DFG Delphi Financial Grp., Inc.

Delphi Financial Group, Inc. (NYSE: DFG) announced today that its operating earnings (1) in the first quarter of 2011 were $51.5 million or $0.91 per share, compared to $46.3 million or $0.84 per share in the first quarter of 2010. Annualized operating return on beginning equity (2) in the first quarter of 2011 was 13.5% compared to 14.3% in the first quarter of 2010. Diluted book value per share was $28.02 at March 31, 2011, up 3% from December 31, 2010 and up 15% from March 31, 2010.

Delphi adopted on a retrospective basis, effective January 1, 2011, new FASB guidance limiting the extent to which an insurer may capitalize costs incurred in the acquisition of an insurance contract. Accordingly, the 2010 financial information has been restated, to reduce operating earnings per share for the first quarter of 2010 by $0.02 per share and to reduce diluted book value per share at March 31, 2010 by $1.06. (3)

Delphi’s net income attributable to shareholders in the first quarter of 2011 was $50.2 million, up 38% from $36.5 million in the first quarter of 2010. On a per share basis, net income was $0.89, a 35% increase from $0.66 per share in the prior period. Net income attributable to shareholders in the first quarter of 2011 included after-tax net realized investment losses of $(1.3) million or $(0.02) per share, including other-than-temporary impairments (OTTI), net of taxes, of $(5.9) million or $(0.10) per share. Net income attributable to shareholders in the first quarter of 2010 included after-tax net realized investment losses of $(9.8) million or $(0.18) per share, including OTTI, net of taxes, of $(14.9) million or $(0.27) per share.

Robert Rosenkranz, Chairman and Chief Executive Officer, commented, “Delphi’s insurance businesses achieved strong top-line growth in the first quarter as we benefited from improving payroll trends in our small case market niche at Reliance Standard and continued market share gains for Safety National’s products. In both companies, we have been able to achieve the largest price increases of the past several years. Our group employee benefits loss ratio improved 110 basis points from the fourth quarter of 2010 as we began to see the effect of better pricing and other actions we’ve taken to address the elevated long-term disability claims incidence we experienced in the second half of 2010.”

Delphi’s core group employee benefit premiums in the first quarter of 2011 rose 8% to $359.4 million from $333.3 million in the first quarter of 2010. This premium growth was driven by a 16% increase in core premiums at Delphi’s Safety National subsidiary. Excess workers’ compensation premiums grew 10% in the quarter, boosted by a 42% increase in production, and assumed workers’ compensation reinsurance premiums rose 51%. Core premiums increased 5% at Delphi’s Reliance Standard Life subsidiary and core production was up 40%. Delphi’s group employee benefit combined ratio in the first quarter of 2011 was 95.2%, compared with 94.6% for the first quarter of 2010.

Delphi’s asset accumulation segment, which is primarily focused on individual fixed annuities, had new sales of $97.6 million in the first quarter of 2011, up from $38.8 million in last year’s first quarter. Funds under management at March 31, 2011 rose to $1.7 billion, up 20% percent over the prior year.

Delphi’s net investment income in the first quarter of 2011 rose 10% to $92.3 million from $84.1 million in the first quarter of 2010. Invested assets at March 31, 2011 were $6.7 billion compared to $6.0 billion at March 31, 2010. The tax equivalent yield on the Company’s investment portfolio in the first quarter of 2011 was 6.0%, compared to 6.2% in the first quarter of 2010.

Mr. Rosenkranz added, “We are off to a good start in 2011 from our well-diversified business mix. Delphi continues to have excellent financial flexibility to support the growth of our insurance and asset accumulation products.”

Conference Call

On April 27, 2011 at 11:00 AM (Eastern time), Delphi will broadcast the Company’s first quarter 2011 earnings teleconference live on the Internet, hosted by Robert Rosenkranz, Chairman and Chief Executive Officer. Investors can access the broadcast at www.delphifin.com by clicking on the webcast icon on the home page. It is advisable to register at least 15 minutes prior to the call to download and install any necessary audio software. The online replay will be available on Delphi’s website for one week beginning at approximately 12:00 PM (Eastern time) on April 27, 2011. Investors can also download Delphi’s first quarter 2011 statistical supplement from the Company’s website at www.delphifin.com/financial/stats11.html.

In connection with, and because it desires to take advantage of, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, Delphi cautions readers regarding certain forward-looking statements in the foregoing discussion and in any other statements made by, or on behalf of, Delphi, whether in future filings with the Securities and Exchange Commission or otherwise. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, prospects, outlooks or other developments. Some forward-looking statements may be identified by the use of terms such as “expects,” “believes,” “anticipates,” “intends,” “judgment,” “outlook,” “effort,” “attempt,” “achieve,” “project,” or other similar expressions.

Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic, competitive and other uncertainties and contingencies, many of which are beyond Delphi’s control and many of which, with respect to future business decisions, are subject to change. Examples of such uncertainties and contingencies include, among other important factors, those affecting the insurance industry generally, such as the economic and interest rate environment, federal and state legislative and regulatory developments, including but not limited to changes in financial services, employee benefit, health care and tax laws and regulations, changes in accounting rules or interpretations thereof, market pricing and competitive trends relating to insurance products and services, acts of terrorism or war, and the availability and cost of reinsurance, and those relating specifically to Delphi’s business, such as the level of its insurance premiums and fee income, the claims experience, persistency and other factors affecting the profitability of its insurance products, the performance of its investment portfolio and changes in Delphi’s investment strategy, acquisitions of companies or blocks of business, and ratings by major rating organizations of Delphi and its insurance subsidiaries. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, Delphi. Forward-looking statements contained in the foregoing discussion are made as of the date of this press release and Delphi disclaims any obligation to update these or any other forward-looking statements.

Delphi Financial Group, Inc. is an integrated employee benefit services company. Delphi is a leader in managing all aspects of employee absence to enhance the productivity of its clients and provides the related group insurance coverages: long-term and short-term disability, life, excess workers’ compensation for self-insured employers, large casualty programs including large deductible workers’ compensation, travel accident, dental and limited benefit health insurance. Delphi’s asset accumulation business emphasizes individual annuity products. Delphi’s common stock is listed on the New York Stock Exchange under the symbol DFG and its corporate website address is www.delphifin.com.

  (1)

Operating earnings, which is a non-GAAP financial measure, consists of net income attributable to shareholders excluding after-tax realized investment gains and losses, losses on early retirement of senior notes and results from discontinued operations, as applicable. The Company believes that because these excluded items arise from events that are largely within management’s discretion and whose fluctuations can distort comparisons between periods, a measure excluding their impact is useful in analyzing the Company's operating trends. Investment gains or losses are realized based on management’s decision to dispose of an investment, and investment losses are realized based on management’s judgment that a decline in the market value of an investment is other than temporary. Early retirement of senior notes occurs based on management’s decision to redeem or repurchase these notes. Discontinued operations result from management’s decision to exit or sell a particular business. Thus, these excluded items are not reflective of the Company’s ongoing earnings capacity, and trends in the earnings of the Company’s underlying insurance operations can be more clearly identified without their effects. For these reasons, management uses the measure of operating earnings to assess performance and make operating plans and decisions, and the Company believes that analysts and investors typically utilize measures of this type as one element of their evaluations of insurers’ financial performance. However, gains or losses from the excluded items, particularly as to investments, can occur frequently and should not be considered as nonrecurring items. Further, operating earnings should not be considered a substitute for net income attributable to shareholders, the most directly comparable GAAP measure, as an indication of the Company’s overall financial performance and may not be calculated in the same manner as similarly titled captions in other companies’ financial statements. For reconciliations of the amounts of operating earnings to the corresponding amounts of net income attributable to shareholders for the indicated periods, see the table captioned “Non-GAAP Financial Measures – Reconciliation to GAAP” which follows. All per share amounts are on a diluted basis.

  (2) Annualized operating return on beginning equity, which is a non-GAAP financial measure, is based on operating earnings, as defined in the preceding footnote (1) (rather than the most directly comparable GAAP measure, net income attributable to shareholders), divided by beginning shareholders’ equity. For the reasons that the Company believes that the calculation of this non-GAAP measure based upon operating earnings is useful, see footnote (1). For reconciliations of the amounts of annualized operating return on equity to the corresponding amounts of annualized net income return on equity for the indicated periods, see the table captioned “Non-GAAP Financial Measures – Reconciliation to GAAP” which follows.   (3)

In October 2010, the FASB issued guidance limiting the extent to which an insurer may capitalize costs incurred in the acquisition of an insurance contract. The guidance provides that, in order to be capitalized, such costs must be incremental and directly related to the acquisition of a new or renewal insurance contract. Insurers may only capitalize costs related to successful efforts in attaining a contract and advertising costs may only be capitalized if certain direct response advertising criteria are met. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011, with either prospective or retrospective adoption permitted. Effective January 1, 2011, Delphi elected to adopt this guidance on a retrospective basis, which resulted in the write-off of the portion of its cost of business acquired that does not satisfy the standards for being capitalized under such guidance, as well as the restatement of certain of Delphi’s financial information for prior periods. Detailed financial data concerning these matters is contained in the Company’s First Quarter 2011 Financial Supplement, which is available on the Company’s website at www.delphifin.com/financial/stats11.html.

    DELPHI FINANCIAL GROUP, INC. Non-GAAP Financial Measures Reconciliation to GAAP (Dollars In Thousands, Except Per Share Data)     Three Months Ended

Income Statement Data

  03/31/2011     03/31/2010     Operating earnings $ 51,506 $ 46,335 Net realized investment losses (A)   (1,282 )   (9,819 )   Net income attributable to shareholders (GAAP measure) $ 50,224   $ 36,516     Diluted results per share of common stock attributable to shareholders: Operating earnings $ 0.91 $ 0.84 Net realized investment losses (A)   (0.02 )   (0.18 )   Net income attributable to shareholders (GAAP measure) $ 0.89   $ 0.66       Annualized operating return on beginning shareholders' equity 13.5 % 14.3 %   Annualized net income return on beginning shareholders' equity (GAAP measure) 13.1 % 11.2 %   (A) Net of an income tax benefit of $0.7 million and $5.3 million, or $0.01 per diluted share and $0.10 per diluted share for the three months ended 03/31/2011 and 03/31/2010, respectively. The tax effect is calculated using the Company's statutory tax rate of 35%.    

Balance Sheet Data

  03/31/2011     12/31/2010     Shareholders' equity, excluding accumulated other comprehensive income $ 1,549,115 $ 1,499,564 Add: Accumulated other comprehensive income   41,206     30,932   Shareholders' equity (GAAP measure) $ 1,590,321   $ 1,530,496       Diluted book value per share of common stock, excluding accumulated other comprehensive income $ 27.35 $ 26.57 Add: Accumulated other comprehensive income   0.67     0.52   Diluted book value per share of common stock (GAAP measure) $ 28.02   $ 27.09     Corporate debt to total capitalization ratio, excluding accumulated other comprehensive income 17.9 % 18.3 %   Corporate debt to total capitalization ratio (GAAP measure) 17.5 % 18.0 %     DELPHI FINANCIAL GROUP, INC. Consolidated Statements of Income Total Operations (Dollars in Thousands, Except Per Share Data)     Three Months Ended   03/31/2011     03/31/2010   Revenue: Premium and fee income $ 376,399 $ 347,763 Net investment income 92,294 84,050 Net realized investment losses: Total other than temporary impairment losses (7,539 ) (27,273 ) Portion of other than temporary impairment losses (reclassified from) recognized in other comprehensive income   (1,479 )   4,275   Net impairment losses recognized in earnings (9,018 ) (22,998 ) Other net realized investment gains   7,046     7,892   Net realized investment losses   (1,972 )   (15,106 ) Total revenue   466,721     416,707     Benefits and expenses: Benefits, claims and interest credited to policyholders 271,265 246,321 Commissions and expenses   119,438     113,329     390,703     359,650     Operating income 76,018 57,057   Interest expense: Corporate debt 6,010 7,323 Junior subordinated debentures 3,242 3,241 Income tax expense   16,395     9,912     Net income 50,371 36,581   Less: Net income attributable to noncontrolling interest   147     65     Net income attributable to shareholders $ 50,224   $ 36,516         Basic results per share of common stock Net income attributable to shareholders $ 0.90 $ 0.66   Weighted average shares outstanding 55,921 55,160   Diluted results per share of common stock: Net income attributable to shareholders $ 0.89 $ 0.66   Weighted average shares outstanding 56,734 55,457   Dividends paid per share of common stock $ 0.11 $ 0.10     DELPHI FINANCIAL GROUP, INC. Summarized Consolidated Balance Sheets (Dollars In Thousands)       03/31/2011     12/31/2010   Assets: Investments: Fixed maturity securities, available for sale $ 5,865,382 $ 5,717,090 Short-term investments 267,389 334,215 Other investments   613,343     498,678   6,746,114 6,549,983   Cash 93,025 72,806 Cost of business acquired 151,777 149,325 Reinsurance receivables 355,241 360,255 Goodwill 93,929 93,929 Other assets 335,536 311,577 Assets held in separate account   129,428     123,674   Total assets $ 7,905,050   $ 7,661,549     Liabilities and Equity: Policy liabilities and accruals $ 3,047,953 $ 2,970,389 Policyholder account balances 1,756,144 1,753,744 Corporate debt 375,000 375,000 Junior subordinated debentures 175,000 175,000 Other liabilities and policyholder funds 825,649 728,612 Liabilities related to separate account   129,428     123,674   Total liabilities   6,309,174     6,126,419     Equity: Class A Common Stock 566 565 Class B Common Stock 60 60 Additional paid-in capital 688,300 682,816 Accumulated other comprehensive income 41,206 30,932 Retained earnings 1,057,435 1,013,369 Treasury stock, at cost   (197,246 )   (197,246 ) Total shareholders' equity 1,590,321 1,530,496 Noncontrolling interest   5,555     4,634   Total equity   1,595,876     1,535,130   Total liabilities and equity $ 7,905,050   $ 7,661,549       DELPHI FINANCIAL GROUP, INC. Consolidated Statements of Cash Flows (Unaudited; in thousands)   Three Months Ended   03/31/2011     03/31/2010   Operating activities: Net income attributable to shareholders $ 50,224 $ 36,516

Adjustments to reconcile net income attributable to shareholders to net cash provided by operating activities:

Change in policy liabilities and policyholder accounts 123,648 94,640 Net change in reinsurance receivables and payables 1,017 (7,428 ) Amortization, principally the cost of business acquired and investments 13,912 6,906 Deferred costs of business acquired (26,032 ) (20,630 ) Net realized losses on investments 1,972 15,106 Net change in federal income taxes 23,875 9,138 Other   (71,177 )   (32,743 ) Net cash provided by operating activities   117,439     101,505     Investing activities: Purchases of investments and loans made (826,996 ) (435,672 ) Sales of investments and receipts from repayment of loans 592,455 165,711 Maturities of investments 71,970 139,323 Net change in short-term investments   66,826     (13,510 ) Net cash used by investing activities   (95,745 )   (144,148 )   Financing activities: Deposits to policyholder accounts 99,076 40,332 Withdrawals from policyholder accounts (97,028 ) (26,138 ) Proceeds from issuance of 2020 Senior Notes - 250,000 Principal payments under bank credit facility - (222,000 ) Cash dividends paid on common stock (6,158 ) (5,524 ) Other financing activities   2,635     2,292   Net cash (used) provided by financing activities   (1,475 )   38,962     Increase (decrease) in cash 20,219 (3,681 ) Cash at beginning of year   72,806     65,464   Cash at end of year $ 93,025   $ 61,783