Here is my attempt.
So starting with $f(x_0)=f(1)=1$ and $\epsilon >0$, I want to find $\delta >0$ such that if $|x-1|< \delta$ I get $|f(x)-f(x_0)| \leq \epsilon$.
I started studying $|f(x)-f(x_0)|$ as follows
$|f(x)-f(x_0)|= |\frac{x^2+1}{x+1}-1|= |\frac{x^2-x}{x+1}|= |x \frac{x-1}{x+1}| \leq |\frac{x}{x+1}| \delta$
But now I cannot find a way to conclude. I want to find an upper bound for $|\frac{x}{x+1}|$ and then find an expression for $\delta$ in terms of $\epsilon$
$|f(x)-f(x_0)|= |\frac{x}{x+1}| \delta \leq \frac{(\delta +1)\delta}{2- \delta}$
From now on I tried to set $ \frac{(\delta +1)\delta}{2- \delta} = \epsilon$ and solve for $\delta$ but this didn't work.
I then noticed that $\frac{(\delta +1)\delta}{2- \delta} \leq \frac{(\delta +1)^2}{2- \delta}$ from where I tried solving $\frac{(\delta +1)^2}{2- \delta}=\epsilon$ but again, I failed to find an applicable solution.
I have the feeling that I am near but somehow I cannot see how to overcome the difficulty.
Thank you for your help.
Unfortunately, $$\frac{x}{x+1}=1-\frac1{x+1}$$ is an unbounded function, so that $\left\lvert\frac{x}{x+1}\right\rvert$ has no upper bound. However, we can bound it by making sure that $x$ is bounded away from $-1,$ at which the function has its vertical asymptote. Fortunately, this isn't an issue, since we want to keep $x$ near $1,$ anyway.
So long as $x$ is positive, $\frac{x}{x+1}$ will be positive, as well, and necessarily less than $1.$ Can you see why?
Consequently, picking some arbitrary $\alpha\in(0,1),$ we need only make sure that $\delta=\min\{\alpha,\epsilon\},$ at which point we'll have $$\left\lvert\frac{x}{x+1}\right\rvert\delta<\delta\le\epsilon$$ whenever $|x-1|<\delta,$ which completes the proof.