<PAGE>
 
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549


                        ------------------------------
                                    FORM 10-K
                        ------------------------------


                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934



For the fiscal year ended December 31, 1997      Commission File Number  0-26788


                        THE GUARANTEE LIFE COMPANIES INC.

           (Exact Name of the Registrant as Specified in its Charter)

    Delaware                                        47-0785066
(State of Incorporation)             (I.R.S. Employer Identification Number)

                 8801 Indian Hills Drive, Omaha, Nebraska 68114
                    (Address of Principal Executive Offices)

                  Registrant's telephone number: (402) 361-7300

           Securities registered pursuant to Section 12(b) of the Act:

                                                     Name of Each Exchange on
Title of Each Class                                       Which Registered
-------------------                                       ----------------
     NONE

           Securities registered pursuant to Section 12(g) of the Act:

                               Title of Each Class
                               ------------------- 
                          Common Stock, $0.01 Par Value

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 (or for such shorter period that the registrant was
required to file such reports), 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]

As of March 17, 1998, 8,838,101 shares of Common Stock were outstanding. The
aggregate market value of such shares held by nonaffiliates was approximately
$243,047,778.

Select materials from the Proxy Statement for the Annual Meeting of
Shareholders, scheduled for May 14, 1998, have been incorporated by reference
into Part III of this Form 10-K.

Select materials from the 1997 Annual Report to Shareholders have been
incorporated by reference into Parts II and IV of this Form 10-K.

                                       1
<PAGE>
 
===============================================================================

PART I.

ITEM 1.  Business.

Forward-looking Statements

     This analysis contains numerous forward-looking statements. All
forward-looking statements are inherently uncertain as they are based on various
management expectations and assumptions concerning future events and they are
subject to numerous known and unknown risks and uncertainties which could cause
actual results to differ materially from those projected. Due to the
uncertainties inherent in forward-looking statements, readers are urged not to
place undue reliance on these statements.

General

     On December 26, 1995, Guarantee Mutual Life Company was converted to a
stock life insurance company ("Demutualization"), renamed Guarantee Life
Insurance Company, and became a wholly-owned subsidiary of The Guarantee Life
Companies Inc. ("Holding Company"). For this discussion, "Guarantee Life" will
refer to the operations of the consolidated companies, and "Guarantee Life
Insurance" will refer to Guarantee Life Insurance Company.

     Guarantee Life Insurance was organized in Nebraska in 1901 as a mutual
assessment association and became a mutual legal reserve life insurance company
in 1931. The Holding Company, a Delaware corporation, was formed on November 28,
1994, in anticipation of and for the purpose of facilitating the
Demutualization.

     Guarantee Life operates in two business segments, the group insurance
business and the individual insurance business, providing group life and health
insurance to employers and other groups and providing life insurance and
annuities for individuals. Guarantee Life operates its group insurance business
through two divisions, the Employee Benefits Division ("EBD") and the Group
Special Markets Division ("GSM"). EBD markets group non-medical coverages,
including term life, long-term and short-term disability, dental and vision,
("Core Products") primarily through regional group sales offices. GSM markets
specialty medical products ("Specialty Products"), such as excess loss, medical
reimbursement insurance for business executives, and related Core Products
through additional distribution systems such as Third Party Administrators
("TPAs"), Managing General Underwriters ("MGUs") and Blue Cross/Blue Shield
organizations. Guarantee Life's individual insurance business is conducted
through the Individual Division. In 1997, Guarantee Life's principal business
operations were conducted by Guarantee Life Insurance, which is authorized to
transact life and health insurance in 48 states and the District of Columbia.

     Guarantee Life manages five basic risks: mortality, morbidity, investment
yield, persistency and expense. Product pricing is generally determined by
reference to actuarial calculations and statistical assumptions principally
relating to mortality, morbidity and persistency, investment yield assumptions,
estimates of expenses and management's judgment as to market and competitive
conditions. The premiums and deposits received, together with assumed investment
earnings, are designed to cover policy benefits, expenses and policyholder
dividends and return a profit to Guarantee Life. These profits arise from the
margin between mortality or morbidity charges and insurance benefits paid, the
margin between actual investment results and the investment income credited to
policies (either directly or indirectly through dividends to policyholders) and
the margin between expense charges and actual expenses. The level of profits
also depends on persistency because business acquisition costs, particularly
agent commissions, are recovered over the life of the policy.

     On December 23, 1997, Guarantee Life completed its acquisition of PFG,
Inc., and its subsidiaries ("PFG"), in a transaction valued at $37.3 million
which was accounted for as a purchase. PFG, Inc.'s wholly-owned subsidiaries
include AGL Life Assurance Company ("AGL") and "Philadelphia Financial Group"
which consists of Philadelphia Financial Group, Inc., PFG Distribution Company,
Philadelphia Financial Group Agency of Ohio, Inc., PFG Insurance Agency of
Texas, Inc., and Philadelphia Financial Insurance Agency of Massachusetts, Inc.

     AGL, formerly American Guardian Life Assurance Company, was organized in
1960. AGL's business is focused on the sale of term insurance through brokers.
It is licensed in 45 states and the District of Columbia. AGL will be managed as
part of Guarantee Life's individual insurance business.

     Philadelphia Financial Group, Inc. was established in 1995 to provide
marketing services and products to the financial institutions marketplace, and
PFG Distribution Co. is a broker-dealer for variable life and annuity products.
Philadelphia Financial Group Inc.'s business is focused on the sale of AGL's
private placement variable life and annuity products for the 

                                       2
<PAGE>
 
high net worth marketplace. Philadelphia Financial Group, Inc. and PFG
Distribution Co. will be operated as independent subsidiaries and managed as
part of Guarantee Life's individual insurance business.

     On December 31, 1997, Guarantee Life completed a coinsurance agreement to
acquire a block of excess loss policies from EBPLife Insurance Company. As the
policies renew, the Company intends to re-write selected risks on Guarantee Life
Insurance policy forms.

     Guarantee Life Insurance is rated "A (Excellent)" by A.M. Best, A.M. Best's
third highest rating. AGL is rated "B++ (Very Good)" by A. M. Best, its fifth
highest rating. A.M. Best assigns ratings to solvent insurance companies, which
currently range from "A++ (Superior)" to "D (Vulnerable)" and include 13 rating
categories.

Business Strategy

     Guarantee Life's management team has developed a business strategy to
improve its long-term competitive position. This strategy capitalizes on
Guarantee Life's history of quality service, its approach to the marketing and
administration of its group insurance businesses, the improving operations of
its individual insurance business and its high-quality investment portfolio.

     Guarantee Life's strategic priorities include:

        .   Growing the Employee Benefits Division and improving its
            profitability by increasing sales of Core Products, while
            constraining expense growth, thereby reducing unit costs.
            Management's focus is on the national sales office distribution
            system, direct access service, a market focus on providing low cost,
            basic programs to small and medium-sized employers, and on managing
            the operational infrastructure to efficiently handle a large volume
            of new and inforce business in a standardized, cost-effective
            manner;

        .   Increasing its presence in the excess loss markets through the
            Group Special Markets Division. Growth through acquisition will
            continue to be an important business strategy for this division;

        .   Improving the marketing performance of the individual insurance
            business while continuing to improve its financial results by
            expanding its distribution systems, introducing new products that
            are both competitive and profitable, and aggressively managing fixed
            expenses. Growth through acquisition will continue to be an
            important strategy for this business; and

        .   Maintaining high quality, adequately liquid investment portfolios.

Acquisitions

     Since 1989, Guarantee Life has acquired six blocks of group insurance
business, a block of annuities, a block of universal life policies, a small life
insurance company in 1992 and PFG in 1997. Guarantee Life intends to continue
its strategy of pursuing similar acquisitions of blocks of insurance business
and small insurance companies and other insurance-related opportunities.
Management believes that acquisitions will lower unit costs by increasing the
number of policies and the amount of premiums over which fixed expenses are
spread.

                                       3
<PAGE>
 
Segment Information

    The following table sets forth, by business segment, certain financial
    data for Guarantee Life for the periods indicated.

           Selected Consolidated Financial Data by Business Segment

<TABLE> 
<CAPTION> 

                                                                    At or for the Years Ended December 31,
                                                         --------------------------------------------------------------       
                                                            1997          1996         1995         1994        1993
                                                         ---------    ---------     ---------    ---------    ---------
                                                                                      (In Millions)
<S>                                                      <C>          <C>           <C>          <C>          <C>       
Revenues from continuing operations (1):
   Group insurance business........................       $  228.2    $   175.1     $   182.2    $   140.1    $   125.6
   Individual insurance business (2)...............           82.2         75.8         112.2        107.4        110.8
   Corporate.......................................          (0.1)          1.1             -            -            -
                                                         ---------    ---------     ---------    ---------    ---------
   Total...........................................       $  310.3    $   252.0     $   294.4    $   247.5    $   236.4
                                                         =========    =========     =========    =========    =========
Income from continuing operations before 
   income taxes:
   Group insurance business........................           $9.3    $    10.1     $     4.4    $    14.6    $    17.1
   Individual insurance business...................           18.2         13.6          15.5         12.8         10.6
   Corporate.......................................          (1.8)         (1.1)            -            -            -
                                                         ---------    ---------     ---------    ---------    ---------
   Total...........................................          $25.7    $    22.6     $    19.9    $    27.4    $    27.7
                                                         =========    =========     =========    =========    =========
Assets (at period end):
   Group insurance business........................         $255.7    $   224.2     $   221.8    $   204.7    $   187.2
   Individual insurance business...................        1,187.4      1,029.5         985.7        908.0        920.0
   Corporate.......................................           54.9         19.1          22.7            -            -
   Discontinued Operations.........................           21.0         32.4          50.6         75.3         45.6
                                                         ---------    ---------     ---------    ---------    ---------
   Total Consolidated Assets.......................       $1,519.0     $1,305.2      $1,280.8     $1,188.0     $1,152.8
                                                         =========    =========     =========    =========    =========
</TABLE> 
-----------
(1) Includes investment income allocated to each business segment.
(2) The results of the closed block subsequent to December 31, 1995 are reported
on one line of the Consolidated Statements of Income. Accordingly, the
line-by-line income statements are not comparable for all periods presented.
Total assets include the assets of the closed block, therefore amounts are
comparable for all periods presented.

Group Insurance Business

     Guarantee Life's group insurance includes Core Products, including term
life, accidental death and dismemberment, short- and long-term disability,
dental and vision insurance, and Specialty Products, including excess loss
insurance for employers with self-funded medical plans and medical reimbursement
insurance for business executives. In 1996, to more effectively manage the
growth of Guarantee Life's group insurance business, this segment was separated
into two divisions. The Employee Benefits Division manages the Core Products
distributed through the national sales office distribution system, and the Group
Special Markets Division manages the Specialty Products and Core Products
distributed through its MGU's, TPA's, Blue Cross/Blue Shield plans and managed
care organizations. As of December 31, 1997, Guarantee Life's group insurance
business had $24.7 billion of life insurance in force.

     Guarantee Life intends to grow the group insurance business and improve its
profitability by increasing sales of Core Products, marketed through its
national distribution system of sales offices. By emphasizing sales of Core
Products while carefully managing the growth of the Specialty Products,
Guarantee Life intends to maintain its diversification, mitigating the possible
adverse impact on its group insurance business from potential health care
reforms and the cyclical nature of the group health market.

     As the national sales office distribution system expands, Guarantee Life
will continue its home office support strategy of providing distributors and
customers direct access to home office personnel. Management believes this
strategy results in (i) better service to distributors and customers through
direct contact with personnel administering their business, (ii) improved
underwriting consistency and control for Guarantee Life through centralization
of underwriting decisions, (iii) increased productivity of regional marketing
personnel by permitting them to focus on marketing Guarantee Life's products
rather than performing administrative functions and (iv) ultimately, lower
distribution costs by avoiding additional layers of management and regional
office support staff.

                                       4
<PAGE>
 
Marketing

     Guarantee Life's group products are marketed primarily to businesses with
up to 500 employees. Its Core Products are marketed primarily through its
national sales offices distribution system, which develops group insurance
business through employee benefit firms and brokers. Guarantee Life distributes
its Specialty Products, and to a lesser extent its Core Products, through
additional distribution systems. A senior vice president located in the home
office manages the employee benefit division's marketing of the Core Products
through the national sales office distribution system. Six regional vice
presidents, who supervise group field operations, operate under his direction,
as well as the Voluntary Products' vice president. A senior vice president
located in the home office manages the Group Special Markets Division's
marketing of Specialty and Core Products.

     National Distribution System. Guarantee Life has developed group sales
offices in major metropolitan areas of the United States to facilitate the
development of relationships with, and improve the provision of marketing
services to, employee benefit firms and brokers and to increase the sales of
Core Products. As of December 31, 1997, Guarantee Life had 21 group sales
offices in major metropolitan areas in 18 states. This distribution system
generated $75.0 million of first year annualized premiums during the year ended
December 31, 1997 and $49.2 million of first year annualized premiums for the
year ended December 31, 1996. The 43.0% growth in group net earned premiums from
Core Products in 1997 is primarily a result of the sales growth from existing
group offices and continued expansion of the national distribution system.

     The following table sets forth information regarding when the group sales
offices were established.

<TABLE> 
<CAPTION> 
                                                     Group Sales Offices

                          1997              1996             1995              1994             1993              1992
                      -------------      -----------    --------------   ---------------    --------------  ---------------
<S>                   <C>                <C>            <C>              <C>                <C>             <C> 
                        Nashville          Boston         Philadelphia       Portland         Kansas City       Cincinnati
                                           Phoenix          Detroit           Houston         Los Angeles       Charlotte
                                            Miami                             Atlanta           Chicago         Baltimore
                                                                               Dallas           Denver           Orlando
                                                                            Minneapolis                       San Francisco
                                                                              Seattle
 Total number of            21                20               17                15                9                5
offices at period
       end
----------
</TABLE> 
     Guarantee Life selects locations for its group sales offices based on the
availability of qualified personnel, the characteristics of the potential market
and the extent to which such markets are already served by other providers.
Guarantee Life performs a comprehensive review of the marketing performance and
expenses for each group sales office on a monthly basis. In addition to opening
new offices, Guarantee Life also intends to increase the marketing staff at
existing offices.

     Additional Distribution Systems. Guarantee Life distributes its Specialty
Products, and to a lesser extent its Core Products, through additional
distribution systems. These distributors include MGUs, TPAs, Blue Cross and Blue
Shield plans and health maintenance organizations. These multiple distribution
systems allow the sale of Group Products to markets that complement those served
by Guarantee Life's group sales offices.

     Guarantee Life markets its Specialty Products primarily through MGUs and
TPAs. Guarantee Life's excess loss insurance product is marketed by National
Benefit Resources, Inc. ("NBR"), which accounted for 64.1% of Guarantee Life's
excess loss insurance premiums during 1997. NBR performs all marketing,
underwriting and administrative services for the excess loss insurance it sells.
The balance of excess loss insurance sales are marketed directly by TPAs and
administered by Guarantee Life. Guarantee Life's Exec-U-Care medical
reimbursement program is marketed exclusively through Seabury and Smith, Inc.,
which performs all marketing, underwriting and administrative services for this
product.

                                       5
<PAGE>
 
Group Products

     Guarantee Life's Core Products and Specialty Products accounted for $177.8
million, or 88.9%, and $22.2 million, or 11.1%, of group net earned premiums,
respectively, for the year ended December 31, 1997. The following table sets
forth net earned premiums for Guarantee Life's group insurance products for the
past five years.

<TABLE> 
<CAPTION> 
                                                  Group Net Earned Premiums

                                                                             For the Years Ended December 31,
                                                         ---------------------------------------------------------------
                                                             1997         1996         1995          1994       1993
                                                           --------     --------    ---------     --------    --------- 
                                                                                (In Millions)   
<S>                                                        <C>          <C>          <C>          <C>         <C> 
Core products......................................        $ 177.8      $  124.3     $  104.6     $   79.5    $    66.1
Specialty products.................................           22.2          29.3         58.5         32.4         25.9
                                                           --------     --------    ---------     --------    --------- 
Total group business...............................        $ 200.0      $  153.6     $  163.1     $  111.9    $    92.0
                                                           ========     ========    =========     ========    ========= 
</TABLE> 

Core Products

     Group Life. Group term life provides insurance coverage on the insured for
a specified period and has no accumulation value. Coverage is offered to
employees and their dependents. Group life accounted for $71.0 million, or
39.9%, of net earned premiums from Core Products for the year ended December 31,
1997.

     Accidental Death and Dismemberment. Group accidental death and
dismemberment insurance provides insurance coverage that is payable after the
accidental death of the insured in an amount based on the face amount of the
policy or after a covered dismemberment of the insured in an amount based on the
schedule to the policy. Accidental death and dismemberment accounted for $9.9
million, or 5.6%, of net earned premiums from Core Products for the year ended
December 31, 1997.

     Short-Term Disability. Short-term disability provides a weekly benefit
amount to insured employees when they are unable to work due to an accident or
an illness. The period that insured employees must remain disabled prior to
becoming eligible for benefit payments ranges from zero to 30 days for
disability due to accident and from three to 30 days for disability due to
sickness. Short-term disability accounted for $19.1 million, or 10.7%, of net
earned premiums from Core Products for the year ended December 31, 1997.

     Long-Term Disability. Long-term disability provides a monthly benefit for
longer periods of time than covered by short-term disability insurance when
insured employees are unable to work due to disability. Employees may receive
total or partial disability benefits. Long-term disability accounted for $35.1
million, or 19.7%, of net earned premiums from Core Products for the year ended
December 31, 1997.

     Dental Insurance. Dental insurance provides partial reimbursement for
covered dental expenses. Plans may cover only preventive and basic care or more
comprehensive care, including major services and orthodontia. Dental insurance
accounted for $42.7 million, or 24.0%, of net earned premiums from Core Products
for the year ended December 31, 1997.

     Voluntary Products. Guarantee Life's voluntary products currently include
term life, dependent life, dental, vision, accidental death and dismemberment,
short-term disability, and long-term disability insurance that is paid for by
employees through payroll deductions. In 1997, sales of voluntary products
increased to $10.1 million from $6.0 million in 1996.

Specialty Products

     Excess Loss. Excess loss insurance reimburses employers for self-funded
medical plan costs when those costs exceed aggregate limits specified under the
plan or when a single claim exceeds a specified limit. Guarantee Life provides
aggregate and specific excess loss insurance to small and medium-employer groups
of 50 or more lives with self-funded medical plans. Excess loss accounted for
$15.7 million, or 70.7%, of net earned premiums from Specialty Products for the
year ended December 31, 1997.

     Exec-U-Care. Under the Exec-U-Care program, Guarantee Life supplements an
employer's basic medical plan by reimbursing business executives for many of the
expenses not covered by that plan. Coverage automatically includes a
prescription drug card and an accidental death and dismemberment benefit.
Exec-U-Care accounted for $6.1 million, or 27.5%, of net earned premiums from
Specialty Products for the year ended December 31, 1997.

                                       6
<PAGE>
 
Product Development and Management

     Guarantee Life's product actuaries in its group business set underwriting
guidelines and manage the pricing and actuarial functions for each product line.
The product actuaries are responsible for monitoring experience, revising or
implementing new underwriting guidelines, adjusting pricing and ensuring such
changes are communicated to the underwriters and regional group offices. After
release, sales and pricing assumptions are monitored to assist in making any
necessary adjustments.

     Due to the rapid growth in Core Products, and a strategic assessment of the
small and medium-sized employer market, management took steps in 1996 to
re-engineer some of the group business' processes to gain efficiencies. A
transformation project was initiated to better align home office service teams
with designated group sales offices for underwriting, premiums, enrollment, and
customer service. The elimination of redundant data entry and multiple hand-offs
is expected to increase productivity by over 60% when all new processes are
fully implemented. Management believes this will give Guarantee Life the ability
to significantly lower units costs and gain strategic service advantages. During
1997, the regional alignment of teams was completed, quoting processes
streamlined and specifications for other processes and systems established. A
delay in the technological implementation of the new quoting system planned for
the third quarter 1997 postponed the expected productivity increases until 1998.
In 1998, new quoting technology is expected to further streamline the quoting
and new case issue process, and the initial rollout of in-force processes will
also improve efficiency.

Insurance Underwriting

     Guarantee Life uses underwriting standards to protect the quality of its
group life and health business. Standard rating systems have been developed for
each product based on Guarantee Life's own past experience and relevant industry
experience. Home office underwriters or expert systems evaluate the risk
characteristics of prospective insured groups. The premium rate quoted to a
prospective insured group is based on standard rating formulae adjusted within
limits using pre-approved discounting flexibility, and for larger groups, the
group's past claims experience rate.

Individual Insurance Business

     Guarantee Life's individual insurance products include universal life, term
life and interest-sensitive whole life insurance and annuities. These products
are marketed primarily to individuals with family incomes of up to $150,000 and
small business owners primarily by an independent agency force of approximately
1,325 licensed insurance agents. As of December 31, 1997, Guarantee Life's
individual insurance business had $12.9 billion of life insurance in force and
approximately 208,000 life and annuity policies in force.

     Guarantee Life plans to grow sales of individual life and annuity business
while improving its financial results by continuing to introduce products that
are competitive and profitable, including equity indexed products, improving
retention and productivity of its agents and aggressively managing fixed
expenses.

     Over the last few years, Guarantee Life has replaced its entire individual
life portfolio with new products which are designed to provide better value to
customers and improved profitability. Management believes that this new life
portfolio plus an improved annuity portfolio featuring an equity indexed
deferred annuity, will help increase sales from existing producers and allow
sales management to effectively recruit marketing organizations and agents.
Guarantee Life will continue to aggressively manage fixed expenses and reduce
unit expense rates.

Marketing

     Guarantee Life's products are marketed primarily to individuals with family
incomes up to $150,000 and small business owners with fewer than 25 employees
and earnings up to $150,000. Guarantee Life's individual insurance products are
marketed primarily by an independent agency force of approximately 1,325
licensed insurance agents. During 1997, the top 100 agents produced nearly 90%
of Guarantee Life's individual insurance business. Most of the individual
insurance agents also sell insurance products offered by other companies.

     A vice president located in the home office manages Guarantee Life's agency
marketing efforts. Three regional vice presidents divide responsibility for
field relationships. The regional vice presidents are responsible for recruiting
and developing quality RMOs and PPGAs.

Individual Products

     Guarantee Life currently offers a portfolio of universal life products,
annuities, traditional life products, and interest-sensitive whole life
products. Life insurance products and annuities accounted for 17.9% and 82.1%,
respectively, of the individual insurance business's first year annualized
premiums for 1997. As part of the strategy to improve the financial and
marketing performance of its individual insurance business, Guarantee Life has
replaced its entire individual life insurance 

                                       7
<PAGE>
 
portfolio over the last few years. These new products are designed to provide
better value to customers and improve profitability relative to the previous
generation of products.

     Universal Life Products. Universal life provides benefits for the life of
the insured. Within limits established by Guarantee Life, the Internal Revenue
Code and state regulations, policyholders may vary their premiums and the amount
of the death benefit as long as there are sufficient policy funds to cover all
policy charges for the coming period. Over the past four years, Guarantee Life
introduced five new universal life products, which are designed to provide
better value to the consumer and increase profitability for Guarantee Life.
Sales of universal life policies represented 81.9% of first year annualized
premiums for individual life products for the year ended December 31, 1997.

     Annuities. Guarantee Life markets single premium fixed annuities, flexible
premium fixed annuities and an equity indexed annuity. For fixed annuities, the
contract accumulates tax-deferred interest and provides for periodic fixed
payments to the annuitant in the future. Flexible premium annuities allow for
flexibility, within certain parameters established by Guarantee Life, in the
payment of periodic annuity premiums. In the third quarter of 1996, Guarantee
Life introduced an equity indexed single premium deferred annuity with credited
rates linked to the growth in the S&P 500 index which accounted for over 80% of
annuity sales in 1997. Guarantee Life is reinsuring 70% of the risk on this
product. Sales of the indexed annuity slowed significantly during the fourth
quarter, 1997 due to reduced participation rates.

     Traditional Life Products. Guarantee Life's traditional life products
include whole life and term life products. Participating whole life generally
provides for level premiums and a level death benefit and requires payments in
excess of the mortality cost in the early years to offset increasing mortality
costs in later years. Guarantee Life introduced interest-sensitive whole life
products in 1995 to take the place of participating whole life insurance
products, which are no longer sold after the Demutualization. As part of the
Demutualization, all participating policies are included in the closed block.

     Guarantee Life also markets term policies that provide life insurance
protection for a specified period. As such, they are mortality-based and have no
accumulation values. Guarantee Life introduced a new term life insurance
portfolio of three products in 1995; two of these policies have a 10-year rate
guarantee and are renewable after one or 10 years, and the other has a 15-year
rate guarantee and is renewable after 15 years. The portfolio was updated and a
20-year product was added in late 1996. The portfolio was updated again in 1997.
Minimum policy size is $50,000, except for the one year product which is
$100,000. The underwriting of these products begins with a teledirect process,
utilizing medical professionals under contract with Guarantee Life, who contact
the insurance applicant by telephone after receiving a request form. Before a
policy is issued, the proposed insured must satisfactorily complete a blood test
and medical examination. An underwriter makes the final decision whether to
accept the risk. Management believes this process enhances the efficiency and
quality of the underwriting process. The teledirect application process also
enhances the efficiency of the agent, who can devote more time to selling rather
than filling out applications. Guarantee Life substantially reinsured this
portfolio and, as a result, this portfolio did not produce significant amounts
of net earned premium in the three years ended December 31, 1997. For the year
ended December 31, 1997, term life sales represented 13.1% of first year
annualized premiums for individual life products.

     Interest-Sensitive Whole Life Products. Interest-sensitive whole life
products charge a fixed annual premium and provide guaranteed death benefits and
cash values. Interest-sensitive whole life products may build cash values
greater than that which is guaranteed by crediting higher than guaranteed rates
of interest or charging less than guaranteed costs of insurance. These products,
although similar to universal life products, differ in that a fixed (as opposed
to flexible) premium obligation is undertaken by the policyholder. For the year
ended December 31, 1997, sales of interest-sensitive whole life products
represented 5.0% of first year annualized premiums for individual life products.

                                       8
<PAGE>
 
     The following table sets forth the first year annualized premiums for
Guarantee Life's individual products for the periods indicated.

                            Sales Activity by Product
                         First Year Annualized Premiums

<TABLE> 
<CAPTION> 
                                                                      For the Years Ended December 31,
                                                         -----------------------------------------------------------
                                                              1997         1996        1995         1994       1993
                                                              ----         ----        ----         ----       ----
                                                                                  (In Millions)
<S>                                                      <C>           <C>         <C>          <C>        <C> 
Universal life.....................................      $     5.8     $     5.5   $     4.3    $     7.0  $     8.0
Traditional life (1)...............................            1.2           1.0         1.0          1.4        1.7
                                                         ---------     ---------   ---------    ---------  ---------
Total life(1)......................................            7.0           6.5         5.3          8.4        9.7
Annuities (2)......................................           25.2           9.3         8.1         21.5       20.1
                                                         ---------     ---------   ---------    ---------  ---------
     Total.........................................       $   32.2      $   15.8    $   13.4     $   29.9  $    29.8
                                                         =========     =========   =========    =========  =========
</TABLE> 
----------
(1)  Prior to 1995, does not include interest-sensitive whole life products,
     which were introduced in 1995.
(2)  The increase in annuity sales was primarily due to the equity indexed
     annuity product introduced in August, 1996.

     Management believes sales of universal life and traditional life products
declined in 1994 and 1995 principally as a result of changes arising from the
Demutualization, the transition to new products and a lower field compensation
structure. Annuity sales declined substantially in 1995 due to increased
competition from other financial products.

Crediting Rates and Policyholder Dividends

     Guarantee Life pays dividends, credits interest and determines other
nonguaranteed elements on its individual insurance policies depending on the
type of product. Although certain nonguaranteed elements (such as initial
interest rates on an annuity product) may be fixed for a limited, predetermined
period, Guarantee Life generally determines dividends, resets interest rates and
establishes other nonguaranteed elements based on experience as it emerges and
with regard to competitive factors. Guarantee Life Insurance does not maintain
separate accounts of assets for its interest-sensitive products; however, for
risk management and reporting purposes, assets are internally segmented among
the traditional life, universal life, annuities and group insurance product
lines. AGL maintains separate accounts for its variable universal life and
annuity product lines.

     Policyholder dividends are declared and paid only on those policies
included in the closed block, including traditional whole life, some term life
and some older fixed annuity policies. Policyholder dividend scales are
established annually by Guarantee Life, and are based on the performance of an
asset portfolio which has been identified as supporting these policies, the
mortality experience of the policies, expense levels and taxes.

     For universal life policies and annuity contracts, credited interest rates
are established on a monthly basis by Guarantee Life's interest rate committee.
Crediting rates are based on the performance of the asset portfolio supporting
these policies and competitive considerations. Mortality charges for universal
life policies are determined based on the mortality experience of the policies
and are reset on a less frequent basis. For annuities, crediting rates are
determined for groups of identified deposits and reflect the timing of the
deposits and the investment performance of the assets backing those deposits.
Guarantee's average crediting rates on universal life contracts were 5.68%,
5.90% and 6.03% and its average crediting rates on annuities were 5.38%, 5.46%
and 5.93% for the years ended December 31, 1997, 1996 and 1995, respectively.

     For the equity indexed annuity introduced in 1996, participation rates are
established on a weekly basis. The participation rates are applied to increases
in the equity index defined in the contracts to determine the credited interest
rates. The participation rates are set based on various factors, including the
current interest rate environment and competitive considerations.

Product Development

     Guarantee Life's individual insurance product development committee, which
includes representatives from all individual insurance business disciplines as
well as investment and legal areas, designs, analyzes and conducts operational
tests of new products. An advisory council, composed of agents and home office
personnel, works with marketing and actuarial personnel to determine the final
design for the product. Assuming a product is approved, a product team puts the
product through extensive model office testing prior to release. After release,
sales and pricing assumptions are monitored and any necessary adjustments are
made to maintain profitability standards.

                                       9
<PAGE>
 
Insurance Underwriting

     Guarantee Life follows detailed, uniform underwriting practices and
procedures in its individual business designed to assess and qualify risks
before issuing coverage to qualified applicants. Guarantee Life has underwriters
who evaluate policy applications on the basis of information provided by the
applicant and others. Management believes that its underwriting standards
produce mortality results consistent with the assumptions used in product
pricing, while also allowing competitive risk selection. Blood testing is
required for all individual insurance policies with face amounts of $100,000 or
more at issue ages of 16 and over, and other tests, such as medical
examinations, electrocardiograms, blood tests, urine tests, treadmill tests,
chest x-rays and inspection reports, are used to evaluate certain individual
insurance policy applications, depending on the size of the policy, the age of
the proposed insured and other factors.

Closed Block

     The closed block was established on the date of the Demutualization and is
designed to give reasonable assurance to holders of policies included therein
that assets will be available to maintain the dividend scales which were in
effect prior to the Demutualization if the experience underlying such scales
continues.. Guarantee Life allocated assets to the closed block in an amount
expected to produce cash flows which, together with anticipated revenues from
the closed block, are expected to be sufficient to support the closed block,
including provision for payment of claims, certain expenses and taxes, and for
the continuation of dividend scales in effect for the year preceding the
Demutualization, if the experience underlying such scales (including the
portfolio interest rate) continues, and for appropriate adjustments in such
scales if the experience changes. The assets, including the revenue therefrom,
allocated to the closed block business will accrue solely to the benefit of
holders of policies included in the closed block until the closed block is no
longer in effect. To the extent that over time cash flows from the assets
allocated to the closed block and other experience relating to the closed block
are, in the aggregate, more or less favorable than assumed in establishing the
closed block, total dividends paid to closed block policyholders in the future
may be greater than or less than the total dividends that would have been paid
to these policyholders if the dividend scales in effect for 1994 had been
continued. Dividends on policies included in the closed block, as in the past,
will be declared at the discretion of Guarantee Life Insurance's Board of
Directors, may vary from time to time (reflecting changes in investment,
mortality, persistency and other experience factors) and are not guaranteed.
Guarantee Life will not be required to support the payment of dividends on
closed block policies from its general funds, although it could choose to
provide such support.

     If the assets allocated to the closed block, the investment cash flows from
those assets and the revenues from the policies included in the closed block
prove to be insufficient to pay the benefits guaranteed under the policies
included in the closed block, Guarantee Life will be required to make such
payments from its general funds. Since the closed block has been funded to
provide for payment of guaranteed benefits, it should not be necessary to use
other general funds to pay guaranteed benefits unless the closed block
experiences substantial adverse deviations in investment, mortality, persistency
or other experience factors.

     Premiums received and policy benefits paid by Guarantee Life on the
policies included in the closed block and investment cash flows from the assets
allocated to the closed block are added to or withdrawn from the closed block.
Guarantee Life charges the closed block with federal, state or local taxes
relating to the closed block. Guarantee Life also charges the closed block for
commissions and other expenses of administering the policies included in the
closed block.

     Dividends on the closed block policies are set annually by Guarantee Life
Insurance's Board of Directors in accordance with applicable law and with the
objective of exhausting assets in the closed block upon the final required
payment under the last policy in the closed block.

     The closed block will continue in effect until either (i) the last policy
in the closed block is no longer in force or (ii) the closed block is dissolved.
The closed block may not be dissolved without the approval of the Director of
the Nebraska Department of Insurance. If the closed block is dissolved, the
assets associated with the closed block will become part of Guarantee Life's
general funds. If the closed block is not dissolved, the expected life of the
closed block is over 75 years. Even if the Director approves the dissolution of
the closed block, the policies at the time of dissolution shall remain
obligations of Guarantee Life and dividends on these policies shall be
apportioned by Guarantee Life Insurance's Board of Directors in accordance with
policy provisions and actuarial standards.

Discontinued Operations

     In November 1994, Guarantee Life made a decision to withdraw from its
Special Risk segment, an alternate workers' compensation program in Alabama,
Georgia and Louisiana. This decision was the result of unanticipated high levels
of premium growth, which impeded Guarantee Life's ability to maintain
appropriate administrative, operational and underwriting standards and required
levels of risk-based capital that were unacceptable to Guarantee Life's
management. Furthermore, the plans of the managing general agent to continue to
grow the Special Risk segment were not consistent with Guarantee Life's

                                       10
<PAGE>
 
strategy. To facilitate its exit, Guarantee Life entered into a reinsurance
arrangement whereby it cedes 80% of all claims incurred after October 31, 1994.
In addition, Guarantee Life entered into a reinsurance arrangement to limit its
exposure to $10,000 per claim relating to its 20% retention. Guarantee Life
retains the liability for claims incurred on or before October 31, 1994.
Effective November 1, 1995, Guarantee Life ceased writing Special Risk policies.

     Guarantee Life intends to allow the assets and liabilities related to this
business to run off over a period of years as claims are paid, unless an
appropriate sale of this block of business can be made. Guarantee Life does not
believe the disposal of this segment will result in a significant loss.
Guarantee Life believes that, based on current estimates, approximately 75% of
the net liabilities related to discontinued operations will be extinguished
within five years of its ceasing writing business. These estimates are based on
assumptions developed from industry-wide claim data which Guarantee Life
believes are appropriate for the nature of the business involved; however,
actual runoff patterns may differ from these estimates.

Investment Portfolio

General

     Guarantee Life maintains a diversified portfolio of investments, including
fixed maturity securities and mortgage loans. Guarantee Life's objective is to
maintain high quality, well diversified fixed maturity securities portfolios
that produce nominal yields and total returns that supports the various product
line liabilities. The fixed maturity securities portfolio consists primarily of
investment grade corporate fixed maturity securities, high quality
mortgage-backed securities (MBS), high quality asset-backed securities (ABS) and
United States government and agency obligations.

     Although all of its assets support all of its liabilities, Guarantee Life
has developed an asset/liability management approach with separate investment
segments for specific product lines, such as its traditional life insurance
products (which includes the closed block as a subset), universal life,
annuities and group insurance products. As part of this approach, Guarantee Life
develops investment policies and objectives for each product line which form the
basis for distinct investment strategies and performance benchmarks to manage
each product's return and liquidity requirements.

     Management has a general policy of diversifying assets within each asset
category. Guarantee Life monitors and limits the exposure to individual
borrowers, credit risks, industries or property types and geographic locations.
All investments are subject to suitability and diversification requirements
under Nebraska and Pennsylvania law, respectively, and require the approval of
the respective Boards of Directors, or a sub-committee of the Boards.

     Guarantee Life Insurance's demutualization and the establishment of the
closed block significantly affected the presentation of Guarantee Life's
consolidated financial statements. For comparability with prior years'
information, the following tables include closed block invested assets combined
with similar assets outside the closed block.

     The following table summarizes consolidated invested assets by asset
category as of December 31, 1997, 1996, 1995, 1994, and 1993.

<TABLE> 
<CAPTION> 



                                                           CONSOLIDATED INVESTED ASSETS

                                                                   December 31,
                           -------------------------------------------------------------------------------------------
                                 1997                1996              1995              1994               1993
                           -----------------   ---------------   ---------------    ---------------   ----------------
                           Carrying     % of   Carrying   % of   Carrying   % of    Carrying   % of   Carrying   % of
                             Value     Total     Value   Total     Value   Total      Value   Total     Value    Total 
                           --------    -----   --------  -----   --------  -----     -------  -----   --------   -----
                                                              (Dollars in Millions) 
<S>                        <C>         <C>     <C>       <C>     <C>       <C>       <C>      <C>     <C>         <C> 
Fixed maturities:   
   Public(1)..........       $663.1     54.7   $  595.3   54.4   $  580.7   55.0      $540.5   54.8      $496.4   52.3            
   Private............        351.9     29.1      318.6   29.1      317.1   30.0       312.4   31.7       338.7   35.6
                            -------     ----      -----   ----      -----   ----       -----   ----       -----   ----
     Subtotal.........      1,015.0     83.8      913.9   83.5      897.8   85.0       852.9   86.5       835.1   87.9
Equity securities.....          3.7      0.3        3.0    0.3        6.0    0.6         4.9    0.5         6.4    0.7
Mortgage loans........         85.8      7.1       70.2    6.4       61.5    5.8        48.1    4.9        26.1    2.7
Policy loans..........         68.7      5.7       67.5    6.2       63.5    6.0        62.9    6.4        63.3    6.7
Investment real estate          3.4      0.2        6.6    0.6        6.9    0.6         7.2    0.7         7.7    0.8
Other invested assets.         11.6      1.0        9.8    0.9        8.1    0.8         9.1    1.0        11.1    1.2
Short-term                                                      
   investments........         23.3      1.9       23.3    2.1%      12.3    1.2         0.5    0.0         0.3    0.0
                           --------   ------   --------  -----   --------  -----      ------  -----      ------  -----
     Total invested                                             
       assets.........     $1,211.5    100.0%  $1,094.3  100.0%  $1,056.1  100.0%     $985.6  100.0%     $950.0  100.0%
                           ========   ======   ========  =====   ========  =====      ======  =====      ======  =====
</TABLE> 
--------------
(1)   During 1994, Guarantee Life implemented SFAS 115 and, as a result of
      classifying certain of its fixed maturity securities portfolio as
      available-for-sale, the carrying value of such securities reflected
      unrealized gains of $24.5 million, $8.7 

                                       11
<PAGE>
 
      million and $23.8 million as of December 31, 1997, 1996 and 1995 and
      unrealized losses of $36.5 million as of December 31, 1994.

Investment Philosophy

     Guarantee Life employs conservative investment strategies based on the
specific characteristics of each product line. Performance is measured on both a
nominal yield spread basis and on a total return basis. Total return investment
performance evaluation requires that the risk and expected return of each asset
is evaluated regularly. Guarantee Life uses broad-based market indices and
customized liability-based benchmarks to measure the relative performance of its
fixed maturity securities. The current yield of the investment portfolios must
be sufficient to satisfy the interest rate assumptions used in product pricing.
In addition, each portfolio must achieve a satisfactory balance between risk and
expected return and support the investment requirements of the underlying
product. This approach allows Guarantee Life to be more effective in its
asset/liability management efforts since it requires decisions to be based on
both the fair value of each asset and each asset's contribution to investment
income. Guarantee Life's portfolio of invested assets is managed by its
employees, except for its publicly traded Mortgage-backed and Asset-backed
securities which are managed by an external investment manager pursuant to
guidelines adopted by Guarantee Life.

     Guarantee Life seeks to manage the relationship between risk and expected
return and is committed to maintaining a prudent balance of the two. Guarantee
Life is exposed to four major sources of investment risk: credit risk, relating
to the uncertainty attached to the timing and amount of principal and interest
payments; interest rate risk, relating to the economic effects of changing
interest rates; real estate risk, relating to changes in property values due to
changing local economic and demographic conditions; and liquidity risk, relating
to holding investments for which there is no active secondary market, such as
private fixed maturity securities and commercial mortgage loans. Guarantee
Life's principal methods for managing credit risk are credit quality analyses of
each issuer, diversification and asset allocation. Guarantee Life's principal
method for managing interest rate risk is asset/liability management. Guarantee
Life's principal methods of managing real estate risk are geographic and
property diversification, annual property analysis and inspections and periodic
analysis of regional and local economic and demographic statistics. Guarantee
Life's principal methods for managing liquidity risk are asset allocation,
maintenance of a portfolio of public fixed maturity securities in an amount
greater than 50% of invested assets.

     In recent years, Guarantee Life has emphasized investments in fixed
maturity securities which, as of December 31, 1997, comprised 83.8% of the
carrying value of invested assets. Future investment activity will continue to
be focused mainly on investment grade public and private fixed maturity
securities, which comprised 96.6% of fixed maturity securities as of December
31, 1997, and, to a lesser extent, fixed-rate commercial mortgage loans. During
the past three years, the effective yield on Guarantee Life investment portfolio
was 7.7% in 1995, 7.4% in 1996 and 7.4% in 1997. This decline is primarily due
to lower reinvestment rates for fixed maturity securities purchased in recent
periods.

Investment Monitoring and Valuation

     As a part of Guarantee Life's investment management process, it regularly
monitors invested assets. Fixed maturity securities are reviewed upon receipt of
the obligor's financial statements, generally quarterly, for financial
performance and compliance with financial covenants. Generally, Guarantee Life
reviews its commercial mortgage loan portfolio and identifies monthly all
commercial mortgage loans where certain objective or subjective characteristics
cause management to conclude such loans require increased management attention.
Detailed property analyses and property inspections are performed annually for
each commercial mortgage loan. Guarantee Life generally requires borrowers to
submit financial statements for annual review.

     Guarantee Life has policies and procedures which management believes value
invested assets properly and consistently. Certain fixed maturity securities are
classified as available-for-sale, and therefore are carried at fair value in
Guarantee Life's consolidated financial statements. Public fixed maturity
securities are carried principally at fair value, and investment grade private
fixed maturity securities are carried principally at amortized cost. Below
investment grade private fixed maturity securities are carried principally at
fair value. Fair value for all fixed maturity securities is determined by
independent valuation procedures. Mortgage loans on real estate are carried at
unpaid principal balance net of unamortized discounts and valuation allowances.
The valuation allowances on mortgage loans are based on anticipated losses
expected by management.

                                       12
<PAGE>
 
Fixed Maturity Securities

     The following table provides a comparison of the carrying value, fair value
and amortized cost of fixed maturity securities owned by Guarantee Life as of
December 31, 1997.

<TABLE> 
<CAPTION> 

                                                           Fixed Maturity Securities
                                                  Carrying Value, Fair Value and Amortized Cost

                                                                December 31, 1997
                                               ---------------------------------------------------
                                                    Carrying                             Amortized
                                                     Value           Fair Value            Cost
                                                  ----------       -------------        ---------- 
                                                                   (In Millions)
                  <S>                             <C>              <C>                  <C> 
                  Public..................          $663,074           $663,074           $641,225
                  Private.................           351,879            367,578            349,193
                                                  ----------         ----------           --------
                       Total..............        $1,014,953         $1,030,652           $990,418
                                                  ==========         ==========           ========
</TABLE> 

     Guarantee Life's portfolio of investment grade fixed maturity securities is
well diversified by number and type of issuer. As of December 31, 1997,
investment grade fixed maturity securities included the securities of over 315
issuers, with 662 different issues of securities, with no issuer, other than
securities retained in the 1992 securitization of commercial mortgage loans and
obligations of the United States government or its agencies, representing more
than 1.1% of investment grade fixed maturity securities. As of December 31,
1997, none of these investments were classified as a problem investment or had
been restructured.

     The following table sets forth the credit quality, by NAIC designation and
S&P's rating equivalents, of fixed maturity securities as of December 31, 1997.

<TABLE> 
<CAPTION> 

                                        Fixed Maturity Securities by NAIC Designation

                                                                              December 31, 1997
                                                     -----------------------------------------------------------------
                                                              Public               Private               Total
                                                       -------------------   -------------------   -------------------
     NAIC               Standard & Poor's              Amortized      %      Amortized    %        Amortized     %
  Designation        Equivalent Designation               Cost    of Total     Cost    of Total       Cost    of Total
  -----------  -----------------------------------     ---------  --------   --------- ----------  ---------  --------
                                                                            (Dollars in Millions)
  <S>          <C>                                     <C>        <C>        <C>       <C>         <C>        <C>  
      1        A- or Higher......................        $509.2     79.4%      $179.8    51.5%       $689.0    69.6%
      2        BBB- to BBB+......................         128.7     20.1%       139.2    39.9%        267.9    27.0%
                                                         ------    -----       ------   -----        ------   -----
                  Total investment grade..........        637.9     99.5%       319.0    91.4%        956.9    96.6%
      3        BB to BB+.........................           3.0      0.5%        10.5     3.0%         13.5     1.4%
      4        B ................................             -        -         10.3     2.9%         10.3     1.0%
      5        CCC or lower......................             -        -          9.3     2.7%          9.3     1.0%
      6        In or near default................           0.3      0.0%         0.1     0.0%          0.4     0.0%
                                                         ------    -----       ------   -----        ------   -----
                 Total below investment grade....           3.3      0.5%        30.2     8.6%         33.5     3.4%
                                                         ------    -----       ------   -----        ------   -----
               Total.............................        $641.2    100.0%      $349.2   100.0%       $990.4   100.0%
                                                         ======    =====       ======   =====        ======   =====
</TABLE> 

     Guarantee Life maintains significant investments in private fixed maturity
securities because of the generally higher nominal yield available relative to
comparably rated public fixed maturity securities, more restrictive financial
and business covenants available in private fixed maturity security loan
agreements and stronger prepayment protection. Although private fixed maturity
securities are not registered with the SEC and generally are less liquid than
public fixed maturity securities, restrictive financial and business covenants
included in private fixed maturity security loan agreements are generally
designed to offset the impact of their increased liquidity risk. Substantially
all of the private fixed maturity securities that Guarantee Life holds are
participations in issues that are also owned by other investors. In addition,
some of the private fixed maturity securities are rated by nationally recognized
rating agencies and substantially all have been assigned a rating designation by
the NAIC Securities Valuation Office. To the extent that such private fixed
maturity securities are not rated by nationally recognized rating agencies,
Guarantee Life assigns a rating for internal monitoring purposes that it
believes generally emulates methodologies employed by nationally recognized
rating agencies.

     MBS constitute a core position within Guarantee Life's fixed maturity
securities investments. MBS investments include residential MBS, commercial MBS
and securities retained in the 1992 securitization of Guarantee Life's
commercial mortgage loans. As of December 31, 1997, MBS were $261.8 million, or
26.4% (based on amortized cost), of fixed maturity securities, 

                                       13
<PAGE>
 
of which $86.6 million, or 33.1%, of MBS were guaranteed by the U.S. government
or an agency of the U.S. government. Retained securitized bonds were $37.3
million, or 14.2%, of MBS as of December 31, 1997.

     Guarantee Life has established specific investment guidelines for the
management of MBS. All MBS, other than retained subordinate tranches of the
securitized mortgages, must be rated "Baa3/BBB-" or higher by one or more
nationally recognized rating agencies when purchased. As of December 31, 1997,
all MBS owned by Guarantee Life, excluding the $29.3 million in amortized cost
of subordinate tranches of the retained securitized mortgages, were so rated.
Guarantee Life limits total MBS investments (excluding the retained senior and
subordinate tranches of the securitized mortgages) to not more than 25% of
invested assets. Guarantee Life has diversification requirements among the three
agency issuers of MBS and limits non-agency "whole loan" MBS and "commercial"
MBS to 20% of total MBS investments. In addition, each type of MBS is limited to
10% of total invested assets.

     The objective of Guarantee Life's MBS investments is to provide incremental
return, while maintaining reasonable liquidity and cash flow stability.
Guarantee Life's external investment manager employs a disciplined analytical
approach, whereby each MBS is evaluated to determine its interest rate
sensitivity and average life variability. In general, Guarantee Life's
investment policies and guidelines seek investments which provide improved cash
flow stability through either implicit or explicit prepayment protection.
Investments with implicit prepayment protection can take the form of
pass-throughs or CMOs backed by seasoned pools of loans which have already had
ample opportunity to refinance but have failed to do so. Explicit prepayment
protection can take the form of prepayment lockouts, yield maintenance
provisions or prepayment penalties, which are common features of multifamily
MBS, commercial MBS and FHA-insured project loans. Guarantee Life's MBS
investments do not include interest-only securities which are limited by
Nebraska law, principal-only securities or other MBS which may exhibit extreme
market value volatility.

Commercial Mortgage Loans

     As of December 31, 1997, commercial mortgage loans constituted $86.2
million of Guarantee Life's $87.1 million mortgage loan portfolio. Substantially
all commercial mortgage loans are fixed-rate first mortgage loans on completed
properties. As of December 31, 1997 there were 85 individual commercial mortgage
loans all of which were first mortgage loans, and all bore a fixed interest
rate.

     The following table sets forth the distribution, by property type and for
the top five states, of Guarantee Life's commercial mortgage loans based on
unpaid principal balance as of December 31, 1997.

               Composition of Commercial Mortgage Loan Portfolio
                     by Property Type and Top Five States

                                                        December 31, 1997
                                                   ---------------------------
                                                   Amount           % of Total
                                                   ------           ----------
                                                        (Dollars in Millions)
    Property Type
      Office................................         $24.2            28.1%
      Medical Office........................           2.5             2.9%
      Retail................................          10.6            12.3%
      Apartment.............................          10.6            12.3%
      Industrial............................          33.8            39.2%
      Other.................................           4.5             5.2%
                                                     -----           -----
        Total...............................         $86.2           100.0%
                                                     =====           =====

    Top Five States
      Nebraska..............................         $10.3            11.9%
      Indiana...............................           9.2            10.7%
      California............................           8.5             9.9%
      Michigan..............................           7.3             8.5%
      Arizona...............................           7.1             8.2%

     Substantially all of the commercial mortgage loans were originated by
Guarantee Life through mortgage loan correspondents and were not purchased from
third parties. Guarantee Life's investment policy with regard to the origination
of new commercial mortgage loans involves a review of the economics of the
property being financed, adherence to guidelines that provide for
diversification of Guarantee Life's commercial mortgage loan portfolio by
property type and geographic region 

                                       14
<PAGE>
 
and prevailing industry lending practices, including, among others, an
assessment of environmental risk. Current guidelines for new commercial mortgage
loans generally require a loan-to-value ratio of not greater than 75% at the
time of origination. Guarantee Life annually estimates the current loan-to-value
ratios of its commercial mortgage loans based on an analysis of the operating
statements of each mortgaged property.

     The commercial mortgage loan portfolio includes both amortizing and balloon
loans. Management defines balloon loans to be commercial mortgage loans for
which the final principal payment is at least twice as large as any other
scheduled payment due thereon. As of December 31, 1997, 86.6% of the commercial
mortgage loan portfolio consisted of commercial mortgage loans that provided for
significant or complete amortization prior to final maturity.

     The following table sets forth the maturity and principal repayment
schedule for the commercial mortgage loan portfolio as of December 31, 1997.

<TABLE> 
<CAPTION> 

                                  Commercial Mortgage Loan Scheduled Principal Repayments

                                                        December 31, 1997
                              -----------------------------------------------------------------
                              Maturity Payments      All Other          Annual
     Year                      on Balloon Loans    Loan Payments         Total     % of Total
     ----                     -----------------    -------------        ------     ----------  
                                                      (Dollars in Millions)
     <S>                      <C>                  <C>                  <C>        <C>     
     1997...................        $1.4               $3.8              $5.2          6.0%
     1998...................         -                  4.2               4.2          4.9%
     1999...................         1.0                4.6               5.6          6.5%
     2000...................         0.5                5.8               6.3          7.3%
     2001-2019..............         8.6               56.3              64.9         75.3%
                                     ---               ----              ----         ----
     Total..................       $11.5              $74.7             $86.2        100.0%
                                   =====              =====             =====        =====
</TABLE> 

     The high quality of Guarantee Life's commercial mortgage loan portfolio is
evidenced by its delinquency experience. As of December 31, 1997, Guarantee Life
had no commercial mortgage loans classified as either delinquent or in
foreclosure, although $1.4 million, or 1.6%, of Guarantee Life's total mortgage
portfolio was classified as restructured.

Other Invested Assets

     Guarantee Life held $68.7 million of policy loans on individual insurance
products as of December 31, 1997. Policy loans are permitted to the extent of a
policy's contractual limits and are fully collateralized by policy cash values.
Loan rates are fixed in the contracts and range from 4.8% to 7.4%. The weighted
average policy loan interest rates were 6.2%, 6.2%, and 6.1%, as of December 31,
1997, 1996 and 1995, respectively. Since all policy loan interest is payable in
advance, these interest rates are lower than the annual effective yields. For
universal life products, the policy loan portion of the account value is
credited the guaranteed rate, 4.0% to 5.5% depending on the product. For
traditional dividend-paying policies, dividends reflect each policy's loan
activity.

     Guarantee Life held $34.9 million of other invested assets (including $23.3
million of short-term investments) on December 31, 1997. Other invested assets
include the residual interest of $8.2 million in the GMLC Trust. Other invested
assets are net of a valuation allowance of $2.6 million.

Competition

     Guarantee Life competes with a large number of other insurers, managed care
providers and non-insurance financial services companies, such as banks,
broker-dealers and mutual funds, many of whom have greater financial resources,
offer alternative products and, with respect to other insurers, may have higher
ratings than Guarantee Life Insurance and AGL Life. Competition exists for
employer groups, individual consumers and agents and other distributors of
insurance products. Most currently insured employer groups are underwritten on
an annual basis, and employers may seek competitive quotations from several
sources prior to renewal. National banks, with their pre-existing customer bases
for financial services products, may pose increasing competition in the future
to insurers who sell annuities. Guarantee Life may also face increased
competition with respect to Core Products as other group health insurers enter
these markets to diversify their businesses.

     Guarantee Life must attract and maintain productive agents and brokers to
sell its insurance and annuity products. Strong competition exists among
insurance companies for agents and brokers with demonstrated ability. Management
believes that key bases of competition among insurance companies for agents and
brokers with demonstrated ability include the services provided to, and
relationships developed with, these agents and brokers in addition to
compensation and product structure.

                                       15
<PAGE>
 
Employees

     As of December 31, 1997, Guarantee Life had 633 full- and part-time
employees. None of Guarantee Life's employees are covered by a collective
bargaining agreement. Management believes its relations with employees are
satisfactory.

Insurance Regulation

State Supervision

     Guarantee Life's insurance subsidiaries are subject to extensive regulation
and supervision by each of the 48 states and the District of Columbia in which
they hold a certificate of authority to transact insurance business. The extent
of state regulation varies, but each of these jurisdictions has laws and
regulations governing standards of solvency, levels of reserves and business
conduct. In addition, statutes and regulations require the licensing of agents,
the approval of policy forms and, for certain lines of insurance, the approval
or filing of rates. State statutes and regulations also prescribe the permitted
types and concentration of investments by insurance companies. Guarantee Life's
insurance subsidiaries are required to file detailed annual financial
statements, as well as numerous jurisdiction-specific financial data reports,
with departments of insurance in each of the 48 states and the District of
Columbia.

     Examinations. Nebraska law requires the Nebraska Department of Insurance to
conduct periodic financial examinations of each domestic insurance company and
its operations. No material issues were raised during the most recent financial
examination of Guarantee Life Insurance for the four-year period ending December
31, 1993. No material issues were raised during the market conduct examination
of Guarantee Life Insurance as of June 30, 1996. The Nebraska Department of
Insurance is currently conducting its financial examination of Guarantee Life
Insurance and Guarantee Protective for the three year period ending December 31,
1996.

     Pennsylvania law requires the Pennsylvania Department of Insurance to
conduct periodic financial examinations of each domestic insurance company and
its operations. No material issues were raised during the most recent financial
examination of AGL for the three-year period ending December 31, 1995.

     Regulation of Investments. Guarantee Life Insurance is subject to Nebraska
laws and regulations that require diversification of its investment portfolio
and limit the amount of investments in certain investment categories such as
below investment grade fixed maturity securities, equity real estate and equity
securities. Failure to comply with these laws and regulations would cause
investments exceeding regulatory limitations to be treated as nonadmitted assets
for purposes of measuring statutory surplus. As of December 31, 1997, Guarantee
Life Insurance's investments complied in all material respects with all such
laws and regulations.

     AGL is subject to Pennsylvania laws and regulations that require
diversification of its investment portfolio and limit the amount of investments
in certain investment categories such as below investment grade fixed maturity
securities, equity real estate and equity securities. Failure to comply with
these laws and regulations would cause investments exceeding regulatory
limitations to be treated as nonadmitted assets for purposes of measuring
statutory surplus. As of December 31, 1997, AGL's investments complied in all
material respects with all such laws and regulations.

     Holding Company Regulation. The Holding Company is subject to Nebraska's
Insurance Holding Company System Act, which generally contains certain reporting
requirements as well as restrictions on transactions between an insurer and its
holding company or one or more of either of their affiliates. Under this act,
the Director may, under certain circumstances, prevent transactions between
Guarantee Life Insurance and any of its affiliates, including the Holding
Company, which involve certain sales, purchases, exchanges, loans or extensions
of credit, dividends in excess of certain limits or investments that require the
prior approval of the Director.

     The insurance laws and regulations of Nebraska may delay or impede a
business combination involving the Holding Company. Under Nebraska law, through
2000, no person other than Guarantee Life Insurance shall, without the prior
approval of the Director, directly or indirectly offer to acquire or acquire in
any manner the beneficial ownership of five percent or more of any class of a
voting security issued by Guarantee Life Insurance or the Holding Company.
Nebraska law requires that any proposed tender offer, acquisition or attempted
acquisition of stock that would result in an acquisition of control of an
insurance holding company be approved by the Director prior to the undertaking
of any such action.

                                       16
<PAGE>
 
Federal Initiatives

     Although the federal government generally does not directly regulate the
insurance business, federal initiatives often have an impact on the business in
a variety of ways. Current and proposed federal measures which may significantly
affect the insurance business include employee benefits regulations, controls on
medical care cost, medical entitlement programs such as Medicare, changes to the
insurance industry anti-trust exemption, minimum solvency requirements and
removal of barriers preventing banks from engaging in the insurance, annuity and
mutual fund business.

                                       17
<PAGE>
 
ITEM 2.  Properties.

      Guarantee Life's headquarters are located at 8801 Indian Hills Drive,
Omaha, Nebraska and consist of 200,000 square feet of office space owned by
Guarantee Life, including a 60,000 square foot office building constructed in
1995. In addition, Guarantee Life leases the space used by PFG and group sales
offices under short-term leases. Management believes that its facilities will be
adequate for its anticipated needs in all material respects.

ITEM 3.  Legal Proceedings.

      Guarantee Life is a defendant in actions arising out of its insurance
operations and is from time to time involved as a party in various governmental
and administrative proceedings. While the outcome of such pending or future
litigation cannot be predicted, as of the date hereof, Guarantee Life does not
believe that any such pending litigation will have a material adverse effect on
Guarantee Life's financial condition or results of operations.

ITEM 4.  Submission of Matters to a Vote of Security Holders.

      No matters were submitted to a vote of the shareholders of the Holding
Company during the fourth quarter of 1997.


PART II.

ITEM 5.  Market for Registrant's Common Equity and Related Stockholder Matters.

      The information required by this Item is incorporated herein by reference
from "Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 29, and "Shareholder Information" on page 60 in Guarantee
Life's 1997 Annual Report to Shareholders.

ITEM 6.  Selected Financial Data.

      The information required by this Item is incorporated herein by reference
from "Summary Consolidated Financial and Operating Data" on page 19, and from
"Consolidated Statements of Income" on page 32, in Guarantee Life's 1997 Annual
Report to Shareholders.

ITEM 7.  Management's Discussion and Analysis of Financial Condition and Results
of Operations.

      The information required by this Item is incorporated herein by reference
from "Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 20-29 in Guarantee Life's 1997 Annual Report to
Shareholders.

ITEM 7A.  Quantitative and Qualitative Disclosures About Market Risk.

      The information required by this Item is not applicable to the Holding
Company prior to its annual report on Form 10-K for the fiscal year ended
December 31, 1998.

ITEM 8.  Financial Statements and Supplementary Data.

      The information required by this Item is incorporated herein by reference
from pages 30-59 in Guarantee Life's 1997 Annual Report to Shareholders.

ITEM 9.  Changes in and Disagreements With Accountants on Accounting and 
Financial Disclosure.
      None.


PART III.

ITEM 10.  Directors and Executive Officers of the Registrant.

      The information required by this Item will be set forth in the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held May 14, 1998,
incorporated herein by reference.

ITEM 11.  Executive Compensation.

     The information required by this Item will be set forth in the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held May 14, 1998,
incorporated herein by reference.

ITEM 12.  Security Ownership of Certain Beneficial Owners and Management.

                                       18
<PAGE>
 
      The information required by this Item will be set forth in the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held May 14, 1998,
incorporated herein by reference.

ITEM 13. Certain Relationships and Related Transactions.

      The information required by this Item will be set forth in the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held May 14, 1998,
incorporated herein by reference.


PART IV.

ITEM 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)
         (1)  The following financial statements are incorporated herein by
              reference under Item 8, Guarantee Life's 1997 Annual Report to
              Shareholders, filed as Exhibit 13:
                  Consolidated Balance Sheets
                  Consolidated Statements of Income
                  Consolidated Statements of Shareholders' Equity
                  Consolidated Statements of Cash Flows

         (2)  The following financial statement schedules are filed as part of
              this Report:
                  Schedule I        -       Summary of Investments
                  Schedule II       -       Condensed Financial Information of
                                             Registrant
                  Schedule III      -       Supplementary Insurance Information
                  Schedule IV       -       Reinsurance
                  Schedule V        -       Valuation and Qualifying Accounts

              All other schedules have been omitted as the required information
              is inapplicable, immaterial, or the information is included in the
              consolidated financial statements or related notes.

         (3)  The following exhibits are being filed pursuant to Item 14(c) of
              Form 10-K. Exhibit numbers refer to the paragraph numbers under
              Item 601 of Regulation S-K:

         2(a)     Plan of Conversion of Guarantee Mutual Life Company(2)
         2(b)     Amendment No. 1 to Plan of Conversion(2)
         3(a)     Amended and Restated Certificate of Incorporation of The
                   Guarantee Life Companies Inc.(3)
         3(b)     Amended and Restated Bylaws of The Guarantee Life Companies
                   Inc.
         4(a)     Form of Certificate of The Guarantee Life Companies Inc.
                   Common Stock, par value $0.01 per share(2)
         4(b)     Rights Agreement(8)
         10(a)    The Guarantee Life Companies Inc.'s 1994 Long Term Incentive
                   Plan(2)
         10(b)    The Guarantee Life Companies Inc. and Guarantee Mutual Life
                   Company Executive Severance Plan(2)
         10(c)    Guarantee Mutual Life Company Retirement Plan(2)
         10(d)    Guarantee Mutual Life Company Supplemental Retirement Plan(2)
         10(e)    Guarantee Mutual Life Company Equalizer Plan(2)
         10(f)    Employment Agreement with Robert D. Bates, as amended and
                   restated effective January 1, 1997(5)
         10(g)    Severance Agreement with Theodore C. Cooley(2)
         10(h)    Guarantee Mutual Life Company Phantom Stock Plan as Amended
                   and Restated(2)
         10(i)    Amendment No. 1 to The Guarantee Life Companies Inc.'s 1994
                   Long Term Incentive Plan(2)
         10(j)    Amendment No. 2 to The Guarantee Life Companies Inc.'s 1994
                   Long-Term Incentive Plan(5)
         10(k)    Amendment No. 3 to The Guarantee Life Companies Inc.'s 1994
                   Long-Term Incentive Plan(6)
         10(l)    The Guarantee Life Companies Inc. Directors Stock Incentive
                   Plan(1)
         10(m)    Amendment No. 1 to The Guarantee Life Companies Inc. Directors
                   Stock Incentive Plan(4)
         10(n)    Revised Exhibit A to The Guarantee Life Companies Inc. and
                   Guarantee Life Insurance Company Executive Severance Plan(4)
         10(o)    Merger Agreement among The Guarantee Life Companies Inc.,
                   Guarantee Subsidiary, Inc. and PFG, Inc., dated as of October
                   17, 1997(7)
         13       1997 Annual Report to Shareholders 21 Subsidiaries of the
                   Registrant
         23       Consent of KPMG Peat Marwick LLP 

                                      19
<PAGE>
 
         24(a)    Powers of Attorney(3)
         24(b)    Power of Attorney of Director Gammill 
         27       Financial Data Schedule



         -------------------------------------

         (1) Incorporated by reference as an exhibit to Registrant's Form 10-Q
         for the fiscal quarter ended June 30, 1996 (Commission File No. 0-
         26788).
         (2) Incorporated by reference as an exhibit to Registrant's
         Registration Statement on Form S-1, Registration No. 33-92992. 
         (3) Incorporated by reference as an exhibit to Registrant's Form 10-K
         for the fiscal year ended December 31, 1995 (Commission File No. 0-
         26788).
         (4) Incorporated by reference as an exhibit to Registrant's Form 10-Q
         for the fiscal quarter ended September 30, 1996 (Commission File No. 0-
         26788).
         (5) Incorporated by reference as an exhibit to Registrant's Form 10-Q
         for the fiscal quarter ended March 31, 1997 (Commission File No. 0-
         26788).
         (6) Incorporated by reference as an exhibit to Registrant's Form 10-Q
         for the fiscal quarter ended June 30, 1997 (Commission File No.
         0-26788). (7) Incorporated by reference as an exhibit to Registrant's
         Form 8-K filed December 23, 1997 (Commission File No.
         0-26788).
         (8) Incorporated by reference as an exhibit to Registrant's Form 8-K
         filed November 25, 1996 (Commission File 0-26788).

(b) The following Current Reports on Form 8-K were filed during the last fiscal
quarter of the period covered by this Report:

<TABLE> 
<CAPTION> 
         Item Reported                          Financial Statements Filed          Date of Report
         -------------                          --------------------------          --------------
<S>                                             <C>                                <C> 
         Item 5 - Other Events                            None                     October 17, 1997
Item 2 - Acquisition or Disposition of Assets             None                     December 23, 1997
</TABLE> 

                                      20
<PAGE>
 
                                  SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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 dated this 18th day of
March, 1998.


                                            THE GUARANTEE LIFE COMPANIES INC.

                                            By  /s/ RICHARD A. SPELLMAN
                                              ----------------------------------
                                              Richard A. Spellman
                                              Senior Vice President, General 
                                              Counsel & Secretary

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 indicated on the 18th day of March, 1998.

<TABLE> 
<CAPTION> 

            Signatures                                                Title
            ----------                                                -----
<S>                                             <C> 
     /s/ ROBERT D. BATES*                       Chairman of the Board,
-----------------------------------              Director, President and Chief Executive Officer
         Robert D. Bates                         (Principal Executive Officer)

     /s/ WILLIAM L. BAUHARD                     Senior Vice President and Chief Financial Officer
-----------------------------------              (Principal Financial  & Accounting Officer)
         William L. Bauhard

    /s/ C.R. "Bob" BELL*                        Director
-----------------------------------           
        C. R. "Bob" Bell

    /s/ JOHN R. COCHRAN*                        Director
-----------------------------------          
        John R. Cochran

   /s/ THEODORE C. COOLEY                       Executive Vice President
-----------------------------------             Director                    
       Theodore C. Cooley

   /s/ LEE M. GAMMILL, JR.*                     Director
-----------------------------------           
       Lee M. Gammill, Jr.

    /s/ THOMAS T. HACKING*                      Director
-----------------------------------          
        Thomas T. Hacking

    /s/ JAMES M. McCLYMOND*                     Director
-----------------------------------        
        James M. McClymond

    /s/ BERNARD W. REZNICEK*                    Director
-----------------------------------        
        Bernard W. Reznicek

     /s/ ADRIAN J. SCRIBANTE*                   Director
-----------------------------------         
         Adrian J. Scribante
</TABLE> 

                                      21
<PAGE>
 

   /s/ JANICE D. STONEY*                        Director
-----------------------------------                 
       Janice D. Stoney

   /s/ WILLIAM F. WELSH  II*                    Director
-----------------------------------           
       William F. Welsh II


*By Richard A. Spellman, as attorney-in-fact

                                             /s/ RICHARD A. SPELLMAN
                                     -------------------------------------------
                                     Richard A. Spellman, as attorney-in-fact 
                                     for the individuals as indicated

                                      22
<PAGE>
 
                    INDEX TO FINANCIAL STATEMENT SCHEDULES

Supplementary Financial Statement Schedules of The Guarantee Life Companies Inc.

Independent Auditors' Report

SCHEDULE  I        --Summary of Investments

SCHEDULE  II       --Condensed Financial Information of Registrant

SCHEDULE  III      --Supplementary Insurance Information

SCHEDULE  IV       --Reinsurance

SCHEDULE  V        --Valuation and Qualifying Accounts..

     All other schedules have been omitted as the required information is
inapplicable, immaterial or the information is included in the consolidated
financial statements or related notes.


                         INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Directors of The Guarantee Life Companies Inc.:

     Under date of February 13, 1998, we reported on the consolidated balance
sheets of The Guarantee Life Companies Inc. and subsidiaries (Guarantee Life) as
of December 31, 1997 and 1996, and the related consolidated statements of
income, comprehensive income, shareholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1997, as contained in the
1997 Annual Report to Shareholders. These consolidated financial statements and
our report thereon are incorporated by reference in the annual report on Form
10-K for the year 1997. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedules as listed in the accompanying index. These
financial statement schedules are the responsibility of Guarantee Life's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits.

     In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.




                                                  KPMG Peat Marwick LLP

Omaha, Nebraska
February 13, 1998

                                       23
<PAGE>
 
              THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES

                      SCHEDULE I--SUMMARY OF INVESTMENTS

                               December 31, 1997
                                (In Thousands)
<TABLE>
<CAPTION>
                                                                                 Fair             Carrying
                     Type of Investments                      Cost(1)            Value              Value
                     -------------------                     ----------        ----------        ----------
<S>                                                          <C>               <C>               <C>
Fixed maturities:
     U.S. Treasury securities and obligations of U.S.
         government corporations and agencies.............   $  131,697        $  133,306        $  133,204
     Obligations of states and political subdivisions.....       21,986            22,437            22,435
     Debt maturities issued by foreign governments........        5,909             6,695             6,696
     Corporate securities.................................      569,055           603,098           587,503
     Mortgage-backed securities...........................      261,772           265,115           265,115
                                                             ----------        ----------        ----------
     Total fixed maturities...............................   $  990,419        $1,030,651        $1,014,953
                                                             ----------        ----------        ----------
Equity securities:
     Common stocks of banks, trusts and insurance
         companies........................................        3,735             3,721             3,735
Mortgage loans............................................       87,113            91,160            85,849
Policy loans..............................................       68,655            63,431            68,655
Investment real estate....................................        3,394             7,800             3,394
Other long-term investments...............................       11,648            11,648            11,648
Short-term investments....................................       23,258            23,258            23,258
                                                             ----------        ----------        ----------
Total investments.........................................   $1,118,222        $1,231,669        $1,211,492
                                                             ==========        ==========        ==========
</TABLE>

(1)  Fixed maturities at original cost reduced by repayments and adjusted for
     amortization of premiums or accrual of discounts.

     Table above includes closed block invested assets with cost of $301.4
million, fair value of $309.5 million, and carrying value of $309.8 million.

     Available-for-sale fixed maturities are shown in the consolidated balance
sheet at fair value. Held-to-maturity fixed maturities are shown in the
consolidated balance sheet at amortized cost adjusted for other than temporary
fair value declines.

     Common and nonredeemable preferred stocks are shown in the consolidated
balance sheet at fair value.

     Mortgage loans are shown in the consolidated balance sheet at unpaid
balances adjusted for discount accruals and allowances for possible losses.

     Policy loans are carried at unpaid balances.

     Real estate is shown in the consolidated balance sheet at depreciated cost
less allowances for other than temporary declines in value.

     Other invested assets are shown in the consolidated balance sheet at
amortized cost less allowances for other than temporary declines in value and
allowances for possible losses.

                                       24
<PAGE>
 
                       THE GUARANTEE LIFE COMPANIES INC.

          SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                                (In Thousands)

<TABLE> 
<CAPTION> 
                                                                                           As of and for the period ended
                                                                                                     December 31,
                                      Balance Sheet                                             1997              1996
                                      -------------                                          ---------         ---------
<S>                                                                                          <C>               <C> 
Investment in consolidated subsidiaries .............................................        $ 219,818         $ 179,612
Fixed maturities available for sale, at fair value (amortized cost, $0 and $17,512) .                             17,502
Other invested assets ...............................................................            2,248             1,294
                                                                                             ---------         ---------
     Total invested assets ..........................................................          222,066           198,408
Cash and cash equivalents ...........................................................              523               181
Dividends receivable from subsidiary ................................................           15,000            10,000
Other assets ........................................................................            1,799               170
                                                                                             ---------         ---------
Total assets ........................................................................          239,388         $ 208,759
                                                                                             =========         =========

Notes Payable .......................................................................        $  30,000         $      --
Accrued liabilities .................................................................            1,216               471
Income taxes ........................................................................           (1,026)             (384)
                                                                                             ---------         ---------
Total liabilities ...................................................................           30,190                87

Shareholders' equity:
     Common stock ...................................................................        $      99         $      99
     Additional paid-in capital .....................................................          191,123           191,226
     Retained earnings ..............................................................           27,463            13,435
     Treasury stock, end of year ....................................................          (22,512)               --
     Unrealized appreciation of invested securities carried at fair value, net ......           13,025             3,912
                                                                                             ---------         ---------
Total shareholders' equity ..........................................................          209,198           208,672
                                                                                             ---------         ---------
Total liabilities and shareholders' equity ..........................................          239,388           208,759
                                                                                             =========         =========
</TABLE> 

                               Income Statement
                               ----------------

 
                                                  For the period ended
                                                        December 31,
                                             1997         1996         1995
                                             ----         ----         ---- 
Equity in earnings of subsidiaries....... $ 17,642     $ 15,723           --
Investment income, net ..................      (69)       1,057           17
General and administrative expenses......    1,744        2,146           --
                                          --------     --------      -------
Income before income taxes ..............   15,799       14,634           17
Income tax (benefit) expense ............     (645)        (381)           6
                                          --------     --------      -------
Net income .............................. $ 16,444     $ 15,015      $    11
                                          ========     ========      =======

                                       25
<PAGE>
 
                       THE GUARANTEE LIFE COMPANIES INC.

          SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                                  (CONTINUED)

                                (In Thousands)
<TABLE> 
<CAPTION> 
                                                                               For the period ended
                                                                                   December 31,
                                                                     1997             1996             1995
                                                                   --------         --------         --------
<S>                                                                <C>              <C>              <C> 
                             Cash Flow                             
                             ---------                             
Cash flows from operating activities:
Net income ................................................        $ 16,444         $ 15,015         $     11
Adjustments to reconcile net income to net cash provided by
 operating activities
     Equity in earnings of subsidiaries ...................         (17,642)         (15,723)              --
     Other, net ...........................................            (524)             (39)              (7)
                                                                   --------         --------         --------
Net cash provided (used) by operations ....................          (1,722)            (747)               4
                                                                   --------         --------         --------

Cash flows from investing activities:
     Dividend from (contribution to) insurance subsidiary .          10,000               --          (12,101)
     Purchases (sales) of fixed maturities ................          17,494          (17,547)              --
     Purchase of PFG, Inc .................................         (28,457)              --               --
     Net change in short term investments .................            (954)          (1,294)              --
                                                                   --------         --------         --------
Net cash used by investing activities .....................          (1,917)         (18,841)         (12,101)
                                                                   --------         --------         --------
Cash flows from financing activities:
     Net proceeds from initial public offering ............              --               --           33,457
     Net proceeds from issuance of note payable ...........          30,000               --               --
     Purchase of treasury stock ...........................         (23,603)              --               --
     Change in unpaid IPO expenses ........................              --           (1,302)           1,302
     Dividends paid to shareholders .......................          (2,416)          (1,591)              --
                                                                   --------         --------         --------
Net cash provided by financing activities .................           3,981           (2,893)          34,759
                                                                   --------         --------         --------
Net increase (decrease) in cash and cash equivalents ......             342          (22,481)          22,662
Cash and cash equivalents at beginning of period ..........             181           22,662               --
                                                                   --------         --------         --------
Cash and cash equivalents at end of period ................        $    523         $    181         $ 22,662
                                                                   ========         ========         ========
</TABLE> 
These condensed financial statements should be read in conjunction with the
consolidated financial statements and the accompanying notes thereto.

                                       26
<PAGE>
 
              THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES

               SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
                                (In Thousands)
<TABLE> 
<CAPTION> 
                                               Future
                                               Policy
                                              Benefits,
                                            Policyholder
                                               Account                  Premium
                                Deferred      Balances                  Revenue                                            Other
                                 Policy         and       Unearned        and         Net         Policy     Policy      Insurance
                               Acquisition     Claims      Premium    Policyholder Investment     Holder   Acquisition   Operating
             Segment              Cost         Payable     Revenue    Assessments    Income      Benefits     Costs      Expenses
             -------           ----------    ----------  ----------    ----------  ----------   ----------  ----------  ----------
<S>                            <C>           <C>         <C>           <C>         <C>          <C>         <C>         <C> 
Year ended December 31, 1997
     Group ..................  $      536    $  125,141  $      766    $  200,002  $   12,680   $  128,419  $   45,391  $   45,015
     Individual .............     114,393     1,009,267      11,100        51,859      67,732       59,809      13,956      17,806
     Corporate ..............          --            --          --            --         (69)          --          --       1,774
                               ----------    ----------  ----------    ----------  ----------   ----------  ----------  ----------
          Total .............     114,929     1,134,408      11,866       251,861      80,343      188,228      59,347      64,595
                               ==========    ==========  ==========    ==========  ==========   ==========  ==========  ==========

Year ended December 31, 1996
     Group ..................  $       --       117,622         569       153,623       9,468       92,568      36,388      35,989
     Individual .............      91,893       888,478      10,110        49,852      65,389       61,075      13,165      17,489
     Corporate ..............          --            --          --            --       1,057           --          --       2,146
                               ----------    ----------  ----------    ----------  ----------   ----------  ----------  ----------
         Total ..............      91,893     1,006,100      10,679       203,475      75,914      153,643      49,553      55,624
                               ==========    ==========  ==========    ==========  ==========   ==========  ==========  ==========

Year ended December 31, 1995:
     Group ..................  $       --       119,455         534       163,083      10,217      106,276      38,594      32,934
     Individual .............      85,605       826,511       9,971        45,428      64,381       59,146       8,979      18,051
     Corporate ..............          --            --          --            --          17           --          --          --
                               ----------    ----------  ----------    ----------  ----------   ----------  ----------  ----------
         Total ..............      85,605       945,966      10,505       208,511      74,615      165,422      47,573      50,985
                               ==========    ==========  ==========    ==========  ==========   ==========  ==========  ==========
</TABLE> 

     The table above includes assets and liabilities allocated to the closed
block, as well as revenues and expenses for the years ending December 31, 1997
and 1996.

                                       27
<PAGE>
 
              THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES

                           SCHEDULE IV--REINSURANCE
                                (In Thousands)
<TABLE>
<CAPTION>
                                        Gross                                                                   Percentage
                                        Amount            Ceded              Assumed                             of Amount
                                        Before           to Other           From Other           Net              Assumed
                                     Reinsurance         Companies          Companies           Amount             to Net
                                     -----------        -----------        -----------        -----------       ----------
<S>                                  <C>                <C>                <C>                <C>               <C>
Year ended December 31, 1997:
Life insurance in force ..........   $37,504,746        $ 4,073,045        $   888,007        $34,319,708           2.59%
                                     ===========        ===========        ===========        ===========           ====
Premiums:
     Life and annuity(1) (2)......       178,590              5,065              1,110            174,635           0.99%
     Accident and Health .........       127,634             50,704                296             77,226           5.72%
                                     -----------        -----------        -----------        -----------           ----
     Total premiums ..............   $   306,224        $    55,769        $     1,406        $   251,861           3.41%
                                     ===========        ===========        ===========        ===========           ====
Year ended December 31, 1996:
Life insurance in force ..........   $29,116,078        $ 1,530,511        $   339,044        $27,924,611           1.21%
                                     ===========        ===========        ===========        ===========           ====
Premiums:
     Life and annuity(1) .........       112,345              4,893                781            108,233           0.72%
     Accident and health .........       135,531             40,915                626             95,242           0.66
                                     -----------        -----------        -----------        -----------           ----
     Total premiums ..............   $   247,876        $    45,808        $     1,407        $   203,475           0.69
                                     ===========        ===========        ===========        ===========           ====
Year ended December 31, 1995:
Life insurance in force ..........   $25,204,463        $ 1,268,329        $   349,373        $24,285,507           1.44%
                                     ===========        ===========        ===========        ===========           ====
Premiums:
     Life and annuity(1) .........   $   101,650        $     3,815        $     1,345        $    99,180           1.36%
     Accident and health .........       152,724             45,410              2,017            109,331           1.84
                                     -----------        -----------        -----------        -----------           ----
     Total premiums ..............   $   254,374        $    49,225        $     3,362        $   208,511           1.61
                                     ===========        ===========        ===========        ===========           ====
</TABLE>
-----------
(1)   Includes life insurance premiums and policyholder assessments.
(2)   Includes gross amount of $21,194 and ceded amount of $261 attributable to
      closed block.

      The table above includes amounts attributable to the closed block.

                                       28
<PAGE>
 
               THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES

                 SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
                                (In Thousands)

<TABLE> 
<CAPTION> 
                                                Beginning    Charged to                     Ending
              Description                        Balance     Operations     Deductions     Balance
              -----------                       ---------    ----------     ----------     -------
<S>                                             <C>          <C>            <C>            <C> 
Year ended December 31, 1997:
     Allowance for other invested assets....      $2,055        $  500            --        $2,555
     Allowance for mortgage loans...........         806           588           130         1,264
                                                  ======        ======        ======        ======
Year ended December 31, 1996:              
     Allowance for other invested assets....      $2,958            --        $  903        $2,055
     Allowance for mortgage loans...........         744            92            30           806
                                                  ======        ======        ======        ======
Year ended December 31, 1995:              
     Allowance for other invested assets....      $2,636        $  322            --        $2,958
     Allowance for mortgage loans...........         523           221            --           744
                                                  ======        ======        ======        ======
</TABLE> 

                                       29