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Article by DailyStocks_admin    (11-27-08 03:38 AM)

Delphi Financial Group Inc. CEO ROBERT ROSENKRANZ bought 200000 shares on 11-21-2008 at $8.88

BUSINESS OVERVIEW

Delphi Financial Group, Inc. (the “Company” or “Delphi,” which term includes the Company and its consolidated subsidiaries unless the context indicates otherwise) is a holding company whose subsidiaries provide integrated employee benefit services. The Company was organized as a Delaware corporation in 1987 and completed the initial public offering of its Class A common stock in 1990. The Company manages all aspects of employee absence to enhance the productivity of its clients and provides the related insurance coverages: long-term and short-term disability, excess and primary workers’ compensation, group life, travel accident and dental. The Company’s asset accumulation business emphasizes individual fixed annuity products. The Company offers its products and services in all fifty states, the District of Columbia and Canada. The Company’s two reportable segments are group employee benefit products and asset accumulation products. See Notes A and Q to the Consolidated Financial Statements included in this Form 10-K for additional information regarding the Company’s segments.
The Company makes available free of charge on its website at www.delphifin.com/financial/secfilings.html its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports as soon as reasonably possible after such material has been filed with or furnished to the Securities and Exchange Commission. Additional copies of the Company’s annual reports on Form 10-K may be obtained without charge by submitting a written request to the Investor Relations Department, Delphi Financial Group, Inc., 1105 North Market Street, Suite 1230, Wilmington, Delaware 19899.
Operating Strategy
The Company’s operating strategy is to offer financial products and services which have the potential for significant growth, which require specialized expertise to meet the individual needs of its customers and which provide the Company the opportunity to achieve superior operating earnings growth and returns on capital.
The Company has concentrated its efforts within certain niche insurance markets, primarily group employee benefits for small to mid-sized employers, where data from the Bureau of Labor Statistics indicate the vast majority of the employment growth in the American economy has occurred in recent years. The Company also markets its group employee benefit products and services to large employers, emphasizing unique programs that integrate both employee benefit insurance coverages and absence management services. The Company also operates an asset accumulation business that focuses primarily on offering fixed annuities to individuals planning for retirement as well as the issuance of funding agreements in connection with the offering of funding agreement-backed notes to institutional investors.
The Company’s primary operating subsidiaries are as follows:
Reliance Standard Life Insurance Company (“RSLIC”), founded in 1907 and having administrative offices headquartered in Philadelphia, Pennsylvania, and its subsidiary, First Reliance Standard Life Insurance Company (“FRSLIC”), underwrite a diverse portfolio of group life, disability, travel accident and dental insurance products targeted principally to the employee benefits market. RSLIC also markets asset accumulation products, primarily fixed annuities, to individuals and groups. The financial strength rating of RSLIC as of February 2008 as assigned by A.M. Best was A (Excellent). Financial strength ratings are based upon factors relevant to the Company’s insurance subsidiary policyholders and are not directed toward protection of investors in the Company. The Company, through Reliance Standard Life Insurance Company of Texas (“RSLIC-Texas”), acquired RSLIC and FRSLIC in 1987.

Safety National Casualty Corporation (“SNCC”) focuses primarily on providing excess workers’ compensation insurance to the self-insured market. Founded in 1942 and located in St. Louis, Missouri, SNCC is one of the oldest continuous writers of excess workers’ compensation insurance in the United States. The financial strength rating of SNCC as of February 2008 as assigned by A.M. Best was A (Excellent). The Company, through SIG Holdings, Inc. (“SIG”), acquired SNCC in 1996. In 2001, SNCC formed an insurance subsidiary, Safety First Insurance Company, which also focuses on selling excess workers’ compensation products to the self-insured market.
Matrix Absence Management, Inc. (“Matrix”), founded in 1987, provides integrated disability and absence management services to the employee benefits market across the United States. Headquartered in San Jose, California, Matrix was acquired by the Company in 1998.
Group Employee Benefit Products
The Company is a leading provider of group life, disability and excess workers’ compensation insurance products to small and mid-sized employers, with more than 30,000 policies in force. The Company also offers travel accident, voluntary accidental death and dismemberment and group dental insurance. The Company markets its group products to employer-employee groups and associations in a variety of industries. The Company insures groups ranging from 2 to more than 5,000 individuals, although the size of an insured group generally ranges from 10 to 1,000 individuals. The Company markets its 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 group employee benefit products to large employers. In 2003, the Company introduced a suite of voluntary group life, disability and accidental death and dismemberment insurance products that are purchased by employees on an elective basis at their worksite. This suite of voluntary benefits allows the employees of the Company’s clients to choose, within specified parameters, the type and amount of insurance coverage, the premiums for which are collected through payroll deductions. The Company also offers a group limited benefit health insurance product which provides employee-paid coverage for hourly, part-time or other employees with seasonal or other irregular work schedules who would generally not be eligible for other employer-provided health insurance plans. In underwriting its group employee benefit products, the Company attempts to avoid concentrations of business in any particular industry segment or geographic area; however, no assurance can be given that such efforts will be successful.
The Company’s group employee benefit products are sold to employers and groups primarily through independent brokers and agents. The Company’s products are marketed to brokers and agents by 163 sales representatives and managers. RSLIC had 129 group sales representatives and managers located in 31 sales offices nationwide at December 31, 2007, up from 125 sales representatives and managers located in 26 sales offices nationwide at the end of 2006. In addition, RSLIC had 20 sales representatives and managers devoted to its limited benefit health insurance product at December 31, 2007. At December 31, 2007, SNCC had 13 sales representatives and managers. The Company’s four administrative offices and 31 sales offices also service existing business.

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. Under these 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. See “Reinsurance”. Accordingly, the profitability of group employee benefit products is affected by the amount, cost and terms of reinsurance obtained by the Company. 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 loss and expense ratios are affected by, among other things, claims development related to insurance policies written in prior years and the results with respect to the Company’s non-core group employee benefit products. Such ratios can also be affected by changes in the Company’s mix of products, such as the level of premium from loss portfolio transfers (“LPTs”), from year to year. LPTs, which are classified as a non-core product due to the episodic nature of sales, carry a higher loss ratio and a significantly lower expense ratio as compared to the Company’s other group employee benefit products.

Group disability insurance products offered by the Company, principally long-term disability insurance, generally provide a specified level of periodic benefits for a specified term, typically to the insured’s normal retirement age, to a member of the insured group who, because of a medical condition or injury, is unable to work. The Company’s group long-term disability coverages are spread across many industries. Typically, long-term disability benefits are paid monthly and are limited for any one insured to two-thirds of the insured’s earned income up to a specified maximum benefit. Long-term disability benefits are usually offset by income the claimant receives from other sources, primarily Social Security disability benefits. The Company actively manages its disability claims, working with claimants in an effort to assist them in returning to work as quickly as possible. When claimants’ disabilities prevent them from returning to their original occupations, the Company, in appropriate cases, may provide assistance in developing new productive skills for an alternative career. Following the initial premium rate guarantee period for a new policy, typically two years in length, premium rates are generally re-determined annually for disability insurance and are based upon expected morbidity and mortality and the insured group’s emerging experience, as well as assumptions regarding operating expenses and future interest rates. In April 2006, RSLIC purchased substantially all of the assets of a third-party administrator which had previously been administering business for RSLIC and contributed them to a newly established division of RSLIC, Custom Disability Solutions (“CDS”). In addition, RSLIC hired approximately 100 former employees of the third-party administrator in connection with the asset acquisition. CDS, the operations of which are based in South Portland, Maine, is focused on expanding the Company’s presence in the turnkey group disability reinsurance market, while also continuing to service existing clients from an indemnity reinsurance arrangement. Turnkey group disability reinsurance is typically provided to other insurance companies that would not otherwise have the capability of providing to their clients a group disability insurance product to complement their other product offerings. Under these reinsurance arrangements, RSLIC typically assumes through reinsurance, on a quota share basis, a substantial majority in proportionate amount of the risk associated with the group disability insurance policies issued by such other insurers. CDS provides pricing, underwriting and claims management services relating to such policies, utilizing the same policies and procedures as are applied with respect to RSLIC’s directly written group disability insurance policies. Effective October 1, 2003 for new policies and, for policies that were in effect on such date, the earlier of the next policy anniversary date or October 1, 2004, the Company cedes through indemnity reinsurance risks in excess of $7,500 (compared to $2,500 previously) in long-term disability benefits per individual per month. See “Reinsurance” and “Liquidity and Capital Resources — Reinsurance” in Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The Company’s group life insurance products provide for the payment of a stated amount upon the death of a member of the insured group. Following the initial premium rate guarantee period for a new policy, typically two years in length, premium rates are generally re-determined annually for group life insurance policies and are based upon expected mortality and morbidity and the insured group’s emerging experience, as well as assumptions regarding operating expenses and future interest rates. Accidental death and dismemberment insurance, which provides for the payment of a stated amount upon the accidental death or dismemberment of a member of the insured group, is frequently sold in conjunction with group life insurance policies and is included in premiums charged for group life insurance. The Company cedes through indemnity reinsurance risks in excess of $100,000 per individual for voluntary group term life insurance policies. Effective January 1, 2007, the Company ceded through indemnity reinsurance risks in excess of $200,000 (compared to $150,000 previously) per individual and type of coverage for employer-paid group life insurance policies. Effective January 1, 2008, the Company cedes through indemnity reinsurance risks in excess of $300,000 per individual and type of coverage for new and existing employer-paid group life insurance policies. See “Reinsurance”.
Excess workers’ compensation insurance products provide coverage against workers’ compensation risks to employers and groups who self-insure such risks. The coverage applies to losses in excess of the applicable self-insured retentions (“SIRs” or deductibles) of employers and groups, whose workers’ compensation claims are generally handled by third-party administrators (“TPAs”). These products are principally targeted to mid-sized companies and other employers, particularly small municipalities, hospitals and schools. These employers are believed to be less prone to catastrophic workers’ compensation exposures and less price sensitive than larger account business. Because claim payments under the Company’s excess workers’ compensation products do not begin until the self-insured’s total loss payments exceed the SIR, the period from when the claim is incurred to the time the Company’s claim payments begin is 15 years on average. At that point, the payments are primarily for wage replacement, similar to the benefit provided under long-term disability coverage, and any medical payments tend to be relatively more stable and predictable in nature than at the inception of the workers’ compensation claim. This family of products also includes large deductible workers’ compensation insurance, which provides coverage similar to excess workers’ compensation insurance, and a complementary product, workers’ compensation self-insurance bonds.

The pricing environment and demand for excess workers’ compensation insurance improved substantially after 2000 due to high primary workers’ compensation rates and disruption in the excess workers’ compensation marketplace resulting from difficulties experienced by some competitors, particularly during 2000. These trends accelerated during the second half of 2001 as sharply higher primary workers’ compensation rates and rising reinsurance costs due to the September 11 th terrorist attacks increased the demand for alternatives to primary workers’ compensation. As a result, the demand for excess workers’ compensation insurance products and the rates for such products continued to increase significantly through 2004. The cumulative effect of these rate increases during 2002 through 2004 was an increase of 57%. SNCC was able to maintain its pricing in its renewals of insurance coverage from 2005 through 2006 and also obtained significant improvements in contract terms in new and renewal policies written in those years, in particular higher SIR levels. On average, SIRs increased 8% in 2005 and 6% in 2006, with further modest increases in 2007. For the 2008 renewals, rates declined slightly and SIR levels on average are up modestly in new and renewal policies in those periods. New business production, which represents the amount of new annualized premium sold, for excess workers’ compensation products was $46.0 million in 2005, $57.2 million in 2006 and $30.1 million in 2007 and the retention of existing customers remains strong. New business production for 2005, 2006 and 2007 included $6.9 million, $25.8 million and $3.4 million, respectively, from a renewal rights agreement into which SNCC entered in July 2005 (the “Renewal Rights Agreement”). Under the agreement, SNCC acquired, among other things, the right to offer renewal quotes to expiring excess workers’ compensation policies of a former competitor. Excess workers’ compensation new business production for the important January renewal season was $3.9 million in 2008 as compared to $11.2 million in 2007, which included $2.9 million related to policies written in Canada under the Renewal Rights Agreement.
The Company from time to time replaces or modifies its existing reinsurance arrangements for its excess workers’ compensation insurance products based on reinsurance market conditions then existing. The Company presently cedes through indemnity reinsurance excess workers’ compensation risks in excess of $5.0 million per occurrence. Effective July 1, 2007, the Company entered into a reinsurance agreement under which it cedes 50% on a quota share basis (compared to 100% previously) of its excess workers’ compensation risks between $5.0 million and $10.0 million per occurrence. The Company presently cedes through indemnity reinsurance 100% of its excess workers’ compensation risks between $10.0 million and $50.0 million per occurrence, and 85% on a quota share basis of its workers’ compensation risks between $50.0 million and $100.0 million per occurrence. Effective October 1, 2007, the Company entered into a reinsurance agreement under which it cedes 75% (compared to 60% previously) on a quota share basis of its excess workers’ compensation risks between $100.0 million and $150.0 million per occurrence. See “Reinsurance” and “Liquidity and Capital Resources — Reinsurance” in Part II, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.
As a result of the September 11 th terrorist attacks, a number of the Company’s reinsurers have excluded coverage for losses resulting from terrorism. In November 2002, the Terrorism Risk Insurance Act of 2002 (the “Terrorism Act”) was enacted. The Terrorism Act established a program under which the federal government will share with the insurance industry the risk of loss from covered acts of international terrorism. In December 2005, Congress passed the Terrorism Risk Insurance Extension Act of 2005 extending, with certain modifications, the Terrorism Act for an additional two-year term through December 31, 2007. In December 2007, Congress modified the program to include domestic terrorism and extended it again through December 31, 2014 pursuant to the Terrorism Risk Insurance Program Reauthorization Act of 2007. The Terrorism Act applies to lines of property and casualty insurance directly written by SNCC (as opposed to business assumed by SNCC through reinsurance), including excess workers’ compensation. SNCC’s surety line of business is not covered under the Terrorism Act. The federal government would pay 85% of each covered loss in 2008 and the insurer would pay the remaining 15%, respectively. Each insurer has a separate deductible before federal assistance becomes available for a covered act of terrorism. The deductible is based on a percentage of the insurer’s direct earned premiums from the previous calendar year. Such percentage will be 20% in 2008. The maximum after-tax loss to the Company for 2008 within the Terrorism Act deductible from property and casualty products is approximately 3.3% of the Company’s shareholders’ equity as of December 31, 2007. Any payments made by the federal government under the Terrorism Act would be subject to recoupment via surcharges to policyholders when future premiums are billed. The Terrorism Act does not apply to the lines of insurance written by the Company’s life insurance subsidiaries.
Business travel accident and voluntary accidental death and dismemberment group insurance policies pay a stated amount based on a predetermined schedule in the event of the accidental death or dismemberment of a member of the insured group. The Company cedes through indemnity reinsurance risks in excess of $150,000 per individual and type of coverage. Group dental insurance provides coverage for preventive, restorative and specialized dentistry up to a stated maximum benefit per individual per year. Under a reinsurance arrangement, the Company ceded 50% of its risk under dental policies with effective dates prior to 2003, ceded 100% of its risk under dental policies with effective dates in 2003 through June 30, 2004 and cedes 75% of its risk under dental policies with effective dates after June 30, 2004. See “Reinsurance”.

The Company’s suite of voluntary group life, disability and accidental death and dismemberment insurance products are sold to employees on an elective basis at the worksite. Trends in the U.S. employment market, particularly the increasing cost of employer-provided medical benefits, are leading an increasing number of employers to offer new or additional benefits on a voluntary basis. The Company’s suite of voluntary products allows the employees of the Company’s clients to choose, within specified parameters, the type and amount of insurance coverage, the premiums for which are collected through payroll deductions. The Company also offers a group limited benefit health insurance product which provides employee-paid coverage for hourly, part-time or other employees with seasonal or other irregular work schedules who would generally not be eligible for other employer-provided health insurance plans. Because these products are convenient to purchase and maintain, the Company believes that they are appealing to employees who might have little opportunity or inclination to purchase similar coverage on an individual basis. The Company believes that these products complement the Company’s core group employee benefit products and represent a significant growth opportunity.
Non-core group employee benefit products include certain products that have been discontinued, such as reinsurance facilities and excess casualty insurance, newer products which have not demonstrated their financial potential, products which are not expected to comprise a significant percentage of earned premiums and products for which sales are episodic in nature, such as LPTs. Pursuant to an LPT, the Company, in exchange for a specified one-time premium payment to the Company, assumes responsibility for making ongoing payments with respect to an existing block of disability or self-insured workers’ compensation claims that are in the course of being paid over time. These products are typically marketed to the same types of clients who have historically purchased the Company’s disability and excess workers’ compensation products. Non-core group employee benefit products also include primary workers’ compensation insurance products, for which the Company primarily receives fee income since a significant portion of the risks relating to these products is ceded by the Company to third parties through indemnity reinsurance. Excess casualty insurance consists of a discontinued excess umbrella liability program. This program entails exposure to excess of loss liability claims from past years, including environmental and asbestos-related claims. Net incurred losses and loss adjustment expenses relating to this program totaled $9.0 million, $8.0 million and $6.5 million in 2007, 2006 and 2005, respectively. In addition, non-core group employee benefit products include bail bond insurance and workers’ compensation assumed reinsurance. See “Reinsurance”.


MANAGEMENT DISCUSSION FROM LATEST 10K

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, the outlook for new business production and growth in premiums for these products is less favorable at present. For its other group employee benefit products, the Company is continuing to increase the size of its sales force in order 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 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 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. The Company believes that the funding agreement program enhances the Company’s asset accumulation business by providing an alternative source of distribution for this business. The Company’s liabilities for the funding agreements 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 to holders of 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.

As noted above and elsewhere in this document, the management of the Company’s investment portfolio is an important component of its profitability. Over the second half of 2007 and continuing into 2008, due to the subprime mortgage crisis and other market developments, the investment markets have been the subject of substantially increased volatility, while at the same time the overall level of risk-free interest rates has declined substantially. If these market conditions continue to persist, the Company’s ability to achieve attractive yields with respect to its fixed maturity security investments may be adversely affected, and the carrying values of certain portions of its investment portfolio may be subject to an unusually high degree of variability. In the cases of those investments whose changes in value, positive or negative, are included in the Company’s net investment income, such as the investment funds organized as limited partnerships and limited liability companies, this variability may result in significant fluctuations in net investment income, and as a result, in the Company’s results of operations.
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. 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 presented below in the “Critical Accounting Policies and Estimates” section 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 in Part I, Item 1A — Risk Factors. See “Forward-Looking Statements And Cautionary Statements Regarding Certain Factors That May Affect Future Results.”

Results of Operations
2007 Compared to 2006

Summary of Results. Net income was $164.5 million, or $3.19 per diluted share, in 2007 as compared to $142.1 million, or $2.79 per diluted share, in 2006. Net income in 2007 and 2006 included net realized investment losses, net of the related income tax benefit, of $1.2 million, or $0.02 per diluted share, and $0.6 million, or $0.01 per diluted share, respectively. Net income in 2007 benefited from growth in income from the Company’s core group employee benefit products, increased investment spreads on the Company’s asset accumulation products and an increase in net investment income, and was adversely impacted by an increase in interest expense and by a loss on the redemption of junior subordinated deferrable interest debentures. Core group employee benefit products include disability, group life, excess workers’ compensation, travel accident and dental insurance. See “Group Employee Benefit Products” in Part I, Item 1 — Business. Premiums from these core group employee benefit products increased 14% in 2007 and the combined ratio (loss ratio plus expense ratio) for group employee benefit products decreased to 92.4% in 2007 from 93.2% in 2006. Net investment income in 2007, which increased 6% from 2006, primarily reflects a 13% increase in average invested assets. The increase in interest expense was primarily due to interest payments on the 2007 Junior Debentures, which the Company issued in the second quarter of 2007.
Premium and Fee Income. Premium and fee income in 2007 was $1,304.2 million as compared to $1,156.6 million in 2006, an increase of 13%. Premiums from core group employee benefit products increased 14% to $1,227.9 million in 2007 from $1,081.7 million in 2006. This increase reflects normal growth in employment and salary levels for the Company’s existing customer base, price increases, new business production and improved persistency. Premiums from excess workers’ compensation insurance for self-insured employers increased 6% to $276.2 million in 2007 from $260.0 million in 2006. This increase was primarily due to the continuing substantial level of demand for this product. Excess workers’ compensation premiums in 2007 included $3.5 million of 2006 policy year premiums from Canadian policies assumed by SNCC in the first quarter of 2007 under the renewal rights agreement entered into by SNCC in 2005 (the “Renewal Rights Agreement”), pursuant to Canadian regulatory approval received in the first quarter. Under the agreement, SNCC acquired, among other things, the right to offer renewal quotes to expiring excess workers’ compensation policies of a former competitor. Excess workers’ compensation new business production, which represents the amount of new annualized premium sold, was $30.1 million in 2007, including $3.4 million from the Renewal Rights Agreement, compared to $57.2 million in 2006, including $25.8 million from such agreement. SNCC’s rates declined modestly on its 2008 renewals and SIRs on average are up modestly in 2008 new and renewal policies, excluding the Canadian policies written under the Renewal Rights Agreement. The retention of existing customers in 2007 remained strong.
Premiums from the Company’s other core group employee benefit products increased 16% to $951.7 million in 2007 from $821.6 million in 2006, primarily attributable to a 15% increase in premiums from the Company’s group disability products, new business production, improved retention of existing customers and a decrease in premiums ceded by the Company to reinsurers for these products. During 2007, premiums from the Company’s group disability products increased to $527.5 million from $458.1 million in 2006, primarily reflecting new business production. Premiums from the Company’s turnkey disability business were $53.6 million and $54.3 million in 2007 and 2006, respectively. New business production for the Company’s other core group employee benefit products increased 18% to $262.7 million in 2007 from $222.9 million in 2006 reflecting growth in the Company’s integrated employee benefits program and its suite of voluntary group insurance products, which includes, among others, its group limited benefit health insurance product. 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 other core group employee products also reflects the Company’s focus on the small case niche (insured groups of 10 to 500 individuals). The Company continues to implement price increases for certain existing group disability and group life insurance customers.
Non-core group employee benefit products include LPTs, primary workers’ compensation, bail bond insurance, workers’ compensation reinsurance and reinsurance facilities. See “Group Employee Benefit Products” and “Reinsurance” in Part I, Item 1 — Business. Premiums from non-core group employee benefit products were $39.7 million in 2007 as compared to $42.5 million in 2006, primarily due to a lower level of premium from LPTs, which are episodic in nature.
Deposits from the Company’s asset accumulation products were $107.1 million in 2007 as compared to $190.7 million in 2006. This decrease in deposits primarily reflects the issuance of $100.0 million of fixed and floating rate funding agreements during the first quarter of 2006 pursuant to a program of the Company under which funding agreement-backed notes are issued to institutional investors by an unconsolidated special purpose vehicle which uses the proceeds to purchase from the Company funding agreements having terms substantially similar to those of the notes. 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 2007 was $270.5 million as compared to $255.9 million in 2006, an increase of 6%. The level of net investment income in the 2007 period reflects a 13% increase in average invested assets to $4,555.2 million in 2007 from $4,038.7 million in 2006. The tax equivalent weighted average annual yield on invested assets was 6.2% and 6.6% in 2007 and 2006, respectively.
Net Realized Investment Losses. Net realized investment losses were $1.9 million in 2007 as compared to $0.9 million in 2006. The Company’s investment strategy results in periodic sales of securities and, therefore, the recognition of realized investment gains and losses. During 2007 and 2006, the Company recognized $2.2 million and $3.3 million, respectively, of net gains on the 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 2007 and 2006, the Company recognized $4.1 million and 4.2 million, respectively, of losses due to the other than temporary declines in the market values of various fixed maturity and other securities.
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 monitors the affected securities pursuant to its procedures for evaluation for other than temporary impairment in valuation. See “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. There can be no assurance that the Company will realize investment gains in the future in an amount sufficient to offset any such losses.
Loss on Redemption of Junior Subordinated Deferrable Interest Debentures. During 2007, the Company recognized a pre-tax loss of $2.2 million from the redemption of the 9.31% junior subordinated deferrable interest debentures (“Junior Debentures”) underlying the 9.31% Capital Securities, Series A (“Capital Securities”) of Delphi Funding L.L.C. On March 27, 2007, Delphi Funding L.L.C. redeemed the remaining $36.0 million liquidation amount of Capital Securities concurrently with the redemption by the Company of the underlying Junior Debentures held by Delphi Funding L.L.C. The redemption price was $1,046.55 per Capital Security plus accrued dividends. As a result, the $103.1 million principal amount of the Junior Debentures ceased to be outstanding and dividends on the Capital Securities ceased to accrue.
Benefits and Expenses. Policyholder benefits and expenses were $1,310.6 million in 2007 as compared to $1,178.2 million in 2006, an increase of 11%. This increase primarily reflects the increase in premiums from the Company’s group employee benefit products discussed above, and also reflects additions to reserves for prior years’ claims and claim expenses in the amount of $11.6 million due to adverse loss experience, primarily arising from the Company’s excess workers’ compensation line, due principally to moderately increased claim frequency, relative to prior periods, relating to policies written during the period from 2000 to 2002. If this experience trend were to continue in the future, absent favorable loss experience in other policy years, the Company’s results of operations could be materially adversely affected. The combined ratio (loss ratio plus expense ratio) for the Company’s group employee benefits products decreased to 92.4% in 2007 from 93.2% in 2006. The weighted average annual crediting rate on the Company’s asset accumulation products, which reflects the effects of the first year bonus crediting rate on certain newly issued products, was 4.3% and 4.5% in 2007 and 2006, respectively.
Interest Expense . Interest expense was $27.5 million in 2007 as compared to $25.4 million in 2006, an increase of $2.1 million. This increase primarily resulted from interest payments on the 2007 Junior Debentures issued by the Company in the second quarter of 2007. See “Liquidity and Capital Resources — General”. This increase was offset by a decrease in the weighted average borrowings under the Company’s revolving credit facility.
Income Tax Expense. Income tax expense was $68.0 million in 2007 as compared to $63.0 million in 2006. The Company’s effective tax rate was 29.3% in 2007 and 30.3% in 2006.
2006 Compared to 2005
Summary of Results. Net income was $142.1 million, or $2.79 per diluted share, in 2006 as compared to $113.3 million, or $2.25 per diluted share, in 2005. Net income in 2006 and 2005 included realized investment (losses) gains (net of the related income tax (benefit) expense) of $(0.6) million, or $(0.01) per diluted share, and $5.9 million, or $0.12 per diluted share, respectively. Net income in 2006 benefited from growth in income from the Company’s core group employee benefit products, increased investment spreads on the Company’s asset accumulation products and an increase in net investment income, and was adversely impacted by an increase in interest expense. Core group employee benefit products include disability, group life, excess workers’ compensation, travel accident and dental insurance. See “Group Employee Benefit Products” in Part I, Item 1 - Business. Premiums from these core group employee benefit products increased 16% in 2006 and the combined ratio (loss ratio plus expense ratio) for these products decreased to 93.2% in 2006 from 94.1% in 2005. Net investment income in 2006, which increased 14% from 2005, reflects a 12% increase in average invested assets. The increase in interest expense was primarily due to increases in the Company’s weighted average borrowings under the Company’s revolving credit facility, as well as in the weighted average borrowing rate due to the increases in the levels of the short-term interest indices referenced under such facility during 2006 as compared to 2005. During 2006 and 2005, the Company had losses from discontinued operations (net of the related income tax benefit) of $2.9 million, or $0.06 per diluted share, and $13.4 million, or $0.27 per diluted share, respectively, attributable to its non-core property catastrophe reinsurance business which it decided to exit during the fourth quarter of 2005.
Premium and Fee Income. Premium and fee income in 2006 was $1,156.6 million as compared to $990.2 million in 2005, an increase of 17%. Premiums from core group employee benefit products increased 16% to $1,081.7 million in 2006 from $936.2 million in 2005. This increase reflects normal growth in employment and salary levels for the Company’s existing customer base, price increases, new business production and improved persistency. Premiums from excess workers’ compensation insurance for self-insured employers increased 18% to $260.0 million in 2006 from $220.3 million in 2005. This increase was primarily due to the demand for this product as a result of high primary workers’ compensation rates. In its renewals of insurance coverage during 2006, SNCC continued to obtain higher SIR levels, which were up 6%, while maintaining its pricing. Excess workers’ compensation new business production, which represents the amount of new annualized premium sold, increased 24% to $57.2 million in 2006 from $46.0 million in 2005 and the retention of existing customers in 2006 remained strong. New business production for 2005 and 2006 benefited from the aforementioned Renewal Rights Agreement.
Premiums from the Company’s other core group employee benefit products increased 15% to $821.6 million in 2006 from $715.9 million in 2005, primarily attributable to new business production, improved retention of existing customers and a 17% increase in premiums from the Company’s group disability products. During 2006, premiums from the Company’s group disability products increased to $458.1 million from $393.0 million in 2005, reflecting new business production and substantial growth in the Company’s turnkey disability business. See “Liquidity and Capital Resources — Reinsurance”. New business production for the Company’s other core group employee benefit products was $222.9 million in 2006 and $198.1 million in 2005. New business production includes only directly written business, and does not include premiums from the Company’s turnkey disability business.
Non-core group employee benefit products include LPTs, primary workers’ compensation, bail bond insurance, workers’ compensation reinsurance and reinsurance facilities. See “Group Employee Benefit Products” and “Reinsurance” in Part I, Item 1 — Business. Premiums from non-core group employee benefit products were $42.5 million in 2006 as compared to $24.9 million in 2005, primarily due to a higher level of premium from LPTs, which are episodic in nature.
Deposits from the Company’s asset accumulation products were $190.7 million in 2006 as compared to $95.0 million in 2005. These deposits consist of new annuity sales and funding agreements, which are recorded as liabilities rather than as premiums. The increase in deposits reflects the issuance of $100.0 million in aggregate principal amount of fixed and floating rate funding agreements during the first quarter of 2006 under the Company’s new program under which funding agreement-backed notes are issued to institutional investors by an unconsolidated special purpose vehicle which uses the proceeds to purchase from the Company funding agreements having terms substantially similar to those of the notes.
Net Investment Income. Net investment income in 2006 was $255.9 million as compared to $223.6 million in 2005, an increase of 14%. The level of net investment income in the 2006 period reflects a 12% increase in average invested assets to $4,038.7 million in 2006 from $3,621.6 million in 2005. The tax equivalent weighted average annual yield on invested assets was 6.6% and 6.4% in 2006 and 2005, respectively.
Net Realized Investment (Losses) Gains. Net realized investment losses were $0.9 million in 2006 as compared to net realized investment gains of $9.0 million in 2005. The Company’s investment strategy results in periodic sales of securities and, therefore, the recognition of realized investment gains and losses. During 2006 and 2005, the Company recognized $3.3 million and $13.2 million, respectively, of net gains on the 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 each of 2006 and 2005, the Company recognized $4.2 million of losses due to the other than temporary declines in the market values of various fixed maturity and other securities.
Benefits and Expenses. Policyholder benefits and expenses were $1,178.2 million in 2006 as compared to $1,018.8 million in 2005, an increase of 16%. This increase primarily reflects the increase in premiums from the Company’s group employee benefit products discussed above, and also reflects additions to reserves for prior years’ claims and claim expenses in the amount of $36.0 million due to adverse loss experience, primarily arising from the Company’s excess workers’ compensation line, due principally to moderately increased claim frequency, relative to prior periods, relating to policies written during the period from 1997 to 2003. In 2005, the Company recognized an additional provision of $32.9 million, which arose primarily from adverse loss experience in the Company’s excess workers’ compensation line, principally due to moderately increased claim frequency, relative to prior periods, relating to policies written during the competitive market cycle years from 1997 to 2001. If this experience trend were to continue in the future, absent favorable loss experience in other policy years, the Company’s results of operations could be materially adversely affected. The combined ratio (loss ratio plus expense ratio) for the Company’s group employee benefits products decreased to 93.2% in 2006 from 94.1% in 2005. The weighted average annual crediting rate on the Company’s asset accumulation products, which reflects the effects of the first year bonus crediting rate on certain newly issued products, was 4.5% and 4.6% in 2006 and 2005, respectively.
Interest Expense . Interest expense was $25.4 million in 2006 as compared to $20.5 million in 2005, an increase of $4.9 million. This increase primarily resulted from the increases in the weighted average borrowings under the Company’s revolving credit facility, as well as in the weighted average borrowing rate due to increases in the levels of short-term interest indices referenced under such facility, during 2006 as compared to 2005.
Income Tax Expense. Income tax expense was $63.0 million in 2006 as compared to $56.9 million in 2005. The Company’s effective tax rate was 30.3% in 2006 and 31.0% in 2005.
Loss from Discontinued Operations. During the fourth quarter of 2005, the Company decided to exit its non-core property catastrophe reinsurance business, due to the volatility associated with such business and other strategic considerations, and did not enter into or renew any assumed property reinsurance contracts. A substantial majority of these reinsurance contracts expired on or before December 31, 2005 and all the remaining contracts expired during the third quarter of 2006. In 2006, the Company recognized an after-tax operating loss of $2.9 million, or $0.06 per diluted share, net of an income tax benefit of $1.6 million, substantially all of which was attributable to additional losses relating to the Katrina and Wilma hurricanes which occurred in 2005. In 2005, the Company recognized an after-tax operating loss of $13.4 million, or $0.27 per diluted share, net of an income tax benefit of $7.2 million, from this business. See Note R to the Consolidated Financial Statements.
Liquidity and Capital Resources
General. The Company held approximately $116.0 million of financial resources at the holding company level at December 31, 2007, primarily comprised of investments in the common stock of its investment subsidiaries, investments in investment funds organized as limited partnerships and limited liability companies and short-term investments. The assets of the investment subsidiaries are primarily invested in investment funds organized as limited partnerships and limited liability companies. Other sources of liquidity at the holding company level include dividends paid from subsidiaries, primarily generated from operating cash flows and investments. During 2008, the Company’s insurance subsidiaries will be permitted, without prior regulatory approval, to make dividend payments totaling $99.5 million. The Company’s insurance subsidiaries may also pay additional dividends with the requisite regulatory approvals. See “Regulation” in Part I, Item 1 - Business. In general, dividends from the Company’s non-insurance subsidiaries are not subject to regulatory or other restrictions. A shelf registration statement is also in effect under which securities yielding proceeds of up to $106.2 million may be issued by the Company. In addition, the Company is categorized as a well known seasoned issuer under Rule 405 of the Securities Act. As such, the Company has the ability to file automatically effective shelf registration statements for unspecified amounts of different securities, allowing for immediate, on-demand offerings
In October 2006, the Company entered into an Amended and Restated Credit Agreement with Bank of America, N.A. as administrative agent, and a group of major banking institutions (the “Amended Credit Agreement”). The amendment, among other things, increased the maximum borrowings available to $250 million, improved the pricing terms and extended the maturity date from May 2010 to October 2011. On November 8, 2007, the amount of the facility was increased to the amount of $350 million, and certain financial institutions were added as new lenders, pursuant to a supplement to the Credit Agreement. The Amended Credit Agreement contains various financial and other affirmative and negative covenants, along with various representations and warranties, considered ordinary for this type of credit agreement. The covenants include, among others, a maximum Company consolidated debt to capital ratio, a minimum Company consolidated net worth, minimum statutory risk-based capital requirements for RSLIC and SNCC, and certain limitations on investments and subsidiary indebtedness. As of December 31, 2007, the Company was in compliance in all material respects with the financial and various other affirmative and negative covenants in the Amended Credit Agreement. At December 31, 2007, the Company had $276.0 million of borrowings available under the Amended Credit Agreement.
During the first quarter of 2007, the Company recognized a pre-tax loss of $2.2 million from the redemption of the Junior Debentures underlying the Capital Securities of Delphi Funding L.L.C. On March 27, 2007, Delphi Funding L.L.C. redeemed the remaining $36.0 million liquidation amount of Capital Securities concurrently with the redemption by the Company of the underlying Junior Debentures held by Delphi Funding L.L.C. The redemption price was $1,046.55 per Capital Security plus accrued dividends. As a result, the $103.1 million principal amount of the Junior Debentures ceased to be outstanding and dividends on the Junior Debentures ceased to accrue. The Company utilized borrowings under its Amended Credit Agreement and cash on hand to fund such redemption.
On May 23, 2007, the Company completed the issuance of $175.0 million of fixed-to-floating rate junior subordinated debentures (the “2007 Junior Debentures”), pursuant to an effective registration statement. The 2007 Junior Debentures bear interest at a fixed rate of 7.376% until May 15, 2017, at which time the interest rate becomes a variable rate equal to the three month LIBOR Rate plus 3.19%, payable quarterly in arrears. The proceeds from this issuance were used primarily to repay the then outstanding borrowings under the Amended Credit Agreement and for other general corporate purposes. See Note I to the Consolidated Financial Statements.
The Company’s current liquidity needs, in addition to funding its operating expenses, include principal and interest payments on outstanding borrowings under the Amended Credit Agreement, interest payments on the 2033 Senior Notes, and 2007 Junior Debentures and distributions on 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 deferrable interest debentures underlying the 2003 Capital Securities are redeemable, in whole or in part, beginning May 15, 2008. The 2007 Junior Debentures will become due on May 15, 2037, but only to the extent that the Company has received sufficient net proceeds from the sale of certain specified qualifying capital securities. Any remaining outstanding principal amount will be due on May 1, 2067. The Company may elect to redeem any or all of the 2007 Junior Debentures at any time. In the case of a redemption before May 15, 2017, the redemption price will be equal to the greater of 100% of the principal amount of the 2007 Junior Debentures being redeemed and the applicable make-whole amount, in each case plus any accrued and unpaid interest. In the case of a redemption on or after May 15, 2017, the redemption price will be equal to 100% of the principal amount of the debentures being redeemed plus any accrued and unpaid interest. See Notes D, H and I to the Consolidated Financial Statements.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

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 are less favorable at present. In addition, the Company is presently experiencing more competitive market conditions, particularly as to pricing, for its other group employee benefit products. These conditions may impact the Company’s ability to achieve levels of new business production and growth in premiums for these products commensurate with those achieved in recent 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 offers 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 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. Also, during the third quarter of 2008, the Company acquired a block of existing annuity policies from another insurer through an indemnity 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 has the right under this transaction to recommend to such insurer on an ongoing basis the interest rates to be credited with respect to the reinsured annuity policies, subject to the minimum crediting rates specified in such policies. 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 the first nine months of 2008, due to the extraordinary decline in housing prices and highly adverse consequences in the credit markets, particularly the structured mortgage securities market, the investment markets have been the subject of extraordinary volatility and dramatically widened spreads in numerous sectors. At the same time the overall level of risk-free interest rates has declined substantially. These market conditions have resulted in a high degree of variability in the carrying values of certain portions of the Company’s investment portfolio, as well as a significant decrease in its level of net investment income during the three month and nine month periods ended September 30, 2008. Such conditions may persist or worsen in the future, and, in the cases 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, this variability may continue to result in significant fluctuations in net investment income, and as a result, in the Company’s results of operations. In an effort to reduce these fluctuations, the Company is presently engaged in efforts to reposition its investment portfolio so as to reduce its overall holdings of investments of this type and, in particular, those of such investments whose performance has demonstrated the highest levels of variability and to increase its investments in more traditional sectors of the fixed income market such as high credit quality mortgage-backed securities and municipal bonds, whose present spreads have widened to historically high levels due to the market conditions discussed above. However, there can be no assurance as to the time period in which such repositioning will be fully completed or as to the ultimate impact, positive or negative, of such repositioning on the Company’s net investment income and the future variability thereof. In addition, the Company may determine that declines in market value relative to the amortized cost of certain securities are other than temporary, in which event the declines will be reported as realized investment losses in the Company’s results of operations.
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, 2007 (the “2007 Form 10-K”). Capitalized terms used herein without definition have the meanings ascribed to them in the 2007 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 2007 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 2007 Form 10-K, “Risk Factors”.

Results of Operations
Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
Summary of Results. Net income was $38.2 million, or $0.78 per diluted share, in the first nine months of 2008 as compared to $122.8 million, or $2.38 per diluted share, in the first nine months of 2007. Net income in the first nine months of 2008 and 2007 included net realized investment losses (net of the related income tax benefit) of $38.8 million, or $0.78 per diluted share, and $0.6 million, or $0.01 per diluted share, respectively. Net income in the first nine months of 2008 benefited from growth in income from the Company’s core group employee benefit products and, due to the market conditions discussed above, was adversely impacted by realized investment losses and a large decrease in net investment income. See “Introduction.” Core group employee benefit products include disability, group life, excess workers’ compensation, travel accident and dental insurance. Premiums from these core group employee benefit products increased 6% in the first nine months of 2008. The combined ratio (loss ratio plus expense ratio) for group employee benefit products decreased to 91.8% in the first nine months of 2008 from 92.5% in the first nine months of 2007. In the first nine months of 2008 and 2007, realized investment losses included losses of $52.5 million and $2.5 million, respectively, due to the other than temporary declines in the market values of certain fixed maturity and other securities. Net investment income decreased in the first nine months of 2008 from the first nine months of 2007 due to a lower tax equivalent weighted average annualized yield on invested assets of 3.5% in the 2008 period as compared to 6.3% for the prior period.
Premium and Fee Income. Premium and fee income in the first nine months of 2008 was $1,028.1 million as compared to $972.5 million in the first nine months of 2007, an increase of 6%. Premiums from core group employee benefit products increased 6% to $975.4 million in the first nine months of 2008 from $916.3 million in the first nine months of 2007. This increase reflects normal growth in employment and salary levels for the Company’s existing customer base, price increases, and new business production. Premiums from excess workers’ compensation insurance for self-insured employers were $196.9 million in the first nine months of 2008 as compared to $209.2 million in the first nine months of 2007. Excess workers’ compensation premiums in the first nine months of 2007 included $3.5 million of 2006 policy year premiums from Canadian policies assumed by SNCC in the first quarter of 2007 under the renewal rights agreement into which SNCC entered in 2005 (the “Renewal Rights Agreement”), pursuant to Canadian regulatory approval received in the first quarter of 2007. Excess workers’ compensation new business production, which represents the amount of new annualized premium sold, was $19.4 million in the first nine months of 2008 compared to $27.8 million in first nine months of 2007, which included new business production of $3.4 million from the Renewal Rights Agreement. The retention of existing customers in the first nine months of 2008 remained strong.
Premiums from the Company’s other core group employee benefit products increased 10% to $778.5 million in the first nine months of 2008 from $707.0 million in the first nine months of 2007, primarily reflecting a 11% increase in premiums from the Company’s group life products, a 9% increase in premiums from the Company’s disability products and new business production. During the first nine months of 2008, premiums from the Company’s group life products increased to $301.7 million from $271.3 million in the first nine months of 2007, primarily reflecting new business production and a decrease in premiums ceded by the Company to reinsurers. During the first nine months of 2008, premiums from the Company’s group disability products increased to $425.5 million from $391.7 million in the first nine months of 2007, primarily reflecting new business production. Premiums from the Company’s turnkey disability business were $36.7 million and $38.0 million in the first nine months of 2008 and 2007, respectively. New business production for the Company’s other core group employee benefit products was $168.6 million and $179.3 million in the first nine months of 2008 and 2007, 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 other core group employee benefit products also reflects the Company’s focus on the small case niche (insured groups of 10 to 500 individuals) which resulted in an 11% increase in production based on the number of cases sold as compared to the first nine months of 2007. The Company continues to implement price increases for certain existing group disability and group life insurance customers.
Non-core group employee benefit products include LPTs, primary workers’ compensation, bail bond insurance, workers’ compensation reinsurance and reinsurance facilities. Premiums from non-core group employee benefit products were $22.3 million in the first nine months of 2008 as compared to $29.6 million in the first nine months of 2007, primarily due to a lower level of premium from LPTs, which are episodic in nature.
Deposits from the Company’s asset accumulation products were $195.8 million in the first nine months of 2008 as compared to $83.8 million in the first nine months of 2007. This increase in deposits is primarily due to increased sales of the Company’s multi-year rate guarantee products. 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 first nine months of 2008 was $112.5 million as compared to $203.2 million in the first nine months of 2007. This decrease reflects a decrease in the tax equivalent weighted average annualized yield on invested assets to 3.5% for the first nine months of 2008 from 6.3% for the first nine months of 2007. This decrease in yield was primarily due to adverse performance in the Company’s investments in investment funds organized as limited partnerships and limited liability companies, trading account securities and hybrid financial instruments which resulted from adverse market conditions for financial assets in the first nine months of 2008. See “Introduction.” This adverse performance was partially offset by a 6% increase in average invested assets to $4,778.8 million in the first nine months of 2008 from $4,517.9 million in the first nine months of 2007.
Net Realized Investment Losses. Net realized investment losses were $59.7 million in the first nine months of 2008 compared to $0.9 million in the first nine months of 2007. 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, and if management judges the decline to be other than temporary, the decline is reported as a realized investment loss. In the first nine months of 2008 and 2007, the Company recognized $52.5 million and $2.5 million, respectively, of losses due to the other than temporary declines in the market values of certain fixed maturity and other securities. 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 2008 and 2007, the Company recognized $(7.2) million and $1.6 million, respectively, of net (losses) gains on the sales of securities.
The Company may recognize additional losses due to other than temporary declines in security market values in the future, particularly if the general market conditions described above were to persist or worsen. See “Introduction.” The extent of such losses will depend on, among other things, future market developments, 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, which are described in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Investments” in the 2007 Form 10-K and in Note A to the Consolidated Financial Statements included in this document. 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. For further information concerning the Company’s investment portfolio, see “Liquidity and Capital Resources — Investments.”
Loss on Redemption of Junior Subordinated Deferrable Interest Debentures. During the first nine months of 2008, the Company recognized a pre-tax loss of $0.6 million on the redemption of the floating rate junior subordinated deferrable interest debentures (“2003 Junior Debentures”) underlying the Floating Rate Capital Securities (“2003 Capital Securities”) of Delphi Financial Statutory Trust I (the “Trust”). On August 15, 2008, the Trust redeemed the $20.0 million liquidation amount of 2003 Capital Securities concurrently with the redemption by the Company of the underlying 2003 Junior Debentures held by the Trust. The redemption price was $1,000.00 per 2003 Capital Security plus accrued dividends. As a result, the $20.6 million principal amount of the 2003 Junior Debentures ceased to be outstanding and dividends on the 2003 Junior Debentures ceased to accrue.
During the first nine months of 2007, the Company recognized a pre-tax loss of $2.2 million from the redemption of the 9.31% junior subordinated deferrable interest debentures (“Junior Debentures”) underlying the 9.31% Capital Securities, Series A (“Capital Securities”) of Delphi Funding L.L.C. On March 27, 2007, Delphi Funding L.L.C. redeemed the remaining $36.0 million liquidation amount of Capital Securities concurrently with the redemption by the Company of the underlying Junior Debentures held by Delphi Funding L.L.C. The redemption price was $1,046.55 per Capital Security plus accrued dividends. As a result, the $103.1 million principal amount of the Junior Debentures ceased to be outstanding and dividends on the Capital Securities ceased to accrue.
Benefits and Expenses. Policyholder benefits and expenses were $1,015.1 million in the first nine months of 2008 as compared to $977.2 million in the first nine months of 2007. This increase primarily reflects the increase in premiums from the Company’s group employee benefit products discussed above, and reflects a small amount of positive development in the Company’s excess workers’ compensation line. The combined ratio (loss ratio plus expense ratio) for group employee benefit products decreased to 91.8% in the first nine months of 2008 from 92.5% in the first nine months of 2007. Amortization of cost of business acquired was decelerated by $7.7 million during the first nine months of 2008 primarily due to the decrease 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, which reflects the effects of the first year bonus crediting rate on certain newly issued products, was 4.2% and 4.3% in the first nine months of 2008 and 2007, respectively.
Interest Expense . Interest expense was $23.6 million in the first nine months of 2008 as compared to $19.9 million in the first nine months of 2007, an increase of $3.7 million. This increase is primarily due to interest payments on the 2007 Junior Debentures issued by the Company in the second quarter of 2007. This increase was partially offset by a decrease in the interest rate on the 2003 Junior Debentures.
Income Tax Expense. Income tax expense was $3.4 million in the first nine months of 2008 as compared to $52.7 million in the first nine months of 2007 primarily due to the lower level of the Company’s operating income. The Company’s effective tax rate decreased to 8.2% in the first nine months of 2008 from 30.0% in the first nine months of 2007 primarily due to the proportionately higher level of tax-exempt interest income earned on invested assets.
Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
Summary of Results. For the third quarter of 2008, the Company had a net loss of $9.8 million, or $0.20 per diluted share, as compared to net income of $40.7 million, or $0.79 per diluted share, for the third quarter of 2007. The net loss in the third quarter of 2008 was primarily due to realized investment losses and a significant decrease in net investment income. The net loss in the third quarter of 2008 was partially offset by growth in income from the Company’s core group employee benefit products. Realized investment losses (net of the related income tax benefit) in the third quarter of 2008 were $21.9 million, or $0.45 per diluted share, compared to $1.0 million, or $0.02 per diluted share, in the third quarter of 2007. In the third quarters of 2008 and 2007, realized investment losses included losses of $28.2 million and $0.6 million, respectively, due to the other than temporary declines in the market values of certain fixed maturity and other securities. Net investment income decreased in the third quarter of 2008 from the third quarter of 2007 due to a lower tax equivalent weighted average annualized yield on invested assets of 2.0% in the 2008 period as compared to 5.7% for the prior period. Premiums from the Company’s core group employee benefit products increased 7% in the third quarter of 2008.
Premium and Fee Income. Premium and fee income for the third quarter of 2008 was $345.0 million as compared to $325.9 million for the third quarter of 2007, an increase of 6% . Premiums from core group employee benefit products increased 7% to $327.1 million in the third quarter of 2008 from $306.6 million in the third quarter of 2007. This increase reflects normal growth in employment and salary levels for the Company’s existing customer base, price increases, and new business production. Premiums from excess workers’ compensation insurance for self-insured employers were $66.2 million in the third quarter of 2008 as compared to $68.1 million in the third quarter of 2007. Excess workers’ compensation new business production, which represents the amount of new annualized premium sold, increased 38% to $11.4 million in the third quarter of 2008 from $8.3 million in the third quarter of 2007. SNCC’s rates declined modestly on its third quarter 2008 renewals and SIRs are on average up modestly in third quarter 2008 new and renewal policies. The retention of existing customers in the third quarter of 2008 remained strong.
Premiums from the Company’s other core group employee benefit products increased 9% to $260.9 million for the third quarter of 2008 from $238.4 million for the third quarter of 2007, primarily reflecting a 10% increase in premiums from the Company’s group life products, an 8% increase in premiums from the Company’s group disability products and new business production. During the third quarter of 2008, premiums from the Company’s group life products increased to $100.8 million from $91.6 million in the third quarter of 2007, primarily reflecting new business production and a decrease in premiums ceded by the Company to reinsurers. During the third quarter of 2008, premiums from the Company’s group disability products increased to $142.7 million from $132.6 million in the third quarter of 2007, primarily reflecting new business production. Premiums from the Company’s turnkey disability business were $12.6 million during the third quarter of 2008 compared to $12.5 million during the third quarter of 2007. New business production for the Company’s other core group employee benefit products increased 12% to $56.9 million in the third quarter of 2008 from $51.0 million in the third quarter of 2007. 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 an 18% increase in production based on the number of cases sold as compared to the third quarter of 2007. The Company continued to implement price increases for certain existing disability and group life customers.
Deposits from the Company’s asset accumulation products were $44.0 million for the third quarter of 2008 as compared to $32.6 million for the third quarter of 2007. This increase in deposits is primarily due to increased sales of the Company’s multi-year rate guarantee products. 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 third quarter of 2008 was $19.4 million as compared to $62.8 million in the third quarter of 2007. This decrease reflects a decrease in the tax equivalent weighted average annualized yield on invested assets to 2.0% for the third quarter of 2008 from 5.7% for the third quarter of 2007. This decrease in yield was primarily due to adverse performance in the Company’s investments in investment funds organized as limited partnerships and limited liability companies, trading account securities and hybrid financial instruments as compared to the performance in third quarter of 2007, which resulted from adverse market conditions for financial assets in the third quarter of 2008. This performance was partially offset by a 2% increase in average invested assets to $4,756.2 million in the third quarter of 2008 from $4,646.3 million in the third quarter of 2007.
Net Realized Investment Losses. Net realized investment losses were $33.7 million in the third quarter of 2008 compared to $1.5 million in the third quarter of 2007. 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, and if management judges the decline to be other than temporary, the decline is reported as a realized investment loss. In the third quarters of 2008 and 2007, the Company recognized $28.2 million and $0.6 million, respectively, of losses due to the other than temporary declines in the market values of certain fixed maturity and other securities. The Company’s investment strategy results in periodic sales of securities and, therefore, the recognition of realized investment gains and losses. During the third quarters of 2008 and 2007, the Company recognized $5.5 million and $0.9 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 particularly if the general market conditions described above were to persist or worsen. See “Introduction” and “Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007 — Net Realized Investment Losses.”
Loss on Redemption of Junior Subordinated Deferrable Interest Debentures. During the third quarter of 2008, the Company recognized a pre-tax loss of $0.6 million on the redemption of the 2003 Junior Debentures underlying the 2003 Capital Securities of the Trust. On August 15, 2008, the Trust redeemed the $20.0 million liquidation amount of 2003 Capital Securities concurrently with the redemption by the Company of the underlying 2003 Junior Debentures held by the Trust. The redemption price was $1,000.00 per 2003 Capital Security plus accrued dividends. As a result, the $20.6 million principal amount of the 2003 Junior Debentures ceased to be outstanding and dividends on the 2003 Junior Debentures ceased to accrue.
Benefits and Expenses. Policyholder benefits and expenses were $343.9 million in the third quarter of 2008 as compared to $322.2 million in the third quarter of 2007. This increase primarily reflects the increase in premiums from the Company’s group employee benefit products discussed above and reflects a small amount of positive development in the Company’s excess workers’ compensation line. The combined ratio (loss ratio plus expense ratio) for group employee benefit products was 92.3% and 91.9% in the third quarters of 2008 and 2007, respectively. Amortization of cost of business acquired was decelerated by $2.0 million during the third quarter of 2008 primarily due to the decrease 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, which reflects the effect of the first year bonus crediting rate on certain newly issued products, was 4.1% and 4.3% in the third quarters of 2008 and 2007, respectively.
Income Tax (Benefit) Expense. Income tax (benefit) expense was $(11.8) million in the third quarter of 2008 as compared to $17.3 million in the third quarter of 2007 primarily due to the Company’s operating loss. The Company’s effective tax rate was 54.6% in the third quarter of 2008 compared to 29.8% in the third quarter of 2007. This change is primarily due to the proportionately higher level of tax-exempt interest income earned on invested assets.

CONF CALL

Robert Rosenkranz – Chairman and Chief Executing Officer

Thanks. I’d like to welcome all of you to Delphi Financial’s second quarter 2008 conference call. The earnings release was distributed last evening. It’s posted on the company’s website along with our second quarter financial supplement. The call is also being broadcast live at our website at www.delphifin.com.

Participating in the call with me this morning are Don Sherman, Delphi’s President and Chief Operating Officer; Bob Smith, our Executive Vice President; Anita Savage, VP Finance; Bernie Kilkelly, VP Investor Relations; and our colleagues at Reliance Standard Life, Safety National, and Matrix.

Bernie, would you please now read the Safe Harbor Statement.

Bernie Kilkelly – Vice President of Investor Relations

Thanks Bob and good morning everyone. For those listening to a replay of this call, it's being held on July 23, 2008. It contains time sensitive information that is current only as of this date.

Statements made in this call relating to the future operations, performance, goals and expectations of the company as opposed to historical facts are forward-looking statements under the Federal Securities Laws. These statements are based on assumptions and estimates by the company that are subject to various uncertainties and contingencies.

Discussions of these risk factors can be found in our second quarter earnings release yesterday, our first quarter Form 10-Q, and our 2007 Form 10-K. These factors could cause the company’s actual results to differ materially from those expressed in any forward-looking statements made during this call and should be considered carefully. The company specifically disclaims any duty to update forward-looking statements made in this call.

In addition, certain non-GAAP financial measures will be discussed on this call. The comparable GAAP financial measures along with reconciliations to such measures are contained in our second quarter earnings release and financial supplement accessible on the company’s website.

Now, I’ll turn the call back.

Robert Rosenkranz – Chairman and Chief Executing Officer

Thanks Bernie. Delphi had a solid second quarter driven by continued strong underwriting profits in our insurance business. We achieved operating earnings per share of $0.81 and an annualized operating return on beginning equity of 14.7%. We continue to have a very strong balance sheet and took advantage of our financial flexibility to repurchase almost a million shares during the quarter. This morning in our remarks we are going to cover four main topics.

First, I’m going to ask Don to review our second quarter results. Second, I’ll provide some additional detail on our second quarter investment performance, which improved from the first quarter, but continued to be impacted by volatile markets and continued low interest rates. Third, I will discuss the topic that we had been getting lots of questions about in the last few months, which is the potential impact of the downturn in the economy on our insurance business. And finally, I will discuss our outlook for the reminder of 2008. After our remarks, we will happy to answer any questions. Don?

Donald Sherman – President and Chief Operating Officer

Thanks Bob and good morning everyone. We were very pleased with the underwriting performance of our insurance businesses in the second quarter. Our group employee benefits combined ratio was 91.8%, down from 92.4% for the second quarter of last year. We continue to achieve better loss ratios from our disciplined pricing and underwriting at both Reliance Standard and Safety National.

Looking at premium growth, core group employee benefit premiums rose 4.5% to 324 million. Group life premiums at Reliance Standard increased 11% while disability increased 5%. Our premium growth at Reliance was impacted by a decline in core production and this resulted from maintaining our focus on pricing and underwriting discipline in the phase of a somewhat more competitive environment. Price competition has increased particularly in long term disability and in the large case market which we addressed with our integrated employee benefits effort. Delphi's philosophy has always been to focus on growing the bottom line and not just the top line, which we believe is the best way to build long term value. To this point in the economic cycle, we do not believe the challenging economy has had a material impact on our production since our coding activity has continued to increase in the low single digits in the quarter. Bob Rosenkranz will talk a bit later about our view of the potential impact of an economic slowdown on our insurance businesses.

RSL's disability premium growth was also affected by a decline in premiums from our turnkey disability division, CDS. Premiums at CDS were 12 million compared to 13.4 million in last year’s second quarter. For the first half of 2008, turnkey disability premiums were essentially flat with last year and we except this trend to continue for the second half. CDS is focused on adding new turnkey partners, which tends to have a long sales and implementation cycle. We continue to be excited about the long term growth opportunity at CDS, which does provide us with significant alternative distribution to the small case market.

At Safety National, excess workers compensation premiums and production declined in the second quarter as the market continues to flatten out after seven years of hard market conditions. We were encouraged, however, by the trends in the recent July renewal period, which were not reflected of course now in our second quarter results. July renewals are the second most important period for Safety, in which they typically write about a quarter of their business. In the most recent period, Safety had record high renewal ratios, which demonstrates the ongoing strength of our market position. We also achieved higher sales compared to last year’s July renewal period, which we believe is due to effective new programs put in place by the management team at Safety including the new Head of Sales, who joined last fall, Steve Luebbert.

Rates in the July renewal period decreased modestly, but we continue to achieve modest increases in the average self-insured retention. As you know this is the important point where the risk shifts from the employer to us and we’ve been able to raise this average attachment point over $500,000. This is up from an average of $300,000 in 2001. So we continue to feel good about the business we’ve written and are continuing to write. More importantly, we continue to see no signs that the market will soften significantly anytime soon since there continue to be substantial barriers to profitable entry into this market segment.

In our asset accumulation segment, at Reliance Standard Life, operating profits in the second quarter was 6.7 million compared to 8.8 million for the second quarter of last year. This decrease was due to a decline in investment income from assets allocated to the segment. Funds under management in this segment increased to about 1.2 billion at the end of June. This increase was driven by strong sales in the quarter of our traditional fixed annuities, which have benefited as bank CD rates have fallen. We had modest sales in the quarter of our new equity index annuity product.

As you probably know, the SEC recently issued a proposed rule that, if implemented, we will classify these index annuities as securities and require these products to be distributed through broker dealers by registered reps. There is still a lot of uncertainty about whether this rule will pass in its current form and even if it does pass there presumably would be a 12 month period before it became effective. We are reviewing the potential impact of this proposed ruling, what it would have on our ability to sell this product. In the meantime, we’re pleased with the strong sales of our traditional annuities and continue to maintain our low overhead opportunistic approach to this business.

Now, let me return to investment results. Investment income in the second quarter improved over the first quarter but continue to be below our expectations. Average invested assets for the quarter were up 3% from year ago and our tax equivalent yield was 5.4% in the quarter compared to 6.3% last year. The low yield was primarily due to lower returns from our investments in limited partnerships, limited liability companies and hybrid financial instruments, as well as our trading account where these returns are mark-to-market to the income statement. The overall return on these alternative investments was about 60 basis points in the quarter, which is an improvement from the negative 3% return in the first quarter of this year, but still below our annual budget of 10% or approximately 2.5% per quarter.

In the second quarter, the balance of our investment portfolio generated yields inline with our budget. Turning from the investment yields to total returns, the aggregate total return in our investment portfolio was nearly 100 basis points better than the Lehman aggregate. Most of this out-performance was attributable to the returns from our alternative investment portfolio, which are not correlated with the buy market. Bob Rosenkranz will provide some additional comments on our investment results shortly.

In the second quarter, we had aftertax realized investment losses of 12.7 million. This included 11.7 million in aftertax losses from other than temporary impairments or OTTI, primarily on bonds in our fixed income portfolio sprinkled across a number of sectors. We had a consistent methodical approach we use for classifying for OTTI, which is discussed on Page 59 of our 2007 Form 10-K. This process includes projecting ultimate losses in principal, shortfalls and expected cash flows, the financial condition and prospects of the issuer, and our ability and intent to hold this investment until recovery. We believe there is no substitute for seasoned judgments, so we don’t use a [formulated right line] approach for OTTI.

Our process and its application are reviewed by our outside auditors and the impairments we took in the second quarter reflect our best evaluation of the current market conditions. But the credit cycle continues to deteriorate and with $5 billion portfolio, we would expect to have some additional OTTI write-downs going forward.

Turning now to our balance sheet. Book value per share, excluding mark-to-market adjustments, was $24.91 at the end of the quarter, up from $24.34 at the end of 2007. At the end of June, we had $221 million in unused borrowing capacity on our bank facility and 84 million in financial assets of the holding company. So we continue to have excellent financial flexibility to support the growth of our businesses and build stockholder value through higher dividends and share repurchases.

In May, we announced an 11% increase in our cash dividend and in the second quarter we bought back 965,200 shares bringing our repurchases for the year to about $1.5 million. We currently have an authorization to repurchase an additional 1 million shares.

Now I am going to turn the call back to Bob.

Robert Rosenkranz – Chairman of the Board and CEO

Thank you Don. For a second topic today, I wanted to review our investment results in some more detail. As Don mentioned our results from the quarter were below our expectations primarily due to the performance of our alternative assets, which get mark-to-market through the income segment.

Delphi is historically allocated a portion of our investment portfolio these types of assets and over the past 8 or 9 years, these investments have added about 10% to our investment income while at the same time reducing volatility in the total return of the portfolio, also by about 10%. But total returns is not the whole story, we also need to manage volatility and quarterly operating earnings.

Historically, our alternative investments were not the source of excess of volatility, but this years turbulent markets have a different story. We planned to gradually reduce our exposure to these assets at the end of the June was 490 million down from 550 million at the end of March.

Fortunately, the market is a target rich environment today, offering generous spreads on fixed income assets for those able to do the intensive analytic work required. Thus we have been able to redeploy these proceeds with comparable yields. Assuming these opportunities persist, by year end we would hope to reduce our overall volatility to historic levels, which we can achieve by focusing on reductions from the most volatile managers.

We believe, we can maintain historic returns as well, but the process will not happen overnight. So far though we are making very good progress, as an example, we’ve purchased mortgage back securities with AAA ratings at deep discounts where we have the potentials to earn returns in low teens.

We are also seeing good opportunities in [municipals] where volatility of our quarterly results is likely to remain high this year. By next year we should be generating both the yields and volatility we have historically achieved.

We generally have a policy not to provide any performance or other data relating to our outside investment managers for proprietary and competitive reasons. But I would like to make an exception now, due to number of questions we have got in recently about one of our investment managers [DB Zorn] which has been in the news for the past few months. Zorn announced in February that they were closing their two largest investment funds and there have been news reports with the SEC who is investigating the firm.

We have no comment on the SEC investigation, but with regards to our relationship with Zorn we are not investors in this Zorn funds that had been in the news. Delphi has managed accounts with Zorn and which we participate in specific investments they originate. This is a highly diversified portfolio with over 120 different investments. The investments are primarily high yield fixed maturity securities such as corporate loans and we’ve also have some ownership interest in the limited partnership or in limited liability companies and equities.

At the end of the second quarter, our accounts were around 230 million, which is down from more than 300 million last year. This portfolio was not been a source of meaningful impairments, in the second quarter we had only 1.7 million and after tax OTT write downs from the five investments in the Zorn portfolio. As they wind down their main funds over the next three years and one of these investments we expect to our investments with them to run off as well.

For third topic, I want to talk briefly about the potential impact of the economic slowdown on our insurance business. We’ve spoken in previous calls about the analysis we have done on this topic is part of our overall Enterprise Risk Management work. This analysis has shown that there’s no significant correlation between changes in grows domestic product and overall premium of loss ratios. We’ve also done correlations between our own premiums and loss ratios and payroll data for the last seven years, again not showing significant correlations.

We believe that there are three main reasons for those, first, our product lines are well diversified, that one product makes up additional portion of percentage of our premium. Our three main lines disability, group life and excess workers' comp have different market cycles in different competitive environments.

Second their customer base is well diversified by industry and a significant percentage of our customers on industries they are less economically sensitive. For example almost two-thirds of safety national customer basis in government entities, health care, education hardly economically sensitive sectors. Our sales customer base is broadly diversified both industrially and geographically.

Finally we focus on smaller companies, which is where the vast majority of job growth has been in the past decade and which we expect to perform better in recession. Almost half of our sales premiums comes from customers with less than 500 employees over 90% by case account. So we continued to feel very good about our ability to grow premiums and earnings in recessionary environment.

We are also continuing to explore ways to enhance our growth by adding new products or new distribution channels either through potential acquisitions or internal product development. In the second quarter Safety hired a very experienced executive to head up market research and product development. Stephanie Bush came to safety after 20 years at Hartford, where among her roles she was responsible for all product development at Hartford’s Property/Casualty Company. She will head Safety National’s effort to build on its reputation and long standing relationships in the excess workers' Comp market and potentially expand the scope of its products offering.

Now for our final topic, I’d like to discuss our outlook for the remainder of 2008. We believe the strong underwriting results of our insurance business from the first half of 2008 are sustainable for the foreseeable future. While there could be some continued quarterly volatility on our investment income, we continue to expect operating earnings per share in 2008 to be in a range of $3 to $3.30.

Looking beyond this year we’re confident of our ability to achieve continued earnings growth in our insurance business. As I have discussed, we are working to reduce volatility on our investment income while at the same time earning attractive returns. We feel good about our ability to use our strong balance-sheet and our financial flexibility to build value for shareholders and support the growth of our business.

In closing, we had a solid second quarter, we are comfortable about the outlook for insurance business in the second half.

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