UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

Commission File Number 001-11462

DELPHI FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

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

1105 North Market Street, Suite 1230, P.O. Box 8985, Wilmington, Delaware		19899
(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 þ       No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files):

Yes o       No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o       No þ

As of November 2, 2009, the Registrant had 48,161,591 shares of Class A Common Stock
and 5,753,833 shares of Class B Common Stock outstanding.

 

 

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

		Page
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2009 and 2008			3
Consolidated Balance Sheets at September 30, 2009 and December 31, 2008			4
Consolidated Statements of Equity for the Nine Months Ended September 30, 2009 and 2008			5
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures About Market Risk			29
Item 4. Controls and Procedures			29
PART II. OTHER INFORMATION
Item 1A. Risk Factors			30
Item 6. Exhibits			31
Signatures			31

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Data)
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Revenue:
Premium and fee income		$	342,610			$	345,028			$	1,052,776			$	1,028,092
Net investment income			88,682				19,407				243,560				112,494
Net realized investment losses:
Total other than temporary impairment losses			(73,771	)			(28,173	)			(137,007	)			(52,479	)
Less: Portion of other than temporary impairment losses recognized in other comprehensive income			21,748				—				42,467				—
Net impairment losses recognized in earnings			(52,023	)			(28,173	)			(94,540	)			(52,479	)
Other net realized investment gains (losses)			1,564				(5,567	)			(5,389	)			(7,196	)
			(50,459	)			(33,740	)			(99,929	)			(59,675	)
Loss on redemption of junior subordinated deferrable interest debentures underlying company-obligated mandatorily redeemable capital securities issued by unconsolidated subsidiaries			—				(598	)			—				(598	)
Total revenues			380,833				330,097				1,196,407				1,080,313
Benefits and expenses:
Benefits, claims and interest credited to policyholders			240,956				244,042				748,361				730,709
Commissions			21,886				22,254				67,046				64,374
Amortization of cost of business acquired			26,740				21,814				76,217				58,459
Other operating expenses			61,054				55,756				181,813				161,567
			350,636				343,866				1,073,437				1,015,109
Operating income (loss)			30,197				(13,769	)			122,970				65,204
Interest expense:
Corporate debt			3,806				4,427				11,667				12,940
Junior subordinated debentures			3,247				3,240				9,728				9,726
Junior subordinated deferrable interest debentures underlying company-obligated redeemable capital securities issued by unconsolidated subsidiaries			—				177				—				934
			7,053				7,844				21,395				23,600
Income (loss) before income tax expense (benefit)			23,144				(21,613	)			101,575				41,604
Income tax expense (benefit)			2,321				(11,803	)			19,261				3,395
Net income (loss)		$	20,823			$	(9,810	)		$	82,314			$	38,209
Basic results per share of common stock:
Net income (loss)		$	0.39			$	(0.20	)		$	1.63			$	0.79
Diluted results per share of common stock:
Net income (loss)		$	0.39			$	(0.20	)		$	1.63			$	0.78
Dividends paid per share of common stock		$	0.10			$	0.10			$	0.30			$	0.29

See notes to consolidated financial statements.

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Data)

		September 30,				December 31,
		2009				2008
Assets:
Investments:
Fixed maturity securities, available for sale		$	4,608,184			$	3,773,382
Short-term investments			572,802				401,620
Other investments			542,047				479,921
			5,723,033				4,654,923
Cash			82,269				63,837
Cost of business acquired			244,930				264,777
Reinsurance receivables			378,277				376,731
Goodwill			93,929				93,929
Other assets			320,428				409,103
Assets held in separate account			109,016				90,573
Total assets		$	6,951,882			$	5,953,873
Liabilities and Equity:
Future policy benefits:
Life		$	346,716			$	300,567
Disability and accident			775,320				743,690
Unpaid claims and claim expenses:
Life			64,110				70,076
Disability and accident			426,802				398,671
Casualty			1,158,937				1,061,046
Policyholder account balances			1,452,332				1,356,932
Corporate debt			365,750				350,750
Junior subordinated debentures			175,000				175,000
Other liabilities and policyholder funds			740,539				581,954
Liabilities related to separate account			109,016				90,573
Total liabilities			5,614,522				5,129,259
Equity:
Preferred Stock, $.01 par; 50,000,000 shares authorized, none issued			—				—
Class A Common Stock, $.01 par; 150,000,000 shares authorized; 55,922,807 and 48,946,432 shares issued, respectively			559				489
Class B Common Stock, $.01 par; 20,000,000 shares authorized; 5,981,049 shares issued			60				60
Additional paid-in capital			659,683				522,596
Accumulated other comprehensive loss			(46,303	)			(351,710	)
Retained earnings			916,309				846,390
Treasury stock, at cost; 7,761,216 shares of Class A Common Stock and 227,216 shares of Class B Common Stock			(197,246	)			(197,246	)
Total shareholders’ equity			1,333,062				820,579
Noncontrolling interest			4,298				4,035
Total equity			1,337,360				824,614
Total liabilities and equity		$	6,951,882			$	5,953,873

See notes to consolidated financial statements.

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY
(Dollars in Thousands)
(Unaudited)

														Accumulated
		Class A				Class B				Additional				Other												Total				Non-
		Common				Common				Paid in				Comprehensive				Retained				Treasury				Shareholders’				controlling				Total
		Stock				Stock				Capital				Income (Loss)				Earnings				Stock				Equity				Interest				Equity
Balance, January 1, 2008		$	487			$	59			$	509,742			$	(42,497	)		$	828,116			$	(154,517	)		$	1,141,390			$	30,181			$	1,171,571
Net income			—				—				—				—				38,209				—				38,209				1,697				39,906
Other comprehensive loss:
Increase in net unrealized depreciation on investments			—				—				—				(246,781	)			—				—				(246,781	)			(1,032	)			(247,813	)
Decrease in net loss on cash flow hedge			—				—				—				589				—				—				589				—				589
Change in net periodic pension cost			—				—				—				35				—				—				35				—				35
Comprehensive loss																											(207,948	)			665				(207,283	)
Change in noncontrolling interest ownership			—				—				—				—				—				—				—				(491	)			(491	)
Exercise of stock options			2				1				7,197				—				—				—				7,200				—				7,200
Stock-based compensation			—				—				4,880				—				—				—				4,880				—				4,880
Acquisition of treasury stock			—				—				—				—				—				(42,729	)			(42,729	)			—				(42,729	)
Cash dividends			—				—				—				—				(13,716	)			—				(13,716	)			—				(13,716	)
Balance, September 30, 2008		$	489			$	60			$	521,819			$	(288,654	)		$	852,609			$	(197,246	)		$	889,077`			$	30,355			$	919,432
Balance, January 1, 2009		$	489			$	60			$	522,596			$	(351,710	)		$	846,390			$	(197,246	)		$	820,579			$	4,035			$	824,614
Cumulative effect adjustment, April 1, 2009			—				—				—				(2,372	)			2,372				—				—				—				—
Net income			—				—				—				—				82,314				—				82,314				226				82,540
Other comprehensive income:
Decrease in net unrealized depreciation on investments			—				—				—				325,660				—				—				325,660				—				325,660
Increase in other than temporary impairment losses recognized in other comprehensive income			—				—				—				(19,343	)			—				—				(19,343	)			—				(19,343	)
Decrease in net loss on cash flow hedge			—				—				—				589				—				—				589				—				589
Change in net periodic pension cost			—				—				—				873				—				—				873				—				873
Comprehensive income			—				—				—								—				—				390,093				226				390,319
Net contribution from noncontrolling interest			—				—				—				—				—				—				—				37				37
Issuance of common stock			65				—				121,056				—				—				—				121,121				—				121,121
Exercise of stock options			5				—				9,189				—				—				—				9,194				—				9,194
Stock-based compensation			—				—				6,842				—				—				—				6,842				—				6,842
Cash dividends			—				—				—				—				(14,767	)							(14,767	)			—				(14,767	)
Balance, September 30, 2009		$	559			$	60			$	659,683			$	(46,303	)		$	916,309			$	(197,246	)		$	1,333,062			$	4,298			$	1,337,360

See notes to consolidated financial statements.

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)

		Nine Months Ended
		September 30,
		2009				2008
Operating activities:
Net income		$	82,314			$	38,209
Adjustments to reconcile net income to net cash provided by operating activities:
Change in policy liabilities and policyholder accounts			225,538				194,967
Net change in reinsurance receivables and payables			(4,613	)			18,901
Amortization, principally the cost of business acquired and investments			38,295				46,601
Deferred costs of business acquired			(97,936	)			(94,043	)
Net realized losses on investments			99,929				59,675
Net change in federal income tax liability			6,632				(53,654	)
Other			(14,101	)			(56,828	)
Net cash provided by operating activities			336,058				267,484
Investing activities:
Purchases of investments and loans made			(1,206,214	)			(1,012,307	)
Sales of investments and receipts from repayment of loans			177,957				348,569
Maturities of investments			637,166				311,840
Net change in short-term investments			(171,162	)			(158,961	)
Change in deposit in separate account			4,845				10,547
Net cash used by investing activities			(557,408	)			(500,312	)
Financing activities:
Deposits to policyholder accounts			242,614				335,082
Withdrawals from policyholder accounts			(131,337	)			(83,382	)
Borrowings under revolving credit facility			17,000				79,000
Principal payments under revolving credit facility			(2,000	)			(6,000	)
Redemption of junior subordinated deferrable interest debentures			—				(20,619	)
Proceeds from the issuance of common stock			121,121				—
Acquisition of treasury stock			—				(42,729	)
Cash dividends paid on common stock			(14,767	)			(13,715	)
Other financing activities			7,151				3,200
Net cash provided by financing activities			239,782				250,837
Increase in cash			18,432				18,009
Cash at beginning of period			63,837				51,240
Cash at end of period		$	82,269			$	69,249

See notes to consolidated financial statements.

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, in the opinion of management, are necessary for a fair presentation of results for the interim periods. Certain reclassifications have been made in the September 30, 2008 consolidated financial statements to conform to the September 30, 2009 presentation. Operating results for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ended December 31, 2009. 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, 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.

Accounting Changes

Basis of Accounting. In June 2009, the Financial Accounting Standards Board (“FASB”) adopted the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative GAAP recognized by the FASB for application by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under federal securities laws are also sources of authoritative GAAP for the SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009, with certain exceptions for nonpublic nongovernmental entities. Since the Codification primarily identifies the sources of authoritative accounting principles that are generally accepted and does not modify any accounting principles, its adoption did not have a material effect on the Company’s consolidated financial position or results of operations.

Business Combinations. As of January 1, 2009, the Company adopted new guidance issued by the FASB on business combinations. This new guidance establishes principles and requirements for how the acquirer in a business combination: (a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, (b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and (c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This new guidance requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with specified limited exceptions. The new guidance is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Assets and liabilities arising from a business combination having an earlier acquisition date are not to be adjusted upon the effectiveness of this statement. The adoption of the new guidance did not have any effect on the Company’s consolidated financial position or results of operations.

In April 2009, the FASB issued new guidance for accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. This new guidance addresses application issues relating to initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. Acquirers are now required to recognize at fair value an asset acquired or liability assumed in a business combination that arises from a contingency if the acquisition date fair value of that asset or liability can be determined during the measurement period. If the acquisition date fair value cannot be determined during the measurement period, a contingency shall be recognized if information available before the end of the measurement period indicates that it is probable that an asset existed or liability had been incurred at the acquisition date and the amount thereof can be reasonably estimated. The new guidance is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after January 1, 2009. The adoption of the new guidance did not have any effect on the Company’s consolidated financial position or results of operations.

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note A — Significant Accounting Policies — (Continued)

Noncontrolling Interests. As of January 1, 2009, the Company adopted new guidance issued by the FASB on noncontrolling interests. This new guidance prescribes the accounting for and the financial reporting of a noncontrolling interest in a company’s subsidiary, which is the portion of the equity (residual interest) in the subsidiary attributable to owners thereof other than the parent and the parent’s affiliates. The new guidance requires that a noncontrolling interest in a consolidated subsidiary be presented in a consolidated statement of financial position as a separate component of equity and that changes in ownership interests in a consolidated subsidiary that does not result in a loss of control be recorded as an equity transaction with no gain or loss recognized. For a change in the ownership interests in a consolidated subsidiary that results in a loss of control or a deconsolidation, a gain or loss is recognized in the amount of the difference between the proceeds of that sale and the carrying amount of the interest sold. In the case of a deconsolidation, the new guidance requires the establishment of a new fair value basis for the remaining noncontrolling ownership interest, with a gain or loss recognized for the difference between that new basis and the historical cost basis of the remaining ownership interest. Upon adoption, the amounts of consolidated net income and consolidated comprehensive income attributable to the parent and the noncontrolling interest must be presented separately on the face of the consolidated financial statements. A detailed reconciliation of the changes in the equity of a noncontrolling interest during the period is also required. The adoption of the new guidance did not have a material effect on the Company’s consolidated financial position or results of operations.

Derivative Instruments. As of January 1, 2009, the Company adopted new guidance issued by the FASB concerning disclosures about derivative instruments and hedging activities. This new guidance requires entities to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. The new guidance requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and credit-risk-related contingent features in derivative instruments. The adoption of the new guidance did not have any effect on the Company’s consolidated financial position or results of operations.

The Company, at times, enters into futures and option contracts and interest rate and credit default swap agreements in connection with its investment strategy and indexed annuity program. These agreements are primarily utilized to reduce the risk associated with changes in the value of the Company’s fixed maturity portfolio and to fund the interest crediting obligations associated with the Company’s indexed annuity contracts. These positions are carried at fair value with gains and losses included in income. The Company recognized net investment income of $1.6 million during the nine months ended September 30, 2009 related to these instruments. The Company had no material outstanding futures and option contracts or interest rate and credit default swap agreements at September 30, 2009. The Company, at times, may also invest in non-dollar denominated fixed maturity securities that expose it to fluctuations in foreign currency rates, and, therefore, may hedge such exposure by using currency forward contracts. The Company had no material currency forward contracts outstanding at September 30, 2009.

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, of which $12.1 million was recorded in accumulated other comprehensive income and the remaining loss was deemed ineffective and recognized as a reduction of net investment income. This transaction was accounted for as a cash flow hedge; accordingly, $12.1 million of the loss on the treasury rate lock agreement is being amortized into interest expense ratably over 10 years. The Company will amortize $1.2 million of such loss into interest expense over the next twelve months. The Company recognized $0.9 million of such loss into interest expense during the first nine months of 2009 and 2008. The net loss on the treasury rate lock agreement included in accumulated other comprehensive loss was $2.9 million (net of an income tax benefit of $1.6 million) at September 30, 2009.

Earnings Per Share. As of January 1, 2009, the Company adopted new guidance issued by the FASB on determining whether instruments granted in share-based payment transactions are participating securities. This new guidance addresses whether unvested instruments granted in share-based payment transactions are participating

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note A — Significant Accounting Policies — (Continued)

securities which must be included in the earnings allocation in computing earnings per share. The new guidance provides guidance for the calculation of earnings per share for share-based payment awards with rights to dividends or dividend equivalents. The adoption of the new guidance did not have a material effect on the Company’s consolidated financial position or results of operations.

Fair Value Measurements. Effective April 1, 2009, the Company adopted new guidance issued by the FASB on interim disclosures about fair value of financial instruments. This new guidance requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. The adoption of the new guidance did not have a material effect on the Company’s consolidated financial position or results of operations.

Effective April 1, 2009, the Company adopted new guidance issued by the FASB on determining fair value which provides additional guidance for estimating fair value of financial instruments when the volume and level of activity for the asset or liability have significantly decreased. It also provides guidance on identifying circumstances indicating that a transaction is not orderly, and indicates that significant decreases in the volume and level of activity of an asset or liability in relation to normal market activity for the asset or liability require a company to further evaluate transactions or quoted prices and exercise significant judgment in arriving at the fair value. The adoption of the new guidance did not have a material effect on the Company’s consolidated financial position or results of operations

Other Than Temporary Impairments. Effective April 1, 2009, the Company adopted new guidance on the recognition and presentation of other than temporary impairments. Under this new guidance, which applies only to debt securities, companies are required to recognize in earnings only the credit component of an other than temporary impairment. The remainder of the impairment will continue to be recognized in other comprehensive income. The new guidance also modifies the existing requirement for a company to assert that it has both the intent and the ability to hold a security for a period of time sufficient to allow for an anticipated recovery in its fair value to its amortized cost basis. In lieu of this requirement, a company is only required to assert that it does not have the intent to sell the debt security and that it is more likely than not that it will not be required to sell the debt security before its anticipated recovery. Upon its adoption of the new guidance, the Company recorded an after-tax increase of $2.4 million in retained earnings and a decrease in the same amount in other comprehensive income to reclassify the non-credit related portion of previously recognized other than temporary impairments on fixed maturity securities held as of April 1, 2009.

Subsequent events. In May 2009, the FASB issued new guidance on subsequent events. This new guidance establishes principles for accounting and disclosure of events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. The new guidance requires an entity to (a) recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements, (b) disclose the nature and financial effect of subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but must be disclosed to keep the financial statements from being misleading, and (c) evaluate subsequent events for recognition and disclosure through the date the financial statements are issued or are available to be issued. The new guidance also requires entities to disclose the date through which subsequent events have been evaluated. The new guidance is effective for financial statements for interim and annual periods ending after June 15, 2009. Accordingly, the Company evaluated subsequent events for recognition and disclosure through the filing date of this Form 10-Q. The adoption of this new guidance did not have any effect on the Company’s consolidated financial position or results of operations.

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note A — Significant Accounting Policies — (Continued)

Recently Issued Accounting Standards

In June 2009, the FASB issued new guidance on the accounting for the transfers of financial assets. This new guidance aims to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial reports about transfers of financial assets, the effects of a transfer of financial assets on its financial position, financial performance, and cash flows and a transferor’s continuing involvement in transferred financial assets. This new guidance removes the concept of a qualifying special-purpose entity from the existing guidance and removes the exception from applying applicable consolidation guidance to variable interest entities that were considered qualifying special-purpose entities. The new guidance is effective for financial statements for interim and annual periods ending after November 15, 2009 and the transfers occurring on or after the effective date. The Company has not yet determined the impact, if any, that the adoption of SFAS No. 166 will have on its consolidated financial position and results of operations.

In June 2009, the FASB issued new guidance on the accounting for variable interest entities (“VIEs”). This new guidance requires ongoing assessments of whether an enterprise is a primary beneficiary of a VIE and replaces the quantitative approach to identifying variable interest entities and determining a variable interest entity’s primary beneficiary with a qualitative method. The qualitative method is based on an enterprise’s (a) power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (b) obligation to absorb losses or right to receive benefits that could be potentially material to the VIE. The new guidance also requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a VIE. The new guidance is effective for financial statements for interim and annual periods ending after November 15, 2009. The Company has not yet determined the impact, if any, that the adoption of the new guidance will have on its consolidated financial position and results of operations.

In August 2009, the FASB issued guidance clarifying that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value of a liability using techniques such as referring to the quoted price of the identical liability when traded as an asset, the quoted prices for similar liabilities, the quoted price of similar liabilities when traded as assets or a present value technique. The fair value of a liability is not adjusted to reflect the impact of contractual restrictions that prevent its transfer. The new guidance is effective for financial statements for interim and annual periods beginning after August 26, 2009, with early adoption permitted under certain conditions. The Company has not yet determined the impact, if any, that the adoption of the new guidance will have on its consolidated financial position and results of operations.

In September 2009, the FASB issued guidance on determining fair value for investments in certain entities that calculate net asset value per share or its equivalent. This new guidance permits the fair value of an investment in such an entity to be measured on the basis of the entity’s reported net asset value per share if the net asset value is calculated in a manner consistent with the measurement principles of GAAP for investment companies and requires enhanced disclosures about the nature and risks of investments in such entities. The standard is effective for interim and annual periods ending after December 15, 2009. The Company has not yet determined the impact, if any, that the adoption of the new guidance will have on its consolidated financial position and results of operations.

Note B — Investments

At September 30, 2009, the Company had fixed maturity securities available for sale with a carrying value and a fair value of $4,608.2 million and an amortized cost of $4,666.8 million. At December 31, 2008, the Company had fixed maturity securities available for sale with a carrying value and a fair value of $3,773.4 million and an amortized cost of $4,322.0 million. Declines in market value relative to such securities’ amortized cost determined to be other than temporary pursuant to the Company’s methodology for such determinations, as further discussed below, are reflected as reductions in the amortized cost of such securities.

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note B — Investments — (Continued)

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

		September 30, 2009
						Gross Unrealized
														Other Than
		Amortized												Temporary				Fair
		Cost				Gains				Losses				Impairments				Value
		(dollars in thousands)
Residential mortgage-backed securities		$	1,493,735			$	88,050			$	(86,710	)		$	(31,048	)		$	1,464,027
Commercial mortgage-backed securities			34,962				164				(6,656	)			(785	)			27,685
Corporate securities			1,244,356				49,595				(40,421	)			—				1,253,530
Collateralized debt obligations			220,587				384				(100,130	)			(1,573	)			119,268
U.S. Treasury and other U.S. Government guaranteed securities			100,107				5,875				—				—				105,982
U.S. Government-sponsored enterprise securities			6,752				599				—				—				7,351
Obligations of U.S. states, municipalities and political subdivisions			1,566,295				75,085				(11,039	)			—				1,630,341
Total fixed maturity securities		$	4,666,794			$	219,752			$	(244,956	)		$	(33,406	)		$	4,608,184

		December 31, 2008
						Gross Unrealized
														Other Than
		Amortized												Temporary				Fair
		Cost				Gains				Losses				Impairments				Value
		(dollars in thousands)
Residential mortgage-backed securities		$	1,367,041			$	40,489			$	(207,905	)		$	—			$	1,199,625
Commercial mortgage-backed securities			44,190				—				(18,891	)			—				25,299
Corporate securities			1,339,519				9,688				(183,995	)			—				1,165,212
Collateralized debt obligations			227,229				—				(116,268	)			—				110,961
U.S. Treasury and other U.S. Government guaranteed securities			51,826				5,905				—				—				57,731
U.S. Government-sponsored enterprise securities			22,031				3,147				—				—				25,178
Obligations of U.S. states, municipalities and political subdivisions			1,270,166				19,230				(100,020	)			—				1,189,376
Total fixed maturity securities		$	4,322,002			$	78,459			$	(627,079	)		$	—			$	3,773,382

The amortized cost and fair value of fixed maturity securities available for sale at September 30, 2009, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations, with or without prepayment penalties.

		Amortized				Fair
		Cost				Value
		(dollars in thousands)
Residential mortgage-backed securities		$	1,493,735			$	1,464,027
Commercial mortgage-backed securities			34,962				27,685
Other fixed maturity securities:
One year or less			57,017				57,097
Greater than 1, up to 5 years			493,228				495,930
Greater than 5, up to 10 years			851,477				830,221
Greater than 10 years			1,736,375				1,733,224
Total		$	4,666,794			$	4,608,184

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note B — Investments — (Continued)

The gross unrealized losses and fair value of fixed maturity securities available for sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

		September 30, 2009
		Less Than 12 Months								12 Months or More								Total
						Gross								Gross								Gross
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		(dollars in thousands)
Residential mortgage-backed securities		$	36,605			$	(139	)		$	446,865			$	(117,619	)		$	483,470			$	(117,758	)
Commercial mortgage-backed securities			—				—				24,111				(7,441	)			24,111				(7,441	)
Corporate securities			20,419				(180	)			313,002				(40,241	)			333,421				(40,421	)
Collateralized debt obligations			—				—				112,854				(101,703	)			112,854				(101,703	)
U.S. Treasury and other U.S. Government guaranteed securities			—				—				—				—				—				—
U.S. Government-sponsored enterprise securities			—				—				—				—				—				—
Obligations of U.S. states, municipalities & political subdivisions			37,128				(196	)			142,204				(10,843	)			179,332				(11,039	)
Total fixed maturity securities		$	94,152			$	(515	)		$	1,039,036			$	(277,847	)		$	1,133,188			$	(278,362	)

		December 31, 2008
		Less Than 12 Months								12 Months or More								Total
						Gross								Gross								Gross
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		(dollars in thousands)
Residential mortgage-backed securities		$	415,738			$	(140,542	)		$	151,971			$	(67,363	)		$	567,709			$	(207,905	)
Commercial mortgage-backed securities			22,089				(9,819	)			3,211				(9,072	)			25,300				(18,891	)
Corporate securities			505,595				(67,205	)			256,980				(116,790	)			762,575				(183,995	)
Collateralized debt obligations			76,003				(62,854	)			34,958				(53,414	)			110,961				(116,268	)
U.S. Treasury and other U.S. Government guaranteed securities			—				—				—				—				—				—
U.S. Government-sponsored enterprise securities			—				—				—				—				—				—
Obligations of U.S. states, municipalities & political subdivisions			520,492				(61,106	)			164,817				(38,914	)			685,309				(100,020	)
Total fixed maturity securities		$	1,539,917			$	(341,526	)		$	611,937			$	(285,553	)		$	2,151,854			$	(627,079	)

Net realized investment losses arose from the following:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(dollars in thousands)
Fixed maturity securities, available for sale		$	(41,918	)		$	(31,444	)		$	(85,929	)		$	(48,639	)
Other investments			(8,541	)			(2,296	)			(14,000	)			(11,036	)
		$	(50,459	)		$	(33,740	)		$	(99,929	)		$	(59,675	)

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note B – Investments – (Continued)

Proceeds from sales of fixed maturity securities during the first nine months of 2009 and 2008 were $394.2 million and $196.8 million, respectively. Gross gains of $17.4 million and gross losses of $(25.6) million were realized on the 2009 sales and gross gains of $2.6 million and gross losses of $(9.9) million were realized on the 2008 sales. Proceeds from sales of fixed maturity securities during the third quarters of 2009 and 2008 were $76.2 million and $90.7 million, respectively. Gross gains of $3.7 million and gross losses of $(3.1) million were realized on sales during the third quarter of 2009 and gross gains of $0.4 million and gross losses of $(5.6) million were realized on sales during the third quarter of 2008. Net realized investment gains and losses on investment sales are determined under the specific identification method and are included in income. In the first nine months of 2009 and 2008 the net losses realized on fixed maturity securities also include provisions for the other than temporary declines in the values of certain fixed maturity securities of $(77.7) million and $(41.4) million, respectively. The change in unrealized appreciation and depreciation on investments, primarily relating to fixed maturity securities, is included as a component of accumulated other comprehensive income or loss.

The Company regularly evaluates its investment portfolio utilizing its established methodology to determine whether declines in the fair values of its investments are other than temporary. Under this methodology, management 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 changes in credit ratings of the issuer by nationally recognized rating agencies to determine if and when a decline in the fair value of an investment below amortized cost is other than temporary. Management also considers the length of time and extent to which the fair value of the investment is lower than its amortized cost and evaluates whether the Company intends to, or will more likely than not be required to, sell the investment before the anticipated recovery in the investment’s fair value. In addition, the Company evaluates loan to collateral value ratios, current levels of subordination and vintages of its residential and commercial mortgage-backed securities.

If the fair value of a fixed maturity security declines in value below the Company’s amortized cost and the Company intends to sell or determines that it will more likely than not be required to sell the security before recovery of its amortized cost basis, management considers the security to be other than temporarily impaired and reports its decline in fair value as a realized investment loss. If, however, the Company does not intend to sell the security and determines that it is not more likely than not that it will not be required to do so, declines in the fair value that are considered in the judgment of management to be other than temporary are separated into the amounts representing credit losses and the amounts related to other factors. Amounts representing credit losses are reported as realized investment losses in the income statement and amounts related to other factors are included as a component of accumulated other comprehensive income or loss, net of the related income tax benefit and the related adjustment to cost of business acquired. The amount of credit loss is determined by discounting the security’s expected cash flows at its effective interest rate, taking into account the security’s purchase price. Declines in the fair value of all other investments that are considered in the judgment of management to be other than temporary are reported as realized investment losses.

During the first nine months of 2009, the Company recognized $89.1 million of after-tax other than temporary impairment losses, of which $61.5 million was recognized as after-tax realized investment losses in the income statement related to credit losses and $27.6 million was recognized, net of the related income tax benefit, as a component of accumulated other comprehensive income on the balance sheet related to noncredit losses.

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note B – Investments – (Continued)

The following table provides a reconciliation of the beginning and ending balances of other than temporary impairments on fixed maturity securities held by the Company for which a portion of the other than temporary impairment was recognized in accumulated other comprehensive income or loss (dollars in thousands):

		Three months ended				Nine months ended
		September 30, 2009				September 30, 2009
Balance at the beginning of period		$	59,420			$	—
Increases attributable to credit losses on securities for which an other than temporary impairment was not previously recognized			17,775				77,384
Increases attributable to credit losses on securities for which an other than temporary impairment was previously recognized			2,332				2,143
Reductions due to sales, maturities, pay downs or prepayments of securities for which an other than temporary impairment was previously recognized			(9,454	)			(9,454	)
Balance at the end of the period		$	70,073			$	70,073

The gross unrealized losses at September 30, 2009 are attributable to over eight hundred fixed maturity security positions, with the largest unrealized loss associated with any one security equal to $6.1 million. Unrealized losses attributable to fixed maturity securities having investment grade ratings by a nationally recognized statistical rating organization comprised 51% of the aggregate gross unrealized losses at September 30, 2009, with the remainder of such losses being attributable to non-investment grade fixed maturity securities.

At September 30, 2009, the Company held approximately $1,145.6 million of insured municipal fixed maturity securities, which represented approximately 20% of the Company’s total invested assets. These securities had a weighted average credit rating of “AA” by nationally recognized statistical rating organizations at September 30, 2009. For the portion of these securities having ratings by nationally recognized statistical rating organizations without giving effect to the credit enhancement provided by the insurance, which totaled $817.2 million at September 30, 2009, the weighted average credit rating at such date by such organizations was also “AA”. Insurers of significant portions of the municipal fixed maturity securities held by the Company at September 30, 2009 included National Public Finance Guarantee Corp. ($322.9 million), Financial Security Assurance Inc. ($171.2 million), Ambac Financial Group, Inc. ($146.1 million), and Financial Guaranty Insurance Company ($40.9 million). At September 30, 2009, the Company did not have significant holdings of credit enhanced asset-backed or mortgage-backed securities, nor did it have any significant direct investments in the guarantors of the municipal fixed maturity securities held by the Company.

Net investment income was attributable to the following:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(dollars in thousands)
Gross investment income:
Fixed maturity securities, available for sale		$	77,648			$	35,476			$	225,354			$	142,526
Mortgage loans			1,121				3,072				2,527				10,274
Short-term investments			26				1,953				348				7,114
Other			16,510				(14,042	)			38,586				(24,877	)
			95,305				26,459				266,815				135,037
Less: Investment expenses			(6,623	)			(7,052	)			(23,255	)			(22,543	)
		$	88,682			$	19,407			$	243,560			$	112,494

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note C – Fair Value Measurements

The Company measures its assets and liabilities recorded at fair value in the consolidated balance sheet based on the framework set forth in the GAAP fair value accounting guidance. This framework establishes a fair value hierarchy of three levels based upon the transparency and availability of information used in measuring the fair value of assets or liabilities as of the measurement date. The levels are categorized as follows:

Level 1- Valuation is based upon quoted prices for identical assets or liabilities in active markets. Level 1 fair value is not subject to valuation adjustments or block discounts.

Level 2 — Valuation is based upon quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar instruments in markets that are not active. In addition, a company may use various valuation techniques or pricing models that use observable inputs to measure fair value.

Level 3 — Valuation is generated from techniques in which one or more of the significant inputs for valuing such assets or liabilities are not observable. These inputs may reflect the Company’s best estimates of the various assumptions that market participants would use in valuing the financial assets and financial liabilities.

For these purposes, the Company determines the existence of an active market for an asset or liability based on its judgment as to whether transactions for the asset or liability occur in such market with sufficient frequency and volume to provide reliable pricing information. If the Company concludes that there has been a significant decrease in the volume and level of activity for an investment in relation to normal market activity for such investment, adjustments to transactions and quoted prices are made to estimate fair value.

The Company’s investments in fixed maturity securities available for sale, equity securities available for sale, trading account securities, assets held in the separate account and securities sold, not yet purchased are carried at fair value. The methodologies and valuation techniques used by the Company to value its assets and liabilities measured at fair value are described below.

Instruments included in fixed maturity securities available for sale include mortgage-backed and corporate securities, U.S. Treasury and other U.S. government guaranteed securities, securities issued by U.S. government-sponsored enterprises, and obligations of U.S. states, municipalities and political subdivisions. The market liquidity of each security is taken into consideration in the valuation technique used to value such security. For securities where market transactions involving identical or comparable assets generate sufficient relevant information, the Company employs a market approach to valuation. If sufficient information is not generated from market transactions involving identical or comparable assets, the Company uses an income approach to valuation. The majority of the instruments included in fixed maturity securities available for sale are valued utilizing observable inputs; accordingly, they are categorized in either Level 1 or Level 2 of the fair value hierarchy described above. However, in instances where significant inputs utilized are unobservable, the securities are categorized in Level 3 of the fair value hierarchy.

The inputs used in the valuation techniques employed by the Company are provided by nationally recognized pricing services, external investment managers and internal resources. To assess these inputs, the Company’s review process includes, but is not limited to, quantitative analysis including benchmarking, initial and ongoing evaluations of methodologies used by external parties to calculate fair value, and ongoing evaluations of fair value estimates based on the Company’s knowledge and monitoring of market conditions.

Residential mortgage-backed securities and commercial mortgage-backed securities include U.S. agency securities and collateralized mortgage obligations. The Company uses various valuation techniques and pricing models to measure the fair value of these instruments, including option-adjusted spread models, volatility-driven multi-dimensional single cash flow stream models and matrix correlation to comparable securities. A portion of the Company’s investments in mortgage-backed securities are valued using observable inputs and therefore categorized in Level 2 of the fair value hierarchy. The remaining mortgage-backed securities are valued using varying numbers of non-binding broker quotes or a discount rate adjustment technique based on internal assumptions for expected cash flows and appropriately risk-adjusted discount rates. These methodologies rely on unobservable inputs and thus these securities are categorized in Level 3 of the fair value hierarchy.

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note C – Fair Value Measurements – (Continued)

Corporate securities primarily include fixed rate corporate bonds, floating and variable rate notes and securities acquired through private placements. The Company uses recently executed transactions, market price quotations, benchmark yields and issuer spreads to arrive at the fair value of its investments in corporate securities and collateralized debt obligations. The majority of the corporate securities, other than securities acquired through private placements, are categorized in Level 2 of the fair value hierarchy. Collateralized debt obligations and private placement corporate securities are valued with cash flow models using yield curves, issuer-provided information and material events as key inputs. As these inputs are generally unobservable, collateralized debt obligations and private placement securities are categorized in Level 3 of the fair value hierarchy.

U.S. Treasury and other U.S. government guaranteed securities include U.S. Treasury bonds and notes, Treasury Inflation Protected Securities (“TIPS”) and other U.S. government guaranteed securities. The fair values of the U.S. Treasury securities and TIPS are based on quoted prices in active markets and are generally categorized in Level 1 of the fair value hierarchy.

Other U.S. government guaranteed securities are valued based on observable inputs including interest rate yield curves, maturity dates, and credit spreads relating to similar instruments. Accordingly, these securities are generally categorized in Level 2 of the fair value hierarchy.

U.S. government-sponsored enterprise securities include issues of medium term notes by U.S. government-sponsored enterprises. The Company uses recently executed transactions, market price quotations, benchmark yields and issuer spreads to arrive at the fair value of these instruments. These inputs are generally observable and these securities are generally categorized in Level 2 of the fair value hierarchy.

Obligations of U.S. states, municipalities and political subdivisions primarily include bonds or notes issued by U.S municipalities. The Company values these securities using recently executed transactions, spreads, benchmark curves including treasury benchmarks, and trustee reports. These inputs are generally observable and these securities are generally categorized in Level 2 of the fair value hierarchy.

Other investments held at fair value primarily consist of equity securities available for sale and trading account securities. These investments are primarily valued at quoted active market prices and are therefore categorized in Level 1 of the fair value hierarchy. For private equity investments, since quoted market prices are not available, the transaction price is used as the best estimate of fair value at inception. When evidence is believed to support a change to the carrying value from the transaction price, adjustments are made to reflect expected exit values. Ongoing reviews by Company management are based on assessments of each underlying investment, incorporating, among other things, the evaluation of financing and sale transactions with third parties, expected cash flows, material events and market-based information. These investments are included in Level 3 of the fair value hierarchy.

Assets held in the separate account represent funds invested in a separately administered variable life insurance product for which the policyholder, rather than the Company, bears the investment risk. These assets are invested in a limited liability company that invests in entities which trade in various financial instruments. The Company concluded that the value calculated using the equity method of accounting was reflective of the fair market value of such investments. The investment portfolios of the funds in which the fund investments are maintained vary from fund to fund, but are generally comprised of liquid, publicly traded securities that have readily determinable market values and which are carried at fair value on the financial statements of such funds, substantially all of which are audited annually. The amount that an investor is entitled to receive upon the redemption of its investment from the applicable fund is determined by reference to such security values. The Company utilizes the financial statements furnished by the funds to determine the values of its investments in such funds and the carrying value of each such investment, which is based on its proportionate interest in the relevant fund as of the balance sheet date. These investments are included in Level 3 of the fair value hierarchy.

Other liabilities measured at fair value include securities sold, not yet purchased. These securities are valued using the quoted active market prices of the securities sold and are categorized in Level 1 of the fair value hierarchy.

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note C – Fair Value Measurements – (Continued)

Assets and liabilities measured at fair value in the consolidated balance sheet on a recurring basis are summarized below:

		September 30, 2009
		Total				Level 1				Level 2				Level 3
						(dollars in thousands)
Assets:
Fixed maturity securities, available for sale:
Residential mortgage-backed securities		$	1,464,027			$	761			$	1,303,745			$	159,521
Commercial mortgage-backed securities			27,685				—				—				27,685
Corporate securities			1,253,530				2,958				1,131,255				119,317
Collateralized debt obligations			119,268				—				—				119,268
U.S. Treasury and other U.S. Government guaranteed securities			105,982				74,135				29,110				2,737
U.S. Government-sponsored enterprise securities			7,351				—				7,351				—
Obligations of U.S. states, municipalities and political subdivisions			1,630,341				—				1,630,341				—
Other investments			128,041				111,574				—				16,467
Assets held in separate account			109,016				—				—				109,016
Total		$	4,845,241			$	189,428			$	4,101,802			$	554,011
Liabilities:
Other liabilities		$	58,695			$	58,695			$	—			$	—

The following table provides reconciliations for Level 3 assets measured at fair value on a recurring basis.

		Three Months Ended September 30, 2009
																						U.S.
																						Treasury and
						Residential				Commercial												Other U.S.								Assets
						Mortgage-				Mortgage-								Collateralized				Gov’t								held in
						backed				backed				Corporate				Debt				Guaranteed				Other				Separate
		Total				Securities				Securities				Securities				Obligations				Securities				Investments				Account
														(dollars in thousands)
Balance at beginning of quarter		$	554,020			$	180,356			$	18,736			$	131,745			$	103,499			$	2,185			$	17,310			$	100,189
Total (losses) gains
Included in earnings			(29,829	)			(1,077	)			(4,794	)			(19,917	)			(3,095	)			—				(946	)			—
Included in other comprehensive income			37,839				1,764				13,868				2,740				19,273				59				135				—
Purchases, issuances and settlements			26,326				10,307				(125	)			7,265				(409	)			493				(32	)			8,827
Net transfer (out of) in to Level 3			(34,345	)			(31,829	)			—				(2,516	)			—				—				—				—
Balance at end of the period		$	554,011			$	159,521			$	27,685			$	119,317			$	119,268			$	2,737			$	16,467			$	109,016
Net losses for the period included in earnings attributable to the net change in unrealized gains and losses of assets measured at fair value using unobservable inputs and held at September 30, 2009 (1)		$	(38,893	)		$	(8,826	)		$	(4,887	)		$	(19,933	)		$	(4,295	)		$	—			$	(952	)		$	—

DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note C – Fair Value Measurements – (Continued)

		Nine months Ended September 30, 2009
																						U.S.
																						Treasury and
						Residential				Commercial												Other U.S.								Assets
						Mortgage-				Mortgage-								Collateralized				Gov’t								held in
						backed				backed				Corporate				Debt				Guaranteed				Other				Separate
		Total				Securities				Securities				Securities				Obligations				Securities				Investments				Account
		(dollars in thousands)
Balance at beginning of period		$	735,379			$	163,004			$	25,299			$	323,043			$	109,358			$	2,608			$	21,494			$	90,573
Total (losses) gains
Included in earnings			(61,614	)			(23,395	)			(4,305	)			(30,428	)			(3,993	)			—				507				—
Included in other comprehensive income			43,499				15,791				11,614				3,245				14,185				47				(1,383	)			—
Purchases, issuances and settlements			(117,633	)			19,444				(4,923	)			(146,246	)			(282	)			82				(4,151	)			18,443
Net transfer (out of) in to Level 3			(45,620	)			(15,323	)			—				(30,297	)			—				—				—				—
Balance at end of the period		$	554,011			$	159,521			$	27,685			$	119,317			$	119,268			$	2,737			$	16,467			$	109,016
Net losses for the period included in earnings attributable to the net change in unrealized gains and losses of assets measured at fair value using unobservable inputs and held at September 30, 2009 (1)		$	(68,480	)		$	(32,057	)		$	(4,887	)		$	(21,530	)		$	(7,471	)		$	—			$	(2,535	)		$	—