<PAGE>   1
 
================================================================================
 
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
 
                                   FORM 10-K
 
[X]              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                      THE SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
 
                                       OR
 
[ ]            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
 
           FOR THE TRANSITION PERIOD FROM             TO
 
                         COMMISSION FILE NUMBER 1-12540
 
                          WESTERN NATIONAL CORPORATION
    (Exact name of registrant as specified in its articles of incorporation)
 
<TABLE>
<S>                                            <C>
                  DELAWARE                                      75-2502064
          (State of incorporation)                 (I.R.S. Employer Identification No.)
    5555 SAN FELIPE ROAD, HOUSTON, TEXAS                           77056
  (Address of principal executive offices)                      (Zip Code)
</TABLE>
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 888-7800
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
<TABLE>
<CAPTION>
                                                           NAME OF EACH EXCHANGE
             TITLE OF EACH CLASS                            ON WHICH REGISTERED
             -------------------                           ---------------------
<C>                                            <C>
   Common Stock, Par Value $.001 per share                New York Stock Exchange
        7 1/8% Senior Notes due 2004                      New York Stock Exchange
</TABLE>
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
 
                                      NONE
 
     Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.  Yes [X]  No [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
 
     The aggregate market value based on published prices as of March 6, 1997,
of Western National's voting stock held by non-affiliates was approximately
$886.3 million. As of March 6, 1997, there were outstanding 62,509,412 shares of
Western National common stock.
 
================================================================================
<PAGE>   2
 
                                     INDEX
 
                                     PART I
 
<TABLE>
<S>       <C>                                                             <C>
Item 1.   Business....................................................       1
Item 2.   Properties..................................................      20
Item 3.   Legal Proceedings...........................................      20
Item 4.   Submission of Matters to a Vote of Security Holders.........      20
 
                                   PART II
 
Item 5.   Market for Registrant's Common Equity and Related
            Stockholder Matters.......................................      21
Item 6.   Selected Financial Data.....................................      22
Item 7.   Management's Discussion and Analysis of Financial Condition
            and Results of Operations.................................      24
Item 8.   Consolidated Financial Statements and Supplementary Data....      44
          Report of Management........................................      45
          Report of Independent Accountants...........................      46
          Consolidated Balance Sheet at December 31, 1996 and 1995....      47
          Consolidated Statement of Operations for the Years Ended
            December 31, 1996, 1995 and 1994..........................      48
          Consolidated Statement of Shareholders' Equity for the Years
            Ended December 31, 1996, 1995 and 1994....................      49
          Consolidated Statement of Cash Flows for the Years Ended
            December 31, 1996, 1995 and 1994..........................      50
          Notes to Consolidated Financial Statements..................      51
          Report of Independent Accountants on Financial Statement
            Schedules.................................................      76
          Financial Statement Schedules: Schedule I -- Condensed
            Financial Information of Registrant at December 31, 1996
            and 1995 and for the Years Ended December 31, 1996, 1995
            and 1994..................................................      77
          Schedule VI -- Reinsurance for the Years Ended December
            31, 1996, 1995 and 1994...................................      82
Item 9.   Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure..................................      82
 
                                   PART III
 
Item 10.  Directors and Executive Officers of the Registrant..........      83
Item 11.  Executive Compensation......................................      83
Item 12.  Security Ownership of Certain Beneficial Owners and
            Management................................................      83
Item 13.  Certain Relationships and Related Transactions..............      83
 
                                   PART IV
 
Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form
            8-K.......................................................      84
</TABLE>
 
                                        i
<PAGE>   3
 
                                     PART I
 
ITEM 1. BUSINESS
 
BACKGROUND
 
     Western National Corporation (the "Company") is a Delaware corporation
organized in October 1993 to serve as the holding company for Western National
Life Insurance Company ("Western"), a Texas life insurance company founded in
1944. Western is a leading provider of retirement annuity products, with $10.1
billion of assets at December 31, 1996. Unless the context otherwise requires,
references to the "Company" are references to Western National Corporation and
its consolidated subsidiaries.
 
     In a series of transactions consummated on February 15, 1994 (the
"Reorganization"), the Company acquired all of the outstanding capital stock of
Western from Conseco, Inc. ("Conseco") and issued to Conseco shares of common
stock of the Company and a note. Conseco then sold approximately 35 million
shares of common stock of the Company in a public offering, and the Company sold
an additional 2.3 million shares of common stock in the same offering. In
February 1994, the Company also issued $150 million principal amount of 7 1/8%
Senior Notes due 2004 ("the Senior Notes"), and repaid its note to Conseco.
 
     In December 1994, AGC Life Insurance Company ("AGC Life"), a
Missouri-domiciled life insurer, purchased the remaining shares of common stock
held by Conseco. These shares represented approximately 40% of the Company's
outstanding common stock. AGC Life is a wholly-owned subsidiary of American
General Corporation, a Texas corporation ("AGC"). References to "American
General" are references to AGC and its direct and indirect majority controlled
subsidiaries. Currently, American General owns approximately a 46.2% equity
interest in the Company. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Holding Company Liquidity and
Capital".
 
     The historical financial and operating data for the Company are presented
on a consolidated basis for the Company as if Western had been a part of the
Company for all periods presented. The historical data for periods prior to
February 15, 1994, when Western was owned by Conseco, does not, however, reflect
the effects of the issuance of the Senior Notes or of the additional shares of
Company common stock issued in the Reorganization.
 
     See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Other Information".
 
GENERAL
 
     Western develops, markets and issues annuity products through niche
distribution channels. Nearly all of the $1.6 billion of premiums collected in
the year ended December 31, 1996, were from the sale of annuity products.
Western sells deferred annuities, including its proprietary fixed annuities, to
the savings and retirement markets through financial institutions (principally
banks and thrifts), and sells deferred annuities to both the tax-qualified and
nonqualified retirement markets through personal producing general agents
("PPGAs"). Western also sells deferred annuities through its direct sales
operations. Under a joint marketing arrangement with American General Life
Insurance Company ("AGLIC"), Western markets and coinsures single premium
immediate annuities ("SPIAs") through specialty brokers to the structured
settlement market. Western also sells SPIAs (other than structured settlement
SPIAs) through its financial institution and PPGA distribution channels. Western
commenced sales of its first variable annuity product in fourth quarter 1995.
 
     The Company's operating income is primarily a function of its investment
spread, total invested assets, and operating expenses. The Company generates a
substantial portion of its earnings from the investment spread on its block of
interest-sensitive annuity and other reserves, totaling $8.7 billion as of
December 31, 1996. The stability of the in-force block is enhanced by policy
restrictions on withdrawal of funds. At December 31, 1996, 20% of Western's
in-force policies could not be surrendered, 48% could be surrendered only by
incurring surrender charges, and 32% could be surrendered without penalty.
Western had the right to change interest crediting rates at least annually,
subject to minimum guaranteed rates, on approximately 78%
<PAGE>   4
 
of its insurance liabilities at December 31, 1996. This ability to adjust
interest crediting rates enables the Company to manage its investment spread in
a variety of interest rate environments.
 
     The Company's headquarters are located in Houston, Texas. Western's annuity
administration center is in Amarillo, Texas. Western is licensed to conduct life
insurance operations in all states and the District of Columbia, with the
exceptions of Maine, New Hampshire, New York, and Vermont.
 
PRODUCTS AND DISTRIBUTION
 
     Western currently markets three basic types of fixed annuities: single
premium deferred annuities ("SPDAs"), flexible premium deferred annuities
("FPDAs"), and SPIAs. Western introduced a variable annuity product in fourth
quarter 1995.
 
     Premiums collected by Western during 1996 totaled approximately $1.6
billion, of which over 99% were from the sale of annuity products. Approximately
82% of premiums were collected through financial institutions, 9% through PPGAs,
8% through specialty brokers, and 1% through Western's direct marketing
operations. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Sales". The individual annuity business
is a growing segment of the savings and retirement industry. Annuities currently
enjoy an advantage over certain other savings mechanisms, because the annuity
buyer receives a tax-deferred accrual of interest during the accumulation
period. See "-- Federal Income Taxation", below.
 
     The following table sets forth premium generated by distribution channel:
 
<TABLE>
<CAPTION>
                                               DECEMBER 31,
                                          ----------------------
                                             1996         1995
                                          ----------    --------
                                          (DOLLARS IN MILLIONS)
<S>                                       <C>           <C>
Premiums and Deposits Collected:
Financial institutions:
  Proprietary...........................    $  890.4      $ 37.1
  Retail................................       447.1       453.0
                                            --------      ------
          Total.........................     1,337.5       490.1
Personal producing general agents.......       147.6       156.4
Specialty sales.........................       134.3        68.4
Direct marketing........................         6.1         5.5
                                            --------      ------
          Total premiums and deposits
            collected...................     1,625.5       720.4
Reinsurance ceded.......................        (1.5)       (0.9)
                                            --------      ------
          Net premiums and deposits
            collected (1)...............    $1,624.0      $719.5
                                            ========      ======
</TABLE>
 
---------------
 
(1) Effective January 1, 1996, the Company revised the way it reports Premiums
    and Deposits Collected. Previously, internal exchanges were included in
    Premiums and Deposits Collected. Beginning January 1, 1996, internal
    exchanges are not included in Premiums and Deposits Collected, and prior
    periods have been adjusted to reflect this method of reporting. An internal
    exchange is the rollover of an existing policyholder's deposit to a revised
    contract with a new surrender charge period, on which there is generally
    reduced or no commission expense. Western had $194.6 million and $59.2
    million of internal exchanges for 1996 and 1995, respectively.
 
     Financial Institutions. Western was ranked the number one provider of fixed
annuities through financial institutions in 1996 by Kenneth Kehrer Associates,
Inc. Western's financial institution sales for 1996 were $1.3 billion, up 173%
from 1995 sales of $490.1 million. Of the $1.3 billion of financial institution
sales in 1996, 67% were proprietary sales, and 33% were retail sales.
 
     Western finds financial institutions to be an attractive distribution
channel for annuities and other insurance products because of (i) the relatively
low marketing and administrative costs required to provide a broad distribution
of Western's products, (ii) the record of persistency on products sold in this
marketplace,
 
                                        2
<PAGE>   5
 
(iii) Western's ability to develop strong relationships with these institutions
based on its product quality, efficient operations, and high level of customer
and agent service, and (iv) Western's ability to develop custom-designed
proprietary products.
 
     Western's proprietary annuity programs are the primary focus of its overall
marketing strategy. Under these programs, Western and a distributing financial
institution jointly develop a product to be offered solely through that
institution, and jointly establish product specifications and target spreads.
This process requires a mutual agreement regarding policy benefits, sales
compensation, and profitability. In most cases, the distributing financial
institution, subject to investment guidelines established and monitored by
Western, manages Western's general account assets resulting from annuity sales
to its customers and receives an investment management fee. Western is solely
responsible for policy administration and insurance regulatory compliance, and
retains the right to establish policy crediting rates. Western believes that it
is currently the only insurance company with a proprietary fixed annuity program
that also provides for the selling financial institution to manage the resulting
assets. Because Western's proprietary program generally provides for the
financial institution to receive an investment management fee based on the
resulting assets, the financial institution has an economic interest in both the
successful distribution of Western's annuities and in the persistency of such
business.
 
     By year-end 1996, Western had established proprietary fixed annuity
programs at a number of financial institutions, the largest of which is First
Union Corp. of Charlotte, North Carolina ("First Union"). First Union began
marketing Western non-proprietary fixed annuity products in mid-1995. In March
1996, Western and First Union launched a proprietary fixed annuity program. The
Western/First Union proprietary annuity program resulted in approximately $606
million of premiums in 1996. Total collected premiums for all proprietary
programs were $890.4 million in 1996. See "-- Sales", below. Development of
additional proprietary fixed products will continue to be a focus for the
Company during 1997.
 
     Total retail sales (non-proprietary sales) through financial institutions
were $447.1 million in 1996, compared to $453.0 million in 1995. The lack of
growth in this area is primarily due to Western's increased focus on its
proprietary marketing program, and the conversion of major retail accounts to
proprietary accounts. Management expects the trend towards proprietary
relationships to continue in the future.
 
     At December 31, 1996, Western's financial institution channel included
approximately 180 financial institutions, primarily banks and thrifts, with over
8,400 locations at which Western annuities were sold, representing an increase
of over 2,400 available locations since December 31, 1995. While in prior years
Western relied on marketing companies to develop new relationships and assist in
licensing, training, and supervision, independent marketing companies have
accounted for a decreasing percentage of sales, and direct sales relationships
between Western and financial institutions have increased. Sales through
independent marketing companies accounted for 100% of Western's financial
institution sales in 1993, compared to approximately 25% in 1996.
 
     Deferred fixed annuities are sold at financial institutions primarily as an
alternative to certificates of deposit. These fixed annuities require a purchase
premium and typically have a guaranteed crediting rate for the first policy year
that exceeds the minimum guaranteed rate. Minimum guaranteed rates currently
range from 3% to 4%. After the first year, Western may change its crediting rate
at least annually on substantially all of its financial institution products.
The policyowner is generally permitted to withdraw the premium(s) paid plus the
amount credited to his or her account, less a surrender charge for withdrawals
during a surrender charge period of five to seven years from each premium
payment. The surrender charge is initially 7% to 9% of the premium and decreases
through the surrender charge period. Generally, Western's deferred fixed
annuities allow partial withdrawals of either accumulated interest credited or
up to 10% annually of the accumulation value, without incurring a surrender
charge. The weighted average interest rate credited on Western's financial
institution annuities at December 31, 1996 was 5.78%. The average premium per
policy sold during 1996 through financial institutions was approximately
$26,000.
 
     Personal Producing General Agent Sales. Western markets SPDAs and FPDAs
through about 2,100 PPGAs and approximately 3,700 sub-agents. Independent
general agents recruit, train and supervise this agent force. Western is one of
several insurance companies that contract directly with agents. Western has
 
                                        3
<PAGE>   6
 
sought to maintain sales in this distribution channel by introducing new
products and establishing relationships with marketing companies. These
companies recruit, train, supervise and make products available to networks of
PPGAs. Western competes on the strength and the quality of products and assets
as well as on the quality of its customer and agent support systems.
 
     The FPDAs marketed by Western's PPGA agents are primarily Internal Revenue
Code Section 403(b) tax-sheltered annuities ("TSAs"). TSAs are marketed to
teachers and employees of not-for-profit organizations as tax-qualified salary
reduction retirement programs. Western has approximately 1,700 payroll slots,
principally in school systems in California and Texas, where it is authorized to
market directly to employees and to receive premium payments through payroll
reductions. Western's FPDAs provide for multiple, flexible premium payments and
have a crediting rate declared by the Company that cannot fall below the 3% to
4% minimum guaranteed rate. The policyowner is permitted to withdraw all or part
of the accumulation value, less a surrender charge for withdrawals during a
surrender charge period of five to ten years. The initial surrender charge
ranges from 6% to 10% of the policy value and decreases over the period. The
weighted average interest rate credited on all Western FPDAs marketed through
PPGAs was 5.56% at December 31, 1996. Premiums from FPDAs marketed through PPGAs
decreased 27% in 1996, down to $67.7 million from $92.2 million in 1995. Such
premiums accounted for 4% of premiums collected by Western in 1996.
 
     In January 1997, Western restructured its PPGA agency force so that one
agency (the "Agency") acts as a managing general agent for substantially all of
Western's PPGAs. The Agency is owned by former Western marketing officers. The
Agency provides marketing support to Western's PPGAs, and receives a marketing
allowance and a percentage of commissions on PPGA sales for its services.
Western believes that this restructuring will reduce the costs associated with
managing its PPGA agency force, without lessening the level of marketing support
traditionally provided to its agents.
 
     Total premiums collected by Western relating to the PPGA distribution
channel totaled $147.6 million for 1996, compared to $156.4 million for 1995.
The decrease in this distribution channel for 1996 is primarily due to increased
competition from equity-linked products, including variable annuities and
equity-indexed annuities. See "-- Equity-Indexed Annuities", below.
 
     Specialty Broker Marketing. SPIAs accounted for $127.5 million, or 8%, of
premiums collected by Western in 1996. Immediate annuities are designed to
provide a series of periodic payments for a fixed length of time or for life,
according to the annuitant's choice at the time of issue. Once the payments have
begun, the amount, frequency and length of time for which they are payable are
fixed, subject to any life contingencies. Since SPIAs are not generally subject
to surrender or borrowing by the policyholder, they provide a highly predictable
element of Western's liability mix. The implicit interest rate on SPIAs is based
on market conditions when the policy is issued. Because SPIA policies may
provide for payments over long periods of time (30 years or more), some SPIA
policies are subject to the risk that the reinvestment of investment proceeds
will be at lower rates than those assumed when the policies were issued. The
weighted average implicit interest rate on outstanding SPIAs issued by Western
was approximately 9.09% at December 31, 1996.
 
     One type of SPIA offered by Western is a structured settlement SPIA.
Structured settlement SPIAs are usually sold as part of a settlement resulting
from a personal injury claim or lawsuit to provide scheduled payments to an
injured person (or his or her dependents) in lieu of lump sum cash settlements.
Such structured settlement annuities are marketed through specialty brokers and
units of major insurance brokers. Under the Internal Revenue Code, the periodic
payments received as compensation for personal injury are excluded from the
recipient's gross income. By purchasing an annuity, the self-insured company or
casualty insurer is able to fix the total cost of the settlement and deduct for
tax purposes the premium paid to purchase the annuity. Structured settlement
annuities are generally long-term and cannot be surrendered. Western had a $1.3
billion block of in-force structured settlement business at December 31, 1996.
 
     To enhance its competitiveness in the ratings-sensitive structured
settlement market, Western entered into a modified coinsurance agreement with
American General Life Insurance Company ("AGLIC"). Western and AGLIC began the
joint marketing of structured settlement SPIAs under this arrangement in
 
                                        4
<PAGE>   7
 
fourth quarter 1995. Under this agreement, SPIAs are issued by AGLIC, and
Western administers the resulting blocks of business and coinsures 50% of such
business. Western also provides marketing and underwriting services. The costs
of the arrangement are split between AGLIC and Western, and Western receives a
fee for its administrative services. Western's share of SPIA sales under this
agreement totaled $90.9 million in 1996. During its term, the agreement is an
exclusive arrangement for sales by each party in the structured settlement
market. The agreement is terminable by either party on 90 days notice.
 
     Western also sells SPIAs (other than structured settlement SPIAs) through
PPGAs and financial institutions. Additionally, Western issues supplemental
contracts to its deferred annuity customers when they elect to annuitize their
polices. The premium for a supplemental contract is generally the value of the
existing Western deferred annuity policy. Premiums for SPIAs (other than
structured settlement SPIAs) and supplemental contracts were $13.0 million and
$23.2 million, respectively, in 1996, compared with $14.7 million and $24.5
million in 1995.
 
     Direct Sales. The Company sells annuity and life insurance products both
for Western and for unrelated companies through Independent Advantage Financial
and Insurance Services, Inc. ("IAF"), a direct marketing agency, which was
acquired in July 1994. Sales through IAF of third-party products generated $2.5
million and $2.7 million of fee revenue in 1996 and 1995, respectively. In
addition, Western's conservation unit, which is part of its direct sales
operations, effected internal policy exchanges of $115.9 million for 1996 and
$16.2 million for 1995.
 
     Variable Annuities. In the fourth quarter 1995, Western introduced a
variable annuity product. A variable annuity is a separate account product in
which the investment performance of the underlying assets is passed through to
the policyholder. The variable annuity is available for sale by broker-dealers,
financial institutions, PPGAs, and Western's direct marketing affiliate.
Western's sales of variable annuities in 1996 were $6.1 million. The development
of distribution channels for this product has not been a priority for Western in
light of the strong sales levels of fixed products.
 
     Life Products. Life products accounted for less than 1% of premiums
collected by Western in 1996. This amount reflects renewal premiums on ordinary
life insurance. Western has not actively marketed traditional life insurance
products for several years.
 
     Market Value Adjusted Annuities. Western has expanded its annuity portfolio
by developing two market value adjusted ("MVA") annuities, which it intends to
introduce in 1997, subject to receipt of required regulatory approvals. MVA
annuities provide the policyowner with a multi-year interest rate guarantee. If
the policy is surrendered before the end of the guarantee period, a market value
adjustment and possibly a surrender penalty will apply. The adjustment may be
positive or negative, and generally moves inversely to changes in interest
rates. That is, if interest rates rise, the adjustment will act as an additional
surrender penalty to decrease the policy value. Conversely, if interest rates
decline more than a specified amount during the guarantee period, the market
value adjustment will increase the policy value upon premature surrender. The
Company cannot predict the level of sales these products may yield.
 
     Equity-Indexed Annuities. Equity-linked annuities have recently surged in
popularity, due to the relatively low and stable interest rate environment
coupled with the strong performance of the equity market. Most policies offered
by the insurance industry to date base the policy value, at least in part, on
changes in the value of the Standard & Poor's 500 Stock Index ("S&P Index").
 
     Western currently has under development an equity-indexed annuity which,
subject to receipt of all requisite regulatory approvals, it expects to make
available for sale in the latter part of 1997 through financial institutions,
PPGAs, and its direct marketing channel. The Company intends to hedge its
exposure to equity index movements through the use of equity index linked
derivative instruments. The Company cannot predict the level of sales this
product may yield.
 
     Sales. Western's principal emphasis has been on generating profits through
adequate pricing of its insurance products and maintaining appropriate
investment spreads throughout the life of the policies sold. Western's operating
income is primarily a function of its investment spread, total invested assets
and operating expenses. Accordingly, a change in premiums collected in a single
period does not directly cause income to
 
                                        5
<PAGE>   8
 
change, although continued increases or decreases in premiums will affect the
level of assets on which investment spread is earned. For additional information
with respect to revenues and operating income (loss), see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements contained in Item 8 herein.
 
     The table which follows sets forth the amount of total premiums collected
by Western during each of the last five years:
 
<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                                          --------------------------------------------
                                            1996      1995     1994     1993     1992
                                          --------   ------   ------   ------   ------
                                                     (DOLLARS IN MILLIONS)
<S>                                       <C>        <C>      <C>      <C>      <C>
First-year Premiums and Deposits:
  Single premium deferred annuities
     (1)................................  $1,420.2   $559.5   $616.2   $404.3   $667.1
  Flexible premium deferred annuities...      11.2     27.4     14.8     23.2     19.4
  Single premium immediate annuities....     127.5     64.4     50.5     57.0     76.8
  Variable annuities....................       6.1       --       --       --       --
  Other.................................        --       --       --      6.4       --
                                          --------   ------   ------   ------   ------
          Total first-year..............   1,565.0    651.3    681.5    490.9    763.3
                                          --------   ------   ------   ------   ------
Renewal Premiums and Deposits:
  Flexible premium deferred annuities...      56.5     64.8     65.8     67.1     71.8
  Life products.........................       4.0      4.3      4.6      5.0      5.6
                                          --------   ------   ------   ------   ------
          Total renewal.................      60.5     69.1     70.4     72.1     77.4
                                          --------   ------   ------   ------   ------
          Total premiums and deposits
            collected...................   1,625.5    720.4    751.9    563.0    840.7
Reinsurance ceded.......................      (1.5)    (0.9)    (1.2)    (2.0)    (7.4)
                                          --------   ------   ------   ------   ------
          Net Premiums and Deposits
            Collected (2)...............  $1,624.0   $719.5   $750.7   $561.0   $833.3
                                          ========   ======   ======   ======   ======
</TABLE>
 
---------------
 
(1) Includes certain deferred annuity products that allow for additional
    deposits, but generally have been utilized by policyholders as SPDAs.
 
(2) Excludes $194.6 million and $59.2 million of premium known to have been
    received as the result of internal exchanges of SPDA policies in 1996 and
    1995. Known internal exchanges prior to 1995 were not material.
 
     Total premiums and deposits collected in 1996 increased 126% to $1.6
billion from $720.4 million in 1995. Western's sales through financial
institutions increased substantially over 1995 sales due principally to the
launch of the proprietary fixed annuity program. The development of new bank
relationships led to a significant increase in the number of bank locations at
which Western products were sold. At December 31, 1996, Western products were
sold at over 8,400 bank locations, representing an increase of over 2,400
locations since December 31, 1995.
 
     Western's 1996 sales in the financial institution market continued to
reflect high levels of production from relatively few large bank distribution
relationships. The largest five relationships accounted for 75% of financial
institution sales in 1996 and 38% of such sales in 1995. Each of the largest
five relationships accounted for the following percentage of sales in 1996:
First Union 49%, Shawmut 9%, Home Savings of America 7%, First of America 6% and
U.S. Bancorporation 4%. This increased concentration of sales makes Western's
sales levels more vulnerable to the loss of any single major relationship,
especially its relationship with First Union. If First Union terminated its
relationship with Western and Western was unable to replace the sales volume it
currently represents with other accounts, Western's sales levels and long-term
profitability would be adversely affected. Western believes that its current
business relationship with First Union is good.
 
                                        6
<PAGE>   9
 
     The geographic distribution of premiums collected as a percentage of total
direct collected premiums for each of the years ended December 31, 1996 and 1995
was as follows:
 
<TABLE>
<CAPTION>
                                           DECEMBER 31,
                                          --------------
                 STATE                    1996     1995
                 -----                    -----    -----
<S>                                       <C>      <C>
Florida.................................   22.1%     7.6%
New Jersey..............................   11.7      9.3
California..............................   11.3     12.4
North Carolina..........................    6.6      5.9
Georgia.................................    5.7      1.4
Michigan................................    5.3      7.9
Connecticut.............................    4.1      7.7
Massachusetts...........................    3.9      6.1
Illinois................................    3.0      4.5
Texas...................................    2.7      7.1
Ohio....................................    2.5      3.3
Virginia................................    2.5      0.5
Wisconsin...............................    2.0      1.1
Other (1)...............................   16.6     25.2
                                          -----    -----
                                          100.0%   100.0%
                                          =====    =====
</TABLE>
 
---------------
 
(1) Includes all other states and the District of Columbia, each of which
    accounted for less than 2% of premiums collected in 1996.
 
     The strong increase in the percentage of sales in Florida and New Jersey
reflects Western's sales through First Union and Home Savings affiliates in
1996. These organizations did not account for significant sales in prior years.
Management expects that the geographic distribution of sales in 1997 will
continue to shift as new sales relationships are formed.
 
INSURANCE DATA
 
     The table below sets forth the change in contract values of annuities in
force (net of reinsurance), excluding annuities and supplemental contracts with
life contingencies, for the three years ended December 31, 1996:
 
<TABLE>
<CAPTION>
                                                         IMMEDIATE
                                                         ANNUITIES
                                          DEFERRED     WITHOUT LIFE
                                          ANNUITIES    CONTINGENCIES      TOTAL
                                          ---------    -------------    ---------
                                                   (DOLLARS IN MILLIONS)
<S>                                       <C>          <C>              <C>
December 31, 1993.......................  $ 5,571.0       $402.9        $ 5,973.9
  Deposits..............................      696.7         32.0            728.7
  Distributions.........................     (595.5)       (60.6)          (656.1)
  Credited interest.....................      312.0         33.4            345.4
                                          ---------       ------        ---------
December 31, 1994.......................  $ 5,984.2       $407.7        $ 6,391.9
  Deposits..............................      651.7         38.1            689.8
  Reinsurance recaptured................       72.8           --             72.8
  Distributions.........................     (921.9)       (65.2)          (987.1)
  Credited interest.....................      334.2         33.9            368.1
                                          ---------       ------        ---------
December 31, 1995.......................  $ 6,121.0       $414.5        $ 6,535.5
  Deposits..............................    1,491.6         48.0          1,539.6
  Distributions.........................   (1,129.7)       (77.9)        (1,207.6)
  Credited interest.....................      356.5         34.1            390.6
                                          ---------       ------        ---------
December 31, 1996.......................  $ 6,839.4       $418.7        $ 7,258.1
                                          =========       ======        =========
</TABLE>
 
                                        7
<PAGE>   10
 
     Distributions (withdrawals, deaths, and annuitizations) in 1996 increased
from the previous year primarily due to an increase in the amount of annuity
deposits surrenderable without penalty. As a percentage of average deferred
annuity liabilities, the average annualized distribution rate for 1996 was
17.4%, compared to 15.2% for 1995. Withdrawals in 1996 were somewhat higher than
anticipated. Withdrawals tend to be sensitive to changes in market interest
rates and alternative investment opportunities, and they will fluctuate from
period to period. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Amortization related to operations".
 
     The Company believes that the increased withdrawal activity in 1996
reflects the fact that substantial blocks of annuities issued in 1991 exited
surrender charge protection in 1996. Because Western's sales levels in late 1991
and continuing through 1992 and 1993 declined substantially from those
prevailing in 1990 and the first half of 1991, the Company anticipates that
withdrawal rates will continue to moderate somewhat over the next several
quarters, provided interest rates do not increase substantially. Total fourth
quarter 1996 withdrawals were $216.6 million, compared with $249.1 million in
third quarter 1996, $296.4 million in second quarter 1996, and $231.5 million in
first quarter 1996.
 
     The following table sets forth the deferred annuity account values, as of
the dates indicated, that went or will go out of the surrender charge period in
each of the years from 1995 through 2000 (dollars in millions):
 
<TABLE>
<CAPTION>
                                                                  ACCOUNT VALUES AS OF DECEMBER 31,
YEAR THAT ACCOUNT VALUES EXIT                                     ---------------------------------
   SURRENDER CHARGE PERIOD                                          1994         1995        1996
-----------------------------                                     ---------    ---------    -------
<S>                                                               <C>          <C>          <C>
          1995..................................................   $1,087.2     $     --     $   --
          1996..................................................    1,099.3      1,082.3         --
          1997..................................................      712.7        704.5      694.1
          1998..................................................      438.9        440.7      438.4
          1999..................................................      576.4        596.5      598.7
          2000..................................................       13.4        517.1      556.6
</TABLE>
 
     See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity for Insurance Operations" for additional
information regarding the relationship between withdrawal activity and the
cessation of the surrender charge period.
 
     In response to increased levels of withdrawals, Western instituted a
conservation program in early 1995. This program resulted in $194.6 million and
$59.2 million of internal exchanges in 1996 and 1995, respectively. Western
anticipates continuation of its conservation program for the foreseeable future.
 
OPERATIONS
 
     Western currently administers approximately 350,000 annuities and life
insurance contracts at its administrative center in Amarillo, Texas. During
1995, Western launched a comprehensive re-engineering effort at its
administrative center intended to improve both efficiency and effectiveness.
This program included the restructure of work flow from a functional basis to a
team-based approach, as well as the upgrading of certain operating systems. This
program enables customer service representatives to deal with most customer or
agent inquiries and service requests on a "one-stop" basis, without the need for
referral to multiple departments. Through the implementation of optical disk
imaging and other advanced technology, Western is further improving processing
efficiency. Western possesses adequate administrative capacity to handle
significant growth.
 
     Management intends to modify existing systems for the year 2000. Such costs
are not expected to be significant.
 
     Western utilizes Conseco for certain data processing functions. The
services agreement with Conseco pursuant to which data processing is provided
can be terminated by either party at any time with 180 days advance written
notice. However, Western has no current plans to terminate this agreement.
 
                                        8
<PAGE>   11
 
INVESTMENTS
 
     At December 31, 1996, the Company had invested assets with a total carrying
value of approximately $9.4 billion. The Company's investment strategy is to
maintain a largely liquid, investment grade fixed-income portfolio, provide
adequate liquidity through active asset/liability management for expected
liability cash flows and other requirements, and maximize return through active
investment management. The Company's investment strategy places strong emphasis
on active asset/liability management as a principal tool to mitigate variations
in investment spread and disintermediation risk. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Investments".
 
     Western retains Conseco Capital Management, Inc. ("CCM") to assist in the
management of its invested assets. Western pays CCM a total of 7.25 basis points
annually on the market value of assets under their management (consisting of a
6.75 basis point investment management fee and a 0.5 basis point investment
accounting fee). At December 31, 1996, approximately 90% of the portfolio was
managed by CCM. Additionally, under its proprietary fixed annuity program, the
net premiums from the sale of Western's proprietary fixed annuities (the
"proprietary assets") are being managed by the respective selling institution's
investment departments. Western pays the proprietary asset managers fees ranging
between 10-25 basis points annually on the statutory value of assets under their
respective management (plus a Conseco affiliate is paid 0.5 basis points
annually for providing investment accounting services on proprietary accounts).
All of Western's advisory agreements are terminable without cause or penalty
upon ninety days written notice, with the exception of the agreement with CCM,
which is currently subject to a $2.0 million early termination penalty through
December 1, 1997 (thereupon, the penalty reduces to $0.6 million through October
1, 1998 and zero thereafter). Western has no current plans to terminate any of
its investment advisory agreements. Below is a percentage breakdown of Western's
investments by asset manager as of December 31, 1996 (at carrying value):
 
<TABLE>
<CAPTION>
                                            % OF TOTAL
             ASSET MANAGER                INVESTED ASSETS
             -------------                ---------------
<S>                                       <C>
Conseco Capital Management, Inc.........        90.1%
Proprietary Asset Managers:
  First Union Capital Management
     Group..............................         6.7
  Griffin Financial Investment Advisors
     (Home Savings).....................         1.3
  First of America Investment
     Corporation........................         1.1
  Firstar Investment Research &
     Management Co......................         0.4
  Summit Bancorp Investment Management
     Division...........................         0.2
  Star Bank Capital Management
     Division...........................         0.2
                                               -----
       Total proprietary assets.........         9.9
                                               -----
          Total invested assets.........       100.0%
                                               =====
</TABLE>
 
     Because new sales are concentrated in the proprietary accounts, the Company
anticipates that the percentage of assets managed by proprietary account
managers will increase over time.
 
     Investment income is a significant component of Western's total revenues.
Profitability is significantly affected by spreads between the rates credited on
insurance liabilities and the yield on invested assets. Substantially all
credited rates on Western's SPDAs and FPDAs may be changed at least annually. At
December 31, 1996, the interest rate credited on Western's total liability
portfolio was 6.14% and the yield on Western's total investment portfolio was
8.27%.
 
     Within certain parameters, Western seeks to reasonably closely match the
duration of its invested assets with the expected duration of benefit payments
arising from insurance liabilities. At December 31, 1996, the effective asset
duration was 5.2 years, compared to an estimated modified liability duration of
5.4 years. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Effects of Changing Interest Rates on
Investments".
 
                                        9
<PAGE>   12
 
     The amortized cost and carrying value of the Company's invested assets
categorized by type as of December 31, 1996 were as follows:
 
<TABLE>
<CAPTION>
                                                     CARRYING   AS A % OF TOTAL   AMORTIZED
                INVESTMENT CATEGORY                   VALUE     CARRYING VALUE      COST
                -------------------                  --------   ---------------   ---------
                                                             (DOLLARS IN MILLIONS)
<S>                                                  <C>        <C>               <C>
Actively managed fixed maturities:
  U.S. Treasury securities and obligations of U.S.
     government corporations and agencies..........  $   21.4          0.2%       $   20.8
  Obligations of states and political
     subdivisions..................................     222.0          2.4           224.1
  Public utility securities........................   1,242.2         13.2         1,251.6
  Other corporate securities.......................   4,687.4         50.0         4,583.6
  Asset-backed securities..........................     351.9          3.8           349.3
  Mortgage-backed securities.......................   2,317.6         24.7         2,309.0
                                                     --------        -----        --------
          Total actively managed fixed
            maturities.............................   8,842.5         94.3         8,738.4
Held to maturity fixed maturities -- at amortized
  cost.............................................        --           --              --
                                                     --------        -----        --------
          Total fixed maturities...................   8,842.5         94.3         8,738.4
Equity securities..................................        --           --              --
Mortgage loans.....................................     122.7          1.3           122.7
Credit-tenant loans................................     208.5          2.2           208.5
Policy loans.......................................      66.8          0.7            66.8
Other invested assets..............................      25.6          0.3            24.7
Short-term investments.............................     110.0          1.2           110.0
                                                     --------        -----        --------
          Total invested assets....................  $9,376.1        100.0%       $9,271.1
                                                     ========        =====        ========
</TABLE>
 
     The difference in value between amortized cost and carrying value results
from the application of Statement of Financial Accounting Standard No. 115
("SFAS 115"), Accounting for Certain Investments and Debt and Equity Securities,
which requires actively managed and held to maturity investments (collectively,
"fixed maturities") to be carried at market value and amortized cost,
respectively. Because changes in interest rates have a direct, inverse impact on
market value of fixed income securities, given continuing fluctuations in
interest rates, differences between carrying value and amortized cost should be
expected to continue. See Note 2 to the Consolidated Financial Statements and
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Investments" for further discussion.
 
                                       10
<PAGE>   13
 
     The following table sets forth the quality of the Company's fixed
maturities (which do not include short-term investments) as of December 31,
1996, classified in accordance with the highest rating by a nationally
recognized statistical rating organization or, as to $159.1 million of fixed
maturities (at fair value) not commercially rated, based on ratings assigned by
the National Association of Insurance Commissioners ("NAIC"):
 
<TABLE>
<CAPTION>
                                                                                FAIR VALUE
                                                                   -------------------------------------
                                                                   AS A % OF    AS A % OF     AS A % OF
                                 AMORTIZED   CARRYING     FAIR       FIXED      AMORTIZED       TOTAL
       COMMERCIAL RATING           COST       VALUE      VALUE     MATURITIES      COST      INVESTMENTS
       -----------------         ---------   --------   --------   ----------   ----------   -----------
                                      (DOLLARS IN MILLIONS)
<S>                              <C>         <C>        <C>        <C>          <C>          <C>
AAA............................  $2,491.6    $2,498.9   $2,498.9      28.3%       100.3%         26.7%
AA.............................     801.0       801.6      801.6       9.1        100.1           8.5
A..............................   2,461.4     2,500.4    2,500.4      28.3        101.6          26.7
BBB+...........................     834.1       855.4      855.4       9.7        102.6           9.1
BBB............................     991.8     1,009.2    1,009.2      11.4        101.8          10.8
BBB-...........................     553.3       558.3      558.3       6.2        100.9           5.9
                                 --------    --------   --------     -----        -----         -----
          Total investment
            grade..............   8,133.2     8,223.8    8,223.8      93.0        101.1          87.7
                                 --------    --------   --------     -----        -----         -----
BB+............................     138.5       140.9      140.9       1.6        101.7           1.6
BB.............................      75.4        77.5       77.5       0.9        102.8           0.8
BB-............................     165.2       171.7      171.7       1.9        103.9           1.8
B and below....................     226.1       228.6      228.6       2.6        101.1           2.4
                                 --------    --------   --------     -----        -----         -----
          Total below
            investment grade...     605.2       618.7      618.7       7.0        102.2           6.6
                                 --------    --------   --------     -----        -----         -----
          Total fixed
            maturities.........  $8,738.4    $8,842.5   $8,842.5     100.0%       101.2%         94.3%
                                 ========    ========   ========     =====        =====         =====
</TABLE>
 
     The NAIC assigns securities quality ratings and uniform prices called "NAIC
Designations", which are used by insurers when preparing their annual
statements. The NAIC assigns ratings to publicly-traded as well as
privately-placed securities. The NAIC Designations range from Class 1 to Class
6, with Class 1 being the highest quality. For purposes of the table above and
only for fixed maturities not commercially rated, any NAIC Class 1 securities
would be included in the "A" rating category; Class 2, "BBB-"; Class 3, "BB-";
and Classes 4, 5 and 6, "B and below".
 
     The following table sets forth the amortized cost and estimated fair value
of the Company's fixed maturities according to NAIC Designations, or the
equivalent for $554.8 million of fixed maturities (at fair value) currently not
rated by the NAIC, as of December 31, 1996:
 
<TABLE>
<CAPTION>
                                                AMORTIZED COST                      FAIR VALUE
                                        -------------------------------   -------------------------------
                                          (DOLLARS        AS A % OF         (DOLLARS        AS A % OF
                                        IN MILLIONS)   FIXED MATURITIES   IN MILLIONS)   FIXED MATURITIES
                                        ------------   ----------------   ------------   ----------------
<S>   <C>                               <C>            <C>                <C>            <C>
1     AAA, AA, A......................    $5,165.9           59.2%          $5,200.0           58.8%
2     BBB.............................     2,922.7           33.4            2,977.0           33.7
                                          --------         ------           --------         ------
      Total investment grade..........     8,088.6           92.6            8,177.0           92.5
3     BB..............................       347.5            4.0              357.3            4.1
4     B...............................       295.5            3.3              304.2            3.4
5     CCC, CC, C......................         6.8            0.1                4.0             --
6     CI, D...........................          --             --                 --             --
                                          --------         ------           --------         ------
      Total below investment
                grade.................       649.8            7.4              665.5            7.5
                                          --------         ------           --------         ------
      Total fixed maturities..........    $8,738.4          100.0%          $8,842.5          100.0%
                                          ========         ======           ========         ======
</TABLE>
 
(1) Comparisons between NAIC ratings and Standard & Poor's Corporation ratings
    are published by the NAIC.
 
                                       11
<PAGE>   14
 
     For additional information regarding the Company's investment portfolio,
see "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Investments" and Note 2 to the Consolidated Financial
Statements.
 
COMPETITION, RATINGS AND OTHER FACTORS AFFECTING BUSINESS
 
     The life insurance industry is highly competitive and consists of a large
number of insurance companies, some of which have substantially greater
financial resources, broader and more diversified product lines, and larger
staffs than those available to the Company. Western's annuity products compete
not only with products sold by other insurance companies but also with mutual
fund products, traditional bank savings products, and other investment and
savings alternatives. Such competition is based on many factors, including
pricing and other terms, service provided to distribution channels and
policyholders, and ratings.
 
     Financial institutions, school districts and brokers of structured
settlement annuities, as well as policyholders, consider the ratings of an
insurer in determining which insurer's annuity to market or purchase. Western is
rated "A" (Excellent) by A.M. Best. Ratings for the industry currently range
from "A++" (Superior) to "F" (Under Liquidation). Publications of A.M. Best
indicate that the "A" rating is assigned to those companies that in A.M. Best's
opinion have achieved excellent overall performance when compared to the norms
of the insurance industry and that generally have demonstrated a strong ability
to meet their respective policyholder and other contractual obligations. In
evaluating a company's financial and operating performance, A.M. Best reviews
the company's profitability, leverage, and liquidity as well as the company's
book of business, the adequacy and soundness of its reinsurance, the quality and
estimated market value of its assets, the adequacy of its reserves, and the
experience and competence of its management. A.M. Best's ratings are based upon
factors relevant to policyholders, agents, insurance brokers, and
intermediaries; A.M. Best's ratings are not directed to the protection of
investors. Western's A.M. Best's rating is currently under review with positive
implications; however, Western cannot predict if or when such rating may be
changed. At present, Western also has claims-paying or financial strength
ratings of "AA-" (Very Good) from Standard & Poor's Corporation, "AA-" (Very
Good) from Duff & Phelps Rating Company and "A2" (Good) from Moody's Investors
Service. The Standard & Poor's rating reflects a one-level upgrade in September
1996 from "A+" (Good), and the Moody's rating reflects a three-level upgrade in
early 1995 from "Baa2" (Adequate). Generally, rating agencies base their ratings
on information furnished to them by the insurer and on investigations, studies
and assumptions by the rating agencies. There is no assurance that any
particular rating will continue for any given period or that it will not be
changed or withdrawn entirely if, in the judgment of the rating agency,
circumstances so warrant. Such ratings are not a recommendation to buy, sell or
hold securities. If Western's ratings were downgraded from their current levels,
sales of its products and the persistency of its in-force business could be
adversely affected.
 
     In attempting to improve its ratings, the Company has taken and is taking
steps to improve the factors believed by it to be of significance in achieving
favorable ratings. However, there can be no assurance that it will be successful
in obtaining higher ratings.
 
     Western believes that it is generally able to compete effectively because
it (i) emphasizes specialized distribution channels, such as financial
institutions, where its ability to respond rapidly to changing customer needs
and to develop innovative marketing and product structures, such as its
proprietary annuity program, provides a competitive edge, (ii) is experienced in
establishing and cultivating relationships with the specialized distribution
networks and the independent marketing companies operating in these markets,
(iii) can offer competitive interest rates as a result of its lower-than-average
operating costs and active investment portfolio management techniques, and (iv)
has effective and efficient policyholder administrative services housed in its
administration center in Amarillo, Texas. In addition, it has a focused
management team that has made reinvigorating sales a high priority. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Sales".
 
     In recent years, the market for structured settlement annuities has been
dominated by those insurers with the highest claims-paying ratings. As a result,
Western had been relatively inactive in this market. In order to
 
                                       12
<PAGE>   15
 
re-enter this market with its existing ratings, Western entered into an
agreement with AGLIC for the joint marketing of structured settlement SPIAs in
1995. See "-- Products and Distribution", above.
 
UNDERWRITING
 
     Underwriting for deferred annuities is minimal. For certain structured
settlement SPIAs, more significant underwriting is required. Agents obtain
detailed medical information, including test results and medical history, which
is evaluated by the medical director, who computes a life expectancy which is
equated to an age higher than the current age of the annuitant. The price of the
structured settlement SPIA is developed using the higher "rated" age and a
mortality table, and reflects expectations about current and future investment
performance.
 
REINSURANCE
 
     Consistent with the general practice of the life insurance industry,
Western has reinsured portions of the coverage provided by its insurance
products with other insurance companies under agreements of indemnity
reinsurance. Indemnity reinsurance agreements limit an insurer's maximum loss on
a large or unusually hazardous risk and provide risk diversification. Indemnity
reinsurance does not discharge the primary liability of the original, or
primary, insurer. However, subject to certain statutory limitations, the primary
insurer accounts for a reinsured risk as though the insurer were not liable for
it, to the extent the risk is reinsured. Western limits its risk retention on
life insurance policies to $0.8 million per policy or less.
 
     Western is also a party to two other reinsurance or coinsurance-type
arrangements. In October 1995, Western and AGLIC entered into a modified
coinsurance agreement. Under the agreement, AGLIC issues the policies, and 50%
of each risk is reinsured to Western. Under this arrangement, Western reports
its pro rata share of premiums and shares in its pro rata portion of the gain or
loss on policies sold. See "-- Sales", above. Since 1994, Western has been a
party to a standby reinsurance agreement for new annuity sales through selected
financial institutions, which is triggered only if Western's risk-based capital
ratio falls below a prescribed level. No reinsurance pursuant to this agreement
has been triggered. At December 31, 1996, $826.7 million of policy reserves were
subject to this standby arrangement.
 
     Effective October 1, 1995, Western recaptured $72.8 million of reserves
which had previously been ceded to an affiliate of Conseco. These transactions
terminated all existing reinsurance transactions between Western and Conseco
affiliates. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Reinsurance".
 
REGULATION
 
  Federal/State Developments
 
     The major portion of Western's annuity sales are currently made through
banks and thrifts. Although banks and thrifts are presently precluded by state
and federal regulation from issuing insurance directly, legal and regulatory
developments affecting the distribution of annuities and insurance products
through financial institutions are unfolding rapidly. In January 1995, the
United States Supreme Court ruled in Variable Annuity Life Insurance Company v.
Nationsbank (the "VALIC Case") that the National Bank Act did not prohibit a
national bank from acting as an agent to sell annuity products, as such is an
activity incidental to the business of banking. Because most major banks
interested in distributing annuities were already doing so, either directly,
through affiliates, or through marketing companies, the VALIC Case did not have
any significant impact on Western's business.
 
     Following the VALIC Case, a substantial unresolved legal issue remained
concerning the interplay of state and federal law, including the extent to which
federal banking law preempts state insurance regulatory laws, and the extent to
which states may limit bank activities in the insurance arena under the
McCarren-Ferguson Act (which generally provides that state insurance laws
preempt federal laws that do not deal specifically with the business of
insurance). In March 1996, the United States Supreme Court decided Barnett Bank
of Marion County, N.A. v. Gallagher (the "Barnett Case"). At issue was the
conflict between Section 92
 
                                       13
<PAGE>   16
 
of the National Banking Act, which permits national banks with offices located
in places with fewer than 5,000 residents to sell insurance, and certain state
anti-affiliation laws which prevent banks or their affiliates from selling
insurance. Also before the court was the question of whether the reverse
preemption provisions of the McCarren-Ferguson Act encompass state
anti-affiliation laws dealing with the business of insurance.
 
     The Supreme Court in the Barnett Case ruled unanimously that Section 92 was
in "irreconcilable conflict" with (and thus preempted) the state
anti-affiliation statute at issue, and that the McCarren-Ferguson Act did not
preserve the state statute. However, the Court ruled that a state may regulate
the insurance sales activities of a national bank acting under Section 92
powers, provided that the state does not "significantly interfere" with the
bank's exercise of these powers.
 
     As a result of the Barnett decision, many state legislatures and insurance
departments have eliminated prohibitions that previously impeded insurance sales
through financial institutions. Approximately 30 states have "wild card" or
parity provisions, which are designed to effect the same treatment to
state-chartered banks as national banks enjoy. In these jurisdictions,
state-chartered banks have also benefited from the Barnett Case. Not
surprisingly, litigation has ensued between financial institutions and insurance
regulators in the aftermath of the Barnett ruling. In Texas, litigation is
pending between the Insurance Commissioner and the Texas Bankers Association.
The Texas Bankers Association opposes the Commissioner's interim procedures for
banks selling insurance, which were promulgated in an attempt to comply with the
Barnett opinion and limit bank sales of annuities to towns with fewer than 5,000
residents. The Office of the Comptroller of the Currency ("OCC") has filed a
petition requesting permission to intervene in this case.
 
     In spite of the controversy surrounding the Supreme Court's decision,
Western's sales through financial institutions have not been materially
affected. The changes currently under way are more of form than substance as
banks take advantage of selling structures and relationships not previously
available to them.
 
     Some federal regulatory agencies, members of Congress and representatives
of the banking industry have advocated legislative and regulatory changes, or
additional changes in interpretation of existing laws and regulations, to
broaden the ability of banks to participate in the underwriting of insurance
products as well as the direct sale of such products. If such changes were to
occur, Western could be faced with increased competition in its markets or the
loss of certain marketing relationships. Consolidation of the financial services
industries may be expected to continue into the foreseeable future, with
financial institutions offering a broad spectrum of financial products,
including insurance, to their customers. See "-- Federal Regulation", below. The
Company believes that its annuity products will remain attractive to banks that
wish to offer tax-deferred savings vehicles. Western's annuities offer banks and
other financial institutions the advantages of fee income generation and the
absence of balance sheet exposure.
 
  State Regulation
 
     Life insurance companies are subject to regulation and supervision by the
states in which they are domiciled or transact business. State laws establish
regulatory agencies with broad administrative and supervisory powers related to
granting and revoking licenses to transact business, regulating trade practices,
establishing guaranty associations, licensing agents, approving policy forms,
filing premium rates on certain business, setting reserve requirements,
determining the form and content of required financial statements, determining
the reasonableness and adequacy of capital and surplus, and prescribing the
maximum concentrations of certain classes of investments.
 
     The National Association of Insurance Commissioners ("NAIC"), an
organization of state insurance regulators, attempts to standardize and
coordinate state regulatory processes. It seeks to obtain these objectives by
formulating model acts and regulations for adoption and implementation at the
state level, establishing minimum regulatory standards and procedures,
organizing multi-state responses to situations of a scope or magnitude exceeding
the ability of a single state to respond, and providing a forum for the
examination of and response to issues of public policy affecting the insurance
industry and insurance consumers. Recent NAIC initiatives of particular concern
to the Company have included: sales of insurance products by banks, federal
involvement in the sales of insurance products, sales of annuities, market
conduct, standardization of statutory accounting principles, the regulation of
equity and other index annuities, and
 
                                       14
<PAGE>   17
 
different formulations of a model investment act. In prior periods, the NAIC has
emphasized different matters and the Company anticipates that the focus will
shift again in the future. It is not, however, possible to predict the impact of
changing state regulations on the operations of the Company and Western, and it
should be noted that unless enacted or adopted in a jurisdiction the model acts
or regulations of the NAIC do not have the effect of law.
 
     Guideline 33. Effective December 31, 1995, the NAIC adopted an actuarial
guideline that more precisely defines the methods to be used in determining
minimum statutory reserves for annuity contracts. Under this guideline, known as
Guideline 33, Western is required to calculate deferred annuity reserves
assuming each policyholder will receive the contract benefits which generate the
greatest present value. Western estimated the effect of Guideline 33 on in-force
business as of December 31, 1996, to be an increase in statutory reserves of
$47.5 million. Guideline 33 permits a three-year phase-in of the required total
increase. Western absorbed $15.1 million of the required increase in 1995 and
$16.5 million in 1996, and the remaining required reserves will be established
in 1997.
 
     Western considers Guideline 33 to be extremely conservative as it requires
the calculation of reserves to be based on the assumption that 100% of
policyholders will annuitize at the point most costly for Western. Western's
actual annuitization rates during 1996, 1995, and 1994 were less than 1%.
 
     The Guideline 33 adjustment affects only Western's statutory financial
statements. For financial statements issued in accordance with Generally
Accepted Accounting Principles ("GAAP"), policy reserves for deferred annuities
are equal to policy accumulation values. However, under certain circumstances
the reduction in statutory surplus resulting from the Guideline 33 adjustment
may constrain the ability of an insurer to write new business while maintaining
desired surplus ratios, or require the insurer to seek additional capital to
maintain such ratios. New products introduced since 1993 have been designed to
minimize the impact of this guideline. Adoption of the guideline has not
constrained Western's sales efforts.
 
     Guaranty Fund. Western is required under the solvency or guaranty laws of
most states in which it does business to pay guaranty association assessments
(up to certain prescribed limits) to fund policyholder losses or liabilities of
insurance companies that become insolvent. These assessments may be deferred or
forgiven under most guaranty laws if they would threaten an insurer's financial
strength and, in certain instances, may be offset against future premium taxes.
Western incurred no net expenses relating to reserves for guaranty fund
assessments in 1996. Incurred expenses relating to reserves for guaranty fund
assessments were $27.6 million, and $5.7 million in 1995 and 1994, respectively.
 
     After incurring a special fourth quarter 1995 charge to increase its
reserve for guaranty fund assessments, Western believes it is fully reserved for
all known insolvencies, and therefore does not anticipate material additional
charges for guaranty assessments, in the absence of any material new insurer
insolvencies. At December 31, 1996, Western held reserves of $22.1 million for
future assessments. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Financial Condition -- Guaranty
Association Assessments".
 
     Risk-Based Capital. The NAIC adopted model risk-based capital ("RBC")
requirements, effective December 31, 1993, to evaluate the adequacy of statutory
capital and surplus in relation to investment and insurance risks associated
with (i) asset quality, (ii) mortality and morbidity, (iii) disintermediation
and investments, and (iv) other business factors. The RBC formula is designed to
be used by the state insurance departments as an early warning tool to identify
possible weakly-capitalized companies for the purpose of initiating regulatory
action. In addition, the formula defines a minimum capital standard which
supplements the previously prevailing system of low, fixed minimum capital and
surplus requirements on a state-by-state basis.
 
     The RBC requirements provide for four different levels of regulatory
attention depending on the ratio of a company's total adjusted capital (defined
as the total of its statutory capital, surplus, asset valuation reserve, and 50%
of apportioned dividends) to its RBC. The "Company Action Level" is triggered if
a company's total adjusted capital is less than 100% but greater than or equal
to 75% of its RBC, or if total adjusted capital is less than 125% of RBC and a
negative trend has occurred. The trend test calculates the greater of any
decrease in
 
                                       15
<PAGE>   18
 
the margin (i.e., the amount in dollars by which a company's total adjusted
capital exceeds its RBC) between the current year and the prior year and between
the current year and the average of the past three years, and assumes that the
decrease could occur again in the coming year. If a similar decrease in the
margin in the coming year would result in an RBC of less than 95%, then the
"Company Action Level" would be triggered. At the "Company Action Level", a
company must submit to the regulatory authority a comprehensive plan which
discusses proposed corrective actions to improve its capital position. The
"Regulatory Action Level" is triggered if a company's total adjusted capital is
less than 75% but greater than or equal to 50% of its RBC. At the "Regulatory
Action Level", the regulatory authority will perform a special examination of
the company and issue an order specifying corrective actions that must be
followed. The "Authorized Control Level" is triggered if a company's total
adjusted capital is less than 50% but greater than or equal to 35% of its RBC,
and the regulatory authority may take any action it deems necessary, including
placing the company under regulatory control. The "Mandatory Control Level" is
triggered if a company's total adjusted capital is less than 35% of its RBC, and
the regulatory authority is mandated to place the company under its control.
Calculations using the NAIC formula at December 31, 1996, indicate that the
ratio of total adjusted capital to RBC for Western was 265%, up from 234% at
December 31, 1995. Western's RBC is more than twice the "Company Action Level".
 
     The Texas Department of Insurance ("TDI") follows its own RBC requirements,
the stated purpose of which is to require a minimum level of capital and surplus
to absorb the financial, underwriting, and investment risks assumed by an
insurer. Under Texas' RBC regulations, Western must maintain a minimum level of
capital and surplus determined by a calculation formula contained in the Texas
regulations. Texas' RBC requirements differ from those adopted by the NAIC in
two principal respects: (i) the elements used to determine minimum RBC levels in
the respective calculation formulas differ, and (ii) the Texas regulations do
not contain "Action Levels" (like those adopted by the NAIC) prescribing certain
corrective actions if RBC threshold levels are not met, although the
Commissioner of the TDI does have the power to take similar corrective actions
if a company does not maintain the required minimum level of capital and
surplus. Under current Texas regulations, an insurer has met RBC requirements if
its admitted assets exceed its liabilities by at least 5%. At December 31, 1996,
Western's admitted assets exceeded its liabilities by more than 6%.
 
     AVR and IMR. Statutorily required annual and quarterly financial filings
require classifications of investments. The Asset Valuation Reserve ("AVR")
account which consists of two main components: a "default component" to provide
for future credit-related losses on fixed maturities and an "equity component"
to provide for losses on all types of equity investments, including real estate.
Western's maximum AVR balance as of December 31, 1996, would have been $171.9
million. However, the rules only require annual additions of up to 20% of the
excess of the maximum balance over the current accumulated balance. Hence,
Western's AVR balance was $109.0 million as of December 31, 1996, compared to
$91.1 million as of December 31, 1995. The Company is also required to maintain
an Interest Maintenance Reserve ("IMR"), which is credited with the portion of
realized capital gains (losses) from the sale of fixed income securities
attributable to changes in interest rates. The IMR is required to be amortized
into earnings on a basis reflecting the remaining period to maturity of the
fixed maturities sold. Western's IMR balance was $104.4 million and $105.3
million as of December 31, 1996, and December 31, 1995, respectively.
 
     Other. The Company is registered as a holding company system in Texas.
Under Texas laws, the TDI regulates Texas-domiciled insurance holding company
systems, including acquisitions, dividends, surplus debentures, the terms of
affiliate transactions and other related matters. Texas law also limits the
amount of dividends that may be paid by Western to the Company without prior
regulatory approval. See "Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters".
 
     As part of its routine regulatory oversight process, the TDI conducts a
triennial examination of the books, records and accounts of each insurance
company domiciled in its jurisdiction. The triennial examination is generally
conducted in cooperation with the insurance departments of two or three other
states under guidelines promulgated by the NAIC. The TDI last conducted an
examination of Western for the triennial period ended June 30, 1994, and issued
its examination report during second quarter 1995. There were no material
adverse findings, and all open matters were resolved in an order dated September
6, 1995. The triennial examination for the ensuing period has not yet been
scheduled.
 
                                       16
<PAGE>   19
 
     Most states, including Texas, have enacted legislation or adopted
administrative regulations affecting the acquisition of control of insurance
companies as well as transactions between insurance companies and persons
controlling them or their commonly controlled affiliates. The nature and extent
of such legislation and regulations currently in effect vary from state to
state. However, most states require administrative approval of the acquisition
of 10% or more of the outstanding shares of an insurance company incorporated in
the state or the acquisition of 10% or more of the outstanding stock of an
insurance holding company whose insurance subsidiary is incorporated in the
state. The acquisition of 10% of such shares is generally deemed to be the
acquisition of "control" for the purpose of the holding company statutes and
requires not only the filing of detailed information concerning the acquiring
parties and the plan of acquisition, but also administrative approval prior to
the acquisition. For purposes of Texas law, Western is deemed to be an affiliate
of American General.
 
  Federal Regulation
 
     Although the federal government does not directly regulate the business of
insurance, federal legislation and administrative policies in several areas,
including pension regulation, banking laws, securities laws, age and gender
discrimination protection, financial services regulation and federal taxation,
can significantly affect the insurance business.
 
     Amid the increased state and federal activity arising from the Barnett
decision, the OCC issued two important letters relating to bank sales of
insurance. These letters further solidify the role of financial institutions as
a distribution channel for insurance products. The first, issued in October
1996, affirmed that state insurance laws that do not "discriminate against or
have a disparate impact on banks" are not preempted. States may impose (i)
licensing requirements based on product line and the character, experience and
education of the agent; (ii) testing requirements; and (iii) consumer protection
and market conduct standards. The second, issued in November 1996, clarified the
Section 92 "small place" exemption by liberally construing the exemption as
imposing no geographical boundaries on the customers who purchase insurance. An
agency is "clearly" bona fide if agents will be managed and paid through the
agency located in the small town, and use that location as their place of
business for licensing purposes. In addition, in November 1996, the OCC adopted
rules which defined procedures by which national banks may establish operating
subsidiaries to conduct business activities "that are part of or incidental to
the business of banking". At a minimum, the "operating subsidiary" rule opens
the possibility of banks underwriting insurance.
 
     Federal legislation has been proposed which would provide expanded powers
for the banking, insurance, and securities industries. Bills are currently
before Congress to permit affiliates of bank holding companies to engage in
insurance activities, reform the Glass-Steagall Act to allow the merger of
commercial and investment banking, abolish the federal thrift charter, establish
parity in interstate branching rights for state and national banks, and allow
affiliation between stock and mutual insurance companies. Other federal
legislative proposals may be anticipated which would similarly expand permitted
banking activities to encompass the insurance business. The Company cannot
assess the likelihood of passage of any such legislation, what the final terms
of any proposal that is enacted might be, or what the ultimate impact on the
Company of the adoption of any such proposals might be. The Company would note
that certain thrift holding companies have had the ability under federal law to
also own an insurance company for some time.
 
FEDERAL INCOME TAXATION
 
     Policyholders of annuity products marketed and issued by Western enjoy
certain income tax advantages as compared to holders of certain other savings
investments such as certificates of deposit and taxable bonds. One important tax
advantage is the deferral of income taxation on any increases in the contract
values of these annuity and life insurance products until those values are
received by the policyholder, instead of the current taxation of all earnings
that is imposed on many other savings investments. A further tax benefit is that
when annuity payments are paid to a policyholder under an annuity contract, the
portions of the policyholder's income that are attributable to any accrued
income under the contract at the time payments commence and to
 
                                       17
<PAGE>   20
 
all additional earnings under the contract during the annuity period are
recognized as taxable income only ratably as payments are made under the
contract. This treatment provides an income tax deferral as compared to the
economic accrual methods that are generally required for other savings
investments. These tax advantages for annuities and life insurance are provided
in the Internal Revenue Code of 1986, as amended (the "Code"), and are generally
followed in all states and other United States taxing jurisdictions.
Accordingly, these tax advantages are subject to change by Congress and, as to
state and local taxes, by the legislatures of the respective taxing
jurisdictions. From time to time, Congress has considered proposals to revise or
eliminate this tax deferral. If legislation were enacted to eliminate the tax
deferral for certain annuities, such a change would have an adverse effect on
the ability of Western to sell certain annuities.
 
     Numerous proposals have been advanced in Congress over the past years to
modify existing federal tax law in various respects. Certain of these proposals
would institute a so-called "flat tax" system that would lower the marginal tax
rates of certain taxpayers, and could lower the relative value of the
tax-deferral of inside buildup on insurance products, including annuities. Other
proposals would expand the availability of other tax-deferred long-term savings
vehicles, such as IRAs, and could result in increased competition for
tax-deferred vehicles such as annuities. Still others would eliminate the income
tax altogether, to be replaced by consumption-based taxes, thereby eliminating
the relative value of tax deferral and increasing competition for long-term
savings products such as annuities. It is impossible for the Company to predict
when, if, or in what form, any such changes in tax law may be adopted, and
whether any such changes will adversely affect the Company. The Labor
Department's Advisory Council on Employee Welfare and Pension Benefit Plans has
urged the 105th Congress to thoroughly consider the effect on retirement savings
before voting on any tax reform proposals.
 
     Policyholders who purchase variable annuities receive tax treatment and
deferral as described above for annuities generally. However, at the time of
withdrawal, or receipt by the policyholder, the entire investment income is
taxed at ordinary rates, and no capital gains treatment is available.
 
     Western sells tax-qualified 403(b) annuities to the tax-qualified
retirement market. A tax-qualified 403(b) annuity is a retirement savings plan
vehicle through which educators and employees of not-for-profit institutions are
permitted under section 403(b) of the Code to defer income through a salary
reduction program. A tax-qualified annuity purchased under section 403(b) is
similar to contributions made to a pension plan, but with different rules on the
maximum amount of current income which may be contributed by the participant on
a pre-tax basis.
 
     Western is taxed as a life insurance company as provided in the Code. The
Revenue Reconciliation Act of 1990 amended the Code to require a portion of the
expenses incurred in selling insurance products to be deducted over a period of
years, as opposed to immediate deduction in the year incurred. Since the change
only affects the timing of the deductions, it does not affect tax expense as
shown on Western's financial statements prepared in accordance with GAAP.
However, the change will increase the tax provisions for statutory accounting
purposes, which will reduce statutory surplus and, accordingly, decrease the
maximum amount of cash dividends that may be paid by Western in certain
conditions.
 
     The Code generally does not permit a life insurance company and a non-life
insurance company such as the Company to file a consolidated tax return unless
they have been members of the same affiliated group for tax purposes for at
least five taxable years immediately preceding the taxable year for which the
consolidated return is filed. The Company and Western have not met the five-year
requirement. As a result, Western and the Company currently file separate tax
returns. This inability to file a consolidated tax return may result in higher
current tax payments to the extent that tax losses at the Company level cannot
be used currently to offset taxable income at the Western level.
 
EMPLOYEES
 
     The Company employs approximately 290 people, approximately 250 of which
are employed by Western. None of these employees are covered by a collective
bargaining agreement. The Company believes that it has good relations with its
employees.
 
                                       18
<PAGE>   21
 
EXECUTIVE OFFICERS OF REGISTRANT
 
     The executive officers of the Company are:
 
<TABLE>
<CAPTION>
                                                  EXECUTIVE
                                                   OFFICER
                   NAME                     AGE     SINCE                   TITLE
                   ----                     ---   ---------                 -----
<S>                                         <C>   <C>         <C>
Michael J. Poulos.........................  66      1993      Chairman of the Board, President,
                                                                and Chief Executive Officer
Richard W. Scott..........................  43      1994      Vice Chairman, General Counsel,
                                                              and Chief Investment Officer
John A. Graf..............................  37      1993      Vice Chairman and Chief Marketing
                                                                and Administrative Officer
Arthur R. McGimsey........................  52      1993      Executive Vice President and
                                                              Chief Financial Officer
Michael J. Akers..........................  47      1994      Executive Vice President and
                                                              Chief Actuary
</TABLE>
 
     Officers are elected annually by the Board of Directors for one-year terms,
subject to removal by the Board. The executive officers of the Company generally
serve in comparable positions with Western.
 
     Mr. Poulos has been Chairman of the Board, President, and Chief Executive
Officer of the Company since October 1993. Prior to joining the Company in 1993,
Mr. Poulos was employed at American General for 23 years, including ten years as
President, and retired as Vice Chairman in 1993. From 1979 until he joined the
Company, Mr. Poulos also served as Chairman or Senior Chairman of American
General's principal life insurance subsidiaries, including VALIC.
 
     Mr. Scott was named Executive Vice President and General Counsel and a
director of the Company in February 1994. He was named Chief Investment Officer
of the Company in 1995, and was named Vice Chairman in July 1996. From 1984
until he joined the Company, Mr. Scott was a partner of the Houston, Texas,
office of the law firm of Vinson & Elkins L.L.P., where he specialized in
corporate finance.
 
     Mr. Graf was named Executive Vice President and Chief Marketing Officer of
the Company in November 1993, and was named Vice Chairman in July 1996, at which
time he also assumed responsibility for the Company's administrative operations.
He was Senior, Second or Assistant Vice President or Vice President, Marketing
of Conseco and Western from November 1987 until the Reorganization, and has
served as Chief Marketing Officer of Western since March 1993. From 1986 to
1987, Mr. Graf was Vice President of Skokie Federated Insurance, Inc., a
subsidiary of Skokie Federal Savings, and from 1981 to 1986, he was a sales
manager with John Hancock Mutual Life Insurance Co.
 
     Mr. McGimsey has been Executive Vice President and Chief Financial Officer
since November 1993. From 1988 until he joined the Company, he was President of
American Benefit Plan Administrators, Inc. (a third party administrator of
benefit programs). From 1986 to 1988, Mr. McGimsey was Executive Vice President
of American General Life Insurance Company and from 1984 to 1986, he served as
Executive Vice President of Sun Life Insurance Company. From 1970 to 1984, Mr.
McGimsey served in various management capacities with Integon Corp. (an
insurance company).
 
     Mr. Akers joined the Company as Vice President and Chief Actuary in
November 1993, and was named a Senior Vice President in July 1994. Mr. Akers was
named an Executive Vice President of Western in February 1996, and of the
Company in February 1997. From 1990 to 1993 he was Vice President -- Actuarial
of Conseco. For 16 years prior thereto, Mr. Akers worked as an executive with an
actuarial software development and data processing firm.
 
     Reference is made to the material incorporated by reference in "Item 11.
Executive Compensation" of this report with respect to employment arrangements
between the Company and the above officers.
 
                                       19
<PAGE>   22
 
ITEM 2. PROPERTIES
 
     The Company leases approximately 25,000 square feet in an office building
in Houston, Texas. The lease expires in 2000. The Company owns a five-story
office building located in downtown Amarillo, Texas, which serves as the
Company's annuity administration center. This building has approximately 50,000
square feet of net usable space. The Company believes that its existing
facilities are adequate to meet its current and future anticipated needs.
 
ITEM 3. LEGAL PROCEEDINGS
 
     The Company is not a party to, and its property is not subject to, any
material pending legal proceedings other than routine matters arising in the
ordinary course of its business.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     In the fourth quarter of 1996, no matters were submitted to a vote of the
security holders.
 
                                       20
<PAGE>   23
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
 
     Prior to the Reorganization, all of the Company's common stock was owned by
a subsidiary of Conseco. The common stock began trading on the New York Stock
Exchange ("NYSE") under the symbol "WNH" on February 9, 1994.
 
     The following table sets forth the trading range on the NYSE Composite
Tape, and dividends paid per share, for the common stock for the periods
indicated:
 
<TABLE>
<CAPTION>
                                                             HIGH            LOW       DIVIDENDS
                                                           --------        --------    ---------
<S>                                                        <C>             <C>         <C>
1995:
  First Quarter..........................................    $13 1/8         $10 7/8     $.04
  Second Quarter.........................................     13 1/4          10 7/8      .04
  Third Quarter..........................................     14 1/4          11 5/8      .04
  Fourth Quarter.........................................     16 1/4          13 1/2      .04
1996:
  First Quarter..........................................    $17 1/8         $15 1/8     $.04
  Second Quarter.........................................     19 1/2          16 1/8      .04
  Third Quarter..........................................     19 1/4          15 7/8      .04
  Fourth Quarter.........................................     19 7/8          17 1/8      .04
1997:
  First Quarter (through March 6, 1997)..................    $25 5/8         $18 5/8     $.04
</TABLE>
 
     The closing price of the common stock on the NYSE Composite Tape on March
6, 1997, was $23 7/8 per share. On that date there were approximately 8,000
holders of common stock, including those known to the Company to be beneficial
owners through participation in securities position listings.
 
     The Company's Board of Directors has established a policy of declaring
regular quarterly cash dividends. The payment of dividends in the future is
subject to the discretion of the Board of Directors and will depend upon general
business conditions, legal and regulatory restrictions on the payment of
dividends and other factors the Board of Directors deem relevant. The Company's
general policy is to retain most of its earnings to finance the growth and
development of its business. Future borrowing agreements of the Company may
contain certain limitations on the payment of dividends.
 
     On September 17, 1996, the Company issued 7,254,464 shares of a
newly-created class of Series A Participating Convertible Preferred Shares (the
"Series A Preferred Stock") to American General for net cash proceeds of
approximately $126 million. The Series A Preferred Stock shares pro rata on a
share-for-share basis with the Company's existing common stock in dividends and
in liquidation, subject to a $.001 per share liquidation preference. No dividend
may be paid on shares of the Company's common stock unless a corresponding
dividend is paid on the Series A Preferred Stock. Except as otherwise required
by Delaware law, the Series A Preferred Stock has no voting power. The Series A
Preferred Stock is not redeemable. The Series A Preferred Stock automatically
converts with no further action on the part of the Company or its holder into
common stock on a share-for-share basis, upon approval of the Company's common
stockholders of the issuance of the common stock. The Company has agreed to
submit to its shareholders a proposal providing for such conversion at its 1997
annual meeting of shareholders. The Certificate of Designation also contains
anti-dilution provisions relating to conversion. Reference is made to the
Company's Report on Form 8-K/A, dated September 17, 1996, for a more detailed
description of the Series A Preferred Stock. As a result of this issuance,
American General now owns 24,947,500 shares of common stock and 7,254,464 shares
of Series A Preferred Stock, which are treated as common stock equivalents.
American General's combined ownership of common stock and Series A Preferred
stock represents a 46.2% equity interest in the Company.
 
     As a result of the Company's holding company structure, its ability to pay
dividends and make required debt service payments depends ultimately upon the
cash flow generated by Western's operating activities and
 
                                       21
<PAGE>   24
 
the ability of Western to pay dividends to the Company. Dividend payments by an
insurance company, such as Western, are subject to statutory limitations and in
certain cases to the approval of insurance regulatory authorities. Generally,
annual dividends in excess of maximum amounts prescribed by state statutes
(so-called "extraordinary dividends") may not be paid without the approval of
the insurance commissioner of the insurance company's state of domicile. Western
is domiciled in Texas and at present may not, without the prior approval of the
TDI, pay dividends in any twelve-month period exceeding the greater of (i)
statutory net gain from operations (excluding realized gains or losses on
investments) for the preceding year or (ii) 10% of statutory surplus at the end
of the preceding year. As of January 1, 1997, the amount payable as dividends by
Western to the Company without prior TDI approval was $57.0 million.
 
ITEM 6. SELECTED FINANCIAL DATA
 
     Reference is made to the audited Consolidated Financial Statements
contained in Item 8 herein, including the consolidated balance sheets as of
December 31, 1996 and 1995, the statements of operations for the fiscal years
ended December 31, 1996, 1995 and 1994, the related Notes to the Consolidated
Financial Statements, and to "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations". This information has been
prepared on a basis that restates the accounts of Western and the Company as if
Western had been a subsidiary of the Company for all periods presented. See Note
1 to the Consolidated Financial Statements. For periods prior to February 1994,
this information and the Consolidated Financial Statements do not give effect to
the issuance of $150 million of Senior Notes by the Company or to the issuance
of 2.3 million shares of the Company's common stock in the Reorganization
completed in February 1994. See "Item 1. Business -- Background" and Notes 1 and
16 to the Consolidated Financial Statements. Life Company Data is based upon
statutory accounting practices that differ in certain respects from GAAP, and
was derived from statutory financial statements filed with the state insurance
regulatory departments.
 
                                       22
<PAGE>   25
 
                            SELECTED FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                              -----------------------------------------------------
                                                                1996        1995       1994       1993       1992
                                                              ---------   --------   --------   --------   --------
                                                                   (DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
<S>                                                           <C>         <C>        <C>        <C>        <C>
INCOME STATEMENT DATA:
Total revenues..............................................  $   800.6   $  569.6   $  615.6   $  774.2   $  653.2
  Insurance policy income...................................       92.8       29.1       27.4       21.8       48.0
  Net investment income.....................................      703.1      662.9      637.4      610.1      507.8
  Equity in earnings of partnership investments.............        7.0        3.8         --         --         --
  Net trading income........................................         --         --        3.7       49.6       25.0
  Net realized gains (losses)...............................       (2.3)    (126.2)     (52.9)      92.7       72.4
Benefits and expenses.......................................      647.7      560.8      501.5      569.7      496.4
  Amortization and change in future policy benefits related
    to realized gains (losses)..............................        0.6      (29.8)     (16.8)      84.3       64.6
Income before income taxes..................................      152.9        8.8      114.1      204.5      156.8
Net income..................................................       99.4        7.3       73.3      130.0      102.2
Ratio of earnings to fixed charges(1).......................       1.38x      1.02x      1.32x      1.60x      1.57x
Ratio of earnings to fixed charges, excluding interest on
  annuities and financial products(2).......................       8.01x      1.44x      7.75x     33.98x     26.70x
BALANCE SHEET DATA (at period end):
Total assets................................................  $10,095.5   $9,312.2   $8,321.2   $8,369.7   $7,640.6
Invested assets, at carrying value..........................    9,376.1    8,845.2    7,452.6    7,918.1    5,787.9
Invested assets, at amortized cost..........................    9,271.1    8,492.0    8,058.2    7,686.2    5,673.8
Insurance liabilities, with SFAS 115 adjustment.............    8,679.9    7,915.8    7,776.1    7,379.9    6,894.3
Insurance liabilities, without SFAS 115 adjustment..........    8,679.9    7,879.5    7,776.1    7,343.0    6,869.5
Long-term debt..............................................      148.0      147.8      147.7         --         --
Shareholders' equity, without SFAS 115 adjustment...........      875.7      659.3      662.6      723.1      608.6
Shareholders' equity(3).....................................      914.8      784.5      339.4      760.9      622.3
ADDITIONAL DATA:
Earnings, excluding net realized gains (losses), net of
  applicable expenses, amortization and taxes...............  $   101.3   $   69.5   $   94.2   $   93.4   $   80.6
Realized gains (losses) net of applicable amortization,
  expenses and taxes(4).....................................       (1.9)     (62.2)     (20.9)      36.6       21.6
Net income(4)...............................................       99.4        7.3       73.3      130.0      102.2
PER SHARE DATA:
Earnings, excluding net realized gains (losses), net of
  applicable expenses, amortization and taxes...............  $    1.56   $   1.11   $   1.52   $   1.56   $   1.34
Realized gains (losses) net of applicable amortization,
  expenses, and taxes(4)....................................       (.03)      (.99)      (.34)       .61        .36
Net income(4)...............................................       1.53        .12       1.18       2.17       1.70
Book value (at period end) without SFAS 115 adjustment......      12.58      10.58      10.63      12.05      10.14
Book value (at period end)(5)...............................      13.14      12.59       5.47      12.68      10.37
Cash dividends per common share(6)..........................        .16        .16        .12       1.23         --
Common shares outstanding (at period end)(7)................       62.4       62.3       62.3       60.0       60.0
LIFE COMPANY DATA:
Premiums collected(8).......................................  $ 1,625.5   $  720.4   $  751.9   $  563.0   $  840.7
  First year premiums and deposits:
    Single premium deferred annuities(8)(9).................    1,420.2      559.5      616.2      404.3      667.1
    Flexible premium deferred annuities.....................       11.2       27.4       14.8       23.2       19.4
    Single premium immediate annuities......................      127.5       64.4       50.5       57.0       76.8
    Variable annuities......................................        6.1         --         --         --         --
    Other...................................................         --         --         --        6.4         --
  Renewal premiums and deposits:
    Flexible premium deferred annuities.....................       56.5       64.8       65.8       67.1       71.8
    Life products...........................................        4.0        4.3        4.6        5.0        5.6
Statutory capital and surplus...............................      572.4      426.1      375.7      372.8      388.9
Adjusted capital accounts (at period end)(10)...............      785.8      622.5      632.4      641.7      519.3
</TABLE>
 
---------------
 
 (1) For purposes of this ratio, "fixed charges" consist of interest expense on
     annuities, financial products, investment borrowings, and notes payable,
     and "earnings" consist of income before income taxes plus the fixed
     charges, as defined.
 
                                       23
<PAGE>   26
 
 (2) For purposes of this ratio, "fixed charges" consist of interest expense on
     investment borrowings and notes payable, and "earnings" consist of income
     before income taxes plus the fixed charges, as defined.
 
 (3) Reflects the effects of the marking to market the Company's fixed
     maturities portfolio and related adjustments, as required by SFAS 115.
 
 (4) The level of net realized gains (losses) is subject to fluctuation from
     period to period. The additional data is provided for analytical purposes
     disclosing the impact of these items on net income.
 
 (5) After giving effect to the adjustments required by SFAS 115.
 
 (6) Includes a one-time $73.8 million dividend to Conseco in 1993 and excludes
     a note in the amount of $150 million issued to Conseco in connection with
     the Reorganization which was accounted for as a dividend.
 
 (7) Excludes 7,254,464 outstanding shares of Series A Preferred Stock.
 
 (8) Excludes $194.6 million and $59.2 million of SPDA premium attributable to
     internal exchanges for 1996 and 1995, respectively.
 
 (9) Includes certain deferred annuity products that allow for additional
     deposits, but generally have been utilized as SPDAs.
 
(10) Includes statutory capital and surplus, asset valuation reserve (AVR), and
     interest maintenance reserve (IMR) for the appropriate periods presented.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
GENERAL
 
     The following discussion should be read in conjunction with "Item 6.
Selected Financial Data" and "Item 8. Consolidated Financial Statements and
Supplementary Data". The historical financial and operating data for the Company
are presented on a consolidated basis for the Company as if Western had been a
part of the Company for all periods presented. The historical data for periods
prior to February 15, 1994, when Western was owned by Conseco, does not,
however, reflect the effects of the issuance of the Senior Notes or of the
additional shares of Company common stock issued in the Reorganization.
 
RESULTS OF OPERATIONS
 
  General
 
     The Company's operating earnings are primarily a function of its investment
spread, the amount of its invested assets, and its operating expenses.
Accordingly, management's principal emphasis is on generating profits through
adequate pricing of its insurance products and maintaining appropriate
investment spreads throughout the life of the policies sold. Investment spread
is the excess of net investment income over interest credited to insurance
liabilities, and is a function of the level of, and yield on, invested assets
and the interest crediting rates on insurance liabilities. The Company's
investment spread over recent periods has been maintained through a combination
of active investment management and the ability to change rates credited on a
majority of its insurance liabilities. Management adjusts crediting rates based
upon pricing objectives, current investment performance, market interest rates,
and competitive factors. Although Western has the right to adjust interest
crediting rates on most products, such adjustments to crediting rates may not be
sufficient to maintain targeted investment spreads in all economic and
market-rate environments. Furthermore, competitive and other factors may limit
Western's ability to adjust crediting rates. A narrowing of spreads may
adversely affect operating results. Western believes that its policy structure,
which generally provides for resetting of policy crediting rates at least
annually and imposes withdrawal penalties during the first five to ten years a
policy is in force, mitigates substantially the potentially adverse effects of
interest rate changes, except in the case of sudden and dramatic changes in
market rates.
 
     In first quarter 1996, Western revised the manner in which it reports
investment spread on insurance liabilities. Western began excluding first-year
bonus interest on certain deferred annuities, which is generally paid in lieu of
commissions, from its average crediting rate calculations. Bonus interest is
capitalized along with other acquisition expenses and amortized over the
lifetime of the block of business. Prior periods have
 
                                       24
<PAGE>   27
 
been adjusted to reflect this change. Western believes that the exclusion of the
capitalized bonus interest is more consistent with the presentation of interest
expenses and acquisition expenses in its Statement of Operations.
 
     As of the last day of each quarter, Western determines investment spread on
insurance liabilities by measuring the difference between the average yield on
invested assets and the average base liability crediting rate on such date.
Since first quarter 1994, investment spread, as so defined, has remained between
approximately 1.91% and 2.13%, and stood at approximately 2.13% at December 31,
1996. In second quarter 1996, Western also began presenting its average spread
on insurance liabilities for each quarter, which Western believes more
accurately reflects its experience during the reported period. Average
investment spread calculations exclude prepayment income and loss, income from
the Company's investment in limited partnerships, and investment income from
other non-scheduled sources. Average investment spread has remained between
approximately 1.96% and 2.19% since first quarter 1994, and was 2.19% for fourth
quarter 1996. Western generally expects to maintain a spread within the range of
spreads it has achieved in recent years. The level of the investment spread
varies over time as a result of market factors, competitive influences,
crediting rates, and investment yields.
 
     Operating earnings (which exclude realized investment gains and losses, net
of applicable adjustments to amortization, expenses and taxes) for the year were
$101.3 million, or $1.56 per share, compared to $69.5 million, or $1.11 per
share in 1995, and $94.2 million, or $1.52 per share, in 1994. Operating
earnings for 1995 include a special charge of $21.0 million, or $.34 per share,
reflecting an increase in reserves for future guaranty fund assessments (see
"Guaranty Association Assessments", below) and adjustments made to the cost of
policies purchased and produced (see "Amortization related to operations",
below). Because the decision to realize investment gains or losses lies to a
great degree in management's discretion, and may reflect tax or other
considerations unrelated to core earning power, management believes that
operating earnings are the best indication of earnings capacity for financial
services organizations such as Western.
 
     The following table sets forth operating and net income for the three-year
period ended December 31, 1996:
 
<TABLE>
<CAPTION>
                                                            1996      1995      1994
                                                           ------    ------    ------
                                                             (DOLLARS IN MILLIONS)
<S>                                                        <C>       <C>       <C>
Operating revenues.......................................  $802.9    $695.8    $664.8
Benefits and expenses, excluding special charge..........   647.1     558.2     518.3
                                                           ------    ------    ------
Pre-tax operating income, excluding special charge.......   155.8     137.6     146.5
Income tax expense from operations, excluding special
  charge.................................................    54.5      47.1      52.3
                                                           ------    ------    ------
Net operating income before special charge...............   101.3      90.5      94.2
Special charge...........................................      --     (21.0)       --
                                                           ------    ------    ------
Net operating income after special charge................   101.3      69.5      94.2
Realized investment gains (losses) net of amortization,
  expenses and taxes.....................................    (1.9)    (62.2)    (20.9)
                                                           ------    ------    ------
Net Income...............................................  $ 99.4    $  7.3    $ 73.3
                                                           ======    ======    ======
</TABLE>
 
  Discussion of Changes in the Statement of Operations for Years Ended December
31, 1996, 1995 and 1994
 
     Net investment income. Net investment income, including the Company's
equity earnings in partnerships and other equity-type investments, increased
$43.4 million, or 7%, in 1996, to $710.1 million from $666.7 million in 1995.
The 1995 figure reflects an increase of $29.3 million from the $637.4 million
earned in 1994. This category of earnings, net of interest expense on short-term
investment borrowings, was $699.0 million for 1996 compared to $657.5 million
and $630.1 million for 1995 and 1994, respectively. The increase in net
investment income for 1996 is partially attributable to an increase in the
amount of invested assets, an increase in income resulting from a limited
partnership, and from prepayment revenues, which is included in this category of
earnings. Prepayment revenues resulted in $4.5 million of income in 1996
compared to prepayment revenues of $1.9 million and $3.1 million in 1995 and
1994, respectively. The amount of
 
                                       25
<PAGE>   28
 
prepayment revenues received by Western varies significantly from period to
period based on both the composition of the portfolio and the level of and
direction of changes in market interest rates. Generally, prepayment revenues
will increase as market interest rates decline and decrease as market interest
rates rise. The increases in investment income also reflect the beneficial
effects of the realized losses recorded in 1994 and 1995, which enabled the
Company to increase the effective yield on the assets sold, as well as
generating tax refunds from the carryback of realized losses against prior
period gains.
 
     The Company's equity share of net income in Conseco Capital Partners II,
L.P. ("CCPII") for 1996 was $7.0 million, compared to $3.8 million for 1995. The
Company committed to its investment in CCPII in third quarter 1994, and did not
report any income from CCPII in 1994. CCPII was dissolved during the third
quarter 1996. The Company has begun to invest in certain partnership investments
that are intended to replace the investment income previously generated by
CCPII. However, the Company anticipates that total partnership investments will
not exceed approximately 1% of total invested assets. Partnership investments
are likely to result in a higher degree of volatility in reported earnings than
is typically the case with fixed income investments, and present a greater risk
of loss, as they generally reflect equity claims on an issuer's capital
structure junior to that of most fixed-income investments.
 
     Net investment income also increased in 1996 from earlier years because
Western was more fully invested. During the second half of 1996, Western began
to pre-invest in anticipation of future net cash flows, as such net cash flows
from operations had increased. The percentage of cash flow that is pre-invested
by Western is based on market conditions and varies from time to time. During
fourth quarter 1996, the average daily amount outstanding reflecting such
advance investments was approximately $116.0 million. The Company earns a
positive spread on such advance investments so long as short-term rates are
lower than the rates earned in such investments. The amount of cash flow that is
pre-invested is not anticipated to exceed approximately 2% of invested assets,
or approximately one month of premium flow.
 
     For 1996, net investment income also benefited from the substantially
larger average balance of investment securities held by Western compared with
1995 and 1994. On an amortized cost basis, the investment portfolio, net of
short-term investment borrowings, was approximately $9.1 billion as of year-end
1996, compared to $8.2 billion and $8.0 billion as of year-end 1995 and year-end
1994, respectively. The average portfolio yield (calculated based on amortized
cost) was 8.2% for each of 1996 and 1995, and 8.1% for 1994. See "Investments",
below, for a discussion of the factors affecting average portfolio yields for
1996, 1995, and 1994.
 
     Net realized investment gains (losses). Net realized investment losses were
$2.3 million in 1996, compared to losses of $126.2 million in 1995 and $49.2
million in 1994. Net of related adjustments to amortization, reserves, related
expenses, and taxes, net realized investment losses were $1.9 million in 1996,
compared to net losses of $62.2 million in 1995 and $20.9 million in 1994. The
level of investment gains and losses in the portfolio is dependent on general
market conditions and market interest rates, as well as the amount of activity
in the portfolio. Western follows an active strategy in the management of its
portfolio, in which decisions to buy, sell, or hold securities are dictated
principally by relative value analysis, rather than the gain (loss) to be
realized on any given trade. Western generally intends to seek to operate its
portfolio on a gain/loss neutral basis. Management elected to incur substantial
realized losses in 1995 and 1994 in order to utilize certain capital loss tax
carrybacks that would otherwise have expired at the end of 1995. Realized losses
incurred in 1995 gave rise to $37.8 million of tax refund received in 1996. This
program was initiated in 1994, and $26.4 million of the cash tax refund received
in March 1995 was attributable to the 1994 losses.
 
     Amortization and change in future policy benefits related to realized gains
and losses. As described in Note 1 to the Consolidated Financial Statements, the
realization of investment gains and losses affects the timing of amortization of
the cost of policies purchased and the timing of amortization of cost of
policies produced. Additionally, the realization of investment gains may also
require that insurance liabilities on certain life insurance products be
increased. As a result of the net realized gains and losses from sales of fixed
maturities, amortization of the cost of policies purchased decreased by $2.3
million in 1994; amortization of cost of policies produced increased by $0.6
million in 1996, decreased by $29.8 million in 1995, and decreased by $16.7
million in 1994. As a result of realized gains in 1994, insurance liabilities on
certain life insurance products increased by $2.2 million in 1994.
 
                                       26
<PAGE>   29
 
     Insurance policy and fee income. Insurance policy and fee income was $92.8
million, $29.1 million, and $27.4 million in 1996, 1995, and 1994, respectively.
This income relates primarily to premiums from products with mortality and
morbidity features such as traditional life insurance and certain SPIAs. It also
includes surrender charge income, primarily from deferred annuities, and fee
income from direct sales operations. The significant increase in this source of
income in 1996 was primarily due to $71.1 million of premium income resulting
from the modified coinsurance agreement entered into with AGLIC in fourth
quarter 1995. The agreement provides for the parties to jointly market SPIA
policies in the structured settlement market. The increase in 1995 from 1994 was
primarily a result of fee income due to a direct sales operation that was
purchased by the Company in the third quarter 1994.
 
     Insurance policy benefits and other liabilities. Total insurance policy
benefits (including changes in future policy benefits), which relate solely to
policies with mortality features, increased $61.8 million in 1996 from 1995, and
increased $3.2 million in 1995 from 1994. The 1996 increase was primarily due to
the modified coinsurance agreement entered into with AGLIC in fourth quarter
1995, which resulted in a recognition of $71.1 million of insurance policy
benefits in 1996. Full-year 1996, 1995, and 1994 reflected favorable mortality
experience of $3.9 million, $0.2 million, and $1.4 million, respectively.
 
     Interest expense on annuities and financial products. Interest expense on
annuities and financial products was $381.7 million in 1996, representing an
increase of $16.8 million, or 5%, from 1995, and increased by $20.7 million, or
6%, in 1995 from 1994. The increase in 1996 reflects an increase in reserves to
$7.3 billion at year-end 1996 from $6.6 billion at year-end 1995, partially
offset by lower crediting rates on insurance liabilities in 1996 compared to
1995. The increase in 1995 reflects an increase in reserves to $6.6 billion at
year-end 1995 from $6.5 billion at year-end 1994 and slightly higher crediting
rates in 1995 compared to 1994. The average rate credited on all insurance
liabilities declined to approximately 6.1% at December 31, 1996, from 6.4% and
6.3% at year-end 1995 and 1994, respectively. Average crediting rates on
annuities may increase if market interest rates rise, or if lower cost policies
lapse, are repriced, or are replaced with policies having higher crediting
rates. Conversely, if rates generally decrease, the average credited rate will
generally tend to decrease over time as well.
 
     Amortization related to operations. Amortization of the cost of policies
produced and purchased, which excludes the effects of realized gains (losses),
increased by $4.5 million in 1996 over 1995, and increased by $17.0 million in
1995 over 1994. The increases in 1996 and 1995 amortization were the result of
increases in the amount of in-force business and changes in assumptions made in
fourth quarter 1995 concerning crediting rates on policyholder balances and
expected lapses of certain out-of-surrender-charge blocks of business. Asset
balances and amortization of costs of policies produced and purchased are
reviewed annually for products governed by SFAS 97 and may be reviewed more
frequently if circumstances dictate. This accounting standard requires that the
asset balances and future amortization be unlocked; i.e., recomputed based on
actual past experience and updated expectations of future experience. This
unlocking may result in both one-time adjustments related to prior amortization
as well as changes to ongoing amortization rates. Amortization for 1995 includes
an unlocking adjustment of $19.7 million, of which $1.6 million was expensed in
the first six months of 1995, due to actual lapses in excess of expected amounts
for that period. The remaining $18.1 million, which was expensed in the fourth
quarter of 1995, was based on the results of Western's annual unlocking study.
Increased amortization in 1995 was partially offset due to an increase in the
guaranty fund liability. Full year unlocking adjustments for 1994 totaled $1.6
million. No unlocking adjustments were made in 1996. While withdrawals for 1996
exceeded expected levels, improvement in spread effectively offset the effects
of higher withdrawals. As a result, the annual unlocking study for 1996 revealed
no need for an unlocking adjustment to 1996 scheduled amortization.
 
     The special fourth-quarter 1995 charge reflected principally adjustments to
amortization resulting from refinements to persistency assumptions for policies
sold from 1990 through 1992, and were based on actual 1995 experience. The
policies sold from 1990 through 1992 were written at comparatively high interest
crediting rates (in the 8% to 9% range), and then experienced substantial
reductions in interest rates credited in subsequent periods. As a result,
management believes that such policies may be more likely to lapse, despite the
unavailability of superior interest rates in the market, than would be the case
with later business, which has experienced, and is expected to continue to
experience, a more level crediting rate history. The special fourth-
 
                                       27
<PAGE>   30
 
quarter 1995 charge also included adjustments related to estimated persistency
for 1995 and beyond. Accordingly, Western does not anticipate the need for any
additional material unlocking adjustments to amortization. However, such
adjustments could become necessary if economic or other factors, such as a
persistent high interest rate environment, were to result in persistency or
spread experience substantially worse than that realized in 1995 and 1996. See
"Risks of Changing Interest Rates", below.
 
     Scheduled amortization in future periods is expected to increase over prior
periods (excluding amortization associated with the special fourth-quarter 1995
adjustment) as a result of new business written in 1996 and 1995 and the
revisions of adjustments that led to the special fourth-quarter 1995 unlocking
adjustment. The amount of amortization for future periods will depend on the
level of sales, withdrawals, and realized gains (losses).
 
     Other operating costs and expenses. Other operating costs and expenses,
excluding a special charge for guaranty fund assessments of $24.5 million taken
in the fourth quarter 1995, decreased $4.0 million in 1996 compared to 1995. The
lower operating costs and expenses for 1996 were due to a decrease in expenses
relating to guaranty fund assessments of $5.1 million (excluding the special
fourth quarter 1995 charge) for 1996 compared to 1995. See "Guaranty Association
Assessments", below. Excluding the special charge for guaranty fund assessments
taken in fourth quarter 1995, other operating costs and expenses increased by
$4.0 million in 1995 over 1994 levels. The increase in 1995 was primarily due to
$2.4 million of operating expenses relating to a direct sales operation
purchased by the Company in third quarter 1994, and $1.6 million associated with
higher post-Reorganization expenses.
 
     Interest expense on notes payable and investment borrowings. Interest
expense of $21.8 million for 1996 was up from $19.9 million in 1995. Interest
expense for 1996 and 1995 consisted of $8.1 million and $8.6 million,
respectively, in interest expense on short-term investment borrowings (primarily
mortgage dollar roll transactions whereby Western seeks to enhance yield by
reinvesting the proceeds at higher rates), $3.0 million and $0.6 million,
respectively, of interest on other short-term borrowings, and $10.7 million of
interest expense relating to the Senior Notes for both years. Interest expense
for 1995 increased $3.0 million from 1994, due principally to the fact that the
Senior Notes were outstanding throughout the entire year in 1995, but for only
46 weeks in 1994. The amount of investment interest expense and other short-term
interest expense may vary substantially from time to time based on the level of
market interest rates and the volume of borrowings.
 
     Income taxes. Income taxes for 1996 were $53.5 million, compared to $1.5
million and $40.8 million in 1995 and 1994, respectively. The significantly
lower level of income taxes for 1995 compared to 1996 and 1994 was primarily
attributable to the Company's 1995 tax loss recovery program. See "Net realized
investment gains (losses)", above. Additionally, increased operating earnings
also contributed to a higher income tax level for 1996 compared to 1995.
 
     The components of income tax included in the consolidated balance sheet are
as follows:
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                1996         1995
                                                              --------     ---------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>          <C>
Deferred income tax liabilities:
  Western's operations......................................     $77.3        $ 51.0
  Unrealized appreciation on invested assets................      21.1          67.4
                                                                 -----        ------
Deferred income tax liabilities.............................     $98.4        $118.4
                                                                 =====        ======
Deferred income tax assets:
Company net operating loss carryforward.....................     $13.4        $  8.9
                                                                 -----        ------
Deferred income tax assets..................................     $13.4        $  8.9
                                                                 =====        ======
</TABLE>
 
     The deferred income tax liability of $98.4 million at December 31, 1996,
was partially the result of the temporary differences between tax and financial
bases of the cost of policies produced, the cost of policies
 
                                       28
<PAGE>   31
 
purchased, and insurance liabilities. Also contributing to the tax liability
were the temporary differences between tax and financial bases related to net
unrealized appreciation of actively managed fixed maturities that are carried at
market value in accordance with the requirements of SFAS 115.
 
     The deferred income tax asset of $13.4 million at December 31, 1996, is
attributable to net operating losses incurred at the holding company level that
cannot be utilized by Western since each is required to file separate federal
income tax returns. Net operating losses at the holding company level totaled
$38.3 million at December 31, 1996, and can be carried forward to offset future
taxable income at the holding company level. If such net operating losses are
not utilized, they will begin expiring in 2009. Management believes that it is
more likely than not that the deferred tax asset of $13.4 million will be
realized against future years' taxable income generated at the holding company
level during the carryforward period.
 
     As of December 31, 1996, the consolidated federal income tax returns for
1993 and short period ending February 15, 1994, in which Western was included
pursuant to a tax sharing agreement, are in the process of being audited.
Management does not anticipate any material adjustment by the Internal Revenue
Service.
 
     Net income. Net income in 1996 was $99.4 million, compared with $7.3
million and $73.3 million for 1995 and 1994, respectively. The increase in net
income in 1996 from 1995 was primarily the result of the termination at the end
of 1995 of the Company's realized tax loss recovery program and increases in
operating revenues. See "Net realized investment gains (losses)", below. In
addition, net income was reduced in 1995 due to the special after-tax charge of
$21.0 million, which resulted from an increase in reserves for future guaranty
fund assessments (see "Guaranty Association Assessments", below) and adjustments
made to the deferred acquisition cost asset (see "Amortization related to
operations", above). The decrease in net income in 1995 from 1994 was also
primarily due to the Company's realized tax loss recovery program in 1995 and
the special after-tax charge of $21.0 million in fourth quarter 1995.
 
INVESTMENTS
 
     Western's investment strategy is to maintain a portfolio consisting largely
of readily-marketable, investment grade fixed maturities, to provide adequate
liquidity through active asset/liability management for expected liability cash
flows and other requirements, and to maximize return through active investment
management. Western's investment strategy places strong emphasis on active
asset/liability management as a principal tool to mitigate variations in
investment spread and disintermediation risk. At December 31, 1996, Western had
total invested assets with a carrying value of approximately $9.4 billion. See
"Item 1. Business -- Investments" and Note 2 to the Consolidated Financial
Statements.
 
     The following table shows Western's investment performance for the three
years ended December 31, 1996:
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                       --------------------------------
                                                         1996        1995        1994
                                                       --------    --------    --------
                                                            (DOLLARS IN MILLIONS)
<S>                                                    <C>         <C>         <C>
Net investment income(1).............................  $  710.1    $  666.7    $  637.4
Average net invested assets, at amortized cost(2)....   8,713.6     8,150.0     7,907.4
Yield on invested assets, at amortized cost..........       8.2%        8.2%        8.1%
</TABLE>
 
---------------
 
(1) Includes equity in earnings of partnership investments.
 
(2) Net of short-term investment borrowings and amounts due to brokers.
 
     The portfolio yield for 1996 and 1995 was approximately 8.2%, and was
approximately 8.1% for 1994. Market interest rates rose by approximately 100
basis points in most maturity ranges during the first half of 1996, then
declined by 25-30 basis points during the second half of the year. Although
market interest rates were generally higher in 1996 than the levels prevailing
in late 1995, changes in market rates affect Western's portfolio yield only
slowly due to the relatively small volume of new investments in any one period
relative to the size of the overall portfolio. In addition, because the
portfolio includes a mix of securities with yields both above and below the
average portfolio yield (as well as both above and below current market rates),
changes
 
                                       29
<PAGE>   32
 
in portfolio yield will not necessarily parallel changes in market rates, except
over longer periods of time. Securities that are sold or otherwise redeemed, or
that are partially prepaid, may be yielding rates above and below the portfolio
yield or current market rates. As part of Western's realized loss/tax recovery
program in 1995, a majority of the portfolio sales transactions were
concentrated in lower yielding issues; therefore, average portfolio yield
remained relatively unchanged in 1995 despite the general decrease in market
interest rates during that year.
 
     The creditworthiness of each issuer whose securities are held in the
portfolio is evaluated periodically by Western and its portfolio managers, with
special attention given to those securities with market values which have
declined or appreciated materially for reasons other than changes in interest
rates or other general market conditions. Available evidence is considered to
evaluate the realizable value of the investment, including specific conditions
of the issuing entity and its ability to comply with the material terms of the
security. Evidence reviewed may include the recent operational results and
financial position of the issuer, information about its industry, recent press
releases and other information. If evidence does not exist to support a
realizable value equal to or greater than the cost basis of the investment, and
such decline in market value is determined to be other than temporary, the
carrying amount would be written down to net realizable value. Any recoveries
would not be recognized, except in the form of realized gains generated upon the
sale, repayment, or other disposition of the investment.
 
     Investments in fixed maturities that are rated below investment grade by
nationally recognized statistical rating organizations (or, if not rated by such
firms, with NAIC Class Designations below 2) were 7.0% of fixed maturities and
6.6% of total invested assets as of December 31, 1996. Western currently plans
to remain in the range of such percentages in the investment of its portfolio in
below investment grade fixed maturities, although such percentages may vary by
several percentage points from time to time. Individual investments in below
investment grade corporate debt securities generally have greater risks than
other individual corporate debt investments. Risk of loss upon default by the
borrower is greater with below investment grade corporate debt securities
because these securities generally are unsecured and often are subordinated to
other creditors of the issuers. Furthermore, because the issuers usually have
high levels of indebtedness, they are more sensitive to adverse economic
conditions, such as recession or increasing interest rates, than are investment
grade issuers. Western is aware of this risk exposure and monitors its below
investment grade securities closely.
 
     At December 31, 1996, Western had no fixed maturities known to be in
default of either a substantive nature (i.e., in default due to nonpayment of
interest or principal) or technical nature (i.e., in default, but not as to the
payment of interest or principal), which includes investments in grace periods
or with waivers. During 1996, Western recorded writedowns of fixed maturities
totaling $1.6 million for credit-related permanent impairments of value,
compared to $6.4 million and $0.4 million in 1995 and 1994, respectively.
 
     If Western determines that changes in conditions dictate that an investment
be disposed of, the security will be sold and any associated gain (loss)
recognized.
 
     See "-- Results of Operations -- Net realized gains (losses)", above, for
further discussions of the impact that such sales of investments and other
related actions may have on future earnings of the Company.
 
  Mortgage Loans
 
     At December 31, 1996, Western had total mortgage loans of $122.7 million,
or 1.3% of total invested assets, consisting of $89.6 million of commercial
mortgages and $33.1 million of mortgage investments in junior and residual
interests of CMOs ("CMO residuals"). Total mortgage loans at year-end 1996
increased by $36.2 million from year-end 1995. This increase reflects Western's
reclassification during the second quarter 1996 of $43.5 million of investments
from the credit-tenant loan category to the mortgage loan category. The
reclassified investments represented credit-tenant loans on which the commercial
credit rating of the tenant, Kmart Corp., was downgraded to below investment
grade status by several rating services. Additionally, approximately 12% of the
collateral underlying Western's CMO residuals were supported by Kmart Corp.
credit at December 31, 1996.
 
                                       30
<PAGE>   33
 
     Approximately 72% of the commercial mortgages were on properties located in
four states -- Florida (24%), Texas (21%), North Carolina (15%) and Indiana
(12%), respectively. No other state comprised greater than 7% of the total
commercial mortgage loan balance.
 
     The CMO residuals are investment instruments that entitle Western to the
excess cash flows arising from the difference between (i) the cash flows
required to make principal and interest payments on the other tranches of the
CMO and (ii) the actual cash flows received on the mortgage loan assets backing
the CMO. If prepayments or credit losses on the underlying mortgage loan assets
vary from projections, the total cash flows to Western could differ from
projections. Changes in projected cash flows that impact the yields of the CMO
residuals are recognized in investment income prospectively. If the carrying
value of CMO residuals exceeds the projected cash flows discounted at a
risk-free rate, the carrying value is adjusted to fair value and a realized loss
is recognized.
 
     During 1996, Western had $0.2 million of realized losses on the disposition
of mortgage loans, compared with none in 1995 or 1994. At December 31, 1996,
Western had no nonperforming mortgage loans.
 
  Credit-Tenant Loans
 
     At December 31, 1996, Western held $208.5 million, or 2.2% of total
invested assets, of credit-tenant loans ("CTLs"), compared to $249.7 million at
year-end 1995. CTLs are mortgage loans for commercial properties which require,
as stipulated by Western's underwriting guidelines, (i) the lease of the
principal tenant to be assigned to Western (including the direct receipt by
Western of the tenant's lease payments) and to produce adequate cash flow to
fund the requirements of the loan and (ii) the principal tenant (or the
guarantor of such tenant's obligations) to have a credit rating of generally at
least "BBB" or its equivalent. The underwriting guidelines take into account
such factors as: the lease terms on the subject property; the borrower's
management ability, including business experience, property management
capabilities and financial soundness; and such economic, demographic or other
factors that may affect the income generated by the property or its value. The
underwriting guidelines also require a loan-to-value ratio of 75% or less.
Because CTLs are principally underwritten on the basis of the creditworthiness
of the tenant rather than on the value of the underlying property, they are
classified as a separate class of securities for financial reporting purposes.
As with commercial mortgage loans, CTLs are additionally secured by liens on the
underlying property.
 
  Partnership Investments
 
     In third-quarter 1994, the Company committed to a $25.0 million investment
in CCPII, a limited partnership that invested in other insurance companies.
CCPII was dissolved during the third quarter 1996. At the time of the
dissolution of CCPII, the funded portion of the Company's $25.0 million
commitment was $4.8 million. CCPII resulted in $7.0 million and $3.8 million of
net investment income for the Company in 1996 and 1995, respectively. The
Company has begun to invest in certain partnership investments that are intended
to replace the investment income previously generated by CCPII. However, the
Company anticipates that total partnership investments will not exceed
approximately 1% of total invested assets. At year-end 1996, the Company's total
commitment to partnership investments was $50.0 million, of which $1.1 million
had been funded. Partnership investments are likely to result in a higher degree
of volatility in reported earnings than is typically the case with fixed income
investments, and present a greater risk of loss, as they generally reflect
equity claims on an issuer's capital structure junior to that of most
fixed-income investments.
 
  Investment Borrowings
 
     Western occasionally enters into mortgage dollar roll and reverse
repurchase transactions (collectively, "dollar rolls") when earnings enhancement
opportunities arise. Dollar rolls are agreements with an outside source, usually
broker/dealers, to sell mortgage-backed securities and then, at a predetermined
date, to buy back "substantially the same securities". Western's investment
guidelines require that the original term of a dollar roll be no longer than
thirty days and that all proceeds of such short-term transactions be invested in
short-term investments. The securities involved must also have been issued,
assumed or guaranteed by the
 
                                       31
<PAGE>   34
 
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), or the Federal Home Loan Mortgage Corporation ("FHLMC").
 
     Western enters into dollar rolls whenever a positive spread can be realized
from the implicit interest cost of the investment borrowings and the
reinvestment of the proceeds in short-term financial instruments. Because both
sides of the transaction are entered into on the basis of short-term money
market rates, dollar rolls involve no duration risk while providing an
enhancement to investment income.
 
     Western's dollar rolls are accounted for as short-term investment
borrowings, with the proceeds included in short-term investments. At December
31, 1996, Western had $134.6 million of short-term investment borrowings
outstanding under dollar rolls. The carrying values of Western's investment
borrowings are assumed to approximate estimated fair value.
 
PRE-INVESTMENT OF FUTURE CASH FLOWS
 
     Net investment income also increased in 1996 from earlier years because
Western was more fully invested. During the second half of 1996, Western began
to pre-invest in anticipation of future net cash flows, as such net cash flows
from operations had increased. The percentage of cash flow that is pre-invested
by Western is based on market conditions and varies from time to time. During
fourth quarter 1996, the average daily amount outstanding reflecting such
advance investments was approximately $116.0 million. The Company earns a
positive spread on such advance investments so long as short-term rates are
lower than the rates earned in such investments. The amount of cash flow that is
pre-invested is not anticipated to exceed approximately 2% of invested assets,
or approximately one month of premium flow.
 
EFFECTS OF CHANGING INTEREST RATES ON INVESTMENTS
 
     Fixed maturities at December 31, 1996, were comprised primarily of debt
securities of the U.S. government, public utilities and other corporations,
asset-backed securities and mortgage-backed securities.
 
     Approximately 94.3% of Western's total invested assets are fixed
maturities, with approximately 96.3% and 3.7% of the fixed maturities being
fixed-rate and floating-rate instruments, respectively. The market values of
fixed-rate securities are highly dependent on the external interest rate
environment. Market values will normally increase when market interest rates
fall, as in 1995, and decrease when market interest rates rise, as in 1996 and
1994. The following table illustrates the effects of changes in market interest
rates on the market value of Western's fixed maturities for the periods
indicated:
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                       --------------------------------
                  FIXED MATURITIES                       1996        1995        1994
                  ----------------                     --------   ----------   --------
                                                            (DOLLARS IN MILLIONS)
<S>                                                    <C>        <C>          <C>
Market value.........................................  $8,842.5     $7,998.8   $7,001.1
Amortized cost.......................................   8,738.4      7,655.6    7,605.9
Market value as a percentage of amortized cost.......     101.2%      104.5%       92.0%
30-year U.S. Treasury Bond -- change in yield between
  year ends (in basis points)........................   69 b.p.    (193 b.p.)  153 b.p.
5-year U.S. Treasury Bond -- change in yield between
  year ends (in basis points)........................   83 b.p.    (246 b.p.)  263 b.p.
</TABLE>
 
     At December 31, 1996, Western's actively managed fixed maturities had net
unrealized gains of $104.1 million, for a carrying value of 101.2% of amortized
cost, compared to net unrealized gains of $342.2 million, for a carrying value
of 104.5% of amortized cost, at December 31, 1995. Estimated fair values for
fixed maturities are based primarily on estimates from nationally recognized
pricing services and broker-dealer market makers. The amount of net unrealized
gains in the portfolio at a given time can dramatically fluctuate due to
changing market interest rates and credit factors. The 3.3% decline in net
unrealized gains, as a percentage of amortized cost, between year-end 1996 and
1995, resulted principally from the moderate increase in market interest rates
in 1996. Western anticipates that the carrying value of the portfolio relative
to
 
                                       32
<PAGE>   35
 
amortized cost will continue to fluctuate, reflecting the effects of market
interest rate changes on the market value of the portfolio.
 
     Western seeks to minimize the effects of changes in the market value of its
portfolio on its reported operating earnings by following an active
asset/liability management philosophy in its portfolio structure which seeks to
match reasonably closely the average duration of the asset portfolio with the
average duration of the liability portfolio. This is implemented through the
active management of both asset and liability components. For example, Western
can initiate securities transactions that will specifically alter the average
asset duration to bring it in line with changes in the estimated liability
duration. The following table illustrates asset and liability durations for the
two years ended:
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                              --------------
                                                              1996      1995
                                                              ----      ----
                                                                (IN YEARS)
<S>                                                           <C>       <C>
Asset duration (1)..........................................  5.3       5.3
Liability modified duration.................................  5.4       5.7
</TABLE>
 
---------------
 
     (1) Excludes short-term investments. Including short-term investments,
         asset duration was approximately 5.2 and 5.1 years in 1996 and 1995,
         respectively. See "Item 1. Business -- Investments".
 
     Because Western earns income on the spread between its earned rate on
assets and its credited rate on liabilities, a reasonably closely matched
duration strategy has enabled Western to maintain consistent spread income in
most market environments, despite wide fluctuations in market interest rates and
the market value of Western's fixed income portfolio. The following table
illustrates this stability over the past two years, showing average invested
asset yield and average credited rate as of the last day of each of the quarters
indicated:
 
<TABLE>
<CAPTION>
                                      Q4/96   Q3/96   Q2/96   Q1/96   Q4/95   Q3/95   Q2/95   Q1/95
                                      -----   -----   -----   -----   -----   -----   -----   -----
<S>                                   <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>
Invested Asset Yield................  8.27%   8.24%   8.22%   8.20%   8.25%   8.32%   8.30%   8.26%
Investment Credited Rate............  6.14    6.16    6.15    6.21    6.34    6.34    6.36    6.29
                                      ----    ----    ----    ----    ----    ----    ----    ----
Investment Spread...................  2.13    2.08    2.07    1.99    1.91    1.98    1.94    1.97
</TABLE>
 
     This spread stability results in part from Western's ability to adjust
crediting rates at least annually on approximately 78% of its annuity
liabilities as of December 31, 1996. However, there are possible market
environment scenarios that could impair the ability of Western to maintain
spreads at historical levels. These would include sustained periods of
exceptionally high interest rates following a rapid upward movement in the yield
curve, particularly in a flat or inverted yield curve scenario (in which case
liability duration would likely shorten relative to estimated asset duration, as
interest rate-driven withdrawal activity increased; thereby placing pressure on
the spread), or sustained periods of very low interest rates (e.g., medium-term
corporate bond rates in the range of 5% or less), in which event, liability
duration would tend to lengthen relative to asset duration, while Western's
ability to reduce crediting rates would be constrained by contractual minimums
(generally, 3% to 4%). However, Western views these scenarios as unlikely in
light of current and anticipated economic conditions.
 
     One measure of the ability of Western to withstand changes in the external
interest rate environment is provided by annual actuarial testing of the
adequacy of statutory reserves in various interest rate scenarios. The two most
extreme of the seven commonly used scenarios involves an assumed 300 basis point
permanent parallel shift in the yield curve both upward and downward. At
December 31, 1996, Western demonstrated its ability to withstand such scenarios
without adding to its existing statutory reserves.
 
     The Company estimates that, based on the composition and structure of its
fixed-maturities portfolio and the yield curve at December 31, 1996, a 100 basis
point upward (downward) parallel shift in the then existing yield curve would
result in an approximate 5% decrease (increase) in the market value of the
fixed-maturities portfolio. Because of the composition and maturity structure of
its portfolio, the market value of Western's
 
                                       33
<PAGE>   36
 
portfolio will tend to be most sensitive to changes in five to ten year maturity
ranges. The following table illustrates the estimated percentage changes in the
carrying value of Western's fixed income securities under different market
interest rate scenarios:
 
<TABLE>
<CAPTION>
                                             INTEREST RATE SHIFTS AS OF DECEMBER 31, 1996
                                            -----------------------------------------------
                                             +300%     +100%       0%      -100%     -300%
                                            -------    ------    ------    ------    ------
<S>                                         <C>        <C>       <C>       <C>       <C>
Total fixed maturities:
  Percent change in carrying value........   (11.09)%  (4.84)%      --      4.98%     15.51%
  Option-adjusted duration................     5.44     5.49      5.38      5.24       5.22
Mortgage-backed securities (excluding
  CMBS):
  Percent change in carrying value........   (12.48)%  (4.24)%      --      4.03%     10.60%
  Option-adjusted duration................     4.50     4.44      4.18      3.67       2.59
Commercial mortgage-backed securities:
  Percent change in carrying value........   (16.17)%  (5.81)%      --      6.28%     20.44%
  Option-adjusted duration................     5.72     5.93      6.04      6.15       6.36
Corporate securities with call
  features(1):
  Percent change in carrying value........   (16.32)%  (5.53)%      --      5.44%     16.89%
  Option-adjusted duration................     6.15     5.87      5.48      5.17       5.24
</TABLE>
 
---------------
 
(1) Call features include call, sink and put redemption options and conversion
    options.
 
     The interest rate scenario model assumes a parallel shift in the yield
curve for all maturity ranges and fixed income asset classes alone, without
consideration of changes in market interest rates due to credit quality or
credit spread issues. Because different securities are more susceptible to
changes in market interest rates in different maturity ranges, non-parallel
shifts in the yield curve could lead to materially different results. However,
changes in the market value of the portfolio do not directly impact operating
earnings, as operating earnings are based principally on the spread between the
book yield based on amortized cost of the assets over the rate paid on
liabilities. The Company seeks to minimize the impact of changing rates on
operating earnings by maintaining a reasonably close match between asset and
liability durations. See prior table above that illustrates asset and liability
durations for the two years ended December 31, 1996 and 1995. In addition, the
ability of the Company to adjust crediting rates annually on over 75% of its
insurance liabilities provides further tools to mitigate the effects of changing
interest rates on the long-term profitability and value of the Company's
franchise.
 
  Mortgage-Backed Securities
 
     Mortgage-backed securities ("MBS") are securitized pools of individual
residential mortgages that are collateralized by the underlying mortgage loans.
MBS are subject to risks associated with variable prepayments, principally due
to both home sales and homeowner refinancings. Refinancings tend to accelerate
in decreasing market rate environments (especially for mortgage rate drops of
100 basis points or more) and, accordingly, an MBS may have significantly
different cash flow patterns than originally anticipated. As a result of this
prepayment variability, the duration of MBS tends to shorten as market interest
rates fall and lengthen as they rise. Because prepayments are based on par,
faster-than-anticipated prepayments will increase (decrease) the effective yield
of an MBS bought at a discount (premium) to par; with slower-than-anticipated
prepayments having the opposite effect. There are two principal types of MBS:
pass-throughs and collateralized mortgage obligations ("CMOs"). (Additionally,
see discussion of commercial MBS below.) The principal distinctions between
pass-throughs and CMOs involve the exposure of each to the prepayment risk
associated with the underlying pools of mortgages and their respective coupon
rate and maturity characteristics.
 
     As the name implies, a pass-through security passes through the monthly
principal and interest payments on the underlying pool of mortgages. An investor
in a pass-through security is exposed to the total prepayment risk associated
with the underlying pool of mortgages. If prepayments are experienced on the
underlying
 
                                       34
<PAGE>   37
 
collateral, they are directly passed on to the pass-through investor on a
pro-rata basis. The total prepayment risk can be divided into two components:
contraction risk and extension risk. Contraction risk is the risk that
prepayments will occur when interest rates have declined, forcing an investor to
reinvest unscheduled cash flows at lower interest rates. Conversely, extension
risk results from the slowdown of prepayments when interest rates have
increased, forcing an investor to realize less cash flows that otherwise could
have been reinvested at higher interest rates. Pass-throughs issued, assumed
and/or guaranteed by the Government National Mortgage Association (the "GNMA"),
the Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC") are known as agency pass-throughs; the non-
agency-backed issues are typically referred to as whole loans or private-labels.
As the name implies, the relevant agency guarantees (at least implicitly)
payment on agency pass-throughs, so there is effectively no credit risk to the
security holder.
 
     A collateralized mortgage obligation ("CMO") is essentially a structured
pass-through security on which the prepayment risk has been divided among
classes of bonds (or tranches) with various coupons and maturity dates. Instead
of distributing monthly cash flow on a pro-rata basis, the distribution of the
principal repayment (both scheduled and unscheduled) is made on a prioritized
basis, so as to redistribute prepayment risk among the various classes in the
CMO structure (i.e., certain tranches, such as PACs and VADMs, offer more cash
flow certainty and prepayment protection than pass-throughs, while others, such
as supports, offer less). CMO structures consist of two major types: the first
type provides for the redirection of principal payments only (e.g., sequentials,
PACs, TACs and supports), while the second type provides for the redirection of
both principal and interest (e.g., VADMs, Z-tranches, IOs and POs). Due to the
multi-class structure of a CMO, a CMO is better able to provide for a wide range
of investors' maturity and coupon requirements than is the case with a regular
pass-through. In addition, in the case of CMOs using non-agency guaranteed
collateral, the CMO structure may disproportionately allocate the risk of
mortgagor payment default among different classes, with losses allocated to
junior or support tranches, thus providing credit support to more senior
tranches. Because defaults are generally treated as prepayments, high
delinquency levels can shorten duration.
 
     Western manages the extent of MBS prepayment risk (and the accompanying
duration risk) by (i) principally purchasing securities with "current" coupon
rates, which are accordingly backed by collateral with lower prepayment
sensitivities (e.g., MBS priced at or near par), (ii) typically avoiding
securities with values heavily influenced by changes in prepayment rates (e.g.,
IOs and POs, or securities with significant premiums or discounts to par), and
(iii) purchasing securities with prepayment protected structures (e.g., PACs,
TACs and VADMs). At December 31, 1996, the aggregate amortized cost of the
aggregate MBS portfolio was at a slight net discount to par of $13.2 million, or
99.4% of aggregate par value.
 
     Commercial mortgage-backed securities ("CMBS") are similar in structure to
MBS (i.e., can either be pass-through securities or CMOs). The major distinction
between CMBS and MBS is that whereas MBS are backed by residential mortgage
loans (e.g., single-family housing), CMBS are collateralized by income-producing
commercial properties such as multi-family properties, shopping centers, hotels
and office buildings. CMBS also differ from MBS in that the structuring process
for them is largely centered on the allocation of credit risk (versus prepayment
risk) because CMBS are typically less exposed to prepayments due to call-
protection features embedded in the underlying commercial mortgages.
 
                                       35
<PAGE>   38
 
     At December 31, 1996, the aggregate carrying value of Western's MBS
portfolio was $2.3 billion, or 24.7% of total invested assets, consisting of
$1.3 billion of agency pass-throughs, $68.9 million of commercial MBS, and
$922.5 million of CMOs. The following table sets forth the carrying value of
Western's MBS portfolio by structural type and underlying collateral coupon
rates as of December 31, 1996:
 
<TABLE>
<CAPTION>
                                                       COLLATERAL COUPON CLASS
                                                      -------------------------
                                                                         9.01%
                                             7% AND    7.01-    8.01-     AND
                 MBS TYPE                    BELOW     8.00%    9.00%    ABOVE     TOTAL
                 --------                    ------   -------   ------   ------   --------
                                                         (DOLLARS IN MILLIONS)
<S>                                          <C>      <C>       <C>      <C>      <C>
Agency pass-throughs.......................  $815.7    $469.9    $29.7    $10.9   $1,326.2
Commercial MBS.............................    38.2      29.5      1.2       --       68.9
CMOs:
  PACs, TACs and VADMs.....................   231.2      45.6      6.1       --      282.9
  Sequentials..............................    48.6     141.5     94.5     53.3      337.9
  Supports and other.......................    10.6       3.3       --       --       13.9
  Mezzanines and subordinates..............    23.3      22.1       --       --       45.4
  Z-tranches...............................      --        --     28.0       --       28.0
  ARMs and floaters........................   (a)       (a)      (a)      (a)        214.4
                                                                                  --------
       Total CMOs..........................                                          922.5
                                                                                  --------
          Total MBS/CMOs...................                                       $2,317.6
                                                                                  ========
</TABLE>
 
---------------
 
     (a) The collateral coupon rates are not meaningful as they reset
         periodically in accordance with changes in market interest rates. See
         "Derivative Financial Instruments", below.
 
  Asset-Backed Securities
 
     Asset-backed securities ("ABS") are securitized pools of assets, such as
manufactured housing loans and credit card receivables, that are collateralized
by the underlying loans. ABS are typically structured similarly to CMOs or MBS
pass-throughs (see "Mortgage-Backed Securities", above) , but are usually
subject to less prepayment risk than MBS due to the generally less
interest-sensitive prepayment rates of the underlying collateral. Senior-tranche
ABS contain credit enhancement features which raise the quality of the ABS above
that of the underlying assets, while junior tranches bear a disproportionate
share of credit risk. At December 31, 1996, the aggregate carrying value of
Western's ABS portfolio was $351.9 million, or 3.8% of total invested assets.
The following table sets forth the carrying value of Western's ABS portfolio by
collateral type as of December 31, 1996:
 
<TABLE>
<CAPTION>
                                              CARRYING VALUE
                                          ----------------------
                                          (DOLLARS IN      AS A
            COLLATERAL TYPE                MILLIONS)         %
            ---------------               -----------      -----
<S>                                       <C>              <C>
Manufactured housing loans..............    $161.0          45.8%
Credit card receivables.................      52.2          14.8
Home equity loans.......................      36.9          10.5
Home improvement loans..................      23.6           6.7
Energy receivables......................      16.7           4.7
Airplane leases.........................      13.5           3.8
Farm equipment leases...................      13.2           3.8
All other...............................      34.8           9.9
                                            ------         -----
          Total asset-backed
            securities..................    $351.9         100.0%
                                            ======         =====
</TABLE>
 
  Corporate Fixed-Income Securities with Early Redemption Featuures
 
     Bond issues, primarily corporates, may have "redemption" features, such as
call or put options, that allow the issuer to prepay its obligations on or after
certain "redemption" dates (collectively, "callable securities").
 
                                       36
<PAGE>   39
 
Accordingly, callable securities, like MBS, are subject to contraction risk.
Because a callable security will likely be exercised in a declining market
interest rate environment, Western assumes for pricing purposes that the call
option will be exercised on the date that will result in the lowest effective
yield. The resulting yield, known as the "yield-to-call" or "yield-to-worst",
may be less than the comparable "yield-to-maturity". At December 31, 1996,
Western owned approximately $598.3 million, or 6.4% of total invested assets, of
callable securities that had yields-to-worst that differed from
yields-to-maturity by more than 50 basis points. Whether or not such securities
will actually be called is normally a function of the cost to the issuer of the
outstanding issue compared to its current new issue funding cost.
 
  Derivative Financial Instruments
 
     Western occasionally uses derivative financial instruments to alter
interest rate exposure arising from mismatches between assets and liabilities.
At December 31, 1996, approximately $324.2 million, or 3.7%, of Western's fixed
maturities were floating-rate instruments. In an effort to reasonably closely
match the average duration of assets and liabilities, Western has entered into
interest rate swap contracts that effectively convert the floating-rate
securities to fixed-rate instruments. Specifically, Western contracted with
counterparties to exchange, at specified intervals, the difference between
fixed-rate and floating-rate interest amounts calculated by reference to an
agreed notional amount. Western has contracted to pay a floating rate and to
receive a fixed rate, with the net difference charged or credited as an
adjustment to investment income. Western's investment guidelines provide that
all swap contracts must be either (i) with parties rated "A" or better by a
nationally recognized statistical rating service, and/or (ii) secured by
collateral approved by Western's Investment Committee.
 
     Western had outstanding interest rate swap agreements with total notional
contract amounts of $330.0 million at December 31, 1996 and 1995, and which
expire at various dates through October 1999. At December 31, 1996 and 1995,
Western's average contractual floating-pay rates approximated 5.7% and 5.9%,
respectively, and fixed-receipt rates approximated 7.3% for both years. Based on
these rates, Western's interest rate swaps had an estimated fair value of a
positive $4.4 million and $12.2 million at year-end 1996 and 1995, respectively.
 
SALES
 
     Sales through financial institutions accounted for approximately two-thirds
of Western's overall sales in 1996. Western sells deferred annuities through
financial institutions and PPGAs. Sales through PPGAs include FPDAs sold as
tax-qualified salary-reduction retirement programs (403(b) annuities) to
teachers and employees of not-for-profit organizations. Western also markets
structured settlement annuities pursuant to a modified coinsurance agreement
with AGLIC. Additionally, Western sells products directly through its affiliate,
IAF. In third quarter 1995, Western launched its first variable annuity product,
which is sold through financial institutions, PPGAs, and direct marketing
operations. Sales of variable annuities in 1996 were not material. See "Item 1.
Business -- Products and Distribution".
 
     Insurance policy income shown on the Consolidated Financial Statements in
accordance with generally accepted accounting principles consists of premiums
received for (i) whole or term life products, (ii) immediate annuity and
structured settlement annuity contracts which have life contingencies and (iii)
insurance contracts with morbidity features. Western does not currently market
any whole or term life products.
 
     For annuity contracts without life contingencies, premiums collected are
not reported as revenues, but rather are reported as deposits to insurance
liabilities. Revenues for products recognized as deposits to insurance
liabilities are recognized over time in the form of investment income and
surrender charges.
 
     Total premiums collected were $1.6 billion, $720.4 million and $751.9
million in the years ended December 31, 1996, 1995, and 1994, respectively.
Sales through financial institutions, Western's primary distribution channel,
were $1.3 billion in 1996, compared to $490.1 million in 1995 and $556.0 million
in 1994. The increase in 1996 over 1995 reflects the success of Western's
proprietary annuity arrangements. Proprietary sales through financial
institutions for 1996 were $890.4 million, compared to $37.1 million for 1995.
At year-
 
                                       37
<PAGE>   40
 
end 1996, Western had established proprietary annuity programs at a number of
financial institutions, the largest of which is First Union. See "Item 1.
Business -- Products and Distribution" for a discussion of the concentration of
Western's sales. Retail sales in 1996 were $447.1 million, compared to $453.0
million for 1995. This decrease is due to the Company's increased focus on its
proprietary marketing program and the conversion of major retail accounts to
proprietary annuity programs. See "Item 1. Business -- Products and
Distribution".
 
     Sales through PPGAs were $147.6 million in 1996, compared to $156.4
million, and $141.8 million in 1995 and 1994, respectively. See "Item
1. Business -- Products and Distribution".
 
     Western emphasizes generating profits through adequate pricing of its
insurance products and maintaining appropriate investment spreads throughout the
life of the policies sold. Western's operating income is primarily a function of
its investment spread, total invested assets and operating expenses.
Accordingly, a change in premiums collected in a single period does not directly
cause income to change, although continued increases or decreases in premiums
may affect the rate of growth of total assets on which investment spread is
earned.
 
REINSURANCE
 
     In conformity with industry practice, Western reinsures a portion of the
business it sells. Under such reinsurance arrangements, Western will be liable
under the reinsured policies in the event the reinsurer is unable to fulfill its
obligations.
 
     In October 1995, Western and American General Life Insurance Company
entered into a modified coinsurance agreement. Under the agreement, American
General Life Insurance Company issues the policies, and 50% of each risk is
reinsured to Western. Under this arrangement, Western reports its pro rata share
of premiums and shares in its pro rata portion of the gain or loss on policies
sold. See, "Business -- Products and Distributions". Additionally, Western is a
party to a stand-by coinsurance agreement with an unaffiliated insurer under
which the insurer has agreed to provide coinsurance for selected Western
policies upon the occurrence of certain contingencies.
 
     Effective October 1, 1995, Western recaptured the remaining $72.8 million
of business previously ceded to Conseco affiliates. This recapture resulted in
no gain or loss to Western but increased invested assets on which investment
spread could be earned. In this transaction, Western received assets with a fair
market value approximately equal to statutory reserves, consisting primarily of
fixed maturities which were recorded at fair value. The crediting rates on these
contracts were consistent with the remaining SPDA contracts of Western which
were not reinsured. The increase in Western's invested assets and insurance
liabilities as a result of the 1995 recapture has had no material effect on
Western's liquidity and capital resources. See "Financial Condition -- Liquidity
for Insurance Operations".
 
FOURTH QUARTER RESULTS
 
     Pre-tax operating earnings in the fourth quarter of 1996 were $44.0
million, compared to $33.5 million in the fourth quarter of 1995, excluding the
fourth quarter 1995 special charge. The $10.5 million increase in the fourth
quarter of 1996 is attributable to increased spread income of $8.8 million,
favorable SPIA mortality of $2.8 million, and a net reduction in general
expenses of $2.2 million related to the guaranty fund assessment, partially
offset by increased scheduled amortization of $3.4 million.
 
     Operating earnings after-tax in the fourth quarter of 1996 were $28.4
million, compared to $23.0 million in 1995, excluding the special charge, and
$2.0 million in 1995 including the special charge. The $5.4 million increase is
a result of increased spread income of $5.7 million, favorable SPIA mortality of
$1.8 million, and a net reduction in general expenses of $1.4 million related to
the guaranty fund assessment, partially offset by increased scheduled
amortization of $2.2 million.
 
     Net income for the fourth quarter of 1996 was $28.4 million, compared to a
net loss in 1995 of $21.2 million. The $49.6 million increase reflects the
impact of the fourth quarter 1995 special charge of
 
                                       38
<PAGE>   41
 
$21.0 million, a realized investment loss of $23.2 million in 1995, and is a
result of an increase of $5.4 million in net operating earnings in 1996 compared
to 1995.
 
     Sales, as measured by net premiums and deposits collected were $466.0
million in the fourth quarter, compared to $218.0 million in the corresponding
1995 quarter. The increase in fourth-quarter 1996 sales compared to the
corresponding 1995 quarter is generally attributable to Western's proprietary
annuity arrangements with certain financial institutions. See "Sales", above,
and "Item 1. Business -- Products and Distribution".
 
     The following table summarizes the financial results for the fourth quarter
of 1996 and 1995:
 
<TABLE>
<CAPTION>
                                                FOURTH QUARTER
                                          --------------------------
                                             1996            1995
                                          ----------      ----------
                                            (DOLLARS IN MILLIONS,
                                          EXCEPT FOR PER SHARE DATA)
<S>                                       <C>             <C>
Revenues:
Insurance policy income.................      $ 33.7          $  7.4
Net investment income...................       186.6           171.0
Net realized gains (losses).............         0.4           (35.3)
                                              ------          ------
          Total revenues................       220.7           143.1
Benefits and expenses:
Insurance policy benefits...............        27.7            25.1
Change in future policy benefits and
  other liabilities.....................        28.5             7.9
Interest expense on annuities and
  financial products....................       100.5            94.2
Interest expense on notes payable.......         2.7             2.7
Interest expense on investment
  borrowings............................         3.3             2.8
Amortization related to operations
  excluding special charge..............        11.6             6.9
Amortization related to realized gains
  (losses)..............................         0.4             0.6
Other operating costs and expenses
  excluding special charge..............         2.0             5.3
                                              ------          ------
          Total benefits and expenses
            excluding special charge....       176.7           145.5
Income (loss) before income taxes and
  special charge........................        44.0            (2.4)
Income tax expense excluding special
  charge................................       (15.6)           (2.2)
                                              ------          ------
          Net income (loss) before
            special charge..............        28.4            (0.2)
          Special after-tax charge......          --           (21.0)
                                              ------          ------
          Net income (loss) after
            special charge..............      $ 28.4          $(21.2)
                                              ======          ======
Earnings per common share and common
  equivalent share:
Weighted average shares.................        70.1            62.7
          Net income (loss).............      $  .41          $(0.34)
                                              ======          ======
</TABLE>
 
FINANCIAL CONDITION
 
  Liquidity for Insurance Operations
 
     Western's business generally provides adequate cash flow from premium
collections and investment income to meet its liquidity. For the year ended
December 31, 1996, statutory net cash flow from operations, premium collections,
plus investment income, less benefits and expenses was $715.2 million. The
liabilities related to insurance policies are primarily long term and generally
are paid from future cash flows. Most assets are invested in bonds and other
securities, most of which are readily marketable. Although there is no present
need or intent to dispose of such investments, Western could liquidate portions
of these investments if the need arose. To increase its return on investments
and improve liquidity, Western may from time to time enter into dollar roll and
reverse repurchase agreements or other short-term borrowings.
 
     Of Western's total insurance liabilities at December 31, 1996, 20% could
not be surrendered, 48% could be surrendered only by incurring a surrender
charge, and 32% could be surrendered without penalty. The extent of charges in
the percentage of interest-sensitive reserves subject to withdrawal without
penalty will
 
                                       39
<PAGE>   42
 
depend on the level of new sales, as well as on the level of policyholder
withdrawals. In general, policy liabilities not subject to a surrender charge
are more likely to be withdrawn by policyholders than are those that remain
subject to such charges. Of those liabilities subject to surrender charge, the
average remaining surrender charge period was approximately 3.2 years and the
surrender charge averaged approximately 4.6% of accumulated policy value at
December 31, 1996.
 
     The following table sets forth the deferred annuity account values, as of
the dates indicated, that went or will go out of the surrender charge period in
each of the years from 1995 through 2000 (dollars in millions):
 
<TABLE>
<CAPTION>
                                                                  ACCOUNT VALUES AS OF DECEMBER 31,
YEAR THAT ACCOUNT VALUES EXIT                                     ---------------------------------
   SURRENDER CHARGE PERIOD                                          1994         1995        1996
-----------------------------                                     ---------    ---------    -------
<S>                           <C>                                 <C>          <C>          <C>
          1995..................................................   $1,087.2     $     --     $   --
          1996..................................................    1,099.3      1,082.3         --
          1997..................................................      712.7        704.5      694.1
          1998..................................................      438.9        440.7      438.4
          1999..................................................      576.4        596.5      598.7
          2000..................................................       13.4        517.1      556.6
</TABLE>
 
     The payment characteristics of Western's insurance liabilities at December
31, 1996 were as follows (dollars in millions):
 
<TABLE>
<S>                                                           <C>
Payments under contracts containing fixed payment dates:
  Due in one year or less...................................  $  170.4
  Due after one year through five years.....................     668.9
  Due after five years through ten years....................     761.0
  Due after ten years.......................................   3,770.6
                                                              --------
          Total gross payments whose payment dates are fixed
           by contract......................................   5,370.9
Less amounts representing future interest on such
  contracts.................................................   3,645.2
                                                              --------
Insurance liabilities whose payment dates are fixed by
  contract..................................................   1,725.7
Insurance liabilities whose payment dates are not fixed by
  contract..................................................   6,954.2
                                                              --------
          Total insurance liabilities.......................  $8,679.9
                                                              ========
</TABLE>
 
     Of the above insurance liabilities under contracts containing fixed payment
dates, approximately 30% related to payments that will be made on such date only
if the contract holder is living. Expected mortality is considered in
determining the amount of this liability. The remainder of the insurance
liabilities with fixed payment dates were payable regardless of the contract
holder's survival.
 
     Approximately 20% of insurance liabilities were established or initially
priced with reference to implicit interest rates ranging from 4% to 11%, fixed
for the life of the contract. The remainder of the liabilities generally were
subject to interest rates that may be reset, subject to minimum guaranteed
rates, at least annually.
 
     Western believes that it has adequate short-term investments and readily
marketable fixed maturities to cover the payments under contracts containing
fixed payment dates plus any likely cash needs for surrenders. At December 31,
1996, Western had fixed maturities and short-term investments, net of investment
borrowings, with a total market value of approximately $8.8 billion, or 95% of
invested assets. Western believes that such investments could be readily sold or
used to facilitate borrowings under dollar roll and reverse repurchase
agreements.
 
                                       40
<PAGE>   43
 
     Insurance departments in the states where Western does business require it
to make annual and quarterly filings. These statutory filings require the
establishment of two investment-related reserves, AVR and IMR. The AVR captures
investment gains (losses) related to changes in creditworthiness and is
increased or decreased at each reporting date based on a formula related to the
quality and loss experience of Western's investment portfolio. The IMR captures
all realized investment gains (losses) resulting from changes in interest rates
and provides for subsequent amortization of such amounts into statutory net
income on a basis reflecting the remaining life of the assets sold. Western
reported the following amounts to regulatory agencies at December 31, 1996 and
1995:
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                1996         1995
                                                              ---------    ---------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>          <C>
Statutory capital and surplus...............................     $572.4       $426.1
AVR.........................................................      109.0         91.1
IMR.........................................................      104.4        105.3
                                                                 ------       ------
          Total(1)..........................................     $785.8       $622.5
                                                                 ======       ======
</TABLE>
 
---------------
 
(1) Statutory accounting practices require that AVR and IMR be appropriated and
    reported as liabilities.
 
     The TDI, the NAIC and several other states evaluate the sufficiency of an
insurer's capital by computing a risk-adjusted capital level that takes into
consideration risks associated with the assets and insurance products of the
insurer. Using the NAIC computations, Western's total adjusted capital was more
than twice the "Company Action Level", as calculated at December 31, 1996, under
the guidelines. See "Item 1. Business -- Regulation".
 
  Holding Company Liquidity and Capital
 
     At December 31, 1996, shareholders' equity, as adjusted for SFAS No. 115,
was $914.8 million, or $13.14 per share, compared to $784.5 million, or $12.59
per share as of December 31, 1995. Shareholders' equity at December 31, 1996,
reflects the issuance on September 17, 1996, of 7,254,464 shares (the "Preferred
Shares") of Series A Preferred Stock to American General, which resulted in net
proceeds to the Company of approximately $126 million. Reference is made to the
Company's Report on Form 8-K/A, dated September 17, 1996, for a more detailed
discussion of the Series A Preferred Stock and the related transactions with
American General. The Company anticipates that Western's growth potential due to
this infusion of capital will eventually offset the dilutive effects on earnings
per share caused by the issuance. Without taking into account Western's growth
potential due to the capital infusion, but assuming the proceeds are invested at
Western's current portfolio rate, the issuance of the Series A Preferred Stock
would result in a decrease in earnings per share of approximately $0.06
annually.
 
     Shareholders' equity is also affected by net adjustments made in the market
value of the Company's investment portfolio as required under SFAS No. 115. See
Note 2 to the Consolidated Financial Statements. Excluding the effects of SFAS
No. 115, shareholders' equity would have been $875.7 million, or $12.58 per
share, at December 31, 1996, compared with $659.3 million, or $10.58 per share,
at December 31, 1995. In general, SFAS No. 115 requires that actively managed
portfolios of marketable securities be marked to current market value, with the
resulting unrealized gain or loss reported as an adjustment to shareholders'
equity (see Note 2). Because no corresponding adjustment is made to liabilities,
management of the Company is of the view that SFAS No. 115 distorts the true
economic effects of changes in interest rates on the financial condition of
financial services companies, and that resulting equity and book value
determinations are not meaningful indicators of financial strength. Because SFAS
No. 115 causes the Company's reported book value to vary substantially with
changes in market interest rates, the Company expects its shareholders' equity
to vary widely over time, increasing during periods of declining interest rates
and decreasing during periods of rising interest rates.
 
                                       41
<PAGE>   44
 
     Because Western is governed for insurance regulatory purposes by statutory
accounting principles that do not give effect to the adjustments required by
SFAS No. 115, the application of SFAS No. 115 does not affect Western's
statutory operations or regulatory capital position.
 
     Prior to issuing the Preferred Shares to American General, the Company
explored financing alternatives available in the private and public capital
markets and considered the issuance of securities other than the Preferred
Shares. Although the regulatory capital of Western was not constrained at the
time of the sale of the Preferred Shares and management did not anticipate
imminent capital constraints from growing premium volumes, the Company sought
additional capital in the third quarter 1996 to support 1996 levels of premium
growth and anticipated future asset growth. Additionally, the Company sought to
strengthen its capitalization to enhance prospects for favorable rating agency
action. See "Item 1. Business -- Competition, Ratings and Other Factors
Affecting Business". The Company concluded that these objectives could best be
achieved through the issuance of parent company equity, and that a private
transaction with American General offered advantages in terms of transaction
timing and certainty. The Company contributed the net proceeds from the sale of
the Preferred Shares to Western. With the capital infusion from the Preferred
Shares and the other financial alternatives available to the Company, including
the credit agreement with First Union described below, management believes that
its capital resources are more than sufficient to support anticipated premium
and asset growth, as well as to continue to make common stock dividend payments
and to meet its debt service obligations, for the next several years at least.
 
     Dividend payments by Western are subject to statutory limitations and in
certain cases to the approval of the insurance regulatory authorities. The
maximum dividend payment that Western may make without prior approval in 1997 is
$57.0 million. Western did not pay a dividend to the Company in 1996.
 
     In June 1995, the Company entered into a five-year credit agreement with
First Union National Bank of North Carolina, Texas Commerce Bank National
Association, and certain other financial institutions (collectively referred to
as the "Lenders"). Under that agreement, the Lenders had agreed to extend credit
to the Company on a revolving basis, upon the Company's request, in an aggregate
principal amount up to $100.0 million. On February 20, 1997, the Company and the
Lenders replaced the $100.0 million credit agreement with a new five-year
agreement that (i) provides for an aggregate principal amount of
$150.0 million and (ii) allows the Company to request bid loans, in addition to
committed loans based on either LIBOR plus a margin or First Union's prime rate.
The credit agreement contains certain provisions that require the Company and
its material subsidiaries to maintain specified levels of financial solvency
during the term of the agreement. At December 31, 1996, the Company had $50.0
million outstanding under the revolving line of credit.
 
  Inflation
 
     Inflation has not had a significant impact on Western's operations in
recent years.
 
  Changes In Accounting Principles
 
     In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). SFAS 123 establishes fair value based accounting and
reporting standards for all transactions in which a company acquires goods or
services by issuing equity investments, including stock-based compensation
plans. Under SFAS 123, compensation cost is measured at the grant date based on
the value of the award and is recognized over the service period, which is
usually the vesting period. The fair value of stock options is determined using
an option-pricing model. This statement encourages, but does not require,
companies to adopt the fair value based method of accounting to recognize
compensation expense for employee stock compensation plans. However, it does
require a company to comply with the disclosure requirements set forth in the
statement. For 1996, the Company utilized the accounting in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
made pro forma disclosures for 1996 and 1995 of net income as if the fair value
based method of accounting defined in SFAS 123 had been applied.
 
                                       42
<PAGE>   45
 
     In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities ("SFAS 125"). SFAS 125 establishes, among other
things, new criteria for determining whether a transfer of financial assets in
exchange for cash or other consideration should be accounted for as a sale or as
a pledge of collateral in a secured borrowing. SFAS 125 also establishes new
accounting requirements for pledged collateral. As issued, SFAS 125 is effective
for all transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. In December 1996, the FASB issued
Statement of Financial Accounting Standards No. 127, Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125 ("SFAS 127"). SFAS 127
defers for one year the effective date of the requirements of SFAS 125 for
repurchase agreements, dollar-rolls, the lending of securities, and similar
transactions. The Company does not anticipate that adoption of SFAS 125 will
have a material impact.
 
  Federal Income Taxes
 
     Western is taxed as a life insurance company as provided in the Code. The
Revenue Reconciliation Act of 1990 amended the Code to require a portion of the
expenses incurred in selling insurance products to be deducted over a period of
years, as opposed to deducted immediately in the year incurred. Since the change
only affects the timing of the deduction, it does not affect tax expense as
shown on Western's financial statements prepared in accordance with GAAP.
However, the change will increase the tax for statutory accounting purposes,
which will reduce statutory surplus and, accordingly, decrease the maximum
amount of cash dividends that may be paid by Western in certain conditions. See
"Item 1. Business -- Federal Income Taxation".
 
     Pursuant to the Code, Western will not be eligible to be included in the
Company's consolidated tax return until the 1999 tax year. This inability to
file a consolidated tax return may result in higher current tax payments to the
extent that tax losses at the Company level cannot be used currently to offset
taxable income at the Western level.
 
  Guaranty Association Assessments
 
     Western may be required under the solvency or guaranty laws of most states
in which it does business to pay assessments (up to certain prescribed limits)
to fund policyholder losses or liabilities of insurance companies that become
insolvent. Each year Western re-evaluates the sufficiency of its reserves for
guaranty fund assessments. Western's evaluation is primarily based on the annual
review conducted by the National Organization of Life and Health Insurance
Guaranty Associations and distributed each December to all life insurance
companies. Western estimates its total exposure to guaranty fund assessments for
currently known insolvencies, net of discounts and premium tax credits, to be
$43.2 million, of which Western had already paid $21.1 million as of December
31, 1996, leaving it with a net total estimated liability of $22.1 million which
was fully provided for at such date. Western increased its reserves by $24.5
million in fourth quarter 1995 due principally to the failures of Executive
Life, Guarantee Security Life, Corporate Life, Confederation Life, and National
Heritage Life. Accordingly, Western believes that the reserve at December 31,
1996, of
$22.1 million, is adequate for all known insolvencies, and does not anticipate
the need for any material additions to this reserve, absent any new major life
insurance company insolvency. Western incurred no net expenses relating to
reserves for guaranty fund assessments in 1996, compared to $27.6 million and
$5.7 million in 1995 and 1994, respectively.
 
OTHER INFORMATION
 
     With respect to statements herein that may be construed as predictive of
future performance, readers should be aware that performance may differ from
that currently anticipated. Such differences may be either positive or negative
and may be significant. Differences may arise from, among other things, changes
in the economic, legal, and competitive environment in which the Company
operates.
 
                                       43
<PAGE>   46
 
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Management........................................    45
Report of Independent Accountants...........................    46
Consolidated Balance Sheet as of December 31, 1996 and
  1995......................................................    47
Consolidated Statement of Operations for the years ended
  December 31, 1996, 1995 and 1994..........................    48
Consolidated Statement of Shareholders' Equity for the years
  ended December 31, 1996, 1995 and 1994....................    49
Consolidated Statement of Cash Flows for the years ended
  December 31, 1996, 1995 and 1994..........................    50
Notes to Consolidated Financial Statements..................    51
Report of Independent Accountants on Financial Statement
  Schedules.................................................    76
Financial Statement Schedules:
  Schedule I -- Condensed Financial Information of
     Registrant as of December 31, 1996 and 1995 and for the
     years ended December 31, 1996, 1995 and 1994...........    77
  Schedule VI -- Reinsurance for the years ended December
     31, 1996, 1995 and 1994................................    82
</TABLE>
 
                                       44
<PAGE>   47
 
                              REPORT OF MANAGEMENT
 
To Our Shareholders:
 
     Management of Western National Corporation and its subsidiaries is
responsible for the reliability of the financial information in this annual
report. The consolidated financial statements are prepared in accordance with
generally accepted accounting principles and the other financial information in
this annual report, except where otherwise noted, is consistent with that of the
consolidated financial statements.
 
     The integrity of the financial information relies in large part on
maintaining a system of internal control that is established by management to
provide reasonable assurance that assets are safeguarded and transactions are
properly authorized, recorded and reported. Reasonable assurance is based upon
the premise that the cost of controls should not exceed the benefits derived
from them.
 
     Certain financial information presented depends upon management's estimates
and judgments regarding the ultimate outcome of transactions which are not yet
complete. Management believes these estimates and judgments are fair and
reasonable in view of present conditions and available information.
 
     The Company engages independent accountants to audit its consolidated
financial statements and express their opinion thereon. They have full access to
each member of management in conducting their audits. Such audits are conducted
in accordance with generally accepted auditing standards and include a review of
internal controls, tests of the accounting records, and such other auditing
procedures as they consider necessary to express an opinion on the Company's
consolidated financial statements.
 
     The Audit Committee of the Board of Directors, composed solely of
non-management directors, meets periodically with management and the independent
accountants to review internal accounting controls, audit activities and
financial reporting matters. The independent accountants have full and free
access to the Audit Committee.
 
<TABLE>
<S>                                                    <C>
                  Michael J. Poulos                                     Arthur R. McGimsey
               Chairman of the Board,                              Executive Vice President and
                    President and                                     Chief Financial Officer
               Chief Executive Officer
</TABLE>
 
                                       45
<PAGE>   48
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Shareholders
of Western National Corporation:
 
     We have audited the accompanying consolidated balance sheet of Western
National Corporation and its subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Western National Corporation and its subsidiaries as of December 31, 1996 and
1995, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
 
                                            COOPERS & LYBRAND L.L.P.
 
Houston, Texas
February 5, 1997
 
                                       46
<PAGE>   49
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
                           CONSOLIDATED BALANCE SHEET
                           DECEMBER 31, 1996 AND 1995
                             (DOLLARS IN MILLIONS)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                1996         1995
                                                              ---------    --------
<S>                                                           <C>          <C>
Investments:
  Fixed maturities -- actively managed at fair value
     (amortized cost: 1996 -- $8,738.4; 1995 -- $7,654.5)...  $ 8,842.5    $7,996.7
  Fixed maturities -- held to maturity at amortized cost
     (fair value: 1995 -- $2.1).............................         --         1.1
  Equity securities at fair value (cost: 1995 -- $0.8)......         --         0.8
  Mortgage loans............................................      122.7        86.5
  Credit-tenant loans.......................................      208.5       249.7
  Policy loans..............................................       66.8        68.3
  Other invested assets.....................................       25.6        24.5
  Short-term investments....................................      110.0       417.6
                                                              ---------    --------
          Total investments.................................    9,376.1     8,845.2
Accrued investment income...................................      156.6       131.7
Funds held by reinsurer and reinsurance receivables.........       98.0         1.8
Cost of policies purchased..................................       50.4        35.8
Cost of policies produced...................................      380.2       228.7
Deferred income taxes.......................................       13.4         8.9
Other assets................................................       20.8        60.1
                                                              ---------    --------
          Total assets......................................  $10,095.5    $9,312.2
                                                              =========    ========
 
                       LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
  Insurance liabilities.....................................  $ 8,679.9    $7,915.8
  Notes payable.............................................      148.0       147.8
  Investment borrowings and due to brokers..................      156.3       257.3
  Deferred income taxes.....................................       98.4       118.4
  Other liabilities.........................................       98.1        88.4
                                                              ---------    --------
          Total liabilities.................................    9,180.7     8,527.7
Shareholders' equity:
  Preferred stock (par value $.001 per share; 50,000,000
     shares authorized; issued and outstanding:
     1996 -- 7,254,464; 1995 -- 0)..........................         --          --
  Common stock and additional paid-in capital (par value
     $.001 per share; 500,000,000 shares authorized; issued
     and outstanding: 1996 -- 62,441,423;
     1995 -- 62,348,000)....................................      473.1       345.7
  Unrealized appreciation of investments, net...............       39.1       125.2
  Retained earnings.........................................      402.6       313.6
                                                              ---------    --------
          Total shareholders' equity........................      914.8       784.5
                                                              ---------    --------
          Total liabilities and shareholders' equity........  $10,095.5    $9,312.2
                                                              =========    ========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       47
<PAGE>   50
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
                      CONSOLIDATED STATEMENT OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                  (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                               1996     1995      1994
                                                              ------   -------   ------
<S>                                                           <C>      <C>       <C>
Revenues:
  Insurance policy income...................................  $ 92.8   $  29.1   $ 27.4
  Net investment income.....................................   703.1     662.9    637.4
  Equity in earnings of partnership investments.............     7.0       3.8       --
  Net trading income........................................      --        --      3.7
  Net realized gains (losses)...............................    (2.3)   (126.2)   (52.9)
                                                              ------   -------   ------
          Total revenues....................................   800.6     569.6    615.6
                                                              ------   -------   ------
Benefits and expenses:
  Insurance policy benefits.................................   109.6     108.3    104.7
  Change in future policy benefits and other liabilities....    74.6      14.1     14.5
  Interest expense on annuities and financial products......   381.7     364.9    344.2
  Interest expense on notes payable.........................    10.7      10.7      9.6
  Interest expense on investment and short-term
     borrowings.............................................    11.1       9.2      7.3
  Amortization related to operations........................    41.6      37.1     20.1
  Amortization and change in future policy benefits related
     to realized gains (losses).............................     0.6     (29.8)   (16.8)
  Other operating costs and expenses........................    17.8      46.3     17.9
                                                              ------   -------   ------
          Total benefits and expenses.......................   647.7     560.8    501.5
                                                              ------   -------   ------
          Income before income taxes........................   152.9       8.8    114.1
Income tax expense..........................................    53.5       1.5     40.8
                                                              ------   -------   ------
          Net income........................................  $ 99.4   $   7.3   $ 73.3
                                                              ======   =======   ======
Earnings per common share and common equivalent share:
  Weighted average shares...................................    64.9      62.5     62.1
  Net income................................................  $ 1.53   $  0.12   $ 1.18
                                                              ======   =======   ======
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       48
<PAGE>   51
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                             (DOLLARS IN MILLIONS)
 
<TABLE>
<CAPTION>
                                           1996     1995      1994
                                          ------   -------   -------
<S>                                       <C>      <C>       <C>
Preferred stock:
  Issuance of 7,254,464 shares of
     preferred stock ($.001 per share
     liquidation preference)............  $   --   $    --   $    --
                                          ------   -------   -------
  Balance, end of year..................      --        --        --
                                          ------   -------   -------
Common stock and additional paid-in
  capital:
Balance, beginning of year (as restated
  at December 31, 1995).................   345.7     345.2     322.6
  Issuance of 2,300,000 shares of common
     stock..............................      --        --      23.7
  Proceeds from issuance of 7,254,464
     shares of preferred stock in excess
     of liquidation preference..........   125.9        --        --
  Issuance of shares of common stock
     related to restricted stock awards
     and options, and 401(k) matching
     (1996 -- 93,423 shares and 1995 --
     48,000 shares).....................     1.5       0.5        --
                                          ------   -------   -------
Balance, December 31, 1994, as
  previously reported...................                       346.3
  Reclassification of note receivable
     from officer for purchase of common
     stock..............................                        (1.1)
                                          ------   -------   -------
Balance, end of year (as restated at
  December 31, 1995 and 1994)...........   473.1     345.7     345.2
                                          ------   -------   -------
Unrealized appreciation (depreciation)
  of investments, net:
  Balance, beginning of year............   125.2    (322.1)     37.8
     Change in unrealized appreciation
       (depreciation), net..............   (86.1)    447.3    (359.9)
                                          ------   -------   -------
  Balance, end of year..................    39.1     125.2    (322.1)
                                          ------   -------   -------
Retained earnings:
  Balance, beginning of year............   313.6     316.3     400.5
     Net income.........................    99.4       7.3      73.3
     Dividends on common stock held by
       the former parent prior to the
       initial public offering..........      --        --    (150.0)
     Dividends on common stock
       subsequent to the initial public
       offering ($.16, $.16 and $.12 per
       share in 1996, 1995, and 1994,
       respectively)....................   (10.0)    (10.0)     (7.5)
     Dividends on preferred stock.......    (0.4)       --        --
                                          ------   -------   -------
  Balance, end of year..................   402.6     313.6     316.3
                                          ------   -------   -------
          Total shareholders' equity....  $914.8   $ 784.5   $ 339.4
                                          ======   =======   =======
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       49
<PAGE>   52
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                             (DOLLARS IN MILLIONS)
 
<TABLE>
<CAPTION>
                                            1996         1995         1994
                                          ---------    ---------    ---------
<S>                                       <C>          <C>          <C>
Cash flows from operating activities:
  Net income............................  $    99.4    $     7.3    $    73.3
  Adjustments to reconcile net income to
     net cash provided by operating
     activities:
     Amortization and depreciation......       43.5          7.8          1.1
     Realized (gains) losses on
       investments, net.................       (2.5)       119.4         47.1
     Income taxes.......................       80.0          9.6         22.5
     Increase in insurance
       liabilities......................        8.2        116.0         22.3
     Interest credited to insurance
       liabilities......................      391.8        370.2        348.7
     Fees charged to insurance
       liabilities......................       (4.4)        (4.2)        (4.7)
     Amortization (accrual) of
       investment income, net...........      (27.3)         3.6        (14.3)
     Deferral of cost of policies
       produced.........................     (120.7)       (62.2)       (57.4)
     Change in trading account
       securities.......................         --           --         60.8
     Other..............................      (16.9)         9.2         11.7
                                          ---------    ---------    ---------
     Net cash provided by operating
       activities.......................      451.1        576.7        511.1
                                          ---------    ---------    ---------
Cash flows from investing activities:
  Sales of investments..................    3,086.8      3,151.8      3,482.8
  Maturities and redemptions of
     investments........................      431.0        376.3        441.6
  Purchases of investments..............   (4,570.4)    (3,682.7)    (4,572.2)
  Acquisitions of subsidiaries..........         --           --         (0.3)
  Other.................................         --           --         (1.1)
                                          ---------    ---------    ---------
     Net cash used in investing
       activities.......................   (1,052.6)      (154.6)      (649.2)
                                          ---------    ---------    ---------
Cash flows from financing activities:
  Deposits to insurance liabilities.....    1,711.3        747.2        728.8
  Withdrawals from insurance
     liabilities........................   (1,402.7)    (1,052.5)      (662.2)
  Proceeds from preferred stock
     issuance, net......................      125.9           --           --
  Proceeds from common stock issuance,
     net................................         --           --         23.7
  Dividends on preferred stock..........       (0.4)          --           --
  Dividends on common stock.............      (10.0)       (10.0)      (157.5)
  Proceeds from issuance of Senior
     Notes, net.........................         --           --        147.5
  Proceeds from line of credit..........       30.1         65.1           --
  Payments on line of credit............      (37.7)        (7.5)          --
  Other.................................         --         (1.4)          --
  Investment borrowings, net............     (122.6)       226.6       (189.9)
                                          ---------    ---------    ---------
     Net cash provided by (used in)
       financing activities.............      293.9        (32.5)      (109.6)
                                          ---------    ---------    ---------
     Net increase (decrease) in
       short-term investments...........     (307.6)       389.6       (247.7)
Short-term investments -- beginning of
  year..................................      417.6         28.0        275.7
                                          ---------    ---------    ---------
Short-term investments -- end of year...  $   110.0    $   417.6    $    28.0
                                          =========    =========    =========
Supplemental cash flow disclosure:
  Income taxes (refunded) paid, net.....  $   (25.4)   $    (4.7)   $    17.9
                                          =========    =========    =========
  Interest paid on notes payable and
     short-term and investment
     borrowings.........................  $    22.2    $    19.3    $    13.3
                                          =========    =========    =========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       50
<PAGE>   53
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. SIGNIFICANT ACCOUNTING POLICIES:
 
ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF PRESENTATION
 
     Western National Corporation (the "Company") is a Delaware corporation
organized in October 1993 to serve as the holding company for Western National
Life Insurance Company ("Western"), a Texas life insurance company founded in
1944. Unless the context otherwise requires, references to the "Company" are
references to Western National Corporation and its consolidated subsidiaries. In
a series of transactions consummated on February 15, 1994 (the
"Reorganization"), the Company acquired all of the outstanding capital stock of
Western from Conseco, Inc. ("Conseco") and issued to a Conseco subsidiary 60
million shares of common stock of the Company and a note in the amount of $150
million (the "Conseco Note"). Conseco thereupon sold approximately 35 million
shares of common stock of the Company in a public offering, and the Company sold
an additional 2.3 million shares of common stock in the same offering. On
February 22, 1994, the Company issued $150 million 7 1/8% Senior Notes due 2004
("the Senior Notes"), and repaid the Conseco Note. (The issuance and repayment
of the Conseco Note were treated as a dividend in the accompanying consolidated
financial statements.) Western was a subsidiary of Conseco between its
acquisition in 1987 and the consummation of the Reorganization.
 
     On December 23, 1994, AGC Life Insurance Company ("AGC Life"), a
Missouri-domiciled life insurer, purchased the remaining shares of common stock
held by Conseco. These shares represented approximately 40% of the Company's
outstanding common stock. AGC Life is a wholly-owned subsidiary of American
General Corporation, a Texas corporation ("AGC"). References to "American
General" are references to AGC and its direct and indirect majority controlled
subsidiaries. As of December 31, 1996, American General owned approximately a
46.2% equity interest in the Company. The increase in American General's equity
interest was the result of the Company issuing preferred stock to American
General in September 1996. See Note 8 for a description of the transaction
involving the preferred stock.
 
     Western develops, markets and issues annuity products through niche
distribution channels. Western sells deferred annuities, including its
proprietary fixed annuities, to the savings and retirement markets through
financial institutions (principally banks and thrifts), and sells deferred
annuities to both the tax-qualified and nonqualified retirement markets through
personal producing general agents ("PPGAs"). Western also sells deferred
annuities through its direct sales operations. Under a joint marketing
arrangement with American General Life Insurance Company ("AGLIC"), Western
markets and coinsures single premium immediate annuities ("SPIAs") through
specialty brokers to the structured settlement market. Western also sells SPIAs
(other than structured settlement SPIAs) through its financial institution and
PPGA distribution channels. Western commenced sales of its first variable
annuity product in fourth quarter 1995. Sales of deferred annuities through
financial institutions comprised 82%, 68%, and 74% of net premiums collected in
1996, 1995, and 1994, respectively. Sales through a single financial institution
comprised 45% of net premiums collected in 1996.
 
     The accompanying consolidated financial statements include Western National
Corporation and its subsidiaries. Intercompany balances and transactions have
been eliminated. The consolidated statements of operations, changes in
shareholders' equity and cash flows for the periods prior to the Reorganization
are presented as if Western had been a part of the Company. As such, results of
operations and cash flows of the Company and Western have been combined at
historical values. Certain consolidated financial statement items have been
reclassified to conform to the current year's presentation.
 
OVERALL EFFECT OF ESTIMATES
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the
 
                                       51
<PAGE>   54
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
 
INVESTMENTS
 
     Fixed maturity investments ("fixed maturities") are debt securities that
have original maturities greater than one year and comprise investments such as
U.S. Treasury securities, mortgage-backed securities, asset-backed securities,
corporate bonds and redeemable preferred stocks. Equity securities include
common and non-redeemable preferred stocks. The Company follows the provisions
of Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("SFAS 115"), and, accordingly,
classifies its fixed maturities and equity securities into the following
categories:
 
     - Actively managed fixed maturities and equity securities are securities
       that may be sold prior to maturity due to changes that might occur in
       market interest rates, changes in prepayment risk, the Company's
       management of its income tax position, general liquidity needs, increase
       in loan demand, the need to increase regulatory capital or similar
       factors. Actively managed securities are carried at estimated fair value
       and the net unrealized gains (losses) are recorded as a component of
       shareholders' equity, net of tax and related adjustments described below.
       All of the Company's fixed maturities and equity securities were
       classified as actively managed as of December 31, 1996, compared to all
       but $1.1 million at December 31, 1995.
 
     - Held to maturity securities are those debt securities that the Company
       has the ability and positive intent to hold to maturity, and are carried
       at amortized cost. The Company may dispose of such securities under
       certain unforeseen circumstances, such as issuer credit deterioration or
       changes in regulatory requirements. The Company had no securities
       classified as held to maturity as of December 31, 1996, compared to $1.1
       million at December 31, 1995.
 
     - Trading account securities are fixed maturity and equity securities that
       are bought and held primarily for the purpose of selling them in the near
       term. Trading account securities are carried at estimated fair value and
       the net unrealized gains (losses) are included as a component of net
       trading income. The Company had no trading account activities in 1996 or
       1995.
 
     Changes in interest rates have a direct, inverse impact on the market value
of fixed-income investments. It is reasonably possible that changes in interest
rates will occur in the near term and, as a result of SFAS 115, such changes
will have a material impact on the carrying value of actively managed fixed
maturity and equity securities, with an offsetting effect to shareholders'
equity, net of the related effects on cost of policies purchased and produced
and deferred income taxes.
 
     Anticipated returns, including realized gains and losses, from the
investment of policyholder balances are considered in determining the
amortization of the cost of policies purchased and the cost of policies
produced. When actively managed fixed maturity and equity securities are stated
at fair value, an adjustment is made to the cost of policies purchased and the
cost of policies produced equal to the change in amortization that would have
been recorded if such securities had been sold at their fair value and the
proceeds reinvested at current yields. Furthermore, if future yields expected to
be earned on such securities decline, it may be necessary to increase certain
insurance liabilities. Adjustments to such liabilities are required when their
balances, in addition to future net cash flows including investment income, are
insufficient to cover future benefits and expenses.
 
     Mortgage loans and credit-tenant loans are carried at amortized cost.
Policy loans are carried at their current unpaid principal balance. Fees
received and costs incurred in connection with Western's origination of these
loans are deferred, and are amortized as yield adjustments over their remaining
contractual lives in accordance with SFAS 91. Short-term investments, which
principally include commercial paper, cash and
 
                                       52
<PAGE>   55
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
other financial instruments with original maturities of typically ninety days or
less, are carried at amortized cost.
 
     Discounts and premiums of investment securities to par are amortized as
yield adjustments over the contractual lives of the underlying securities and
callable corporate bonds. Principal prepayments can alter the cash flow pattern
and yield of prepayment-sensitive investments such as mortgage-backed securities
("MBS"). The accretion of discount and amortization of premium takes into
consideration actual and estimated principal prepayments. In the case of MBS,
the Company utilizes estimated prepayment speed information obtained from
published sources or from estimates developed by its investment advisors. The
effects on the yield of a security from changes in principal prepayments are
recognized retrospectively, except for interest only or residual interests in
structured securities that are recognized prospectively. The degree to which a
security is susceptible to yield adjustments is influenced by the difference
between its carrying value and par, the relative sensitivity of the underlying
assets backing the securities to changing interest rates, and the repayment
priority of the securities in the overall securitization structure. Prepayments
may also reduce future yield to the extent that proceeds are reinvested in a
lower rate environment.
 
     Western manages these risks by (i) principally purchasing securities that
are backed by collateral with lower prepayment sensitivity (such as seasoned MBS
priced at or near par value), (ii) avoiding securities with values heavily
influenced by changes in prepayments (such as interest-only and principal-only
securities), and (iii) purchasing securities with prepayment protected
structures.
 
     The specific identification method is used to account for the disposition
of investments. The differences between the sales proceeds and the carrying
values are reported as gains (losses), or in the case of prepayments, as
adjustments to investment income. Declines in values of investments that are
considered other than temporary are recognized as realized losses. Subsequent
recoveries in value are recognized in income only when the investments are sold.
 
     Western occasionally uses derivative financial instruments to alter
interest rate exposure arising from mismatches between assets and liabilities.
Certain of Western's fixed maturities are floating-rate instruments. Western has
entered into interest rate swap contracts that effectively convert the
floating-rate securities to fixed-rate instruments. Specifically, Western
contracts with counterparties to exchange, at specified intervals, the
difference between fixed-rate and floating-rate interest amounts calculated by
reference to an agreed notional amount. Western has contracted to pay a floating
rate and receive a fixed rate, with the net difference charged or credited as an
adjustment to investment income. Interest rate swaps are reported in the
consolidated balance sheet at fair value, since they are hedged against
investments reported at fair value. Gains or losses on early termination of
interest rate swaps are recorded if the related hedged investments are sold. If
the hedged investments are not sold, the gains or losses are deferred and
amortized over the shorter of the remaining original terms of the interest rate
swaps or hedged investments. Western's investment guidelines provide that all
swap contracts must be either (i) with parties rated "A" or better by a
nationally recognized statistical rating service, and/or (ii) secured by
collateral approved by Western's Investment Committee.
 
     Western occasionally enters into mortgage dollar roll and reverse
repurchase transactions (collectively, "dollar rolls") when earnings enhancement
opportunities arise. Dollar rolls are agreements with an outside source, usually
broker/dealers, to sell MBS and then, at a predetermined date, to buy back
"substantially the same securities". Western's investment guidelines require
that the original term of a dollar roll be no longer than thirty days and that
all proceeds of such short-term transactions be invested in short-term
investments. The securities involved must also have been issued, assumed or
guaranteed by the Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA"), or the Federal Home Loan Mortgage
Corporation ("FHLMC").
 
     Western enters into dollar rolls whenever a positive spread can be realized
from the implicit interest cost of the investment borrowings and the
reinvestment of the proceeds in short-term financial instruments.
 
                                       53
<PAGE>   56
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Because both sides of the transaction are entered into on the basis of
short-term, money-market rates, dollar rolls involve no duration risk while
providing an enhancement to investment income. Western's dollar rolls are
accounted for as short-term investment borrowings, with the proceeds included in
short-term investments. The carrying values of Western's investment borrowings
are assumed to approximate estimated fair value.
 
     Other invested assets include investments in limited partnerships. The
Company follows the equity method of accounting for these investments. Limited
partnership investments are likely to result in a higher degree of volatility in
reported earnings than is typically the case with fixed income investments, and
present a greater risk of loss, as they reflect claims on an issuer's capital
structure junior to that of most fixed-income investments.
 
COST OF POLICIES PURCHASED
 
     The cost of policies purchased represents the portion of Conseco's cost of
acquiring Western in 1987 that was attributable to the value of the right to
receive future cash flows from insurance contracts existing at the date of
acquisition. The value of the cost of policies purchased is the actuarially
determined present value of the projected future cash flows from the acquired
policies.
 
     Expected future cash flows used in determining the cost of policies
purchased are based on actuarially determined projections of future premium
collections, mortality, surrenders, benefit payments, operating expenses,
changes in insurance liabilities, investment yields on the assets held to back
such policy liabilities and other factors. These projections take into account
all factors known or expected at the valuation date based on the collective
judgment of the management of the Company. Actual experience on purchased
business may vary from projections due to differences in renewal premiums
collected, investment spread, investment gains (losses), mortality and morbidity
costs and other factors. These variances from original projections, whether
positive or negative, are included in net income as they occur. To the extent
that these variances indicate that future cash flows will differ from those
reflected in the scheduled amortization of the cost of policies purchased,
current and future amortization is adjusted. Therefore, when the Company sells
fixed maturities and recognizes a gain (loss) it also reduces (increases) the
future investment spread because the proceeds from the sale of investments are
reinvested at a lower (higher) earnings rate and amortization is increased
(decreased) to reflect the change in the incidence of cash flows. The discount
rate used to determine such value is the current rate of return the Company
would require to justify the investment.
 
     The cost of policies purchased is amortized (with interest at the same rate
used to determine the discounted value of the asset) based on the incidence of
the expected cash flows. Recoverability of the cost of policies purchased is
evaluated regularly by comparing the current estimate of expected future cash
flows (discounted at the rate of interest that accrues to the policies) to the
unamortized asset balance by line of insurance business. If such current
estimate indicates that the existing insurance liabilities, together with the
present value of future net cash flows from the business, will not be sufficient
to recover the cost of policies purchased, the difference is charged to expense.
Amortization is also adjusted for the current and future years to reflect (i)
the revised estimate of future cash flows and (ii) the revised interest rate
(but not greater than the rate initially used and not lower than the rate of
interest earned on invested assets) at which the discounted present value of
such expected future profits equals the unamortized asset balance. Expected
future cash flows used in determining the amortization pattern and
recoverability of cost of policies purchased is based on historical gross
profits and management's estimates and assumptions regarding future investment
spreads, maintenance expenses, and persistency of the block of business. The
accuracy of the estimates and assumptions is affected by several factors,
including factors outside the control of management such as movements in
interest rates and competition from other investment alternatives. It is
reasonably possible that conditions affecting the estimates and assumptions will
change and that such changes will result in future adjustments to cost of
policies purchased.
 
                                       54
<PAGE>   57
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
COST OF POLICIES PRODUCED
 
     Costs of producing new business (primarily commissions and certain costs of
policy issuance and underwriting), which vary with and are primarily related to
the production of new business, are deferred to the extent recoverable from
future profits. Such costs are amortized with interest as follows:
 
     - For universal life-type contracts and investment-type contracts
       (including SPDAs and FPDAs), in relation to the present value of expected
       gross profits from these contracts, discounted using the interest rate
       credited to the policy;
 
     - For immediate annuities with mortality risks, in relation to the present
       value of benefits to be paid;
 
     - For traditional life contracts, in relation to future anticipated premium
       revenue using the same assumptions that are used in calculating the
       insurance liabilities.
 
     Recoverability of the unamortized balance of the cost of policies produced
is evaluated regularly. For universal life-type contracts and investment-type
contracts, the accumulated amortization is adjusted (whether an increase or a
decrease) whenever there is a material change in the estimated gross profits
expected over the life of a block of business in order to maintain a constant
relationship between cumulative amortization and the present value (discounted
at the rate of interest that accrues to the policies) of expected gross profits.
For most other contracts, the unamortized asset balance is reduced by a charge
to income only when the sum of the present value of future cash flows and the
policy liabilities is not sufficient to cover such asset balance. Expected gross
profits used in determining the amortization pattern and recoverability of cost
of policies produced is based on historical gross profits and management's
estimates and assumptions regarding future investment spreads, maintenance
expenses, and persistency of the block of business. The accuracy of the
estimates and assumptions is affected by several factors, including factors
outside the control of management such as movements in interest rates and
competition from other investment alternatives. It is reasonably possible that
conditions affecting the estimates and assumptions will change and that such
changes will result in future adjustments to cost of policies produced.
 
INSURANCE LIABILITIES, RECOGNITION OF INSURANCE POLICY INCOME AND RELATED
BENEFITS AND EXPENSES
 
     Reserves for universal life-type and investment-type contracts are based on
the contract account balance, if future benefit payments in excess of the
account balance are not guaranteed, or on the present value of future benefit
payments when such payments are guaranteed. Additional increases to insurance
liabilities are made if future cash flows, including investment income, are
insufficient to cover future benefits and expenses.
 
     For investment contracts without mortality risk (such as deferred annuities
and immediate annuities with benefits paid for a period certain) and for
contracts that permit the Company or the insured to make changes in the contract
terms (such as single premium whole life and universal life), premium deposits
and benefit payments are recorded as increases or decreases in a liability
account rather than as revenue and expense. Amounts charged against the
liability account for the cost of insurance, policy administration and surrender
penalties are recorded as revenues. Interest credited to the liability account
and benefit payments made in excess of the contract liability account balance
are charged to expense.
 
     Reserves for traditional and limited-payment contracts are generally
calculated using the net level premium method and assumptions as to investment
yields, mortality, withdrawals and dividends. The assumptions are based on
projections of past experience and include provisions for possible adverse
deviation. These assumptions are made at the time the contract is issued or, in
the case of contracts acquired by purchase, at the purchase date.
 
     For traditional insurance contracts, premiums are recognized as income when
due. Benefits and expenses are associated with earned premiums so as to result
in their recognition over the premium-paying period of the
 
                                       55
<PAGE>   58
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
contracts. Such recognition is accomplished through the provision for future
policy benefits and the amortization of deferred policy acquisition costs.
 
     For contracts with mortality risk, but with premiums paid for only a
limited period (such as single premium immediate annuities with benefits paid
for the life of the annuitant), the accounting treatment is similar to
traditional contracts. However, the excess of the gross premium over the net
premium is deferred and recognized in relation to the present value of expected
future benefit payments.
 
     Liabilities for incurred claims are determined using historical experience
and represent an estimate of the present value of the ultimate net cost of all
reported and unreported claims. Management believes these estimates are
adequate. Such estimates are periodically reviewed and any adjustments are
reflected in current operations.
 
INCOME TAXES
 
     Pursuant to a tax sharing agreement, the Company was included in Conseco's
consolidated tax return beginning January 1, 1993. Under the agreement, income
taxes were allocated based upon separate return calculations with certain
adjustments. Commencing with the income tax reporting period ended December 31,
1994, Western National Corporation and its non-life insurance subsidiaries file
a consolidated tax return and Western files a separate life insurance company
tax return.
 
     Deferred income taxes are provided for the future tax effects of temporary
differences between the tax bases of assets and liabilities and their financial
reporting amounts, measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. The Company provides a
valuation allowance, if necessary, to reduce deferred tax assets, if any, to
their estimated realizable value.
 
EARNINGS PER SHARE
 
     Earnings per common share is computed by dividing net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the year and assuming the common shares issued in the
Reorganization in 1994 were outstanding for all of 1994.
 
                                       56
<PAGE>   59
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
2. INVESTMENTS:
 
     The amortized cost, gross unrealized gains and losses, estimated fair value
and carrying value of actively managed and held to maturity fixed maturities
were as follows:
 
<TABLE>
<CAPTION>
                                                                     DECEMBER 31, 1996
                                                 ----------------------------------------------------------
                                                               GROSS        GROSS      ESTIMATED
                                                 AMORTIZED   UNREALIZED   UNREALIZED     FAIR      CARRYING
                                                   COST        GAINS        LOSSES       VALUE      VALUE
                                                 ---------   ----------   ----------   ---------   --------
                                                                   (DOLLARS IN MILLIONS)
<S>                                              <C>         <C>          <C>          <C>         <C>
Actively managed:
  U.S. Treasury securities and obligations of
     U.S. government corporations and
     agencies..................................  $   20.8      $  0.6       $  --      $   21.4    $   21.4
  Obligations of states and political
     subdivisions..............................     224.1         2.6         4.7         222.0       222.0
  Public utility securities....................   1,251.6        21.0        30.4       1,242.2     1,242.2
  Other corporate securities...................   4,583.6       140.0        36.2       4,687.4     4,687.4
  Asset-backed securities......................     349.3         5.2         2.6         351.9       351.9
  Mortgage-backed securities...................   2,309.0        28.4        19.8       2,317.6     2,317.6
                                                 --------      ------       -----      --------    --------
          Total actively managed...............  $8,738.4      $197.8       $93.7      $8,842.5    $8,842.5
                                                 ========      ======       =====      ========    ========
Held to maturity -- obligations of states and
  political subdivisions.......................  $     --      $   --       $  --      $     --    $     --
                                                 ========      ======       =====      ========    ========
</TABLE>
 
<TABLE>
<CAPTION>
                                                                     DECEMBER 31, 1995
                                                 ----------------------------------------------------------
                                                               GROSS        GROSS      ESTIMATED
                                                 AMORTIZED   UNREALIZED   UNREALIZED     FAIR      CARRYING
                                                   COST        GAINS        LOSSES       VALUE      VALUE
                                                 ---------   ----------   ----------   ---------   --------
                                                                   (DOLLARS IN MILLIONS)
<S>                                              <C>         <C>          <C>          <C>         <C>
Actively managed:
  U.S. Treasury securities and obligations of
     U.S. government corporations and
     agencies..................................  $   57.8      $  2.2       $  --      $   60.0    $   60.0
  Obligations of states and political
     subdivisions..............................     169.8         5.7         2.7         172.8       172.8
  Public utility securities....................   1,335.1        51.1        10.2       1,376.0     1,376.0
  Other corporate securities...................   3,519.9       233.0         9.1       3,743.8     3,743.8
  Asset-backed securities......................     280.4         8.9         0.1         289.2       289.2
  Mortgage-backed securities...................   2,291.5        70.3         6.9       2,354.9     2,354.9
                                                 --------      ------       -----      --------    --------
          Total actively managed...............  $7,654.5      $371.2       $29.0      $7,996.7    $7,996.7
                                                 ========      ======       =====      ========    ========
Held to maturity -- obligations of states and
  political subdivisions.......................  $    1.1      $  1.0       $  --      $    2.1    $    1.1
                                                 ========      ======       =====      ========    ========
</TABLE>
 
     The following table sets forth the amortized cost and estimated fair value
of fixed maturities as of December 31, 1996, based upon the source of the
estimated fair value:
 
<TABLE>
<CAPTION>
                                                              (DOLLARS IN MILLIONS)
                                                              AMORTIZED   ESTIMATED
                                                                COST      FAIR VALUE
                                                              ---------   ----------
<S>                                                           <C>         <C>
Nationally recognized pricing services......................  $7,340.4     $7,416.1
Broker-dealer market makers.................................   1,176.4      1,204.8
Internally developed methods................................     221.6        221.6
                                                              --------     --------
          Total fixed maturities............................  $8,738.4     $8,842.5
                                                              ========     ========
</TABLE>
 
                                       57
<PAGE>   60
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following table sets forth the quality of total fixed maturities as of
December 31, 1996, classified in accordance with the highest rating by a
nationally recognized statistical rating organization or, as to $159.1 million
of fixed maturities not commercially rated, based on ratings assigned by the
National Association of Insurance Commissioners ("NAIC") as follows (for
purposes of the table, and only for fixed maturities (at fair value) not
commercially rated: NAIC Class 1 securities are included in the "A" rating;
Class 2, "BBB-"; Class 3, "BB-"; and Classes 4-6, "B" and below):
 
<TABLE>
<CAPTION>
                                                                              FAIR VALUE
                                                                 ------------------------------------
                                                                 AS A % OF    AS A % OF    AS A % OF
                               AMORTIZED   CARRYING     FAIR       FIXED      AMORTIZED      TOTAL
      COMMERCIAL RATING          COST       VALUE      VALUE     MATURITIES     COST      INVESTMENTS
      -----------------        ---------   --------   --------   ----------   ---------   -----------
                                    (DOLLARS IN MILLIONS)
<S>                            <C>         <C>        <C>        <C>          <C>         <C>
AAA..........................  $2,491.6    $2,498.9   $2,498.9      28.3%       100.3%       26.7%
AA...........................     801.0       801.6      801.6       9.1        100.1         8.5
A............................   2,461.4     2,500.4    2,500.4      28.3        101.6        26.7
BBB+.........................     834.1       855.4      855.4       9.7        102.6         9.1
BBB..........................     991.8     1,009.2    1,009.2      11.4        101.8        10.8
BBB-.........................     553.3       558.3      558.3       6.2        100.9         5.9
                               --------    --------   --------     -----        -----        ----
          Total investment
            grade............   8,133.2     8,223.8    8,223.8      93.0        101.1        87.7
                               --------    --------   --------     -----        -----        ----
BB+..........................     138.5       140.9      140.9       1.6        101.7         1.6
BB...........................      75.4        77.5       77.5       0.9        102.8         0.8
BB-..........................     165.2       171.7      171.7       1.9        103.9         1.8
B and below..................     226.1       228.6      228.6       2.6        101.1         2.4
                               --------    --------   --------     -----        -----        ----
          Total below
            investment
            grade............     605.2       618.7      618.7       7.0        102.2         6.6
                               --------    --------   --------     -----        -----        ----
          Total fixed
            maturities.......  $8,738.4    $8,842.5   $8,842.5     100.0%       101.2%       94.3%
                               ========    ========   ========     =====        =====        ====
</TABLE>
 
     The amortized cost and estimated fair value of fixed maturities (all
actively managed) by contractual maturity as of December 31, 1996, were as
follows:
 
<TABLE>
<CAPTION>
                                                              AMORTIZED    ESTIMATED
                                                                COST       FAIR VALUE
                                                              ---------    ----------
                                                               (DOLLARS IN MILLIONS)
<S>                                                           <C>          <C>
Due in one year or less.....................................  $   66.7      $   68.6
Due after one year through five years.......................     619.5         629.8
Due after five years through ten years......................   2,437.9       2,482.6
Due after ten years.........................................   3,305.3       3,343.9
                                                              --------      --------
          Subtotal..........................................   6,429.4       6,524.9
Mortgage-backed securities..................................   2,309.0       2,317.6
                                                              --------      --------
          Total fixed maturities............................  $8,738.4      $8,842.5
                                                              ========      ========
</TABLE>
 
     Actual maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations, with or without call or
prepayment penalties, and because most mortgage-backed securities provide for
periodic payments throughout their lives.
 
                                       58
<PAGE>   61
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Net investment income for the years indicated consisted of the following:
 
<TABLE>
<CAPTION>
                                                             1996      1995      1994
                                                            ------    ------    ------
                                                              (DOLLARS IN MILLIONS)
<S>                                                         <C>       <C>       <C>
Fixed maturities..........................................  $656.8    $610.1    $593.8
Equity securities.........................................     0.8       0.2       0.9
Mortgage loans............................................     9.7       9.4      11.7
Credit-tenant loans.......................................    19.8      23.9      20.9
Policy loans..............................................     4.1       4.4       4.4
Equity in earnings of partnership investments.............     7.0       3.8        --
Other invested assets.....................................     8.3       5.9       2.7
Short-term investments....................................     6.8      13.6      11.9
                                                            ------    ------    ------
          Gross investment income.........................   713.3     671.3     646.3
Investment expenses.......................................    (3.2)     (4.6)     (8.9)
                                                            ------    ------    ------
          Net investment income and equity in earnings of
            partnership investments.......................  $710.1    $666.7    $637.4
                                                            ======    ======    ======
</TABLE>
 
     The Company had no investments on nonaccrual status as of December 31,
1996, compared to $0.6 million and $13.6 million at December 31, 1995 and 1994,
respectively. The Company had no fixed maturities in default as to the payment
of principal or interest at December 31, 1996 and 1995, compared to $13.6
million at December 31, 1994. During 1996, 1995, and 1994, the Company recorded
writedowns of fixed maturities totaling $5.6 million, $6.4 million, and $0.4
million, respectively. Of the $5.6 million in 1996, $1.6 million of the
writedowns were related to value impairments for credit risk.
 
     The proceeds from sales of actively managed fixed maturities were $3.1
billion, $3.2 billion, and $3.5 billion for the years ended December 31, 1996,
1995, and 1994, respectively.
 
     During 1994, the Company transferred trading account securities with
carrying values of $73.3 million to the actively managed fixed maturities
category. The Company suspended trading account activities during 1994.
 
     Net trading income for the year ended December 31, 1994, was as follows
(dollars in millions):
 
<TABLE>
<CAPTION>
                                                                1994
                                                                -----
<S>                                                             <C>
Gross trading gains.........................................    $ 6.2
Gross trading losses........................................     (1.7)
                                                                -----
          Net realized gains from trading account securities
           before expenses..................................      4.5
Trading expenses............................................     (0.8)
                                                                -----
          Net trading income................................    $ 3.7
                                                                =====
</TABLE>
 
                                       59
<PAGE>   62
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Net realized gains (losses) for the years indicated were as follows:
 
<TABLE>
<CAPTION>
                                                             1996     1995      1994
                                                            ------   -------   ------
                                                              (DOLLARS IN MILLIONS)
<S>                                                         <C>      <C>       <C>
Fixed maturities:
  Gross realized gains....................................  $ 34.0   $  17.8   $ 34.4
  Gross realized losses...................................   (25.6)   (128.6)   (80.4)
  Decline in net realizable value that is other than
     temporary............................................    (5.6)     (6.4)    (0.4)
                                                            ------   -------   ------
                                                               2.8    (117.2)   (46.4)
Equity securities.........................................      --       0.8       --
Mortgages loans...........................................    (0.2)       --       --
Other.....................................................      --      (3.0)    (0.7)
                                                            ------   -------   ------
          Net realized gains (losses) before expenses.....     2.6    (119.4)   (47.1)
Investment expenses.......................................    (4.9)     (6.8)    (5.8)
                                                            ------   -------   ------
          Net realized gains (losses).....................  $ (2.3)  $(126.2)  $(52.9)
                                                            ======   =======   ======
</TABLE>
 
     Changes in unrealized appreciation (depreciation) on investments carried at
estimated fair value, net of the effects on other balance sheet accounts, were
as follows:
 
<TABLE>
<CAPTION>
                                                           1996      1995      1994
                                                          -------   -------   -------
                                                             (DOLLARS IN MILLIONS)
<S>                                                       <C>       <C>       <C>
Investments carried at estimated fair value:
  Actively managed fixed maturities.....................  $(238.1)  $ 947.5   $(837.2)
  Equity securities.....................................       --       0.4      (0.4)
  Other.................................................    (10.1)     11.0        --
                                                          -------   -------   -------
     Change in unrealized appreciation (depreciation),
       gross............................................   (248.2)    958.9    (837.6)
Less effect on other balance sheet accounts:
  Cost of policies purchased............................     18.9     (63.7)     44.9
  Cost of policies produced.............................     68.3    (196.7)    215.9
  Insurance liabilities.................................     36.3     (36.3)     36.9
  Other liabilities.....................................     (7.8)     25.8     (13.6)
  Deferred income taxes.................................     46.4    (240.7)    193.6
                                                          -------   -------   -------
     Change in unrealized appreciation (depreciation),
       net..............................................  $ (86.1)  $ 447.3   $(359.9)
                                                          =======   =======   =======
</TABLE>
 
                                       60
<PAGE>   63
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     At December 31, 1996, the aggregate carrying value of Western's MBS
portfolio was $2.3 billion, or 24.7% of total invested assets. The following
table sets forth the carrying value of Western's MBS portfolio by structural
type and underlying collateral coupon class as of December 31, 1996:
 
<TABLE>
<CAPTION>
                                                      COLLATERAL COUPON CLASS
                                             ------------------------------------------
                                                                       9.01%
                                             7% AND   7.01-    8.01-    AND
                 MBS TYPE                    BELOW    8.00%    9.00%   ABOVE    TOTAL
                 --------                    ------   ------   -----   -----   --------
                                                       (DOLLARS IN MILLIONS)
<S>                                          <C>      <C>      <C>     <C>     <C>
Agency pass-throughs.......................  $815.7   $469.9   $29.7   $10.9   $1,326.2
Commercial MBS.............................    38.2     29.5     1.2      --       68.9
CMOs:
  PACs, TACs and VADMs.....................   231.2     45.6     6.1      --      282.9
  Sequentials..............................    48.6    141.5    94.5    53.3      337.9
  Supports and other.......................    10.6      3.3      --      --       13.9
  Mezzanines and subordinates..............    23.3     22.1      --      --       45.4
  Z-tranches...............................      --       --    28.0      --       28.0
  ARMs and floaters........................      (a)      (a)     (a)     (a)     214.4
                                                                               --------
       Total CMOs..........................                                       922.5
                                                                               --------
          Total MBS........................                                    $2,317.6
                                                                               ========
</TABLE>
 
---------------
 
(a) The collateral coupon rates are not meaningful as they reset periodically in
    accordance with changes in market interest rates. In addition, such security
    coupons have been swapped for fixed rate payments.
 
     Asset-backed securities ("ABS") are securitized pools of assets, such as
manufactured housing loans and credit card receivables, that are collateralized
by the underlying loans. ABS are typically structured similarly to CMOs or MBS
pass-throughs, but are usually not subject to as much prepayment risk as MBS.
Senior-tranche ABS contain credit enhancement features that raise the quality of
the ABS above that of the underlying loans. At December 31,1996, the aggregate
carrying value of Western's ABS portfolio was $351.9 million, or 3.8% of total
invested assets. The following table sets forth the carrying value of Western's
ABS portfolio by collateral type as of December 31,1996:
 
<TABLE>
<CAPTION>
                                                                 CARRYING VALUE
                                                              --------------------
                                                              (DOLLARS IN    AS A
                      COLLATERAL TYPE                          MILLIONS)       %
                      ---------------                         -----------    -----
<S>                                                           <C>            <C>
Manufactured housing loans..................................    $161.0        45.8%
Credit card receivables.....................................      52.2        14.8
Home equity loans...........................................      36.9        10.5
Home improvement loans......................................      23.6         6.7
Energy receivables..........................................      16.7         4.7
Airplane leases.............................................      13.5         3.8
Farm equipment leases.......................................      13.2         3.8
All other...................................................      34.8         9.9
                                                                ------       -----
          Total asset-backed securities.....................    $351.9       100.0%
                                                                ======       =====
</TABLE>
 
     At December 31, 1996, Western had total mortgage loans of $122.7 million,
or 1.3% of total invested assets, consisting of $89.6 million of commercial
mortgages and $33.1 million of mortgage investments in junior and residual
interests of CMOs ("CMO residuals"). Total mortgage loans at year-end 1996
increased by $36.2 million from year-end 1995. This increase reflects Western's
reclassification during the second quarter 1996 of $43.5 million of investments
from the credit-tenant loan category to the mortgage loan
 
                                       61
<PAGE>   64
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
category. The reclassified investments represented credit-tenant loans on which
the commercial credit rating of the tenant, Kmart Corp., was downgraded to below
investment grade status by several rating services. Additionally, approximately
12% of the collateral underlying Western's CMO residuals were supported by Kmart
Corp. credit at December 31, 1996. The Company has not incurred any losses as a
result of its investments involving Kmart Corp.
 
     Approximately 72% of the commercial mortgages were on properties located in
four states -- Florida (24%), Texas (21%), North Carolina (15%) and Indiana
(12%), respectively. No other state comprised greater than 7% of the total
commercial mortgage loan balance.
 
     CMO residuals entitle Western to the excess cash flows arising from the
difference between (i) the cash flows required to make principal and interest
payments on the other tranches of the CMO and (ii) the actual cash flows
received on the mortgage loan assets backing the CMO. If prepayments or credit
losses on the underlying mortgage loan assets vary from projections, the total
cash flows to Western could differ from projections. Changes in projected cash
flows which impact the yields of the CMO residuals are recognized in investment
income prospectively. The average yield of the Company's CMO residual was 9.5%
at December 31, 1996. If the carrying value of CMO residuals exceed the
projected cash flows discounted at a risk free rate, the carrying value is
adjusted to fair value and a realized loss is recognized.
 
     During 1996, Western recognized $0.2 million of realized losses on mortgage
loans, compared with none in 1995 and 1994. At December 31, 1996, Western had no
nonperforming mortgage loans.
 
     At December 31, 1996, Western held $208.5 million, or 2.2% of total
invested assets, of credit-tenant loans ("CTLs"), compared to $249.7 million at
year-end 1995. CTLs are mortgage loans for commercial properties which require,
as stipulated by Western's underwriting guidelines, (i) the lease of the
principal tenant to be assigned to Western (including the direct receipt by
Western of the tenant's lease payments) and to produce adequate cash flow to
fund the requirements of the loan and (ii) the principal tenant (or the
guarantor of such tenant's obligations) to have a credit rating of generally at
least "BBB" or its equivalent. The underwriting guidelines take into account
such factors as the lease terms on the subject property; the borrower's
management ability, including business experience, property management
capabilities and financial soundness; and such economic, demographic or other
factors that may affect the income generated by the property or its value. The
underwriting guidelines also require a loan-to-value ratio of 75% or less.
Because CTLs are principally underwritten on the basis of the creditworthiness
of the tenant rather than on the value of the underlying property, they are
classified as a separate class of securities for financial reporting purposes.
As with commercial mortgage loans, CTLs are additionally secured by liens on the
underlying property.
 
     As part of its investment strategy, the Company enters into mortgage dollar
roll and reverse repurchase transactions principally to increase investment
earnings and improve liquidity. These transactions are terminable after thirty
days and are accounted for as short-term investment borrowings, with the
proceeds of such borrowings generally reinvested in short-term financial
instruments. The borrowings are collateralized by mortgage-backed agency
pass-throughs with fair values approximating the underlying loan value. Such
borrowings were $134.6 million and $257.3 million as of December 31, 1996, and
1995, respectively.
 
     The Company had outstanding interest rate swap agreements with total
notional contract amounts of $330.0 million at December 31, 1996 and 1995, and
which expire at various dates through October 1999. At December 31, 1996 and
1995, Western's average contractual floating-pay rates approximated 5.7% and
5.9%, respectively, and fixed-receipt rates approximated 7.3% for both years.
Based on these rates, the Company's interest rate swaps had an estimated fair
value of a positive $4.4 million and $12.2 million at year-end 1996 and 1995,
respectively.
 
                                       62
<PAGE>   65
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Company had no investments in any entity in excess of 10% of
shareholders' equity, or $91.5 million, as of December 31, 1996, excluding
investments issued, assumed or guaranteed by the U.S. government or U.S.
government agencies. The Company's largest twenty non-U.S. government issuer
concentrations were as follows:
 
<TABLE>
<CAPTION>
                                                                               ESTIMATED
                                                                  AMORTIZED      FAIR
                               ISSUER                               COST         VALUE
                               ------                             ---------    ---------
                                                                  (DOLLARS IN MILLIONS)
<S>  <C>                                                          <C>          <C>
 1.  GTE Corporation............................................  $   86.8     $   83.5
 2.  Occidental Petroleum.......................................      75.9         81.0
 3.  Ontario Province...........................................      71.8         68.0
 4.  American Reinsurance.......................................      68.2         67.4
 5.  Telecommunications Inc./TCI International..................      67.0         64.1
 6.  Paine Webber Group.........................................      66.3         68.8
 7.  May Department Stores......................................      64.2         63.9
 8.  Philips Electronics NV.....................................      63.8         64.1
 9.  Salomon, Inc...............................................      62.9         64.8
10.  BankAmerica Corporation....................................      60.5         61.0
11.  News America Holdings......................................      59.1         62.7
12.  Phillips Petroleum.........................................      57.6         64.5
13.  American Airlines/AMR Corporation..........................      55.3         61.5
14.  Northern Indiana Public Service............................      54.9         52.7
15.  McDonnell Douglas..........................................      54.2         58.7
16.  Countrywide Credit.........................................      53.8         54.2
17.  Dayton Hudson..............................................      53.1         53.8
18.  Wal-Mart Stores............................................      52.3         52.8
19.  Lehman Brothers............................................      51.8         53.6
20.  Commonwealth Edison........................................      51.3         51.0
                                                                  --------     --------
                                                                  $1,230.8     $1,252.1
                                                                  ========     ========
</TABLE>
 
3. INSURANCE LIABILITIES:
 
     Insurance liabilities consisted of the following:
 
<TABLE>
<CAPTION>
                                                             INTEREST       DECEMBER 31,
                                  WITHDRAWAL   MORTALITY       RATE      -------------------
                                  ASSUMPTION   ASSUMPTION   ASSUMPTION     1996       1995
                                  ----------   ----------   ----------   --------   --------
                                                                             (DOLLARS IN
                                                                              MILLIONS)
<S>                               <C>          <C>          <C>          <C>        <C>
Future policy benefits:
  Investment contracts..........    N/A         N/A           (d)        $7,274.3   $6,566.5
  Limited-payment contracts.....   None         (b)          4%-11%       1,328.1    1,267.2
  Traditional life insurance
     contracts..................    (a)         (c)           (e)            32.5       32.7
  Universal life-type
     contracts..................    N/A         N/A           N/A            43.5       47.7
  Claims payable and other
     policyholders' funds.......    N/A         N/A           N/A             1.5        1.7
                                                                         --------   --------
          Total insurance
            liabilities.........                                         $8,679.9   $7,915.8
                                                                         ========   ========
</TABLE>
 
---------------
 
(a) Company experience
 
(b) Principally the 1984 United States Population Table.
 
                                       63
<PAGE>   66
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
(c) Principally modifications of the 1965-70 Basic, Select and Ultimate Tables.
 
(d) In 1996 and 1995, approximately 95% of this liability represented account
    balances where future benefits were not guaranteed and 5% represented the
    present value of guaranteed future benefits determined using interest rates
    ranging from 3% to 12%.
 
(e) Various, ranging from 3% to 6% in 1996 and 1995.
 
     Realized gains on fixed maturities during 1994 reduced the expected future
yields on the investment of policyholder balances to the extent that future cash
flows on certain limited-payment contracts were insufficient to cover future
benefits and expenses. Accordingly, an additional estimated insurance liability
of $2.2 million was established by a charge to expense in 1994. No additions to
liabilities were required in 1996 and 1995.
 
4. REINSURANCE:
 
     In the normal course of business, the Company seeks to limit its exposure
to loss on any single policy and to recover a portion of benefits paid by ceding
reinsurance to other insurance enterprises or reinsurers under excess coverage
contracts. The Company has set its retention limit for acceptance of risk on
life insurance policies at various levels up to $0.8 million. To the extent that
reinsuring companies are unable to meet obligations under these agreements, the
Company remains contingently liable. The Company evaluates the financial
condition of its reinsurers to minimize its exposure to significant losses from
reinsurer insolvencies. Assets and liabilities relating to reinsurance contracts
are reported gross of the effects of reinsurance. Reinsurance receivables and
prepaid reinsurance premiums, including amounts related to insurance
liabilities, are reported as assets.
 
     Direct and assumed life insurance in force totaled $561.5 million, $628.6
million and $706.3 million at December 31, 1996, 1995 and 1994, respectively,
and ceded life insurance in force totaled $247.6 million, $286.1 million and
$329.1 million at December 31, 1996, 1995 and 1994, respectively.
 
     The cost of ceded policies containing mortality risks totaled $1.5 million
in 1996, and $1.3 million in 1995 and 1994. These costs were deducted from
insurance premiums. Reinsurance recoveries netted against insurance policy
benefits totaled $1.4 million, $4.5 million and $3.5 million in 1996, 1995 and
1994, respectively.
 
     Effective October 1, 1995, the Company recaptured certain annuity business
with assets approximately equal to insurance liabilities of $72.8 million that
had previously been ceded.
 
     In October 1995, Western and AGLIC entered into a modified coinsurance
agreement. Under the agreement, AGLIC issues the SPIAs, and 50% of each risk is
reinsured to Western. Under this arrangement, Western reports its pro rata share
of premiums and shares in its pro rata portion of the gain or loss on policies
sold. Pursuant to this arrangement in 1996, Western assumed $90.9 million of
premiums. The arrangement resulted in $91.3 million of revenues and expenses for
Western in 1996. As of December 31, 1996, the funds held by reinsurer and the
insurance liabilities resulting from this agreement were $96.6 million.
 
     Since 1994, Western has been a party to a standby reinsurance agreement for
new SPDA sales through selected financial institutions, which becomes effective
only if Western's risk-based capital ratio falls below a prescribed level. No
reinsurance pursuant to this agreement has become effective.
 
                                       64
<PAGE>   67
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
5. NOTES PAYABLE:
 
     Notes payable consisted of the following:
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                1996          1995
                                                              --------      --------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>           <C>
Senior Notes due February 15, 2004, bearing interest at
  7 1/8% per annum, not redeemable prior to maturity, net of
  unamortized discount of $2.0 million in 1996 and $2.2
  million in 1995...........................................    $148.0        $147.8
</TABLE>
 
     Additionally, included in other liabilities is $50.0 million and $57.6
million at December 31, 1996 and 1995, respectively, of outstanding borrowings
under an unsecured credit agreement with a syndicate of banks, which matures in
2000 (the "Credit Agreement"). Under the Credit Agreement, the Company could
borrow on a revolving basis an aggregate principal amount of up to $100.0
million as of December 31, 1996. Subsequent to year end, the borrowing base was
increased to $150.0 million. At December 31, 1996, the interest rate under the
Credit Agreement was either the agent bank's prime rate or LIBOR plus .375%
(5.975% at December 31, 1996). The Credit Agreement contained certain provisions
that required the Company to maintain specified levels of financial solvency
during the term of the agreement, including provisions concerning its
consolidated net worth, adjusted statutory capital and surplus, market
capitalization, A.M. Best rating, and risk based capital levels.
 
6. INCOME TAXES:
 
     The components of income tax included in the consolidated balance sheet are
as follows:
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                               1996          1995
                                                              -------      --------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>          <C>
Deferred income tax liabilities:
  Investments...............................................   $ 21.1       $  20.0
  Cost of policies produced and purchased...................    143.6         118.4
  Unrealized appreciation of investments....................     21.1          67.5
                                                               ------       -------
          Gross deferred income tax liabilities.............    185.8         205.9
Deferred income tax assets:
  Insurance liabilities.....................................     80.6          76.7
  Net operating loss carryforward...........................     13.4           8.9
  Other.....................................................      6.8          10.8
                                                               ------       -------
          Gross deferred income tax assets..................    100.8          96.4
                                                               ------       -------
Net deferred income tax assets (liabilities)................    (85.0)       (109.5)
Income tax receivable (included in other assets)............       --          46.4
Income tax payable (included in other liabilities)..........    (11.7)           --
                                                               ------       -------
                                                               $(96.7)      $ (63.1)
                                                               ======       =======
</TABLE>
 
     Income tax expense was as follows:
 
<TABLE>
<CAPTION>
                                                             1996      1995     1994
                                                             -----    ------    -----
                                                              (DOLLARS IN MILLIONS)
<S>                                                          <C>      <C>       <C>
Current tax provision (benefit)............................  $31.6    $(23.0)   $(5.0)
Deferred tax provision (benefit)...........................   21.9      24.5     45.8
                                                             -----    ------    -----
  Income tax expense.......................................  $53.5    $  1.5    $40.8
                                                             =====    ======    =====
</TABLE>
 
                                       65
<PAGE>   68
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Net operating losses incurred by Western National Corporation cannot be
utilized by Western since each files separate income tax returns. Net operating
loss carryforwards of Western National Corporation were $38.3 million at
December 31, 1996, and will expire beginning in 2009 if not previously utilized.
Management believes that it is more likely than not that the related deferred
tax asset of $13.4 million at December 31, 1996, will be utilized to offset
future taxable income of Western National Corporation during the carryforward
period.
 
     Income tax expense differed from that computed at the applicable federal
statutory rate (35% during 1996, 1995, and 1994) for the following reasons:
 
<TABLE>
<CAPTION>
                                                              1996     1995     1994
                                                              -----    -----    -----
                                                               (DOLLARS IN MILLIONS)
<S>                                                           <C>      <C>      <C>
Federal tax on income before income taxes at statutory
  rates.....................................................  $53.5    $ 3.1    $39.9
State taxes.................................................    0.3      0.5      0.5
Various adjustments.........................................   (0.3)    (2.1)     0.4
                                                              -----    -----    -----
  Income tax expense........................................  $53.5    $ 1.5    $40.8
                                                              =====    =====    =====
</TABLE>
 
7. FAIR VALUE OF FINANCIAL INSTRUMENTS:
 
     Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Values of Financial Instruments ("SFAS 107") requires disclosures of fair value
information about financial instruments, and includes assets and liabilities
recognized or not recognized in the balance sheet, for which it is practicable
to estimate their fair value. In instances where quoted market prices are not
available, fair values are based on estimates using discounted cash flow or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rates and estimates of the amount and
timing of future cash flows. SFAS 107 excludes certain insurance liabilities and
other non-financial instruments from its disclosure requirements, such as the
amount for the value associated with customer or agent relationships, the
expected interest margin (interest earnings over interest credited) to be earned
in the future on investment-type products, or other intangible items.
Accordingly, the aggregate fair value amounts presented herein do not
necessarily represent the underlying value of the Company; likewise, care should
be exercised in deriving conclusions about the Company's business or financial
condition based on the fair value information presented herein.
 
     The following methods and assumptions were used by the Company in
determining estimated fair values of financial instruments:
 
          Fixed maturities and equity securities: The estimated fair values for
     fixed maturities are based on quoted market prices, where available. For
     fixed maturities not actively traded, the estimated fair values are
     determined using values obtained from independent pricing services or, in
     the case of private placements, are determined by discounting expected
     future cash flows using a current market rate applicable to the yield,
     credit quality, and maturity of the securities. The estimated fair values
     for equity securities are based on quoted market prices.
 
          Short-term investments: The carrying values approximate estimated fair
     value.
 
          Mortgage loans, credit-tenant loans, and policy loans: The estimated
     fair values for mortgage loans, CTLs and policy loans are determined by
     discounting future expected cash flows using interest rates currently being
     offered for similar loans to borrowers with similar credit ratings.
 
          Other invested assets: The estimated fair values are determined using
     quoted market prices for similar instruments.
 
                                       66
<PAGE>   69
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
          Insurance liabilities for investment contracts: The estimated fair
     values are determined using discounted cash flow calculations based on
     interest rates currently being offered for similar contracts with
     maturities consistent with those remaining for the contracts being valued.
     The estimated fair values of the insurance liabilities for investment
     contracts were approximately equal to the carrying values as of December
     31, 1996 and 1995, because interest rates credited on the vast majority of
     account balances approximate current rates paid on similar investments and
     are not generally guaranteed beyond one year. Fair values for the Company's
     insurance liabilities other than those for investment-type insurance
     contracts are not required to be disclosed. However, the estimated fair
     values of liabilities for all insurance contracts are taken into
     consideration in the Company's overall management of interest rate risk,
     which minimizes exposure to changing interest rates through the matching of
     investment maturities with amounts due under insurance contracts.
 
          Notes payable: The estimated fair value is determined by discounting
     future cash flows based on the Company's current incremental borrowing rate
     for similar types of borrowing arrangements.
 
          Investment borrowings: The carrying values approximate estimated fair
     value.
 
     The estimated fair values and carrying values of the Company's financial
instruments were as follows:
 
<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                                          --------------------------------------------
                                                  1996                    1995
                                          --------------------    --------------------
                                            FAIR      CARRYING      FAIR      CARRYING
                                           VALUE       VALUE       VALUE       VALUE
                                          --------    --------    --------    --------
                                                     (DOLLARS IN MILLIONS)
<S>                                       <C>         <C>         <C>         <C>
Assets:
  Fixed maturities and equity
     securities.........................  $8,842.5    $8,842.5    $7,999.6    $7,998.6
  Mortgage loans, credit-tenant loans
     and policy loans...................     396.2       398.0       400.0       404.5
  Other invested assets.................      25.6        25.6        24.5        24.5
  Short-term investments................     110.0       110.0       417.6       417.6
Liabilities:
  Insurance liabilities for investment
     contracts..........................   7,274.3     7,274.3     6,566.5     6,566.5
  Notes payable.........................     150.0       148.0       150.0       147.8
  Investment borrowings and due to
     brokers............................     156.3       156.3       257.3       257.3
</TABLE>
 
8. SHAREHOLDERS' EQUITY:
 
     Generally, the net assets of Western available for transfer to the Company
are limited to the amounts by which Western's net assets, as determined in
accordance with statutory accounting practices, exceed minimum statutory capital
requirements. Under Texas law, dividends that can be paid by Western to the
Company during any twelve-month period without prior regulatory approval cannot
exceed the greater of statutory net gain from operations (excluding realized
gains on investments) for the preceding year or 10% of statutory surplus at the
end of the preceding year. In 1997, Western can transfer up to $57.0 million in
the form of dividends to the Company without seeking prior regulatory approval.
 
                                       67
<PAGE>   70
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The components of the balance sheet caption "unrealized appreciation of
investments, net" in shareholders' equity are summarized as follows:
 
<TABLE>
<CAPTION>
                                                   DECEMBER 31, 1996                      DECEMBER 31, 1995
                                          ------------------------------------   ------------------------------------
                                                        EFFECT OF                              EFFECT OF
                                                       FAIR VALUE    CARRYING                 FAIR VALUE    CARRYING
                                          COST BASIS   ADJUSTMENTS     VALUE     COST BASIS   ADJUSTMENTS     VALUE
                                          ----------   -----------   ---------   ----------   -----------   ---------
                                                                     (DOLLARS IN MILLIONS)
<S>                                       <C>          <C>           <C>         <C>          <C>           <C>
Investments:
  Actively managed fixed maturities.....   $ 8,738.4     $104.1      $ 8,842.5    $ 7,654.5     $342.2      $ 7,996.7
  Other invested assets.................        24.7        0.9           25.6         13.5       11.0           24.5
                                           ---------     ------      ---------    ---------     ------      ---------
                                             8,763.1      105.0        8,868.1      7,668.0      353.2        8,021.2
Other Balance Sheet Items:
  Cost of policies purchased............        71.5      (21.1)          50.4         75.8      (40.0)          35.8
  Cost of policies produced.............       408.3      (28.1)         380.2        325.1      (96.4)         228.7
  Insurance liabilities.................    (8,679.9)        --       (8,679.9)    (7,879.5)     (36.3)      (7,915.8)
  Other liabilities.....................      (102.5)       4.4          (98.1)      (100.6)      12.2          (88.4)
  Deferred income tax liability.........       (77.3)     (21.1)         (98.4)       (50.9)     (67.5)        (118.4)
                                                         ------                                 ------
  Unrealized appreciation of
     investments, net...................                 $ 39.1                                 $125.2
                                                         ======                                 ======
</TABLE>
 
     On September 17, 1996, the Company issued 7,254,464 shares of convertible
stock to a subsidiary of American General for an aggregate purchase price of
$130.0 million. The Company incurred a discount in lieu of underwriting and
other fees incident to a public offering and other direct issue costs totaling
$4.1 million, resulting in net proceeds to the Company of $125.9 million. The
preferred stock shares pro rata on a share-for-share basis with the Company's
common stock in dividends and in liquidation, subject to a $.001 per share
liquidation preference. No dividends may be paid on the Company's common stock
unless a corresponding dividend is paid on the Company's preferred stock. The
preferred stock automatically converts with no further action on the part of the
Company or its holder into an equal number of shares of the Company's common
stock upon approval of the common stock shareholders at the Company's 1997
Annual Meeting of Shareholders. The preferred stock is considered a common stock
equivalent in deriving earnings per share. The proceeds from the issuance of
preferred stock in excess of the liquidation preference has been recorded as a
component of common shareholders' paid-in capital.
 
     In February 1994, the Company loaned approximately $1.1 million to an
officer for the purchase of 100,000 shares of the Company's common stock under
the terms of a promissory note bearing interest at the prime rate plus 1% with
principal and accrued interest payable in February 1999. The note receivable is
collateralized by the 100,000 shares purchased by the officer and has been
recorded as a reduction to common stock and additional paid-in capital. The
accompanying balance sheet as of December 31, 1995, and the statements of
shareholders' equity for the years ended December 31, 1995 and 1994, have been
restated to reflect the reclassification of the note receivable from other
assets to common stock and additional paid-in capital.
 
9. STOCK AND INCENTIVE PLAN:
 
     The Western National Corporation 1993 Stock and Incentive Plan (the "1993
Plan") was adopted by the Company effective December 31, 1993, and will
terminate on December 31, 2003. The 1993 Plan provides for the grant of any or
all of the following types of awards: (i) stock options, including incentive
stock options and non-qualified stock options; (ii) stock appreciation rights;
(iii) restricted stock; (iv) incentive awards; and (v) performance awards. The
number of shares of common stock that may be issued under the 1993 Plan, or
 
                                       68
<PAGE>   71
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
as to which stock appreciation rights or other awards may be granted, may not
exceed 5,000,000. Under the Plan, the maximum number of such shares awardable to
an individual was limited to 1,350,000 in the year ended December 31, 1994, and
100,000 for any year thereafter. Options have a ten-year term and vest equally
over a five-year period with the exception of 1.25 million options granted in
1994 which vest over a four-year period. The exercise price of options granted
will not be less than the fair market value of the common stock at the date of
grant. Shares issued under restricted stock awards vest one-third per year
beginning on the third anniversary of the grant date.
 
     A summary of changes in common stock options is as follows:
 
<TABLE>
<CAPTION>
                                                          SHARES
                                                         ISSUABLE
                                            SHARES         UNDER
                                          AVAILABLE     OUTSTANDING
                                          FOR ISSUE       OPTIONS      PRICE PER SHARE
                                          ----------    -----------    ---------------
<S>                                       <C>           <C>            <C>
Balance at December 31, 1993:...........   5,000,000
  Options:
     Granted............................  (1,994,150)    1,994,150         $12.11
     Forfeited..........................      50,000       (50,000)        $12.00
                                          ----------     ---------
Balance at December 31, 1994............   3,055,850     1,944,150         $12.11
  Options:
     Granted............................    (221,000)      221,000         $12.10
     Exercised..........................          --        (3,000)        $13.19
     Forfeited..........................      21,050       (21,050)        $12.90
  Restricted stock awards granted.......     (45,000)           --
                                          ----------     ---------
Balance at December 31, 1995............   2,810,900     2,141,100         $12.06
  Options:
     Granted............................    (211,000)      211,000         $17.12
     Exercised..........................          --        (2,350)        $17.30
     Forfeited..........................       8,900        (8,900)        $15.10
  Restricted stock awards granted.......     (74,000)           --
                                          ----------     ---------
Balance at December 31, 1996............   2,534,800     2,340,850         $12.50
                                          ==========     =========
</TABLE>
 
     The shares exercisable for vested options and the corresponding weighted
average exercise price was 971,110 shares and $12.08, and 458,330 shares and
$12.07 at December 31, 1996 and 1995, respectively.
 
     The following table summarizes the information about stock options
outstanding in December 31, 1996:
 
<TABLE>
<CAPTION>
                                                 OPTIONS OUTSTANDING            OPTIONS EXERCISABLE
                                          ----------------------------------    -------------------
                                                       WEIGHTED     WEIGHTED               WEIGHTED
                                                        AVERAGE     AVERAGE                AVERAGE
                RANGE OF                               REMAINING    EXERCISE               EXERCISE
            EXERCISE PRICES                SHARES        TERM        PRICE      SHARES      PRICE
            ---------------               ---------    ---------    --------    -------    --------
<S>                                       <C>          <C>          <C>         <C>        <C>
$12.00 to $15.00........................  2,137,700      7.10        $12.10     971,110     $12.08
$15.01 to $18.63........................    203,150      9.14        $18.43          --         --
                                          ---------      ----        ------     -------     ------
                                          2,340,850      7.28        $12.50     971,110     $12.08
</TABLE>
 
     The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
123") in 1995 which, if fully adopted by the Company, would change the methods
the Company applies in recognizing the cost of the Plan. Adoption of the cost
recognition provisions of SFAS 123 is optional and the Company has decided not
to elect those provisions. As a result, the Company continues to apply
Accounting Principles Board Opinion No. 25 and
 
                                       69
<PAGE>   72
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
related Interpretations ("APB 25") in accounting for the measurement and
recognition of the Plan's cost. However, pro forma disclosures as if the Company
adopted the cost recognition provisions of SFAS 123 effective with awards
granted since January 1, 1995, are required.
 
     Under SFAS 123, compensation cost is measured at the grant date based on
the fair value of the awards and is recognized over the service period, which is
usually the vesting period. The fair value of options granted during 1996 and
1995 is estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions used to calculate fair values of options
awarded in both 1996 and 1995: (i) average dividend yield of .2%, (ii) expected
volatility of 25.3%, (iii) expected life of five years, and (iv) an estimated
risk-free interest rate, which is different for grants awarded on different
grant dates, ranging from 5.3% to 7.7%.
 
     The weighted average fair value of options granted was $5.08 and $3.80
during the years ended December 31, 1996 and 1995, respectively. The weighted
average fair value of restricted stock awards granted was $17.14 and $12.38
during the years ended December 31, 1996 and 1995, respectively.
 
     The total amount of compensation expense recognized in the accompanying
statements of operations under the provisions of APB 25 was $0.3 million and
$0.1 million during the years ending December 31, 1996 and 1995, respectively.
 
     The pro forma disclosures as if the Company adopted the cost recognition
requirements of SFAS 123 are presented below (in millions, except per share
amounts):
 
<TABLE>
<CAPTION>
                                                    1996                        1995
                                          ------------------------    ------------------------
                                          AS REPORTED    PRO FORMA    AS REPORTED    PRO FORMA
                                          -----------    ---------    -----------    ---------
<S>                                       <C>            <C>          <C>            <C>
Net income..............................     $99.4         $99.1         $7.3          $7.2
Earnings per common share and common
  equivalent share......................     $1.53         $1.53         $.12          $.12
</TABLE>
 
     The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995
and additional awards in future years are anticipated.
 
10. COMMITMENTS AND CONTINGENCIES:
 
COMMITMENTS
 
     The Company leases office space and equipment under noncancellable
operating leases. The approximate future minimum lease rental commitments under
such leases as of December 31, 1996 are as follows (dollars in thousands):
 
<TABLE>
<CAPTION>
                YEAR ENDING DECEMBER 31,
                ------------------------
<S>                                                       <C>
      1997..............................................   $  993
      1998..............................................    1,002
      1999..............................................      993
      2000..............................................      968
      2001..............................................      581
      Thereafter........................................    1,405
                                                           ------
                                                           $5,942
                                                           ======
</TABLE>
 
     Rent expense was $1,018,000, $752,000 and $788,000 in 1996, 1995, and 1994,
respectively.
 
     At December 31, 1996, the Company's total commitment to limited partnership
investments was $50.0 million, of which $1.1 million had been funded.
 
                                       70
<PAGE>   73
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Until May 1, 1997, Western is committed to reimburse the WNL Series Trust
for administrative expenses in excess of .12% of the market value of investments
related to variable annuity policies issued by Western. During 1996, Western
incurred approximately $0.6 million related to this commitment.
 
     Certain officers of the Company are employed pursuant to long-term
employment agreements. The agreements provide, among other things, for base
salaries plus bonuses and may be terminated at any time for any reason upon
written notice to the other party, subject to, in the case of termination by the
Company without cause, to the payment of contractually specified amounts to the
terminated employee. In the event of termination following a "change in control"
(as defined), certain additional amounts may become payable.
 
CONTINGENCIES
 
     Assessments are levied on Western from time to time by guaranty fund
associations of states in which it is licensed to provide for payment of covered
claims or to meet other insurance obligations, subject to prescribed limits, of
insolvent insurance enterprises. Assessments are allocated to an insurer based
on the ratio of premiums written by an insurer to total premiums written in the
state. The terms of the assessments depend on how each guaranty fund association
elects to fund its obligations. Assessments levied by certain states may be
recoverable through a reduction in future premium taxes. Western provides a
liability, net of discount and estimated premium tax offsets, for estimated
future assessments of known insolvencies. Included in other liabilities is a
reserve for guaranty fund assessments of $22.1 million, $29.2 million and $7.4
million, at December 31, 1996, 1995, and 1994, respectively. Western determines
guaranty fund liabilities by utilizing a report prepared annually by the
National Organization of Life and Health Insurance Guaranty Associations which
provides estimates of assessments by insolvency. Management believes the
provision for guaranty fund assessments is adequate for all known insolvencies,
and does not currently anticipate the need for any material additions to the
reserve for known insolvencies. However, it is reasonably possible that the
estimates on which the provision is based will change and that such changes will
result in future adjustments.
 
     From time to time, the Company is involved in lawsuits which are related to
its operations. In most cases, such lawsuits involve claims under insurance
policies or other contracts of the Company. None of the lawsuits currently
pending, either individually or in the aggregate, is expected to have a material
effect on the Company's financial condition or results of operations.
 
11. EMPLOYEE BENEFIT PLANS:
 
     The Company sponsors a qualified defined contribution plan (the "Plan")
covering all full-time employees. The Plan provides for the Company to match,
with equivalent value of Company stock, 50% of a participant's voluntary
contributions up to 4% of a participant's compensation (subject to certain
Internal Revenue Code limitations). The Company can also elect to make
additional discretionary contributions to the Plan. For 1996 and 1995, the
Company made a matching contribution in an amount equal to 65% and 50%,
respectively, of each participant's elective contributions, up to 6% of annual
compensation (subject to Internal Revenue Code limitations). Subsequent to year
end, the Company's matching contribution was increased to 75% for 1997
contributions. The Company's Supplemental Plan is an unfunded, nonqualified plan
that provides to certain employees similar benefits that cannot be provided by a
qualified defined contribution plan due to Internal Revenue Code limitations.
Participants can also defer additional amounts of salary and bonus under the
Supplemental Plan, but there is no employer match for such additional
contributions. Expense recorded related to the Company's matching contributions
under both plans was approximately $394,000, $232,000 and $92,000 in 1996, 1995
and 1994, respectively.
 
                                       71
<PAGE>   74
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
12. RELATED PARTY TRANSACTIONS:
 
     See Note 4 for a description of the modified coinsurance agreement with
AGLIC.
 
     The Company was an affiliate of Conseco through December 23, 1994. In 1994,
the Company incurred $17.3 million of fees under investment management and
service agreements with Conseco and its subsidiaries. Subsequent to 1994,
Conseco has continued to provide investment accounting and investment advisory
services for a substantial majority of the Company's portfolio. Total investment
accounting and advisory fees incurred from Conseco and other advisors were $7.4
million and $7.9 million for the years ended December 31, 1996 and 1995,
respectively.
 
13. OTHER OPERATING STATEMENT DATA:
 
     Insurance policy income consisted of the following:
 
<TABLE>
<CAPTION>
                                                            1996      1995      1994
                                                          --------   -------   ------
                                                             (DOLLARS IN MILLIONS)
<S>                                                       <C>        <C>       <C>
Premiums collected......................................  $1,625.5   $ 720.4   $751.9
Reinsurance ceded.......................................      (1.5)     (0.9)    (1.2)
                                                          --------   -------   ------
  Premiums collected, net...............................   1,624.0     719.5    750.7
Less premiums on universal life and investment contracts
  without mortality risk (which are recorded as
  additions to insurance liabilities)...................  (1,613.4)   (697.8)  (729.6)
                                                          --------   -------   ------
  Direct premiums on products with mortality risk,
     recorded as insurance policy income................      10.6      21.7     21.1
Reinsurance assumed.....................................      71.1        --       --
Amortization of deferred revenue........................       0.5       0.5      0.4
Fees and surrender charges..............................       4.4       4.2      4.8
Other income............................................       6.2       2.7      1.1
                                                          --------   -------   ------
  Insurance policy income...............................  $   92.8   $  29.1   $ 27.4
                                                          ========   =======   ======
</TABLE>
 
     The changes in the cost of policies purchased were as follows:
 
<TABLE>
<CAPTION>
                                                          1996       1995       1994
                                                          -----     ------     ------
                                                             (DOLLARS IN MILLIONS)
<S>                                                       <C>       <C>        <C>
Balance, beginning of year before effect of fair value
  adjustments of actively managed fixed maturities......  $75.8     $ 80.5     $ 83.1
  Scheduled amortization................................   (4.3)      (4.7)      (4.9)
  Amortization related to realized gains and losses.....     --         --        2.3
                                                          -----     ------     ------
Balance, end of year before effect of fair value
  adjustments of actively managed fixed maturities......   71.5       75.8       80.5
Effect of fair value adjustments of actively managed
  fixed maturities......................................  (21.1)     (40.0)      23.7
                                                          -----     ------     ------
Balance, end of year....................................  $50.4     $ 35.8     $104.2
                                                          =====     ======     ======
</TABLE>
 
                                       72
<PAGE>   75
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The changes in the cost of policies produced were as follows:
 
<TABLE>
<CAPTION>
                                                             1996      1995      1994
                                                            ------    ------    ------
                                                              (DOLLARS IN MILLIONS)
<S>                                                         <C>       <C>       <C>
Balance, beginning of year before effect of fair value
  adjustments of actively managed fixed maturities........  $325.1    $265.0    $200.5
  Acquisition costs incurred..............................   120.6      62.2      62.4
  Scheduled amortization..................................   (37.3)    (34.0)    (15.1)
  Amortization related to realized gains and losses.......    (0.6)     29.8      16.7
  Amortization of deferred revenue........................     0.5       0.5       0.5
  Effects of reinsurance..................................      --       1.6        --
                                                            ------    ------    ------
Balance, end of year before effect of fair value
  adjustments of actively managed fixed maturities........   408.3     325.1     265.0
Effect of fair value adjustments of actively managed fixed
  maturities..............................................   (28.1)    (96.4)    100.3
                                                            ------    ------    ------
Balance, end of year......................................  $380.2    $228.7    $365.3
                                                            ======    ======    ======
</TABLE>
 
     Based on current conditions and assumptions as to future events on all
policies in force, approximately 6% to 7% of the cost of policies purchased as
of December 31, 1996, excluding the effect of fair value adjustments for
actively managed fixed maturities, is expected to be amortized in each of the
next five years. The average discount rate for the cost of policies purchased
was approximately 19% for the year ended December 31, 1996.
 
14. STATUTORY INFORMATION:
 
     Statutory accounting practices prescribed or permitted for Western by
regulatory authorities differ from generally accepted accounting principles.
Western reported the following amounts to regulatory agencies:
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                1996         1995
                                                              ---------    ---------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>          <C>
Statutory capital and surplus...............................     $572.4       $426.1
Asset valuation reserve.....................................      109.0         91.1
Interest maintenance reserve................................      104.4        105.3
                                                                 ------       ------
          Total.............................................     $785.8       $622.5
                                                                 ======       ======
</TABLE>
 
     Statutory accounting practices require that certain investment-related
portions of surplus, called the asset valuation reserve ("AVR") and the interest
maintenance reserve ("IMR"), be appropriated and reported as liabilities. The
purpose of these reserves is to stabilize statutory surplus against fluctuations
in the market value of investments. The AVR captures realized and unrealized
investment gains and losses related to changes in creditworthiness. The IMR
captures realized investment gains and losses on debt instruments resulting from
changes in interest rates and provides for subsequent amortization of such
amounts into statutory net income on a basis reflecting the remaining life of
the assets sold.
 
                                       73
<PAGE>   76
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following table compares the pre-tax income determined on a statutory
accounting basis with such income reported herein in accordance with generally
accepted accounting principles:
 
<TABLE>
<CAPTION>
                                                             1996     1995      1994
                                                            ------   -------   ------
                                                              (DOLLARS IN MILLIONS)
<S>                                                         <C>      <C>       <C>
Statutory net gain from operations........................  $ 65.3   $  51.6   $ 68.8
  IMR amortization........................................    (8.7)     (8.7)   (13.5)
  Realized gains (losses).................................    15.1    (118.2)   (39.4)
                                                            ------   -------   ------
Pre-tax statutory income (loss) before transfers to and
  from and amortization of tax IMR........................    71.7     (75.3)    15.9
Net effect of adjustments for generally accepted
  accounting principles...................................    81.2      84.1     98.2
                                                            ------   -------   ------
  Pre-tax income, generally accepted accounting
     principles...........................................  $152.9   $   8.8   $114.1
                                                            ======   =======   ======
</TABLE>
 
15. QUARTERLY FINANCIAL DATA (UNAUDITED):
 
     Earnings per common share for each quarter are computed independently of
earnings per share for the year. Due to transactions affecting the number of
shares outstanding during each quarter and due to the uneven distribution of
earnings during the year, the sum of the quarterly earnings per share may not
equal the earnings per share for the year.
 
<TABLE>
<CAPTION>
                                                                           1996
                                                         -----------------------------------------
                                                         1ST QTR.   2ND QTR.   3RD QTR.   4TH QTR.
                                                         --------   --------   --------   --------
                                                               (DOLLARS IN MILLIONS, EXCEPT
                                                                    PER SHARE AMOUNTS)
<S>                                                      <C>        <C>        <C>        <C>
Net investment income..................................   $169.5     $171.5     $175.5     $186.6
Revenues...............................................    187.9      190.0      202.7      220.0
Income before income taxes.............................     36.9       32.8       39.2       44.0
Net income.............................................     24.0       21.4       25.6       28.4
Net income per common share............................   $  .38     $  .34     $  .40     $  .41
</TABLE>
 
<TABLE>
<CAPTION>
                                                                           1995
                                                         -----------------------------------------
                                                         1ST QTR.   2ND QTR.   3RD QTR.   4TH QTR.
                                                         --------   --------   --------   --------
                                                               (DOLLARS IN MILLIONS, EXCEPT
                                                                    PER SHARE AMOUNTS)
<S>                                                      <C>        <C>        <C>        <C>
Net investment income..................................   $161.4     $161.7     $170.2     $169.7
Revenues...............................................    134.5      138.4      153.7      143.0
Income (loss) before income taxes......................     14.8       14.4       14.4      (34.8)
Net income (loss)......................................      9.5        9.5        9.5      (21.2)
Net income (loss) per common share.....................   $  .15     $  .15     $  .15     $ (.34)
</TABLE>
 
     Quarterly results of operations are based on numerous estimates,
principally related to policy reserves, the amortization of cost of policies
purchased, the amortization of cost of policies produced, and income taxes. Such
estimates are revised quarterly and are ultimately adjusted to year-end amounts.
When such revisions are determined, they are reported as part of operations of
the current quarter. The Company recorded a provision for guaranty fund
assessments of $24.5 million and amortization of cost of policies purchased and
produced of $8.0 million from retrospective adjustments in the fourth quarter of
1995.
 
                                       74
<PAGE>   77
 
                 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
16. PRO FORMA RESULTS OF OPERATIONS (UNAUDITED):
 
     Following are unaudited pro forma results of operations of the Company for
the year ended December 31, 1994, as if the initial public common stock
offering, issuance of Senior Notes and related transactions (described in Note
1) had occurred at the beginning of 1994, as compared with actual results of
operations for 1996 and 1995:
 
<TABLE>
<CAPTION>
                                                           (ACTUAL)   (ACTUAL)   (PRO FORMA)
                                                             1996       1995        1994
                                                           --------   --------   -----------
                                                                 (DOLLARS IN MILLIONS,
                                                                EXCEPT PER SHARE DATA)
<S>                                                        <C>        <C>        <C>
Net investment income....................................    $703.1     $662.9     $637.4
Revenues.................................................     800.6      569.6      615.6
Income before income taxes...............................     152.9        8.8      112.9
Net income...............................................      99.4        7.3       72.5
Net income per common share..............................    $ 1.53     $  .12     $ 1.16
</TABLE>
 
                                       75
<PAGE>   78
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
                        ON FINANCIAL STATEMENT SCHEDULES
 
To the Board of Directors and Shareholders of
Western National Corporation
 
     Our report on the consolidated financial statements of Western National
Corporation and its subsidiaries is included on page 46 of this Form 10-K. In
connection with our audits of such consolidated financial statements, we have
also audited the related financial statement schedules listed in the index on
page 44 of this Form 10-K.
 
     In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information required to be
included therein.
 
                                            COOPERS & LYBRAND L.L.P.
 
Houston, Texas
February 5, 1997
 
                                       76
<PAGE>   79
 
                          WESTERN NATIONAL CORPORATION
                                (PARENT COMPANY)
 
                                   SCHEDULE I
 
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                           DECEMBER 31, 1996 AND 1995
                             (DOLLARS IN THOUSANDS)
 
CONDENSED BALANCE SHEET
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                 1996          1995
                                                              ----------    ----------
<S>                                                           <C>           <C>
Investments in and advances to subsidiaries.................  $1,097,277    $  944,988
Short-term investments......................................       3,987         2,107
Current income tax receivable...............................          --        46,400
Deferred income taxes.......................................      14,034         8,542
Other assets................................................       6,143         4,041
                                                              ----------    ----------
          Total assets......................................  $1,121,441    $1,006,078
                                                              ==========    ==========
 
                         LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
  Notes payable.............................................  $  148,030    $  147,827
  Payable to subsidiary.....................................          89        11,117
  Other liabilities.........................................      58,457        62,637
                                                              ----------    ----------
          Total liabilities.................................     206,576       221,581
Shareholders' Equity:
  Preferred stock...........................................           7            --
  Common stock and additional paid-in capital...............     473,073       345,690
  Unrealized appreciation of investments, net...............      39,138       125,244
  Retained earnings.........................................     402,647       313,563
                                                              ----------    ----------
          Total shareholders' equity........................     914,865       784,497
                                                              ----------    ----------
          Total liabilities and shareholders' equity........  $1,121,441    $1,006,078
                                                              ==========    ==========
</TABLE>
 
                                       77
<PAGE>   80
 
                          WESTERN NATIONAL CORPORATION
                                (PARENT COMPANY)
 
                                   SCHEDULE I
                                  (CONTINUED)
 
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                             (DOLLARS IN THOUSANDS)
 
CONDENSED STATEMENT OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                1996        1995        1994
                                                              --------    --------    --------
<S>                                                           <C>         <C>         <C>
Revenues:
  Net investment income.....................................  $    155    $     84    $    495
Expenses:
  Interest expense..........................................    13,707      11,320       9,558
  Other operating expenses..................................     2,139       1,372       2,734
                                                              --------    --------    --------
                                                                15,846      12,692      12,292
                                                              --------    --------    --------
  Income before income taxes and equity in net income (loss)
     of subsidiaries........................................   (15,691)    (12,608)    (11,797)
Income tax benefit..........................................    (5,492)     (4,413)     (4,129)
                                                              --------    --------    --------
                                                               (10,199)     (8,195)     (7,668)
                                                              --------    --------    --------
Equity in net income of subsidiaries........................   109,563      15,451      80,894
                                                              --------    --------    --------
  Net income................................................  $ 99,364    $  7,256    $ 73,226
                                                              ========    ========    ========
</TABLE>
 
                                       78
<PAGE>   81
 
                          WESTERN NATIONAL CORPORATION
                                (PARENT COMPANY)
 
                                   SCHEDULE I
                                  (CONTINUED)
 
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                             (DOLLARS IN THOUSANDS)
 
CONDENSED STATEMENT OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                               1996        1995        1994
                                                             ---------   ---------   ---------
<S>                                                          <C>         <C>         <C>
Cash flows from operating activities:
  Net income...............................................  $  99,364   $   7,256   $  73,226
  Adjustments to reconcile net income to net cash provided
     by operating activities:
     Amortization and depreciation.........................        653         375         171
     Income taxes..........................................     (5,492)     (4,413)     (4,129)
     Amortization (accrual) of investment income, net......         --        (100)        (73)
     Increase in other assets..............................        122     (10,607)       (702)
     Increase in other liabilities.........................        119       9,697       6,059
     Equity in earnings of subsidiaries....................   (109,563)    (15,451)    (80,894)
                                                             ---------   ---------   ---------
          Net cash used in operating activities............    (14,797)    (13,243)     (6,342)
                                                             ---------   ---------   ---------
Cash flows from investing activities:
  Sales of investments.....................................         --       3,679          --
  Purchases of investments.................................         --          --      (3,679)
  Issuance of note receivable -- officer...................         --          --      (1,137)
  Collection (purchase) of subsidiary federal income tax
     recoverable...........................................     35,300     (36,900)         --
  Advances (to) from affiliates, net.......................      2,042      (1,240)         --
  Capital contribution to subsidiaries.....................   (128,661)         --          --
  Acquisitions of subsidiaries.............................         --          --        (300)
                                                             ---------   ---------   ---------
  Net cash provided by (used in) investing activities......    (91,319)    (34,461)     (5,116)
                                                             ---------   ---------   ---------
Cash flows from financing activities:
  Proceeds from preferred stock issuance, net..............    125,875          --          --
  Proceeds from issuance of Senior Notes, net..............         --          --     147,484
  Proceeds from common stock issuance, net.................         --          --      23,636
  Proceeds from line of credit.............................     30,100      65,100          --
  Payments on line of credit...............................    (37,700)     (7,500)         --
  Dividends paid on common stock...........................     (9,989)     (9,975)   (157,476)
  Dividends paid on preferred stock........................       (290)         --          --
                                                             ---------   ---------   ---------
          Net cash provided by financing activities........    107,996      47,625      13,644
                                                             ---------   ---------   ---------
          Net increase (decrease) in short-term
            investments....................................      1,880         (79)      2,186
Short-term investments -- beginning of year................      2,107       2,186          --
                                                             ---------   ---------   ---------
Short-term investments -- end of year......................  $   3,987   $   2,107   $   2,186
                                                             =========   =========   =========
Supplemental cash flow disclosure:
  Interest paid on notes payable...........................  $  13,728   $  11,320   $   5,438
                                                             =========   =========   =========
</TABLE>
 
                                       79
<PAGE>   82
 
                          WESTERN NATIONAL CORPORATION
                                (PARENT COMPANY)
 
                                   SCHEDULE I
                                  (CONTINUED)
 
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 
NOTES TO CONDENSED FINANCIAL STATEMENTS
 
1. BASIS OF PRESENTATION:
 
     Western National Corporation's investment in subsidiaries is stated at cost
plus equity in undistributed earnings of subsidiaries since the date of
acquisition. Western National Corporation's share of net income of its
unconsolidated subsidiaries is included in income using the equity method. These
financial statements should be read in conjunction with Western National
Corporation's Consolidated Financial Statements.
 
2. SHAREHOLDERS' EQUITY:
 
     On September 17, 1996, the Company issued 7,254,464 shares of convertible
stock to a subsidiary of American General for an aggregate purchase price of
$130.0 million. The Company incurred a discount in lieu of underwriting and
other fees incident to a public offering and other direct issue costs totaling
$4.1 million, resulting in net proceeds to the Company of $125.9 million. The
preferred stock shares pro rata on a share-for-share basis with the Company's
common stock in dividends and in liquidation, subject to a $.001 per share
liquidation preference. No dividends may be paid on the Company's common stock
unless a corresponding dividend is paid on the Company's preferred stock. The
preferred stock automatically converts with no further action on the part of the
company or its holder into an equal number of shares of the Company's common
stock upon approval of the common stock shareholders at the Company's 1997
Annual Meeting of Shareholders. The preferred stock is considered a common stock
equivalent in deriving earnings per share. The proceeds from the issuance of
preferred stock in excess of the liquidation preference has been recorded as a
component of common shareholders' paid-in capital.
 
     In February 1994, the Company loaned approximately $1.1 million to an
officer for the purchase of 100,000 shares of the Company's common stock under
the terms of a promissory note bearing interest at the prime rate plus 1% with
principal and accrued interest payable in February 1999. The note receivable is
collateralized by the 100,000 shares purchased by the officer and has been
recorded as a reduction to common stock and additional paid-in capital. The
accompanying balance sheet as of December 31, 1995 has been restated to reflect
the reclassification of the note receivable from other assets to common stock
and additional paid-in capital. During 1996, the promissory note was contributed
to a subsidiary of the Company.
 
3. NOTES PAYABLE:
 
     Notes payable consisted of the following:
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                1996          1995
                                                              --------      --------
                                                              (DOLLARS IN THOUSANDS)
<S>                                                           <C>           <C>
Senior Notes due February 15, 2004, bearing interest at
  7 1/8% per annum, not redeemable prior to maturity, net of
  unamortized discount of $1,970 in 1996 and $2,173 in
  1995......................................................  $148,030      $147,827
</TABLE>
 
                                       80
<PAGE>   83
 
     Additionally, included in other liabilities is $50.0 million and $57.6
million at December 31, 1996 and 1995, respectively, of outstanding borrowings
under an unsecured credit agreement with a syndicate of banks, which matures in
2000 (the "Credit Agreement"). Under the Credit Agreement, the Company could
borrow on a revolving basis an aggregate principal amount of up to $100.0
million as of December 31, 1996. Subsequent to year end the borrowing base was
increased to $150.0 million. At December 31, 1996, the interest rate under the
Credit Agreement was either the agent bank's prime rate or LIBOR plus .375%
(5.975% at December 31, 1996). The Credit Agreement contained certain provisions
that required the Company to maintain specified levels of financial solvency
during the term of the agreement, including provisions concerning its
consolidated net worth, adjusted statutory capital and surplus, market
capitalization, A.M. Best rating, and risk based capital levels.
 
                                       81
<PAGE>   84
 
                    WESTERN NATIONAL LIFE INSURANCE COMPANY
 
                                  SCHEDULE VI
 
                                  REINSURANCE
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                             (DOLLARS IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                               1996       1995       1994
                                                              -------    -------    -------
<S>                                                           <C>        <C>        <C>
Life insurance in force:
  Direct....................................................  $ 559.3    $ 626.0    $ 703.1
  Assumed...................................................      2.2        2.6        3.2
  Ceded.....................................................   (247.6)    (286.1)    (329.1)
                                                              -------    -------    -------
          Net insurance in force............................  $ 313.9    $ 342.5    $ 377.2
                                                              =======    =======    =======
          Percentage of assumed to net......................      0.7%       0.7%       0.8%
Premiums recorded as revenue for generally accepted
  accounting principles:
  Direct....................................................  $  12.1    $  23.0    $  22.4
  Assumed...................................................     71.1         --         --
  Ceded.....................................................     (1.5)      (1.3)      (1.3)
                                                              -------    -------    -------
          Net premiums......................................  $  81.7    $  21.7    $  21.1
                                                              =======    =======    =======
          Percentage of assumed to net......................     87.0%        --%        --%
</TABLE>
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.
 
     Not applicable.
 
                                       82
<PAGE>   85
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     This item is incorporated herein by reference to "Item 1.
Business -- Executive Officers of Registrant", above, and to the Company's 1997
Proxy Statement, which will be filed with the Securities and Exchange Commission
on or before March 31, 1997.
 
ITEM 11. EXECUTIVE COMPENSATION
 
     This item is incorporated herein by reference to the 1997 Proxy Statement,
which will be filed with the Securities and Exchange Commission on or before
March 31, 1997.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     This item is incorporated herein by reference to the 1997 Proxy Statement,
which will be filed with the Securities and Exchange Commission on or before
March 31, 1997.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     This item is incorporated herein by reference to the 1997 Proxy Statement,
which will be filed with the Securities and Exchange Commission on or before
March 31, 1997.
 
                                       83
<PAGE>   86
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
(a) The following documents have been filed as a part of this Report.
 
     1. Reference is made to the consolidated financial statements of the
        Company included in Item 8 of this Report.
 
     2. See Index to Financial Statements on page 43 for a list of financial
        statements included in this Report.
 
     3. The following exhibits are being filed with this Report:
 
<TABLE>
<C>                      <S>
           3.1           -- Amended and Restated Certificate of Incorporation of the
                            Company (incorporated by reference to Exhibit 4.1 of the
                            Company's Report on Form 8-K for the quarter ended
                            September 30, 1996).
           3.2           -- Amended and Restated Bylaws of the Company (incorporated
                            by reference to Exhibit 3.2 to the Company's Quarterly
                            Report on Form 10-Q for the quarter ended June 30, 1996).
           4.1           -- Indenture, dated as of February 15, 1994, between the
                            Company and Shawmut Bank, N.A., as trustee, relating to
                            the Company's 7 1/8 Senior Notes due 2004, including form
                            of the Notes (incorporated by reference to Exhibit 4.1 to
                            the Company's Annual Report on Form 10-K for the year
                            ended December 31, 1993).
           4.2           -- Form of Common Stock Certificate (incorporated by
                            reference to Exhibit 4.2 to the Company's Annual Report
                            on Form 10-K for the year ended December 31, 1993).
           4.3           -- Certificate of Designation, Preferences and Rights and
                            Limitations of the Series A Participating Convertible
                            Preferred Stock of the Company (incorporated by reference
                            to Exhibit 4.1 of the Report on Form 8-K/A of the Company
                            dated September 17, 1996).
          10.1           -- Employment Agreement, dated as of September 9, 1993,
                            between Conseco, Inc. and Michael J. Poulos, February 8,
                            1994 Amendment, and February 15, 1994 Assignment and
                            Assumption Agreement between Conseco, the Company and
                            Michael J. Poulos (incorporated by reference to Exhibit
                            10.1 to the Company's Annual Report on Form 10-K for the
                            year ended December 31, 1993).
          10.2           -- Amendment to Employment Agreement, dated as of December
                            2, 1994, between the Company and Michael J. Poulos
                            (incorporated by reference to Exhibit 10.3 of the Report
                            on Form 8-K of the Company dated December 2, 1994).
          10.3           -- Amendment to Employment Agreement, dated as of February
                            8, 1995, between the Company and Michael J. Poulos
                            (incorporated by reference to Exhibit 10.4 to the
                            Company's Annual Report on Form 10-K for the year ended
                            December 31, 1994).
          10.4           -- Employment Agreement, dated as of February 8, 1994,
                            between the Company and John A. Graf (incorporated by
                            reference to Exhibit 10.20 to the Company's Annual Report
                            on Form 10-K for the year ended December 31, 1993).
          10.5           -- Amendment to Employment Agreement, dated as of December
                            2, 1994, between the Company and John A. Graf
                            (incorporated by reference to Exhibit 10.5 of the Report
                            on Form 8-K of the Company dated December 2, 1994).
          10.6           -- Employment Agreement, dated as of November 9, 1994,
                            between the Company and Arthur R. McGimsey (incorporated
                            by reference to Exhibit 10.21 to the Company's Annual
                            Report on Form 10-K for the year ended December 31,
                            1993).
          10.7           -- Amendment to Employment Agreement, dated as of December
                            2, 1994, between the Company and Arthur R. McGimsey
                            (incorporated by reference to Exhibit 10.6 of the Report
                            on Form 8-K of the Company dated December 2, 1994).
</TABLE>
 
                                       84
<PAGE>   87
<TABLE>
<CAPTION>
<C>                      <S>
          10.8           -- Employment Agreement, dated as of February 8, 1994,
                            between the Company and Richard W. Scott (incorporated by
                            reference to Exhibit 10.22 to the Company's Annual Report
                            on Form 10-K for the year ended December 31, 1993).
          10.9           -- Amendment to Employment Agreement, dated as of December
                            2, 1994, between the Company and Richard W. Scott
                            (incorporated by reference to Exhibit 10.4 of the Report
                            on Form 8-K of the Company dated December 2, 1994).
         *10.10          -- Termination Agreement, dated as of February 10, 1997,
                            between the Company and Michael J. Akers.
          10.11          -- Termination Agreement, dated as of May 15, 1996, between
                            the Company and Bruce R. Abrams (incorporated by
                            reference to Exhibit 3.2 to the Company's Quarterly
                            Report on Form 10-Q for the quarter ended June 30, 1996).
          10.12          -- Consulting Agreement, as amended, dated as of November 4,
                            1993, between the Company and Alan Richards and March 15,
                            1994 modification, which provides that the services will
                            be rendered through Alan Richards Consulting Inc.
                            (incorporated by reference to Exhibit 10.23 to the
                            Company's Annual Report on Form 10-K for the year ended
                            December 31, 1993).
          10.13          -- Replacement Consulting Agreement, dated as of July 10,
                            1996, between the Company and Alan Richards Consulting,
                            Inc. (incorporated by reference to Exhibit 10.2 to the
                            Company's Quarterly Report on Form 10-Q for the quarter
                            ended June 30, 1996).
         *10.14          -- WesternSave Plan, as amended.
          10.15          -- Amended and Restated WesternSave Trust (incorporated by
                            reference to Exhibit 10.1 to the Company's Quarterly
                            Report on Form 10-Q for the quarter ended September 30,
                            1995).
          10.16          -- Western National Corporation Supplemental Plan
                            (incorporated by reference to Exhibit 10.37 to the
                            Company's Annual Report on Form 10-K for the year ended
                            December 31, 1994).
          10.17          -- Western National Corporation Supplemental Plan Trust
                            Agreement (incorporated by reference to Exhibit 10.17 to
                            the Company's Annual Report on Form 10-K for the year
                            ended December 31, 1995).
          10.18          -- The Company's 1993 Stock and Incentive Plan, as amended
                            (incorporated by reference to Exhibit 10.18 to the
                            Company's Annual Report on Form 10-K for the year ended
                            December 31, 1995).
         *10.19          -- Western National Corporation Job Security Plan, as
                            amended.
          10.20          -- Shareholder's Agreement, as amended, between American
                            General Corporation and the Company (incorporated by
                            reference to Exhibits 10.2 and 10.3 of the Report on Form
                            8-K/A of the Company dated September 17, 1996).
          10.21          -- Stock Purchase Agreement, dated as of September 13, 1996,
                            between American General Corporation and the Company
                            (incorporated by reference to Exhibit 10.1 of the Report
                            on Form 8-K/A of the Company dated September 17, 1996).
          10.22          -- Marketing Agreement between American General Life
                            Insurance Company and Western National Life Insurance
                            Company (incorporated by reference to Exhibit 10.1 to the
                            Company's Quarterly Report on Form 10-Q for the quarter
                            ended March 31, 1995).
          10.23          -- Consolidated Federal Income Tax Agreement, dated February
                            21, 1989, among Conseco and certain subsidiaries,
                            including Western, as amended (incorporated by reference
                            to Exhibit 10.10 to the Company's Annual Report on Form
                            10-K for the year ended December 31, 1993).
 </TABLE>


                                       85
<PAGE>   88
<TABLE>
<CAPTION>
<C>                      <S>
          10.24          -- Separation Agreement, dated February 8, 1994, between the
                            Company and Conseco, together with February 15, 1994
                            Agreement for Assignment and Assumption of Structured
                            Settlement Obligations between Conseco, the Company and
                            Western, and March 23, 1994 Letter Agreement between
                            Conseco, the Company and Western regarding structured
                            settlement annuities (incorporated by reference to
                            Exhibit 10.9 to the Company's Annual Report on Form 10-K
                            for the year ended December 31, 1993).
          10.25          -- Insurance Services Agreement, dated February 15, 1994,
                            between the Company and Conseco (incorporated by
                            reference to Exhibit 10.16 to the Company's Annual Report
                            on Form 10-K for the year ended December 31, 1993).
          10.26          -- Amendment Agreement, dated as of December 2, 1994,
                            between Conseco, Inc. and the Company (incorporated by
                            reference to Exhibit 10.2 of the Report on Form 8-K of
                            the Company dated December 2, 1994).
          10.27          -- Second Amendment Agreement, dated as of November 10,
                            1995, between Conseco, Inc. and the Company (incorporated
                            by reference to Exhibit 10.29 to the Company's Annual
                            Report on Form 10-K for the year ended December 31,
                            1995).
          10.28          -- Investment Services Agreement, dated as of October 1,
                            1995, between Conseco, Inc. and WNL Investment Advisory
                            Services, Inc. (incorporated by reference to Exhibit
                            10.29 to the Company's Annual Report on Form 10-K for the
                            year ended December 31, 1995).
          10.29          -- Conseco Note, dated February 8, 1994 (incorporated by
                            reference to Exhibit 10.25 to the Company's Annual Report
                            on Form 10-K for the year ended December 31, 1993).
          10.30          -- Promissory Note and Security Agreement, dated February
                            15, 1994, between the Company and Michael J. Poulos
                            (incorporated by reference to Exhibit 10.26 to the
                            Company's Annual Report on Form 10-K for the year ended
                            December 31, 1993).
          10.31          -- Credit Agreement, dated June 8, 1995, among Western
                            National Corporation, First Union National Bank of North
                            Carolina, and certain other financial institutions
                            (incorporated by reference to Exhibit 10.2 to the
                            Company's Quarterly Report on Form 10-Q for the quarter
                            ended June 30, 1995).
         *10.32          -- Credit Agreement, dated February 20, 1997, among Western
                            National Corporation, First Union National Bank of North
                            Carolina, and certain other financial institutions.
          10.33          -- Lease Agreement, dated October 26, 1993, between Western
                            and Marathon Oil Company (incorporated by reference to
                            Exhibit 10.15 to the Company's Annual Report on Form 10-K
                            for the year ended December 31, 1993).
         *11.1           -- Computation of Per Share Earnings.
         *12.1           -- Computation of Ratios of Earnings to Fixed Charges.
         *21.1           -- Subsidiaries of the Company.
         *23.1           -- Consent of Independent Accountants.
         *27.1           -- Financial Data Schedule
</TABLE>
 
---------------
 
* Filed herewith.
 
                                       86
<PAGE>   89
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, this 13th day of March, 1997.
 
                                            WESTERN NATIONAL CORPORATION
 
                                            By:     /s/ MICHAEL J. POULOS
                                              ----------------------------------
                                                 Michael J. Poulos, President
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
 
<TABLE>
<CAPTION>
                      SIGNATURE                               TITLE (CAPACITY)               DATE
                      ---------                               ----------------               ----
<C>                                                    <C>                              <S>
 
                /s/ MICHAEL J. POULOS                      Chairman of the Board,       March 13, 1997
-----------------------------------------------------      President Chief Executive
                  Michael J. Poulos                          Officer and Director
                                                         (Principal Executive Officer)
 
               /s/ ARTHUR R. MCGIMSEY                     Executive Vice President      March 13, 1997
-----------------------------------------------------    (Principal Financial Officer
                 Arthur R. McGimsey                        and Principal Accounting
                                                                   Officer)
 
                  /s/ DON G. BAKER                                Director              March 13, 1997
-----------------------------------------------------
                    Don G. Baker
 
             /s/ ALAN R. BUCKWALTER III                           Director              March 13, 1997
-----------------------------------------------------
               Alan R. Buckwalter III
 
               /s/ ROBERT M. HERMANCE                             Director              March 13, 1997
-----------------------------------------------------
                 Robert M. Hermance
 
              /s/ SYDNEY F. KEEBLE, JR.                           Director              March 13, 1997
-----------------------------------------------------
                Sydney F. Keeble, Jr.
 
                  /s/ ALAN RICHARDS                               Director              March 13, 1997
-----------------------------------------------------
                    Alan Richards
 
                /s/ RICHARD W. SCOTT                              Director              March 13, 1997
-----------------------------------------------------
                  Richard W. Scott
</TABLE>
 
                                       87
<PAGE>   90
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
           3.1           -- Amended and Restated Certificate of Incorporation of the
                            Company (incorporated by reference to Exhibit 4.1 of the
                            Company's Report on Form 8-K for the quarter ended
                            September 30, 1996).
           3.2           -- Amended and Restated Bylaws of the Company (incorporated
                            by reference to Exhibit 3.2 to the Company's Quarterly
                            Report on Form 10-Q for the quarter ended June 30, 1996).
           4.1           -- Indenture, dated as of February 15, 1994, between the
                            Company and Shawmut Bank, N.A., as trustee, relating to
                            the Company's 7 1/8 Senior Notes due 2004, including form
                            of the Notes (incorporated by reference to Exhibit 4.1 to
                            the Company's Annual Report on Form 10-K for the year
                            ended December 31, 1993).
           4.2           -- Form of Common Stock Certificate (incorporated by
                            reference to Exhibit 4.2 to the Company's Annual Report
                            on Form 10-K for the year ended December 31, 1993).
           4.3           -- Certificate of Designation, Preferences and Rights and
                            Limitations of the Series A Participating Convertible
                            Preferred Stock of the Company (incorporated by reference
                            to Exhibit 4.1 of the Report on Form 8-K/A of the Company
                            dated September 17, 1996).
          10.1           -- Employment Agreement, dated as of September 9, 1993,
                            between Conseco, Inc. and Michael J. Poulos, February 8,
                            1994 Amendment, and February 15, 1994 Assignment and
                            Assumption Agreement between Conseco, the Company and
                            Michael J. Poulos (incorporated by reference to Exhibit
                            10.1 to the Company's Annual Report on Form 10-K for the
                            year ended December 31, 1993).
          10.2           -- Amendment to Employment Agreement, dated as of December
                            2, 1994, between the Company and Michael J. Poulos
                            (incorporated by reference to Exhibit 10.3 of the Report
                            on Form 8-K of the Company dated December 2, 1994).
          10.3           -- Amendment to Employment Agreement, dated as of February
                            8, 1995, between the Company and Michael J. Poulos
                            (incorporated by reference to Exhibit 10.4 to the
                            Company's Annual Report on Form 10-K for the year ended
                            December 31, 1994).
          10.4           -- Employment Agreement, dated as of February 8, 1994,
                            between the Company and John A. Graf (incorporated by
                            reference to Exhibit 10.20 to the Company's Annual Report
                            on Form 10-K for the year ended December 31, 1993).
          10.5           -- Amendment to Employment Agreement, dated as of December
                            2, 1994, between the Company and John A. Graf
                            (incorporated by reference to Exhibit 10.5 of the Report
                            on Form 8-K of the Company dated December 2, 1994).
          10.6           -- Employment Agreement, dated as of November 9, 1994,
                            between the Company and Arthur R. McGimsey (incorporated
                            by reference to Exhibit 10.21 to the Company's Annual
                            Report on Form 10-K for the year ended December 31,
                            1993).
          10.7           -- Amendment to Employment Agreement, dated as of December
                            2, 1994, between the Company and Arthur R. McGimsey
                            (incorporated by reference to Exhibit 10.6 of the Report
                            on Form 8-K of the Company dated December 2, 1994).
          10.8           -- Employment Agreement, dated as of February 8, 1994,
                            between the Company and Richard W. Scott (incorporated by
                            reference to Exhibit 10.22 to the Company's Annual Report
                            on Form 10-K for the year ended December 31, 1993).
          10.9           -- Amendment to Employment Agreement, dated as of December
                            2, 1994, between the Company and Richard W. Scott
                            (incorporated by reference to Exhibit 10.4 of the Report
                            on Form 8-K of the Company dated December 2, 1994).
</TABLE>
<PAGE>   91
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         *10.10          -- Termination Agreement, dated as of February 10, 1996,
                            between the Company and Michael J. Akers.
          10.11          -- Termination Agreement, dated as of May 15, 1996, between
                            the Company and Bruce R. Abrams (incorporated by
                            reference to Exhibit 3.2 to the Company's Quarterly
                            Report on Form 10-Q for the quarter ended June 30, 1996).
          10.12          -- Consulting Agreement, as amended, dated as of November 4,
                            1993, between the Company and Alan Richards and March 15,
                            1994 modification, which provides that the services will
                            be rendered through Alan Richards Consulting Inc.
                            (incorporated by reference to Exhibit 10.23 to the
                            Company's Annual Report on Form 10-K for the year ended
                            December 31, 1993).
          10.13          -- Replacement Consulting Agreement, dated as of July 10,
                            1996, between the Company and Alan Richards Consulting,
                            Inc. (incorporated by reference to Exhibit 10.2 to the
                            Company's Quarterly Report on Form 10-Q for the quarter
                            ended June 30, 1996).
         *10.14          -- WesternSave Plan, as amended.
          10.15          -- Amended and Restated WesternSave Trust (incorporated by
                            reference to Exhibit 10.1 to the Company's Quarterly
                            Report on Form 10-Q for the quarter ended September 30,
                            1995).
          10.16          -- Western National Corporation Supplemental Plan
                            (incorporated by reference to Exhibit 10.37 to the
                            Company's Annual Report on Form 10-K for the year ended
                            December 31, 1994).
          10.17          -- Western National Corporation Supplemental Plan Trust
                            Agreement (incorporated by reference to Exhibit 10.17 to
                            the Company's Annual Report on Form 10-K for the year
                            ended December 31, 1995).
          10.18          -- The Company's 1993 Stock and Incentive Plan, as amended
                            (incorporated by reference to Exhibit 10.18 to the
                            Company's Annual Report on Form 10-K for the year ended
                            December 31, 1995).
         *10.19          -- Western National Corporation Job Security Plan, as
                            amended.
          10.20          -- Shareholder's Agreement, as amended, between American
                            General Corporation and the Company (incorporated by
                            reference to Exhibits 10.2 and 10.3 of the Report on Form
                            8-K/A of the Company dated September 17, 1996).
          10.21          -- Stock Purchase Agreement, dated as of September 13, 1996,
                            between American General Corporation and the Company
                            (incorporated by reference to Exhibit 10.1 of the Report
                            on Form 8-K/A of the Company dated September 17, 1996).
          10.22          -- Marketing Agreement between American General Life
                            Insurance Company and Western National Life Insurance
                            Company (incorporated by reference to Exhibit 10.1 to the
                            Company's Quarterly Report on Form 10-Q for the quarter
                            ended March 31, 1995).
          10.23          -- Consolidated Federal Income Tax Agreement, dated February
                            21, 1989, among Conseco and certain subsidiaries,
                            including Western, as amended (incorporated by reference
                            to Exhibit 10.10 to the Company's Annual Report on Form
                            10-K for the year ended December 31, 1993).
</TABLE>
<PAGE>   92
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
          10.24          -- Separation Agreement, dated February 8, 1994, between the
                            Company and Conseco, together with February 15, 1994
                            Agreement for Assignment and Assumption of Structured
                            Settlement Obligations between Conseco, the Company and
                            Western, and March 23, 1994 Letter Agreement between
                            Conseco, the Company and Western regarding structured
                            settlement annuities (incorporated by reference to
                            Exhibit 10.9 to the Company's Annual Report on Form 10-K
                            for the year ended December 31, 1993).
          10.25          -- Insurance Services Agreement, dated February 15, 1994,
                            between the Company and Conseco (incorporated by
                            reference to Exhibit 10.16 to the Company's Annual Report
                            on Form 10-K for the year ended December 31, 1993).
          10.26          -- Amendment Agreement, dated as of December 2, 1994,
                            between Conseco, Inc. and the Company (incorporated by
                            reference to Exhibit 10.2 of the Report on Form 8-K of
                            the Company dated December 2, 1994).
          10.27          -- Second Amendment Agreement, dated as of November 10,
                            1995, between Conseco, Inc. and the Company (incorporated
                            by reference to Exhibit 10.29 to the Company's Annual
                            Report on Form 10-K for the year ended December 31,
                            1995).
          10.28          -- Investment Services Agreement, dated as of October 1,
                            1995, between Conseco, Inc. and WNL Investment Advisory
                            Services, Inc. (incorporated by reference to Exhibit
                            10.29 to the Company's Annual Report on Form 10-K for the
                            year ended December 31, 1995).
          10.29          -- Conseco Note, dated February 8, 1994 (incorporated by
                            reference to Exhibit 10.25 to the Company's Annual Report
                            on Form 10-K for the year ended December 31, 1993).
          10.30          -- Promissory Note and Security Agreement, dated February
                            15, 1994, between the Company and Michael J. Poulos
                            (incorporated by reference to Exhibit 10.26 to the
                            Company's Annual Report on Form 10-K for the year ended
                            December 31, 1993).
          10.31          -- Credit Agreement, dated June 8, 1995, among Western
                            National Corporation, First Union National Bank of North
                            Carolina, and certain other financial institutions
                            (incorporated by reference to Exhibit 10.2 to the
                            Company's Quarterly Report on Form 10-Q for the quarter
                            ended June 30, 1995).
         *10.32          -- Credit Agreement, dated February 20, 1997, among Western
                            National Corporation, First Union National Bank of North
                            Carolina, and certain other financial institutions.
          10.33          -- Lease Agreement, dated October 26, 1993, between Western
                            and Marathon Oil Company (incorporated by reference to
                            Exhibit 10.15 to the Company's Annual Report on Form 10-K
                            for the year ended December 31, 1993).
         *11.1           -- Computation of Per Share Earnings.
         *12.1           -- Computation of Ratios of Earnings to Fixed Charges.
         *21.1           -- Subsidiaries of the Company.
         *23.1           -- Consent of Independent Accountants.
         *27.1           -- Financial Data Schedule
</TABLE>
 
---------------
 
* Filed herewith.