A.M. Best Revises Outlook to Stable for Delphi Financial Group, Inc. and Its Life/Health Subsidiaries

A.M. Best Co. has revised the outlook to stable from negative and affirmed the financial strength rating of A (Excellent) and issuer credit ratings (ICR) of “a” of Reliance Standard Life Insurance Company (Reliance Standard) (Chicago, IL) and First Reliance Standard Life Insurance Company (First Reliance) (New York, NY), the primary life/health insurance subsidiaries of Delphi Financial Group, Inc. (Delphi Financial) [NYSE: DFG] (headquartered in New York, NY). Additionally, A.M. Best has revised the outlook to stable from negative and affirmed the ICRs of “bbb” and “a” and the existing debt ratings of Delphi Financial and Reliance Standard Life Global Funding (a Delaware business trust), respectively. (See below for a detailed listing of the debt ratings.)

The revised outlook for Reliance Standard and First Reliance reflect better relative investment performance and enhanced overall capitalization. Over the last 12-18 months, notable improvement has been reported in the group’s invested asset portfolio, compared to sizeable realized and unrealized losses in 2008 and the first part of 2009. The majority of the organization’s riskier assets are held at Reliance Standard, the flagship life/health insurance subsidiary. The life/health companies continue to generate good operating results and are maintaining their pricing discipline despite the weak U.S. economy and considerable competitive pressures. A.M. Best also notes that Reliance Standard’s risk-adjusted capital position has been maintained at its highest level, which is more than sufficient for its ratings.

Although exposure in certain riskier asset classes has been somewhat reduced, A.M. Best remains concerned regarding Reliance Standard’s relatively high exposure to structured securities (especially non-agency residential mortgage-backed securities) and below investment grade bonds compared to many of its employee benefits peers. Additionally, A.M. Best believes that an extended period of low interest rates would likely have a notable negative impact on the life/health companies’ future earnings.

Nonetheless, Delphi Financial has reported record earnings so far in 2010, with its property/casualty operations (Safety National Casualty Corporation) generating strong operating results. This year, Delphi Financial has refinanced existing debt and has been active in repaying some of its existing debt early. Furthermore, the company has announced plans to redeem the remaining balance of its 8% senior notes, due 2033 on December 23, 2010. On an adjusted basis, the ratio was below 19% at the end of the third quarter of 2010, which is well within A.M. Best’s guidelines for the organization’s current ratings. A.M. Best also notes that Delphi Financial maintains a healthy interest coverage ratio.

The following debt ratings have been affirmed:

Delphi Financial Group, Inc.—

-- “bbb” on $143.8 million 8% senior unsecured notes, due 2033 ($68.8 million of 8% notes currently outstanding)

-- “bbb” on $250 million 7.875% senior unsecured notes, due 2020

-- “bb+” on $175 million 7.376% fixed/floating rate junior subordinated debentures, due 2037

Reliance Standard Life Global Funding—“a” program rating

-- “a” on $65 million 5.625% medium-term notes (MTNs), due 2011

The following indicative ratings have been affirmed for debt securities available under the shelf registration:

Delphi Financial Group, Inc.—

-- “bbb” on senior unsecured debt

-- “bbb-” on subordinated debt

-- “bb+” on preferred stock

Delphi Finance Trust I—

-- “bb+” on preferred securities

The principal methodology used in determining these ratings is Best’s Credit Rating Methodology - Global Life and Non-Life Insurance Edition, which provides a comprehensive explanation of A.M. Best’s rating process and highlights the different rating criteria employed. Additional key criteria utilized include: “BCAR for Life & Health Insurers”; “Rating Health Insurance Companies”; “Risk Management and the Rating Process for Insurance Companies”; “Rating Members of Insurance Groups”; “A.M. Best’s Ratings & the Treatment of Debt”; and “Equity Credit for Hybrid Securities.” Methodologies can be found at http://www.ambest.com/ratings/methodology.