UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K


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

                   For the fiscal year ended December 31, 1999

                         Commission File Number 1-11422

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

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

  c/o Southwestern Financial Services
              Corporation
       717 North Harwood Street
             Dallas, Texas
    (Address of principal executive                     75201
               offices)                               (Zip code)

       Registrant's telephone number, including area code: (214) 954-7111

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                                    Name of Each Exchange
               Title of Each Class                   on Which Registered
        -----------------------------------    --------------------------------

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

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

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                                      None

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

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

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant as of March 29, 2000: $729,868.

The  number  of Common  Stock  shares  outstanding  as of March  29,  2000,  was
29,194,731.

                       DOCUMENTS INCORPORATED BY REFERENCE

None.




<PAGE>




                          ANNUAL REPORT ON FORM 10-K
                     FOR THE YEAR ENDED DECEMBER 31, 1999

                               TABLE OF CONTENTS

                                                                            Page

PART I

     Item 1    Business                                                       3
     Item 2    Properties                                                    21
     Item 3    Legal Proceedings                                             21
     Item 4    Submission of Matters to a Vote of Security Holders           22

PART II

      Item 5.  Market for the Registrant's Common Equity and Related
               Shareholder Matters                                           23
      Item 6.  Selected Consolidated Financial Data                          24
      Item 7.  Management's Discussion and Analysis of Financial Condition
               and Results of Operations                                     25
      Item 7A. Quantitative and Qualitative Disclosures about Market
               Risk Exposures of Financial Instruments for the
               Businesses Owned at December 31, 1999                         48
      Item 8.  Financial Statements and Supplementary Data                   52
      Item 9.  Changes in and Disagreements with Accountants on Accounting
               and Financial Disclosure                                     119

PART III

      Item 10. Directors and Executive Officers of the Registrant           119
      Item 11. Executive Compensation                                       120
      Item 12. Security Ownership of Certain Beneficial Owners
               and Management                                               122
      Item 13. Certain Relationships and Related Transactions               123

PART IV

      Item 14. Exhibits, Financial Statement Schedules, and Reports
               on Form 8-K                                                  126


                                       2
<PAGE>


                                    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 Southwestern Life Insurance Company  ("Southwestern Life") and Security Life
and  Trust  Insurance  Company  ("Security   Life").  The  Company's   insurance
subsidiaries  market and underwrite  life insurance,  accumulation  products and
fixed benefit accident and sickness insurance to lower and middle-income markets
throughout the United States and Canada.  The Company's  insurance  products are
sold primarily through independent general agents. Prior to the sales of certain
subsidiaries,  the Company sold products through several additional distribution
channels including,  exclusive agents,  payroll deduction programs and financial
institutions.  During 1997 the Company  restructured  its  operating  units into
three primary business units: the Financial Services Division, the Payroll Sales
Division and the Career Sales Division.

      As part  of its  effort  to  stabilize  its  capital  structure,  increase
liquidity and reduce  indebtedness,  the Company sold its Career Sales Division,
Payroll Sales Division and portions of its Financial  Services  Division in 1999
and the first  two  months of 2000.  As a result of the  material  impact of the
companies  sold during 1999 to the aggregate  operating  results of the Company,
this Annual Report on Form 10-K includes a discussion of these companies.

      The  Financial  Services  Division  was  comprised  of  Southwestern  Life
Insurance  Company  ("Southwestern  Life"),  Security  Life and Trust  Insurance
Company ("Security Life") and United Life and Annuity Insurance Company ("United
Life")  (sold April 30,  1999).  The Payroll  Sales  Division  was  comprised of
Professional  Insurance Company  ("Professional") (sold March 31, 1999), Pioneer
Security  Life  Insurance   Company   ("Pioneer   Security"),   its  subsidiary,
American-Amicable     Life     Insurance     Company      ("American-Amicable"),
American-Amicable's  subsidiary,  Pioneer American  Insurance  Company ("Pioneer
American")   (Pioneer   Security,   American-Amicable   and   Pioneer   American
collectively, "AA Life") and Occidental Life Insurance Company ("OLIC"). AA Life
and OLIC were sold on February 4, 2000.  The Career Sales Division was comprised
of  Pennsylvania  Life  Insurance  Company  ("PLIC") and PennCorp Life Insurance
Company  (together  with PLIC,  "PennLife"),  Union  Bankers  Insurance  Company
("Union  Bankers"),   Constitution  Life  Insurance  Company   ("Constitution"),
Marquette  National Life Insurance  Company  ("Marquette")  and Peninsular  Life
Insurance  Company  ("Peninsular").  The Career Sales Division was sold July 30,
1999. See "Organizational Changes".

      The Career Sales Division together with  Professional,  United Life Assets
(consisting  of United  Life,  UC  Mortgage  Corp.  ("UC  Mortgage"),  Cyberlink
Development,  Inc.  ("Cyberlink")  and certain  assets of  Marketing  One,  Inc.
("Marketing  One")) (sold April 30, 1999) and KIVEX,  Inc.  ("KIVEX") (sold July
30,  1999),  a  non-insurance  subsidiary  and internet  service  provider,  are
referred to as "Businesses Held for Sale".

      On January 10, 2000, the Company  announced that it had agreed to sell its
Payroll Sales Division to a company formed by Thoma Cressey Equity  Partners for
approximately $102 million subject to certain adjustments.  On February 4, 2000,
the Company consummated the sale of the Payroll Sales Division for cash proceeds
of approximately $103.3 million. As a result of the sale, the Company recognized
an  impairment  loss of $95.5  million  which was  recognized  in the  financial
statements for the year ended December 31, 1999.

      Also on January 10, 2000, the Company announced that it had agreed to sell
its  Financial  Services  Division to Reassure  America Life  Insurance  Company
("Reassure  America"),  a  subsidiary  of Swiss  Reinsurance  Company  of Zurich
("Swiss Re"), for $260 million  subject to certain  adjustments,  and accomplish
such  transaction  through the filing of a voluntary  petition  for relief under
chapter 11 ("Chapter 11") of title 11 of the United States  Bankruptcy Code (the
"Bankruptcy Code").

      On  February 7, 2000 (the  "Petition  Date"),  PennCorp  filed a voluntary
petition for relief under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy  Court for the District of Delaware (the "Bankruptcy  Court").  Since
the Petition  Date,  PennCorp has continued to operate and manage its assets and
business as a debtor in possession as authorized by provisions of the Bankruptcy
Code.

      On February 28, 2000 the  Bankruptcy  Court  issued an order  scheduling a
hearing to  consider  approval  of the sale  agreement  with  Reassure  America,
subject to higher or better  offers,  and  establishing  the  procedures for the
submission of competing offers ("Sales Procedure Order").

                                       3
<PAGE>


      On March 15, 2000,  the Company  received a competing bid in the form of a
recapitalization  plan submitted by Inverness/Phoenix  Capital LLC ("Inverness")
and Vicuna Advisors, LLC ("Vicuna") on behalf of the unofficial ad hoc committee
of preferred  stockholders,  and Mr. Bernard Rapoport  ("Rapoport") and Mr. John
Sharpe  ("Sharpe")  ("Recapitalization  Plan").  On March 23, 2000 the Company's
Board of Directors  selected  the  Recapitalization  Plan as the final  accepted
offer pursuant to the bidding procedures approved as part of the Sales Procedure
Order. On March 24, 2000, the Bankruptcy  Court approved the Board of Director's
selection of the Recapitalization Plan.

      The  proposed   Recapitalization   Plan   provides   that  the   preferred
stockholders  will receive one share of common stock of the reorganized  company
for each share of  outstanding  preferred  stock.  In  addition,  the  preferred
stockholders  will  have an  opportunity,  pursuant  to a  rights  offering,  to
purchase .3787 shares of common stock of the reorganized  company for each share
of  outstanding  preferred  stock owned at a purchase price of $12.50 per share.
Inverness  and Vicuna have issued a standby  commitment  letter to the  Company,
committing $24.5 million to fully  underwrite the rights offering.  In addition,
Rapoport  and Sharpe  have  committed  to purchase  equity in the  recapitalized
company amounting to $20.0 million and $3.0 million,  respectively.  The standby
commitment  letter and the Rapoport and Sharpe investment are subject to certain
conditions.

      Under the  Recapitalization  Plan,  all existing  shares of the  Company's
common stock will be cancelled for no value,  and the Company's  existing senior
and subordinated debt, with principal aggregating  approximately $180 million at
March  31,  2000,  will be paid in full in cash.  Any and all other  claims  and
liabilities of the Company will be paid in accordance with their terms.

      Consummation  of the  recapitalization  transaction  is subject to certain
conditions  including  regulatory  approvals,  the consummation of a $95 million
credit facility, the consummation of a proposed transaction whereby Southwestern
Life and  Security  Life  will  reinsure  substantially  all of  their  existing
deferred  annuity blocks of business,  an order confirming the Company's plan of
reorganization that incorporates the proposed recapitalization transaction shall
have been entered by the  Bankruptcy  Court and such order shall be unstayed and
in full force and effect, and the closing of the recapitalization shall occur no
later than December 31, 2000. The definitive  agreements for the credit facility
and  the  reinsurance   transaction  will  contain  conditions  to  consummation
including  no material  adverse  change as defined in the  proposed  $95 million
credit agreement.

      The  Company  has  received   irrevocable   commitments  from  holders  of
approximately  71 percent of the Company's two  outstanding  series of preferred
stock indicating that they will vote in favor of the Recapitalization  Plan upon
solicitation by the Company which,  when such shares are voted, will satisfy the
voting  requirements  for confirmation of a plan of  reorganization.  Inverness,
Vicuna, Rapoport and Sharpe have deposited an aggregate of $47.5 million into an
escrow  account,  such that those  funds  will be used to make their  respective
committed   equity   investments   in  the   recapitalized   company   once  the
Recapitalization  Plan is consummated.  A portion of such funds may be forfeited
to the Company under certain circumstances.

      The Company filed a plan of  reorganization on April 5, 2000 and will seek
confirmation  of the  Recapitalization  Plan by the Bankruptcy  Court on June 5,
2000, with consummation  expected to occur promptly  thereafter.  For additional
information  see Item 7.  Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations-- Financial Condition, Liquidity and Capital
Resources and Notes 9 and 23 of Notes to Consolidated Financial Statements.

      Following the filing of PennCorp's Chapter 11 petition, the New York Stock
Exchange  ("NYSE")  suspended all trading in the Company's listed securities and
has applied to the  Securities  and Exchange  Commission  for the removal of the
Company's  common  stock and $3.375  convertible  preferred  stock  listing  and
registration on the NYSE. See Item 5. Market for Registrant's  Common Equity and
Related Shareholder Matters.



                                       4
<PAGE>

ORGANIZATIONAL CHANGES

      The Company has experienced  significant  changes in the past three years.
As a result of  integration of acquired  businesses and material  changes to the
Company's operating platform,  the Company began a strategic business evaluation
in the third quarter of 1996.  The review  resulted in the Company  establishing
three divisional  platforms,  Career Sales Division,  Payroll Sales Division and
Financial Services Division in 1997. On January 2, 1998, the Company consummated
the acquisition of the SW Financial Controlling Interest (the holdings of common
stock and/or common stock warrants of Southwestern  Financial  Corporation  ("SW
Financial")  from KB  Investment  Fund I, LP ("KB Fund") and  Messrs.  Steven F.
Fickes and David J.  Stone,  former  executive  officers  and  directors  of the
Company.) On January 5, 1998,  the Company  consummated  the  acquisition of the
interest of Messrs. Fickes and Stone in KB Management, LLC ("KB Management"), KB
Fund and KB Consultants,  LLC (the "Fickes and Stone Knightsbridge  Interests").
In order to stabilize the Company's capital  structure,  increase  liquidity and
materially  reduce its  indebtedness  the Company  sought to sell certain assets
during 1999.  Professional  was sold March 31, 1999, the United Life Assets were
sold April 30, 1999,  KIVEX was sold June 30, 1999 and the Career Sales Division
was sold on July 30, 1999. On February 4, 2000 the Company  consummated the sale
of the Payroll Sales Division.

      The  following  chart  summarizes  the  classification  of  the  Company's
principal operating subsidiaries for the years ended December 31, 1999, 1998 and
1997:
<TABLE>
<CAPTION>

                                                 1999                           1998              1997
                                       -------------------------    --------------------------   -------
                                                  Business Held                  Business Held
                                       Ongoing      for Sale        Ongoing        For Sale      Ongoing
                                       -------    -------------     -------      -------------   -------
         <S>                           <C>        <C>               <C>          <C>             <C>
         Corporate
           PennCorp                       X                             X                           X
           KIVEX(1)                                     X                               X           X
           KB Management(2)               X                             X

         Financial Services Division
           Southwestern Life(3)           X                             X
           Security Life                  X                             X                           X
           United Life(4)                               X                               X           X

         Payroll Sales Division
           Professional(5)                              X                               X           X
           AA Life(6)                     X                             X                           X
           OLIC(6)                        X                             X                           X

         Career Sales Division

           PennLife(7)                                  X                               X           X
           Union Bankers(8)                             X                               X
           Constitution(8)                              X                               X
           Marquette(8)                                 X                               X
           Peninsular(7)                                X                               X           X
</TABLE>

          ---------------
          (1)  Transferred to Businesses Held for Sale in 1998 and sold June 30,
               1999.
          (2)  Acquired January 5, 1998.
          (3)  Remaining  interests acquired with acquisition of SW Financial on
               January 2, 1998.
          (4)  Transferred  to  Businesses  Held for Sale in 1998 and sold April
               30, 1999.
          (5)  Transferred  to  Businesses  Held for Sale in 1998 and sold March
               31, 1999.
          (6)  Sold  February 4, 2000 (see pro forma  effect of  disposition  in
               Management's  Discussion and Analysis of Financial  Condition and
               Results   of   Operations--General   and  Note  17  of  Notes  to
               Consolidated Financial Statements.)
          (7)  Transferred to Businesses Held for Sale in 1998 and sold July 30,
               1999.
          (8)  Remaining  interests acquired with acquisition of SW Financial on
               January 2, 1998;  transferred to Businesses Held for Sale in 1998
               and sold July 30, 1999.

                                       5
<PAGE>


CURRENT STRUCTURE

      In conjunction  with the sale of the Payroll Sales Division on February 4,
2000,  Security  Life  became a  wholly-owned  subsidiary  of  Pacific  Life and
Accident Insurance Company ("PLAIC").  The current organization structure of the
Company after the sale of the Payroll Sales Division is as follows:

                                    PennCorp
                                       |
       ________________________________|_________________________________
       |                               |                                |
     Other                             |                                |
Non-insurance(1)                     PLAIC                       KB Management
                                       |
                          _____________|______________
                          |                           |
                    Southwestern                  Security
                         Life                        Life


---------------
(1)  Includes  Marketing  One, SW  Financial,  Southwestern  Financial  Services
     Corporation  ("SFSC"),  PennCorp  Financial  Services,  Inc.  ("PCFS"),  KB
     Investment, LLC, American-Amicable Holdings Corporation ("AA Holdings") and
     PennCorp Occidental Corp.

DISPOSITIONS

      On March 31, 1999, the Company  consummated the sale of Professional to GE
Financial Assurance  Holdings,  Inc. ("GE Financial") for cash proceeds of $47.5
million. The Company realized net cash proceeds of $40.2 million.  Professional,
which previously was included in the Payroll Sales Division, provided individual
fixed  benefit  and life  products  utilizing  a network of  independent  agents
primarily in the southeastern United States through  employer-sponsored  payroll
deduction  programs.  The Company  realized a gain from the sale  totaling  $1.1
million. As a result of the sale,  unrealized gains on securities  available for
sale by Professional  decreased by $488,000.  On September 15, 1999, as a result
of certain settlement and consideration  adjustment  provisions  included in the
purchase and sale agreement,  the Company reduced the consideration  received by
$1.2 million.

      On April 30,  1999,  the Company  consummated  the sale of the United Life
Assets to ING America  Insurance  Holdings,  Inc.  ("ING").  United Life,  which
previously was included in the Financial Services Division, principally marketed
fixed and variable  annuities  through  financial  institutions  and independent
general  agents,  primarily  in the  southern  and western  United  States.  The
purchase  consideration  totaled  $154.1  million  including  a dividend of $2.1
million  that  was  paid by  United  Life at  closing.  The  cash  consideration
ultimately  was  reduced as a result of the  Company's  obligation  to  purchase
certain  mortgages and other assets as well as for transaction  related costs at
closing.  The Company received net cash proceeds of $136.5 million.  The Company
realized a loss from the sale totaling  $3.9  million.  As a result of the sale,
unrealized  gains on  securities  held for sale by United  Life  decreased  $1.7
million.  As of December 31, 1999, the Company has sold substantially all of the
mortgages  retained  by the  Company  as a part of the Sale of the  United  Life
Assets and  received  proceeds  aggregating  $8.0  million.  The  Company may be
obligated to repurchase  certain of the mortgages  sold. The amount of mortgages
the  Company  may  be  required  to   repurchase   is  not  expected  to  exceed
approximately $1.6 million.  At December 31, 1999, the Company has established a
$1.2 million liability related to these contingencies.

      On June 30, 1999,  the Company  completed  the sale of KIVEX,  an internet
service provider, to Allegiance Telecom, Inc. for $34.5 million in cash. The net
proceeds to the parent company from the sale were $22.2 million after payment of
costs and fees  associated  with the  transaction  and after  repayment of $10.2
million of intercompany  borrowings to insurance company affiliates of PennCorp.
The Company recorded a gain of $30.9 million from the sale.

                                       6
<PAGE>


      On July 30,  1999,  the Company  consummated  the sale of the Career Sales
Division to Universal  American  Financial  Corp.  ("Universal  American").  The
Career  Sales  Division  marketed  and  underwrote  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.  The net cash
proceeds after  transaction  costs and fulfillment of contract  obligations were
$82.0 million. The Company realized a foreign currency translation loss of $25.0
million  which  represented  previously  unrealized  translation  losses  on the
Company's  Canadian  insurance  operations,  partially  offset by a gain of $3.5
million  on the  disposition  resulting  in a net  loss  of  $21.5  million.  In
addition,  as a result of the sale, unrealized gains on securities available for
sale and  unrealized  foreign  currency  translation  losses  decreased  by $2.3
million and $25.0  million,  respectively.  On December 29, 1999, as a result of
certain  settlement  and  consideration  adjustment  provisions  included in the
purchase and sale agreement,  the Company reduced the consideration  received by
$2.6 million.

      During  1999,  the Company used $267.0  million of the net  proceeds  from
these sales to pay down the  outstanding  balance under the bank credit facility
(the "Bank Credit Facility"). In addition, the Company repaid an additional $2.0
million of indebtedness as a result of liquidity at the parent company above the
amounts prescribed in the Bank Credit Facility, as amended.

BUSINESSES OWNED AT DECEMBER 31, 1999

      The remaining  companies in the Financial  Services  Division  market life
insurance and, to a lesser extent,  annuity products through independent general
agents who sell  directly  to  individuals  primarily  in the  southeastern  and
southwestern  United  States.  In early 2000 the Company  discontinued  new life
sales at Security  Life in order to reduce costs and  concentrate  its marketing
efforts at Southwestern Life.

      The  Payroll  Sales  Division,  principally  through AA Life,  markets and
underwrites customized life insurance and accumulation products to U.S. military
personnel and government employees through a general agency force. OLIC provides
individual  fixed  benefit,  accident  and sickness  products and life  products
utilizing a network of independent  agents primarily in the southeastern  United
States through  employer-sponsored payroll deduction programs. The Payroll Sales
Division was sold on February 4, 2000.

      For purposes of the Company's  separate  disclosure of the Businesses Held
for Sale as described above, Security Life, Southwestern Life, OLIC, AA Life and
other non-life insurance corporate entities are collectively  referred to herein
as the "Businesses Owned at December 31, 1999."

ACQUISITION OF SW FINANCIAL CONTROLLING INTEREST AND KB INTERESTS

      On January 2, 1998, the Company consummated the acquisition,  from KB Fund
(formerly  Knightsbridge  Capital  Fund I, LP) and Messrs.  Steven W. Fickes and
David J. Stone,  former executive officers and directors of the Company,  of the
SW  Financial  Controlling  Interest for an  aggregate  purchase  price of $73.7
million (not including acquisition expenses).

      On January 5, 1998, the Company  consummated the acquisition of the Fickes
and Stone Knightsbridge  Interests for total consideration estimated to be $10.6
million  (not  including   acquisition   expenses).   Under  the  terms  of  the
transaction,  Mr.  Fickes is to receive  consideration  in the form of estimated
annual interest  payments,  ranging from $301,000 to $330,000,  on April 15 each
year through 2001 and is to be issued  173,160  shares of the  Company's  Common
Stock on April 15, 2001.  The Company issued 173,160 shares to Mr. Stone in July
1998.

      Further information  regarding the SW Financial investment appears in Note
6 of Notes to Consolidated  Financial  Statements.  Information  relating to the
relationship  between the Company and the KB Fund, the acquisition of the Fickes
and Stone  Knightsbridge  Interests and the Southwestern  Financial  Controlling
Interest  appears  in  Notes  3  and  18  of  Notes  to  Consolidated  Financial
Statements,  and in Item 13.  Certain  Relationships  and  Related  Transactions
hereof.


                                       7
<PAGE>

PRODUCTS

General

      The  Company's  insurance  subsidiaries  underwrite a variety of insurance
products  with the  primary  emphasis  on modest  premium  policies in the life,
accumulation and fixed benefit product sectors.  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.  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.

      Product  profitability  is achieved through a pricing policy that is based
upon what the Company believes to be 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.

      The following  table presents the historical  percentages of  consolidated
insurance operations revenues derived from these product types:

                                         PERCENTAGE OF CONSOLIDATED
                                            INSURANCE OPERATIONS
                                        REVENUES FOR THE YEARS ENDED
                                                DECEMBER 31,
                                 --------------------------------------------
                                                  Pro forma         Pro forma
   INSURANCE PRODUCT TYPE         1997     1998     1998(1)  1999    1999(1)
   ----------------------------- ------   ------   -------- ------   -------

   Fixed benefit................    29.8%    30.4%     3.9%    21.0%     3.3%
   Life.........................    43.1     48.7     79.7     63.6     82.5
   Accumulation.................    27.1     20.9     16.4     15.4     14.2
                                 -------  -------  -------  -------  -------
     Total......................   100.0%   100.0%   100.0%   100.0%   100.0%
                                 =======  =======  =======  =======  =======
   ---------------
   (1)  Pro forma 1999 and 1998  ratios and  amounts  exclude  the  results of
        Businesses  Held for Sale as if  Businesses  Held for Sale  were  sold
        January  1,  1998.   Such  pro  forma   information  is  provided  for
        comparative  purposes  only and does not purport to be  indicative  of
        what  would  have   occurred  had  the   consummation   of  the  sales
        transactions  occurred as of January 1, 1998, or future results of the
        Businesses Owned at December 31, 1999.

      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
                                                  AS OF DECEMBER 31,
                                          -----------------------------------------
                                                   ($ in thousands)
                                                              Pro forma(1)
   INSURANCE PRODUCT TYPE                   1997       1998       1998       1999
   ------------------------------------    ------     ------     ------     -----
   <S>                                    <C>        <C>        <C>        <C>
   Life(2).............................   $219,180   $496,712   $355,089   $316,976
   Fixed benefit.......................    184,214    209,495     13,966     16,008
                                          --------   --------   --------   --------
     Total.............................   $403,394   $706,207   $369,055   $332,984
                                          ========   ========   ========   ========
</TABLE>

   ---------------
   (1)  Pro forma 1998  ratios and amounts  exclude the results of  Businesses
        Held for Sale as if  Businesses  Held for Sale  were sold  January  1,
        1998. Such pro forma information is provided for comparative  purposes
        only and does not purport to be indicative of what would have occurred
        had the consummation of the sales transactions  occurred as of January
        1, 1998,  or future  results of the  Businesses  Owned at December 31,
        1999.
   (2)  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   funds  and  are  not  determined  by  policy   revenues
        collected.

                                       8
<PAGE>


      The following  discussion of the Company's  principal  products relates to
the Businesses Owned at December 31, 1999.

Life Insurance Products

      Traditional  Whole Life.  The Company's  whole life policies are permanent
insurance  products  that  combine  life  insurance  protection  with a  savings
component  or cash value  that  gradually  increases  in  amount.  Typically,  a
guaranteed fixed premium, which is higher than for comparable term coverage when
the  policyholder  is younger,  but less than  comparable  term  coverage as the
policyholder  grows older,  is paid over a period of years. A  policyholder  may
borrow  against  the  policy's  accumulated  cash  value,  but the amount of any
outstanding  loans decreases the death benefit under the policy.  A policyholder
may  surrender  a policy and  receive  the  accumulated  net cash  value.  As of
December 31, 1999, for the Businesses Owned,  there were  approximately  212,000
whole life  policies in force with $900 million in face amount of insurance  and
$502.3 million in future policy benefit reserves.

      Universal    and    Interest-Sensitive    Life.    The    universal    and
interest-sensitive  life  products  offered by the  Company  provide  whole life
insurance with  adjustable  rates of return related to current  interest  rates.
Universal life products permit  policyholders  to vary the frequency and size of
their premium payments, although policy benefits may also vary.

      The majority of sales of individual life insurance  products,  measured by
premium  volume,  has been derived from  universal and  interest-sensitive  life
insurance products. The Company's universal and interest-sensitive life products
provide  advantages  generally not available to its  traditional  whole life and
term  life  policyholders,  such  as  flexibility  in  available  coverages  and
flexibility  in the  amount and timing of premium  payments.  In  addition,  the
Company's universal and interest-sensitive  life products can, in some respects,
provide higher returns and greater cash values to policyholders as compared with
traditional  whole life  insurance  products.  The Company's  universal life and
interest-sensitive  life insurance products are marketed to individuals directly
and  through  qualified  retirement  plans,  deferred  compensation  plans,  and
employer  sponsored  payroll  deduction  plans. As of December 31, 1999, for the
Businesses  Owned  at  December  31,  1999,  there  were  approximately  217,000
universal  and  interest-sensitive  life policies in force with $16.9 billion in
face amount of insurance and $1,353.2 million in account value.

      Term Life.  Term life  products  offer  pure  insurance  protection  for a
specified period of time, typically one, five or ten years. The Company offers a
variety  of  term  life  products  that  include  some  or all of the  following
features:  current and  guaranteed  premium rates that are level for a specified
number of years; preferred smoker,  preferred nonsmoker,  nonsmoker,  and smoker
underwriting  classes;  and conversion to permanent  insurance allowed to age 65
with  premium  credit.  As of December  31, 1999,  for the  Businesses  Owned at
December 31, 1999, there were approximately  115,000 term life policies in force
with  $10.3  billion in face  amount of  insurance  and $42.3  million in future
policy benefit reserves.

      Total  sales of  individual  life  insurance  by the  Businesses  Owned at
December 31, 1999 were  approximately  $43.8  million,  $50.2  million and $46.8
million for the years ended December 31, 1999, 1998 and 1997, respectively.

Accumulation Products

      The  Company's  accumulation  products  include  single  premium  deferred
annuities,  flexible premium deferred  annuities and variable annuity  products.
The principal annuity products marketed by the Company's insurance  subsidiaries
owned at  December  31,  1999  consist of flexible  premium  deferred  annuities
("FPDAs") and single premium deferred annuities ("SPDAs").


                                      9
<PAGE>


      As of December 31, 1999, the  guaranteed  minimum  crediting  rates of the
Company's  deferred  annuity  products for the Businesses  Owned at December 31,
1999 were as follows:

                 Guaranteed Minimum            Funds Under
                   Crediting Rate               Management
                 ------------------          ---------------
                                             ($ in millions)

                  3.00%......................  $    46.5
                  3.50%......................        2.1
                  4.00%......................      377.6
                  4.50%......................       76.0
                  5.00%......................       --
                  6.00%......................       20.6
                    No guaranteed minimum....        5.4
                                               ---------
                                               $   528.2
                                               =========

      At December 31, 1999, annuity  liabilities were composed of $112.5 million
of SPDA liabilities and $415.7 million of FPDA liabilities and $192.0 million of
other annuity liabilities, for a total of $720.2 million of annuity liabilities.
Of such liabilities  $219.3 million were subject to surrender  charges averaging
7.0% as of December 31, 1999.

      Total sales of annuities by the Businesses Owned at December 31, 1999 were
approximately $10.5 million, $31.8 million and $33.2 million for the years ended
December 31, 1999, 1998 and 1997, respectively.

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 together with other  similar  coverages,  do not provide  monthly
benefits in excess of $2,000 or 50% 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 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.

      Historically,  most of the Company's  sales of fixed benefit  products are
produced by Businesses Held for Sale.  Total sales of fixed benefit  products by
the Businesses Owned at December 31, 1999 were approximately $6.3 million,  $3.7
million and $3.8 million for the years ended  December 31, 1999,  1998 and 1997,
respectively.

                                       10
<PAGE>


      During 1998,  Southwestern  Life began  marketing  long-term care products
which are  marketed  to  retirees,  older  self-employed  individuals  and other
persons  in middle  income  levels.  The  Company  believes  that the market for
long-term care insurance  products is attractive because of the general aging of
the  United  States  population  and the  lack of  savings  resources  to  cover
prolonged  illnesses or convalescent  care. As of December 31, 1999,  there were
2,487 long-term care policies in force  representing  $3.5 million in annualized
premiums  and $300,000 in reserves.  Total sales of long-term  care  products by
Southwestern Life during 1999 and 1998 were  approximately $2.9 million and $1.0
million, respectively.

      The  following  table  provides  certain  information  with respect to the
number of policies in force of various categories of insurance business in force
of the Company's insurance subsidiaries:

<TABLE>
<CAPTION>

                                      1997                            1998                              1999
                          -----------------------------  ------------------------------   -----------------------------
                           Fixed                Accum-    Fixed                 Accum-     Fixed                Accum-
                          Benefit     Life     ulation   Benefit      Life      ulation   Benefit       Life    ulation
                          --------  --------   -------   --------   --------    -------   --------    --------  -------
<S>                       <C>       <C>        <C>       <C>        <C>         <C>       <C>         <C>       <C>
Policies in force -
  January 1 ...........    698,072   558,697    90,265    654,936    506,913     69,769    697,018     779,932   86,612
  New issues ..........     84,286    62,449     5,012     89,218     72,080      8,715      9,932      90,921    1,189
  Business acquired, net      --        --        --      112,098    301,537     35,511       --          --       --
  Businesses sold(1), net     --        --        --         --          --        --     (652,417)   (212,718) (53,343)
  Policies terminated .   (127,422) (114,233)  (25,508)  (159,234)  (100,598)   (27,383)    (9,514)    (72,715)  (6,140)
                          --------  --------   -------   --------   --------    -------   --------    --------  -------
  Policies in force -
    December 31 .......    654,936   506,913    69,769    697,018    779,932     86,612     45,019     585,420   28,318
                          ========  ========   =======   ========   ========    =======   ========    ========  =======
</TABLE>

(1)  Reflects  amounts as if Businesses Held for Sale were sold as of January 1,
     1999.

MARKETING AND DISTRIBUTION

      The  Financial  Services  Division  is  licensed  to market its  insurance
products  in 43 states,  the  District  of  Columbia,  and in Guam.  The Company
markets and  distributes  its products  primarily  through  independent  general
agents who sell on an individual basis.

      The following tables  illustrate,  by direct cash premium  collected,  (as
reported to  regulatory  authorities)  and relative  percentages,  the principal
states in which the  Financial  Services  Division  collected in excess of 4% of
policy revenues for the year ended December 31, 1999.

                              Direct Premium Collected
                    --------------------------------------------
                    Jurisdiction            Amount    Percentage
                    ------------            ------    ----------
                                       ($ in thousands)

                    Texas ..............   $ 47,657      30.4%
                    North Carolina .....     17,369      11.1
                    California .........     11,017       7.0
                    Georgia ............     10,413       6.7
                    Florida ............      8,330       5.3
                    Virginia ...........      6,649       4.3
                                           --------     -----
                      Subtotal .........    101,435      64.8
                    All Others .........     55,170      35.2
                                           --------     -----
                      Total ............   $156,605     100.0%
                                           ========     =====

      The Payroll Sales Division is licensed to market its insurance products in
all states (other than New York) and in the District of Columbia,  and in Puerto
Rico,  Guam and certain  Caribbean  countries.  In addition,  the Payroll  Sales
Division is authorized to sell its products to U.S.  Military  installations  in
foreign  countries.  The Company markets and distributes its products  primarily
through  independent  general  agents  who  sell  on  an  individual  basis  and
independent general agents who sell through payroll deduction programs.

      The following tables  illustrate,  by direct cash premium  collected,  (as
reported to  regulatory  authorities)  and relative  percentages,  the principal
states in which the Payroll Sales Division collected in excess of 4.0% of policy
revenues for the year ended December 31, 1999.

                                       11
<PAGE>



                              Direct Premium Collected
                    --------------------------------------------
                    Jurisdiction            Amount    Percentage
                    ------------            ------    ----------
                                       ($ in thousands)

                    Texas ..............   $ 9,017       9.3%
                    California .........     8,506       8.8
                    North Carolina .....     6,850       7.1
                    Florida ............     5,444       5.6
                    South Carolina .....     4,020       4.1
                    Kansas .............     3,883       4.0
                                           -------     -----
                      Subtotal .........    37,720      38.9
                    All Others .........    59,190      61.1
                                           -------     -----
                      Total ............   $96,910     100.0%
                                           =======     =====

Financial Services Division

      The Financial  Services Division markets products to individual  customers
through leads  developed  over time.  This  division  utilizes  field  marketing
directors,  affiliations  with independent  marketing  organizations,  financial
institutions and financial planners 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.

      The  following  tables  set  forth  information  regarding  the  Financial
Services Division.  Southwestern Life is included beginning in 1998. United Life
is  excluded  on a pro  forma  basis  for  1998 and  1999 as it is  included  in
Businesses Held for Sale and was sold on April 30, 1999.

<TABLE>
<CAPTION>

                                                                             Pro forma
                                                                          ------------------
   FINANCIAL SERVICES DIVISION                          1997     1998       1998      1999
   -------------------------------------------------  -------  ---------  --------  --------
                                                               ($ in thousands)
   <S>                                                <C>       <C>        <C>       <C>
   Agents under contract ...........................     7,730    19,254    16,607    14,663
   Number of agents annually producing new business.     2,206     4,894     4,353     3,955
   Submitted annualized new business premiums ......  $139,483  $160,258   $72,465   $39,849
   Annualized new business premium per agent .......  $   63.2  $   32.7   $  16.6   $  10.1

</TABLE>

      The revenue earned by the Financial  Services  Division by product type is
shown below:

                                                                   Pro forma
                                                              ------------------
   INSURANCE PRODUCT TYPE                   1997      1998      1998      1999
   -------------------------------------- --------  --------  --------  --------
                                                         ($ in millions)

   Life.................................. $  127.9  $  249.3  $  239.6  $  244.3
   Accumulation..........................    166.9     167.8      65.7      54.7
   Fixed benefit.........................      0.3       2.7       2.4       0.3
                                          --------  --------  --------  --------
     Total............................... $  295.1  $  419.8  $  307.7  $  299.3
                                          ========  ========  ========  ========


                                       12
<PAGE>


      The percentage of the Financial Services Division revenue to the Company's
total insurance operations revenue by insurance product is shown below:

                                                                  Pro forma
                                                                 ------------
   INSURANCE PRODUCT TYPE                        1997    1998    1998    1999
   -----------------------------------------     ----    ----    ----    ----

   Life ....................................     46.3%   60.2%   69.1%   68.2%
   Fixed benefit ...........................      0.2     1.0    14.3     1.8
   Accumulation ............................     95.0    94.2    92.0    88.5
     Total division revenue to the Company's
      total insurance operations revenue ...     45.9    49.5    70.7    68.9

Payroll Sales Division

      Each of the  Payroll  Sales  Division's  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. Professional is excluded on a pro forma basis for 1998 and for 1999 as
it is included in Businesses Held for Sale and was sold on March 31, 1999:

<TABLE>
<CAPTION>

                                                                             Pro forma
                                                                          -----------------
   PAYROLL SALES DIVISION                              1997      1998      1998      1999
   ------------------------------------------------   -------   -------   -------   -------
                                                                  ($ in thousands)
   <S>                                                <C>       <C>       <C>       <C>
   Agents under contract ..........................     6,784     6,941     3,638     3,129
   Number of agents annually producing new business     2,955     1,926       783       684

   Submitted annualized new business premiums .....   $42,527   $44,100   $26,944   $23,786
   Annualized new business premium per agent ......   $  14.4   $  22.9   $  34.4   $  34.8
</TABLE>

      The revenue  earned by the Payroll Sales Division by product type is shown
below:
<TABLE>
<CAPTION>

                                                                     Pro forma
                                                                -------------------
   INSURANCE PRODUCT TYPE                   1997       1998       1998       1999
   -------------------------------------- --------   --------   --------   --------
                                                    ($ in millions)
   <S>                                    <C>        <C>        <C>        <C>
   Life................................   $  116.4   $  112.6   $  107.0   $  114.1
   Fixed benefit.......................       48.9       48.0       14.6       13.8
   Accumulation........................        7.2        5.9        5.7        7.1
                                          --------   --------   --------   --------
     Total.............................   $  172.5   $  166.5   $  127.3   $  135.0
                                          ========   ========   ========   ========
</TABLE>


                                       13
<PAGE>


      The  percentage  of the Payroll  Sales  Division  revenue to the Company's
total insurance operations revenue by insurance product is shown below:

                                                                  Pro forma
                                                                 ------------
   INSURANCE PRODUCT TYPE                        1997    1998    1998    1999
   -----------------------------------------     ----    ----    ----    ----

   Life ....................................     42.2%   27.2%   30.9%   31.8%
   Fixed benefit ...........................     25.5    18.6    85.7    98.2
   Accumulation ............................      4.1     3.3     8.0    11.5
     Total division revenue to the Company's
       total insurance operations revenue ..     26.8    19.5    29.3    31.1

INSURANCE UNDERWRITING

      The Financial Services Division generally utilizes the underwriting manual
of a large  reinsurer as a guide for risk selection.  The Company  considers its
underwriting  philosophy  to be in line with the majority of the life  insurance
industry.  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 Company  exceeds  $100,000,  a
prospective  policyholder  must submit a  screening  for  antibodies  related to
Acquired Immune  Deficiency  Syndrome ("AIDS") , to the extent permitted by law.
Life products that are specifically designed for simplified issue are 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,
1999 and 1998, the Company  estimated its Businesses  Owned at December 31, 1999
paid approximately  $795,000 and $1.0 million,  respectively,  in death benefits
(representing  less than 1% 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. The AIDS claims paid in 1997 were $2.1 million.

      The Company has  identified a block of  approximately  283 policies with a
total face amount of  approximately  $27.8 million which it suspects  could have
been issued on applications containing material misrepresentations, particularly
concerning  the  treatment  for or the  diagnosis of AIDS or HIV. The Company is
investigating  each one of these  policies  and is taking  steps to rescind  any
contestable policy where material  misrepresentations  are found.  Approximately
156 policies with a face amount totaling  approximately  $17.8 million have been
rescinded.  The Company is also reviewing its underwriting guidelines to prevent
a  recurrence  of this  situation  and  reviewing  its current cost of insurance
charges to  determine if current  charges are  sufficient  to cover  potentially
higher mortality associated with such policies.

INVESTMENT PORTFOLIO

      The Company's  investment  portfolio  (including total invested assets and
cash and cash  equivalents)  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 investment-grade fixed maturity
securities,  which  accounted for  approximately  84.4% of the  Company's  total
invested  assets at December 31, 1999.  The Company  believes that the nature of
its life products,  which limit the early accumulation of cash values, permit it
to utilize this conservative investment strategy.

      At December 31, 1999,  51.6% of the Company's  fixed  maturity  bonds were
rated AA or higher by Standard & Poor's and  approximately  93.2% were rated BBB
or higher by Standard & Poor'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 governments and government agencies
and authorities,  no single issuer  represented more than 0.9% of total invested
assets at December 31, 1999.

                                       14
<PAGE>


      The following  table  summarizes the Company's  investments as of December
31, 1999:

<TABLE>
<CAPTION>

                                                                                    Percent of
                                                                                       Total
                                             Amortized      Fair      Carrying       Carrying
                                                Cost       Value(1)     Value          Value
                                             ----------   ----------  ----------       -----
                                                       ($ in thousands)
   <S>                                       <C>          <C>         <C>              <C>
   Fixed maturities available for sale:
   U.S. Government and agency bonds ......   $  224,922   $  213,628  $  213,628         7.8%
   Debt securities issued or guaranteed by
     foreign governments .................       23,677       22,518       22,518        0.8
   Municipal bonds .......................       54,480       45,880       45,880        1.6
   Corporate bonds .......................    1,210,492    1,150,001    1,150,001       41.8
   Mortgage-backed bonds .................      972,425      931,663      931,663       33.9
                                             ----------   ----------  ----------       -----
     Total fixed maturity securities
      available for sale .................    2,485,996    2,363,690   2,363,690        85.9

   Equity securities available for sale ..        2,008        2,008        2,008        0.1
   Commercial mortgages ..................       20,032       20,285       20,032        0.7
   Real estate ...........................        5,475        5,141        5,141        0.2
   Policy loans ..........................      197,287      197,287      197,287        7.2
   Other investments .....................       17,667       21,429       21,429        0.8
                                             ----------   ----------  ----------       -----
     Total invested assets ...............    2,728,465    2,609,840   2,609,587        94.9
   Cash and cash equivalents .............      141,636      141,636      141,636        5.1
                                             ----------   ----------  ----------       -----
     Total investment portfolio ..........   $2,870,101   $2,751,476  $2,751,223       100.0%
                                             ==========   ==========  ==========       =====
</TABLE>

     -----------------
     (1)  Fair values are obtained  principally  from the  Company's  investment
          advisors.

      The table set forth below indicates the composition of the Company's fixed
maturity portfolio by rating as of December 31, 1999:

                                                                Percent of
                                                      Total       Total
                                                    Carrying     Carrying
                   Rating                             Value        Value
                                                    ----------     -----
                                                 ($ in thousands)

                    AAA(1) ......................   $1,056,879      44.7 %
                    AA ..........................      162,689       6.9
                    A ...........................      589,152      24.9
                    BBB .........................      394,334      16.7
                                                    ----------     -----
                     Total investment grade .....    2,203,054      93.2
                                                    ----------     -----

                    BB ..........................       84,930       3.6
                    B or below ..................       54,591       2.3
                                                    ----------     -----
                     Total below-investment grade      139,521       5.9
                                                    ----------     -----
                    Nonrated ....................       21,115       0.9
                                                    ----------     -----
                     Total fixed maturities .....   $2,363,690     100.0%
                                                    ==========     =====

                    --------------------
                    (1)  Includes  approximately $213.6 million of United States
                         government and agency bonds.



                                     15
<PAGE>


      The following table reflects  investment  results for the Company for each
of the periods  indicated.  The pro forma  amounts for 1998 and 1999 exclude the
Businesses Held for Sale.

<TABLE>
<CAPTION>
                                                              FOR THE YEARS ENDED DECEMBER 31,
                                                 --------------------------------------------------------
                                                                                       Pro forma
                                                                               --------------------------
                                                     1997           1998          1998           1999
                                                 -----------    -----------    -----------    -----------
                                                                      ($ in thousands)

   <S>                                           <C>            <C>            <C>            <C>
   End of period total investment portfolio(1)   $ 3,339,979    $ 4,930,535    $ 2,956,254    $ 2,751,223
   Net investment income(2) ..................       273,237        369,052        215,909        201,514
   Net realized investment gains (losses)(3) .        17,487         14,068          4,956         (1,398)
   Average annual yield ......................           7.6%           7.2%           7.0%           7.1%
</TABLE>

   -----------

(1)  Consists of total  investment  portfolio,  less  amounts due to brokers for
     securities  committed to be purchased at end of period. For 1998,  invested
     assets of  Businesses  Held for Sale have  been  included  in end of period
     total invested  assets.  In the pro forma 1998,  net investment  income and
     realized investment gains of Businesses Held for Sale have been excluded.

(2)  Net investment income is net of investment expenses, excludes capital gains
     or losses  and is before  income  taxes.  Net  investment  income  for 1999
     excludes income from Businesses Held for Sale that were sold during 1999.

(3)  Amounts  shown above are before income taxes,  and include  provisions  for
     impairments in value which are considered to be other than  temporary.  For
     1999,  amount  excludes gains from  Businesses Held for Sale that were sold
     during 1999.

      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.  Some new insurance sales are reinsured above
prescribed  limits and others are  reinsured as a  percentage  of each dollar of
coverage up to prescribed  limits;  these 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 $500,000 per life, depending on insured
issue age, the product type and each insurance  company's  historical  practice.
Generally, accidental death benefits in excess of $50,000 per life are reinsured
on a bulk  basis.  Long  term  care is 80%  reinsured  on a  coinsurance  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.

      The Businesses  Owned at December 31, 1999 are currently in the process of
reviewing existing reinsurance programs. This review is expected to be completed
in 2000 and may affect retention  limits,  the cost of its reinsurance  coverage
and other aspects of its reinsurance programs.

      At December  31, 1999 and 1998,  of the  approximately  $28.2  billion and
$36.5 billion of life  insurance in force,  approximately  $5.5 billion and $6.4
billion had been ceded to reinsurers,  respectively. As of December 31, 1999 the
Company's  principal  reinsurers  are  RGA  Reinsurance  Company,  Allianz  Life
Insurance  Company,  Life Reassurance  Corp. of America,  Swiss Re Life & Health
Insurance   Company,   Transamerica   Occidental  Life  Insurance   Company  and
Reassurance  Company of Hanover which collectively have reinsured  approximately
69.6% of the ceded business.

YEAR 2000 ISSUES

      Many computer and software  programs were designed to accommodate only two
digit  fields to  represent a given year (e.g.  "98"  represents  1998).  It was
highly likely that such systems  could not have been able to accurately  process
data  containing date  information for the year 2000 and beyond.  The Company is


                                       16
<PAGE>


highly reliant upon computer  systems and software as are many of the businesses
with  which  the  Company  interacts.  The  Company's  ability  to  service  its
policyholders  and agents is  dependent  upon  accurate  and timely  transaction
processing.  Transaction  processing  in turn is  dependent  upon the  Company's
highly complex interdependent  computer hardware,  software,  telecommunications
and desktop  applications.  The  inability of the Company or any of its integral
business partners to continue processing  transactions during 2000 could lead to
a significant business interruption. Such an interruption could have resulted in
a decline in current and long-term profitability and business franchise value.

      The  Company's  overall  year 2000  compliance  initiatives,  included the
following components:  (i) assessment of all business critical systems (business
critical  systems includes  computer and other systems),  processes and external
interfaces and dependancies;  (ii) remediation or upgrading of business critical
systems;  (iii)  testing  of  both  modified  and  updated  systems  as  well as
integrated systems testing; (iv) implementation of modified and updated systems;
and (v) contingency  planning. As a part of the process, the Company has written
letters and corresponded with its outside vendors and critical business partners
concerning year 2000 compliance efforts and has followed up periodically.

      The Company engaged  outside  vendors and focused certain  employees' full
time  efforts  to help in the  full  array  of its year  2000  initiative.  This
included  systems  assessment and monitoring  advice,  actual code  remediation,
communication  and consultation  with critical  business partners and additional
data center and testing  resources.  The Company  originally  projected to incur
internal and external costs  associated  with such expertise  ranging from $10.6
million to $14.5 million, which were anticipated to be incurred primarily during
1998 and early 1999. The Company actually  incurred  internal and external costs
of $8.0 million during 1999. The Company  estimates it has incurred internal and
external  costs  aggregating  $13.4 million and $1.9 million for the years ended
December 31, 1998 and 1997, respectively.

      Since December 31, 1999 the Company has not  experienced  any  significant
disruption in the Company's business,  or an increase in the cost of the Company
doing business related to the year 2000 issue.

      The  Company  provided  certain  representations  and  warranties  to each
respective  purchaser  of the  businesses  sold with  respect  to each  entity's
ability  to process  date-sensitive  information  for the year 2000 and  beyond.
Although the Company believes that it is in compliance with, and is not aware of
any  breach of the year 2000  representations  and  warranties  provided  to the
respective  purchasers,  there  can be no  assurances  that  the  Company  is in
compliance with all such representations and warranties. A breach by the Company
of  such   representations   and  warranties  could  result  in  indemnification
obligations owed by the Company to the purchasers.

COMPETITION

      The life insurance industry is highly competitive. Numerous life insurance
companies and other entities,  including banks and other financial institutions,
compete with the Company,  many of which 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. The
Company believes that the principal competitive factors in the sale of insurance
products are product features, price, commission structure,  perceived stability
of the insurer, claims-paying ratings, value-added service and name recognition.
The  Company's  ability to compete  for sales is  dependent  upon its ability to
address the competitive factors described above.

      As a  result  of the high  percentage  of life  and  accumulation  product
revenue as  compared  to total  revenue,  the  Company  faces a broad  market of
competition.  The sale of life insurance products,  and to a greater extent, the
sale of accumulation  products is very sensitive to an organization's  A.M. Best
rating, its size and perceived  financial strength and the  competitiveness  and
the financial performance of the products themselves.  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.

      During  1998,  each  of  the  Company's  insurance  subsidiaries  received
downgrades  in their  respective  A.M.  Best  rating,  primarily  as a result of
concerns regarding the financial  strength of the Company.  The Company believes
that as a result of the  rating  action,  certain  insurance  subsidiaries  have
experienced  slight declines in new business  production and modest increases in
policyholder surrenders.  Certain of the Company's insurance subsidiaries market
insurance  products that are highly sensitive to competitive  factors  including
financial  strength and  ratings.  Over time and without an  improvement  in the
financial strength of the Company,  the Company believes that the rating decline
of its insurance  subsidiaries  will  negatively  impact their ability to market
certain  products and to retain some customers and  distribution  channels.  For
additional  information  on ratings see  "Business-Ratings"  included  elsewhere
herein.

                                       17
<PAGE>


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.

      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 require the Company to continually
review and occasionally modify or restructure the insurance  subsidiaries within
the insurance holding company system. Additionally, the Company has entered into
an agreement  with the Texas  Department of Insurance  dated  September 22, 1998
which establishes  procedures  resulting in greater oversight of the Company and
its insurance subsidiaries by the Texas Department of Insurance.  The Company is
registered  as an insurance  holding  company  system in Texas (the  domiciliary
state 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  National  Association  of
Insurance Commissioners ("NAIC") and state insurance regulators also have become
involved in a process of  re-examining  existing laws and  regulations and their
application to insurance  companies.  In  particular,  this  re-examination  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,  the  codification of Statutory  Accounting  Principles,  and the
regulation of various products offered by insurance companies.

      In connection with its  accreditation  of states,  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.  Texas,
the state of domicile  for the  Company's  insurance  subsidiaries,  has adopted
dividend  tests  that are  substantially  similar  to that of the  NAIC's  model
legislation. Texas only allows dividends to be paid out of unassigned funds.

      Texas law  permits AA Life,  OLIC,  Pioneer  American,  Pioneer  Security,
Pacific Life,  Security  Life and  Southwestern  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 its statutory surplus as of the end of the prior calendar
year or (ii) its net income from  operations  for the prior  calendar  year. 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 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.

      On the basis of 1999 statutory  financial  statements filed with the state
insurance  regulators,  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. The Company's businesses experienced the
departures from the usual ranges on the following ratios.

      PLAIC had four ratios outside of the usual range  established by the NAIC.
PLAIC is primarily a holding company for its principal assets,  being the common
stock of certain of the  Company's  insurance  subsidiaries.  Security  Life had
three  ratios  outside the usual range  principally  as a result of the exchange
program  implemented during 1999 to holders of certain life insurance  products.
For a description of the exchange  program,  see page 20.  Southwestern Life had
none of the twelve ratios outside of the usual ranges.

                                       18
<PAGE>


      In the past, variances in the insurance companies' ratios have resulted in
inquiries  from insurance  departments  to which the Company has responded.  The
Company may receive inquiries from certain insurance departments  concerning its
ratio  results  for  1999,  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 ("RBC") 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,
neither the Model Act or similar  legislation  or regulation has been adopted in
Texas, the domiciliary states of the Company's  insurance  subsidiaries owned at
December 31, 1999.

      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
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, 1999,  indicate that each of
the  insurance   subsidiaries'   capital   exceeded  Company  Action  Level  RBC
requirements.

      Of the Company's remaining insurance  subsidiaries,  Security Life has one
state  license which is subject to limits on the amount of new business that may
be written.  This license  restriction has not had a material  adverse effect on
the  Company's  results of  operations  and is 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's  life  insurance  subsidiaries  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 Company  received a
refund of $223,000 in 1999.  The Company paid  $300,000 and $2.5 million for the
years  ended  December  31,  1998 and  1997,  respectively,  as a result of such
assessments. At December 31, 1999, the Company's life insurance subsidiaries had
accrued assessment liability totaling $1.8 million.

      On March  16,  1998,  the NAIC  approved  the  codification  of  statutory
accounting  practices.  The  codification  will  constitute  the only  source of
"prescribed"  statutory  accounting  practices and is subject to adoption by the
Department  of Insurance of the state of domicile.  The  Statements of Statutory
Accounting Principles established under the codification are generally effective
January 1, 2001. The Company has not fully determined the impact the adoption of
the codification  will have on unassigned  surplus of each insurance  subsidiary
though the Company does not believe it will be material.

      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.

                                       19
<PAGE>


      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.  Additionally,  there  can  be no
assurance that existing  insurance-related  laws and regulations will not have a
material  adverse  effect  on the  ability  of PLAIC to make  payments  on their
respective surplus  debentures.  For further information related to said surplus
debenture,  see Item 7.  Management's  Discussion  and  Analysis  of  Results of
Operations and Financial  Condition--Financial  Condition, Liquidity and Capital
Resources and Note 14 of Notes to Consolidated Financial Statements.

      Certain of the Company's insurance subsidiaries  historically sold certain
interest sensitive life insurance contracts in which the determination of policy
reserves is highly sensitive to assumptions such as withdrawal rates, investment
earnings rates,  mortality rates and premium persistency.  Minor changes in such
assumptions   could  have  a  material  impact  on  future   statutory   reserve
requirements.  Significant increases in statutory reserves would result in lower
statutory earnings for the impacted insurance subsidiaries,  which in turn would
reduce the dividend capacity of such subsidiaries  ultimately reducing cash flow
available to the Company.

      The Company is continually  evaluating  actuarial  assumptions  associated
with interest  sensitive life insurance  contracts in which the determination of
policy  reserves is highly  sensitive to assumptions  such as withdrawal  rates,
investment earnings rates,  mortality rates, and premium persistency.  Currently
reflected in the Company's financial  statements are policy reserves and account
values  associated with such contracts,  which aggregated  approximately  $527.1
million and $525.4  million as of December 31, 1999 and 1998,  respectively.  If
developing trends were to continue,  principally the less than expected level of
the lapses currently associated with such interest sensitive blocks of business,
the Company would be required to record additional reserves or reduce intangible
assets,  which could have a material impact on the Company's  financial position
and results of  operations.  A decrease  of 1% in the  assumed  lapse rate would
increase  policy  reserves  associated  with  such  contracts  by $9.0  million.
Management is also assessing the potential impact of future management  actions,
which might mitigate the financial  impact of these trends.  Types of management
actions would likely  include,  but are not limited to, the  redetermination  of
non-guaranteed charges and/or benefits under the contracts,  asset segmentation,
and  reinsurance.  There are risks  associated with management  action including
potential  sales  disruption  and the threat of  litigation.  During  1999,  the
Company  modified  certain  assumptions  associated  with the blocks of business
including lowering the aggregate  expected lapse rate. In addition,  the Company
is pursuing a plan to continue  charging  certain expense loads  associated with
certain  interest  sensitive  life  insurance  contracts.  As a  result  of  the
aggregate  impact of the changes in  assumptions  and  management  actions,  the
Company  increased  the amount of  reserves  associated  with these  policies by
approximately $6.2 million during the fourth quarter of 1999.

      The Company's insurance  subsidiaries are required,  at least annually, to
perform cash flow and "Asset Adequacy  Analysis"  under differing  interest rate
scenarios.  At December 31, 1999 and 1998,  Southwestern  Life failed certain of
those cash flow testing  scenarios.  As a result,  Southwestern Life performed a
series of  expanded  tests.  Based  upon the  results of these  expanded  tests,
Southwestern  Life has determined  that additional  statutory  reserves were not
needed at December 31, 1999 or 1998. Factors that may require  Southwestern Life
to establish  additional statutory reserves in future periods include changes in
interest rates, timing of the emergence of insurance profits, persistency of the
insurance  in force,  sales or  reinsurance  of blocks of insurance in force and
mortality  experience.  Management  actions that may mitigate the need for these
additional  reserves may include but are not limited to, new profitable business
being  added to the  insurance  in force,  reinsurance  or actions  that  impact
persistency,  mortality experience, interest spreads and costs to administer the
insurance in force.  Southwestern  Life  periodically  monitors these factors to
determine if additional statutory reserves will be required.

      In January 1999, Security Life initiated  management action in the form of
a new exchange  program for certain  policyholders of Security Life. The program
was offered to all  policyholders  who had certain  policy  forms in force as of
January 1, 1998. The program allowed the policyholder  the following  options in
exchange for terminating  his or her policy and executing a release:  (i) refund
of 115% of all premiums paid for the policy prior to January 1, 1999 and 100% of
premiums  paid   thereafter;   (ii)  exchange  the  policy,   without  proof  of
insurability, for the same face amount in a universal life policy, or a new term
universal life policy. The policyholder also had the choice of not accepting the
exchange  program and keeping the current  policy in force.  As of December  31,
1999, 66% of such policyholders  completed the exchange offer. In November 1999,
a lawsuit was filed against  Security Life regarding  these matters (see Item 3.
Legal Proceedings).

RATINGS

     A.M. Best Company ("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.  All of the
Company's life insurance subsidiaries carry a "B+ (Very Good)" rating from A. M.
Best. A "B+ (Very Good)" rating is the sixth highest letter rating.


                                       20
<PAGE>


EMPLOYEES

      At December 31, 1999, the Company had 484 full time employees. None of the
Company's employees were represented by any union.

Item 2.     Properties

FACILITIES

      The Company's primary administrative offices are located in Dallas, Texas.
Southwestern   Financial  Services  Corporation  ("SFSC")  leases  approximately
125,000  square  feet in Dallas,  Texas at an annual cost of $1.8  million.  The
Company  believes that the current make up of its properties is adequate for its
operations,  and  based  on  recent  experience,  that  it  will be able to find
suitable  replacement  properties on acceptable terms for properties the Company
chooses to replace or to which leases are terminated or not renewed.

Item 3.     Legal Proceedings

      During the third quarter of 1998, the first of ten class-action complaints
was filed in the United States  District Court for the Southern  District of New
York ("District Court") against the Company and certain of its current or former
directors and officers.

      During a pre-trial  conference on November 9, 1998,  all parties agreed to
the  consolidation of all of the actions and the Court appointed lead plaintiffs
on behalf of shareholders and noteholders. The Court also approved the selection
of three law firms as  co-lead  counsel  for  shareholders  and  noteholders.  A
consolidated  and  amended  complaint  was filed on January  22,  1999.  A First
Consolidated Amended Class Action Complaint naming, as defendants,  the Company,
David J. Stone,  formerly a director and Chairman and Chief  Executive  Officer,
and Steven W. Fickes,  formerly a director  and  President  and Chief  Financial
Officer was filed on March 15, 1999 (the "Complaint").

      The Complaint alleges that defendants violated the Securities Exchange Act
of 1934. Among other things, plaintiffs claim that defendants issued a series of
materially false and misleading  statements and omitted material facts regarding
the Company's financial condition, including the value of certain of its assets,
and failed to timely disclose that it was under  investigation by the Securities
and Exchange Commission (the "SEC").

      Plaintiffs  seek to recover  damages in  unspecified  amounts on behalf of
themselves and all other purchasers of the Company's common stock and purchasers
of the  Company's  subordinated  notes  during the period of  February  8, 1996,
through November 16, 1998.

      During a conference on March 19, 1999,  defendants sought and were granted
permission to file, and  subsequently  filed, a motion to dismiss the Complaint.
Although  there are no  assurances  that the motion to dismiss  will be granted,
management believes that there are meritorious  defenses to the action that were
raised in connection with the motion, including whether the Complaint adequately
pleads  scienter  (i.e.,  intent to  defraud)  as  required  under  the  Private
Securities Litigation Reform Act of 1995.

      The Company has notified its primary and excess  carriers of directors and
officers  liability  insurance  of the  existence of the claims set forth in the
Complaint,  and the total  potential  insurance  available  is $15.0  million of
primary  and $10.0  million of excess  coverage,  respectively,  for  securities
claims.  The primary insurance coverage requires the Company to bear 25% of: (i)
all expenses and (ii) any losses in excess of a $1.0 million  retention  amount.
The primary and excess  carriers have  reserved  their rights under the policies
with respect to coverage of the claims set forth in the Complaint.  As explained
below, the primary insurer has agreed in principle to contribute to a settlement
of the litigation.

       Following  settlement   discussions  with  the  Plaintiffs'  counsel  and
representatives of the primary insurance carrier and their counsel,  the parties
to the Complaint  entered into a Memorandum of Understanding  dated November 11,
1999 (the "Memo") containing the essential terms of a settlement.

                                       21
<PAGE>


      The Memo states that $9.0 million of cash plus interest  accruing  through
the date of  consummation  of the  settlement,  will be paid in full  and  final
settlement of all claims set forth in the Complaint (the "Settlement").  Of that
sum,  $1.5  million plus  interest  will be paid by the Company and $7.5 million
plus  interest  will be paid by the  Company's  outside  directors  and officers
liability  insurance  carrier.  The Settlement is conditioned  upon, among other
things,  confirmatory discovery,  execution of a definitive settlement agreement
and related  documents,  notice to the Company's  shareholders of the Settlement
and final approval by the United States  District Court (with all time to appeal
such  approval  having  run or any  appeals  having  been  resolved  in favor of
approval of the  Settlement).  During the three months ended  December 31, 1999,
the Company  paid the $1.5 million  liability  related to the  settlement  to an
escrow account.

      The Company  expects that this  litigation  will not affect its ability to
operate through 2000. While it is not feasible to predict or determine the final
outcome of these  proceedings  or to estimate the amounts or potential  range of
loss with respect to these matters,  management  believes that if the Settlement
is not  consummated  and  there  is an  adverse  outcome  with  respect  to such
proceedings,  it would have a material  adverse impact on the Company and affect
its ability to operate as is currently intended.

      In May 1998, the North  Carolina  Attorney  General's  Office (the "NCAG")
initiated an inquiry  concerning  certain life insurance  products  historically
sold by Security  Life and  representations  allegedly  made by Security  Life's
agents and officers  with respect to not charging  insurance  charges  after the
eighth policy year for  non-smoker  insureds.  The NCAG  indicated that Security
Life may be estopped to change its current  practice of not charging the cost of
the insurance for non-smoking  policyholders because of certain  representations
made by agents and officers of Security  Life.  Although  Security  Life has not
charged the cost of insurance  charges for non-smoker  policyholders who reached
their  ninth  policy  year,  this  practice  is not  guaranteed  under  the life
insurance contracts. The contracts specifically allow Security Life the right to
change the cost of insurance  rates in accordance  with the parameters set forth
in the insurance contracts. Security Life has responded to the NCAG's inquiry by
denying that it is estopped from  changing the cost of insurance  rates based on
the alleged representations, and continuing to reserve its contractual rights to
charge the cost of insurance  rates in accordance  with the parameters set forth
in the insurance  contracts.  In June 1998, the NCAG informed Security Life that
it could not  adjudicate  this matter and left it mutually  unresolved.  In June
1999, the North Carolina  Department of Insurance  ("NCDOI") asked Security Life
about the status of its  current  practice  of not  charging  cost of  insurance
charges after the eighth  contract year for  non-smokers on these same insurance
products  and  requested  to be informed if  Security  Life  changes its current
practice.  Security Life has responded to the NCDOI's  inquiry by verifying that
no  decision  has been made to date to change  such  current  practice  and such
practice has not changed;  and affirming that the NCDOI would be notified in the
event this  current  practice  changes.  The Company has  initiated  an exchange
program which enables policyholders of such life insurance products to terminate
their policies and, in exchange for the termination of the original policy and a
release,   obtain  either  (i)  the  refund  of  all  premiums  paid  and  other
consideration  or (ii)  another  Security  Life  product.  On  November 5, 1999,
Security  Life was served  with an  Original  Petition  filed in state  court in
Dallas County,  Texas,  asserting a class action  concerning such policies.  The
petition  alleges  that  Security  Life has waived  the right to charge  cost of
insurance  charges  after the eighth  year on such  non-smoker  policies  and to
increase cost of insurance charges on such smoker policies. The petition alleges
Security  Life made  these  waivers  through  its  marketing  pieces  and signed
statements by its officers.  The petition also alleges that not all of the facts
were outlined in the Company's  communication to its policyholders outlining the
exchange  program and therefore  alleges  Security  Life's  exchange  program is
deceptive.  The petition asks for declaratory  judgment concerning the rights of
the  Plaintiffs,  and  the  class  of  policyholders  of such  policies  and for
attorney's  fees.  It, among other  things,  asks for an  injunction  to prevent
Security  Life from  charging  cost of  insurance  charges  for such  non-smoker
policies or increasing  cost of insurance  charges on such smoker policies after
the eighth  contract year. It also asks the Court to rule the releases signed by
such  policyholders  under the  exchange  program be declared  null and void and
those  policyholders  who signed the releases be given the option of reinstating
the prior  policies.  Security Life denies the  allegations  in the petition and
intends to vigorously defend this lawsuit. The trial court in which this case is
pending has granted class  certification in at least one other lawsuit involving
similar types of claims.  There can be no assurances  that the exchange  program
will be  successful  or that the Company will resolve these matters on such life
insurance  products  on a  satisfactory  basis,  or at  all,  or that  any  such
resolution would not have a material  adverse effect on the Company's  financial
condition, results of operations or cash flows.

      On July 30, 1998,  the SEC  notified  the Company that it had  commenced a
formal  investigation  into possible  violations of the federal  securities laws
including  matters  relating  to the  Company's  restatement  of  its  financial
statements  for the first six months of 1997,  and for the years ended  December
31, 1994,  1995 and 1996. The Company and its  management are fully  cooperating
with the SEC in its investigation.

      The  Company  is a party to various  other  pending  or  threatened  legal
actions  arising  in the  ordinary  course of  business,  some of which  include
allegations of insufficient  policy  illustration 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

      None.

                                       22
<PAGE>


                                    PART II

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

MARKET FOR COMMON STOCK

      On January 8, 2000,  the NYSE  suspended  trading in the Company's  common
stock and applied to the Securities  and Exchange  Commission for the removal of
the Company's  common stock and $3.375  convertible  preferred stock listing and
registration  on the  NYSE.  The  shares  of  common  stock of the  Company  are
currently traded in the over-the-counter market under the ticker symbol "PFGRQ."

      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,  1998.  The  prices do not  include
mark-ups,   mark-downs,  or  commissions.  As  of  March  29,  2000,  there  are
approximately  278  shareholders  of record  throughout  the  United  States and
abroad.

      The price  history as provided by NYSE and  dividends  for the years ended
December 31, 1999 and 1998, are presented below:

                                                    SALES PRICE
                                               ---------------------    DIVIDEND
         FOR THE YEAR ENDED DECEMBER 31, 1999    HIGH         LOW       DECLARED
         ------------------------------------  --------     --------    --------

         Fourth quarter......................  $  0.750     $  0.312    $    --
         Third quarter.......................     0.688        0.281         --
         Second quarter......................     0.750        0.438         --
         First quarter.......................     1.312        0.500         --

                                                    SALES PRICE
                                               ---------------------    DIVIDEND
         FOR THE YEAR ENDED DECEMBER 31, 1998    HIGH         LOW       DECLARED
         ------------------------------------  --------     --------    --------

         Fourth quarter......................  $  2.250     $  0.500    $    --
         Third quarter.......................    20.750        1.750         --
         Second quarter......................    28.688       20.125       0.05
         First quarter.......................    35.938       27.813       0.05


                 (Remainder of Page Intentionally Left Blank)

                                       23
<PAGE>


Item 6.     Selected Consolidated Financial Data
<TABLE>
<CAPTION>

                                                                   For the years ended December 31,
                                                      ---------------------------------------------------------
                                                         1999         1998         1997       1996       1995
                                                      ----------    ---------    --------   --------   --------
                                                                (In thousands, except per share amounts)
<S>                                                   <C>           <C>          <C>        <C>        <C>
Revenues:
  Policy revenues ................................    $  338,874    $ 459,158    $345,566   $348,090   $301,889
  Net investment income ..........................       257,600      369,052     273,237    210,734    102,291
  Other income(1) ................................        34,066       37,717      46,476     43,703     21,794
  Net gains (losses) from the sale of investments           (502)      14,068      17,487      1,257      3,770
  Net gains from sales of subsidiaries(2) ........         6,602         --          --         --         --
                                                      ----------    ---------    --------   --------   --------
     Total revenues ..............................       636,640      879,995     682,766    603,784    429,744
                                                      ----------    ---------    --------   --------   --------

Benefits and expenses:
  Claims incurred ................................       223,658      308,432     202,472    188,727    141,876
  Change in liability for future policy benefits and
   other policy benefits .........................       153,929      233,330     121,817     83,184     20,047
  Insurance and other operating expenses .........       236,826      376,941     264,607    181,678    164,126
  Interest and amortization of deferred
    debt issuance costs ..........................        40,222       42,960      23,355     18,579     19,520
  Impairment of intangibles ......................        95,522         --          --         --         --
  Impairment provision associated with assets of
   Businesses Held for Sale ......................        58,486      342,960        --         --         --
                                                     -----------    ---------    --------   --------   --------
     Total benefits and expenses. ................       808,643    1,304,623     612,251    472,168    345,569
                                                     -----------    ---------    --------   --------   --------

Income (loss) before income taxes and extraordinary
  charge .........................................      (172,003)    (424,628)     70,515    131,616     84,175
  Income taxes (benefits) ........................        28,709       (3,369)     20,375     40,957     27,829
                                                     -----------    ---------    --------   --------   --------
Income (loss) before extraordinary charge ........      (200,712)    (421,259)     50,140     90,659     56,346
  Extraordinary charge, net of income taxes ......          --         (1,671)       --       (2,372)      --
                                                     -----------    ---------    --------   --------   --------
Net Income (loss) ................................      (200,712)    (422,930)     50,140     88,287     56,346
  Preferred stock dividend requirements ..........        17,825       18,273      19,533     14,646      6,540
                                                     -----------    ---------    --------   --------   --------
Net income (loss) applicable to common stock .....   $  (218,537)   $(441,203)   $ 30,607   $ 73,641   $ 49,806
                                                     ===========    =========    ========   ========   ========

(1)  Includes  $19.0  million,  $21.0  million  and $4.7  million  of  equity in
     earnings of  unconsolidated  affiliates for the years ended 1997,  1996 and
     1995, respectively.

(2)  Includes foreign currency translation losses of $24,978 realized on sale of
     the Career Sales Division.

<CAPTION>

<S>                                                  <C>            <C>          <C>        <C>        <C>
Per Share Information:
Basic:
  Net income (loss) applicable to common stock ...   $     (7.44)   $  (15.23)   $   1.09   $   2.70   $   2.26
  Common shares used in computing basic earnings
     per share ...................................        29,354       29,091      28,016     27,208     22,048
Diluted:
  Net income (loss) applicable to common stock ...   $     (7.44)   $  (15.23)   $   1.07   $   2.42   $   2.12
  Common shares used in computing diluted earnings
     per share ...................................        29,354       29,091      28,645     35,273     25,216
Cash dividends declared ..........................   $      --      $    0.10    $   0.20   $   0.20   $   0.06

<CAPTION>
                                                                             As of December 31,
                                                     --------------------------------------------------------------
                                                        1999         1998         1997         1996         1995
                                                     ----------   ----------   ----------   ----------   ----------
<S>                                                  <C>          <C>          <C>          <C>          <C>
Assets:
Investments and cash .............................   $2,751,223   $2,957,080   $3,340,114   $3,694,609   $2,288,979
Insurance assets .................................      271,413      347,728      617,318      639,798      499,668
Other assets .....................................      265,512      261,633      766,703      474,916      354,271
Assets of Businesses Held for Sale ...............         --      2,417,583         --           --           --
                                                     ----------   ----------   ----------   ----------   ----------
  Total assets ...................................   $3,288,148   $5,984,024   $4,724,135   $4,809,323   $3,142,918
                                                     ==========   ==========   ==========   ==========   ==========

Liabilities and shareholders' equity:
Insurance liabilities ............................   $2,756,957   $2,819,661   $3,289,925   $3,566,455   $2,221,161
Notes payable ....................................      279,646      550,923      359,755      210,325      307,271
Other liabilities ................................       98,579      114,187      194,352      170,302      125,351
Liabilities of Businesses Held for Sale ..........         --      2,063,312         --           --           --
Redeemable preferred stock .......................         --           --         19,867       32,864       30,007
Shareholders' equity .............................      152,966      435,941      860,236      829,377      459,128
                                                     ----------   ----------   ----------   ----------   ----------
  Total liabilities and shareholders' equity .....   $3,288,148   $5,984,024   $4,724,135   $4,809,323   $3,142,918
                                                     ==========   ==========   ==========   ==========   ==========
</TABLE>

                                       24
<PAGE>


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

      This  "Management's  Discussion  and Analysis of Financial  Condition  and
Results of  Operations"  reviews the  consolidated  financial  condition  of the
Company as of December 31, 1999 and 1998, the consolidated results of operations
for the three years ended December 31, 1999, and where appropriate, factors that
may affect future financial performance.

      The  following   discussion   should  be  read  in  conjunction  with  the
accompanying  consolidated financial statements and related notes of this Annual
Report on Form 10-K.

CAUTIONARY STATEMENT

      Cautionary  Statement  for purposes of the Safe Harbor  Provisions  of the
Private Securities Litigation Reform Act of 1995. All statements, trend analyses
and  other  information  contained  in  this  report  relative  to  markets  for
PennCorp's products and trends in PennCorp's operations or financial results, as
well as  other  statements  including  words  such as  "anticipate,"  "believe,"
"plan,"  "estimate,"   "expect,"   "intend,"  and  other  similar   expressions,
constitute  forward-looking  statements under the Private Securities  Litigation
Reform Act of 1995.  These  forward-looking  statements are subject to known and
unknown risks, uncertainties and other factors which may cause actual results to
be  materially   different  from  those  contemplated  by  the   forward-looking
statements.  Such factors  include,  among other  things:  (1) general  economic
conditions  and other  factors,  including  prevailing  interest rate levels and
stock market  performance,  which may affect the ability of PennCorp to sell its
products,  the market  value of  PennCorp's  investments  and the lapse rate and
profitability  of  insurance   products;   (2)  PennCorp's  ability  to  achieve
anticipated levels of operational efficiencies and cost-saving initiatives;  (3)
customer  response  to  new  products,   distribution   channels  and  marketing
initiatives;  (4) mortality,  morbidity,  and other factors which may affect the
profitability  of  PennCorp's  insurance  products;  (5)  changes in the Federal
income tax laws and regulations  which may affect the relative tax advantages of
some of PennCorp's products; (6) increasing competition in the sale of insurance
and annuities;  (7) regulatory  changes or actions,  including those relating to
regulation  of  insurance  products  and of  insurance  companies;  (8)  ratings
assigned  to   PennCorp'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; (9) PennCorp's
continued  ability to  address  Year 2000  issues;  (10)  PennCorp's  ability to
consummate the Recapitalization Plan; and (11) 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.

BANKRUPTCY PROCEEDINGS

      On January 10, 2000 the Company  announced  that it had agreed to sell its
Financial  Services  Division to Reassure  America for $260  million  subject to
certain adjustments, and would accomplish such transaction through the filing of
a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.

      On February 7, 2000,  PennCorp filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code in the Bankruptcy  Court.  Since
the Petition  Date,  PennCorp has continued to operate and manage its assets and
business as a debtor in possession as authorized by provisions of the Bankruptcy
Code.

      On February 28, 2000 the  Bankruptcy  Court  issued an order  scheduling a
hearing to  consider  approval  of the sale  agreement  with  Reassure  America,
subject to higher or better  offers,  and  establishing  the  procedures for the
submission of competing offers.

      On March 15, 2000,  the Company  received a competing bid in the form of a
recapitalization  plan  submitted  by  Inverness  and  Vicuna  on  behalf of the
unofficial ad hoc committee of preferred stockholders,  and Rapoport and Sharpe.
On March 23, 2000 the Company's Board of Directors selected the Recapitalization
Plan as the final accepted offer pursuant to the bidding procedures  approved as
part of the Sales  Procedure  Order.  On March 24, 2000,  the  Bankruptcy  Court
approved the Board of Director's selection of the Recapitalization Plan.

                                       25
<PAGE>


      The  proposed   Recapitalization   Plan   provides   that  the   preferred
stockholders  will receive one share of common stock of the reorganized  company
for each share of  outstanding  preferred  stock.  In  addition,  the  preferred
stockholders  will  have an  opportunity,  pursuant  to a  rights  offering,  to
purchase .3787 shares of common stock of the reorganized  company for each share
of  outstanding  preferred  stock owned at a purchase price of $12.50 per share.
Inverness  and Vicuna have issued a stand by  commitment  letter to the Company,
committing $24.5 million to fully  underwrite the rights offering.  In addition,
Rapoport  and Sharpe  have  committed  to purchase  equity in the  recapitalized
company amounting to $20.0 million and $3.0 million,  respectively.  The standby
commitment letter and the Rapoport and Sharpe investment, are subject to certain
conditions.

      Under the  Recapitalization  Plan,  all existing  shares of the  Company's
common stock will be cancelled for no value,  and the Company's  existing senior
and subordinated debt, with principal currently  aggregating  approximately $180
million,  will be paid in full in cash. Any and all other claims and liabilities
of the Company will be paid in accordance with their terms.

      Consummation  of the  recapitalization  transaction  is subject to certain
conditions  including  regulatory  approvals,  the consummation of a $95 million
credit facility, the consummation of a proposed transaction whereby Southwestern
Life and  Security  Life  will  reinsure  substantially  all of  their  existing
deferred  annuity blocks of business,  an order confirming the Company's plan of
reorganization that incorporates the proposed recapitalization transaction shall
have been entered by the  Bankruptcy  Court and such order shall be unstayed and
in full force and effect, and the closing of the recapitalization shall occur no
later than December 31, 2000. The definitive  agreements for the credit facility
and  the  reinsurance   transaction  will  contain  conditions  to  consummation
including  no material  adverse  change as defined in the  proposed  $95 million
credit agreement.

      The  Company  has  received   irrevocable   commitments  from  holders  of
approximately  71 percent of the Company's two  outstanding  series of preferred
stock indicating that they will vote in favor of the Recapitalization  Plan upon
solicitation by the Company which,  when such shares are voted, will satisfy the
voting  requirements  for confirmation of a plan of  reorganization.  Inverness,
Vicuna, Rapoport and Sharpe have deposited an aggregate of $47.5 million into an
escrow  account,  such that those  funds  will be used to make their  respective
committed   equity   investments   in  the   recapitalized   company   once  the
Recapitalization  Plan is consummated.  A portion of such funds may be forfeited
to the Company under certain circumstances.

      The Company filed a plan of  reorganization on April 5, 2000 and will seek
confirmation  of the  Recapitalization  Plan by the Bankruptcy  Court on June 5,
2000, with consummation  expected to occur promptly  thereafter.  For additional
information,  see Item 7.  Management's  Discussion  and  Analysis of  Financial
Condition and Results of Operations--Financial  Condition, Liquidity and Capital
Resources and Notes 9 and 23 of Notes to Consolidated Financial Statements.

GENERAL

      Historically, the Company, through its three operating divisions, provided
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 independent general agents,  exclusive
agents,  financial institutions and payroll deduction programs, and are targeted
primarily to lower and  middle-income  individuals in rural and suburban  areas.
The  Company's  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.  During 1999, the Company disposed of
its Career Sales Division and certain operating subsidiaries.  See "Dispositions
and Other Events" below. Each disposition impacted certain distribution channels
and related products historically utilized by the Company.

      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.

      Dispositions and Other Events.  On July 30, 1999, the Company  consummated
the sale of the  Career  Sales  Division  to  Universal  American.  The net cash
proceeds after  transaction  costs and fulfillment of contract  obligations were
$82.0 million. The Company realized a foreign currency translation loss of $25.0
million,  which  represented  previously  unrealized  translation  losses on the
Company's  Canadian  insurance  operations,  partially  offset by a gain of $3.5
million  resulting in a net loss of $21.5 million.  In addition,  as a result of
the sale,  unrealized  gains on  securities  available  for sale and  unrealized
foreign currency translation losses decreased by $2.3 million and $25.0 million,
respectively.  On  December  29,  1999,  as a result of certain  settlement  and
consideration  adjustment provisions included in the purchase and sale agreement
the Company reduced the consideration received by $2.6 million.

      On June 30, 1999,  the Company  completed  the sale of KIVEX to Allegiance
for $34.5 million in cash.  The net proceeds to the parent company from the sale
were  $22.2  million  after  payment  of  costs  and  fees  associated  with the
transaction and after  repayment of $10.2 million of intercompany  borrowings to
insurance company  affiliates of PennCorp.  The Company recorded a gain of $30.9
million from the sale.

                                       26
<PAGE>


      On April 30,  1999,  the Company  consummated  the sale of the United Life
Assets to ING. The purchase  consideration  totaled $154.1  million  including a
dividend  of $2.1  million  that was paid by United  Life at  closing.  The cash
consideration  ultimately was reduced as a result of the Company's obligation to
purchase certain  mortgages and other assets as well as for transaction  related
costs at closing.  The Company received net cash proceeds of $136.5 million. The
Company realized a loss from the sale totaling $3.9 million.  As a result of the
sale, unrealized gains on securities held for sale by United Life decreased $1.7
million.  As of December 31, 1999,  the Company  sold  substantially  all of the
mortgages  retained  by the  Company  as a part of the sale of the  United  Life
Assets for aggregate consideration of $8.0 million. The Company may be obligated
to repurchase certain of the mortgages sold. The amount of mortgages the Company
may be required to  repurchase  is not  expected  to exceed  approximately  $1.6
million.  At December  31,  1999,  the Company has  established  a $1.2  million
liability  related to these  contingencies.  In  addition,  the Company has been
notified by ING that it disputes certain federal income tax  calculations  under
the  provisions in the purchase and sale  agreement.  Under the provision of the
purchase and sale agreement ING is to provide the Company with  preliminary  tax
returns in order for the Company to evaluate any potential  differential  in tax
amounts  between closing and the final return  preparation.  To date ING has not
provided such preliminary tax returns and hence the Company has not been able to
fully evaluate the merits of ING's claim.  At December 31, 1999, the Company has
established a liability of $1.2 million related to this contingency.

      On March 31, 1999, the Company  consummated the sale of Professional to GE
Financial  for cash  proceeds of $47.5  million.  The Company  realized net cash
proceeds of $40.2 million.  Professional,  which  previously was included in the
Payroll  Sales  Division,  provided  individual  fixed benefit and life products
utilizing a network of independent  agents primarily in the southeastern  United
States  through  employer-sponsored  payroll  deduction  programs.  The  Company
realized a gain from the sale totaling  $1.1  million.  As a result of the sale,
unrealized gains on securities  available for sale by Professional  decreased by
$488,000.  On  September  15,  1999,  as a  result  of  certain  settlement  and
consideration  adjustment provisions included in the purchase and sale agreement
the Company reduced the consideration received by $1.2 million.

      The following unaudited selected pro forma financial  information has been
prepared  to  illustrate  the pro forma  effects of the sales of  Payroll  Sales
Division  (sold  February 4, 2000) (see Notes 3 and 23 of Notes to  Consolidated
Financial  Statements),  Career Sales Division (sold July 30, 1999), KIVEX (sold
June 30,  1999),  the United Life Assets (sold April 30, 1999) and  Professional
(sold March 31, 1999) . The pro forma  statements  of  operations  for the years
ended  December  31,  1999 and 1998  give  effect  to such  sales as if they had
occurred  on  January  1,  1998.  The  unaudited  selected  pro forma  financial
information has been prepared for comparative purposes only and does not purport
to be indicative  of what would have occurred had such  purchases and sales been
made as of January 1, 1998, or results which may occur in the future.
<TABLE>
<CAPTION>

                                                                               (Unaudited)
                                                                  As Reported   Pro Forma
                                                                      1999        1999
                                                                   ---------    ---------
                                                                   (In thousands, except
                                                                      per share amounts)
     <S>                                                           <C>          <C>
     Total revenues ............................................   $ 636,640    $ 318,467
     Loss before extraordinary charge ..........................    (200,712)     (72,144)
     Loss before extraordinary charge applicable to common stock    (218,537)     (89,969)
     Per share information:

       Net loss before extraordinary charge applicable to
        common stock-basic .....................................   $   (7.44)   $   (3.06)
       Net loss before extraordinary charge applicable to
        common stock-diluted ...................................       (7.44)       (3.06)

</TABLE>

                                       27
<PAGE>

<TABLE>
<CAPTION>
                                                                                        (Unaudited)
                                                                           As Reported   Pro Forma
                                                                               1998         1998
                                                                            ---------    ---------
                                                                            (In thousands, except
                                                                              per share amounts)

     <S>                                                                    <C>          <C>
     Total revenues .....................................................   $ 879,995    $ 340,498
     Income (loss) before extraordinary charge ..........................    (421,259)     (70,282)
     Income (loss) before extraordinary charge applicable to common stock    (439,532)     (88,555)
     Per share information:
       Net income (loss) before extraordinary charge applicable
        to common stock-basic ...........................................   $  (15.17)   $   (3.04)
       Net income (loss) before extraordinary charge applicable
        to common stock-diluted .........................................      (15.17)       (3.04)
</TABLE>


      During 1999 the Company used $267.0 million of the net proceeds from these
sales to pay down the  outstanding  balance under the Bank Credit  Facility.  In
addition,  the Company repaid an additional  $2.0 million of  indebtedness  as a
result of liquidity at the parent  company  above the amounts  prescribed in the
Bank Credit Facility, as amended.

      Acquisitions  and Other  Transactions.  On January 2,  1998,  the  Company
consummated the acquisition from KB Fund the SW Financial  Controlling  Interest
for an aggregate  purchase  price of $73.7  million (not  including  acquisition
expenses).

      On  January  5, 1998,  the  Company  consummated  the  acquisition  of the
interests of Fickes and Stone  Knightsbridge  Interests for total  consideration
estimated to be $10.6 million (not including  acquisition  expenses).  Under the
terms of the transaction,  Mr. Fickes is to receive consideration in the form of
estimated annual interest payments,  ranging from $301,000 to $330,000, on April
15 each year through 2001 and is to be issued  173,160  shares of the  Company's
Common Stock on April 15, 2001.  The Company  issued 173,160 shares to Mr. Stone
in July 1998.

      Restructuring  and Other Costs.  The Company has  developed  restructuring
plans to realign or consolidate  certain  operations  resulting in restructuring
costs  incurred  during 1999,  the fourth  quarter of 1998, the first quarter of
1998 and 1997.

1999 Plan

      As a  result  of the sale of the  United  Life  Assets  along  with  other
non-core operations,  the Company announced a restructuring plan in June 1999 to
significantly reduce its Dallas-based staff and vacate certain office space. The
Company incurred restructuring costs aggregating $5.3 million for the year ended
December 31, 1999 associated with such restructuring.

      The following  reflects the impact of activity for the year ended December
31,  1999  on the  restructuring  accrual  balances  under  the  1999  Plan  (in
thousands):
<TABLE>
<CAPTION>
                                                             Paid or
                                                             Charged                     Balance at
                                                 1999        Against                    December 31,
                                               Provision    Liability    Adjustments         1999
                                               ---------    ---------    -----------    ------------
<S>                                             <C>          <C>           <C>            <C>
Severance and related benefits ..............   $ 3,185      $  (663)      $  (148)       $ 2,374
Estimated holding costs of vacated facilities     2,122          --           --            2,122
                                                -------      -------       -------        -------
                                                $ 5,307      $  (663)      $  (148)       $ 4,496
                                                =======      =======       =======        =======
</TABLE>

      The 1999 plan provided for the  termination of 50 employees  consisting of
divisional  management  and  staff in Dallas  over a nine  month  period.  As of
December 31, 1999, the Company had paid and charged $663,000 against the accrual
for severance and related  benefits for 32 terminated  employees.  Substantially
all of the remaining terminations occurred by March 31, 2000.

                                       28
<PAGE>


      The  1999  plan  also  provided  for  vacating  additional  floors  of the
Company's  Dallas leased offices.  The  restructuring  provision of $2.1 million
represented  the  estimated net present value of the rent on the office space to
be vacated net of the  estimated  sublease  rental  income to be received by the
Company.

      The Company  anticipates  realizing  operating expense reductions and cash
savings of approximately  $3.9 million and $3.4 million per year,  respectively,
after implementing the 1999 restructuring plan.

4th Quarter 1998 Plan

      In the fourth quarter of 1998, the Company  recorded  restructuring  costs
aggregating   approximately  $9.3  million  as  a  result  of  the  decision  to
consolidate or merge substantially all of the Company's corporate functions into
the Dallas infrastructure.

      The following reflects the impact of activity for the years ended December
31, 1998 and 1999 on the  restructuring  accrual  balances under the 4th Quarter
1998 Plan (in thousands):
<TABLE>
<CAPTION>

                                                          1998 Activities                         1999 Activities
                                                     -----------------------                 -----------------------
                                                      Paid or                                 Paid or
                                                      Charged                   Balance at    Charged                  Balance at
                                          1998        Against                  December 31,   Against                 December 31,
                                        Provision    Liability   Adjustments        1998     Liability   Adjustments      1999
                                        ---------    ---------   -----------   ------------  ---------   -----------  ------------

<S>                                      <C>          <C>           <C>           <C>         <C>          <C>          <C>
Severance and related benefits .......   $ 6,259      $(3,985)      $  --         $ 2,274     $(1,396)     $   189      $ 1,067
Estimated holding costs of
  vacated facilities .................     2,954       (2,954)         --            --          --            --          --
Estimated contract terminations costs         61          (29)         --              32         (40)           8         --
                                         -------      -------       ------        -------     -------      -------      -------
                                         $ 9,274      $(6,968)      $  --         $ 2,306     $(1,436)     $   197      $ 1,067
                                         =======      =======       ======        =======     =======      =======      =======
</TABLE>

      The fourth quarter 1998 plan provided for the  termination of 43 employees
including substantially all of the executive and administrative employees in the
Company's Bethesda and New York offices,  based on the decision to shut down the
Bethesda  and  New  York  offices  by May  31,  1999.  Substantially  all of the
severance has been paid with the exception of one former executive officer whose
severance is to be paid  monthly  through  April 2001.  The Company had incurred
costs of $1.4  million and $4.0 million  which were charged  against the accrual
during 1999 and 1998, respectively, for terminated employees.

      The fourth quarter 1998 plan recognized  abandoned  leasehold  improvement
costs in connection  with the Company's  plan to sublease or vacate the New York
offices. The Company expensed $3.0 million principally as a result of abandoning
the New York leased property.

      The  fourth  quarter  1998  restructuring  plan is  expected  to result in
corporate  operating expense  reductions and cash savings of approximately  $4.2
million annually.

1st Quarter 1998 Plan

      On January 2,  1998,  and  January  5,  1998,  respectively,  the  Company
acquired  the SW  Financial  Controlling  Interest  and  the  Fickes  and  Stone
Knightsbridge  Interest.  The  acquisition  allowed the Company to complete  its
divisional  restructuring which began in 1997. As a result, the Company incurred
restructuring  costs aggregating  approximately $11.8 million for the year ended
December 31, 1998, associated with the divisional restructuring.

                                       29
<PAGE>


      The following reflects the impact of activity for the years ended December
31, 1999 and 1998 on the  restructuring  accrual  balances under the 1st Quarter
1998 Plan (in thousands):

<TABLE>
<CAPTION>
                                                          1998 Activities                         1999 Activities
                                                     -----------------------                 -----------------------
                                                      Paid or                                 Paid or
                                                      Charged                   Balance at    Charged                  Balance at
                                          1998        Against                  December 31,   Against                 December 31,
                                        Provision    Liability   Adjustments        1998     Liability   Adjustments      1999
                                        ---------    ---------   -----------   ------------  ---------   -----------  ------------
<S>                                      <C>          <C>         <C>             <C>         <C>          <C>          <C>
Severance and related benefits .......   $ 3,831      $(4,417)    $1,205          $  619      $ (297)      $ (322)      $   --
Estimated holding costs of
  vacated facilities .................     2,205         --         --             2,205        (350)         (41)       1,814
Write-off of certain fixed assets ....     1,131         (831)      (300)           --          --            --          --
Estimated contract terminations
  costs ..............................     4,600       (3,247)    (1,353)           --          --            --          --
                                         -------      -------    -------          ------      ------       ------        ------
                                         $11,767      $(8,495)   $  (448)         $2,824      $ (647)      $ (363)       $1,814
                                         =======      =======    =======          ======      ======       ======        ======
</TABLE>

      Approximately  120  and 39  people,  respectively,  were  estimated  to be
terminated,  as a result of the  decision to transfer  all  operations  of Union
Bankers to Raleigh and  transfer  operations  of United Life from Baton Rouge to
Dallas. In addition,  the Company also restructured certain of the operations in
Raleigh.  Certain  employees  in the  areas of  customer  services,  information
technology,  actuarial,  legal, human resources and other  policyholder  service
areas,  totaling 54 people were  considered  for  termination  under the Raleigh
portion of the  restructuring  plan.  The  Company  recognized  severance  costs
totaling $3.8 million. The Company charged $297,000 and $4.4 million against the
severance  accrual  during  1999  and  1998,  respectively,  as  the  result  of
termination payments. In addition, during 1999 and 1998 the Company adjusted the
severance accrual in the amount of $322,000 and $405,000,  respectively,  due to
the Company  paying less  severance  costs as a result of natural  attrition and
other factors such as  inter-company  transfers of employees.  During 1998,  the
Company also increased the severance  accrual by $1.6 million as a result of the
decision to terminate all 54 of Security Life's Raleigh employees.

      The first quarter 1998  restructuring  plan provided for vacating  certain
Dallas office space. In connection with the plan, the Company recorded estimated
holding costs of vacated  facilities of $2.2 million which  represented  the net
present value of the rent on the office space to be vacated net of the estimated
sublease rent to be received.  During 1999, the Company charged $350,000 of rent
expense on vacated office space against the accrual.

      The  first  quarter  1998  plan  also  recognized  impairment  of  certain
furniture, fixture and data processing equipment totaling $1.1 million which had
been utilized in the office space to be vacated. The Company charged $831,000 of
such assets against the accrual during 1998.

      As  part  of the  first  quarter  1998  restructuring  plan,  the  Company
terminated  an  information  technology  outsourcing  agreement.   The  original
contract  termination  fee was $4.6 million.  As a result of an amendment to the
termination  agreement,  the Company  exited the agreement for a payment of $3.2
million and the remaining accrual was adjusted during 1998.

1997 Plan

      The Company has experienced  significant  changes in the past three years.
As a result of  integration of acquired  businesses and material  changes to the
Company's operating platform,  the Company began a strategic business evaluation
in the third quarter of 1996.  The review  resulted in the Company  establishing
three divisional  platforms,  Career Sales Division,  Payroll Sales Division and
Financial Services Division.

      As a result, the Company began to realign its existing operating companies
and incurred restructuring costs aggregating  approximately $19.1 million during
the year ended December 31, 1997,  directly and indirectly  associated  with the
initial divisional restructuring which had no future economic benefit.

                                       30
<PAGE>


      The following reflects the impact of activity for the years ended December
31, 1997 and 1998 on the restructuring  accrual balances under the 1997 plan (in
thousands):
<TABLE>
<CAPTION>
                                                          1998 Activities                         1999 Activities
                                                     -----------------------                 -----------------------
                                                      Paid or                                 Paid or
                                                      Charged                   Balance at    Charged                  Balance at
                                          1998        Against                  December 31,   Against                 December 31,
                                        Provision    Liability   Adjustments        1998     Liability   Adjustments      1999
                                        ---------    ---------   -----------   ------------  ---------   -----------  ------------
<S>                                      <C>         <C>          <C>             <C>         <C>          <C>          <C>
Severance and related benefits .......   $ 5,355     $ (2,411)    $(1,008)        $1,936      $  --        $(1,936)       $  --
Estimated holding costs of
  vacated facilities .................     6,166       (1,916)       --            4,250         (841)      (3,409)          --
Write-off of certain fixed assets ....     1,526         (332)       (847)           347         --           (347)          --
Estimated contract termination
   costs .............................        24         --          --               24         --            (24)          --
Investment in foreign operations .....     6,000       (5,555)       (445)          --           --            --            --
                                         -------     --------     -------         ------      -------      -------        -------
                                         $19,071     $(10,214)    $(2,300)        $6,557      $  (841)     $(5,716)       $  --
                                         =======     ========     =======         ======      =======      =======        =======
</TABLE>

      The 1997 plan provided for the termination of approximately  269 employees
in  the  Company's   Raleigh   offices  and  certain   foreign   operations  and
substantially  all of the employees of the Company's Waco  operations,  totaling
114. The 1997 plan anticipated a significant consolidation of operations into an
affiliate's  Dallas offices over a twelve month period. As of December 31, 1997,
the Company had  charged  $2.4  million  against the accrual for  severance  and
related benefits.  The Company adjusted the remaining  severance accrual by $1.0
million  during  1997  due to  natural  attrition  thus  reducing  the  level of
severance  required  coupled  with the  decision  to  retain  certain  employees
indefinitely.  As of December 31, 1997,  the severance  accrual was $1.9 million
which was  adjusted  during  1998 as a result of the  decision  not to merge the
Company's Waco operations into Dallas.

      The plan also  provided  for  vacating of certain  leased  facilities  and
abandoning  certain Company owned real estate.  The Company accrued $6.2 million
for holding and abandonment costs associated with these facilities. During 1997,
the Company  charged $1.9 million to such accrued lease costs.  During 1998, the
Company further charged  $841,000 to the accrued costs. As of December 31, 1998,
the  remaining  accrual was no longer  necessary  as a result of the decision to
retain the Waco operating platform.

      In addition, the 1997 plan recognized the impairment of certain furniture,
fixture  and data  processing  equipment  of $1.5  million  as a  result  of the
decision to abandon certain Company owned and leased facilities. During 1998 and
1997, the Company charged off furniture,  fixtures and data processing equipment
totaling $-- and $332,000,  respectively,  and adjusted the original  impairment
provision by $347,000 and $847,000, respectively.

      Contract termination costs provided in the 1997 plan were adjusted to zero
during 1998 as a result of the ultimate  settlement of certain contracts without
penalty.

      Restructuring  charges  in the 1997  plan  also  included  a $6.0  million
provision  for the  write-off of the  Company's  investment  in certain  foreign
operations,  principally Argentina. In 1997, the Company disposed of the foreign
operations at a cost of $5.6 million and the balance of $449,000 was adjusted to
zero.

Other Costs

      The Company  did not incur  incremental  costs  during  1999.  The Company
incurred  approximately  $6.3 million and $4.7  million of pre-tax  period costs
("period costs") associated with the corporate restructuring for the years ended
December  31,  1998 and  1997,  respectively.  Such  costs are  included  in the
Company's Consolidated  Statements of Operations and Comprehensive Income (Loss)
as underwriting and other administrative expenses.

      On August 30,  1997,  the merger  agreement  between  Washington  National
Corporation  ("Washington  National")  and the Company  terminated.  The Company
incurred  legal,  accounting  and financial  advisory fees  associated  with the
merger.  In  addition,  the Company had began to provide  certain  resources  to
Washington  National  including  personnel to perform policy  administration and
claims  processing  function on  Washington  National's  behalf.  The  aggregate
advisory and administrative  costs incurred by the Company during 1997 were $7.6
million.

                                       31
<PAGE>


      For the years ended  December  31,  1999 and 1998 the Company  recorded an
impairment   provisions   aggregating   $58.5   million   and  $343.0   million,
respectively. The Company recorded the impairment provisions in order to reflect
the difference in the Company's accounting basis in the Businesses Held for Sale
and the fair value of the  consideration  that the Company would likely  receive
for such businesses.  The fair value of the consideration  likely to be received
has been  primarily  based upon the terms of definitive  sales  agreements.  The
impairment  provision of $58.5 million in 1999 was related to the disposition of
the Career  Sales  Division.  The  impairment  provision  recorded  during  1998
aggregating  $343.0  million  reduced the  Company's  value of the Career  Sales
Division,  Professional  and the  United  Life  Assets in the  amounts of $328.6
million, $3.3 million and $11.1 million, respectively.

      The Company  evaluated the  recoverability of all intangible assets of the
Payroll  Sales  Division  based  upon  the  sales  proceeds  received  from  the
disposition  of the remaining  Payroll Sales  Division  companies on February 4,
2000.  As a result,  an  impairment  provision  for  certain  intangible  assets
aggregating  $95.5 million was reflected in the Statement of Operations  for the
year  ended  December  31,  1999.  All  remaining  costs in excess of net assets
acquired in the Payroll Sales Division,  totaling $19.3 million,  were impaired.
In addition,  the Company  impaired all remaining  present value of insurance in
force and a portion of deferred policy  acquisition costs totaling $67.6 million
and $49.7 million, respectively, net of deferred taxes of $41.0 million.

YEAR 2000 ISSUES

      Many computer and software  programs were designed to accommodate only two
digit  fields to  represent a given year (e.g.  "98"  represents  1998).  It was
highly likely that such systems  could not have been able to accurately  process
data  containing date  information for the year 2000 and beyond.  The Company is
highly reliant upon computer  systems and software as are many of the businesses
with  which  the  Company  interacts.  The  Company's  ability  to  service  its
policyholders  and agents is  dependent  upon  accurate  and timely  transaction
processing.  Transaction  processing  in turn is  dependent  upon the  Company's
highly complex interdependent  computer hardware,  software,  telecommunications
and desktop  applications.  The  inability of the Company or any of its integral
business partners to continue processing  transactions during 2000 could lead to
a significant business interruption. Such an interruption could have resulted in
a decline in current and long-term profitability and business franchise value.

      The  Company's  overall  year 2000  compliance  initiatives,  included the
following components:  (i) assessment of all business critical systems (business
critical  systems includes  computer and other systems),  processes and external
interfaces and dependancies;  (ii) remediation or upgrading of business critical
systems;  (iii)  testing  of  both  modified  and  updated  systems  as  well as
integrated systems testing; (iv) implementation of modified and updated systems;
and (v) contingency  planning. As a part of the process, the Company has written
letters and corresponded with its outside vendors and critical business partners
concerning year 2000 compliance efforts and has followed up periodically.

      The Company engaged  outside  vendors and focused certain  employees' full
time  efforts  to help in the  full  array  of its year  2000  initiative.  This
included  systems  assessment and monitoring  advice,  actual code  remediation,
communication  and consultation  with critical  business partners and additional
data center and testing  resources.  The Company  originally  projected to incur
internal and external costs  associated  with such expertise  ranging from $10.6
million to $14.5 million, which were anticipated to be incurred primarily during
1998 and early 1999. The Company actually  incurred  internal and external costs
of $8.0 million during 1999. The Company  estimates it has incurred internal and
external  costs  aggregating  $13.4 million and $1.9 million for the years ended
December 31, 1998 and 1997, respectively.

      Since December 31, 1999 the Company has not  experienced  any  significant
disruption in the Company's business,  or an increase in the cost of the Company
doing business related to the year 2000 issue.

      The  Company  provided  certain  representations  and  warranties  to each
respective  purchaser  of the  businesses  sold with  respect  to each  entity's
ability  to process  date-sensitive  information  for the year 2000 and  beyond.
Although the Company believes that it is in compliance with, and is not aware of
any  breach of the year 2000  representations  and  warranties  provided  to the
respective  purchasers,  there  can be no  assurances  that  the  Company  is in
compliance with all such representations and warranties. A breach by the Company
of  such   representations   and  warranties  could  result  in  indemnification
obligations owed by the Company to the purchasers.


                                       32
<PAGE>

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Parent Company

      General.  PennCorp  ("parent  company")  is a legal  entity,  separate and
distinct from its  subsidiaries  and has no material  business  operations.  The
parent  company  needs  cash for:  (i)  principal  and  interest  on debt;  (ii)
dividends on preferred and common stock;  (iii) holding  company  administrative
expenses;  (iv) income taxes and (v) investments in  subsidiaries.  In September
1998, the Company suspended payment of preferred and common stock dividends. The
primary sources of cash to meet parent company  obligations  include statutorily
permitted  payments from life  insurance  subsidiaries,  including:  (i) surplus
debenture interest and principal payments, (ii) dividend payments; and (iii) tax
sharing  payments.  The parent  company may also obtain cash through the sale of
subsidiaries or other assets.

      Since the February 7, 2000  bankruptcy  petition  filing,  the Company has
been managing its assets as a  "debtor-in-possession."  In  anticipation  of the
filing of the Chapter 11 Case,  the  Company  and the lenders  party to the Bank
Credit  Facility  executed a  forbearance  agreement  ("Forbearance  Agreement")
whereby the lenders agreed to forbear from  exercising  their remedies under the
Bank Credit Facility as a result of the event of default that occurred under the
Bank Credit Facility when the Company commenced the Chapter 11 Case.

      In addition,  the Company and the lenders  entered into a cash  collateral
agreement  ("Cash  Collateral  Agreement")  which  superseded  the  Bank  Credit
Facility.  The Cash Collateral Agreement provides a mechanism for the Company to
repay its currently  outstanding  borrowings and establishes  certain  covenants
with  which the  Company  must  comply  until  the  Company's  outstanding  bank
borrowings and related  interest are paid in full.  Certain  covenants  strictly
define the Company's ability to utilize any and all cash that is maintained in a
collateral  account  held by the agent  lender.  As a result,  the  Company  may
utilize cash from the cash collateral  account for only  predetermined  types of
expenses  and in  specified  amounts.  The  restrictions  on cash  only  impacts
PennCorp  as the  debtor-in-possession  and does not  impact  any of  PennCorp's
subsidiaries. See Note 9 of Notes to Consolidated Financial Statements.

                  (Remainder of Page Intentionally Left Blank)

                                       33
<PAGE>


      The following  table shows the cash sources and uses of the parent company
on a projected basis for 2000, assuming the consummation of the Recapitalization
Plan,  and on an actual basis for the period January 1, 2000 to February 7, 2000
(prior to the Petition Date) and years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>

                                                  Period        Period
                                                 February 8,   January 1,
                                                   2000 to      2000 to           Year ended December 31,
                                                 December 31,  February 7,   ---------------------------------
                                                   2000 (1)       2000         1999         1998        1997
                                                 ------------  -----------   --------    ---------   ---------
                                                                            ($ in thousands)
  <S>                                              <C>          <C>          <C>         <C>         <C>
  Cash sources:
   Cash from subsidiaries ......................   $  64,800    $130,127     $349,881    $  73,521   $  34,839
   Issuance of common stock ....................      47,500         --          --           --          --
   Sale of directly owned subsidiaries .........        --           --         5,989         --          --
   Other investment income .....................         238          44          754        2,865       3,547
   Sale of equity securities ...................        --           --          --         30,500        --
   Additional borrowings .......................      90,000         --          --        203,000     250,000
   Sales of/collection on assets held ..........        --           --        11,642         --          --
   Other, net ..................................        --            26          215        1,306       3,243
                                                   ---------    --------     --------    ---------   ---------
        Total sources ..........................     202,538     130,197      368,481      311,192     291,629
                                                   ---------    --------     --------    ---------   ---------
  Cash uses:
   Acquisition of businesses ...................        --          --           --         73,858        --
   Interest paid on debt .......................      13,315       3,057       38,014       37,849      20,946
   Operating expenses, including restructuring
     charges ...................................      12,448      18,584       20,984       36,217      24,362
   Purchase of treasury shares .................        --          --           --           --        28,760
   Reduction of notes payable ..................     180,021     100,000      269,000      126,015     100,000
   Costs of recapitalization ...................      13,500        --           --           --          --
   Capital contributions to subsidiaries .......        --          --         27,668        7,853      14,889
   Costs to dispose of Businesses Held for Sale         --          --         14,991         --          --
   Purchase of equity securities ...............        --          --           --          5,000      20,000
   Purchase of SW Financial note ...............        --          --           --           --        40,000
   Redemption of preferred stock ...............        --          --           --           --        14,705
   Dividends on preferred and common stock .....        --          --           --         16,210      23,460
   Other, net ..................................        --          --           --           --         2,142
                                                   ---------    --------     --------    ---------   ---------
        Total uses .............................     219,284     121,641      370,657      303,002     289,264
                                                   ---------    --------     --------    ---------   ---------
  Increase (decrease) in cash and cash equivalents   (16,746)      8,556       (2,176)       8,190       2,365
  Cash and cash equivalents at beginning of period    19,034      10,478       12,654        4,464       2,099
                                                   ---------    --------     --------    ---------   ---------
  Cash and cash equivalents at end of period ...   $   2,288    $ 19,034     $ 10,478    $  12,654   $   4,464
                                                   =========    ========     ========    =========   =========
</TABLE>

--------------
(1)  Projected  amounts are on pro forma basis which considers the impact of the
     Recapitalization  Plan as if such  plan is  consummated  on June 15,  2000.
     There can be no assurance that the Recapitalization  Plan is consummated in
     its current form or at all.


                                       34
<PAGE>

Cash Sources

      Cash  from  Subsidiaries.   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,  Constitution
(sold July 30,  1999) and Pioneer  Security  (collectively,  the  "Surplus  Note
Companies"). The surplus debentures issued by PLAIC and Constitution were repaid
in full in  connection  with the  consummation  of the sale of the Career  Sales
Division.  As part of a  subsidiary  realignment,  PLAIC  issued  a new  surplus
debenture to SW Financial in the amount of $150.0  million to acquire the common
stock of Southwestern  Life. With respect to Constitution,  Pioneer Security and
PLAIC (as to its  surplus  debenture  issued as of July 30,  1999),  the surplus
debenture payments are made to non-insurance  intermediate holding companies and
paid to the  Company in the form of  dividends  and tax  sharing  payments.  The
amounts  outstanding  under the surplus  debentures  totaled  $258.3 million and
$453.1  million as of  December  31,  1999 and 1998,  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 under the Texas Insurance Laws and
Regulations  with respect to the maximum amount of dividends that can be paid to
the Surplus Note Companies within a twelve month period without prior regulatory
approval.  Such  dividend  restrictions  are  generally  the  greater  of 10% of
statutory capital and surplus or statutory earnings for the prior calendar year.
See Item 1. Business--Regulatory  Matters for additional discussions of dividend
restrictions.

      For the years ended December 31, 1999, 1998 and 1997, the Company received
surplus debenture  interest and principal payments from PLAIC of $223.5 million,
$26.2 million and $16.4 million,  respectively,  and received  dividends and tax
sharing payments from  non-insurance  intermediate  holding  companies of $126.4
million,  $47.3 million and $ 18.4 million,  respectively.  Approximately  $80.0
million of dividends and tax sharing  payments from  non-insurance  intermediate
holding  companies during 1999 were the direct result of proceeds  received from
sales of Businesses  Held for Sale.  The Surplus Note  Companies  received $25.2
million,  $69.5 million and $32.1 million in dividends and tax sharing  payments
from their respective insurance subsidiaries.

      Sale of Directly  Owned  Subsidiaries.  During the year ended December 31,
1999, the Company sold certain  directly owned  subsidiaries  in connection with
the  disposition of the Businesses  Held for Sale and received  proceeds of $6.0
million.

      Other Investment Income. During each of the years in the three year period
ended  December 31, 1999,  the Company  received  other  investment  income from
short-term invested assets.

      Sales of Equity Securities.  During 1998 the parent company liquidated its
common and preferred stock holdings in ACO Brokerage Holding Corp. ("ACO"),  the
parent  company of Acordia Inc.  Total  proceeds  received  from the sale of the
preferred and common stock  aggregated  $30.5 million.  The Company had acquired
the  preferred  stock  interests  in ACO for $20.0  million  during 1997 and the
common stock interests in January 1998 for $5.0 million as part of the Company's
and the KB Fund  investment  in  ACO.  See  Note  18 of  Notes  to  Consolidated
Financial  Statements  for  additional   information   regarding  the  Company's
investment in ACO.

      Sales  of/Collection  on Assets Held.  During the year ended  December 31,
1999, the Company  received  mortgage loan principal  payments and  distribution
from a limited partnership totaling $1.4 million. In addition,  the Company sold
certain mortgage loans and the limited partnership interest held directly by the
parent company for proceeds aggregating $10.2 million.

      Additional  Borrowings.  During 1998 and 1997 the Company  borrowed  under
then existing bank credit  facilities to primarily  fund  acquisitions  or repay
existing  indebtedness.  See "Cash Uses" below for the use of proceeds  from the
additional borrowings.

Cash Uses

      Acquisition  of  Businesses.   During  1998,  the  Company   acquired  the
Controlling  Interest in SW Financial  for $73.7  million in cash and the Fickes
and Stone  Knightsbridge  Interests for $10.6  million of which  $200,000 of the
consideration  was paid in cash. To fund such  acquisitions the Company utilized
borrowings under its existing credit facility. For additional information on the
acquisition of the Controlling Interest in SW Financial and the Fickes and Stone
Knightsbridge   Interests,  see  Note  3  of  Notes  to  Consolidated  Financial
Statements.

      Interest Paid on Indebtedness.  During the three year period,  the Company
utilized  varying  amounts of leverage in its capital  structure.  For the years
ended  December 31, 1999,  1998 and 1997, the average  indebtedness  outstanding
aggregated $366.9 million, $452.6 million and $281.6 million,  respectively. The
Company's weighted average costs of borrowings  increased  significantly  during
1999  and  1998 as a  result  of the  Company's  increased  leverage  ratio  and
projected  weakness in future liquidity.  For additional  information  regarding
indebtedness,  see Note 9 of  Notes to  Consolidated  Financial  Statements  and
Management's   Discussion   and   Analysis   of   Financial    Condition--Parent
Company--General.

                                       35
<PAGE>


      Operating Expenses Including  Restructuring Charges. During 1999, 1998 and
1997 the parent  company  directly  and  indirectly,  through  charges  from its
subsidiaries,  incurred significant operating and restructuring  charges.  Total
restructuring  charges paid by the parent  company  during  1999,  1998 and 1997
aggregated $1.8 million,  $9.1 million and $11.5 million,  respectively.  During
1999 and 1998, the parent company also incurred legal, accounting and investment
banking fees associated  with asset  dispositions  aggregating  $2.4 million and
$1.5 million,  respectively.  Operating  expenses  incurred during 1999 and 1998
also include costs aggregating $1.6 and $1.6 million,  respectively,  associated
with  shareholder  litigation  and the SEC's  investigation  into the  Company's
historical accounting practices.

      Purchase of Treasury  Shares.  During 1997 the Company  utilized  proceeds
from its existing credit facility to repurchase  approximately 819,000 shares of
Common Stock for $28.8 million in accordance  with an agreement  with the former
owner of United Life.

      Reduction of Notes  Payable.  During the year ended December 31, 1999, the
Company  made  repayments  under the Bank  Credit  Facility  aggregating  $267.0
million upon the consummation of sales of Professional,  the United Life Assets,
KIVEX and the Career Sales Division.  An additional $2.0 million was repaid as a
result of liquidity at the parent company level above amounts  prescribed in the
Bank Credit Facility, as amended.

      In  conjunction  with the Company's  1998  acquisition of the SW Financial
Controlling interest,  the Company borrowed under its existing $450 million Bank
Credit Facility to repay indebtedness of SW Financial aggregating $115.0 million
upon acquisition.  In addition,  during 1998 the Company used existing liquidity
to repay $11.0 million of indebtedness under the company's Bank Credit Facility.
During 1997,  the Company  utilized  proceeds  from the Bank Credit  Facility to
retire  indebtedness  aggregating $100.0 million  outstanding under a prior bank
credit agreement.

      Capital  Contributions to  Subsidiaries.  For the years ended December 31,
1999,  1998 and 1997,  the Company made capital  contributions  to  subsidiaries
totaling $27.7 million,  $7.9 million and $14.9  million,  respectively.  During
1999,  $3.3  million  was  contributed  to  PLAIC to make a  subsequent  capital
contribution  to PLIC and $3.1 million was  contributed to a non-life  insurance
subsidiary.  In addition,  $21.3 million was contributed to subsidiaries to meet
certain target capital and surplus  requirements as required by the purchase and
sale agreement for the Career Sales  Division.  The Company  utilized funds from
proceeds from the Businesses Held for Sale to fund these  contributions.  During
1998 and 1997,  contributions  were primarily made to certain non-life insurance
subsidiaries,  principally  KIVEX,  to fund  expansion  and for other  corporate
purposes.

      Purchase of Equity Securities.  In conjunction with the acquisition of the
Fickes and Stone  Knightsbridge  Interests,  the  Company  acquired  Fickes' and
Stone's  interest in the ACO  Brokerage  Common Stock for $5.0  million.  During
1997, the Company invested $20.0 million in ACO Preferred Stock.

      Purchase of SW Financial  Note.  During 1997, the Company  acquired all of
the issued and outstanding convertible subordinated indebtedness of SW Financial
aggregating  $40.0  million.  Such  indebtedness  was  previously  held  by  the
creditors of ICH Corporation.

      Redemption of Preferred Stock. In March 1997 the Company utilized proceeds
available  under  its  then  existing  credit  facility  to  redeem  all  of the
outstanding Series B Preferred Stock for $14.7 million.

      Dividends of Preferred and Common Stock.  During 1998 and 1997 the Company
paid common and preferred  stock dividends  aggregating  $16.2 million and $23.5
million,  respectively. The decrease in dividend payments during 1998 was due to
the Company's decision to halt common and preferred stock dividend payments as a
result of impending liquidity concerns.

Cash Sources and Uses for the Period January 1, 2000 to February 7, 2000

      As part of  series of  restructuring  transactions  approved  by the Texas
Department  of  Insurance,  Security  Life became a  wholly-owned  subsidiary of
PLAIC. In addition, PLAIC was permitted to prepay $20.4 million of principal and
interest on its surplus  debenture to SW Financial,  which then paid these funds
as a dividend  to the  Company.  On  February  4,  2000,  AA  Holdings  sold the
companies in the Payroll Sales Division for $103.3 million.  The net proceeds to
the parent  company  after  repayment of  intercompany  borrowings  to insurance
company  affiliates  of PennCorp was $97.0  million.  In  addition,  the Company
received a $12.7  million  dividend from AA Holdings.  Of the  proceeds,  $100.0
million were used to repay a portion of the Company's Bank Credit Facility.

                                       36
<PAGE>


      For the period from January 1, 2000 to February 7, 2000,  the Company paid
$10.0 million in employment  contract  obligations  and $280,000 in  transaction
bonuses ($8.3 million had been accrued and expensed  prior to December 31, 1999)
under  executive  employment  agreements  with certain senior  executives of the
Company  and its  subsidiaries  (see  Notes 15 and 23 of  Notes to  Consolidated
Financial  Statements.) In addition, the Company paid $2.0 million for insurance
coverage,  principally to cover possible  indemnification  claims arising from a
breach of the representations and warranties contained in each of the subsidiary
and asset sale  agreements,  $1.9 million in retainers to professional  services
firms and $3.5  million  for other  professional  and legal  services.  Interest
totaling  $3.1  million  was paid  during  the period in order to bring the Bank
Credit Facility current.

Cash Sources and Uses for the Period February 8, 2000 to December 31, 2000

      The pro forma  schedule of cash sources and uses of the parent company for
the period from February 8, 2000 to December 31, 2000,  assumes the consummation
of the Recapitalization  Plan in June of 2000. As part of this plan,  additional
equity of $47.5 million would be contributed  and the Company would enter into a
new $95.0 million  credit  facility of which $90.0 million is  anticipated to be
drawn  during  2000.  Existing  senior and  subordinated  debt with a  principal
balance of $180.0  million  would be repaid.  The parent  company  would receive
approximately  $55.0  million from PLAIC as principal  repayment on the existing
surplus  debenture.  The $55.0  million  would be made  available  to PLAIC from
proceeds  received as the result of an extraordinary  dividend from Southwestern
Life and Security Life,  subject to final approval from the Texas  Department of
Insurance.  Such  approval is  contingent in part,  upon the  consummation  of a
reinsurance  transaction  whereby  Southwestern  Life and  Security  Life  would
reinsure substantially all of their existing deferred annuity blocks of business
to a non-affiliated reinsurer.  Projected cash sources also include $9.8 million
in  dividends  and  principal  and interest  payments on the surplus  debenture.
Closing  costs  associated  with  the  Recapitalization  Plan are  estimated  to
aggregate $13.5 million.

      Management  believes  the Company  will likely have  sufficient  financial
flexibility and projected  liquidity sources to meet all cash requirements until
the maturity of the cash collateral agreement on May 31, 2000. The Company is in
the  process  of  proposing  a plan of  recapitalization  to be  filed  with the
Delaware  Bankruptcy  Court  which  will  provide  for  the  repayment  of  such
indebtedness (see Note 23 of Notes to Consolidated Financial  Statements).  With
respect to current  liquidity  projections,  there can be no  assurances  actual
liquidity sources will develop.  In the event of a shortfall of actual liquidity
sources,  and as a result of the  necessity  of the  Company to  establish a new
credit  facility,  the Company  will explore  options to generate any  necessary
liquidity,  such as: (i) the sale of subsidiaries and (ii) obtaining  regulatory
approval for extraordinary  dividends from its insurance  subsidiaries (which is
unlikely at the  present  time).  If the Company is unable to obtain  sufficient
liquidity to meet its projected cash requirements,  such failure could result in
a default on one or more  obligations  and the holders thereof would be entitled
to exercise certain remedies,  including the acceleration of the maturity of the
entire   indebtedness   and   commencing   legal   proceedings  to  collect  the
indebtedness.  In such event, the Company will examine and consider the range of
available alternatives to the Company at that time.

Subsidiaries, Principally Insurance Operations

      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.

      Cash Flow from Operating Activities.  Cash flow from operating activities,
excluding  the parent  company,  were $54.9  million,  $34.2  million  and $74.6
million, respectively, for the years ended December 31, 1999, 1998 and 1997. The
increasing  trend in cash  flow from  operating  activities  for the year  ended
December 31, 1999 principally resulted from decreasing costs associated with (i)
year 2000 remediation at all of the insurance  subsidiaries,  (ii) reduced costs
as a result of strategic  business  evaluations and associated  restructuring of
the Company and (iii) sale of KIVEX,  which used cash from operating  activities
due to its rapid  growth.  The  decreasing  trend in cash  flow  from  operating
activities  for the year ended December 31, 1998, is primarily  attributable  to
the Company assuming 100% of the economic interest of KB Management during 1998.
Prior to the acquisition,  the Company  maintained a 45% economic interest in KB
Management.  At the  time of the  acquisition,  KB  Management's  operating  and
administrative expenses were in excess of current fee income resulting in a cash
strain to the Company. Other factors impacting the decreasing trend in cash flow
from operating  activities for 1998 were increasing  costs  associated with: (i)
Year 2000 remediation at all of the insurance  subsidiaries,  (ii) the strategic
business  evaluations and associated  restructuring of the Company and (iii) the
accelerating  expansion  and  transition  of KIVEX from a regional to a national
internet service provider.

                                       37
<PAGE>


      Cash Flow from Investing  Activities.  During the years ended December 31,
1999, 1998 and 1997, the Company's  subsidiaries  sold $603.5 million,  $1,019.9
million  and  $801.1  million  of fixed  maturity  and  equity  securities,  and
purchased  $814.2  million,  $1,054.7  million  and  $1,021.5  million  of fixed
maturity and equity  securities,  respectively.  Such sales and  purchases  were
primarily   effected  in  order  to  meet  cash  flow  demands  associated  with
policyholder surrenders that in the aggregate increasingly exceeded policyholder
deposits as well as to improve the quality of the investment  portfolio or avoid
prepayment risks.

      Cash Flow from Financing  Activities.  Cash used by financing  activities,
excluding the parent  company,  were $492.3  million,  $391.4 million and $325.9
million for the years ended December 31, 1999, 1998 and 1997, respectively.  The
majority  of  the  cash  outflow  is  attributable  to  policyholder  surrenders
exceeding  deposits by $191.7 million in 1999, $354.1 million in 1998 and $275.7
million in 1997. Cash outflows  during 1999 also included  dividends and surplus
debenture  principal  aggregating  $326.3  million  made to the  parent  company
compared to $44.3 million in 1998 and $14.7 million in 1997.  Substantially  all
of the increases in dividends and surplus  debenture  payments  during 1999 were
the  direct  result  of  proceeds  received  by PLAIC  from the  disposition  of
Businesses Held for Sale.

RESULTS OF OPERATIONS

      For the years ended  December  31,  1999,  1998 and 1997,  the Company has
prepared the following  unaudited  selected pro forma financial  information for
the Company's  remaining  operating  divisions,  the Financial Services Division
(Southwestern  Life and Security  Life) and the Payroll Sales  Division (AA Life
and OLIC) and Businesses Held for Sale (Career Sales Division, Professional, the
United Life Assets and KIVEX).  During the three months ended June 30, 1999, the
Company  concluded  that it would  retain,  and shut  down  over  time,  certain
remaining operations of Marketing One.  Consequently,  the results of operations
of Marketing One have been  reclassified  out of  "Businesses  Held for Sale" to
"Corporate"  for  all  periods  presented.  The  selected  pro  forma  financial
information by operating  division is defined as pre-tax income (loss) excluding
the  impact  of: (i)  restructuring  costs,  (ii) gains or losses on the sale of
investments  and (iii) the impact of the  Company's  decision  to dispose of the
Businesses Held for Sale ((i), (ii) and (iii)  collectively,  "Operating  Income
(Loss)").  The Company considers operating income (loss) to reflect a division's
"core  earnings  (loss)" and to be the most relevant and useful  information  to
evaluate trends impacting each of the Company's  divisions.  This information is
used by the Company's  principal  decision makers to evaluate the performance of
each  division  as it  eliminates  the impact of  transactions  that the Company
considers to be unrelated to the core operating results of the divisions.  Other
companies that operate  primarily in the life insurance  industry may or may not
use  similar  measures.  In  addition,  the 1997  unaudited  selected  pro forma
financial  information  considers the impact of the: (i)  acquisition  of the SW
Financial  Controlling  Interest,  including the financing thereof, and (ii) the
acquisition  of the  Fickes and Stone  Knightsbridge  Interests,  including  the
financing thereof, as though each had occurred on January 1, 1997.

      The Company has prepared such  information  as it believes  that:  (i) the
acquisition  of  the  SW  Financial  Controlling  Interest,  (ii)  the  intended
disposition of the Businesses  Held for Sale and (iii) the  restructuring  costs
are material enough to make historical  comparative  results not meaningful.  In
addition,  the Company  believes that the pro forma financial  information  will
facilitate the  subsequent  discussion  parallel with how  management  views and
evaluates the operations of the Company.

      The following unaudited selected pro forma financial  information 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, 1997,
or the results which may occur in the future.

                                       38
<PAGE>

<TABLE>

                   SELECTED PRO FORMA FINANCIAL INFORMATION
<CAPTION>

                                                            Year ended December 31,
                                                     -------------------------------------
                                                        1999         1998          1997
                                                     ---------     ---------     ---------
                                                               ($ in thousands)
  <S>                                                <C>           <C>           <C>
  Financial Services Division:
   Operating income ..............................   $  26,213     $  19,018     $  75,590
   Net investment gains ..........................        (737)         1,503        6,848
   Restructuring costs ...........................      (5,165)        (3,803)        --
   Eliminate effects of including acquisition of
     the SW Financial Controlling Interest and the
     Fickes and Stone Knightsbridge Interests as
     though each had occurred on January 1, 197 ..         --            --        (49,816)
                                                     ---------     ---------     ---------
                                                        20,311        16,718        32,622
                                                     ---------     ---------     ---------
  Payroll Sales Division:
   Operating income (loss) .......................      16,100        (3,501)       23,960
   Net investment gains (losses) .................        (702)          (36)        2,654
   Impairment of intangibles .....................     (95,522)         --            --
                                                     ---------     ---------     ---------
                                                       (80,124)       (3,537)       26,614
                                                     ---------     ---------     ---------
  Businesses Held for Sale:
   Operating income (loss) .......................      15,968       (16,541)       46,807
   Net investment gains (losses) .................         889         9,069         9,827
   Restructuring costs ...........................         202        (2,643)         --
   Net gains from sale of subsidiaries (including
     realized losses on foreign currency of
     $24,978) ...... .............................       6,602          --            --
   Impairment provision associated with assets of
     Businesses Held for Sale ....................     (58,486)     (342,960)         --
   Eliminate effects of including acquisition of
     the SW Financial Controlling Interest and
     the Fickes and Stone Knightsbridge Interests
     as though each had occurred on January 1, 1997       --            --          (7,717)
                                                     ---------     ---------     ---------
                                                       (34,825)     (353,075)       48,917
                                                     ---------     ---------     ---------
  Corporate:
   Interest and amortization of deferred debt
     interest ....................................     (40,222)      (42,960)      (38,653)
   Corporate expenses, eliminations and other ....     (37,161)      (36,875)      (25,311)
   Net investment gains ..........................          48         3,532            (1)
   Restructuring costs ...........................         (30)       (8,431)      (16,771)
   Eliminate effects of including acquisition of
     the SW Financial Controlling Interest and
     the Fickes and Stone Knightsbridge
     Interests as though each had occurred on
     January 1, 1997 .............................        --            --          24,126
                                                     ---------     ---------     ---------
                                                       (77,365)      (84,734)      (56,610)
                                                     ---------     ---------     ---------
  Income (loss) before income taxes and
     extraordinary charge ........................   $(172,003)    $(424,628)    $  51,543
                                                     =========     =========     =========
</TABLE>


                                       39
<PAGE>


BUSINESSES OWNED AT DECEMBER 31, 1999--FINANCIAL SERVICES DIVISION

      The Financial  Services  Division  includes the operations of Southwestern
Life  and  Security  Life.  Southwestern  Life and  Security  Life  market  life
insurance and, to a lesser extent annuity products,  through independent general
agents who sell  directly  to  individuals  primarily  in the  southwestern  and
southeastern United States.

                   SELECTED PRO FORMA FINANCIAL INFORMATION

                                                   Year ended December 31,
                                               ------------------------------
                                                  1999      1998      1997
                                               --------- ---------  ---------
                                                         ($ in thousands)
Revenues:
  Policy revenues............................  $ 133,930 $ 129,241  $ 138,006
  Net investment income......................    161,841   179,433    201,483
  Other income...............................     11,395     3,678      1,052
                                               --------- ---------  ---------
                                                 307,166   312,352    340,541
                                               --------- ---------  ---------
Benefits and expenses:
  Total policyholder benefits................    213,407   215,415    195,131
  Insurance related expenses.................     28,653    29,591     32,893
  Other operating expenses...................     38,893    48,328     36,927
                                               --------- ---------  ---------
                                                 280,953   293,334    264,951
                                               --------- ---------  ---------
   Pre-tax operating income..................  $  26,213 $  19,018  $  75,590
                                               ========= =========  =========

      Policy  Revenues.  Policy  revenues  include:  (i)  premiums  received  on
traditional  life products  (ii)  mortality  and  administrative  fees earned on
universal life insurance and annuities and (iii) surrender charges on terminated
universal  life and  annuity  products.  In  accordance  with GAAP,  premiums on
universal  life and annuity  products are accounted for as deposits to insurance
liabilities.

     Premiums,  net of  reinsurance,  by major  product line for the years ended
December 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>

                                                                       Year ended December 31,
                                                                  --------------------------------
                                                                    1999        1998        1997
                                                                  --------    --------    --------
                                                                          ($ in thousands)
     <S>                                                          <C>         <C>         <C>
     Life premiums:
      Universal life (first year) .............................   $  9,474    $ 11,146    $  8,900
      Universal life (renewal) ................................     73,776      97,299     100,788
      Yearly renewable term reinsurance on universal life .....     (8,980)     (7,505)     (6,987)

      Traditional life (first year) ...........................      9,578      12,686       5,878
      Traditional life (renewal) ..............................     32,969      36,655      37,308
                                                                  --------    --------    --------
        Life premiums collected, net of reinsurance ...........    116,817     150,281     145,887
                                                                  --------    --------    --------

     Annuity premiums .........................................      8,678      16,189      29,331
                                                                  --------    --------    --------
     Fixed benefit premiums:
        Long-term care premiums net of reinsurance ............        254         456        --
                                                                  --------    --------    --------

     Premiums, net of reinsurance .............................    125,749     166,926     175,218
     Less premiums on universal life and annuities which are
       recorded as additions to insurance liabilities .........    (91,928)   (124,634)   (139,019)
                                                                  --------    --------    --------
     Premiums on products with mortality or morbidity risk ....     33,821      42,292      36,199
     Fees and surrender charges on interest sensitive products     100,109      86,949     101,807
                                                                  --------    --------    --------
        Policy revenues.............................. .........   $133,930    $129,241    $138,006
                                                                  ========    ========    ========
</TABLE>


                                       40
<PAGE>


      Policy revenues increased 3.6% during 1999 to $133.9 million compared with
1998.  Policy  revenues in 1998 decreased  6.4% to $129.2 million  compared with
1997. Life premiums collected,  net of reinsurance,  were $116.8 million in 1999
compared  with  $150.3  million in 1998 and $145.9  million in 1997.  First year
universal life premiums  decreased  15.0% in 1999 to $9.5 million and first year
traditional  life  decreased  24.5%  to $9.6  million.  The  decline  in 1999 is
attributable  to lower  sales at  Security  Life.  New  sales at  Security  Life
declined  significantly in 1999 reflecting the impact of ratings  downgrades and
management  changes  in  Security  Life's  marketing  management.   The  Company
announced in the third  quarter of 1999 it was  discontinuing  new life sales at
Security Life in order to reduce costs and concentrate its marketing  efforts at
Southwestern Life.  Partially  offsetting the decline in first year premiums for
Security  Life  was  an  increase  in  first  year  universal  life  premium  at
Southwestern  Life which  increased  21.1% to $7.3 million  during 1999 compared
with 1998. Most of the increase in production during 1998 compared with 1997 was
attributable  to  Southwestern  Life. The A.M. Best  downgrades,  which occurred
during the third  quarter  of 1998  continue  to have a  negative  impact on new
business production levels.

      Universal  life and  traditional  life  renewal  premiums  declined  $27.2
million and $4.1 million or 20.3% and 3.0% for the years ended December 31, 1999
and 1998,  respectively.  This reflects the impact of certain management actions
instituted by Security Life and ratings downgrades.  On January 1, 1999 Security
Life  instituted  an exchange or refund  program for holders of certain types of
interest  sensitive  insurance  contracts.  This program resulted in a refund of
premiums  of  $23.0  million  during  1999  (see  below).   Universal  life  and
traditional  life renewal  premiums  declined $3.5 million and $653,000 for 3.5%
and 1.8%  respectively for the year ended December 31, 1998 compared to the year
ended  December 31, 1997.  This reflects  ratings  downgrades  and the impact of
certain  management actions instituted by Southwestern Life in the third quarter
of 1997.  Southwestern Life is implementing additional management actions during
2000 which may result in reduced renewal premiums in 2000 and subsequent  years.
See "Total Policyholder Benefits" included herein.

      Annuity  premiums have declined  46.4% to $8.7 million in 1999 compared to
1998 after  declining $13.1 million or 44.8% in 1998 compared to 1997. The sales
decline is  attributable  to a shift in the overall  annuity  market to sales of
variable  products (which the Financial  Services  Division does not offer) from
fixed products due to historically  low interest rates and consumer  interest in
equities.  Annuity sales are also typically more sensitive to Company  financial
strength  ratings than other  insurance  products.  Annuity  sales are likely to
continue to decline  unless market  conditions for fixed  annuities  become more
favorable and ratings of Southwestern Life improve.

      In January 1999, Security Life initiated  management action in the form of
an exchange program for certain  policyholders of Security Life. The program was
offered to all policyholders who had certain policy forms in force as of January
1, 1998. The program allowed the policyholder the following  options in exchange
for terminating his or her policy and executing a release: (i) refund of 115% of
all  premiums  paid for the policy prior to January 1, 1999 and 100% of premiums
paid thereafter;  (ii) exchange the policy,  without proof of insurability,  for
the same face amount in a universal  life policy,  or a new term  universal life
policy.  The  policyholder  also had the choice of not  accepting  the  exchange
program and keeping the current policy in force. As of December 31, 1999, 66% of
such policyholders completed the exchange. In November 1999, a lawsuit was filed
against Security Life regarding the exchange program and products.  (See Item 3.
Legal Proceedings.)

      Net  Investment  Income.  Net investment  income  decreased 9.8% to $161.8
million in 1999 due to a decrease  in  invested  assets  and  reduced  yields on
investments.  Average invested assets declined  approximately  $177.6 million in
1999 compared with 1998 and decreased $110.3 million from 1998 compared to 1997.
Most of this  decrease  resulted from the need to liquidate  invested  assets to
provide  cash to fund  surrenders  of  annuities  and  interest  sensitive  life
contracts,  which totaled  $265.1  million and $179.0  million in 1999 and 1998.
Most of the  surrendered  policies  had reached the end of their  surrender  fee
period.  A continued  decline in the invested asset base and related  investment
income is  anticipated  as surrenders  are expected to remain high over the next
few years as more  policies in force reach the end of the surrender fee periods.
The  decrease in  invested  assets due to  surrenders  was  partially  offset by
premiums on new and existing life policies and investment income collected, less
commissions and operating  expenses.  Weighted average yields on invested assets
have  decreased to 6.8% in 1999  compared to 7.1% in 1998 and 7.4% in 1997.  The
decline  reflects a decrease in higher  yielding but less liquid  asset  classes
such as mortgages,  real estate and collateral loans. Also impacting investments
yields were lower new money rates available to the Company to invest as a result
of extensive  maturities and calls of higher  yielding  investments and slightly
higher  investment  expenses  as a result  of the  decision  in 1997 to  utilize
outside investment managers.

      Other Income. Other income increased $7.7 million in 1999 compared to 1998
and increased $2.6 million in 1998 compared to 1997. Included in 1999 was income
of $5.7 million from the  distribution  of assets of a joint venture  investment
resulting  from the  sale of most of the  operations  and  assets  of the  joint
venture.  During 1998, the Company received approximately $1.0 million resulting
from a settlement  associated  with  securities  owned in the past.  Most of the
remaining  differences  between  the  years  reflect  changes  in  consideration
received on supplemental  contracts.  Supplemental  contract  revenue is derived
from   annuity   contracts   which  have  reached  the   annuitization   period.
Consideration from supplemental  contracts  recognized as other income is offset
by policyholder benefits, resulting in no net effect on the Company's results of
operations.

                                       41
<PAGE>


     Total  Policyholder  Benefits.  The following table shows the components of
total policyholder benefits for the year ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>

                                                        Year ended December 31,
                                                   ----------------------------------
                                                      1999        1998         1997
                                                   ---------    ---------    --------
                                                             ($ in thousands)
<S>                                                <C>           <C>         <C>
   Death benefits ..............................   $  80,658     $ 87,578    $ 77,980
   Other insurance policy benefits and change in
    future policy benefits .....................     132,749      127,837     117,151
                                                   ---------    ---------    --------
   Total policyholder benefits .................   $ 213,407    $ 215,415    $195,131
                                                   =========    =========    ========
</TABLE>

      During  1999,  policyholder  benefits  decreased  0.9% to  $213.4  million
compared with 1998. Death benefits  decreased $6.9 million or 7.9% compared with
1998.  Death benefits may vary  significantly  from period to period.  Change in
future  policy  benefits and other  benefits  increased  3.8% and 9.1% to $132.7
million and $127.8 million in 1999 and 1998,  respectively.  During 1999, future
policy  benefits were  increased  approximately  $6.2 million as a result of the
re-estimation  of certain  deficiency  reserves on a block of Southwestern  Life
interest sensitive business.  Certain assumptions related to the expected future
experience for lapses, premiums, mortality and interest were adjusted to reflect
recent  experience.  In  addition,  management  began  implementing  a plan that
included  contractually  allowable  increases to expense  charges.  During 1997,
future policy benefits were reduced  approximately  $23.9 million related to the
adjustment  of  certain  deficiency  reserves  on a block of  Southwestern  Life
interest sensitive business.  During 1997,  management began implementing a plan
intended to reduce the anticipated  losses associated with these policies.  Such
actions  included  contractually  allowable  reductions  in  credited  rates and
increases in cost of insurance and expense charges.

      The Company is continually  evaluating  actuarial  assumptions  associated
with interest  sensitive life insurance  contracts in which the determination of
policy  reserves is highly  sensitive to assumptions  such as withdrawal  rates,
investment earnings rates,  mortality rates, and premium persistency.  Currently
reflected in the Company's financial  statements are policy reserves and account
values  associated with such contracts,  which aggregated  approximately  $527.1
million and $525.4  million as of December 31, 1999 and 1998,  respectively.  If
developing trends were to continue,  principally the less than expected level of
the lapses currently associated with such interest sensitive blocks of business,
the Company would be required to record additional reserves or reduce intangible
assets,  which could have a material impact on the Company's  financial position
and results of  operations.  A decrease  of 1% in the  assumed  lapse rate would
increase  policy  reserves  associated  with  such  contracts  by $9.0  million.
Management is also assessing the potential impact of future management  actions,
which might mitigate the financial  impact of these trends.  Types of management
actions would likely  include,  but are not limited to, the  redetermination  of
non-guaranteed charges and/or benefits under the contracts,  asset segmentation,
and  reinsurance.  There are risks  associated with management  action including
potential sales disruption and the threat of litigation.

      Insurance  Related  Expenses.  During  1999,  insurance  related  expenses
(including   non-deferrable   commissions,   amortization   of  deferred  policy
acquisition  costs and  amortization  of present  value of  insurance  in force)
decreased  $938,000 to $28.7  million or 3.2% from $29.6  million  during  1998.
Insurance  related expenses  decreased $3.3 million or 10.0% in 1998 compared to
1997.  The small  decrease  in 1999  reflects  reduced  insurance  expenses  for
Security  Life as a result of declining  production  of new business for several
years and a diminished block of in force business as a result of surrenders. The
decrease in 1998  compared to 1997 also  reflects  this trend.  Also during 1998
amortization of deferred policy  acquisition costs increased  approximately $3.2
million as a result of writing  off certain  deferred  costs for  Security  Life
which were unrecoverable from future profits as a result of shifts in the mix of
products sold during the year. This was offset by a $3.2 million decrease in the
amortization  of present value of future  profits at  Southwestern  Life in 1998
resulting from unlocking assumptions of future interest rates, lapses,  expenses
and  mortality  which  affect  the  estimated  future  profitability  of certain
interest sensitive life insurance products.

                                       42
<PAGE>


      Other Operating  Expenses.  Other operating  expenses  (including  general
operating,  overhead and policy maintenance) decreased $9.4 million in 1999 from
$48.3 million in 1998, and increased $11.4 million in 1998 from $36.9 million in
1997.  The  decrease  in 1999 is  attributable  to ongoing  reductions  in costs
associated  with the  restructuring  of the Dallas  operations,  a reduction  in
non-deferrable  expenses  associated  with year  2000  remediation  efforts  and
systems  conversions  for Security  Life.  The  decrease was also  impacted by a
charge of $2.3 million during 1998 for  uncollectible  agents' debit balances at
Security  Life.  In addition,  the  liabilities  held at  Southwestern  Life and
Security  Life to  reflect  expected  assessments  to life and  health  guaranty
associations  of states in which it is licensed  to do  business  was reduced by
approximately $3.4 million as a result of completing these companies' evaluation
of  third  party  guaranty  fund  assessment  data  on a  corporate-wide  basis,
including the impact of the  disposition  of the  Businesses  Held for Sale. The
1998 increase is attributable to several  factors  including:  (i) Security Life
established an allowance for  uncollectible  agents' debit balances  aggregating
approximately $2.3 million, (ii) approximately $4.9 million of remediation costs
associated with Year 2000 systems  conversions and upgrades and (iii) additional
non-deferrable expenses such as consulting fees, appraisal costs and other costs
associated   with  the   divisional   realignment   which  are  not   considered
restructuring costs.

BUSINESSES OWNED AT DECEMBER 31, 1999--PAYROLL SALES DIVISION

      The Payroll Sales Division includes the operations of AA Life and OLIC. AA
Life markets and underwrites customized life insurance and accumulation products
to U.S. military personnel and federal employees through a general agency force.
OLIC provides  individual fixed benefit and life products utilizing a network of
independent   agents  primarily  in  the  southeastern   United  States  through
employer-sponsored payroll deduction programs.

                   SELECTED PRO FORMA FINANCIAL INFORMATION

                                                      Year ended December 31,
                                                   -----------------------------
                                                     1999      1998       1997
                                                   -------   --------   --------
                                                         ($ in thousands)
Revenues:
  Policy revenues ..........................      $ 92,029   $ 89,990   $ 89,698
  Net investment income ....................        36,771     38,252     38,161
  Other income (loss) ......................         2,085     (1,691)     4,454
                                                  --------   --------   --------
                                                   130,885    126,551    132,313
                                                  --------   --------   --------
Benefits and expenses:
  Total policyholder benefits ..............        62,617     64,708     64,622
  Insurance related expenses ...............        35,244     42,135     29,377
  Other operating expenses .................        16,924     23,209     14,354
                                                  --------   --------   --------
                                                   114,785    130,052    108,353
                                                  --------   --------   --------
   Pre-tax operating income (loss) .........      $ 16,100   $ 23,960   $ 23,960
                                                  ========   ========   ========


     Policy Revenues.  Premiums received,  net of reinsurance,  by major product
line for the years ended December 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
                                                                 Year ended December 31,
                                                             ------------------------------
                                                                1999       1998      1997
                                                              --------   --------  --------
                                                                     ($ in thousands)
     <S>                                                      <C>        <C>       <C>
     Life premiums:
      Universal life (first year) ..........................  $    803   $  1,327  $  5,248
      Universal life (renewal) .............................    25,914     29,573    30,808
      Traditional life (first year) ........................    15,878     17,718    16,139
      Traditional life (renewal) ...........................    37,888     34,370    30,138
                                                              --------   --------  --------
        Life premiums, net of reinsurance ..................    80,483     82,988    82,333
                                                              --------   --------  --------

     Annuity premiums ......................................     1,178      1,590     4,021
                                                              --------   --------  --------
     Fixed benefit premiums:
      Accident and Health (first year) .....................     2,470      2,361     3,583
      Accident and Health (renewal) ........................    10,295     10,356     9,720
                                                              --------   --------  --------
        Fixed benefit premiums, net of reinsurance .........    12,765     12,717    13,303
                                                              --------   --------  --------

     Premiums, net of reinsurance ..........................    94,426     97,295    99,657
     Less premiums on universal life and annuities which are
      recorded as additions to insurance liabilities .......   (27,895)   (32,490)  (45,084)
                                                              --------   --------  --------

     Premiums on products with mortality or morbidity risk .    66,531     64,805    54,573
     Fees and surrender charges on interest sensitive
      products .............................................    25,498     25,185    35,125
                                                              --------   --------  --------
        Policy revenues ....................................  $ 92,029   $ 89,990  $ 89,698
                                                              ========   ========  ========
</TABLE>


                                       43
<PAGE>


      Total policy revenues  increased 2.3% to $92.0 million in 1999 compared to
1998. Most of the increase was attributable to AA Life's increasing new business
sales during 1998 which  resulted in higher  traditional  life renewal  premiums
during 1999. Total policy revenues were consistent between 1998 and 1997. Policy
revenues  increased  $4.3  million  for AA Life in 1998  but  were  offset  by a
decrease of $4.1 million for OLIC. OLIC's decline was anticipated as a result of
the Company's  decision to cease marketing  products  through any  "non-payroll"
production sources during 1997.

      Net Investment  Income.  Net investment income decreased 3.9% in 1999 from
1998 to $36.8 million and increased 0.2% in 1998 from 1997 to $38.3 million. The
decrease  in net  investment  income  is  primarily  a result of a  decrease  in
weighted  average yields on invested assets which decreased to 7.0% in 1999 from
7.2% in 1998 and a decrease in average  invested assets of $1.5 million in 1999.
The increase in net  investment  income in 1998 was  primarily  the result of an
increase in the average  invested  assets which  increased  approximately  $14.9
million in 1998 compared to 1997. The increases in invested  assets is primarily
attributed to modest increases in business in force at AA Life.

      Other Income.  Other income was $2.1 million in 1999 compared to a loss of
$1.7 million in 1998.  Other income in 1998 decreased $6.1 million from 1997 and
resulted in a loss of $1.7 million in 1998 compared to income of $4.5 million in
1997.  Supplemental  contracts  represent most of the other income in 1999 which
can  fluctuate  significantly  from period to period but have  little  impact on
results of operations as proceeds are offset by change in reserves.  Included in
other  income  in 1998 is a loss on the sale of  OLIC's  Guam  book of  business
totaling $2.6 million. In 1997, OLIC recorded a gain of $4.4 million on the sale
of its Panamanian business.

      Total Policyholder  Benefits.  The following table shows the components of
total policyholder benefits for the year ended December 31, 1999, 1998 and 1997:

                                                   Year ended December 31,
                                               ------------------------------
                                                  1999       1998      1997
                                               --------- ---------  ---------
                                                         ($ in thousands)

  Death benefits.............................  $  22,137 $  23,435  $  23,282
  Fixed benefit claims incurred..............      8,477     7,929     10,114
  Other insurance policy benefits and change
   in future policy benefits.................     32,003    33,344     31,226
                                               --------- ---------  ---------
  Total policyholder benefits................  $  62,617 $  64,708  $  64,622
                                               ========= =========  =========

      Policyholder  benefits decreased $2.1 million or 3.2% during 1999 compared
with 1998. Death benefits decreased $1.3 million during 1999. Death benefits may
vary  significantly  from period to period.  Other insurance policy benefits and
change in future policy  benefits  decreased $1.3 million during 1999 reflecting
decreases  in life and  fixed  benefit  health  reserves  at OLIC as a result of
reduced  claims  activity and a reduced  inventory of open claims.  Policyholder
benefits  totaled $64.7 million in 1998,  which was little  changed  compared to
1997.

      Insurance   Related  Expenses.   Insurance  related  expenses   (including
non-deferrable  commissions,  amortization of deferred policy  acquisition costs
and  amortization of present value of insurance in force) decreased $6.9 million
in 1999 compared to 1998 and  increased  $12.8 million in 1998 compared to 1997.
The  decrease in 1999  results  principally  from a decline in  amortization  of
deferred policy  acquisition  costs at OLIC of $10.2 million.  During 1998, OLIC
accelerated amortization of deferred acquisition costs by $8.6 million primarily
as a result of  refinements  in  persistency  assumptions  and  unlocking of the
estimates of future profits. In addition,  there was a small increase in 1999 in
the  amortization  of  present  value of  insurance  in force at OLIC.  This was
partially offset by amortization of deferred policy acquisition costs at AA Life
which  increased  $2.4  million  in  1999  when  compared  with  1998  primarily
reflecting  the growing  block of policies in force as a result of new  business
sales  subsequent  to the  Company's  acquisition  of AA Life.  Amortization  of
present value of insurance in force increased  $280,000 in 1999. The increase in
1998  compared  to 1997  primarily  reflects  the $8.6  million  of  accelerated
amortization  of  deferred  policy  acquisition  costs  at  OLIC.  In  addition,
amortization  of deferred  policy  acquisition  costs at AA Life  increased $2.7
million in 1998 compared to 1997  primarily  reflecting  the growing block of in
force policies sold since the Company's acquisition of AA Life.

      Other Operating  Expenses.  Other operating  expenses  (including  general
operating,  overhead and policy maintenance)  decreased $6.3 million during 1999
from 1998 and increased $8.9 million during 1998 from 1997. The decrease in 1999
operating  expenses  primarily  reflects the  consolidation of OLIC's operations
into Waco which  occurred in the fourth quarter of 1998. The increase in 1998 is
attributable to several factors,  including:  (i) approximately  $3.6 million of
remediation  costs  associated with Year 2000 systems  conversions and upgrades,
(ii) approximately $2.0 million of acquisition costs at OLIC which were expensed
in 1998 as unrecoverable from future profits and (iii) additional non-deferrable
expenses such as consulting  fees,  appraisals and other costs  associated  with
divisional realignment which are not considered restructuring costs.

                                       44
<PAGE>


BUSINESSES HELD FOR SALE

      Businesses  Held for Sale  include  the  operations  of the  Career  Sales
Division (sold July 30, 1999),  KIVEX (sold June 30, 1999),  Professional  (sold
March 31, 1999) and the United Life Assets (sold April 30,  1999).  As a result,
all of the  Businesses  Held for Sale were  disposed  of by July 30,  1999.  The
Career Sales Division,  which included the operations of Penn Life, marketed and
underwrote 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.  With the  January  2,  1998,  consummation  of the
acquisition of the SW Financial  Controlling  Interest,  the Company  integrated
Union Bankers,  Marquette and Constitution with the Career Sales Division. KIVEX
was an internet service provider. Professional provided individual fixed benefit
and life products  utilizing a network of  independent  agents  primarily in the
southeastern   United  States  through   employer-sponsored   payroll  deduction
programs.  United Life principally  markets fixed and variable annuities through
financial institutions and independent general agents, primarily in the southern
and western United States.

                   SELECTED PRO FORMA FINANCIAL INFORMATION

                                                   Year ended December 31,
                                               ------------------------------
                                                 1999       1998      1997
                                               --------- ---------  ---------
                                                         ($ in thousands)
Revenues:
  Policy revenues............................  $ 112,915 $ 239,927  $ 263,680
  Net investment income......................     54,568   144,072    154,087
  Other income...............................     13,015    20,984     20,138
                                               --------- ---------  ---------
                                                 180,498   404,983    437,905
                                               --------- ---------  ---------
Benefits and expenses:
  Total policyholder benefits................    101,565   261,639    230,818
  Insurance related expenses.................     24,224    86,717     93,359
  Other operating expenses...................     38,741    73,168     66,921
                                               --------- ---------  ---------
                                                 164,530   421,524    391,098
                                               --------- ---------  ---------
   Pre-tax operating income (loss)...........  $  15,968 $ (16,541) $  46,807
                                               ========= =========  =========

      Policy Revenues.  Policy revenues declined 52.9% or $127.0 million in 1999
compared to 1998 and 9.0% or $23.8 million to $239.9 million in 1998 compared to
1997. The decline in 1999 is primarily attributable to the sale of Professional,
the United Life Assets and the Career Sales  Division on March 31,  1999,  April
1999 and July 30, 1999,  respectively.  The decline in 1998 of $21.4  million is
primarily  attributable  to  Union  Bankers  which  discontinued  sales of major
medical  health  products  and its life  insurance  products and  increased  its
utilization of  reinsurance.  The remainder of the decrease is  attributable  to
Penn Life which experienced  decreases in policy revenues of $3.8 million (2.6%)
in 1998 compared to 1997 principally as a result of lower first year sales.

      Net Investment  Income.  Net  investment  income  decreased  $89.5 million
(62.1%) in 1999  compared to 1998 and  decreased  $10.0  million  (6.5%) in 1998
compared to 1997. The decline in 1999 is primarily  attributable  to the sale of
Professional,  the United Life Assets and the Career Sales Division on March 31,
1999,  April  1999 and July 30,  1999,  respectively.  The  decrease  in 1998 is
primarily  attributable to United Life,  where net investment  income  decreased
$11.4  million  in 1998  compared  to 1997.  United  Life has  experienced  high
surrenders of fixed annuities in 1998 and 1997 reflecting low reinvestment rates
available as annuities reached the end of their surrender fee period. Surrenders
at United Life totaled $253.2  million in 1998 and $255.6 million in 1997.  Such
surrenders resulted in a liquidation of approximately  $168.9 million and $104.0
million of invested assets during 1998 and 1997, respectively,  which caused the
declines in investment income.  Partially  offsetting the decline at United Life
are small  increases  for other  companies,  the  largest  of which  related  to
investment  income earned by Marquette  during 1998 from an assumed  reinsurance
contract. This contract was terminated as of September 30, 1998.

      Other Income. Other income decreased $8.0 million (38.0%) in 1999 compared
to 1998 and increased $846,000 (4.2%) to $21.0 million in 1998 compared to 1997.
The decrease in 1999 from 1998 is  attributable to the sale of KIVEX on June 30,
1999. The increase in other income in 1998 compared to 1997 is  attributable  to
increases in revenue from KIVEX and increased fee income for United Life.  These
increases in 1998 are partially offset by a decline in the amortization of Union
Bankers'  deferred  gain  associated  with a third  party  Medicare  reinsurance
contract.  The  decrease in  amortization  is  attributable  to a decline in the
underlying premium in force subject to the reinsurance  arrangement,  over time,
which results in lower amortization of the gain.

                                       45
<PAGE>


      Total  Policyholder  Benefits.   Policyholder  benefits  decreased  $160.1
million  (61.2%) in 1999 compared to 1998 and increased $30.8 million (13.4%) in
1998 compared to 1997. The decline in 1999 is primarily attributable to the sale
of  Professional,  the United Life Assets and the Career Sales Division on March
31, 1999, April 1999 and July 30, 1999, respectively.  The policyholder benefits
of Penn life increased  $43.0 million in 1998 compared to 1997. The increase was
primarily the result of specific increases in reserve estimates  associated with
long term care products and certain  claims  reserves held by Penn Life.  Policy
reserves and claims reserves increases  associated with the changes in estimates
aggregated approximately $32.6 million.

      The Company  had been  closely  monitoring  the  development  of its claim
reserve  experience  associated with the Career Sales  Division.  The historical
method of establishing claims reserves  principally utilized claims lag factors.
Based on results of independent calculations of the claim lag factors, performed
annually,  this  methodology  indicated a deterioration in the adequacy of claim
reserves  associated with Penn Life's  disability  income products  underwritten
prior to PennCorp's  ownership of Penn Life.  Disability claim adequacy analysis
included  statutory claim information,  independent  third-party review of claim
lag method and factors and other claim  tests.  Previous  results  indicated  no
reason to consider a new  methodology  as results  appeared  consistent  between
periods and claim  reserves  appeared  adequate.  Once results of such  analysis
began to vary outside an acceptable tolerance,  the Company reviewed its methods
to determine the reasons for the variances.

      The lag factor method (an actuarial  method to estimate  aggregate  claims
reserves  which  utilize the ratio of actual  claims paid to what is  ultimately
paid as a  function  of time  since  the date  incurred  based  upon  historical
experience) is one method which utilized Penn Life's experience  considering its
products and market.  The Company  believes  that  available  industry  data for
establishing  claim reserves was not  appropriate  for Penn Life's  products and
market.  The  utilization  of a case reserve method (which  estimates  aggregate
claims reserves based on the total estimates of all cases  outstanding) for Penn
Life required experience, in addition to that utilized by the lag factor method,
to create case reserves based on Penn Life's experience. This experience was not
sufficient until 1998. With system upgrades, Penn Life was able to obtain better
benefit data distinguishing disability benefits from other benefits which may be
payable  under the same policy form.  With the systems  upgrades and more robust
experience  the Company was able to consider a more refined  claims  methodology
such as seriatim case reserves (which estimates  aggregate claims reserves based
upon the sum of estimates for each individual unsettled case). During 1998, Penn
Life  implemented a method which  substituted  case reserves for most disability
claims. The new method utilizes more detailed  information by policy and by line
of business resulting in a more refined estimate.  As a result, the accident and
health claim reserve for Penn Life  increased by $25.7 million  during 1998. The
effect of the change in methodology is inseparable from the effect of the change
in accounting  estimate and is accordingly  reflected in operations for the year
ended  December 31, 1998. See Notes 2 and 8 of Notes to  Consolidated  Financial
Statements.  In  determining  the  amount of the  necessary  increase  in policy
reserve  estimates  associated  with its long  term  care  products,  Penn  Life
allocated  approximately $11.2 million of previously identified redundant policy
reserves to long term care reserves,  and additionally increased policy reserves
by approximately  $7.6 million.  This was partially offset by decreases of $16.9
million in Union  Bankers  policyholder  benefits,  reflecting  less business in
force as a result  of the  decision  to cease  sales of major  medical  and life
business,  the cession of the  remaining  20% of the  Medicare  business and the
runoff of existing business.

      Insurance   Related  Expenses.   Insurance  related  expenses   (including
commissions,  amortization of deferred policy acquisition costs and amortization
of present value of insurance in force) decreased $62.5 million to $24.2 million
in 1999  compared to 1998 and  decreased  $6.6 million to $86.7  million in 1998
compared to 1997. The decline in 1999 is primarily  attributable  to the sale of
Professional,  the United Life Assets and the Career Sales Division on March 31,
1999, April 1999 and July 30, 1999, respectively.  Amortization of present value
of insurance in force decreased $11.6 million in 1998 principally as a result of
the  Company  recording  an  impairment  provision  associated  with  assets  of
Businesses  Held for Sale  resulting in the  elimination  of  substantially  all
insurance  assets  subject to  amortization.  Specifically,  Penn Life and Union
Bankers  wrote off $98.1  million of present value of insurance in force in 1998
which  reduced  amortization.  This  was  partially  offset  by an  increase  in
amortization  of  deferred  policy  acquisition  costs  of $5.3  million,  which
included (i) an increase at  Professional  of $1.8  million in 1998  compared to
1997 as a result of higher than expected lapses on fixed benefit products,  (ii)
an increase of $1.7  million  for United  Life as a result of  unlocking  future
assumptions regarding the profitability of certain annuity products and (iii) an
increase  at Union  Bankers  of $1.9  million  as a  result  of  higher  lapses.
Non-deferrable commissions decreased approximately $1.0 million at Union Bankers
principally  due to the  decision  to stop  writing  new major  medical and life
business.

                                       46
<PAGE>


      Other Operating  Expenses.  Other operating  expenses  (including  general
operating,  overhead and policy maintenance)  decreased $34.4 million (47.1%) in
1999  compared to 1998 and  increased  $6.2 million  (9.3%) in 1998  compared to
1997. The decline in 1999 is primarily attributable to the sale of Professional,
the United Life Assets and the Career Sales  Division on March 31,  1999,  April
1999 and July 30,  1999,  respectively.  In  1998,  KIVEX's  operating  expenses
increased $7.4 million  reflecting  costs associated with its expansion into new
cities.  In  addition,  the  companies  included  in  Businesses  Held  for Sale
experienced  increased costs as a result of additional  non-deferrable  expenses
such as  consulting,  overhead and other costs  associated  with the  divisional
realignment,  which  are not  considered  restructuring  costs.  Offsetting  the
increases in operating  expenses is reduced  amortization  of costs in excess of
net assets acquired  associated with the assets of the Businesses Held for Sale.
During 1998, a total of $114.5 million of costs in excess of net assets acquired
were  written  off  as  part  of  the  impairment  provision,   which  decreased
amortization by approximately $2.8 million in 1998 compared to 1997.

GENERAL CORPORATE

      Interest and  Amortization of Deferred Debt Issuance  Costs.  Interest and
amortization  of deferred debt  issuance  costs  decreased  $2.7 million in 1999
compared  to 1998 and  increased  $4.3  million in 1998  compared  to 1997.  The
decrease  in  1999  compared  to 1998  is  principally  a  result  of  principal
repayments  under the bank credit  facility.  The Company repaid the outstanding
bank credit facility  aggregating  $267.0 million upon consummation of the sales
of Professional ($40.0 million), the United Life Assets ($127.0 million),  KIVEX
($22.0 million) and the Career Sales Division ($78.0 million). In addition,  the
Company  repaid $2.0 million on  September  23, 1999 as a result of liquidity at
the parent  company above amounts  prescribed  in the bank credit  facility,  as
amended.  The decrease  during 1999 of the weighted  average amount of principal
outstanding was partially offset by the higher borrowing costs, additional costs
associated  with  credit  facility  fees and costs  incurred to amend the credit
agreement as a direct result of the Company's financial  position.  In addition,
during 1999, the Company accelerated amortization of certain deferred loan costs
in the  amount of $2.1  million in  accordance  with  Emerging  Issue Task Force
("EITF") Issue No. 98-14,  "Debtor's Accounting for Changes in Line-of-Credit or
Revolving-Debt-Arrangements,"  as a result of the  amendment  to the bank credit
facility.  EITF Issue No. 98-14 requires the unamortized  deferred loan costs to
be  amortized  in  proportion  to the  impact of  periodic  changes  in a credit
facility as compared with its original  terms.  The increase in 1998 compared to
1997 is the result of higher  weighted  average  borrowing  costs and additional
costs  associated  with  credit  facility  fees and costs  incurred to amend the
credit agreement.

      Corporate Expenses. Corporate expenses,  eliminations and other costs were
$37.2 million, $36.9 million, and $25.3 million for the years ended December 31,
1999,  1998 and 1997,  respectively.  The  increase  in 1999  compared  to 1998,
despite the cost  savings  realized by the decision to close the  Company's  New
York and Bethesda offices and eliminate  personnel  located in such offices,  is
principally  attributable  to additional  amortization of costs in excess of net
assets  acquired  of  approximately  $7.6  million  in 1999  associated  with KB
Management.  The  accelerated  amortization  reflects  the  Board of  Directors'
decision to terminate KB Fund,  for which KB Management and KB Investment act as
administrator and general partner,  respectively.  The Company also incurred (i)
additional  costs  associated  with  efforts  to  develop  recapitalization  and
restructuring  alternatives aggregating $2.2 million; (ii) additional consulting
and  legal  fees  of  $1.8  million   associated   with  the   negotiation   and
implementation  of, and  compliance  with,  the amended  Bank  Credit  Facility,
pending class action securityholder litigation and the SEC investigation;  (iii)
additional  deferred  compensation of $3.2 million  associated with the two year
employment agreements of the Company's senior executives which were entered into
in May 1998; and (iv) provisions of $2.3 million to settle shareholder and other
litigation.

      The  increase in 1998  compared to 1997 is  directly  attributable  to two
factors as follows:  (i) the  economics  of KB  Management,  and (ii)  strategic
business  evaluation and  associated  restructuring  of the Company.  During the
years ended December 31, 1997, the Company maintained a 45% economic interest in
KB  Management.  As of January 2, 1998,  the  Company  purchased  the  remaining
interest  in KB  Management  (see  Note 3 of  Notes  to  Consolidated  Financial
Statements). From the formation of KB Management in 1995, KB Management provided
certain management and acquisition  services to the Company.  From its formation
through the year ended December 31, 1996, the  transaction  and management  fees
derived  by KB  Management  were  sufficient  to  offset  the  majority  of  the
administrative  costs  which in turn  minimized  the costs  associated  with the
Company's  45% economic  interest in KB  Management.  During 1997, KB Management
operating and administrative  expenses grew disproportionately to the ability of
KB  Management  to  engage  and  consummate   acquisitions  and  other  business
transactions  which would  generate fee income and the Company  recognized a net
loss related to its 45% economic  interest.  With  acquisition  of the remaining
interest in KB Management on January 2, 1998, the Company recognized 100% of the
economic net loss derived by KB Management for the year ended December 31, 1998.

      The strategic  business  evaluation  and associated  restructuring  of the
Company  that  began  in the  early  part  of 1997  (see  Note  21 of  Notes  to
Consolidated Financial Statements) was primarily funded by the Company on behalf
of the subsidiaries. As a result, a significant portion of the associated period
costs  were  funded by the  Company.  Period  costs  recognized  by the  Company
increased  to $5.7  million  for the year ended  December  31,  1998,  from $1.8
million for the year ended December 31, 1997.  Included in expenses for the year
ended  December 31, 1998 were $6.8 million  associated  with severance and other
employment  agreements.  In addition, the Company paid or expensed approximately
$3.0  million  associated  with the shut  down of a small  marketing  entity  in
anticipation of the sale of Professional.

                                       47
<PAGE>


      In addition, during the year ended December 31, 1997, the Company incurred
$7.6  million  of  one  time  pre-tax  transaction  costs  associated  with  the
termination of the Washington National merger agreement.

      Income Taxes.  For the years ended December 31, 1999 and 1998, the Company
incurred income tax expense (benefit) of $28.7 million and ($3.4 million),  on a
pretax loss of $172.0  million  and $424.6  million,  respectively.  The unusual
effective   tax  rates  for  1999  and  1998  are   substantially   due  to  the
non-deductibility  of the reduction in carrying  value of the assets  associated
with the sale of the Payroll Sales Division and Businesses  Held for Sale and an
increase in the tax valuation allowance. The valuation allowance associated with
tax assets is  continually  monitored  by the  Company in light of the  dramatic
changes in the operating  structure and financial  results of the Company.  As a
result of such analysis the Company increased the valuation  allowances by $38.9
million and $23.5  million  during 1999 and 1998,  respectively.  In each of the
periods,  the  valuation  allowance  was incurred as the result of the increased
likelihood  that certain net  operating  losses and capital  loss  carryforwards
would not be  utilized  and the  impact  or  potential  impact  of a "change  in
control" as defined by the Internal  Revenue Code Section 382. Change of control
provisions of Section 382 could limit the Company's  ability to utilize  certain
tax benefits including net operating loss  carryforwards in future periods.  For
the year ended December 31, 1997, the effective rate of 39.5% is higher than the
statutory rate of 35% primarily due to  non-deductible  amortization of costs in
excess of net assets  acquired  and  foreign  taxes in excess of  foreign  taxes
utilized.

      Net  Investment  Gains  (Losses).  The  Company  maintains  an  investment
portfolio  that focuses on maximizing  investment  income,  without  exposure to
unwarranted  interest rate and credit risk. The Company  actively  manages asset
duration  and  liquidity  risks.  As a  result  of this  strategy,  the  Company
routinely sells positions in securities no longer meeting its criteria. Sales of
securities  resulted in the Company  realizing  gains  (losses),  of ($502,000),
$14.1  million and $19.3  million  (including  $1.8  million for SW  Financial),
during  1999,  1998 and 1997,  respectively.  During  1999,  1998 and 1997,  the
Company  liquidated  securities  available  for sale in order to meet  cash flow
demands  associated with policyholder  surrenders that in the aggregate exceeded
policyholder  deposits by $191.7  million,  $354.1  million and $275.7  million,
respectively.  In addition,  during  1997,  the Company  liquidated  most of its
equity holdings and private placement bond holdings.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk Exposures of
         Financial Instruments for the Businesses Owned at December 31, 1999

      The Company  analyzes and reviews the risks arising from market  exposures
of financial instruments.  From an overall perspective, 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 minimal inflation risk.

      By aggregating  and  monitoring  the potential  impact of market risk, the
Company  attempts to optimize its risk  adjusted  earnings.  In addition,  these
risks are reviewed and managed  individually by operating  entity using analysis
prepared by the Company's actuaries.  The exposures of financial  instruments to
market risks, and the related risk management process,  are most relevant to the
life insurance and annuity  product  lines.  These product lines require most of
the invested assets to support  accumulation and investment  oriented  insurance
products.

      The Company has material exposures to market risks including interest rate
risk and default risk.  Additional market exposures exist in the Company's other
insurance  products and in its debt  structure.  The primary sources of interest
rate risk  include (i) a sustained  decrease  in interest  rates,  and (ii) to a
lesser extent,  near term increases in interest  rates. As of December 31, 1999,
the  Company  is not  utilizing  derivatives  in its  asset  liability  matching
process.  Each of these market risks is  discussed in detail  below.  All of the
subsequent  amounts and  percentages  exclude  investments  of the Payroll Sales
Division as of December 31, 1999 (sold February 4, 2000) and Businesses Held for
Sale as of December 31, 1998 (sold during 1999) unless noted otherwise.



                                       48
<PAGE>

INTEREST RATE RISK

      Accumulation and Investment Oriented Insurance  Products.  General account
assets supporting  accumulation and investment oriented insurance products total
$1,726.8 million or 76.8% and $1,844.5 million or 77.4% of total invested assets
at December 31, 1999 and 1998,  respectively.  These insurance  products include
single  premium and  flexible  premium  fixed  deferred  annuities  and interest
sensitive life,  primarily  universal life. Fixed maturity and equity securities
are carried at fair value.  Mortgage  loans on real estate are recorded at cost,
adjusted by provision for loan loss, if necessary.  Policy loans are recorded at
cost. Short-term  investments,  considered as cash equivalents,  are recorded at
amortized cost. Policy liabilities are generally carried at policyholder account
values  with an  adjustment,  when the  policyholder  account  values are deemed
inadequate.  With respect to these products,  the Company seeks to earn a stable
and  profitable  spread  between  investment  income and  interest  credited  to
policyholder  account  values.  As of December  31, 1999 and 1998,  the weighted
average interest spread on interest  sensitive  insurance  liabilities was 1.85%
and 2.03%. If the Company has adverse  experience on investments  that cannot be
passed onto its customers, its spreads are reduced. Alternately, the Company may
seek to maintain spreads which may result in  non-competitive  credited interest
rates to customers.  This strategy could result in adverse surrender  experience
and cause the  Company to  liquidate a portion of its  portfolio  to fund excess
cash surrender benefits.  As a result of flexibility in adjusting crediting rate
levels and protection afforded by policy surrender charges, the Company does not
view the near term risk to spreads over the next twelve months to be material.

      Fixed Deferred  Annuities.  Assets of $492.7 million and $599.6 million as
of  December  31,  1999 and  1998,  respectively,  support a large  category  of
accumulation  and  investment  oriented  insurance   products,   fixed  deferred
annuities.  For these products,  the Company may adjust renewal  crediting rates
monthly,  or in some  cases less  frequently,  subject  to  guaranteed  minimums
ranging from 3% to 6%.  Generally,  an annuity  insurance  policyholder  has the
right to surrender a contract at account value less a surrender  charge.  Due to
the Company's ability to change crediting rates to track investment  experience,
the interest  rate risk of the  underlying  assets is assumed to be a good match
for the  interest  rate risk  inherent in  deferred  annuity  liabilities.  This
assumption,  however, may not be appropriate for either substantial increases or
decreases in interest rates.

      Universal  Life.  Assets of  $1,234.1  million  and  $1,244.9  million  at
December  31,  1999 and 1998,  respectively,  support  the  largest  category of
accumulation and investment  oriented  insurance  products,  universal and other
interest sensitive life products. For these contracts, the Company has the right
to adjust  renewal-crediting  rates subject to guaranteed  minimums from 3.5% to
6.0%.  Similar to annuities,  universal  life insurance  policyholders  have the
right to surrender  their  contracts at account  value less a surrender  charge.
Generally,  the surrender charge protection ranges over a longer period of years
than those applicable to annuity policies,  and in some cases may be much larger
in size  relative  to account  values  being  surrendered.  The  Company  limits
interest rate risk by analyzing  projected  liability cash flows and structuring
investment portfolios with similar cash flow characteristics.

      Other Annuities.  Assets  aggregating $121.1 million and $132.1 million as
of  December  31,  1999 and 1998,  respectively,  support  immediate  annuities,
traditional fixed benefit annuities,  deposit funds and supplementary contracts.
Generally,  the cash  flows  expected  on  these  liabilities  do not vary  with
fluctuations  in market  interest  rates and imputed  rates of interest  are not
adjustable  by the  Company.  Accordingly,  spreads  will  tend  to  fall  below
expectations if experience is adverse  relative to the assumptions used to price
these  products at issue.  The Company  attempts to limit its  exposure to these
products by being conservative in pricing,  thereby limiting sales and lessening
the  possibility  of  adverse  experience.  Many  of  these  contracts  are  not
surrenderable at the option of the policyholder.

      Other General Account Insurance  Products.  The Company had $400.2 million
and $407.2  million of assets as of December  31,  1999 and 1998,  respectively,
supporting  general  account  products,  including  traditional  and  term  life
insurance,  accidental and health insurance,  and long-term care insurance.  For
these products,  the liability cash flows have actuarial  uncertainty.  However,
their  amounts  and timing do not vary  significantly  with  changes in interest
rates.

      Decreasing  Interest  Rates.  Under scenarios in which interest rates fall
and remain at levels  significantly  lower than rates prevailing at December 31,
1999,  minimum guarantees for annuity and universal life policies will cause the
spread   between  the  portfolio   yield  and  the  interest  rate  credited  to
policyholders  to narrow.  The earned  rate on the annuity  and  universal  life
insurance  portfolios  averaged  7.15% for the year  ended  December  31,  1999,
providing some cushion for further decline in earned interest rates before there
is  insufficient  margin to cover  minimum  guaranteed  interest  rates plus the
required spread for profitability. The maturity structure and call provisions of
the related  investment  portfolios  also  protect the  imbedded  interest  rate
cushion for a period of time.  However,  spreads  are at risk if interest  rates
fall below current  levels and remain lower for a sustained  period of time. The
Company believes that the portfolios  supporting its accumulation and investment
oriented insurance products have a prudent degree of call protection.

                                       49
<PAGE>


      The Company held $931.7  million and $1,188.7  million of  mortgage-backed
bonds which  represented 35.7% and 40.2% of total invested assets as of December
31,  1999  and  1998,  respectively.  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 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.  Convexity  is a  measure  of the  responsiveness  of the price of a
security  to  changes  in yields  and is  normally  a  positive  attribute  of a
portfolio.  The Company manages the portfolio  convexity risk within the context
of  the  overall  asset  and   liability   model  and  the   quantification   of
disintermediation  risk.  Generally,  disintermediation  risk is a risk that net
cash  outflows  may  occur  at a time  when  the  sale  of  assets  can  only be
accomplished  at  undesirable  prices.  Due to the  combination  of recent lower
interest rates and increased  efficiency by mortgage holders in exercising their
prepayment  options,  the riskiness of these securities has increased  without a
compensating adjustment to risk premiums.  Accordingly, the Company may consider
reducing its exposure to the mortgage-backed bonds in future years, reducing its
ability to enhance yield with these types of securities.

      Increasing   Interest  Rates.   For  both  annuities  and  universal  life
insurance,  an increase in interest rates in the near term poses risks of either
deteriorating  spreads or excess surrender activity.  The portfolios  supporting
these  products  have fixed  assets with  maturities  ranging from one to twenty
years or more. Accordingly,  the earned rate on each portfolio will not increase
as fast as market yields  increase.  Prepayments on  mortgage-backed  bonds will
likely slow as well,  causing  the earned  rate to fall behind the market  yield
even  further.  If the Company sets its renewal  crediting  rates at the desired
spread level, the difference between its renewal crediting rates and competitors
new  money  rates  may be wide  enough to cause  increased  surrender  activity.
Alternatively,   if  the  Company  sets  its  renewal  crediting  rates  at  the
competitive  level,  its spread will narrow.  The Company's  actuaries  evaluate
these risks by simulating  asset and liability cash flows for numerous  interest
rate scenarios.  Nevertheless,  the potential  impact of a near term increase in
interest rates may be adverse thereby exceeding corporate risk tolerance levels.
The risk of increasing  interest rates is reduced to the extent renewal premiums
are collected on periodic premium paying products.

RISK MANAGEMENT

      The  Company  seeks to invest its  available  funds in a manner  that will
maximize its investment  return and fund future  obligations  to  policyholders,
subject to  appropriate  risk  considerations.  The  Company  seeks to meet this
objective  through  investments  that (i) have  similar  characteristics  to the
liabilities they support;  (ii) are diversified  among  industries,  issuers and
geographic locations;  and (iii) make up a predominantly  investment-grade fixed
maturity  securities  portfolio.  The Company's products  incorporate  surrender
charges, or other features to encourage persistency.  Approximately 69.6% of the
total  insurance  liabilities at December 31, 1999,  had surrender  penalties or
other restrictions and approximately 6.5% are not subject to surrender.

      The Company seeks to maximize the total return on its investments  through
active investment management.  Accordingly, management has determined the entire
portfolio of fixed  maturity  securities  is available to be sold in response to
(i)  changes  in market  interest  rates;  (ii)  changes in  relative  values of
individual securities and asset sectors; (iii) changes in prepayment risks; (iv)
changes in credit quality outlook for certain  securities;  (v) liquidity needs;
and (vi) other factors.

      The Company uses computer models to perform  simulations of the cash flows
generated from existing  business under various  interest rate scenarios.  These
simulations  enable  management  to measure the  potential  gain or loss in fair
value of interest-rate  sensitive financial  instruments.  In this analysis, the
fair value is measured as the present value of the projected  statutory earnings
under a given  interest  rate  scenario,  discounted at the earned rates in that
scenario.  It is  standard  industry  practice  to base fair value of  insurance
businesses on statutory  earnings.  The two scenarios compare one with no change
in interest rates and one with an  instantaneous  parallel  decrease in treasury
yields.

      Selected  fixed-income assets in the amount necessary to equal liabilities
are modeled  individually.  These  assets  include  corporate  bonds,  asset and
mortgage-backed  securities,  and mortgage loans on real estate. All significant
insurance liabilities are grouped and modeled in representative liability cells.
The options  embedded in the  securities  and their  underlying  collateral  are
modeled  directly,  with  the  incidence  of  prepayments  based  on the type of
collateral and the level of interest rates in the scenarios tested. Defaults are
modeled based on published credit ratings. The policyholder options to borrow or
surrender are modeled, with exercise of the options determined by product design
and the level of rates which  competitors  would offer in the tested  scenarios.
Other  policyholder  behavior is estimated  from  anticipated  and recent actual
experience.

      Although the traditional insurance liabilities could be excluded from this
analysis,  they contain loan provisions which are interest  sensitive in nature.
In addition,  the risk of asset and liability mismatch in a decreasing  interest
rate  environment can become  significant.  In order to capture these risks, the
traditional insurance product liabilities were included.

      If  treasury  yields  were to  decrease  by 100 basis  points  from  their
December  31, 1999  levels,  the fair value of these  insurance  businesses,  as
defined above, would be $8.5 million less than the fair value assuming no change
from the December 31, 1999 levels.

                                       50
<PAGE>


      The  calculations  involved  in  these  computer  simulations  incorporate
numerous  assumptions,  require significant  estimates,  and assume an immediate
change in interest rates without any  management of the investment  portfolio in
reaction to such change.  Consequently,  potential changes in value of financial
instruments  indicated  by the  simulations  will likely be  different  from the
actual  changes  experienced  under  given  interest  rate  scenarios,  and  the
difference may be material. Because the Company actively manages its investments
and  liabilities,  the actual change in fair value could be less than  estimated
above.

DEBT STRUCTURE

      Borrowed  capital at December 31, 1999 includes  outstanding  principal of
$114.6 million of unsecured 9 1/4% Senior Subordinated Notes due 2003 and $165.0
million of a Bank Credit Facility maturing in May 2000. The senior  subordinated
notes carry a fixed rate of interest.  Based on the interest  rate  exposure and
prevalent  rates at December 31,  1999,  a relative 100 basis point  decrease in
interest rates would  increase the fair value of fixed rate borrowed  capital by
approximately $3.3 million.  Interest expense on the Bank Credit Facility, which
contains floating rate debt, will fluctuate as prevailing interest rates change.
At December  31, 1999,  a relative  100 basis point  increase in interest  rates
would  increase  interest  expense  on a  pre-tax  basis by  approximately  $1.7
million.

INVESTMENTS AND RISK OF DEFAULT

      The  Company  continuously  evaluates  its  investment  portfolio  and the
conditions under which it might sell securities,  including  changes in interest
rates,  changes in prepayment risks,  liquidity needs, asset liability matching,
tax planning  strategies and other economic  factors.  These 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 $2,363.7
million and  $2,589.7  million at December 31, 1999 and 1998,  respectively.  Of
those securities  available for sale, 93.2% and 93.0% were rated BBB or above by
Standard & Poor's at December 31, 1999 and 1998, respectively.

      During the years ended December 31, 1999 and 1998,  Southwestern  Life and
Security  Life sold $337.5  million  and $705.1  million of fixed  maturity  and
equity  securities,  and purchased  $461.3  million and $720.5  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.

      Mortgage loans on real estate  amounted to 0.8% and 1.2% of total invested
assets  as of  December  31,  1999  and  1998,  respectively.  The  Company  has
established a reserve for loan loss, which aggregated  $682,000 and $4.3 million
as of  December  31,  1999 and 1998.  As of  December  31,  1999,  there were no
non-performing  loans. As of December 31, 1998, the Company had a non-performing
loan amounting to $5.0 million.  The Company foreclosed on this loan in 1999 and
is in the process of selling the property. The Company believes its current loan
loss  provision  is adequate  to cover any future  losses  related to  currently
performing and non-performing loans.

      In assessing the risk that the rate of default  losses may exceed  pricing
expectations, the Company considers the entire investment portfolio. The Company
manages the risk of adverse default  experience on these investments by applying
disciplined  credit evaluation and underwriting  standards,  prudently  limiting
allocations to lower quality,  higher  yielding  investments,  and  diversifying
exposures  by issuer,  industry  and  region.  The  Company  remains  exposed to
occasional  cyclical  economic  downturns,  which may  result in  default  rates
significantly higher than historical averages.

                                       51
<PAGE>


Item 8. Financial Statements and Supplementary Data

                                                                     Page
                                                                     ----

       Management's Responsibility for Financial Statements .......   53

       PennCorp Financial Group, Inc. and Subsidiaries ............   54

       Southwestern Financial Corporation and Subsidiaries ........   97




                                       52
<PAGE>


MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS

      The management of the Company is responsible  for the preparation and fair
presentation of the consolidated financial statements,  financial data and other
information  in this annual report.  They have been prepared in conformity  with
generally accepted  accounting  principles  appropriate in the circumstances and
include  amounts  based on the best  estimates and judgment of  management.  The
Company's  management is also  responsible  for the accuracy and  consistency of
other financial information included in this annual report.

      In recognition of its  responsibility for the integrity and objectivity of
data in the  financial  statements,  the Company  maintains a system of internal
control over financial  reporting which is designed to provide  reasonable,  but
not  absolute,  assurance  with  respect  to the  reliability  of the  Company's
financial statements. The concept of reasonable assurance is based on the notion
that the cost of the  internal  control  system  should not exceed the  benefits
derived.

      Internal  auditors  monitor and assess the  effectiveness  of the internal
control  system  and  report  their  findings  to  management  and the  Board of
Directors throughout the year. The Company's independent auditors are engaged to
express an opinion on the financial  statements and with the coordinated support
of the internal auditors, review the financial records and related data and test
the internal control system over financial reporting.

      The  Audit  Committee  of the Board of  Directors,  which is  composed  of
outside  directors,  serves in an  oversight  role to assure the  integrity  and
objectivity of the Company's  financial  reporting process.  The committee meets
periodically with representatives of management,  as well as the independent and
internal  auditors,  to review matters of a material nature related to financial
reporting  and  the  planning,   results  and  recommendations  of  audits.  The
independent  and  internal  auditors  have free  access to the Audit  Committee,
without management present, to discuss any matter they believe should be brought
to the attention of the committee.  The committee is also responsible for making
recommendations  to the  Board of  Directors  concerning  the  selection  of the
independent auditors.

Keith A. Maib                                       James P. McDermott
President, Chief Executive Officer                  Executive Vice President and
and Chief Operating Officer                         Chief Financial Officer


                                       53
<PAGE>


INDEPENDENT AUDITORS' REPORT

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

      We have audited the accompanying  consolidated  balance sheets of PennCorp
Financial Group, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related  consolidated  statements of operations and comprehensive income (loss),
changes  in  shareholders'  equity  and cash  flows for each of the years in the
three-year  period  ended  December  31,  1999.  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 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 as of December 31, 1999 and 1998, and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.

      The accompanying 1999 consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company suffered
losses  from  operations  in  1999  and  1998.  As  discussed  in Note 23 to the
consolidated  financial  statements,  PennCorp  Financial  Group,  Inc.  filed a
voluntary  petition for relief under chapter 11 of title 11 of the United States
Bankruptcy  Code in the  United  States  Bankruptcy  Court for the  District  of
Delaware.  The  Company  has  filed  a plan  of  reorganization  and  will  seek
confirmation of the  Recapitalization  Plan by the Bankruptcy Court.  Should the
recapitalization  plan not be approved by the  Bankruptcy  Court,  be materially
delayed or not be consummated,  the Company may have to sell assets or otherwise
realize assets and liquidate or settle  liabilities for amounts other than those
reflected in the  consolidated  financial  statements  or related  notes.  These
factors raise  substantial  doubt about the  Company's  ability to continue as a
going concern.  The 1999  consolidated  financial  statements do not include any
adjustments that might result from the outcome of these uncertainties.

      As discussed in Note 8, the Company  changed its method of recording claim
reserves associated with disability income products of the Career Sales Division
during the year ended December 31, 1998. The effect of the change in methodology
is  inseparable  from the effect of the change in  accounting  estimates  and is
accordingly  reflected in operations as a change in accounting  estimate for the
year ended December 31, 1998.



KPMG LLP
Dallas, Texas
April 10, 2000

                                       54
<PAGE>

<TABLE>

                PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
     CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
                   (In thousands, except per share amounts)
<CAPTION>

                                                                             For the years ended December 31,
                                                                         -----------------------------------------
                                                                             1999           1998           1997
                                                                         -----------    -----------    -----------
<S>                                                                      <C>            <C>            <C>
REVENUES:
  Premiums ...........................................................   $   210,496    $   337,685    $   254,020
  Interest sensitive policy product charges ..........................       128,378        121,473         91,546
  Net investment income ..............................................       257,600        369,052        273,237
  Other income .......................................................        34,066         37,717         27,504
  Net gains (losses) from the sale of investments ....................          (502)        14,068         17,487
  Net gains from sales of subsidiaries (including foreign currency
   translation losses of $24,978 realized on sale) ...................         6,602           --             --
                                                                         -----------    -----------    -----------
     Total revenues ..................................................       636,640        879,995        663,794
                                                                         -----------    -----------    -----------

BENEFITS AND EXPENSES:
  Claims incurred ....................................................       223,658        308,432        202,472
  Change in liability for future policy benefits and other policy
     benefit .........................................................       153,929        233,330        121,817
  Amortization of present value of insurance in force and deferred
   policy acquisition costs ..........................................        69,626        117,446         92,046
  Amortization of costs in excess of net assets acquired and other
     intangibles .....................................................        13,316         15,121          9,545
  Underwriting and other administrative expenses .....................       148,891        229,497        146,245
  Interest and amortization of deferred debt issuance costs ..........        40,222         42,960
                                                                                                            23,355

  Restructuring charge ...............................................         4,993         14,877         16,771
  Impairment of intangibles ..........................................        95,522           --             --
  Impairment provision associated with assets of Businesses Held for
     Sale ............................................................        58,486        342,960           --
                                                                         -----------    -----------    -----------
     Total benefits and expenses .....................................       808,643      1,304,623        612,251
                                                                         -----------    -----------    -----------
Income (loss) before income taxes (benefits), equity in earnings of
   unconsolidated affiliates and extraordinary charge ................      (172,003)      (424,628)        51,543
   Income taxes (benefits) ...........................................        28,709         (3,369)        20,375
                                                                         -----------    -----------    -----------
Income (loss) before equity in earnings of unconsolidated affiliates
  and extraordinary charge ...........................................      (200,712)      (421,259)        31,168
   Equity in earnings of unconsolidated affiliates ...................          --             --           18,972
                                                                         -----------    -----------    -----------
Income (loss) before extraordinary charge ............................      (200,712)      (421,259)        50,140
   Extraordinary charge (net of income taxes of $--, $900 and $--) ...          --           (1,671)          --
Net income (loss) ....................................................      (200,712)      (422,930)        50,140
   Preferred stock dividend requirements .............................        17,825         18,273         19,533
                                                                         -----------    -----------    -----------
Net income (loss) applicable to common stock .........................   $  (218,537)   $  (441,203)   $    30,607
                                                                         ===========    ===========    ===========


PER SHARE INFORMATION:
Basic:
  Net income (loss) applicable to common stock before extraordinary
    charge ...........................................................   $     (7.44)   $    (15.17)   $      1.09
   Extraordinary charge, net of income taxes .........................          --            (0.06)          --
                                                                         -----------    -----------    -----------
  Net income (loss) applicable to common stock .......................   $     (7.44)   $    (15.23)   $      1.09
                                                                         ===========    ===========    ===========

Common shares used in computing basic income (loss) per share ........        29,354         29,091         28,016
                                                                         ===========    ===========    ===========

Diluted:
  Net income (loss) applicable to common stock before extraordinary
   charge ............................................................   $     (7.44)   $    (15.17)   $      1.07
   Extraordinary charge, net of income taxes .........................          --            (0.06)          --
                                                                         -----------    -----------    -----------
  Net income (loss) applicable to common stock .......................   $     (7.44)   $    (15.23)   $      1.07
                                                                         ===========    ===========    ===========

Common shares used in computing diluted income (loss) per share ......        29,354         29,091         28,645
                                                                         ===========    ===========    ===========

COMPREHENSIVE INCOME (LOSS) INFORMATION:
  Net income (loss) ..................................................   $  (200,712)   $  (422,930)   $    50,140

  Change in unrealized foreign currency translation gains (losses),
    net of income taxes ..............................................         1,713         (6,089)        (5,641)
  Decrease in unrealized foreign currency translation loss resulting
   from sale of subsidiaries .........................................        24,978           --             --
  Change in unrealized gains (losses) on securities available for sale
   of unconsolidated affiliate during the year .......................          --             --           24,277
  Change in unrealized holding gains (losses) arising during
    the year on securities available for sale, net of income taxes
    (benefits) of $(58,905), $4,818 and ($6,490) .....................      (109,035)         5,602         27,185
  Reclassification adjustments for gains included in net income (loss)          (418)       (14,552)       (15,890)
  Decrease in unrealized holding gains resulting from the sale of
   subsidiaries, net of income tax benefit of $4, in 1999 ............            55           --             --
                                                                         -----------    -----------    -----------
     Total comprehensive income (loss) applicable to common stock ....   $  (283,419)   $  (437,969)   $    80,071
                                                                         ===========    ===========    ===========


           See accompanying Notes to Consolidated Financial Statements

                                       55
<PAGE>

<CAPTION>

                PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

                     (In thousands, except share amounts)

                                                                     As of December 31,
                                                                --------------------------
                                                                    1999           1998
                                                                -----------    -----------
<S>                                                             <C>            <C>
ASSETS:
Investments:
  Fixed maturities available for sale, at fair value
   (amortized cost $2,485,996 in 1999 and $2,524,990 in 1998)   $ 2,363,690    $ 2,589,714
  Equity securities available for sale, at fair value
   (cost $2,008 in 1999 and 1998) ...........................         2,008          2,035
  Mortgage loans on real estate, net of allowance of $682
    in 1999 and $4,295 in 1998 ..............................        20,032         36,882
  Policy loans ..............................................       197,287        207,490
  Other investments .........................................        26,570         27,406
                                                                -----------    -----------
   Total investments ........................................     2,609,587      2,863,527
Cash and cash equivalents ...................................       141,636         93,553
Accrued investment income ...................................        37,922         37,291
Accounts and notes receivable, net of allowance of $5,910
   in 1999 and $6,201 in 1998 ...............................        11,935         16,468
Present value of insurance in force .........................       119,766        170,729
Deferred policy acquisition costs ...........................       113,726        139,708
Costs in excess of net assets acquired ......................        79,725        108,070
Income taxes, primarily deferred ............................       111,517         45,451
Other assets ................................................        62,334         91,644
Assets of Businesses Held for Sale (including cash and
  cash equivalents of $131,531 in 1998) .....................          --        2,417,583
                                                                -----------    -----------
   Total assets .............................................   $ 3,288,148    $ 5,984,024
                                                                ===========    ===========

LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:

Policy liabilities and accruals .............................   $ 2,756,957    $ 2,819,661
Notes payable ...............................................       279,646        550,923
Accrued expenses and other liabilities ......................        98,579        114,187
Liabilities of Businesses Held for Sale .....................          --        2,063,312
                                                                -----------    -----------
   Total liabilities ........................................     3,135,182      5,548,083
                                                                -----------    -----------

Shareholders' equity:
$3.375 Convertible Preferred Stock, $.01 par value, $50
  redemption value; authorized issued and outstanding
  2,300,000 in 1999 and 1998 ................................       120,216        112,454
$3.50 Series II Convertible Preferred Stock, $.01 par value,
  $50 redemption value; authorized issued and outstanding
  2,875,000 in 1999 and 1998 ................................       151,736        141,673
Common stock, $.01 par value; authorized 100,000,000; issued
  and outstanding 30,143,416 in 1999 and 30,072,344 in
  1998 ......................................................           303            301
Additional paid-in capital ..................................       428,974        430,321
Accumulated other comprehensive income, net of income taxes .       (62,712)        19,995
Accumulated deficit .........................................      (453,487)      (234,921)
Treasury shares (928,685 in 1999 and 1,105,369 in 1998) .....       (30,829)       (32,391)
Notes receivable and other assets secured by common stock ...        (1,235)        (1,491)
                                                                -----------    -----------
   Total shareholders' equity ...............................       152,966        435,941
                                                                -----------    -----------
   Total liabilities and shareholders' equity ...............   $ 3,288,148    $ 5,984,024
                                                                ===========    ===========


          See accompanying Notes to Consolidated Financial Statements

                                       56
<PAGE>

<CAPTION>

                PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

                                (In thousands)

                                                          For the years ended December 31,
                                                       -------------------------------------
                                                          1999         1998          1997
                                                       ---------     ---------     ---------
<S>                                                    <C>           <C>           <C>
Convertible preferred stock:
  Balance at beginning of year .....................   $ 254,127     $  249,670    $ 249,670
  Accrual of dividends in arrears ..................      17,825         4,457          --
                                                       ---------     ---------     ---------
   Balance at end of year ..........................     271,952       254,127       249,670
                                                       ---------     ---------     ---------

Common stock:
  Balance at beginning of year .....................         301           289           286
  Issuance of common stock .........................           2            10             1
  Exercise of stock options ........................        --               2             2
                                                       ---------     ---------     ---------
   Balance at end of year ..........................         303           301           289
                                                       ---------     ---------     ---------

Additional paid-in capital:
  Balance at beginning of year .....................     430,321       397,590       393,156
  Issuance of common stock .........................         100        30,717         1,697
  Exercise of stock options ........................        --           2,014         2,737
  Reissuance of treasury stock .....................      (1,447)         --            --
                                                       ---------     ---------     ---------
   Balance at end of year ..........................     428,974       430,321       397,590
                                                       ---------     ---------     ---------

Accumulated other comprehensive income:
  Unrealized foreign currency translation
   losses:
   Balance at beginning of year ....................     (26,691)      (20,602)      (14,961)
   Change in unrealized foreign currency
     translation gains (losses)
     during the year, net of income taxes ..........       1,713        (6,089)       (5,641)
   Decrease in unrealized foreign currency
     translation loss resulting from sale of
     subsidiary ....................................      24,978          --            --
                                                       ---------     ---------     ---------
      Balance at end of year .......................        --         (26,691)      (20,602)
                                                       ---------     ---------     ---------
  Unrealized gains on securities available for
    sale:
   Balance at beginning of year ....................      46,686        55,636        20,064
   Change in unrealized gains (losses) on securities
     available for sale of unconsolidated affiliate
     during the year ...............................        --            --          24,277
   Change in unrealized holding gains (losses) on
     securities available for sale during the
     year, net of income taxes .....................    (106,453)        5,602        27,185

   Reclassification adjustments for gains included
     in net income (loss) ..........................      (1,096)      (14,552)      (15,890)
   Decrease in unrealized holding gains resulting
     from sale of subsidiaries, net of income
     taxes of $1,865 in 1999 .......................      (1,849)         --            --
                                                       ---------     ---------     ---------
      Balance at end of year .......................     (62,712)       46,686        55,636
                                                       ---------     ---------     ---------
      Total other comprehensive income (losses)  ...     (62,712)       19,995        35,034
                                                       ---------     ---------     ---------

Retained earnings (deficit):
  Balance at beginning of year .....................    (234,921)      211,055       186,032
  Net income (loss) ................................    (200,712)       50,140
  Dividends on common stock ........................        --          (2,860)       (5,618)
  Dividends on preferred stock .....................     (17,825)      (18,273)      (19,533)
  Redemption of Series C preferred stock ...........        --          (1,913)         --
  Earned portion of treasury stock awarded to
     employees .....................................         (29)         --              34
                                                       ---------     ---------     ---------
     Balance at end of year ........................    (453,487)     (234,921)      211,055
                                                       ---------     ---------     ---------

Treasury shares:

  Balance at beginning of year .....................     (32,391)      (32,130)       (3,370)
  Purchases of treasury stock ......................        --            (261)      (28,760)
  Reissuance of treasury stock .....................       1,562          --            --
                                                       ---------     ---------     ---------
     Balance at end of year ........................     (30,829)      (32,391)      (32,130)
                                                       ---------     ---------     ---------

Notes receivable and other assets secured by
  common stock: ....................................      (1,235)       (1,491)       (1,272)
                                                       ---------     ---------     ---------
     Total shareholders' equity ....................   $ 152,966     $ 435,941     $ 860,236
                                                       =========     =========     =========

          See accompanying Notes to Consolidated Financial Statements

                                       57
<PAGE>

<CAPTION>

                PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                (In thousands)

                                                                                      For the years ended December 31,
                                                                                 -----------------------------------------
                                                                                    1999           1998            1997
                                                                                 -----------    -----------    -----------
<S>                                                                              <C>            <C>            <C>
Cash flows from operating activities:
  Income (loss) before equity in earnings of  unconsolidated  affiliates  and
    extraordinary charge .....................................................   $  (200,712)   $  (421,259)   $    31,168
  Adjustments to reconcile income (loss) before equity in earnings of
   unconsolidated  affiliates and extraordinary charge to net cash provided by
   operating activities:
     Impairment provision associated with assets of Businesses Held for Sale .        58,486        342,960           --
     Impairment of intangibles ...............................................        95,522           --             --
     Net gain from sales of subsidiaries .....................................        (6,602)          --             --
     Capitalization of deferred policy acquisition costs .....................       (75,109)      (109,482)
     Amortization of present value of insurance in force, deferred policy
      acquisition costs, intangibles, depreciation and accretion, net ........        76,242        123,310         91,902
     Increase (decrease) in policy liabilities and accruals and other
       policyholder funds ....................................................        15,984         57,730         (1,644)
     Sales of trading securities .............................................          --             --           29,914
     Deferred income taxes ...................................................        29,868          7,884         13,002
     Other, net ..............................................................        26,977         10,757         (1,577)
                                                                                 -----------    -----------    -----------
      Net cash provided (used) by operating activities .......................        20,656         (7,210)        53,283
                                                                                 -----------    -----------    -----------

Cash flows from investing activities:
  Cash received from sales of subsidiaries, net of cash and short-term
   investments of $138,902 of subsidiaries sold ..............................       138,718           --           --
Cash and short-term investments acquired in acquisition of businesses, net of
   cash expended of $--, $82,771 and $--in 1999, 1998 and 1997 ...............          --           91,492           --
  Purchases of fixed maturity securities available for sale ..................      (814,215)    (1,049,341)      (993,768)
  Purchases of equity securities available for sale ..........................          --           (5,391)       (27,776)
  Maturities of fixed maturity securities available for sale .................       354,346        304,122        439,938
  Sales of fixed maturity securities available for sale ......................       603,496        987,788        777,960
  Sales of equity securities available for sale ..............................            21         32,062         23,121
  Acquisitions and originations of mortgage loans ............................        (1,082)       (36,965)       (44,375)
  Sales of mortgage loans ....................................................        15,129         20,867         13,643
  Principal collected on mortgage loans ......................................        34,069         50,794         54,145
  Other, net .................................................................        28,956         21,203        (49,712)
                                                                                 -----------    -----------    -----------
      Net cash provided by investing activities ..............................       359,438        416,631        193,176
                                                                                 -----------    -----------    -----------
Cash flows from financing activities:
  Additional borrowings ......................................................          --          203,000        250,000
  Issuance of common stock ...................................................          --                3           --
  Purchases of treasury stock ................................................          --             --          (28,760)
  Reduction of notes payable .................................................      (271,277)      (126,839)      (100,570)
  Redemption of preferred stock ..............................................          --             --          (14,705)
  Receipts from interest sensitive products credited to policyholders' account
    balances .................................................................       181,322        251,627         186,166
  Return of policyholders' account balances on interest sensitive products ...      (372,977)      (605,757)      (461,888)
  Cash transferred on reinsurance ceded to an affiliate ......................          --             --          (50,000)
  Other, primarily dividends, net ............................................           216        (16,210)
                                                                                 -----------    -----------    -----------
      Net cash used by financing activities ..................................      (462,716)      (294,176)      (240,023)
                                                                                 -----------    -----------    -----------

      Net increase (decrease) in cash ........................................       (82,622)       115,245          6,436

Cash and cash equivalents at beginning of year (including $131,531 of cash and
  cash equivalents classified as Businesses Held for Sale in 1999) ...........       224,258        109,013        102,577
                                                                                 -----------    -----------    -----------
Cash and cash equivalents at end of year (including $131,531 of cash and
  cash equivalents classified as assets of Businesses Held for Sale in 1998) .   $   141,636    $   224,258    $   109,013
                                                                                 ===========    ===========    ===========

Supplemental disclosures:
  Income taxes paid (refunded) ...............................................   $    (5,780)   $     5,814    $    (1,554)
  Interest paid ..............................................................        38,014         38,017         20,946
Non-cash financing activities:
  Redemption of Series C Preferred Stock .....................................   $      --      $    22,227    $      --
  Debt assumed with acquisition ..............................................          --          115,015           --
  Issuance of common stock associated with the acquisition of the Fickes and
    Stone Knightsbridge Interests ............................................          --            8,500           --
  Accrued and unpaid preferred stock dividends ...............................        17,825          4,457           --
  Reissuance of treasury stock ...............................................         1,562           --             --
  Other ......................................................................          --              261          1,281

          See accompanying Notes to Consolidated Financial Statements

</TABLE>

                                       58
<PAGE>


                PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION

      PennCorp  Financial  Group,  Inc.  ("PennCorp,"  or the  "Company")  is an
insurance holding company. Through its wholly-owned life insurance subsidiaries;
Pennsylvania  Life Insurance  Company ("PLIC") and its wholly-owned  subsidiary,
PennCorp Life Insurance Company (collectively  referred to as "Penn Life") (sold
July 30, 1999);  Peninsular Life Insurance Company ("Peninsular") (sold July 30,
1999);  Professional  Insurance  Corporation  ("Professional")  (sold  March 31,
1999);  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 as "AA Life");  Southwestern Financial Corporation ("SW
Financial")  and  its  wholly-owned  subsidiaries  Southwestern  Life  Insurance
Company   ("Southwestern    Life"),    Constitution   Life   Insurance   Company
("Constitution")  (sold July 30, 1999),  Union Bankers Insurance Company ("Union
Bankers") (sold July 30, 1999),  and Marquette  National Life Insurance  Company
("Marquette")  (sold July 30, 1999);  Security Life and Trust Insurance  Company
("Security Life"); Occidental Life Insurance Company of North Carolina ("OLIC");
United Life & Annuity  Insurance  Company ("United Life") (sold April 30, 1999);
and Pacific Life and Accident Insurance Company ("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.  Additionally,  the
Company owns KB Management, LLC ("KB Management"), which provides management and
advisory services to the Company; Marketing One, Inc. ("Marketing One"), a third
party marketing  organization;  KIVEX,  Inc.  ("KIVEX") (sold June 30, 1999), an
internet service  provider,  UC Mortgage Corp.  ("UC") (sold April 30, 1999) and
Cyberlink  Development,  Inc.  ("Cyberlink") (sold April 30, 1999). As part of a
subsidiary  realignment,  Southwestern Life became a wholly-owned  subsidiary of
PLAIC as of July 30, 1999.

      As a result of the  Company's  announcement  of its  decision  to sell the
Career Sales  Division (the Career Sales Division is comprised of the operations
of Penn Life,  Peninsular,  Union Bankers,  Constitution and Marquette),  KIVEX,
Professional  and the United Life Assets (the United Life Assets is comprised of
the  operations of United Life,  UC,  Cyberlink and certain  assets of Marketing
One),  within a period not  likely to exceed one year (see Notes 3 and 16),  the
assets and liabilities of the Career Sales Division, KIVEX, Professional and the
United Life Assets,  (collectively the "Businesses Held for Sale") were reported
as "Assets of Businesses Held for Sale" and  "Liabilities of Businesses Held for
Sale" at December 31, 1998.  As of July 30,  1999,  sales of all the  Businesses
Held for Sale had been completed.

      The  Businesses  Owned at December  31, 1999  includes  the Payroll  Sales
Division (the Payroll  Sales  Division is comprised of AA Life and OLIC) and the
Financial  Services  Division (the Financial  Services  Division is comprised of
Southwestern Life and Security Life).

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

      The  financial  statements  are  prepared  in  accordance  with  generally
accepted  accounting  principles  ("GAAP").  These  principles  are  established
primarily by the Financial  Accounting Standards Board ("FASB") and the American
Institute  of  Certified  Public  Accountants  ("AICPA").   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 as well as revenues and expenses. Accounts that the Company deems to
be acutely sensitive to changes in estimates include deferred policy acquisition
costs,  policy  liabilities  and accruals,  present value of insurance in force,
costs in excess of net assets acquired, the fair value of assets and liabilities
classified as held for sale and deferred  taxes.  In addition,  the Company must
determine the requirements  for disclosure of contingent  assets and liabilities
as of the date of the financial  statements based upon estimates.  As additional
information becomes available, or actual amounts are determinable,  the recorded
estimates  may be revised and  reflected in  operating  results.  Although  some
variability  is inherent in these  estimates,  management  believes  the amounts
provided  are  adequate.  In all  instances,  actual  results  could differ from
estimates.

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(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Investments

      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,  capital or other economic factors.  Fair values are determined based on
quoted  market  prices,  where  available.   For  fixed  maturities  and  equity
securities 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.  Changes in unrealized gains and losses related to
securities  available for sale are recorded as accumulated  other  comprehensive
income, a separate  component of shareholders'  equity, net of applicable income
taxes and amount  attributable to deferred policy  acquisition costs and present
value of insurance in force related to universal life and accumulation products.
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. During 1997, the
Company carried its investment in SW Financial and its wholly-owned subsidiaries
on the equity basis of  accounting as a result of its  percentage  ownership and
lack of voting  control.  Mortgage-backed  fixed  maturity  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 and  short-term  investments  are recorded at cost.  Other invested
assets include  investments in limited  partnerships stated at cost and adjusted
for   contributions,   distributions   and   undistributed   income   and  other
miscellaneous investments carried at cost.

      As a result of the Company's  decision to exit the private  placement bond
sector,  the  Company  transferred  all of its  remaining  assets  in the  fixed
maturities  held for  investment  portfolio  aggregating  $49,384  to its  fixed
maturities  available for sale portfolio as of April 1, 1997. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, the Company marked
all assets subject to the transfer to fair value  resulting in a net increase in
shareholders' equity, net of applicable income taxes, of $1,800.

      The Company  regularly  evaluates  the carrying  value of its  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 estimated 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 net income.

Cash and Cash Equivalents

      Cash and  cash  equivalents  include  cash on hand  and  investments  with
original maturities of three months or less.

Accounts and Notes Receivable

      Accounts and notes  receivable  consist  primarily of agents' balances and
premiums  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.  During
1999, 1998 and 1997, the Company wrote off receivables  totaling $1,541,  $1,960
and $6,605, respectively.


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Intangible Assets

      The Company continually  monitors the recoverability of the carrying value
of intangible assets using the methodology  prescribed in Statement of Financial
Accounting  Standards  ("SFAS") No. 121 and Accounting  Principles Board ("APB")
No. 17  "Intangible  Assets." The Company  evaluates  long-lived  assets and the
related  intangible  assets  for  impairment   whenever  events  or  changes  in
circumstances  indicate  the  carrying  amounts  of  these  assets  may  not  be
recoverable.  Recoverability  of these  assets  is  determined  by  comparing  a
forecast of the  undiscounted net cash flows of the entity to the asset carrying
amount.  If the entity is determined to be unable to recover the carrying amount
of its assets,  intangible  assets are written down  initially,  followed by the
other  long-lived  assets  of the  operation,  to  fair  value.  Fair  value  is
determined  based upon discounted cash flows or appraised  values,  depending on
the nature of the associated assets.

      During 1999 and 1998,  the Company  recognized  an  aggregate  $58,486 and
$342,960,   respectively,   non-cash  charges  related  to  the  fair  value  of
consideration  to be received upon  disposition of certain  operating  companies
which are aggregated  for purposes of  presentation  of the Company's  financial
information as "assets and liabilities of Businesses Held for Sale."

      In  accordance  with SFAS No. 121,  the Company  recorded  the  impairment
provision in order to reflect the difference in the Company's  accounting  basis
in the Businesses Held for Sale and the fair value of the consideration that the
Company  would  likely  receive  for  such  businesses.  The  fair  value of the
consideration  likely to be received has been primarily  based upon the terms of
definitive sales agreements.

      The Company  evaluated the  recoverability of all intangible assets of the
Payroll  Sales  Division  based upon the sales  proceeds  received from the sale
which was entered into on January 8, 2000 and consummated  February 4, 2000 (see
Notes 3 and 23). As a result,  an impairment  provision of $95,522 was reflected
in the Statement of Operations for the year ended December 31, 1999.

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,  certain  variable  agency and marketing  expenses and other costs
directly associated with these functions to the extent such costs are determined
to vary with and are primarily related to the production of new business.  Costs
deferred associated with 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 $119,313
and $96,273 as of December 31, 1999 and 1998, respectively.

Costs in Excess of Net Assets Acquired

      Costs in excess of the fair value of net  assets  acquired  are  primarily
amortized  on a  straight-line  basis  ranging  from 5 to 30 years.  Accumulated
amortization  was  $32,921  and  $31,024  as of  December  31,  1999  and  1998,
respectively. In 1999, unamortized costs in excess of net assets acquired in the
amount of $19,287  was  impaired  due to the  evaluation  of  recoverability  of
intangible  assets  of the  Payroll  Sales  Division  as a result of its sale on
February  4,  2000 (see  Notes 3 and 23).  During  1999,  costs in excess of net
assets  acquired  of a  non-insurance  subsidiary  in the  amount of $7,635  was
written off as the result of the  decision  to cease  operations.  During  1998,
unamortized costs in excess of net assets acquired in the amount of $22,792 were
transferred  to assets of Businesses  Held for Sale and $114,514 was written off
in connection with the impairment provision associated with assets of Businesses
Held for Sale.

      For the year  ended  December  31,  1998,  the  Company  made a  valuation
determination with respect to certain preacquisition contingencies.  The Company
reduced tax  liabilities  and associated  costs in excess of net assets acquired
associated  with the SW  Financial  and United Life  acquisitions  by $6,407 and
$647,  respectively,  as a result of the Company resolving  certain  acquisition
date contingencies.

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<PAGE>


      For the year ended December 31, 1997, the Company determined the following
with respect to certain material acquisition  contingencies or allocations:  (i)
the Company increased deferred tax assets and reduced associated costs in excess
of net assets acquired  associated with the Security Life acquisition by $19,600
as a result of the Company resolving certain acquisition date tax contingencies,
(ii) the Company reduced both deferred tax  liabilities and associated  costs in
excess of net assets  acquired  associated with the Marketing One acquisition by
$1,100  as a  result  of the  Company  resolving  certain  acquisition  date tax
contingencies,  and  (iii) the  Company  reduced  costs in excess of net  assets
acquired and increased  certain mortgage loan values by $1,100,  associated with
the  acquisition  of  United  Life,  as a result  of final  appraisals  becoming
available.

Policy Liabilities

      Future policy benefits for traditional life insurance  products  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.  Prior to disposition, the
Company had been closely monitoring the development of claims reserve experience
for Penn  Life.  The  methodology  previously  utilized  has  experienced,  what
appeared to be, a deterioration  of the adequacy of claims  reserves  associated
with disability  income products sold prior to the Company's  ownership.  During
1998, the Company  changed its  methodology  in recording  these  reserves.  The
effect of the change in methodology is inseparable from the effect of the change
in accounting estimate and is accordingly reflected in operations as a change in
accounting estimate for 1998.

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  temporary  differences  between  the  financial
statement  carrying  amounts  of  existing  assets  and  liabilities  and  their
respective  tax bases as well as  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.

      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.

Treasury Shares

      Shares  purchased  are  recorded at cost as a reduction  of  shareholders'
equity. Shares abandoned by the associated shareholders are recorded at no cost.
The cost basis of shares  reissued from treasury are  determined on the basis of
specific identification.

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.

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<PAGE>


Net Income (Loss) per Common Share

      Net income (loss) per common share is computed in accordance with SFAS No.
128, "Earnings Per Share." Basic earnings (loss) per share excludes dilution and
is computed by dividing  income  (loss)  applicable  to common  shareholders  by
weighted  average number of common shares  outstanding  for the period.  Diluted
earnings (loss) per share represents the potential  dilution that could occur if
all  convertible  securities,  warrants  and stock  options were  exercised  and
converted into common stock, if the effect of doing so is dilutive.  The diluted
earnings  per share  calculation  assumes that the  proceeds  received  upon the
conversion  of all  dilutive  options and warrants  are used to  repurchase  the
Company's  common  shares at the average  market price of such shares during the
period.

      The Company  utilized the  requirements  of SFAS No. 123,  "Accounting for
Stock-Based  Compensation,"  when  accounting  for stock options and other stock
based  compensation.  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 APB No.  25,
"Accounting for Stock Issued to Employees," and related Interpretations. Note 13
contains a summary of the pro forma effects to reported net income applicable to
common stock and earnings per share for 1999,  1998 and 1997,  as if the Company
had elected to account for employee stock  compensation plans utilizing the fair
value methodology prescribed by SFAS No. 123.

Business Combinations

      Business combinations accounted for as a purchase result in the allocation
of the purchase  consideration  to the fair values of the assets and liabilities
acquired  establishing  such fair values as the new accounting  bases.  Purchase
consideration in excess of the fair value of net assets acquired is allocated to
"costs in excess  of net  assets  acquired."  Should  the fair  value of the net
assets  acquired exceed the purchase  consideration,  such excess is utilized to
reduce  certain  intangible  assets,  primarily  "present  value of insurance in
force."  Allocation  of purchase  price is  performed in the period in which the
purchase is  consummated  and may be  preliminary.  Adjustments  resulting  from
completion of the purchase allocation process affect the value of the assets and
liabilities acquired.

Foreign Currency Translation

      The  financial  statement  accounts of the Company's  Canadian  operations
(sold July 30, 1999), 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 accumulated  other
comprehensive  income, 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.
Realized  gains  on  retroactive  reinsurance   arrangements  are  deferred  and
amortized into net income over the estimated duration of the reinsured business.


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Accounting Pronouncements Not Yet Adopted

      In June 1998,  the FASB issued SFAS No. 133,  "Accounting  for  Derivative
Instruments and Hedging Activities." SFAS No. 133 defines derivative instruments
and  provides   comprehensive   accounting  and  reporting   standards  for  the
recognition  and  measurement  of derivative and hedging  activities  (including
certain instruments embedded in other contracts).  It requires derivatives to be
recorded  in the  Consolidated  Balance  Sheet  at fair  value  and  establishes
criteria for hedges of changes in the fair value of assets,  liabilities or firm
commitments,  hedges of  variable  cash flows of  forecasted  transactions,  and
hedges of foreign currency  exposures of net investments in foreign  operations.
Changes in the fair value of derivatives not meeting  specific hedge  accounting
criteria would be recognized in the Consolidated  Statement of Operations.  SFAS
No. 133 was originally  effective for all fiscal quarters of all years beginning
after June 15, 1999. In June 1999,  the FASB  deferred the effective  date until
fiscal years  beginning after June 15, 2000. The Company will adopt SFAS No. 133
on January 1, 2001. The Company is currently evaluating SFAS No.133 but does not
expect its  adoption  to have a material  effect on the  consolidated  financial
statements.

Reclassifications

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

(3) ACQUISITIONS, DISPOSITIONS AND OTHER EVENTS

     Acquisitions of SW Financial Controlling Interest,  Knightsbridge Interests
and United Life

      On January 2, 1998,  following  shareholder approval at the Company's 1997
annual meeting of shareholders, the Company consummated the acquisition, from KB
Investment  Fund I, LP  (formerly  Knightsbridge  Capital  Fund I,  LP) (the "KB
Fund")  and  Messrs.  Steven W.  Fickes  and David J.  Stone,  former  executive
officers and directors of the Company,  of their  respective  holdings of common
stock and, in the case of the KB Fund,  common  stock  warrants of SW  Financial
(collectively,  the  "SW  Financial  Controlling  Interest")  for  an  aggregate
purchase price of $73,658 (not including acquisition  expenses).  The fair value
of net assets  acquired  amounted  to $45,520  resulting  in $28,138 of costs in
excess of net assets  acquired which will be amortized over 30 years. As part of
the acquisition of the SW Financial  Controlling Interest on January 2, 1998, SW
Financial  Subordinated Notes in the amount of $40,000  previously  purchased by
the Company were reclassified to purchase  consideration  for SW Financial.  The
acquisition of the SW Financial Controlling Interest has been accounted for as a
step purchase  transaction  in accordance  with  generally  accepted  accounting
principles, and accordingly, fair values of assets and liabilities acquired have
been determined as of January 2, 1998.

      On January 5, 1998,  following  shareholder  approval  at the 1997  annual
meeting  of  shareholders,  the  Company  consummated  the  acquisition  of  the
interests  of  Messrs.  Fickes  and  Stone  in KB  Management,  KB  Fund  and KB
Consultants LLC (formerly known as Knightsbridge Consultants LLC) (collectively,
the  "Fickes  and  Stone  Knightsbridge   Interests")  for  total  consideration
estimated  to  be  $10,564  (not  including  acquisition  expenses).  Under  the
transaction  terms,  Mr.  Fickes  is to  receive  consideration  in the  form of
estimated annual interest payments,  ranging from $301 to $330, on April 15 each
year through 2001 and is to be issued  173,160  shares of the  Company's  Common
Stock on April 15, 2001.  Mr.  Stone was issued his 173,160  shares in July 1998
which he pledged to financial  institutions  in connection  with his appeal of a
judgment  awarded  against  him and his  spouse.  The fair  value of net  assets
acquired  amounted  to ($1,701)  resulting  in $12,294 of costs in excess of net
assets acquired which will be amortized over seven years. The acquisition of the
Fickes and Stone  Knightsbridge  Interests has been  accounted for as a purchase
transaction in accordance with generally  accepted  accounting  principles,  and
accordingly,  preliminary  fair values of assets and  liabilities  acquired were
recorded as of the acquisition date which became the new accounting basis.

Disposition of Businesses

      On February 18, 1998, the Company  announced it had engaged the investment
banking firms Salomon  Smith  Barney,  Inc. and Fox-Pitt,  Kelton Inc. to review
strategic  alternatives for maximizing  shareholder value, including the sale of
the   Company's   Career  Sales   Division  and  certain   other   non-strategic
subsidiaries.

      In  addition,   in  February  1999,  the  Company   engaged  the  firm  of
Wasserstein,  Perella & Co.  ("Wasserstein  Perella")  to review  the  Company's
capital structure and develop  recapitalization and restructuring  alternatives.
The Company,  with  Wasserstein  Perella,  has been  exploring  with  interested
parties, a sale of the Company or certain of its subsidiaries and, on a parallel
track, a restructuring or recapitalization transaction (see Notes 3 and 23).

      On March 31, 1999, the Company  consummated the sale of Professional to GE
Financial  Assurance Holdings,  Inc. ("GE Financial").  The operating results of
Professional  are included in the consolidated  operating  results through March
31, 1999. The Company realized a gain from the sale totaling $1,054. As a result
of the sale,  unrealized gains on securities  available for sale by Professional
decreased by $488. On September 15, 1999, as a result of certain  settlement and
consideration  adjustment provisions included in the purchase and sale agreement
the Company reduced the consideration received by $1,237.

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<PAGE>


      On April 30, 1999, the Company  consummated the sale of United Life Assets
to ING America Insurance Holdings, Inc. ("ING"). The operating results of United
Life Assets are included consolidated  operating results through April 30, 1999.
The Company  realized a loss from the sale totaling  $3,877.  As a result of the
sale,  unrealized  gains on  securities  held for sale by United Life  decreased
$1,726.  The  purchase  and  sale  agreement  includes  certain  settlement  and
consideration  adjustment  provisions  relating to certain mortgages retained by
the Company and federal income tax calculations (see Note 19).

      On June 30, 1999,  the Company  completed  the sale of KIVEX to Allegiance
Telecom,  Inc. The operating  results of KIVEX are included in the  consolidated
operating  results through June 30, 1999. The Company recorded a gain of $30,881
on the sale.

      On July 30,  1999,  the Company  consummated  the sale of the Career Sales
Division to Universal American Financial Corp.  ("Universal  American").  During
1999 and  prior  to the  consummation  of the  sale,  the  Company  incurred  an
additional impairment provision of $58,486 related to the Career Sales Division.
This resulted from the decrease in the nominal purchase consideration of $38,000
partially offset by an estimated  discount to the stated value of the note to be
received.  In addition,  impairment provision included the impact of the true-up
of  statutory  capital and surplus of the Career  Sales  Division  companies  to
levels specified in the sale agreement which aggregated  approximately  $24,218.
Other factors modestly impacting the impairment  provision  included  additional
transaction costs, changes in unrealized gains and losses of securities, foreign
currency  translation and net income not considered in the determination of sale
consideration.  The operating  results of the Career Sales Division are included
in the  consolidated  operating  results  through  July 30,  1999.  The  Company
realized a foreign  currency  transaction  loss on the sale of the Career  Sales
Division totaling $24,978,  which represented  previously unrealized translation
losses on the Company's  Canadian  insurance  operations,  partially offset by a
gain of  $3,522  on the  disposition  resulting  in a net  loss of  $21,456.  In
addition,  as a result of the sale, unrealized gains on securities available for
sale and unrealized foreign currency  translation losses decreased by $2,268 and
$24,978,  respectively.  On December 29, 1999, as a result of certain settlement
and  consideration  adjustment  provisions,  included in the  purchase  and sale
agreement the Company reduced the consideration received by $2,550.

      The Company used $267,000 of the net proceeds from these sales to pay down
the  outstanding  balance  under the bank  credit  facility  (the  "Bank  Credit
Facility"). In addition, the Company repaid an additional $2,000 of indebtedness
as a result of liquidity at the parent  company above the amounts  prescribed in
the Bank Credit Facility, as amended.

      In January 2000,  the Company  announced it had agreed to sell the Payroll
Sales  Division  to a  company  formed  by Thoma  Cressey  Equity  Partners  for
approximately  $102,000,  subject to  adjustment.  The sale was  consummated  on
February  4, 2000 (see Note 23).  The  operating  results of the  Payroll  Sales
Division are included in the consolidated operating results through December 31,
1999. The Company recorded impairment  provision totaling $95,522 to reflect the
difference in the Company's  accounting  basis in the Payroll Sales Division and
the  consideration  the Company is to receive for such  businesses.  The Company
fully impaired the costs in excess of net assets acquired  aggregating  $19,287.
In addition,  the Company fully impaired the present value of insurance in force
and partially impaired deferred policy acquisition costs resulting in charges of
$67,617 and $49,668 respectively, net of related deferred taxes of $41,050.

(4) BUSINESS SEGMENT INFORMATION

      The Company has adopted SFAS No. 131,  "Disclosures  about  Segments of an
Enterprise  and Related  Information"  which  requires that  companies  disclose
segment data on a basis that is used  internally  by management  for  evaluating
segment  performance and allocating  resources to segments.  The Company defines
its operating divisions based on the distribution channels of its products.  The
Company  has  three  reportable  operating  segments:   (i)  Financial  Services
Division,  which is based in Dallas, Texas, and markets life insurance and fixed
annuities through independent general agents; (ii) Payroll Sales Division, which
is based in Waco,  Texas, and markets and underwrites  customized life insurance
and  accumulation  products to U.S.  military  personnel  and federal  employees
through a general  agency force and provides  individual  fixed benefit and life
products  through  employer-sponsored  payroll  deduction  programs;  and  (iii)
Businesses Held for Sale.

      The  Company's  Chief  Executive  Officer  evaluates  performance  of each
segment  based on profit or loss from  operations  excluding  (i)  restructuring
costs, (ii) net gains on the sale of investments,  (iii) net gains from sales of
subsidiaries,  (iv)  impairment  valuation  associated  with Businesses Held for
Sale,  (v) interest  expense,  (vi) income taxes and (vii) equity in earnings of
unconsolidated subsidiaries. The accounting policies of segments are the same as
those described in the summary of significant  accounting policies (see Note 2).
Segment  data for 1998  and 1997  have  been  restated  to  conform  to the 1999
presentation.

                                       65
<PAGE>

<TABLE>
<CAPTION>

                                                     Year Ended December 31,
                                              -----------------------------------
                                                 1999         1998         1997
                                              ---------    ---------    ---------
<S>                                           <C>          <C>          <C>
Premiums and policy product charges:
   Financial Services Division ............   $ 133,930    $ 129,241    $  69,831
   Payroll Sales Division .................      92,029       89,990       89,698
   Businesses Held for Sale (United States)      85,045      194,997      141,834
   Businesses Held for Sale (Canada) ......      27,870       44,930       44,203
                                              ---------    ---------    ---------
                                              $ 338,874    $ 459,158    $ 345,566
                                              =========    =========    =========

Net investment income:
   Financial Services Division ............   $ 161,841    $ 179,433    $  90,787
   Payroll Sales Division .................      36,771       38,252       38,161
   Businesses Held for Sale ...............      54,568      144,072      138,355
   Corporate ..............................       4,420        7,295        5,934
                                              ---------    ---------    ---------
                                              $ 257,600    $ 369,052    $ 273,237
                                              =========    =========    =========

Operating profit (loss):
   Financial Services Division ............   $  26,213    $  19,018    $  27,785
   Payroll Sales Division .................      16,100       (3,501)      23,960
   Businesses Held for Sale ...............      15,968      (16,541)      38,915
                                              ---------    ---------    ---------
                                              $  58,281    $  (1,024)   $  90,660
                                              =========    =========    =========

Amortization of present value of insurance
  in force and deferred policy acquisition
  costs:
      Financial Services Division .........   $  29,589    $  26,122    $  19,469
      Payroll Sales Division ..............      30,551       37,978       24,271
      Businesses Held for Sale ............       9,486       53,346       48,306
                                              ---------    ---------    ---------
                                              $  69,626    $ 117,446    $  92,046
                                              =========    =========    =========


<CAPTION>

                                                        As of December 31,
                                                     -----------------------
                                                        1999        1998
                                                     ----------   ----------
<S>                                                  <C>          <C>
Total assets:
   Financial Services Division ...................   $2,645,337   $2,823,007
   Payroll Sales Division ........................      598,011      648,400
   Businesses Held for Sale (United States) ......         --      2,290,724
   Businesses Held for Sale (Canada) .............         --        126,859
                                                     ----------   ----------
                                                     $3,243,348   $5,888,990
                                                     ==========   ==========
</TABLE>



                                       66
<PAGE>


   Reconciliations  of segment data to the  Company's  consolidated  data are as
follows:
<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                                -----------------------------------
                                                                   1999         1998        1997
                                                                ---------    ---------    ---------
<S>                                                             <C>          <C>          <C>
Total revenues:
   Segments--premiums and policy product charges ...........    $ 338,874    $ 459,158    $ 345,566
   Segments--net investment income .........................      257,600      369,052      273,237
   Other income ............................................       34,066       37,717       27,504
   Net gains (losses) from sale of investments .............         (502)      14,068       17,487
   Net gains from sales of subsidiaries (including realized
     losses on foreign currency of $24,978) ................        6,602         --           --
                                                                ---------    ---------    ---------
                                                                $ 636,640    $ 879,995    $ 663,794
                                                                =========    =========    =========

Income (loss) before taxes,  equity in earnings of
   unconsolidated  affiliates and extraordinary charge:
   Segments ................................................    $  58,281    $  (1,024)   $  90,660
   Corporate expenses and eliminations .....................      (30,559)     (36,875)     (16,478)
   Impairment of intangibles ...............................      (95,522)        --           --
   Impairment provision associated with
     assets of Businesses Held for Sale ....................      (58,486)    (342,960)        --
   Interest and amortization of deferred debt
     issuance costs ........................................      (40,222)     (42,960)     (23,355)
   Net gains (losses) on the sale of investments ...........         (502)      14,068       17,487
   Restructuring costs .....................................       (4,993)     (14,877)     (16,771)
                                                                ---------    ---------    ---------
                                                                $(172,003)   $(424,628)   $  51,543
                                                                =========    =========    =========
</TABLE>

<TABLE>
<CAPTION>

                                                                  As of December 31,
                                                               -----------------------
                                                                  1999         1998
                                                               ----------   ----------

Total assets:
<S>                                                            <C>          <C>
   Segments ................................................   $3,243,348   $5,888,990
   Corporate and other .....................................       44,800       95,034
                                                               ----------   ----------
                                                               $3,288,148   $5,984,024
                                                               ==========   ==========
</TABLE>

(5) INVESTMENTS

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

                                                                              1999
                                                       --------------------------------------------------
                                                                       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 ...........   $  972,425   $    5,922     $(46,684)   $  931,663
U.S. Treasury securities and obligations of
 U.S. Government corporations and agencies .........      279,402        2,236      (22,130)      259,508

Debt securities issued by foreign governments ......       23,677          101       (1,260)       22,518

Corporate securities ...............................    1,210,492        3,999      (64,490)    1,150,001
                                                       ----------   ----------   ----------    ----------
                                                       $2,485,996   $   12,258   $ (134,564)   $2,363,690
                                                       ==========   ==========   ==========    ==========
</TABLE>


                                       67
<PAGE>

<TABLE>

<CAPTION>
                                                                              1998
                                                       -------------------------------------------------
                                                                      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 ...........   $1,164,739   $   33,930   $    9,983   $1,188,686
U.S. Treasury securities and obligations of
 U.S. Government corporations and agencies .........      235,037       15,849        6,059      244,827
Debt securities issued by foreign governments ......       25,701        1,477         --         27,178
Corporate securities ...............................    1,099,513       41,723       12,213    1,129,023
                                                       ----------   ----------   ----------   ----------
                                                       $2,524,990   $   92,979   $   28,255   $2,589,714
                                                       ==========   ==========   ==========   ==========
</TABLE>


      The amortized cost and fair value of fixed  maturities  available for sale
as of December 31, 1999, by contractual maturity, are shown below:

                                                        Amortized      Fair
                                                           Cost        Value
                                                       ----------   ----------

     Due in one year or less .......................   $   72,287   $   72,405
     Due after 1 through 5 years ...................      409,061      399,277
     Due after 5 through 10 years ..................      567,644      542,233
     Due after 10 years ............................      464,579      418,112
     Mortgage-backed securities, principally
      obligations of U.S. Government agencies ......      972,425      931,663
                                                       ----------   ----------
                                                       $2,485,996   $2,363,690
                                                       ==========   ==========

      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  available  for sale as of December 31, 1999
and 1998,  are  below  investment-grade  securities  with an  amortized  cost of
$161,785 and $177,263 and a fair value of $139,521 and  $163,252,  respectively.
Included in fixed  maturities  available  for sale as of December 31, 1999,  are
unrated  securities  with an  amortized  cost of  $33,041  and a fair  value  of
$21,115. Included in fixed maturities available for sale as of December 31, 1998
are unrated  securities  with an  amortized  cost of $18,211 and a fair value of
$18,239.  Investments  in a single  entity,  other than  obligations of the U.S.
government  or  agencies  thereof,  totaling  in excess of 10% of the  Company's
equity at December 31, 1999  consisted of an investment in Episode IV Loan Trust
with carrying value and fair value of $25,000.

      As of December 31, 1999,  there was no unrealized  appreciation or loss in
equity  securities  available for sale. As of December 31, 1998,  net unrealized
appreciation  in  equity  securities  available  for  sale  consisted  of  gross
unrealized gains of $27.

      The Company's  commercial  and  residential  mortgage  portfolios  had net
carrying values $20,032 and $36,882,  respectively,  and, fair values of $20,285
and $38,865, respectively, as of December 31, 1999 and 1998.

                                       68
<PAGE>


      As  of  December  31,  1999,  commercial  and  residential  mortgage  loan
investments were concentrated in the following states:

                                                                Percent of Total
                                             Carrying Value      Carrying Value
                                             --------------      --------------

         Texas...............................   $10,070               50.3%
         Kansas..............................     1,946                9.7
         Illinois............................     1,787                8.9
         Nevada..............................     1,719                8.6
         Alabama.............................     1,673                8.4
         Louisiana...........................     1,187                5.9
         All other (less than 4% individually)    1,650                8.2
                                                -------              -----
                                                $20,032              100.0%
                                                =======              =====

      Investments with a carrying value of $216,629 and $146,385 were on deposit
with  certain  regulatory   authorities  as  of  December  31,  1999  and  1998,
respectively.  Amounts on deposit are temporarily  approximately $100,000 higher
as a result of a change in custodians.

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

<TABLE>
<CAPTION>
                                                                               1999         1998         1997
                                                                            ---------    ---------    ---------
     <S>                                                                    <C>          <C>          <C>
     Realized gains (losses) on dispositions of investments:
       Securities available for sale:
        Gross gains from sales ..........................................   $   6,853    $  20,509    $  22,076
        Gross losses from sales .........................................      (6,435)      (5,960)      (6,186)
        Net gains (losses) from redemptions .............................        --              3         --
                                                                            ---------    ---------    ---------
                                                                                  418       14,552       15,890

       Mortgage loans ...................................................          38       (6,545)        (284)
       Other investments ................................................        (958)       6,061        1,881
                                                                            ---------    ---------    ---------
          Net realized gains (losses) ...................................   $    (502)   $  14,068    $  17,487
                                                                            =========    =========    =========

     Change in unrealized gains (losses):
       Securities held for investment ...................................   $    --      $    --      $  (2,429)
                                                                            =========    =========    =========

       Securities available for sale ....................................   $(219,314)   $ (27,038)   $  44,627
       Securities available for sale of
          unconsolidated affiliate ......................................        --           --         24,277
       Less effect on other balance sheet accounts:
        Value of business acquired, deferred acquisition costs and other,
          principally unearned revenue on interest sensitive products ...      50,956       13,270      (26,842)
        Deferred income (taxes) benefits ................................      58,905        4,818       (6,490)
        Decrease in unrealized holding gains resulting from the sale
          of subsidiaries ...............................................          55         --           --
                                                                            ---------    ---------    ---------
          Net change in unrealized gains (losses)  ......................   $(109,398)   $  (8,950)   $  35,572
                                                                            =========    =========    =========

     Trading portfolio:
       Net gains (losses) from sales ....................................   $    --      $    --      $    (142)
       Net change in unrealized gains (losses) ..........................        --           --          1,258
                                                                            ---------    ---------    ---------
          Total net trading gains .......................................   $    --      $    --      $   1,116
                                                                            =========    =========    =========
</TABLE>

      As a result of the Company's  decision to exit the private  placement bond
sector,  the  Company  transferred  all of its  remaining  assets  in the  fixed
maturities  held for  investment  portfolio  aggregating  $49,384  to its  fixed
maturity  available for sale as of April 1, 1997.  In  accordance  with SFAS No.
115, the Company  adjusted all  transferred  assets to fair value resulting in a
net increase in shareholders' equity of $1,800, net of applicable income taxes.


                                       69
<PAGE>


      Major  categories of net investment  income consisted of the following for
the years ended December 31:

                                                      1999      1998      1997
                                                    --------  --------  --------

     Fixed maturity securities ...................  $231,196  $310,798  $231,867
     Mortgage loans on real estate ...............     9,610    27,773    26,498
     Policy loans ................................    13,996    16,235     9,037
     Cash and cash equivalents ...................     7,548     9,016     6,366
     Other investments ...........................     2,422    13,553     9,177
                                                    --------  --------  --------
       Gross investment income ...................   264,772   377,375   282,945
     Less: investment expenses ...................     7,172     8,323     9,708
                                                    --------  --------  --------
       Net investment income .....................  $257,600  $369,052  $273,237
                                                    ========  ========  ========

      The Company had non-income producing investments at December 31, 1999 with
an amortized cost and fair value as follows:

                                                      Amortized     Fair
                                                        Cost        Value
                                                        ----        -----

      Preferred stock..............................   $  6,656     $ 5,063
      Other investments............................     19,351      23,113
                                                      --------     -------
                                                      $ 26,007     $28,176
                                                      ========     =======

(6) SOUTHWESTERN LIFE INVESTMENT

      On December 14, 1995, SW Financial (see Note 18) purchased SW Life,  Union
Bankers and certain other related assets from I.C.H. Corporation for $260,000.

      Through its initial  direct  investment  of $120,000 in SW Financial  (the
"Southwestern Life Investment"), the Company beneficially owned, at December 31,
1997,  74.8% of SW Financial's  outstanding  common stock,  including 100% of SW
Financial's  non-voting  common  stock,  14.3% of SW  Financial's  voting common
stock,  and  100% of SW  Financial  preferred  stock.  PennCorp  is also a 16.3%
limited partner in KB Fund. As a result, the Company had an economic interest in
SW Financial aggregating 78.0 percent. Retained earnings of the Company included
undistributed  earnings of SW Financial  aggregating  $40,919 as of December 31,
1997.

      On January 2, 1998,  the Company  acquired  the SW  Financial  Controlling
Interest (see Note 3).

      The Company  accounted for its  investment  in SW Financial  utilizing the
equity method for the year ended December 31, 1997. The  consolidated  condensed
results of operations for the years ended December 31, 1997 are provided below:

     Revenues:
     Policy revenues .........................................   $ 145,818
     Net investment income ...................................     126,427
     Other income ............................................      16,039
     Net gains from the sale of investments ..................       1,841
                                                                 ---------
          Total revenues .....................................     290,125
                                                                 ---------
     Benefits and expenses:

     Claims incurred .........................................     201,385
     Change in liability for future policy benefits and
       other policy benefits .................................     (35,103)
     Insurance and other operating expenses ..................      66,319
     Interest and amortization of deferred debt issuance costs      13,773
                                                                 ---------
        Total benefits and expenses ..........................     246,374
                                                                 ---------
     Income before income taxes ..............................      43,751
       Income taxes ..........................................      16,416
                                                                 ---------
     Net income ..............................................      27,335
       Preferred stock dividend requirements .................       3,012
                                                                 ---------
     Net income applicable to common stock ...................   $  24,323
                                                                 =========

                                       70
<PAGE>



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

      Information  relating to deferred policy  acquisition  costs is as follows
for the years ended December 31:
<TABLE>
<CAPTION>

                                                                         1999        1998        1997
                                                                       --------    --------    --------
     <S>                                                               <C>         <C>         <C>
     Balance as of January 1 .......................................   $139,708    $310,117    $252,428
     Policy acquisition costs deferred:
      Commissions ..................................................     41,504      86,441      59,238
      Underwriting and issue costs .................................     13,435      42,151      50,244
      Addition due to acquisition, including $171 of unrealized loss       --        30,606        --
                                                                       --------    --------    --------

                                                                        194,647     469,315     361,910
     Policy acquisition costs amortized ............................    (37,100)    (79,291)    (44,323)
     Unrealized investment (gain) loss adjustment ..................      5,348      (1,213)     (2,344)
     Transfer pursuant to reinsurance transaction ..................        499        --          --
     Foreign currency translation adjustment .......................       --        (1,038)     (1,482)
     Reduction due to sale of blocks of business ...................       --        (4,129)     (3,644)
     Impairment for Businesses Held for Sale .......................       --      (191,595)       --
     Impairment related to recoverability analysis associated with
      subsequent sale of Payroll Sales Division ....................    (49,668)       --          --
     Amounts transferred to assets of Businesses Held for Sale .....       --       (52,341)       --
                                                                       --------    --------    --------
      Balance as of December 31 ....................................   $113,726    $139,708    $310,117
                                                                       ========    ========    ========
</TABLE>

      As a part of the purchase  accounting  for the Company's  acquisitions,  a
present value of insurance in force 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 and 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.

      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 utilizing  expected future cash
flows.  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  amortization rates for insurance
products accounted for under SFAS No. 97, "Accounting and Reporting by Insurance
Enterprises  for Certain  Long-Duration  Contracts  and for  Realized  Gains and
Losses from Sales of Investments."  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 insurance in force, future amortization may
be adjusted.

                                       71
<PAGE>


      Information  related  to the  present  value of  insurance  in force is as
follows:
<TABLE>
<CAPTION>

                                                                       1999       1998       1997
                                                                     --------   --------   --------
   <S>                                                               <C>        <C>        <C>
   Balance as of January 1 ........................................  $170,729   $263,889   $339,010
   Addition due to acquisition, including $1,235 of unrealized loss      --       58,564       --

   Accretion of interest ..........................................    14,497      4,693     20,371
   Amortization ...................................................   (37,537)   (42,848)   (68,094)
   Transfer pursuant to reinsurance transaction ...................     5,144       --       (2,291)
   Impairment for Business Held for Sale ..........................      --      (98,164)      --
   Impairment related to recoverability analysis associated with
     subsequent sale of Payroll Sales Division ....................   (67,617)      --         --
   Unrealized investment (gain) loss adjustment ...................    34,550     14,025    (24,444)
   Foreign currency translation adjustment ........................      --         (333)      (663)
   Amounts transferred to assets of Businesses Held for Sale ......      --      (25,987)      --
   Reduction due to sale of block of business and other ...........      --       (3,110)      --
                                                                     --------   --------   --------
     Balance as of December 31 ....................................  $119,766   $170,729   $263,889
                                                                     ========   ========   ========
</TABLE>

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

                           Beginning      Gross       Accretion        Net
                            Balance   Amortization   of Interest   Amortization
                            -------   ------------   -----------   ------------

     2000 ..............   $119,766     $ 19,743      $  5,871      $ 13,872
     2001 ..............    105,894       16,799         5,162        11,637
     2002 ..............     94,257       14,583         4,519        10,064
     2003 ..............     84,193       12,751         3,943         8,808
     2004 ..............     75,385       11,031         3,441         7,590

(8) FUTURE POLICY BENEFITS

      The liability for future  policy  benefits  consists of reserves for fixed
benefit, life and accumulation products. For interest sensitive life and annuity
products,  the liability for future policy  benefits is equal to the accumulated
fund value.  Fund values are equal to the 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 and in accordance with policy terms.

      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 benefit  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 may
also be  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.

                                       72
<PAGE>


      The Company is continually  evaluating  actuarial  assumptions  associated
with interest  sensitive life insurance  contracts in which the determination of
policy  reserves is highly  sensitive to assumptions  such as withdrawal  rates,
investment earnings rates,  mortality rates, and premium persistency.  Currently
reflected in the Company's financial  statements are policy reserves and account
values  associated with such contracts,  which aggregated  approximately  $527.1
million and $525.4  million as of December 31, 1999 and 1998,  respectively.  If
developing trends were to continue,  principally the less than expected level of
the lapses currently associated with such interest sensitive blocks of business,
the Company would be required to record additional reserves or reduce intangible
assets,  which could have a material impact on the Company's  financial position
and results of  operations.  A decrease  of 1% in the  assumed  lapse rate would
increase  policy  reserves  associated  with  such  contracts  by $9.0  million.
Management is also assessing the potential impact of future management  actions,
which might mitigate the financial  impact of these trends.  Types of management
actions would likely  include,  but are not limited to, the  redetermination  of
non-guaranteed charges and/or benefits under the contracts,  asset segmentation,
and  reinsurance.  There are risks  associated with management  action including
potential  sales  disruption  and the threat of  litigation.  During  1999,  the
Company  modified  certain  assumptions  associated  with the blocks of business
including lowering the aggregate  expected lapse rate. In addition,  the Company
is pursuing a plan to continue  charging  certain  non-guaranteed  expense loads
associated with certain interest sensitive life insurance contracts. As a result
of the actions,  the Company  increased the amount of reserves  associated  with
these policies by approximately $6,200 during the fourth quarter of 1999.

      Total future policy  benefits  consist of the following as of December 31,
1999 and 1998:

                                                          1999         1998
                                                       ----------   ----------
     Future policy benefits on traditional products:
       Traditional life insurance contracts ........   $  736,931   $  670,321
       Health ......................................       13,629       10,824
       Unearned premiums ...........................        1,809          730
       Other policyholder funds ....................       73,411       69,247
                                                       ----------   ----------
                                                          825,780      751,122

     Interest sensitive products:
       Universal life ..............................    1,353,224    1,420,306
       Annuities ...................................      528,184      609,915
                                                       ----------   ----------
                                                        1,881,408    2,030,221

     Policy and contract claims:
       Health ......................................       13,231       13,073
       Life and other ..............................       36,538       25,245
                                                       ----------   ----------
        Total future policy benefits ...............   $2,756,957   $2,819,661
                                                       ==========   ==========

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

<TABLE>
<CAPTION>
                                                                  1999       1998       1997
                                                                --------   --------   --------

     <S>                                                        <C>        <C>        <C>
     Claim liability as of January 1 ........................   $ 14,463   $125,005   $130,392
       Less reinsurance recoverables ........................      1,390      5,848      2,242
                                                                --------   --------   --------
        Net balance as of January 1 .........................     13,073    119,157    128,150
                                                                --------   --------   --------

     Addition due to acquisition ............................       --       26,229       --
                                                                --------   --------   --------

     Add claims incurred during the year related to:
       Current year .........................................      8,125    116,170     60,727
       Prior years ..........................................      1,217     31,545      6,344
                                                                --------   --------   --------
        Total claims incurred ...............................      9,342    147,715     67,071
                                                                --------   --------   --------

     Less claims paid during the year related to:

       Current year .........................................      3,687     57,370     28,268
       Prior years ..........................................      5,497     65,736     47,796
                                                                --------   --------   --------
        Total claims paid ...................................      9,184    123,106     76,064
                                                                --------   --------   --------

     Less reduction for liabilities of Business Held for Sale       --      156,922       --

     Net balance as of December 31 ..........................     13,231     13,073    119,157
       Plus reinsurance recoverables ........................        678      1,390      5,848
                                                                --------   --------   --------
        Claim liability as of December 31 ...................   $ 13,909   $ 14,463   $125,005
                                                                ========   ========   ========
</TABLE>

      As a result of changes in estimates  of insured  events in prior years and
changes in methodology  (described  below),  the liability for health policy and
contract claims increased net of reinsurance by $1,217 in 1999,  $31,545 in 1998
and $6,344 in 1997.

                                       73
<PAGE>


      The  Company  closely  monitored  the  development  of its  claim  reserve
experience  associated with the Career Sales Division.  The historical method of
establishing claims reserves principally  utilized claims lag factors.  Based on
results  of  independent  calculations  of  the  claim  lag  factors,  performed
annually,  this  methodology  indicated a deterioration in the adequacy of claim
reserves  associated with Penn Life's  disability  income products  underwritten
prior to PennCorp's  ownership of Penn Life.  Disability claim adequacy analysis
included  statutory claim information,  independent  third-party review of claim
lag method and factors and other claim  tests.  Previous  results  indicated  no
reason to consider a new  methodology  as results  appeared  consistent  between
periods and claim  reserves  appeared  adequate.  Once results of such  analysis
began to vary outside an acceptable tolerance,  the Company reviewed its methods
to determine the reasons for the variances.

      The lag factor method (an actuarial  method to estimate  aggregate  claims
reserves  which  utilizes the ratio of actual  claims paid to what is ultimately
paid as a  function  of time  since  the date  incurred  based  upon  historical
experience) is one method which utilized Penn Life's experience  considering its
products and market.  The Company  believes  that  available  industry  data for
establishing  claim reserves was not  appropriate  for Penn Life's  products and
market.  The  utilization  of a case reserve method (which  estimates  aggregate
claims reserves based on the total estimates of all cases  outstanding) for Penn
Life required experience, in addition to that utilized by the lag factor method,
to create case reserves based on Penn Life's experience. This experience was not
sufficient until 1998. With system upgrades, Penn Life was able to obtain better
benefit data distinguishing disability benefits from other benefits which may be
payable  under the same policy form.  With the systems  upgrades and more robust
experience  the Company was able to consider a more refined  claims  methodology
such as seriatim case reserves (which estimates  aggregate claims reserves based
upon the sum of estimates for each individual unsettled case). During 1998, Penn
Life  implemented a method which  substituted  case reserves for most disability
claims. The new method utilizes more detailed  information by policy and by line
of business resulting in a more refined estimate.  As a result, the accident and
health claim reserve for Penn Life  increased by $25,691 during 1998. The effect
of the change in  methodology  is  inseparable  from the effect of the change in
accounting  estimate and is  accordingly  reflected in  operations  for the year
ended December 31, 1998.

(9) NOTES PAYABLE

      The  outstanding  principal  amounts of the notes  payable  consist of the
following as of December 31:
<TABLE>
<CAPTION>

                                                                1999       1998
                                                              --------   --------
     <S>                                                       <C>        <C>

     Unsecured 9 1/4% Senior Subordinated Notes due 2003(a)   $114,646   $114,646
     Bank Credit Facility maturing 2000(b) ................    165,000    434,000
     Other ................................................       --        2,277
                                                              --------   --------
                                                              $279,646   $550,923
                                                              ========   ========
</TABLE>

     --------------
     (a)  Interest  costs under the Unsecured 9 1/4% Senior  Subordinated  Notes
          due 2003 (the "Notes")  totaled  $10,605,  $10,622 and $11,461  during
          1999,  1998 and 1997,  respectively.  As of  December  31,  1999,  the
          effective rate for the Notes was approximately 9 1/4%.
     (b)  Interest costs under the $450,000  credit  facility  totaled  $25,523,
          $30,680 and $9,188 during 1999,  1998 and 1997.  The effective rate of
          interest as of December 31, 1999 was approximately 10.4%. In addition,
          the Company pays  facility  fees of $15 per month.  During  1997,  the
          Company  had a $175,000  bank  credit  facility  for which it incurred
          interest costs of $1,855.

      The aggregate  maturities  of notes payable  during each of the five years
after December 31, 1999, are as follows: 2000, $165,000; and 2003, $114,646.

      Covenants  and  Liquidity.  The Notes and the bank credit  agreement  (the
"Bank Credit  Facility")  impose  certain  covenants  on the Company,  including
covenants  restricting  the amount of  additional  indebtedness  the Company may
incur,  limit its ability to engage in future  acquisitions  and  certain  other
business  transactions,  and the amount of dividends the Company may declare and
pay (see Note 12),  and  requires  the Company to maintain  specified  financial
ratios and meet specified financial tests.

      On March 31,  April 30, May 14,  June 25 and June 30,  1999,  the  Company
entered into amendments (the "amendments") to its existing Bank Credit Facility.
The  amendments  included  additional  covenants and revised  certain  financial
covenants to the Bank Credit  Facility.  In addition,  the  amendments  changed,
among other things,  the maturity date of the Bank Credit  Facility to May 2000,
extensions of dates for cash sweeps,  principal  payments and certain  available
commitments.

                                       74
<PAGE>


      Significant  additional  covenants  included  in the March 31 and June 25,
1999  amendments  required the Company to repay  indebtedness at specified dates
and amounts  throughout  1999.  The timing and required debt  reduction  were as
follows:

                      Date                         Amount
                      ----                         ------

            Upon sale of Professional             $  40,000
         Upon sale of United Life Assets            127,000
               Upon sale of KIVEX                    22,000
       Upon sale of Career Sales Division            78,000

      The required  debt  reduction  of $40,000 was made on April 1, 1999,  with
proceeds  from the sale of  Professional,  and the  required  debt  reduction of
$127,000 was made on April 30, 1999,  with  proceeds from the sale of the United
Life  Assets.  Additional  debt  reduction of $22,000 was made on June 30, 1999,
upon the  completion of the sale of KIVEX.  The Company repaid the final $78,000
of debt reduction requirements on July 30, 1999, upon the completion of the sale
of the Career Sales  Division.  On September  23,  1999,  the Company  repaid an
additional $2,000 of indebtedness as a result of liquidity at the parent company
above amounts prescribed in the Bank Credit Facility, as amended.

      In  anticipation of the filing of the Chapter 11 case, the Company and the
lenders  party to the Bank  Credit  Facility  executed a  forbearance  agreement
("Forbearance  Agreement") whereby the lenders agreed to forbear from exercising
their  remedies  under  the Bank  Credit  Facility  as a result  of the event of
default that occurred under the Bank Credit Facility when the Company  commenced
the Chapter 11 case. In connection with the commencement of the Chapter 11 Case,
the Bank Credit Facility was superseded by a Cash Collateral  Agreement dated as
of February 8, 2000 (as amended, the "Cash Collateral Agreement"),  by and among
the  Company,  the lenders  from time to time party  thereto and The Bank of New
York,  as  administrative  agent.  The  Cash  Collateral  Agreement  provides  a
mechanism  for the Company to repay its  currently  outstanding  borrowings  and
establishes  certain  covenants  with which the Company must comply until all of
the Company's  outstanding  loans (plus  interest  thereon) are repaid.  Certain
covenants strictly define the Company's ability to utilize any and all cash that
is maintained  in the cash  collateral  account held by the agent  lender.  As a
result,  the Company may utilize cash from the cash collateral  account for only
predetermined  types of expenses and in specified amounts. On February 10, 2000,
the  Company,   the  lenders  party  thereto  and  The  Bank  of  New  York,  as
administrative  agent,  executed  Amendment No. 1 to Cash  Collateral  Agreement
("Amendment  No.  1"), in order to provide  for the  establishment  of a custody
account to provide for the  investment of the  Company's  funds which are in the
possession  of The Bank of New York  (and  over  which it has a lien)  through a
custody  account  maintained  at The Bank of New York,  all as  required  by the
Bankruptcy Court.

      Management  believes  the Company  will likely have  sufficient  financial
flexibility and projected  liquidity sources to meet all cash requirements until
the maturity of the cash collateral agreement on May 31, 2000. The Company is in
the  process  of a plan of  reorganization  which  was filed  with the  Delaware
Bankruptcy  Court on April 5, 2000  which  provides  for the  repayment  of such
indebtedness (see Note 23). With respect to current liquidity projections, there
can be no assurances  actual liquidity  sources will develop.  In the event of a
shortfall of actual liquidity  sources,  and as a result of the necessity of the
Company to establish a new credit facility,  the Company will explore options to
generate any necessary liquidity, such as: (i) the sale of subsidiaries and (ii)
obtaining  regulatory  approval for  extraordinary  dividends from its insurance
subsidiaries  (which is unlikely at the present time).  If the Company is unable
to obtain  sufficient  liquidity to meet its projected cash  requirements,  such
failure  could  result in a default on one or more  obligations  and the holders
thereof  would  be  entitled  to  exercise  certain   remedies,   including  the
acceleration  of the maturity of the entire  indebtedness  and commencing  legal
proceedings to collect the indebtedness. In such event, the Company will examine
and  consider the range of  available  alternatives  to the Company at that time
(see Notes 3 and 23).

      Extraordinary  Charges.  For the year ended December 31, 1998, the Company
realized  an  after-tax  extraordinary  charge of $1,671  which  represents  the
write-off of the deferred  financing costs associated with the refinance of a SW
Financial existing note that the Company assumed as a part of the acquisition of
SW Financial Controlling Interest.

(10) INCOME TAXES (BENEFITS)

      The  Company  and a  number  of  its  non-insurance  subsidiaries  file  a
consolidated  federal income tax return.  The life insurance  subsidiaries  file
federal  income  tax  returns  with  either  PLAIC,  or  Pioneer  Security,   or
Constitution  (sold July 30, 1999) as the parent of the particular  consolidated
life insurance company tax group.

                                       75
<PAGE>


      Total  income  taxes  (benefits)  were  allocated as follows for the years
ended December 31:
<TABLE>
<CAPTION>
                                                      1999      1998        1997
                                                    -------   --------    --------

     <S>                                            <C>       <C>         <C>
     Income (loss) before income taxes, equity in
      earnings of unconsolidated affiliates and
      extraordinary charge ......................   $28,709   $ (3,369)   $ 20,375
     Extraordinary charge .......................      --         (900)       --
                                                    -------   --------    --------
                                                    $28,709   $ (4,269)   $ 20,375
                                                    =======   ========    ========
</TABLE>

      The provisions  for income tax expense  (benefit)  attributable  to income
(loss) before income taxes, equity in earnings of unconsolidated  affiliates and
extraordinary charge are as follows for the years ended December 31:

                                        1999        1998        1997
                                      --------    --------    --------

     Current U.S. .................   $ (2,226)   $(12,031)   $  3,775
     Current foreign ..............      1,067         778       3,598
     Deferred U.S. ................     30,934      10,108      10,984
     Deferred foreign .............     (1,066)     (2,224)      2,018
                                      --------    --------    --------
       Income tax expense (benefit)   $ 28,709    $ (3,369)   $ 20,375
                                      ========    ========    ========

      Taxes  (benefits)  computed  using the federal  statutory  rate of 35% are
reconciled to the Company's actual income tax expense (benefit)  attributable to
income  (loss)  before  extraordinary  charge as  follows  for the  years  ended
December 31:
<TABLE>
<CAPTION>

                                                                              1999         1998         1997
                                                                           ---------    ---------    ---------
     <S>                                                                   <C>          <C>          <C>
     Tax expense (benefit) computed at statutory rate ..................   $ (60,201)   $(148,620)   $  18,040
     Dividends received deduction ......................................        (216)        (268)      (1,450)
     Amortization of costs in excess of net assets acquired ............       4,661        3,678        3,341
     Impairment of intangibles related to sale of Payroll Sales Division      33,432         --           --
     Impairment on assets held for sale ................................      20,292      116,886         --
     Change in valuation allowance .....................................      38,890       23,492         (525)
     Foreign taxes net of U.S. tax benefit .............................        --           (181)         263
     Sale of subsidiaries ..............................................     (13,360)        --           --
     Other .............................................................       5,211        1,644          706
                                                                           ---------    ---------    ---------
       Income tax expense (benefit) ....................................   $  28,709    $  (3,369)   $  20,375
                                                                           =========    =========    =========
</TABLE>


      Temporary differences between the financial statement carrying amounts and
tax bases of assets and  liabilities  that give rise to the  deferred tax assets
and liabilities relate to the following as of December 31:
<TABLE>
<CAPTION>

                                                                    1999                     1998
                                                          ------------------------   ----------------------
                                                           Deferred    Deferred      Deferred    Deferred
                                                             Tax          Tax          Tax          Tax
                                                            Assets     Liabilities    Assets    Liabilities
                                                          ---------    -----------   ---------  -----------
     <S>                                                  <C>          <C>         <C>          <C>
     Deferred policy acquisition costs ................   $    --      $  10,758     $    --    $  21,536
     Present value of insurance in force ..............        --         35,447          --       55,248
     Future policy benefits ...........................      92,164         --         106,212       --
     Net operating losses .............................      47,462         --          41,081       --
     Capital losses ...................................      41,428         --           2,630       --
     Unrealized gain/loss on investment securities ....      33,765         --            --       16,890

     Other ............................................      22,798         --          33,132       --
                                                          ---------    ---------     ---------  ---------
                                                            237,617       46,205       183,055     93,674
     Valuation allowance ..............................     (83,674)        --         (44,784       --
                                                          ---------    ---------     ---------  ---------
                                                          $ 153,943    $  46,205     $ 138,271  $  93,674
                                                          =========    =========     =========  =========
</TABLE>


                                       76
<PAGE>


      The  valuation  allowance  for deferred tax assets as of December 31, 1999
and 1998,  was $83,674 and  $44,784,  respectively.  The net change in the total
valuation  allowance  for the years ended  December  31,  1999 and 1998,  was an
increase  of  $38,890  and  $23,492,   respectively.   The  valuation  allowance
associated  with tax assets is continually  monitored by the Company in light of
the dramatic  changes in the operating  structure  and financial  results of the
Company.  As a result of such  analysis  the  Company  increased  the  valuation
allowances by $38,890 and $23,492 during 1999 and 1998, respectively. In each of
the periods, the valuation allowance was incurred as the result of the increased
likelihood  that certain net  operating  losses and capital  loss  carryforwards
would not be  utilized  and the  impact  or  potential  impact  of a "change  in
control" as defined by the Internal  Revenue Code Section 382. Change of control
provisions of Section 382 could limit the Company's  ability to utilize  certain
tax benefits including net operating loss carryforwards in future periods.

      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. Management believes it is
more likely than not that the Company  will  realize the  remaining  benefits of
these  deductible  differences,  net of the existing  valuation  allowance as of
December 31, 1999.

      As of December 31, 1999, a valuation  allowance  has not been  established
for the  deferred  tax  asset  relating  to the  unrealized  loss on  investment
securities.  Management believes that the recognition of these unrealized losses
can be  managed  through a tax  planning  strategy  of  holding  the  investment
securities to maturity or until market conditions improve.

      The Company's recording of impairment  provisions associated with the sale
of the Payroll Sales Division results in a reduction in deferred tax liabilities
of $41,050  during 1999  related to such  assets.  The  Company's  recording  of
impairment  provisions associated with the Businesses Held for Sale results in a
reduction in deferred  tax  liabilities  of $95,137  during 1998 related to such
assets.

      As of December 31, 1999, the Company has life  consolidated  net operating
loss  carryforwards of  approximately  $55,681 for tax return purposes which, if
not utilized,  will begin to expire in 2004.  The Company has life  consolidated
capital loss carryforwards of approximately $13,545 which, if not utilized, will
begin to  expire  in 2000.  In  addition,  Pioneer  Security  has  acquired  net
operating  loss  carryforwards  of  approximately  $8,693.  The  utilization  of
acquired  net  operating  loss  carryforwards  is limited in any one year to the
lesser of (i) the Pioneer Security life insurance group's  consolidated  taxable
income or (ii) OLIC's taxable income  computed on a separate  return basis.  The
acquired net operating loss carryforwards will begin to expire in 2003.

      As of  December  31,  1999,  the  Company has  non-life  consolidated  net
operating loss carryforwards of approximately $71,232 for tax purposes which, if
not utilized, will begin to expire in 2012. As of December 31, 1999, the Company
also has non-life  consolidated  capital  loss  carryforwards  of  approximately
$104,820 for tax purposes which, if not utilized, will expire in 2004.

      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. In addition, on February 7, 2000, the
Clinton  administration  released its Fiscal Year 2001 Budget  which  included a
revenue raising provision that would require life insurance companies to include
the balance of these special  deductions in income over a five year period as of
the beginning of the first taxable year starting after the date of enactment. At
this time,  it is  uncertain  whether  this  provision  will be  included in any
legislation proposed by Congress, and if included,  whether such provision would
be enacted into law. As it is not currently  considered  likely that a tax would
become due on any such  balances,  no deferred  income taxes have been provided.
However,  if such tax were to become payable,  it would amount to  approximately
$14,805.

                                       77
<PAGE>


(11) COMPUTATION OF EARNINGS (LOSS) PER SHARE

      The  following is a  reconciliation  of net income  (loss)  applicable  to
common stock as well as common stock used to compute basic and diluted  earnings
(loss) per share for the years ended December 31:

<TABLE>
<CAPTION>
                                                                     1999        1998         1997
                                                                  ---------    ---------    ---------
<S>                                                               <C>          <C>          <C>
Reconciliation of net income (loss) applicable to common stock:
Basic net income (loss) applicable to common stock:
   Net income (loss) applicable to common stock before
     extraordinary charge .....................................   $(218,537)   $(439,532)   $  30,607
   Redemption of Series C Preferred Stock .....................        --         (1,913)        --
                                                                  ---------    ---------    ---------
                                                                   (218,537)    (441,445)      30,607
      Extraordinary charge ....................................        --         (1,671)        --
                                                                  ---------    ---------    ---------
                                                                  $(218,537)   $(443,116)   $  30,607
                                                                  =========    =========    =========

Diluted net income (loss) applicable to common stock:
   Net income (loss) applicable to common stock before
     extraordinary charge .....................................   $(218,537)   $(439,532)   $  30,607
   Redemption of Series C Preferred Stock .....................        --         (1,913)        --
                                                                  ---------    ---------    ---------
                                                                   (218,537)    (441,445)      30,607
      Extraordinary charge ....................................        --         (1,671)        --
                                                                  ---------    ---------    ---------
                                                                  $(218,537)   $(443,116)   $  30,607
                                                                  =========    =========    =========
<CAPTION>


                                                                     1999      1998       1997
                                                                   -------    -------    -------
<S>                                                                 <C>        <C>        <C>
Common stock used to compute basic and diluted earnings (loss)
  per share:
Basic:
   Shares outstanding beginning of period ......................    30,072     28,860     28,648
   Incremental shares applicable to Stock Warrants/Stock Options        68        374        143
   Acquisition of the Fickes and Stone Knightsbridge Interests .       173        346       --
   Redemption of Series C Preferred Stock ......................      --          521       --
   Treasury shares .............................................      (959)    (1,010)      (775)
                                                                   -------    -------    -------
                                                                    29,354     29,091     28,016
                                                                   =======    =======    =======
Diluted:
   Shares outstanding beginning of period ......................    30,072     28,860     28,648
   Incremental shares applicable to Stock Warrants/Stock Options        68        374        772

   Acquisition of the Fickes and Stone Knightsbridge Interests .       173        346       --
   Redemption of Series C Preferred Stock ......................      --          521       --
   Treasury shares .............................................      (959)    (1,010)      (775)
                                                                   -------    -------    -------
                                                                    29,354     29,091     28,645
                                                                   =======    =======    =======
</TABLE>

(12) COMMON AND PREFERRED STOCK

      At December 31, 1999 the Company had 100,000,000  shares of $.01 par value
common stock authorized and 30,143,416 shares issued and outstanding. The common
stock has no preemptive or other subscription rights and there are no conversion
rights, redemption or sinking fund provisions with respect to such shares.

      A portion of the consideration for the acquisition of the Fickes and Stone
Knightsbridge  Interests  included  173,160 shares of the Company's Common Stock
due each of  Messrs.  Fickes  and  Stone on April 15,  2001.  As a result of the
acquisition,  common  stock and  additional  paid in  capital  increased  $3 and
$8,497,  respectively,  for the year ended December 31, 1998.  Common shares due
Mr. Stone were issued during 1998.

      During the year ended December 31, 1999, the Company issued 188,235 shares
of  treasury  stock to the  Chairman  of the Board of  Directors  as a part of a
special bonus award.  The result was to decrease  additional paid in capital and
treasury  shares by $1,447 and $1,562,  respectively.  In addition,  the Company
recorded compensation expense of $115.

                                       78
<PAGE>


      During 1999,  the Company  issued 71,072 shares to certain  members of the
Board of Directors  as  compensation.  During the year ended  December 31, 1998,
certain employees exercised stock options and warrants resulting in the issuance
of 616,572  shares of the Company's  Common Stock.  The result of such exercises
was to increase  common stock and  additional  paid in capital by $2 and $2,014,
respectively.

      During the year  ended  December  31,  1998,  83,260  stock  options  were
exercised and issued to certain employees as discounted  restricted common stock
of the Company  with  vesting  periods of three and four years.  During the year
ended December 31, 1998, the Company recognized $2,751 of deferred compensation,
associated with the issuance of this common stock.  For the years ended December
31, 1999 and 1998,  the Company  recognized  $180 and $2,267,  respectively,  of
compensation  expense.  As  of  December  31,  1999,  the  balance  of  deferred
compensation was $304 and was recorded as a reduction to shareholders' equity.

      Associated with the  restructuring  and the consolidation of all corporate
functions into the Company's  Dallas location,  certain  employees were severed.
For the year ended December 31, 1998, notes  receivable  secured by 7,500 shares
of common stock were discharged and 9,051 and 88,280 shares of common stock were
abandoned as a result of the severance during 1999 and 1998,  respectively.  The
result was to increase treasury stock, and decrease notes receivable  secured by
common  stock,  $261.  During  1999,  the Company  reversed  previously  accrued
interest on notes receivable secured by common stock totaling $146.

      The  Company  has  issued   2,875,000   shares  of  $50  redemption  value
(liquidation preference,  $50 plus accrued and unpaid dividends) $3.50 Series II
Convertible  Preferred Stock (the "Series II Convertible  Preferred Stock"). 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.  As of December 31, 1999,  the
estimated fair value of the Series II Convertible  Preferred  Stock,  based upon
market-maker quotes, was $35,765 or $12.44 per share.

      The  Company  has  issued   2,300,000   shares  of  $50  redemption  value
(liquidation   preference,   $50  plus  accrued  and  unpaid  dividends)  $3.375
Convertible Preferred Stock (the "Convertible Preferred Stock"). 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.  As of December 31, 1999, the estimated fair value
of the Convertible Preferred Stock, based upon active market quotes, was $27,600
or $12 per share.

      As of  December  31,  1999 and 1998,  the  cumulative  accrued  and unpaid
dividends  on the $3.375  Convertible  Preferred  Stock  amounted to $11,321 and
$3,558,  respectively.  As of December 31, 1999 and 1998, the cumulative accrued
and unpaid  dividends  on the $3.50  Convertible  Preferred  Stock  amounted  to
$14,255 and $4,193, respectively.

      The  Company  suspended  the  payment of cash  dividends  during the third
quarter of 1998 on its outstanding  $3.375  Convertible  Preferred Stock,  $3.50
Series II Convertible  Preferred Stock and Common Stock. Under the amended terms
of the Company's  Bank Credit  Facility the Company may not pay dividends on its
Common Stock or  Preferred  Stock  issues.  Under the terms of the two series of
convertible  preferred  stock,  if  dividends  are in  arrears  for  six or more
quarterly  dividend  periods  (whether or not  consecutive),  the holders of the
convertible  preferred stock,  voting as a single class,  will have the right to
elect  two  directors  of the  Company.  In  addition,  for as long as there are
dividend  arrearages on the  convertible  preferred  stock,  the Company will be
prohibited from paying dividends on the Common Stock or purchasing, redeeming or
otherwise acquiring Common Stock.

      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 Security Life purchase  price.  The Series B Preferred  Stock and
the Series C Preferred Stock were  mandatorily  redeemable on or before June 30,
1997 and June 30, 1998,  respectively.  On March 15, 1997, the Company  redeemed
all of the  previously  outstanding  Series  B  preferred  stock  at its  stated
redemption value of $14,705.  Effective March 31, 1998, the Company redeemed all
of the outstanding Series C Preferred Stock into 691,528 shares of the Company's
Common Stock under  provisions of the Series C Preferred  Stock  certificate  of
designation.  The result of such  redemption  was to increase  common  stock and
additional  paid in capital by $7 and $22,220,  respectively,  as well as reduce
retained earnings by $1,913  reflecting the difference  between the reported and
redemption amounts of the Series C Preferred Stock. Such difference is reflected
in both the basic and diluted earnings per share  calculation for the year ended
December 31, 1998.

(13) STOCK OPTIONS AND WARRANTS

                                       79
<PAGE>


      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 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  warrant 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  agreements  effective  July 1998,  the  Company  issued to the
Chairman of the Board of Directors  as well as the three senior  officers of the
Company, an aggregate of 1,550,000 stock appreciation rights at $3.88 per share.
The stock  appreciation  rights provide  compensation  to each  individual in an
amount  equal to the excess of the fair value of each stock  appreciation  right
over  the fair  value of each  stock  appreciation  right at the date of  grant.
Compensation, if any, is payable in either shares of common stock of the Company
or cash, at the election of the  recipient.  As of December 31, 1999,  there has
been no compensation  expense accrued  associated with these stock  appreciation
rights.

      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 and as such no  compensation  is
recorded.

      The Company had  established in 1995 a U.S. Sales Manager  incentive stock
option plan in which the senior  sales  manager of one of the  Company's  former
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 vested 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 and as such no compensation
expense is recorded.

      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>

                                                        1999                    1998                   1997
                                               --------------------    --------------------    -------------------
<S>                                            <C>          <C>        <C>          <C>        <C>         <C>
Number of shares subject to option/warrant:
  Outstanding at beginning of year ........    3,429,477    $ 24.70    3,344,477    $ 21.73    1,984,049   $ 11.56
  Granted .................................         --      $  --      1,244,072    $ 29.93    1,565,500   $ 32.34
  Expired/cancelled .......................     (895,717)   $ 28.81     (542,500)   $ 30.11      (46,303)  $ 11.41
  Exercised ...............................         --      $  --       (616,572)   $ 14.36     (158,769)  $  7.97
                                               ---------    -------    ---------    -------    ---------   -------
   Outstanding at end of year .............    2,533,760    $ 22.40    3,429,477    $ 24.70    3,344,477   $ 21.73
                                               =========               =========               =========

Exercisable at end of year ................    2,369,006    $ 21.71    2,649,446    $ 22.47    2,037,067   $ 15.38
                                               =========               =========               =========

Available for future grant at end of year .    1,550,937                 726,292               1,488,460
                                               =========               =========               =========
</TABLE>


      The following  table  summarizes  information  concerning  outstanding and
exercisable options and warrants as of December 31, 1999:
<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>
$ 4.00 - $ 4.00        570,760              0.64                $ 4.00           570,760          $ 4.00
$15.00 - $23.50        505,000              2.65                $16.75           505,000          $16.75
$27.25 - $38.40      1,458,000              1.11                $31.56         1,293,246          $31.46
                     ---------                                                 ---------
                     2,533,760                                                 2,369,006
                     =========                                                 =========
</TABLE>


                                       80
<PAGE>


      As allowed under the provisions of SFAS No. 123, the Company  utilizes APB
Opinion No. 25 and related  Interpretations  in accounting  for its stock option
and warrant plans and, accordingly,  does not recognize  compensation cost based
on fair value as a component of net income  applicable to common  stock.  If the
Company had elected to  recognize  compensation  cost based on the fair value of
the  options  and  warrants  as of  the  grant  date,  estimated  utilizing  the
Black-Scholes  multiple  options  approach  prescribed  by  SFAS  No.  123,  the
Company's  net income  (loss)  applicable  to common  stock as well as  earnings
(loss) per share would have been reduced by the pro forma  amounts  indicated in
the following table:
<TABLE>
<CAPTION>

                                                                       1999         1998         1997
                                                                    ---------    ---------    ---------
<S>                                                                 <C>          <C>          <C>
Reconciliation of net income (loss) applicable to common stock:
Basic net income (loss) applicable to common stock:
  Net income (loss) applicable to common stock before
   extraordinary charge (as reported) ...........................   $(218,537)   $(439,532)   $  30,607
     Redemption of Series C Preferred Stock .....................        --         (1,913)        --
                                                                    ---------    ---------    ---------
                                                                     (218,537)    (441,445)   30,607
     Extraordinary charge .......................................        --         (1,671)        --
                                                                    ---------    ---------    ---------
      Net income (loss) applicable to common
        stock (as reported) .....................................    (218,537)    (443,116)      30,607
     Pro forma compensation expense, net of tax benefits ........      (2,269)     (10,836)     (10,229)
                                                                    ---------    ---------    ---------
      Net income (loss) applicable to common stock (pro forma) ..   $(220,806)   $(453,952)   $  20,378
                                                                    =========    =========    =========

Diluted net income (loss) applicable to common stock:
  Net income (loss) applicable to common stock before
    extraordinary charge (as reported) ..........................   $(218,537)   $(439,532)   $  30,607
     Redemption of Series C Preferred Stock .....................        --         (1,913)        --
                                                                    ---------    ---------    ---------
                                                                     (218,537)    (441,445)      30,607
     Common stock equivalents:
      Convertible preferred stock dividend requirements .........        --           --           --
                                                                    ---------    ---------    ---------
                                                                     (218,537)    (441,445)      30,607
     Extraordinary charge .......................................        --         (1,671)        --
                                                                    ---------    ---------    ---------
      Net income (loss) applicable to common
        stock (as reported) .....................................    (218,537)    (443,116)      30,607
     Pro forma compensation expense, net of tax benefits ........      (2,269)     (10,836)     (10,229)
                                                                    ---------    ---------    ---------

      Net income (loss) applicable to common stock (pro forma) ..   $(220,806)   $(453,952)   $  20,378
                                                                    =========    =========    =========

Per share information:
Basic net income (loss) applicable to common stock:
  Net income (loss) applicable to common stock before
   extraordinary charge (as reported) ...........................   $   (7.44)   $  (15.17)   $    1.09
    Extraordinary charge .......................................        --           (0.06)       --
                                                                    ---------    ---------    ---------
      Net income (loss) applicable to common
        stock (as reported) .....................................       (7.44)      (15.23)        1.09
     Pro forma compensation expense .............................       (0.08)       (0.37)       (0.37)
                                                                    ---------    ---------    ---------
      Net income (loss) applicable to common stock (pro forma) ..   $   (7.52)   $  (15.60)   $    0.72
                                                                    =========    =========    =========

Common shares used in computing basic earnings (loss) per share .      29,354       29,091       28,016
                                                                    =========    =========    =========

Diluted net income (loss) applicable to common stock:
  Net income (loss) applicable to common stock before
   extraordinary charge (as reported) ...........................   $   (7.44)   $  (15.17)   $    1.07
     Extraordinary charge .......................................        --          (0.06)       --
                                                                    ---------    ---------    ---------
      Net income (loss) applicable to common
        stock (as reported) .....................................       (7.44)      (15.23)        1.07
     Pro forma compensation expense .............................       (0.08)       (0.37)       (0.36)
                                                                    ---------    ---------    ---------
      Net income (loss) applicable to common stock (pro forma) ..   $   (7.52)   $  (15.60)   $    0.71
                                                                    =========    =========    =========

Common shares used in computing diluted earnings (loss) per share      29,354       29,091       28,645
                                                                    =========    =========    =========
</TABLE>

                                       81
<PAGE>


      The fair value of each option and warrant  grant used to determine the pro
forma amounts  indicated in the previous table is estimated on the date of grant
using the following weighted average assumptions for 1999, 1998 and 1997:

                                                    1999     1998      1997
                                                   ------   ------    ------

 Weighted average risk-free interest rate.....      -- %      6.06%     6.34%
 Weighted average dividend yields.............      -- %       -- %      -- %
 Volatility factors...........................      --        0.83       .61
 Weighted average expected life (years).......      --        1.90      4.50
 Weighted average fair value per share........  $   --     $ 15.02   $ 15.67

      The  Black-Scholes  option  valuation  model  was  developed  for  use  in
estimating the fair value of traded options having no vesting  restrictions  and
are fully transferable.  In addition,  option valuation models require the input
of highly subjective  assumptions including the expected stock price volatility.
As  employee  stock  options and  warrants  have  characteristics  significantly
different  from those of traded  options,  and  because  changes  in  subjective
assumptions  can  materially  affect the fair value  estimate,  in  management's
opinion,  the existing  models do not provide a reliable  single  measure of the
fair value of employee stock options and warrants.  As SFAS No. 123 is effective
only for  awards  granted  after  January  1,  1995,  the pro forma  disclosures
provided above may not be  representative  of the effects on reported net income
for future years.

(14) 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,  Constitution  (sold  July 30,  1999) and
Pioneer  Security  (collectively,  the "Surplus  Note  Companies").  The surplus
debentures issued by PLAIC and Constitution were paid in full in connection with
the  consummation of the sale of the Career Sales  Division.  In connection with
the  acquisition  of  Southwestern  Life from SW  Financial  which was part of a
subsidiary realignment,  PLAIC issued a new surplus debenture to SW Financial in
the amount of $150,000. With respect to Constitution, Pioneer Security and PLAIC
(as a result of its surplus  debenture  issued as of July 30, 1999), the surplus
debenture  payments  have  been  made  to  non-insurance   intermediate  holding
companies  and paid to the  Company  in the form of  dividends  and tax  sharing
payments.  The amounts outstanding under the surplus debentures totaled $258,335
and  $453,118 as of  December  31, 1999 and 1998,  respectively.  These  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 quarterly.

      Statutes  in  Texas,  the  domiciliary  state of the  Company's  insurance
subsidiaries  owned at December 31,  1999,  restrict the payment of dividends by
insurance  companies  to the  available  surplus  funds  derived  from their net
profits.  The maximum  amount of cash  dividends  that may be  declared  without
regulatory  approval  in any  twelve-month  period is the greater of ten percent
(10%) of the insurer's  statutory surplus, as shown by its last annual statement
on file with the Texas Department of Insurance, or one hundred percent (100%) of
statutory  net  gain  from  operations  for the  preceding  year.  In  addition,
dividends  may  only  be  paid  from  earned  surplus.   After  considering  the
extraordinary  dividends of $21,897 paid on January 31, 2000,  Southwestern Life
and Security Life, the Company's principal insurance subsidiaries (excluding the
Payroll Sales Division which was sold on February 4, 2000),  will be able to pay
$2,244 in dividends in 2000 to PLAIC, without prior regulatory approval.

      Statutory capital and surplus of the Company's life insurance subsidiaries
as reported to  regulatory  authorities  at December 31, 1999 and 1998,  totaled
$253,435  and  $399,766,  respectively.  Statutory  net  income  (loss)  of  the
Company's  life  insurance  subsidiaries  as reported to regulatory  authorities
totaled  $116,134,  ($44,563) and $18,776 for the years ended December 31, 1999,
1998 and 1997,  respectively.  The 1999  statutory net income  included gains on
sales of  subsidiaries  totaling  $127,435.  Surplus  note  interest  expense of
$34,599,  $40,531 and $34,758 for the years ended  December 31,  1999,  1998 and
1997, respectively, is included in statutory net income (loss).

      In December 1992, the NAIC adopted the RBC 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,  neither  the Model Act or
similar legislation or regulation has been adopted by Texas.

                                       82
<PAGE>


      The Company's insurance  subsidiaries are required,  at least annually, to
perform cash flow and "Asset Adequacy  Analysis"  under differing  interest rate
scenarios.  At December 31, 1999 and 1998,  Southwestern  Life failed certain of
those cash flow testing  scenarios.  As a result,  Southwestern Life performed a
series of  expanded  tests.  Based  upon the  results of these  expanded  tests,
Southwestern  Life has determined  that additional  statutory  reserves were not
needed at December 31, 1999 or 1998. Factors that may require  Southwestern Life
to establish  additional statutory reserves in future periods include changes in
interest rates, timing of the emergence of insurance profits, persistency of the
insurance  in force,  sales or  reinsurance  of blocks of insurance in force and
mortality  experience.  Management  actions that may mitigate the need for these
additional  reserves may include but are not limited to, new profitable business
being  added to the  insurance  in force,  reinsurance  or actions  that  impact
persistency,  mortality experience, interest spreads and costs to administer the
insurance in force.  Southwestern  Life  monitors  these factors to determine if
additional statutory reserves will be required.

      Calculations  using the NAIC formula and the life insurance  subsidiaries'
statutory  financial  statements as of December 31, 1999,  indicate that each of
the  insurance   subsidiaries'   capital   exceeded  Company  Action  Level  RBC
requirements.

(15) RETIREMENT AND PROFIT SHARING PLANS

      During 1998, the Company implemented SFAS No. 132, "Employer's Disclosures
about Pensions and Other  Postretirement  Benefits."  This  accounting  standard
revised  the  disclosure  requirements  for  pensions  and other  postretirement
benefit  plans,  but does not  change the  measurement  or  financial  statement
recognition of such plans.

      On October 1, 1990, the Company established the PennCorp  Financial,  Inc.
Retirement  and  Savings  Plan,  a defined  contribution  retirement  plan,  for
eligible  employees.  This plan and the Marketing One Incorporated 401(k) Profit
Sharing Plan merged with the Southwestern Financial Services Corporation Savings
Investment  Plan effective  January 1, 1998 and the name of the plan was changed
to the PennCorp Financial Group, Inc. Retirement and Savings Plan ("the PennCorp
Plan").  Employees are eligible to  participate  in the plan after six months of
employment  in which they are credited  with 500 hours of service.  Participants
may  contribute  from 1 to 15% of pre-tax  compensation  and/or from 1 to 10% of
after tax compensation.  Each subsidiary  participating in the plan matches each
pay-period,  50% of pre-tax contributions up to 6% of compensation.  If approved
by the Board of  Directors,  each  subsidiary  may make a  discretionary  profit
sharing contribution  annually on behalf of employees eligible to participate in
the  plan  based  on  their  compensation  for the  prior  plan  year.  Employee
contributions are fully vested at all times. The employer matching contributions
made for  employees  who  participated  in the PennCorp Plan prior to January 1,
1998 vest at the rate of 50% per calendar year of service. The employer matching
contributions  made for all other  participants  and the employer  discretionary
contribution vests at the rate of 20% per year of service.  All participants are
fully vested at death,  disability  or  attainment of age 65. The assets of each
account are  invested at the  direction  of the  participant.  Eleven funds with
various investment  objectives are available to the participants.  Distributions
are normally  made in a lump sum.  Participants  of the  PennCorp  Plan prior to
January 1, 1998 may elect to receive  an  annuity in various  forms of  payment.
Expenses  related to this plan for years ended December 31, 1999,  1998 and 1997
amounted  to  $1,468,  $3,341 and  $1,483.  During  1999 and 1998,  the sales of
Businesses  Held  for  Sale  and   restructuring   constituted  a  partial  plan
termination of the PennCorp Plan. As a result, terminated employees became fully
vested.

      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  achievement  of
specified operating objectives and the performance of eligible participants. The
Company recognized  expense of $1,875,  $3,390 and $1,417 under this plan during
the years ended December 31, 1999, 1998 and 1997, respectively.

      In May 1998, the three senior  executives of the Company  entered into two
year  employment  agreements  with the Company which have various  annual bonus,
deferred  payment and  termination  provisions.  As of December  31,  1999,  the
Company had accrued liabilities aggregating $1,800 for the annual 1999 bonus and
$8,252 for deferred compensation provisions,  respectively associated with these
employment agreements. The deferred compensation provisions are payable upon the
earliest  of:  expiration  of  the  employment  agreement;  termination  of  the
executive by the Company  without  cause;  or  termination  by the executive for
"good reason" as defined in the employment agreements (see Note 23).

      The Company and certain of its subsidiaries provide certain postretirement
benefits to eligible  retirees.  The plans provide  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  postretirement  benefits is  unfunded.  Following is an

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<PAGE>


analysis of the  accumulated  benefit  obligation  and the liability for accrued
postretirement benefits for the year ended December 31, 1999 and 1998:

                                                         1999      1998
                                                        ------    ------
        Benefit obligation at beginning of year......  $26,602   $10,380
        Service cost.................................      283       184
        Interest cost................................    1,384     1,533
        Plan participants' contributions.............      238       364
        Actuarial (gain) loss........................   (2,826)    1,975
        Acquisition/sale.............................   (4,717)   14,827
        Benefit paid.................................   (2,342)   (2,661)
                                                       -------   -------
         Benefit obligation at end of year...........  $18,622   $26,602
                                                       =======   =======

      The liability  for accrued  benefit  obligation  includes the following at
December 31, 1999 and 1998:

                                                         1999      1998
                                                        ------    ------
        Accumulated benefit obligation...............  $18,622   $26,602
        Unrecognized prior service cost..............      108       162
        Unrecognized transition obligation...........   (2,029)   (5,185)
        Unrecognized actuarial loss..................    4,290       827
                                                       -------   -------
         Benefit obligation at end of year...........  $20,991   $22,406
                                                       =======   =======

      At December 31, 1998, the accumulated benefit obligation and the liability
for accrued  postretirement  benefits  included  $4,717 and $933,  respectively,
related to Businesses Held for Sale.

      Components of net periodic benefit cost include the following for the year
ended December 31, 1999 and 1998:

                                                        1999      1998
                                                       ------    ------
        Service cost................................. $   229   $   130
        Interest cost................................   1,407     1,533
        Amortization of transition obligation........     158       657
        Recognized net actuarial loss................    (125)     (108)
                                                      -------   -------
         Net periodic benefit cost................... $ 1,669   $ 2,212
                                                      =======   =======

      For measurement  purposes, an annual rate increase ranging from 5.5% to 7%
in the health care cost trend rate was assumed for 1999; the rate was assumed to
decrease  gradually to 4% by year 2015 and remain at that level thereafter.  The
weighted   average   discount   rates  used  in  determining   the   accumulated
postretirement benefit obligation ranged from 6.5% to 7.5%. The health care cost
trend rate  assumption  has a  significant  effect on the  amounts  reported.  A
one-percentage-point  change in assumed  health care cost trend rates would have
the following effects:

                                                             One         One
                                                          Percentage  Percentage
                                                             Point       Point
                                                           Increase    Decrease
                                                          ----------  ----------

Effect on total of service and interest cost components..   $   160    $  (142)
Effect on postretirement benefit obligation..............     1,014       (917)

(16) ASSETS AND LIABILITIES OF BUSINESSES HELD FOR SALE

      As a result of the  Company's  announcement  of its  decision  to sell the
Career Sales Division,  KIVEX,  Professional and the United Life Assets within a
period not likely to exceed one year,  the assets and  liabilities of the Career
Sales Division,  KIVEX, Professional and the United Life Assets were reported as

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<PAGE>

"Assets of Businesses  Held for Sale" and  "Liabilities  of Businesses  Held for
Sale" at December 31, 1998 in the accompanying  consolidated  balance sheet (see
Note 3). The assets and  liabilities of Businesses Held for Sale at December 31,
1998 were as follows:

            Invested assets..............................  $1,842,749
            Insurance assets.............................     329,950
            Other assets.................................     244,884
                                                           ----------
              Total assets...............................  $2,417,583
                                                           ==========

            Insurance liabilities........................  $1,853,163
            Other liabilities............................     210,149
                                                           ----------
              Total liabilities..........................  $2,063,312
                                                           ==========

      During  1999  and  1998  the  Company   recorded   impairment   provisions
aggregating $58,486 and $342,960, respectively,  associated with Businesses Held
for Sale. The Company  recorded an impairment  provision in order to reflect the
difference in the Company's accounting basis in the Businesses Held for Sale and
the fair value of the consideration  that the Company would be likely to receive
for such businesses.

      The fair  value of the  consideration  likely  to be  received  was  based
primarily  upon  the  terms  of  definitive  sales  agreements.  The  impairment
provisions  recorded  in 1999 for the  Career  Sales  Division  resulted  from a
renegotiation  of the purchase and sell  agreement  which included a decrease in
the nominal  purchase  consideration of $38,000 which was partially offset by an
estimated discount to the stated value of the note to be received.  In addition,
impairment provision included the impact of the true-up of statutory capital and
surplus of the Career Sales Division  companies to levels  specified in the sale
agreement  which  aggregated   approximately  $24,218.  Other  factors  modestly
impacting  the  impairment  provision  included  additional  transaction  costs,
changes  in  unrealized  gains  and  losses  of  securities,   foreign  currency
translation  and  net  income  not  considered  in  the  determination  of  sale
consideration.  The Company realized a foreign currency  transaction loss on the
sale of the Career Sales Division totaling $24,978, which represented previously
unrealized  translation losses on the Company's  Canadian insurance  operations,
partially offset by a gain of $3,126 on the disposition  resulting in a net loss
of $21,852.

      The Company impaired costs in excess of net assets acquired for the Career
Sales  Division,  Professional  and the United Life Assets in 1998 by  $100,138,
$3,263 and $11,113,  respectively.  To the extent that the impairment  provision
exceeded the balance of costs in excess of net assets  acquired  associated with
each company to be disposed,  additional  impairment was  necessary,  as was the
case for the Career Sales Division,  the Company reduced other intangible assets
in  accordance  with APB No. 17. As a result,  the Company  fully  impaired  the
present  value of  insurance  in force and  deferred  policy  acquisition  costs
resulting  in charges  of $98,164  and  $191,595,  respectively,  net of related
deferred  taxes of $95,137.  Additionally,  the Company  established a liability
aggregating  $33,824 for the  remaining  impairment  as a result of all monetary
assets of the Career Sales Division being recorded at fair value.

      As of July 30, 1999, sales of all of the Businesses Held for Sale had been
completed.  During the three months ended June 30, 1999,  the Company  concluded
that it would retain, and shut down over time,  certain remaining  operations of
Marketing One. The related financial  statement  accounts of Marketing One which
included assets and liabilities of $4,221 and $3,242, respectively,  at December
31, 1998 have been reclassified out of Assets and Liabilities of Businesses Held
for Sale.

(17) PRO FORMA FINANCIAL INFORMATION

      The following unaudited selected pro forma financial  information has been
prepared  to  illustrate  the pro forma  effects of the sales of  Payroll  Sales
Division  (sold  February 4, 2000) (see Notes 3 and 23),  Career Sales  Division
(sold July 30, 1999),  KIVEX (sold June 30, 1999),  the United Life Assets (sold
April  30,  1999)  and  Professional  (sold  March  31,  1999) . The  pro  forma
statements  of  operations  for the years ended  December 31, 1999 and 1998 give
effect to such sales as if they had occurred on January 1, 1998.  The  unaudited
selected pro forma  financial  information  has been  prepared  for  comparative
purposes  only and does not purport to be indicative of what would have occurred
had such  purchases  and sales been made as of January 1, 1998, or results which
may occur in the future.

                                       85
<PAGE>


                                                                   (Unaudited)
                                                                    ---------
                                                     As Reported    Pro Forma
                                                         1999         1999
                                                     -----------    ---------
                                                      (In thousands, except
                                                        per share amounts)

      Total revenues................................. $  636,640   $  318,467
      Loss before extraordinary charge...............   (200,712)     (72,144)
      Loss before extraordinary charge applicable
         to common stock.............................   (218,537)     (89,969)
      Per share information:
        Net loss before extraordinary charge
         applicable to common stock-basic........... $     (7.44)  $    (3.06)
        Net loss before extraordinary charge
         applicable to common stock-diluted.........       (7.44)       (3.06)

                                                                    (Unaudited)
                                                                     ---------
                                                      As Reported    Pro Forma
                                                          1998         1998
                                                      -----------    ---------
                                                       (In thousands, except
                                                         per share amounts)

      Total revenues.................................   $ 879,995    $ 340,498
      Income (loss) before extraordinary charge......    (421,259)     (70,282)
      Income (loss) before extraordinary charge
        applicable to common stock...................    (439,532)     (88,555)
      Per share information:
        Net income (loss) before extraordinary
          charge applicable to common stock-basic....   $  (15.17)   $   (3.04)
        Net income (loss) before extraordinary charge
           applicable to common stock-diluted.........     (15.17)       (3.04)

(18) RELATED PARTY TRANSACTIONS

      Related party transactions described herein include those transactions not
included elsewhere in the Notes to Consolidated Financial Statements.

      Southwestern  Life owns 66,555  shares of  redeemable  preferred  stock of
Portsmouth Financial Group, Inc.  ("Portsmouth") with a carrying value of $5,063
as of  December  31,  1999 as of  December  31,  1999.  Portsmouth  underwrites,
acquires  and  ultimately  receives the benefits  payable  under life  insurance
contacts covering  individuals facing terminal  illnesses.  Portsmouth's  common
equity was owned by KB Fund and its  affiliates  and certain  former and current
executive officers of the Company.

      As of  December  31, 1999 and 1998,  the  Company had  invested a total of
$13,462 and $12,641,  respectively,  in transactions  sponsored by Wand Partners
L.L.C.  ("Wand  Partners")  in which a  director  of the  Company  is a managing
member. The Company has committed to invest up to an additional $7,038 in future
transactions sponsored by Wand Partners.

      During 1999,  1998 and 1997,  the Company's  insurance  subsidiaries  paid
management and commitment fees aggregating $488, $718 and $444, respectively, to
investment funds managed by a former member of the Board of Directors.

      On September 1, 1997,  the Company,  through its  insurance  subsidiaries,
purchased $25,000 of ACO Acquisition Corp.  (subsequently re-named Acordia, Inc.
("Acordia")  subordinated  indebtedness and the Company purchased $20,000 of ACO
Brokerage  Holdings  Corporation  ("ACO"),  an affiliate  of Acordia,  preferred
stock. The Acordia  subordinated notes pay interest on a current basis at 12.5%,
per annum,  payable in semi-annual  installments.  Acordia was 28.6% owned by KB
Investment  Fund I, LP  (formerly  Knightsbridge  Capital Fund I, L.P.) (the "KB
Fund").  PennCorp received fees aggregating  $1,100 in 1997 from Acordia for its
underwriting and  participation  in the  subordinated  notes and preferred stock
offering.  Knightsbridge  Management,  L.L.C.  ("KM") received  sponsor fees and
other fees aggregating  $1,714 in 1997 from Acordia for its role in consummating
the  Acordia  acquisition.  During 1998 the  Company  liquidated  its common and
preferred  stock holdings in ACO.  Total proceeds  received from the sale of the

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<PAGE>

preferred  and common  stock  aggregated  $30,500.  The Company had acquired the
common stock  interest in January 1998 for $5,000 as part of the  Company's  and
the KB Fund investment in ACO.

      For the year ended  December 31, 1997 (prior to the purchase of the Fickes
and Stone  Knightsbridge  Interests in January  1998),  PennCorp paid or accrued
$2,385  in  transaction  fees  and  expenses  to KM  related  to the  Washington
National, United Life and SW Financial transactions,  respectively. During 1997,
certain of the Company's  affiliates and subsidiaries paid management fees to KM
amounting  to $5,325.  SW  Financial  and United  Life  incurred  KM  investment
advisory fees totaling $4,358 during 1997.

      During 1997,  payments  aggregating $250 were made for actuarial  services
provided in  connection  with the Company's  acquisition  activity to a company,
whose chairman is a shareholder and director of the Company.

(19) 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 $2,769,
$5,299 and $ 5,178 in 1999, 1998 and 1997, respectively.

      Minimum lease  commitments  for the Businesses  Owned at December 31, 1999
are:

            2000.........................................  $ 2,724
            2001.........................................    2,576
            2002.........................................    2,568
            2003.........................................    2,376
            2004.........................................    2,242
            2005 and thereafter..........................    6,118
                                                           -------
               Total minimum payments required...........  $18,604
                                                           =======

      During the third quarter of 1998, the first of ten class-action complaints
was filed in the United States  District Court for the Southern  District of New
York ("District Court") against the Company and certain of its current or former
directors and officers.

      During a pre-trial  conference on November 9, 1998,  all parties agreed to
the  consolidation of all of the actions and the Court appointed lead plaintiffs
on behalf of shareholders and noteholders. The Court also approved the selection
of three law firms as  co-lead  counsel  for  shareholders  and  noteholders.  A
consolidated  and  amended  complaint  was filed on January  22,  1999.  A First
Consolidated Amended Class Action Complaint naming, as defendants,  the Company,
David J. Stone,  formerly a director and Chairman and Chief  Executive  Officer,
and Steven W. Fickes,  formerly a director  and  President  and Chief  Financial
Officer was filed on March 15, 1999 (the "Complaint").

      The Complaint alleges that defendants violated the Securities Exchange Act
of 1934. Among other things, plaintiffs claim that defendants issued a series of
materially false and misleading  statements and omitted material facts regarding
the Company's financial condition, including the value of certain of its assets,
and failed to timely disclose that it was under  investigation by the Securities
and Exchange Commission (the "SEC").

      Plaintiffs  seek to recover  damages in  unspecified  amounts on behalf of
themselves and all other purchasers of the Company's common stock and purchasers
of the  Company's  subordinated  notes  during the period of  February  8, 1996,
through November 16, 1998.

      During a conference on March 19, 1999,  defendants sought and were granted
permission to file, and  subsequently  filed, a motion to dismiss the Complaint.
Although  there are no  assurances  that the motion to dismiss  will be granted,
management believes that there are meritorious  defenses to the action that were
raised in connection with the motion, including whether the Complaint adequately
pleads  scienter  (i.e.,  intent to  defraud)  as  required  under  the  Private
Securities Litigation Reform Act of 1995.

      The Company has notified its primary and excess  carriers of directors and
officers  liability  insurance  of the  existence of the claims set forth in the
Complaint, and the total potential insurance available is $15,000 of primary and
$10,000 of excess coverage,  respectively,  for securities  claims.  The primary
insurance  coverage  requires  the Company to bear 25% of: (i) all  expenses and
(ii) any losses in excess of a $1,000 retention  amount.  The primary and excess

                                       87

<PAGE>

carriers have reserved  their rights under the policies with respect to coverage
of the  claims set forth in the  Complaint.  As  explained  below,  the  primary
insurer has agreed in principle to contribute to a settlement of the litigation.

       Following  settlement   discussions  with  the  Plaintiffs'  counsel  and
representatives of the primary insurance carrier and their counsel,  the parties
to the Complaint  entered into a Memorandum of Understanding  dated November 11,
1999 (the "Memo") containing the essential terms of a settlement.

      The Memo  states that $9,000 of cash plus  interest  accruing  through the
date  of  consummation  of the  settlement,  will be  paid  in  full  and  final
settlement of all claims set forth in the Complaint (the "Settlement").  Of that
sum,  $1,500 plus  interest will be paid by the Company and $7,500 plus interest
will be paid by the Company's outside directors and officers liability insurance
carrier.  The Settlement is conditioned  upon, among other things,  confirmatory
discovery, execution of a definitive settlement agreement and related documents,
notice to the Company's shareholders of the Settlement and final approval by the
United States  District Court (with all time to appeal such approval  having run
or any  appeals  having been  resolved in favor of approval of the  Settlement).
During the three  months ended  December  31, 1999,  the Company paid the $1,500
liability related to the settlement to an escrow account.

      The Company  expects that this  litigation  will not affect its ability to
operate through 2000. While it is not feasible to predict or determine the final
outcome of these  proceedings  or to estimate the amounts or potential  range of
loss with respect to these matters,  management  believes that if the Settlement
is not  consummated  and  there  is an  adverse  outcome  with  respect  to such
proceedings,  it would have a material  adverse impact on the Company and affect
its ability to operate as is currently intended.

      In May 1998, the North  Carolina  Attorney  General's  Office (the "NCAG")
initiated an inquiry  concerning  certain life insurance  products  historically
sold by Security  Life and  representations  allegedly  made by Security  Life's
agents and officers  with respect to not charging  insurance  charges  after the
eighth policy year for  non-smoker  insureds.  The NCAG  indicated that Security
Life may be estopped to change its current  practice of not charging the cost of
the insurance for non-smoking  policyholders because of certain  representations
made by agents and officers of Security  Life.  Although  Security  Life has not
charged the cost of insurance  charges for non-smoker  policyholders who reached
their  ninth  policy  year,  this  practice  is not  guaranteed  under  the life
insurance contracts. The contracts specifically allow Security Life the right to
change the cost of insurance  rates in accordance  with the parameters set forth
in the insurance contracts. Security Life has responded to the NCAG's inquiry by
denying that it is estopped from  changing the cost of insurance  rates based on
the alleged representations, and continuing to reserve its contractual rights to
charge the cost of insurance  rates in accordance  with the parameters set forth
in the insurance  contracts.  In June 1998, the NCAG informed Security Life that
it could not  adjudicate  this matter and left it mutually  unresolved.  In June
1999, the North Carolina  Department of Insurance  ("NCDOI") asked Security Life
about the status of its  current  practice  of not  charging  cost of  insurance
charges after the eighth  contract year for  non-smokers on these same insurance
products  and  requested  to be informed if  Security  Life  changes its current
practice.  Security Life has responded to the NCDOI's  inquiry by verifying that
no  decision  has been made to date to change  such  current  practice  and such
practice has not changed;  and affirming that the NCDOI would be notified in the
event this  current  practice  changes.  The Company has  initiated  an exchange
program which enables policyholders of such life insurance products to terminate
their policies and, in exchange for the termination of the original policy and a
release,   obtain  either  (i)  the  refund  of  all  premiums  paid  and  other
consideration  or (ii)  another  Security  Life  product.  On  November 5, 1999,
Security  Life was served  with an  Original  Petition  filed in state  court in
Dallas County,  Texas,  asserting a class action  concerning such policies.  The
petition  alleges  that  Security  Life has waived  the right to charge  cost of
insurance  charges  after the eighth  year on such  non-smoker  policies  and to
increase cost of insurance charges on such smoker policies. The petition alleges
Security  Life made  these  waivers  through  its  marketing  pieces  and signed
statements by its officers.  The petition also alleges that not all of the facts
were outlined in the Company's  communication to its policyholders outlining the
exchange  program and therefore  alleges  Security  Life's  exchange  program is
deceptive.  The petition asks for declaratory  judgment concerning the rights of
the  Plaintiffs,  and  the  class  of  policyholders  of such  policies  and for
attorney's  fees.  It, among other  things,  asks for an  injunction  to prevent
Security  Life from  charging  cost of  insurance  charges  for such  non-smoker
policies or increasing  cost of insurance  charges on such smoker policies after
the eighth  contract year. It also asks the Court to rule the releases signed by
such  policyholders  under the  exchange  program be declared  null and void and
those  policyholders  who signed the releases be given the option of reinstating
the prior  policies.  Security Life denies the  allegations  in the petition and
intends to vigorously defend this lawsuit. The trial court in which this case is
pending has granted class  certification in at least one other lawsuit involving
similar types of claims.  There can be no assurances  that the exchange  program
will be  successful  or that the Company will resolve these matters on such life
insurance  products  on a  satisfactory  basis,  or at  all,  or that  any  such
resolution would not have a material  adverse effect on the Company's  financial
condition, results of operations or cash flows.

                                       88

<PAGE>

      On July 30, 1998,  the SEC  notified  the Company that it had  commenced a
formal  investigation  into possible  violations of the federal  securities laws
including  matters  relating  to the  Company's  restatement  of  its  financial
statements  for the first six months of 1997,  and for the years ended  December
31, 1994,  1995 and 1996. The Company and its  management are fully  cooperating
with the SEC in its investigation.

      The  Company  is a party to various  other  pending  or  threatened  legal
actions  arising  in the  ordinary  course of  business,  some of which  include
allegations of insufficient  policy  illustration 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.

      The life insurance  subsidiaries of the Company 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 in  accordance  with
Statement of Position  97-3 issued by the AICPA,  "Accounting  by Insurance  and
Other Enterprises for  Insurance-Related  Assessments." The Company periodically
evaluates  the  accruals  for  future  assessments  net of  future  premium  tax
reductions at its life insurance subsidiaries.  During 1999, the Company reduced
the accrual  approximately  $3,500 as a result of completing  its  evaluation of
third party guaranty fund assessment data on a corporate-wide  basis,  including
the impact of the dispositions of the Businesses Held for Sale.

      Many computer and software  programs were designed to accommodate only two
digit  fields to  represent a given year (e.g.  "98"  represents  1998).  It was
highly likely that such systems  could not have been able to accurately  process
data  containing date  information for the year 2000 and beyond.  The Company is
highly reliant upon computer  systems and software as are many of the businesses
with  which  the  Company  interacts.  The  Company's  ability  to  service  its
policyholders  and agents is  dependent  upon  accurate  and timely  transaction
processing.  Transaction  processing  in turn is  dependent  upon the  Company's
highly complex interdependent  computer hardware,  software,  telecommunications
and desktop  applications.  The  inability of the Company or any of its integral
business  partners to complete year 2000  remediation  efforts  associated  with
these highly complex and interdependent  systems could have led to a significant
business interruption.  Such an interruption could have resulted in a decline in
current and long-term profitability and business franchise value.

      The  Company's  overall  year 2000  compliance  initiatives,  included the
following components:  (i) assessment of all business critical systems (business
critical  systems includes  computer and other systems),  processes and external
interfaces and dependancies;  (ii) remediation or upgrading of business critical
systems;  (iii)  testing  of  both  modified  and  updated  systems  as  well as
integrated systems testing; (iv) implementation of modified and updated systems;
and (v) contingency  planning. As a part of the process, the Company has written
letters and corresponded with its outside vendors and critical business partners
concerning year 2000 compliance efforts and has followed up periodically.

      The Company engaged  outside  vendors and focused certain  employees' full
time  efforts  to help in the  full  array  of its year  2000  initiative.  This
included  systems  assessment and monitoring  advice,  actual code  remediation,
communication  and consultation  with critical  business partners and additional
data center and testing  resources.  The Company  originally  projected to incur
internal and external costs associated with such expertise  ranging from $10,600
to $14,500,  which were  anticipated  to be incurred  primarily  during 1998 and
early 1999. The Company actually  incurred internal and external costs of $8,000
million during 1999. The Company estimates it has incurred internal and external
costs  aggregating  $13,400 and $1,900  million for the years ended December 31,
1998 and 1997, respectively.

      Since December 31, 1999 the Company has not  experienced  any  significant
disruption in the Company's business,  or an increase in the cost of the Company
doing business related to the year 2000 issue.

      The  Company  provided  certain  representations  and  warranties  to each
respective  purchaser  of the  businesses  sold with  respect  to each  entity's
ability  to process  date-sensitive  information  for the year 2000 and  beyond.
Although the Company believes that it is in compliance with, and is not aware of
any  breach of the year 2000  representations  and  warranties  provided  to the
respective  purchasers,  there  can be no  assurances  that  the  Company  is in
compliance with all such representations and warranties. A breach by the Company
of  such   representations   and  warranties  could  result  in  indemnification
obligations owed by the Company to the purchasers.

      Each of the  definitive  purchase  and sale  agreements  the  Company  has
consummated for  Professional,  the United Life Assets,  KIVEX, the Career Sales
Division and the Payroll  Sales  Division,  contain  indemnification  provisions

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<PAGE>

which survive the closing of each sales transaction for varying periods of time.
The  indemnification  provisions  would be invoked by the purchasers  should the
Company be found in breach of certain  representation and warranty provisions or
upon the  occurrence  of  specified  events  contained  in the purchase and sale
agreements.  The Company has purchased representations and warranty insurance to
cover  potential  indemnification  claims  arising under each of the  definitive
purchase  and  sale  agreements  in an  aggregate  amount  of  $20,000  for  all
indemnification claims.

      At December 31, 1999, the Company's insurance subsidiaries had outstanding
commitments  to invest up to $10,185 in various  limited  partnership  funds and
other investments.

      As of  December  31,  1999,  the  Company  sold  substantially  all of the
mortgages  originally  held by United Life but retained by the Company as a part
of the  Sale  of the  United  Life  Assets.  The  Company  may be  obligated  to
repurchase  certain of the mortgages  sold.  The amount of mortgages the Company
may be required to repurchase is not expected to exceed approximately $1,600. At
December 31, 1999,  the Company has  established a $1,200  liability  related to
these contingencies.

      In addition, the Company has been notified by ING that it disputes certain
federal income tax calculations under the provisions of the related purchase and
sale  agreement.  Under the provisions of the purchase and sale agreement ING is
to provide the Company with  preliminary tax returns in order for the Company to
evaluate any potential differential in tax amounts between closing and the final
return  preparation.  To date ING has not provided such  preliminary tax returns
and hence the  Company has not been able to fully  evaluate  the merits of ING's
claim.  At December 31, 1999, the Company has  established a liability of $1,151
related to this contingency.

      At December 31, 1999, the Company had a contingent obligation for mortgage
loans previously sold aggregating  $4,884 as a result of the Company acting as a
servicing conduit.

(20) 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.  The Company
cedes varying amounts of certain accident and sickness  policies up to a maximum
cession  of $800,  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:

                                                    1999       1998      1997
                                                  -------    -------    -------
  Direct policy revenues and amounts assessed
    against policyholders......................  $423,030   $586,317   $375,538
  Reinsurance assumed..........................     2,492      6,018      2,527
  Reinsurance ceded............................   (86,648)  (133,177)   (32,499)
                                                 --------   --------    -------
    Net premiums and amounts earned............  $338,874   $459,158   $345,566
                                                 ========   ========   ========

   Policyholder benefits ceded.................. $ 70,397   $109,079    $33,612
                                                 ========   ========   ========

      Fees incurred for financial reinsurance were approximately $372, $675, and
$145 during 1999, 1998 and 1997, respectively.

(21) RESTRUCTURING AND OTHER COSTS

      The Company has developed  restructuring  plans to realign or  consolidate
certain  operations  resulting in restructuring  costs incurred during 1999, the
fourth quarter of 1998, the first quarter of 1998 and 1997.

                                       90

<PAGE>


1999 Plan

      As a  result  of the sale of the  United  Life  Assets  along  with  other
non-core operations,  the Company announced a restructuring plan in June 1999 to
significantly reduce its Dallas-based staff and vacate certain office space. The
Company  incurred  restructuring  costs  aggregating  $5,307 for the nine months
ended September 30, 1999 associated with such restructuring.

      The following  reflects the impact of activity for the year ended December
31, 1999 on the restructuring accrual balances under the 1999 Plan:

<TABLE>
<CAPTION>
                                                                   Paid or
                                                                   Charged                 Balance at
                                                      1999         Against                December 31,
                                                    Provision     Liability   Adjustments     1999
                                                    ---------     ---------   -----------  -----------

<S>                                                 <C>             <C>          <C>          <C>
  Severance and related benefits.................   $  3,185        $  (663)     $  (148)     $ 2,374
  Estimated holding costs of vacated facilities..      2,122            --            --        2,122
                                                    --------        -------      -------      -------
                                                    $  5,307        $  (663)     $  (148)     $ 4,496
                                                    ========        =======      =======      =======
</TABLE>

      The 1999 plan provided for the  termination of 50 employees  consisting of
divisional  management  and  staff in Dallas  over a nine  month  period.  As of
December 31, 1999, the Company had paid and charged $663 against the accrual for
severance and related benefits for 32 terminated employees. Substantially all of
the remaining terminations will occur by March 31, 2000.

      The  1999  plan  also  provided  for  vacating  additional  floors  of the
Company's  Dallas  leased  offices.   The  restructuring   provision  of  $2,122
represented  the  estimated net present value of the rent on the office space to
be vacated net of the  estimated  sublease  rental  income to be received by the
Company.

4th Quarter 1998 Plan

      In the fourth quarter of 1998, the Company  recorded  restructuring  costs
aggregating  approximately  $9,274 as a result of the decision to consolidate or
merge  substantially  all of the Company's  corporate  functions into the Dallas
infrastructure.

      The following reflects the impact of activity for the years ended December
31, 1999 on the restructuring accrual balances under the 4th Quarter 1998 Plan:

<TABLE>
<CAPTION>

                                                      1998 Activities                       1999 Activities
                                                   ---------------------                ----------------------
                                                   Paid or                               Paid or
                                                   Charged                 Balance at    Charged                 Balance at
                                          1998     Against                December 31,   Against                December 31,
                                       Provision  Liability  Adjustments     1998       Liability  Adjustments      1999
                                       ---------  ---------  -----------  ------------  ---------  -----------  ------------

<S>                                      <C>       <C>         <C>           <C>         <C>         <C>           <C>
Severance and related benefits.......    $6,259    $(3,985)    $   --        $ 2,274     $(1,396)    $  189        $ 1,067
Estimated holding costs of
   vacated facilities................     2,954     (2,954)        --            --           --        --             --
Estimated contract terminations
   costs.............................        61        (29)        --             32         (40)         8            --
                                         ------    -------     ------        -------     -------     ------        -------
                                         $9,274    $(6,968)    $   --        $ 2,306     $(1,436)    $  197        $ 1,067
                                         ======    =======     ======        =======     =======     ======        =======
</TABLE>

      The fourth quarter 1998 plan provided for the  termination of 43 employees
including substantially all of the executive and administrative employees in the
Company's Bethesda and New York offices, based on the Company's decision to shut
down the Bethesda and New York offices by May 31, 1999. Substantially all of the
severance has been paid with the exception of one former executive officer whose
severance is to be paid  monthly  through  April 2001.  The Company had incurred
costs of $1,396 and $3,985  which were charged  against the accrual  during 1999
and 1998, respectively, for terminated employees.

      The fourth quarter 1998 plan recognized  abandoned  leasehold  improvement
costs in connection  with the Company's  plan to sublease or vacate the New York
offices.  The Company expensed $2,954  principally as a result of abandoning the
New York leased property.

                                       91

<PAGE>


1st Quarter 1998 Plan

      On January 2,  1998,  and  January  5,  1998,  respectively,  the  Company
acquired  the SW  Financial  Controlling  Interest  and  the  Fickes  and  Stone
Knightsbridge  Interest.  The  acquisition  allowed the Company to complete  its
divisional  restructuring which began in 1997. As a result, the Company incurred
restructuring  costs  aggregating  approximately  $11,767  for  the  year  ended
December 31, 1998, associated with the divisional restructuring.

      The following reflects the impact of activity for the years ended December
31, 1999 and 1998 on the  restructuring  accrual  balances under the 1st Quarter
1998 Plan:

<TABLE>
<CAPTION>

                                                      1998 Activities                       1999 Activities
                                                   ---------------------                ----------------------
                                                   Paid or                               Paid or
                                                   Charged                 Balance at    Charged                 Balance at
                                          1998     Against                December 31,   Against                December 31,
                                       Provision  Liability  Adjustments     1998       Liability  Adjustments      1999
                                       ---------  ---------  -----------  ------------  ---------  -----------  ------------

<S>                                      <C>       <C>         <C>           <C>         <C>         <C>           <C>
Severance and related benefits.......    $3,831    $(4,417)   $ 1,205        $  619      $ (297)      $ (322)      $  --
Estimated holding costs of
  vacated facilities................      2,205        --         --          2,205        (350)         (41)       1,814
Write-off of certain fixed assets...      1,131       (831)      (300)          --          --           --           --
Estimated contract terminations
  costs.............................      4,600     (3,247)    (1,353)          --          --           --           --
                                        -------    -------     ------        ------      ------       ------       ------
                                        $11,767    $(8,495)    $ (448)       $2,824      $ (647)      $ (363)      $1,814
                                        =======    =======     ======        ======      ======       ======       ======
</TABLE>

      Approximately  120  and 39  people,  respectively,  were  estimated  to be
terminated,  as a result of the  decision to transfer  all  operations  of Union
Bankers to Raleigh and  transfer  operations  of United Life from Baton Rouge to
Dallas. In addition,  the Company also restructured certain of the operations in
Raleigh.  Certain  employees  in the  areas of  customer  services,  information
technology,  actuarial,  legal, human resources and other  policyholder  service
areas,  totaling 54 people were  considered  for  termination  under the Raleigh
portion of the  restructuring  plan.  The  Company  recognized  severance  costs
totaling  $3,831.  The Company  charged  $297 and $4,417  against the  severance
accrual  during  1999 and  1998,  respectively,  as the  result  of  termination
payments.  In addition,  during 1999 and 1998 the Company adjusted the severance
accrual in the amount of $322 and $405, respectively,  due to the Company paying
less severance costs as a result of natural  attrition and other factors such as
inter-company  transfers of employees.  During 1998,  the Company also increased
the severance  accrual by $1,610 as a result of the decision to terminate all 54
of Security Life's Raleigh-based employees.

      The first quarter 1998  restructuring  plan provided for vacating  certain
Dallas office space. In connection with the plan, the Company recorded estimated
holding costs of vacated  facilities of $2,205 which represented the net present
value  of the  rent on the  office  space  to be  vacated  net of the  estimated
sublease  rent to be  received.  During 1999,  the Company  charged $350 of rent
expense on vacated office space against the accrual.

      The  first  quarter  1998  plan  also  recognized  impairment  of  certain
furniture,  fixture and data processing equipment totaling $1,131 which had been
utilized in the office  space to be vacated.  The Company  charged  $831 of such
assets against the accrual during 1998.

      As  part  of the  first  quarter  1998  restructuring  plan,  the  Company
terminated  an  information  technology  outsourcing  agreement.   The  original
contract  termination  fee  was  $4,600.  As a  result  of an  amendment  to the
termination agreement,  the Company exited the agreement for a payment of $3,247
and the remaining accrual was adjusted during 1998.

1997 Plan

      The Company has experienced  significant  changes in the past three years.
As a result of  integration of acquired  businesses and material  changes to the
Company's operating platform,  the Company began a strategic business evaluation
in the third quarter of 1996.  The review  resulted in the Company  establishing
three divisional  platforms,  Career Sales Division,  Payroll Sales Division and
Financial Services Division.

      As a result, the Company began to realign its existing operating companies
and incurred  restructuring costs aggregating  approximately  $19,071 during the
year ended  December  31,  1997,  directly and  indirectly  associated  with the
initial divisional restructuring which had no future economic benefit.

                                       92

<PAGE>


      The following reflects the impact of activity for the years ended December
31, 1997 and 1998 on the restructuring accrual balances under the 1997 plan:
<TABLE>
<CAPTION>

                                                      1997 Activities                       1998 Activities
                                                   ---------------------                ----------------------
                                                   Paid or                               Paid or
                                                   Charged                 Balance at    Charged                 Balance at
                                          1997     Against                December 31,   Against                December 31,
                                       Provision  Liability  Adjustments     1997       Liability  Adjustments      1998
                                       ---------  ---------  -----------  ------------  ---------  -----------  ------------
<S>                                      <C>      <C>         <C>           <C>         <C>          <C>          <C>
Severance and related benefits .......   $ 5,355  $ (2,411)   $ (1,008)     $ 1,936     $   --       $(1,936)     $    --
Estimated holding costs of
  vacated facilities .................     6,166    (1,916)       --          4,250         (841)     (3,409)          --
Write-off of certain fixed assets ....     1,526      (332)       (847)         347         --          (347)          --
Estimated contract termination
   costs .............................        24      --          --             24         --           (24)          --
Investment in foreign operations .....     6,000    (5,555)       (445)         --          --           --            --
                                         -------   --------    -------      -------     --------     -------        -------
                                         $19,071   $(10,214)   $(2,300)     $ 6,557     $   (841)    $(5,716)       $  --
                                         =======   ========    =======      =======     ========     =======        =======
</TABLE>

      The 1997 plan provided for the termination of approximately  269 employees
in  the  Company's   Raleigh   offices  and  certain   foreign   operations  and
substantially  all of the employees of the Company's Waco  operations,  totaling
114. The 1997 plan anticipated a significant consolidation of operations into an
affiliate's  Dallas offices over a twelve month period. As of December 31, 1997,
the Company had charged  $2,411  against the accrual for  severance  and related
benefits.  The Company adjusted the remaining severance accrual by $1,008 during
1997 due to natural  attrition  thus  reducing the level of  severance  required
coupled  with the  decision  to retain  certain  employees  indefinitely.  As of
December 31, 1997,  the severance  accrual was $1,936 which was adjusted  during
1998 as a result of the decision not to merge the Company's Waco operations into
Dallas.

      The plan also  provided  for  vacating of certain  leased  facilities  and
abandoning  certain  Company owned real estate.  The Company  accrued $6,166 for
holding and abandonment costs associated with these facilities. During 1997, the
Company  charged  $1,916 to such accrued lease costs.  During 1998,  the Company
further  charged  $841 to the  accrued  costs.  As of  December  31,  1998,  the
remaining  accrual was no longer necessary as a result of the decision to retain
the Waco operating platform.

      In addition, the 1997 plan recognized the impairment of certain furniture,
fixture and data  processing  equipment of $1,526 as a result of the decision to
abandon certain Company owned and leased  facilities.  During 1998 and 1997, the
Company charged off furniture,  fixtures and data processing  equipment totaling
$-- and $332,  respectively,  and adjusted the original impairment  provision by
$347 and $847, respectively.

      Contract termination costs provided in the 1997 plan were adjusted to zero
during 1998 as a result of the ultimate  settlement of certain contracts without
penalty.

      Restructuring  charges in the 1997 plan also  included a $6,000  provision
for the write-off of the Company's  investment  in certain  foreign  operations,
principally  Argentina.  In 1997, the Company disposed of the foreign operations
at a costs of $5,555 and the balance of $445 was adjusted to zero.

Other Costs

      The Company  did not incur  incremental  costs  during  1999.  The Company
incurred  approximately  $6,296  and  $4,652 of pre-tax  period  costs  ("period
costs") associated with the corporate restructuring for the years ended December
31,  1998 and 1997,  respectively.  Such  costs are  included  in the  Company's
Consolidated  Statements  of  Operations  and  Comprehensive  Income  (Loss)  as
underwriting and other administrative expenses.

      On August 30,  1997,  the merger  agreement  between  Washington  National
Corporation  ("Washington  National")  and the Company  terminated.  The Company
incurred  legal,  accounting  and financial  advisory fees  associated  with the
merger.  In  addition,  the Company had began to provide  certain  resources  to
Washington  National  including  personnel to perform policy  administration and
claims  processing  function on  Washington  National's  behalf.  The  aggregate
advisory  and  administrative  costs  incurred by the  Company  during 1997 were
$7,646.

                                       93
<PAGE>


(22) FINANCIAL INSTRUMENTS

      The  following  is a summary of the  carrying  value and fair value of the
Company's financial instruments at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
                                                                1999                  1998
                                                      ----------------------  ----------------------
                                                       Carrying      Fair      Carrying       Fair
                                                         Value       Value       Value       Value
                                                      ----------  ----------  ----------  ----------
<S>                                                   <C>         <C>         <C>         <C>
Assets:
  Cash and cash equivalents ........................  $  141,636  $  141,636  $   92,727  $   92,727
  Fixed maturities .................................   2,363,690   2,363,690   2,589,714   2,589,714
  Equity securities ................................       2,008       2,008       2,035       2,035
  Mortgage loans ...................................      20,032      20,285      36,882      38,865
  Policy loans .....................................     197,287     197,287     207,490     207,490
  Other investments ................................      26,570      26,570      27,406      27,406
  Accounts and notes receivable ....................      11,935      11,935      14,319      14,319
Liabilities:
  Notes payable ....................................     279,646     262,441     550,923     497,039
  Universal life and investment contract liabilities   1,881,408   1,650,444   2,063,823   1,756,762
</TABLE>

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

      Cash and Cash  Equivalents,  Accounts and Notes  Receivable:  The carrying
      value  approximates  their fair value due to the  short-term  maturity  of
      these instruments.

      Fixed Maturities Available for Sale and Equity Securities: The 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 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 Loans:  The fair values 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.

      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.

      Other  Investments:   Other  investments   consist  primarily  of  limited
      partnerships  and  joint  ventures.   These  are  evaluated  periodically.
      Carrying  value   represents   the   underlying   equity  of  the  limited
      partnerships  or joint  ventures  of their  cost which  approximates  fair
      value.

      Notes Payable: The carrying value for outstanding notes payable other than
      the senior  subordinated  notes  approximates the fair value as they carry
      variable  interest  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.

      Universal  Life and  Investment  Contract  Liabilities:  The fair  value
      of accumulation products approximates their cash surrender value.

(23) SUBSEQUENT EVENTS

      On January 10, 2000, the Company  announced that it had agreed to sell its
Payroll Sales Division to a company formed by Thoma Cressey Equity  Partners for
approximately $102,000 subject to certain adjustments.  On February 4, 2000, the
Company  consummated the sale of the Payroll Sales Division for cash proceeds of
approximately  $103,000.  The Company used $100,000 of the proceeds to repay the
Bank  Credit  Facility.  As a result  of the sale,  the  Company  recognized  an
impairment loss of $95,522 which was recognized in the financial  statements for
the year ended December 31, 1999.

                                       94
<PAGE>


      Also on January 10, 2000, the Company announced that it had agreed to sell
its  Financial  Services  Division to Reassure  America Life  Insurance  Company
("Reassure  America"),  a  subsidiary  of Swiss  Reinsurance  Company  of Zurich
("Swiss Re"), for $260,000 subject to certain  adjustments,  and accomplish such
transaction  through the filing of a voluntary petition for relief under Chapter
11  ("Chapter  11") of  title  11 of the  United  States  Bankruptcy  Code  (the
"Bankruptcy Code").

      On  February 7, 2000 (the  "Petition  Date"),  PennCorp  filed a voluntary
petition for relief under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy  Court for the District of Delaware (the "Bankruptcy  Court").  Since
the Petition  Date,  PennCorp has continued to operate and manage its assets and
business as a debtor in possession as authorized by provisions of the Bankruptcy
Code.

      On February 28, 2000 the  Bankruptcy  Court  issued an order  scheduling a
hearing to  consider  approval  of the sale  agreement  with  Reassure  America,
subject to higher or better  offers,  and  establishing  the  procedures for the
submission of competing offers ("Sales Procedure Order").

      On March 15, 2000,  the Company  received a competing bid in the form of a
recapitalization  plan submitted by Inverness/Phoenix  Capital LLC ("Inverness")
and Vicuna Advisors, LLC ("Vicuna") on behalf of the unofficial ad hoc committee
of preferred  stockholders,  and Mr. Bernard Rapoport  ("Rapoport") and Mr. John
Sharpe  ("Sharpe")  ("Recapitalization  Plan").  On March 23, 2000 the Company's
Board of Directors  selected  the  Recapitalization  Plan as the final  accepted
offer pursuant to the bidding procedures approved as part of the Sales Procedure
Order. On March 24, 2000, the Bankruptcy  Court approved the Board of Director's
selection of the Recapitalization Plan.

      The  proposed   Recapitalization   Plan   provides   that  the   preferred
stockholders  will receive one share of common stock of the reorganized  company
for each share of  outstanding  preferred  stock.  In  addition,  the  preferred
stockholders  will  have an  opportunity,  pursuant  to a  rights  offering,  to
purchase .3787 shares of common stock of the reorganized  company for each share
of  outstanding  preferred  stock owned at a purchase price of $12.50 per share.
Inverness  and Vicuna have issued a standby  commitment  letter to the  Company,
committing  $24,500  to fully  underwrite  the  rights  offering.  In  addition,
Rapoport  and Sharpe  have  committed  to purchase  equity in the  recapitalized
company amounting to $20,000 and $3,000,  respectively.  The standby  commitment
letter and the Rapoport and Sharpe investment are subject to certain conditions.

      Under the  Recapitalization  Plan,  all existing  shares of the  Company's
common stock will be cancelled for no value,  and the Company's  existing senior
and  subordinated  debt, with principal  aggregating  approximately  $179,646 at
March  31,  2000,  will be paid in full in cash.  Any and all other  claims  and
liabilities of the Company will be paid in accordance with their terms.

      Consummation  of the  recapitalization  transaction  is subject to certain
conditions including regulatory approvals,  the consummation of a $95,000 credit
facility,  the consummation of a proposed  transaction whereby Southwestern Life
and Security Life will reinsure  substantially  all of their  existing  deferred
annuity  blocks  of  business,   an  order  confirming  the  Company's  plan  of
reorganization that incorporates the proposed recapitalization transaction shall
have been entered by the  Bankruptcy  Court and such order shall be unstayed and
in full force and effect, and the closing of the recapitalization shall occur no
later than December 31, 2000. The definitive  agreements for the credit facility
and  the  reinsurance   transaction  will  contain  conditions  to  consummation
including no material  adverse change as defined in the proposed  $95,000 credit
agreement.

      The  Company  has  received   irrevocable   commitments  from  holders  of
approximately  71 percent of the Company's two  outstanding  series of preferred
stock indicating that they will vote in favor of the Recapitalization  Plan upon
solicitation by the Company which,  when such shares are voted, will satisfy the
voting  requirements  for confirmation of a plan of  reorganization.  Inverness,
Vicuna,  Rapoport  and Sharpe have  deposited  an  aggregate  of $47,500 into an
escrow  account,  such that those  funds  will be used to make their  respective
committed   equity   investments   in  the   recapitalized   company   once  the
Recapitalization  Plan is consummated.  A portion of such funds may be forfeited
to the Company under certain circumstances.

      The Company  filed plan of  reorganization  on April 5, 2000 and will seek
confirmation  of the  Recapitalization  Plan by the Bankruptcy  Court on June 5,
2000, with consummation expected to occur promptly thereafter.

      Following the filing of PennCorp's Chapter 11 petition, the New York Stock
Exchange  ("NYSE")  suspended all trading in the Company's listed securities and
has applied to the  Securities  and Exchange  Commission  for the removal of the
Company's  common  stock and $3.375  convertible  preferred  stock  listing  and
registration on the NYSE.

                                       95
<PAGE>


      In the first quarter of 2000,  Portsmouth was  reorganized and merged into
ROP Financial Group, a wholly-owned  subsidiary of Southwestern Life. The common
equity was terminated with no value.

      As part of a series of  transactions  approved by the Texas  Department of
Insurance,  Security Life became a wholly-owed subsidiary of PLAIC. In addition,
Southwestern Life and Security Life paid extraordinary  dividends  consisting of
affiliate notes and securities aggregating $15,461 and $14,167, respectively.

      As a  result  of the  agreements  to  sell  the  Payroll  Sales  Division,
Southwestern  Life and Security Life, the three senior executives of the Company
became  entitled to terminate  their  existing  employment  agreements for "Good
Reason" (as defined therein).  In order to ensure the continued  services of the
executives, on January 28, 2000, the Company entered into an agreement with each
executive,  pursuant to which the Company and each  executive  terminated  their
existing  employment  agreements  and  entered  into  new  executive  employment
agreements.  As a result,  the  Company  paid a total of $10,034  in  employment
contract obligations to the three senior executives of the Company.

(24) UNAUDITED QUARTERLY FINANCIAL DATA

      The following is a summary of the quarterly  results of operations for the
years ended December 31, 1999 and 1998:

<TABLE>
<CAPTION>
(In thousands, except per share amounts)

1999 Quarter-ended                               March 31       June 30      September 30   December 31
--------------------------------------------   -----------    -----------    ------------   -----------
<S>                                            <C>            <C>            <C>            <C>
Total revenues .............................   $   214,099    $   205,171    $   112,806    $   104,564
Net income (loss) applicable to common stock   $   (46,111)   $   (23,674)   $   (32,554)   $  (116,198)

Net income (loss) per share of common
  stock - basic ............................   $     (1.58)   $     (0.81)   $     (1.11)   $     (3.95)
Net income (loss) per share of common
  stock - diluted ..........................   $     (1.58)   $     (0.81)   $     (1.11)   $     (3.95)


<CAPTION>

1998 Quarter-ended                               March 31       June 30      September 30   December 31
--------------------------------------------   -----------    -----------    ------------   -----------
<S>                                            <C>            <C>            <C>            <C>
Total revenues .............................   $   232,651    $   227,888    $   225,682    $   193,774
Net income (loss) applicable to common stock   $    (3,686)   $  (163,904)   $  (165,088)   $  (108,525)

Net income (loss) per share of common
  stock - basic ............................   $     (0.20)   $     (5.60)   $     (5.64)   $     (3.71)
Net income (loss) per share of common
  stock - diluted ..........................   $     (0.20)   $     (5.60)   $     (5.64)   $     (3.71)
</TABLE>

      The Company's  fourth quarter 1999 reported loss  primarily  resulted from
the  impairment  of  intangibles  totaling  $95,522.  The Company  evaluated the
intangible assets of the Payroll Sales Division based upon the proceeds received
from the sale of the Payroll Sales Division on February 4, 2000 (see Notes 3 and
23). The Company increased the valuation  allowances  associated with tax assets
by $17,900 as the result of the  increased  likelihood  that  certain  operating
losses and capital  loss  carryforwards  would not be utilized and the impact or
potential  impact of a "change in  control" as defined by the  Internal  Revenue
Code Section 382.

      The Company's fourth quarter 1998 reported loss primarily resulted from an
additional  impairment  provision  associated with assets of Businesses Held for
Sale totaling  $57,475.  The Company  unlocked  actuarial  assumptions of future
interest rates,  lapses,  expenses and mortality on interest sensitive blocks of
business   (principally   interest  sensitive  and  deferred  annuity  products)
resulting in additional  amortization of deferred policy  acquisition  costs and
present value of insurance in force  amounting to  approximately  $16,250.  Such
unlocking was necessary  principally  as a result of  deteriorating  persistency
associated  with certain  blocks of business in the Payroll Sales Division which
aggregated  approximately  $8,575. The remaining  amortization resulted from the
application  of  current  period   assumptions   (unlocking)  for  expenses  and
persistency  for the  Financial  Services  Division.  In  addition,  the Company
incurred restructuring costs of $7,228.

                                       96
<PAGE>











                         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, 1997 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 audits.

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, 1997 and the results
of their  operations  and their cash flows for the year then ended in conformity
with generally accepted accounting principles.

KPMG Peat Marwick LLP
Dallas, Texas
March 19, 1998

                                       97
<PAGE>

<TABLE>

              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEET
                            as of December 31, 1997
                   (In thousands, except share information)
<CAPTION>

<S>                                                                 <C>
ASSETS
Investments:
  Fixed maturities available for sale at fair value
    (cost $1,643,769) ...........................................   $1,677,508
  Equity securities available for sale at fair value
     (cost $688) ................................................        1,079
  Mortgage loans on real estate, net of allowance of $680 .......       51,070
  Policy loans ..................................................      123,041
  Short-term investments ........................................      157,140
  Real estate ...................................................        1,893
  Other investments .............................................        8,461
                                                                    ----------
   Total investments ............................................    2,020,192
Cash ............................................................        6,576
Due from reinsurers .............................................      109,051
Accrued investment income .......................................       25,224
Accounts and notes receivable, net of allowance of $181 .........        5,507
Present value of insurance in force .............................       58,565
Deferred policy acquisition costs ...............................       30,606
Deferred income taxes, net ......................................       34,746
Other assets ....................................................       19,025
Costs in excess of net assets acquired ..........................      115,388
                                                                    ----------
   Total assets .................................................   $2,424,880
                                                                    ==========

LIABILITIES

Policy liabilities and accruals:
  Future policy benefits on traditional products ................   $  554,998
  Universal life and investment contract liabilities ............    1,315,496
  Policy and contract claims ....................................       57,517
  Other policyholder funds ......................................       14,203
                                                                    ----------
   Total policy liabilities and accruals ........................    1,942,214
Federal income taxes payable ....................................        1,298
Notes payable ...................................................      154,750
Accrued expenses and other liabilities ..........................       97,211
                                                                    ----------
   Total liabilities ............................................    2,195,473
                                                                    ----------

Mandatorily redeemable preferred stock:

  Series A 10%, $.01 par value, $100 redemption value; 500,000
    shares authorized, 257,070 issued and outstanding ...........       25,707
  5.5% preferred stock $.01 par value, $10,000 redemption
   value; 2,000 shares authorized, 1,118 shares issued and
    outstanding .................................................       11,184

SHAREHOLDERS' EQUITY

Common Stock, Class A, $.01 par value; 18,000,000 shares
  authorized; 3,500,000 shares issued and outstanding ...........           35
Common Stock, Class B, non-voting $.01 par value; 10,000,000
  shares authorized; 8,400,000 shares issued and outstanding ....           84
Additional paid in capital ......................................      116,992
Unrealized gains on securities available for sale,
  net of tax of $11,776 .........................................       21,870
Retained earnings ...............................................       53,535
                                                                    ----------
   Total shareholders' equity ...................................      192,516
                                                                    ----------
   Total liabilities and shareholders' equity ...................   $2,424,880
                                                                    ==========

         See accompanying Notes to Consolidated Financial Statements.

</TABLE>
                                       98
<PAGE>


              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES

                       CONSOLIDATED STATEMENT OF INCOME
                     for the Year Ended December 31, 1997
                                (In thousands)


Revenues:
  Premiums ......................................................   $ 103,138
  Interest sensitive policy product charges .....................      42,680
  Net investment income .........................................     126,427
  Net gains from sale of investments ............................       1,841
  Other income ..................................................      16,039
                                                                    ---------
   Total revenues ...............................................     290,125
                                                                    ---------

Benefits and expenses:
  Policyholder benefits incurred ................................     201,385
  Change in liability for future policy benefits and other
    policy benefits .............................................     (35,103)

  Amortization of present value of insurance
   in force and deferred policy acquisition costs ...............      21,589
  Amortization of costs in excess of net assets acquired ........       4,130
  Underwriting and other administrative expenses ................      40,600
  Interest and amortization of deferred debt issuance costs .....      13,773
                                                                    ---------
   Total benefits and expenses ..................................     246,374
                                                                    ---------

Income before income taxes ......................................      43,751
   Income taxes .................................................      16,416
                                                                    ---------
Net income ......................................................      27,335
   Preferred stock dividend requirements ........................       3,012
                                                                    ---------
Net income available to common shareholders .....................   $  24,323
                                                                    =========

         See accompanying Notes to Consolidated Financial Statements.

                                       99
<PAGE>

<TABLE>

              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
           CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
                     for the Year Ended December 31, 1997
                                (In thousands)

<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, 1996 .....   $      35   $      84   $ 120,626      $  (8,081)    $  29,212    $ 141,876
Net income .......................        --          --          --                         27,335       27,335
Preferred dividends ..............        --          --          --                         (3,012)      (3,012)
Deemed dividend to eliminate
   effects of reinsurance contract
  with affiliate .................        --          --        (3,634)         4,161          --            527
Unrealized gain on securities
  available for sale, net ........        --          --          --           25,790          --         25,790
                                     ---------   ---------   ---------      ---------     ---------    ---------
Balance at December 31, 1997 .....   $      35   $      84   $ 116,992      $  21,870     $  53,535    $ 192,516
                                     =========   =========   =========      =========     =========    =========
</TABLE>

         See accompanying Notes to Consolidated Financial Statements.

                                      100
<PAGE>

<TABLE>

              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENT OF CASH FLOWS
                     for the Year Ended December 31, 1997
                                (In thousands)
<CAPTION>

<S>                                                                                <C>
Cash flows from operating activities:
  Net income ...................................................................   $  27,335
  Adjustments to reconcile net income to net cash used by operating  activities:
   Adjustments relating to universal life and investment products:
     Interest credited to account balances .....................................      55,135
     Charges for mortality and administration ..................................     (50,687)
   Capitalization of deferred policy acquisition costs .........................     (24,808)
   Amortization of intangibles, depreciation and accretion, net ................      26,545
   Decrease in policy liabilities, accruals and other policyholder funds .......     (24,319)
   Decrease in accrued expenses and other liabilities ..........................     (19,673)
   Decrease in notes and accounts receivable and
     accrued investment income .................................................       3,844
   Decrease in taxes payable ...................................................      (7,820)
   Deferred income taxes .......................................................        (836)
   Net gains from sales of investments .........................................      (1,841)
   Other, net ..................................................................       5,330
                                                                                   ---------
     Net cash used by operating activities .....................................     (11,795)
                                                                                   ---------
Cash flows from investing activities:
  Sales of fixed maturities available for sale .................................     201,402
  Maturities and other redemptions of fixed maturities available for sale ......     129,600
  Sales of mortgages, real estate and other investments ........................       7,512
  Principal collected on mortgage loans and collateral loans ...................      28,030
  Change in short-term investments, net ........................................     (21,929)
  Purchases of fixed maturities available for sale .............................    (419,525)
  Purchases of other investments ...............................................        (764)
                                                                                   ---------
     Net cash used by investing activities .....................................     (75,674)
                                                                                   ---------
Cash flows from financing activities:
  Receipts from interest sensitive products credited to
   policyholders' account balances .............................................     103,243
  Return of policyholders' account balances on interest sensitive products .....    (102,112)
  Cash provided by reinsurance recapture .......................................      21,222
  Cash provided by assumed reinsurance with affiliate ..........................      50,000
  Reduction of notes payable ...................................................      (5,000)
                                                                                   ---------
     Net cash provided by financing activities .................................      67,353
                                                                                   ---------
Decrease in cash ...............................................................     (20,116)
Cash at beginning of year ......................................................      26,692
                                                                                   ---------
Cash at end of year ............................................................   $   6,576
                                                                                   =========
Supplemental disclosures:
  Income taxes paid ............................................................   $  25,072
  Interest paid ................................................................      12,305
Non-cash financing activities:
  Preferred stock issued as dividends ..........................................       3,012

</TABLE>
         See accompanying Notes to Consolidated Financial Statements.

                                      101
<PAGE>



              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1997
                                (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).   A  wholly-owned   subsidiary  of  SWF  acquired  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.  Effective  January  2,  1998,  PennCorp
acquired   Knightsbridge's  interest  in  SWF  and  SWF  became  a  wholly-owned
subsidiary of PennCorp. (See Note 16).

In August 1997, the Company  acquired from ICH the remaining 17% interest in ICH
Funding  and  certain  other  assets  and  released  ICH  from   indemnification
obligations relative to certain tax, litigation and other matters.

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  27.4% 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 1997.

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.

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  recorded at cost,  adjusted  for the  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.

                                      102
<PAGE>


              SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



2. Summary of Significant Accounting Policies (Continued)

      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.

      Collateral loans are carried at their aggregate unpaid principal balances.

      The Company  regularly  evaluates the carrying value of their  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 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

                                      103
<PAGE>


2. Summary of Significant Accounting Policies (Continued)

      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 credited rate, over
      the years that such profits are  anticipated  to be received in proportion
      to the estimated gross profits. Accumulated amortization was $35,386.

(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 $2,530 which is net of accumulated amortization of $1,580.

(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
      $8,260.

(i) 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.

(j) 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

                                      104
<PAGE>


2. Summary of Significant Accounting Policies (Continued)

      on  deferred  tax  assets  and  liabilities  of a change  in tax  rates is
      recognized in income in the period that includes the enactment date.

(k) 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 reducing the related account balances.

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, 1997 included Fund America  Investors  Corp.,  Ser.  93-C,  Class B
Certificates which had a carrying value of $19,271 (10%) of shareholders equity.

The amortized cost and fair value of investments in fixed  maturities  available
for sale at December 31, 1997 by categories of securities are as follows:

<TABLE>
<CAPTION>
                                                                           Gross       Gross
                                                           Amortized    Unrealized   Unrealized       Fair
                                                              Cost         Gains       Losses         Value
                                                           ----------   ----------   ----------    ----------
<S>                                                        <C>          <C>          <C>           <C>
December 31, 1997:
   Mortgage-backed securities ..........................   $  820,837     $ 22,791   $   (1,434)   $  842,194
   U.S. Treasury securities and obligations of
     U.S. Government corporations and agencies .........       27,492           91          (12)       27,571

   Debt securities issued by states of the United States
      and political subdivisions of the states .........       22,469          365         (130)       22,704

   Debt securities issued by foreign governments .......       20,525          821         --          21,346

   Corporate debt securities ...........................      752,446       14,664       (3,417)      763,693
                                                           ----------   ----------   ----------    ----------
     Total fixed maturities available for sale .........   $1,643,769   $   38,732   $   (4,993)   $1,677,508
                                                           ==========   ==========   ==========    ==========
</TABLE>

The amortized  cost and fair value of fixed  maturities at December 31, 1997, by
contractual maturity, are shown below:

                                                         Amortized       Fair
                                                           Cost          Value
                                                        ----------    ----------
     Available for sale:
      Due in one year or less.........................    $ 28,929      $ 28,921
      Due after one year through five years...........     234,776       236,677
      Due after five years through ten years..........     272,127       275,248
      Due after ten years.............................     287,100       294,468
                                                        ----------    ----------
                                                           822,932       835,314
      Mortgage-backed securities......................     820,837       842,194
                                                        ----------    ----------
                                                        $1,643,769    $1,677,508
                                                        ==========    ==========

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  $119,695  were  on  deposit  with  certain
regulatory authorities at December 31, 1997.

                                      105
<PAGE>


3. Investments (Continued)

Included in fixed maturities  available for sale at December 31, 1997, are below
investment-grade  securities  with amortized costs of $71,467 and fair values of
$74,227.  Included in fixed  maturities  available  for sale as of December  31,
1997, are unrated securities with an amortized cost and fair value of $11,811.

During 1997, the Company  purchased  $7,650 of subordinated  indebtedness of ACO
Acquisition Corp., which was subsequently re-named Acordia, Inc. (Acordia).  The
Acordia  subordinated  notes pay interest on a current basis at 12.5% per annum,
payable in semi-annual installment.  Acordia is an insurance broker specializing
in the marketing of commercial property and casualty programs.  Acordia is 28.6%
owned by Knightsbridge.

In addition,  during 1997,  the Company  acquired  41,605  shares of  redeemable
preferred stock of Portsmouth Financial Group, Inc. (Portsmouth) for $4,161. The
preferred  stock  pays  dividends  of 18.0% of which  12.5% is in cash  with the
remainder in the form of additional  preferred stock. The shares are mandatorily
redeemable  on June 30, 2002.  Portsmouth  underwrites,  acquires,  and holds to
receipt of  benefits,  life  insurance  contracts  covering  individuals  facing
terminal illnesses. Portsmouth is owned by Knightsbridge and its affiliates. The
Company has agreed,  subject to required  regulatory  approvals  to make up to a
$10,000 preferred equity investment in Portsmouth.

The Company had  non-income  producing  investments at December 31, 1997 with an
amortized cost and fair value as follows:

                                                        Amortized
                                                           Cost      Fair Value
                                                        ----------   ----------

            Fixed maturities ........................   $      487   $       66
            Equity securities .......................          688        1,079
            Other investments .......................        5,778        5,791
                                                        ----------   ----------
                                                        $    6,953   $    6,936
                                                        ==========   ==========

At December 31, 1997 net unrealized  appreciation  of equity  securities of $391
consisted of gross unrealized gains of $415, less unrealized losses of $24.

Following is an analysis of net gains (losses) from sale of investments  for the
year ended December 31, 1997:

            Fixed maturities.......................     $     553
            Other investments......................         1,146
            Real estate............................           134
            Short-term investments.................             8
                                                        ---------
                                                        $   1,841
                                                        =========

For the year  ended  December  31,  1997,  net  realized  gains on sale of fixed
maturities consisted of gross gains of $2,779 and gross losses of $2,226.

                                      106
<PAGE>


3. Investments (Continued)

Following are changes in unrealized  appreciation  (depreciation) on investments
for the year ended December 31, 1997:

Investments carried at fair value:

  Fixed maturities...................................... $  48,976
  Equity securities.....................................       221
  Other investments.....................................      (713)
                                                         ---------
                                                            48,484

Eliminate  effects from reinsurance contract with
   affiliate ...........................................    (4,161)
Less effect on other balance sheet accounts:
  Value of business acquired and deferred acquisition
    costs ..............................................    (2,768)
  Deferred income taxes.................................   (16,000)
  Minority interest in unrealized losses................       235
                                                         ---------
Change in unrealized investment gains and losses........ $  25,790
                                                         =========

Major  categories of net investment  income for the year ended December 31, 1997
consist of the following:

  Fixed maturities...................................... $  98,906
  Mortgage loans........................................     5,490
  Policy loans..........................................     7,621
  Short-term investments................................     4,442
  Collateral loans......................................     2,218
  Real estate...........................................       441
  Investments held in trust under reinsurance treaty(a).     9,617
  Other investments.....................................     1,250
  Investment expenses...................................    (3,558)
                                                         ---------
                                                         $ 126,427
                                                         =========

  --------------------
  (a)Investments  held in trust by a reinsurer with carrying  values of $121,016
     as of December 31, 1996, are included in amounts due from reinsurers.  This
     contract was recaptured during 1997 (see Note 10).

At December  31, 1997 the Company  held  mortgage  loans  principally  involving
commercial  real estate with carrying value of $51,070,  net of an allowance for
losses of $680.  Estimated  fair values of  mortgage  loans  totaled  $51,816 at
December  31,  1997.  The average  outstanding  loan  balance was  approximately
$1,027.  At December 31, 1997 mortgage loan investments were concentrated in the
following states:

                                                   Carrying    Percent of Total
                                                     Value      Carrying Total
                                                   --------     --------------

      Texas....................................... $23,832         46.7 %
      Illinois....................................   7,029         13.8
      Oklahoma....................................   4,915          9.6
      Florida.....................................   3,180          6.2
      Kansas......................................   2,527          4.9
      All other...................................   9,587         18.8
                                                   -------        -----
      Balance, end of period...................... $51,070        100.0 %
                                                   =======        =====


                                      107
<PAGE>


4. 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.

The Company has carefully  monitored a block of interest sensitive life policies
where  overall  financial  performance  was not  satisfactory.  During the third
quarter  of 1997,  management  implemented  certain  corrective  actions.  These
actions included reduction in credited interest rates, increased monthly expense
charges and cost of insurance  increases on selected  policy forms. As a result,
reserves on this block were reduced approximately $17,000.

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 policy liabilities and accruals are adequate,  such estimates may be more or
less than the amounts ultimately paid when the claims are settled.  In addition,
the Company is involved in certain litigation regarding  policyholder  benefits.
The Company intends to vigorously  defend its position relative to these claims;
however,  if  unsuccessful,  the level of reserves  currently  provided could be
adversely effected.

Total policy  liabilities  and accruals  consist of the following as of December
31, 1997:

     Future policy benefits on traditional products:
       Traditional life insurance contracts ...............   $  335,283
       Traditional annuity products .......................      105,663
       Individual accident and health .....................       87,152
       Unearned premiums ..................................       26,900
                                                              ----------
        Total future policy benefits ......................      554,998
                                                              ----------

     Universal life and investment contract liabilities:
       Universal life and annuities .......................    1,315,333
       Guaranteed investment contracts ....................          163
                                                              ----------
        Total universal and investment contract liabilities    1,315,496
                                                              ----------

     Policy and contract claims ...........................       57,517
     Other policyholder funds .............................       14,203
                                                              ----------

        Total policy liabilities and accruals .............   $1,942,214
                                                              ==========


                                      108
<PAGE>


4. 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, 1997:

     Policy and contract claims at January 1 ....................   $ 55,011
     Less reinsurance recoverables ..............................        153
                                                                    --------
       Net balance at January 1 .................................     54,858
                                                                    --------

     Add claims incurred, net of reinsurance related to:
       Current year .............................................     81,168
       Prior years ..............................................     (6,012)
                                                                    --------
                                                                      75,156

     Deduct claims paid, net of reinsurance related to:
       Current year .............................................     58,658
       Prior years ..............................................     13,839
                                                                    --------
                                                                      72,497

     Policy and contract claims at December 31 ..................   $ 57,517
                                                                    ========

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
$6,012 in 1997.

5. Notes Payable

The outstanding  principal amounts of notes payable at December 31, 1997 consist
of the following:

     Revolving bank debt ........................................   $ 90,250
     Bank debt with quarterly principal requirements ............     24,500
     7.0% convertible subordinated note .........................     40,000
                                                                    --------
                                                                    $154,750
                                                                    ========

Interest  costs under the revolving  bank debt totaled $7,860 for the year ended
December 31, 1997.  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,
1997,  the effective  rate of the revolving loan was  approximately  9.13%.  The
revolving bank debt was repaid on January 2, 1998.

Interest  costs  under the bank  term debt  totaled  $2,229  for the year  ended
December  31,  1997.  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, 1997,  the effective rate of the
term loans was approximately  9.63%. The bank term debt was repaid on January 2,
1998.

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. During 1997, PennCorp acquired the notes from the liquidating trust
for the  creditors  of ICH for $40,000 plus accrued  interest.  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

                                      109
<PAGE>


5. Notes Payable (Continued)

under the Convertible Notes totaled $2,800 for the year ended December 31, 1997.
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, 1997 restricted cash and short-term investments totaled $3,339.

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,
1997, three-month LIBOR was 5.81%.

6. 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  to  PennCorp  and  one  of  its
subsidiaries.  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 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,  1997,  24,180  additional  shares  were issued with a
redemption value of $2,418 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  Southwestern  Life  Acquisition
Corporation,  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, 1997, 59 additional shares were
issued  with a  redemption  value  of $594 in lieu of cash to  satisfy  dividend
requirements.

7. Income Taxes

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

Total income taxes for the year ended December 31, 1997 are as follows:

      Current..................................... $  17,252
      Deferred....................................      (836)
                                                   ---------
                                                   $  16,416
                                                   =========

                                      110
<PAGE>


7. 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, 1997, as follows:

     Tax expense computed at statutory rate .....................   $ 15,313
     Amortization of costs in excess of net assets acquired .....      1,445
     Change in deferred tax asset valuation allowance ...........        364
     Other ......................................................       (706)
                                                                    --------
                                                                    $ 16,416
                                                                    ========

Temporary  differences,   including  $1,956  in  1997  of  deferred  tax  assets
transferred  in  association  with a  reinsurance  contract  with an  affiliate,
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, 1997 relate to the following:

     Deferred tax assets:
       Deferred policy acquisition costs ........................   $   9,548
       Future policy benefits ...................................      73,660
       Invested assets, subject to capital gains treatment ......      24,907
                                                                    ---------
                                                                      108,115

     Deferred tax liabilities:
       Present value of insurance in force ......................     (20,498)
       Other assets and liabilities .............................     (20,123)
       Net unrealized gain ......................................     (11,776)
                                                                    ---------
                                                                      (52,397)

       Net deferred tax asset ...................................      55,718
       Valuation allowance ......................................     (20,972)
                                                                    ---------
                                                                    $  34,746
                                                                    =========

The  valuation  allowance at December 31, 1997 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, 1997.



                                       111
<PAGE>


8. 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, 1997, is as follows:

     Balance at beginning of period ...............................   $ 15,095
     Policy acquisition costs deferred:
       Commissions ................................................     17,443
       Underwriting and issue costs ...............................      7,366
     Policy acquisition costs amortized ...........................     (9,092)
     Unrealized investment (gain) loss adjustment .................       (206)
                                                                      --------
     Unamortized deferred policy acquisition costs at period end ..   $ 30,606
                                                                      ========

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.

Information  related to the  present  value of  insurance  in force for the year
ended December 31, 1997 is as follows:

     Balance at beginning of year .................................   $ 71,333
     Accretion of interest ........................................      3,806
     Amortization .................................................    (16,303)
     Transferred on assumed reinsurance contract with affiliate ...      2,291
     Unrealized investment (gain) loss adjustment .................     (2,562)
                                                                      --------
       Balance at end of year .....................................   $ 58,565
                                                                      ========


                                      112
<PAGE>


8.   Deferred Policy  Acquisition  Costs and Present Value of Insurance in Force
     (Continued)

Expected amortization,  based upon current assumptions and accretion of interest
at a policy  liability  or contract  rate ranging from 5.5% 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>
     1998 ...............   $   58,565   $     12,805   $    3,226   $      9,579
     1999 ...............       48,986          7,806        2,719          5,087
     2000 ...............       43,899          8,374        2,315          6,059
     2001 ...............       37,840          6,957        1,989          4,968
     2002 ...............       32,872          5,673        1,724          3,949
</TABLE>

9. 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, 1997 was $174,715,  of
which $161,098 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  earned surplus at December 31, 1997, no dividends can
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
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, 1997 totaled  approximately
$174,715.  Statutory net loss of the Company's  life insurance  subsidiaries  as
reported to regulatory  authorities  totaled  $2,521 for the year ended December
31, 1997.

10. 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

                                      113
<PAGE>


10. Reinsurance (Continued)

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, 1997 is as follows:

     Direct policy revenues and amounts assessed
       against policyholders ....................................   $ 252,656
     Reinsurance assumed ........................................       1,182
     Reinsurance ceded ..........................................    (108,020)
                                                                    ---------
     Net premiums and amounts earned ............................   $ 145,818
                                                                    =========

     Policyholder benefits ceded ................................   $  78,767
                                                                    =========

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.  For the year ended  December  31,  1997
$14,222  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  previously  ceded a block of annuities  under a  reinsurance
agreement  with  Employees  Reassurance  Corporation  (ERC).  Such  reinsurance,
accounted for as a financing  arrangement,  is not reflected in the accompanying
financial  statements  except  for the risk  fees paid to ERC.  The  reinsurance
agreement  was  terminated  as of  November  30,  1997.  Risk  fees  paid to the
reinsurer  were 2% of the net  amount of surplus  provided,  but not less than a
minimum fee of $40 per quarter, and totaled $110 for the year ended December 31,
1997.

At December 31, 1997,  Southwestern  Life entered into a  reinsurance  agreement
with Integon Life  Insurance  Corporation  (Integon),  an indirect  wholly-owned
subsidiary  of PennCorp,  to coinsure  certain  annuities  which had GAAP policy
liabilities of $256,673.  Cash of $50,000 and securities  were  transferred at a
cost  basis  of  $198,793  which  had fair  values  equal  to  statutory  policy
liabilities  of $255,195.  The present value of insurance in force which Integon
had recorded on these policies was estimated to be $2,291.  Because Southwestern
Life  and  Integon  are  affiliates,  the  historical  GAAP  book  value  of the
securities  and the present  value of insurance in force at Integon was retained
by Southwestern Life. Rather than record a loss of $3,634, which is net of taxes
of $1,956,  on a GAAP basis,  Southwestern  Life recorded a "deemed dividend" of
this amount as a direct charge to its paid in capital.  In addition,  the change
in unrealized investment gain (loss) associated with the transferred  securities
is recorded as an adjustment to prior unrealized gains.

11. 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 year ended
December 31, 1997 amounted to $936.

                                      114
<PAGE>


11. Retirement and Profit Sharing Plans (Continued)

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 $1,350 under
this plan during the year ended December 31, 1997.

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
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, 1997:

     Accrued postretirement benefits,  beginning of year $ 12,686 Recognition of
     components of net periodic postretirement benefit cost:

      Service cost ................................        269
      Interest cost................................        930
                                                     ---------
      Net periodic postretirement benefit cost.....      1,199
     Benefit payments..............................     (1,290)
                                                     ---------
     Net change....................................        (91)
                                                     ---------
     Accrued postretirement benefits, end of year..  $  12,595
                                                     =========

     The liability for accrued postretirement benefits includes the following at
December 31, 1997:

     Accumulated postretirement benefit obligation:
      Retirees.....................................  $  11,167
      Active eligible..............................      1,076
      Active ineligible............................        944
                                                     ---------
                                                        13,187

     Unrecognized actuarial loss...................       (592)
                                                     ---------
     Accrued postretirement benefits...............  $  12,595
                                                     =========

For measurement  purposes,  an 5.5% annual rate increase in the health care cost
trend rate was assumed for 1998;  the rate was assumed to decrease  gradually to
4.0% 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, 1997 by $767 and the aggregate
of the service and interest  components  of net periodic  postretirement  health
care benefit cost for 1997 by $127. The weighted  average  discount rate used in
determining the accumulated postretirement benefit obligation was 7.0%.

12. Related Party Transactions

Related party  transactions  described  herein  include those  transactions  not
included elsewhere in the Notes to Consolidated Financial Statements.

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, 1997, fees incurred totaled
$1,871.

The Company  paid  interest  of $1,400 in 1997 in  conjunction  with  PennCorp's
acquisition of the Company's 7.0% convertible subordinated note.

                                      115
<PAGE>


12. Related Party Transactions (Continued)

The Company  provides  services for a wholly-owned  subsidiary of PennCorp.  The
Company  charges  the  subsidiary  for its direct  costs and a share of overhead
costs based upon time and utilization studies. These costs totaled approximately
$5,178 during 1997.

13. Other Commitments and Contingencies

The Company and its subsidiaries are obligated under operating leases, primarily
for office  space.  Rent  expense was $2,169 in 1997.  There was no  significant
sublease income.

Minimum lease commitments are:

            1998......................................  $ 2,381
            1999......................................    2,685
            2000......................................    2,666
            2001......................................    2,652
            2002......................................    2,497
            2003 and thereafter.......................   10,704
                                                        -------
              Total minimum payments required.........  $23,585
                                                        =======

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 $980 in 1997.  Based on information  currently
available,  the insurance  subsidiaries have accrued $3,194 at December 31, 1997
for future assessments, net of future premium tax reductions.

14. Other Operating Information

Underwriting and other  administrative  expenses for the year ended December 31,
1997 are as follows:

     Non-deferrable commission expense .....................   $ 19,746
     Commission allowances on reinsurance ceded ............    (12,696)
     Taxes, licenses and fees ..............................      7,492
     General and administrative expenses ...................     34,467
     Expense allowance on reinsurance ceded ................     (8,409)
                                                               --------
      Underwriting and other administrative expenses .......   $ 40,600
                                                               ========


                                      116
<PAGE>


15. Financial Instruments

The following is a summary of the carrying value and fair value of the Company's
financial instruments at December 31, 1997:
<TABLE>
<CAPTION>

                                                            Carrying       Fair
                                                              Value        Value
                                                            ----------   ----------
     <S>                                                    <C>          <C>
     Assets:
       Cash and short-term investments ..................   $  163,716   $  163,716
       Fixed maturities .................................    1,677,508    1,677,508
       Equity securities ................................        1,079        1,079
       Mortgage loans ...................................       51,070       51,816
       Policy loans .....................................      123,041      123,041
       Other investments ................................        8,461        8,461
       Interest rate cap ................................           41         --
       Agent and premium receivables ....................        5,507        5,507
     Liabilities:
       Notes payable ....................................      154,750      154,750
       Universal life and investment contract liabilities    1,315,496    1,315,496
</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.

      Mortgages:  The fair values for mortgages 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.

      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  convertible note payable is not valued at December 31, 1997
      as it was owned by PennCorp and canceled in February 1998.

                                      117
<PAGE>


15. Financial Instruments (Continued)

      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.

16. Subsequent Event

On January 2, 1998,  PennCorp acquired all of the outstanding  common stock held
by  Knightsbridge  and certain other parties for  aggregate  cash  consideration
ranging from $73,777 to $77,444  (excluding  anticipated  acquisition  expenses)
depending upon the outcome of certain  contingencies.  As a result, SWF became a
wholly-owned subsidiary of PennCorp.  After the acquisition of the common stock,
PennCorp  repaid SWF's bank revolving debt in the amount of $90,250 and its bank
term debt in the amount of $24,500.  Consequently,  the Company  will realize an
extraordinary  charge  in 1998 for the  write-off  of  deferred  costs of $2,571
associated with these loans. In addition, PennCorp canceled the $40,000 SWF note
it acquired from ICH.

On February 18, 1998,  PennCorp announced that it had engaged investment banking
firms  to  review  strategic  alternatives  for  maximizing  shareholder  value,
including  the  sale  of  certain   divisions,   which  include  Union  Bankers,
Constitution,   Marquette  and  affiliated  service  providing   companies  ("SW
Financial  Businesses Held for Sale"). As of and for the year ended December 31,
1997, the total assets,  excess of liabilities  over assets,  total revenues and
net loss of the SW  Financial  Businesses  Held for  Sale  aggregated  $530,866,
$49,697, $109,387 and $5,201, respectively.

                                      118
<PAGE>



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

Name                    Age   Position
----                    ---   --------

David C. Smith          58    Chairman of the Board
Keith A. Maib           41    President, Chief Executive Officer and Director
Thomas A. Player        60    Director
Allan D. Greenberg      55    Director
Bruce W. Schnitzer      55    Director
James P. McDermott      38    Executive Vice President and Chief Financial
                                 Officer
Scott D. Silverman      41    Executive Vice President, Chief Administrative
                                 Officer, General Counsel and Secretary

David C. Smith has served as  Non-Executive  Chairman of the Board since  August
21, 1998 and has been a director of the Company since September 1994. Since 1993
he has been a management consultant. Mr. Smith was with KPMG 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 KPMG. 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.

Keith A. Maib was  elected  as a  director  and Chief  Operating  Officer of the
Company on June 11, 1998.  On August 21,  1998,  he became  President  and Chief
Executive  Officer.  From June 1996 to June 1998,  Mr. Maib served as  Executive
Vice  President  and Chief  Financial  Officer of  Acordia,  Inc.,  where he was
involved  in the  repositioning  of the  company,  including  the  privatization
transaction and the leveraged acquisition of the brokerage operations, which was
co-sponsored  by  Knightsbridge  Investment,  an affiliate  of the  Company.  He
continued  to serve as a Director of ACO,  the parent  company of Acordia,  Inc.
until December 1998.  From March 1995 to June 1996 Mr. Maib was a partner in the
Dallas and New York offices of Coopers & Lybrand, L.L.P., where he was primarily
responsible for the firm's southern United States  corporate  finance  practice.
From March 1994 to March 1995 he held the position of Chief Operating Officer of
Borland International, Inc., at the time, one of the world's largest PC software
developers.  As Chief  Operating  Officer,  he managed the  company's  worldwide
operations  and was  responsible  for  planning  and  implementing  a successful
turnaround for the company.  Prior to joining Borland,  Mr. Maib was employed by
Price  Waterhouse,  L.L.P.  from June 1991 to March 1994,  and from June 1993 to
March 1994 was a partner in the corporate  recovery  services  practice of Price
Waterhouse,  L.L.P.  Mr. Maib also  serves as a director  of Sagent  Technology,
Inc., a publicly traded technology company.

Thomas A. 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  currently
serves as a director for Amerisure, Inc. 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.

Allan D. Greenberg served as Vice Chairman of the Board and as a director of the
Company from August 1990 through 1997. Mr.  Greenberg also serves as Chairman of
the Board of ADG Insurance  Advisors Inc.  ("ADG"),  a private  consulting  firm
specializing in life insurance actuarial and acquisition services.  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 provided consulting
services to the Company prior to January 1, 1998.


                                      119
<PAGE>


Bruce W.  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:  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.

James P.  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, and on June 11, 1998 he was elected
Executive Vice President and Chief  Financial  Officer.  From January 1985 until
November 1992, Mr.  McDermott was employed by KPMG,  serving as a Senior Manager
in the firm's insurance practice prior to joining the Company. Mr. McDermott has
more than 6 years experience in the insurance industry.

Scott D.  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,
and on  June  11,  1998  he was  elected  Executive  Vice  President  and  Chief
Administrative  Officer in  addition  to his  position  of General  Counsel  and
Secretary.  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.

Item 11.    Executive Compensation

SUMMARY OF EXECUTIVE COMPENSATION

The following  table sets forth,  for the fiscal years ended  December 31, 1997,
1998 and 1999, the compensation  earned by the Company's current Chief Executive
Officer  and the two other most  highly  compensated  executive  officers of the
Company   (comprising  all  of  the  Company's  current   executive   officers),
(collectively, the "Named Executive Officers") for those years.
<TABLE>
<CAPTION>
                                                                              Long-Term Compensation
                                                                             ------------------------
                                     Annual Compensation           Other     Restricted   Securities
                                  --------------------------      Annual       Stock      Underlying     All  Other
                                  Year    Salary    Bonus(1)   Compensation   Awards(2)  Options/SARs   Compensation(3)
                                  ----   --------   --------   ------------   ---------  ------------   ---------------

<S>                               <C>    <C>        <C>        <C>            <C>        <C>            <C>
Keith A. Maib--                   1999   $449,992   $545,000   $       --     $   --     $       --     $         9,600
  President and Chief             1998    235,641    600,000           --         --          600,000           268,426
  Executive Officer               1997       --         --             --         --             --                --

James P. McDermott--              1999    400,008    575,000           --         --             --               9,600
  Executive Vice President        1998    337,083    677,000           --         --          475,817            17,388
  and Chief Financial Officer     1997    225,000     18,750           --       46,601         10,000            11,869

Scott D. Silverman--
  Executive Vice President,       1999    400,008    575,000           --         --             --               9,600
  Chief Administrative Officer    1998    337,821    727,000           --         --          475,000            17,388

  General Counsel and Secretary   1997    225,000     18,750           --       42,150         10,000            66,120
</TABLE>

---------------
(1)  The amounts reflected for 1998 include bonuses of $100,000 and $77,000 paid
     to Messrs.  McDermott and Silverman in connection with their  assistance in
     the   Knightsbridge  and  Acordia   transactions.   See  Item  13.  Certain
     Relationship and Related Transactions.

(2)  Represents  the  value of  restricted  stock  awards  granted  based on the
     closing  price of the  Company's  Common  Stock on the  date of  grant,  as
     reported by the New York Stock Exchange.  Amounts  reflected do not include
     dividends on prior restricted stock award grants paid in additional  shares
     of restricted stock.

(3)  For 1997,  includes matching and profit sharing  contributions made to each
     Named  Executive  Officer  (other than Mr. Maib)  pursuant to the Company's
     401(k)  retirement and profit sharing plan of $4,750 and $7,119 (other than
     for Mr.  Silverman  who  received a matching  contribution  of $2,816 and a
     profit  sharing  contribution  of  $7,119  in each  such  year).  For 1998,
     includes  matching  and  profit  sharing  contributions  made to each Named
     Executive  Officer (other than Mr. Maib)  pursuant to the Company's  401(k)
     retirement and profit sharing plan of $9,750 and $7,638. In the case of Mr.
     Maib,  the amount  reflected  for 1998  consists  of the  reimbursement  of
     relocation  expenses  of $268,426  and does not include a $100,000  advance
     made to Mr. Maib in  connection  with his  relocation,  which was repaid on
     March 16, 1999. See Indebtedness of Executive Officers.  In the case of Mr.
     Silverman,  the amount  reflected for 1997 also includes  reimbursement  of
     relocation expenses of $56,185.

Option/SAR Grants in Last Fiscal Year

There were no option/SAR grants made to the Named Executive  Officers during the
year ended December 31, 1999.

                                      120
<PAGE>


Aggregated Option Exercises in Last Fiscal Year-End/SAR Option Values

No options were exercised by the Named Executive  Officers during the year ended
December 31, 1999.
<TABLE>
<CAPTION>
                                                        Number of
                                                   Securities Underlying        Value of Unexercised
                                                   Unexercised Options at      In-the-Money Options at
                                                     Fiscal Year-End             Fiscal Year-End (1)
                         Acquired       Value   ---------------------------   ---------------------------
                        on Exercise   Realized  Exercisable   Unexercisable   Exercisable   Unexercisable
                        -----------   --------  -----------   -------------   -----------   -------------
<S>                           <C>      <C>           <C>         <C>             <C>           <C>
Keith A. Maib                 --       $ --            --        600,000         $  --         $  --
James P. McDermott            --         --          35,815      500,002         $  --         $  --
Scott D. Silverman            --         --          34,998      500,002         $  --         $  --
</TABLE>

---------------
(1)  Based on the  closing  price of the  Common  Stock  of $0.44  per  share on
December 31, 1999, as reported by the NYSE.

Employment Agreements

Pursuant to the Stock  Purchase  Agreement  dated as of January 10, 2000, by and
between Reassure America and the Company,  Messrs. Maib, McDermott and Silverman
became entitled to terminate  their then existing  employment  agreements.  As a
result thereof, the amounts of $3,403,467,  $2,983,335 and $3,062,930 became due
and owing to Messrs.  Maib, McDermott and Silverman,  respectively.  In order to
ensure the continued service of each executive, on January 28, 2000, the Company
entered into an Agreement  with each of Messrs.  Maib,  McDermott and Silverman,
pursuant to which the Company entered into new Executive  Employment  Agreements
with each executive (the "New  Employment  Agreements")  and paid each executive
the amount  indicated above.  Under the terms of the New Employment  Agreements,
Mr.  Maib is entitled  to receive an annual  base  salary of  $250,000.  Messrs.
McDermott  and  Silverman  are  entitled  to receive  annual  base  salaries  of
$200,000. Additionally, under the terms of their employment agreements, Mr. Maib
has the  opportunity to earn up to $300,000 and Messrs.  McDermott and Silverman
have the opportunity to earn up to $200,000 in performance bonus payments.  Such
performance bonuses shall be determined solely at the discretion of the Board of
Directors of the Company and are payable  upon  termination  of the  executive's
employment under his New Employment Agreement.

SUMMARY OF DIRECTOR COMPENSATION

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 $30,000 and a fee
of $2,000 for each meeting of the Board of Directors  (except for the first four
meetings  in each  calendar  year for  which no fee will be paid) 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. As a result of serving as Chairman of the Board
of the Company, Mr. Smith is entitled to receive an annual fee of $200,000.  Mr.
Smith also  received a grant of 50,000  phantom  options,  the value of which is
determined by the increase in market value of the  Company's  Common Stock above
$3.88,  which was 115% of the closing  price of the Common  Stock on the date of
grant.  During  1998,  Mr.  Player  received a special  fee of  $25,000  for his
services  rendered in 1997.  In 1999,  Mr. Smith was awarded a special  bonus of
$115,000 in shares of the  Company's  Common Stock for his services  rendered in
1998.  Also in 1999,  Mr.  Greenberg  received a special  fee of $50,000 for his
services rendered in 1998.

In addition  to the  foregoing,  the  Warrant  Plan  granted  each  Non-Employee
Director (other than Mr.  Greenberg) 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 was
equal to the fair market  value of the Common  Stock on the date of grant.  Each
warrant  vested  and  became  exercisable  in three  equal  annual  installments
commencing on the first  anniversary  date after the date of the grant  provided
that the Non-Employee  Director was serving as a director of the Company on such
anniversary date. On November 5, 1992, each of Messrs. Schnitzer 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 $15.63  per  share.  No
further awards will be made under the Warrant Plan.

                                      121
<PAGE>


Pursuant  to  an  amendment  to  the  Stock  Plan   approved  by  the  Company's
stockholders on December 31, 1997, Messrs. Schnitzer, Player and Smith exercised
these Warrants for which they received 1977, 1444, and 1819 shares of restricted
common  stock,  respectively.  The  shares of  restricted  stock are  subject to
forfeiture if any of these  Non-Employee  Directors  ceases to be a director for
any reason  other than as a result of a change of  control or  ownership  of the
Company,  the failure to be  re-elected  by the  Company's  shareholders  or the
Non-Employee Director's death or disability (as defined in the Stock Plan). Each
of these  Non-Employee  Directors  was also granted an option to purchase  3,000
shares of Common Stock at the exercise price of $32.25 (the closing price of the
Common Stock on March 31, 1997, the effective date of the grant).

Under the Stock Plan  Non-Employee  Directors  are entitled to receive an annual
stock option to purchase 7,500 shares of Common Stock. Option grants are made on
the date of each annual stockholders meeting and are exercisable eighteen months
after the date of the grant at the fair  market  value (as  defined in the Stock
Plan) of PennCorp's Common Stock on the grant date. Additionally, the Stock Plan
generally  enables  Non-Employee  Directors to receive all or a portion of their
annual fees in Common Stock. Messrs.  Player and Smith elected to receive Common
Stock in lieu of 50% of their annual fee for 1998.

Item 12.    Security Ownership of Certain Beneficial Owners and Management

OWNERS AND MANAGEMENT

Except as otherwise noted below, the following table sets forth, as of March 29,
2000, the ownership of the outstanding  shares of Common Stock (including shares
of Common Stock  issuable  upon  conversion  of shares of the  Company's  $3.375
Convertible  Preferred Stock ("Preferred  Stock") and the Company's $3.50 Series
II Preferred Stock ("Series II Preferred")) 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,  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
      Name and Address of Beneficial Owner                  Ownership       Percent of Class
      ------------------------------------                  ---------       ----------------

<S>                                                         <C>                     <C>
Brown's Dock, L.L.C.(1) ..........................          3,301,266               10.2
  56 Prospect Street
  Hartford, Connecticut 06115
NBT of Delaware, Inc.(2) .........................          1,787,472                6.0
  1209 Orange Street, Room 123
  Wilmington, Delaware 19801
Allan D. Greenberg(3) ............................            409,253                1.4
Keith A. Maib ....................................               --                 --
James P. McDermott(4) ............................             81,726                  *
Thomas A. Player(5) ..............................             33,918                  *
Bruce W. Schnitzer(6) ............................             51,698                  *
Scott D. Silverman(7) ............................             84,605                  *
David C. Smith(8) ................................            231,313                  *
All directors and executive officers as a group(9)            892,513                3.1
</TABLE>

----------------
* Represents less than 1%.

                                      122
<PAGE>


(1)  The following  information was provided by Brown's Dock,  L.L.C.  ("Brown's
     Dock") on behalf of its "group" of reporting persons: Brown's Dock, Phoenix
     Home Life Mutual Insurance  Company,  Phoenix  Investment  Partners,  Ltd.,
     Inverness  Management Fund I LLC, WMD LLC, W. McComb  Dunwoody,  J.C. Comis
     LLC, James C. Comis III,  Inverness/Phoenix  Partners LP, Executive Capital
     Partners I LP,  Inverness/Phoenix  Capital  LLC,  and DCPM  Holdings,  Inc.
     (collectively, the "Inverness Persons"). As of January 19, 2000, based on a
     Schedule  13D filed by the  Inverness  Persons  with the SEC on January 19,
     2000, the Inverness Persons have shared voting power and shared dispositive
     power as to  1,346,600  shares of  Preferred  Stock and  224,800  shares of
     Series II Preferred.  The Company's  Preferred  Stock is  convertible  into
     2.2124 shares of the Company's  Common Stock,  and the Company's  Series II
     Preferred is convertible into 1.4326 shares of the Company's Common Stock.

(2)  The following  information was provided by National Bancshares  Corporation
     of Texas and NBT of Delaware,  Inc.  (collectively,  "NBT"). As of November
     24,  1999,  based on a Schedule 13D filed by NBT,  NBT  beneficially  owned
     1,299,200 shares of the Company's Common Stock, 177,100 shares of Preferred
     Stock and 67,330  shares of Series II Preferred.  The  Company's  Preferred
     Stock is convertible  into 2.2124 shares of the Company's Common Stock, and
     the Company's  Series II Preferred is convertible into 1.4326 shares of the
     Company's Common Stock.

(3)  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, (iii) 7,500 shares
     of Common  Stock that may be purchased  pursuant to  presently  exercisable
     stock options  awarded to Mr.  Greenberg  pursuant to the 1996 Stock Option
     Plan and (iv) 8,000  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.

(4)  Consists  of (i)  11,933  shares  of  Common  Stock  owned of record by Mr.
     McDermott,  (ii) 7,295  shares of  restricted  Common  Stock,  (iii) 37,498
     shares of Common Stock subject to a presently  exercisable stock option and
     (iv)  25,000  shares of Common  Stock that may be  purchased  pursuant to a
     presently exercisable Management Warrant.

(5)  Consists of (i) 6,128 shares of Common Stock owned of record by Mr. Player,
     (ii) 1,995 shares of restricted Common Stock,  (iii) 7,500 shares of Common
     Stock that may be purchased pursuant to presently exercisable stock options
     awarded  to Mr.  Player  pursuant  to the 1996 Stock  Option  Plan and (iv)
     18,295  shares of Common  Stock  owned by Mr.  Player's  wife.  Mr.  Player
     disclaims beneficial ownership of Common Stock not held of record by him.

(6)  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,  (iii) 1,995  shares of  restricted
     Common  Stock and (iv) 7,500  shares of Common  Stock that may be purchased
     pursuant to presently  exercisable  stock options awarded to Mr.  Schnitzer
     pursuant to the 1996 Stock Option Plan.

(7)  Consists of (i) 15,500  shares of Common  Stock owned of record  jointly by
     Mr.  Silverman and his wife, (ii) 6,607 shares of restricted  Common Stock,
     (iii)  37,498  shares of Common  Stock  subject to a presently  exercisable
     stock  option and (iv) 25,000  shares of Common Stock that may be purchased
     pursuant to a presently exercisable Management Warrant.

(8)  Consists of 33,742  shares of Common  Stock owned of record  jointly by Mr.
     Smith and his wife, (ii) 190,071 shares of restricted Common Stock, 188,235
     of which are subject to restriction  pursuant to Rule 144 of the Securities
     and  Exchange Act of 1934,  as amended,  (iii) 7,500 shares of Common Stock
     that may be  purchased  pursuant to  presently  exercisable  stock  options
     awarded to Mr. Smith pursuant to the 1996 Stock Option Plan.

(9)  Assumes the exercise of warrants or options to purchase  379,996  shares of
     Common Stock and  includes  shares of  restricted  Common Stock that do not
     (absent certain  contingencies) vest until March 31, 2001 or March 31, 2000
     in the case of  restricted  stock held by  Messrs.  Player,  Schnitzer  and
     Smith.



                                      123
<PAGE>

Item 13.    Certain Relationships and Related Transactions

INDEBTEDNESS OF EXECUTIVE OFFICERS

On September 8, 1997, the Company loaned each of Messrs.  James P. McDermott and
Scott D.  Silverman,  executive  officers of the Company,  $310,380,  to finance
their purchase of 10,000 shares each of the Company's Common Stock.  Each of the
above loans were due and  payable  (absent  the  earlier  occurrence  of certain
specified  contingencies)  on  September 8, 2002,  bear  interest at the rate of
6.23% per  annum and were  secured  by a pledge  of the  shares of Common  Stock
purchased with the loan proceeds. These loans were made on a non-recourse basis.
As of December 31, 1999,  each of Messrs.  McDermott and Silverman owed $355,093
in unpaid  principal and accrued  interest.  In February  2000,  pursuant to the
terms of their  employment,  the Company accepted from each of Mr. McDermott and
Mr.  Silverman  10,000 shares of the Company's Common Stock in full and complete
extinguishment of the outstanding principal and accrued interest on these loans.
At the time of such surrender, the fair market value of Messrs.  McDermott's and
Silverman's 10,000 shares was $350.

On July 9, 1998, the Company  advanced Mr. Keith A. Maib, the current  President
and Chief  Executive  Officer of the Company,  $100,000  against the  guaranteed
portion of his annual incentive bonus. See "Executive  Compensation - Employment
Agreements."  The  purpose  of  this  advance  was to  assist  Mr.  Maib  in his
relocation from Indianapolis,  Indiana to Dallas, Texas. This advance was repaid
on March 16, 1999.

On September 30, 1997, the Company loaned Mr. Silverman $100,000. The loan bears
interest at the rate of 6.34% per annum,  was due and payable on  September  30,
2002,  and was secured by a second  mortgage on Mr.  Silverman's  residence.  On
December  31,  1999,  the  outstanding  principal  and  accrued  interest on Mr.
Silverman's  loan was $114,278.  On January 27, 1995, the Company loaned $30,000
to Mr.  McDermott,  which loan bears  interest at the rate of 7.2% per annum and
was due and payable on demand.  On December 31, 1999, the outstanding  principal
and accrued interest on Mr. McDermott's loan was $40,646.  These loans were made
as part of the relocations of Messrs.  Silverman and McDermott.  Pursuant to the
terms  of their  employment  agreements,  Mr.  McDermott's  and Mr.  Silverman's
outstanding  loans were forgiven in January 2000, the date of the termination of
their employment agreements.  The total amount forgiven was $62,433 and $173,294
for Messrs.  McDermott  and  Silverman,  respectively,  which  included  accrued
interest as of January 28, 2000 and cash payments made to cover tax liabilities.

On March 5, 1998,  Knightsbridge Management loaned each of Messrs. McDermott and
Silverman  $146,250 to be used to pay tax  obligations  on stock  awards made to
each of them on October 31, 1997.  These loans bear  interest at a rate of 5.39%
per annum and were due and payable on March 5, 2001,  with  interest  payable in
arrears  starting on March 5, 1999. The unpaid principal and accrued interest as
of December 31, 1999 was $160,634 for Messrs. McDermott and Silverman.  Pursuant
to the terms of their employment  agreements,  Mr. McDermott and Mr. Silverman's
outstanding  loans were forgiven in January 2000, the date of the termination of
their employment agreements. The total amount forgiven was $246,713 and $243,488
for Messrs.  McDermott  and  Silverman,  respectively,  which  included  accrued
interest as of January 2000, and cash payments made to cover tax liabilities.

For more information  concerning Messrs.  McDermott's and Silverman's employment
agreements and the termination thereof, see "Executive  Compensation--Employment
Agreements."

INTERESTS OF CERTAIN DIRECTORS

Bruce W.  Schnitzer,  a director of the  Company,  is a managing  member of Wand
Partners,  and an owner of Wand Partners  Inc., a private  investment  firm. Two
limited  partnerships  controlled by Wand Partners and Wand  (Acordia)  Partners
L.L.C.  invested an aggregate of  $28,000,000 in the common stock of ACO as part
of the Acordia transaction. Wand Partners Inc. received aggregate commitment and
financial advisory fees of approximately  $2,000,000 from ACO in connection with
that transaction. In addition, the Company is a limited partner in a partnership
controlled by Wand Partners (the "Wand Fund"),  and invested (through one of its
subsidiaries)  $2,000,000 in ACO through the Wand Fund.  The general  partner of
the Wand Fund is entitled  to receive  20% of the profits  earned by its limited
partners,  including the Company,  on their  investment in ACO,  after they have
been  repaid  their  capital  contributions  to the  partnership,  assuming a 9%
preferred  rate of return has been  achieved  on their  capital.  Pursuant  to a
"promote"  agreement between Messrs.  Stone and Fickes and Wand Partners,  which
was assumed by the Company,  Wand Partners  received a performance bonus payment
of $280,000 upon the sale by the Company of its ACO common stock.

In 1999 the Company invested a total of $4,355,016 in transactions  sponsored by
Wand  Partners.  The  Company  has  committed  to  invest  up to  an  additional
$7,038,000 in future transactions sponsored by the Wand Fund. In addition, as of
December 31, 1999, the Company has invested approximately $13,462,000 in limited
partnership interests in limited partnerships affiliated with Wand Partners. The
Company  paid  fees of  approximately  $386,718  to Wand  Partners  and  related
entities for the period from January 1, 1999 through December 31, 1999.

On July 30, 1999, the Company  consummated the sale of its career sales division
and related assets to Universal American Financial Corp.  ("Universal American")
for net cash  proceeds,  after  transaction  costs and  fulfillment  of contract
obligations,  of $82.0 million.  Bruce W. Schnitzer  (through the Wand Fund) and
Allan D.  Greenberg,  directors of the Company,  are  minority  shareholders  of
Universal American.  Mr. Schnitzer and Mr. Greenberg did not vote at the meeting
of the Company's  Board of Directors at which the Board of Directors  authorized
the Company to enter into the definitive purchase and sale agreement relating to
its career sales division.

                                      124
<PAGE>


David C.  Smith,  the  Chairman  of the Board of the  Company is an  investor in
Executive Capital Partners I LP. Such fund, along with certain of its affiliates
including  Inverness/Phoenix Capital, LLC, Inverness/Phoenix Partners, L.P., and
Partners  Management  I, LP  (collectively  "Inverness"),  controls  and manages
approximately 30% of the outstanding preferred stock of the Company. Mr. Smith's
investment  in the  Fund is less  than 1% of the  aggregate  investments  in the
Inverness.  Additionally,  Mr. Smith has been  excluded  from  participation  in
Inverness'  investment  in the  Company.  The  Company is  currently  pursuing a
recapitalization  transaction  in which  Inverness and its  affiliates  will own
between 30%-36% of the post-recapitalization capital stock of the Company.

                  (Remainder of Page Intentionally Left Blank)

                                      125
<PAGE>


                                    PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)   Documents

      1.    The  financial  statements  of PennCorp  Financial  Group,  Inc. and
            Subsidiaries  set forth on pages 55 through 96, and the  Independent
            Auditors  Report set forth on page 54 hereof are in  response to the
            information required by this Item.

      2.    An index to the financial  statement  schedules required to be filed
            by  Item 8 of this  Report  on Form  10-K is set  forth  immediately
            before the  attached  financial  statement  schedules on page 135 of
            this filing.

Exhibits

          2.1  Amended and Restated Purchase Agreement dated as of July 2, 1999,
               among Universal  American  Financial  Corp.,  PennCorp  Financial
               Group,   Inc.,  Pacific  Life  and  Accident  Insurance  Company,
               Pennsylvania  Life  Insurance  Company,   Southwestern  Financial
               Corporation,  Constitution Life Insurance  Company,  and PennCorp
               Financial Services, Inc. (5)

          2.2  Stock Purchase Agreement dated as of December 31, 1998 between GE
               Financial Assurance Holdings,  Inc. and Pacific Life and Accident
               Insurance Company. (23)

          2.3  Agreement  dated as of  December  31, 1998  between GE  Financial
               Assurance Holdings, Inc. and PennCorp Financial Group, Inc. (23)

          2.4  Purchase  Agreement  dated  February 21, 1999,  among ING America
               Insurance Holdings, Inc., PennCorp Financial Group, Inc., Pacific
               Life and Accident  Insurance  Company,  marketing  One  Financial
               Corporation and Marketing One, Inc. (18)

          2.5  Purchase  Agreement dated June 11, 1999, by and between  PennCorp
               Financial Services, Inc. and Allegiance Telecom, Inc. (25)

          2.6  First Amendment to Stock Purchase  Agreement dated as of June 30,
               1999,  by and  between  PennCorp  Financial  Services,  Inc.  and
               Allegiance Telecom, Inc. (5)

          2.7  Stock  Purchase  Agreement,  dated as of January 8, 2000,  by and
               between Pioneer-Occidental Holdings Company and American-Amicable
               Holdings Corporation (26)

          2.8  Amendment  to Stock  Purchase  Agreement  dated as of February 4,
               2000, by and between  American-Amicable  Holdings Corporation and
               Pioneer-Occidental Holdings Company. (27)

          2.9  Stock Purchase  Agreement,  dated as of January 7, 2000,  between
               Reassure  America Life Insurance  Company and PennCorp  Financial
               Group, Inc. (26)

          3.1  Restated By-Laws of PennCorp Financial Group, Inc. (9)

          3.2  Third Restated Certificate of Incorporation of PennCorp Financial
               Group, Inc. (17)

          4.1  Corrected   Certificate  of  Designation  of  $3.375  Convertible
               Preferred Stock. (4)

          4.2  Certificate   of  Designation  of  $3.50  Series  II  Convertible
               Preferred Stock. (3)

          4.3  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. (8)

                                      126
<PAGE>


                            MANAGEMENT COMPENSATION
                              RELATED AGREEMENTS

         10.1  Executive  Employment  Agreement  dated  January 28, 2000, by and
               between PennCorp Financial Group, Inc. and Keith A. Maib. (27)

         10.2  Agreement  dated  January  28,  2000,  by  and  between  PennCorp
               Financial Group, Inc. and Keith A. Maib. (27)

         10.3  Executive  Employment  Agreement  dated  January 28, 2000, by and
               between PennCorp  Financial  Group,  Inc. and James P. McDermott.
               (27)

         10.4  Agreement  dated  January  28,  2000,  by  and  between  PennCorp
               Financial Group, Inc. and James P. McDermott. (27)

         10.5  Executive  Employment  Agreement  dated  January 28, 2000, by and
               between PennCorp  Financial  Group,  Inc. and Scott D. Silverman.
               (27)

         10.6  Agreement  dated  January  28,  2000,  by  and  between  PennCorp
               Financial Group, Inc. and Scott D. Silverman. (27)

         10.7  Agreement  dated  September  9,  1999  between  David  C.  Smith,
               chairman  of the  Board of the  Company  and  PennCorp  Financial
               Group, Inc. (28)

         10.8  PennCorp Financial, Inc. Retirement and Savings Plan. (10)

         10.9  PennCorp Financial Group, Inc. Retirement and Savings Plan. (2)

         10.10 PennCorp Financial Group, Inc. 1992 Stock Option Plan. (10)

         10.11 PennCorp  Financial Group, Inc. Senior  Management  Warrant
               Award Program. (10)

         10.12 Form  of  Restricted  Stock  Agreement  by and  between  PennCorp
               Financial Group, Inc. and certain  participants,  effective as of
               April 1, 1994. (6)

         10.13 PennCorp  Financial Group, Inc. 1996 Stock Award and Stock Option
               Plan. (11)

         10.14 Amendment  Number One to  PennCorp  Financial  Group,  Inc.  1996
               Stock Award and Stock Option Plan. (17)

         10.15 Amendment  Number Two to  PennCorp  Financial  Group,  Inc.  1996
               Stock Award and Stock Option Plan. (2)

         10.16 Executive  Employment Agreement dated May 22, 1998 by and between
               PennCorp Financial Group, Inc. and James P. McDermott. (19)

         10.17 Executive  Retention  Agreement dated May 22, 1998 by and between
               PennCorp Financial Group, Inc. and James P. McDermott. (19)

         10.18 Executive  Employment Agreement dated May 22, 1998 by and between
               PennCorp Financial Group, Inc. and Scott D. Silverman. (19)

         10.19 Executive  Retention  Agreement dated May 22, 1998 by and between
               PennCorp Financial Group, Inc. and Scott D. Silverman. (19)

         10.20 Executive  Employment Agreement dated July 1, 1998 by and between
               PennCorp Financial Group, Inc. and Keith A. Maib. (19)


                                      127
<PAGE>


         10.21 Executive  Retention  Agreement dated July 1, 1998 by and between
               PennCorp Financial Group, Inc. and Keith A. Maib. (19)

         10.22 Letter  Agreement  dated  May 21,  1998 for  Option  to  Purchase
               Shares  of ACO  Brokerage  Holdings  Corporation  by and  between
               PennCorp Financial Group, Inc. and James P. McDermott. (2)

         10.23 Letter  Agreement  dated  May 21,  1998 for  Option  to  Purchase
               Shares  of ACO  Brokerage  Holdings  Corporation  by and  between
               PennCorp Financial Group, Inc. and Scott D. Silverman (2)

         10.24 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. (13)

         10.25 Amendment  No. 1 and Waiver  dated as of June 13,  1997 to Credit
               Agreement  dated  as of  March  12,  1997 by and  among  PennCorp
               Financial Group,  Inc., lenders signatory to the Credit Agreement
               and The Bank of New York. (19)

         10.26 Amendment  No. 2 and Waiver  dated as of April 17, 1998 to Credit
               Agreement  dated  as of  March  12,  1997 by and  among  PennCorp
               Financial Group,  Inc., lenders signatory to the Credit Agreement
               and The Bank of New York. (19)

         10.27 Waiver dated as of August 14, 1998 to Credit  Agreement  dated as
               of March 12, 1997 by and among PennCorp  Financial  Group,  Inc.,
               lenders  signatory  to the Credit  Agreement  and The Bank of New
               York. (2)

         10.28 Amendment  No.  3  dated  as of  September  11,  1998  to  Credit
               Agreement  dated  as of  March  12,  1997 by and  among  PennCorp
               Financial Group,  Inc., lenders signatory to the Credit Agreement
               and The Bank of New York. (20)

         10.29 Amendment  No. 4 and  Waiver  dated as of  November  16,  1998 to
               Credit Agreement dated as of March 12, 1997 by and among PennCorp
               Financial Group,  Inc., lenders signatory to the Credit Agreement
               and The Bank of New York. (22)

         10.30 Amendment  No.  5  dated  as  of  December  31,  1998  to  Credit
               Agreement  dated  as of  March  12,  1997 by and  among  PennCorp
               Financial Group,  Inc., lenders signatory to the Credit Agreement
               and The Bank of New York. (23)

         10.31 United Life  Consent  Agreement  dated as of March 5, 1999 by and
               among PennCorp  Financial Group,  Inc.,  lenders signatory to the
               Credit  Agreement  dated as of March 12, 1997 and The Bank of New
               York. (24)

         10.32 Amendment  No. 6 dated as of March 31, 1999 to Credit  Agreement,
               among the Company,  the lenders signatory  thereto,  the Managing
               Agents and the Co-Agents  named therein and The Bank of New York,
               as administrative agent. (18)

         10.33 Amendment No. 7 dated as of April 30, 1999, to Credit  Agreement,
               among the Company,  the lenders signatory  thereto,  the Managing
               Agents and the Co-Agents  named therein and The Bank of New York,
               as administrative agent. (5)

         10.34 Amendment  No. 8 dated as of May 14, 1999,  to Credit  Agreement,
               among the Company,  the lenders signatory  thereto,  the Managing
               Agents and the Co-Agents  named therein and The Bank of New York,
               as administrative agent. (5)


                                      128
<PAGE>


         10.35 Amendment No. 9 dated as of June 25, 1999,  to Credit  Agreement,
               among the Company,  the lenders signatory  thereto,  the Managing
               Agents and the Co-Agents  named therein and The bank of New York,
               as administrative agent. (5)

         10.36 Amendment No. 10 dated as of June 30, 1999, to Credit  Agreement,
               among the Company,  the lenders signatory  thereto,  the Managing
               Agents and the Co-Agents  named therein and The Bank of New York,
               as administrative agent. (5)

         10.37 Amendment  No.  11 dated  as of  November  26,  1999,  to  Credit
               Agreement,  among the Company, the lenders signatory thereto, the
               Managing  Agents and the Co-Agents  named therein and The Bank of
               New York, as administrative agent. (1)

         10.38 Waco  Consent  and Waiver and  Amendment  dated as of January 31,
               2000,  to  Credit  Agreement,  among  the  Company,  the  lenders
               signatory  thereto,  the Managing  Agents and the Co-Agents named
               therein and The bank of New York, as administrative agent. (1)

         10.39 Swiss  Re  Consent  dated  as of  January  31,  2000,  to  Credit
               Agreement,  among the Company, the lenders signatory thereto, the
               managing  Agents and the Co-Agents  named therein and The Bank of
               New York, as administrative agent. (1)

         10.40 Other Consent dated as of January 31, 2000, to Credit  Agreement,
               among the Company,  the lenders signatory  thereto,  the managing
               Agents and the Co-Agents  named therein and The Bank of New York,
               as administrative agent. (1)

         10.41 Forbearance   Agreement  dated  as  of  February  4,  2000  among
               American-Amicable  Holdings Corporation,  Southwestern  Financial
               Corporation,   Southwestern   Financial   Services   Corporation,
               PennCorp  Occidental  Corp., KB Investment  L.L.C., KB Management
               L.L.C.  and the lenders  signatory to the Credit  Agreement,  the
               Managing  Agents and the Co-Agents  named therein and The Bank of
               New York, as administrative  agent ans collateral agent under the
               Security Agreements. (29)

         10.42 Cash  Collateral  Agreement  dated as of February 8, 2000,  among
               the  Company  as Debtor  and  Debtor-in-Possession,  the  lenders
               signatory  thereto,  and The Bank of New York, as  administrative
               agent. (29)

         10.43 Amendment  No.  1  to  Cash  Collateral  Agreement  dated  as  of
               February   10,   2000,   among  the   Company   as   Debtor   and
               Debtor-in-Possession, the lenders signatory thereto, and The Bank
               of New York, as administrative agent. (29)

         10.44 Revision  Agreement,  dated  as of May  30,  1997,  by and  among
               United Companies Financial Corporation, PennCorp Financial Group,
               Inc.,  Pacific  Life  and  Accident  Insurance  Company  and each
               additional party set forth on the signature pages thereto. (14)

         10.45 Amendment to Surplus  Debenture in the original  principal amount
               of $73,000,000  issued by Pioneer Security Life Insurance Company
               to American-Amicable  Holdings  Corporation,  dated May 17, 1996.
               (14)

         10.46 Second Amendment to Surplus  Debenture in the original  principal
               amount of $73,000,000  issued by Pioneer  Security Life Insurance
               Company  to  American-Amicable  Holdings  Corporation,  effective
               January 1, 1997. (14)

         10.47 Third  Amendment to Surplus  Debenture in the original  principal
               amount of $73,000,000  issued by Pioneer  Security Life Insurance
               Company to American-Amicable Holdings Corporation,  effective May
               14, 1997. (14)

         10.48 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.
               (7)

                                      129
<PAGE>


         10.49 Amendment  to  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.,
               effective January 1, 1997. (14)

         10.50 Second  Amendment  to  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.,
               effective May 14, 1997. (14)

         10.51 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. (12)

         10.52 Amendment  to  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.,
               effective January 1, 1997. (14)

         10.53 Second  Amendment  to  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.,
               effective May 14, 1997. (14)

         10.54 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.
               (11)

         10.55 Amendment  to  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.,
               effective January 1, 1997. (14)

         10.56 Second Amendment to 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.,
               effective May 14, 1997. (14)

         10.57 Amendment  to Surplus  Debenture  dated  December 14, 1995 in the
               original  principal amount of $80,000,000  issued by Constitution
               Life Insurance  Company to  Southwestern  Financial  Corporation.
               (19)

         10.58 Amendment  to  Surplus  Debenture  dated  January  1, 1996 in the
               original  principal amount of $40,000,000  issued by Constitution
               Life Insurance  Company to  Southwestern  Financial  Corporation.
               (19)

         10.59 Surplus  Debenture Number Seven in the original  principal amount
               of  $150,000,000,  issued by Pacific Life and Accident  Insurance
               Company to Southwestern Financial  Corporation,  dated as of July
               30, 1999. (30)

         10.60 Surplus  Debenture Number Eight in the original  principal amount
               of  $35,000,000,  issued by Pacific Life and  Accident  Insurance
               Company to Southwestern Financial Corporation,  dated January 31,
               2000. (1)

         10.61 Note Purchase,  Release and Settlement Agreement,  dated July 13,
               1997, executed by Lone Star Liquidating Trust, PennCorp Financial
               Group, Inc. and Southwestern Financial Corporation . (15)

         10.62 Amended and Restated Assignment  Agreement dated as of January 2,
               1998  by  and  between  PennCorp   Financial   Group,   Inc.  and
               Knightsbridge Capital Fund I, L.P. (16)


                                      130
<PAGE>


         10.63 Amended and Restated Assignment  Agreement dated as of January 2,
               1998 by and between  PennCorp  Financial  Group,  Inc.,  David J.
               Stone, Steven W. Fickes, the Steven Wayne Fickes, Jr. Trust dated
               December  21, 1995 and the Kathryn  Elizabeth  Fickes Trust dated
               December 21, 1995. (16)

         10.64 Agreement dated September 22, 1998 by PennCorp  Financial  Group,
               Inc. and certain subsidiaries  signatory to the Agreement and the
               Texas Department of Insurance. (21)

          12   Computation of ratio of earnings to fixed charges. (1)

          21   List of subsidiaries of the Registrant. (1)

          23.1 Auditors consent. (1)

          23.2 Auditors consent. (1)

          27   Financial Data Schedule. (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, 1998 of PennCorp  Financial  Group,
     Inc.

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

(4)  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.

(5)  Such  exhibit is  incorporated  by reference to the Form 8-K dated June 25,
     1999  which  was filed  with the  Securities  and  Exchange  Commission  by
     PennCorp Financial Group, Inc. on July 13, 1999 relating to the sale of the
     Career Sales Division and related assets, First Amendment to Stock Purchase
     Agreement; and Amendment No's. 7, 8, 9 and 10 to Credit Agreement.

(6)  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.

(7)  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.

(8)  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.

(9)  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.

(10) Such exhibit is incorporated by reference to the Registration  Statement on
     Form S-1  (Registration  No. 33-50530) of PennCorp  Financial  Group,  Inc.
     filed on August 6, 1992.

(11) 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.

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

(13) Such exhibit is  incorporated  by reference  to the  Amendment  Number 1 to
     Annual  Report on Form 10-K for the fiscal year ended  December 31, 1996 of
     PennCorp Financial Group, Inc.

(14) Such exhibit is incorporated  by reference to the Quarterly  Report on Form
     10-Q for the three months ended June 30, 1997 of PennCorp  Financial Group,
     Inc.

                                      131
<PAGE>


(15) Such exhibit is incorporated  by reference to the Quarterly  Report on Form
     10-Q for the three months ended  September  30, 1997 of PennCorp  Financial
     Group, Inc.

(16) Such exhibit is incorporated by reference to the Form 8-K dated January 13,
     1998  which  was filed  with the  Securities  and  Exchange  Commission  by
     PennCorp  Financial  Group,  Inc.  on  January  13,  1998  relating  to the
     acquisition  of common  stock and common  stock  warrants  of  Southwestern
     Financial  Corporation not previously  owned by PennCorp  Financial  Group,
     Inc.

(17) Such exhibit is incorporated by reference to the Registration  Statement on
     Form S-8  (Registration  No.  333-48629) of PennCorp  Financial Group, Inc.
     filed on March 24, 1998.

(18) Such exhibit is  incorporated  by reference to the Form 8-K dated March 31,
     1999  which  was filed  with the  Securities  and  Exchange  Commission  by
     PennCorp Financial Group, Inc. on April 5, 1999 relating to the sale of the
     United Life & Annuity Insurance Company,  CyberLink  Development,  Inc., UC
     Mortgage  Corp.,  United  Variable  Services,  Inc.  and certain  assets of
     Marketing One, Inc.; and Amendment No. 6 to Credit Agreement

(19) Such exhibit is incorporated  by reference to the Quarterly  Report on Form
     10-Q for the three months ended June 30, 1998 of PennCorp  Financial Group,
     Inc.

(20) Such exhibit is  incorporated  by reference to the Form 8-K dated September
     15, 1998 which was filed with the  Securities  and Exchange  Commission  by
     PennCorp  Financial Group, Inc. on September 15, 1998 relating to Amendment
     No. 3 to Credit Agreement.

(21) Such exhibit is incorporated  by reference to the Quarterly  Report on Form
     10-Q for the three months ended  September  30, 1998 of PennCorp  Financial
     Group, Inc.

(22) Such exhibit is  incorporated  by reference to the Form 8-K dated  November
     17, 1998 which was filed with the  Securities  and Exchange  Commission  by
     PennCorp  Financial Group,  Inc. on November 17, 1998 relating to Amendment
     No. 4 and Waiver of Credit Agreement.

(23) Such exhibit is incorporated by reference to the Form 8-K dated January 11,
     1999  which  was filed  with the  Securities  and  Exchange  Commission  by
     PennCorp  Financial  Group,  Inc.  on  January  11,  1999  relating  to the
     acquisition of Pennsylvania Life Insurance Company, Union Bankers Insurance
     Company and related  entities,  the acquisition of  Professional  Insurance
     Company, and Amendment No. 5 to Credit Agreement.

(24) Such exhibit is  incorporated  by reference to the Form 8-K dated March 11,
     1999  which  was filed  with the  Securities  and  Exchange  Commission  by
     PennCorp  Financial  Group,  Inc. on March 11, 1999  relating to the United
     Life Consent Agreement by and among PennCorp  Financial Group, Inc. lenders
     signatory to the Credit  Agreement  dated as of March 12, 1997 and The Bank
     of New York.

(25) Such  exhibit is  incorporated  by reference to the Form 8-K dated June 11,
     1999  which  was filed  with the  Securities  and  Exchange  Commission  by
     PennCorp  Financial  Group,  Inc. on June 18, 1999  relating to the sale of
     Kivex, Inc.

(26) Such exhibit is incorporated by reference to the Form 8-K dated January 10,
     2000  which  was filed  with the  Securities  and  Exchange  Commission  by
     PennCorp  Financial Group, Inc. on January 10, 2000 relating to the sale of
     Pioneer Security Life Insurance Company, Occidental Life Insurance Company,
     American-Amicable  Life  Insurance  Company of Texas and  Pioneer  American
     Insurance Company;  and the sale of Southwestern Life Insurance Company and
     Security Life & Trust Insurance Company.

(27) Such exhibit is incorporated by reference to the Form 8-K dated February 4,
     2000  which  was filed  with the  Securities  and  Exchange  Commission  by
     PennCorp Financial Group, Inc. on February 11, 2000 relating to the sale of
     Pioneer Security Life Insurance Company, Occidental Life Insurance Company,
     American-Amicable  Life  Insurance  Company of Texas and  Pioneer  American
     Insurance Company; and new Agreements and Executive  Employment  Agreements
     for Keith A. Maib, James P. McDermott and Scott D. Silverman.

(28) Such exhibit is incorporated  by reference to the Quarterly  Report on Form
     10-Q for the three months ended June 30, 1999 of PennCorp  Financial Group,
     Inc.

                                      132
<PAGE>


(29) Such exhibit is incorporated by reference to the Form 8-K dated February 4,
     2000  which  was filed  with the  Securities  and  Exchange  Commission  by
     PennCorp  Financial  Group,  Inc.  on  February  29,  2000  relating to the
     Forbearance  Agreement,  Cash  Collateral  Agreement and Amendment No. 1 to
     Cash Collateral Agreement.

(30) Such exhibit is incorporated  by reference to the Quarterly  Report on Form
     10-Q for the three months ended  September  30, 1999 of PennCorp  Financial
     Group, Inc.

(b)  Reports on Form 8-K.

     None
                                      133
<PAGE>


                                  SIGNATURES

      Pursuant  to the  requirements  of  Section  13 or  Section  15(d)  of the
Securities  Exchange Act of 1934, PennCorp Financial Group, Inc. has duly caused
this  report to be  signed on its  behalf  by the  undersigned,  thereunto  duly
authorized.

                                    PENNCORP FINANCIAL GROUP, INC.
                                    (Registrant)


                                    By:/s/ Keith A. Maib
                                       -------------------------------------
                                       Keith A. Maib
                                       President and Chief Executive Officer

                              Date: April 13, 2000

      Pursuant to the requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.



/s/ Keith A. Maib                            /s/ Thomas A. Player
------------------------------------         ----------------------------------
Keith A. Maib                                Thomas A. Player
Director                                     Director

Date:  April 13, 2000                        Date:  April 13, 2000



/s/ Allan D. Greenberg                       /s/ Bruce W. Schnitzer
------------------------------------         ----------------------------------
Allan D. Greenberg                           Bruce W. Schnitzer
Director                                     Director

Date:  April 13, 2000                        Date:  April 13, 2000



/s/ David C. Smith
------------------------------------
David C. Smith
Chairman of the Board and Director

Date:  April 13, 2000








                                      134
<PAGE>


                PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
                  INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

Financial Statements:

Reference  is made  to  data  appearing  on  pages  50  through  89,  and to the
Independent Auditors' Report appearing on page 49 hereof.

      Schedules:*                                                      Page
      ---------                                                        ----

Independent Auditors' Report - Financial Statement Schedules .......    136

Schedule II   Condensed Financial Information of Registrant ........    137
Schedule III  Supplementary Insurance Information ..................    140
Schedule IV   Reinsurance ..........................................    141
Schedule V    Valuation and Qualifying Accounts ....................    142

*  All other  schedules  have been  omitted  as they are not  applicable  or not
   required,  or the  information  is given in the financial  statements,  notes
   hereto or in other schedules.

                                      135
<PAGE>


INDEPENDENT AUDITORS' REPORT

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

      Under date of April 10,  2000,  we  reported on the  consolidated  balance
sheets of PennCorp  Financial  Group,  Inc. and  subsidiaries as of December 31,
1999 and  1998,  and the  related  consolidated  statements  of  operations  and
comprehensive income (loss),  changes in shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1999, as contained
in the annual  report on Form 10-K for the year  1999.  In  connection  with our
audits of the aforementioned  consolidated financial statements, we also audited
the  related  consolidated  financial  statement  schedules  as  listed  in  the
accompanying  index. These financial  statement schedules are the responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these financial statement schedules based on our audits.

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

      The  accompanying  1999 financial  statement  schedules have been prepared
assuming that the Company will continue as a going concern. The Company suffered
losses from operations in 1999 and 1998. As discussed in Note 23 of the Notes to
the Consolidated  Financial  Statements,  PennCorp Financial Group, Inc. filed a
voluntary  petition for relief under chapter 11 of title 11 of the United States
Bankruptcy  Code in the  United  States  Bankruptcy  Court for the  District  of
Delaware.  The  Company  has  filed  a plan  of  reorganization  and  will  seek
confirmation of the  Recapitalization  Plan by the Bankruptcy Court.  Should the
recapitalization  plan not be approved by the  Bankruptcy  Court,  be materially
delayed or not be consummated,  the Company may have to sell assets or otherwise
realize assets and liquidate or settle  liabilities for amounts other than those
reflected in the  consolidated  financial  statements  or related  notes.  These
factors raise  substantial  doubt about the  Company's  ability to continue as a
going  concern.  The 1999  financial  statement  schedules  do not  include  any
adjustments that might result from the outcome of these uncertainties.

KPMG LLP
Dallas, Texas
April 10, 2000

                                      136
<PAGE>

<TABLE>

                                                                   SCHEDULE II

                         PENNCORP FINANCIAL GROUP, INC.
                              (PARENT COMPANY ONLY)
            CONDENSED STATEMENTS OF INCOME (LOSS) For the years ended
                        December 31, 1999, 1998 and 1997
                                 (In thousands)
<CAPTION>

                                                                    1999         1998         1997
                                                                 ---------    ---------    --------
<S>                                                              <C>          <C>          <C>
Revenue:
  Interest income from subsidiaries ..........................   $  19,349    $  19,663    $ 21,173
  Other interest income ......................................         754        2,865       3,547
  Net gains from sale of investments .........................        --            577        --
  Net loss from sale of subsidiaries .........................      (1,898)        --          --
  Other income ...............................................         143          589         249
                                                                 ---------    ---------    --------
     Total revenue ...........................................      18,348       23,694      24,969
                                                                 ---------    ---------    --------

Operating expenses:
  General and administrative expenses ........................      20,116       19,429      36,939
  Interest and amortization of deferred debt issuance costs ..      40,176       42,730
                                                                                             23,103

  Restructuring charges ......................................          30        4,529        --
  Impairment provision associated with assets of
   Businesses Held for Sale ..................................        --          9,000        --
                                                                 ---------    ---------    --------
     Total operating expenses ................................      60,322       75,688      60,042
                                                                 ---------    ---------    --------

Loss before income tax benefits, equity in earnings of
   subsidiaries ..............................................     (41,974)     (51,994)    (35,073)
   Income tax benefit ........................................      (1,249)      (3,132)     (8,689)
                                                                 ---------    ---------    --------
Loss before equity in losses of subsidiaries .................     (40,725)     (48,862)    (26,384)
   Equity in earnings (losses) of subsidiaries. ..............    (145,987)    (374,068)     76,524
                                                                 ---------    ---------    --------
Net income (loss) ............................................    (200,712)    (422,930)     50,140
   Preferred stock dividend requirement ......................      17,825       18,273      19,533
                                                                 ---------    ---------    --------
Net income (loss) applicable to common stock .................   $(218,537)   $(441,203)   $ 30,607
                                                                 =========    =========    ========

                See accompanying independent auditors' report.


                                      137
<PAGE>

<CAPTION>

                                                                   SCHEDULE II

                        PENNCORP FINANCIAL GROUP, INC.
                             (PARENT COMPANY ONLY)

                           CONDENSED BALANCE SHEETS
                       As of December 31, 1999 and 1998
                                (In thousands)

                                                                1999          1998
                                                              ---------    -----------
<S>                                                           <C>          <C>
ASSETS
  Investments:
   Investment in subsidiaries .............................   $ 435,077    $   730,436
   Notes receivable from subsidiaries .....................       7,665        257,442
                                                              ---------    -----------
     Total investments ....................................     442,742        987,878

  Cash and cash equivalents ...............................      10,478         12,654
  Deferred debt issuance costs ............................       2,051          4,896
  Other assets ............................................         221          1,145
                                                              ---------    -----------
     Total assets .........................................   $ 455,492    $ 1,006,573
                                                              =========    ===========

LIABILITIES

  Notes payable ...........................................   $ 279,646    $   548,646
  Due to subsidiaries .....................................       2,552           --
  Accrued expenses and other liabilities ..................      20,328         21,986
                                                              ---------    -----------
     Total liabilities ....................................     302,526        570,632
                                                              ---------    -----------

SHAREHOLDERS' EQUITY
  $3.375 Convertible preferred stock ......................     120,216        112,454
  $3.50 Series II convertible preferred stock .............     151,736        141,673
  Common stock ............................................         303            301
  Additional paid in capital ..............................     428,974        430,321
  Accumulated other comprehensive income ..................     (62,712)        19,995
  Accumulated deficit .....................................    (453,487)
  Treasury shares .........................................     (30,829)       (32,391)
  Notes receivable and other assets secured by common stock      (1,235)        (1,491)
                                                              ---------    -----------
     Total shareholders' equity ...........................     152,966        435,941
                                                              ---------    -----------
     Total liabilities and shareholders' equity ...........   $ 455,492    $ 1,006,573
                                                              =========    ===========

                See accompanying independent auditors' report.

                                      138
<PAGE>

<CAPTION>

                                                                   SCHEDULE II

                         PENNCORP FINANCIAL GROUP, INC.
                              (PARENT COMPANY ONLY)
             CONDENSED STATEMENTS OF CASH FLOWS For the years ended
                        December 31, 1999, 1998 and 1997
                                 (In thousands)

                                                                       1999         1998         1997
                                                                    ---------    ---------    ---------
<S>                                                                 <C>          <C>          <C>
Cash flows from operating activities:
  Net income (loss) .............................................   $(200,712)   $(422,930)   $  50,140
  Adjustments to reconcile net income (loss) to net cash
   provided (used) in operating activities:
     Amortization of intangibles and depreciation ...............       4,010        1,966        1,389
     Impairment provision associated with assets of
      Businesses Held for Sale ..................................        --          9,000         --
     Equity in (earnings) losses of subsidiaries ................     159,987      374,068      (76,524)
     Increase (decrease) in liabilities and due to subs .........      (1,839)      (6,164)      12,870

     Loss on sale of subsidiaries ...............................       1,898         --           --
     Other, net .................................................       3,914        2,644       (9,227)
                                                                    ---------    ---------    ---------
      Net cash used by operations ...............................     (32,742)     (41,416)     (21,352)
                                                                    ---------    ---------    ---------

Cash flows from investing activities:

  Acquisition of businesses .....................................        --        (73,858)        --
  Purchase of equity security ...................................        --         (5,000)     (20,000)
  Sale of equity security .......................................        --         30,500         --
  Settlement on sale of subsidiaries ............................      (9,002)        --           --
  Collections on mortgage loans .................................       1,238         --           --
  Sale of mortgage loans and limited partnerships ...............      10,238         --           --
  Principal payment on notes receivable from subsidiaries .......     204,211         --           --
  Dividend received from subsidiary .............................     120,549       44,327       14,677
  Capital contribution to subsidiary ............................     (27,668)      (7,853)     (14,889)
  Other, net ....................................................        --            712      (42,142)
                                                                    ---------    ---------    ---------
     Net cash provided (used) by investing activities ...........     299,566      (11,172)     (62,354)
                                                                    ---------    ---------    ---------

Cash flows from financing activities:

  Issuance of notes payable .....................................        --        203,000      250,000
  Issuance of common stock ......................................        --              3         --
  Purchase of treasury stock ....................................        --           --        (28,760)
  Reduction of notes payable ....................................    (269,000)    (126,015)
  Redemption of preferred stock .................................        --           --        (14,705)
  Other, primarily dividends, net ...............................        --        (16,210)     (20,464)
                                                                    ---------    ---------    ---------
     Net cash provided by financing activities...................    (269,000)      60,778       86,071
                                                                    ---------    ---------    ---------

Net increase in cash ............................................      (2,176)       8,190        2,365
Cash and cash equivalents at beginning of year ..................      12,654        4,464        2,099
                                                                    ---------    ---------    ---------
Cash and cash equivalents at end of year ........................   $  10,478    $  12,654    $   4,464
                                                                    =========    =========    =========
Supplemental Disclosure:
  Interest paid .................................................   $  38,014    $  37,849    $  20,946
  Taxes paid (refunded) .........................................         (55)        (213)        --
Non-cash financing activities:
  Redemption of Series C Preferred Stock ........................        --         22,227         --
  Debt assumed with acquisition .................................        --        115,015         --
  Issuance of common stock associated with the acquisition of the
   Fickes and Stone Knightsbridge Interests .....................        --          8,500         --
  Accrued and unpaid preferred stock dividends ..................      17,825        4,457         --
  Reissuance of treasury stock ..................................       1,562         --           --
  Other .........................................................        --            261        1,281

                See accompanying independent auditors' report.

                                      139
<PAGE>

<CAPTION>

                                                                  SCHEDULE III

                         PENNCORP FINANCIAL GROUP, INC.
                       SUPPLEMENTARY INSURANCE INFORMATION
              For the years ended December 31, 1999, 1998 and 1997
                                 (In thousands)


                                  Future
                                  Policy                                              Amorti-
                                 Benefits                             Benefits,     zation of
                    Deferred      Losses,                             Claims,       Deferred
                     Policy       Claims                   Net        Losses &       Policy       Other
                  Acquisition     & Loss     Premium    Investment   Settlement    Acquisition   Operating
                     Costs       Expenses    Revenue      Income      Expenses        Costs      Expenses
                  -----------   ----------   --------   ----------   -----------   -----------   ---------
<S>               <C>           <C>          <C>        <C>          <C>           <C>           <C>
1999
---------------
Fixed benefit .   $       456   $   27,503   $106,411   $   14,559   $    74,079   $     6,957   $  53,537
Life ..........       109,042    2,061,540    225,976      160,218       242,903        35,107      78,102
Accumulation ..         4,228      667,914      6,487       82,823        60,605         2,992      17,252
                  -----------   ----------   --------   ----------   -----------   -----------   ---------
 Total ........   $   113,726   $2,756,957   $338,874   $  257,600   $   377,587   $    45,056   $ 148,891
                  ===========   ==========   ========   ==========   ===========   ===========   =========

1998
---------------
Fixed benefit .   $      --     $   24,190   $216,219    $  25,826   $   160,135   $    27,251   $ 107,772
Life ..........       136,420    2,064,035    234,540      174,249       267,074        49,265      98,906
Accumulation ..         3,288      731,436      8,399      168,977       114,553         2,775      22,819
                  -----------   ----------   --------   ----------   -----------   -----------   ---------
  Total .......   $   139,708   $2,819,661   $459,158   $  369,052   $   541,762   $    79,291   $ 229,497
                  ===========   ==========   ========   ==========   ===========   ===========   =========

1997
---------------
Fixed benefit .   $   160,974   $  175,524   $168,974   $   19,206   $    54,630   $    19,386   $  73,488
Life ..........       122,376    1,342,563    169,518       94,442       164,878        24,154      59,879
Accumulation ..        26,767    1,771,838      7,074      159,589       104,781           783      12,878
                  -----------   ----------   --------   ----------   -----------   -----------   ---------
  Total .......   $   310,117   $3,289,925   $345,566   $  273,237   $   324,289   $    44,323   $ 146,245
                  ===========   ==========   ========   ==========   ===========   ===========   =========


                 See accompanying independent auditors' report

                                      140
<PAGE>

<CAPTION>

                                                                   SCHEDULE IV

                        PENNCORP FINANCIAL GROUP, INC.

                                  REINSURANCE

             For the years ended December 31, 1999, 1998, and 1997
                                (In thousands)

                                                                                                        Percentage
                                                              Ceded to       Assumed                    Of Amount
                                                  Gross         Other       from Other        Net         Assumed
                                                  Amount      Companies     Companies        Amount       to Net
                                                -----------   ----------   ------------    -----------  ----------
<S>                                             <C>           <C>          <C>             <C>               <C>
Year ended December 31, 1999:
   Life insurance in force ..................   $29,573,138   $5,511,902   $  1,090,479    $25,151,715
                                                ===========   ==========   ============    ===========

Premiums:
   Accident and health insurance ............   $   162,027   $   55,376   $         (9)   $   106,642        --%
   Life insurance/accumulation ..............       261,003       31,272          2,501        232,232       1.1%
                                                -----------   ----------   ------------    -----------
                                                $   423,030   $   86,648   $     2,492     $   338,874
                                                ===========   ==========   ===========     ===========

Year ended December 31, 1998:
   Life insurance in force ..................   $35,350,735   $5,501,096   $ 1,325,067     $31,174,706
                                                ===========   ==========   ===========     ===========

Premiums:
   Accident and health insurance ............   $   310,477   $   96,770   $      2,047    $   215,754       0.9%
   Life insurance/accumulation ..............       275,840       36,407          3,971        243,404       1.6%
                                                -----------   ----------   ------------    -----------
                                                $   586,317   $  133,177   $     6,018     $  459,158
                                                ===========   ==========   ===========     ==========

Year ended December 31, 1997:
   Life insurance in force ..................   $24,618,960   $4,366,266   $ 1,251,538     $21,504,232
                                                ===========   ==========   ===========     ===========

Premiums:
   Accident and health insurance ............   $   172,511   $    2,537   $       --      $   169,974        --%
   Life insurance/accumulation ..............       203,027       29,962          2,527        175,592       1.4%
                                                -----------   ----------   ------------    -----------
                                                $   375,538   $   32,499   $     2,527     $   345,566
                                                ===========   ==========   ===========     ===========

                See accompanying independent auditors' report.

                                      141
<PAGE>


<CAPTION>
                                                                    SCHEDULE V

                         PENNCORP FINANCIAL GROUP, INC.
              VALUATION AND QUALIFYING ACCOUNTS For the years ended
                        December 31, 1999, 1998 and 1997
                                 (In thousands)

                                      Balance at     Charge to   Charge to                    Balance at
                                      Beginning      Cost and     Other                         End of
                                      Of Period      Expenses    Accounts    Deductions         Period
                                      ---------      ---------   ---------   -----------      ----------
<S>                                   <C>            <C>         <C>         <C>              <C>
1999:
Mortgage loans on real estate .....   $   4,295      $    --     $   3,494   $     7,107      $      682
Accounts and notes receivable .....       6,201          1,250        --           1,541           5,910

1998:
Mortgage loans on real estate .....   $   6,721(a)   $  11,425   $    --     $    13,851(b)   $    4,295
Unearned loan charges .............       1,569           --          --           1,569(b)         --
Accounts and notes receivable .....       9,205(a)       4,449        --           7,453(b)        6,201

1997:
Mortgage loans on real estate .....   $   4,211      $   2,106   $    --     $       276      $    6,041
Allowance for bond losses .........         189           --          --             189            --
Unearned loan charges .............         266          1,806        --             503           1,569
Accounts and notes receivable .....       6,528          9,102        --           6,605           9,025

--------------
(a)  Includes amounts recorded as a purchase GAAP adjustment in conjunction with
     the acquisition of SW Financial.
(b)  Includes amounts transferred to assets of Businesses Held for Sale.


                See accompanying independent auditors' report.

                                      142

</TABLE>