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                                                                   EXHIBIT 10.12

 
                              EMPLOYMENT AGREEMENT
 
     AGREEMENT, made and entered into as of the 7th day of June, 1996 by and
between PennCorp Financial Group, Inc., a Delaware corporation (together with
its successors and assigns permitted under this Agreement, the "Company"), and
David J. Stone (the "Executive").
 
                                  WITNESSETH:
 
     WHEREAS, the Executive is the Chairman of the Board and Chief Executive
Officer of the Company; and
 
     WHEREAS, the Company desires to continue to employ the Executive and to
enter into an employment agreement embodying the terms of such employment (the
"Agreement"); and
 
     WHEREAS, the Executive desires to enter into the Agreement and to accept
such employment, subject to the terms and provisions of the Agreement;
 
     NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the receipt of
which is mutually acknowledged, the Company and the Executive (individually a
"Party" and together the "Parties") agree as follows:
 
     1. Definitions.
 
     (a) "Annual Incentive Plan" shall mean the Company's 1996 Senior Executive
Annual Incentive Award Plan.
 
     (b) "Approved Medical Doctor" shall mean a medical doctor selected by the
Company and the Executive for the purposes of determining Disability. In the
event that the Company and the Executive cannot agree on a medical doctor, then
each Party shall select a medical doctor and the two medical doctors shall
select a third medical doctor who shall be the Approved Medical Doctor.
 
     (c) "Base Salary" shall mean the salary provided for in Section 4 below or
any increased salary granted to the Executive pursuant to Section 4.
 
     (d) "Board" shall mean the Board of Directors of the Company.
 
     (e) "Cause" shall mean:
 
          (1) the Executive (i) is convicted of or (ii) pleads guilty or nolo
     contendere to (a) a felony or (b) a crime against the Company that causes
     or is reasonably likely to cause material economic harm to the Company; or
 
          (2) the Executive engages in conduct that constitutes willful gross
     neglect or willful gross misconduct in carrying out his duties under the
     Agreement, resulting, in either case, in material economic harm to the
     Company.
 
     (f) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, including regulations thereunder and successor provisions and
regulations thereto.
 
     (g) "Company Target" shall mean any entity with which the Company has
actively engaged in discussions to acquire, merge or enter into any joint
venture during the 12-month period ending on the date of the Executive's
termination of employment.
 
     (h) A "Change in Control" shall mean the first to occur of the following
events:
 
          (1) any "person" (as such term is used in Sections 3(a)(9) and 13(d)
     of the Exchange Act) becomes a "beneficial owner" (as such term is used in
     Rule 13d-3 under the Exchange Act) of more than 25 percent of the Voting
     Stock of the Company;
 
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          (2) the majority of the Board consists of individuals other than
     Incumbent Directors;
 
          (3) the Company adopts any plan of liquidation providing for the
     distribution of all or substantially all of its assets;
 
          (4) all or substantially all of the assets or business of the Company
     are disposed of pursuant to a merger, consolidation or other transaction,
     unless (i) the shareholders of the Company immediately prior to such
     merger, consolidation or other transaction beneficially own, directly or
     indirectly, in substantially the same proportion as they owned the Voting
     Stock of the Company, at least 60 percent of the Voting Stock or other
     ownership interests of the entity or entities, if any, that succeed to the
     business of the Company and (ii) the successor entity (or entities) has
     assumed all obligations under the Agreement; or
 
          (5) the Company combines with another company and is the surviving
     corporation; provided, however, that immediately after the combination, the
     shareholders of the Company immediately prior to the combination hold,
     directly or indirectly, less than 60 percent of the Voting Stock of the
     combined company (there being excluded from the number of shares held by
     such shareholders, but not from the Voting Stock of the combined company,
     any shares received by affiliates (as such term is defined in Rule 12b-2 of
     the Exchange Act) of such other company in exchange for stock of such other
     company).
 
     (i) "Competitive Activity" shall mean any activity engaged in by the
Executive, whether as an employee, consultant, principal, agent, officer,
director, partner or shareholder (except as a less than one percent shareholder
of a publicly traded company or a less than five percent shareholder of a
privately held company), which is competitive with the Company. For this
purpose, an activity which is competitive with the Company shall mean a business
that is primarily involved in the acquisition of life insurance companies.
Notwithstanding anything to the contrary in this Section 1(i), an activity shall
not be deemed to be a Competitive Activity solely as a result of the Executive's
being employed by or otherwise associated with a business of which a unit is in
competition with the Company or any Subsidiary but as to which unit the
Executive does not have direct or indirect responsibilities.
 
     (j) "Disability" shall mean the Executive's inability to substantially
perform his duties and responsibilities under the Agreement for a period of 180
days during any 240-day period as determined by an Approved Medical Doctor.
 
     (k) "Effective Date" shall mean April 15, 1996.
 
     (l) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time, including regulations thereunder and successor
provisions and regulations thereto.
 
     (m) "Good Reason" shall mean the occurrence of any of the following events
within the 60-day period preceding the termination of employment by the
Executive:
 
          (1) a reduction in the Executive's Base Salary or any material failure
     by the Company to honor its obligations under Sections 7, 8, 9 or 10
     hereof, in any such case, without the Executive's prior written consent;
 
          (2) a material change in the Executive's position, duties or
     responsibilities with respect to his employment by the Company under the
     Agreement without the Executive's prior written consent;
 
          (3) the failure to elect or reelect the Executive to any of the
     positions described in Section 3 below (including his position as a member
     of the Board) or the removal of him from any such position (other than a
     removal resulting from the termination of the Executive's employment for
     Cause pursuant to Section 11(c) below);
 
          (4) a reduction in the Executive's annual target bonus opportunity
     below $800,000 or any material change in the Executive's participation in
     the Annual Incentive Plan without the Executive's prior written consent;
 
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          (5) an actual change by the Board in the Executive's principal work
     location by more than 25 miles and more than 25 miles from the Executive's
     principal place of abode as of the date hereof without the Executive's
     prior written consent;
 
          (6) the failure of the Company to obtain the assumption in writing of
     its obligation to perform this Agreement by any successor to all or
     substantially all of the assets of the Company within 45 days after a
     merger, consolidation, sale or similar transaction; or
 
          (7) a Change in Control.
 
     (n) "Incumbent Directors" shall mean the members of the Board as of the
Effective Date; provided, however, that any person becoming a director
subsequent to such date whose election or nomination for election was supported
by 75 percent of the directors who then comprised the Incumbent Directors shall
be considered to be an Incumbent Director.
 
     (o) "Stock" shall mean the Common Stock of the Company.
 
     (p) "Stock Plan" shall mean the Company's 1996 Stock Award and Stock Option
Plan.
 
     (q) "Subsidiary" of the Company shall mean any corporation of which the
Company owns, directly or indirectly, more than 50 percent of the Voting Stock
or any other business entity in which the Company directly or indirectly has an
ownership interest of more than 50 percent.
 
     (r) "Term of Employment" shall mean the period specified in Section 2
below.
 
     (s) "Voting Stock" shall mean capital stock of any class or classes having
general voting power under ordinary circumstances, in the absence of
contingencies, to elect the directors of a corporation.
 
     2. Term of Employment.
 
     The Company hereby employs the Executive, and the Executive hereby accepts
such employment, for the period commencing on the Effective Date and ending on
the fifth anniversary of the Effective Date, subject to earlier termination of
the Term of Employment in accordance with the terms of the Agreement; provided,
however, this Agreement shall become null and void ab initio and of no further
force and effect unless (i) prior to January 1, 1997 (or such other date to
which the Executive and the Company may agree), the Company and the Executive
(or affiliates of the Executive) enter into a definitive agreement (the
"Knightsbridge Agreement") providing for the sale (the "Sale") by the Executive
(or such affiliates) to the Company of the interests of the Executive (or such
affiliates) in Knightsbridge Capital Fund I, L.P. ("Knightsbridge") and
Knightsbridge Management, L.L.C., (ii) the stockholders of the Company approve
the Sale no later than at the Company's 1997 annual meeting of stockholders, and
(iii) the Company's stockholders approve the Annual Incentive Plan and the Stock
Plan at the Company's 1996 annual meeting of stockholders.
 
     3. Position, Duties and Responsibilities.
 
     (a) On the Effective Date and continuing for the remainder of the Term of
Employment, the Executive shall be employed as the Chief Executive Officer of
the Company and be responsible for the general management of the affairs of the
Company. The Executive, in carrying out his duties under the Agreement, shall
report to the Board.
 
     (b) It is the intention of the Parties that as of the Effective Date and
continuing for the remainder of the Term of Employment, the Executive shall
serve as a member of the Board and of the Executive Committee thereof.
 
     (c) Notwithstanding anything herein to the contrary, nothing shall preclude
the Executive from:
 
          (1) serving on the boards of directors of other corporations if the
              Board consents in writing to such service; provided, however, that
              consent by the Board is not required for serving on the boards of
              directors of corporations in which Knightsbridge had an investment
              at the time at which the Executive originally undertook such
              position and so long as all directors' fees and any other
 
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           compensation paid by such corporation in respect of the Executive's
           services as a member of such board while he is an employee of the
           Company are paid to the Company;
 
          (2) serving on the boards of a reasonable number of trade associations
     and/or charitable organizations;
 
          (3) engaging in charitable activities and community affairs; and
 
          (4) managing his personal investments and affairs.
 
     4. Base Salary.
 
     The Executive shall be paid an annualized Base Salary, payable in
accordance with the regular payroll practices of the Company, of $750,000. The
Base Salary shall be reviewed no less frequently than annually for increase in
the discretion of the Board and/or the Compensation Committee thereof.
 
     5. Annual Incentive Award.
 
     Provided that the Annual Incentive Plan is approved by the Company's
shareholders, the Executive shall participate in the Annual Incentive Plan and
shall have a minimum annual target bonus opportunity under such Plan of $800,000
and a maximum bonus opportunity of 2 times such minimum. Payment of annual
incentive awards shall be made at the same time that other senior level
executives of the Company receive their incentive awards unless otherwise agreed
to by the Executive.
 
     6. Long-Term Incentive Award.
 
     Provided that the Stock Plan is approved by the Company's shareholders, the
Executive shall participate in the Stock Plan and shall be granted under the
Stock Plan, as of the Effective Date, an option to purchase 559,000 shares of
Stock. The option shall be divided into four tranches as set forth below:
 
<TABLE>
<CAPTION>
                              NUMBER OF SHARES OF          EXERCISE PRICE
TRANCHE                     STOCK UNDERLYING TRANCHE         PER SHARE
-------                     ------------------------       --------------
<S>     <C>                 <C>                            <C>
  1......................            250,000                    $29.50
  2......................            103,000                    $32.45
  3......................            103,000                  $ 35.695
  4......................            103,000                  $ 39.325
</TABLE>
 
     Twenty-five percent of each tranche shall become exercisable (vest) on the
first four anniversaries of the Effective Date and the option shall expire on
the fifth anniversary of the Effective Date.
 
     7. Employee Benefit Programs.
 
     a. During the Term of Employment, the Executive shall be entitled to
participate in all employee pension and welfare benefit plans and programs made
available to the senior-level executives of the Company or to its employees
generally, as such plans or programs may be in effect from time to time,
including, without limitation, pension, profit sharing, savings and other
retirement plans or programs, medical, dental, hospitalization, short-term and
long-term disability and life insurance plans, accidental death and
dismemberment protection, travel accident insurance, and any other pension or
retirement plans or programs and any other employee welfare benefit plans or
programs that may be sponsored by the Company from time to time, including any
plans that supplement the above-listed types of plans or programs, whether
funded or unfunded.
 
     b. In addition, the Company shall immediately cause one of its life
insurance subsidiaries acceptable to the Executive to issue the Executive a life
insurance policy having a death benefit equal to $5,000,000 (the "Policy") with
the beneficiary as designated by the Executive. Amounts due under the policy
will be payable in accordance with the terms thereof notwithstanding any other
provision of this Agreement. The Company shall incur the first $15,000 of the
annual cost of the Policy, and the Executive shall pay the portion of the annual
cost of the Policy that exceeds $15,000 (if any).
 
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     8. Reimbursement of Business and Other Expenses.
 
     The Executive is authorized to incur reasonable expenses in carrying out
his duties and responsibilities under the Agreement and the Company shall
promptly reimburse him for all business expenses incurred in connection with
carrying out the business of the Company, subject to documentation in accordance
with the Company's policy.
 
     9. Perquisites.
 
     a. During the Term of Employment, the Executive shall be entitled to
participate in any of the Company's executive fringe benefits in accordance with
the terms and conditions of such arrangements as are in effect from time to time
for the senior-level executives of the Company.
 
     b. In addition, the Company shall:
 
          (1) provide the Executive with a luxury automobile and pay the
     reasonable expenses of such automobile; and
 
          (2) reimburse the Executive for any expenses incurred by the Executive
     relating to personal financial and/or tax counselling; provided, however,
     that such reimbursement shall not exceed $10,000 per year.
 
     10. Vacation.
 
     The Executive shall be entitled to 6 weeks paid vacation each year. In the
event that the Executive does not use all of his vacation time during an
applicable calendar year, he shall be entitled to carry forward such unused
vacation time; provided, however, that only four weeks of unused vacation time
(including all previously carried forward unused vacation time) may be carried
forward from any one calendar year to the next calendar year.
 
     11. Termination of Employment.
 
     a. Termination of Employment Due to Death. In the event the Executive's
employment is terminated due to his death, his estate or his beneficiaries as
the case may be, shall be entitled to:
 
          (1) Base Salary earned but not paid prior to the date of death;
 
          (2) have all unexercisable stock options granted under Section 6 above
     and held by the Executive on the date of death become immediately
     exercisable;
 
          (3) have all exercisable and unexercisable stock options granted under
     Section 6 above and held by the Executive on the date of death remain
     exercisable until the end of the earlier of (i) the one-year period
     following the date of death or (ii) the date the option would otherwise
     expire;
 
          (4) any amounts earned, accrued or owing to the Executive but not yet
     paid under Section 7, 8, or 9 above; and
 
          (5) other or additional benefits in accordance with applicable plans
     and programs of the Company.
 
     b. Termination of Employment Due to Disability. In the event the
Executive's employment is terminated due to his Disability, he shall be entitled
to the following (but in no event less than the benefits due him under the then
current disability program of the Company):
 
          (1) Base Salary earned but not paid prior to the date of the
     termination of employment;
 
          (2) an amount equal to the sum of 60% percent of Base Salary, at the
     annual rate in effect on the date of the termination of employment, for a
     period ending on the last day of the month in which he becomes 65, less the
     amount of any disability benefits provided to the Executive by the Company
     (other than benefits attributable to the Executive's own contributions)
     under any disability plan;
 
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          (3) an amount equal to the product of (a) the average percentage of
     Base Salary paid to the Executive as annual incentive bonuses for the two
     calendar years immediately preceding the year of the termination of
     employment multiplied by (b) the Base Salary in effect on the date of the
     Executive's termination of employment multiplied by (c) a fraction, the
     numerator of which is the number of days in the current calendar year prior
     to the date of the termination of employment and the denominator of which
     is 365;
 
          (4) have all unexercisable stock options granted under Section 6 above
     and held by the Executive on the date of the termination of employment
     become immediately exercisable;
 
          (5) have all exercisable and unexercisable stock options granted under
     Section 6 above and held by the Executive on the date of the termination of
     employment remain exercisable until the end of the earlier of (i) the
     one-year period following the date of the termination of employment or (ii)
     the date the option otherwise expires;
 
          (6) any amounts earned, accrued or owing to the Executive but not yet
     paid under Section 7, 8, or 9 above; and
 
          (7) continued participation in medical, dental, hospitalization and
     life insurance coverage and in all other employee plans and programs in
     which he was participating on the date of the termination of employment
     until he attains age 65 as if he were an employee; and
 
          (8) other or additional benefits in accordance with applicable plans
     and programs of the Company.
 
     If the Executive is precluded from continuing his participation in any
employee benefit plan or program as provided in Section 11(b)(7) above, he shall
be provided the after-tax economic equivalent of the benefits provided under the
plan or program in which he is unable to participate. The economic equivalent of
any benefit foregone shall be deemed to be the competitive cost that would
reasonably be incurred by the Executive in obtaining such benefit himself on an
individual basis.
 
     In no event shall a termination of the Executive's employment for
Disability occur unless the Party terminating his employment gives written
notice to the other Party in accordance with Section 24 below.
 
     (c) Termination of Employment by the Company for Cause.
 
          (1) A termination of employment for Cause shall not take effect unless
     the provisions of this Section 11(c)(1) are complied with. The Executive
     shall be given written notice by the Board of the intention to terminate
     him for Cause, and such notice:
 
             i) to state in reasonable detail the particular act or acts or
        failure or failures to act that constitute the grounds on which the
        proposed termination of employment for Cause is based, and
 
             ii) to be given within six months of the Board learning of such act
        or acts or failure or failures to act.
 
     Unless the termination of employment for Cause is pursuant to Section
     1(e)(1) hereof, the Executive shall have 20 days after the date that such
     written notice has been given to the Executive in which to cure such
     conduct, to the extent such cure is possible. If he fails to cure such
     conduct or such termination of employment for Cause is pursuant to Section
     1(e)(1) hereof, the Executive shall then be entitled to a hearing before
     the Board. Such hearing shall be held within 20 days of such notice to the
     Executive, provided he requests such hearing within 10 days of the written
     notice from the Board of the intention to terminate him for Cause. If,
     within 5 days following such hearing, the Executive is furnished written
     notice by the Board confirming that, in its judgment, grounds for Cause on
     the basis of the original notice exist, he shall thereupon be terminated
     for Cause.
 
          (2) In the event the Company terminates the Executive's employment for
     Cause, he shall be entitled to:
 
             i) Base Salary earned but not paid prior to the date of the
        termination of employment;
 
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             ii) any amounts earned, accrued or owing to the Executive but not
        yet paid under Section 7, 8, or 9 above; and
 
             iii) other or additional benefits in accordance with applicable
        plans or programs of the Company.
 
          (3) In addition, in the event of a termination of employment for
     Cause, the Executive shall immediately forfeit all stock options granted
     under Section 6 above and held by the Executive on the date of the
     termination of employment.
 
          (4) Notwithstanding anything herein to the contrary, if following a
     termination of the Executive's employment by the Company for Cause based
     upon the conviction of the Executive for a felony or any crime against the
     Company such conviction is overturned in a final determination on appeal,
     the Executive shall be entitled to the payments and the economic equivalent
     of the benefits the Executive would have received under Section 11(d)
     hereof if his employment had been terminated by the Company without Cause.
 
     (d) Termination of Employment by the Company Without Cause. In the event
the Executive's employment is terminated without Cause, other than due to
Disability or death, the Executive shall be entitled to:
 
          (1) Base Salary earned but not paid prior to the date of the
     termination of employment;
 
          (2) Base Salary, at the annualized rate in effect on the date of the
     termination of the Executive's employment for the longer of (i) the end of
     the Term of Employment or (ii) 24 months, payable as a lump sum using as a
     discount rate the long-term applicable federal rate compounded annually as
     published by the Internal Revenue Service for the month in which the
     termination of employment occurs;
 
          (3) an amount equal to the product of (a) the average percentage of
     Base Salary paid to the Executive as annual incentive bonuses for the two
     calendar years immediately preceding the year of the termination of
     employment multiplied by (b) the Base Salary in effect on the date of the
     Executive's termination of employment;
 
          (4) have all unexercisable stock options granted under Section 6 above
     and held by the Executive on the date of the termination of employment
     become immediately exercisable;
 
          (5) have all exercisable and unexercisable stock options granted under
     Section 6 above and held by the Executive on the date of the termination of
     employment remain exercisable until the date the option would otherwise
     expire;
 
          (6) the Company continue its payment of the Policy's annual premium
     pursuant to Section 7 above;
 
          (7) any amounts earned, accrued or owing to the Executive but not yet
     paid under Section 7, 8, or 9 above; and
 
          (8) continued participation in all medical, dental, hospitalization
     and life insurance coverage and in other employee benefit plans or programs
     in which he was participating on the date of the termination of employment
     until the earlier of:
 
             i) the end of the period in respect of which a lump-sum severance
        payment is made;
 
             ii) the date, or dates, he receives equivalent coverage and
        benefits under the plans and programs of a subsequent employer (such
        coverage and benefits to be determined on a coverage-by-coverage, or
        benefit-by-benefit, basis);
 
     provided, however, that (i) if the Executive is precluded from continuing
     his participation in any employee benefit plan or program as provided in
     Section 11(d)(8)(A) above, he shall be provided with the after-tax economic
     equivalent of the benefits provided under the plan or program in which he
     is unable to participate for the period specified in this Section 11(d)(8),
     (ii) the economic equivalent of
 
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     any benefit foregone shall be deemed to be the competitive cost that would
     reasonably be incurred by the Executive in obtaining such benefit himself
     on an individual basis, and (iii) payment of such after-tax economic
     equivalent shall be made quarterly in advance; and
 
          (9) other or additional benefits in accordance with applicable plans
     and programs of the Company.
 
     e. Termination of Employment by the Executive For Good Reason. The
Executive may terminate his employment for Good Reason. Upon a termination of
employment for Good Reason, the Executive shall be entitled to the payments and
benefits provided in Section 11(d) above; provided, however, that if the
Executive terminates his employment for Good Reason based on a reduction in Base
Salary as provided in Section 1(l)(1) above, then the Base Salary to be used
pursuant to Section 11(d)(2) above for the determination of the lump sum payment
shall be the Base Salary in effect immediately prior to such reduction.
 
     f. Termination of Employment Following a Change in Control. If, following a
Change in Control, the Executive's employment is terminated by the Company
without Cause or by the Executive for Good Reason, the Executive shall be
entitled to the payments and benefits provided in Section 11(d); provided,
however, that the amount calculated under Section 11(d)(2) shall be payable as a
lump sum without discounting. Also, immediately following a Change in Control,
all amounts, entitlements or benefits in which the Executive is not yet vested
shall become fully vested except to the extent such vesting would be
inconsistent with the terms of the relevant plan; provided, however, that this
sentence shall be inapplicable to the options granted under Section 6 above.
 
     g. Voluntary Termination of Employment by the Executive. In the event of a
termination of employment by the Executive on his own initiative, other than a
termination of employment due to death or Disability or a termination of
employment for Good Reason, the Executive shall have the same entitlements as
provided in Section 11(c)(2) above for a termination of employment for Cause,
except that all exercisable stock options granted under Section 6 above and held
by the Executive on the date of the termination of employment shall remain
exercisable until the earlier of (i) the end of the six-month period following
the date of the termination of employment or (ii) the date the option would
expire. A termination of employment under this Section 11(g) shall be effective
upon 30 days prior written notice to the Company and shall not be deemed a
breach of this Agreement.
 
     h. Payment Following a Change in Control. In the event that the termination
of the Executive's employment follows a Change in Control and the aggregate of
all payments or benefits made or provided to the Executive under Section 11(f)
above and under all other plans and programs of the Company (the "Aggregate
Payment") is determined to constitute a "parachute payment" (as such term is
defined in Code Section 280G(b)(2)), the Company shall pay to the Executive,
prior to the time any excise tax imposed by Code Section 4999 ("Excise Tax") is
payable with respect to such Aggregate Payment, an additional amount which,
after the imposition of all income and excise taxes thereon, is equal to the
Excise Tax on the Aggregate Payment. The determination of whether the Aggregate
Payment constitutes a parachute payment and, if so, the amount to be paid to the
Executive and the time of payment pursuant to this Section 11(h) shall be made
by an independent auditor (the "Auditor") jointly selected by the Company and
the Executive and paid by the Company. The Auditor shall be a nationally
recognized United States public accounting firm which has not, during the two
years preceding the date of its selection, acted in any way on behalf of the
Company or any affiliate thereof. If the Executive and the Company cannot agree
on the firm to serve as the Auditor, then the Executive and the Company shall
each select one accounting firm and those two firms shall jointly select the
accounting firm to serve as the Auditor.
 
     i. No Mitigation; No Offset. In the event of any termination of employment
under this Section 11, the Executive shall be under no obligation to seek other
employment and there shall be no offset against amounts due the Executive under
this Agreement on account of any remuneration attributable to any subsequent
employment that he may obtain except as specifically provided in this Section
11.
 
     j. Nature of Payments. Any amounts due under this Section 11 are in the
nature of severance payments considered to be reasonable by the Company and are
not in the nature of a penalty.
 
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     12. Confidentiality: Assignment of Rights.
 
     a. During the Term of Employment and thereafter, the Executive shall not
disclose to anyone or make use of any trade secret or proprietary or
confidential information of the Company, including such trade secret or
proprietary or confidential information of any customer or other entity to which
the Company owes an obligation not to disclose such information, which he
acquires during the Term of Employment, including but not limited to records
kept in the ordinary course of business (collectively, the "Confidential
Information"), except (i) as such disclosure or use may be required or
appropriate in connection with his work as an employee of the Company, (ii) when
required to do so by a court of law, by any governmental agency having
supervisory authority over the business of the Company or by any administrative
or legislative body (including a committee thereof) with apparent jurisdiction
to order him to divulge, disclose or make accessible such information or (iii)
any such disclosure after such Confidential Information has become public
knowledge (other than by acts of the Executive or his representatives in
violation of this Agreement).
 
     b. The Executive hereby sells, assigns and transfers to the Company all of
his right, title and interest in and to all inventions, discoveries,
improvements and copyrightable subject matter (the "rights") which during the
Term of Employment are made or conceived by him, alone or with others and which
are within or arise out of any general field of the Company's business or arise
out of any work he performs or information he receives regarding the business of
the Company while employed by the Company. The Executive shall fully disclose to
the Company as promptly as available all information known or possessed by him
concerning the rights referred to in the preceding sentence, and upon request by
the Company and without any further remuneration in any form to him by the
Company, but at the expense of the Company, execute all applications for patents
and for copyright registration, assignments thereof and other instruments and do
all things which the Company may deem necessary to vest and maintain in it the
entire right, title and interest in and to all such rights.
 
     13. Noncompetition; Nonsolicitation.
 
     a. The Executive covenants and agrees that he shall not directly or
indirectly engage in a Competitive Activity during (i) the Term of Employment
and (ii) in the event of a voluntary termination of employment described in
Section 11(g) above, the six-month period following the date of the termination
of employment. In addition, the Executive shall not directly or indirectly
solicit, negotiate with or enter into discussion with the shareholders or
representatives of any Company Target during (i) the Term of Employment and (ii)
in the event of a voluntary termination of employment pursuant to Section 11(g)
above, the one-year period following the date of the termination of employment.
The Executive covenants and agrees that he shall not directly or indirectly
solicit the Company's (or any subsidiary's) (i) employees during the 18-month
period following the date of termination of employment or (ii) agents, brokers
and/or policyholders during the 36-month period following the date of
termination of employment.
 
     b. The Parties acknowledge that in the event of a breach or threatened
breach of Section 13(a) above, the Company shall not have an adequate remedy at
law. Accordingly, in the event of any breach or threatened breach of Section
13(a) above, the Company shall be entitled to such equitable and injunctive
relief as may be available to restrain the Executive and any business, firm,
partnership, individual, corporation or entity participating in the breach or
threatened breach from the violation of the provisions of Section 13(a) above.
Nothing in this Agreement shall be construed as prohibiting the Company from
pursuing any other remedies available at law or in equity for breach or
threatened breach of Section 13(a) above, including the recovery of damages.
 
     c. The Company and the Executive intend that the Knightsbridge Agreement
will provide, among other things, for the potential forfeiture by the Executive
of the consideration paid to him thereunder in the event of a breach by the
Executive of any of the provisions of Section 13(a) above.
 
     14. Indemnification.
 
     a. The Company agrees that if the Executive is made a party, or is
threatened to be made a party, to any action, suit or proceeding, whether civil,
criminal, administrative or investigative (a "Proceeding"), by reason of the
fact that he is or was a director, officer or employee of the Company or is or
was serving at the request of
 
                                       9

<PAGE>   10
 
the Company as a director, officer, member, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, including
service with respect to employee benefit plans, whether or not the basis of such
Proceeding is the Executive's alleged action in an official capacity while
serving as a director, officer, member, employee or agent, the Executive shall
be indemnified and held harmless by the Company to the fullest extent legally
permitted or authorized by the Company's certificate of incorporation or bylaws
or resolutions of the Company's Board of Directors or, if greater, by the laws
of the State of Delaware, against all cost, expense, liability and loss
(including, without limitation, attorney's fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered by the Executive in connection therewith, and such
indemnification shall continue as to the Executive even if he has ceased to be a
director, member, employee or agent of the Company or other entity and shall
inure to the benefit of the Executive's heirs, executors and administrators. The
Company shall advance to the Executive all reasonable costs and expenses
incurred by him in connection with a Proceeding within 20 days after receipt by
the Company of a written request for such advance accompanied by such supporting
documentation as the Company may reasonably request. Such request shall include
an undertaking by the Executive to repay the amount of such advance if it shall
ultimately be determined that he is not entitled to be indemnified against such
costs and expenses.
 
     b. Neither the failure of the Company (including its board of directors,
independent legal counsel or stockholders) to have made a determination prior to
the commencement of any proceeding concerning payment of amounts claimed by the
Executive under Section 14(a) above that indemnification of the Executive is
proper because he has met the applicable standard of conduct, nor a
determination by the Company (including its board of directors, independent
legal counsel or stockholders) that the Executive has not met such applicable
standard of conduct, shall create a presumption that the Executive has not met
the applicable standard of conduct.
 
     c. The Company agrees to continue and maintain a directors and officers'
liability insurance policy covering the Executive to the extent the Company
provides such coverage for its other executive officers.
 
     15. Effect of Agreement on Other Benefits.
 
     Except as specifically provided in this Agreement, the existence of this
Agreement shall not prohibit or restrict the Executive's entitlement to full
participation in the employee benefit and other plans or programs in which
senior executives of the Company are eligible to participate.
 
     16. Assignability; Binding Nature.
 
     This Agreement shall be binding upon and inure to the benefit of the
Parties and their respective successors, heirs (in the case of the Executive)
and assigns. No rights or obligations of the Company under this Agreement may be
assigned or transferred by the Company except that such rights or obligations
may be assigned or transferred pursuant to a merger or consolidation in which
the Company is not the continuing entity, or the sale or liquidation of all or
substantially all of the assets of the Company; provided, however, that the
assignee or transferee is the successor to all or substantially all of the
assets of the Company and such assignee or transferee assumes the liabilities,
obligations and duties of the Company, as contained in this Agreement, either
contractually or as a matter of law. The Company further agrees that, in the
event of a sale of assets or liquidation as described in the preceding sentence,
it shall take whatever action it legally can in order to cause such assignee or
transferee to expressly assume the liabilities, obligations and duties of the
Company hereunder. No rights or obligations of the Executive under this
Agreement may be assigned or transferred by the Executive other than his rights
to compensation and benefits, which may be transferred only by will or operation
of law, except as provided in Section 21 below. This Agreement shall be binding
upon and inure solely to the benefit of the parties hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
 
     17. Representation.
 
     The Company represents and warrants that it is fully authorized and
empowered to enter into this Agreement and that the performance of its
obligations under this Agreement will not violate any agreement
 
                                      10

<PAGE>   11
 
between it and any other person, firm or organization. The Executive represents
that he knows of no agreement between him and any other person, firm or
organization that would be violated by the performance of his obligations under
this Agreement.
 
     18. Amendment or Waiver.
 
     No provision in this Agreement may be amended unless such amendment is
agreed to in writing and signed by the Executive and an authorized officer of
the Company. No waiver by either Party of any breach by the other Party of any
condition or provision contained in this Agreement to be performed by such other
Party shall be deemed a waiver of a similar or dissimilar condition or provision
at the same or any prior or subsequent time. Any waiver must be in writing and
signed by the Executive or an authorized officer of the Company, as the case may
be.
 
     19. Severability.
 
     In the event that any provision or portion of this Agreement shall be
determined to be invalid or unenforceable for any reason, in whole or in part,
the remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect to the fullest extent permitted by law.
 
     20. Survivorship.
 
     The respective rights and obligations of the Parties hereunder shall
survive any termination of the Executive's employment to the extent necessary to
the intended preservation of such rights and obligations.
 
     21. Beneficiaries/References.
 
     The Executive shall be entitled, to the extent permitted under any
applicable law, to select and change a beneficiary or beneficiaries to receive
any compensation or benefit payable hereunder following the Executive's death by
giving the Company written notice thereof. In the event of the Executive's death
or a judicial determination of his incompetence, reference in this Agreement to
the Executive shall be deemed, where appropriate, to refer to his beneficiary,
estate or other legal representative.
 
     22. Governing Law/Jurisdiction.
 
     Except as provided in Section 14 above, this Agreement shall be governed by
and construed and interpreted in accordance with the laws of New York without
reference to principles of conflict of laws.
 
     23. Resolution of Disputes.
 
     Any disputes arising under or in connection with this Agreement shall, at
the election of the Executive or the Company, be resolved by binding
arbitration, to be held in New York City in accordance with the rules and
procedures of the American Arbitration Association. Judgment upon the award
rendered by the arbitrator(s) may be entered in any court having jurisdiction
thereof. Costs of the arbitration or litigation, including, without limitation,
reasonable attorneys' fees of both Parties, shall be borne by the Party who does
not prevail. Pending the resolution of any arbitration or court proceeding, the
Company shall continue payment of all amounts due the Executive under this
Agreement and all benefits to which the Executive is entitled at the time the
dispute arises.
 
                                      11

<PAGE>   12
 
     24. Notices.
 
     Any notice given to a Party shall be in writing and shall be deemed to have
been given when delivered personally or sent by certified or registered mail,
postage prepaid, return receipt requested, duly addressed to the Party concerned
at the address indicated below or to such changed address as such Party may
subsequently give such notice of:
 
<TABLE>
<S>                      <C>
If to the Company:       PennCorp Financial Group, Inc.
                         745 Fifth Avenue
                         New York, NY 10151
                         Attention: General Counsel

With a copy to:          Jeremy W. Dickens, Esq.
                         Weil, Gotshal & Manges LLP
                         100 Crescent Court
                         Suite 1300
                         Dallas, Texas 75201-6950

If to the Executive:     David J. Stone
                         745 Fifth Avenue
                         New York, NY 10151
</TABLE>
 
     25. Headings.
 
     The headings of the sections contained in this Agreement are for
convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.
 
     26. Counterparts.
 
     This Agreement may be executed in two or more counterparts.
 
     IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first written above.
 
                                            PENNCORP FINANCIAL GROUP, INC.
 
                                            By:   /s/  SCOTT D. SILVERMAN
                                               -------------------------------
                                                      Scott D. Silverman
                                                    Senior Vice President,
                                                       General Counsel
 
                                            By:      /s/  KENNETH ROMAN
                                               -------------------------------
                                                        Kenneth Roman
                                                    Chairman Compensation
                                                          Committee
 
                                                  /s/  DAVID J. STONE
                                               -------------------------------
                                                       David J. Stone
 
                                      12