<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: June 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.


       Date                          Class                  Shares Outstanding
--------------------------------------------------------------------------------
August 11, 1998                        A                        23,469,552

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

<PAGE>


                         PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

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


                                                                                          June 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: June 30, 
   1998-$5,615,744; December 31, 1997-$4,021,495)                                      $  5,605,965         $  4,068,386

  Equity securities, at fair value (cost: June 30, 1998-$31,086; December 31, 
   1997-$28,177)
                                                                                             30,423               28,342
  Mortgage loans on real estate                                                              15,460               16,429
  Policy loans                                                                              125,642              126,114
  Cash and cash equivalents                                                                 204,739              228,206
                                                                                        --------------------------------
Total cash and investments                                                                5,982,229            4,467,477

Assets held in separate accounts:
  Guaranteed                                                                              1,307,690            1,266,796
  Nonguaranteed                                                                           1,441,639            1,173,088
Accrued investment income                                                                    56,556               44,546
Value of insurance in force                                                                  33,280               25,975
Deferred policy acquisition costs                                                           107,593               87,170
Goodwill                                                                                      5,935                6,523
Deferred federal income taxes                                                                50,141               31,049
Other assets                                                                                 40,746               35,800
                                                                                        --------------------------------


Total assets                                                                           $  9,025,809         $  7,138,424
                                                                                        --------------------------------
                                                                                        --------------------------------
</TABLE>

                                          2
<PAGE>

<TABLE>
<CAPTION>

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





                                                                                          June 30,
                                                                                            1998            December 31,
(IN THOUSANDS)                                                                           (Unaudited)            1997
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>                 <C>

   
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
  Customer deposits                                                                    $  5,418,223         $  4,242,578
  Customer deposits in separate accounts:
   Guaranteed                                                                             1,295,557            1,254,801
   Nonguaranteed                                                                          1,438,978            1,160,595
  Long-term debt                                                                             38,000               38,000
  Accounts payable and accrued expenses                                                      24,680               18,741
  Payable for investment securities purchased                                               316,404               69,286
  Payable to reinsurer                                                                        7,869                8,800
  Repurchase agreement liability                                                            150,910                    -
  Other liabilities                                                                          34,703               38,078
                                                                                        --------------------------------
Total liabilities                                                                         8,725,324            6,830,879

Contingencies

Shareholders' equity:
Cumulative perpetual preferred stock, $25.00 stated value                                    50,000               50,000
Class A common stock, $.01 par value, 23,465,806 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                                                                  216,951              211,430
Retained earnings                                                                            40,247               25,583
Accumulated other comprehensive income from net unrealized gains
  (losses) on available-for-sale securities                                                  (6,948)              20,300
                                                                                        --------------------------------
Total shareholders' equity                                                                  300,485              307,545
                                                                                        --------------------------------

Total liabilities and shareholders' equity                                             $  9,025,809         $  7,138,424
                                                                                        --------------------------------
                                                                                        --------------------------------
</TABLE>

SEE ACCOMPANYING NOTES

                                          3
<PAGE>

<TABLE>
<CAPTION>

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

                                                                   Three Months Ended                        Six Months Ended
                                                                         June 30,                                June 30,
                                                            ------------------------------          ------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)                         1998                 1997               1998                1997
------------------------------------------------------------------------------------------          ------------------------------
<S>                                                        <C>                   <C>               <C>                 <C>       
Investment income                                          $  115,163            $  77,759         $  219,569          $  147,459
Interest credited on customer deposits                        (92,657)             (58,282)          (174,337)           (109,607)
                                                            ------------------------------          ------------------------------
  Net investment spread                                        22,506               19,477             45,232              37,852

Fee income:
  Variable annuity fees                                         5,029                3,412              9,455               6,651
  Asset management fees                                             -                1,882                  -               3,766
  Other fee income                                                385                  450                617                 847
                                                            ------------------------------          ------------------------------
    Total fee income                                            5,414                5,744             10,072              11,264

Other income and expenses:
  Surrender charges                                             1,816                  973              3,150               1,855
  Operating expenses                                           (7,984)              (6,926)           (15,534)            (15,082)
  Commissions, net of deferrals                                  (424)                (748)            (1,022)             (1,386)
  Interest expense on debt                                       (661)                (580)            (1,278)             (1,266)
  Amortization:
    Deferred policy acquisition costs                          (3,185)              (2,436)            (5,909)             (4,611)
    Value of insurance in force                                (1,401)              (2,118)            (2,932)             (4,359)
    Acquisition-related deferred charges                         (111)                (125)              (237)               (251)
    Goodwill                                                      (93)                (106)              (187)               (228)
  Non-recurring charges:
    Stock-based compensation                                        -               (8,145)            (2,036)             (8,145)
    Other                                                      (1,105)              (1,188)            (2,639)             (2,633)
  Other, net                                                     (455)                (914)            (1,048)             (1,909)
                                                            ------------------------------          ------------------------------
    Total other income and expenses                           (13,603)             (22,313)           (29,672)            (38,015)
Realized investment gains                                       1,786                  420              6,951               2,651
                                                            ------------------------------          ------------------------------

Income before income taxes                                     16,103                3,328             32,583              13,752
Income tax expense                                             (4,208)              (3,185)            (9,707)             (5,999)
                                                            ------------------------------          ------------------------------

Net income                                                     11,895                  143             22,876               7,753

Dividends on preferred stock                                   (1,188)              (1,188)            (2,376)             (2,376)
                                                            ------------------------------          ------------------------------
Net income (loss) applicable to common 
  shareholders                                             $   10,707            $  (1,045)        $   20,500           $   5,377
                                                            ------------------------------          ------------------------------
                                                            ------------------------------          ------------------------------

Net income (loss) per common share (basic)                 $     0.46            $   (0.06)        $     0.88           $    0.30
                                                            ------------------------------          ------------------------------
                                                            ------------------------------          ------------------------------
Net income (loss) per common and common 
  equivalent share (diluted)                               $     0.44            $   (0.06)        $     0.84           $    0.30
                                                            ------------------------------          ------------------------------
                                                            ------------------------------          ------------------------------

Cash dividends paid per common share                       $     0.04                    -         $     0.06                   -
                                                            ------------------------------          ------------------------------
                                                            ------------------------------          ------------------------------
</TABLE>

SEE ACCOMPANYING NOTES.

                                          4
<PAGE>

<TABLE>
<CAPTION>

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


(IN THOUSANDS)                                                                     1998                1997  
--------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                <C>       
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES                                     $   134,251        $   95,559

CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments:
  Purchases                                                                      (4,501,093)       (2,508,366)
  Maturities and redemptions                                                        360,266           170,973
  Sales                                                                           2,788,703         1,978,072
Other investments:
  Purchases                                                                          (9,950)          (34,014)
  Maturities and redemptions                                                          1,214             8,740
  Sales                                                                               7,101            35,725
Policy loans, net                                                                       472               335
Transfers (to) from the separate accounts:
  Purchase of assets held in separate accounts                                     (245,506)         (387,670)
  Proceeds from sale of assets held in separate accounts                            100,442            46,561
                                                                                ------------------------------
Cash flows used in investing activities                                          (1,498,351)         (689,644)

CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net proceeds from issuance of common stock                                             (945)           78,813
Amounts received from customers                                                   1,533,766           858,715
Amounts paid to customers                                                          (338,387)         (284,407)
Principal payment on long-term debt                                                       -            (2,000)
Change in payable to reinsurer                                                         (931)             (458)
Change in repurchase agreement liability                                            150,910                 -
Dividends on common stock                                                            (1,404)                -
Dividends on preferred stock                                                         (2,376)           (2,376)
                                                                                ------------------------------
Cash flows provided by financing activities                                       1,340,633           648,287
                                                                                ------------------------------

Net increase (decrease) in cash and cash equivalents                                (23,467)           54,202

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

                                                                                ------------------------------
Cash and cash equivalents at end of period                                      $   204,739        $  164,269
                                                                                ------------------------------
                                                                                ------------------------------
</TABLE>
SEE ACCOMPANYING NOTES

                                          5
<PAGE>
                                          
                                          
                     ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                                   JUNE 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 six month periods ended June 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 years 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.

                                          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 exercises prices of $22.53 and $19.81
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 $10.8 million for the six
months ended June 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 June 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                          23,408    $    0.46      18,201   $   (.06)
 Effect of dilutive stock options      929         (.02)        118          -
                                    -------------------      ------------------
 Diluted EPS                        24,337    $    0.44      18,319   $   (.06)
                                    -------------------      ------------------
                                    -------------------      ------------------

<CAPTION>
                                              Six Months Ended June 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                          23,365      $  0.88      17,855    $  0.30
 Effect of dilutive stock options      981         (.04)         50          -
                                    -------------------      ------------------
 Diluted EPS                        24,346      $  0.84      17,905    $  0.30
                                    -------------------      ------------------
                                    -------------------      ------------------
</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.

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

<TABLE>
<CAPTION>

                                                                             Three Months Ended June 30,
                                                                           ------------------------------
(IN THOUSANDS)                                                                1998                1997  
---------------------------------------------------------------------------------------------------------
<S>                                                                       <C>                 <C>       
REVENUES

Retail spread products and options                                        $   54,180          $   55,382
Institutional spread products                                                 58,829              20,869
Retail variable fund options                                                   5,029               3,412
Corporate and other                                                            2,539               3,840
                                                                           ------------------------------
  Consolidated total revenues (investment income and fee income)          $  120,577          $   83,503
                                                                           ------------------------------
                                                                           ------------------------------

EARNINGS 
Retail spread products and options                                        $    9,502          $    9,006
Institutional spread products                                                  4,336               2,170
Retail variable fund options                                                   2,094                 989
Corporate and other                                                             (510)               (196)
                                                                           ------------------------------
  Pretax operating earnings (before preferred stock dividends)                15,422              11,969
Income taxes on operations                                                    (3,583)             (3,038)
Preferred stock dividends                                                     (1,188)             (1,188)
                                                                           ------------------------------
  Operating earnings                                                          10,651               7,743
Realized investment gains, net of tax                                          1,161                 420
Non-recurring charges                                                         (1,105)             (9,480)
Income from defined benefit pension plan asset management operations               -                 272
                                                                           ------------------------------
  Net income applicable to common shareholders                            $   10,707          $   (1,045)
                                                                           ------------------------------
                                                                           ------------------------------
</TABLE>

                                                                      9
<PAGE>

<TABLE>
<CAPTION>

                                                                              Six Months Ended June 30,
                                                                           ------------------------------
(IN THOUSANDS)                                                                1998                1997  
---------------------------------------------------------------------------------------------------------
<S>                                                                       <C>                 <C>       
REVENUES
Retail spread products and options                                        $  109,688          $  107,341
Institutional spread products                                                105,795              36,905
Retail variable fund options                                                   9,455               6,651
Corporate and other                                                            4,703               7,826
                                                                           ------------------------------
  Consolidated total revenues (investment income and fee income)          $  229,641          $  158,723
                                                                           ------------------------------
                                                                           ------------------------------

EARNINGS
Retail spread products and options                                        $   20,019          $   17,732
Institutional spread products                                                  8,518               3,515
Retail variable fund options                                                   3,695               1,875
Corporate and other                                                           (1,925)             (2,096)
                                                                           ------------------------------
  Pretax operating earnings (before preferred stock dividends)                30,307              21,026
Income taxes on operations                                                    (7,274)             (5,071)
Preferred stock dividends                                                     (2,376)             (2,376)
                                                                           ------------------------------
  Operating earnings                                                          20,657              13,579
Realized investment gains, net of tax                                          4,518               2,651
Non-recurring charges                                                         (4,675)            (11,706)
Income from defined benefit pension plan asset management operations               -                 853
                                                                           ------------------------------
  Net income applicable to common shareholders                            $   20,500          $    5,377
                                                                           ------------------------------
                                                                           ------------------------------
</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 six months ended June 30, 1998 and 1997 are as follows:


<TABLE>
<CAPTION>

                                                                             Three Months Ended June 30,
                                                                           ------------------------------
(IN THOUSANDS)                                                                1998                1997  
---------------------------------------------------------------------------------------------------------
<S>                                                                       <C>                 <C>       
Net income                                                                $   11,895          $      143
Net unrealized gains (losses) on available-for-sale securities                (7,774)             31,859
                                                                           ------------------------------
Comprehensive income                                                      $    4,121          $   32,002
                                                                           ------------------------------
                                                                           ------------------------------

<CAPTION>
                                                                              Six Months Ended June 30,
                                                                           ------------------------------
(IN THOUSANDS)                                                                1998                1997  
---------------------------------------------------------------------------------------------------------
<S>                                                                       <C>                  <C>
Net income                                                                $   22,876           $   7,753
Net unrealized gains (losses) on available-for-sale securities               (27,248)              1,469
                                                                           ------------------------------
Comprehensive income (loss)                                               $   (4,372)          $   9,222
                                                                           ------------------------------
                                                                           ------------------------------
</TABLE>

8.   DERIVATIVES AND HEDGING ACTIVITIES

     In June 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. The Company has not yet determined what 
the effect of SFAS No. 133 will be on the earnings and financial position of 
the Company.

9.   SUBSEQUENT EVENTS

     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
existing preferred stock, which may be redeemed on or after December 15, 1998,
and for other general corporate purposes.

                                          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 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 $3.8 million and $1.9 million during the six and three months
ended June 30, 1997, respectively.

                                          12
<PAGE>

RESULTS OF OPERATIONS

     SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997

     Net income during the six months ended June 30, 1998 was $22.9 million 
compared to $7.8 million for the six months ended June 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 $20.7 million and $13.6 million for the six months ended 
June 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 $5.6 billion at 
June 30, 1997 to $8.4 billion at June 30, 1998.

     Pro forma operating earnings for the six months ended June 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 June 1997
initial public offering of Class A common stock assuming it occurred on January
1, 1997) were $15.8 million. Operating earnings per diluted share (pro forma for
1997) were $0.85 and $0.66 for the six months ended June 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 1.43% and 1.32% of average assets under management of $2.81 billion and
$2.68 billion for that segment during the six months ended June 30, 1998 and
1997, respectively. Annualized pretax operating earnings for institutional
spread products were 0.53% and 0.63% of average assets under management of $3.18
billion and $1.11 billion for that segment during the six months ended June 30, 
1998 and 1997, respectively.  Annualized pretax operating earnings for
retail variable fund options (fee business) were 0.58% and 0.43% of average
assets under management of $1.27 billion and $0.88 billion for that segment
during the six months ended June 30, 1998 and 1997, respectively.

                                          13
<PAGE>

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

<TABLE>
<CAPTION>
                                                                              Six Months Ended June 30,
                                                                           ------------------------------
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)                                       1998                1997  
---------------------------------------------------------------------------------------------------------
<S>                                                                       <C>                 <C>       
Investment income                                                         $  219,569          $  147,459
Interest credited on customer deposits                                      (174,337)           (109,607)
                                                                           ------------------------------
  Net investment spread                                                   $   45,232          $   37,852
                                                                           ------------------------------
                                                                           ------------------------------

Annualized investment yield                                                     7.11%               7.49%
Annualized average credited rate                                               (5.87%)             (5.77%)
                                                                           ------------------------------
  Investment spread rate                                                        1.24%               1.72%
                                                                           ------------------------------
                                                                           ------------------------------

Average cash and investments (IN BILLIONS)                                $     6.18          $     3.94

Average spread-based customer deposits (IN BILLIONS)                      $     5.99          $     3.83
</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 1.72% in 1997 to 1.24% 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 7.60% for
the first half of 1998, a decrease from 7.83% for the comparable 1997 period. In
comparison, the annualized investment yield on cash and investments supporting
institutional spread product deposits was 6.64% and 6.62% for the six months
ended June 30, 1998 and 1997, respectively. Average cash and investments related
to institutional spread product deposits grew from $1.1 billion during the six
months ended June 30, 1997 to $3.2 billion during the six months ended June 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 six months 
ended June 30, 1998 was primarily attributable to the greater proportion of 
institutional spread product deposits and to higher LIBOR compared to the six 
months ended June 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 $9.5 million in the six months ended June 30,
1998 from $6.7 million in the six months ended June 30, 1997. This increase is
primarily attributable to asset growth from the receipt of variable annuity
deposits and from a stock market-driven increase in the value of existing
variable annuity deposits invested in mutual funds.

          Assets under management as of June 30, 1998 and 1997 were as follows:

<TABLE>
<CAPTION>

                                                                                                June 30,
                                                                          -----------------------------------------------------
                                                                                     1998                       1997
                                                                          ----------------------------  -----------------------
                                                                                           Percent of                Percent of
(DOLLARS IN MILLIONS)                                                        Amount           Total         Amount      Total
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>              <C>          <C>          <C>
Retail spread products and options (primarily fixed
 and indexed annuity deposits)                                            $  2,782.8           33%      $  2,856.6         51%
Institutional spread products (funding agreement,
 GIC and face-amount certificate deposits)                                   3,811.4           45          1,302.5         24
Retail variable fund options (variable annuity
 deposits invested in mutual funds)                                          1,404.7           17            964.7         17
Corporate and other:
  Off-balance sheet deposits under marketing partnership arrangements          233.7            3            257.4          5
  Cash and investments in excess of customer deposits                          201.9            2            170.2          3
                                                                           ----------------------------------------------------

Total assets under management                                             $  8,434.5          100%      $  5,551.4        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 and the investment performance of
variable annuity mutual funds due to strong stock market returns.

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

                                          15
<PAGE>

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

<TABLE>
<CAPTION>

                                                     Six Months Ended June 30,
                                                   ----------------------------
(IN MILLIONS)                                         1998              1997  
-------------------------------------------------------------------------------
<S>                                                <C>               <C>      
Retail:
  Spread products                                  $    64.1         $   289.7
  Variable products:
    Spread options                                      36.0              28.8
    Fund options                                       164.6              62.4
                                                   ----------------------------
      Total variable products                          200.6              91.2
                                                   ----------------------------
Total retail                                           264.7             380.9

Institutional:
  Spread products                                    1,266.0             460.8
                                                   ----------------------------

Total sales                                        $ 1,530.7         $   841.7
                                                   ----------------------------
                                                   ----------------------------
</TABLE>

     Sales of retail variable products during the six months ended June 30, 1998
increased $109.4 million over the six months ended June 30, 1997. This increase
is primarily attributable to continued growth in sales of the PINNACLE variable
annuity product. Retail variable products sales include spread-based systematic
transfer option sales which are transferred into other products and options
within one year. Sales of retail spread products decreased to $64.1 million for
the six months ended June 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 $289.7 million during the six months ended June 30, 1997
were a result of the spike up in market interest rates early in 1997. 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. The increase in institutional sales
is primarily attributable to the sale of a $500 million face-amount certificate
through the newly formed subsidiary, ARM Face-Amount Certificate Group, Inc.,
and its subsidiary 312 Certificate Company, as well as increased sales of
institutional funding agreements.

                                          16
<PAGE>

     Net surrenders of retail spread and variable annuity products and options
issued by the Company's insurance subsidiaries were $184.0 million in the six
months ended June 30, 1998 compared to $155.1 million for the six months ended
June 30, 1997. Surrender charge income increased to $3.2 million for the six
months ended June 30, 1998 from $1.9 million for the six months ended June 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 six 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
six months of 1997 and 1998.

     Operating expenses were $15.5 million for the six months ended June 30,
1998 compared to $15.1 million for the six months ended June 30, 1997. 

     Amortization of deferred policy acquisition costs related to operations was
$5.9 million and $4.6 million during the six months ended June 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 $2.9
million and $4.4 million for the six months ended June 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
of value of insurance in force related to operations is a result of the decrease
in the value of insurance in force asset from $46.6 million at June 30, 1997 to
$33.3 million at June 30, 1998.

                                          17
<PAGE>

     The Company recorded non-recurring charges of $4.7 million in the six
months ended June 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 $10.8 million for the six months ended June 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 gains, which are reported net of related amortization
of deferred policy acquisition costs and value of insurance in force, were $7.0
million during the six months ended June 30, 1998 compared to $2.7 million
during the six months ended June 30, 1997. Such realized investment gains 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 $9.7 million and $6.0 million during the six months
ended June 30,  1998 and 1997, respectively, reflecting effective tax rates of
29.8% and 43.6% 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 six months ended June 30, 1997 would be 27.4%. 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 carryforwards.

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

     Net income during the second quarter of 1998 was $11.9 million compared 
to $143,000 for the second quarter of 1997. Operating earnings were $10.7 
million and $7.7 million for the second quarters of 1998 and 1997, 
respectively. Operating earnings for the second quarter of 1998 were 
positively impacted by increased institutional assets under management from 
strong sales and increased variable annuity assets under management from 
solid sales results and positive stock market performance.

                                          18
<PAGE>

     Pro forma operating earnings for the second quarter of 1997 were $8.8
million. Operating earnings per share (pro forma for 1997) were $0.44 and $0.37
for the second quarter of 1998 and 1997, respectively.

     Annualized pretax operating earnings for retail spread products and 
options were 1.36% and 1.32% of average assets under management of $2.80 
billion and $2.73 billion for that segment during the second quarter of 1998 
and 1997, respectively. Annualized pretax operating earnings for 
institutional spread products were 0.49% and 0.71% of average assets under 
management of $3.57 billion and $1.23 billion for that segment during the 
second quarter of 1998 and 1997, respectively. Annualized pretax operating 
earnings for retail variable fund options (fee business) were 0.62% and 0.44% 
of average assets under management of $1.35 billion and $0.90 billion for 
that segment during the second quarter of 1998 and 1997, respectively

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

<TABLE>
<CAPTION>
                                                         Three Months Ended
                                                              June 30,
                                                      ------------------------
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)                 1998           1997  
------------------------------------------------------------------------------
<S>                                                  <C>            <C>      
Investment income                                    $ 115,163      $  77,759
Interest credited on customer deposits                 (92,657)       (58,282)
                                                      ------------------------
  Net investment spread                              $  22,506      $  19,477
                                                      ------------------------
                                                      ------------------------

Annualized investment yield                               7.02%          7.58%
Annualized average credited rate                         (5.84%)        (5.87%)
                                                      ------------------------
  Investment spread rate                                  1.18%          1.71%
                                                      ------------------------
                                                      ------------------------

Average cash and investments (IN BILLIONS)           $    6.56      $    4.09
Average spread-based customer deposits (IN BILLIONS) $    6.36      $    3.99
</TABLE>


     The decrease in the overall investment spread rate from 1.71% in 1997 to 
1.18% 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 7.53% for the second 
quarter of 1998, a decrease from 7.92% for the comparable 1997 period. In 
comparison, the annualized investment yield on cash and investments 
supporting institutional spread product deposits was 6.60% and 6.79% for the 
second quarter of 1998 and 1997, respectively. Average cash and investments 
related to institutional spread product deposits grew from $1.2 billion 
during the second quarter of 1997 to $3.6 billion during the second 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 June 30,
1998 and 1997 were as follows: 

<TABLE>
<CAPTION>

                                                     Three Months Ended June 30,
                                                     ---------------------------
(IN MILLIONS)                                           1998           1997  
--------------------------------------------------------------------------------
<S>                                                 <C>              <C>     
Retail:
  Spread products                                     $   30.8       $  227.5
  Variable products:
    Spread options                                        19.5           16.5
    Fund options                                          92.9           31.8
                                                      --------------------------
      Total variable products                            112.4           48.3
                                                      --------------------------
    Total retail                                         143.2          275.8

Institutional:
  Spread products                                        818.8          212.2

Total sales                                           $  962.0       $  488.0
                                                      --------------------------
                                                      --------------------------
</TABLE>

     Sales of retail variable products during the second quarter of 1998
increased $64.1 million over the second quarter of 1997. This increase is
primarily attributable to continued growth in sales of the PINNACLE variable
annuity product. Sales of retail spread products decreased to $30.8 million for
the second quarter of 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 $227.5 million during the second quarter of 1997 were a result
of the spike up in market interest rates early in 1997. The increase in
institutional sales is primarily attributable to the sale of a $500 million
face-amount certificate through the Company's newly formed wholly owned
subsidiary, ARM Face-Amount Certificate Group, Inc., and its subsidiary 312
Certificate Company, as well as increased sales of institutional funding
agreements.

     Net surrenders of retail spread and variable annuity products issued by the
Company's insurance subsidiaries were $83.0 million for the three months ended
June 30, 1998 compared to $79.0 million in the second quarter of 1997. Surrender
charge income increased to $1.8 million in the second quarter of 1998 from $1.0
million for the three months ended June 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.

     Operating expenses were $8.0 million in the second quarter of 1998 compared
$6.9 million in the second quarter of 1997. 

     Amortization of deferred policy acquisition costs related to operations was
$3.2 million and $2.4 million during the three months ended June 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.

                                          20
<PAGE>

     Amortization of value of insurance in force related to operations was $1.4
million and $2.1 million for the three months ended June 30, 1998 and 1997,
respectively. The decrease in amortization of value of insurance in force
related to operations is a result of the decrease in the value of insurance in
force asset from $46.6 million at June 30, 1997 to $33.3 million               
at June 30, 1998.

     The Company recorded non-recurring charges of $1.1 million and $9.3 million
for the three months ended June 30, 1998 and 1997, respectively. The 1998 charge
is for registration expenses associated with the Company's public offering of
common stock in May.  The 1997 charge includes a non-cash stock-based
compensation charge of $8.1 million in connection with the Company's initial
public offering of common stock. 

     Realized investment gains, which are reported net of related amortization
of deferred policy acquisition costs and value of insurance in force, were $1.8
million in the second quarter of 1998 compared to $0.4 million in the second
quarter of 1997. Such realized investment gains 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 $4.2 million and $3.2 million during the three
months ended    June 30, 1998 and 1997, respectively, reflecting effective tax
rates of 26.1% and 27.8% (after adding back the 1997 non-recurring stock-based
compensation expense charge for comparability purposes).

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 June 30, 1998 totaled $5.6
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 June 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                                             $  1,976.0           33%     $    1,968.3
    U.S. Treasury securities and obligations of U.S.
       government agencies                                                470.0            8             469.4
    Other government securities                                            54.7            1              50.2
    Asset-backed securities                                               524.5            9             524.0
    Mortgage-backed securities (MBSs):
       Agency pass-throughs                                                98.5            2              98.3
       Collateralized mortgage obligations (CMOs):
         Agency                                                           369.1            6             370.0
         Non-agency                                                     2,122.9           35           2,125.8
                                                                      -------------------------    --------------
Total fixed maturities                                                  5,615.7           94           5,606.0

Equity securities (i.e., non-redeemable preferred stock)                   31.1            1              30.4
Mortgage loans on real estate                                              15.5            *              15.5
Policy loans                                                              125.6            2             125.6
Cash and cash equivalents                                                 204.7            3             204.7
Total cash and investments                                           $  5,992.6          100%     $    5,982.2
                                                                      -------------------------    --------------
                                                                      -------------------------    --------------
</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 June 30, 1998 (on an amortized
cost basis), 84% used mortgage loans or mortgage loan pools, letters of credit,
agency mortgage pass-through securities and other types of credit enhancement as
collateral. The remaining 16% 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 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.

                                          22
<PAGE>

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 $31.7 million and $15.2 million, respectively,
at June 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 June 30, 1998, home equity loan
collateral represented 42% 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 94% and 95% 
investment grade or equivalent as of June 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 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. 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. Additionally, 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 June 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 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
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 June 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)                                                       $  3,366.3           60%      $  3,361.5
2 (BBB)                                                                 1,886.7           33          1,894.8
3 (BB)                                                                    203.6            4            197.9
4 (B)                                                                     159.1            3            151.8
5 (CCC, CC, C)                                                                -            -                -
6 (CI, D)                                                                     -            -                -
                                                                      ----------------------------------------
Total fixed maturities                                               $  5,615.7          100%      $  5,606.0
                                                                      ----------------------------------------
                                                                      ----------------------------------------
</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>

    The fluctuations in interest rates during the first six months of 1998 
resulted in net unrealized losses on available-for-sale securities which 
totaled $6.9 million (net of $0.2 million of related amortization of deferred 
policy acquisition costs and value of insurance in force and $3.7 million of 
deferred income taxes) at June 30, 1998, compared to net unrealized gains of 
$20.3 million (net of $15.8 million of related amortization of deferred 
policy acquisition costs and value of insurance in force and $10.9 million of 
deferred income taxes) at December 31, 1997.  This change in net unrealized 
gains and losses on available-for-sale securities for the first six months of 
1998 decreased reported shareholders' equity by $27.2 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 June 30, 1998 and December 31, 1997, shareholders' equity 
excluding the effects of SFAS No. 115 was $307.4 million and $287.2 million, 
respectively.  

    Assets held in the Company's guaranteed separate accounts include $1.27
billion and $1.26 billion of cash and investments at June 30, 1998 and December
31, 1997, of which approximately 91% and 87% were fixed maturities,
respectively. Total guaranteed separate account cash and investments were 98%
and 99% investment grade at June 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.

    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 half 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 $44.3 million at June 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 June 30, 1998.

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<PAGE>

    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.

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. 

    During the six months ended June 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 June 30, 1998, cash and cash
equivalents totaled $210.6 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.

    The Company generated cash flows of $134.3 million and $95.6 million from
operating activities during the six months ended June 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 $3.2 billion and $2.2 billion in
cash flows during the six months ended June 30, 1998 and 1997, respectively,
which were offset by purchases of investments of $4.5 billion and $2.5 billion, 
respectively. An increase in investment purchases and sales activity
during the first six 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.


                                          26
<PAGE>

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 management believes that it will be 100% Year 2000 compliant by
March 31, 1999. 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.

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 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.

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

     The Company held its annual meeting of the stockholders on May 27, 1998. At
the annual meeting, the stockholders elected two directors to serve for a term
of three years expiring in 2001. The number of votes cast for or withheld for
each director were as follows:


                              Votes For       Votes Withheld
                              ----------      --------------
Dudley J. Godfrey, Jr.        19,691,731          15,720
John R. Lindholm              19,690,931          16,520


In addition, the stockholders approved the ARM Financial Group, Inc. 1998
Non-Employee Director Stock Option Plan by the vote of 19,082,270 in favor,
600,826 against and 23,355 abstentions and 1,000 non-broker votes.

ITEM 5.   OTHER INFORMATION

     The Board of Directors by unanimous written consent dated August 12, 
1998, declared (i) a quarterly dividend of 59.375 cents per share payable 
September 15, 1998 to holders of the 91/2% Cumulative Perpetual Preferred 
Stock of record on August 31, 1998; (ii) a quarterly dividend of 4 cents per 
share payable September 15, 1998 to holders of the Class A common stock of 
record on August 31, 1998; and (iii) the first quarterly dividend (partial 
period) of approximately $1.77 per share payable September 15, 1998 to 
holders of the Series A Fixed/Adjustable Rate Cumulative Preferred Stock of 
record on August 31, 1998.

     On August 6, 1998, the Company announced that William H. Panning will 
assume the newly created position of Executive Vice President and Chief 
Investment Officer on August 17, 1998. The Company also announced the 
resignation, effective August 7, 1998, of Robert H. Scott as Executive Vice 
President, General Counsel and Secretary.

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<PAGE>

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K
 
     REPORTS ON FORM 8-K
 
     On April 22, 1998, the Company filed a current report on Form 8-K to
announce operating results for the first quarter of 1998.
 
     On June 1, 1998, the Company filed a current report on Form 8-K announcing
that as of May 29, 1998, (i) Patricia L. Winter resigned as Executive Vice
President-Investment Assurance and Institutional Products and (ii) Dennis L.
Carr, Executive Vice President and Chief Actuary of the Company, will assume Ms.
Winter's duties with respect to the Company's institutional product group.
 
 EXHIBITS
 
10.1   Amendment dated as of April 20, 1998 to the Credit Agreement dated as of
       June 24, 1997, as amended by the Release and Amendment dated as of
       December 15, 1997, among the Registrant, the financial institutions from
       time to time party thereto, and The Chase Manhattan Bank (filed
       herewith).

10.2   Administrative Services Agreement dated April 22, 1998 between the
       Registrant and 312 Certificate Company (filed herewith).

10.3   Investment Services Agreement dated April 22, 1998 between Integrity
       Capital Advisors, Inc. and ARM Capital Advisors, LLC (filed herewith).

10.4   Investment Management Agreement dated as of April 24, 1998 among 312
       Certificate Company, Integrity Capital Advisors, Inc. and The First
       National Bank of Chicago (filed herewith).

10.5   ARM Financial Group, Inc. 1998 Non-Employee Director Stock Option Plan
       (incorporated herein by reference to Annex A to the Company's Notice of
       1998 Annual Meeting and Proxy Statement, filed April 22, 1998).

 27    Financial Data Schedule.

                                          29
<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 August 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)


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