<PAGE>

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


                     SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C.  20549

                                 ----------
                                  FORM 10-Q


              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
                   OF THE SECURITIES EXCHANGE ACT OF 1934


             For the quarterly period ended: September 30, 1998


                      Commission file number: 33-67268
           
                          ARM FINANCIAL GROUP, INC.
           (Exact name of registrant as specified in its charter)

               DELAWARE                               61-1244251
     (State or other jurisdiction of              (I.R.S. Employer
      incorporation or organization)              Identification No.)

          515 WEST MARKET STREET
           LOUISVILLE, KENTUCKY                          40202
(Address of principal executive offices)               (Zip Code)


Registrant's telephone number, including area code:  (502) 582-7900


     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.    /X/   Yes   / /   No

     Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

<TABLE>
<CAPTION>

          Date                     Class               Shares Outstanding
--------------------------------------------------------------------------------
<S>                                <C>                 <C>
   November 11, 1998                 A                    23,635,115
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>


<PAGE>

                            PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                      ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
                        CONDENSED CONSOLIDATED BALANCE SHEETS


 
<TABLE>
<CAPTION>

                                                                                        September 30, 
                                                                                            1998            December 31,
(IN THOUSANDS)                                                                           (Unaudited)           1997
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>                <C>
ASSETS
Cash and investments:
   Fixed maturities, available-for-sale, at fair value (amortized cost:
     September 30, 1998-$5,984,270; December 31, 1997-$4,021,495)                      $  5,905,180      $  4,068,386
   Equity securities, at fair value (cost: September 30, 1998-$31,086;
     December 31, 1997-$28,177)                                                              29,594            28,342
   Mortgage loans on real estate                                                             15,291            16,429
   Policy loans                                                                             126,950           126,114
   Cash and cash equivalents                                                                269,097           228,206
                                                                                      --------------------------------
Total cash and investments                                                                6,346,112         4,467,477

Assets held in separate accounts:
   Guaranteed                                                                             1,305,080         1,266,796
   Nonguaranteed                                                                          1,368,377         1,173,088
Accrued investment income                                                                    64,205            44,546
Value of insurance in force                                                                  41,733            25,975
Deferred policy acquisition costs                                                           115,886            87,170
Goodwill                                                                                      5,642             6,523
Deferred federal income taxes                                                                73,365            31,049
Other assets                                                                                 26,603            35,800
                                                                                      --------------------------------
Total assets                                                                           $  9,347,003      $  7,138,424
                                                                                      --------------------------------
                                                                                      --------------------------------
</TABLE>
 


                                          2

<PAGE>

                      ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
                  CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)


<TABLE>
<CAPTION>
 

                                                                                        September 30, 
                                                                                            1998            December 31,
(IN THOUSANDS)                                                                           (Unaudited)           1997
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>               <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
  Customer deposits                                                                     $  6,182,825      $  4,242,578
  Customer deposits in separate accounts:
    Guaranteed                                                                             1,292,987         1,254,801
    Nonguaranteed                                                                          1,368,377         1,160,595
  Long-term debt                                                                              38,000            38,000
  Accounts payable and accrued expenses                                                       24,783            18,741
  Payable for investment securities purchased                                                 77,562            69,286
  Payable to reinsurer                                                                         7,405             8,800
  Other liabilities                                                                           16,464            38,078
                                                                                        --------------------------------
Total liabilities                                                                          9,008,403         6,830,879

Contingencies

Shareholders' equity:
Cumulative perpetual preferred stock, $25.00 stated value                                     50,000            50,000
Series A fixed/adjustable rate cumulative preferred stock, $200.00
   stated value per share                                                                     75,000                 -
Class A common stock, $.01 par value, 23,528,515 and 21,316,068
   shares issued and outstanding, respectively                                                   235               213
Class B common stock, $.01 par value, no shares and 1,947,646 
   shares issued and outstanding, respectively                                                     -                19
Additional paid-in capital                                                                   216,313           211,430
Retained earnings                                                                             42,985            25,583
Accumulated other comprehensive income from net unrealized gains
  (losses) on available-for-sale securities                                                  (45,933)           20,300
                                                                                        --------------------------------
Total shareholders' equity                                                                   338,600           307,545
                                                                                        --------------------------------
Total liabilities and shareholders' equity                                              $  9,347,003      $  7,138,424
                                                                                        --------------------------------
                                                                                        --------------------------------
</TABLE>


SEE ACCOMPANYING NOTES.


                                          3

<PAGE>

                      ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
               CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


<TABLE>
<CAPTION>

                                                                       Three Months Ended                   Nine Months Ended
                                                                          September 30,                       September 30,
                                                                 ----------------------------        ----------------------------
 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)                             1998            1997                1998            1997
---------------------------------------------------------------------------------------------        ----------------------------
 <S>                                                             <C>             <C>                 <C>             <C>
 Investment income                                               $   125,634     $     87,811        $   345,203     $    235,270
 Interest credited on customer deposits                              (99,976)         (65,724)          (274,313)        (175,331)
                                                                 ----------------------------        ----------------------------
      Net investment spread                                           25,658           22,087             70,890           59,939

 Fee income:
   Variable annuity fees                                               5,208            3,865             14,663           10,516
   Asset management fees                                                  -             2,302                 -             6,068
   Other fee income                                                      377              303                994              944
                                                                 ----------------------------        ----------------------------
      Total fee income                                                 5,585            6,470             15,657           17,528

 Other income and expenses:
   Surrender charges                                                   1,307            1,187              4,457            3,042
   Operating expenses                                                 (8,591)          (8,424)           (24,125)         (23,506)
   Commissions, net of deferrals                                        (375)            (396)            (1,397)          (1,576)
   Interest expense on debt                                             (677)            (627)            (1,955)          (1,893)
   Amortization:
     Deferred policy acquisition costs                                (3,243)          (3,069)            (9,152)          (7,680)
     Value of insurance in force                                      (1,504)          (2,586)            (4,436)          (6,945)
     Acquisition-related deferred charges                                (84)            (126)              (321)            (377)
     Goodwill                                                            (94)             (99)              (281)            (327)
   Non-recurring charges:                                                                                          
     Stock-based compensation                                              -                -             (2,036)          (8,145)
     Other                                                                 -           (2,489)            (2,639)          (5,122)
   Other, net                                                         (1,041)             524             (2,089)          (1,385)
                                                                 ----------------------------        ----------------------------
       Total other income and expenses                               (14,302)         (16,105)           (43,974)         (53,914)
 Realized investment gains (losses)                                  (11,053)             376             (4,102)           3,027
                                                                 ----------------------------        ----------------------------

 Income before income taxes                                            5,888           12,828             38,471           26,580
 Income tax expense                                                     (210)          (3,735)            (9,917)          (9,734)
                                                                 ----------------------------        ----------------------------

 Net income                                                            5,678            9,093             28,554           16,846

 Dividends on preferred stock                                         (2,000)          (1,187)            (4,376)          (3,563)
                                                                 ----------------------------        ----------------------------
 Net income applicable to common shareholders                    $     3,678     $      7,906        $    24,178     $     13,283
                                                                 ----------------------------        ----------------------------
                                                                 ----------------------------        ----------------------------
 Net income per common share (basic)                             $      0.16     $       0.34        $      1.03     $       0.68
                                                                 ----------------------------        ----------------------------
                                                                 ----------------------------        ----------------------------

 Net income per common and common equivalent
  share (diluted)                                                $      0.15     $       0.33        $      0.99     $       0.66
                                                                 ----------------------------        ----------------------------
                                                                 ----------------------------        ----------------------------

 Cash dividends paid per common share                            $      0.04     $       0.02        $      0.10     $       0.02
                                                                 ----------------------------        ----------------------------
                                                                 ----------------------------        ----------------------------
</TABLE>
 


 SEE ACCOMPANYING NOTES.


                                          4

<PAGE>

                      ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
             CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997


<TABLE>
<CAPTION>

(IN THOUSANDS)                                                            1998           1997  
----------------------------------------------------------------------------------------------------
<S>                                                                   <C>            <C>       
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES                           $  191,301     $  149,524

CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments:
   Purchases                                                          (6,525,621)    (3,620,622)
   Maturities and redemptions                                            559,558        286,987
   Sales                                                               4,015,398      2,587,832
Other investments:
   Purchases                                                              (9,950)       (60,292)
   Maturities and redemptions                                              1,481         20,500
   Sales                                                                   7,285         43,683
Policy loans, net                                                           (836)          (476)
Transfers (to) from the separate accounts:
   Purchase of assets held in separate accounts                         (371,163)      (469,545)
   Proceeds from sale of assets held in separate accounts                151,215         74,608
                                                                 -----------------------------------
Cash flows used in investing activities                               (2,172,633)    (1,137,325)

CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net proceeds from issuance of common stock                                   655         78,813
Net proceeds from issuance of preferred stock                             73,638             - 
Amounts received from customers                                        2,474,486      1,412,928
Amounts paid to customers                                               (518,442)      (420,168)
Principal payment on long-term debt                                           -          (2,000)
Change in payable to reinsurer                                            (1,395)          (913)
Dividends on common stock                                                 (2,343)          (465)
Dividends on preferred stock                                              (4,376)        (3,563)
                                                                 -----------------------------------
Cash flows provided by financing activities                            2,022,223      1,064,632
                                                                 -----------------------------------

Net increase in cash and cash equivalents                                 40,891         76,831

Cash and cash equivalents at beginning of period                         228,206        110,067

                                                                 -----------------------------------
Cash and cash equivalents at end of period                            $  269,097    $   186,898
                                                                 -----------------------------------
                                                                 -----------------------------------
</TABLE>


SEE ACCOMPANYING NOTES.


                                          5

<PAGE>

                      ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
           NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                                  SEPTEMBER 30, 1998

1.   BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine month periods ended September
30, 1998 are not necessarily indicative of those to be expected for the year
ending December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the annual report on Form
10-K of ARM Financial Group, Inc. (the "Company") for the year ended December
31, 1997.

     Certain amounts from prior year have been reclassified to conform to the
current year's presentation. Such reclassifications have no effect on previously
reported net income or shareholders' equity.

2.   INCOME TAXES

     Income tax expense differs from that computed using the expected federal
income tax rate of 35%. The differences are primarily attributable to changes in
valuation allowances related to deferred federal income tax assets.

3.   SHAREHOLDERS' EQUITY

PUBLIC OFFERING OF COMMON STOCK
     In May 1998, the Company completed a public offering of approximately 12.4
million shares of common stock held by certain private equity funds sponsored by
Morgan Stanley Dean Witter & Co. (The "Morgan Stanley Stockholders"). The
Company did not receive any of the proceeds from the public offering. As a
result of the public offering, the Morgan Stanley Stockholders no longer own any
shares of the Company's outstanding common stock and all of the Company's
outstanding Class B common stock was converted into Class A common stock.

PREFERRED STOCK OFFERING
     In July 1998, the Company completed a $75 million offering of Series A
Fixed/Adjustable Rate Cumulative Preferred Stock ("Preferred Stock") with an
initial coupon rate of 5.575% through June 15, 2003.  The net proceeds from the
sale of the Preferred Stock will be used for the redemption of the Company's 
9 1/2% Cumulative Perpetual Preferred Stock, which will be redeemed on December
15, 1998, and for other general corporate purposes.


                                          6

<PAGE>

STOCK OPTIONS
     Certain employees of the Company were granted a total of 188,000 and
207,000 stock options during April and May of 1998, respectively, under the
Company's 1997 Equity Incentive Plan at exercise prices of $22.53 and $19.81 per
share. An additional 72,500 stock options were issued during the three months
ended September 30, 1998 at an average exercise price of $19.06 per share. Such
options will automatically vest and become exercisable in four equal
installments of 25% annually commencing on the first anniversary of the date of
grant.

     In addition, 30,000 stock options were awarded to certain members of the
board of directors of the Company in April 1998 under the Company's 1998 Non-
Employee Director Stock Option Plan at an exercise price of $22.53 per share.
Such options are fully vested to such directors in recognition of their tenure
as directors of the Company.

4.  NON-RECURRING CHARGES

     Effective February 10, 1998, John Franco, the Company's Co-Chairman and Co-
Chief Executive Officer, retired. Mr. Franco had shared that title with Martin
H. Ruby since the Company was founded in 1993. As part of the retirement package
for Mr. Franco, the Company recorded a non-recurring charge of $3.6 million in
the first quarter of 1998. The charge consisted of (i) a $2.0 million non-cash
charge in connection with the vesting of the unvested portion of the options
held by Mr. Franco to purchase 232,647 shares of the Company's common stock and
(ii) a $1.6 million charge for fulfilling the remaining compensation related to
his employment agreement.  Concurrent with Mr. Franco's retirement, Mr. Ruby
assumed the role of Chairman and Chief Executive Officer of the Company. 

     In addition, the Company recorded a charge of $1.1 million during the
second quarter of 1998 for registration expenses associated with the Company's
public offering of common stock in May 1998 (see Note 3).

     The Company recorded non-recurring charges of $13.3 million for the nine
months ended September 30, 1997 including a non-cash stock-based compensation
expense charge of $8.1 million in connection with the Company's initial public
offering of common stock and other non-recurring costs primarily attributable to
the relocation and consolidation of the Company's operations facilities from
Ohio to Louisville, Kentucky. The stock-based compensation expense charge
represents the aggregate difference between the $15 per share initial public
offering price of Class A common stock and the exercise prices of the then-
outstanding options.

5.   EARNINGS PER SHARE

     In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards  ("SFAS") No. 128, "Earnings Per Share," which superseded
Accounting Principles Board Opinion No. 15 of the same name. Earnings per share
("EPS") for all periods presented reflect the adoption of SFAS No. 128. SFAS No.
128 requires companies to present basic and, if applicable, diluted EPS, instead
of primary and fully diluted EPS. Basic EPS is computed by dividing net income
applicable to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if options to issue common stock were exercised into common
stock.


                                          7

<PAGE>

     The following is a reconciliation of the number of shares used in the basic
and diluted EPS computations:

<TABLE>
<CAPTION>

                                                      Three Months Ended September 30,
                                       ----------------------------------------------------------
                                                  1998                              1997
                                       ----------------------------    --------------------------
                                         Weighted                        Weighted
                                          Average       Per Share         Average       Per Share
(SHARES IN THOUSANDS)                     Shares          Amount          Shares          Amount
-------------------------------------------------------------------    --------------------------
<S>                                      <C>            <C>              <C>            <C>
Basic EPS                                 23,491         $   0.16         23,256         $   0.34
Effect of dilutive stock options             759            (0.01)         1,067            (0.01)
                                       ----------------------------    --------------------------
Diluted EPS                               24,250         $   0.15         24,323         $   0.33
                                       ----------------------------    --------------------------
                                       ----------------------------    --------------------------

<CAPTION>

                                                      Three Months Ended September 30,
                                       ----------------------------------------------------------
                                                  1998                              1997
                                       ----------------------------    --------------------------
                                         Weighted                        Weighted
                                          Average       Per Share         Average       Per Share
(SHARES IN THOUSANDS)                     Shares          Amount          Shares          Amount
-------------------------------------------------------------------    --------------------------
<S>                                      <C>            <C>              <C>            <C>
Basic EPS                                 23,407         $   1.03         19,675         $   0.68
Effect of dilutive stock options             904            (0.04)           509            (0.02)
                                       ----------------------------    --------------------------
Diluted EPS                               24,311         $   0.99         20,184         $   0.66
                                       ----------------------------    --------------------------
                                       ----------------------------    --------------------------
</TABLE>


6.   SEGMENT INFORMATION

     Effective December 31, 1997, the Company adopted SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information." SFAS No. 131
superseded SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments. The adoption of SFAS
No. 131 did not affect results of operations or financial position, but did
affect the disclosure of segment information.


                                          8

<PAGE>

     The Company currently has four reportable segments: retail spread products
and options (fixed and indexed annuities and face-amount certificates),
institutional spread products (funding agreements, guaranteed investment
contracts ("GICs") and face-amount certificates), retail variable fund options
(fee-based variable annuity mutual fund options), and corporate and other. The
Company's corporate and other segment includes investment income on the surplus
assets of its insurance subsidiaries and holding company cash and investments,
fee income from marketing partnerships and broker-dealer operations, unallocated
amortization expenses, and other various corporate expenditures that are not
allocated to specific products. Income tax expense and preferred stock dividends
are not allocated to any segment. 

     The Company's reportable segments are based on the characteristics of the
product and the markets through which the product is sold. The reportable
segments are each managed separately because the impact of fluctuating interest
rates and changes in the equity market environment affects each segments'
products differently. The Company evaluates performance based on operating
earnings. Operating earnings represents net income applicable to common
shareholders excluding, net of tax, realized investment gains and losses,
non-recurring charges and for 1997, income from defined benefit pension plan
asset management operations which were sold in 1997.

     Segment revenues and earnings for the three and nine months ended September
30, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>

                                                                          Three Months Ended September 30
                                                                          -------------------------------
(IN THOUSANDS)                                                                  1998           1997
---------------------------------------------------------------------------------------------------------
<S>                                                                       <C>              <C>
REVENUES
Retail spread products and options                                          $  54,568      $  57,229
Institutional spread products                                                  67,608         27,114
Retail variable fund options                                                    5,208          3,865
Corporate and other                                                             3,835          6,073
                                                                          -------------------------------
  Consolidated total revenues (investment income and fee income)            $ 131,219      $  94,281
                                                                          -------------------------------
                                                                          -------------------------------

EARNINGS
Retail spread products and options                                          $   9,163      $  10,218
Institutional spread products                                                   5,900          2,437
Retail variable fund options                                                    1,797          1,395
Corporate and other                                                                81            566
                                                                           ------------------------------
  Pretax operating earnings (before preferred stock dividends)                 16,941         14,616
Income taxes on operations                                                     (4,079)        (3,604)
Preferred stock dividends                                                      (2,000)        (1,187)
                                                                           ------------------------------
  Operating earnings                                                           10,862          9,825
Realized investment gains (losses), net of tax                                 (7,184)           245
Non-recurring charges                                                             -           (2,489)
Income from defined benefit pension plan asset management operations              -              325
                                                                           ------------------------------
  Net income applicable to common shareholders                              $   3,678      $   7,906
                                                                           ------------------------------
                                                                           ------------------------------
</TABLE>
 


                                          9

<PAGE>

 
<TABLE>
<CAPTION>
                                                                                Nine Months Ended September 30,
                                                                           -----------------------------------------
(IN THOUSANDS)                                                                          1998               1997
--------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                <C>
REVENUES
Retail spread products and options                                               $  164,256          $  164,570
Institutional spread products                                                       173,403              64,019
Retail variable fund options                                                         14,663              10,516
Corporate and other                                                                   8,538              13,693
                                                                           -----------------------------------------
   Consolidated total revenues (investment income and fee income)                $  360,860          $  252,798
                                                                           -----------------------------------------
                                                                           -----------------------------------------

EARNINGS
Retail spread products and options                                               $   29,182          $   27,950
Institutional spread products                                                        14,418               5,952
Retail variable fund options                                                          5,492               3,270
Corporate and other                                                                  (1,844)             (1,530)
                                                                           -----------------------------------------
   Pretax operating earnings (before preferred stock dividends)                      47,248              35,642
Income taxes on operations                                                          (11,353)             (8,675)
Preferred stock dividends                                                            (4,376)             (3,563)
                                                                           -----------------------------------------
   Operating earnings                                                                31,519              23,404
Realized investment gains (losses), net of tax                                       (2,666)              1,968
Non-recurring charges                                                                (4,675)            (13,267)
Income from defined benefit pension plan asset management operations                     -                1,178
                                                                           -----------------------------------------
   Net income applicable to common shareholders                                  $   24,178          $   13,283
                                                                           -----------------------------------------
                                                                           -----------------------------------------
</TABLE>
 
7.   COMPREHENSIVE INCOME

     As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or total shareholders'
equity. SFAS No. 130 requires unrealized gains and losses on the Company's
available-for-sale securities to be included in other comprehensive income.


                                          10

<PAGE>

     The components of comprehensive income (loss), net of related tax, for the
three and nine months ended September 30, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
 

                                                                                   Three Months Ended September 30,
                                                                                   --------------------------------
(IN THOUSANDS)                                                                            1998                1997 
-------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                  <C>
Net income                                                                          $     5,678          $    9,093
Net unrealized gains (losses) on available-for-sale securities                          (38,985)             18,337
                                                                                 ----------------------------------
Comprehensive income (loss)                                                         $   (33,307)         $   27,430
                                                                                 ----------------------------------
                                                                                 ----------------------------------

<CAPTION>

                                                                                    Nine Months Ended September 30,
                                                                                   --------------------------------
(IN THOUSANDS)                                                                             1998                1997
-------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                  <C>
Net income                                                                          $    28,554          $   16,846
Net unrealized gains (losses) on available-for-sale securities                          (66,233)             19,806
                                                                                 ----------------------------------
Comprehensive income (loss)                                                         $   (37,679)         $   36,652
                                                                                 ----------------------------------
                                                                                 ----------------------------------
</TABLE>
 
8.   DERIVATIVES AND HEDGING ACTIVITIES

     In September 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which is required to be adopted for fiscal years beginning after
June 15, 1999. The Statement will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. To the
extent that a derivative is ineffective as a hedge, the ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
Management does not anticipate that the adoption of SFAS No. 133 will have a
significant effect on earnings or the financial position of the Company.


                                          11

<PAGE>

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND  
            RESULTS OF OPERATIONS

GENERAL

     The Company specializes in the growing asset accumulation business with
particular emphasis on retirement savings and investment products. The Company's
products and services are sold in two principal markets, the retail and
institutional markets, through a broad spectrum of distribution channels.

     The Company derives its earnings from the investment spread and fee income
generated by the assets it manages. The Company earns a spread between what is
earned on invested assets and what is credited to customer accounts with its
retail spread products and options (primarily fixed and indexed annuities) and
institutional spread products (funding agreements, GICs and face-amount
certificates). The Company receives a fee in exchange for managing customers'
deposits and the customers accept the investment risk with its retail variable
fund options (variable annuity mutual fund options). The Company believes that
market forces and population demographics are producing and will continue to
generate strong consumer demand for long-term savings and retirement products,
including retail fixed, indexed and variable annuity products. In addition, the
Company expects to benefit from the growing institutional marketplace by
increasing penetration in the stable value and fixed income markets and
developing new products and applications. Although the Company's core business
is developing and managing spread-based investment products, it continues to
focus on the development of its fee-based variable annuity business. Fee-based
business is less capital intensive than spread-based business and provides the
Company with diversified sources of income. 

     On November 7, 1997, the Company transferred substantially all of the
assets and operations of ARM Capital Advisors, Inc. ("ARM Capital Advisors") to
ARM Capital Advisors, LLC ("New ARMCA") and sold an 80% interest in New ARMCA.
Although third-party assets managed by ARM Capital Advisors grew since 1995 when
ARM Capital Advisors began its operations, the Company believes that market
attitudes towards developing an asset management service for defined benefit
pension plans within a holding company structure consisting predominantly of
insurance companies constrained ARM Capital Advisors' growth. ARM Capital
Advisors' management of defined benefit pension plan accounts generated asset
management fees of $6.1 million and $2.3 million during the nine and three
months ended September 30, 1997, respectively.


                                          12

<PAGE>

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED 
SEPTEMBER 30, 1997

     Net income during the nine months ended September 30, 1998 was $28.6
million compared to $16.8 million for the nine months ended September 30, 1997.
Operating earnings (net income applicable to common shareholders excluding, net
of tax, realized investment gains and losses, non-recurring charges and for
1997, income from defined benefit pension plan asset management operations which
were sold) were $31.5 million and $23.4 million for the nine months ended
September 30, 1998 and 1997, respectively. The increase in operating earnings is
primarily attributable to an increase in net investment spread due to the growth
of assets under management which increased from $6.1 billion at September 30,
1997 to $9.2 billion at September 30, 1998.

     Pro forma operating earnings for the nine months ended September 30, 1997
(operating earnings including a pro forma adjustment to reflect investment
income at an assumed rate of 7.5% on the net proceeds of the Company's September
1997 initial public offering of Class A common stock assuming it occurred on
January 1, 1997) were $25.6 million. Operating earnings per diluted share (pro
forma for 1997) were $1.30 and $1.07 for the nine months ended September 30,
1998 and 1997, respectively. The pro forma information for 1997 is not
necessarily indicative of what would have occurred had the initial public
offering occurred on the date indicated.

     Annualized pretax operating earnings for retail spread products and options
were 1.39% and 1.36% of average assets under management of $2.80 billion and
$2.74 billion for that segment during the nine months ended September 30, 1998
and 1997, respectively. Annualized pretax operating earnings for institutional
spread products were 0.56% and 0.62% of average assets under management of $3.46
billion and $1.28 billion for that segment during the nine months ended
September 30, 1998 and 1997, respectively. Annualized pretax operating earnings
for retail variable fund options (fee business) were 0.57% and 0.47% of average
assets under management of $1.29 billion and $0.93 billion for that segment
during the nine months ended September 30, 1998 and 1997, respectively.


                                          13

<PAGE>

     Net investment spread for the nine months ended September 30, 1998 and 1997
was as follows:

<TABLE>
<CAPTION>
 

                                                                    Nine Months Ended September 30,
                                                                    -------------------------------
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)                                    1998           1997
---------------------------------------------------------------------------------------------------------
<S>                                                                 <C>               <C>
Investment income                                                      $  345,203      $  235,270
Interest credited on customer deposits                                   (274,313)       (175,331)
                                                                      -----------------------------
   Net investment spread                                               $   70,890      $   59,939
                                                                      -----------------------------
                                                                      -----------------------------

Annualized investment yield                                                  7.20%           7.63%
Annualized average credited rate                                            (5.86)%         (5.84%)
                                                                      -----------------------------
   Investment spread rate                                                    1.34%           1.79%
                                                                      -----------------------------
                                                                      -----------------------------

Average cash and investments (IN BILLIONS)                             $     6.40      $     4.11 

Average spread-based customer deposits (IN BILLIONS)                   $     6.26      $     4.02 

</TABLE>

     Changes in investment yield and average credited rates must be analyzed in
relation to the liability portfolios to which they relate. The decrease in the
overall investment spread rate from 1.79% in 1997 to 1.34% in 1998 is primarily
attributable to a greater proportion of institutional spread product deposits in
1998, which generate lower spreads. In addition, lower market interest rates and
a flatter U.S. Treasury yield curve during 1998 contributed to suppressed
investment returns. The annualized investment yield on cash and investments,
excluding assets supporting institutional spread product deposits, was 7.80% for
the first nine months of 1998, a decrease from 8.05% for the comparable 1997
period. In comparison, the annualized investment yield on cash and investments
supporting institutional spread product deposits was 6.68% and 6.69% for the
nine months ended September 30, 1998 and 1997, respectively. Average cash and
investments related to institutional spread product deposits grew from $1.28
billion during the nine months ended September 30, 1997 to $3.46 billion during
the nine months ended September 30, 1998, contributing to the aggregate decrease
in investment yields. The proceeds from institutional spread product sales are
invested in securities of shorter duration (which generally have lower
investment yields) than the Company's other investment portfolios. The average
credited rate pattern is dependent upon the general trend of market interest
rates, frequency of credited rate resets and business mix. For institutional
spread products, crediting rates are reset monthly or quarterly based on London
Interbank Offered Rates ("LIBOR") and semi-annually or annually for certain
fixed annuities. The increase in the average rate of interest credited on
customer deposits during the nine months ended September 30, 1998 was primarily
attributable to the greater proportion of institutional spread product deposits
and to higher LIBOR compared to the nine months ended September 30, 1997.


                                          14

<PAGE>

     Variable annuity fees, which are based on the market value of the mutual
fund assets supporting variable annuity customer deposits in nonguaranteed
separate accounts, increased to $14.7 million in the nine months ended September
30, 1998 from $10.5 million in the nine months ended September 30, 1997. This
increase is primarily attributable to asset growth from the receipt of variable
annuity deposits.

     Assets under management by business segment as of September 30, 1998
and 1997 were as follows:


<TABLE>
<CAPTION> 

                                                                               September 30,
                                                       -------------------------------------------------------------
                                                                    1998                          1997
                                                       -------------------------------------------------------------
                                                            Amount    Percent of Total    Amount    Percent of Total
--------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>          <C>               <C>         <C>
Retail spread products and options (primarily fixed
   and indexed annuity deposits)                         $  2,760.9           30%       $  2,843.2           46%
Institutional spread products (funding agreement,
   GIC and face-amount certificate deposits)                4,617.6           50           1,770.5           29
Retail variable fund options (variable annuity
   deposits invested in mutual funds)                       1,340.2           15           1,080.3           18
Corporate and other:
   Off-balance sheet deposits under marketing
     partnerships                                             230.3            2             251.1            4
   Cash and investments in excess of customer
     deposits                                                 270.9            3             176.8            3
                                                      --------------------------------------------------------------
Total assets under management                            $  9,219.9          100%       $  6,121.9          100%
                                                      --------------------------------------------------------------
                                                      --------------------------------------------------------------
</TABLE>
 

     The increase in total assets under management was primarily attributable to
sales of floating rate funding agreements, GICs and face-amount certificates to
institutional customers and an increase in retail variable fund option deposits
attributable to variable annuity sales.  The Company manages the mix of its 
business by monitoring various economic factors and responding to market 
opportunities as they present themselves. This approach, which may produce 
changes in the mix of business from one reporting period to the next, is 
intended by management to enhance the Company's long-term profitability.



                                          15

<PAGE>

     Sales represent premiums and deposits received for products issued by the
Company's insurance and face-amount certificate subsidiaries.

     Sales by market and type of product for the nine months ended September 30,
1998 and 1997 were as follows:

<TABLE>
<CAPTION>
                                                 Nine Months Ended September 30,
                                                 -------------------------------
(IN MILLIONS)                                          1998           1997
--------------------------------------------------------------------------------
<S>                                              <C>               <C>
Retail:
   Spread products                               $     104.4      $    329.9
   Variable products:
     Spread options                                     63.0            40.2
     Fund options                                      237.1           118.1
                                                 -------------------------------
       Total variable products                         300.1           158.3
                                                 -------------------------------
Total retail                                           404.5           488.2

Institutional:
     Spread products                                 2,063.6           926.9
                                                 -------------------------------
Total sales                                      $   2,468.1      $  1,415.1
                                                 -------------------------------
                                                 -------------------------------
</TABLE>


     Sales of retail variable products during the nine months ended September
30, 1998 increased $141.8 million over the nine months ended September 30, 1997.
This increase is primarily attributable to continued growth in sales of the
PINNACLE variable annuity product, including sales of the new SELECT TEN PLUS
investment option within PINNACLE.  SELECT TEN PLUS follows the "Dogs of the
Dow" investment strategy.  An additional factor contributing to the increase in
retail variable product sales is continued growth in systematic transfer option
deposits.  This option allows dollar-cost averaging over a twelve-month period
into other investment options within variable products and has gained in
popularity as a result of market volatility.  Sales of retail spread products
decreased to $104.4 million for the nine months ended September 30, 1998. The
decrease is related to the decline in the yield on intermediate-term U.S.
Treasury securities which is one of the factors considered in setting credited
rates on retail spread products. Retail spread product sales of $329.9 million
during the nine months ended September 30, 1997 were a result of a brief 
increase in market interest rates early in 1997. The increase in 
institutional sales is primarily attributable to the sale of two privately 
placed $500 million face-amount certificates through the newly formed 
subsidiary, ARM Face-Amount Certificate Group, Inc., and its subsidiaries 312 
Certificate Company and 212 Certificate Company, as well as increased sales 
of institutional funding agreements. The Company continues its sales strategy 
of developing a broad mix of products, services and distribution channels to 
enable it to achieve its target sales within different interest rate 
environments.

                                          16

<PAGE>

     Net surrenders of retail spread and variable annuity products and options
issued by the Company's insurance subsidiaries were $283.7 million in the nine
months ended September 30, 1998 compared to $252.6 million for the nine months
ended September 30, 1997. Surrender charge income increased to $4.5 million for
the nine months ended September 30, 1998 from $3.0 million for the nine months
ended September 30, 1997.  The increase in surrender charge income is
attributable to a larger mix of surrenders of customer deposits acquired in
connection with the 1995 acquisition of SBM Company's insurance subsidiary which
have higher surrender charge penalties. Retail products issued by the Company's
insurance subsidiaries generally include lapse protection provisions that
provide a deterrent to surrenders when interest rates rise.  These provisions
can include surrender charges and market value adjustments on annuity
withdrawals.  During the period that surrender charges are assessable (generally
the first five to seven years after a policy is issued) surrenders are
relatively low.  The surrender and withdrawal activity during the first nine
months of 1997 and 1998 was generally expected by the Company due to the level
of customer deposits written several years ago that were subject to declining or
expiring surrender charges, and the Company's strategy of maintaining investment
spreads.  The Company attempts to reduce retail surrender activity and improve
persistency through various programs.  The Company has experienced minimal
withdrawals (excluding scheduled interest payments) by institutional spread
product customers during the first nine months of 1997 and 1998.

     Operating expenses were $24.1 million for the nine months ended September
30, 1998 compared to $23.5 million for the nine months ended September 30, 1997.

     Amortization of deferred policy acquisition costs related to operations was
$9.2 million and $7.7 million during the nine months ended September 30, 1998
and 1997, respectively. This increase was primarily the result of growth in the
deferred policy acquisition cost asset due to additional sales of fixed, indexed
and variable annuity products. Variable costs of selling and issuing the
Company's insurance subsidiaries' products (primarily commissions and certain
policy issuance and marketing costs) are deferred and then amortized over the
expected life of the contracts.

     Amortization of value of insurance in force related to operations of $4.4
million and $6.9 million for the nine months ended September 30, 1998 and 1997,
respectively, primarily reflects the amortization of the value of insurance in
force established as an asset by the Company in connection with the 1995
acquisition of SBM Company's insurance subsidiary.  The decrease in amortization
related to operations is primarily attributable to a decrease in the value of
insurance in force asset (excluding the effects of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities") which was $32.9 million at
September 30, 1998 compared to $40.7 million at December 31, 1997.


                                          17

<PAGE>

     The Company recorded non-recurring charges of $4.7 million in the nine
months ended September 30, 1998 of which $3.6 million was part of a retirement
package for John Franco, the Company's former Co-Chairman and Co-Chief Executive
Officer, and $1.1 million was related to registration expenses associated with
the Company's secondary offering of common stock. The Company recorded
non-recurring charges of $13.3 million for the nine months ended September 30,
1997 which included a non-cash stock-based compensation expense charge and other
non-recurring costs primarily related to the relocation and consolidation of the
Company's operations facilities from Ohio to Louisville, Kentucky.

     Other expenses, net primarily includes premiums paid on agreements to
reinsure the majority of the mortality risks associated with single premium
endowment and variable annuity deposits.

     Realized investment losses, which are reported net of related amortization
of deferred policy acquisition costs and value of insurance in force, were $4.1
million during the nine months ended September 30, 1998 compared to $3.0 million
of realized investment gains during the nine months ended September 30, 1997.
Such realized investment gains and losses were primarily interest-rate related
and attributable to the ongoing management of the Company's fixed maturity
securities classified as available-for-sale which can result in period-to-period
swings in realized investment gains and losses since securities are sold during
both rising and falling interest rate environments. The ongoing management of
securities is a significant component of the Company's asset/liability
management strategy. The ongoing portfolio management process involves
evaluating the various asset sectors (i.e., security types and industry classes)
and individual securities comprising the Company's investment portfolios and,
based on market yield rates, repositioning holdings from sectors perceived to be
relatively overvalued to sectors perceived to be undervalued with the aim of
improving cash flows. The Company endeavors to accomplish this repositioning
without materially changing the overall credit, asset duration, convexity, and
liquidity characteristics of its investment portfolios.

     Income tax expense was $9.9 million and $9.7 million during the nine months
ended September 30, 1998 and 1997, respectively, reflecting effective tax rates
of 25.8% and 36.6% as a percentage of pretax income. If the 1997 non-recurring
stock-based compensation expense charge was added back to pretax income, the
effective tax rate for the nine months ended September 30, 1997 would be 28.0%.
A tax benefit was not recognized for the charge because a full valuation
allowance was provided on the Company's non-life net operating loss carry
forwards.  The effective tax rates of 25.8% for 1998 and 28.0% for 1997 (as
adjusted) are below the federal income tax rate of 35% primarily as a result of
the recognition of benefits associated with certain deferred tax assets
established in connection with the Company's acquisition of the Integrity
Companies in 1993 for which a full valuation allowance was originally provided.

THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED 
SEPTEMBER 30, 1997

     Net income during the third quarter of 1998 was $5.7 million compared to
$9.1 million for the third quarter of 1997. Operating earnings were $10.9
million and $9.8 million for the third quarter of 1998 and 1997, respectively.
Operating earnings for the third quarter of 1998 were


                                          18
<PAGE>

positively impacted by increased institutional assets under management from
strong sales and increased variable annuity assets under management from solid
sales results.  Operating earnings per share were $0.45 and $0.40 for the third
quarter of 1998 and 1997, respectively.

     Annualized pretax operating earnings for retail spread products and options
were 1.32% and 1.43% of average assets under management of $2.78 billion and
$2.86 billion for that segment during the third quarter of 1998 and 1997,
respectively. Annualized pretax operating earnings for institutional spread
products were 0.59% and 0.61% of average assets under management of $4.01
billion and $1.60 billion for that segment during the third quarter of 1998 and
1997, respectively. Annualized pretax operating earnings for retail variable
fund options (fee business) were 0.53% and 0.54% of average assets under
management of $1.36 billion and $1.03 billion for that segment during the third
quarter of 1998 and 1997, respectively.

     Net investment spread for the three months ended September 30, 1998 and
1997 was as follows:

<TABLE>
<CAPTION>
                                                          Three Months Ended
                                                             September 30,
                                                       -------------------------
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)                   1998            1997
--------------------------------------------------------------------------------
<S>                                                    <C>            <C>
Investment income                                      $ 125,634      $  87,811
Interest credited on customer deposits                   (99,976)       (65,724)
                                                       -------------------------
    Net investment spread                              $  25,658      $  22,087
                                                       -------------------------
                                                       -------------------------

Annualized investment yield                                 7.19%          7.67%
Annualized average credited rate                           (5.85)%        (5.85%)
                                                       -------------------------
    Investment spread rate                                  1.34%          1.82%
                                                       -------------------------
                                                       -------------------------

Average cash and investments (IN BILLIONS)             $    6.99      $    4.58
Average spread-based customer deposits (IN BILLIONS)   $    6.79      $    4.46
</TABLE>

     The decrease in the overall investment spread rate from 1.82% in 1997 to
1.34% in 1998 is primarily attributable to a greater proportion of institutional
spread product deposits in 1998, which generate lower spreads. In addition,
lower market interest rates and a flatter U.S. Treasury yield curve during 1998
contributed to suppressed investment returns. The annualized investment yield on
cash and investments, excluding assets supporting institutional spread product
deposits, was 7.79% for the third quarter of 1998, a decrease from 8.15% for the
comparable 1997 period. In comparison, the annualized investment yield on cash
and investments supporting institutional spread product deposits was 6.74% and
6.77% for the third quarter of 1998 and 1997, respectively. Average cash and
investments related to institutional spread product deposits grew from $1.60
billion during the third quarter of 1997 to $4.01 billion during the third
quarter of 1998, contributing to the aggregate decrease in investment yields.


                                          19
<PAGE>



     Sales by market and type of product for the three months ended
September 30, 1998 and 1997 were as follows:

<TABLE>
<CAPTION>
                                                            Three Months Ended
                                                               September 30,
                                                          ----------------------
(IN MILLIONS)                                               1998          1997
--------------------------------------------------------------------------------
<S>                                                       <C>            <C>
Retail:
   Spread products                                        $ 40.3         $ 40.2
   Variable products:
      Spread options                                        27.0           11.5
      Fund options                                          72.5           55.7
                                                          ---------------------
      Total variable products                               99.5           67.2
                                                          ---------------------
Total retail                                               139.8          107.4

Institutional:
   Spread products                                         797.6          466.1
                                                          ---------------------

Total sales                                               $937.4         $573.5
                                                          ---------------------
                                                          ---------------------
</TABLE>

     Sales of retail variable products during the third quarter of 1998
increased $32.3 million over the third quarter of 1997. This increase is
primarily attributable to continued growth in sales of the PINNACLE variable
annuity product, including sales of the new SELECT TEN PLUS investment option
with PINNACLE.  Sales of retail variable products also increased during the
third quarter of 1998 due to continued growth in systematic transfer option
deposits. Sales of retail spread products remained constant at $40.3 million for
the third quarter of 1998. The increase in institutional sales is primarily
attributable to the sale of a privately placed $500 million face-amount
certificate through the Company's newly formed wholly owned subsidiary, ARM
Face-Amount Certificate Group, Inc., and one of its subsidiaries 212 Certificate
Company.

     Net surrenders of retail spread and variable annuity products and options
issued by the Company's insurance subsidiaries were $99.7 million in the third
quarter of 1998 compared to $91.5 million in the third quarter of 1997.
Surrender charge income increased to $1.3 million in the third quarter of 1998
from $1.2 million for the three months ended September 30, 1997.

     Operating expenses were $8.6 million in the third quarter of 1998 compared
$8.4 million in the third quarter of 1997.

     Amortization of deferred policy acquisition costs related to operations was
$3.2 million and $3.1 million during the three months ended September 30, 1998
and 1997, respectively.


                                          20
<PAGE>


     Amortization of value of insurance in force related to operations was $1.5
million and $2.6 million for the three months ended September 30, 1998 and 1997,
respectively.  The decrease in amortization related to operations is primarily
attributable to a decrease in the value of insurance in force asset (excluding
the effects of SFAS No. 115).

     The Company recorded non-recurring charges of $2.5 million for the three
months ended September 30, 1997 related to relocating the Company's operations
facilities from Ohio to Louisville, Kentucky.

     Realized investment losses, which are reported net of related amortization
of deferred policy acquisition costs and value of insurance in force, were $11.1
million in the third quarter of 1998 compared to $0.4 million of realized
investment gains in the third quarter of 1997. Such realized investment gains
and losses were interest-rate related and attributable to the ongoing management
of the Company's fixed maturity securities classified as available-for-sale
which can result in period-to-period swings in realized investment gains and
losses since securities are sold during both rising and falling interest rate
environments.

     Income tax expense was $0.2 million and $3.7 million during the three
months ended September 30, 1998 and 1997, respectively, reflecting effective tax
rates of 3.6% and 29.1%.  The decrease in the effective rate is primarily
attributable to lower pretax income in the 1998 period with the same level of
tax preferences in both the 1997 and 1998 periods.

ASSET PORTFOLIO REVIEW

     The Company primarily invests in securities with fixed maturities with the
objective of earning reasonable returns while limiting credit and liquidity
risks. At amortized cost, fixed maturities at September 30, 1998 totaled $6.0
billion, compared with $4.0 billion at December 31, 1997, representing
approximately 94% and 91% of total cash and investments, respectively. This
increase in investments in fixed maturities primarily resulted from the
investment of the proceeds from the sales of institutional spread products.


                                          21
<PAGE>

     The Company's cash and investments as of September 30, 1998 are detailed as
follows:


<TABLE>
<CAPTION>
                                                               Amortized  Cost
                                                         ----------------------------
                                                                       Percent of      Estimated Fair
(DOLLARS IN MILLIONS)                                      Amount        Total             Value
-----------------------------------------------------------------------------------------------------
<S>                                                      <C>           <C>             <C>
Fixed maturities:
   Corporate securities                                  $2,228.1          35%           $2,140.9
   Mortgage-backed securities ("MBSs"):
      Collateralized mortgage obligations ("CMOs"):
         Non-agency                                       2,154.9          34             2,169.8
         Agency                                             523.3           8               532.7
      Agency pass-throughs                                   32.6           1                32.8
   Asset-backed securities                                  601.3           9               593.2
   U.S. Treasury securities and obligations of U.S.
      government agencies                                   387.4           6               387.9
   Other government securities                               56.7           1                47.9
                                                         -------------------------------------------
Total fixed maturities                                    5,984.3          94             5,905.2

Equity securities (i.e., non-redeemable preferred stock)     31.1           *                29.6
Mortgage loans on real estate                                15.3           *                15.3
Policy loans                                                126.9           2               126.9
Cash and cash equivalents                                   269.1           4               269.1
                                                         -------------------------------------------
Total cash and investments                               $6,426.7         100%           $6,346.1
                                                         -------------------------------------------
                                                         -------------------------------------------
</TABLE>


* Less than 1%.

     Agency pass-through certificates are MBSs which represent an undivided
interest in a specific pool of residential mortgages. The payment of principal
and interest is guaranteed by the U.S. government or U.S. government agencies.
CMOs are pools of mortgages that are segregated into sections, or tranches,
which provide prioritized retirement of bonds rather than a pro rata share of
principal return as in the pass-through structure. The underlying mortgages of
agency CMOs are guaranteed by the U.S. government or U.S. government agencies.
Of the Company's non-agency CMO investments at September 30, 1998 (on an
amortized cost basis), 79% used mortgage loans or mortgage loan pools (primarily
residential in nature), letters of credit, agency mortgage pass-through
securities, and other types of credit enhancement as collateral. The remaining
21% of the non-agency CMOs used commercial mortgage loans as collateral.

     The Company manages prepayment exposure on CMO holdings by diversifying not
only within the more stable CMO tranches, but across alternative collateral
classes such as commercial mortgages and Federal Housing Administration project
loans, which are generally less volatile than agency-backed, residential
mortgages. Additionally, prepayment sensitivity is


                                          22
<PAGE>

evaluated and monitored, giving full consideration to the collateral
characteristics such as weighted average coupon rate, weighted average maturity
and the prepayment history of the specific collateral.  MBSs are subject to
risks associated with prepayments of the underlying collateral pools.
Prepayments cause these securities to have actual maturities different from
those projected at the time of purchase. Securities that have an amortized cost
that is greater than par (i.e., purchased at a premium) that are backed by
mortgages that prepay faster than expected will incur a reduction in yield or a
loss, versus an increase in yield or a gain if the mortgages prepay slower than
expected. Those securities that have an amortized cost that is less than par
(i.e., purchased at a discount) that are backed by mortgages that prepay faster
than expected will generate an increase in yield or a gain, versus a decrease in
yield or a loss if the mortgages prepay slower than expected. The reduction or
increase in yields may be partially offset as funds from prepayments are
reinvested at current interest rates. The degree to which a security is
susceptible to either gains or losses is influenced by the difference between
its amortized cost and par, the relative sensitivity of the underlying mortgages
backing the assets to prepayments in a changing interest rate environment and
the repayment priority of the securities in the overall securitization
structure. The Company had gross unamortized premiums and unaccreted discounts
of MBSs of $16.0 million and $15.1 million, respectively, at September 30, 1998.

     Asset-backed securities ("ABSs") are securitized bonds which can be backed
by, but not limited to, collateral such as home equity loans, second mortgages,
automobile loans, and credit card receivables. At September 30, 1998, home
equity loan collateral represented 33% of the Company's investments in the ABS
market. The typical structure of an ABS provides for favorable yields, high
credit rating and stable prepayments.

     Total cash and investments (on an amortized cost basis) were 93% and 95%
investment grade or equivalent as of September 30, 1998 and December 31, 1997,
respectively. Investment grade securities are those classified as 1 or 2 by the
National Association of Insurance Commissioners ("NAIC") or, where such
classifications are not available, having a rating on the scale used by Standard
& Poor's Corporation ("S&P") of BBB- or above. Yields available on
non-investment grade securities are generally higher than are available on
investment grade securities. However, credit risk is greater with respect to
such non-investment grade securities. The Company attempts to reduce the risks
associated with non-investment grade securities by limiting the exposure to any
one issuer and by closely monitoring the credit worthiness of such issuers.
Additionally, the Company has a diversified portfolio of dollar denominated
bonds issued in the U.S. by foreign governments, banks and corporations,
including a limited exposure to the Asian market.  Such foreign securities
represented 10.1% of the Company's cash and investments at September 30, 1998
(on an amortized cost basis), with Asian securities representing 1.6% of total
cash and investments.  The Company reduces the risks associated with buying
foreign securities by limiting the exposure to both issuer and country. The
Company closely monitors the creditworthiness of such issuers and the stability
of each country. The Company's investment portfolio has minimal exposure to real
estate, mortgage loans and common equity securities, which represented less than
1% of cash and investments as of September 30, 1998.


                                          23
<PAGE>


     The Company analyzes its investment portfolio, including below investment
grade securities, at least quarterly in order to determine if its ability to
realize the carrying value on any investment has been impaired. For fixed
maturity and equity securities, if impairment in value is determined to be other
than temporary (i.e., if it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the security), the
cost basis of the impaired security is written down to fair value, which becomes
the security's new cost basis. The amount of the write-down is included in
income as a realized loss. Future events may occur, or additional or updated
information may be received, which may necessitate future write-downs of
securities in the Company's portfolio. Significant write-downs in the carrying
value of investments could materially adversely affect the Company's net income
in future periods.

     At September 30, 1998, the ratings assigned by the NAIC and comparable S&P
ratings on the Company's fixed maturity portfolio were as follows:


<TABLE>
<CAPTION>
                                                             Amortized Cost
                                                         -----------------------
                                                                       Percent          Estimated
NAIC Designation (Comparable S&P Rating)                  Amount       of Total         Fair Value
--------------------------------------------------------------------------------------------------
                                                                 (DOLLARS IN MILLIONS)
--------------------------------------------------------------------------------------------------
<S>                                                      <C>          <C>               <C>
1 (AAA, AA, A)                                           $3,474.2          58%          $3,482.8
2 (BBB)                                                   2,083.4          35            2,048.5
3 (BB)                                                      245.4           4              220.8
4 (B)                                                       181.3           3              153.1
5 (CCC, CC, C)                                                  -           -                  -
6 (CI, D)                                                       -           -                  -
                                                         -----------------------------------------
Total fixed maturities                                   $5,984.3         100%          $5,905.2
                                                         -----------------------------------------
                                                         -----------------------------------------
</TABLE>


     Pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," the Company classifies its entire fixed maturities portfolio
as available-for-sale. Fixed maturities classified as available-for-sale are
carried at fair value and changes in fair value, net of related deferred policy
acquisition cost and value of insurance in force amortization and deferred
income taxes, are charged or credited directly to shareholders' equity and
classified as accumulated other comprehensive income from net unrealized gains
and losses on available-for-sale securities.


                                          24
<PAGE>

     During the first nine months of 1998, net unrealized losses on
available-for-sale securities totaled $45.9 million (net of $9.9 million of
related amortization of deferred policy acquisition costs and value of insurance
in force and $24.7 million of deferred income taxes) at September 30, 1998,
compared to net unrealized gains of $20.3 million (net of $15.8 million of
related adjustments to of deferred policy acquisition costs and value of
insurance in force and $10.9 million of deferred income taxes) at December 31,
1997.  The unrealized losses on available-for-sale securities at September
30,1998 were attributable to volatility in the bond market which began in August
1998.  The bond market became somewhat illiquid, with the exception of U.S.
Treasury securities.  In addition, the widening of yield spreads on bonds (i.e.,
yields above the yields of comparable U.S. Treasury securities) and economic
contractions in Asia, South America and Russia also created decreased values in
the bond markets.  Even in this environment the Company continues to meet
overall objectives because of its integrated asset/liability management
approach, which includes the ongoing management of its investment portfolios.
The Company's investment portfolios remain within targeted duration, convexity,
credit, and liquidity guidelines.

     The change in net unrealized gains and losses on available-for-sale
securities for the first nine months of 1998 decreased reported shareholders'
equity by $66.2 million as compared to an increase of $16.6 million for the year
ended December 31, 1997.  This volatility in reported shareholders' equity
occurs as a result of SFAS No. 115, which requires that available-for-sale
securities be carried at fair value while other assets and all liabilities are
carried at historical values. At September 30, 1998 and December 31, 1997,
shareholders' equity excluding the effects of SFAS No. 115 was $384.5 million
and $287.2 million, respectively.

     Assets held in the Company's guaranteed separate accounts include $1.3
billion of cash and investments at both September 30, 1998 and December 31,
1997, of which approximately 94% and 87% were fixed maturities, respectively.
Total guaranteed separate account cash and investments were 98% and 99%
investment grade at September 30, 1998 and December 31, 1997, respectively.
Separate accounts are investment accounts maintained by an insurer to which
funds have been allocated for certain policies under provisions of relevant
state law. The investments in each separate account are maintained separately
from those in other separate accounts and from an insurance company's general
account.

LIQUIDITY AND FINANCIAL RESOURCES

HOLDING COMPANY OPERATIONS

     The Company's principal need for liquidity has historically consisted of
debt service obligations under its bank financing agreements, dividend payments
on its common and preferred stock, operating expenses not absorbed by management
fees charged to its subsidiaries, and corporate development expenditures. The
Company is dependent on dividends from Integrity Life Insurance Company
("Integrity") and management and service fee income from the Company's
subsidiaries to meet ongoing cash needs, including amounts required to pay
dividends on its common and preferred stock.


                                          25
<PAGE>


     The ability of the Company's insurance subsidiaries to pay dividends and
enter into agreements with affiliates for the payment of service or other fees
is limited by state insurance laws. During the first nine months of 1998, the
Company received cash dividends of $6.0 million from Integrity. The maximum
dividend payments that may be made by Integrity to the Company during 1998
without the prior approval of the Ohio Insurance Director are $38.2 million. The
Company had cash and investments at the holding company level of $109.4 million
at September 30, 1998. In addition, the Company has a $75.0 million syndicated
bank credit facility of which $37.0 million is available to the Company at
September 30, 1998.

     In May 1998, the Company completed a public offering of approximately 12.4
million shares of common stock held by the Morgan Stanley Stockholders.  The
Company did not receive any of the proceeds from the public offering. As a
result of the public offering, the Morgan Stanley Stockholders no longer own any
shares of the Company's outstanding common stock and all of the Company's
outstanding Class B common stock was converted into Class A common stock.

     In July 1998, the Company completed a $75 million offering of Preferred
Stock with an initial coupon rate of 5.575% through June 15, 2003.  The net
proceeds from the sale of the Preferred Stock will be used for the redemption of
the Company's 9 1/2% Cumulative Perpetual Preferred Stock, which will be 
redeemed on December 15, 1998, and for other general corporate purposes.  The 
new Preferred Stock issue provides approximately $569,000 in annual dividend
savings, following the redemption of the 9 1/2% Cumulative Perpetual Preferred
Stock.

INSURANCE SUBSIDIARIES OPERATIONS

     The primary sources of liquidity of the Company's insurance subsidiaries
are investment income and proceeds from maturities and redemptions of
investments. The principal uses of such funds are benefits, withdrawals and
loans associated with customer deposits, commissions, operating expenses, and
the purchase of new investments.

     The Company develops cash flow projections under a variety of interest rate
scenarios generated by the Company. The Company attempts to structure asset
portfolios so that the interest and principal payments, along with other fee
income, are more than sufficient to cover the cash outflows for benefits,
withdrawals and expenses under the expected scenarios developed by the Company.
In addition, the Company maintains other liquid assets and aims to meet
unexpected cash requirements without exposure to material realized losses during
a higher interest rate environment. These other liquid assets include cash and
cash equivalents and high-grade floating-rate securities held by both the
Company and its insurance subsidiaries.  Even though the bond market has been
less liquid, the Company believes that it can maintain adequate sources of
liquidity.

     During the nine months ended September 30, 1998 and 1997, the Company met
its liquidity needs entirely by cash flows from operating activities and
principal payments and redemptions of investments. At September 30, 1998, cash
and cash equivalents totaled $269.1 million compared to $228.2 million at
December 31, 1997. The Company's aim is to manage its cash and cash equivalents
position in order to satisfy short-term liquidity needs. In connection with this
management of cash and cash equivalents, the Company may invest idle cash in
short-duration fixed maturities to capture additional yield when short-term
liquidity requirements permit.


                                          26
<PAGE>


     The Company generated cash flows of $191.3 million and $149.5 million from
operating activities during the nine months ended September 30, 1998 and 1997,
respectively. These cash flows resulted principally from investment income, less
commissions and operating expenses. Proceeds from sales, maturities and
redemptions of investments generated $4.6 billion and $2.9 billion in cash flows
during the nine months ended September 30, 1998 and 1997, respectively, which
were offset by purchases of investments of $6.5 billion and $3.7 billion,
respectively. An increase in investment purchases and sales activity during the
first nine months of 1998 reflects the Company's ongoing management of its fixed
maturity portfolio which has increased in size due to sales of retail and
institutional spread products.

YEAR 2000

     The Company has undertaken a Year 2000 project which includes all of its
subsidiaries. The Company has completed the assessment phase of the project. All
production applications, hardware (personal computers and servers), system
software, facilities, vendors, and business partners have been assessed.
Although the Company is still waiting for responses from a few vendors and
business partners, the Company's major production systems are substantially Year
2000 compliant. Where Year 2000 problems were found, the necessary upgrades and
repairs have begun and are scheduled for completion no later than March 31,
1999.

     The Company is currently in the repair and certification testing phase of
its project. The testing phase will serve to verify the results of repairs and
assessments. Steps needed to correct any problems uncovered during testing will
begin immediately at that time. The Company's Year 2000 project is well underway
and because management believes that it will be completely Year 2000 compliant
by March 31, 1999, it currently has no contingency plans in place beyond its
normal disaster recovery procedures.  In the event that the Company does not
complete all phrases of its Year 2000 project by March 1999, it will evaluate at
that time whether such a plan is necessary.

     Although the Company anticipates no major interruption of business
activities, that will be dependent in part, upon the activity of third parties.
Even though the Company has assessed and continues to assess third party issues,
it has no direct ability to influence the compliance actions of such parties.
Accordingly, while the Company believes its actions in this regard should have
the effect of reducing Year 2000 risks, it is unable to eliminate them or to
estimate the ultimate effect Year 2000 risks will have on the Company's
operations.

     The cost of the Company's Year 2000 initiatives is not expected to be
material to the Company's results of operations or financial condition.

     The estimated completion date on which the Company believes it will
complete its Year 2000 compliance efforts, and the expenses related to the
Company's Year 2000 compliance efforts are based upon management's best
estimates, which were based on assumptions of future events, including the
availability of certain resources, third party modification plans and other
factors.  There can be no assurances that these results and estimates will be
achieved, and the actual results could materially differ from those anticipated.


                                          27
<PAGE>

FORWARD-LOOKING STATEMENTS

     The Company has made a number of forward-looking statements in this
document that are subject to risks and uncertainties. Forward-looking statements
include the information concerning possible or assumed future results of
operations and those preceded by, followed by or that include the words
"believes," "expects," or similar expressions. Such forward-looking statements
are based on the Company's beliefs as to its competitive position in its
industry and the factors affecting its business. In particular, the statements
of the Company's belief as to the growth of the long-term savings and retirement
market and the stimulation of future demand for long-term savings and retirement
products, including retail fixed, indexed and variable annuity products under
the heading "General" are forward-looking statements. Factors that could cause
actual results to differ materially from the forward-looking statements related
to the demand for fixed, indexed and variable annuity products include, but are
not limited to, a change in population demographics, development of alternative
investment products, a change in economic conditions, and changes in current
federal income tax laws. In addition, there can be no assurance that (i) the
Company has correctly identified and assessed all of the factors affecting its
business; (ii) the publicly available and other information on which the Company
has based its analyses is complete or correct; (iii) the Company's analyses are
correct; or (iv) the Company's strategy, which is based in part on these
analyses, will be successful.


                                          28
<PAGE>


                             PART II.  OTHER INFORMATION


ITEM 1.   LEGAL PROCEEDINGS

     The Company is currently involved in no material legal or administrative
proceedings. The Company's subsidiaries are currently involved only in routine
legal and administrative proceedings incidental to the conduct of their
businesses. The Company believes that none of these proceedings will have a
material adverse impact to the financial position or results of operations of
the Company or its subsidiaries.

ITEM 5.   OTHER INFORMATION

     The Board of Directors by unanimous written consent dated November 5, 1998,
declared (i) a quarterly dividend of 59.375 cents per share payable December 15,
1998 to holders of the 9 1/2% Cumulative Perpetual Preferred Stock of record on
November 30, 1998; (ii) a quarterly dividend of 4 cents per share payable
December 15, 1998 to holders of the Class A common stock of record on November
30, 1998; and (iii) a quarterly dividend of $2.7875 cents per share payable
December 15, 1998 to holders of record of the Series A Fixed/Adjustable Rate
Cumulative Preferred Stock of record on November 30, 1998.

     On September 25, 1998, the Company's Board of Directors appointed John R.
McGeeney as Executive Vice President and General Counsel.

     On September 29, 1998, the Company announced the appointment of David F.
Babbel, Michael F. Holland and Mark V. Kaminski to its Board of Directors.  The
appointments were made to fill two open positions and one newly created
position, bringing the total number of Board members to nine.

     On November 9, 1998, the Company announced that it had elected to redeem 
all outstanding shares of its 9 1/2% Cumulative Perpetual Preferred Stock on 
December 15, 1998 (the "Redemption Date"). The Company also announced that it 
had declared a dividend of 59.375 cents per share on the 9 1/2% Cumulative 
Perpetual Preferred Stock. The dividend will be payable on December 15, 1998 
only to holders of record of the 9 1/2% Cumulative Perpetual Preferred Stock 
as of November 30, 1998. Payment of the redemption price will be made on or 
after the Redemption Date upon presentation and surrender of certificates to 
ChaseMellon Shareholder Services, L.L.C. The redemption price is $25 per 
share.


                                          29
<PAGE>


ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

REPORTS ON FORM 8-K

     The Company did not file any reports on Form 8-K during the three months
ended September 30, 1998.

EXHIBITS  (ELECTRONIC FILING ONLY)
<TABLE>
<C>       <S>
10.1      Administrative Services Agreement dated September 15, 1998 between the
          Registrant and 212 Certificate Company (filed herewith).

27        Financial Data Schedule.
</TABLE>

                                          30
<PAGE>

                                      SIGNATURES

     Pursuant to the requirements 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, on November 11, 1998.

                                     ARM FINANCIAL GROUP, INC.



                                        By: /S/EDWARD L. ZEMAN
                                          --------------------------------
                                          Edward L. Zeman
                                          Executive Vice President-Chief
                                          Financial Officer
                                          (Principal Financial Officer)


                                        By:/S/BARRY G. WARD
                                          --------------------------------
                                          Barry G. Ward
                                          Controller (Principal Accounting
                                           Officer)



                                          31