premium and fee income in the first half of 2009 was $710.2 million as compared to $683.1 million in the first half of 2008, an increase of 4%. Premiums from core group employee benefit products, which include disability, group life, excess workers' compensation, travel accident and dental insurance, increased 3% to $668.5 million in the first half of 2009 from $648.3 million in the first half of 2008. Premiums from excess workers' compensation insurance for self-insured employers were $136.8 million in the first half of 2009 as compared to $130.7 million in the first half of 2008, an increase of 5%. Excess workers' compensation new business production, which represents the amount of new annualized premium sold, increased 216% to $25.3 million in the first half of 2009 from $8.0 million in the first half of 2008. In its important July 2009 renewal season, the results of which are not reflected in the Company's results for the first half of 2009, SNCC's rates declined modestly and SIRs were on average up modestly on new and renewal policies. SNCC's retention of its existing customers in the first half of 2009 remained strong.
Premiums from the Company's other core group employee benefit products increased 3% to $531.7 million in the first half of 2009 from $517.6 million in the first half of 2008, primarily reflecting modest increases in premiums from the Company's group life and group disability products and new business production. During the first half of 2009 and 2008, premiums from the Company's group life products were $204.3 million and $201.0 million, respectively, and premiums from the Company's group disability products were $287.2 million and $282.8 million, respectively. In the first half of 2009, premiums from the Company's turnkey disability business increased 16% to $28.0 million from $24.1 million in the first half of 2008. New business production for the Company's other core group employee benefit products was $88.3 million and $111.7 million in the first half of 2009 and 2008, respectively. New business production includes only directly written business, and does not include premiums from the Company's turnkey disability business. The level of production achieved from these products reflects the Company's focus on the small case niche (insured groups of 10 to 500 individuals), which resulted in a 3% increase in production based on the number of cases sold as compared to the first half of 2009. The Company continues to implement price increases for certain existing group disability and group life insurance customers.
Non-core group employee benefit products include workers' compensation reinsurance, primary workers' compensation, bail bond insurance and reinsurance facilities. Premiums from non-core group employee benefit products were $19.0 million in the first half of 2009 as compared to $14.8 million in the first half of 2008.
Deposits from the Company's asset accumulation products were $174.7 million in the first half of 2009 as compared to $151.8 million in the first half of 2008. This increase in deposits is primarily due to the decrease in short-term interest rates, which has caused fixed annuity products to be an attractive alternative to competing investment products such as certificates of deposit. Deposits from the Company's asset accumulation products, consisting of new annuity sales and issuances of funding agreements, are recorded as liabilities rather than as premiums. The Company is continuing to maintain its discipline in setting the crediting rates offered on its asset accumulation products in 2009 in an effort to achieve its targeted interest rate spreads on these products. Net Investment Income. Net investment income in the first half of 2009 was $154.9 million as compared to $93.1 million in the first half of 2008, an increase of 66%. This increase reflects an increase in the tax equivalent weighted average annualized yield on invested assets to 6.9% for the first half of 2009 from 4.2% for the first half of 2008, primarily attributable to the improved performance of the Company's investments in investment funds organized as limited partnerships and limited liability companies and a higher level of investment income from the Company's fixed maturity security portfolio resulting from the portfolio repositioning discussed above. See "Introduction". Average invested assets were $4,799.3 million and $4,815.3 million in the first half of 2009 and 2008, respectively.
Net Realized Investment Losses. Net realized investment losses were $49.5 million in the first half of 2009 compared to $25.9 million in the first half of 2008. The Company monitors its investments on an ongoing basis. When the market value of a security declines below its cost, the decline is included as a component of accumulated other comprehensive income or loss, net of the related income tax benefit and adjustment to cost of business acquired, on the Company's balance sheet. If management judges the decline to be other than temporary, the portion of the decline related to credit losses is recognized as a realized investment loss in the Company's income statement and the remaining portion of the decline continues to be included as a component of accumulated other comprehensive income or loss. Due to the adverse market conditions for financial assets described above, the Company recognized $63.2 million of losses in the first half of 2009 due to the other than temporary declines in the market values of certain fixed maturity securities and other investments, of which $42.5 million was recognized as credit-related realized investment losses and $20.7 million remained as a component of accumulated other comprehensive income. The Company recognized $24.3 million of realized losses due to other than temporary impairments in the first half of 2008. See "Introduction". The Company's investment strategy results in periodic sales of securities and, therefore, the recognition of realized investment gains and losses. During the first half of 2009 and 2008, the Company recognized $7.0 million and $1.6 million, respectively, of net losses on the sales of securities.

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The Company may continue to recognize losses due to other than temporary declines in security market values in the future, particularly in light of the ongoing volatility in the financial markets, and such losses may be significant. The extent of such losses will depend on, among other things, future developments in the global economy, financial and credit markets, credit spreads, interest rates, the outlook for the performance by the issuers of their obligations under such securities and changes in security values. The Company continuously monitors its investments in securities whose fair values are below the Company's amortized cost pursuant to its procedures for evaluation for other than temporary impairment in valuation. See Note B to the Consolidated Financial Statements and the section in the 2008 Form 10-K entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" 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. For further information concerning the Company's investment portfolio, see "Liquidity and Capital Resources - Investments." Benefits and Expenses. Policyholder benefits and expenses were $722.8 million in the first half of 2009 as compared to $671.2 million in the first half of 2008. This increase primarily reflects the increase in premiums from the Company's group employee benefit products discussed above, and does not reflect significant additions to reserves for prior years' claims and claim expenses. However, there can be no assurance that future periods will not include additions to reserves of this type, which will depend on the Company's future loss development. If the Company were to experience significant adverse loss development in the future, the Company's results of operations could be materially adversely affected. The combined ratio (loss ratio plus expense ratio) for group employee benefit products was 93.2% and 91.6% in the first half of 2009 and 2008, respectively. The increase in the combined ratio in the first half of 2009 resulted primarily from increased spending on new product development at SNCC. Amortization of cost of business acquired was accelerated by $1.2 million during the first half of 2009 primarily due to the increase in the Company's tax equivalent weighted average annualized yield on invested assets. The weighted average annualized crediting rate on the Company's asset accumulation products was 4.2% in the first half of 2009 and 2008. Interest Expense. Interest expense was $14.3 million in the first half of 2009 as compared to $15.8 million in the first half of 2008, a decrease of $1.5 million. This decrease resulted primarily from the redemption of the 2003 Junior Debentures in the third quarter of 2008.
Income Tax Expense. Income tax expense was $16.9 million in the first half of 2009 as compared to $15.2 million in the first half of 2008 primarily due to the higher level of operating income. The Company's effective tax rate decreased to 21.6% in the first half of 2009 from 24.0% in the first half of 2008 primarily due to the proportionately higher level of tax-exempt interest income earned on invested assets.
Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008
Summary of Results. Net income was $37.0 million, or $0.74 per diluted share, for the second quarter of 2009 as compared to $26.9 million, or $0.55 per diluted share, for the second quarter of 2008. Net income in the second quarter of 2009 and 2008 included realized investment losses (net of the related income tax benefit) of $17.9 million, or $0.35 per diluted share, and $12.7 million, or $0.26 per diluted share, respectively. Net income in the second quarter of 2009 benefited from a significant increase in net investment income, including increased investment spreads on the Company's asset accumulation products, and was adversely impacted by realized investment losses due to the continuing effects of the adverse market conditions discussed above. See "Introduction". Net investment income in the second quarter of 2009, which increased 51% from the second quarter of 2008, reflects an increase in the tax equivalent weighted average annualized yield to 7.9% from 5.4%. Investment losses in the second quarter of 2009 and 2008 included losses, net of the related income tax benefit, of $16.2 million, or $0.32 per diluted share, and $11.8 million, or $0.24 per diluted share, respectively, due to the other than temporary declines in the market values of certain fixed maturity securities and other investments. Premium and Fee Income. Premium and fee income for the second quarter of 2009 was $352.4 million as compared to $340.8 million for the second quarter of 2008, an increase of 3%. Premiums from core group employee benefit products increased 2% to $330.9 million in the second quarter of 2009 from $324.0 million in the second quarter of 2008. Premiums from excess workers' compensation insurance for self-insured employers increased 8% to $69.0 million in the second quarter of 2009 from $64.1 million in the second quarter of 2008. Excess workers' compensation new business production, which represents the amount of new annualized premium sold, increased 176% to $10.2 million in the second quarter of 2009 from $3.7 million in the second quarter of 2008. SNCC's rates increased modestly and SIRs on average are up 5% for second quarter 2009 new and renewal policies. SNCC's retention of its existing customers in the second quarter of 2009 remained strong.

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Premiums from the Company's other core group employee benefit products were $261.9 million and $260.0 million in the second quarters of 2009 and 2008, respectively. During the second quarter of 2009 and 2008 premiums from the Company's group life products were $100.7 million and $101.5 million, respectively, and premiums from the Company's group disability products were $140.8 million and $141.1 million, respectively. Premiums from the Company's turnkey disability business were $12.8 million during the second quarter of 2009 compared to $11.9 million during the second quarter of 2008. New business production for the Company's other core group employee benefit products was $43.8 million and $50.6 million in the second quarters of 2009 and 2008, respectively. New business production includes only directly written business, and does not include premiums from the Company's turnkey disability business. The level of production achieved from these products reflects the Company's focus on the small case niche (insured groups of 10 to 500 individuals). The Company continued to implement price increases for certain existing disability and group life customers.
Deposits from the Company's asset accumulation products increased 15% to $115.0 million in the second quarter of 2009 from $99.6 million in the second quarter of 2008. This increase in deposits is primarily attributable to the decrease in short-term interest rates, which has caused fixed annuity products to be an attractive alternative to other competing investment products such as certificates of deposit. Deposits from the Company's asset accumulation products, consisting of new annuity sales and issuances of funding agreements, are recorded as liabilities rather than as premiums.
Net Investment Income. Net investment income in the second quarter of 2009 was $92.0 million as compared to $60.8 million in the second quarter of 2008, an increase of 51%. This increase reflects an increase in the tax equivalent weighted average annualized yield on invested assets to 7.9% for the second quarter of 2009 from 5.4% for the second quarter of 2008, primarily attributable to the improved performance of the Company's investments in investment funds organized as limited partnerships and limited liability companies and a higher level of investment income from the Company's fixed maturity security portfolio resulting from the portfolio repositioning discussed above. See "Introduction". Average invested assets were $4,947.0 million and $4,771.9 million in the second quarters of 2009 and 2008, respectively.
Net Realized Investment Losses. Net realized investment losses were $27.5 million in the second quarter of 2009 compared to $19.5 million in the second quarter of 2008. The Company monitors its investments on an ongoing basis. When the market value of a security declines below its cost, the decline is included as a component of accumulated other comprehensive income or loss, net of the related income tax benefit and adjustment to cost of business acquired, on the Company's balance sheet. If management judges the decline to be other than temporary, the portion of the decline related to credit losses is reported as a realized investment loss in the Company's income statement and the remaining portion of the decline related to other factors continues to be included as a component of additional other comprehensive income or loss. Due to the adverse market condition for financial assets noted above, the Company recognized $45.6 million of losses in the second quarter of 2009 due to the other than temporary declines in the market values of certain fixed maturity securities and other investments, of which $24.9 million was recognized as realized investment losses related to credit losses and $20.7 million remained as a component of accumulated other comprehensive income on the balance sheet related to noncredit losses. The Company recognized $18.1 million of realized losses due to other than temporary impairments in the second quarter of 2008. The Company's investment strategy results in periodic sales of securities and, therefore, the recognition of realized investment gains and losses. During the second quarters of 2009 and 2008, the Company recognized $2.6 million and $1.4 million, respectively, of net losses on sales of securities.
The Company may recognize additional losses due to other than temporary declines in security market values in the future, and such losses may be significant. See "Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008 - Net Realized Investment Losses."
Benefits and Expenses. Policyholder benefits and expenses were $361.1 million in . . .