<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 period ended: March 31, 1997


                      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


   As of March 31, 1997, 23,796 and 1,000 shares of the registrant's Class A 
and Class B common stock, respectively, were outstanding, all of which are 
privately owned and not traded on a public market.

                                     

<PAGE>

                                TABLE OF CONTENTS

Item                                                             Page
-----                                                           ------

                 PART I.  FINANCIAL INFORMATION

1.   Financial Statements (Unaudited)
         Condensed Consolidated Balance Sheets--
          March 31, 1997 and December 31, 1996  . . . . . . . . .  3
         Condensed Consolidated Statements of Operations--
          Three Months Ended March 31, 1997 and 1996  . . . . . .  5
         Condensed Consolidated Statements of Cash Flows--
          Three Months Ended March 31, 1997 and 1996  . . . . . .  6
         Notes to Condensed Consolidated Financial Statements . .  7
2.   Management's Discussion and Analysis of Financial
         Condition and Results of Operations  . . . . . . . . . . 13


                           PART II.  OTHER INFORMATION

1.   Legal Proceedings  . . . . . . . . . . . . . . . . . . . .   25
4.   Submission of Matters to a Vote of Security Holders  . . .   25
6.   Exhibits and Reports on Form 8-K . . . . . . . . . . . . .   25

    Signatures. . . . . . . . . . . . . . . . . . . . . . . . .   27
              
                                       2

<PAGE>

                       PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                             Carrying Amount                  Fair Value
                                                     --------------------------------  --------------------------
                                                      March 31,      December 31,       March 31,    December 31,
(IN THOUSANDS)                                           1997            1996             1997           1996
-----------------------------------------------------------------------------------------------------------------
                                                      (Unaudited)                       (Unaudited)
<S>                                                   <C>             <C>            <C>            <C>
ASSETS
Cash and investments:
 Fixed maturities available-for-sale, at fair
   value (amortized cost: March 31, 1997-
   $3,235,336; December 31, 1996-$3,048,834)          $ 3,191,109     $3,054,513     $3,191,109     $3,054,513

 Equity securities, at fair value (cost: March
   31, 1997-$21,405; December 31, 1996-$21,268)            22,160         22,552         22,160         22,552
 Mortgage loans on real estate                             28,963         36,879         28,963         36,879
 Policy loans                                             123,297        123,466        123,297        123,466
 Cash and cash equivalents                                133,471        110,067        133,471        110,067
                                                     --------------------------------  --------------------------

Total cash and investments                              3,499,000      3,347,477      3,499,000      3,347,477

Assets held in separate accounts                        1,201,621      1,135,048      1,201,621      1,135,048

Accrued investment income                                  35,694         36,233         35,694         36,233
Value of insurance in force                                50,798         52,024        124,191        112,389
Deferred policy acquisition costs                          64,747         59,001             --             --
Goodwill                                                    7,448          7,636          7,448          7,636

Deferred federal income taxes                              53,182         35,604         45,763         42,653
Other assets                                               30,731         28,641         30,731         28,641
                                                     --------------------------------  --------------------------

Total assets                                           $4,943,221     $4,701,664     $4,944,448     $4,710,077
                                                     --------------------------------  --------------------------
                                                     --------------------------------  --------------------------

</TABLE>
                                       3

<PAGE>


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

<TABLE>
<CAPTION>
                                                     Carrying Amount                  Fair Value
                                             --------------------------------  --------------------------
                                                March 31,     December 31,       March 31,    December 31,
(IN THOUSANDS)                                     1997           1996             1997           1996
---------------------------------------------------------------------------------------------------------
                                              (Unaudited)                       (Unaudited)
<S>                                           <C>             <C>               <C>            <C>

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
  Customer deposits                            $3,499,471      $3,294,174       $3,433,495     $3,260,253

  Customer deposits in separate accounts        1,196,830       1,130,159        1,196,830      1,130,159
  Long-term debt                                   38,000          40,000           38,000         40,000
  Accounts payable and accrued expenses            17,325          22,684           17,325         22,684
  Payable for investment securities
       purchased                                    8,378          10,431            8,378         10,431

  Payable to reinsurer                             10,000          10,000           10,000         10,000
  Other liabilities                                15,243          12,274           15,243         12,274
                                             --------------------------------  --------------------------
Total liabilities                               4,785,247       4,519,722        4,719,271      4,485,801


Contingencies

Shareholders' equity:

  Preferred stock, $25.00 stated value             50,000          50,000
  Class A common stock, $.01 par value, 
  23,796 shares issued                                  *               *

  Class B common stock, $.01 par value, 
  1,000 shares issued                                   *               *


  Additional paid-in capital                      124,609         124,609
  Net unrealized gains (losses) on 
  available-for-sale securities                   (26,721)          3,669

  Retained earnings                                10,086           3,664
                                             --------------------------------
Total shareholders' equity                        157,974         181,942          225,177        224,276
                                             --------------------------------  --------------------------

Total liabilities and shareholders' equity     $4,943,221      $4,701,664       $4,944,448     $4,710,077
                                             --------------------------------  --------------------------
                                             --------------------------------  --------------------------

</TABLE>

* LESS THAN $1,000.

SEE ACCOMPANYING NOTES.

                                       4

<PAGE>


                  ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
           CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
              FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 

<TABLE>
<CAPTION>

(IN THOUSANDS, EXCEPT SHARE AMOUNTS AND PER SHARE AMOUNTS)     1997      1996
--------------------------------------------------------------------------------
<S>                                                          <C>        <C>
Investment income                                            $69,700    $55,353

Interest credited on customer deposits                       (51,325)   (41,198)
                                                            ---------   --------
    Net investment spread                                     18,375     14,155

Fee income:
  Variable annuity fees                                        3,239      2,362
  Asset management fees                                        1,884      1,515
  Other fee income                                               397        271
                                                            --------    -------

    Total fee income                                           5,520      4,148
Other income and expenses:

  Surrender charges                                              882      1,570
  Operating expenses                                          (8,156)    (6,983)
  Commissions, net of deferrals                                 (638)      (544)
  Interest expense on debt                                      (686)      (787)

  Amortization:
    Deferred policy acquisition costs                         (2,175)    (1,687)
    Value of insurance in force                               (2,241)    (2,057)
    Acquisition-related deferred charges                        (126)      (500)
    Goodwill                                                    (122)      (122)

  Non-recurring charges                                       (1,445)        --
  Other, net                                                    (995)      (732)
                                                            ---------   --------
    Total other income and expenses                          (15,702)   (11,842)

Realized investment gains (losses)                             2,231       (403)
                                                            ---------   --------
Income before federal income taxes                            10,424      6,058
Federal income tax expense                                    (2,814)    (1,573)
                                                            ---------   --------

Net income                                                     7,610      4,485

Dividends on preferred stock                                  (1,188)    (1,188)
                                                            ---------   --------
Net income applicable to common shareholders                  $6,422     $3,297
                                                            ---------   --------
                                                            ---------   --------
Net income per common share                                  $258.99    $133.09  
                                                            ---------   --------
                                                            ---------   --------
Average common shares outstanding                             24,796     24,773
                                                            ---------   --------
                                                            ---------   --------

</TABLE>
SEE ACCOMPANYING NOTES.

                                       5

<PAGE>


                 ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
         CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
            FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996

<TABLE>
<CAPTION>
(IN THOUSANDS)                                               1997       1996
-------------------------------------------------------------------------------
<S>                                                     <C>          <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES                $46,677     $36,533

CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments:

  Purchases                                             (1,199,200)   (767,864)
  Maturities and redemptions                                59,905      46,702
  Sales                                                    947,397     663,577
Other investments:
  Purchases                                                (10,489)    (23,893)
  Maturities and redemptions                                 8,029       1,011
  Sales                                                     10,892       2,827
Policy loans, net                                              169      (1,971)

Purchase of separate account assets                       (102,059)    (59,616)
Proceeds from sale of separate account assets               20,383      22,272
                                                          ---------    --------
Cash flows used in investing activities                   (264,973)   (116,955)

CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Amounts received from customers                            357,581     309,293
Amounts paid to customers                                 (112,693)   (115,687)
Change in repurchase agreement liability                        --     (12,008)

Principal payment on long-term debt                         (2,000)         --
Dividends on preferred stock                                (1,188)     (1,188)
                                                          ---------    --------
Cash flows provided by financing activities                241,700     180,410
                                                          ---------    --------
Net increase in cash and cash equivalents                   23,404      99,988
                                                        
Cash and cash equivalents at beginning of period           110,067      76,896
                                                          ---------    --------

Cash and cash equivalents at end of period                $133,471    $176,884
                                                          ---------    --------
                                                          ---------    --------
</TABLE>

SEE ACCOMPANYING NOTES.

                                       6

<PAGE>

                  ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                               MARCH 31, 1997


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 months ended 
March 31, 1997 are not necessarily indicative of those to be expected for the 
year ending December 31, 1997. 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, 1996.

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

2.    FAIR VALUE BALANCE SHEETS

   The consolidated balance sheets include a dual presentation of carrying 
amount and fair value balances. In accordance with Statement of Financial 
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in 
Debt and Equity Securities," fixed maturities classified as 
available-for-sale are reported at fair value in the carrying amount balance 
sheets; however, corresponding customer deposits are reported at historical 
values. In contrast, in the fair value balance sheets, both assets and 
liabilities are reported at fair value. As permitted by SFAS No. 107, 
"Disclosures About Fair Value of Financial Instruments," the fair value 
balance sheets are presented as a supplemental disclosure to provide a more 
meaningful picture of the Company's financial position.

   SFAS No. 107 requires disclosure of fair value information about all 
financial instruments, including insurance liabilities classified as 
investment contracts, unless specifically exempted. The accompanying fair 
value balance sheets reflect fair values for those financial instruments 
specifically covered by SFAS No. 107, along with fair value amounts for other 
assets and liabilities for which disclosure is permitted but not required.

   The fair value of a financial instrument is the amount at which the 
instrument could be exchanged in a current transaction between willing 
parties, other than in a forced or liquidation sale. In cases where quoted 
market prices are not available, fair values are based on estimates using 
present value or other valuation techniques. Those techniques are 
significantly affected by the assumptions used, including the discount rate 
and estimates of future cash flows. Accordingly, the 

                                       7

<PAGE>

aggregate fair value amounts presented do not necessarily represent the 
underlying value of the Company.

   The Company's management of interest rate risk reduces its exposure to 
changing interest rates through a close matching of duration, convexity and 
cash flow characteristics of both assets and liabilities while maintaining 
liquidity redundancies (i.e., sources of liquidity in excess of projected 
liquidity needs). As a result, fair values of the Company's assets and 
liabilities will tend to respond similarly to changes in interest rates.

   The following methods and assumptions were used in estimating fair values:

FIXED MATURITIES AND EQUITY SECURITIES
   Fair values for fixed maturities and equity securities are based on quoted 
market prices, where available. For fixed maturities for which a quoted 
market price is not available, fair values are estimated using internally 
calculated estimates or quoted market prices of comparable instruments.

MORTGAGE LOANS ON REAL ESTATE
   Pursuant to the terms of the acquisition of certain of the Company's 
insurance operations, payments of principal and interest on substantially its 
entire mortgage loan portfolio are guaranteed by The National Mutual Life 
Association of Australasia Limited ("National Mutual"). Principal received in 
excess of statutory book value is to be returned to National Mutual. 
Accordingly, book value is deemed to be fair value for these mortgage loans. 

POLICY LOANS
   The carrying amount of policy loans approximates their fair value.

CASH AND CASH EQUIVALENTS AND ACCRUED INVESTMENT INCOME
   The carrying amount of cash and cash equivalents and accrued investment
income approximates their fair value given the short-term nature of these
assets.

ASSETS HELD IN SEPARATE ACCOUNTS AND CUSTOMER DEPOSITS IN SEPARATE ACCOUNTS
   Fair value of assets held in separate accounts is based on the quoted 
market prices of the underlying mutual funds for assets invested in variable 
options. The fair value of assets held in separate accounts invested in 
guaranteed rate options is primarily based on quoted market prices of fixed 
maturity securities. The fair value of customer deposits in separate accounts 
is based on the account values of the underlying policies, plus or minus 
market value adjustments applicable to certain customers who are guaranteed a 
fixed rate of return.

GOODWILL
   The carrying amount of goodwill approximates fair value.

                                       8

<PAGE>


DEFERRED FEDERAL INCOME TAXES
   The deferred federal income tax asset and related valuation allowance were 
adjusted for federal income tax which may be incurred as a result of the 
differences between the estimated fair values and carrying amounts of the 
assets and liabilities.

CUSTOMER DEPOSITS AND VALUE OF INSURANCE IN FORCE 
   The fair value of customer deposits for single premium immediate annuity 
contracts is based on discounted cash flow calculations using a current 
market yield rate for assets with similar durations (i.e., indexed to the 
U.S. Treasury yield curve). The fair value of customer deposits for single 
premium immediate annuity contracts represents the fair values of those 
contracts as a whole which implicitly eliminates the corresponding value of 
insurance in force. The fair value amounts of the remaining customer 
deposits, primarily related to deferred annuity contracts, single premium 
endowment contracts and guaranteed investment contracts ("GICs"), represent 
the account values of the underlying contracts before applicable surrender 
charges. The fair value of the value of insurance in force represents the 
estimated present value of future profits for all customer deposits, 
excluding single premium immediate annuity contracts, assuming a discount 
rate of 13%.  Deferred policy acquisition costs do not appear on the fair 
value presentation because those values are implicitly considered in the 
determination of the fair value of the corresponding customer deposits and 
value of insurance in force.

LONG-TERM DEBT AND PAYABLE TO REINSURER
   The carrying amounts of long-term debt and payable to reinsurer approximate
fair value.

OTHER ASSETS AND LIABILITIES
   The fair values of other assets and liabilities are reported at their
financial statement carrying amounts.

3.    FEDERAL INCOME TAXES

   Federal income taxes are different from the amount determined by 
multiplying pretax earnings by 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.

                                       9

<PAGE>


4.    STATUTORY INFORMATION

   Following is a reconciliation of income based on statutory accounting 
practices prescribed or permitted by insurance regulatory authorities for the 
Company's insurance subsidiaries with GAAP net income reported in the 
accompanying condensed consolidated statements of operations: 

<TABLE>
<CAPTION>
                                                          Three Months Ended
                                                               March 31,
(IN THOUSANDS)                                            1997            1996
--------------------------------------------------------------------------------
<S>                                                     <C>              <C>
Insurance subsidiaries (statutory-basis)(1)              $9,886          $8,258
Non-insurance companies(2)                                  527             133
                                                        --------         -------
   Consolidated statutory-basis pretax operating income  10,413           8,391

Reconciling items:
 Amortization of interest maintenance reserve              (926)         (1,112)
 Adjustments to invested asset carrying values at            (9)           (158)
   acquisition date
 Adjustments to customer deposits                        (1,272)            146
 Interest expense on debt                                  (686)           (787)
 Deferred policy acquisition costs, net of                4,872           3,148
 amortization
 Amortization of value of insurance in force             (2,241)         (2,057)
 Amortization of acquisition-related deferred charges      (126)           (500)
 Amortization of goodwill                                  (122)           (122)
 Non-recurring charges                                   (1,445)             --

 Realized investment gains (losses)                       2,231            (403)
 Other                                                     (265)           (488)
                                                        --------         -------
GAAP-basis:
 Income before federal income taxes                      10,424           6,058
 Federal income tax expense                              (2,814)         (1,573)
                                                        --------         -------
 Net income                                               7,610           4,485
 Dividends on preferred stock                            (1,188)         (1,188)
                                                        --------         -------
 Net income applicable to common shareholders             6,422           3,297
 Exclude, net of tax:
   Realized investment (gains) losses                    (1,450)            262
   Non-recurring charges                                  1,445              --
                                                        --------         -------
Operating earnings(3)                                    $6,417          $3,559
                                                        --------         -------
                                                        --------         -------
</TABLE>

(1)   Insurance company statutory-basis pretax income excluding realized gains
      and losses.
(2)   Non-insurance company pretax income excluding amortization of
      acquisition-related deferred charges, interest expense on debt, realized
      investment gains and losses, and non-recurring corporate costs and
      charges related to acquisition, financing and restructuring activities.
(3)   Net income applicable to common shareholders, excluding, net of tax,
      realized investment gains and losses and non-recurring charges.

                                       10

<PAGE>

5.    NON-RECURRING CHARGES

   The Company recorded non-recurring charges of $1.4 million in the first 
quarter of 1997 including $1.0 million related to the relocation and 
consolidation of the Company's main processing center from Columbus, Ohio to 
Louisville, Kentucky and $0.4 million related to merger and acquisition 
activities which did not result in a transaction. Additional costs associated 
with the relocation and consolidation of approximately $4 million are 
expected to be incurred through the end of the year.

6.    SHAREHOLDERS' EQUITY

PUBLIC OFFERING OF COMMON STOCK

   The Company filed a registration statement with the Securities and 
Exchange Commission on October 23, 1996, and the amendments thereto on March 
27, 1997 and May 7, 1997, with respect to the public offering (the 
"Offering") of a yet to be determined number of shares of Class A common 
stock, par value $.01 per share (the "New Class A Common Stock"). The 
Company's decision to proceed with the Offering is subject to market and 
other conditions. Prior to the consummation of the Offering, the Company 
expects to amend and restate its Certificate of Incorporation and By-Laws to 
effectuate a recapitalization such that (i) the common equity of the Company 
will consist of New Class A Common Stock and Class B Common Stock, par value 
of $.01 per share (the "New Class B Common Stock" and, together with the New 
Class A Common Stock, the "New Common Stock"), (ii) each outstanding share of 
common stock of the Company will be converted into one share of New Class A 
Common Stock, (iii) certain shares of the New Class A Common Stock owned by 
private equity funds sponsored by Morgan Stanley Group Inc. (the "Morgan 
Stanley Stockholders," which at March 31, 1997 owned approximately 91% of the 
outstanding shares of common stock of the Company) will be converted into New 
Class B Common Stock such that, after giving effect to such conversion, but 
not giving effect to the proposed Offering, the Morgan Stanley Stockholders 
will own, in the aggregate, 49% of the outstanding New Class A Common Stock, 
and (iv) each share of New Common Stock will be split into an as yet to be 
determined number of shares of New Common Stock. Holders of New Class B 
Common Stock will have no right to vote on matters submitted to a vote of 
stockholders, except in certain circumstances. Shares of the New Class B 
Common Stock will have no preemptive or other subscription rights and will be 
convertible into an equal number of shares of New Class A Common Stock (1) at 
the option of the holder thereof to the extent that, following such 
conversion, the Morgan Stanley Stockholders will not, in the aggregate, own 
more than 49% of the outstanding shares of New Class A Common Stock, and (2) 
automatically upon the transfer of such shares by any Morgan Stanley 
Stockholder to a person that is not a Morgan Stanley Stockholder or an 
affiliate of a Morgan Stanley Stockholder. The registration statement has not 
yet become effective. 

STOCK OPTIONS

   The Company's Stock Option Plan adopted in December 1993, as amended (the 
"Plan"), provides for granting of options to purchase up to 3,445 shares of 
Class A common stock. A total of 2,713 options were outstanding as of 
March 31, 1997, of which 946 were exercisable. Each option 

                                       11

<PAGE>

has an exercise price set initially at fair market value on the date of the 
grant, as determined by the Board of Directors of the Company. The option 
exercise price increases at the end of every three month period following the 
date of grant at a rate of 12% per annum, compounded annually, while the 
option remains issued but unexercised (or, if shorter, up to the date the 
Plan is terminated or there are certain changes in the ownership of the 
Company). Such options become exercisable in equal installments on the first 
through fifth anniversaries of the date of grant. Upon certain events, such 
as the Offering, options not previously granted will be automatically granted 
on a pro rata basis to participants of the Plan.

   The Company has elected to follow Accounting Principles Board Opinion 
("APB") No. 25, "Accounting for Stock Issued to Employees," and related 
Interpretations in accounting for its employee stock options. Under the 
variable plan accounting requirements of APB No. 25, no stock-based 
compensation expense has been recognized through March 31, 1997 for the Plan. 
However, upon the effective date of the Offering, assuming it is consummated, 
the Company will record a one-time stock-based compensation expense charge 
related to the Plan equal to the aggregate difference between the initial 
public offering price of the New Class A Common Stock and the exercise price 
of the options.

   Upon completion of the Offering, the Company will adopt the 1997 Equity 
Incentive Plan (the "1997 Equity Plan"). The 1997 Equity Plan will be 
administered by the Compensation Committee upon establishment thereof, and by 
the Board of Directors prior to that time. The 1997 Equity Plan provides for 
the granting of incentive stock options and nonqualified stock options, stock 
appreciation rights, restricted stock, performance units, and performance 
shares to those officers, and other key employees and consultants with 
potential to contribute to the future success of the Company or its 
subsidiaries; provided that only employees may be granted incentive stock 
options. 

EARNINGS PER SHARE

   In February 1997, the Financial Accounting Standards Board issued SFAS No. 
128, "Earnings Per Share," which is required to be adopted by the Company on 
December 31, 1997. At that time, the Company will be required to change the 
method currently used to compute earnings per share and to restate all prior 
periods. Under the new requirements for calculating primary earnings per 
share, the dilutive effect of stock options will be excluded. The impact of 
SFAS No. 128 on the calculation of fully diluted earnings per share is not 
expected to be material.

                                       12

<PAGE>

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

GENERAL

     The Company specializes in the asset accumulation business, providing 
retail and institutional customers with products and services designed to 
serve the growing long-term savings and retirement markets.

     The Company's revenues are derived from its spread-based business and 
its fee-based business. The products and services comprising the spread-based 
and fee-based businesses are sold in two principal markets, the retail and 
institutional markets, through a broad spectrum of distribution channels. In 
the spread-based line of business the Company earns a spread between what is 
earned on invested assets and what is credited to customer accounts. In the 
fee-based line of business the Company receives a fee in exchange for 
managing customers' deposits, and the customer accepts the investment risk. 
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 variable, indexed and fixed 
annuity products. Acquisitions by the Company have provided it with the 
opportunity to leverage its resources and enter into new markets in order to 
try to meet this demand. Although the Company's core business is developing 
and managing spread-based investment products, it has also focused on the 
development of its fee-based variable annuity business in addition to 
exploring other alternatives to increase the size of the fee-based business 
line. Fee-based business is less capital intensive than the spread-based 
business and provides the Company with diversified sources of income. 
Although the Company believes that it is desirable to achieve a reasonable 
business mix between its spread-based and fee-based businesses, the business 
mix may vary from time to time, due in part to opportunistic acquisitions and 
market conditions.

     The Company is negotiating to sell substantially all of the operations 
of ARM Capital Advisors, Inc. ("ARM Capital Advisors"), a registered 
investment adviser and wholly owned subsidiary of the Company that provides 
asset management services to the Company's subsidiaries and certain 
institutional clients, primarily defined benefit pension plans. Although 
third-party assets managed by ARM Capital Advisors have grown since the 
Company acquired this business in 1995, 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 has constrained ARM Capital Advisors' growth. 
Accordingly, the Company intends to transfer substantially all of the assets 
and operations of ARM Capital Advisors to a newly-formed and wholly owned 
subsidiary, ARM Capital Advisors, LLC, and then sell an 80% interest in ARM 
Capital Advisors, LLC to an entity controlled by Emad A. Zikry, President of 
ARM Capital Advisors. The Company expects to recognize an immaterial gain on 
the sale. Under the proposed terms of the sale, which are being negotiated, 
ARM Capital Advisors, LLC will continue to provide the Company's subsidiaries 
with investment management services through December 31, 1997 on the same 
basis as in the past. The proposed terms of the sale further provide that 
after December 31, 1997, the Company can continue to engage ARM Capital 
Advisors, LLC as its investment adviser at agreed upon rates; but, the 
Company may also consider retaining other investment management 


                                     13
<PAGE>

firms. In connection with the proposed sale, Mr. Zikry will terminate his 
employment with the Company. After consummation of the sale, ARM Capital 
Advisors will be renamed Integrity Capital Advisors, Inc. ARM Capital 
Advisors' management of defined benefit pension plan accounts generated asset 
management fees of $1.9 million and $1.1 million during the first quarters of 
1997 and 1996, respectively. 

     On December 13, 1996, the Company transferred its contracts to perform
management and advisory services for six mutual funds (the "State Bond Mutual
Funds") to Federated Investors because such funds were not considered a
strategic line of business for the Company. Asset management fee income during
the first quarter of 1996 included $0.4 million from the management of such
funds.

     Had the sale of ARM Capital Advisors, LLC and the sale of the management
contracts for the State Bond Mutual Funds occurred on January 1, 1996, the pro
forma effects on the Company's net income for the three months ended March 31,
1997 and 1996 would have been immaterial.

RESULTS OF OPERATIONS

     THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED 
MARCH 31, 1996

     Net income during the first quarter of 1997 was $7.6 million compared to 
$4.5 million for the first quarter of 1996. Operating earnings (net income 
applicable to common shareholders, excluding, net of tax, realized investment 
gains and losses and non-recurring charges) were $6.4 million and $3.6 
million for the first quarters of 1997 and 1996, respectively. The increase 
in operating earnings is primarily attributable to (i) an increase in net 
investment spread due to ongoing asset/liability management and deposit 
growth from sales of spread-based products and (ii) an increase in fee income 
as a result of a growing base of variable annuity deposits. Such increases in 
revenues were partially offset by an increase in operating expenses as a 
result of increased marketing efforts.

     Annualized spread-based operating earnings were 1.10% and 0.92% of 
average spread-based assets under management of $3.65 billion and $2.92 
billion during the first quarters of 1997 and 1996, respectively. This 
increase in spread-based margins is primarily attributable to ongoing 
asset/liability management, which generated higher net investment spreads. 
Annualized fee-based operating earnings were 0.15% and 0.19% of average 
fee-based assets under management of $4.27 billion and $2.75 billion during 
the first quarters of 1997 and 1996, respectively. Fee-based margins for the 
first quarter of 1997 decreased from the corresponding prior period due to 
the growth of institutional fee-based assets under management which generate 
lower margins than the Company's variable annuity deposits. Certain expenses 
including federal income taxes and unallocated corporate overhead are not 
reflected in annualized spread-based and fee-based operating earnings.

                                       14
<PAGE>

     Net investment spread for the three months ended March 31, 1997 and 1996 
was as follows:
<TABLE>
<CAPTION>
                                                    Three Months Ended
                                                         March 31,
(DOLLARS IN THOUSANDS)                              1997          1996
-------------------------------------------------------------------------------
<S>                                           <C>           <C>
Investment income                              $   69,700    $   55,353
Interest credited on customer deposits            (51,325)      (41,198)
                                               ---------------------------
  Net investment spread                        $   18,375    $   14,155
                                               ---------------------------
                                               ---------------------------

Annualized investment yield                          7.61%         7.58%
Annualized average credited rate                     5.65%         5.64%
                                               ---------------------------
  Investment spread                                  1.96%         1.94%
                                               ---------------------------
                                               ---------------------------

Average cash and investments                   $3,662,948    $2,922,814
Average spread-based customer deposits         $3,634,028    $2,920,419
</TABLE>

     Changes in investment yield must be analyzed in relation to the liability
portfolios that they support. The annualized investment yield on cash and
investments, excluding assets supporting GIC deposits, was 7.98% for the first
quarter of 1997, up from 7.66% for the comparable 1996 period. This increase
reflects the benefits of ongoing investment portfolio management. In comparison,
the annualized investment yield on cash and investments supporting GIC deposits
was 6.61% and 6.47% for the first quarters of 1997 and 1996, respectively. GIC
deposits grew from $383.3 million at March 31, 1996 to $1,141.3 million at March
31, 1997. The proceeds from GIC 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 interest rates, frequency of credited rate resets and business
mix. Crediting rates are reset monthly based on LIBOR for GICs and semi-annually
or annually for certain fixed annuities. To date, the Company has been able to
react to changes in market interest rates and maintain a desired investment
spread without a significant effect on surrender and withdrawal activity.

     Fee income increased to $5.5 million in the first quarter of 1997 from $4.1
million in the first quarter of 1996. This increase is primarily attributable to
variable annuity fees, which are based on the market value of the mutual fund
assets supporting variable annuity customer deposits in separate accounts.
Variable annuity fees increased to $3.2 million in the first quarter of 1997
from $2.4 million in the first quarter of 1996 principally due to asset growth
from the receipt of variable annuity deposits and from a market-driven increase
in the value of existing variable annuity deposits invested in mutual funds.
Fee-based variable annuity deposits averaged $861.3 million in the first quarter
of 1997, an increase from $649.3 million in the first quarter of 1996. In
addition, asset management fees earned by ARM Capital Advisors on off-balance
sheet assets, primarily related to defined benefit pension plans (and, in 1996
only, fees from the State Bond Mutual Funds), increased to $1.9 million in the
first quarter of 1997 from $1.5 million in the first quarter of 1996, reflecting
a significant increase in the average fair value of off-balance sheet assets
managed, from $1.72  billion during the first quarter of 1996 to $3.04 billion
in the first quarter of 1997. As a result of the proposed sale of ARM Capital
Advisors' operations and the sale of the State Bond Mutual Funds, asset
management fee income is expected to decrease in the future.


                                     15
<PAGE>

   Assets under management by type of product and service as of March 31, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
                                                                              March   31,
                                                                --------------------------------------
                                                                       1997               1996
                                                                --------------------------------------
(DOLLARS IN MILLIONS)                                                   Percent of          Percent of
                                                                Amount    Total     Amount    Total
------------------------------------------------------------------------------------------------------
<S>                                                            <C>        <C>     <C>        <C>
Spread-based:
 Retail (fixed and indexed annuity and face-amount
   certificate deposits)                                        $2,653.5    52%    $2,662.7    64%
 Institutional (GIC deposits)                                    1,141.3    22        383.3     9 
                                                               -------------------------------------
    Total spread-based                                           3,794.8    74      3,046.0    73   
Fee-based:

 Retail (variable annuity deposits invested in mutual funds)       859.5    17        681.2    16

 Institutional (off-balance sheet deposits under marketing
   partnership arrangements)                                       368.7     7        385.3     9
                                                               -------------------------------------
    Total fee-based*                                             1,228.2    24      1,066.5    25  
Corporate and other (primarily cash and investments in
 excess of customer deposits)                                       75.1     2         52.8     2
                                                               -------------------------------------
Total assets under management*                                  $5,098.1   100%    $4,165.3   100%
                                                               -------------------------------------
                                                               -------------------------------------
</TABLE>

*  Does not include off-balance sheet assets managed by ARM Capital Advisors for
   institutional clients and, for 1996 only, off-balance sheet assets in the
   State Bond Mutual Funds. Including such assets, total fee-based assets under
   management at  March 31, 1997 and 1996 were $4,520.1 million and $2,903.3
   million, respectively, and total assets under management at March 31, 1997
   and 1996 were $8,390.0 million and $6,002.1 million, respectively.


     The increase in spread-based deposits was attributable to sales of GICs to
institutional customers. The increase in the fee-based line of business is
attributable to variable annuity sales. The Company continues to focus on its
fee-based variable annuity business to diversify its spread-based and fee-based
products and their associated channels of distribution.

     Sales of spread-based products include premiums and deposits received for
products issued by the Company's insurance and face-amount certificate
subsidiaries. Sales of fee-based products include premiums for the investment
portfolio options of variable annuity products issued by the Company's insurance
subsidiaries. 


                                       16
<PAGE>

     Sales by market and type of business for the three months ended March 31,
1997 and 1996 were as follows: 
<TABLE>
<CAPTION>
                                                             Three Months Ended
                                                                 March 31,
                                                             ------------------
(IN MILLIONS)                                                 1997        1996
-------------------------------------------------------------------------------
<S>                                                         <C>          <C>
Retail:
 Spread-based                                                $68.8        $11.9
 Fee-based                                                    36.3         57.0
                                                            -------------------
   Total retail                                              105.1         68.9


Institutional:
 Spread-based                                                248.6        239.6
                                                            -------------------
Total sales*                                                $353.7       $308.5
                                                            -------------------
                                                            -------------------
</TABLE>
*  Does not include new deposits related to off-balance sheet assets managed by
   ARM Capital Advisors for institutional clients and, for 1996 only, new
   deposits in the State Bond Mutual Funds. Including such deposits, total
   retail sales for the three months ended March 31, 1997 and 1996 were $105.1
   million and $72.7 million, respectively, and total institutional sales for
   the three months ended March 31, 1997 and 1996 were $881.9 million and $669.4
   million, respectively.


     The increase in retail sales was attributable to an increase in marketing
efforts surrounding the Company's spread-based guaranteed rate option annuity
product, partially offset by a decrease in fee-based variable annuity sales as a
result of weakening stock market returns. The Company's efforts to diversify
sales across distribution channels has increased its sales activity through
independent agents and stockbrokers. The Company's sales strategy is to broaden
its mix of products, services and distribution channels to enable it to achieve
its target sales within different interest rate environments.

     Net surrenders of annuity products issued by the Company's insurance
subsidiaries were $76.1 million in the first quarter of 1997 compared to $88.6
million in the first quarter of 1996. Surrender charge income decreased to $0.9
million in the first quarter of 1997 from $1.6 million in the first quarter of
1996. The decrease in surrender charge income is primarily attributable to an
increase in partial surrenders which did not result in a surrender charge
penalty. Policies 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 quarters of 1996 and 1997 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 has programs designed to reduce
surrender activity and improve persistency. 


                                     17
<PAGE>

     Operating expenses increased to $8.2 million in the first quarter of 1997
from $7.0 million in the first quarter of 1996. The increase is primarily
attributable to increased marketing efforts (including an increase in marketing
staff and additional investments in technology) to expand and enhance the
support of distribution channels in the retail and institutional markets. The
Company is actively pursuing and retaining producers within these distribution
channels to market its products.

     Commissions, net of deferrals were $0.6 million and $0.5 million for the
three months ended March 31, 1997 and 1996, respectively, and represent renewal
and trailer commissions under certain deferred annuity contracts acquired
through the acquisition of substantially all of the assets and business
operations of SBM Company ("SBM").

     Amortization of deferred policy acquisition costs related to operations was
$2.2 million and $1.7 million during the three months ended March 31, 1997 and
1996, respectively. This increase was the result of growth in the deferred
policy acquisition cost asset due to additional sales of fixed and variable
annuity products. Variable costs of selling and issuing the Company's insurance
subsidiaries' products (primarily first-year commissions) are deferred and then
amortized over the expected life of the contract.

     Amortization of value of insurance in force related to operations of $2.2
million and $2.1 million for the three months ended March 31, 1997 and 1996,
respectively, primarily reflects the amortization of the value of insurance in
force established as an asset by the Company in connection with the acquisition
of SBM's insurance subsidiary.

     Amortization of acquisition-related deferred charges of $0.1 million and 
$0.5 million for the three months ended March 31, 1997 and 1996, respectively,
reflects amortization of certain costs incurred in connection with the Company's
acquisitions. The decrease was primarily attributable to certain deferred
charges related to the SBM acquisition being fully amortized at December 31,
1996.

     The Company recorded non-recurring charges of $1.4 million in the first
quarter of 1997 including $1.0 million related to relocating the Company's main
processing center from Columbus, Ohio to Louisville, Kentucky and costs of $0.4
million for mergers and acquisitions activities that did not result in a
transaction. Costs associated with the relocation are expected to continue
through the end of the year.

     Other expenses, net include premiums paid on agreements to reinsure
substantially all mortality risks associated with single premium endowment and
variable annuity deposits and benefits paid or provided to contract holders.

     Realized investment gains, which are reported net of related amortization 
of deferred policy acquisition costs and value of insurance in force, were $2.2
million in the first quarter of 1997 compared to realized investment losses of
$0.4 million in the first quarter of 1996. 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. The ongoing management of securities is a significant 


                                     18
<PAGE>

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.

     Federal income tax expense was $2.8 million and $1.6 million for the 
quarters ended March 31, 1997 and 1996, respectively, reflecting effective 
tax rates of 27.0% and 26.0%. 

ASSET PORTFOLIO REVIEW

     The Company primarily invests in fixed maturities with the objective of
earning reasonable returns while limiting credit and liquidity risks. The
amortized cost of fixed maturities at March 31, 1997 totaled $3.24 billion,
compared with $3.05 billion at December 31, 1996, representing 91% of total cash
and investments at both dates. This increase in fixed maturities is primarily
attributable to the investment of the proceeds from the sales of GICs.

     The Company's cash and investments as of March 31, 1997 are detailed as
follows:
<TABLE>
<CAPTION>
                                                Amortized Cost
                                             ----------------------
                                                        Percent of   Estimated
(DOLLARS IN MILLIONS)                         Amount      Total      Fair Value
-------------------------------------------------------------------------------
<S>                                          <C>          <C>          <C>
Fixed maturities:
 Corporate securities                        $1,114.1      31.5%       $1,088.0
 U.S. Treasury securities and obligations
   of U.S. government agencies                  169.7        4.8          169.0
 Other government securities                     49.8        1.4           46.9

 Asset-backed securities                        380.0       10.7          376.4
 Mortgage-backed securities ("MBSs"):
   Agency pass-throughs                         262.7        7.4          262.3
   Collateralized mortgage obligations
("CMOs"):
    Agency                                      326.0        9.2          323.1
    Non-agency                                  914.3       25.8          906.3
    Interest only                                18.7        0.5           19.1
                                             ----------------------------------
Total fixed maturities                        3,235.3       91.3        3,191.1

Equity securities (i.e., non-redeemable          21.4        0.6           22.2
preferred stocks)

Mortgage loans on real estate                    29.0        0.8           29.0
Policy loans                                    123.3        3.5          123.3
Cash and cash equivalents                       133.4        3.8          133.4
                                             ----------------------------------
Total cash and investments                   $3,542.4     100.0%       $3,499.0
                                             ----------------------------------
                                             ----------------------------------
</TABLE>


                                     19
<PAGE>

     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 CMOs (on an amortized cost basis), 67.3% use
mortgage loans or mortgage loan pools, letters of credit, agency mortgage pass-
through securities and other types of credit enhancement as collateral. The
remaining 32.7% of the non-agency CMOs use 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 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 is 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 $32.7 million and $39.0 million, respectively,
at March 31, 1997. Although the interest rate environment has experienced
significant volatility during 1996 and the first quarter of 1997, prepayments
and extensions of cash flows from MBSs have not materially affected investment
income of the Company. 

     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. Home equity loan collateral
represents 61.7% of the Company's investments in the ABS market. The typical
structure of an ABS provides for favorable yields, high credit ratings and
stable prepayments.

     Total cash and investments (on an amortized cost basis) were 93% and 96% 
investment grade or equivalent as of March 31, 1997 and December 31, 1996, 
respectively. Investment grade securities are those classified as 1 or 2 by 
the 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, 

                                     20
<PAGE>

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 creditworthiness of such issuers. Additionally, the Company's 
investment portfolio has minimal exposure to real estate, non-indemnified 
mortgage loans and common equity securities, which represented less than 0.1% 
of cash and investments as of March 31, 1997.

     The Company continually monitors and analyzes its investment portfolio,
including below investment grade securities, in order to determine if its
ability to realize its 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
earnings 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 March 31, 1997 the ratings assigned by the NAIC and comparable S&P 
ratings on the Company's fixed maturity portfolio, and the percentage of 
total fixed maturity investments classified in each category, 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)                                 $2,263.1     70%      $2,237.3
2 (BBB)                                           730.6     23          722.0
3 (BB)                                            165.9      5          157.8

4 (B)                                              71.0      2           69.3
5 (CCC, CC, C)                                      4.7      *            4.7
6 (CI, D)                                          --       --             --
                                               ------------------------------
Total fixed maturities                         $3,235.3    100%      $3,191.1
                                               ------------------------------
                                               ------------------------------
</TABLE>

*  Less than 1%.


     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 value of
insurance in force and deferred policy acquisition cost amortization and
deferred income taxes, are charged or credited directly to shareholders' equity.


                                     21
<PAGE>

     The rise in interest rates during the first quarter of 1997 resulted in net
unrealized losses on available-for-sale securities which totaled $26.7 million
(net of $2.4 million of related amortization and $14.4 million in deferred
income taxes) at March 31, 1997, compared to net unrealized gains of $3.7
million (net of $1.3 million of related amortization and $2.0 million in
deferred income taxes) at December 31, 1996. 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 corresponding
customer deposit liabilities are carried at historical values. At March 31, 1997
and December 31, 1996, shareholders' equity excluding the effects of SFAS No.
115 was $184.7 million and $178.3 million, respectively.

     The Company manages assets and liabilities in a closely integrated manner,
with the aim of reducing the volatility of investment spreads during a changing
interest rate environment. As a result, adjusting shareholders' equity for
changes in the fair value of the Company's fixed maturities and equity
securities without reflecting offsetting changes in the value of the Company's
liabilities creates volatility in reported shareholders' equity but does not
fully reflect the underlying economics of the Company's business. The Company's
accompanying consolidated financial statements include fair value balance sheets
which demonstrate that the general rise in interest rates during 1997 do not
have a material effect on the financial position of the Company when all assets
and liabilities are adjusted to estimated fair values.

     Mortgage loans on real estate represented approximately 1% of total cash 
and investments at March 31, 1997 and December 31, 1996. Pursuant to the 
terms of the acquisition of certain of the Company's insurance operations, 
National Mutual has indemnified the Company with respect to principal (up to 
100% of the investments' year-end 1992 statutory book value) and interest 
with respect to approximately 99% of these loans at March 31, 1997. In 
support of its indemnification obligations, National Mutual placed $23.0 
million into escrow in favor of the Company's insurance subsidiaries, which 
will remain available until the subject commercial and agricultural loans 
have been paid in full.

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 agreement, dividend 
payments on its preferred stock, operating expenses, 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 preferred stock.

     The ability of the Company's insurance subsidiaries to pay dividends and
enter into agreements with affiliates is limited by state insurance laws. In
March 1997, the Company received a dividend of $7.0 million from Integrity. The
maximum dividend payments that may be made by Integrity to the Company during
1997 without prior approval of the Ohio Insurance Director are $26.0 million.


                                     22
<PAGE>

The Company had cash and investments at the holding company level of $8.8
million at March 31, 1997. In addition, $20.0 million was available on unused
bank lines of credit at March 31, 1997. 

     On October 23, 1996, as amended on March 27, 1997 and May 7, 1997, the 
Company filed a registration statement with the Securities and Exchange 
Commission with respect to the public offering of a yet to be determined 
number of shares of New Class A Common Stock. The Company's decision to 
proceed with the Offering is subject to market and other conditions. 

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. The Company also has $20.0 million
available on unused bank lines of credit as mentioned above.

     During the quarters ended March 31, 1997 and 1996, the Company met its
liquidity needs entirely by cash flows from operating activities and principal
payments on and redemptions of investments. At March 31, 1997, cash and cash
equivalents totaled $133.5 million compared to $110.1 million at December 31,
1996. 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. 

     The Company generated cash flows of $46.7 million and $36.5 million from
operating activities during the quarters ended March 31, 1997 and 1996,
respectively. These cash flows resulted principally from investment income, less
commissions and operating expenses. Proceeds from sales, maturities and
redemptions of investments generated $1,026.2 million and $714.1 million in cash
flows during the quarters ended March 31, 1997 and 1996, respectively, which
were offset by purchases of investments of $1,209.7 million and $791.8 million,
respectively. An increase in investment purchases and sales activity during the
first quarter of 1997 reflects the Company's ongoing management of its fixed
maturity portfolio which has increased in size due to sales of spread-based
products.


                                       23
<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," "anticipates" 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 stimulation 
of future demand for long-term savings and retirement products, including 
variable, indexed and fixed 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 
variable, indexed and fixed 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.


                                       24
<PAGE>

                           PART II.  OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

     As a consequence of the acquisition of State Bond and Mortgage Life 
Insurance Company and its merger with and into Integrity, Integrity became a 
party to a marketing agreement with Multico Marketing Corporation 
("Multico"). In reliance upon the marketing agreement, Integrity eliminated 
commissions to Multico on new product sales on a prospective basis effective 
July 1, 1995. Multico filed a lawsuit in the United States District Court for 
the Western District of Kentucky against Integrity on February 23, 1996, 
alleging breach of contract and breach of the covenant of good faith and fair 
dealing, and seeking a trial by jury and compensatory and punitive damages of 
approximately $61 million. Integrity filed a counterclaim against Multico 
seeking a declaration that Integrity's actions in revising commissions did 
not constitute a breach of contract, and the recovery of commissions, fees, 
trailers, overwrites, and bonuses paid to Multico in the amount of 
approximately $9.3 million. Discovery is proceeding between the parties. On 
May 23, 1996, Integrity filed a motion for summary judgement in the 
litigation; this motion was denied by the court on March 10, 1997. It is 
anticipated that the parties will proceed with further discovery. Company 
management believes that the ultimate resolution of this litigation will not 
result in any material adverse impact to the financial position of the 
Company. 

     Except as described above, the Company is currently involved in no 
material legal or administrative proceedings that could result in a material 
adverse impact to the financial position of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     On January 28, 1997, a majority of the stockholders of the Company, by
written consent in lieu of a special meeting, approved the election of Colin F.
Raymond as a director of the Company to fill the vacancy on the Board created by
the resignation of David R. Ramsey.

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 March 31, 1997.


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<PAGE>

EXHIBITS

   10.1     Engagement Agreement, dated March 12, 1993, between Analytical 
            Risk Management, Ltd. and General American Life Insurance 
            Company-Group Pension (incorporated by reference to Exhibit 10.27 
            to Form S-1 (file no. 333-14693) filed by the Registrant on 
            October 23, 1996.  Portion of the exhibit have been omitted 
            pursuant to a request for confidential treatment filed with the 
            Securities and Exchange Commission under Rule 406 of the 
            Securities Act of 1933, as amended.  The omitted material has 
            been filed separately with the Securities and Exchange 
            Commission).

   10.2     Consent to Assignment of Engagement Agreement, dated September 8, 
            1993, by General American Life Insurance Company-Group Pension 
            (incorporated by reference to Exhibit 10.28 to Form S-1 (file no. 
            333-14693) filed by the Registrant on October 23, 1996).

   10.3     Amendment #1 to Engagement Agreement, dated as of August 14, 
            1995, General American Life Insurance Company and ARM Financial 
            Group, Inc. (incorporated by reference to Exhibit 10.29 to Form 
            S-1 (file no. 333-14693) filed by the Registrant on October 23, 
            1996).

   10.4     Amendment #2 to Engagement Agreement, dated September 1, 1995, 
            between General American Life Insurance Company and ARM Financial 
            Group, Inc. (incorporated by reference to Exhibit 10.30 to Form 
            S-1 (file no. 333-14693) filed by the Registrant on October 23, 
            1996).

   10.5     Reinsurance Agreement between General American Life Insurance 
            Company and Integrity Life Insurance Company (incorporated by 
            reference to Exhibit 10.31 to Form S-1 (file  no. 333-14693) 
            filed by the Registrant on October 23, 1996.  Portions of the 
            exhibit have been omitted pursuant to a request for confidential 
            treatment filed with the Securities and Exchange Commission under 
            Rule 406 of the Securities Act of 1933, as amended.  The omitted 
            material has been filed separately with the Securities and 
            Exchange Commission).

    27      Financial Data Schedule (ELECTRONIC FILING ONLY).


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<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 May 14, 1997.

                                       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)










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