<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

   
                                  FORM 10-K/A
    

   
                               AMENDMENT NO. 1
    

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

For the fiscal year ended December 31, 1996

                         Commission file number 1-11422

                       PENNCORP FINANCIAL GROUP, INC.
--------------------------------------------------------------------------------
           (Exact name of Registrant as specified in its charter)

         Delaware                                        13-3543540
-------------------------------             ------------------------------------
(State or other jurisdiction of             (I.R.S. employer identification no.)
incorporation or organization)

  745 Fifth Avenue, Suite 500, NY, NY                       10151
----------------------------------------                  ----------
(Address of principal executive offices)                  (Zip code)

Registrant's telephone number, including area code: (212) 832-0700

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

      Title of each class              Name of each exchange on which registered
      -------------------              -----------------------------------------

      Common Stock, $.01 par value            New York Stock Exchange

      $3.375 Convertible Preferred            New York Stock Exchange
      Stock, $.01 par value

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

                                    None
--------------------------------------------------------------------------------
                               (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
                                             ---   ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained in the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 14, 1997: $1,038,930,511.50.

The number of Common Stock shares outstanding as of March 14, 1997 was
28,462,502.

                     DOCUMENTS INCORPORATED BY REFERENCE

   
                                     NONE
    

<PAGE>   2
                                                                          PAGE 2




                         PENNCORP FINANCIAL GROUP, INC.
                           ANNUAL REPORT ON FORM 10-K/A
                      FOR THE YEAR ENDED DECEMBER 31, 1996

                               TABLE OF CONTENTS

   
<TABLE>
<CAPTION>
                                                                                                      Page
                                                                                                      ----
<S>        <C>                                                                                         <C>
PART I

Item 1.    Business   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           3

Item 2.    Properties.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          23

Item 3.    Legal Proceedings  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          23

Item 4.    Submission of Matters to a Vote of Security Holders  . . . . . . . . . . . . . . .          24

PART II

Item 5.    Market for the Registrant's Common Equity and Related Shareholder Matters  . . . .          25

Item 6.    Selected Financial Data  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          26

Item 7.    Management's Discussion and Analysis of Financial Condition and Results
           of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          27

Item 8.    Financial Statements and Supplementary Data  . . . . . . . . . . . . . . . . . . .          35

Item 9.    Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          89

PART III

Item 10.   Directors and Executive Officers of the Company  . . . . . . . . . . . . . . . . .          89

Item 11.   Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          93

Item 12.   Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . .          99

Item 13.   Certain Relationships and Related Transactions.  . . . . . . . . . . . . . . . . .         102

PART IV

Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . .         108
</TABLE>
    
<PAGE>   3
                                                                          PAGE 3




                                     PART I

ITEM 1. BUSINESS

GENERAL DESCRIPTION AND HISTORY

   
         PennCorp Financial Group, Inc. ("PennCorp" or the "Company"),
incorporated in Delaware in 1989, is a holding company the principal
subsidiaries of which are insurance companies with operations in Raleigh, North
Carolina, Baton Rouge, Louisiana, Jacksonville, Florida, Waco, Texas and
Toronto, Canada. The Company's insurance subsidiaries market and underwrite
fixed benefit accident and sickness insurance, life insurance and accumulation
products to lower- and middle-income markets throughout the United States,
Canada, Puerto Rico and the Caribbean Basin. The Company's insurance products
are sold through several distribution channels including exclusive agents,
general agents, payroll deduction programs and through financial institutions.
PennCorp's only significant industry segment is insurance. Information relating
to the Company's U.S. and Canadian operations appears in Note 4 of "Notes to
Consolidated Financial Statements" on Page 44 hereof. For more information
regarding the Company's markets, see "Insurance" and "Marketing and
Distribution" included herein.
    

         The following is a description of PennCorp's principal operating
units:

         AA Life - Collectively, Pioneer Security Life Insurance Company
("Pioneer Security") and its subsidiaries, American-Amicable Life Insurance
Company of Texas ("American-Amicable") and Pioneer American Insurance Company
("Pioneer American"), markets and underwrites customized life insurance and
accumulation products to U.S. military personnel and federal employees through
a general agency force.

         Penn Life - Collectively, Pennsylvania Life Insurance Company ("PLIC")
and PennCorp Life Insurance Company, markets and underwrites fixed benefit
accident and sickness products and, to a lesser extent, life products through a
sales force exclusive to the Company throughout the United States and Canada.

         Professional - Professional Insurance Corporation provides individual
fixed benefit products utilizing a network of independent agents primarily in
the southeastern United States through employer-sponsored payroll deduction
programs.

         Integon Life - Collectively, Salem Life Insurance Corporation, Integon
Life Insurance Corporation, Georgia International Life Insurance Company and
Occidental Life Insurance Company of North Carolina ("OLIC") which markets life
insurance, individual life and fixed benefit products and, to a lesser extent,
annuity products through independent general agents and marketing organizations
who sell directly to individuals throughout the United States and in several
foreign countries, principally Panama.

         UC Life - United Companies Life Insurance Company principally markets
deferred annuities and variable annuities through financial institutions and
independent general agents, primarily in the southern and western United
States.

   
         The Company's growth strategy emphasizes the acquisition of
complementary insurance operations and the utilization of the Company's several
distribution channels to further penetrate its target markets. In making
acquisitions, the Company seeks to broaden its distribution channels, increase
its product offerings and expand its geographical presence. The Company also
seeks benefits from expense reduction through the consolidation of facilities
and staff and the creation of common administrative systems. Since 1990, the
Company has acquired OLIC, Professional, AA Life, Integon Life and UC Life and
a majority economic interest in Southwestern Financial Corporation ("SW
Financial").  The merger of Washington National Corporation ("Washington
National") into the Company is pending shareholder and regulatory approvals and
is anticipated to close in June 1997.
    
<PAGE>   4
                                                                          PAGE 4





THE SOUTHWESTERN LIFE INVESTMENT

         On December 14, 1995, SW Financial, a newly organized corporation
formed by the Company and Knightsbridge Fund Capital Fund I, L.P.
("Knightsbridge Fund"), purchased Southwestern Life Insurance Company
("Southwestern Life") and Union Bankers Insurance Company ("Union Bankers") and
certain related assets from I.C.H. Corporation and certain of its subsidiaries
(collectively, "ICH") (the "Southwestern Life Investment") for $260.0 million.

   
         Through its direct investment of $120.0 million in SW Financial,
without giving effect to the conversion of the SW Financial convertible
debentures, the Company beneficially owns 75.4% of SW Financial's outstanding
common stock, including 100.0% of SW Financial's non-voting common stock and
21.0% of SW Financial's voting common stock. The Company also owns preferred
stock of SW Financial and its subsidiary. The Company is also a 16.3% limited
partner in Knightsbridge Fund.  More specifically, in addition to its
$89,000,000 common stock investment in SW Financial, the Company also purchased
$21,000,000 initial liquidation value of SW Financial's Series A Preferred
Stock, which accrues (but does not require the payment of) dividends at the
rate of 10.0% per annum, compounded quarterly, and is mandatorily redeemable on
December 31, 2005. The Series A Preferred Stock is not redeemable at the option
of SW Financial. At maturity, the Series A Preferred Stock will be required to
be redeemed for approximately $56.0 million in cash. If SW Financial fails to
satisfy its mandatory redemption obligation, the holders of the Series A
Preferred Stock will be entitled to elect 49.0% of the members of the Board of
Directors of SW Financial and, upon receipt of regulatory approval, a majority
of the directors of SW Financial. The Series A Preferred Stock is senior
preferred stock. The holders of the Series A Preferred Stock are entitled to
class voting rights under certain circumstances, including in connection with a
merger of SW Financial or a sale of all or substantially all its assets or the
authorization or issuance of senior or pari passu preferred stock, and as
otherwise provided by law.
    
 
   
     In addition, certain of the Company's insurance subsidiaries purchased 
$10.0 million liquidation value of 5.5% Mandatorily Redeemable Preferred Stock,
par value $0.01 per share (the "5.5% Preferred Stock") of Southwestern Life
Companies ("SWLC"), the immediate parent company of Southwestern Life and Union
Bankers. The 5.5% Preferred Stock accrues dividends at a fixed rate of $5.50
per share per annum, payable in cash or, subject to certain conditions, through
the issuance of additional shares of 5.5% Preferred Stock. The 5.5% Preferred
Stock is not subject to optional redemption and matures on December 31, 2005.
If SWLC fails to satisfy its mandatory redemption obligation or if dividends
payable on the 5.5% Preferred stock are in arrears for four or more quarterly
dividend periods, the holders of the 5.5% Preferred Stock will be entitled to
elect 49.0% of the members of the Board of Directors of SWLC and, upon receipt
of regulatory approval, a majority of the Board of Directors of SWLC. The 5.5%
Preferred Stock is the only preferred stock of SWLC authorized for issuance.
The holders of the 5.5% Preferred Stock are entitled to class voting rights
under certain circumstances, including in connection with a merger of SWLC or a
sale of all or substantially all its assets or the authorization or issuance of
senior or pari passu preferred stock, and as otherwise provided by law.
    
 
   
     As part of the SW Financial Investment, the Company, the Knightsbridge Fund
and its affiliates, and SW Financial entered into a 10-year stockholders
agreement (the "Stockholders Agreement"). Pursuant to that agreement, prior to
the time when the Company converts its shares of nonvoting stock into voting
common stock (the "Conversion"), the parties have agreed that the Board of
Directors of SW Financial will consist of (i) Glenn H. Gettier (the President
of Southwestern Life and Union Bankers), so long as he is an employee of SW
Financial and its subsidiaries and is willing to serve as a director, (ii)
David J. Stone and Steven W. Fickes, so long as they are principals of the
Knightsbridge Fund and are willing to serve as directors and (iii) at least
four independent directors (as defined) reasonably acceptable to the Company
and the Knightsbridge Fund. To date, neither the Company nor the Knightsbridge
Fund has required SW Financial to nominate candidates to serve as independent
directors. In addition to the foregoing, prior to the Conversion, the Company
is entitled to send three of its designees (in addition to Messrs. Stone and
Fickes) to observe all meetings of the Board of Directors (and committees
thereof) of SW Financial and its subsidiaries.
    
 
   
     The Stockholders Agreement further grants the Company, but not the
Knightsbridge Fund and its affiliates, certain "drag-along" rights pursuant to
which, if the Company desires to sell all or any portion of its common stock
(including common stock purchase warrants) in SW Financial, it can require the
Knightsbridge parties to sell an equivalent proportionate amount of their SW
Financial common stock and warrants. The Stockholders Agreement also grants
both the Company and the Knightsbridge parties certain "tag-along" rights
pursuant to which, subject to certain de minimis exceptions, if either party
desires to sell its common stock (including warrants) to a third party, the
other party will have the opportunity to participate on identical terms and on
a ratable basis in such sale.
    
 
   
     In addition to the foregoing, the Stockholders Agreement grants "demand"
and "piggyback" registration rights to the Company and the Knightsbridge parties
under certain circumstances.
    
 
   
     The voting provisions of the Stockholders Agreement and the tag-along and
drag-along rights thereunder automatically terminate upon the consummation of an
initial public offering of common stock of SW Financial pursuant to which SW
Financial receives gross proceeds of at least $50.0 million in cash.
    

   
         The Company's Board, including its independent directors, authorized
the Company and the Knightsbridge Fund to pursue the acquisition of
Southwestern Life and Union Bankers after considering, among other things,
ICH's and its creditors' insistence that they would only consider potential
bids for Southwestern Life and Union Bankers that were structured to allow ICH
to satisfy its tax planning objectives. In addition, the Company's Board
expressed reluctance to increase significantly the Company's financial
leverage, which the directors believed might cause concern among insurance
regulatory authorities and which might also jeopardize the Company's ratings
from A.M. Best and Company and other rating agencies. After taking into account
the foregoing factors and considering the time that might be necessary to raise
sufficient equity capital to fund the transaction based on the Company's target
range of debt to capitalization ratios, the Company's Board authorized
management to work with the Knightsbridge Fund to devise a transaction
structure that accommodated ICH's tax objectives, timing requirements, and
mitigated the above stated concerns of the Company's Board. In addition, the
Company's Board considered the fact that there were at least four potential
avenues for the Company 's stockholders to realize value (directly or
indirectly) from the Company's investment: (i) an initial public offering of SW
Financial, (ii) a spin-off of the Company's investment in SW Financial, (iii) a
sale of SW Financial to a third party and (iv) the purchase of the SW Financial
Controlling Interest and the consolidation of SW Financial into the Company.
Based on the foregoing, the Company's Board elected to structure the Company's
investment in SW Financial in a manner that it believed enabled the Company to
share in the economic benefits of having purchased SW Financial for a purchase
price it considered attractive, while enabling the Company's Board to be
flexible with respect to its ultimate ability to realize value from its
investment.
    

   
         The Company believes that the Southwestern Life Investment represents
an opportunity to benefit both financially and strategically from an ownership
interest in an insurance company with a well-established franchise.
Southwestern Life and Union Bankers market insurance products which are
complementary to those of the Company and which are sold through similar
distribution channels, although historically the target markets of the Company
and Southwestern Life and Union Bankers have been different. Because of their
parallel products, distribution systems and administrative systems, the Company
and SW Financial are evaluating a number of possible ways in which they may
mutually benefit from their relationship. Among others, potential opportunities
include expanded product offerings through cross-licensing arrangements and
increased operating efficiencies through shared administrative functions. In
1996, the Company was successful in a cross-marketing effort whereby Penn Life
agents sell Union Bankers' products. Total new annualized sales during 1996 by
the Penn Life agents of Union Bankers products was $1.2 million. 
    

THE KNIGHTSBRIDGE RESTRUCTURING PLAN

   
         In February 1996, Messrs. Stone and Fickes began discussions with
the Company's Board of Directors on a means of consolidating their outside
business interests, including the Knightsbridge Fund, under the Company.
Subsequently, Messrs.  Stone and Fickes and the members of the Knightsbridge
and Compensation Committees of the Company's Board developed a plan to enable
the Company to manage the Knightsbridge Fund and to provide Messrs. Stone and
Fickes with a compensation program that offers them compensation opportunities
with economic interests aligned with stockholders generally and that provides
incentives for each to make a long-term, full-time commitment to the Company.
    

         The components of the Knightsbridge restructuring plan are as follows:

   
         o   The adoption of compensation arrangements pursuant to which
             Messrs. Stone and Fickes have entered into five-year employment
             agreements with the Company. These compensation arrangements are
             described in detail under the captions "Executive Compensation -
             Employment Agreements" in Item 11 hereof. 
    

   
         o   The acquisition by the Company of the interests of Messrs. Stone
             and Fickes in Knightsbridge Management, L.L.C. ("Knightsbridge
             Management"), Knightsbridge Capital L.L.C. and Knightsbridge
             Consultants L.L.C. (collectively, "The Fickes and Stone
             Knightsbridge Interests").
    

   
         o   The acquisition by the Company from the Knightsbridge Fund and
             Messrs. Stone and Fickes of their respective holdings of common
             stock and common stock warrants of SW Financial (collectively,
             "The Southwestern Financial Controlling Interest") provided that
             if the Proposed Settlement (as defined in "Item 3 - Legal
             Proceedings" below) is approved by the Delaware Chancery Court
             after notice to the Company's stockholders, Messrs. Stone and 
             Fickes will cancel their SW Financial common stock warrants for no
             additional consideration). See Item 3 - Legal Proceedings on page
             23 hereof.
    

   
         The acquisition of The Fickes and Stone Knightsbridge Interests and
the acquisition of the Southwestern Financial Controlling Interest are being
submitted to a vote of the stockholders of the Company at a Special Meeting of
Stockholders anticipated to be held in June 1997.
    
<PAGE>   5
                                                                          PAGE 5





   
         Further information regarding the Southwestern Life Investment appears
in Note 6 of "Notes to Consolidated Financial Statements" on page 49 hereof.
Information relating to the relationship between the Company and the
Knightsbridge Fund, the acquisition of The Fickes and Stone Knightsbridge
Interests and the Southwestern Financial Controlling Interest appear in Notes
15 and 16 of "Notes to Consolidated Financial Statements" on pages 57 and 58,
respectively, hereof.
    

THE WASHINGTON NATIONAL TRANSACTION

   
         On November 14, 1996, the Company and Washington National entered into
an agreement whereby Washington National will merge with the Company (the
"Merger"), the corporate existence of Washington National will cease, and the 
Company will continue as the surviving corporation.
    

   
         Each share of Washington National common stock, par value $5.00 per
share (the "Washington National Common Stock") (other than treasury shares held
by Washington National or shares with respect to which appraisal rights are
perfected under the Delaware General Corporation Law ("Dissenting Shares")),
outstanding at the effective time of the Merger will be converted into the
right to receive (i) $29.50 (the "Cash Price") in cash, without interest,
subject to the cash limitation referred to below and determined as described
herein, (ii) a fraction (rounded to the nearest ten-thousandth) of a share of
the Company's common stock, par value $0.01 per share (the "PennCorp Common 
Stock"), determined as described herein, or (iii) a combination of cash and 
shares of PennCorp Common Stock.
    

   
         Washington National stockholders will be entitled to elect (the "Cash
Election") to receive solely cash, based on the Cash Price, in exchange for all
or any part of their shares of Washington National Common Stock. However, the
number of shares of Washington National Common Stock that may be converted into
the right to receive cash in the Merger (the "Cash Election Number") is
limited. Based on information available to the Company and Washington National
as of March 9, 1997, the Company and Washington National estimate that the
amount of cash available for Cash Elections will be approximately $73,000,000
and the maximum number of shares of Washington National Common Stock that could
be converted into the right to receive cash in the Merger will be approximately
2,487,000 shares.
    

   
         Each holder of an outstanding share of Washington National Common
Stock (other than treasury shares and Dissenting Shares) not subject to a valid
Cash Election will be entitled to receive PennCorp Common Stock. The amount of
PennCorp Common Stock received per share of Washington National Common Stock
will depend on the average closing price (the "Trading Average") of the
PennCorp Common Stock on the New York Stock Exchange (the "NYSE") during the 20
trading days ending on the third trading day prior to the effective time of the
Merger. If the Trading Average is equal to or greater than $31.658 but not
greater than $38.693 per share, the number of shares of PennCorp Common Stock
received will be adjusted so that each share of Washington National Common
Stock will be exchanged for PennCorp Common Stock with a value of $29.50 (based
on the Trading Average). If the Trading Average is equal to or greater than
$28.14 but not greater than $31.658, each share of Washington National Common
Stock will be exchanged for 0.9318 shares of PennCorp Common Stock and the
value of the PennCorp Common Stock received will be between $26.22 and $29.50
(based on the Trading Average). If the Trading Average is below $28.14, the
transaction may be terminated by Washington National unless the Company agrees
to increase the number of shares of PennCorp Common Stock to be received by
Washington National stockholders so that each share of Washington National
Common Stock will be exchanged for PennCorp Common Stock with a value of $26.22
(based on the Trading Average). If the Trading Average is equal to or greater
than $38.693 but not greater than $42.21 per share, each share of Washington
National Common Stock will be exchanged for 0.7624 shares of PennCorp Common
Stock and the value of the PennCorp Common Stock received will be between
$29.50 and $32.18 (based on the Trading Average). If the Trading Average is
greater than $42.21, the transaction may be terminated by the Company unless
Washington National agrees to decrease the number of shares of PennCorp Common
Stock to be received by Washington National stockholders so that each share of
Washington National Common Stock will be exchanged for PennCorp Common Stock
with a value of $32.18 (based on the Trading Average). As of the date hereof,
neither the Company's Board nor the Washington National Board has determined
what action it will take if the Trading Average is below $28.14 or above
$42.21, as the case may be. However, each such action would be undertaken in
accordance with the fiduciary duty of each Board to act in the best interests
of its respective stockholders. The actual market value of the PennCorp Common
Stock received in the Merger will depend on market conditions at the time it is
received by Washington National stockholders and, therefore, may be more or
less than the values referred to above.
    

         Washington National is an insurance holding company with two principal
subsidiaries: Washington National Insurance Company, which provides
employee-paid disability insurance and other specialty insurance products to
school employees, including teachers, administrative and custodial personnel
via payroll deduction programs, and
<PAGE>   6
                                                                          PAGE 6




United Presidential Life Insurance Company, which primarily markets and sells
universal life and certain interest- sensitive life insurance and annuity
products to individuals and small businesses.

   
         The Company's Board of Directors reviewed the terms and conditions of
the Merger and determined that the Merger is fair to and in the best interests
of the Company and its stockholders. This recommendation is based on a number
of considerations, principally including the following: (i) current industry,
economic and market conditions; (ii) the additional distribution channels to
the Company's target market offered by Washington National; (iii) the fact that
both the Company and Washington National sell their products to the same target
market, thus providing "cross-selling" opportunities; (iv) the Company's ability
to use its  existing payroll deduction capabilities and its individual product
division to service Washington National policyholders without a proportionate
increase in costs; (v) future statutory income expected to be received from
Washington National's closed block of annuity business (estimated initially at
$10,000,000 per year and diminishing over time); (vi) potential consolidation
savings (run-rate reduction of a minimum of approximately $10,000,000 on a
pre-tax basis) resulting from the Merger; (vii) the financial condition,
results of operations and cash flows of the Company and Washington National,
both on a historical and a prospective basis; (viii) the historical market
prices and trading volumes of the PennCorp Common Stock and Washington National
Common Stock; (ix) management's expectation that the Merger will be accretive
to the Company's earnings per share; (x) the terms and conditions of the Merger
Agreement, including the requirement for the Company's stockholders' approval,
the requirement that the Company receive a $10,000,000 termination fee under
certain circumstances, and the requirement that the Company provide certain
large stockholders of Washington National with registration rights; and (xi)
results of due diligence which, included (a) concerns about the profitability
of certain of Washington National's insurance products, (b) potential credit
exposures related to Washington National's mortgage portfolio and valuation
concerns related to the Kokomo, Indiana home office building, (c) possible
litigation exposures, including a class action suit involving former employees
of Washington National, and (d) potential tax liabilities of Washington
National. 
    

INSURANCE

         The Company's insurance subsidiaries underwrite a variety of
individual insurance products with the primary emphasis on modest premium
policies in the accumulation, life and fixed benefit product sectors. Fixed
benefit products include indemnity insurance policies in which the benefit
amounts are fixed at the time of policy issue. Those products provide
supplemental income payments directly to the insured who is disabled and unable
to work due to accident or sickness. Life products are primarily low face
amount traditional whole life or universal life products which build cash
values that are available to the policyholder. Accumulation products include
various forms of annuity products which are utilized by policyholders primarily
as a means of tax deferred savings. The following table presents the historical
percentages of consolidated insurance operations revenues derived from these
product types:
<TABLE>
<CAPTION>
                                      PERCENTAGE OF CONSOLIDATED
                                        INSURANCE OPERATIONS
            INSURANCE PRODUCT TYPE    REVENUES AS OF DECEMBER 31,
            ----------------------    ----------------------------
                                      1994         1995       1996
                                      ----         ----       ----
            <S>                        <C>          <C>        <C>
            Fixed benefit  . .         67.1%        48.8%      34.1%
            Life . . . . . . .         32.9         43.5       46.2
            Accumulation . . .           --          7.7       19.7
                                      ------       ------     ------
              Total  . . . . .        100.0%       100.0%     100.0%
                                      ======       ======     ======
</TABLE>

         The amount of annualized premium in force and policy activity by type
of business for the past three years is as follows:
<TABLE>
<CAPTION>
                                        ANNUALIZED PREMIUM IN FORCE
           INSURANCE PRODUCT TYPE            AS OF DECEMBER 31,
           ----------------------    --------------------------
                                        1994        1995        1996
                                        ----        ----        ----
                                           (Dollars in thousands)
          <S>                          <C>         <C>         <C>
          Fixed benefit  . .           $179,791    $189,681    $194,475
          Life(1)  . . . . .            131,134     216,263     327,538
                                       --------    --------    --------
           Total . . . . . .           $310,925    $405,944    $522,013
----------                             ========    ========    ========
</TABLE>

(1) Life annualized premium in force includes target premium for interest
    sensitive products. Interest sensitive policy revenue may vary from target
    premium as policyholders have no obligation to pay target premium.
    Additionally, interest sensitive policy revenues are determined based upon
    contractual charges assessed against policyholder fund and are not
    determined by policy revenues collected.
<PAGE>   7
                                                                          PAGE 7





<TABLE>
<CAPTION>
                                                    1994                         1995                              1996
                                                  ---------                   ----------                        ----------
                                             Fixed                 Fixed                Accum-     Fixed                 Accum-
                                            Benefit      Life     Benefit      Life     ulation   Benefit      Life      ulation
                                           --------      -----    --------    ------    -------  ---------    ------     -------

      <S>                                  <C>         <C>       <C>         <C>        <C>      <C>         <C>         <C>
      Policies in force - January 1, . .    786,772    309,549    761,082    422,056     6,861    733,893     562,620     34,854
       New issues . . . . . . . . . . .     124,459     50,743    111,999     60,097     1,691     81,547      54,157      4,834
       Business acquired, net . . . . .          --    131,882        200    170,136    32,069     15,664      67,731     64,210
       Policies terminated  . . . . . .    (150,149)   (70,118)  (139,388)   (89,669)   (5,767)  (133,032)   (125,811)   (13,633)
                                           ---------   --------  ---------   --------   -------  ---------   ---------   --------
      Policies in force -December31,. .     761,082    422,056    733,893     562,620    34,854   698,072     558,697     90,265
                                           =========   ========  =========   ========   =======  =========   =========   ========
</TABLE>

         As a result of the acquisition of Integon Life, the Company acquired a
substantial block of credit insurance policies (550,152 policies at
acquisition, 187,244 policies as of December 31, 1996). Integon Life no longer
markets such products and nearly all of Integon Life's credit insurance is
subject to a 100.0% coinsurance agreement. Such policies have been excluded
from the above table.

MARKETING AND DISTRIBUTION

         The Company's insurance subsidiaries collectively are licensed to
market the Company's insurance products in all states (other than New York) and
in the District of Columbia, all provinces of Canada, Puerto Rico, Panama and
certain Caribbean countries. In addition, the Company is authorized to sell its
products at U.S. military installations in foreign countries.

         The Company's broadly defined markets are reached through four primary
distribution channels: agents contracted exclusively with the Company,
independent general agents who sell on an individual basis, independent general
agents who sell through payroll deduction programs and arrangements for
distribution through various financial institutions. Those market segments are
further divided as follows:

<TABLE>
<CAPTION>
        MAJOR MARKET                  SUB-MARKET
      --------------    --------------------------------------
      <S>               <C>
      Individual        Low and moderate income households
                        Non-English speaking households
                        U.S. military enlistees
                        Suburban and rural locales


      Government        Local governments and governmental agencies
                        U.S. federal government
                        Self-employed
</TABLE>

         Each of the Company's market segments may be served by each of the
primary distribution channels. Additionally, though there are certain regions
in which all sales forces are active, the Company's sales forces generally
operate in geographically discrete regions.
<PAGE>   8
                                                                          PAGE 8





         The following tables illustrate, by direct cash premium collected for
the year ended December 31, 1996 and relative percentages, the principal
marketing regions in which the Company collected in excess of $10.0 million of
policy revenues for the year ended December 31, 1996.

<TABLE>
<CAPTION>
                                                   DIRECT PREMIUM COLLECTED
   -------------------------------------------------------------------------------------------------------
    Jurisdiction       Company      Penn Life     Integon Life      AA Life   Professional  UC Life(1),(2)
   --------------      -------      ---------     ------------      -------   ------------  --------------
                                           (Dollars in thousands)
   <S>                <C>            <C>              <C>           <C>            <C>            <C>
   Canada  . . .      $ 43,064       $ 43,055             $  2          $ 7           $ --          $  --
   North Carolina       38,336          1,222           32,633        1,821          2,200            460
   Florida . . .        35,977          1,928            9,848        2,578          7,757         13,866
   Missouri  . .        33,538          4,343              776          673            114         27,632
   Georgia . . .        31,173            945           19,708        1,538          8,155            827
   Louisiana . .        30,986            424            1,144          656            637         28,125
   Texas . . . .        20,438          3,512            6,367        4,695          1,682          4,182
   California  .        20,402          8,191            5,976        3,537             85          2,613
   Illinois  . .        18,189          3,805            2,931        1,027             37         10,389
   Ohio  . . . .        14,135          4,610            2,533        1,233            335          5,424
   South Carolina       13,301            881            5,977        1,084          1,642          3,717
   Virginia  . .        12,390          1,648            6,589        2,402            473          1,278
   Alabama . . .        10,235          1,927            4,276          749          2,704            579
                       -------         ------           ------         ----         ------          -----
     Subtotal  .       322,164         76,491           98,760       22,000         25,821         99,092
   All Others  .       138,379         48,562           43,323       24,815          6,541         15,138
                      --------        -------          -------      -------         ------        -------
     Total . . .      $460,543       $125,053         $142,083      $46,815        $32,362        $114,230
                      ========       ========         ========      =======       ========       =========
</TABLE>
--------------
(1) Primarily single premium deferred annuity premiums.
(2) Includes $16,811 of variable annuity premiums collected on a separate
     account basis.


<TABLE>
<CAPTION>
                                           PERCENTAGE OF TOTAL DIRECT PREMIUM
  -------------------------------------------------------------------------------------------------------
   Jurisdiction    Company  Penn Life     Integon Life      AA Life   Professional    UC Life(1),(2)
  ---------------  -------  ---------     ------------      -------   ------------    --------------
  <S>              <C>         <C>            <C>              <C>        <C>            <C>
  Canada  . . .     9.4%        9.4%            --%              --%         --%            --%
  North Carolina    8.3         0.2            7.1              0.4         0.5            0.1
  Florida . . .     7.8         0.4            2.1              0.6         1.7            3.0
  Missouri  . .     7.3         0.9            0.2              0.2          --            6.0
  Georgia . . .     6.8         0.2            4.3              0.3         1.8            0.2
  Louisiana . .     6.7         0.1            0.3              0.1         0.1            6.1
  Texas . . . .     4.4         0.8            1.3              1.0         0.4            0.9
  California  .     4.4         1.8            1.3              0.8          --            0.5
  Illinois  . .     3.9         0.8            0.6              0.2          --            2.3
  Ohio  . . . .     3.2         1.0            0.6              0.3         0.1            1.2
  South Carolina    2.9         0.2            1.3              0.2         0.4            0.8
  Virginia  . .     2.7         0.4            1.4              0.5         0.1            0.3
  Alabama . . .     2.2         0.4            0.9              0.2         0.6            0.1
                   -----       -----          -----            -----       -----          -----
    Subtotal  .    70.0        16.6           21.4              4.8         5.7           21.5
  All Others  .    30.0        10.6            9.4              5.4         1.3            3.3
                   ------      -----          -----            -----       ----           -----
    Total . . .   100.0%       27.2%          30.8%            10.2%        7.0%          24.8%
                  ======       =====          =====            =====        ====          =====
</TABLE>
(1) Primarily single premium deferred annuity premiums.
(2) Includes $16,811 of variable annuity premiums collected on a separate
    account basis.

Career Sales Force

         Penn Life's agents constitute substantially all of the Company's
career sales force. Penn Life is organized under a regional/branch office
structure. The sales regional managers are responsible for approximately 100
sales locations in the United States and Canada. Commissions are shared among
the regional and branch office managers and the writing agent. Commissions
allocated to the branch offices are used to pay "overwrite" commissions to
agents who train new agents and to pay the expenses of the branch office. Any
commissions allocated to the branch
<PAGE>   9
                                                                          PAGE 9




offices remaining after payment of "overwrite" commissions and expenses,
essentially the branch "profit," are allocated between the senior sales
managers and the Company. The Company retained approximately $2.8 million, $2.8
million and $2.4 million during 1996, 1995 and 1994, respectively, in profit
sharing income, which is recorded as an offset to commissions. Because the
sales managers and the Company share in the profits and losses of the sales
regions, managers have a significant incentive to focus on the bottom line
results of the sales offices for which they are responsible.  The Company
believes that this compensation system promotes efficient field office
administration. The Company also believes that this system enhances agent
loyalty and encourages agents to recruit and train new agents and become sales
managers.

         Management believes that the expansion of the Penn Life sales force
can best be accomplished by broadening the base of sales offices participating
in the profit-sharing structure discussed above. Penn Life has opened the
following new offices and continues to evaluate additional geographic locations
which will complement the current office network.

                                NEW LOCATIONS


<TABLE>
<CAPTION>
              1994                   1995           1996
            --------                -------       --------
             <S>            <C>                 <C>
             Richmond, VA      Bellaire, TX     Salt Lake City,
                                                             UT
              Houston, TX      Amarillo, TX     San Antonio, TX
               Newark, DE   Springfield, MO     Gainesville, FL
                                Gilbert, AZ        Portland, OR
</TABLE>

         The Penn Life career sales force is organized into three distinct
divisions: Instant Issue, Special Services and Individual Life. The Instant
Issue and Special Services Divisions sell fixed benefit products and the
Individual Life Division sells life products. All divisions concentrate
primarily on individual sales or sales to self-employed individuals.

         Instant Issue. Instant Issue agents make "cold call" door-to-door
presentations and market small denomination policies that provide scheduled
payments in fixed amounts to insureds who, as a result of specified types of
accidents, become unable to work or who become hospitalized. The relatively
modest annual premium required to purchase this policy facilitates the initial
sale. Prior to 1996, the Instant Issue agent typically utilized a special
field-underwritten policy form that required the applicant to answer certain
questions designed to confirm that the applicant is within the Company's basic
underwriting guidelines. During 1996, the Company determined that the use of
field-underwritten policies needed to be curtailed for a significant number of
products typically sold by this sales force. To the extent similar products are
sold, the products are now primarily underwritten in the home office. Such
action was instituted by management to help curb rising loss ratios in Instant
Issue products.

         Special Services. Instant Issue policyholders are a significant source
of leads for the Special Services Division. A Special Services agent visits the
policyholder's residence to collect renewal premiums on products purchased from
the Instant Issue Division. The sales agent also delivers a standardized sales
presentation on more comprehensive and higher premium policies. These policies
either provide scheduled payments to insureds who are required to be
hospitalized as the result of accident or sickness or, less frequently,
scheduled payments to insureds who are disabled and unable to work as a result
of accident or sickness.

         Individual Life. Existing policyholders are the primary source of
leads for the Individual Life Division, which sells life products. The Company
has worked to restructure this division, expand its product portfolio and
aggressively recruit new agents. New product offerings include universal life
products and term life products which have been widely accepted by the Penn
Life sales force.
<PAGE>   10
                                                                         PAGE 10





         The Penn Life sales force is made up of approximately 1,000 agents who
produce business annually. The following table sets forth information regarding
the career sales division:

<TABLE>
<CAPTION>
                                                              1994      1995       1996
                                                              ----      ----       ----
                                                             (Dollars in thousands)
   <S>                                                     <C>      <C>        <C>
   INSTANT ISSUE
    Agents under contract  . . . . . . . .                    800        643        682
    Weekly average agents producing new business              266        213        225
    Submitted annualized new business premiums            $13,839    $11,685     $9,497
    Annualized new business premium per agent               $52.0      $54.9      $42.2

   SPECIAL SERVICES
    Agents under contract  . . . . . . . .                    570      1,001        962
    Weekly average agents producing new business              309        342        393
    Submitted annualized new business premiums            $25,825    $29,122    $30,936
    Annualized new business premium per agent               $83.6      $85.2      $78.7

   INDIVIDUAL LIFE
    Agents under contract  . . . . . . . .                    150        161        197
    Weekly average agents producing new business               69         75         91
    Submitted annualized new business premiums             $6,606     $6,969     $8,224
    Annualized new business premium per agent               $95.7      $92.9      $90.4

   TOTAL ALL CAREER SALES DIVISIONS
    Agents under contract  . . . . . . . .                  1,520      1,805      1,841
    Weekly average agents producing new business              644        630        709
    Submitted annualized new business premiums            $46,270    $47,776    $48,657
    Annualized new business premium per agent               $71.8      $75.8      $68.6
</TABLE>

Penn Life is continually striving to develop a core group of agents with proven
ability to produce and service new business. The focus on a strong core group
of agents has allowed the Company to increase productivity over the past few
years without a related incremental increase in agent overhead expenses.

         The revenue earned by the career sales distribution system by product
type is shown below:

<TABLE>
<CAPTION>
     INSURANCE PRODUCT TYPE                              1994      1995      1996
     ----------------------                              ----      ----      ----
                                                           (Dollars in millions)
      <S>                                               <C>     <C>        <C>
      Fixed benefit  . . . . . . . . . . . .            $153.2   $156.0    $148.1
      Life . . . . . . . . . . . . . . . . .              30.7     34.4      32.8
      Accumulation . . . . . . . . . . . . .               --       0.5       1.0
                                                        ------   -----     -----
       Total . . . . . . . . . . . . . . . .            $183.9   $190.9    $181.9
                                                        ======   ======    ======
</TABLE>

         The percentage of career sales division revenue to the Company's total
insurance operations revenue by product type is shown below:

   
<TABLE>
<CAPTION>
    INSURANCE PRODUCT TYPE                              1994      1995     1996
    ----------------------                              ----      ----     ----
    <S>                                               <C>       <C>       <C>
    Fixed benefit . . . . . . . . . . . . . .         77.6%     76.7%     76.8%
    Life  . . . . . . . . . . . . . . . . . .         31.7      19.0      12.6
    Accumulation  . . . . . . . . . . . . . .         --         1.4       0.9
    Total division revenue to the Company's
      insurance operations revenue  . . . . .         62.5      45.8      32.2
</TABLE>
    
<PAGE>   11
                                                                         PAGE 11





Payroll Sales Division

         The payroll sales division includes marketing units of Professional,
AA Life and OLIC. Each of the marketing units is divided into regions utilizing
a hierarchical approach to managing the sales representative. Additionally, AA
Life and OLIC also utilize field marketing directors and independent marketing
organizations to access potential policyholders.

         The payroll sales division markets products solely through the
channels of employer-sponsored payroll deduction or government-sponsored
allotment programs. Under those programs, the agent is permitted by the
employer to meet on the employer's premises with its employees and to make both
group and individual presentations implicitly endorsed by the employer
concerning available products. If an employee elects to purchase a policy,
arrangements are made with the employer to deduct the premiums from the
employee's wages. The employer therefore is able to provide its employees with
insurance benefits without incurring any premium costs. The Company's billing
system can be integrated into the employer's payroll system without additional
cost to the employer, a feature that facilitates the Company's access to
employees of businesses that have not previously participated in payroll
deduction programs.

         The following tables set forth information regarding the payroll sales
division:

<TABLE>
<CAPTION>
         PAYROLL SALES DIVISION                                            1994       1995       1996
         ----------------------                                            ----       ----       ----
                                                                             (Dollars in thousands)
          <S>                                                            <C>          <C>
          Agents under contract  . . . . . . . . . . .                     6,563        6,578     7,539
          Number of annually producing agents  . . . .                     3,170        2,684     2,750
          Annualized new business premium  . . . . . .                   $38,080      $39,435   $39,069
          Annualized new business premium per producing agent              $12.0        $14.7     $14.2
</TABLE>

The revenue earned by the payroll sales division by product type is shown
below:

<TABLE>
<CAPTION>
       INSURANCE PRODUCT TYPE                                            1994       1995       1996
       ----------------------                                            ----       ----       ----
                                                                           (Dollars in millions)
        <S>                                                          <C>          <C>        <C>
        Fixed benefit  . . . . . . . . . . . . . . .                 $37.8        $38.0      $39.5
        Life . . . . . . . . . . . . . . . . . . . .                  44.9         82.0       84.1
        Accumulation . . . . . . . . . . . . . . . .                   --           5.9        8.0
                                                                     -----        ------     ------
         Total . . . . . . . . . . . . . . . . . . .                 $82.7        $125.9     $131.6
                                                                     =====        ======     ======
</TABLE>

         The percentage of the payroll sales division revenue to the Company's
total insurance operations revenue by insurance product is shown below:

   
<TABLE>
<CAPTION>
       INSURANCE PRODUCT TYPE                                            1994       1995      1996
       ----------------------                                            ----       ----      ----
        <S>                                                          <C>          <C>       <C>
        Fixed benefit  . . . . . . . . . . . . .                     19.2%        18.7%     20.5%
        Life . . . . . . . . . . . . . . . . . .                     46.3         45.2      32.3
        Accumulation . . . . . . . . . . . . . .                     --           18.5      7.2
        Total division revenue to the Company's
        insurance operations revenue   . . . . .                     28.1         30.2      23.3
</TABLE>
    

Individual Sales Division

         The individual sales division includes marketing units of Integon Life
and OLIC. The individual sales division markets products to individual
customers through leads developed over time. This division utilizes field
marketing directors and affiliations with independent marketing organizations
to reach its customer base.

         The sales agents for this division often make sales presentations on a
one-on-one basis with potential prospects. Sales representatives are often
faced with competition from other agents and/or products from other companies.
<PAGE>   12
                                                                         PAGE 12





The following tables set forth information regarding the individual sales
division:

<TABLE>
<CAPTION>
     INDIVIDUAL SALES DIVISION                                         1994       1995       1996
     -------------------------                                         ----       ----       ----
                                                                        (Dollars in thousands)
      <S>                                                           <C>           <C>
      Agents under contract  . . . . . . . . . . .                    1,895         4,638     6,194
      Number of annually producing agents  . . . .                      749         2,033     2,092
      Annualized new business premium  . . . . . .                   $6,011       $11,879   $16,926
      Annualized new business premium per producing agent              $8.0          $5.8      $8.1
</TABLE>

         The revenue earned by the individual sales division by product is
shown below:

<TABLE>
<CAPTION>
     INSURANCE PRODUCT TYPE                                         1994       1995       1996
     ----------------------                                         ----       ----       ----
                                                                         (Dollars in millions)
      <S>                                                           <C>         <C>        <C>
      Fixed benefit  . . . . . . . . . . . . . . .                  $6.3        $9.4         $5.0
      Life . . . . . . . . . . . . . . . . . . . .                  21.3        65.0        137.5
      Accumulation . . . . . . . . . . . . . . . .                  --          25.9         52.7
                                                                    -----       ------     ------
       Total . . . . . . . . . . . . . . . . . . .                  $27.6       $100.3     $195.2
                                                                    =====       ======     ======
</TABLE>

         The percentage of the individual sales division revenue to the
Company's total insurance operations revenue by insurance product is shown
below:

   
<TABLE>
<CAPTION>
     INSURANCE PRODUCT TYPE                                       1994       1995       1996
     ----------------------                                       ----       ----       ----
      <S>                                                          <C>          <C>        <C>
      Fixed benefit  . . . . . . . . . . . . .                     3.2%         4.6%       2.6%
      Life . . . . . . . . . . . . . . . . . .                     22.0         35.8       52.7
      Accumulation . . . . . . . . . . . . . .                      --          80.1       47.4
      Total division revenue to the Company's
      insurance operation revenue  . . . . . .                     9.4          24.0       34.6
</TABLE>
    

Financial Services Division

         The financial services division is comprised of UC Life and Marketing
One Financial Corporation ("Marketing One"). Marketing One is one of the
nations oldest and largest third-party marketers of annuity and mutual fund
products.  Founded in 1983 in Portland, Oregon, the company pioneered the
distribution of annuities through the bank distribution channel. In 1985,
Marketing One expanded its services to the securities arena. Marketing One has
assisted over 300 financial institutions, ranging in size from large regional
banks to small community banks and thrifts, with their alternative investment
programs. Services provided include training thousands of representatives,
sales managers, and administrative staff. Marketing One has annual sales in
excess of $1.0 billion.

         UC Life markets single premium of annuity and securities products and
variable annuity products through independent agents, financial institutions
and financial planners.

         The following tables set forth information regarding the financial
services division:

<TABLE>
<CAPTION>
                                                                        1996
                                                                        ----
                                                               (Dollars in thousands)
 <S>                                                                 <C>
 FINANCIAL SERVICES DIVISION
  Agents under contract  . . . . . . . . . . .                          2,970
  Number of annually producing agents  . . . .                            750
  Annualized new business premium  . . . . . .                       $101,602
  Annualized new business premium per producing
  agent  . . . . . . . . . . . . . . . . . . .                        $135.47
</TABLE>
<PAGE>   13
                                                                         PAGE 13





         The revenue earned by the financial services division by product is
shown below:

   
<TABLE>
<CAPTION>
INSURANCE PRODUCT TYPE                                       1996
----------------------                                       ----
                                                          (Dollars in
                                                          millions)
 <S>                                                          <C>
 Fixed benefit  . . . . . . . . . . . .                       $ 0.3
 Life . . . . . . . . . . . . . . . . .                         6.2
 Accumulation . . . . . . . . . . . . .                        49.5
                                                              -----
  Total . . . . . . . . . . . . . . . .                       $56.0
                                                              =====
</TABLE>
    

         The percentage of the financial services division revenue to the
Company's total insurance operations revenue by insurance product is shown
below:

   
<TABLE>
<CAPTION>
   INSURANCE PRODUCT TYPE                                       1996
   ----------------------                                       ----
    <S>                                                          <C>
    Fixed benefit  . . . . . . . . . . . . .                     0.2%
    Life . . . . . . . . . . . . . . . . . .                     2.4
    Accumulation . . . . . . . . . . . . . .                     44.5
    Total division revenue to the Company's
    insurance operation revenue  . . . . . .                      9.9
</TABLE>
    

PRODUCTS

General

         The Company's products generally are small premium policies with
defined fixed benefits or low face amount life insurance policies, each of
which demonstrate stable risk characteristics. The recent acquisitions of
Integon Life and UC Life added a portfolio of accumulation products for which
the Company actively manages pricing spreads.

         Product profitability is achieved through a pricing policy that is
based upon conservative actuarial assumptions which take into account the
underwriting risks associated with the product being sold, including lapse
rates, mortality, morbidity and whether the product is underwritten in the
field or by the home office, as well as the administrative expenses associated
with the business. The Company, on an ongoing basis, evaluates new products for
use by its sales forces.

         The Company believes that, because of the characteristics of the
market it serves and the nature of its products, the lapse rates for its
products, although stable, tend to be higher than those experienced by other
life and health insurance companies that operate in more affluent markets. The
Company prices its products to reflect these higher lapse rates. To encourage
policyholders to maintain their coverages with the Company, fixed benefit
products generally incorporate a small fixed annual increase in benefits. Early
surrender of accumulation and life products is discouraged by either their low
rate of accumulation of cash values or by high surrender charges.

Fixed Benefit Products

         Fixed benefit products are sold in large volume and are characterized
by low average annual premiums. These products provide one or more of three
principal types of benefits: (i) fixed periodic payments to an insured who
becomes disabled and unable to work because of an accident and/or sickness,
(ii) fixed periodic payments to an insured who becomes hospitalized, and (iii)
fixed single payments that vary in amount generally for specified surgical or
diagnostic procedures. Because the benefits are fixed in amount at the time of
policy issuance and are not intended to provide reimbursement for medical and
hospital expenses, payment amounts are not affected by inflation or the rising
cost of health care services. Fixed benefit products, primarily those covering
inability to work due to an accident, provide payments while the insured is
disabled and unable to work, subject to the terms and conditions of the
applicable policy.  Fixed benefit products under which payments are made to
insureds who are disabled and unable to work may be purchased with coverage for
either (i) specified types of accidents, (ii) all other types of accidents, or
(iii) a combination of accident and sickness. The Company's practice is to sell
products that,
<PAGE>   14
                                                                         PAGE 14




together with other similar coverages, do not provide monthly benefits in
excess of $2,000 or 75% of the insured's income, if less.

         Certain fixed benefit products, primarily those covering
hospitalization due to sickness, provide payments during the period the insured
is hospitalized. Most of the Company's fixed benefit products also provide
additional fixed periodic payments to an insured who becomes hospitalized.
Payments under these products are not designed to cover the actual costs of the
insured's hospital stay, but merely to provide the insured with a means of
paying supplemental expenses during the hospitalization period. The Company's
practice is to provide hospitalization benefits of not more than $250 per day
($1,000 per day if the insured requires intensive care treatment).

         The accident and sickness policies also may be purchased with riders
providing for fixed single payments that vary in amount generally for various
surgical and diagnostic procedures. The Company's practice is to sell riders
that do not provide benefit payments in excess of $5,000. If the covered
procedure is performed on an out-patient basis, the insured receives one-half
of the scheduled payment.

Life Insurance Products

         Of the policy revenues attributable to life products, approximately
50.9% are related to interest sensitive life insurance policies and the
remainder are related to traditional term and whole life insurance policies.

         The Company designs its interest sensitive life insurance policies to
avoid the early accumulation of cash values and to discourage early surrenders
or terminations by imposing relatively high average surrender charges. This is
done to reduce the risk of the Company's insurance subsidiaries having to
liquidate investment assets to meet a liquidity demand resulting from the
surrender of large numbers of life insurance policies. In addition to the basic
policies, policyholders also may purchase accidental death, waiver of premium
and annuity riders. The average face amount of the life insurance policies sold
in the twelve months ended December 31, 1996 was $45,000. The average face
amount of the life insurance policies in force at December 31, 1996 was
$45,000.

Accumulation Products

         For life insurance policyholders seeking a convenient investment
vehicle for their excess funds, the Company offers single premium deferred
annuities, flexible premium deferred annuities and variable annuity products.
Historically, the Company had not actively marketed accumulation products.

         The acquisition of UC Life provided the Company with its first
platform to actively market accumulation products. Prior to its acquisition by
PennCorp, Integon Life ceased marketing various annuity products as a result of
changes in its ratings and financial performance.

         As of December 31, 1996, the Company maintained annuity reserves
aggregating $2,030.4 million at an average credited rate of interest of 5.3%.
Of the $2,030.4 million of annuity reserves, approximately 75.7% were subject
to surrender charges averaging 5.1% of the contract holder's account balance.

INSURANCE UNDERWRITING

         Prior to 1996, most of the products offered by the instant issue sales
forces, primarily accident only products, were field underwritten. Beginning in
1996, for nearly all fixed benefit products, the underwriting practice of the
Company allows the home office underwriting staff to review each applicant's
written application for insurance and, if applicable, an attending physician's
report. In some circumstances, the Company will require a more complete medical
history before issuing a policy, which may be issued with exclusionary riders.
The Company's current practice is not to issue fixed benefit products to
individuals in substandard risk classes to the extent permitted by law.

         In general, the Company permits simplified underwriting of life
products, unless the amount of requested coverage is greater than specified
levels between $25,000 and $100,000, depending on the age of the applicant. If
full underwriting is required, the Company reviews the policy application and
an attending physician's report and may require a paramedical examination or
complete physical examination depending on the age of the applicant and the
amount of coverage requested. If the total amount of coverage applied for plus
any coverage in force with the
<PAGE>   15
                                                                         PAGE 15




Company exceeds $100,000, a prospective policyholder must submit to screening
for antibodies related to Acquired Immune Deficiency Syndrome ("AIDS"), to the
extent permitted by law. The life products are specifically designed and priced
for the mortality risks associated with the Company's simplified underwriting
procedures.

   
   Although the increasing incidence of AIDS is expected to affect mortality
adversely for the life insurance industry as a whole, the Company believes that
the impact of AIDS on its operations should not be material due to the small
average size of the life insurance policies sold. The Company requires and
considers AIDS information to the fullest extent permitted by law in
underwriting and pricing decisions. During the twelve months ended December 31,
1996, 1995 and 1994, the Company paid approximately $3.2 million, $1.9 million
and $728,000, respectively in death benefits (representing less than 3.2% of
total death benefits paid by the Company during each such period) under
individual life policies due to deaths believed by the Company to be
AIDS-related. 
    

   
INVESTMENT PORTFOLIO
    

         The Company's investment portfolio is managed with the objectives of
maintaining high credit quality and liquidity, maximizing current income within
acceptable levels of risk, minimizing market and credit risk and matching the
anticipated maturities of investments to the Company's liabilities. To achieve
these objectives, the portfolio consists primarily of United States and
Canadian government and investment-grade fixed maturity securities, which
together with high quality short-term investments accounted for approximately
79.7% and 82.8% of the Company's total invested assets at December 31, 1996 and
1995, respectively. The Company believes that the nature of its fixed benefit
products, which have no inflation risk, and its life products, which limit the
early accumulation of cash values, permit it to utilize this conservative
investment strategy.

         At December 31, 1996, 58.6% of the Company's fixed maturity bonds were
rated Aa or higher by Moody's and approximately 91.4% were rated Baa or higher
by Moody's, respectively. All dollar amounts or percentages set forth in this
discussion are based on carrying value unless otherwise indicated.

         Other than issues of the United States and Canadian governments and
government agencies and authorities, no single issuer represented more than
0.6% of total invested assets at December 31, 1996.
<PAGE>   16
                                                                         PAGE 16





         The following table summarizes the Company's investments as of
December 31, 1996:

<TABLE>
<CAPTION>
                                                                                           PERCENT OF
                                                   AMORTIZED      MARKET      CARRYING      CARRYING
                                                     COST       VALUE (1)       VALUE        VALUE
                                                     ----       ---------       -----        -----
                                                                (Dollars in thousands)
   <S>                                             <C>          <C>           <C>            <C>
   Fixed maturities held for investment:
    Investment-grade corporate bonds                  $ 6,293      $ 6,305       $ 6,293       0.2%
    Below-investment-grade corporate bonds             34,624       34,624        34,624       0.9
    Non-rated corporate bonds  . . .                   46,413       48,830        46,413       1.3
                                                      -------      -------       -------      -----
     Total securities held for
     investment  . . . . . . . . . .                   87,330       89,759        87,330       2.4
                                                      -------      -------       -------      -----
   Fixed maturities available for sale:
    U.S. Government and agency bonds                  279,534      282,685       282,685       7.8
    Debt securities issued or guaranteed by
    foreign governments(2) . . . . .                   80,492       88,671        88,671       2.4
    Municipal bonds  . . . . . . . .                   52,384       52,209        52,209       1.4
    Investment-grade corporate bonds                  984,186    1,002,709     1,002,709      27.5
    Below-investment-grade corporate bonds             91,589       92,494        92,494       2.5
    Non-rated corporate bonds  . . .                   44,671       46,067        46,067       1.3
    Mandatory Redeemable Preferred Stocks                 770          766           766       0.0
    Mortgage-backed bonds  . . . . .                1,408,124    1,428,324     1,428,324      39.2
                                                    ---------    ---------     ---------     ------
     Total securities available for
     sale  . . . . . . . . . . . . .                2,941,750    2,993,925     2,993,925      82.1
                                                    ---------    ---------     ---------      ------
   Trading Securities:
    Equity securities  . . . . . . .                    1,796        2,050         2,050       0.1
    Short-term investments . . . . .                   29,090       29,090        29,090       0.8
                                                       ------       ------        ------       ----
     Total trading securities  . . .                   30,886       31,140        31,140       0.9
                                                       ------       ------        ------       ----
   Equity securities . . . . . . . .                   17,511       20,867        20,867       0.6
   Commercial mortgages  . . . . . .                  202,268      205,384       202,268       5.5
   Residential mortgages . . . . . .                   54,730       56,024        54,730       1.6
   Real estate . . . . . . . . . . .                   23,522       23,522        23,522       0.6
   Policy loans  . . . . . . . . . .                  145,976      145,976       145,976       4.0
   Short-term investments  . . . . .                   63,113       63,113        63,113       1.7
   Other investments . . . . . . . .                   23,326       23,326        23,326       0.6
                                                      -------      -------       -------      -----
     Total invested assets . . . . .               $3,590,412   $3,653,036    $3,646,197     100.0%
                                                   ==========   ==========    ==========     ======
</TABLE>

__________
(1) Market values are obtained principally from the Company's investment
    advisor.
(2) Consists principally of Canadian provincial government bonds and bonds
    issued or guaranteed by the Canadian federal government (in U.S. $).
<PAGE>   17
                                                                         PAGE 17





         The table set forth below indicates the composition of the Company's
fixed maturity portfolio by rating as of December 31, 1996:

<TABLE>
<CAPTION>
                                                                                  TOTAL
                                                     HELD FOR     AVAILABLE      CARRYING    PERCENT OF TOTAL
                                RATING(1)           INVESTMENT     FOR SALE       VALUE       CARRYING VALUE
                        -------------------------   ----------     --------       -----       --------------
                                                                     (Dollars in thousands)
                        <S>                             <C>                     <C>          <C>
                        Aaa . . . . . . . . . .         $  --     $1,733,170    $1,733,171   56.2%
                        Aa  . . . . . . . . . .                       72,441        72,441    2.4
                        A . . . . . . . . . . .           3,065      584,643       587,708    19.1
                        Baa . . . . . . . . . .           3,228      418,425       421,653    13.7
                                                        -------     --------      --------   ------
                         Total investment grade           6,293    2,808,679     2,814,973    91.4
                                                         ------   ----------     ---------   -----

                        Ba  . . . . . . . . . .          22,562       85,666       108,228     3.5
                        B . . . . . . . . . . .          12,062        6,828        18,889     0.6
                                                        -------      -------       -------   -----
                         Total below-investment
                          grade . . . . . . . .          34,624       92,494       127,117     4.1
                                                        -------      -------      --------   -----
                        Nonrated  . . . . . . .          42,413       92,752       139,165     4.5
                                                        -------      -------      --------   -----
                         Total bonds  . . . . .         $87,330   $2,993,925    $3,081,255   100.0%
----------                                              =======   ==========    ==========   ======
</TABLE>
(1) Includes approximately $329.5 million of United States government and
    agency bonds and approximately $88.7 million of Canadian provincial
    government bonds and bonds issued or guaranteed by the Canadian federal
    government (in U.S. $).

         Of the bonds held by the Company, approximately 89.2% were in the
highest two NAIC designations at December 31, 1996. The following table sets
forth as of December 31, 1996, the carrying values of these securities
according to NAIC designations:

<TABLE>
<CAPTION>
                                                      TOTAL
                         HELD FOR      AVAILABLE      CARRYING     PERCENT OF TOTAL
   NAIC RATING          INVESTMENT      FOR SALE       VALUE        CARRYING VALUE
  ------------          ----------      --------       -----        --------------

                                         (Dollars in thousands)
  <S>                       <C>       <C>            <C>              <C>
  Class 1(1)                $ 1,165   $2,306,852     $2,308,017       74.9%
  Class 2 . .                 6,050      433,066        439,116       14.3
  Class 3 . .                 8,912       68,511         77,423        2.4
  Class 4 . .                14,706        6,804         21,510        0.7
  Class 5 . .                    --       10,990         10,990        0.4
  Class 6 . .                    --           --             --         --
  Nonrated                   56,497      167,702        224,199        7.3
                            -------     --------       --------       -----
    Total . .               $87,330   $2,993,925     $3,081,255      100.0%
----------                  =======   ==========     ==========      ======
</TABLE>
(1) Includes approximately $329.5 million of United States government and
    agency bonds and approximately $88.7 million of Canadian provincial
    government bonds and bonds issued or guaranteed by the Canadian federal
    government (in U.S.  $).

<PAGE>   18
                                                                         PAGE 18





         The following table reflects investment results for the Company for
each of the periods indicated.

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                          ---------------------------
                                                          1994         1995         1996
                                                         ------       ------       ------
                                                              (Dollars in thousands)
      <S>                                                <C>         <C>          <C>
      End of period total invested assets(1)             $822,627    $2,286,203   $3,673,504
      Net investment income(2)  . .                        51,850       102,291      213,563
      Net realized investment gains
       (losses)(3)  . . . . . . . .                        (3,556)          595        1,257
      Average annual yield  . . . .                           7.3%          7.3%         7.7%
</TABLE>

---------------
(1) Consists of total investments plus cash, less amounts due to brokers for
    securities committed to be purchased at end of period.
(2) Net investment income is net of investment expenses and excludes capital
    gains or losses and provision for income taxes.
(3) Amounts shown above are before income taxes, and include provisions for
    impairments in value which are considered to be other than temporary.

         The Company's investments must comply with the insurance laws of the
states in which its insurance subsidiaries are domiciled and in which they are
licensed as well as applicable provisions of the Company's 9 1/4% Senior
Subordinated Notes due 2003. These laws and provisions prescribe the kind,
quality and concentration of investments that may be made by the Company and/or
its insurance subsidiaries.

REINSURANCE

         In keeping with industry practice, the Company reinsures portions of
its life insurance exposure with unaffiliated insurance companies under
traditional indemnity reinsurance agreements. New insurance sales are reinsured
above prescribed limits and do not require the reinsurer's prior approval under
contracts that are renewable on an annual basis. Generally, the Company enters
into indemnity reinsurance arrangements to assist in diversifying its risk and
to limit its maximum loss on risks that exceed the Company's policy retention
limits ranging from $25,000 to $300,000 per life, depending on insurer issue
age, the product type and each subsidiaries historical practice.  Generally,
accidental death benefits in excess of $50,000 per life are reinsured on a bulk
basis. Indemnity reinsurance does not fully discharge the Company's obligation
to pay policy claims on the reinsured business. The ceding insurer remains
responsible for policy claims to the extent the reinsurer fails to pay such
claims. At no time during the past ten years has any present reinsurer of any
continuing block of business ceded by any of the Company's insurance company
subsidiaries failed to pay any policy claims with respect to such ceded
business. At December 31, 1996 and 1995, of the approximately $31.5 billion and
$25.9 billion of life insurance in force, approximately $5.8 billion and $3.1
billion had been ceded to reinsurers, respectively. As of December 31, 1996 the
Company's principal reinsurers are North American Reassurance Corp.,
Reassurance Company of Hanover, Cologne Life Reinsurance Co., Life Reassurance
Corp. of America, Worldwide Assurance Company, Ltd., Lincoln National Life
Insurance Company and Lincoln National Reassurance Company which collectively
have reinsured approximately 50% of the ceded business.

COMPETITION

         The accident and health and life insurance industry is highly
competitive. PennCorp competes with many insurance companies and insurance
holding company systems that have substantially greater capital and surplus,
higher A.M. Best Company ("A. M. Best") ratings, larger and more diversified
product portfolios, and access to larger agency sales forces. In the United
States, there are more than 1,700 life and accident and health insurance
companies, most of which compete in the states in which PennCorp conducts
business.

          Private insurers and voluntary and cooperative plans, such as Blue
Cross and Blue Shield, provide insurance for meeting hospitalization and
medical expenses. Much of this insurance is sold on a group basis. The federal
and state governments also pay substantial costs of medical treatment through
Medicare and Medicaid programs. Such major medical insurance generally covers a
substantial amount of the medical (but not non-medical) expenses incurred by an
insured as a result of major illnesses. PennCorp's fixed benefit products
policies are designed to provide coverage which is supplemental to that
provided by major medical insurance and may also be used to defray non-medical
expenses.
<PAGE>   19
                                                                         PAGE 19





         PennCorp's supplemental insurance is not an alternative to major
medical insurance, but is sold to complement major medical insurance by
covering the gap between major medical insurance reimbursements and the total
costs of an individual's health-care expense.

         Thus, the Company competes directly with other insurers offering
supplemental health insurance and believes that its current policies and
premium rates are generally competitive with those offered by other companies
selling similar types of insurance. Management believes that the Company's
product and market focuses are not widespread in the insurance industry and
that it generally does not face direct competition from major national
insurers, although the Company experiences competition from smaller, regional
insurance companies. Management also believes that few major national insurers
compete directly in the sale of fixed benefit products and life products to the
primary market sub segments to which the Company is focused.

         The Company's expansion of its product line to include a higher
percentage of life and accumulation product revenue as compared to the total
revenue has resulted in a broadening of the markets in which the Company faces
competition. The sale of life insurance products, and to a greater extent, the
sale of accumulation products is very sensitive to an organizations A. M. Best
rating, its size and perceived financial strength and the competitiveness and
the financial performance of the products themselves. Like the market focus of
its fixed benefit products, the Company believes that its target market is not
widely served by many of the large, national insurers, but does face direct
competition from smaller regional and niche-market focused companies.

         The Company's growth strategy emphasizes the acquisition of
complementary insurance operations. The Company competes for acquisition
candidates with other domestic and international insurance and financial
institutions, some of which have substantially greater capital and resources.

REGULATORY MATTERS

         Life insurance companies are subject to regulation and supervision by
the states in which they transact business. The laws of the various states
establish regulatory agencies with broad administrative and supervisory powers
related to, among other things, granting and revoking licenses to transact
business, regulating trade practices, establishing guaranty associations,
licensing agents, approving policy forms, filing premium rates on certain
business, setting reserve requirements, determining the form and content of
required financial statements, determining the reasonableness and adequacy of
capital and surplus and prescribing the type of permitted investments and the
maximum concentrations of certain classes of investments. The Company's
insurance subsidiaries are subject to periodic examinations by state regulatory
authorities. Management does not expect the results of any on-going
examinations to have a material effect on the financial condition of the
Company.

         Most states have enacted legislation regulating insurance holding
company systems, including acquisitions of control of insurance companies,
dividends, the terms of surplus debentures, the terms of transactions with
affiliates, investments in subsidiaries and other related matters. Regulatory
restrictions on investments in subsidiaries and affiliates requires the Company
to continually review and occasionally modify or restructure the insurance
subsidiaries within the insurance holding company system. The Company has
ongoing dialogues with the applicable state insurance departments regarding
this issue. The Company is registered as an insurance holding company system in
Florida, Louisiana, North Carolina, Pennsylvania and Texas, (the domiciliary
states of its insurance companies), and routinely reports to other
jurisdictions in which its insurance subsidiaries are licensed.

         There continues to be substantial scrutiny of the insurance regulatory
framework, and a number of state legislatures have enacted legislative
proposals that alter, and in many cases increase, state authority to regulate
insurance companies and their holding company systems. The NAIC and state
insurance regulators also have become involved in a process of reexamining
existing laws and regulations and their application to insurance companies. In
particular, this reexamination has focused on insurance company investment and
solvency issues and, in some instances, has resulted in new interpretations of
existing law, the development of new laws and the implementation of internal
guidelines. The NAIC has formed committees to study and formulate regulatory
proposals on such diverse issues as the use of surplus debentures, accounting
for reinsurance transactions, assumption reinsurance, valuation of securities,
the adoption of risk-based capital rules, and the regulation of various
products offered by insurance companies.
<PAGE>   20
                                                                         PAGE 20





         In connection with its accreditation of states to conduct periodic
insurance company examinations, the NAIC has encouraged states to adopt model
NAIC laws on specific topics, such as holding company regulations and the
definition of extraordinary dividends. Model legislation proposed by the NAIC
to control the amount of dividends that may be paid by insurance companies
without prior regulatory approval has been adopted in most states and is being
considered by the legislatures of the other states. As of the date hereof,
Louisiana (UC Life's domiciliary state) and North Carolina (Integon Life's
domiciliary state) have adopted the NAIC's most restrictive dividend test.
Pennsylvania (Penn Life's domiciliary state), Texas (Pacific Life & Accident
Insurance Company's ("PLAIC") and AA Life's domiciliary state), and Florida
(Professional's domiciliary state) have adopted dividend tests that are
substantially similar to that of the NAIC's model legislation, though less
restrictive than that of North Carolina. Most states only allow dividends to be
paid out of unassigned funds. It is anticipated that Georgia International Life
Insurance Company, Integon Life Insurance Corporation and Professional will be
redomesticated to Texas in 1997 and the Texas dividend test will apply to these
companies thereafter.

         A dividend may be paid by Integon Life if the amount of such dividend
together with all dividends made in the preceding twelve months does not exceed
the lesser of (i) ten percent (10%) of the insurer's surplus as regards
policyholders as of the preceding December 31, or (ii) the insurer's net gain
from operations, not including realized capital gains, for the twelve month
period ending the preceding December 31. Any dividend above this amount would
be considered an "extraordinary" dividend, and could not be paid until the
earlier of (i) 30 days after the North Carolina Insurance Commissioner has
received written notice of the declaration thereof and has not within such
period disapproved such payment, or (ii) the receipt of approval from the North
Carolina Insurance Commissioner.

         A dividend may be paid by PLIC if the amount of such dividend together
with all dividends made in the preceding twelve months does not exceed the
greater of (i) 10% of its statutory surplus as of the end of the prior calendar
year or (ii) its net income for the prior calendar year. Any dividend above the
prescribed amount is an "extraordinary" dividend, and a Pennsylvania insurer
may not pay an "extraordinary" dividend to its stockholders until the earlier
of (i) 30 days after the Pennsylvania Insurance Commissioner has received
written notice of the declaration thereof and has not within such period
disapproved such payment, or (ii) the receipt of approval from the Pennsylvania
Insurance Commissioner.

         Florida insurance law allows Professional to pay a dividend without
prior written approval of the Florida Insurance Commissioner in an amount
calculated by using one of two alternative formulas:

         Alternative one -- The dividend cannot exceed the larger of: (1) the
lesser of 10% of surplus or net gain from operations; or (2) 10% of surplus
payable from unassigned funds plus 75% of unrealized capital gains; or (3) the
lesser of 10% of surplus or net gain before capital gains payable from
unassigned funds plus 75% of unrealized capital gains;

         Alternative two -- The dividend cannot exceed the larger of: (1) 10%
of surplus as to policyholders derived from realized net operating profits and
net realized capital gains; or (2) the prior year's entire net operating
profits and realized net capital gains. Alternative two also requires surplus
as to policyholders equal to or exceeding 115% of minimum required statutory
surplus as to policyholders after the dividend is made.

         Texas law permits PLAIC and AA Life to pay a dividend without prior
consent of the Texas Insurance Commissioner if the amount paid, together with
all other dividends paid in the preceding 12 months, does not exceed the
greater of (i) 10% of such insurer's surplus as regards to policyholders as of
the 31st day of December next preceding, or (ii) the net gain from operations
of such insurer for the 12 month period ending the 31st day of December next
preceding. Any dividend above this amount would be considered an
"extraordinary" dividend and could not be paid until (i) 30 days after the
Texas Insurance Commissioner has received notice of the declaration thereof and
has not within such period disapproved such payment, or (ii) the Texas
Insurance Commissioner shall have approved such payment within the 30 day
period

         Louisiana law permits UC Life to pay a dividend without prior consent
of the Louisiana Insurance Commissioner if the amount paid, together with all
other dividends paid in the preceding 12 months, does not exceed the lesser of
(i) 10% of such insurer's surplus as regards to policyholders as of the 31st
day of December next preceding, or (ii) the insurer's net gain from operations,
not including realized capital gains, for the 12 month period ending the 31st
day of December next preceding. Any dividend above this amount would be
considered an
<PAGE>   21
                                                                         PAGE 21




"extraordinary" dividend and could not be paid until the earlier of (i) 30 days
after the Louisiana Insurance Commissioner has received notice of the
declaration thereof and has not within such period disapproved such payment, or
(ii) the receipt of approval from the Louisiana Insurance Commissioner. As part
of its July, 1996 approval of the Company's acquisition of UC Life, the
Louisiana Insurance Commissioner approved a dividend plan for UC Life pursuant
to which UC Life may pay a specified amount of dividends for each of the five
years following the acquisition, beginning in 1997, amounting to the lesser of
the pro forma dividend amounts in such plan or the actual earnings of UC Life,
and conditioned on UC Life maintaining a risk-based capital of at least 300%
authorized control level.

         On the basis of statutory financial statements filed with the state
insurance regulators annually, the NAIC calculates twelve financial ratios to
assist state regulators in monitoring the financial condition of insurance
companies. A "usual range" of results for each ratio is used as a benchmark.
Departure from the usual range on four or more of the ratios could lead to
inquiries from individual state insurance departments. Except for
American-Amicable, Pioneer American and Pioneer Security, the NAIC has not yet
issued the 1996 ratios. For the other companies, the Company has calculated
what it expects the ratios will be for 1996. Based on statutory financial
statements for 1996, PLAIC had more than five ratios and Pioneer Security had
three ratios outside of the usual range established by the NAIC. PLAIC and
Pioneer Security are primarily holding companies for their principal assets,
the common stock of certain of the Companies insurance subsidiaries. Integon
Life Insurance Corporation and its wholly-owned subsidiary Georgia
International Life Insurance Company each had two of the twelve ratios outside
of the usual range which were caused primarily by changes occurring as a result
of the acquisition of Integon Life by the Company. PLIC had one of the twelve
ratios outside of the usual range, while OLIC and Peninsular had seven,
Professional had none, American-Amicable had two, Pioneer American had none and
UC Life had one of the twelve ratios outside of the usual ranges. OLIC's and
Peninsular's variances were caused primarily as a result of increased
reinsurance between these two companies. In the past, variances in the
insurance companies' ratios have resulted in inquiries from insurance
departments to which the Company has responded. Some of those inquiries have
led to the writing restrictions in certain states that are discussed above. The
Company may receive inquiries from certain insurance departments concerning its
ratio results for 1996, and there can be no assurance that such insurance
departments will not take action against the insurance companies.

         In December 1992, the NAIC adopted the Risk-Based Capital for Life
and/or Health Insurers Model Act (the "Model Act"). The main purpose of the
Model Act is to provide a tool for insurance regulators to evaluate the capital
of insurers with respect to the risks assumed by them and determine whether
there is a need for possible corrective action with respect to them. To date,
either the Model Act or similar legislation or regulation has been adopted in
all the domiciliary states of the Company's insurance subsidiaries.

         The Model Act provides for four different levels of regulatory action
with respect to statutory financial statements for the calendar year 1994 and
thereafter, each of which may be triggered if an insurer's Total Adjusted
Capital (as defined in the Model Act) is less than a corresponding "level" of
risk-based capital ("RBC"). The "Company Action Level" is triggered if an
insurer's Total Adjusted Capital is less than 200.0% of its "Authorized Control
Level RBC" (as defined in the Model Act) or less than 250.0% of its Authorized
Control Level RBC and the insurer has a negative trend. At the Company Action
Level, the insurer must submit a comprehensive plan to the regulatory authority
which discusses proposed corrective actions to improve its capital position.
The "Regulatory Action Level" is triggered if an insurer's Total Adjusted
Capital is less than 150.0% of its Authorized Control Level RBC. At the
Regulatory Action Level, the regulatory authority will perform a special
examination of the insurer and issue an order specifying corrective actions
that must be followed. The "Authorized Control Level" is triggered if an
insurer's Total Adjusted Capital is less than 100.0% of its Authorized Control
Level RBC, and at that level the regulatory authority is authorized (although
not mandated) to take regulatory control of the insurer. The "Mandatory Control
Level" is triggered if an insurer's Total Adjusted Capital is less than 70.0%
of its Authorized Control Level RBC, and at that level the regulatory authority
must take regulatory control of the insurer. Regulatory control may lead to
rehabilitation or liquidation of an insurer.

   
         Calculations using the NAIC formula and the life insurance
subsidiaries' statutory financial statements as of December 31, 1996 indicate
that each of the insurance subsidiaries' capital substantially exceeded RBC
requirements. Although OLIC's and Salem Life's capital exceeded RBC
requirements, the excess is less substantial than that of the Company's other
insurance subsidiaries.
    
<PAGE>   22
                                                                         PAGE 22





                 The State of Michigan requires insurance companies to
requalify for their insurance licenses following a change in control, and has
enacted legislation substantially increasing capital and surplus requirements
for companies filing requalification applications following a change in
control. This requalification requirement impacts the Company since it is
active in the acquisition of insurance companies. Thus far, it has had a
minimal impact on the Company as none of the insurance companies acquired that
have failed to requalify in Michigan had in excess of 4% of their total
collected premiums prior to acquisition attributable to Michigan.

         Certain licenses of the Company's insurance company subsidiaries are
subject to limits on the amount of new business that may be written in various
states. Of these license restrictions, most were imposed prior to the
acquisition of the relevant insurance subsidiary by PennCorp, or relate to
events occurring prior to those acquisitions.  These license restrictions have
not had a material adverse effect on the Company's results of operations and
are not expected to have a material adverse effect in the future. In some
states, a license restriction, suspension or revocation by another state may
result in reciprocal regulatory action.

         The Company may be required, under the solvency or guaranty laws of
most states in which it does business, to pay assessments (up to certain
prescribed limits) to fund policyholder losses or liabilities of insurance
companies that become insolvent. Recent insolvencies of insurance companies
increase the possibility that such assessments may be required. These
assessments may be deferred or forgiven under most guaranty laws if they would
threaten an insurer's financial strength and, in certain instances, may be
offset against future premium taxes. The occurrence and amount of such
assessments have increased in recent years and generally are expected to
increase in future years. The Company paid approximately $2.6 million, $1.7
million and $1.0 million in the years ended December 31, 1996, 1995 and 1994,
respectively, as a result of such assessments. The likelihood and amount of any
other future assessments cannot be estimated and are beyond the control of the
Company.

         Although the federal government does not directly regulate the
business of insurance, federal legislation and administrative policies in
several areas, including pension regulation, age and sex discrimination,
financial services regulation and federal taxation can significantly affect the
insurance business.

         In addition, there were proposals under consideration since 1994 at
the federal and state levels regarding reforms to the health care system in the
United States. Although these proposals were not adopted at the federal level,
many states have adopted some form of health care reform since then. These
reforms have focused on the increasing cost of health care and insurance plans
that reimburse insured or health care providers for medical and related costs.
Because the Company's fixed benefit products provide supplemental income
payments directly to the insured and are not designed to reimburse health care
providers, the Company does not expect such reforms to have a material adverse
effect on its business.

         There can be no assurance that existing insurance-related laws and
regulations will not become more restrictive in the future and thereby have a
material adverse effect on the operations of the Company and on the ability of
the insurance companies to pay dividends or on the ability of PLAIC, Pioneer
Security and Salem Life Insurance Corporation to make payments on their
respective surplus debentures. For further information related to said surplus
debentures, see "Management's Discussion and Analysis of Results of Operations
and Financial Condition - Financial Condition, Liquidity and Capital Resources
- Surplus Debentures and Dividend Restrictions" on pages 29 and 30 and Note 13
of "Notes to Consolidated Financial Statements" on page 55 hereof.

RATINGS

         A.M. Best assigns fifteen letter ratings to insurance companies, with
the highest being "A++ (Superior)." A.M.  Best ratings are based upon factors
relevant to policyholders and are not directed toward the protection of
investors, such as holders of the Common Stock. AA Life and UC Life carry a "A-
(Excellent)" rating from A. M. Best. An "A- (Excellent)" rating is the fourth
highest letter rating. Professional, OLIC, Integon Life Insurance Corporation
and Georgia International Life Insurance Company and PLIC carry a "B++ (Very
Good)" rating from A.M. Best. A "B++ (Very Good)" rating is the fifth highest
letter rating. A.M. Best also has a "Not Assigned" category, which contains
nine classifications for companies not assigned or not eligible for an A.M.
Best rating. The A.M. Best rating for Peninsular is "NA-9," which is a "no
rating at the company's request." This classification was requested by the
prior owner of Peninsular. The Company does not intend to seek a letter rating
at this time for Peninsular from A.M. Best as Peninsular is not currently a
direct writer of insurance products.
<PAGE>   23
                                                                         PAGE 23





EMPLOYEES

         At December 31, 1996, the Company had a total of 1,371 employees, of
whom 1,146 are United States home office employees, 107 are Canadian employees,
and 118 are employed in various regional and branch offices of the Company
throughout the United States and Canada. The total employees and United States
home office employees include employees of Professional, UC Life, AA Life and
Marketing One. None of the Company's employees are represented by unions. The
Company considers its relations with its employees to be good.

ITEM 2. PROPERTIES

FACILITIES

         The Company's administrative offices are located in Raleigh, North
Carolina. The Company owns and occupies a home office facility comprising
approximately 165,000 rentable square feet, in Raleigh, North Carolina. The
Company subleases a portion of its prior Raleigh home office facility which has
a lease term expiring in 1999 and requires annual lease payments of
approximately $1.1 million.

         The Company leases approximately 100 offices throughout its sales
territories and has a separate Canadian business office facility that includes
office and storage space. In addition, Professional leases office space in
Jacksonville, Florida, American-Amicable owns its home office facility in Waco,
Texas and UC Life leases office space in Baton Rouge, Louisiana. The Company
believes that the current makeup of its properties is adequate for its
operations and, based on its recent experience, that it will be able to find
suitable replacement properties on acceptable terms for any properties the
Company chooses to replace or for which leases are terminated or not renewed.

ITEM 3. LEGAL PROCEEDINGS

   
         In January 1996, stockholder derivative lawsuits styled Tozour Energy
Systems Retirement Plan v. David J. Stone et al. and PennCorp Financial Group,
Inc., C.A. No. 14775 and Lois Miller v. David J. Stone et al. and PennCorp
Financial Group, Inc., C.A. No. 14795 were filed against the Company and each of
its directors, individually, in the Delaware Court of Chancery. The complaint
in the Miller suit has not yet been served on the Company or the other
defendants. Both suits allege that the Southwestern Financial Investment
involved the usurpation of a corporate opportunity and a waste of the Company's
assets by Messrs. Stone and Fickes, and that the directors of the Company in
approving that transaction, failed to act in good faith and breached their
fiduciary duties, including the duty of loyalty to the Company and its
stockholders, having favored the interests of Messrs. Stone and Fickes over the
Company and its stockholders. These lawsuits seek judgments against each of the
defendants for the amount of damages sustained or to be sustained by the
Company as a result of the breaches of fiduciary duty alleged in the complaint,
the imposition of a constructive trust for the benefit of the Company on
profits or benefits obtained by any defendant through the alleged breaches of
fiduciary duty, attorney's fees and costs, and such other relief as the court
determines to be just, proper or equitable.
    

   
         The defendants in the Tozour Case have filed a motion seeking its
dismissal on the ground that the plaintiff failed to comply with the
requirements of Delaware law before instituting a derivative suit and intend to
defend the lawsuit vigorously. Because the Company has not been served with the
Miller complaint, no action has been taken in that case, although the Company
would also defend it vigorously. The defendants believe, however, that it would
not be in the best interests of the Company and its shareholders to expend
considerable management and director time and to incur substantial expenses to
litigate the actions. Consequently, the Company's legal advisors have met or
spoken by telephone with the plaintiff's counsel on several occasions to
discuss the terms of a potential settlement.
    

   
         The defendants and the plaintiffs' counsel entered into a stipulation 
of settlement on March 28, 1997 (the "Proposed Settlement") of the shareholder
derivative actions. The Proposed Settlement consists of the following principal
elements: (i) Messrs. Stone and Fickes will cancel the 335,564 SW Financial
common stock warrants they hold for no consideration enabling the Company to
purchase the Southwestern Financial Controlling Interest for $67.5 million,
reducing the price to be paid by the Company for the Southwestern Financial
Controlling Interest by approximately $2.0 million, (ii) the Company's Board of
Directors will proceed with the purchase of The Fickes and Stone  Knightsbridge 
Interests, having received a fairness opinion of a nationally recognized
investment banking firm with respect to the price to be paid for The Fickes and
Stone Knightsbridge Interests, (iii) the Company's Board of Directors will 
proceed with 
    
<PAGE>   24
                                                                         PAGE 24




   
the acquisition of the Southwestern Financial Controlling Interest, having
received a fairness opinion of a nationally recognized investment banking firm
with respect to the price to be paid for the Southwestern Financial Controlling
Interest; (iv) the Company's Board of Directors will submit the purchase of The
Fickes and Stone Knightsbridge Fund Interests and the Southwestern Financial
Controlling Interest to a vote of a majority of the Company's stockholders
present at the stockholders meeting and entitled to vote, and stockholders must
approve both transactions, (v) Messrs. Stone and Fickes will abstain from
voting on the proposals to approve the purchase of The Fickes and Stone
Knightsbridge Interests and the Southwestern Financial Controlling Interest,
and (vi) the plaintiffs' counsel will be entitled to conduct confirmatory
discovery.
    

   
         The Proposed Settlement is subject to approval by the Delaware
Chancery Court after notice to the Company's stockholders. As discussed above,
Messrs. Stone and Fickes have agreed that, if the Proposed Settlement is
approved by the Delaware Chancery Court, they will cancel their SW Financial
common stock warrants, which will reduce the price to be paid by the Company for
the Southwestern Financial Controlling Interest by approximately $2.0 million.
Because the Knightsbridge Fund restructuring will have the effect of
eliminating potential future conflicts of interest between Messrs. Stone and
Fickes and the Company, and because the Proposed Settlement will have the effect
of reducing the price to be paid by the Company for the Southwestern Financial
Controlling Interest and will obviate the need to expend considerable
management and director time to litigate the action, the Company's Board of
Directors has determined that the Proposed Settlement is in the best interests
of the Company and its shareholders and confers a substantial economic benefit
on the Company. Accordingly, the Company's Board of Directors has authorized
the payment to plaintiffs' counsel of legal fees and disbursements not to
exceed $530,000 in connection with the lawsuit and the related settlement
negotiations, if the Proposed Settlement is approved by the Delaware Chancery
Court after notice to the Company's stockholders.
    

         The Company is a party to various pending or threatened legal actions
arising in the ordinary course of business some of which include allegations of
insufficient policy illustrations and agent misrepresentations. Although the
outcome of such actions is not presently determinable, management does not
believe that such matters, individually or in the aggregate, would have a
material adverse effect on the Company's financial position or results of
operations if resolved against the Company.

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

         Not applicable.





                 [Remainder of page intentionally left blank.]
<PAGE>   25
                                                                         PAGE 25


                                    PART II

   ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
                                    MATTERS

MARKET FOR COMMON STOCK

The shares of PennCorp Financial Group, Inc. are listed on the New York Stock
Exchange ("NYSE") under the ticker symbol "PFG." The following table sets forth
for the calendar periods indicated, the high and low sales price per share of
the Company's Common Stock as reported on the NYSE and the quarterly cash
dividends declared on the Common Stock with respect to each quarter since
January 1, 1995. The prices do not include mark-ups, mark-downs, or
commissions. As of February 28, 1997, there are approximately 179 shareholders,
including nominee holdings, throughout the United States and abroad.

The price history as provided by NYSE and dividends since the initial offering
date are presented below:

<TABLE>
<CAPTION>
                                                                       SALES PRICES              DIVIDEND
FOR THE YEAR ENDED DECEMBER 31, 1996                                HIGH          LOW            DECLARED
=========================================================================================================
<S>                                                               <C>            <C>              <C>
Fourth quarter                                                    $  36.375      32.000           $ 0.05
Third quarter                                                        34.125      25.750             0.05
Second quarter                                                       33.625      26.750             0.05
First quarter                                                        33.000      26.875             0.05
</TABLE>


<TABLE>
<CAPTION>
                                                                       SALES PRICES              DIVIDEND
FOR THE YEAR ENDED DECEMBER 31, 1995                                HIGH          LOW            DECLARED
=========================================================================================================
<S>                                                               <C>            <C>              <C>
Fourth quarter                                                    $  29.875      23.000           $ 0.03
Third quarter                                                        24.000      18.375             0.01
Second quarter                                                       19.375      16.750             0.01
First quarter                                                        17.625      13.000             0.01
</TABLE>



                                                 PENNCORP FINANCIAL GROUP, INC.



<PAGE>   26
                                                                         PAGE 26

                        ITEM 6. SELECTED FINANCIAL DATA

SELECTED CONSOLIDATED
      financial data


(Amounts in thousands, except per share information)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,                                   1996        1995         1994        1993         1992
===========================================================================================================================
<S>                                                            <C>          <C>         <C>          <C>          <C>
REVENUES:
   Policy revenues                                             $ 348,090    $ 301,889   $ 244,422    $ 201,788    $ 184,690
   Net investment income                                         213,563      102,291      51,850       43,114       41,302
   Other income(1)                                                27,234       17,563       1,056        3,817          632
   Net gains (losses) from the sale of investments                 1,257          595      (3,556)       1,439        5,560
                                                               ------------------------------------------------------------
       Total revenues                                            590,144      422,338     293,772      250,158      232,184
                                                               ------------------------------------------------------------

BENEFITS AND EXPENSES:
   Claims incurred                                               188,727      141,876     112,650       95,232       91,904
   Change in liability for future policy benefits and
     other policy benefits                                        79,085       18,126      (9,329)     (13,857)     (14,971)
   Insurance and other operating expenses                        158,552      147,561     113,596      110,598      108,833
   Interest and amortization of deferred debt issuance costs      18,979       19,780      18,274        7,461       17,621
                                                               ------------------------------------------------------------
       Total benefits and expenses                               445,343      327,343     235,191      199,434      203,387
                                                               ------------------------------------------------------------
Income before income taxes and extraordinary charge              144,801       94,995      58,581       50,724       28,797
       Income taxes                                               45,418       31,642      21,437       18,217       10,744
                                                               ------------------------------------------------------------
Net income before extraordinary charge                            99,383       63,353      37,144       32,507       18,053
       Extraordinary charge, net of income taxes                  (2,372)          --          --       (3,322)     (17,655)
                                                               ------------------------------------------------------------
Net income                                                        97,011       63,353      37,144       29,185          398
       Preferred stock dividend requirements                      14,646        6,540       1,151           --        4,562
                                                               ------------------------------------------------------------
Net income (loss) applicable to common stock                   $  82,365    $  56,813   $  35,993    $  29,185    $  (4,164)
                                                               ============================================================
</TABLE>

(1) Includes $21.1 million and $4.7 million of undistributed earnings in
    unconsolidated affiliates for the years ended 1996 and 1995, respectively.

<TABLE>
<CAPTION>
PER SHARE INFORMATION:
-----------------------------------------------------------------------------------------------------------------
<S>                                                   <C>          <C>       <C>        <C>         <C>
Primary:
   Net income before extraordinary charge             $  2.98        $  2.47      $  1.82    $  1.71     $   1.35
   Net income before net gains (losses) from the
     sale of investments and extraordinary charge     $  2.95        $  2.45      $  1.93    $  1.67     $   1.03
   Extraordinary charge, net of income taxes          $ (0.08)       $    --      $    --    $ (0.18)    $  (1.72)
   Common shares used in computing primary earnings
     per share                                         28,462         22,985       19,830     18,957       11,196

Fully diluted:
   Net income before extraordinary charge             $  2.74        $  2.36
   Net income before net gains from the sale
     of investments and extraordinary charge          $  2.72           2.35
   Extraordinary charge, net of income taxes          $ (0.07)       $    --
   Common shares used in computing fully diluted
     earnings per share                                35,229         25,566
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------------------------------------------------------------------------

ASSETS:
<S>                                                   <C>            <C>           <C>          <C>           <C>
Investments and cash                                  $3,830,313     $2,409,427    $  822,778   $  674,552       $556,960
Insurance assets                                         620,329        482,567       341,096      258,723        230,500
Other assets                                             383,091        258,012       156,080      132,767        117,103
                                                      -------------------------------------------------------------------
   Total assets                                       $4,833,733     $3,150,006    $1,319,954   $1,066,042       $904,563
                                                      ===================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY:
Insurance liabilities                                 $3,562,108     $2,229,047    $  798,030   $  649,899       $611,342
Long-term debt                                           210,325        307,271       229,041      150,812        111,082
Other liabilities                                        183,437        117,175        59,107       74,854         41,568
Redeemable preferred stock                                32,864         30,007        37,256            -              -
Shareholders' equity                                     844,999        466,506       196,520      190,477        140,571
                                                      -------------------------------------------------------------------
   Total liabilities and shareholders' equity         $4,833,733     $3,150,006    $1,319,954   $1,066,042       $904,563
                                                      ===================================================================
</TABLE>



                                                 PENNCORP FINANCIAL GROUP, INC.




<PAGE>   27
                                                                         PAGE 27

              ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY STATEMENT

Cautionary Statement for purposes of the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995. The statements below that relate to
future plans, events or performances are forward-looking statements that
involve a number of risks or uncertainties. Among those items that could
adversely affect the Company's financial condition, results of operations and
cash flows are the following: changes in regulations affecting insurance
companies, interest rates, the federal income tax code (to the extent the
Company's product mix includes tax deferred accumulation products), the ratings
assigned to the Company's insurance subsidiaries by independent rating
organizations such as A.M. Best (which the Company believes are particularly
important to the sale of annuity and other accumulation products) and
unanticipated litigation. There can be no assurance that other factors not
currently anticipated by management will not also materially and adversely
affect the Company's results of operations.

GENERAL

PennCorp Financial Group, Inc. (the "Company", "PennCorp"), through its
operating subsidiaries, is a low cost provider of accumulation, life, and fixed
benefit accident and sickness insurance products throughout the United States
and Canada. The Company's products are sold through several distribution
channels, including exclusive agents, general agents, financial institutions,
and payroll deduction programs, and are targeted primarily to lower and
middle-income individuals in rural and suburban areas. These products are
primarily small premium accident and sickness insurance policies with defined
fixed benefit amounts, traditional whole life and universal life insurance with
low face amounts and accumulation products such as single premium deferred
annuities.

The Company's financial condition and results of operations for the periods
covered by this and future "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are or will be affected by several common
factors, each of which is discussed below.

Strategic Review of Business Units. As a result of the tremendous growth the
Company has experienced, the diversification of the underlying business units
resulting from acquisitions over time, and the need for the Company to be able
to rapidly integrate future acquisitions, the Company began a strategic
business evaluation during the third quarter of 1996 which is now nearly
complete.

The evaluation considered each of the current operating companies and, in
anticipation of the consummation of the merger ("Washington National Merger") of
the Company and Washington National Corporation ("Washington National") and the
purchase of the Controlling Interest of Southwestern Financial Corporation ("SW
Financial"), the impact of those operating companies on the Company's current
and long-term profitability potential, the ability of the operating companies to
absorb operations related to future acquisitions and the market focus of the
operating companies.

Immediately following the consummation of the Washington National and SW
Financial transactions, the Company will establish five operating divisions:
Career Sales, Individual Sales, Financial Services, Payroll Sales and Other
Insurance. The newly reorganized divisions will include the operations of SW
Financial and Washington National.

The Company has begun to realign its existing operating companies in light of
the strategic review and anticipates a charge related to costs directly
associated with the initial divisional restructuring which will have no future
economic benefit ("restructuring costs"), including the costs of employee
termination benefits and relocation, early service contract termination, and
facility abandonment. A charge for the restructuring costs will be included in
the Company's results of operations during 1997. In addition, the Company may
incur additional restructuring costs when integration plans are implemented for
the pending Washington National and SW Financial transactions.

Acquisitions. The Company's growth strategy emphasizes the acquisition of
complementary insurance operations and the utilization of the Company's several
distribution channels to further penetrate its target markets. In making
acquisitions, the Company seeks to broaden its distribution channels, increase
its product offerings and expand its geographic presence. The Company also
seeks benefits from expense reduction through the consolidation of facilities
and staff and the conversion to common administrative systems.

Each of the operating considerations outlined above as well as the cost of
capital to the Company, expected cash flows from the target acquisition and
actuarial factors, such as future premium, mortality, morbidity, surrenders,
operating expenses and yields on assets held to back policy liabilities are
considered and weighted in determining the relative risk of financial rewards
for taking on the acquisition target. On July 22, 1996, the Company acquired
United Companies Life Insurance Company ("UC Life") from United Companies
Financial Corporation. UC Life markets fixed and variable annuity products
through independent agents and financial institution marketing channels.

On July 25, 1995, the Company consummated the acquisition of Integon Life
Insurance Corporation ("Integon Life"). Integon Life's life and annuity
products are marketed through a general agency sales force, primarily in the
Southeastern United States.

PENNCORP FINANCIAL GROUP, INC.


<PAGE>   28
                                                                         PAGE 28

M D & A continued


On August 31, 1994, the Company acquired American-Amicable Life Insurance
Company of Texas ("AA Life") through American-Amicable Holding Corporation
("AAHC"). AA Life markets life insurance products to military and civilian
employees at U.S. military installations throughout the world.

The comparability of the Company's financial position, results of operations
and cash flows for each of the periods presented have been affected by these
acquisitions. The pro forma effects of the acquisitions of UC Life, Integon
Life, and AA Life are described in Note 3 to the Company's Consolidated
Financial Statements included elsewhere herein.

Financing Activities. As a part of each of the Company's acquisitions and as
part of a long-term plan to maintain an appropriate balance in its capital
structure, PennCorp has undertaken various public and private financing
transactions. As a result, the Company's historical financial results reflect
significant variations in financing costs including preferred stock dividends
and extraordinary charges resulting from the early extinguishment of debt.


FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

The Company's liquidity requirements are funded primarily by its insurance
subsidiaries. The insurance subsidiaries' principal sources of cash are
premiums and investment income. The insurance subsidiaries' primary uses of
cash are policy claims, commissions, operating expenses, income taxes and
payments to the Company for principal and interest due under surplus
debentures, tax sharing payments and dividends. Both sources and uses of cash
are reasonably predictable.

Financings. On August 2, 1996, the Company issued 2,875,000 shares of $3.50
Series II Convertible Preferred Stock ("Series II Convertible Preferred Stock")
for net proceeds of $139.2 million. The cash raised through this offering,
along with borrowings under the Company's bank credit facility, were utilized
(i) to fund the cash portion of the purchase price for UC Life, aggregating
$100.4 million, (ii) to fund a capital contribution of $57.3 million to UC
Life, and (iii) to pay related expenses of the acquisition of UC Life of $9.7
million. The Company accrued or paid dividends of $4.0 million during 1996,
related to the Series II Convertible Preferred Stock.

On February 28, 1996, PennCorp completed the successful sale of 5,131,300
shares of Common Stock, netting proceeds of $155.5 million ("February Common
Stock Offering"). Proceeds from this offering were utilized to repay $80.0
million of corporate and $57.0 million of subsidiary indebtedness, and to pay
$10.0 million to SW Financial's former owner in lieu of PennCorp's obligation
to issue an equivalent number of shares of Common Stock.

In May 1996, the Company entered into a revolving credit agreement with a
syndicate of banks (the "bank credit agreement") for up to $175.0 million of
funds available at any one time to replace the $100.0 million bridge facility
utilized by the Company to make the investment in SW Financial, which was
repaid out of the proceeds of the February Common Stock Offering. During the
remainder of 1996, the Company borrowed amounts aggregating $92.0 million for
(i) the repurchase of $35.4 million in principal amount of the Company's 9 1/4%
Senior Subordinated Debenture due 2003 (the "Notes") for $37.7 million,
including interest and premium on early redemption of $2.3 million, (ii) the
refinancing of $20.0 million of indebtedness under the previously outstanding
bridge facility, (iii) the repayment of $16.5 million of amounts owed certain
subsidiaries, and (iv) $17.8 million for general corporate purposes including
the UC Life acquisition, interest payments and common and preferred stock
dividend payments. Total interest and related costs incurred under the bank
credit facility were $1.6 million during 1996.

On July 14, 1995, PennCorp issued 2,300,000 shares of the $3.375 Convertible
Preferred Stock ("Convertible Preferred Stock") for net proceeds of $110.5
million. On March 16, 1995, PennCorp issued 3,750,000 shares of Common Stock,
for net proceeds of approximately $51.2 million. The proceeds from these two
offerings were used to (i) consummate the acquisition of Integon Life, which
utilized funds totaling $33.4 million (including a capital contribution of
$15.0 million), (ii) repay $28.5 million outstanding under, and subsequently
cancel, a revolving credit facility, (iii) repurchase, for $34.6 million, all
of the Company's Series A Preferred Stock, (iv) repay $11.2 million due to
Integon Life's former parent company under a subordinated debenture, (v) pay
the $15.4 million cash portion of the purchase price of Occidental Life
Insurance Company of North Carolina ("OLIC") (which PennCorp purchased from
Pennsylvania Life Insurance Company and its wholly-owned subsidiary, Penncorp
Life Insurance Company (collectively referred to herein as "Penn Life") and
subsequently contributed to Integon Life), (vi) prepay $20.0 million principal
amount of indebtedness under the AAHC credit facility, and (vii) make payments
for general corporate purposes, including interest payments and the
cancellation of certain interest rate swap agreements. The Company paid or
accrued dividends on the Convertible Preferred Stock amounting to $7.8 million
and $3.6 million during 1996 and 1995, respectively.


                                                PENNCORP FINANCIAL GROUP, INC.

<PAGE>   29
                                                                         PAGE 29

M D & A continued


As part of the financing for the Integon Life acquisition, PennCorp issued
Series B Preferred Stock with an initial value of $12.8 million, which accretes
at 10.4% per annum until its maturity on June 30, 1997, and Series C Preferred
Stock with an initial value (subject to offset) of $17.9 million, which
accretes at 9.3% per annum until its maturity on June 30, 1998. The Series C
Preferred Stock's estimated initial value for financial statement purposes was
approximately $16.0 million. Preferred stock dividends accreted during 1996 and
1995, on the Series B and Series C Preferred Stock amounted to $2.9
million and $1.3 million, respectively. On March 14, 1997, the Company redeemed
all the outstanding Series B Preferred Stock for $14.7 million, utilizing
proceeds available under the bank credit facility.

In addition to the Series B and Series C Preferred Stock, the Company utilized
$30.0 million in borrowings by Salem Holdings Corporation ("SHC"), the parent of
Integon Life, from a syndicate of banks in order to fund a portion of the
Integon Life acquisition. In March 1996, the Company utilized proceeds from the
February Common Stock Offering to repay $30.0 million of indebtedness
outstanding and cancel the SHC bank facility. For the years ended, December 31,
1996 and 1995, the Company incurred interest costs related to borrowings by SHC
of $451,000 and $513,000, respectively.

In order to fund the AA Life acquisition, AAHC borrowed $55.0 million under the
AAHC credit facility. The AAHC credit facility was repaid and cancelled in
March 1996. During 1996, 1995 and 1994, AAHC made principal payments of $27.0
million, $23.0 million and $5.0 million, and had accumulated interest costs of
$385,000, $3.3 million and $1.3 million under this facility, respectively.

As part of the financing of the AA Life acquisition, PennCorp issued 450,000
shares of Series A Preferred Stock with a stated dividend rate of approximately
6.0% for the first five years and approximately 8.0% thereafter, until
redemption in 2009. During 1994, and prior to its full repurchase on August 25,
1995, PennCorp incurred dividends of $1.2 million and $1.7 million,
respectively, related to the Series A Preferred Stock.

The Notes, the bank credit agreement and the Series C Preferred Stock impose
certain covenants on the Company, including covenants restricting the amount of
additional indebtedness the Company may incur, its ability to engage in future
acquisitions and certain other business transactions, and the amount of
dividends the Company may declare and pay, and requires the Company to maintain
specified financial ratios and meet specified financial tests, all of which may
impose limitations on the Company's future liquidity.

Surplus Debentures, Dividend Restrictions and Cash Flows. Cash generated by the
Company's insurance subsidiaries is made available to PennCorp principally
through periodic payments of principal and interest on surplus debentures
issued by Pacific Life and Accident Insurance Company ("PLAIC"), Salem Life
Insurance Company ("Salem Life") and Pioneer Security Life Insurance Company
("Pioneer Security") (collectively, the "Surplus Note Companies"). The amounts
outstanding under the surplus debentures totalled $367.9 million and $315.8
million as of December 31, 1996 and 1995, respectively. The surplus debentures
generally require (subject to availability of statutory capital and surplus and
in some instances, regulatory approval) principal and interest payments to be
made periodically in amounts sufficient to allow PennCorp to meet its cash
requirements.

The Surplus Note Companies rely upon dividends and tax sharing payments from
their respective insurance subsidiaries. Each of the insurance subsidiaries is
in turn subject to regulatory restrictions with respect to the maximum amount
of dividends that can be paid to the Surplus Note Companies without prior
regulatory approval. Such dividend restrictions are primarily in the form of
(i) the greater of 10% of statutory capital and surplus or statutory earnings,
or (ii) the lesser of 10% of statutory capital and surplus or statutory
earnings, depending upon applicable state laws. The Company believes that such
restrictions will not significantly impact the Company's liquidity for the
foreseeable future.

For the years ended December 31, 1996, 1995 and 1994, the Company received net
payments from the Surplus Note Companies of $31.9 million, $19.1 million and
$11.5 million, respectively. The Surplus Note Companies received $25.8 million,
$21.6 million and $900,000 in dividends and tax sharing payments from their
respective insurance subsidiaries. During 1995, and 1994, the Company's
downstream holding companies, SHC and AAHC, each had direct bank indebtedness
outstanding which restricted the amount of payments which could be made by Salem
Life and Pioneer Security for the benefit of the Company. As a result of the
repayment of such indebtedness from proceeds of the Company's February Common
Stock Offering, Salem Life and Pioneer Security may now make payments under
their respective surplus debentures for the benefit of PennCorp.


PENNCORP FINANCIAL GROUP, INC.

<PAGE>   30
                                                                       PAGE 30

M D & A continued


   
The primary cash requirements of the Company are interest payments, preferred
stock dividends and common stock dividends which aggregated $33.9 million,
$24.5 million and $16.5 million for the years ended December 31, 1996, 1995 and
1994, respectively. For the years ended December 31, 1996, 1995 and 1994, cash
requirements of the Company exceeded cash made available to the Company through
payments under the surplus debentures by $2.0 million, $5.4 million and $5.0
million, respectively. During each of these periods, the Company utilized a
balance of dividends and surplus note payments from the insurance subsidiaries
and borrowings under the Company's credit facilities to fund PennCorp's cash
requirements. This balance resulted in what management believes to be, along
with other factors, an appropriate retention of statutory capital and surplus
to improve the insurance subsidiaries' A.M. Best Company ("A.M. Best") ratings
without placing an undue debt burden upon the Company.
    

During 1997, the maximum dividends and corresponding surplus debenture
payments, without prior regulatory approval, are anticipated to be
approximately $27.2 million and the Company's cash requirements are anticipated
to be approximately $35.3 million. The Company intends to utilize funds
available under its revolving credit facility to fund the shortfall. For
periods beginning in 1998, under current statutory limitations, the Company
believes that it will receive sufficient cash flow from the Surplus Note
Companies and their respective subsidiaries to satisfy its cash requirements.
As a result of the Company's decision to retain capital and surplus at the
insurance subsidiary level, and with the contemplated realignment of the
insurance subsidiaries into operating divisions, the Company believes that as
of December 31, 1996, its insurance subsidiaries have excess capital and
surplus. The Company's own established targets for estimated risk-based capital
requirements indicate that the insurance divisions could make available
approximately $50.0 million to PennCorp, subject to applicable regulatory
approvals.

Investments. The Company's investment portfolio is managed with the objectives
of maintaining high credit quality and liquidity, maximizing current income
within acceptable levels of risk, minimizing market and credit risk, and
matching the anticipated maturities of investments to the Company's
liabilities. The Company believes that a conservative investment strategy fits
the nature of its insurance products which have little or no inflation risk and
limited build-up of cash accumulation values in earlier years.

The Company continuously evaluates its investment portfolio and the conditions
under which it might sell securities, including changes in interest rates,
changes in prepayment risk, liquidity needs, asset liability matching, tax
planning strategies and other economic factors. Those securities that the
Company believes would be subject to sale prior to the specified maturity date
are included in "securities available for sale," which amounted to $2,993.9
million and $1,487.0 million at December 31, 1996 and 1995, respectively. Of
those securities available for sale, 92.1% and 92.7% were rated Baa or above by
Moody's Investors Services, Inc. at December 31, 1996 and 1995, respectively.

During the years ended December 31, 1996, 1995 and 1994, the Company sold $378.6
million, $106.6 million and $92.8 million of fixed maturity and equity
securities, and purchased $955.8 million, $217.8 million and $183.6 million of
fixed maturity and equity securities, respectively. Such sales and purchases
were often effected to improve the quality of the investment portfolio or to
avoid prepayment risks. In addition, during 1996 the Company sold one security
in its held for investment portfolio aggregating $4.9 million as a result of a
dramatic deterioration in its credit rating.

During 1995, the Company established a portfolio of "trading securities" to
provide the Company with the opportunity to undertake interest rate hedging
strategies, to participate in short-term relative value trades and to invest in
special situations with the goal of generating short-term trading profits. As a
result of trading activities, the Company recognized $1.3 million and $5.7
million of profits during 1996 and 1995, respectively.

   
The Company held $1,428.3 million and $503.7 million of mortgage-backed bonds
which represented 38.9% and 22.0% of total invested assets as of December 31,
1996 and 1995, respectively. The significant increase in mortgage-backed
securities for the year ended December 31, 1996, was the result of the UC Life
acquisition. The Company invests in mortgage-backed securities in order to
enhance portfolio yields and maintain a reliable cash flow stream from the
invested asset portfolio. The Company maintains sophisticated models to measure
the effective duration and option-adjusted duration of the consolidated
investment portfolio. These models are updated on a monthly basis and are
designed to allow accurate measurement of the convexity risks inherent in that
percentage of the portfolio invested in mortgage-backed securities and other
callable securities. The Company manages the portfolio convexity risk within the
context of the overall asset and liability model and the quantification of
disintermediation risk. 
    

   

    

Mortgage loans on real estate amounted to 7.0% and 1.6% of total invested
assets as of December 31, 1996 and 1995, respectively. The substantial increase
in mortgage loans was the result of the UC Life acquisition. UC Life invests in
first mortgage loans and provides a mortgage loan warehousing facility for its
former parent as a means of obtaining higher invested asset yields necessary to
support competitively priced annuity products. The Company has established a
reserve for loan loss which aggregated $11.9 million as of December 31, 1996.
As of December 31, 1996 and 1995, the Company had non-performing loans
amounting to $1.4 million and $3.5 million, respectively. The Company is in
various stages of foreclosure or sales of such loans. The Company believes its
current loan loss provision is adequate to cover any future losses related to
currently performing and non-performing loans.

Cash and short-term investments totaled $102.6 million and $444.7 million as of
December 31, 1996 and 1995, respectively. At December 31, 1996 and 1995,
respectively, the Company held approximately $12.2 million and $3.8 million in
short-term investments needed in the settlement of investment trades early in
the following year.



                                                PENNCORP FINANCIAL GROUP, INC.

<PAGE>   31
                                                                         PAGE 31


M D & A continued

   
Disintermediation Risk. With the acquisition of UC Life and Integon Life, the
Company significantly expanded its interest sensitive portfolio of products
including universal life and accumulation products. The Company actively
manages the difference in interest yields on assets backing interest sensitive
liabilities and amounts credited to policyholder account balances so as to
provide a margin or "spread". For the years ended December 31, 1996 and 1995,
the Company had total interest sensitive liabilities aggregating $2,685.7
million and $1,423.7 million, respectively and obtained a spread on such
liabilities of 2.1% and 1.4%, respectively. As part of the ongoing management
of interest sensitive business, the Company annually undertakes "cash flow
testing" sensitivities in which Management evaluates a range of interest rate
scenarios under which credited interest rates and asset/liability durational
matching may become mismatched. The Company believes that it has sufficient
liquidity to withstand all reasonable scenarios established by Management.
    

Cash Flows From Operations. The periods covered by Management's Discussion and
Analysis of Financial Condition and Results of Operations indicate cash
provided by operating activities of $164.7 million, $75.7 million and $5.6
million in 1996, 1995 and 1994, respectively. The positive cash flow from
operating activities is not necessarily indicative of the Company's cash flow
as $(205.2) million, $(53.2) million and $2.1 million of cash was (used)
provided to fund cash flows for interest sensitive life and accumulation
products during 1996, 1995 and 1994, respectively, which are classified as
financing activities in accordance with generally accepted accounting
principles.

Inflation. The Company sells fixed benefit, life, and accumulation products.
Approximately 48.6% of the Company's total policy revenues for the year ended
December 31, 1996, were derived from fixed benefit products. These products
typically provide a predetermined fixed payment that will be paid under
specified conditions. Fixed benefit products are not designed to provide
reimbursement for medical and related costs incurred as a result of accidents
and sickness. Accordingly, payment amounts are not affected by the insured's
actual cost of health care services. Because of the characteristics of its
fixed benefit products, the Company believes that inflation does not have a
material effect on its operations.

Pending Merger, Acquisition and Related Transactions. On January 22, 1997, the
Company filed with the Securities and Exchange Commission ("SEC"), a
preliminary PennCorp Financial Group, Inc. and Washington National Corporation
Joint Proxy Statement and Prospectus ("Joint Proxy Statement") in which the
Company, pending final review by the SEC, will be soliciting shareholder
approval for the following transactions: (i) the Washington National Merger,
(ii) the acquisition of the Controlling Interest in SW Financial, (iii) the
acquisition of the Fickes and Stone Knightsbridge Interests, and (iv) other
items (see Note 15 and 16 of Notes to Consolidated Financial Statements
included elsewhere herein).

The Washington National Merger and the acquisition of the Controlling Interest
in SW Financial will expand the Company's individual and payroll sales division
operations with similar products, distribution channels and asset mixes.

Should the Company obtain shareholder approval for the above transactions, the
Company's reported financial information would change significantly.

The following unaudited pro forma selected financial data represents the
Company's consolidated results of operations, as if the Washington National
Merger, SW Financial transaction, UC Life acquisition and other financial
transactions occurred on January 1, 1996, and the pro forma financial position,
as if such transactions occurred as of December 31, 1996. The unaudited
selected financial data has been prepared for comparative purposes only and
does not purport to be indicative of what would have occurred had the
transactions been consummated as of January 1, 1996, or December 31, 1996,
respectively, or the results of operations or financial position which may
occur in the future.


PENNCORP FINANCIAL GROUP, INC.

<PAGE>   32
                                                                       PAGE 32

M D & A continued

<TABLE>
<CAPTION>
(Amounts in millions, except share information)
                                                                                        Pro forma             Actual
FOR THE YEAR ENDED DECEMBER 31,                                                           1996                1996
====================================================================================================================
<S>                                                                                  <C>                 <C>
Total revenues                                                                       $   1,256.5         $     590.1
Income before income taxes, undistributed earnings in unconsolidated affiliates,
   discontinued operations and extraordinary charge                                        214.7               144.8
Net income before discontinued operations and extraordinary charge
   applicable to common stock                                                              114.8                99.4
Fully diluted net income before discontinued operations and extraordinary charge
   per share applicable to common stock                                                     2.82                2.74

AS OF DECEMBER 31,
--------------------------------------------------------------------------------------------------------------------
Total assets                                                                         $   9,735.4         $   4,833.7
Insurance and other liabilities                                                          8,106.8             3,745.5
Long-term debt                                                                             488.5               210.3
Mandatory redeemable preferred stock                                                        18.1                32.9
Total shareholders' equity                                                               1,122.0               845.0
</TABLE>



In anticipation of the Washington National Merger and the acquisition of the
Controlling Interest in SW Financial, the Company recently consummated a
five-year, $450 million revolving credit facility ("revolver") with a syndicate
of banks and terminated the Bank Credit Agreement. The revolver provides the
Company with sufficient capacity, (i) to pay the cash portion of the Washington
National Merger consideration, (ii) to pay the consideration due to the
controlling shareholders of SW Financial, (iii) to provide amounts needed to
refinance existing indebtedness at SW Financial, and (iv) to provide liquidity
for other general corporate purposes.

Borrowings under the revolver will carry variable rates of interest plus a
margin which varies with the Company's implied senior unsecured indebtedness
rating. Based upon PennCorp's current ratings, the revolver would reduce the
Company's current borrowing rates under the formerly outstanding bank facility
by approximately 35 basis points and would reduce the cost of indebtedness
outstanding at SW Financial by nearly 300 basis points.

   
The Company anticipates, pending regulatory and shareholder approval,
consummating the Washington National Merger, the acquisition of the Controlling
Interest in SW Financial, and the acquisition of the Fickes and Stone
Knightsbridge Interests in June 1997.
    

New Accounting Pronouncements. The Financial Accounting Standard Board ("FASB")
has released for comment an Exposure Draft of a proposed Statement of Financial
Accounting Standards, "Consolidated Financial Statements: Policy and
Procedures" (the "Proposed Statement"). The Proposed Statement provides new
guidelines with respect to the circumstances under which entities must report
financial information on a consolidated basis. The Proposed Statement, if
issued, would be effective for fiscal years beginning after December 15, 1996.
Although the Company cannot predict if, and in what form, the Proposed
Statement will be issued, the Company believes that the Proposed Statement
could require consolidation of Southwestern Life and Union Bankers and certain
other transactions of the Company and Knightsbridge.

On March 3, 1997, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share," replacing Accounting Principles Board
("APB") Opinion No. 15, "Earnings per Share." SFAS No. 128 replaces "primary"
and "fully diluted" earnings per share ("EPS") under APB Opinion No. 15 with
"basic" and "diluted" EPS. Unlike primary EPS, basic EPS excludes the dilutive
effects of options, warrants and other convertible securities. Dilutive EPS
reflects the potential dilution of securities that could share in the earnings
of an entity, similar to fully diluted EPS. However, under SFAS No. 128, the
Company would use the average market price for its stock during the reporting
period to determine the cost of options as opposed to the greater of the
closing price at the end of the period or the average market price during the
period, as currently required by APB Opinion No. 15. SFAS No. 128 is effective
for years ending after December 15, 1997.

RESULTS OF OPERATIONS

The following analysis should be read in conjunction with the historical
financial statements of the Company and related notes thereto contained
elsewhere herein. Significant financial information, percentage changes and
ratios (excluding realized gains and losses on sale of investments and equity
in undistributed earnings of unconsolidated affiliates) are shown in the
following table:

   
<TABLE>
<CAPTION>
                                                                    1996           1995          1994
-----------------------------------------------------------------------------------------------------
<S>                                                                  <C>           <C>           <C>
RATIOS TO REVENUES
Total policy benefits                                                47.1%         38.4%         34.7%
Insurance expenses                                                   15.4          19.1          20.7
Other operating expenses                                             12.5          16.3          17.5
Interest and amortization of deferred debt issuance costs             3.3           4.7           6.1
Pretax operating margin                                              21.7          21.5          21.0
</TABLE>
    



                                                PENNCORP FINANCIAL GROUP, INC.
<PAGE>   33
                                                                        PAGE 33

M D & A continued


   
Operating Ratios. Pretax operating margin improved modestly to 21.7% of
revenues during 1996 from 21.5% and 21.0% in 1995 and 1994, respectively. The
slight improvement was primarily due to declines in all operating ratios except
for policy benefits, which nearly offset the other improvements. As the mix of
insurance products shifts toward life and accumulation products versus fixed
benefit products, management believes the 1996 ratios will be indicative of
future ratios.
    

The ratio of total policy benefits to revenues increased during 1996 to 47.1%
from 38.4% and 34.7% in 1995 and 1994, respectively. The increase in total
policy benefits to revenues during 1996 was primarily attributable to the
continued increase in life products, relative to fixed benefit products, since
benefits for life insurance products are typically greater, as a percentage of
premium, than benefits for fixed benefit products. Additionally, accumulation
products, such as deferred annuities, are priced to allow for the vast
majority of interest earned on assets backing policy reserves to be credited to
the policyholder account balance resulting in a faster growth in policy benefits
than policy benefits for fixed benefit products. Also, during 1996, the Company
experienced higher than expected mortality and morbidity costs for Penn Life and
OLIC, which collectively resulted in an approximately 2.0% increase in the
claims incurred ratio for the Company as a whole. The increase in total policy
benefits during 1995, as compared to 1994 was the result of the shift in product
mix, from fixed benefit accident and sickness insurance, to accumulation and
life insurance products as claims incurred ratios remained consistent between
periods.

Insurance expenses dropped during 1996 to 15.4% of revenues from 19.1% and
20.7% during 1995 and 1994, respectively. The reduction in all periods resulted
primarily from increased premium volume and persistency resulting in less
amortization of insurance assets (primarily the present value of insurance in
force) as a percentage of revenues. In addition, for the year ended December
31, 1996, certain interest sensitive blocks of business had significantly less
amortization of deferred policy acquisition costs and present value of
insurance in force, as compared to 1995 and 1994, due to reduced short-term
profit margins from adverse mortality. The Company believes that the reduced
profit margins will not impact the long-term profitability. However, should
such mortality experience continue, the ultimate recoverability of deferred
policy acquisition costs and present value of insurance in force could be
adversely affected.

Other operating expenses declined as a percentage of revenues to 12.5% during
1996, from 16.3% and 17.5% during 1995 and 1994, respectively. This downward
trend was due to the acquisitions of UC Life and Integon Life, which are
administered by the Company at overhead expense rates less than the business in
force prior to their respective acquisitions. Despite the growing revenue base,
the Company's total underlying expense infrastructure has increased only
moderately. In addition, expense costs have shifted from overhead and
maintenance expenses to those more closely related to the production of new
business.

Interest costs fell to 3.3% of revenues during 1996, from 4.7% during 1995, and
6.1% during 1994. The Company's financings for each of its acquisitions have
impacted these ratios. During 1996, the Company utilized common and preferred
stock offerings to finance acquisition activities rather than debt. The
weighted average interest cost for outstanding indebtedness dropped to 8.8% for
the year ended December 31, 1996, from 9.0% and 9.3% for the years ended
December 31, 1995, and 1994, respectively. The reduction in such interest costs
was the result of the Company replacing subsidiary indebtedness with borrowings
by the Company which carry substantially lower interest rates.

Policy Revenues. Policy revenues increased to $348.1 million in 1996 from
$301.9 and $244.4 million in 1995 and 1994, respectively. Fixed benefit policy
revenues decreased by 3.1% and 1.2% to $169.3 million and $174.7 million during
1996 and 1995, respectively, after increasing by 15.9% during 1994 to $176.9
million. Increases in fixed benefit policy revenues during 1994 resulted
primarily from the acquisition of Professional. During 1996 and 1995, the
Company's operating focus was concentrated primarily on increasing life policy
revenues to achieve a balance of life policy revenues with those of fixed
benefit products. In addition, during 1996 the Company effectively ceased
marketing its "instant issue" fixed benefit products and as a result of higher
than anticipated loss ratios which resulted in a $4.9 million decline in fixed
benefit policy revenues.

   
Life policy revenues increased 43.9%, 75.0% and 37.2% to $170.0 million, $118.1
million and $67.5 million for the years ended 1996, 1995 and 1994,
respectively. The acquisition of UCLife in July 1996, and Integon Life in July
1995, added $72.4 million and $22.9 million of life policy revenues during 1996
and 1995, respectively. The inclusion of AA Life for the full year 1995
increased life policy revenue by $29.1 million while AA Life provided an
additional $13.7 million of life policy revenues during 1994. Partially
offsetting some of these increases were declines in Penn Life's policy revenues
from closed blocks of business of $1.1 million, $750,000 and $1.0 million
during 1996, 1995 and 1994, respectively.
    


PENNCORP FINANCIAL GROUP, INC.

<PAGE>   34
                                                                     PAGE 34


M D & A continued


Net Investment Income. The effects of a larger invested asset base and improved
average portfolio yields to 7.6% in 1996 from 7.3% during 1995 and 1994, have
resulted in net investment income increasing 108.8%, 97.1% and 20.3% in 1996,
1995 and 1994, to $213.6 million, $102.3 million and $51.9 million,
respectively. The acquisitions of UCLife, which added invested assets of
$1,484.4 million in July 1996, Integon Life, which added invested assets of
$1,336.9 million in July 1995, and AA Life, which added invested assets of
$204.3 million in August 1994, contributed to the increase in investment
income. During 1996, UCLife added $50.0 million of investment income and
Integon Life incrementally added $59.7 million as a result of being included
for the entire year. During 1995, Integon Life and AA Life incrementally added
$40.1 million and $9.7 million to investment income, respectively. During
1994, AA Life and Professional provided additional investment income to the
Company of $4.8 million and $2.5 million, respectively.

Claims Incurred. Claims incurred increased 33.0%, 25.9% and 18.3% during 1996,
1995 and 1994, to $188.7 million, $141.9 million and $112.7 million,
respectively. The increase in claims during 1996 was due to the addition of
UCLife, $3.3 million, the inclusion of Integon Life for the full year, $35.1
million, and adverse mortality experience at OLIC and Penn Life of $4.2 million
and $2.6 million, respectively, when compared to the previously reported
period.The Company believes that the modest increase in claims at OLIC and Penn
Life are a statistical aboration and do not appear to be the result of poor
underwriting or anti-selection. The Company is continuing to closely monitor
the claims activity in each insurance subsidiary. During 1995, the increase in
claims incurred attributable to Integon Life and AA Life, was $22.8 million and
$10.3 million, respectively. During 1994, the impact of the AA Life acquisition
and the inclusion of Professional for the entire year increased claims incurred
by $18.2 million.

Insurance Related Expenses. Insurance related expenses (including commissions,
amortization of deferred policy acquisition costs and amortization of the
present value of insurance in force) increased 9.7%, 29.2% and 4.3% to $87.4
million, $79.7 million and $61.7 million during 1996, 1995 and 1994,
respectively. During each of the periods the amortization of the present value
of insurance in force increased slightly as a result of acquisitions. During
1996, and 1995, the Company utilized deferral methods comparable to those
utilized in 1994 and thus the increase in amortization of deferred policy
acquisition costs was the result of the growth of the blocks of new business
issued since the acquisition of each subsidiary and related deferred costs. The
increased insurance related expenses were also the result of somewhat higher
commissions which totaled $34.7 million, $31.9 million and $30.7 million during
1996, 1995 and 1994, respectively.

Other Operating Expenses. Other operating expenses (including general
operating, overhead and policy maintenance expenses) increased during 1996 to
$71.2 million compared to $67.9 million during 1995 and $51.9 million during
1994. Excluding the impact of the UCLife acquisition in 1996 and the inclusion
of Integon Life and AA Life for the full year period 1996 and 1995,
respectively, and a non-recurring restructuring charge of $3.9 million in 1995,
primarily related to the relocation of the Company's operating facility, other
operating expenses decreased by $7.2 million or 14.8% during 1996 to $41.3
million for the Company's other insurance subsidiaries compared to $48.5 and
$46.0 million during 1995 and 1994, respectively.

Also included in other operating expense is the amortization of costs in excess
of net assets acquired which aggregated $8.0 million, $6.6 million and $5.2
million for 1996, 1995 and 1994, respectively.

Income Taxes. The effective tax rates for the years ended December 31, 1996,
1995 and 1994, were 36.7%, 35.1% and 36.6%, respectively. The 1996 effective
rate is higher than the statutory rate of 35% primarily due to non-deductible
amortization of costs in excess of net assets acquired. The decline of the
effective tax rate for 1995 as compared to 1996 and 1994 is due to previously
non-deductible operating losses becoming available to reduce tax on operating
earnings. Effective tax rates in 1994 are higher than the statutory rate
principally due to foreign taxes and non-deductible amortization of costs in
excess of net assets acquired.



                                                PENNCORP FINANCIAL GROUP, INC.

<PAGE>   35
                                                                         PAGE 35
                   ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   
<TABLE>
<CAPTION>
                                                                  Page
                                                                  ----
<S>                                                               <C>
PennCorp Financial Group, Inc. and Subsidiaries                    36

Southwestern Financial Corporation and Subsidiaries                61
</TABLE>
    
<PAGE>   36
   
                                                                        PAGE 36
    




INDEPENDENT AUDITOR'S REPORT


The Shareholders and Board of Directors
PennCorp Financial Group, Inc.

We have audited the accompanying consolidated balance sheets of PennCorp
Financial Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1996. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedules based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PennCorp Financial
Group, Inc. and subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.


KPMG PEAT MARWICK LLP


Raleigh, North Carolina
February 28, 1997




PENNCORP FINANCIAL GROUP, INC.




<PAGE>   37
   
                                                                         PAGE 37
    

 CONSOLIDATED STATEMENTS
      of income


<TABLE>
<CAPTION>
(Amounts in thousands, except per share information)                              FOR THE YEARS ENDED DECEMBER 31,
                                                                                 1996           1995           1994
----------------------------------------------------------------------------------------------------------------------

<S>                                                                        <C>              <C>             <C>
REVENUES:
   Premiums, principally accident and sickness                             $  256,859       $ 239,010       $  214,674
   Interest sensitive policy product charges                                   91,231          62,879           29,748
   Net investment income                                                      213,563         102,291           51,850
   Other income                                                                 6,132          12,845            1,056
   Net gains (losses) from the sale of investments                              1,257             595           (3,556)
                                                                           -------------------------------------------
     Total revenues                                                           569,042         417,620          293,772
                                                                           -------------------------------------------

BENEFITS AND EXPENSES:
   Claims incurred                                                            188,727         141,876          112,650
   Change in liability for future policy benefits and other
     policy benefits                                                           79,085          18,126           (9,329)
   Amortization of present value of insurance in force and
     deferred policy acquisition costs                                         52,877          47,732           30,948
   Amortization of costs in excess of net assets acquired                       7,990           6,557            5,241
   Underwriting and other administrative expenses                              97,685          93,272           77,407
   Interest and amortization of deferred debt issuance costs                   18,979          19,780           18,274
                                                                           -------------------------------------------
     Total benefits and expenses                                              445,343         327,343          235,191
                                                                           -------------------------------------------
Income before income taxes, undistributed earnings in unconsolidated
   affiliates and extraordinary charge                                        123,699          90,277           58,581
     Income taxes                                                              45,418          31,642           21,437
                                                                           -------------------------------------------
Net income before undistributed earnings in unconsolidated affiliates and
   extraordinary charge                                                        78,281          58,635           37,144
     Undistributed earnings in unconsolidated affiliates                       21,102           4,718                -
                                                                           -------------------------------------------
Net income before extraordinary charge                                         99,383          63,353           37,144
     Extraordinary charge (net of income taxes of $1,277, $- and $-)           (2,372)              -                -
                                                                           -------------------------------------------
Net income                                                                     97,011          63,353           37,144
     Preferred stock dividend requirements                                     14,646           6,540            1,151
                                                                           -------------------------------------------
Net income applicable to common stock                                      $   82,365       $  56,813       $   35,993
======================================================================================================================

PER SHARE INFORMATION:

Primary:
   Net income applicable to common stock before extraordinary charge       $     2.98       $    2.47       $     1.82
     Extraordinary charge, net of income taxes                                  (0.08)              -                -
                                                                           -------------------------------------------
   Net income applicable to common stock                                   $     2.90       $    2.47       $     1.82
Common shares used in computing primary earnings per share                     28,462          22,985           19,830

Fully diluted:
   Net income applicable to common stock before extraordinary charge       $     2.74       $    2.36
     Extraordinary charge, net of income taxes                                  (0.07)              -
                                                                           --------------------------
   Net income applicable to common stock                                   $     2.67       $    2.36
Common shares used in computing fully diluted earnings per share               35,229          25,566
</TABLE>

          See accompanying Notes to Consolidated Financial Statements




PENNCORP FINANCIAL GROUP, INC.
<PAGE>   38
   
                                                                        PAGE 38
    

 CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
(Amounts in thousands, except share information)                                                        AS OF DECEMBER 31,
                                                                                                      1996             1995
==============================================================================================================================
<S>                                                                                                 <C>           <C>
ASSETS:
Investments:
   Fixed maturity securities:
     Held for investment, at amortized cost (fair value $89,759 in 1996 and $51,354 in 1995)        $    87,330    $    51,366
     Available for sale, at fair value (amortized cost $2,941,750 in 1996 and $1,414,187 in 1995)     2,993,925      1,486,985
   Equity securities available for sale, at fair value (cost $17,511 in 1996 and $13,707 in 1995)        20,867         15,172
   Trading securities, at fair value                                                                     31,140         86,104
   Mortgage loans on real estate, net of allowance of $11,945 in 1996 and $- in 1995                    256,998         36,563
   Policy loans                                                                                         145,976        125,179
   Short term investments                                                                                63,113        416,953
   Other investments                                                                                     46,848         43,937
                                                                                                    --------------------------
     Total investments                                                                                3,646,197      2,262,259
Cash                                                                                                     39,464         27,778
Accrued investment income                                                                                48,643         30,992
Accounts and notes receivable, net of allowance of $6,528 in 1996 and $8,388 in 1995                     47,307         34,842
Investments in unconsolidated affiliates                                                                144,652        119,390
Present value of insurance in force                                                                     351,973        288,664
Deferred policy acquisition costs                                                                       268,356        193,903
Costs in excess of net assets acquired                                                                  148,174        121,795
Other assets                                                                                            138,967         70,383
                                                                                                    --------------------------
     Total assets                                                                                   $ 4,833,733    $ 3,150,006
==============================================================================================================================

LIABILITIES:
Policy liabilities and accruals:
   Future policy benefits                                                                           $ 3,476,801    $ 2,153,607
   Policy and contract claims                                                                            44,878         36,429
   Other policyholder funds                                                                              40,429         39,011
                                                                                                    --------------------------
     Total policy liabilities and accruals                                                            3,562,108      2,229,047
Income taxes payable, primarily deferred                                                                 65,036         24,977
Notes payable                                                                                           210,325        307,271
Accrued expenses and other liabilities                                                                  118,401         92,198
                                                                                                    --------------------------
     Total liabilities                                                                                3,955,870      2,653,493
                                                                                                    --------------------------
Mandatory redeemable preferred stock:
   Series B, $.01 par value, $100 initial redemption value; authorized, issued and
     outstanding 127,500 in 1996 and 1995                                                                14,689         13,307
   Series C, $.01 par value, $100 initial redemption value; authorized, issued and
     outstanding 178,500 in 1996 and 1995                                                                18,175         16,700

SHAREHOLDERS' EQUITY:
$3.375 Convertible Preferred Stock, $.01 par value, $50 redemption value; authorized
   issued and outstanding 2,300,000 in 1996 and 1995                                                    110,513        110,513
$3.50 Series II Convertible Preferred Stock, $.01 par value, $50 redemption value; authorized
   issued and outstanding 2,875,000 in 1996                                                             139,157             --
Common stock, $.01 par value; authorized 50,000,000; issued and outstanding
   28,647,714 in 1996 and 22,879,708 in 1995                                                                286            229
Additional paid-in capital                                                                              393,156        220,482
Unrealized foreign currency translation losses                                                          (14,969)       (15,539)
Unrealized gains on securities available for sale                                                        19,582         30,353
Retained earnings                                                                                       202,144        125,375
Treasury shares (189,750 in 1996 and 1995)                                                               (3,370)        (3,370)
Notes receivable secured by common stock                                                                 (1,500)        (1,537)
                                                                                                    --------------------------
     Total shareholders' equity                                                                         844,999        466,506
                                                                                                    --------------------------
     Total liabilities and shareholders' equity                                                     $ 4,833,733    $ 3,150,006
==============================================================================================================================
</TABLE>

          See accompanying Notes to Consolidated Financial Statements




                                                PENNCORP FINANCIAL GROUP, INC.
<PAGE>   39
   
                                                                        PAGE 39
    


 CONSOLIDATED STATEMENTS
     of changes in shareholders' equity


<TABLE>
<CAPTION>
(Amounts in thousands)                                                           FOR THE YEARS ENDED DECEMBER 31,
                                                                               1996             1995           1994
======================================================================================================================

<S>                                                                        <C>              <C>             <C>
CONVERTIBLE PREFERRED STOCK:
   Balance at beginning of year                                            $  110,513       $       -       $        -
   Issuance of convertible preferred stock                                    139,157         110,513                -
                                                                           -------------------------------------------
       Balance at end of year                                                 249,670         110,513                -
                                                                           -------------------------------------------
COMMON STOCK:
   Balance at beginning of year                                                   229             191              191
   Issuance of common stock                                                        56              38                -
   Exercise of stock options                                                        1               -                -
                                                                           -------------------------------------------
       Balance at end of year                                                     286             229              191
                                                                           -------------------------------------------

ADDITIONAL PAID-IN CAPITAL:
   Balance at beginning of year                                               220,482         169,310          169,301
   Issuance of common stock                                                   170,393          51,172                -
   Exercise of stock options                                                    2,281               -                -
   Treasury stock awarded to employees, net of unearned award                       -               -                9
                                                                           -------------------------------------------
       Balance at end of year                                                 393,156         220,482          169,310
                                                                           -------------------------------------------
UNREALIZED FOREIGN CURRENCY TRANSLATION LOSSES:
   Balance at beginning of year                                               (15,539)        (17,882)         (13,118)
   Change in unrealized foreign currency translation losses during
     the year, net of income taxes                                                570           2,343           (4,764)
                                                                           -------------------------------------------
       Balance at end of year                                                 (14,969)        (15,539)         (17,882)
                                                                           -------------------------------------------
UNREALIZED GAINS (LOSSES) ON SECURITIES AVAILABLE FOR SALE:
   Balance at beginning of year                                                30,353         (24,454)               -
   Cumulative effect of accounting change, net of income taxes                      -               -            9,328
   Equity in unrealized losses of unconsolidated affiliate                     (6,045)              -                -
   Change in unrealized gains (losses) on securities available for
     sale during the year, net of income taxes                                 (4,726)         54,807          (33,782)
                                                                           -------------------------------------------
       Balance at end of year                                                  19,582          30,353          (24,454)
                                                                           -------------------------------------------

RETAINED EARNINGS:
   Balance at beginning of year                                               125,375          69,856           34,730
   Net income                                                                  97,011          63,353           37,144
   Dividends on common stock                                                   (5,630)         (1,327)            (765)
   Amortization of discount and dividends on preferred stock                  (14,646)         (6,540)          (1,151)
   Treasury stock awarded to employees, net of unearned award                       -               -             (102)
   Earned portion of treasury stock awarded to employees                           34              33                -
                                                                           -------------------------------------------
       Balance at end of year                                                 202,144         125,375           69,856
                                                                           -------------------------------------------
TREASURY SHARES:
   Balance at beginning of year                                                (3,370)           (386)            (280)
   Purchases of treasury shares                                                     -          (2,984)            (232)
   Treasury shares awarded to employees, net of unearned award                      -               -              126
                                                                           -------------------------------------------
       Balance at end of year                                                  (3,370)         (3,370)            (386)
                                                                           -------------------------------------------
NOTES RECEIVABLE SECURED BY COMMON STOCK:                                      (1,500)         (1,537)            (115)
                                                                           -------------------------------------------
   Total shareholders' equity                                              $  844,999       $ 466,506       $  196,520
======================================================================================================================
</TABLE>

                    See accompanying Notes to Consolidated Financial Statements


PENNCORP FINANCIAL GROUP, INC.

<PAGE>   40
   
                                                                        PAGE 40
    

 CONSOLIDATED STATEMENTS
     of cash flows


   
<TABLE>
<CAPTION>
(Amounts in thousands)                                                                        FOR THE YEARS ENDED DECEMBER 31,
                                                                                              1996         1995         1994
==============================================================================================================================
<S>                                                                                        <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income before undistributed earnings in unconsolidated affiliates and
     extraordinary charge                                                                  $  78,281    $  58,635    $  37,144
   Adjustments to reconcile net income before undistributed earnings in unconsolidated
     affiliates and extraordinary charge to net cash provided by operating activities:
     Capitalization of deferred policy acquisition costs                                     (99,545)     (83,795)     (58,919)
     Amortization of present value of business in force, deferred policy acquisition costs,
       intangibles, depreciation and accretion, net                                           59,337       50,428       38,935
     Increase (decrease) in policy liabilities and accruals and other policyholder funds      73,202       12,417      (29,894)
                                                                                                                       
     Purchases of trading securities                                                              --       (1,031)          --
     Sales of trading securities                                                              56,004       47,145           --
     Other, net                                                                               (2,585)      (8,126)      18,302
                                                                                           -----------------------------------
         Net cash provided by operating activities                                           164,694       75,673        5,568
                                                                                           -----------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Cash expended in acquisition of businesses, net of cash acquired
     of $-, $- and $12,931                                                                   (99,596)     (18,363)     (89,137)
   Purchases of fixed maturity securities held for investment                                (27,000)     (15,950)        (472)
   Purchases of fixed maturity securities available for sale                                (920,430)    (188,388)    (174,872)
   Purchases of equity securities                                                             (8,398)     (13,415)      (8,294)
   Purchase of affiliate                                                                          --     (107,366)          --
   Maturities of fixed maturity securities held for investment                                42,351        6,214       18,098
   Maturities of fixed maturity securities available for sale                                 81,538       27,198       41,370
   Sales of fixed maturity securities held for investment                                      4,910           --           --
   Sales of fixed maturity securities available for sale                                     368,331       99,804       83,182
   Sales of equity securities                                                                  5,328        6,818        9,574
   Decrease (increase) in short-term investments, net
     (including changes in amounts due to broker)                                            412,687       39,392      (20,269)
   Acquisitions and originations of mortgage loans                                          (112,473)          --           --
   Sales of mortgage loans                                                                   151,972           --           --
   Principal collected on mortgage loans                                                      21,657           --           --
   Other, net                                                                                  4,521       (3,288)      (3,553)
                                                                                           -----------------------------------
         Net cash used in investing activities                                               (74,602)    (167,344)    (144,373)
                                                                                           -----------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Issuance of notes payable                                                                 230,000      130,783       83,500
   Issuance of common stock                                                                  155,450       51,210           --
   Issuance of preferred stock                                                               139,157      110,513       33,034
   Purchases of treasury stock                                                                    --       (2,984)        (232)
   Reduction of notes payable                                                               (330,624)     (91,507)      (5,271)
   Redemption of preferred stock                                                                  --      (33,415)          --
   Receipts from interest sensitive products credited to policyholders' account balances     160,403       91,175       47,497
                                                                                                                        
   Return of policyholders' account balances on interest sensitive products                 (365,554)    (144,413)     (45,426)
   Repurchase agreement, net                                                                 (52,839)          --           --
   Other, primarily dividends, net                                                           (14,399)      (4,950)          --
                                                                                           -----------------------------------
         Net cash provided (used) by financing activities                                    (78,406)     106,412      113,102
                                                                                           -----------------------------------
         Net increase (decrease) in cash                                                      11,686       14,741      (25,703)
CASH AT BEGINNING OF YEAR                                                                     27,778       13,037       38,740
                                                                                           -----------------------------------
CASH AT END OF YEAR                                                                        $  39,464    $  27,778    $  13,037
==============================================================================================================================


SUPPLEMENTAL DISCLOSURES:
   Income taxes paid (refunded)                                                            $  (4,992)   $     787    $   2,474
   Interest paid                                                                              18,185       20,001       15,443

NON-CASH FINANCING ACTIVITIES:
   Debt assumed with acquisition                                                                  --       38,214           --
   Securities issued in conjunction with acquisition                                          14,999       28,750           --
   Amounts due on acquisition of affiliate                                                        --       11,114           --
</TABLE>
    


          See accompanying Notes to Consolidated Financial Statements





                                                PENNCORP FINANCIAL GROUP, INC.


<PAGE>   41
   
                                                                        PAGE 41
    


 NOTES TO CONSOLIDATED
      financial statements

(1) BASIS OF PRESENTATION

PennCorp Financial Group, Inc. (the "Company", "PennCorp") is an insurance
holding company. The Company commenced operations with the acquisition of
Pennsylvania Life Insurance Company ("PLIC") and Executive Fund Life Insurance
Company (which was merged into PLIC effective July 1, 1996) and Pacific Life
and Accident Insurance Company ("PLAIC") on August 23, 1990. Through its
wholly-owned life insurance subsidiaries, PLIC and its wholly-owned subsidiary,
Penncorp Life Insurance Company (collectively referred to herein as "Penn
Life"), Peninsular Life Insurance Company ("Peninsular"), Professional
Insurance Corporation ("Professional"), Pioneer Security Life Insurance Company
("Pioneer Security") and its wholly-owned subsidiaries American-Amicable Life
Insurance Company of Texas and Pioneer American Insurance Company (Pioneer
Security and its subsidiaries collectively referred to herein as "AA Life"),
Salem Life Insurance Corporation ("Salem Life") and its wholly-owned
subsidiaries Integon Life Insurance Corporation ("ILIC") and Georgia
International Life Insurance Company and Occidental Life Insurance Company of
North Carolina ("OLIC") (Salem Life and its wholly-owned subsidiaries
collectively referred to herein as "Integon Life"), United Companies Life
Insurance Company ("UC Life"), and PLAIC, the Company offers a broad range of
accident and sickness, life, and accumulation insurance products to individuals
through a sales force that is contractually exclusive to certain of the
Company's subsidiaries and through general agents.

The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. All dollar amounts presented
hereafter, except share information, are stated in thousands.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the reported
amounts of revenues and expenses during the reporting period. Accounts that the
Company deems to be acutely sensitive to changes in estimates include deferred
policy acquisition costs, future policy benefits, policy and contract claims
and present value of insurance in force. In addition, the Company must
determine requirements for disclosure of contingent assets and liabilities as
of the date of the financial statements based upon estimates. In all instances,
actual results could differ from estimates.


(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INVESTMENTS

Fixed maturities classified as held for investment are recorded at cost,
adjusted for amortization of premium or discount, as the Company has the intent
and ability to hold them to maturity. Fixed maturities and equity securities
classified as available for sale are recorded at fair value, as they may be
sold in response to changes in interest rates, prepayment risk, liquidity
needs, the need or desire to increase income or capital and other economic
factors. Changes in unrealized gains and losses related to securities available
for sale are recorded as a separate component of shareholders' equity, net of
applicable income taxes. Securities classified as trading securities are
reported at fair value with realized gains and losses and changes in unrealized
gains and losses included in the determination of net income as a component of
other income. The classification of securities as held for investment,
available for sale or trading is generally determined at the date of purchase.
The Company carries certain equity investments in affiliates on the equity
basis of accounting as a result of its percentage ownership and lack of voting
control. Mortgage-backed securities held for investment or available for sale
are amortized using the interest method including anticipated prepayments at
the date of purchase. Significant changes in estimated cash flows from original
assumptions are reflected in the period of such change. Mortgage loans on real
estate are recorded at cost, adjusted for amortization of premium or discount
and provision for loan loss, if necessary. Policy loans, short-term
investments, and other investments are recorded at cost, which approximates
market.

Realized investment gains and losses and declines in value which are other than
temporary, determined on the basis of specific identification, are included in
net income.

Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," which was issued by the Financial Accounting
Standards Board in May 1993. Since December 1991, the Company has utilized
concepts considered in SFAS No. 115 regarding the classification of investments
in debt securities. The implementation of SFAS No. 115 has resulted in the
Company reflecting certain invested assets at fair value rather than lower of
aggregate cost or market as was the previous accounting practice. As of January
1, 1994 the adoption of SFAS No. 115 resulted in an increase in the value
reflected in the financial statements for the fixed maturity securities
available for sale of approximately $14,351 and an increase in shareholders'
equity of $9,328, net of deferred tax.


PENNCORP FINANCIAL GROUP, INC.
<PAGE>   42
   
                                                                       PAGE 42
    

Notes to Consolidated Financial Statements, continued


In November 1995, the Financial Accounting Standards Board ("FASB") announced
that for the year ended December 31, 1995, companies that are subject to the
reporting requirements of SFAS No. 115 would have a one-time opportunity to
reclassify securities currently classified as held for investment without the
risk of tainting the accounting for investments on a historical basis. The
Company has evaluated the securities contained in this portfolio and has
determined under which conditions it may dispose of such securities. In light
of this review, the Company has reclassified approximately $61,410 of
securities which were previously classified as held for investment to available
for sale. The result of such reclassification was to increase shareholders'
equity by $1,198, net of applicable deferred income taxes.


INSURANCE REVENUE RECOGNITION

Accident and sickness insurance premiums are recognized as revenue ratably over
the time period to which premiums relate. Revenues from traditional life
insurance policies represent premiums which are recognized as earned when due.
Benefits and expenses are associated with earned premiums so as to result in
recognition of profits over the lives of the policies. This association is
accomplished by means of the provision for liabilities for future policy
benefits and the deferral and amortization of policy acquisition costs.

Revenues for interest sensitive products such as universal life and annuity
contracts represent charges assessed against the policyholders' account balance
for the cost of insurance, surrenders and policy administration. Benefits
charged to expenses include benefit claims incurred during the period in excess
of policy account balances and interest credited to policy account balances.


POLICY LIABILITIES

Liabilities for future policy benefits generally have been computed on the net
level premium method, based on estimated future investment yield, mortality,
morbidity and withdrawals. Estimates used are based on experience adjusted to
provide for possible adverse deviation. These estimates are periodically
reviewed and compared with actual experience. Future policy benefits for
interest sensitive products include the balance that accrues to the benefit of
the policyholders and amounts that have been assessed to compensate the life
insurance subsidiaries for services to be provided in the future.

Policy and contract claims represent estimates of both reported claims and
claims incurred but not reported based on experience.


ACCOUNTS AND NOTES RECEIVABLE

Accounts and notes receivable consist primarily of agents' balances and
premiums receivable from agents and policyholders in the United States and
Canada. Agents' balances are partially secured by commissions due to agents in
the future and premiums receivable are secured by policy liabilities. An
allowance for doubtful accounts is established, based upon specific
identification and general provision, for amounts which the Company estimates
will not ultimately be collected.


DEFERRED POLICY ACQUISITION COSTS

Estimated costs of acquiring new business which vary with, and are primarily
related to, the production of new business, have been deferred to the extent
that such costs are deemed recoverable from future revenues. Such estimated
costs include commissions, certain costs of policy issuance, underwriting and
certain variable agency expenses. Costs deferred on accident and sickness and
traditional life policies are amortized, with interest, over the anticipated
premium-paying period of the related policies in proportion to the ratio of
annual premium revenue to expected total premium revenue to be received over
the life of the policies. Expected premium revenue is estimated by using the
same mortality, morbidity and withdrawal assumptions used in computing
liabilities for future policy benefits. For interest sensitive products and
limited pay life products, policy acquisition costs are amortized in relation
to the emergence of anticipated gross profits over the life of the policies.


PRESENT VALUE OF INSURANCE IN FORCE

The present value of insurance in force represents the anticipated gross
profits to be realized from future revenues on insurance in force at the date
such insurance was purchased, discounted to provide an appropriate rate of
return and amortized, with interest based upon the policy liability or contract
rate, over the years that such profits are anticipated to be received in
proportion to the estimated gross profits. Accumulated amortization was
$151,173 and $122,851 as of December 31, 1996 and 1995, respectively.




                                                PENNCORP FINANCIAL GROUP, INC.

<PAGE>   43
   
                                                                       PAGE 43
    

Notes to Consolidated Financial Statements, continued


NET INCOME PER COMMON SHARE

Net income per common share is determined after recognition of preferred stock
dividends and accretion of discount on preferred stock and is based on the
weighted average number of common shares outstanding during the year after
giving consideration to the dilutive effect of stock options and stock
warrants. Fully diluted net income per share assumes the conversion of
convertible preferred stock.

The Company adopted the disclosure requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation", in 1996. This statement provides a choice for
the accounting of employee stock compensation plans. A company may elect to use
a new fair-value methodology, under which compensation cost is measured and
recognized in results of operations, or continue to account for these plans
under Accounting Principles Board Opinion ("APB") No. 25, "Accounting for
Stock Issued to Employees", and related Interpretations. Note 12 of the
Consolidated Financial Statements contains a summary of the pro forma effects
to reported net income applicable to common stock and earnings per share for
1996 and 1995, if the Company had elected to account for employee stock
compensation plans utilizing the fair value methodology prescribed by
SFAS No. 123.


COSTS IN EXCESS OF NET ASSETS ACQUIRED

Costs in excess of the fair value of net assets acquired are amortized on a
straight-line basis primarily over 20 years. Accumulated amortization was
$32,434 and $26,484 as of December 31, 1996 and 1995, respectively.

The Company continually monitors the value of costs in excess of net assets
acquired based upon estimates of future earnings. Any amounts deemed to be
impaired are charged, in the period in which such impairment was determined, as
an expense against earnings. For the periods presented there was no charge to
earnings for the impairment of costs in excess of net assets acquired.


INCOME TAXES

Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.


FOREIGN CURRENCY TRANSLATION

The financial statement accounts of the Canadian operations, which are
denominated in Canadian dollars, are translated into U.S. dollars as follows:
(i) Canadian currency assets and liabilities are translated at the rates of
exchange as of the balance sheet dates and the related unrealized translation
adjustments are included as a separate component of shareholders' equity, and
(ii) revenues, expenses and cash flows, expressed in Canadian dollars, are
translated using a weighted average of exchange rates for each of the periods
presented.


REINSURANCE

Financial reinsurance that does not transfer significant insurance risk is
accounted for as deposits. The cost of reinsurance related to long-duration
contracts is accounted for over the life of the underlying reinsured policies.
Balances due to, or from, reinsurers have been reflected as assets and
liabilities rather than being netted against the related account balances.


RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current
year presentation.


(3) ACQUISITIONS

On July 22, 1996, the Company consummated the acquisition of UC Life for a
total purchase price of $110,056 including expenses incurred of $9,706 and
earnings through the date of consummation of the acquisition of $3,608. The
fair value of net assets acquired amounted to $76,008 resulting in $34,048
costs in excess of net assets acquired.

The UC Life acquisition has been accounted for as a purchase transaction in
accordance with generally accepted accounting principles, and accordingly, all
assets and liabilities acquired were recorded at fair value as of the
acquisition date which became the new cost basis.


PENNCORP FINANCIAL GROUP, INC.

<PAGE>   44
   
                                                                        PAGE 44
    

Notes to Consolidated Financial Statements, continued

On July 25, 1995, the Company consummated the acquisition of Integon Life for a
total purchase price of $48,596 including acquisition expenses of approximately
$3,200. The fair value of net assets acquired amounted to $2,974 resulting in
$45,622 of costs in excess of net assets acquired.

The acquisition of Integon Life was initiated on January 20, 1995, when the
Company and its subsidiaries entered into a series of related agreements to
acquire all of the issued and outstanding capital stock of Salem Holdings
Corporation (formerly Integon Life Corporation), including the purchase for
$15,000 in cash, of a 49% limited partnership interest in the ultimate limited
partner that controlled Integon Life. Prior to the consummation of the
acquisition, the Company's 49% equity interest in the net income of Integon
Life, which aggregated $3,808, was reported on the equity method of accounting
as undistributed earnings in unconsolidated affiliates for the period from
January 20, 1995, to July 25, 1995.

The Integon Life acquisition has been accounted for as a purchase transaction
in accordance with generally accepted accounting principles, and accordingly,
assets and liabilities acquired have been recorded as a step purchase with fair
values determined as of January 20, 1995 and July 25, 1995, which became the
new cost basis.

On August 31, 1994, the Company consummated the acquisition of AA Life for a
total cash purchase price of $103,392 including acquisition expenses of $1,865.
The fair value of net assets acquired was $86,880 resulting in $16,512 of costs
in excess of net assets acquired.

The AA Life acquisition has been accounted for as a purchase transaction in
accordance with generally accepted accounting principles, and accordingly, all
assets and liabilities acquired were recorded at fair value as of the
acquisition date which became the new cost basis. .

The results of operations of the acquired companies are included in the
accompanying financial statements since the respective acquisition dates.

The following unaudited pro forma data represents the Company's consolidated
results of operations as if (i) the Integon Life and AA Life acquisition
occurred as of January 1, 1994, and (ii) the UC Life acquisition occurred as of
January 1, 1995. This unaudited pro forma data has been prepared for
comparative purposes only and does not purport to be indicative of what would
have occurred had the acquisitions been made as of January 1, 1995 and 1994, or
results which may occur in the future.

<TABLE>
<CAPTION>
(Amounts in thousands, except per share information)

FOR THE YEARS ENDED DECEMBER 31,                            1996              1995               1994
=========================================================================================================
<S>                                                    <C>                <C>                <C>
Total revenues                                         $   639,076        $   635,508        $    484,181
Income before income taxes, undistributed earnings in
   unconsolidated affiliates and extraordinary charge      131,683            118,742              51,779
Net income applicable to common stock                       82,884             54,077              30,417
Per share information:
   Net income applicable to common stock - primary            2.79               1.84                1.21
   Net income applicable to common stock - fully diluted      2.59               1.81
</TABLE>


(4) FOREIGN INFORMATION AND BUSINESS SEGMENT INFORMATION

The Company's only reportable industry segment is life insurance, and its only
significant foreign operations are conducted in Canada. Within the life
insurance segment the Company's significant lines of business include fixed
benefit, life and accumulation products. Assets and related investment income
are allocated based upon related insurance liabilities which are backed by such
assets. Other operating expenses are allocated in relation to the mix of
related revenues.





                                                PENNCORP FINANCIAL GROUP, INC.

<PAGE>   45
   
                                                                        PAGE 45
    


Notes to Consolidated Financial Statements, continued

The components of operations for the years ended December 31 were as follows:

<TABLE>
<CAPTION>
                                                             1996              1995              1994
=========================================================================================================
<S>                                                    <C>                <C>                <C>
TOTAL REVENUES:
   Insurance operations
     U.S.
       Fixed benefit products                          $   147,226        $   162,747        $    159,644
       Life products                                       253,959            174,934              91,322
       Accumulation products                               111,146             32,378                   -
     Canada
       Fixed benefit products                               45,695             40,596              37,641
       Life products                                         6,690              6,430               5,618
   Non-insurance operations, corporate and eliminations      4,326                535                (453)
                                                       --------------------------------------------------
                                                       $   569,042        $   417,620        $    293,772
=========================================================================================================
INCOME BEFORE INCOME TAXES, UNDISTRIBUTED EARNINGS
   IN UNCONSOLIDATED AFFILIATES AND EXTRAORDINARY
   CHARGE:
Insurance operations
     U.S.
       Fixed benefit products                          $    39,664        $    52,148        $     18,735
       Life products                                        52,363             26,245              40,908
       Accumulation products                                33,289             14,423                   -
     Canada
       Fixed benefit products                               15,435             15,568              13,007
       Life products                                           642              2,451               1,391
   Non-insurance operations, corporate and eliminations    (17,694)           (20,558)            (15,460)
                                                       --------------------------------------------------
                                                       $   123,699        $    90,277        $     58,581
=========================================================================================================
</TABLE>

Total assets as of December 31 were as follows:

<TABLE>
<CAPTION>
                                                                              1996               1995
=========================================================================================================
<S>                                                                       <C>                <C>
TOTAL ASSETS:
   Insurance operations
     U.S.
       Fixed benefit products                                             $   479,900        $    453,087
       Life products                                                        1,686,611           1,497,654
       Accumulation products                                                2,349,905             945,100
     Canada
       Fixed benefit products                                                 139,887             120,011
       Life products                                                           43,613              39,357
   Non-insurance operations, corporate and eliminations                       133,817              94,797
                                                                          -------------------------------
                                                                          $ 4,833,733        $  3,150,006
=========================================================================================================
</TABLE>


(5) INVESTMENTS

The following investments, other than obligations of the U.S. Government or
agencies thereof, individually exceeded 10% of total shareholders' equity as of
December 31:

<TABLE>
<CAPTION>
                                                            1996                         1995
=========================================================================================================
                                                  AMORTIZED       FAIR         AMORTIZED         FAIR
                                                    COST          VALUE          COST            VALUE
                                                ---------------------------------------------------------
<S>                                             <C>            <C>            <C>              <C>
Canadian government obligations                 $   80,492     $   88,671     $   61,245       $   66,374
=========================================================================================================
</TABLE>


PENNCORP FINANCIAL GROUP, INC.

<PAGE>   46
   
                                                                        PAGE 46
    

Notes to Consolidated Financial Statements, continued

The amortized cost and fair value of investments in fixed maturities held for
investment as of December 31 were as follows:

<TABLE>
<CAPTION>
                                                                        1996
=========================================================================================================
                                                                 GROSS           GROSS
                                                 AMORTIZED    UNREALIZED      UNREALIZED         FAIR
                                                   COST          GAINS          LOSSES           VALUE
                                                ---------------------------------------------------------
<S>                                             <C>            <C>            <C>              <C>
Mortgage-backed securities, principally
   obligations of U.S. Government agencies      $   34,546     $    2,307     $        -       $   36,853
Corporate securities                                52,784            124              2           52,906
                                                ---------------------------------------------------------
                                                $   87,330     $    2,431     $        2       $   89,759
=========================================================================================================
</TABLE>


<TABLE>
<CAPTION>
                                                                        1995
=========================================================================================================
                                                                 GROSS           GROSS
                                                 AMORTIZED    UNREALIZED      UNREALIZED         FAIR
                                                   COST          GAINS          LOSSES           VALUE
                                                ---------------------------------------------------------
<S>                                             <C>            <C>            <C>              <C>
Corporate securities                            $   51,366     $        -     $       12       $   51,354
=========================================================================================================
</TABLE>


The amortized cost and fair value of investments in fixed maturities available
for sale as of December 31 were as follows:

<TABLE>
<CAPTION>
                                                                         1996
=========================================================================================================

                                                                 GROSS           GROSS
                                                 AMORTIZED    UNREALIZED      UNREALIZED         FAIR
                                                   COST          GAINS          LOSSES           VALUE
                                                ---------------------------------------------------------
<S>                                             <C>            <C>            <C>              <C>
Mortgage-backed securities, principally
   obligations of U.S. Government agencies      $1,408,124     $   25,710     $    5,510       $1,428,324
U.S. Treasury securities and obligations of
   U.S. Government corporations and agencies       326,484          5,783          2,760          329,507
Debt securities issued by foreign governments       80,492          8,179              -           88,671
Corporate securities                             1,126,650         29,940          9,167        1,147,423
                                                ---------------------------------------------------------
                                                $2,941,750     $   69,612     $   17,437       $2,993,925
=========================================================================================================
</TABLE>


<TABLE>
                                                                        1995
=========================================================================================================
                                                                 GROSS           GROSS
                                                 AMORTIZED    UNREALIZED      UNREALIZED         FAIR
                                                   COST          GAINS          LOSSES           VALUE
                                                ---------------------------------------------------------
<S>                                             <C>            <C>            <C>              <C>
Mortgage-backed securities, principally
   obligations of U.S. Government agencies      $  484,945     $   23,288     $    1,880       $  506,353
U.S. Treasury securities and obligations of
   U.S. Government corporations and agencies       363,305         18,207            980          380,532
Debt securities issued by foreign governments       61,245          5,210             81           66,374
Corporate securities                               504,692         33,486          4,452          533,726
                                                ---------------------------------------------------------
                                                $1,414,187     $   80,191     $    7,393       $1,486,985
=========================================================================================================
</TABLE>



                                                 PENNCORP FINANCIAL GROUP, INC.
<PAGE>   47
   
                                                                        PAGE 47
    



Notes to Consolidated Financial Statements, continued

The amortized cost and fair value of fixed maturities held for investment as of
December 31, 1996, by contractual maturity, are shown below:

<TABLE>
<CAPTION>
                                                                           AMORTIZED            FAIR
                                                                             COST               VALUE
=========================================================================================================
<S>                                                                       <C>                <C>
Due in one year or less                                                   $     5,223        $      5,223
Due after 1 through 5 years                                                    16,793              16,854
Due after 5 through 10 years                                                   30,768              30,829
Mortgage-backed securities, principally
   obligations of U.S. Government agencies                                     34,546              36,853
                                                                          -------------------------------
                                                                          $    87,330        $     89,759
=========================================================================================================
</TABLE>



The amortized cost and fair value of fixed maturities available for sale as of
December 31, 1996, by contractual maturity, are shown below:

<TABLE>
<CAPTION>
                                                                           AMORTIZED            FAIR
                                                                             COST               VALUE
=========================================================================================================
<S>                                                                       <C>                <C>
Due in one year or less                                                   $   126,527        $    127,588
Due after 1 through 5 years                                                   340,267             348,026
Due after 5 through 10 years                                                  781,999             798,307
Due after 10 years                                                            284,833             291,680
Mortgage-backed securities, principally
   obligations of U.S. Government agencies                                  1,408,124           1,428,324
                                                                          -------------------------------
                                                                          $ 2,941,750        $  2,993,925
=========================================================================================================
</TABLE>


Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without prepayment
penalties.

Included in fixed maturities held for investment as of December 31, 1996 and
1995, are below investment-grade securities with an amortized cost and fair
value of $34,624 and $39,281, respectively. Included in fixed maturities held
for investment as of December 31, 1996, are unrated securities with an
amortized cost of $46,413 and a fair value of $48,831.

Included in fixed maturities available for sale as of December 31, 1996 and
1995, are below investment-grade securities with an amortized cost of $91,590
and $30,556 and a fair value of $92,494 and $33,541, respectively. Included in
fixed maturities available for sale as of December 31, 1996, are unrated
securities with an amortized cost of $92,315 and a fair value of $92,752.

As of December 31, 1996, net unrealized appreciation in equity securities
available for sale of $3,356 consisted of gross unrealized gains of $4,047,
less gross unrealized losses of $691. As of December 31, 1995, net unrealized
appreciation in equity securities available for sale of $1,465 consisted of
gross unrealized gains of $2,031, less gross unrealized losses of $566.

Fair values for fixed maturity securities were provided by independent pricing
services using market quotations, prices provided by market makers, or
estimates of fair values obtained from yield data relating to investment
securities with similar characteristics. The fair values for equity securities
were determined using market quotations from principal public exchange markets.

The Company's commercial and residential mortgage portfolios had carrying
values $256,998 and $36,563, respectively, and, fair values of approximately
$261,408 and $37,190, respectively, as of December 31, 1996 and 1995. The fair
values for mortgage loans on real estate are estimated using the quoted market
prices for securities collateralized by similar mortgage loans, adjusted for
the differences in loan characteristics. For mortgage loans on real estate
where quoted market prices are not available, the fair values are estimated
using discounted cash flow analysis and interest rates for loans with similar
credit ratings.



PENNCORP FINANCIAL GROUP, INC.

<PAGE>   48
   
                                                                        PAGE 48
    


Notes to Consolidated Financial Statements, continued

As of December 31, 1996, commercial and residential mortgage loan investments
were concentrated in the following states:

<TABLE>
<CAPTION>
                                                                        PERCENT OF TOTAL
                                                        CARRYING VALUE   CARRYING VALUE
=========================================================================================
<S>                                                       <C>                <C>
Georgia                                                   $ 42,412           16.5%
Florida                                                     40,234           15.7
Colorado                                                    31,434           12.3
Virginia                                                    17,892            6.7
Tennessee                                                   15,828            6.2
Alabama                                                     15,142            5.9
Louisiana                                                   13,912            5.5
All other                                                   80,144           31.2
                                                          -----------------------
                                                          $256,998          100.0%
=========================================================================================
</TABLE>


Investments with a carrying value of $62,767 and $49,036 were on deposit with
certain regulatory authorities as of December 31, 1996 and 1995, respectively.

Realized, and changes in unrealized gains and losses, on investments for the
years ended December 31 were as follows:

<TABLE>
<CAPTION>
                                                            1996               1995               1994
==========================================================================================================
<S>                                                    <C>                <C>                <C>
REALIZED GAINS (LOSSES) ON DISPOSITIONS OF INVESTMENTS:
   Securities held for investment:
     Gross gains from sales                            $         -        $         -        $          -
     Gross losses from sales                                   (28)                 -                   -
     Net gains (losses) from redemptions                      (105)                 1              (2,186)
----------------------------------------------------------------------------------------------------------
                                                              (133)                 1              (2,186)
   Securities available for sale:
     Gross gains from sales                                  2,562              3,009                 182
     Gross losses from sales                                (1,800)            (2,616)             (1,572)
     Net gains (losses) from redemptions                      (166)               201                  20
----------------------------------------------------------------------------------------------------------
                                                               596                594              (1,370)
   Mortgage loans                                              794                  -                   -
       Net realized gains (losses)                     $     1,257        $       595        $     (3,556)
==========================================================================================================

CHANGES IN UNREALIZED GAINS (LOSSES):
   Securities held for investment                      $     2,441        $     3,575        $     (9,639)
   Securities available for sale                           (18,732)           111,732             (52,408)
----------------------------------------------------------------------------------------------------------
       Net change in unrealized gains (losses)         $   (16,291)       $   115,307        $    (62,047)
==========================================================================================================

TRADING PORTFOLIO:
   Net gains from sales                                $     4,930        $     1,830
   Net change in unrealized gains (losses)                  (3,626)             3,880
-------------------------------------------------------------------------------------
       Total trading gains                             $     1,304        $     5,710
=====================================================================================
</TABLE>



Major categories of net investment income for the years ended December 31,
consisted of the following:
<TABLE>
<CAPTION>
                                                           1996               1995               1994
==========================================================================================================
<S>                                                    <C>                <C>                <C>
Fixed maturity securities                              $   170,871        $    70,715        $     44,759
Mortgage loans on real estate                               13,693              2,783               1,702
Policy loans                                                 8,409              5,240               2,725
Short term investments                                      12,966             16,891               1,641
Other investments                                           13,100             10,168               2,291
----------------------------------------------------------------------------------------------------------
   Gross investment income                                 219,039            105,797              53,118
Less:  investment expenses                                   5,476              3,506               1,268
----------------------------------------------------------------------------------------------------------
   Net investment income                               $   213,563        $   102,291        $     51,850
==========================================================================================================
</TABLE>



                                                 PENNCORP FINANCIAL GROUP, INC.

<PAGE>   49
   
                                                                        PAGE 49
    


Notes to Consolidated Financial Statements, continued

The Company had non-income producing fixed maturity investments with an
amortized cost of $17,115 and $10,184 as of December 31, 1996 and 1995,
respectively.


(6) SOUTHWESTERN LIFE INVESTMENT

On December 14, 1995, Southwestern Financial Corporation ("SW Financial"), a
newly organized corporation formed by the Company and Knightsbridge Capital
Fund I, L.P. ("Knightsbridge", see Notes 15 and 16) purchased Southwestern Life
Insurance Company, Union Bankers Insurance Company and certain other related
assets from I.C.H. Corporation for $260,000.

   
Through its direct investment of $120,000 in SW Financial (the "Southwestern
Life Investment"), the Company beneficially owns 75.4% of SW Financial's
outstanding common stock, including 100% of SW Financial's non-voting common
stock, 21.0% of SW Financial's voting common stock, and preferred stock of SW
Financial. PennCorp is also a 16.3% limited partner in Knightsbridge.
    

   
As part of the SW Financial investment, PennCorp, the Knightsbridge Fund and its
affiliates and SW Financial entered into a 10-year stockholders agreement. The
agreement includes customary provisions for corporate governance (including the
right to elect or appoint members of the Board of Directors of SW Financial),
"drag-along" and "tag-along" rights and "demand" and "piggy-back" registration
rights. In addition, each issuance of preferred stock of SW Financial and its
subsidiaries held by PennCorp allows for class voting rights under certain 
circumstances. 
    

The consolidated condensed results of operations and financial position of SW
Financial are provided below:

<TABLE>
<CAPTION>
                                                                          FOR THE YEAR ENDED     FOR THE PERIOD
                                                                            DECEMBER 31,1996    DECEMBER 14-31, 1995
====================================================================================================================

<S>                                                                               <C>              <C>
REVENUES:
   Policy revenues                                                                $ 196,912        $  12,668
   Net investment income                                                            128,972            6,015
   Other income (including limited partnership distributions of 15,811 in 1996)      27,439              320
   Net gains from the sale of investments                                               516               --
                                                                                   -------------------------
         Total revenues                                                             353,839           19,003
                                                                                   -------------------------
BENEFITS AND EXPENSES:
   Claims incurred                                                                  234,773           14,736
   Change in liability for future policy benefits and
     other policy benefits                                                          (36,929)          (2,318)
   Insurance and other operating expenses                                            92,731            3,617
   Interest and amortization of deferred debt issuance costs                         14,052              664
                                                                                   -------------------------
       Total benefits and expenses                                                  304,627           16,699
                                                                                   -------------------------
Income before income taxes and extraordinary charge                                  49,212            2,304
   Income taxes                                                                      18,247              882
                                                                                   -------------------------
Net income                                                                           30,965            1,422
   Preferred stock dividend requirements                                              2,754              205
                                                                                   -------------------------
Net income applicable to common stock                                             $  28,211        $   1,217
                                                                                  ==========================
</TABLE>




<TABLE>
<CAPTION>
AS OF DECEMBER 31,                                                          1996                1995
=========================================================================================================
<S>                                                                       <C>                <C>
ASSETS:
Invested assets                                                           $ 1,640,991        $  1,710,537
Insurance assets                                                              107,230             115,831
Other assets                                                                  462,329             387,656
                                                                          -------------------------------
   Total assets                                                           $ 2,210,550        $  2,214,024
                                                                          ===============================

LIABILITIES AND SHAREHOLDERS' EQUITY:
Insurance liabilities                                                     $ 1,745,160        $  1,821,292
Long-term debt                                                                159,750             160,000
Other liabilities                                                             127,237              74,826
Redeemable preferred stock                                                     33,879              31,099
Shareholders' equity                                                          144,524             126,807
                                                                          -------------------------------
   Total liabilities and shareholders' equity                             $ 2,210,550        $  2,214,024
                                                                          ===============================
</TABLE>

PENNCORP FINANCIAL GROUP, INC.


<PAGE>   50
   
                                                                        PAGE 50
    



Notes to Consolidated Financial Statements, continued


(7) DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF INSURANCE IN FORCE

Deferred policy acquisition costs represent commissions, certain costs of
policy issuance, including underwriting and certain variable agency costs.

Information relating to these costs for the years ended December 31, is as
follows:

<TABLE>
<CAPTION>
                                                            1996                1995              1994
=======================================================================================================
<S>                                                     <C>               <C>                <C>
Policy acquisition costs deferred:
   Commissions                                          $   48,502        $    49,191        $   31,591
   Underwriting and issue costs                             51,043             34,604            27,328
                                                        -----------------------------------------------
                                                            99,545             83,795            58,919
Policy acquisition costs amortized                         (24,556)           (22,234)          (11,141)
Unrealized investment loss adjustment                         (461)            (1,007)                -
Foreign currency translation adjustment                        (75)               486              (751)
                                                        -----------------------------------------------
     Balance as of December 31                          $  268,356        $   193,903        $  132,863
=======================================================================================================
</TABLE>


As a part of the purchase accounting for the Company's acquisitions, a present
value of insurance in force asset is established which represents the value of
the right to receive future cash flows from insurance contracts existing at the
date of acquisition. Such value is the actuarially determined present value of
the projected cash flows from the acquired policies, discounted at an
appropriate risk rate of return.

The methods used by the Company to value the fixed benefit, life, and
accumulation products purchased are consistent with the valuation methods used
most commonly to value blocks of insurance business. It is also consistent with
the basic methodology generally used to value insurance assets. The method used
by the Company includes identifying the future cash flows from the acquired
business, the risks inherent in realizing those cash flows, the rate of return
the Company believes it must earn in order to accept the risks inherent in
realizing the cash flows, and determining the value of the insurance asset by
discounting the expected future cash flows by the discount rate the Company
requires.

The discount rate used to determine such values is the rate of return required
in order to invest in the business being acquired. In selecting the rate of
return, the Company considered the magnitude of the risks associated with the
type of business acquired and actuarial factors described in the following
paragraph, cost of capital available to the Company to fund the acquisition,
compatibility with other Company activities that may favorably affect future
profits, and the complexity of the acquired company.

Expected future cash flows used in determining such values are based on
actuarial determinations of future premium collection, mortality, morbidity,
surrenders, operating expenses and yields on assets held to back policy
liabilities as well as other factors. Variances from original projections,
whether positive or negative, are included in income as they occur and will
affect the present value of insurance in force interest rates for products
subject to SFAS No. 97. To the extent that these variances indicate that future
cash flows will differ from those included in the original scheduled
amortization of the present value of the insurance in force, future
amortization may be adjusted. Recoverability of the present value of insurance
in force is evaluated annually and appropriate adjustments are then determined
and reflected in the financial statements for the applicable period.

Information related to the present value of insurance in force is as follows:
<TABLE>
<CAPTION>
                                                           1996               1995              1994
=========================================================================================================
<S>                                                    <C>                <C>                <C>
Balance as of January 1                                $   288,664        $   208,233        $    172,887
Addition due to acquisition                                 79,077            132,949              56,000
Accretion of interest                                       27,530             22,135              16,853
Amortization                                               (55,851)           (47,633)            (36,661)
Unrealized investment gain (loss) adjustment                12,582            (27,425)                  -
Foreign currency translation adjustment                        (29)               405                (846)
                                                       --------------------------------------------------
   Balance as of December 31                           $   351,973        $   288,664        $    208,233
=========================================================================================================
</TABLE>


                                                 PENNCORP FINANCIAL GROUP, INC.


<PAGE>   51
   
                                                                        PAGE 51
    


Notes to Consolidated Financial Statements, continued


Expected gross amortization, based upon current assumptions and accretion of
interest at a policy liability or contract rate ranging from 3.5% to 14.5%, for
the next five years of the present value of insurance in force is as follows:

<TABLE>
<CAPTION>
                                                  BEGINNING       GROSS         ACCRETION         NET
                                                   BALANCE    AMORTIZATION     OF INTEREST   AMORTIZATION
=========================================================================================================
<C>                                             <C>            <C>            <C>              <C>
1997                                            $  351,973     $   63,796     $   25,354       $   38,442
1998                                               313,531         55,640         22,937           32,703
1999                                               280,828         50,205         20,674           29,531
2000                                               251,297         45,077         18,622           26,455
2001                                               224,842         39,166         16,746           22,420
</TABLE>



(8) FUTURE POLICY BENEFITS

The liability for future policy benefits consists of reserves for fixed
benefit, life and accumulation products. For interest sensitive life products
and annuity products, the liability for future policy benefits is equal to the
accumulated fund value. Fund values are equal to the excess premium received
and interest credited to the fund value less deductions for mortality costs and
expense charges. Current declared interest rates credited range from 4.0% to
6.75 percent. Mortality costs and expense charges are established by the
Company based upon its experience and cost structure.

For traditional life products, the liability for future policy benefits is
based primarily upon Commissioners' Standard Ordinary Tables with interest
rates ranging from 2.5% to 6.0 percent. Fixed products establish a liability
for future policy benefits equal to the excess of the present value of future
benefits to or on behalf of the policyholder over the future net premium
discounted at interest rates ranging primarily from 4.5% to 8.0 percent.
Traditional life products' and fixed benefit products' future policy benefits
are determined using Company experience as to mortality, morbidity and lapses
with a provision for adverse deviation. The Company may vary assumptions by
year of policy issue.

The following table presents information on changes in the liability for
accident and sickness claims for the years ended December 31:

   
<TABLE>
<CAPTION>
                                                          1996               1995                1994
=========================================================================================================
<S>                                                    <C>                <C>                <C>
Claim liability at January 1                           $   127,078        $   126,920        $    136,043
Less reinsurance recoverables                                1,372              2,050               2,750
                                                       --------------------------------------------------
   Net balance at January 1                                125,706            124,870             133,293
                                                       --------------------------------------------------
Addition due to acquisition                                  1,079              1,095                   -
                                                       --------------------------------------------------
Add claims incurred during the year related to:
   Current year                                             63,673             62,106              76,686
   Prior years                                              (6,816)            (2,855)               (579)
                                                       --------------------------------------------------
     Total incurred                                         56,857             59,251              76,107
                                                       --------------------------------------------------
Less claims paid during the year related to:
   Current year                                             19,057             20,346              32,828
   Prior years                                              36,435             39,164              51,702
                                                       --------------------------------------------------
     Total paid                                             55,492             59,510              84,530
                                                       --------------------------------------------------
Net balance at December 31                                 128,150            125,706             124,870
Plus reinsurance recoverables                                2,242              1,372               2,050
                                                       --------------------------------------------------
     Claim liability at December 31*                   $   130,392        $   127,078        $    126,920
=========================================================================================================
</TABLE>
    


* Included in the balance sheet captions "future policy benefits" and "policy
  and contract claims".




PENNCORP FINANCIAL GROUP, INC.
<PAGE>   52
   
                                                                        PAGE 52
    

Notes to Consolidated Financial Statements, continued


(9) NOTES PAYABLE

The outstanding principal amounts of the notes payable consist of the following
as of December 31:

<TABLE>
<CAPTION>
                                                                              1996               1995
=========================================================================================================
<S>                                                                       <C>                <C>
Unsecured 9 1/4% Senior Subordinated Notes due 2003 (a)                   $   114,646        $    150,000
Bank Debt due in 1996 (b)                                                           -             100,000
Bank Debt with annual principal requirement (c)                                     -              57,000
Revolving bank credit facility (d)                                             92,000                   -
Unsecured 9% Notes payable due December 31, 1996                                    -                 271
Other                                                                           3,679                   -
                                                                          -------------------------------
                                                                          $   210,325        $    307,271
=========================================================================================================
</TABLE>


(a) Interest costs under the Notes totaled $13,545, $14,463 and $15,206 during
1996, 1995 and 1994, respectively. At December 31, 1996, the effective rate for
the Notes was approximately 9.6 percent.

(b) Interest costs under the $100,000 credit facility totaled $1,701 and
$362 in 1996 and 1995, respectively. The effective rate of interest charged on
amounts outstanding during 1996 was 7.2 percent.

(c) Interest costs under the $57,000 in bank debt totaled $836 and $3,839 in
1996 and 1995, respectively. The effective rate of interest charged on amounts
outstanding during 1996 was 8.1 percent.

(d) Interest costs under the $175,000 revolving credit facility totaled $1,558
in 1996. The effective rate of interest charged was 6.0% during 1996 on a
weighted average outstanding balance of $25,861.



The fair value of amounts outstanding as notes payable for the years ended
December 31, 1996 and 1995, amounted to $215,341 and $311,771, respectively.
All recorded amounts other than the Senior Subordinated Notes approximate
market as they carry variable rates of interest which adjust at least every 90
days. The fair value of the Senior Subordinated Notes is determined based upon
quotes from market makers.

   
The aggregate maturities of notes payable during each of the five years after
December 31, 1996, are as follows: 1997, $570; 1998, $617; 1999, $668; 2000,
$724; 2001, $92,951.
    

All of the Company's debt obligations contain financial and operating
covenants. The Company and its subsidiaries were in compliance with all
applicable covenants as of December 31, 1996.

The Company realized an after-tax extraordinary charge of $2,372 for the year
ended December 31, 1996. The charge represents (i) the write-off of $816 of
deferred financing costs related to the retirement of certain indebtedness of
the Company and its subsidiaries, and (ii) the write-off of $1,556 of deferred
financing, swap cancellation and other costs related to the repurchase of
approximately $35,354 in principal amount of the Senior Subordinated Notes.


(10) INCOME TAXES

The Company and a number of its non-insurance subsidiaries file a consolidated
federal income tax return with a July 31 year end, which differs from its
financial year end. Marketing One and its subsidiaries file a consolidated
federal income tax return with a December 31 year end. The AA Life, PLAIC, and
Salem Life groups each file a consolidated federal life insurance company
income tax return on a calendar year basis with their life insurance
subsidiaries.

Total income taxes for the years December 31, 1996, 1995, and 1994 were
allocated as follows:

<TABLE>
<CAPTION>
                                                            1996               1995               1994
=========================================================================================================
<S>                                                    <C>                <C>                <C>
Income from operations                                 $    45,418        $    31,642        $     21,437
Extraordinary item                                          (1,277)                 -                   -
Shareholders' equity                                        (1,864)            28,493             (13,015)
                                                       --------------------------------------------------
                                                       $    42,277        $    60,135        $      8,422
=========================================================================================================
</TABLE>



                                                PENNCORP FINANCIAL GROUP, INC.

<PAGE>   53
   
                                                                       PAGE 53
    


Notes to Consolidated Financial Statements, continued


The provisions for income tax expense (benefit) attributable to income before
extraordinary charge for the years ended December 31, 1996, 1995 and 1994, are
as follows:

<TABLE>
<CAPTION>
                                                          1996                1995              1994
=========================================================================================================
<S>                                                    <C>                <C>                <C>
Current U.S.                                           $    (1,285)       $    (1,311)       $      1,174
Current foreign                                              2,319              4,519               2,210
Deferred U.S.                                               39,943             26,329              17,310
Deferred foreign                                             4,441              2,105                 661
Charge in lieu of tax                                            -                  -                  82
                                                       --------------------------------------------------
   Income tax expense                                  $    45,418        $    31,642        $     21,437
=========================================================================================================
</TABLE>


Taxes computed using the federal statutory rate of 35% in 1996, 1995 and 1994,
are reconciled to the Company's actual income tax expense attributable to
income before extraordinary charge as follows:

<TABLE>
<CAPTION>
                                                          1996                1995              1994
=========================================================================================================
<S>                                                    <C>                <C>                <C>
Tax expense computed at statutory rate                 $    43,294        $    31,597        $     20,504
Dividends received deduction                                  (860)               (85)                 (8)
Amortization of costs in excess of net assets acquired       2,796              2,295               1,834
Change in valuation allowance                               (1,265)            (5,102)             (2,388)
Foreign taxes net of U.S. tax benefit                        1,507              2,937               1,413
Other                                                          (54)                 -                  82
                                                       --------------------------------------------------
   Income tax expense                                  $    45,418        $    31,642        $     21,437
=========================================================================================================
</TABLE>


Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that give rise to the deferred tax liabilities
at December 31, 1996 and 1995, relate to the following:

<TABLE>
<CAPTION>
                                                           1996                           1995
==========================================================================================================
                                                DEFERRED        DEFERRED       DEFERRED         DEFERRED
                                                   TAX             TAX            TAX              TAX
                                                 ASSETS        LIABILITIES      ASSETS         LIABILITIES
                                                ---------------------------------------------------------
<S>                                             <C>            <C>            <C>              <C>
Deferred policy acquisition costs               $        -     $   72,676     $        -       $   47,635
Present value of insurance and force                     -         95,252              -           99,905
Future policy benefits                              65,999              -         85,266                -
Net operating losses                                38,557              -         35,524                -
Foreign and alternative minimum tax credits         21,252              -         16,030                -
Unrealized gain on investment securities                 -         13,650              -           15,478
Other                                               23,048         14,830         35,545           19,801
                                                ---------------------------------------------------------
                                                   148,856        196,408        172,365          182,819
Valuation allowance                                (15,892)             -        (17,157)               -
                                                ---------------------------------------------------------
                                                $  132,964     $  196,408     $  155,208       $  182,819
=========================================================================================================
</TABLE>


   
The valuation allowance for deferred tax assets as of January 1, 1996 and 1995
was $17,157 and $17,261, respectively. The net change in the total valuation
allowance for the years ended December 31, 1996 and 1995, was a decrease of
$1,265 and of $104, respectively. If recognized as a tax benefit, a portion of
the valuation allowance totaling $7,349 would be allocated to reduce costs in
excess of net assets acquired.
    

In assessing the realization of deferred taxes, management considers whether it
is more likely than not that some portion or all of the deferred tax assets
will be realized. The ultimate realization of deferred tax assets is dependent
on the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax
planning strategies in making this assessment. Based upon those considerations,
management believes it is more likely than not that the Company will realize
the benefits of these deductible differences, net of the existing valuation
allowance at December 31, 1996.

At December 31, 1996, the Company has life consolidated net operating loss
carryforwards of approximately $100,009 for tax return purposes. In addition,
OLIC and Peninsular have available, on a separate return basis, acquired net
operating loss



PENNCORP FINANCIAL GROUP, INC.


<PAGE>   54
   
                                                                       PAGE 54
    



Notes to Consolidated Financial Statements, continued


carryforwards of approximately $10,153. The utilization of acquired net
operating loss carryforwards is limited in any one year to the lesser of (i)
the life insurance group's consolidated taxable income or (ii) the subsidiary's
taxable income computed on a separate return basis.

The approximate net operating loss carryforwards for income tax purposes expire
as follows:

<TABLE>
<CAPTION>
                                                                             LIFE               LIFE
                                                                         CONSOLIDATED         SEPARATE
EXPIRATION DATE                                                             RETURN             RETURN
=========================================================================================================
<C>                                                                       <C>                <C>
2004                                                                      $         -        $      5,072
2005                                                                              533               4,981
2006                                                                                -                   -
2007                                                                           15,967                   -
2008                                                                           38,047                 100
2009                                                                            9,985                   -
2010                                                                                -                   -
2011                                                                           35,477                   -
                                                                          -------------------------------
                                                                          $   100,009        $     10,153
=========================================================================================================
</TABLE>


Under provisions of the Life Insurance Company Tax Act of 1959, certain special
deductions were allowed to life insurance companies for federal income tax
purposes. These special deductions were repealed by the Tax Reform Act of 1984,
and the untaxed balances were frozen at their December 31, 1983 levels. These
balances, aggregate approximately $42,301 for the Company's life insurance
subsidiaries, and are subject to taxation if certain levels of premium income
or life insurance reserves are not maintained, or if the life insurance
companies make excess distributions to shareholders. It is not expected that a
tax would become due on any such balance and no deferred income taxes have been
provided. However, if such tax were to become payable, it would amount to
approximately $14,805.


(11) PREFERRED STOCK

The Company issued 2,875,000 shares of $50 redemption value $3.50 Series II
Convertible Preferred Stock (the "Series II Convertible Preferred Stock") on
August 2, 1996. The Series II Convertible Preferred Stock is convertible at the
option of the holder, unless previously redeemed, into 1.4327 shares of common
stock for each share, subject to adjustment in certain events. Dividends
accrued and unpaid as of December 31, 1996, were $1,677. The carrying value of
the Series II Convertible Preferred Stock approximates market due to the
short-term nature of the instrument.

On July 25, 1995, the Company issued 127,500 shares of 10% Series B Preferred
Stock and 178,500 shares of 9% Series C Preferred Stock to fund a portion of
the Integon Life purchase price. The Series B Preferred Stock and the Series C
Preferred Stock are mandatorily redeemable on or before June 30, 1997 and June
30, 1998, respectively. The redemption price of the Series C Preferred Stock is
subject to certain offsets related to the Integon Life stock purchase
agreement. Dividends accrued and unpaid were $1,939 and $557 on the Series B
Preferred Stock and $2,175 and $700 on the Series C Preferred Stock,
respectively, as of December 31, 1996 and 1995.

The Company issued 2,300,000 shares of $50 redemption value $3.375 Convertible
Preferred Stock (the "Convertible Preferred Stock") on July 14, 1995. The
Convertible Preferred Stock is convertible at the option of the holder, unless
previously redeemed, into 2.2124 shares of common stock for each share, subject
to adjustment in certain events. Dividends accrued and unpaid as of December
31, 1996 and 1995 were $1,660. The carrying value of the Convertible Preferred
Stock approximates market due to the short-term nature of the instrument.

In conjunction with the acquisition of AA Life in August 1994, the Company
issued 450,000 shares of nonvoting Series A Preferred Stock, $0.01 per share
par value and $100 per share redemption value. The Series A Preferred Stock was
redeemed on August 25, 1995, from the proceeds received from the issuance of
the Convertible Preferred Stock. During 1995, and 1994, the Company paid or
accrued dividends amounting to $1,725 and $1,151, respectively.


(12) STOCK OPTIONS AND WARRANTS

The Company has established two management stock option plans, the 1992 Stock
Option Plan which set aside up to 475,635 shares for grant and the 1996 Stock
Option Plan which set aside up to 2,800,000 shares for grant. Options granted
under the 1992 Stock Option Plan are deemed to be in four equal units which are
earned over four years from the


                                                 PENNCORP FINANCIAL GROUP, INC.

<PAGE>   55
   
                                                                        PAGE 55
    


Notes to Consolidated Financial Statements, continued

date of grant and are exercisable during a one-year period immediately
following the fourth anniversary of the date of grant. The 1996 Stock Option
Plan allows for awards of stock or options subject to such terms, conditions,
and restrictions, and/or limitations, if any, as the Stock Option Committee of
the Board of Directors deems appropriate.

The Company has also established a senior management stock award plan ("Warrant
Plan"). The Warrant Plan allows for grants to senior executive officers of
PennCorp and Directors of PennCorp who are not executive officers of the
Company. Grant prices are determined based on the average price of the shares
traded on the date of grant. Warrants granted under the Warrant Plan are
determined by the Compensation Committee and are exercisable at such times and
in such amounts as the Compensation Committee shall determine, but no warrant
granted under the Warrant Plan will be exercisable more than ten years after
the date of grant. Upon change of control (as defined) of PennCorp, all
outstanding warrants become immediately vested and exercisable, and any
warrants that remain unexercised shall be canceled and replacement warrants
shall be issued by the surviving entity.

As part of an employment agreement effective August 1990, the Company issued to
a former officer of the Company, warrants to purchase up to 570,760 shares of
the common stock of the Company at any time up to 10 years from the date of the
agreement. The warrants are exercisable at a price of $4.00 per share which was
fair value on the date of grant.

The Company has established a U.S. Sales Manager incentive stock option plan in
which the senior sales manager of one of the Company's insurance subsidiaries
may earn stock options in the amount of 275,000 shares over a five-year period,
subject to achieving certain performance goals, in addition to an initial grant
of 100,000 options. Such options are vested immediately as earned, except for
the initial 100,000 which vest in September 1999, and option prices range from
$15 per share, for the initial 100,000 options, to the fair value of the common
stock of the Company on the date of grant for those shares subject to
performance goals.

The following table summarizes data relating to stock options and warrants
activity and associated weighted average option exercise price information for
the years ended December 31:

<TABLE>
<CAPTION>
                                                       1996                   1995                  1994
================================================================================================================
<S>                                           <C>          <C>        <C>         <C>       <C>          <C>
Number of shares subject to option/warrant:
   Outstanding at beginning of year           2,329,754    $ 10.86    2,261,981   $  9.61   2,221,034    $  8.78
   Granted                                       44,000    $ 31.09      110,000   $ 17.64     137,000    $ 15.84
   Expired/canceled                             (59,000)   $ 13.82      (42,227)  $ 13.43     (96,053)   $ 13.24
   Exercised                                   (147,867)   $  5.40        ---     $  ---        ---      $  ---
                                              ------------------------------------------------------------------
     Outstanding at end of year               2,166,887    $ 11.56    2,329,754   $ 10.86   2,261,981    $  9.61
================================================================================================================
Exercisable at end of year                    2,105,438    $ 11.00        ---     $  ---       ---       $  ---
================================================================================================================
Available for future grant at end of year     2,792,000                 144,063               262,024
================================================================================================================
</TABLE>


The following table summarizes information concerning outstanding and
exercisable options and warrants as of December 31, 1996:

<TABLE>
<CAPTION>
                     -------------------------------------------------------------------------------------
                              OPTIONS/WARRANTS OUTSTANDING                 OPTIONS/WARRANTS EXERCISABLE
                     -------------------------------------------------------------------------------------
                                        WEIGHTED          WEIGHTED                             WEIGHTED
  RANGE OF             NUMBER       AVERAGE REMAINING      AVERAGE           NUMBER             AVERAGE
EXERCISE PRICES      OUTSTANDING    CONTRACTUAL LIFE   EXERCISE PRICE      EXERCISABLE      EXERCISE PRICE
==========================================================================================================
<S>      <C>           <C>                 <C>               <C>              <C>                 <C>
 $4.00 - $5.40         893,887             5.8               4.51             893,887             4.51
$14.00 - $19.58      1,229,000             6.2              15.96           1,211,551            15.78
$27.25 - $32.43         44,000             8.4              31.70              ---                ---
----------------------------------------------------------------------------------------------------------
                     2,166,887                                              2,105,438
==========================================================================================================
</TABLE>


In accordance with the provisions of SFAS No. 123, the Company applies APB
Opinion 25 and related Interpretations in accounting for its stock option and
warrant plans and, accordingly, does not recognize compensation cost. If the
Company had elected to recognize compensation cost based on the fair value of
the options and warrants as of the grant date as prescribed by SFAS No. 123,
the reduction in net income applicable to common stock and earnings per share
would have been immaterial.



PENNCORP FINANCIAL GROUP, INC.
<PAGE>   56
   
                                                                        PAGE 56
    

Notes to Consolidated Financial Statements, continued


(13) STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS

Cash generated by the Company's insurance subsidiaries is made available to
PennCorp principally through periodic payments of principal and interest on
surplus debentures issued by PLAIC, Salem Life and Pioneer Security,
(collectively, the "Surplus Note Companies"). The amounts outstanding under the
surplus debentures totalled $367.9 million and $315.8 million as of December
31, 1996 and 1995, respectively. Surplus debentures generally require (subject
to availability of statutory capital and surplus and in some instances,
regulatory approval) principal and interest payments to be made periodically in
amounts sufficient to allow PennCorp to meet its cash requirements.

The Company's cash flow is derived principally from dividends and principal and
interest payments on the surplus debentures issued by the insurance
subsidiaries.

Dividend payments of the Company's insurance subsidiaries are limited by, or
subject to the approval of the insurance regulatory authority of each
subsidiary's state of domicile. Such dividend requirements and approval
processes vary significantly from state to state. In 1997, the insurance
subsidiaries will be able to pay a maximum of $27,165 in dividends to the
Company without prior regulatory approval. In 1997, the insurance subsidiaries,
subject to availability of cash and statutory capital and surplus, could pay a
maximum of $50,730 on surplus note payments to the Company.

Statutory capital and surplus of the Company's life insurance subsidiaries as
reported to regulatory authorities at December 31, 1996 and 1995, totaled
$305,126 and $167,753, respectively. Shareholders' equity of the Company's life
insurance subsidiaries included in the consolidated balance sheet totaled
$592,304 and $410,228 at December 31, 1996 and 1995, respectively. Statutory
net income (loss) of the Company's life insurance subsidiaries as reported to
regulatory authorities totaled $(21,330), $18,581 and $20,156 for the years
ended December 31, 1996, 1995 and 1994, respectively. Surplus note interest
expense of $51,254, $24,170 and $11,527 for the years ended December 31, 1996,
1995, and 1994, respectively, is included in statutory net income (loss).

The Company's Canadian branch and Canadian subsidiary report to Canadian
regulatory authorities based upon Canadian statutory accounting principles that
vary in some respects from U.S. statutory accounting principles. Consolidated
Canadian net assets based upon Canadian statutory accounting principles were
$51,567 and $43,186 as of December 31, 1996 and 1995, respectively.

Remittances to PLIC from the Canadian operations totaled $-, $2,485 and $5,761
for the years ended December 31, 1996, 1995 and 1994, respectively.


(14) RETIREMENT AND PROFIT SHARING PLANS

On October 1, 1990, the Company established a defined contribution retirement
plan (the "Defined Contribution Plan") for all employees of the Company who
have attained age 21, and for certain agents whose commission earnings
represent more than 50% of their income from the Company. Contributions to the
Defined Contribution Plan are made pursuant to salary deferral elections by
participants in an amount equal to 1% to 15% of their annual compensation. In
addition, the Company makes matching contributions in an amount equal to 50% of
each participant's salary deferral to a maximum of 3% of annual compensation.
The Defined Contribution Plan also provides for a discretionary employer profit
sharing contribution, which is determined annually by the Board of Directors
for the succeeding plan year. Profit sharing contributions are credited to
participant's accounts on the basis of their respective compensation in
accordance with a formula that provides a higher percentage contribution for
compensation in excess of the federal Social Security wage base. Salary
deferral contribution accounts are at all times fully vested, while matching
contribution accounts vest ratably from one to two years of service, and profit
sharing contribution accounts vest ratably from one to five years of service.
All participant accounts are fully vested at death, disability or attainment of
age 65. Payment of vested benefits under the Defined Contribution Plan may be
elected by a participant in a variety of forms of payment. The Company's
funding policy is to contribute annually an amount that can be deducted for
federal income tax purposes. Expenses related to this plan for the years ended
December 31, 1996, 1995 and 1994, amounted to $1,520, $1,335 and $1,105,
respectively.

The Company has an established bonus plan for insurance subsidiary officers.
The amount available to pay awards for any year is determined by a committee of
senior executives of the Company and is subject to the review and
recommendation of the Compensation Committee and approval of the Board of
Directors of the Company. Awards are based primarily on the income growth of
the Company and the performance of eligible participants. The Company accrued
or paid $1,144, $691 and $180 under this plan during the years ended December
31, 1996, 1995 and 1994, respectively.


                                                PENNCORP FINANCIAL GROUP, INC.

<PAGE>   57
   
                                                                        PAGE 57
    

Notes to Consolidated Financial Statements, continued

If the Company meets established performance goals, the Company's two most
senior officers are eligible to receive annual cash bonuses based primarily on
annual growth rates in fully diluted earning per share. Bonus awards range from
0% to 200% of a predetermined target annually. During 1996, the Company did not
accrue for such bonuses as the employment arrangements containing the bonus
plan are contingent upon the purchase by the Company of the Fickes and Stone
Knightsbridge Interests (see Notes 15 and 16 below).

Prior to its acquisition by the Company, Integon provided postretirement life
and health benefits for employees who retired at age 55 or later and agents who
retired at age 65 or later with 10 or more years of service. A closed group of
agent retirees under age 65 was also eligible for benefits. Spouses, surviving
spouses and dependent children were eligible for life and health benefits.
Retired employees under age 65 are covered by a health maintenance organization
under which benefits are generally paid at 100% after various copayments.
Retired agents or employees outside the service area are covered by a
self-funded indemnity plan which has a deductible with 20%-30% coinsurance.
Retirees contribute toward their own benefits and contributions are required
for spouses and dependent children. Under the plan, health benefits for
retirees are the same as before retirement, except amounts paid by Medicare are
excluded from consideration.
The plan was terminated as of the date of acquisition.

Postretirement benefits are accrued (but not funded) for eligible retirees. The
components of the accumulated postretirement benefit obligation as of December
31 were as follows:

<TABLE>
<CAPTION>
                                                                             1996                1995
=========================================================================================================
<S>                                                                       <C>                <C>
Retirees                                                                  $     5,279        $      5,253
Fully eligible active plan participants                                             -               1,778
Other active plan participants                                                      -                 658
                                                                          -------------------------------
   Accrued postretirement benefit obligation                              $     5,279        $      7,689
=========================================================================================================
</TABLE>


For the year ended December 31, 1996, the postretirement benefit liability was
calculated assuming an annual trend rate in health care inflation of 8% in 1997
grading down to 5.5% in 2000 and after. If the health care cost trend rate
assumption increased by 1%, the accumulated postretirement benefit obligation
as of December 31, 1996, would increase $198 or 3.8%.


(15) RELATED PARTY TRANSACTIONS

   
During 1995, two of the Company's officers and directors, Messrs. Stone and
Fickes, formed a fund, Knightsbridge Capital Fund I, L.P., ("Knightsbridge")
for the purpose of making equity and equity linked investments in companies
engaged primarily in the life insurance industry. Knightsbridge has received
subscriptions for approximately $92,000 in limited partnership interests,
including a $15,000 subscription from the Company. The general partner of
Knightsbridge is Knightsbridge Capital L.L.C. ("Knightsbridge Capital"), the
members of which are David J. Stone and Steven W. Fickes.  Allan D. Greenberg,
a member of the Company's Board of Directors, formerly owned a 5% interest in
Knightsbridge Capital which was purchased by Messrs. Stone and Fickes.  The
general partner of Knightsbridge cannot be removed by the limited partners,
unless a court has finally determined that the general partner has committed a
willful and material breach of the limited partnership agreement.  However, the
agreement provides that if either Mr. Stone or Mr. Fickes, or both, ceases to
be a member of Knightsbridge Capital or otherwise actively involved in the
management and operations of Knightsbridge, Knightsbridge may not subsequently
call additional capital from the limited partners.  However, the limited
partners have consented to the Company's proposed acquisition of Messrs.
Stone's and Fickes' interests in Knightsbridge Capital.
    

In the second half of 1995, the Company and Knightsbridge determined that a
joint venture strategy was in the best interest of both parties. As part of
that joint venture, Knightsbridge provides PennCorp with a right of first
refusal with respect to all insurance transactions considered by Knightsbridge.
The joint venture entity formed for this purpose is Knightsbridge Management,
L.L.C. ("KM"). PennCorp participates in 45% of the net distributable income of
KM.

The Company has established an independent committee of the Board of Directors
to oversee the relationship between PennCorp and Knightsbridge. KM has the
primary responsibility for negotiating the terms of, and arranging the
financing for PennCorp or PennCorp/Knightsbridge shared transactions. Certain
of those individuals involved in the daily operations of KM are also officers
of the Company.

KM receives management fees from all of its limited partners, including the
Company, for the management of Knightsbridge. KM also receives payment in kind
consideration in lieu of additional management fees from PennCorp for providing
corporate and financial management services to the Company. Fees received by KM
from the Knightsbridge limited partners including PennCorp, as well as the
management fees paid in kind by the Company are subject to offset in future
periods based upon a portion of transaction fees generated by KM.

In February 1996, the PennCorp Board of Directors (the "PennCorp Board") and the
principals of Knightsbridge began discussions on consolidating Messrs. Stone's
and Fickes' outside interests under PennCorp. Such discussions culminated in a
restructuring of the Knightsbridge relationship including the following
completed and pending transactions (see Note 16) (i) Messrs. Stone and Fickes
entered into five-year employment agreements, (ii) the proposed acquisition of
the Fickes and Stone Knightsbridge Interests, (iii) the proposed acquisition of
the Fickes and Stone interests in SW Financial, subject to certain
contingencies, and (iv) the purchase by the Company, from the limited partners
of Knightsbridge, the right to acquire UC Life for $7,500.


PENNCORP FINANCIAL GROUP, INC.
<PAGE>   58
   
                                                                        PAGE 58
    

Notes to Consolidated Financial Statements, continued


For the years ended December 31, 1996 and 1995, PennCorp paid or accrued $2,548
and $3,900 in transaction fees to KM related to the UC Life and SW Financial
transactions, respectively. During 1996, certain of the Company's affiliates and
subsidiaries paid management fees to KM amounting to $2,190 which have been
contingently expensed in the accompanying financial statements pending the
shareholder vote on the acquisition of the Fickes and Stone Knightsbridge
Interests. SW Financial and UC Life incurred KM investment advisory fees
totalling $2,426 and $- during 1996 and 1995, respectively. In addition,
PennCorp received a $1,000 stand-by commitment fee from SW Financial for
contingent financing on a real estate transaction. SW Financial did not draw
upon the commitment.

As required by the joint venture agreement, all bonuses paid to officers of KM
who are also officers of PennCorp must be approved by the Compensation
Committee of the Board of Directors of PennCorp. During 1995, the Company paid
or accrued for KM incentive bonuses to certain individuals who are officers of
PennCorp and KM of approximately $2,400.

In August 1995, the Company sold its preferred and common stock position in a
company which has historically provided investment management services to the
PennCorp insurance subsidiaries and for which a senior executive officer of the
investment management firm is a member of the PennCorp Board of Directors. Fees
paid for such investment management services amounted to $895, $738 and $789
during 1996, 1995 and 1994, respectively.

Certain individuals, who are shareholders, directors and officers of PennCorp,
and affiliates of these individuals, provide services to the Company. During
1996 and 1995, payments aggregating $250 and $210, respectively, were made to
these individuals and their affiliates for services provided in connection with
the Company's acquisition activity. During 1994, fees amounting to $813 were
paid in connection with the establishment of PennCorp's Canadian subsidiary,
the acquisition of AA Life, and certain reinsurance transactions.


(16) OTHER COMMITMENTS AND CONTINGENCIES

On January 22, 1997, the Company filed with the Securities and Exchange
Commission ("SEC"), a preliminary PennCorp Financial Group, Inc. and Washington
National Corporation Joint Proxy Statement and Prospectus ("Joint Proxy
Statement") in which the Company, pending final review by the SEC, will be
soliciting shareholder approval for the following transactions: (i) the
Washington National Merger, (ii) the acquisition of the Controlling Interest in
SW Financial, (iii) the acquisition of the Fickes and Stone Knightsbridge
Interests, and (iv) other items.

Under the terms of the amended and restated Washington National Merger
agreement, Washington National shareholders will receive the right to receive
$29.50 per share of consideration in the form of cash, PennCorp Common Stock,
or a combination of cash and PennCorp Common Stock. The aggregate consideration
to be received by the Washington National shareholders will be approximately
$377,000, of which no more than $100,000 will be payable in cash.

PennCorp will receive its right to acquire the Controlling Interest in SW
Financial through the assignment by Fickes and Stone and Knightsbridge ("the
Controlling Parties") of certain rights including common stock and common stock
equivalents of SW Financial. The Controlling Parties will receive aggregate
cash consideration ranging from $67,500 to $69,600 (not including expenses)
depending upon the outcome of certain contingencies.

   
In addition, PennCorp has proposed to acquire the Fickes and Stone
Knightsbridge Interests for total consideration estimated to be $10,000. Fickes
and Stone will each receive consideration in the form of estimated annual
payments of $330 due April 15, 1997, each year through 2001 and the by issuance
by PennCorp of 173,160 shares of PennCorp Common Stock to each of Fickes and
Stone on April 15, 2001.
    

   
It is anticipated that PennCorp common shareholders will vote on the above
transactions in June 1997, and, subject to shareholder approval, the Company
intends to consummate such transactions as expeditiously as possible.
    

The Company and its subsidiaries are obligated under operating leases,
primarily for office space. Rent expense, net of sublease income, was $8,416,
$8,489 and $7,172 in 1996, 1995 and 1994, respectively.


                                                PENNCORP FINANCIAL GROUP, INC.

<PAGE>   59
   
                                                                        PAGE 59
    


Notes to Consolidated Financial Statements, continued

<TABLE>
<CAPTION>
Minimum lease commitments are:
<C>                                                                                          <C>
1997                                                                                         $      8,806
1998                                                                                                4,269
1999                                                                                                2,852
2000                                                                                                1,716
2001                                                                                                  796
2002 and thereafter                                                                                   177
                                                                                             ------------
Total minimum payments required*                                                             $     18,616
=========================================================================================================
</TABLE>

* Total minimum lease payments have not been reduced by minimum sublease
  rentals of $947 due in the future under noncancelable subleases.

   
In January 1996, stockholder derivative lawsuits styled Tozour Energy Systems
Retirement Plan v. David J. Stone et al, and the PennCorp Financial Group,
Inc., C.A. No. 14775 (the "Tozour Case") and Lois Miller v. David J. Stone et
al, and the PennCorp Financial Group, Inc., C.A. No. 14795 (the "Miller
Complaint") were filed against the Company and each of its directors,
individually, in the Delaware Court of Chancery. The complaint in the Miller
suit has not yet been served on the Company or the other defendants.  Both
suits allege that the SW Financial Investment involved the usurpation of a
corporate opportunity and a waste of the Company's assets by Messrs. Stone and
Fickes, and that the directors of the Company in approving that transaction,
failed to act in good faith and breached their fiduciary duties, including the
duty of loyalty to the Company and its stockholders, having favored the
interests of Messrs. Stone and Fickes over the Company and its stockholders.
These lawsuits seek judgments against each of the defendants for the amount of
damages sustained, or to be sustained, by the Company as a result of the
breaches of fiduciary duty alleged in the complaint, the imposition of a
constructive trust for the benefit of the Company on profits or benefits
obtained by any defendant through the alleged breaches of fiduciary duty,
attorney's fees and costs, and such other relief as the court determines to be
just, proper or equitable.
    

   
The defendants in the Tozour Case have filed a motion seeking its dismissal on
the ground that the plaintiff failed to comply with the requirements of
Delaware law before instituting a derivative suit and intend to defend the
lawsuit vigorously. Because the Company has not been served with the Miller
complaint, no action has been taken in that case, although the Company would
also defend it vigorously. The defendants believe, however, that it would not
be in the best interests of the Company and its shareholders to expend
considerable management and director time and to incur substantial expenses to
litigate the actions. Consequently, the Company's legal advisors have met or
spoken by telephone with the plaintiffs' counsel on several occasions to
discuss the terms of a potential settlement.
    

   
The defendants and the plaintiffs' counsel entered into a Stipulation and
Agreement of Compromise and Settlement dated March 28, 1997 (the "Proposed
Settlement") of the shareholder derivative actions. The Proposed Settlement
consists of the following principal elements: (i) Messrs. Stone and Fickes will
cancel the 335,564 SW Financial common stock warrants they hold for no
consideration enabling the Company to purchase the SW Financial Controlling
Interest for $67.5 million, reducing the price to be paid by the Company for
the SW Financial Controlling Interest by approximately $2.0 million, (ii) the
Company's Board of Directors will proceed with the purchase of The Fickes and
Stone Knightsbridge Interests, having received a fairness opinion of a
nationally recognized investment banking firm with respect to the price to be
paid for The Fickes and Stone Knightsbridge Interests, (iii) the Company's
Board of Directors will proceed with the acquisition of the SW Financial
Controlling Interest, having received a fairness opinion of a nationally
recognized investment banking firm with respect to the price to be paid for the
SW Financial Controlling Interest; (iv) the Company's Board of Directors will
submit the purchase of The Fickes and Stone Knightsbridge Interests and the SW
Financial Controlling Interest to a vote of a majority of the Company's
stockholders present at the stockholders meeting and entitled to vote, and
stockholders must approve both transactions, (v) Messrs. Stone and Fickes will
abstain from voting on the proposals to approve the purchase of The Fickes and
Stone Knightsbridge Interests and the SW Financial Controlling Interest, and
(vi) the plaintiffs' counsel will be entitled to conduct confirmatory
discovery.
    

Certain other lawsuits have been brought against the Company's life insurance
and non-life subsidiaries in the normal course of business involving the
settlement of various matters seeking compensatory and in some cases punitive
damages. Management believes that the ultimate settlement of all such
litigation will not have a materially adverse effect on the Company's
consolidated financial position or results of operations.

Effective January 1, 1996, the Company outsourced the vast majority of its data
center operations and administrative systems programming to a third party
vendor. The processing agreement extends through December 2002 and requires the
Company or its insurance subsidiaries to make payments ranging from
approximately $8,399 to $9,248 during each of the contract years. The contract
has standard provisions for early cancellation, including breakage fees. As
part of the outsourcing agreement, the Company has agreed to provide a line of
credit which may be drawn upon during the first two years, with repayment in
nearly equal monthly installments over the remainder of the contract.

The Company has agreed to provide guarantees of indebtedness of certain
officers and directors up to a maximum of $10,000.

PENNCORP FINANCIAL GROUP, INC.

<PAGE>   60
   
                                                                        PAGE 60
    


Notes to Consolidated Financial Statements, continued


The life insurance companies are required to be members of various state
insurance guaranty associations in order to conduct business in those states.
These associations have the authority to assess member companies in the event
that an insurance company conducting business in that state is unable to meet
its policyholder obligations. Assessments from guaranty associations, which
have not been material, are recorded as assessments when received.

The Company has guaranteed approximately $12,800 in mortgage loans sold to
third parties.


(17)  REINSURANCE

In the normal course of business, the Company reinsures portions of certain
policies that it underwrites to limit disproportionate risks. The Company
retains varying amounts of individual insurance up to a maximum retention of
$300 on any life. Amounts not retained are ceded to other insurance enterprises
or reinsurers on an automatic or facultative basis.

The Company cedes varying amounts of certain accident and sickness policies up
to a maximum cession of $240, as well as varying portions of certain disability
income policies on a facultative basis.

Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Therefore, the Company is contingently liable for recoverable
unpaid claims and policyholder liabilities ceded to reinsurers in the unlikely
event that assuming reinsurers are unable to meet their obligations. The
Company evaluates the financial condition of its reinsurers to minimize its
exposure to significant losses from reinsurer insolvencies. The effect of
reinsurance on policy revenues earned is as follows:

<TABLE>
<CAPTION>
                                                           1996                 1995             1994
=========================================================================================================
<S>                                                    <C>                <C>                <C>
Direct policy revenues and amounts
   assessed against policyholders                      $   358,825        $   310,693        $    250,167
Reinsurance assumed                                          1,320              2,307                 765
Reinsurance ceded                                           12,055             11,111               6,510
                                                       --------------------------------------------------
     Net premiums and amounts earned                   $   348,090        $   301,889        $    244,422
=========================================================================================================
</TABLE>


Fees incurred for financial reinsurance were approximately, $265 in 1996, $339
in 1995, and $515 in 1994.



                                                PENNCORP FINANCIAL GROUP, INC.

<PAGE>   61
   
                                                                        PAGE 61
    

UNAUDITED QUARTERLY FINANCIAL DATA


The following is a summary of the quarterly results of operations for the two
years ended December 31, 1996 and 1995:

(Amounts in thousands, except per share information)
<TABLE>
<CAPTION>
1996 QUARTER-ENDED                               MARCH 31         JUNE 30     SEPTEMBER 30     DECEMBER 31
==========================================================================================================
<S>                                               <C>            <C>            <C>             <C>
Total revenues                                    $132,178       $137,424       $148,370        $ 172,172
Net income before extraordinary charge            $ 20,154       $ 25,917       $ 22,564        $  30,748
Net income applicable to common stock             $ 16,647       $ 23,208       $ 18,006        $  24,504
                                                  =======================================================
Net income per share of common stock - primary    $   0.66       $   0.80       $   0.61        $    0.84
                                                  =======================================================
Net income per share of common stock -
   fully diluted                                  $   0.60       $   0.73       $   0.58        $    0.76
=========================================================================================================
</TABLE>



<TABLE>
<CAPTION>
1995 QUARTER-ENDED                                MARCH 31        JUNE 30     SEPTEMBER 30     DECEMBER 31
==========================================================================================================
<S>                                               <C>            <C>            <C>             <C>
Total revenues                                    $ 88,694       $ 88,730       $120,112        $  124,802
Net income before extraordinary charge            $ 11,966       $ 15,022       $ 20,698        $   15,667
Net income applicable to common stock             $ 11,100       $ 15,022       $ 18,740        $   12,810
                                                  ========================================================
Net income per share of common stock - primary    $   0.54       $   0.60       $   0.79        $     0.54
                                                  ========================================================
Net income per share of common stock -
    fully diluted                                 $     -        $      -       $   0.73        $     0.51
==========================================================================================================
</TABLE>
<PAGE>   62
   
                                                                         PAGE 62
    



   
WE WILL BE IN A POSITION TO RENDER THE FOLLOWING REPORT UPON FINAL COMPLETION
OF OUR AUDIT PROCEDURES.
    

















   
                          INDEPENDENT AUDITORS' REPORT
    


   
Board of Directors
Southwestern Financial Corporation:
    

   
We have audited the accompanying consolidated balance sheet of Southwestern
Financial Corporation and subsidiaries as of December 31, 1996 and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
    

   
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
    

   
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Southwestern
Financial Corporation and subsidiaries as of December 31, 1996 and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
    













   
Dallas, Texas
March 14, 1997
    





<PAGE>   63
   
                                                                         PAGE 63
    


   
              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                        as of December 31, 1996 and 1995
                    (In thousands, except share information)
    

   
<TABLE>
<CAPTION>
                                          ASSETS                                                          1996             1995
                                                                                                     -------------    -------------
                                                                                                                       (UNAUDITED)
<S>                                                                                                   <C>             <C>
Investments:
  Fixed maturities available for sale at fair value (cost $1,270,507 and $1,165,724)  . . . . .        $ 1,255,270    $  1,169,478
  Equity securities available for sale at fair value (cost $959 and $2,173) . . . . . . . . . .              1,129           2,149
  Mortgage loans on real estate, net  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             59,993          99,969
  Policy loans  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            128,551         137,466
  Cash and short-term investments   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            161,895         196,370
  Collateral loans  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             21,308          41,308
  Investment in limited partnership   . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                --           39,600
  Real estate   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              7,292          17,318
  Other investments   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              5,553           6,879
                                                                                                       -----------    ------------
    Total investments   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          1,640,991       1,710,537

Due from reinsurers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            259,288         152,866
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             20,802          21,379
Accounts and notes receivable (net of allowance of $561 and $660) . . . . . . . . . . . . . . .             13,773           2,509
Present value of insurance in force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             71,333         115,831
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             15,095             --
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             48,079          55,500
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              1,907           2,338
Other assets  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             16,642          26,195
Costs in excess of net assets acquired  . . . . . . . . . . . . . . . . . . . . . . . . . . . .            122,640         126,869
                                                                                                       -----------    ------------
    Total assets  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $ 2,210,550    $  2,214,024
                                                                                                       ===========    ============

                                       LIABILITIES
Policy liabilities and accruals:
  Future policy benefits on traditional products  . . . . . . . . . . . . . . . . . . . . . . .        $   584,179    $    632,259
  Universal life and investment contract liabilities  . . . . . . . . . . . . . . . . . . . . .          1,088,335       1,106,447
  Policy and contract claims    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             55,011          62,140
  Other policyholder funds  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             17,635          20,446
                                                                                                       -----------    ------------
    Total policy liabilities and accruals   . . . . . . . . . . . . . . . . . . . . . . . . . .          1,745,160       1,821,292
Federal income taxes payable  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              9,118           3,900
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            159,750         160,000
Accrued expenses and other liabilities  . . . . . . . . . . . . . . . . . . . . . . . . . . . .            118,119          70,900
                                                                                                       -----------    ------------
    Total liabilities   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          2,032,147       2,056,092
                                                                                                       -----------    ------------

Mandatorily redeemable preferred stock:
  Series A 10%, $.01 par value, $100 redemption value; 500,000 shares authorized, 232,890
    and 210,990 issued and outstanding at December 31, 1996 and 1995, respectively. . . . . . .             23,289          21,099
  5.5% preferred stock $.01 par value, $10,000 and $100 redemption value; 2,000 and
    200,000 shares authorized, 1,059 and 100,260 shares issued and outstanding at
    December 31, 1996 and 1995, respectively  . . . . . . . . . . . . . . . . . . . . . . . . .             10,590          10,026

                                   SHAREHOLDERS' EQUITY

Common Stock, Class A, $.01 par value; 18,000,000 shares authorized;
  3,500,000 shares issued and outstanding   . . . . . . . . . . . . . . . . . . . . . . . . . .                 35              35
Common Stock, Class B, non-voting $.01 par value; 10,000,000 shares authorized;
  8,400,000 shares issued and outstanding   . . . . . . . . . . . . . . . . . . . . . . . . . .                 84              84
Additional paid in capital  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            123,191         123,191
Unrealized gains (losses) on securities available for sale,
  net of tax (benefit) of ($4,224) and $1,300   . . . . . . . . . . . . . . . . . . . . . . . .             (8,081)          2,413
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             29,295           1,084
                                                                                                       -----------     -----------
    Total shareholders' equity  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            144,524         126,807
                                                                                                       -----------     -----------
    Total liabilities and shareholders' equity  . . . . . . . . . . . . . . . . . . . . . . . .        $ 2,210,550     $ 2,214,024
                                                                                                       ===========     ===========
</TABLE>
    


   
          See accompanying Notes to Consolidated Financial Statements.
    



<PAGE>   64
   
                                                                         PAGE 64
    


   
              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENT OF INCOME
                      for the Year Ended December 31, 1996
                                 (In thousands)
    


   
<TABLE>
<S>                                                                                             <C>
Revenues:
  Premiums  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $  152,803
  Interest sensitive policy product charges   . . . . . . . . . . . . . . . . . . . . . . .         44,109
  Net investment income   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        128,972
  Net gains from sale of investments  . . . . . . . . . . . . . . . . . . . . . . . . . . .            516
  Other income, including $15,811 in earnings of limited partnership  . . . . . . . . . . .         27,439
                                                                                                ----------
    Total revenues  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        353,839
                                                                                                ----------

Benefits and expenses:
  Policyholders benefits  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        197,844
  Amortization of present value of insurance
    in force and deferred policy acquisition costs  . . . . . . . . . . . . . . . . . . . .         23,392
  Amortization of costs in excess of net assets acquired  . . . . . . . . . . . . . . . . .          4,229
  Underwriting and other administrative expenses  . . . . . . . . . . . . . . . . . . . . .         65,110
  Interest and amortization of deferred debt issuance costs   . . . . . . . . . . . . . . .         14,052
                                                                                                ----------
    Total benefits and expenses   . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        304,627
                                                                                                ----------

Income before income taxes  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         49,212
Income taxes  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         18,247
                                                                                                ----------
    Net income  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         30,965
Preferred stock dividend requirements . . . . . . . . . . . . . . . . . . . . . . . . . . .         (2,754)
                                                                                                ----------
    Net income available to common shareholders   . . . . . . . . . . . . . . . . . . . . .     $   28,211
                                                                                                ==========
</TABLE>
    

   
          See accompanying Notes to Consolidated Financial Statements.
    





<PAGE>   65
   
                                                                         PAGE 65
    


   
              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
           CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
                      for the year ended December 31, 1996
                                 (In thousands)
    


   
<TABLE>
<CAPTION>
                                                                                       UNREALIZED
                                                                                      GAIN (LOSS)
                                                 COMMON       COMMON     ADDITIONAL  ON SECURITIES
                                                  STOCK        STOCK      PAID IN      AVAILABLE      RETAINED
                                                 CLASS A      CLASS B     CAPITAL    FOR SALE, NET    EARNINGS     TOTAL
                                               -----------  ----------   ----------  -------------  -----------  ---------
<S>                                            <C>          <C>          <C>          <C>           <C>         <C>
Balance at December 31, 1995  . . . .          $        35  $       84   $  123,191   $     2,413   $     1,084  $ 126,807
Net income  . . . . . . . . . . . . .                  --          --           --            --         30,965     30,965
Preferred dividends . . . . . . . . .                  --          --           --            --         (2,754)    (2,754)
Unrealized loss on securities
  available for sale, net   . . . . .                  --          --           --        (10,494)          --     (10,494)
                                               -----------  ----------   ----------   -----------   -----------  ---------

Balance at December 31, 1996  . . . .          $        35  $       84   $  123,191   $    (8,081)  $    29,295  $ 144,524
                                               ===========  ==========   ==========   ===========   ===========  =========
</TABLE>
    

   
          See accompanying Notes to Consolidated Financial Statements.
    





<PAGE>   66
   
                                                                         PAGE 66
    


   
              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                      for the Year Ended December 31, 1996
                                 (In thousands)
    



   
<TABLE>
<S>                                                                                              <C>
Cash flows from operating activities:
  Net income  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $   30,965
  Adjustments to reconcile net income to net cash provided (used) by operating activities:
    Adjustments relating to universal life and investment products:
      Interest credited to account balances   . . . . . . . . . . . . . . . . . . . . . . . .        56,203
      Charges for mortality and administration  . . . . . . . . . . . . . . . . . . . . . . .       (50,689)
    Capitalization of deferred policy acquisition costs   . . . . . . . . . . . . . . . . . .       (16,806)
    Amortization of intangibles, depreciation and accretion, net  . . . . . . . . . . . . . .        29,246
    Decrease in policy liabilities, accruals and other policyholder funds   . . . . . . . . .       (54,427)
    Decrease in accrued expenses and other liabilities  . . . . . . . . . . . . . . . . . . .        (7,477)
    Increase in notes and accounts receivable and accrued
      investment income   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        (3,000)
    Increase in taxes payable   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         5,218
    Deferred income taxes   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        12,945
    Equity in undistributed earnings of limited partnership   . . . . . . . . . . . . . . . .       (15,811)
    Net gains from sales of investments   . . . . . . . . . . . . . . . . . . . . . . . . . .          (516)
    Other, net  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         7,916
                                                                                                 ----------
      Net cash used by operating activities   . . . . . . . . . . . . . . . . . . . . . . . .        (6,233)
                                                                                                 ----------
Cash flows from investing activities:
  Sales of fixed maturities available for sale  . . . . . . . . . . . . . . . . . . . . . . .       178,306
  Maturities and other redemptions of fixed maturities available for sale   . . . . . . . . .        20,893
  Sales and principal repayments of mortgages, real estate and other investments  . . . . . .        61,965
  Distributions from limited partnership  . . . . . . . . . . . . . . . . . . . . . . . . . .        53,520
  Purchases of fixed maturities available for sale  . . . . . . . . . . . . . . . . . . . . .      (323,585)
  Purchases of other investments  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          (694)
                                                                                                 -----------
      Net cash used by investing activities   . . . . . . . . . . . . . . . . . . . . . . . .        (9,595)
                                                                                                 ----------
Cash flows from financing activities:
  Receipts from interest sensitive products credited to policyholders' account balances   . .        99,409
  Return of policyholders' account balances on interest sensitive products  . . . . . . . . .      (117,806)
  Reduction of notes payable  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          (250)
                                                                                                 ----------
      Net cash used by financing activities   . . . . . . . . . . . . . . . . . . . . . . . .       (18,647)
                                                                                                 ----------
Decrease in cash and short-term investments . . . . . . . . . . . . . . . . . . . . . . . . .       (34,475)
Cash and short-term investments at beginning of period  . . . . . . . . . . . . . . . . . . .       196,370
                                                                                                 ----------
Cash and short-term investments at end of year  . . . . . . . . . . . . . . . . . . . . . . .    $  161,895
                                                                                                 ==========

Supplemental disclosures:
  Income taxes paid   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $       84
  Interest paid   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        12,714
Non-cash financing activities:
  Preferred stock issued as dividends   . . . . . . . . . . . . . . . . . . . . . . . . . . .         2,754
</TABLE>
    

   
          See accompanying Notes to Consolidated Financial Statements.
    





<PAGE>   67
   
                                                                        PAGE 67
    


   
              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1996
             ( Data with respect to December 31, 1995 is unaudited)
                                 (In thousands)
    

   
1. BASIS OF PRESENTATION
    

   
On December 14, 1995 (the acquisition date), Southwestern Financial Corporation
(SWF or the Company), a newly organized corporation, was formed by PennCorp
Financial Group, Inc. (PennCorp) and Knightsbridge Capital Fund I, L.P.
(Knightsbridge). Its wholly-owned subsidiary, Southwestern Life Acquisition
Corp. (SLAC), was formed to acquire from I.C.H. Corporation (ICH), Southwestern
Life Insurance Company (Southwestern Life) and its wholly-owned subsidiary,
Constitution Life Insurance Company (Constitution) and its 83% owned
subsidiary, ICH Funding Corp. (ICH Funding), and Union Bankers Insurance
Company (Union Bankers) and its wholly-owned subsidiary, Marquette National
Life Insurance Company (Marquette). In addition, a wholly-owned subsidiary of
SWF acquired from ICH substantially all of the assets and liabilities of
Facilities Management Installation, Inc. (FMI), which had provided management
services to ICH's insurance companies. The acquisition was accounted for as a
purchase in accordance with generally accepted accounting principles (GAAP)
and, accordingly, the purchase price was allocated to assets and liabilities
acquired based on estimates of their fair value as of the acquisition date,
which became the new cost basis. Subsequently, the insurance companies were
reorganized such that Constitution became the parent of Southwestern Life and
Union Bankers.
    

   
SWF and its subsidiaries market and underwrite a broad range of life insurance,
annuities and accident and health products to individuals through a sales force
of independent agents. The insurance subsidiaries are licensed to write
business in 48 states, the District of Columbia and Guam. Approximately 24% of
the total direct premium of the Company's insurance subsidiaries was generated
from business written in Texas. No other states accounted for more than 10% of
the direct premium of the Company in 1996.
    

   
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries and ICH Funding. Minority interest in
ICH Funding, totaling $1,486 and $1,174 at December 31, 1996 and 1995,
respectively, are included in accrued expenses and other liabilities. All
significant intercompany accounts and transactions have been eliminated.
    

   
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the reported amounts of revenues and expenses
during the reporting period. Accounts that the Company deems to be acutely
sensitive to changes in estimates include deferred policy acquisition costs,
future policy benefits, policy and contract claims and present value of
insurance in force. In addition, the Company must determine requirements for
disclosure of contingent assets and liabilities as of the date of the financial
statements based upon estimates. In all instances, actual results could differ
from estimates.
    

   
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
    

   
(a) Investments
    

   
         Fixed maturity and equity securities classified as available for sale
         are recorded at fair value, as they may be sold in response to changes
         in interest rates, prepayment risk, liquidity needs, the need or
         desire to increase income or capital and other economic factors.
         Changes in unrealized gains and losses related to securities available
         for sale are recorded as a separate component of shareholders' equity,
         net of applicable taxes and amount attributable to deferred policy
         acquisition costs and present value of insurance in force related to
         universal life and investment-type products. Mortgage-backed
         securities are amortized using the interest method including
         anticipated prepayments at the date of purchase. Significant changes
         in estimated cash flows from original assumptions are reflected in the
         period of such change. Mortgage loans on real estate are
    





<PAGE>   68
   
                                                                         PAGE 68
    


   
              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
             (Data with respect to December 31, 1995 is unaudited)
    


   
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    

   
         recorded at cost, adjusted for amortization of premium or discount and
         provision for loan losses, if necessary.  Policy loans are recorded at
         cost. Short-term investments purchased with maturities generally less
         than three months are recorded at cost, which approximates market. All
         short-term investments are considered to be cash equivalents.
    

   
         Real estate, substantially all of which was acquired through
         foreclosure, is recorded at the lower of fair value, minus estimated
         costs to sell, or cost. If the fair value of the foreclosed real
         estate minus estimated costs to sell is less than cost, a valuation
         allowance is provided for the deficiency. Increases in the valuation
         allowance are charged to income.
    

   
         Investment in a limited partnership is reflected on the equity method.
    

   
         Collateral loans are carried at their aggregate unpaid principal
         balances.
    

   
         The Company regularly evaluates investments based on current economic
         conditions, past credit loss experience and other circumstances. A
         decline in net realizable value that is other than temporary is
         recognized as a realized investment loss and a reduction in the cost
         basis of the investment. The Company discounts expected cash flows in
         the computation of net realizable value of its investments, other than
         certain mortgage-backed securities. In those circumstances where the
         expected cash flows of residual interest and interest-only
         mortgage-backed securities, discounted at a risk-free rate of return,
         result in an amount less than the carrying value, a realized loss is
         reflected in an amount sufficient to adjust the carrying value of a
         given security to its fair value.
    

   
         Realized investment gains and losses and declines in value which are
         other than temporary, determined on the basis of specific
         identification, are included in the determination of net income.
    

   
(b) Insurance Revenue Recognition
    

   
         Accident and health insurance premiums are recognized as revenue
         ratably over the time period to which premiums relate. Revenues from
         traditional life insurance policies represent premiums which are
         recognized as earned when due. Benefits and expenses are associated
         with earned premiums so as to result in recognition of profits over
         the lives of the policies. This association is accomplished by means
         of the provision for liabilities for future policy benefits and the
         deferral and amortization of policy acquisition costs.
    

   
         Revenues for interest sensitive products such as universal life and
         annuity contracts represent charges assessed against the
         policyholders' account balance for the cost of insurance, surrenders
         and policy administration. Benefits charged to expenses include
         benefit claims incurred during the period in excess of policy account
         balances and interest credited to policy account balances.
    

   
(c) Policy Liabilities and Accruals
    

   
         Liabilities for future policy benefits for traditional life products
         generally have been computed on the net level premium method, based on
         estimated future investment yield, mortality, and withdrawals. For
         accident and health products, liabilities for future policy benefits
         are established equal to the excess of the present value of future
         benefits to or on behalf of policyholders over discounted net future
         premiums. Estimates used are based
    





<PAGE>   69
   
                                                                         PAGE 69
    

   
              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
             (Data with respect to December 31, 1995 is unaudited)
    


   
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    

   
         on the Company's experience adjusted to provide for possible adverse
         deviation. These estimates are periodically reviewed and compared with
         actual experience. Liabilities for future policy benefits for interest
         sensitive products include the balance that accrues to the benefit of
         the policyholders and amounts that have been assessed to compensate
         the life insurance subsidiaries for services to be provided in the
         future.
    

   
         Policy and contract claims represent estimates of reported claims and
         claims incurred but not reported based on experience.
    

   
(d) Accounts and Notes Receivable
    

   
         Accounts and notes receivable consist primarily of agents' balances
         and premium receivable from agents and policyholders. Agents' balances
         are partially secured by commissions due to agents in the future and
         premiums receivable are secured by policy liabilities. An allowance
         for doubtful accounts is established, based upon specific
         identification and general provision, for amounts which the Company
         estimates will not ultimately be collected.
    

   
(e) Deferred Policy Acquisition Costs
    

   
         Estimated costs of acquiring new business which vary with, and are
         primarily related to, the production of new business, have been
         deferred to the extent that such costs are deemed recoverable from
         future revenues. Such estimated costs include commissions and certain
         costs of policy issuance and underwriting. Costs deferred on accident
         and health and traditional life policies are amortized, with interest,
         over the anticipated premium-paying period of the related policies in
         proportion to the ratio of annual premium revenue to expected total
         premium revenue to be received over the life of the policies. Expected
         premium revenue is estimated by using the same mortality, morbidity
         and withdrawal assumptions used in computing liabilities for future
         policy benefits. For interest sensitive products and limited pay life
         products, policy acquisition costs are amortized in relation to the
         emergence of anticipated gross profits over the life of the policies.
    

   
(f) Present Value of Insurance In Force
    

   
         The present value of insurance in force represents the anticipated
         gross profits to be realized from future revenues on insurance in
         force at the date such insurance was purchased, discounted to provide
         an appropriate rate of return and amortized, with interest, based on
         policy liability or contract rate, over the years that such profits
         are anticipated to be received in proportion to the estimated gross
         profits.
    

   
(g) Deferred Debt Issuance Costs
    

   
         Deferred debt issuance costs, which are included in other assets,
         represent costs incurred in connection with obtaining long-term debt
         financing which have been capitalized and are being amortized on an
         interest yield method over the terms of the respective debt. Deferred
         costs totaled $3,309 and $4,110 which are net of accumulated
         amortization of $801 and $0 at December 31, 1996 and 1995,
         respectively.
    





<PAGE>   70
   
                                                                         PAGE 70
    


   
              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
             (Data with respect to December 31, 1995 is unaudited)
    


   
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    

   
(h) Costs in Excess of Net Assets Acquired
    

   
         Costs in excess of the fair value of net assets acquired are amortized
         on a straight-line basis over 30 years.  Accumulated amortization
         totaled $4,229 and $0 at December 31, 1996 and 1995, respectively.
    

   
(i) Property and Equipment
    

   
         These assets consist of electronic data processing equipment,
         furniture, and other equipment, and are carried at cost, less
         accumulated depreciation. Depreciation is provided using the
         straight-line method over the estimated useful lives of these assets.
    

   
(j) Recoverability of Long-lived Assets
    

   
         The Company continually monitors long-lived assets and certain
         intangible assets, such as costs in excess of net assets acquired and
         present value of insurance in force, for impairment. An impairment
         loss is recorded in the period in which the carrying value of the
         assets exceeds the fair value or expected future cash flows. Any
         amounts deemed to be impaired are charged, in the period in which such
         impairment was determined, as an expense against earnings. For the
         period presented there was no charge to earnings for the impairment of
         long-lived assets.
    

   
(k) Income Taxes
    

   
         Income taxes are accounted for under the asset and liability method.
         Deferred tax assets and liabilities are recognized for the future tax
         consequences attributable to (i) temporary differences between the
         financial statement carrying amounts of existing assets and
         liabilities and their respective tax bases, and (ii) operating losses
         and tax credit carryforwards. Deferred tax assets and liabilities are
         measured using enacted tax rates expected to apply to taxable income
         in the years in which the temporary differences are expected to be
         recovered or settled. The effect on deferred tax assets and
         liabilities of a change in tax rates is recognized in income in the
         period that includes the enactment date.
    

   
(l) Reinsurance
    

   
         Financial reinsurance that does not transfer significant insurance
         risk is accounted for as a deposit and is reflected as a component of
         due from reinsurers. The cost of reinsurance related to long-duration
         contracts is accounted for over the life of the underlying reinsurance
         policies. Balances due to, or from, reinsurers have been reflected as
         assets and liabilities rather than being netted against the related
         account balances.
    





<PAGE>   71
   
                                                                         PAGE 71
    


   
              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
             (Data with respect to December 31, 1995 is unaudited)
    


   
3. INVESTMENTS
    

   
Investments in a single entity, other than obligations of the U.S. Government
or agencies thereof, totaling in excess of 10% of total shareholders equity at
December 31, 1996 and 1995 are listed below:
    

   
<TABLE>
<CAPTION>
                                                                    1996                       1995
                                                          ------------------------   -----------------------
                                                                       PERCENT OF                 PERCENT OF
                                                            CARRYING  SHAREHOLDERS'   CARRYING   SHAREHOLDERS'
                                                             VALUE       EQUITY         VALUE       EQUITY
                                                          -----------  -----------   -----------  ----------
    <S>                                                   <C>              <C>       <C>             <C>
    James M. Fail and Stone Capital, Inc. (formerly
       CFSB Corp.) Collateral loans   . . . . . . . . .   $  21,308        14.7%     $ 41,308        32.6%
    Fund America Investors Corp., Ser. 93-C,
      Class B Certificates  . . . . . . . . . . . . . .      16,250        11.2        10,908         8.6
    GSSW Limited Partnership  . . . . . . . . . . . . .         --          --         39,600        31.2
</TABLE>
    

   
The amortized cost and estimated fair value of investments in fixed maturities
available for sale at December 31, 1996 and 1995 by categories of securities
are as follows:
    

   
<TABLE>
<CAPTION>
                                                                                      GROSS        GROSS       ESTIMATED
                                                                      AMORTIZED    UNREALIZED   UNREALIZED       FAIR
                                                                         COST         GAINS       LOSSES         VALUE
                                                                         ----         -----       ------         -----
<S>                                                                <C>           <C>           <C>           <C>
December 31, 1996:
    Mortgage-backed securities  . . . . . . . . . . . . .          $    609,593  $      8,153  $    (7,304)  $    610,442
    U.S. Treasury securities and obligations of
      U.S. Government corporations and agencies   . . . .                49,598           224         (343)        49,479
    Debt securities issued by states of the United States
       and political subdivisions of the states   . . . .                15,226            --         (388)        14,838
    Debt securities issued by foreign governments                        22,698           176         (870)        22,004
    Corporate debt securities   . . . . . . . . . . . . .               573,392         1,429      (16,314)       558,507
                                                                   ------------  ------------  -----------   ------------
      Total fixed maturities available for sale   . . . .          $  1,270,507  $      9,982  $   (25,219)  $  1,255,270
                                                                   ============  ============  ===========   ============
</TABLE>
    

   
<TABLE>
<CAPTION>
                                                                                      GROSS        GROSS       ESTIMATED
                                                                      AMORTIZED    UNREALIZED   UNREALIZED       FAIR
                                                                         COST         GAINS       LOSSES         VALUE
                                                                         ----         -----       ------         -----
<S>                                                                <C>           <C>           <C>           <C>
December 31, 1995:
    Mortgage-backed securities  . . . . . . . . . . . . . .        $    489,810  $      1,222  $      (615)  $    490,417
    U.S. Treasury securities and obligations of
      U.S. Government corporations and agencies   . . . . .              39,375           168           --         39,543
    Debt securities issued by states of the United States
       and political subdivisions of the states   . . . . .              15,812           --            --         15,812
    Debt securities issued by foreign governments                        18,518           212           --         18,730
    Corporate debt securities   . . . . . . . . . . . . . .             602,209         2,805          (38)       604,976
                                                                   ------------  ------------  -----------   ------------
      Total fixed maturities available for sale   . . . . .        $  1,165,724  $      4,407  $      (653)  $  1,169,478
                                                                   ============  ============  ===========   ============
</TABLE>
    

   
Included in fixed maturities available for sale at December 31, 1996 and 1995
are investments with a fair value of $78,118 and $103,284, respectively, which
are not publicly traded. Included in fixed maturities available for sale at
    





<PAGE>   72
   
                                                                         PAGE 72
    


   
              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
             (Data with respect to December 31, 1995 is unaudited)
    


   
3. INVESTMENTS (CONTINUED)
    

   
December 31, 1996 and 1995, are below investment-grade securities with
amortized costs of $40,177 and $65,475, respectively, and fair values of
$39,955 and $66,253, respectively.
    

   
The Company had non-income producing investments at December 31, 1996 with an
amortized cost and fair value as follows:
    

   
<TABLE>
<CAPTION>
                                                          AMORTIZED
                                                             COST       FAIR VALUE
                                                        -------------  -------------
   <S>                                                  <C>            <C>
   Fixed maturities . . . . . . . . . . . . . .         $         571  $         405
   Equity securities  . . . . . . . . . . . . .                   434            620
   Mortgage loans . . . . . . . . . . . . . . .                 1,141          1,141
   Real estate  . . . . . . . . . . . . . . . .                 7,292          7,292
   Other investments  . . . . . . . . . . . . .                   992          1,618
                                                        -------------  -------------
                                                        $      10,430  $      11,076
                                                        =============  =============
</TABLE>
    

   
At December 31, 1996 net unrealized appreciation of equity securities of $170
consisted of gross unrealized gains of $207, less unrealized losses of $37. At
December 31, 1995 net unrealized depreciation of $24 consisted of gross
unrealized gains of $21, less unrealized losses of $45.
    

   
Following is an analysis of net gains (losses) from sale of investments for the
year ended December 31, 1996:
    

   
<TABLE>
 <S>                                                                                    <C>
   Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $    1,385
   Equity securities  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            (43)
   Other investments  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          1,736
   Real estate  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           (125)
   Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         (2,437)
                                                                                        ----------
                                                                                        $      516
                                                                                        ==========
</TABLE>
    

   
For the year ended December 31, 1996, net realized gains on sale of fixed
maturities consisted of gross gains of $2,923 and gross losses of $1,538.
    





<PAGE>   73
   
                                                                         PAGE 73
    


   
              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
             (Data with respect to December 31, 1995 is unaudited)
    


   
3. INVESTMENTS (CONTINUED)
    

   
Following are changes in unrealized appreciation (depreciation) on investments
for the year ended December 31, 1996:
    

   
<TABLE>
<S>                                                                                            <C>
Investments carried at fair value:
  Fixed maturities  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      $  (18,991)
  Equity securities   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             194
  Other investments   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           1,652
                                                                                               ----------
                                                                                                  (17,145)
Less effect on other balance sheet accounts:
  Value of business acquired and deferred acquisition costs   . . . . . . . . . . . . . .           1,362
  Deferred income taxes   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           5,524
  Minority interest in unrealized losses  . . . . . . . . . . . . . . . . . . . . . . . .            (235)
                                                                                               ----------
Change in unrealized investment gains and losses  . . . . . . . . . . . . . . . . . . . .      $  (10,494)
                                                                                               ==========
</TABLE>
    

   
The amortized cost and estimated fair value of fixed maturities at December 31,
1996, by contractual maturity, are shown below:
    

   
<TABLE>
<CAPTION>
                                                                                              ESTIMATED
                                                                                 AMORTIZED       FAIR
                                                                                   COST         VALUE
                                                                               -----------  ------------
      <S>                                                                      <C>          <C>
      Available for sale:
         Due in one year or less  . . . . . . . . . . . . . . . . . . . . .    $    25,515  $     25,510
         Due after one year through five years  . . . . . . . . . . . . . .        126,895       126,285
         Due after five years through ten years . . . . . . . . . . . . . .        250,592       245,188
         Due after ten years  . . . . . . . . . . . . . . . . . . . . . . .        257,912       247,845
                                                                               -----------  ------------
                                                                                   660,914       644,828
         Mortgage-backed securities . . . . . . . . . . . . . . . . . . . .        609,593       610,442
                                                                               -----------  ------------
                                                                               $ 1,270,507  $  1,255,270
                                                                               ===========  ============
</TABLE>
    

   
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without prepayment
penalties.
    

   
Investments with a fair value of $121,617 and $146,888 were on deposit with
certain regulatory authorities at December 31, 1996 and 1995, respectively.
    





<PAGE>   74
   
                                                                        PAGE 74
    



   
              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
             (Data with respect to December 31, 1995 is unaudited)
    


   
3. INVESTMENTS (CONTINUED)
    

   
Major categories of net investment income for the year ended December 31, 1996
consist of the following:
    

   
<TABLE>
         <S>                                                                 <C>
         Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . .    $   87,348
         Equity securities  . . . . . . . . . . . . . . . . . . . . . . .            58
         Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . .        11,156
         Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . .         8,011
         Short-term investments . . . . . . . . . . . . . . . . . . . . .         7,738
         Collateral loans . . . . . . . . . . . . . . . . . . . . . . . .         2,947
         Real estate  . . . . . . . . . . . . . . . . . . . . . . . . . .         4,236
         Investments held in trust under reinsurance treaty(a)  . . . . .        12,130
         Other investments  . . . . . . . . . . . . . . . . . . . . . . .         1,503
         Investment expenses  . . . . . . . . . . . . . . . . . . . . . .        (6,155)
                                                                             ----------
                                                                             $  128,972
--------------------                                                         ==========
</TABLE>
    
   
(a)      Investments held in trust by a reinsurer with carrying values of
         $121,016 and $133,742 as of December 31, 1996 and 1995,
         respectively, are included in amounts due from reinsurers (see
         Note 12).
    

   
At December 31, 1996 and 1995 the Company held mortgage loans principally
involving commercial real estate with carrying values and estimated fair values
of $59,993 and $99,969, respectively, net of an allowance for losses of $1,000
at December 31, 1996. The average outstanding loan balances are approximately
$955 and $1,134 at December 31, 1996 and 1995, respectively. At December 31,
1996 mortgage loan investments were concentrated in the following states:
    

   
<TABLE>
<CAPTION>
                                                                        PERCENT OF TOTAL
                                                       CARRYING VALUE    CARRYING TOTAL
                                                       --------------    --------------
         <S>                                            <C>                  <C>
         Texas  . . . . . . . . . . . . . . . . . . .   $    30,319           50.5%
         Illinois . . . . . . . . . . . . . . . . . .         7,657           12.8
         Oklahoma . . . . . . . . . . . . . . . . . .         5,631            9.4
         Florida  . . . . . . . . . . . . . . . . . .         3,161            5.3
         Kansas . . . . . . . . . . . . . . . . . . .         3,105            5.2
         All other  . . . . . . . . . . . . . . . . .        10,120           16.8
                                                        -----------         ------
         Balance, end of period . . . . . . . . . . .   $    59,993          100.0%
                                                        ===========         ======
</TABLE>
    

   
4. INVESTMENT IN GSSW LIMITED PARTNERSHIP
    

   
At December 31, 1995, the limited partnership investment represented a 50%
interest in a partnership, GSSW, L.P. (GSSW) formed to acquire through auction
certain mortgage loans and real estate formerly held by failed savings and loan
associations. Effective December 31, 1996, GSSW liquidated the general partner
interests through distribution of certain assets at fair value, sold
substantially all remaining investments and utilized the proceeds to buy the
limited partnership interest not owned by the Company. As a result of these
transactions, the Company became the parent of GSSW, realized earnings on GSSW
of $13,171, received net cash distributions of $47,520 and paid PennCorp, a
shareholder, a fee of $1,000 as guarantor in GSSW's sale of assets.
    





<PAGE>   75
   
                                                                        PAGE 75
    


   
              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
             (Data with respect to December 31, 1995 is unaudited)
    


   
4. INVESTMENT IN GSSW LIMITED PARTNERSHIP (CONTINUED)
    

   
Following is an analysis of the investment in the GSSW limited partnership for
the year ended December 31, 1996:
    

   
<TABLE>
         <S>                                                                                   <C>
         Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . .      $   39,600
         Equity in operating earnings during year . . . . . . . . . . . . . . . . . . . .           3,640
         Equity in earnings on transactions at December 31, 1996  . . . . . . . . . . . .          13,171
         Distributions during year  . . . . . . . . . . . . . . . . . . . . . . . . . . .          (6,000)
         Net distributions at December 31, 1996 . . . . . . . . . . . . . . . . . . . . .         (47,520)
                                                                                               ----------
         Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      $    2,891
                                                                                               ==========
</TABLE>
    

   
At December 31, 1996, the accounts of GSSW are consolidated into the
accompanying consolidated balance sheet.
    

   
5. BUSINESS SEGMENT INFORMATION
    

   
The Company's only reportable segment is life insurance. Within the life
insurance segment, the Company and its subsidiaries are principally engaged in
the sale and underwriting of individual life and health insurance, and
accumulation products, principally annuities.
    

   
Assets and related investment income are allocated based upon related insurance
reserves which are backed by such assets. Other operating expenses are
allocated to each segment based on a number of assumptions and estimates
generally in relation to the mix of related revenues. Total revenues and income
before income taxes by product for the year ended December 31, 1996 are as
follows:
    

   
<TABLE>
<S>                                                                                            <C>
      Total revenues:
         Individual life products . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $  165,723
         Individual health products . . . . . . . . . . . . . . . . . . . . . . . . . . . .       137,391
         Accumulation products  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        44,427
         Corporate and eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . .         6,298
                                                                                               ----------
                                                                                               $  353,839
                                                                                               ==========
      Income before income taxes:
         Individual life products . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $   27,919
         Individual health products . . . . . . . . . . . . . . . . . . . . . . . . . . . .        18,744
         Accumulation products  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        16,118
         Corporate and eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . .       (13,569)
                                                                                               ----------
                                                                                               $   49,212
                                                                                               ==========
</TABLE>
    

   
Total assets by product as of December 31, 1996 and 1995 are as follows:
    

   
<TABLE>
<CAPTION>
                                                                                   1996           1995
                                                                               ------------   ------------
  <S>                                                                          <C>            <C>
  Total assets:
    Individual life products  . . . . . . . . . . . . . . . . . . . . . . .    $  1,203,950   $  1,205,746
    Individual health products  . . . . . . . . . . . . . . . . . . . . . .         332,118        292,942
    Accumulation products   . . . . . . . . . . . . . . . . . . . . . . . .         486,910        520,656
    Corporate and eliminations  . . . . . . . . . . . . . . . . . . . . . .         187,572        194,680
                                                                               ------------   ------------
                                                                               $  2,210,550   $  2,214,024
                                                                               ============   ============
</TABLE>
    





<PAGE>   76
   
                                                                        PAGE 76
    


   
              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
             (Data with respect to December 31, 1995 is unaudited)
    



   
6. POLICY LIABILITIES AND ACCRUALS
    

   
For interest sensitive life products and annuity products, the liability for
future policy benefits is equal to the accumulated fund value. Fund values are
equal to the excess premium received and interest credited to the fund value
less deductions for mortality costs and expense charges. Current interest rates
credited range from 4% to 8%. Mortality costs and expense charges are
established by the Company based upon its experience and cost structure.
    

   
For traditional life products, the liability for future policy benefits has
been computed by the net level premium method based on estimated future
investment yield, mortality, and withdrawal experience. Reserve interest
assumptions are graded and range from 6.25% to 7.375%. For accident and health
products, liabilities for future policy benefits are established equal to the
excess of the present value of future benefits to or on behalf of policyholders
over future net premiums discounted at interest rates ranging primarily from
6.5% to 8.0%. The future policy benefits of traditional life products and
accident and health products are determined using mortality, morbidity and
withdrawal assumptions that reflect the experience of the Company modified as
necessary to reflect anticipated trends and to include provisions for possible
unfavorable deviations. The assumptions vary by plan, year of issue and
duration.
    

   
Policy and contract claims include provisions for reported claims in process of
settlement, valued in accordance with the terms of the related policies and
contracts, as well as provisions for claims incurred and unreported based on
the Company's prior experience.
    

   
While management believes the estimated amounts included in financial
statements for reserves and claims are adequate, such estimates may be more or
less than the amounts ultimately paid when the claims are settled.
    

   
Total policy liabilities and accruals consist of the following:
    

   
<TABLE>
<CAPTION>
                                                                        DECEMBER 31,      DECEMBER 31,
                                                                             1996             1995
                                                                        -------------    -------------
         <S>                                                            <C>              <C>
         Future policy benefits on traditional products:
           Traditional life insurance contracts . . . . . . . . . . .   $     344,520    $     352,809
           Traditional annuity products . . . . . . . . . . . . . . .         105,246          114,333
           Individual accident and health . . . . . . . . . . . . . .         104,071          132,091
           Unearned premiums  . . . . . . . . . . . . . . . . . . . .          30,342           33,026
                                                                        -------------    -------------
             Total future policy benefits                                     584,179          632,259
                                                                        -------------    -------------

         Universal life and investment contract liabilities:
           Universal life and annuities . . . . . . . . . . . . . . .       1,086,632        1,099,697
           Guaranteed investment contracts  . . . . . . . . . . . . .           1,703            6,750
                                                                        -------------    -------------
             Total universal and investment contract liabilities  . .       1,088,335        1,106,447
                                                                        -------------    -------------

         Policy and contract claims . . . . . . . . . . . . . . . . .          55,011           62,140
         Other policyholder funds . . . . . . . . . . . . . . . . . .          17,635           20,446
                                                                        -------------    -------------

             Total policy liabilities and accruals  . . . . . . . . .   $   1,745,160    $   1,821,292
                                                                        =============    =============
</TABLE>
    





<PAGE>   77
   
                                                                        PAGE 77
    


   
              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
             (Data with respect to December 31, 1995 is unaudited)
    


   
6. POLICY LIABILITIES AND ACCRUALS (CONTINUED)
    

   
The following table presents information on changes in the liability for policy
and contract claims for the year ended December 31, 1996:
    

   
<TABLE>
 <S>                                                                                     <C>
 Policy and contract claims at January 1  . . . . . . . . . . . . . . . . . . .           $    62,140
 Less reinsurance recoverables  . . . . . . . . . . . . . . . . . . . . . . . .                   118
                                                                                          -----------
   Net balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . .                62,022
                                                                                          -----------
 Add claims incurred, net of reinsurance related to:
   Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                91,496
   Prior years  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                (2,646)
                                                                                          -----------
                                                                                               88,850
                                                                                          -----------
 Deduct claims paid, net of reinsurance related to:
   Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                52,240
   Prior years  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                43,774
                                                                                          -----------
                                                                                               96,014
                                                                                          -----------
 Policy and contract claims, net of related reinsurance recoverables at December 31            54,858
 Plus reinsurance recoverables  . . . . . . . . . . . . . . . . . . . . . . . .                   153
                                                                                          -----------
 Policy and contract claims at December 31  . . . . . . . . . . . . . . . . . .           $    55,011
                                                                                          ===========
</TABLE>
    

   
As a result of changes in estimates of insured events in prior years, the
liability for policy and contract claims decreased, net of reinsurance, by
$2,646 in 1996.
    

   
7. NOTES PAYABLE
    

   
The outstanding principal amounts of notes payable at December 31, 1996 and
1995 consist of the following:
    

   
<TABLE>
<CAPTION>
                                                            1996         1995
                                                         -----------  -----------
    <S>                                                  <C>          <C>
    Revolving bank debt  . . . . . . . . . . . . . .     $    95,000  $   95,000
    Bank debt with quarterly principal requirements           24,750      25,000
    Convertible subordinated notes issued to ICH for
      acquisition of insurance subsidiaries  . . . .          40,000      40,000
                                                         -----------  ----------
                                                         $   159,750  $   160,000
                                                         ===========  ===========
</TABLE>
    

   
Interest costs under the revolving bank debt totaled $8,128 for the year ended
December 31, 1996. The interest rate of the debt is based on, at the Company's
option, either a floating rate (based on the base rate of the First National
Bank of Chicago) plus a margin of 1.75% or a Eurodollar rate (based on the
London Interbank Offered Rate or LIBOR) plus a margin of 2.75%. At December 31,
1996, the effective rate of the revolving loan was approximately 8.3%.
    

   
Interest costs under the bank term debt totaled $2,250 for the year ended
December 31, 1996. The interest rate of the term debt is based on, at the
Company's option, either a floating rate (based on the base rate of the First
National Bank of Chicago) plus a margin of 2.25% or a Eurodollar rate (based on
LIBOR) plus a margin of 3.25%. At December 31, 1996, the effective rate of the
term loans was approximately 8.8%.
    





<PAGE>   78
   
                                                                        PAGE 78
    


   
              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
             (Data with respect to December 31, 1995 is unaudited)
    


   
7. NOTES PAYABLE (CONTINUED)
    

   
As part of the consideration for the acquisition of Southwestern Life, Union
Bankers, Constitution and Marquette from ICH, the Company issued to ICH a
$40,000 aggregate principal amount of SWF's 7.0% Convertible Subordinated Notes
due 2005. The notes are convertible into an aggregate 3,200,000 shares of
common stock of SWF, of which 800,000 will be Class B non-voting common stock.
In the aggregate the shares upon conversion represent approximately 21.2% of
SWF's fully diluted shares at closing before giving effect to certain warrants
outstanding. On June 15, 1997, SWF will either (i) offer to repurchase any and
all notes then outstanding at 100% of the principal amount thereof plus accrued
and unpaid interest to the repurchase date (the "Interim Repurchase Offer") or
(ii) reset the interest rate on the Convertible Notes, immediately after such
adjustment, to have a bid price equal to 100% of the principal amount. If SWF
makes the Interim Repurchase Offer, there will be no interest rate reset on any
Convertible Notes not tendered to SWF for purchase pursuant to the Interim
Repurchase Offer. The Convertible Notes are unsecured obligations and are
subordinate in right of payment to SWF's bank debt and all of the indebtedness
of SWF. Interest costs under the Convertible Notes totaled $2,800 for the year
ended December 31, 1996. The Company agreed to maintain sufficient cash and
cash equivalents to fund the interest payments on the Convertible Notes for the
first three years. At December 31, 1996 and December 31, 1995, restricted cash
and short-term investments totaled $5,959 and $8,400, respectively.
    

   
The Company has pledged the stock of certain of its insurance subsidiaries as
collateral under the bank credit facilities. In addition, the bank loans
contain a number of covenants. These prohibit the Company from paying cash
dividends on its preferred or common stock without the banks' consent. In
addition, except for transactions in the ordinary course of business, the
Company and its subsidiaries can not loan or borrow monies, acquire assets in
excess of specified limits, grant liens or generally take any other action
which would result in any material change in the Company or its subsidiaries
without prior written consent of such banks. The Company is also required to
maintain a specified minimum net worth and comply with certain financial
ratios. The Company was in compliance with all applicable covenants as of
December 31, 1996.
    

   
In conjunction with the bank debt, the Company entered into interest rate
protection agreements in the form of a series of interest rate caps in the
notional amount of $62,500 which expire May 1998. These entitle the Company to
revenue should three-month LIBOR exceed the cap rate of 7.5%. At December 31,
1996, three-month LIBOR was 5.56%.
    

   
The aggregate maturities of notes payable during each of the five years after
December 31, 1996 are as follows:
    

   
<TABLE>
  <S>                                                               <C>
  1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $     5,000
  1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         13,788
  1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         13,291
  2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         11,711
  2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         10,692
  2002 and thereafter  . . . . . . . . . . . . . . . . . . . . .        105,268
                                                                    -----------
                                                                    $   159,750
                                                                    ===========
</TABLE>
    

   
8. PREFERRED AND COMMON STOCK
    

   
On December 14, 1995, the Company issued 210,000 shares of Series A preferred
stock with a liquidation value of $21,000.  The Series A preferred stock
accrues dividends at a rate of 10.0% per annum, compounded quarterly and is
mandatorily redeemable at December 31, 2005. Dividends on the Series A
preferred stock are payable in cash, or at SWF's option, are payable in kind.
The Series A preferred stock is not redeemable at the option of the Company but
    





<PAGE>   79
   
                                                                        PAGE 79
    

   
              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
             (Data with respect to December 31, 1995 is unaudited)
    


   
8. PREFERRED AND COMMON STOCK (CONTINUED)
    

   
at maturity will be required to be redeemed for approximately $56 million in
cash assuming no cash dividend distributions. If the Company fails to satisfy
its mandatory redemption obligation, the holders of the Series A preferred
stock will be entitled to elect 49.0% of the members of the Board of SWF and,
upon receipt of regulatory approval, a majority of the directors of SWF. The
Series A preferred stock is senior preferred stock. The holders of the Series A
preferred stock are entitled to class voting rights under certain
circumstances, including in connection with a merger of SWF or a sale of all or
substantially all its assets or the authorization or issuance of senior or pari
passu preferred stock, and as otherwise provided by law. For the year ended
December 31, 1996, 21,900 additional shares were issued with a redemption value
of $2,190 in lieu of cash to satisfy dividend requirements.
    

   
In addition, certain of PennCorp's insurance subsidiaries purchased $10,000
liquidation value of 5.5% Mandatorily Redeemable Preferred Stock, par value
$0.01 per share (the 5.5% Preferred Stock) of SLAC, a wholly-owned subsidiary
of SWF. During 1996 SLAC was dissolved and the 5.5% Preferred Stock was
exchanged for 5.5% Preferred Stock of Southwestern Life Companies, Inc. (SLC),
also a wholly-owned subsidiary of SWF. The 5.5% Preferred Stock accrues
dividends payable in cash or, subject to certain conditions, through the
issuance of additional shares of 5.5% Preferred Stock. The 5.5% Preferred Stock
is not subject to optional redemption and matures on December 31, 2005. If SLC
fails to satisfy its mandatory redemption obligation or if dividends payable on
the 5.5% Preferred Stock are in arrears for four or more quarterly dividend
periods, the holders of the 5.5% Preferred Stock will be entitled to elect
49.0% of the members of the Board of Directors of SLC and, upon receipt of
regulatory approval, a majority of the Board of Directors of SLC. The 5.5%
Preferred Stock is the only preferred stock of SLC authorized for issuance. The
holders of the 5.5% Preferred Stock are entitled to class voting rights under
certain circumstances, including in connection with a merger of SLC or a sale
of all or substantially all its assets or the authorization or issuance of
senior pari passu preferred stock, and as otherwise provided by law. For the
year ended December 31, 1996, 59 additional shares were issued with a
redemption value of $590 in lieu of cash to satisfy dividend requirements of
$564 in 1996 and $26 in 1995.
    

   
In conjunction with the acquisition of its insurance subsidiaries on December
14, 1995, SWF issued warrants to the shareholders of SWF for the purchase of up
to an additional 1,785,000 shares of Class B voting common stock at an exercise
price of $10.00 per share. The warrants are exercisable at any time until their
expiration on December 15, 2005.
    

   
9. INCOME TAXES
    

   
The Company and its non-insurance subsidiaries file a consolidated federal
income tax return. The Company's life insurance subsidiaries also file federal
income tax returns as a consolidated group.
    

   
Total income taxes for the year ended December 31, 1996 are as follows:
    

   
<TABLE>
       <S>                                                               <C>
       Current  . . . . . . . . . . . . . . . . . . . . . . . .    $    5,302
       Deferred . . . . . . . . . . . . . . . . . . . . . . . .        12,945
                                                                   ----------
                                                                   $   18,247
                                                                   ==========
</TABLE>
    





<PAGE>   80
   
                                                                        PAGE 80
    


   
              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
             (Data with respect to December 31, 1995 is unaudited)
    


   
9. INCOME TAXES (CONTINUED)
    

   
Income taxes computed using the prevailing corporate tax rate of 35% are
reconciled to the Company's actual income tax expense attributable to income
for the year ended December 31, 1996, as follows:
    

   
<TABLE>
  <S>                                                               <C>
       Tax expense computed at statutory rate . . . . . . . . . .   $   17,224
       Amortization of costs in excess of net assets acquired . .        1,480
       Change in deferred tax asset valuation allowance . . . . .         (183)
       Other  . . . . . . . . . . . . . . . . . . . . . . . . . .         (274)
                                                                    -----------
                                                                    $   18,247
                                                                    ==========
</TABLE>
    

   
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that give rise to the deferred tax assets
(liabilities) at December 31, 1996 and 1995 relate to the following:
    

   
<TABLE>
<CAPTION>
                                                                               1996             1995
                                                                          -------------    -------------
  <S>                                                                      <C>              <C>
  Deferred tax assets:
    Deferred policy acquisition costs   . . . . . . . . . . . . . . . .    $    10,407      $    12,334
    Future policy benefits  . . . . . . . . . . . . . . . . . . . . . .        112,408          132,330
    Invested assets, subject to capital gains treatment   . . . . . . .         16,895           18,669
    Unrealized loss   . . . . . . . . . . . . . . . . . . . . . . . . .          4,224              --
                                                                           -----------      -----------
                                                                               143,934          163,333
                                                                           -----------      -----------
  Deferred tax liabilities:
    Present value of insurance in force   . . . . . . . . . . . . . . .        (24,967)         (40,541)
    Other assets and liabilities  . . . . . . . . . . . . . . . . . . .        (50,280)         (45,201)
    Unrealized gain   . . . . . . . . . . . . . . . . . . . . . . . . .            --            (1,300)
                                                                           -----------      -----------
                                                                               (75,247)         (87,042)
                                                                           -----------      -----------

    Net deferred tax asset  . . . . . . . . . . . . . . . . . . . . . .         68,687           76,291
    Valuation allowance   . . . . . . . . . . . . . . . . . . . . . . .        (20,608)         (20,791)
                                                                           -----------      -----------
                                                                           $    48,079      $    55,500
                                                                           ===========      ===========
</TABLE>
    

   
The valuation allowance at December 31, 1996, is attributable to deferred tax
assets principally arising from differences in the book and tax bases of
invested assets subject to capital gains treatment that existed as of the date
of acquisition of the company's insurance subsidiaries. To the extent that
income tax benefits relative to such tax assets are ultimately realized, the
reduction in the related valuation allowance would be allocated to reduce costs
in excess of net assets acquired.
    

   
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent on the generation of future taxable income during the periods in
which those temporary differences become deductible.  Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon those
considerations, management believes it is more likely than not that the Company
will realize the benefits of these deductible differences, net of the existing
valuation allowance at December 31, 1996.
    

   
At December 31, 1996, the Company has net operating loss carryovers available
of $561 related to the non-life consolidated return, of which $250 expires in
2010 and $311 expires in 2011.
    





<PAGE>   81
   
                                                                        PAGE 81
    


   
              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
             (Data with respect to December 31, 1995 is unaudited)
    



   
10. DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF INSURANCE IN FORCE
    

   
Deferred policy acquisition costs represent commissions and certain costs of
policy issuance and underwriting.  Information relating to these costs for the
year ended December 31, 1996 is as follows:
    

   
<TABLE>
         <S>                                                                               <C>
         Policy acquisition costs deferred:
           Commissions  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $    11,810
           Underwriting and issue costs . . . . . . . . . . . . . . . . . . . . . . . .          4,996
         Released by 80% coinsurance of Medicare business (see Note 12) . . . . . . . .         (1,243)
         Policy acquisition costs amortized . . . . . . . . . . . . . . . . . . . . . .           (503)
         Unrealized investment loss adjustment  . . . . . . . . . . . . . . . . . . . .             35
                                                                                           -----------
         Unamortized deferred policy acquisition costs at period end  . . . . . . . . .    $    15,095
                                                                                           ===========
</TABLE>
    

   
As part of the purchase accounting for the Company's acquisitions, a present
value of insurance in force asset is established which represents the value of
the right to receive future cash flows from insurance contracts existing at the
date of acquisition. Such value is the actuarially determined present value of
the projected cash flows from the acquired policies, discounted at an
appropriate risk rate of return.
    

   
The methods used by the Company to value the health, life and annuity products
purchased are consistent with the valuation methods used most commonly to value
blocks of insurance business. It is also consistent with the basic methodology
generally used to value insurance assets. The method used by the Company
includes identifying the future cash flows from the acquired business, the
risks inherent in realizing those cash flows, the rate of return the Company
believes it must earn in order to accept the risks inherent in realizing the
cash flows, and determining the value of the insurance asset by discounting the
expected future cash flows by the discount rate the Company requires.
    

   
The discount rate used to determine such values is the rate of return required
in order to invest in the business being acquired. In selecting the rate of
return, the Company considered the magnitude of the risks associated with
actuarial factors described in the following paragraph, cost of capital
available to the Company to fund the acquisition, compatibility with other
Company activities that may favorably affect future profits, and the complexity
of the acquired company.
    

   
Expected future cash flows used in determining such values are based on
actuarial determinations of future premium collection, mortality, morbidity,
surrenders, operating expenses and yields on assets held to back policy
liabilities as well as other factors. Variances from original projections,
whether positive or negative, are included in income as they occur. To the
extent that these variances indicate that future cash flows will differ from
those included in the original scheduled amortization of the value of the
insurance in force, current and future amortization may be adjusted.
Recoverability of the value of insurance in force is evaluated annually and
appropriate adjustments are then determined and reflected in the financial
statements for the applicable period.
    





<PAGE>   82
   
                                                                        PAGE 82
    


   
              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
             (Data with respect to December 31, 1995 is unaudited)
    


   
10. DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF INSURANCE IN FORCE
    (CONTINUED)
    

   
Information related to the present value of insurance in force for the year
ended December 31, 1996 is as follows:
    

   
<TABLE>
         <S>                                                                               <C>
         Balance at December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . .    $   115,831
         Released by 80% coinsurance of Medicare business (see Note 12) . . . . . . . .        (22,936)
         Accretion of interest  . . . . . . . . . . . . . . . . . . . . . . . . . . . .          4,415
         Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        (27,304)
         Unrealized investment loss adjustment  . . . . . . . . . . . . . . . . . . . .          1,327
                                                                                           -----------
           Balance at December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . .    $    71,333
                                                                                           ===========
</TABLE>
    

   
Expected gross amortization, based upon current assumptions and accretion of
interest at a policy liability or contract rate ranging from 0% to 6.6% for the
next five years of the present value of insurance in force is as follows:
    

   
<TABLE>
<CAPTION>
                                               BEGINNING          GROSS          ACCRETION            NET
                                                BALANCE       AMORTIZATION      OF INTEREST       AMORTIZATION
                                             ------------     ------------     -------------      ------------
    <S>                                      <C>              <C>              <C>              <C>
    1997  . . . . . . . . . . . . . . . .    $     71,333     $     15,749     $      3,584     $     12,165
    1998  . . . . . . . . . . . . . . . .          59,168           13,043            2,978           10,065
    1999  . . . . . . . . . . . . . . . .          49,103           10,317            2,491            7,826
    2000  . . . . . . . . . . . . . . . .          41,277            8,314            2,110            6,204
    2001  . . . . . . . . . . . . . . . .          35,073            6,977            1,802            5,175
</TABLE>
    

   
11. STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS
    

   
Pursuant to the terms of the surplus debenture issued by Constitution to the
benefit of SLC, a non-insurance subsidiary of SWF, Constitution may make
principal and interest payments to the extent that Constitution's surplus,
excluding the statutory carrying value of Southwestern Life and Union Bankers,
exceeds $1,200. Constitution's surplus at December 31, 1996 was $177,510, of
which $159,074 was attributable to its ownership of Southwestern Life and Union
Bankers.
    

   
The Company's cash flow is derived principally from dividends and principal and
interest payments owed on the surplus debenture by Constitution. The principal
source of repayment of the surplus debenture is dividends from Constitution's
subsidiaries, Southwestern Life and Union Bankers. Generally, the net assets of
the insurance subsidiaries available for transfer to the Company are limited to
the greater of the subsidiary net gain from operations during the preceding
year or 10% of the subsidiary net statutory surplus as of the end of the
preceding year as determined in accordance with accounting practices prescribed
or permitted by insurance regulatory authorities. Payment of dividends in
excess of such amounts would generally require approval by the regulatory
authorities. Based upon Constitution's net gain from operations for the year
ended December 31, 1996, approximately $19,000 of dividends could be paid to
its parent without prior regulatory approval.
    

   
The insurance subsidiaries prepare their statutory financial statements in
accordance with accounting practices prescribed or permitted by their
respective state insurance departments. Prescribed statutory accounting
practices include state laws, regulations, and general administrative rules, as
well as a variety of publications of the National Association of Insurance
Commissioners (NAIC). Permitted statutory accounting practices encompass all
accounting practices that are approved by insurance regulatory authorities;
such practices differ from state to state, and may differ from company to
company within a state, and may change in the future. Furthermore, the NAIC has
a project to codify statutory
    





<PAGE>   83
   
                                                                        PAGE 83
    


   
              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
             (Data with respect to December 31, 1995 is unaudited)
    


   
11. STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS (CONTINUED)
    

   
accounting practices, the result of which is expected to constitute the only
source of "prescribed" statutory accounting practices. Accordingly, that
project, will likely change to some extent prescribed statutory accounting
practices, and may result in changes to the accounting practices that insurance
enterprises use to prepare their statutory financial statements.
    

   
Statutory capital and surplus of the Company's life insurance subsidiaries as
reported to regulatory authorities at December 31, 1996 and 1995 totaled
approximately $177,510 and $128,729, respectively. Statutory net income of the
Company's life insurance subsidiaries as reported to regulatory authorities
totaled $24,919 for the year ended December 31, 1996.
    

   
12. REINSURANCE
    

   
In the normal course of business, the Company reinsures portions of certain
policies that it underwrites to limit disproportionate risks. The Company
retains varying amounts of individual insurance up to a maximum retention of
$500 on any life. Amounts not retained are ceded to other insurance enterprises
or reinsurers on an automatic or facultative basis.
    

   
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Therefore, the Company is contingently liable for recoverable
unpaid claims and policyholder liabilities ceded to reinsurers in the unlikely
event that assuming reinsurers are unable to meet their obligations. The
Company evaluates the financial condition of its reinsurers to minimize its
exposure to significant losses from reinsurer insolvencies. The effect of
reinsurance on policy revenues earned and the related benefits incurred by such
reinsurers for the year ended December 31, 1996 is as follows:
    

   
<TABLE>
         <S>                                                                         <C>
         Direct policy revenues and amounts assessed against policyholders  . . .    $   255,352
         Reinsurance assumed  . . . . . . . . . . . . . . . . . . . . . . . . . .          3,483
         Reinsurance ceded  . . . . . . . . . . . . . . . . . . . . . . . . . . .        (61,923)
                                                                                     -----------
         Net premiums and amounts earned  . . . . . . . . . . . . . . . . . . . .    $   196,912
                                                                                     ===========

         Policyholder benefits ceded  . . . . . . . . . . . . . . . . . . . . . .    $    25,513
                                                                                     ===========
</TABLE>
    

   
Effective July 1, 1996, Union Bankers entered into reinsurance agreements with
Cologne Life Reinsurance Company ("Cologne") to coinsure 80% of its Medicare
supplement business in force on July 1, 1996 and to coinsure 80% of its
Medicare policies issued on or after July 1, 1996. The Company recorded a
deferred gain on the transaction of $53,893 as of July 1, 1996, which is being
amortized into income over the life of the business. Since July 1, 1996, $6,445
of the deferred gain has been recognized and is included in other income. The
Company is not subject to any negative experience adjustments if the ceded
business is unprofitable; however, the Company may participate in a portion of
future earnings from the ceded business after Cologne recovers its initial
ceding commission plus interest at a specified rate. Union Bankers retained
administration for the ceded block of business and is reimbursed by Cologne for
administrative costs at the rate of 8.5% of ceded renewal premiums and 11.5% of
ceded first year premiums.
    

   
Southwestern Life has ceded a block of annuities under a reinsurance agreement
with Employees Reassurance Corporation (ERC). Such reinsurance is accounted for
as a financing arrangement and is not reflected in the accompanying financial
statements except for the risk fees paid to ERC. Statutory surplus provided by
this treaty totaled $8,714 and $13,074 at December 31, 1996 and 1995,
respectively. Risk fees paid to the reinsurer were 2% of the net amount of
surplus provided and totaled $222 for the year ended December 31, 1996.
    





<PAGE>   84
   
                                                                        PAGE 84
    


   
              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
             (Data with respect to December 31, 1995 is unaudited)
    



   
12. REINSURANCE (CONTINUED)
    

   
Amounts due from reinsurers included amounts due from ERC of $121,016 and
$133,742 at December 31, 1996 and 1995, respectively. The underlying assets
held by ERC had carrying values of $121,016 and $133,742 and fair values of
$122,639 and $139,222 at December 31, 1996 and 1995, respectively.
    

   
13. RETIREMENT AND PROFIT SHARING PLANS
    

   
The Company has a defined contribution retirement plan (Defined Contribution
Plan) for all employees who have attained age 21 and completed a year of
service. Contributions to the Plan are made pursuant to salary deferral
elections by participants in an amount equal to 1% to 15% of their annual
compensation. In addition, the Company makes matching contributions in an
amount equal to 50% of each participant's salary deferral to a maximum of 3% of
annual compensation.  The Defined Contribution Plan also provides for a
discretionary employer profit sharing contribution, which is determined
annually by the Board of Directors for the succeeding plan year. Profit sharing
contributions are credited to participant's accounts on the basis of their
respective compensation. Salary deferral contribution accounts are at all times
fully vested, while matching contribution and profit sharing contribution
accounts vest ratably from one to five years of service. All participant
accounts are fully vested at death, disability or attainment of age 65. Payment
of vested benefits under the Defined Contribution Plan may be elected by a
participant in a variety of forms of payment.  Expenses related to this plan
for the years ended December 31, 1996 amounted to $696.
    

   
In addition, the Company has a bonus plan for certain key officers. The amount
available to pay awards for any year is determined by a committee of senior
executives of the Company and is subject to approval of the Board of Directors
of the Company. Awards are based on the performance of the Company and the
performance of eligible participants. The Company accrued or paid $1,700 under
this plan during the year ended December 31, 1996.
    

   
The Company provides certain health care and life insurance benefits for
retired employees. Employees meeting certain age and length of service
requirements become eligible for these benefits. The Company's obligation for
accrued
    





<PAGE>   85
   
                                                                        PAGE 85
    

   
              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
             (Data with respect to December 31, 1995 is unaudited)
    


   
13. RETIREMENT AND PROFIT SHARING PLANS (CONTINUED)
    

   
postretirement health and welfare benefits is unfunded. Following is an
analysis of the change in the liability for accrued postretirement benefits for
the year ended December 31, 1996:
    

   
<TABLE>
         <S>                                                                               <C>
         Accrued postretirement benefits, beginning of year   . . . . . . . . . . . . .    $    12,821
                                                                                           -----------
         Recognition of components of net periodic postretirement benefit cost:
           Service cost   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            244
           Interest cost  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            834
                                                                                           -----------
           Net periodic postretirement benefit cost . . . . . . . . . . . . . . . . . .          1,078
         Benefit payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         (1,213)
                                                                                           -----------
         Net change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           (135)
                                                                                           -----------
         Accrued postretirement benefits, end of year . . . . . . . . . . . . . . . . .    $    12,686
                                                                                           ===========
</TABLE>
    

   
         The liability for accrued postretirement benefits includes the
following at December 31, 1996:
    

   
<TABLE>
         <S>                                                                               <C>
         Accumulated postretirement benefit obligation:
           Retirees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $    10,884
           Active eligible  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          1,194
           Active ineligible  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            831
                                                                                           -----------
                                                                                                12,909
         Unrecognized actuarial loss  . . . . . . . . . . . . . . . . . . . . . . . . .           (223)
                                                                                           -----------
         Accrued postretirement benefits  . . . . . . . . . . . . . . . . . . . . . . .    $    12,686
                                                                                           ===========
</TABLE>
    

   
For measurement purposes, an 6.5% annual rate increase in the health care cost
trend rate was assumed for 1997; the rate was assumed to decrease gradually to
4.5% by the year 2015 and remain at that level thereafter. The health care cost
trend rate assumption has a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
health care benefit obligation as of December 31, 1996 by $645 and the
aggregate of the service and interest components of net periodic postretirement
health care benefit cost for 1996 by $127. The weighted average discount rate
used in determining the accumulated postretirement benefit obligation was 7.5%.
    

   
14. RELATED PARTY TRANSACTIONS
    

   
The Company and its subsidiaries have management and services agreements with
entities affiliated with Knightsbridge, a shareholder. In connection with an
Advisory and Management Services Agreement with Knightsbridge Management,
L.L.C., the Company pays an annual fee of $1,500 plus expenses. Each insurance
subsidiary has an Investment Management Agreement with Knightsbridge
Consultants, L.L.C. For the year ended December 31, 1996, fees incurred totaled
$1,658.
    

   
The Company agreed to pay PennCorp, a shareholder, $1,000 in conjunction with
the GSSW transaction (see Note 4).
    





<PAGE>   86
   
                                                                        PAGE 86
    

   
              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
             (Data with respect to December 31, 1995 is unaudited)
    


   
15. OTHER COMMITMENTS AND CONTINGENCIES
    

   
The Company and its subsidiaries are obligated under operating leases,
primarily for office space. Rent expense, net of sublease income, was $2,058 in
1996.
    

   
Minimum lease commitments are:
    

   
<TABLE>
                 <S>                                                           <C>
                 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . .    $    1,720
                 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . .           148
                 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . .           148
                 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . .           148
                 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . .           136
                                                                               ----------
                   Total minimum payments required  . . . . . . . . . . . .    $    2,300
                                                                               ==========
</TABLE>
    

   
The Company's office lease expires November 1997. The Company is currently
negotiating a new ten year lease arrangement.
    

   
Certain lawsuits have been brought against the Company's life insurance
subsidiaries in the normal course of the insurance business involving the
settlement of various matters and seeking compensatory and in some cases
punitive damages. Management believes that the ultimate settlement of all such
litigation will not have a materially adverse effect on the Company's
consolidated financial position or results of operation.
    

   
The life insurance companies are required to be members of various state
insurance guaranty associations in order to conduct business in those states.
These associations have the authority to assess member companies in the event
that an insurance company conducting business in that state is unable to meet
its policyholder obligations. In some states, these assessments can be
partially recovered through a reduction in future premium taxes. The insurance
subsidiaries paid assessments of $1,357 in 1996. Based on information currently
available, the insurance subsidiaries have accrued $3,194 at December 31, 1996
for future assessments, net of future premium tax reductions.
    

   
16. OTHER OPERATING INFORMATION
    

   
Underwriting and other administrative expenses for the year ended December 31,
1996 are as follows:
    

   
<TABLE>
                 <S>                                                           <C>
                 Non-deferrable commission expense  . . . . . . . . . . . .    $   22,437
                 Taxes, licenses and fees . . . . . . . . . . . . . . . . .         9,214
                 General and administrative expenses  . . . . . . . . . . .        39,241
                 Expense allowance on reinsurance ceded . . . . . . . . . .        (5,782)
                                                                               ----------
                   Underwriting and other administrative expenses   . . . .    $   65,110
                                                                               ==========
</TABLE>
    





<PAGE>   87
   
                                                                        PAGE 87
    

   
              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
             (Data with respect to December 31, 1995 is unaudited)
    


   
17. FINANCIAL INSTRUMENTS
    

   
The following is a summary of the carrying value and estimated fair value of
the Company's financial instruments at December 31, 1996 and 1995:
    

   
<TABLE>
<CAPTION>
                                                                     1996                      1995
                                                            -----------------------  -----------------------
                                                                         ESTIMATED                 ESTIMATED
                                                            CARRYING        FAIR      CARRYING       FAIR
                                                              VALUE        VALUE        VALUE        VALUE
                                                            ----------  -----------  -----------  ----------
<S>                                                         <C>         <C>          <C>          <C>
Assets:
  Cash and short-term investments   . . . . . . . . . .     $  161,895  $   161,895  $   196,370  $  196,370
  Fixed maturities  . . . . . . . . . . . . . . . . . .      1,255,270    1,255,270    1,169,478   1,169,478
  Equity securities   . . . . . . . . . . . . . . . . .          1,129        1,129        2,149       2,149
  Mortgage loans  . . . . . . . . . . . . . . . . . . .         59,993       59,993       99,969      99,969
  Policy loans  . . . . . . . . . . . . . . . . . . . .        128,551      128,551      137,466     137,466
  Collateral loans  . . . . . . . . . . . . . . . . . .         21,308       21,308       41,308      41,308
  Investment in limited partnership   . . . . . . . . .            --           --        39,600      39,600
  Other investments   . . . . . . . . . . . . . . . . .          5,553        5,553        6,879       6,879
  Interest rate cap   . . . . . . . . . . . . . . . . .            145          --           218         --
  Agent and premium receivables   . . . . . . . . . . .         13,773       13,773        2,509       2,509
Liabilities:
  Notes payable   . . . . . . . . . . . . . . . . . . .        159,750      159,750      160,000     160,000
  Universal life and investment contract liabilities  .      1,088,335    1,088,335    1,106,447   1,106,447
</TABLE>
    

   
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
    

   
         Cash and Short-term Investments, Agent and Premium Receivables: The
         carrying value of short-term investments and amounts receivable
         approximate their fair value due to the short-term maturity of these
         instruments.
    

   
         Fixed Maturities and Equities Available for Sale: Fair values for
         fixed maturities available for sale are based on quoted market prices,
         where available. For fixed maturities not actively traded, fair values
         are estimated using values obtained from independent pricing services
         or are estimated based on expected future cash flows using a current
         market rate applicable to the yield, credit quality, and maturity of
         the investments. The fair values for equity securities are based on
         quoted market prices.
    

   
         Mortgage and Collateral Loans: The fair values for mortgage and
         collateral loans are estimated using discounted cash flow analyses,
         based on interest rates currently being offered for similar loans to
         borrowers with similar credit ratings. Loans with similar
         characteristics are aggregated for purposes of the calculations.
    

   
         Investment in limited partnership: Fair values of the Company's
         investments in limited partnership at December 31, 1995 is based on
         the estimated fair value of the partnership assets and liabilities,
         assuming a liquidation of the partnership and distribution of proceeds
         to the partners.
    





<PAGE>   88
   
                                                                        PAGE 88
    

   
              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
             (Data with respect to December 31, 1995 is unaudited)
    


   
17. FINANCIAL INSTRUMENTS (CONTINUED)
    

   
         Other Investments: The fair value of Company's investment in residual
         interests in mortgage-backed securities was obtained from an
         independent broker-dealer. The fair values of other miscellaneous
         invested assets have not been estimated due to their relative
         immateriality.
    

   
         Interest rate cap: The fair value of the interest rate cap is $0 as
         the current interest rate is below the cap rate.
    

   
         Policy Loans: Policy loans are an integral part of life insurance
         policies which the Company has in force and, in the Company's opinion,
         cannot be valued separately. These loans typically carry an interest
         rate that is tied to the crediting rate applied to the related policy
         and contract reserves.
    

   
         Notes Payable: Fair values of the Company's bank obligations
         approximate carrying values due to the variable interest structure.
         The fair value of the Company's note payable to ICH Corporation is
         based on the Company's implicit incremental borrowing rate from the
         fair value of the Company's bank obligations.
    

   
         Universal Life and Investment Contract Liabilities: The carrying value
         and fair values for the Company's liabilities under universal life and
         investment-type insurance contracts are the same as the interest rates
         credited to these products are periodically adjusted by the Company to
         reflect market conditions. The fair values of liabilities under all
         insurance contracts are taken into consideration in the overall
         management of interest rate risk, which minimizes exposure to changing
         interest rates through the matching of investment maturities with
         amounts due under insurance contracts.
    

   
18. SUBSEQUENT EVENT
    

   
In early 1997, PennCorp entered into an agreement to acquire all of the
outstanding SWF common stock held by Knightsbridge and certain other parties.
Assuming completion of the transaction, SWF would become a wholly-owned
subsidiary of PennCorp. The transaction is subject to the approval of the
shareholders of PennCorp.
    





<PAGE>   89
   
                                                                        PAGE 89
    





ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

         None.



                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below is a listing and brief biographical description of the
directors and executive officers of PennCorp Financial Group, Inc. (the
"Company").

                               CLASS II DIRECTORS
                              TERM EXPIRES IN 1997

ALLAN D. GREENBERG, Age 52
         Director

Mr. Greenberg has been a director of the Company since August 1990.  Mr.
Greenberg also serves as Chairman of the Board of ADG Insurance Advisors Inc.,
a private consulting firm specializing in life insurance actuarial and
acquisition services ("ADG").  From 1981 to 1988, Mr. Greenberg was Vice
President, Chief Actuary and a director of Geneve Capital Group, Inc., and from
1984 to 1988 he also served as Executive Vice President of Standard Security
Life Insurance Company of New York.  Mr. Greenberg is a Fellow of the Society
of Actuaries, a Fellow of the Canadian Institute of Actuaries and a Member of
the American Academy of Actuaries.  Mr. Greenberg has more than 28 years
experience in the insurance industry.  ADG provides consulting services to the
Company.  See "Executive Compensation - Compensation Committee Interlocks and
Insider Participation".

KENNETH ROMAN, Age 66
         Director

Mr. Roman has been a director of the Company since April 1993.  From 1988 to
1989, Mr. Roman served as Chairman and Chief Executive of The Ogilvy Group and,
from 1985 to 1989, as Chairman of Ogilvy & Mather Worldwide.  He was Executive
Vice President of American Express from 1989 to 1991.  He currently serves as a
Director of Compaq Computer Corporation, IBJ Schroder Bank & Trust Company, and
Brunswick Corporation.  In addition, Mr. Roman is a Vice Chairman of The New
York Botanical Garden and Overseer of Memorial Sloan-Kettering Cancer Center.

MAURICE W. SLAYTON, Age 58
         Director

Mr. Slayton has been a director of the Company since August 1990.  He is
Chairman of the Board, President and Chief Executive Officer of Conning &
Company ("Conning").  Mr. Slayton has over 20 years of experience at Conning.
Since joining Conning, Mr. Slayton co-founded the asset management group and
has worked in and actively developed all aspects of Conning's business,
including industry research, securities research, management consulting,
financial advisory services, and private equity funds.  Mr. Slayton also serves
on the Board of Directors for Arlberg Holding Company, Inc., The Robert Plan
Corporation, GAN National Insurance Company, GAN North American Insurance
Company, Cox Insurance Holdings, Ltd. and MedSpan, Inc.  Conning provides
investment management services to certain of the Company's insurance
subsidiaries.  See "Certain Transactions".

                              CLASS III DIRECTORS
                              TERM EXPIRES IN 1998

WILLIAM M. McCORMICK, Age 56
         Director

Mr. McCormick has served as a director of the Company since August 1990 and
served as President and Chief Executive Officer of the Company from August 1990
to June 30, 1995.  Prior to August 1990, Mr. McCormick served as Chairman of
the Board and Chief Executive Officer of Fireman's Fund Insurance Company from
1983 to 1990.  From 1975 to 1983, Mr.  McCormick held various management
positions with American Express Travel Related Services, Inc., American Express
Company and American Express International Banking Corporation, most recently
serving as President of American Express Travel Related Services, Inc.  Mr.
McCormick has more than 20 years experience in the insurance and financial
services industries.  On April 10, 1997, Mr. McCormick announced
<PAGE>   90
                                                                        PAGE 90



to the Company's Board of Directors that he will tender his resignation as a
director of the Company effective at the Company's 1997 Annual Meeting of
Stockholders.

BRUCE W. SCHNITZER, Age 52
         Director

Mr. Schnitzer has been a director of the Company since August 1990.  Since
1985, Mr. Schnitzer has served as Chairman of the Board of Wand Partners Inc.
(or predecessor investment activities), a private investment firm located in
New York, New York.  Mr. Schnitzer also serves as a director of the following
U.S. companies with publicly quoted securities: Chartwell Re Corporation (a
property and casualty insurance holding company), AMRESCO Inc. (a manager of
real estate assets) and Nestor, Inc. (a technology company).  From 1983 to
1985, Mr. Schnitzer served as President and Chief Executive Officer of Marsh &
McLennan, Incorporated, an insurance brokerage firm.

DAVID C. SMITH, Age 55
         Director

Mr. Smith has been a director of the Company since September 1994.  Since 1993
he has been a management consultant.  Mr.  Smith was with KPMG Peat Marwick LLP
("Peat Marwick") from 1964 until his retirement in 1993, having served as Vice
Chairman-Tax from 1987 until 1993.  He also served on the Board of Directors
and the Management Committee of Peat Marwick.  Mr. Smith is a member of the
American Institute of Certified Public Accountants.  He currently serves on the
Board of Governors of Citizens' Scholarship Foundation of America.

                               CLASS I DIRECTORS
                              TERM EXPIRES IN 1999

DAVID J. STONE, Age 54
         Chairman of the Board,
         Chief Executive Officer and Director

Mr. Stone has served as Chairman of the Board and as a director of the Company
since its formation in 1989, as Chief Executive Officer since July 1, 1995, as
President from July 1, 1995 until March 21, 1996 and as Chief Marketing Officer
from August 1990 until May 1993.  Mr. Stone also serves as Chairman of the
Board and President of David J. Stone & Company, a New York based merchant
banking firm specializing in leveraged acquisitions organized in 1978.  Mr.
Stone has more than 22 years experience in finance related business.  During
1995 and 1996, Mr. Stone served, and currently serves, as a manager of
Knightsbridge Capital, L.L.C., which is the General Partner of Knightsbridge
Capital Fund I, L.P., ("Knightsbridge Fund") a Delaware limited partnership
whose objective is to identify, acquire equity or equity-linked interests in,
and manage a portfolio of companies engaged principally in providing life and
accident and health insurance and related services. The Company is a 16.3%
limited partner in the Knightsbridge Fund.  The Company and the Knightsbridge
Fund are restructuring their business relationship.  See "Certain Relationships
and Related Transactions - Certain Transactions".

STEVEN W. FICKES, Age 42
         President, Chief Financial Officer and Director

Mr. Fickes has served as Chief Financial Officer and as a director of the
Company since August 1990, as President since March 21, 1996, and as Vice
Chairman of the Board from August 1990 until March 21, 1996. From 1982 to July
1988, Mr.  Fickes held various positions with Tillinghast, an international
actuarial consulting firm, most recently serving as the principal in charge of
its Washington, D.C. office, and from July 1988 to August 1990 was President of
a private consulting firm.  Mr. Fickes is a Fellow of the Society of Actuaries
and a member of the American Academy of Actuaries.  Mr. Fickes has more than 20
years experience in the insurance industry.  During 1995 and 1996, Mr. Fickes
served, and currently serves, as a manager of Knightsbridge Capital, L.L.C.  The
Company and the Knightsbridge Fund are restructuring their business
relationship. See "Certain Relationships and Related Transactions - Certain
Transactions".
<PAGE>   91
                                                                        PAGE 91



THOMAS A. PLAYER, Age 57
         Director

Mr. Player has been a director of the Company since August 1990.  From June
1974 to June 1995, Mr. Player served as a founding partner of Neely & Player,
P.C., a law firm located in Atlanta, Georgia. In June 1995, Mr. Player became a
senior partner in the law firm of Morris, Manning & Martin, an Atlanta based
commercial law firm having offices in Washington, D.C.  Mr. Player is the
author of a paper for the Organization of Economic Cooperation and Development
concerning insurer reorganization.  Mr. Player has over 30 years experience in
the insurance industry.

                               CLASS III DIRECTOR
                                   APPOINTEES

Upon consummation of the merger with Washington National Corporation
("Washington National"), the Company will cause Ronald L. Bornhuetter and W.
Francis Brennan, who currently serve as members of the Washington National
Board of Directors, to be appointed to serve as Class III Directors of the
Company.  Messrs. Bornhuetter and Brennan will hold such positions until their
successors are duly appointed or elected, which will occur at the Company's
1998 Annual Meeting of Stockholders, or until their earlier death, resignation
or removal.

Ronald L. Bornhuetter, Age 63
         Class III Director Appointee

Mr. Bornhuetter has served as Chairman of the Board and Chief Executive Officer
of NAC Re Corporation, a publicly traded property/casualty reinsurer, since
1985 and as a director of Washington National from January 1992.

W. Francis Brennan, Age 60
         Class III Director Appointee

Mr. Brennan was employed by UNUM Corporation for ten years, serving as
Executive Vice President from 1991 until his retirement on December 31, 1994.
Mr. Brennan has served as a member of the Washington National Board from
January 1995.

                               EXECUTIVE OFFICERS

In addition to Messrs. Stone and Fickes, who also serve as directors of the
Company, Charles H. Lubochinski, Elizabeth C. Malone, James P. McDermott,
Michael J. Prager and Scott D. Silverman serve as executive officers of the
Company.  Such officers are elected by the Board of Directors, each to serve
until his or her successor is elected and has qualified, or until his or her
earlier resignation, removal from office or death.

CHARLES H. LUBOCHINSKI, Age 50
         Senior Vice President

Mr. Lubochinski served as a Vice President of the Company from May 18, 1993
until his election as a Senior Vice President on July 11, 1996. From June 1981
to December 1990, Mr. Lubochinski served as Senior Vice President with Geneve
Corporation and affiliates, an insurance holding and financial services
company.  From January 1991 to December 1993, Mr. Lubochinski was employed by
ADG as Senior Vice President.  Mr. Lubochinski has more than 16 years experience
in the insurance industry.

ELIZABETH C. MALONE, Age 40
         Vice President

Ms. Malone joined the Company in February 1996 and was elected a Vice President
of the Company in March 1996.  From January 1994 to January 1996, Ms. Malone
was a Vice President of Legg, Mason, Wood, Walker, Inc.  From September 1991 to
November 1993, Ms. Malone was Manager of Financial Analysis for the National
Association of Insurance Commissioners.  During 1991, Ms. Malone was employed
by the Treasurer's Office of Alexander & Alexander Services Inc.  From August
1983 to November 1990, Ms. Malone was a Senior Security
<PAGE>   92
                                                                        PAGE 92



Analyst for Alex. Brown & Sons Incorporated.  Ms. Malone has more than 12 years
of experience in the insurance industry.


JAMES P. McDERMOTT, Age 35
         Senior Vice President

Mr. McDermott joined the Company in November 1992 as Vice President and
Controller of the Company's insurance subsidiaries.  He was elected Senior Vice
President of the Company in September 1995.  From January 1985 until November
1992, Mr. McDermott was employed by KPMG Peat Marwick, serving as a Senior
Manager in the firm's insurance practice prior to joining the Company.  Mr.
McDermott has more than 12 years experience in the insurance industry.

MICHAEL J. PRAGER, Age 37
         Senior Vice President and Senior Financial Officer

Mr. Prager joined the Company in October 1990 as Senior Vice President and
Chief Actuary of the Company's insurance subsidiaries.  He was elected Senior
Vice President and Senior Financial Officer of the Company in September 1995.
From June 1989 to October 1990, Mr. Prager served as a Manager of KPMG Peat
Marwick.  Mr. Prager has more than 19 years experience in the insurance
industry.

SCOTT D. SILVERMAN, Age 38
         Senior Vice President, General Counsel and Secretary

Mr. Silverman joined the Company in March 1992 and was elected Vice President,
General Counsel and Secretary of the Company in January 1994.  Mr. Silverman
was elected a Senior Vice President of the Company in September 1995.  From
1990 to March 1992, he served as Vice President-Legal and Secretary of
Independence Holding Company and from 1988 to March 1992, he served as Vice
President, Counsel and Secretary of Standard Security Life Insurance Company of
New York, a subsidiary of Independence Holding Company.  Mr. Silverman has more
than 15 years experience in the insurance industry.

                            SECTION 16(a) REPORTING

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and executive officers, and persons who beneficially own
more than 10% of the Common Stock or other equity securities of the Company, to
file with the Securities and Exchange Commission initial reports of beneficial
ownership (Form 3), reports of changes in beneficial ownership (Form 4) and
annual statements of beneficial ownership (Form 5).  Executive officers,
directors and more than 10% beneficial owners are required to provide the
Company with copies of all Section 16(a) reports they file.  Each of the
following officers failed to file a Form 5 on a timely basis to report a stock
option grant in 1996:

         Charles H. Lubochinski
         Elizabeth C. Malone
         James P. McDermott
         Michael J. Prager
         Scott D. Silverman
<PAGE>   93
                                                                        PAGE 93



ITEM 11.  EXECUTIVE COMPENSATION

The following table sets forth, for the fiscal years ended December 31, 1994,
1995 and 1996, the cash compensation  as well as certain other compensation
paid to or earned by the Company's Chief Executive Officer, and the four other
most highly compensated executive officers of the Company (collectively, the
"Named Executive Officers") for those years.


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                           Annual Compensation         Long-Term Compensation
--------------------------------------------------------------------------------------------------------------------
                                                                     Restricted      Securities       All Other
           Name and Principal               Salary        Bonus        Stock         Underlying      Compensation
                Position           Year      ($)           ($)     Awards($) (6)     Options(#)         ($)(8)
--------------------------------------------------------------------------------------------------------------------
         <S>                        <C>     <C>        <C>           <C>              <C>               <C>
            David J. Stone -        1996    687,495      860,000         --            559,000           11,869
         Chairman of the Board      1995    408,340    1,150,000         --              --              11,784
          and Chief Executive       1994    500,000      100,000         --              --              11,802
              Officer (1)
--------------------------------------------------------------------------------------------------------------------
           Steven W. Fickes -       1996    687,495      860,000         --            559,000           11,869
          President and Chief       1995    408,340    1,000,000         --             60,000           11,784
         Financial Officer (2)      1994    500,000      150,000         --              --              11,802
--------------------------------------------------------------------------------------------------------------------
          Scott D. Silverman -      1996    187,500      150,000         --             50,000           55,725
         Senior Vice President,     1995    118,750      230,000         --              --               9,133
          General Counsel and       1994    115,000       45,000     16,250(7)           5,000            8,007
             Secretary (3)
--------------------------------------------------------------------------------------------------------------------
          Michael J. Prager -       1996    187,500      150,000         --             50,000           11,869
         Senior Vice President      1995    150,000      180,000         --              --             265,153
          and Senior Financial
              Officer (4)
--------------------------------------------------------------------------------------------------------------------
          James P. McDermott -      1996    187,500      150,000         --             50,000           11,869
         Senior Vice President (5)  1995    150,000      150,000         --              --              11,784
--------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)      All compensation shown in the table for 1996 was paid pursuant to Mr.
         Stone's Employment Agreement.  See "Employment Agreements".
(2)      All compensation shown in the table for 1996 was paid pursuant to Mr.
         Fickes' Employment Agreement.  See "Employment Agreements".
(3)      Mr. Silverman became an executive officer of the Company in January
         1994.
(4)      Mr. Prager became an executive officer of the Company in September
         1995.  The table above reflects all of Mr.  Prager's 1995
         compensation.
(5)      Mr. McDermott became an executive officer of the Company in September
         1995.  The table above reflects all of Mr. McDermott's 1995
         compensation.
(6)      The only Named Executive Officers who held restricted stock at the end
         of 1996 were Messrs. Silverman, McDermott and Prager, who each held
         250 shares with a value, as of December 31, 1996, of $9,000.  Those
         shares vested on April 1, 1997.
(7)      Represents the fair market value, based on the closing price of the
         Common Stock on the NYSE on March 31, 1994 (the last trading day
         immediately prior to the date of grant), of 1,000 shares of Common
         Stock granted to Mr.  Silverman as part of his bonus for 1993.
(8)      Except as noted below, represents (a) matching and (b) profit sharing
         contributions made to the Company's 401(k) retirement and profit
         sharing plan for 1996.  (Mr. Stone: $4,750 and $7,119, respectively;
         Mr. Fickes: $4,750 and $7,119, respectively; Mr. Silverman: $2,816 and
         $7,119, respectively; Mr. Prager: $4,750 and $7,119, respectively; Mr.
         McDermott $4,750 and $7,119, respectively.)  In the case of Mr.
         Prager, the amount reflected for 1995 also includes reimbursement of
         relocation expenses of $253,369.  In the case of Mr. Silverman, the
         amount reflected for 1996 also includes reimbursement of relocation
         expenses of $45,790.
<PAGE>   94
                                                                        PAGE 94



         The following table shows options and warrants granted to the Named
         Executive Officers during the fiscal year ended December 31, 1996.

                       OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                      Individual Grants
-------------------------------------------------------------------------------------------------------------------
                                    Number of  % of Total
                                   Securities    Options
                                   Underlying  Granted to        
                                     Options    Employees      
                  Name               Granted    in Fiscal      Exercise Price  Expiration       Grant Date Present
                                       (#)        Year             ($/Sh)         Date             Value ($) (3)
-------------------------------------------------------------------------------------------------------------------
        <S>                            <C>       <C>               <C>           <C>                <C>
        David J. Stone (1)           250,000      17.88            28.875        04/15/01           2,463,750 (4)
-------------------------------------------------------------------------------------------------------------------
                                     103,000       7.37            31.762        04/15/01             906,091 (4)
-------------------------------------------------------------------------------------------------------------------
                                     103,000       7.37            34.939        04/15/01             800,516 (4)
-------------------------------------------------------------------------------------------------------------------
                                     103,000       7.37            38.404        04/15/01             700,297 (4)
-------------------------------------------------------------------------------------------------------------------
        Steven W. Fickes (1)         250,000      17.88            28.875        04/15/01           2,463,750 (4)
-------------------------------------------------------------------------------------------------------------------
                                     103,000       7.37            31.762        04/15/01             906,091 (4)
-------------------------------------------------------------------------------------------------------------------
                                     103,000       7.37            34.939        04/15/01             800,516 (4)
===================================================================================================================
                                     103,000       7.37            38.404        04/15/01             700,297 (4)
===================================================================================================================
                                                                   
        Scott D. Silverman (2)        25,000       1.79            30.000        07/12/01             254,775 (5)
-------------------------------------------------------------------------------------------------------------------
                                       8,333       0.596           31.762        07/12/01              79,297 (5)
-------------------------------------------------------------------------------------------------------------------
                                       8,333       0.596           34.939        07/12/01              70,114 (5)
===================================================================================================================
                                       8,334       0.596           38.404        07/12/01              61,372 (5)
===================================================================================================================
        Michael J. Prager (2)         25,000       1.79            30.000        07/12/01             254,775 (5)
===================================================================================================================
                                       8,333       0.596           31.762        07/12/01              79,297 (5)
-------------------------------------------------------------------------------------------------------------------
                                       8,333       0.596           34.939        07/12/01              70,114 (5)
-------------------------------------------------------------------------------------------------------------------
                                       8,334       0.596           38.404        07/12/01              61,372 (5)
===================================================================================================================
        James P. McDermott (2)        25,000       1.79            30.000        07/12/01             254,775 (5)
===================================================================================================================
                                       8,333       0.596           31.762        07/12/01              79,297 (5)
===================================================================================================================
                                       8,333       0.596           34.939        07/12/01              70,114 (5)
-------------------------------------------------------------------------------------------------------------------
                                       8,334       0.596           38.404        07/12/01              61,372 (5)
</TABLE>

(1)      Represents option grants to Messrs. Stone and Fickes under the
         Company's 1996 Stock Award and Stock Option Plan (the "1996 Stock
         Plan") pursuant to the terms of their Employment Agreements. Of these
         options, (i) 250,000 options have an exercise price of $28.875 per
         share (fair market value based on the closing price of the Common Stock
         on the NYSE on April 15, 1996, the effective date of Messrs. Stone's
         and Fickes' Employment Agreements), (ii) 103,000 options have an
         exercise price of $31.762 per share (110% of fair market value as of
         April 15, 1996), (iii) 103,000 options have an exercise price of
         $34.939 per share (121% of fair market value as of April 15, 1996), and
         (iv) 103,000 options have an exercise price of $38.404 per share (133%
         of fair market value as of April 15, 1996).  Twenty-five percent of
         each option grant shall vest on each April 15th, commencing April 15,
         1997 and all such options, unless previously exercised, will expire 
         on April 15, 2001. For a discussion of the other terms of the options,
         see "Employment Agreements".
(2)      Represents option grants under the terms of the 1996 Stock Plan.  Of 
         these options, (i) 25,000 options have an exercise price of $30 per
         share (fair market value based on the closing price of the Common Stock
         on the NYSE on July 12, 1996, the date of grant), (ii) 8,333 options
         have an exercise price of $31.762 per share (106% of the fair market
         value as of July 12, 1996), (iii) 8,333 options have an exercise price
         of $34.939 per share (116% of fair market value as of July 12, 1996),
         and (iv) 8,334 options have an exercise price of $38.404 per share
         (128% of fair market value as of July 12, 1996). Twenty-five percent
         of each option grant shall vest on each July 12th, commencing July 12,
         1997 and all such options, unless previously exercised, will expire on
         July 12, 2001.  The 1996 Stock Plan provides that in the event of a
         "change of control", the Option Committee of the Board may provide that
         exercisable and/or unexercisable stock options shall become exercisable
         as of the date of the change of control, and remain exercisable until a
         specified date on or prior to the date the stock option expires. In
         the event of the death, or termination of a participant's employment
         other than for "cause", all unexercisable stock options held as of the
         date of the death or termination of employment
<PAGE>   95
                                                                        PAGE 95



         shall be forfeited and all exercisable options held as of the date of
         death or termination of employment shall remain exercisable until:
         (i) ninety-days following the participant's death or termination of
         employment, or (ii) the date the option expires, whichever is earlier.
         In the event of the termination of a participant's employment for
         "cause", all exercisable and unexercisable stock options shall be
         forfeited.
(3)      Based on the Black-Scholes option pricing model adapted for use in
         valuing stock options. The actual value, if any, an executive may
         realize will depend on the excess of the stock price over the exercise
         price on the date the option is exercised, so that there is no
         assurance the value realized by an executive will be at or near the
         value estimated by the Black-Scholes model.  Assumptions used in
         calculating grant date present value under the Black-Scholes model
         include stock price volatility at grant date, risk-free rate of return
         at grant date, annual dividend yield at grant date, option term from
         grant date and closing stock price at grant date.  See Notes 4 and 5
         below.
(4)      The following assumptions were used to calculate the Grant Date
         Present Value using the Black-Scholes option pricing model:  stock
         price volatility at grant date of 30.12%;  risk-free rate of return at
         grant date of 5%; annual dividend yield of 0.64%; warrant term of five
         years from grant date; and closing stock price at grant date of
         $28.875 per share.
(5)      The following assumptions were used to calculate the Grant Date
         Present Value using the Black-Scholes option pricing model:  stock
         price volatility at grant date of 29.14%;  risk-free rate of return at
         grant date of 5.29%; annual dividend yield of 0.64%; warrant term of
         five years from grant date; and closing stock price at grant date of
         $30 per share.

                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                     AND FISCAL YEAR-END OPTION VALUES  (1)


<TABLE>
<CAPTION>
                                                           Number of Securities
                                                          Underlying Unexercised           Value of Unexercised
                                                             Options at Fiscal            In-the-Money Options at
                                                               Year-End (#)               Fiscal Year-End ($) (3)
                                            Value
                        Shares Acquired    Realized
                        on Exercise (#)      ($)       Exercisable    Unexercisable    Exercisable    Unexercisable
<S>                          <C>          <C>              <C>               <C>         <C>                <C>
David J. Stone                --              --           225,000           559,000     4,477,500          2,327,047
Steven W. Fickes              --              --           240,000           604,000     4,777,500          3,227,047
Scott D. Silverman            --              --             2,500            60,000        76,500            400,682
Michael J. Prager             --              --            12,500            50,000       382,500            194,157
James P. McDermott           1,683        31,657 (2)         6,459            54,358       134,864            286,459
</TABLE>

(1)      None of the Named Executive Officers exercised any stock options or
         warrants during 1996 other than Mr.  McDermott.
(2)      Based on the Fair Market Value (the average of the quoted high and low
         sale prices of the Common Stock on the date specified) of the Common
         Stock of $33.93 per share on December 30, 1996, as reported by the
         NYSE.
(3)      Based on the closing price of the Common Stock of $36 per share on
         December 31, 1996, as reported by the NYSE.
<PAGE>   96
                                                                         PAGE 96



                             EMPLOYMENT AGREEMENTS

In June 1996, each of Messrs. Stone and Fickes entered into a five-year
employment agreement with the Company.  The continuation of these employment
agreements are contingent upon the consummation of the acquisition of The
Fickes and Stone Knightsbridge Interests.  See "The PennCorp/Knightsbridge
Relationship" section.  These agreements reflect a three-part compensation
program:

Base Salary - $750,000 per year (subject to annual review for possible
increase).

Annual Incentive Bonus - Base minimum annual target bonus opportunity of
$800,000 per year if the Company meets or exceeds pre-established performance
goals, which for 1996 was based on a targeted growth rate in annual compounded
earnings per share of 15%.

Initial Stock Option Awards

         (i)     250,000 options with an exercise price of $28.875 per share;
         (ii)    103,000 options with an exercise price of $31.762 per share;
         (iii)   103,000 options with an exercise price of $34.939 per share;
                 and
         (iv)    103,000 options with an exercise price of $38.404 per share.

All the initial options to be granted in accordance with the employment
agreements will vest and become exercisable, except as otherwise described in
this paragraph, in four equal installments on each April 15, commencing April
15, 1997, and will expire on April 15, 2001.  In the event of the death or
disability (as defined) of the executive, all unexercisable options immediately
will vest and become exercisable and all the vested and unexercisable options
held by the executive on the date of death or termination of employment will
remain exercisable until the end of the option term or the end of the one-year
period following such death or the termination of employment, whichever is
earlier.  In the event of the termination of the executive's employment by the
Company without "cause", by the employee for "good reason" or by the Company or
the executive following a "change of control" (in each case, as defined), all
unexercisable options immediately will vest and become exercisable and all
vested and unexercisable options held by the executive on the date of the
termination of employment will remain exercisable until the end of the option
term.  In the event of the termination of employment by the Company for
"cause", the executive will forfeit all previously unexercised and
unexercisable stock options granted pursuant to the employment agreement.  In
the event of a termination of employment by the executive other than for "good
reason", all vested and exercisable options held by the executive on the date
of such termination of employment will remain exercisable until the earlier of
the end of the option term or the end of the six-month period following the
termination of employment.  The foregoing discussion addresses the consequences
of termination of employment with respect only to the options initially granted
under the employment agreement. In addition, due to a clerical error in
calculating the initial option exercise price as of April 15, 1996, the
foregoing options were incorrectly reported as having option exercise prices of
$29.50, $32.45, $35.695, and $39.325, respectively.

The employment agreements for Messrs. Stone and Fickes also provide that if
employment is terminated due to death, the executive's estate will receive any
annual salary or similar amounts (but not bonus) earned but not paid prior to
the date of death, plus any additional death benefits provided under the
Company's other benefit plans and programs.  In the event of the termination of
employment due to disability, in addition to any other benefits provided under
the Company's otherwise applicable plans and programs and the right to continue
to participate in the Company's employee benefit plans until reaching age 65,
the executive will receive (i) any salary or similar amounts (not bonus) earned
but not paid prior to the date of termination of employment, plus (ii) in
periodic installments until the last day of the month in which the employee
reaches age 65, an annual amount equal to 60% of the executive's base salary in
effect on the date of the termination of employment, less the amount of any
disability benefits (other than those attributable to the executive's
contributions) provided under the Company's disability plan, plus (iii) a pro
rated bonus for the year in which termination of employment occurs based on an
amount equal to the product of the average percentage of the executive's base
salary paid to the executive as an incentive bonus for the two calendar years
immediately preceding the termination of employment.  In the event of
termination of employment without cause or for good reason, in addition to
continuing to participate in the employee benefit plans of the Company until
the earlier of the end of the period for which payments are made under the
agreement or the date the executive receives equivalent coverage and benefits
from a subsequent employer, the executive will receive (i) any salary or
similar amounts (but not bonus) earned but not paid prior to the date of
termination of employment, plus (ii) a lump sum payment equal to the
executive's base salary, at the annualized rate in effect on the date of
termination of employment, for the longer of the end of the term of the
<PAGE>   97
                                                                         PAGE 97



employment agreement or 24 months (unless termination of employment follows a
change in control, such amount to be discounted using a discount rate based on
the applicable long-term federal rate published by the Internal Revenue Service
(the "IRS") for the month in which termination of employment occurs), plus
(iii) an amount equal to the same percentage of the executive's base salary as
the average of the annual incentive bonuses paid to the executive for the two
calendar years immediately preceding the date of termination of employment  was
as a percentage of base salary in each such year.  In the event of a
termination of employment following a change of control, the executive will
receive the same benefits as for termination without cause, or if the executive
resigns without good reason, the executive will be entitled to receive only
base salary and similar amounts (but not bonus) earned but not paid prior to
the termination of employment.

The employment agreements also provide that Messrs. Stone and Fickes will not
engage in any "competitive activity" (as defined) during the term of the
agreements or, in the event of a voluntary termination of employment by the
executive, for a six-month period following the termination of employment.  In
addition, during the term of the agreements or, in the event of a voluntary
termination of employment by the executive, for a one-year period following the
termination of employment, the executive will not, directly or indirectly,
solicit, negotiate with or enter into discussions with the shareholders or
representatives of any business with which the Company has engaged in
discussions to acquire, merge, or enter into a joint venture during the
12-month period immediately preceding the date of the termination of
employment.  Moreover, the executive will agree not to solicit (i) the
Company's employees for 18 months following the termination of employment and
(ii) the Company's agents, brokers or policyholders for 36 months following the
termination of employment.

Upon approval by the Company's shareholders of the purchase by the Company of
The Fickes and Stone Knightsbridge Interests and the SW Financial Controlling
Interest (each as hereinafter defined, see "The PennCorp - Knightsbridge
Relationship"), Messrs. Stone and Fickes have agreed to modify their employment
agreements to provide that they shall not directly or indirectly engage in
any Fund Competitive Activity (as defined) during (i) the term of employment,
or (ii) in the event of a voluntary termination of employment prior to the date
on which the aggregate Investments (as defined in the Knightsbridge Fund
Partnership Agreement) made by the Knightsbridge Fund in Portfolio Companies
(as defined in the Knightsbridge Fund Partnership Agreement) equals or exceeds
$92 million, the one-year period following the date of the executive's
termination of employment, or (iii) in the event of a voluntary termination of
employment on or after the date on which the aggregate Investments (as defined
in the Knightsbridge Fund Partnership Agreement) made by the Knightsbridge Fund
in Portfolio Companies (as defined in the Knightsbridge Fund Partnership
Agreement) equals or exceeds $92 million (the "Fully Invested Date"), the
nine-month period following the Fully Invested Date or the six-month period
following the date of the executive's termination of employment, whichever is
longer.

                                DIRECTORS' FEES

Directors of the Company are entitled to reimbursement of their reasonable
out-of-pocket expenses in connection with their travel to and attendance at
meetings of the Board of Directors or committees thereof.  In addition, each
director of the Company who is not also an officer or salaried employee of the
Company (a "Non-Employee Director") receives an annual fee of $25,000 and a fee
of $2,000 for each meeting of the Board of Directors at which such director is
present.  Each Non-Employee Director who is a member of a committee of the
Board of Directors also receives a fee of $1,000 for each meeting of such
committee at which such director is present.  Committee chairmen receive an
additional annual fee of $5,000.

In addition to the foregoing, the Warrant Plan grants each Non-Employer
Director (other than Messrs. Greenberg and McCormick) a ten-year warrant to
purchase up to 3,000 shares of Common Stock upon his election to the Board of
Directors.  The exercise price of such warrants with respect to each share of
underlying Common Stock is equal to the fair market value of the Common Stock on
the date of grant.  Each warrant vests and becomes exercisable in three equal
annual installments commencing on the first anniversary date after the date of
the grant provided that the Non-Employee Director is serving as a director of
the Company on such anniversary date.  On November 5, 1992, each of Messrs.
Schnitzer, Slayton and Player were granted warrants to purchase up to 3,000
shares of Common Stock at an exercise price of $14.19 per share.  On April 1,
1993, Mr. Roman received a warrant to purchase up to 3,000 shares of Common
Stock at an exercise price of $19.06 per share.  On September 1, 1994, Mr.
Smith received a warrant to purchase up to 3,000 shares of Common Stock at an
exercise price of
<PAGE>   98
                                                                         PAGE 98



$15.63 per share.  Due to the annual grants to Non-Employee Directors under the
1996 Stock Plan, no further awards will be made under the Warrant Plan.

On November 5, 1992, Mr. Greenberg received a warrant to purchase up to 225,000
shares of Common Stock under the Warrant Plan.  Each of Messrs. Stone, Fickes
and McCormick received identical warrants.  These warrants are now fully
vested.  The exercise price for the warrants is $16.10 per share of Common
Stock.

In 1996, each of Messrs. Player, Roman, Schnitzer, Slayton and Smith were
awarded 1,000 shares of Common Stock under the 1996 Stock Plan (plus cash to
cover tax liabilities).  The 1996 Stock Plan provides for the grant of 1,000
shares of stock to all future Non-Employee Directors elected to the Board of
Directors and, in addition, provides for an annual grant of 1,000 shares of
Common Stock to each then serving Non-Employee Director.  Additionally, the
1996 Stock Plan generally enables Non-Employee Directors to receive a portion
of their annual fees in Common Stock.  Certain directors elected to receive
Common Stock in lieu of a portion of their annual fee for 1997.

                     COMPENSATION COMMITTEE INTERLOCKS AND
                             INSIDER PARTICIPATION

The Compensation Committee consists of Messrs. Roman, Schnitzer, Smith and
Greenberg.  Mr. Greenberg became a member of the Compensation Committee on
September 21, 1995.  In 1996, ADG, of which Mr. Greenberg is Chairman, earned
aggregate consulting fees, including reimbursement of actual out of pocket
expenses, of $250,000 for services in connection with the Company's acquisition
activities.

                  [Remainder of page intentionally left blank]
<PAGE>   99
                                                                         PAGE 99



ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Except as otherwise noted below, the following table sets forth, as of March
14, 1997, the ownership of the outstanding shares of Common Stock held by
persons known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, by all directors of the Company, by the
Named Executive Officers, and by the executive officers and directors of the
Company as a group, and the percentage of the Common Stock represented thereby.
Except as otherwise noted below, the Company believes that each director, Named
Executive Officer, executive officer and over 5% stockholder shown below has
sole voting and sole investment power with respect to all shares beneficially
owned by them.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                                                     Amount and Nature of
                                                                     Beneficial Ownership
                     Name and Address of Beneficial Owner                                    Percent of Class
==============================================================================================================
             <S>                                                           <C>                     <C>
             The Mutuelles AXA  (1)
               100-101 Terrasse Boieldieu                                  3,849,351               13.2
               92042 Paris La Defense France
--------------------------------------------------------------------------------------------------------------
             American Express Company  (2)
               World Financial Center                                      2,887,000               10.2
               200 Vesey Street
               New York, New York  10285
--------------------------------------------------------------------------------------------------------------
             Massachusetts Financial Services Company  (3)
               500 Boylston Street                                         2,476,185               8.7
               Boston, Massachusetts  02116
--------------------------------------------------------------------------------------------------------------
             Merrill Lynch & Co., Inc.  (4)
               World Financial Center, North Tower                         2,060,860               7.2
               250 Vesey Street
               New York, New York  10281
==============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
                                                                     Amount and Nature of
                                                                     Beneficial Ownership
                           Name of Beneficial Owner                                          Percent of Class
--------------------------------------------------------------------------------------------------------------
             <S>                                                                 <C>              <C>
             Steven W. Fickes  (5)                                                 590,810         2.1
==============================================================================================================
             Allan D. Greenberg  (6)                                               403,753         1.4
--------------------------------------------------------------------------------------------------------------
             William M. McCormick  (7)                                             858,129         3.0
==============================================================================================================
             James P. McDermott  (8)                                                 8,392          *
--------------------------------------------------------------------------------------------------------------
             Thomas A. Player  (9)                                                   9,128          *
--------------------------------------------------------------------------------------------------------------
             Michael J. Prager  (10)                                                14,550          *
--------------------------------------------------------------------------------------------------------------
             Kenneth Roman  (11)                                                     8,460          *
--------------------------------------------------------------------------------------------------------------
             Bruce W. Schnitzer  (12)                                               45,203          *
--------------------------------------------------------------------------------------------------------------
             Scott D. Silverman  (13)                                                3,500          *
--------------------------------------------------------------------------------------------------------------
             Maurice W. Slayton  (14)                                                7,383          *
--------------------------------------------------------------------------------------------------------------
             David C. Smith  (15)                                                   10,460          *
==============================================================================================================
             David J. Stone  (16)                                                1,169,577         4.1
--------------------------------------------------------------------------------------------------------------
             All directors and executive officers as a group  (17)               3,146,345        11.05
--------------------------------------------------------------------------------------------------------------
</TABLE>
*    Represents less than 1%.

(1)      The Mutuelles AXA (consisting of AXA Assurances I.A.R.D.  Mutuelle;
         AXA Assurances Vie Mutuelle; Alpha Assurances I.A.R.D. Mutuelle; Alpha
         Assurances Vie Mutuelle; and AXA Courtage Assurance Mutuelle (formerly
         known as Uni Europe Assurance Mutuelle), as a group) and AXA, parent
         holding company for AXA Equity & Law PLC (U.K.).  Each of the
         Mutuelles AXA and AXA disclaim beneficial ownership of the shares
         shown above.  The principal business office of (i) Alpha Assurances
         I.A.R.D. Mutuelle and Alpha Assurances Vie Mutuelle is 100- 101
         Terrasse Boieldieu 92042 Paris La Defense France; (ii)  AXA Assurances
         I.A.R.D. Mutuelle and AXA Assurances Vie Mutuelle is 21, rue de
         Chateaudun 75009 Paris France; (iii) AXA Courtage Assurance Mutuelle
         is 26, rue Louis le Grand 75002 Paris France; and (iv) AXA is 23,
         avenue Matignon 75008 Paris France.  The Equitable Companies
         Incorporated is a parent holding company for The Equitable Life
         Assurance Society of the United States, an insurance company, a
         registered investment adviser and broker-dealer, Alliance Capital
         Management L.P., a registered investment adviser, Donaldson, Lufkin &
         Jenrette Securities Corporation,
<PAGE>   100
                                                                        PAGE 100



         a registered investment adviser and broker-dealer and Wood, Struthers
         & Winthrop Management Corporation, a registered investment adviser.
         The principal business office of The Equitable Companies Incorporated
         is 787 Seventh Avenue, New York, New York 10019.  Each of the
         foregoing subsidiaries of The Equitable Companies Incorporated
         operates under independent management and makes independent decisions.
         As of December 31, 1996, based on Amendment No. 7 to Schedule 13G
         filed with the Securities and Exchange Commission (the "Commission")
         on February 12, 1997 by the Mutuelles AXA and The Equitable Companies
         Incorporated, (i) AXA Equity and Law PLC had sole voting and
         dispositive power over 150,700 shares of Common Stock; (ii)  The
         Equitable Life Assurance Society of the United States had sole voting
         and dispositive power over 70,926 shares of Common Stock including
         45,126 shares of Common Stock issuable upon the conversion of the
         Company's $3.375 Convertible Preferred Stock (iii) Alliance Capital
         Management, L.P.  had  sole voting power over 3,130,147 shares of
         Common Stock and sole dispositive power over 3,538,355 shares of
         Common Stock including 521,453 shares of Common Stock issuable upon
         the conversion of the Company's $3.375 Convertible Preferred Stock;
         (iv) Donaldson, Lufkin & Jenrette Securities Corporation had sole
         voting and dispositive power over 22,120 shares of Common Stock
         issuable upon the conversion of the Company's $3.375 Convertible
         Preferred Stock and shared dispositive power over 10,250 shares of
         Common Stock; and (v) Wood, Struthers & Winthrop Management
         Corporation had sole voting power over 23,000 shares of Common Stock
         and sole dispositive power over 57,000 shares of Common Stock.  The
         shares held by Alliance Capital Management, L.P. and Wood, Struthers &
         Winthrop Management Corp. were acquired solely for investment purposes
         on behalf of client discretionary investment advisory accounts.   The
         shares held by AXA Equity & Law PLC, The Equitable Life Assurance
         Society of the United States and Donaldson, Lufkin & Jenrette
         Securities Corporation were acquired solely for investment purposes.

(2)      American Express Company ("AEC") is the parent holding company of
         American Express Financial Corporation ("AEFC"), which is a registered
         investment adviser.  AEC disclaims beneficial ownership of the shares
         of Common Stock shown in the table above.  The principal business
         office of AEC is 200 Vesey Street, World Financial Center, New York,
         New York 10285.  The principal business office of AEFC is IDS Tower
         10, Minneapolis, Minnesota 55440.  The following information is based
         solely on Amendment No. 3 to Schedule 13G dated December 31, 1996
         filed by AEC and AEFC with the Commission.  As of December 31, 1996
         AEC and AEFC had shared voting power over 1,148,900 shares of Common
         Stock and shared dispositive power over 2,887,000 shares of Common
         Stock.  AEC reported the combined holdings of these entities for the
         purpose of administrative convenience.

(3)      The following information is based solely on Schedule 13G dated
         February 12, 1997, filed with the Commission by Massachusetts
         Financial Services Company ("MFS").  The principal business office of
         MFS is 500 Boylston Street, Boston, Massachusetts 02116.  As of
         December 31, 1996, MFS had sole voting power over 2,429,685 shares of
         Common Stock and sole dispositive power over 2,476,185 shares of
         Common Stock.

(4)      Merrill Lynch & Co., Inc. ("ML&Co.") is the parent holding company of
         Merrill Lynch Group, Inc., ("ML Group"), Princeton Services, Inc.
         ("PSI") and Merrill Lynch, Pierce, Fenner & Smith Incorporated
         ("MLPF&S").  PSI is the general partner of Merrill Lynch Asset
         Management, L.P., a registered investment adviser, (d/b/a Merrill
         Lynch Asset Management ("MLAM").  MLAM provides investment advisement
         to Merrill Lynch Capital Fund, Inc., a registered investment company,
         ("MLCF").  The principal business offices of (i) ML&Co. is World
         Financial Center, North Tower, 250 Vesey Street, New York, New York
         10281; (ii) ML Group is World Financial Center, North Tower, 250 Vesey
         Street, New York, New York 10281; (iii) PSI is 800 Scudders Mill Road,
         Plainsboro, New Jersey 08536; (iv) MLAM is 800 Scudders Mill Road,
         Plainsboro, New Jersey 08536; and (v) MLCF is 800 Scudders Mill Road,
         Plainsboro, New Jersey 08536.  ML&Co may be deemed to be the
         beneficial owner of certain of the shares shown on the chart above by
         virtue of its control of its wholly-owned subsidiaries ML Group and
         MLPF&S.  ML Group may be deemed to be the beneficial owner of the
         shares shown on the chart above by virtue of its control of its
         wholly-owned subsidiary PSI.  PSI may be deemed to be the beneficial
         owner of the shares shown on the chart above by virtue of its being
         the general partner of MLAM.  MLAM may be deemed to be the beneficial
         owner of the shares shown above by virtue of its acting as an
         investment adviser to MLCF.  MLCF is the beneficial owner of the
         shares shown above.  ML&Co., ML Group, and PSI disclaim beneficial
         ownership of the shares of Common Stock shown
<PAGE>   101
                                                                        PAGE 101



         above.  As of December 31, 1996, based on a Schedule 13G filed with
         the Commission on February 12, 1997 by ML&Co., (i) ML&Co. had shared
         voting and dispositive power over 2,060,860 shares of Common Stock;
         (ii) ML Group had shared voting and dispositive power over 2,060,000
         shares of Common Stock; (iii) PSI had shared voting and dispositive
         power over 2,060,000 shares of Common Stock; (iv) MLAM had shared
         voting and dispositive power over 2,060,000 shares of Common Stock;
         and (v) MLCF had shared voting and dispositive power over 2,000,000.

(5)      Consists of (i) 184,226 shares of Common Stock owned of record by Mr.
         Fickes, (ii) 225,000 shares of Common Stock that may be purchased
         pursuant to a presently exercisable Management Warrant, (iii) 30,000
         shares of Common Stock that may be purchased pursuant to a presently
         exercisable Warrant, (iv) 139,750 shares of Common Stock that may be
         purchased pursuant to presently exercisable stock options awarded to
         Mr. Fickes pursuant to his Employment Agreement effective April 15,
         1996, (the continuation of the Employment Agreement is contingent upon
         the consummation of the acquisition of The Fickes and Stone 
         Knightsbridge Interests), (v) 11,106 shares of Common Stock held of 
         record by Mr. Fickes' wife and (vi) 728 shares of Common Stock held 
         of record by Mr. Fickes' children.  Mr. Fickes disclaims beneficial 
         ownership of Common Stock not held of record by him.

(6)      Consists of (i) 168,753 shares of Common Stock owned of record by Mr.
         Greenberg, (ii) 225,000 shares of Common Stock that may be purchased
         pursuant to a presently exercisable Management Warrant and (iii)
         10,000 shares of Common Stock owned of record by a trust for the
         benefit of Mr. Greenberg's minor children over which Mr.  Greenberg's
         wife has sole voting power.  Mr. Greenberg disclaims beneficial
         ownership of Common Stock not held of record by him.

(7)      Consists of (i) 570,760 shares of Common Stock subject to a presently
         exercisable warrant held by a living trust of which Mr. McCormick is
         the sole beneficiary and trustee (the "McCormick Living Trust"), (ii)
         225,000 shares of Common Stock that may be purchased pursuant to a
         presently exercisable Management Warrant, (iii) 10,000 shares of
         Common Stock owned by Mr. McCormick, (iv) 31,967 shares of Common
         Stock held by the McCormick Living Trust, (v) 5,550 shares of Common
         Stock held of record by Mr. McCormick's minor children over which Mr.
         McCormick has voting power, (vi) 10,000 shares of Common Stock owned
         of record by an irrevocable trust for the benefit of Mr. McCormick's
         minor children and over which Mr. McCormick has no voting or
         investment control and (vii) 4,852 shares of Common Stock owned by Mr.
         McCormick's wife.  Other than the shares of Common Stock held by Mr.
         McCormick's minor children over which Mr. McCormick has voting control
         and the warrants and shares of Common Stock owned by Mr. McCormick and
         by the McCormick Living Trust,  Mr. McCormick disclaims beneficial
         ownership of Common Stock not held of record by him.

(8)      Consists of (i) 1,933 shares of Common Stock owned of record by Mr.
         McDermott and (ii) 6,459 shares of Common Stock remaining from a
         presently exercisable employee stock option awarded to Mr. McDermott
         on November 17, 1992.

(9)      Consists of (i) 6,128 shares of Common Stock owned of record by Mr.
         Player and (ii) 3,000 shares of Common Stock that may be purchased
         pursuant to a presently exercisable Management Warrant.

(10)     Consists of (i) 2,050 shares of Common Stock owned of record by Mr.
         Prager, and (ii) 12,500 shares of Common Stock subject to a presently
         exercisable employee stock option awarded to Mr. Prager on April 3,
         1992.

(11)     Consists of (i) 5,460 shares of Common Stock owned of record by Mr.
         Roman and (ii) 3,000 shares of Common Stock that may be purchased
         pursuant to a presently exercisable Management Warrant.

(12)     Consists of (i) 23,497 shares of Common Stock owned of record by Mr.
         Schnitzer, (ii) 18,706 shares owned of record by Magical Corporation,
         of which Mr. Schnitzer is the sole owner and (iii) 3,000 shares of 
         Common Stock that may be purchased pursuant to a presently exercisable
         Management Warrant.  
<PAGE>   102
                                                                        PAGE 102



(13)     Consists of (i) 1,000 shares of Common Stock owned of record by Mr.
         Silverman and (ii) 2,500 shares of Common Stock subject to a presently
         exercisable employee stock option awarded to Mr. Silverman on April 3,
         1992.

(14)     Consists of (i) 4,383 shares of Common Stock owned of record by Mr.
         Slayton and (ii) 3,000 shares of Common Stock that may be purchased
         pursuant to a presently exercisable Management Warrant.

(15)     Consists of 7,460 shares of Common Stock owned of record by Mr. Smith
         and (ii) 3,000 shares of Common Stock that may be purchased pursuant
         to a presently exercisable Management Warrant.

(16)     Consists of (i) 470,647 shares of Common Stock held of record by Mr.
         Stone, (ii) 225,000 shares of Common Stock that may be purchased
         pursuant to a presently exercisable Management Warrant, (iii) 139,750
         shares of Common Stock that may be purchased pursuant to presently
         exercisable stock options awarded to Mr. Stone pursuant to his
         Employment Agreement effective April 15, 1996, (the continuation of the
         Employment Agreement is contingent upon the consummation of the
         acquisition of The Fickes and Stone Knightsbridge Interests), (iv)
         320,805 shares of Common Stock held of record by Mr. Stone's wife and
         (v) 13,375 shares of Common Stock held of record by Mr.  Stone's adult
         children.  Mr. Stone disclaims beneficial ownership of Common Stock
         not held of record by him.

(17)     Assumes the exercise of warrants to purchase shares 1,826,719 of
         Common Stock.  See Notes (5-16).


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                              CERTAIN TRANSACTIONS

Mr. Slayton, a director of the Company, is the Chairman of the Board, President
and Chief Executive Officer of Conning & Company ("Conning") and of Conning
Corporation, the parent of Conning.  Conning provides portfolio management and
related services for a portion of the investment assets of the Company's
insurance subsidiaries.  In 1996, Conning earned aggregate fees, including
reimbursement of actual out of pocket expenses, in the approximate amount of
$895,000 for investment management services.

The PennCorp/Knightsbridge Relationship

General. In 1995, with the authorization of the Company's Board, David J. Stone
and Steven W. Fickes, the Company's two most senior officers, organized the
Knightsbridge Fund to raise capital, to be managed by them and to make equity
and equity-linked investments in companies engaged primarily in the life
insurance industry. The Knightsbridge Fund, whose limited partners include
affiliates of 10 leading domestic and international banking organizations, has
received subscriptions for approximately $92,000,000 in limited partnership
interests, including a $15,000,000 subscription from the Company. The general
partner of the Knightsbridge Fund is Knightsbridge Capital L.L.C.
("Knightsbridge Capital"), the members of which are Messrs. Stone and Fickes.
Allan D. Greenberg, a member of the Company's Board, formerly owned a 5%
interest in Knightsbridge Capital. Messrs. Stone and Fickes have purchased Mr.
Greenberg's interest in Knightsbridge Capital in connection with the
restructuring of the relationship between the Company and the Knightbridge
Fund.

During the second half of 1995, the Company's Board and Messrs. Stone and
Fickes, on behalf of the Knightsbridge Fund, discussed the formation of a joint
venture to pursue life insurance acquisitions and investments. The Company's
Board and Messrs. Stone and Fickes concluded that the formation of a joint
venture to combine Company's and the Knightsbridge Fund's resources on a
transaction-by-transaction basis could increase the opportunities of each to
invest in a broader range of transactions. As part of that joint venture
arrangement, the Company received a right of first refusal on all insurance
transactions considered by the Knightsbridge Fund. In September 1995, the
Company's Board appointed a special committee of the Company's Board composed of
Thomas A. Player, Kenneth Roman, David C. Smith, Maurice W. Slayton and Bruce
W. Schnitzer (the "Knightsbridge Committee"), one of the responsibilities of
which was to evaluate all transactions submitted to the Company by the
Knightsbridge Fund and to determine whether a particular transaction would be
pursued solely by the Company, pursued jointly with the Knightsbridge Fund, or
not pursued by the Company, in which case the Knightsbridge Fund would be
permitted to pursue the transaction for its own account. The
<PAGE>   103
                                                                        PAGE 103



Knightsbridge Fund and the Company determined to use Knightsbridge Management
L.L.C. ("Knightsbridge Management"), the manager of the Knightsbridge Fund, as
their joint venture vehicle and to provide merchant banking services on all
insurance acquisitions involving the companies acquired or invested in by the
Knightsbridge Fund or the Company.

On December 14, 1995, pursuant to a joint transaction approved by the Company's
Board, SW Financial, a newly organized corporation formed by the Company, the
Knightsbridge Fund and Messrs. Stone and Fickes, purchased (the "SW Financial
Investment") Southwestern Life Insurance Company ("Southwestern Life") and
Union Bankers Insurance Company ("Union Bankers") and certain related assets
from I.C.H. Corporation and certain of its subsidiaries (collectively, "ICH")
for $260,000,000. The Company and its subsidiaries invested an aggregate of
$120,000,000 in cash to purchase voting common stock, nonvoting common stock,
common stock warrants and preferred stock of SW Financial and preferred stock
of one of SW Financial's subsidiaries. SW Financial used the proceeds from the
Company's investment, together with a $23,000,000 investment by the
Knightsbridge Fund and a $7,000,000 investment by Messrs. Stone and Fickes,
$120,000,000 in borrowings under a $125,000,000 credit facility arranged by SW
Financial and the issuance to ICH of $40,000,000 principal amount of SW
Financial's convertible debentures, to fund the purchase price for Southwestern
Life and Union Bankers. The balance of the proceeds raised by SW Financial were
used to make a $30,000,000 capital contribution to Southwestern Life and Union
Bankers, to pay transaction fees and expenses of $10,000,000, to fund an
$8,000,000 interest reserve for the SW Financial convertible debentures and to
provide $2,000,000 of working capital. Immediately after the consummation of
the SW Financial Investment, and without giving effect to the conversion of the
SW Financial convertible debentures, the Company beneficially owned 75.4%, and
the Knightsbridge Fund and Messrs. Stone and Fickes, collectively, beneficially
owned 33.5%, of SW Financial's outstanding common stock.

In December 1995, Knightsbridge Management received a fee of $3,900,000 from SW
Financial upon completion of the acquisition of Southwestern Life and Union
Bankers. Based on their respective fully diluted equity investments in SW
Financial (calculated without regard to SW Financial's convertible debentures,
which were issued to a third party), the Company's funding obligation to
Knightsbridge Management for 1996 was reduced by $1,300,000 (50.0% of the
Company's share of the $3,900,000 fee obligation based on its two-thirds
interest in the SW Financial Investment) and the Limited Partners' 1996
management fee to Knightsbridge Management was reduced, in the aggregate, by
$650,000 (50.0% of the Knightsbridge Fund's share of the $3,900,000 fee
obligation based on its one-third interest in the SW Financial Investment). In
addition, the Company recorded $530,000 of income in 1995 related to its 45.0%
interest in Knightsbridge Management's 1995 net distributable income.

For the years ended December 31, 1996 and 1995, the Company paid or accrued
$2,548,000 and $3,900,000 in transaction fees to Knightsbridge Management
related to the United Companies Life Insurance Company ("UC Life") and SW
Financial transactions, respectively.  During 1996, certain of the Company's
affiliates and subsidiaries paid management fees to Knightsbridge Management
amounting to $2,190,000 which have been contingently expensed pending the
shareholder vote on the acquisition of The Fickes and Stone Knightsbridge
Interests (as hereinafter defined).  SW Financial and UC Life incurred
Knightsbridge Management investment advisory fees totaling $2,426,000 and $0
during 1996 and 1995, respectively.  In addition, the Company received a
$1,000,000 stand-by commitment fee from SW Financial for contingent financing
on a real estate transaction.  SW Financial did not draw upon the commitment.

In January 1996, the Knightsbridge Fund entered into an agreement to purchase
United Companies Life Insurance Company ("UC Life") from United Companies
Financial Corporation. As part of the Knightsbridge restructuring transactions
which are described herein, the Company purchased the right to consummate the
UC Life acquisition from the Knightsbridge Fund partners for approximately
$7,575,000 in cash (or approximately $6,375,000 after giving effect to the
Company's portion of that payment), which was the only right of the
Knightsbridge Fund with respect to UC Life. Neither Mr. Stone nor Mr.  Fickes
nor their respective affiliates received, nor will they receive after giving
effect to the consummation of the acquisition of The Fickes and Stone
Knightsbridge Interests by the Company, any portion of that payment.  The
Company completed the UC Life acquisition on July 24, 1996. Knightsbridge
Management accrued a fee of $2,548,000 from the Company in connection with the
consummation of that transaction.

On January 11, 1996, a stockholder derivative lawsuit styled Tozour Energy
Systems Retirement Plan v. David J. Stone et al. and PennCorp Financial Group,
Inc., C.A. No. 14775, was filed against the Company and each of its
<PAGE>   104
                                                                        PAGE 104



directors, individually, in the Court of Chancery for the State of Delaware. On
January 25, 1996, a second shareholder derivative suit, styled Lois Miller v.
David J. Stone et al. and PennCorp Financial Group, Inc., C.A. No. 14795, was
filed against the Company and each of its directors, individually, in the
Delaware Chancery Court. The complaint in that suit has not yet been served on
the Company or the other defendants. The suits allege that the SW Financial
Investment involved the usurpation of a corporate opportunity and a waste of
the Company's assets by Messrs. Stone and Fickes, and that the directors of the
Company in approving that transaction, failed to act in good faith and breached
their fiduciary duties, including the duty of loyalty to the Company and its
stockholders, having favored the interests of Messrs. Stone and Fickes over the
Company and its stockholders. The Tozour and Miller lawsuits seek judgments
against each of the defendants for the amount of damages sustained or to be
sustained by the Company as a result of the breaches of fiduciary duty alleged
in the complaints, the imposition of a constructive trust for the benefit of
the Company on profits or benefits obtained by any defendant through the
alleged breaches of fiduciary duty, attorneys' fees and costs, and such other
relief as the court determines to be just, proper or equitable. Parties to the
lawsuits have executed a Stipulation and Agreement of Compromise and Settlement
which contains the terms and conditions described below.

In February 1996, Messrs. Stone and Fickes began discussions with the Company's
Board on a means of consolidating their outside business interests, including
the Knightsbridge Fund, under the Company. Subsequently, Messrs. Stone and
Fickes and the members of the Knightsbridge and Compensation Committees of the
Company's Board developed a plan to enable the Company to manage the
Knightsbridge Fund and to provide Messrs. Stone and Fickes with a compensation
program that offers them compensation opportunities with economic interests
aligned with stockholders generally and that provides incentives for each to
make a long-term, full-time commitment to the Company. On June 7, 1996 Messrs.
Stone and Fickes entered into five-year employment agreements with the Company.
The continuation of those employment agreements, including the stock options
granted thereunder, is contingent upon the consummation of the acquisition of
The Fickes and Stone Knightsbridge Interests.  In addition to the employment
agreements, the other components of the Knightsbridge restructuring plan
include: (i) the acquisition by the Company of the interests of Messrs. Stone
and Fickes (collectively, "The Fickes and Stone Knightsbridge Interests") in
Knightsbridge Management, Knightsbridge Capital, and Knightsbridge Consultants
L.L.C., the asset management subsidiary of Knightsbridge Management
("Knightsbridge Consultants"); and (ii) the acquisition by the Company from the
Knightsbridge Fund and Messrs. Stone and Fickes of their respective holdings of
common stock and common stock warrants of SW Financial, provided that if the
proposed litigation settlement is approved, Messrs. Stone and Fickes will
cancel their SW Financial common stock warrants for no additional
consideration.

Acquisition of The Fickes and Stone Knightsbridge Interests. The Company
proposes to acquire The Fickes and Stone Knightsbridge Interests in exchange
for the Company's agreement to make annual cash payments, currently estimated
to be approximately $330,000, to each of Messrs. Stone and Fickes on the
closing of the purchase of The Fickes and Stone Knightsbridge Interests and on
each April 15 thereafter, commencing April 15, 1998 and ending on April 15,
2001, and to deliver to each of Messrs. Stone and Fickes 173,160 shares of
Common Stock (subject to adjustment for stock splits, reverse stock splits and
similar transactions) on April 15, 2001 (subject to acceleration upon a change
of control, as defined). The total number of shares to be delivered to each of
Messrs. Stone and Fickes has been calculated by dividing $5,000,000 (the value
agreed to by the Company's Board and each of Messrs. Stone and Fickes for the
sale of their respective portions of The Fickes and Stone Knightsbridge
Interests) by $28.875 per share, the closing price of the Company's Common
Stock on the NYSE on April 15, 1996, the date on which the Knightsbridge
Committee and Messrs. Stone and Fickes reached agreement on the general terms
of the acquisition of The Fickes and Stone Knightsbridge Interests and the
effective date of the Fickes and Stone employment agreements. The actual amount
of the annual cash payment will be based on a theoretical rate of interest
equal to the IRS's mid-term rate at the time of the consummation of the
acquisition of The Fickes and Stone Knightsbridge Interests on a notional
amount of $5,000,000. In addition, Messrs.  Stone and Fickes (i) will retain
their right to receive, under the circumstances specified in the Knightsbridge
Fund's limited partnership agreement, their portion of the general partner's
20% share of the profits earned by the limited partners of the Knightsbridge
Fund on the Fund's $23,000,000 investment in SW Financial and (ii) will
withdraw the balance in their capital accounts in Knightsbridge Management as
of December 31, 1995 and, in addition, will receive at the closing of the
acquisition of The Fickes and Stone Knightsbridge Interests an amount in cash
(currently estimated to be approximately $150,000 in the aggregate) not to
exceed their share of Knightsbridge Management's net distributable income from
January 1, 1996 through April 15, 1996.  The acquisition of The Fickes and
Stone Knightsbridge Interests shall be submitted for approval by the
shareholders of the Company at a Special Meeting currently expected to be held
in June 1997.

<PAGE>   105
                                                                        PAGE 105



As part of the Knightsbridge restructuring and at the request of the Company's
Board, Portsmouth Group, L.L.C.  ("Portsmouth"), which owns a viatical
settlement company, has agreed to repurchase the common equity interests in
Portsmouth held by Messrs. Stone and Fickes and other executive officers of the
Company, which were originally purchased for approximately $2,150,000. The
investments in Portsmouth made by Messrs. Stone and Fickes were part of their
co-investment requirement as the general partners of the Knightsbridge Fund.
(Other than the SW Financial Investment, the Portsmouth investment is the only
other investment made by the Knightsbridge Fund to date). Following the
repurchase of the common equity interests of Messrs. Stone and Fickes and other
Company executive officers in Portsmouth, the Knightsbridge Fund will own all
of the outstanding common equity of Portsmouth. Additionally, as part of an
agreement between Portsmouth, Messrs. Fickes and Stone, and the Company in
connection with the release of Messrs. Fickes and Stone from their
co-investment obligations under the Knightsbridge Fund, SW Financial has
agreed, subject to required regulatory approvals, if any, and negotiation of
definitive documentation and receipt of advice with respect to appropriate
arms' length terms, to make up to a $10,000,000 preferred equity investment in
Portsmouth. Up to $3,000,000 of the proceeds (the exact amount to be determined
following a valuation of Portsmouth) from the investment by SW Financial will
be used by Portsmouth to purchase the common equity of Messrs. Stone, Fickes
and the executive officers. The balance will be used by Portsmouth to fund its
growth in the viatical settlement business. Following the consummation of the
Knightsbridge restructuring, Messrs. Stone and Fickes will have no further
economic interests in the Knightsbridge Fund.

By acquiring The Fickes and Stone Knightsbridge Interests, the Company will
receive the entire annual management fee paid by the limited partners of the
Knightsbridge Fund (presently $1.4 million per year, subject to certain
offsets) to Knightsbridge Management, transactional fees on investments made by
the Knightsbridge Fund and all the fees for oversight and investment management
services provided to businesses in which the Knightsbridge Fund invests. In
addition, the Company will acquire control of the general partner of the
Knightsbridge Fund and, therefore, will control all future investment decisions
by that Fund. The Company's Board believes that control of the Knightsbridge
Fund will be an asset to the Company because it will provide management with an
alternative source of available capital and the flexibility to diversify its
risk in making strategic investments in, and/or acquisitions of, life insurance
and related companies that do not necessarily complement the core strengths of
the Company. As the general partner of the Knightsbridge Fund, the Company will
co-invest, in addition to its 16.3% limited partnership investment, $5,000,000
per Knightsbridge Fund transaction. Accordingly, as the general partner of the
Knightsbridge Fund, so long as the limited partners achieve at least a 15%
cumulative rate of return on their invested capital in all future transactions,
the Company will be entitled to 20% of all profits earned by the limited
partners. On September 19, 1996, Smith Barney Inc.  ("Smith Barney") delivered
to the Company's Board orally and in writing its opinion that, as of April 15,
1996, the consideration determined to be paid by the Company to acquire The
Fickes and Stone Knightsbridge Interests was fair to the Company and its
stockholders (other than Messrs. Stone and Fickes) from a financial point of
view.

Acquisition of the SW Financial Controlling Interest.  As part of the proposed
Knightsbridge restructuring, the Company's Board began negotiating to purchase
from the Knightsbridge Fund and Messrs. Stone and Fickes the SW Financial
Controlling Interest. The Company's Board made this decision after taking into
account the improvement in the Company's leverage ratio following its
successful $165,000,000 common stock offering in February 1996, which lessened
the Company's Board's concerns that insurance regulatory authorities and rating
agencies would respond unfavorably to an increase in the Company's leverage
ratio. Additionally, as previously announced, the Company is in the process of
reorganizing, consolidating and integrating its insurance operations into four
divisions -- Career Division, Payroll Division, Financial Services Division and
Individual Division. The Company's Board considers the acquisition of the SW
Financial Controlling Interest to be an important step in enabling the Company
to establish its Individual Division and to integrate the management and
operations of United Presidential with that of SW Financial. The Company's
Board created a special committee (the "Special Committee"), consisting of
Thomas A. Player, Bruce W. Schnitzer and Maurice W.  Slayton, to negotiate a
purchase price for the SW Financial Controlling Interest with Messrs. Stone and
Fickes, acting on behalf of the Knightsbridge Fund. The Special Committee
engaged Smith Barney as its financial adviser to assist it in the valuation
process. The Knightsbridge Fund engaged Fox-Pitt, Kelton Inc. as its financial
adviser.

Based on the advice of Smith Barney and after negotiations with Messrs. Stone
and Fickes on behalf of the Knightsbridge Fund, the Company's Board authorized
the Company to acquire the SW Financial Controlling Interest, along with any
and all existing rights to future fees or other income which could have been
derived from SW Financial or its subsidiaries, from the Knightsbridge Fund and
Messrs. Stone and Fickes for approximately
<PAGE>   106
                                                                        PAGE 106



$69,537,000 in cash (not including expenses and including a pro rata share of
SW Financial's after-tax income through closing). However, if the proposed
litigation settlement described below is approved, Messrs. Stone and Fickes
will cancel their SW Financial common stock warrants for no additional
consideration, which will enable the Company to purchase the SW Financial
Controlling Interest for $67,500,000 (not including expenses and including a
pro rata share of SW Financial's after-tax income through closing). If the
proposed litigation settlement is approved, Messrs. Stone and Fickes will share
$19,252,000 (or approximately 28.5%) of the $67,500,000 purchase price for the
SW Financial Controlling Interest based on their initial $7,000,000 investment
in SW Financial and their 20% share of the profit earned by the Knightsbridge
Fund limited partners on their $23,000,000 investment in SW Financial. Of the
approximately $19,252,000 Messrs. Stone and Fickes will receive if the proposed
litigation settlement is approved, approximately $12,880,000 will be paid to
them by the Company in respect of their personal investments in SW Financial
and approximately $6,372,000 will be paid to them by the Knightsbridge Fund in
accordance with its agreement of limited partnership. If the proposed
litigation settlement is not approved, Messrs. Stone and Fickes will share
$21,905,000 (or approximately 31.5%) of the $69,537,000 purchase price for the
SW Financial Controlling Interest. Of the approximately $21,905,000 Messrs.
Stone and Fickes will receive if the proposed litigation settlement is not
approved, approximately $15,687,000 will be paid to them by the Company in
respect of their personal investments in SW Financial and approximately
$6,218,000 will be paid to them by the Knightsbridge Fund in accordance with
its agreement of limited partnership. From these amounts, Messrs. Stone and
Fickes will pay Mr. Greenberg $738,963 if the proposed settlement is approved
and $732,392 if it is not approved.

On January 15, 1997, Smith Barney delivered orally its opinion (and 
subsequently confirmed in writing on January 22, 1997) that the consideration
to be paid by the Company for the SW Financial Controlling Interest was fair to
the Company and its stockholders (other than Messrs. Stone and Fickes) from a
financial point of view.  The acquisition of the SW Financial Controlling
Interest shall be submitted for approval by the shareholders of the Company at
a Special Meeting currently expected to be held in June 1997.

Proposed Settlement of Shareholder Litigation. As discussed above, on January
11 and January 25, 1996, shareholder derivative suits relating to the SW
Financial Investment were initiated against the Company and the members of the
Company's Board. The defendants in the Tozour case have filed a motion seeking
its dismissal on the ground that the plaintiff failed to comply with the
requirements of Delaware law before instituting a derivative suit, and intend
to defend the lawsuit vigorously. Because the defendants have not been served
with the Miller complaint, no action has been taken in that case, although the
defendants would also defend it vigorously. The defendants believe, however,
that it would not be in the best interests of the Company and its shareholders
to expend considerable management and director time and to incur substantial
legal expenses to litigate these actions. Consequently, the Company's legal
advisers have met or spoken by telephone on several occasions with the
plaintiffs' counsel to discuss the terms of a potential settlement.

The defendants and the plaintiffs' counsel entered into a Stipulation and
Agreement of Compromise and Settlement on March 28, 1997 (the "Proposed
Settlement") of the shareholder derivative actions. The Proposed Settlement
consists of the following principal elements: (i) Messrs. Stone and Fickes will
cancel the 335,564 SW Financial common stock warrants they hold for no
consideration, enabling the Company to purchase the SW Financial Controlling
Interest for $67,500,000, reducing the price to be paid by the Company for the
SW Financial Controlling Interest by approximately $2,037,000, (ii) the
Company's Board will proceed with the purchase of The Fickes and Stone
Knightsbridge Interests, having received a fairness opinion of a nationally
recognized investment banking firm with respect to the price to be paid for The
Fickes and Stone Knightsbridge Interests, (iii) the Company's Board will
proceed with the acquisition of the SW Financial Controlling Interest, having
received a fairness opinion of a nationally recognized investment banking firm
with respect to the price to be paid for the SW Financial Controlling Interest, 
(iv) the Company's Board will submit the purchase of The Fickes and Stone
Knightsbridge Interests and the SW Financial Controlling Interest to a vote of
a majority of the Company's stockholders present at the shareholder meeting and
entitled to vote, and shareholders must approve both transactions, (v) Messrs.
Stone and Fickes will abstain from voting on the proposals to approve the
purchases of The Fickes and Stone Knightsbridge Interests and the SW Financial
Controlling Interest, and (vi) the plaintiffs' counsel will be entitled to
conduct confirmatory discovery.
<PAGE>   107
                                                                        PAGE 107



The Proposed Settlement is subject to approval by the Delaware Chancery Court
(the "Chancery Court") after notice to the Company stockholders. As discussed
above, Messrs. Stone and Fickes have agreed that if the Proposed Settlement is
approved by the Chancery Court, they will cancel their SW Financial common
stock warrants, which will reduce the price to be paid by the Company for the
SW Financial Controlling Interest by approximately $2,037,000. Because the
Knightsbridge restructuring will have the effect of eliminating potential
future conflicts of interest between Messrs.  Stone and Fickes and the Company,
and because the Proposed Settlement will have the effect of reducing the price
to be paid for the SW Financial Controlling Interest and will obviate the need
to expend considerable management and director time to litigate the actions,
the Company's Board has determined that the Proposed Settlement is in the best
interests of the Company and its shareholders and confers a substantial economic
benefit on the Company. Accordingly, the Company's Board has authorized the
payment to plaintiffs' counsel of legal fees and disbursements not to exceed
$530,000 in connection with the lawsuits and the related settlement
negotiations, if the Proposed Settlement is approved by the Delaware Chancery
Court after notice to the Company's stockholders.

If the Company's stockholders approve the purchase of The Fickes and Stone
Knightsbridge Interests and the SW Financial Controlling Interest on the terms
contained herein, the Company intends to consummate those transactions, whether
or not the Proposed Settlement is approved. However, if the Company's
stockholders do not approve both of those transactions, there will not be a
settlement of the shareholder derivative litigations on the terms discussed
herein, and Messrs. Stone and Fickes and the Knightsbridge Committee will
reconvene their negotiations on the definitive terms of the Knightsbridge
relationship. The Proposed Settlement is conditioned upon, among other things,
the Company's stockholders' approval of the purchase by the Company of The
Fickes and Stone Knightsbridge Interests and the SW Financial Controlling
Interest and court approval after notice to the Company's stockholders.





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<PAGE>   108
                                                                       PAGE 108

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)      Documents

            1.   Exhibits


                 2.1      Purchase Agreement among I.C.H. Corporation, SWL
                          Holding Corporation, Care Financial Corporation,
                          Facilities Management Installation, Inc. and
                          Southwestern Financial Corporation, Southwestern
                          Financial Services Corporation and PennCorp Financial
                          Group, Inc., dated as of December 1, 1995 and
                          Addendum to Purchase Agreement dated as of December
                          14, 1995.  (7)

                 2.2      Amended and Restated Stock Purchase Agreement between
                          United Companies Financial Corporation and Pacific
                          Life and Accident Insurance Company dated as of July
                          24, 1996.  (5)

                 2.3      Amended and Restated Agreement and Plan of Merger
                          dated as of November 25, 1996 by and between PennCorp
                          Financial Group, Inc. and Washington National
                          Corporation.  (3)

                 3.1      Restated By-Laws of PennCorp Financial Group, Inc.  
                          (13)

                 3.3      Second Restated Certificate of Incorporation of
                          PennCorp Financial Group, Inc. as amended.  (8)

                 4.1      Certificate of Designation of Series C Preferred
                          Stock.  (6)

                 4.2      Corrected Certificate of Designation of $3.375
                          Convertible Preferred Stock.  (6)

                 4.3      Certificate of Designation of $3.50 Series II
                          Convertible Preferred Stock (4)

                 4.4      Indenture between PennCorp Financial Group, Inc. and
                          The Bank of New York, as trustee, with respect to 9
                          1/4% Senior Subordinate Notes due 2003.  (12)

<PAGE>   109
                                                                       PAGE 109 





                 10.1     Surplus Debenture Number Four in the original
                          principal amount of $162,539,890, issued by Pacific
                          Life and Accident Insurance Company to PennCorp
                          Financial Group, Inc., dated January 1, 1994.  (11)

                 10.2     Surplus Debenture Number Five in the original
                          principal amount of $17,606,203, issued by Pacific
                          Life and Accident Insurance Company to PennCorp
                          Financial Group, Inc., dated September 29, 1994.
                          (10)

                 10.3     Surplus Debenture Number Six in the original
                          principal amount of $55,000,000, issued by Pacific
                          Life and Accident Insurance Company to PennCorp
                          Financial Group, Inc., dated July 24, 1996.  (2)

                 10.4     10% Promissory Note in the original principal amount
                          of $30,661,996, issued by American- Holdings
                          Corporation to Pennsylvania Life Insurance Company,
                          dated July 1, 1996.  (2)

                 10.5     Certificate of Contribution in the original principal
                          amount of $54,332,790 issued by Integon Financial
                          Life Insurance Corporation to Integon Life
                          Corporation, dated July 25, 1995.  (6)

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

                            MANAGEMENT COMPENSATION
                               RELATED AGREEMENTS

                 10.6     Employment Agreement, dated as of August 19, 1990,
                          between PennCorp Financial Group, Inc. and William M.
                          McCormick.  (14)

                 10.7     PennCorp Financial, Inc. Retirement and Savings Plan.
                          (14)

                 10.8     PennCorp Financial, Inc. Executive Officer Incentive 
                          Plan.  (14)

                 10.9     PennCorp Financial Group, Inc. 1992 Stock Option
                          Plan.  (14)

                 10.10    PennCorp Financial Group, Inc. Senior Management
                          Warrant Award Program.  (14)

                 10.11    Form of Restricted Stock Agreement By and Between
                          PennCorp Financial Group, Inc. and certain
                          participants, effective as of April 1, 1994.  (10)

                 10.12    Employment Agreement between PennCorp Financial
                          Group, Inc. and David J. Stone entered into June 7,
                          1996.  (2)

                 10.13    Employment Agreement between PennCorp Financial
                          Group, Inc. and Steven W. Fickes entered into June 7,
                          1996.  (2)

                 10.14    Amendment Number One to Employment Agreement between
                          PennCorp Financial Group, Inc. and David J. Stone
                          dated April 28, 1997.  (1)

                 10.15    Amendment Number One to Employment Agreement between 
                          PennCorp
        
<PAGE>   110
                                                                        PAGE 110



                          Financial Group, Inc. and Steven W. Fickes dated 
                          April 28, 1997.  (1)

                 10.16    PennCorp Financial Group, Inc. 1996 Stock Award and
                          Stock Option Plan (2)

                 10.17    PennCorp Financial Group, Inc. 1996 Senior Executive 
                          Annual Incentive Award Plan (2)

                 10.18    Real Estate Purchase and Sale Agreement between
                          Peoples Security Life Insurance Company and PennCorp
                          Financial Group, Inc., dated March 24, 1995.  (9)

                 10.19    Registration Rights Agreement dated as of December
                          14, 1995, between PennCorp Financial Group, Inc.,
                          I.C.H. Corporation, SWL Holding Corporation and Care
                          Financial Corporation.  (7)

                 10.20    Conversion, Standstill and Registration Rights
                          Agreement between United Companies Financial
                          Corporation and PennCorp Financial Group, Inc. dated
                          as of July 24, 1996.  (2)

                 10.21    Registration Rights Agreement dated as of August 2,
                          1996, by and among PennCorp Financial Group, Inc.,
                          Smith Barney Inc., Donaldson, Lufkin & Jenrette
                          Securities Corporation and Merrill Lynch, Pierce,
                          Fenner & Smith Incorporated.  (2)

                 10.22    Stockholders Agreement dated December 14, 1995
                          between Southwestern Financial Corporation and the
                          Security holders listed on the signature pages
                          thereof.  (7)

                 10.23    Credit Agreement dated March 12, 1997 by and among
                          PennCorp Financial Group,  Inc. and The Chase
                          Manhattan Bank, The First National Bank of Chicago,
                          and Nationsbank, NA., as Managing Agents, Fleet
                          National Bank, Mellon Bank, N.A., Bank of Montreal,
                          CIBC Inc., and Dresdner Bank AG, New York Branch and
                          Grand Cayman Branch as Co-Agents and The Bank of New
                          York, as Administrative Agent.(1)

<PAGE>   111
                                                                       PAGE 111





                 11       Computations of earnings per share.  (2)

                 12.1     Computation of ratio of earnings to fixed charges.  
                          (2)

                 12.2     Computation of ratio of EBITDA to interest expense. 
                          (2)

                 21       List of subsidiaries of the Registrant.  (2)

                 22       Consent of Independent Auditors (1)

                 99.1     Consent to be named director nominee of PennCorp
                          Financial Group, Inc. by Ronald L. Bornheutter dated
                          as of April 30, 1997. (1)

                 99.2     Consent to be named director nominee of PennCorp
                          Financial Group, Inc. by W. Francis Brennan dated as
                          of April 30, 1997. (1)


   (1)      Filed herewith.

   (2)      Such exhibit is incorporated by reference to the Annual Report on
            Form 10-K for the fiscal year ended December 31, 1996 of PennCorp
            Financial Group, Inc.

   (3)      Such exhibit is incorporated by reference to the Form 8-K dated
            November 25, 1996, which was filed with the Securities and Exchange
            Commission by PennCorp Financial Group, Inc. on December 4, 1996,
            providing a copy of the Amended and Restated Agreement and Plan of
            Merger with Washington National Corporation.

   (4)      Such exhibit is incorporated by reference to the Registration
            Statement on Form S-3 (Registration No. 333- 13285) of PennCorp
            Financial Group, Inc. which was filed with the Securities and
            Exchange Commission on October 10, 1996.

   (5)      Such exhibit is incorporated by reference to the Form 8-K dated
            July 24, 1996 which was filed with the Securities and Exchange
            Commission by PennCorp Financial Group, Inc. on August 8, 1996
            relating to the financial statements and pro forma financial
            information of the United Companies Life Insurance Company.

   (6)      Such exhibit is incorporated by reference to the Annual Report on
            Form 10-K for the fiscal year ended December 31, 1995 of PennCorp
            Financial Group, Inc.

   (7)      Such exhibit is incorporated by reference to the Form 8-K dated
            December 14, 1995 which was filed by PennCorp Financial Group, Inc.
            with the Securities and Exchange Commission on December 28, 1995
            related to its investment in Southwestern Financial Corporation.

   (8)      Such exhibit is incorporated by reference to the Form 8-A dated
            July 11, 1995 which was filed by PennCorp Financial Group, Inc.
            with the Securities and Exchange Commission on July 12, 1995.

   (9)      Such exhibit is incorporated by reference to the Quarterly Report
            on Form 10-Q for the three months ended June 30, 1995 of PennCorp
            Financial Group, Inc.
<PAGE>   112
                                                                       PAGE 112



   (10)     Such exhibit is incorporated by reference to the Quarterly Report
            on Form 10-Q for the three months ended September 30, 1994 of
            PennCorp Financial Group, Inc.

   (11)     Such exhibit is incorporated by reference to the Quarterly Report
            on Form 10-Q for the three months ended June 30, 1994 of PennCorp
            Financial Group, Inc.

   (12)     Such exhibit is incorporated by reference to the Annual Report on
            Form 10-K for the fiscal year ended December 31, 1993 of PennCorp
            Financial Group, Inc.

   (13)     Such exhibit is incorporated by reference to the Annual Report on
            Form 10-K for the fiscal year ended December 31, 1992 of PennCorp
            Financial Group, Inc.

   (14)     Such exhibit is incorporated by reference to the Registration
            Statement on Form S-1 (Registration No. 33- 50530) of PennCorp
            Financial Group, Inc.

(b)  Reports on Form 8-K.

            A report on Form 8-K/A (Amendment No. 1) dated January 29, 1996 was
            filed with the Securities and Exchange Commission on February 21,
            1996 related to the Company's economic participation in
            Southwestern Financial Corporation providing the audited combined
            financial statements as of December 31, 1994 and 1993 and for each
            of the years in the three-year period ended December 31, 1994 and
            unaudited combined financial statements as of September 30, 1995
            and for the nine-month period ended September 30, 1995 for the
            insurance operations of I.C.H. Corporation acquired by Southwestern
            Financial Corporation, the Notes thereto and the Independent
            Auditors' Report with respect thereto, and the unaudited pro forma
            statements of operations of the Company for the year ended December
            31, 1994 and for the nine-months ended September 30, 1995, and the
            unaudited pro forma balance sheet of the Company as of September
            30, 1995 and the Notes thereto, reflecting the consummation of the
            investment by the Company in Southwestern Financial Corporation.

            A report on Form 8-K, dated July 17, 1996, was filed with the
            Securities and Exchange Commission by PennCorp Financial Group,
            Inc. on July 17, 1996, relating to its acquisition of United
            Companies Life Insurance Company.

            A report on Form 8-K, dated August 5, 1996, was filed with the
            Securities and Exchange Commission by PennCorp Financial Group,
            Inc. on August 5, 1996, relating to the press release announcing
            the pricing of its $3.50 Series II Convertible Preferred Stock.

            A report on Form 8-K, dated July 24, 1996 was filed with the
            Securities and Exchange Commission by PennCorp Financial Group,
            Inc. on August 8, 1996 relating to the financial statements and pro
            forma financial information of the United Companies Life Insurance
            Company.

            A report on Form 8-K, dated November 15, 1996, was filed with the
            Securities and Exchange Commission by PennCorp Financial Group,
            Inc. on November 15, 1996, relating to the press release announcing
            the signing of a definitive Merger Agreement with Washington
            National Corporation.

            A report on Form 8-K, dated November 25, 1996, was filed with the
            Securities and Exchange Commission by PennCorp Financial Group,
            Inc. on December 4, 1996, providing a copy of the Amended and
            Restated Agreement and Plan of Merger with Washington National
            Corporation.
<PAGE>   113
                                                                       PAGE 113



                                   SIGNATURES

         Pursuant to the requirements of Section 13 or Section 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.



                                           PennCorp Financial Group, Inc.
                                           (Registrant)

Dated:   April 30, 1997           By:      /s/  Scott D. Silverman           
                                           -----------------------------------
                                           Scott D. Silverman
                                           Senior Vice President, General
                                           Counsel and Secretary

<PAGE>   114


                                INDEX TO EXHIBITS


               EXHIBIT 
               NUMBER     DESCRIPTION 
               --------   -----------
                 2.1      Purchase Agreement among I.C.H. Corporation, SWL
                          Holding Corporation, Care Financial Corporation,
                          Facilities Management Installation, Inc. and
                          Southwestern Financial Corporation, Southwestern
                          Financial Services Corporation and PennCorp Financial
                          Group, Inc., dated as of December 1, 1995 and
                          Addendum to Purchase Agreement dated as of December
                          14, 1995.  (7)

                 2.2      Amended and Restated Stock Purchase Agreement between
                          United Companies Financial Corporation and Pacific
                          Life and Accident Insurance Company dated as of July
                          24, 1996.  (5)

                 2.3      Amended and Restated Agreement and Plan of Merger
                          dated as of November 25, 1996 by and between PennCorp
                          Financial Group, Inc. and Washington National
                          Corporation.  (3)

                 3.1      Restated By-Laws of PennCorp Financial Group, Inc.  
                          (13)

                 3.3      Second Restated Certificate of Incorporation of
                          PennCorp Financial Group, Inc. as amended.  (8)

                 4.1      Certificate of Designation of Series C Preferred
                          Stock.  (6)

                 4.2      Corrected Certificate of Designation of $3.375
                          Convertible Preferred Stock.  (6)

                 4.3      Certificate of Designation of $3.50 Series II
                          Convertible Preferred Stock (4)

                 4.4      Indenture between PennCorp Financial Group, Inc. and
                          The Bank of New York, as trustee, with respect to 9
                          1/4% Senior Subordinate Notes due 2003.  (12)

<PAGE>   115


                 10.1     Surplus Debenture Number Four in the original
                          principal amount of $162,539,890, issued by Pacific
                          Life and Accident Insurance Company to PennCorp
                          Financial Group, Inc., dated January 1, 1994.  (11)

                 10.2     Surplus Debenture Number Five in the original
                          principal amount of $17,606,203, issued by Pacific
                          Life and Accident Insurance Company to PennCorp
                          Financial Group, Inc., dated September 29, 1994.
                          (10)

                 10.3     Surplus Debenture Number Six in the original
                          principal amount of $55,000,000, issued by Pacific
                          Life and Accident Insurance Company to PennCorp
                          Financial Group, Inc., dated July 24, 1996.  (2)

                 10.4     10% Promissory Note in the original principal amount
                          of $30,661,996, issued by American- Holdings
                          Corporation to Pennsylvania Life Insurance Company,
                          dated July 1, 1996.  (2)

                 10.5     Certificate of Contribution in the original principal
                          amount of $54,332,790 issued by Integon Financial
                          Life Insurance Corporation to Integon Life
                          Corporation, dated July 25, 1995.  (6)

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

                            MANAGEMENT COMPENSATION
                               RELATED AGREEMENTS

                 10.6     Employment Agreement, dated as of August 19, 1990,
                          between PennCorp Financial Group, Inc. and William M.
                          McCormick.  (14)

                 10.7     PennCorp Financial, Inc. Retirement and Savings Plan.
                          (14)

                 10.8     PennCorp Financial, Inc. Executive Officer Incentive 
                          Plan.  (14)

                 10.9     PennCorp Financial Group, Inc. 1992 Stock Option
                          Plan.  (14)

                 10.10    PennCorp Financial Group, Inc. Senior Management
                          Warrant Award Program.  (14)

                 10.11    Form of Restricted Stock Agreement By and Between
                          PennCorp Financial Group, Inc. and certain
                          participants, effective as of April 1, 1994.  (10)

                 10.12    Employment Agreement between PennCorp Financial
                          Group, Inc. and David J. Stone entered into June 7,
                          1996.  (2)

                 10.13    Employment Agreement between PennCorp Financial
                          Group, Inc. and Steven W. Fickes entered into June 7,
                          1996.  (2)

                 10.14    Amendment Number One to Employment Agreement between
                          PennCorp Financial Group, Inc. and David J. Stone
                          dated April 28, 1997.  (1)

                 10.15    Amendment Number One to Employment Agreement between 
                          PennCorp 

<PAGE>   116



                          Financial Group, Inc. and Steven W. Fickes dated 
                          April 28, 1997.  (1)

                 10.16    PennCorp Financial Group, Inc. 1996 Stock Award and
                          Stock Option Plan (2)

                 10.17    PennCorp Financial Group, Inc. 1996 Senior Executive 
                          Annual Incentive Award Plan (2)

                 10.18    Real Estate Purchase and Sale Agreement between
                          Peoples Security Life Insurance Company and PennCorp
                          Financial Group, Inc., dated March 24, 1995.  (9)

                 10.19    Registration Rights Agreement dated as of December
                          14, 1995, between PennCorp Financial Group, Inc.,
                          I.C.H. Corporation, SWL Holding Corporation and Care
                          Financial Corporation.  (7)

                 10.20    Conversion, Standstill and Registration Rights
                          Agreement between United Companies Financial
                          Corporation and PennCorp Financial Group, Inc. dated
                          as of July 24, 1996.  (2)

                 10.21    Registration Rights Agreement dated as of August 2,
                          1996, by and among PennCorp Financial Group, Inc.,
                          Smith Barney Inc., Donaldson, Lufkin & Jenrette
                          Securities Corporation and Merrill Lynch, Pierce,
                          Fenner & Smith Incorporated.  (2)

                 10.22    Stockholders Agreement dated December 14, 1995
                          between Southwestern Financial Corporation and the
                          Security holders listed on the signature pages
                          thereof.  (7)

                 10.23    Credit Agreement dated March 12, 1997 by and among
                          PennCorp Financial Group,  Inc. and The Chase
                          Manhattan Bank, The First National Bank of Chicago,
                          and Nationsbank, NA., as Managing Agents, Fleet
                          National Bank, Mellon Bank, N.A., Bank of Montreal,
                          CIBC Inc., and Dresdner Bank AG, New York Branch and
                          Grand Cayman Branch as Co-Agents and The Bank of New
                          York, as Administrative Agent.(1)


<PAGE>   117



                 11       Computations of earnings per share.  (2)

                 12.1     Computation of ratio of earnings to fixed charges.  
                          (2)

                 12.2     Computation of ratio of EBITDA to interest expense. 
                          (2)

                 21       List of subsidiaries of the Registrant.  (2)

                 22       Consent of Independent Auditors (1)

                 99.1     Consent to be named director nominee of PennCorp
                          Financial Group, Inc. by Ronald L. Bornheutter dated
                          as of April 30, 1997. (1)

                 99.2     Consent to be named director nominee of PennCorp
                          Financial Group, Inc. by W. Francis Brennan dated as
                          of April 30, 1997. (1)


   (1)      Filed herewith.

   (2)      Such exhibit is incorporated by reference to the Annual Report on
            Form 10-K for the fiscal year ended December 31, 1996 of PennCorp
            Financial Group, Inc.

   (3)      Such exhibit is incorporated by reference to the Form 8-K dated
            November 25, 1996, which was filed with the Securities and Exchange
            Commission by PennCorp Financial Group, Inc. on December 4, 1996,
            providing a copy of the Amended and Restated Agreement and Plan of
            Merger with Washington National Corporation.

   (4)      Such exhibit is incorporated by reference to the Registration
            Statement on Form S-3 (Registration No. 333- 13285) of PennCorp
            Financial Group, Inc. which was filed with the Securities and
            Exchange Commission on October 10, 1996.

   (5)      Such exhibit is incorporated by reference to the Form 8-K dated
            July 24, 1996 which was filed with the Securities and Exchange
            Commission by PennCorp Financial Group, Inc. on August 8, 1996
            relating to the financial statements and pro forma financial
            information of the United Companies Life Insurance Company.

   (6)      Such exhibit is incorporated by reference to the Annual Report on
            Form 10-K for the fiscal year ended December 31, 1995 of PennCorp
            Financial Group, Inc.

   (7)      Such exhibit is incorporated by reference to the Form 8-K dated
            December 14, 1995 which was filed by PennCorp Financial Group, Inc.
            with the Securities and Exchange Commission on December 28, 1995
            related to its investment in Southwestern Financial Corporation.

   (8)      Such exhibit is incorporated by reference to the Form 8-A dated
            July 11, 1995 which was filed by PennCorp Financial Group, Inc.
            with the Securities and Exchange Commission on July 12, 1995.

   (9)      Such exhibit is incorporated by reference to the Quarterly Report
            on Form 10-Q for the three months ended June 30, 1995 of PennCorp
            Financial Group, Inc.
<PAGE>   118


   (10)     Such exhibit is incorporated by reference to the Quarterly Report
            on Form 10-Q for the three months ended September 30, 1994 of
            PennCorp Financial Group, Inc.

   (11)     Such exhibit is incorporated by reference to the Quarterly Report
            on Form 10-Q for the three months ended June 30, 1994 of PennCorp
            Financial Group, Inc.

   (12)     Such exhibit is incorporated by reference to the Annual Report on
            Form 10-K for the fiscal year ended December 31, 1993 of PennCorp
            Financial Group, Inc.

   (13)     Such exhibit is incorporated by reference to the Annual Report on
            Form 10-K for the fiscal year ended December 31, 1992 of PennCorp
            Financial Group, Inc.

   (14)     Such exhibit is incorporated by reference to the Registration
            Statement on Form S-1 (Registration No. 33- 50530) of PennCorp
            Financial Group, Inc.