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

                                  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, 1997

                         Commission File Number 1-11422

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

                 Delaware                                 13-3543540
      (State or other jurisdiction
     of incorporation or organization)      (I.R.S. employer identification no.)
            590 Madison Avenue                               10022
            New York, New York                            (Zip code)
 (Address of principal executive offices)

        Registrant's telephone number, including area code: (212) 896-2700

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

           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. [X]

     The aggregate  market value of the voting stock held by  non-affiliates  of
the registrant as of March 25, 1998: $806,003,479.80.

     The number of Common Stock  shares  outstanding  as of March 25, 1998,  was
27,853,252.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions  of the Proxy  Statement  for the Annual  Meeting of  Shareholders
scheduled for May 21, 1998, is incorporated by reference into Part III hereof.

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

                                        1

<PAGE>



                           ANNUAL REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 1997

                                TABLE OF CONTENTS

                                                                            Page

PART I
         Item 1. Business                                                     3
         Item 2. Properties                                                  22
         Item 3. Legal Proceedings                                           22
         Item 4. Submission of Matters to a Vote of Security Holders         24

PART II
         Item 5. Market for the Registrant's Common Equity and
                     Related Shareholder Matters                             26
         Item 6. Selected Consolidated Financial Data                        27
         Item 7. Management's Discussion and Analysis of Financial
                     Condition and Results of Operations                     28
         Item 8. Financial Statements and Supplementary Data                 40
         Item 9. Changes in and Disagreements with Accountants on
                     Accounting and Financial Disclosure                    104

PART III
         Item 10. Directors and Executive Officers of the Registrant        104
         Item 11. Executive Compensation                                    104
         Item 12. Security Ownership of Certain Beneficial
                     Owners and Management                                  104
         Item 13. Certain Relationships and Related Transactions            104

PART IV
         Item 14. Exhibits, Financial Statement Schedules,
                     and Reports on Form 8-K                                105



                                        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 insurance companies with operations in Raleigh,  North Carolina;  Dallas and
Waco,  Texas;  Baton  Rouge,  Louisiana;  and  Toronto,  Canada.  The  Company's
insurance subsidiaries market and underwrite fixed benefit accident and sickness
insurance, life insurance and accumulation products to lower- and middle- income
markets  throughout  the  United  States and  Canada.  The  Company's  insurance
products are sold through  several  distribution  channels  including  exclusive
agents,  general  agents,  payroll  deduction  programs  and  through  financial
institutions.   PennCorp's  only  significant  industry  segment  is  insurance.
Information  relating to the Company's U.S. and Canadian  operations  appears in
Note 4 of "Notes to Consolidated  Financial  Statements" on Page 53 hereof.  For
more information  regarding the Company's markets, see "Insurance" and Marketing
and Distribution" included herein.

     During 1997 the Company restructured its operating units into three primary
business  units,  Career Sales  Division,  Payroll Sales  Division and Financial
Services Division.

     Career Sales  Division  includes the  operations  of Penn Life.  Penn Life,
collectively,  Pennsylvania  Life Insurance  Company  ("PLIC") and Penncorp Life
Insurance  Company,  markets and underwrites fixed benefit accident and sickness
products and, to a lesser extent,  life products through a sales force exclusive
to the Company throughout the United States and Canada. With the January 2, 1998
consummation  of the  acquisition  of  Southwestern  Financial  Corporation  and
Subsidiaries  ("SW  Financial"),  the Company has been taking steps to integrate
Union  Bankers  Insurance  Company  ("Union  Bankers")  with  the  Career  Sales
Division.

     Payroll Sales  Division  includes the  operations of AA Life,  Professional
Insurance Corporation  ("Professional") and Occidental Life Insurance Company of
North Carolina ("OLIC"). AA Life, collectively,  Pioneer Security Life Insurance
Company  ("Pioneer  Security")  and  its  subsidiaries,  American-Amicable  Life
Insurance Company of Texas ("American- Amicable") and Pioneer American Insurance
Company ("Pioneer American"),  markets and underwrites customized life insurance
and  accumulation  products to U.S.  military  personnel  and federal  employees
through a general agency force.  Professional and OLIC provide  individual fixed
benefit and life products utilizing a network of independent agents primarily in
the  southeastern  United States through  employer-sponsored  payroll  deduction
programs.

     Financial   Services  Division  is  comprised  of  Integon  Life  Insurance
Corporation  ("Integon  Life")  and  United  Life &  Annuity  Insurance  Company
("United  Life").  Integon Life markets life  insurance  and, to a lesser extent
annuity  products  through  independent  general  agents  who sell  directly  to
individuals primarily in the southeastern United States. United Life principally
markets  fixed  and  variable  annuities  through  financial   institutions  and
independent general agents, primarily in the southern and western United States.
Since its acquisition on January 2, 1998,  Southwestern  Life Insurance  Company
("Southwestern  Life") has been  integrated and managed as part of the Financial
Services Division.

     The  Company's   growth   strategy  has  emphasized   the   acquisition  of
complementary  insurance operations and the utilization of the Company's several
distribution  channels  to  further  penetrate  its  target  markets.  In making
acquisitions,  the  Company  has sought to broaden  its  distribution  channels,
increase its product offerings and expand its geographical presence. The Company
also  seeks  benefits  from  expense  reduction  through  the  consolidation  of
facilities and staff and the creation of common  administrative  systems.  Since
1990, the Company has acquired OLIC, Professional, AA Life, Integon Life, United
Life and SW Financial.

RECENT DEVELOPMENTS

     On February 18, 1998, the Company announced that it has engaged  investment
banking firms Salomon Smith Barney and Fox-Pitt, Kelton Inc. to review strategic
alternatives  for  maximizing  shareholder  value,  including  the  sale  of the
Company's  Career  Sales  Division.  On February  18,  1998,  the  Company  also
announced that it will incur restructuring and

                                        3

<PAGE>



other charges which, in the aggregate, are not expected to exceed $25.0 million,
a  significant  portion of which will be recognized  in the first  quarter.  The
restructuring charge recognizes: (a) severance and related benefits incurred due
to staff reductions,  (b) estimated holding costs of vacated facilities, (c) the
write-off of certain  fixed assets and other  impaired  assets and (d) estimated
contract termination costs.

THE SW FINANCIAL INVESTMENT

     Prior  to the  Company's  acquisition  of the  controlling  interest  in SW
Financial on January 2, 1998, the Company held a significant  economic  interest
in  SW  Financial.  Such  economic  interest  was  derived  through  its  direct
investment  of $120.0  million in SW  Financial.  Without  giving  effect to the
conversion of the SW Financial convertible debentures,  the Company beneficially
owned 75.4% of SW Financial's  outstanding common stock,  including 100.0% of SW
Financial's  non-voting  common stock and 21.0% of SW Financial's  voting common
stock.  The  Company  also  owned  preferred  stock  of  SW  Financial  and  its
subsidiary.  In August 1997, in anticipation of the acquisition of SW Financial,
the Company acquired all of SW Financial's subordinated indebtedness aggregating
$40.0 million.

     Through the Company's  limited  partnership  interest in the  Knightsbridge
Capital Fund I, L.P.  ("Knightsbridge  Fund"),  the Company  indirectly owned an
additional economic interest in SW Financial aggregating 2.6 percent.

THE KNIGHTSBRIDGE RESTRUCTURING PLAN

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

     The components of the Knightsbridge restructuring plan are as follows:

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

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

    o     The acquisition by the Company from the Knightsbridge Fund and Messrs.
          Stone and Fickes of their respective  holdings of common stock and the
          common stock warrants of SW Financial (collectively, "The Southwestern
          Financial Controlling Interest") provided that if the Amended Proposed
          Settlement  (as  defined  in "Item 3 - Legal  Proceedings"  below)  is
          approved by the Delaware  Chancery Court after notice to the Company's
          stockholders,  Messrs. Stone and Fickes will cancel their SW Financial
          common stock warrants for no additional  consideration).  See Item 3 -
          Legal Proceedings on page 22 hereof.

     The  acquisition  of The Fickes and Stone  Knightsbridge  Interests and the
acquisition of the Southwestern  Financial Controlling Interest were approved by
a vote of the  stockholders of the Company at its Annual Meeting of Stockholders
held on December 31, 1997 and were consummated on January 5, 1998 and January 2,
1998, respectively.

     Further information regarding the SW Financial investment appears in Note 6
of "Notes to  Consolidated  Financial  Statements"  and SW  Financial  financial
statements  for the years ended December 31, 1997 and 1996 are included on pages
78 to 103 hereof.  Information  relating to the relationship between the Company
and  the   Knightsbridge   Fund,  the   acquisition  of  The  Fickes  and  Stone
Knightsbridge  Interests and the  Southwestern  Financial  Controlling  Interest
appear in Notes 15, 16 and 19 of "Notes to Consolidated  Financial  Statements,"
and in Item 13 hereof.

                                        4

<PAGE>



INSURANCE

     The  Company's  insurance  subsidiaries  underwrite  a variety of insurance
products  with  the  primary   emphasis  on  modest  premium   policies  in  the
accumulation,  life and fixed benefit product  sectors.  Fixed benefit  products
include indemnity  insurance  policies in which the benefit amounts are fixed at
the time of policy issue.  Those products provide  supplemental  income payments
directly to the  insured  who is disabled  and unable to work due to accident or
sickness.  Life products are primarily low face amount traditional whole life or
universal  life  products  which  build cash values  that are  available  to the
policyholder.  Accumulation  products  include various forms of annuity products
which  are  utilized  by  policyholders  primarily  as a means  of tax  deferred
savings.  Pro forma 1997 ratios and amounts  include the results of SW Financial
as if SW Financial was acquired  January 1, 1997. Such pro forma  information is
provided for comparative  purposes only and does not purport to be indicative of
what would have occurred had the acquisition been made as of January 1, 1997, or
results which may occur in the future.

     The following  table  presents the historical  percentages of  consolidated
insurance operations revenues derived from these product types:
<TABLE>
<CAPTION>
                                                             PERCENTAGE OF CONSOLIDATED
                                                                 INSURANCE OPERATIONS
                                                              REVENUES FOR THE YEARS ENDED
                                                                      DECEMBER 31,
                                                      -----------------------------------------------
                                                                                            Pro forma
 INSURANCE PRODUCT TYPE                               1995         1996         1997           1997
 ----------------------                               ----         ----         ----           ----
<S>                                                   <C>          <C>         <C>           <C>
 Fixed benefit....................................     48.8%        34.1%       29.8%         30.5%
 Life.............................................     43.5         46.2        43.1          46.8
 Accumulation.....................................      7.7         19.7        27.1          22.7
                                                      -----        -----       -----         -----
   Total..........................................    100.0%       100.0%      100.0%        100.0%
                                                      =====        =====       =====         =====
</TABLE>

     The amount of  annualized  premium in force and policy  activity by type of
business for the past three years is as follows:

<TABLE>
<CAPTION>
                                                             ANNUALIZED PREMIUM IN FORCE
                                                                  AS OF DECEMBER 31,
                                                                   ($ in thousands)
                                                     -----------------------------------------------
                                                                                           Pro forma
INSURANCE PRODUCT TYPE                               1995         1996         1997           1997
----------------------                               ----         ----         ----           ----
<S>                                               <C>          <C>         <C>           <C>
Fixed benefit..............................       $  189,681   $  194,475  $   184,214   $   256,272
Life(1)....................................          216,263      217,538      219,180       372,409
                                                  ----------   ----------  -----------   -----------
  Total....................................       $  405,944   $  412,013  $   403,394   $   628,681
                                                  ==========   ==========  ===========   ===========
-------------------
(1)  Life  annualized  premium in force  includes  target  premium for  interest
     sensitive products.  Interest sensitive policy revenue may vary from target
     premium  as  policyholders  have  no  obligation  to  pay  target  premium.
     Additionally,  interest sensitive policy revenues are determined based upon
     contractual  charges  assessed  against  policyholder  funds  and  are  not
     determined by policy revenues collected.
</TABLE>



                                        5

<PAGE>


<TABLE>
<CAPTION>
                                                1995                        1996                       1997
                                      ------------------------   --------------------------   --------------------------
                                       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......   761,082  422,056   6,861   733,893   562,620   34,854   698,072   558,697   90,265
   New issues......................   111,999   60,097   1,691    81,547    54,157    4,834    84,286    62,449    5,012
   Business acquired, net..........       200  170,136  32,069    15,664    67,731   64,210        --        --       --
   Policies terminated.............  (139,388) (89,669) (5,767) (133,032) (125,811) (13,633) (127,422) (114,233) (25,508)
                                      -------  -------  ------   -------   -------   ------   -------   -------   ------
   Policies in force - December 31.   733,893  562,620  34,854   698,072   558,697   90,265   654,936   506,913   69,769
                                      =======  =======  ======   =======   =======   ======   =======   =======   ======
</TABLE>

     As a result of the  acquisition  of Integon  life,  the Company  acquired a
substantial block of credit insurance policies (550,152 policies at acquisition;
111,579  policies as of December 31, 1997).  Integon Life no longer markets such
products  and nearly  all of Integon  Life's  credit  insurance  is subject to a
100.0%  coinsurance  agreement.  Such policies have been excluded from the above
table.

MARKETING AND DISTRIBUTION

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

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

    Major Market                                Sub-Market
    ------------                                ----------

    Individual                Low and moderate income households
                              Non-English speaking households
                              U.S. military enlistees
                              Suburban and rural locales

    Government                Local governments and governmental agencies
                              U.S. federal government
                              Self-employed

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

     The  following  tables  illustrate,  by direct cash premium  collected  and
relative  percentages,  the  principal  marketing  regions in which the  Company
collected  in excess of $10.0  million  of policy  revenues  for the year  ended
December 31, 1997.


                                        6

<PAGE>

<TABLE>
<CAPTION>
                        Direct Premium Collected
       --------------------------------------------------------
         Jurisdiction                Amount          Percentage
         ------------                ------          ----------
       <S>                          <C>                 <C>
       Canada.....................  $   56,067          11.3%
       North Carolina.............      40,451           8.1
       Georgia....................      35,984           7.2
       Louisiana..................      35,763           7.2
       Florida....................      35,406           7.1
       California.................      26,156           5.3
       Texas......................      22,500           4.5
       Ohio.......................      20,713           4.2
       Missouri...................      18,029           3.6
       Illinois...................      15,143           3.0
       Indiana....................      15,099           3.0
       South Carolina.............      14,082           2.8
       Alabama....................      13,604           2.7
       Virginia...................      12,040           2.4
                                    ----------         -----
          Subtotal................     361,037          72.4
       All Others.................     137,032          27.6
                                    ----------         -----
          Total...................  $  498,069         100.0%
                                    ==========         =====

                   Pro forma Direct Premium Collected
       --------------------------------------------------------
         Jurisdiction                Amount          Percentage
         ------------                ------          ----------

       Texas......................  $   95,367          12.2%
       Canada.....................      56,068           7.2
       North Carolina.............      53,256           6.8
       Florida....................      46,589           5.9
       Georgia....................      44,069           5.6
       Indiana....................      42,569           5.4
       Louisiana..................      39,643           5.1
       California.................      36,701           4.7
       Ohio.......................      34,510           4.4
       Missouri...................      31,939           4.1
       Pennsylvania...............      24,727           3.2
       Wisconsin..................      23,493           3.0
       Virginia...................      21,953           2.8
       Illinois...................      21,221           2.7
       South Carolina.............      17,815           2.2
       Oklahoma...................      17,063           2.2
       Alabama....................      16,005           2.0
       Kentucky...................      12,446           1.6
       Kansas.....................      12,286           1.6
       Tennessee..................      11,614           1.5
       Michigan...................      11,502           1.4
                                    ----------         -----
          Subtotal................     670,836          85.6
       All Others.................     112,418          14.4
                                    ----------         -----
          Total...................  $  783,254         100.0%
                                    ==========         =====
</TABLE>

Career Sales Division

     Penn Life's agents  constitute  substantially  all of the Company's  career
sales force. On a pro forma basis Union Bankers is considered part of the Career
Sales Division. Penn Life is organized under a regional/branch office structure.
The

                                        7

<PAGE>



regional sales managers are responsible for approximately 100 sales locations in
the United  States and Canada.  Commissions  are shared  among the  regional and
branch  office  managers  and the writing  agent.  Commissions  allocated to the
branch offices are used to pay  "overwrite"  commissions to agents who train new
agents and to pay the expenses of the branch office.  Any commissions  allocated
to the branch offices  remaining  after payment of "overwrite"  commissions  and
expenses,  essentially the branch "profit", are allocated among the senior sales
managers and the Company. The Company retained  approximately $3.1 million, $2.8
million and $2.4 million  during 1997,  1996 and 1995,  respectively,  in profit
sharing income,  which is recorded as an offset to commissions.  During 1997 the
Company  worked  closely  with the U.S.  based career sales force to develop and
implement a new  compensation  structure which resulted in the Company giving up
its rights to a portion of the profit  participation  associated with the branch
compensation  structures.  As a result, career sales force agents will receive a
lower base commission  structure on new business and will fully absorb all field
office costs.  The new  compensation  structure allows for bonuses to be paid to
agents based upon improving persistency and new sales growth.

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

                           NEW LOCATIONS
                           -------------
          1995                  1996                  1997
          ----                  ----                  ----

      Bellaire, TX       Salt Lake City, UT       Charlotte, NC
      Amarillo, TX         San Antonio, TX         Hughson, CA
     Springfield, MO       Gainesville, FL         Malibu, CA
       Gilbert, AZ          Portland, OR          Hollywood, FL

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

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

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

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


                                        8

<PAGE>



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

<TABLE>
<CAPTION>
                                                             1995         1996         1997
                                                             ----         ----         ----
                                                                    ($ in thousands)
<S>                                                        <C>          <C>          <C>
  INSTANT ISSUE
    Agents under contract..............................          643          682          388
    Weekly average agents producing new business.......          213          225          183
    Submitted annualized new business premiums.........    $  11,685    $   9,497    $   7,541
    Annualized new business premium per agent..........    $    54.9    $    42.2    $    41.2

  SPECIAL SERVICES
    Agents under contract..............................        1,001          962        1,012
    Weekly average agents producing new business.......          342          393          398
    Submitted annualized new business premiums.........    $  29,122    $  30,936    $  33,683
    Annualized new business premium per agent..........    $    85.2    $    78.7    $    84.6

  INDIVIDUAL LIFE
    Agents under contract..............................          161          197          182
    Weekly average agents producing new business.......           75           91           78
    Submitted annualized new business premiums.........    $   6,969    $   8,224    $   7,006
    Annualized new business premium per agent..........    $    92.9    $    90.4    $    89.8

  TOTAL ALL CAREER SALES DIVISIONS
    Agents under contract..............................        1,805        1,841        1,582
    Weekly average agents producing new business.......          630          709          659
    Submitted annualized new business premiums.........    $  47,776    $  48,657    $  48,230
    Annualized new business premium per agent..........    $    75.8    $    68.6    $    73.2
</TABLE>

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

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

<TABLE>
<CAPTION>
                                                                               Pro forma
INSURANCE PRODUCT TYPE                    1995         1996         1997         1997
                                         -------      --------    ---------    ---------
                                                           ($ in millions)
<S>                                      <C>          <C>         <C>          <C>
Fixed benefit.....................       $ 156.0      $  148.1    $   142.3    $   377.2
Life..............................          34.4          32.8         31.6         81.7
                                         -------      --------    ---------    ---------
Accumulation......................           0.5           1.0          1.6          2.7
                                         -------      --------    ---------    ---------
   Total..........................       $ 190.9      $  181.9    $   175.5    $   461.6
                                         =======      ========    =========    =========
</TABLE>


                                        9

<PAGE>



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

<TABLE>
<CAPTION>
                                                                                           Pro forma
INSURANCE PRODUCT TYPE                               1995         1996         1997          1997
----------------------                               ----         ----         ----          ----

<S>                                                   <C>         <C>          <C>          <C>
Fixed benefit.....................................    76.7%       76.8%        74.3%        88.5%
Life  ............................................    19.0        12.6         11.5         17.5
Accumulation......................................     1.4         0.9          0.9          1.3
  Total division revenue to the Company's
      total insurance operations revenue..........    45.8        32.2         27.3         41.6
</TABLE>

Payroll Sales Division

     The Payroll Sales Division  includes  marketing units of  Professional,  AA
Life and OLIC. Each of the marketing  units is divided into regions  utilizing a
hierarchical  approach to managing the sales  representative.  Additionally,  AA
Life and OLIC also utilize field marketing  directors and independent  marketing
organizations to access potential policyholders. During 1997, the Company formed
Occidental Benefit Services,  Inc. ("OBSI").  OBSI maintains  relationships with
senior  industry  producers  who have access to a broad  array of large  payroll
accounts  (average  employee base in excess of 1,000).  OBSI forms joint venture
relationships with the producers or employers in order to access large accounts.
During 1997, OBSI formed its first such  relationship  resulting in access to an
18,000 person employee group in the southeastern United States.

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

     The  following  tables set forth  information  regarding  the Payroll Sales
Division:

<TABLE>
<CAPTION>
  PAYROLL SALES DIVISION                                   1995         1996         1997
  ----------------------                                   ----         ----         ----
                                                                  ($ in thousands)
<S>                                                      <C>          <C>          <C>
  Agents under contract..............................        6,578        7,539        6,784
  Number of agents annually producing new business...        2,684        2,750        2,955
  Submitted annualized new business premiums.........    $  39,435    $  39,069    $  42,527
  Annualized new business premium per agent..........    $    14.7    $    14.2    $    14.4
</TABLE>

     The revenue  earned by the Payroll Sales  Division by product type is shown
below:

<TABLE>
<CAPTION>
   INSURANCE PRODUCT TYPE                                 1995           1996         1997
   ----------------------                                 ----           ----         ----
                                                                    ($ in millions)
<S>                                                       <C>          <C>          <C>
 Fixed benefit........................................    $    38.0    $    39.5    $    48.9
 Life.................................................         82.0         84.1        116.4
 Accumulation.........................................          5.9          8.0          7.2
                                                          ---------    ---------    ---------
   Total..............................................    $   125.9    $   131.6    $   172.5
                                                          =========    =========    =========
</TABLE>

                                       10

<PAGE>



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

<TABLE>
<CAPTION>
                                                                                                  Pro forma
 INSURANCE PRODUCT TYPE                                     1995          1996         1997         1997
 ----------------------                                     ----          ----         ----         ----
<S>                                                          <C>          <C>          <C>          <C>
 Fixed benefit..........................................     18.7%        20.5%        25.5%        11.5%
 Life...................................................     45.2         32.3         42.2         24.9
 Accumulation...........................................     18.5          7.2          4.1          3.4
   Total division revenue to the Company's
     total insurance operations revenue.................     30.2         23.3         26.8         15.6
</TABLE>

Financial Services Division

     The Financial  Services Division  includes  marketing units of Integon Life
and United  Life and on a pro forma  basis,  Southwestern  Life.  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.

<TABLE>
<CAPTION>
                                                                                                  Pro forma
 FINANCIAL SERVICES DIVISION                                1995          1996         1997         1997
 ---------------------------                                ----          ----         ----         ----
                                                                            ($ in thousands)
<S>                                                       <C>          <C>          <C>          <C>
 Agents under contract..................................       4,638        9,164        7,730       18,980
 Number of agents annually producing new business.......       2,033        2,842        2,206        4,674
 Submitted annualized new business premiums.............  $   11,879   $  118,528   $  139,483   $  153,803
 Annualized new business premium per agent..............  $      5.8   $     41.7   $     63.2   $     32.9
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                                  Pro forma
 INSURANCE PRODUCT TYPE                                     1995          1996         1997         1997
 ----------------------                                     ----          ----         ----         ----
                                                                             ($ in millions)
<S>                                                       <C>          <C>          <C>          <C>
 Fixed benefit.....................................       $     9.4    $     5.3    $     0.3    $     0.3
 Life..............................................            65.0        143.7        127.9        270.0
 Accumulation......................................            25.9        102.2        166.9        203.3
                                                          ---------    ---------    ---------    ---------
   Total...........................................       $   100.3    $   251.2    $   295.1    $   473.6
                                                          =========    =========    =========    =========
</TABLE>


                                       11

<PAGE>



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

<TABLE>
<CAPTION>
                                                                                                  Pro forma
 INSURANCE PRODUCT TYPE                                     1995          1996         1997         1997
 ----------------------                                     ----          ----         ----         ----

<S>                                                          <C>          <C>          <C>          <C>
 Fixed benefit..........................................      4.6%         2.8%         0.2%         0.1%
 Life...................................................     35.8         55.1         46.3         57.7
 Accumulation...........................................     80.1         91.9         95.0         95.4
   Total division revenue to the Company's
     total insurance operations revenue.................     24.0         44.5         45.9         42.8
</TABLE>

PRODUCTS

General

     The Company's  products  generally are small premium  policies with defined
fixed  benefits  or low  face  amount  life  insurance  policies,  each of which
demonstrate stable risk characteristics.  The Company's more recent acquisitions
of Integon Life and United Life added a portfolio of  accumulation  products for
which the Company  actively  manages  pricing  spreads.  The  acquisition  of SW
Financial  substantially  expands  the  Company's  fixed  benefit  and  interest
sensitive  life  product  portfolios  and,  to  a  lesser  extent,  accumulation
products.

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

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

Fixed Benefit Products

     Fixed benefit  products are sold in large volume and are  characterized  by
low  average  annual  premiums.  These  products  provide  one or more of  three
principal  types of  benefits:  (i) fixed  periodic  payments  to an insured who
becomes disabled and unable to work because of an accident and/or sickness, (ii)
fixed periodic payments to an insured who becomes hospitalized,  and (iii) fixed
single  payments  that  vary in  amount  generally  for  specified  surgical  or
diagnostic  procedures.  Because the benefits are fixed in amount at the time of
policy  issuance and are not intended to provide  reimbursement  for medical and
hospital  expenses,  payment amounts are not affected by inflation or the rising
cost of health care services.  Fixed benefit products,  primarily those covering
inability  to work due to an  accident,  provide  payments  while the insured is
disabled  and  unable  to work,  subject  to the  terms  and  conditions  of the
applicable  policy.  Fixed  benefit  products  under which  payments are made to
insureds who are disabled and unable to work may be purchased  with coverage for
either (i) specified types of accidents,  (ii) all other types of accidents,  or
(iii) a combination of accident and sickness.  The Company's practice is to sell
products  that together with other  similar  coverages,  do not provide  monthly
benefits in excess of $2,000 or 75% of the insured's income, if less.

     Certain fixed benefit  products,  primarily those covering  hospitalization
due to sickness, provide payments during the period the insured is hospitalized.
Most of the Company's  fixed  benefit  products  also provide  additional  fixed
periodic payments to an insured who becomes  hospitalized.  Payments under these
products are not designed to cover the actual  costs of the  insured's  hospital
stay,  but merely to provide  the  insured  with a means of paying  supplemental
expenses during the

                                       12

<PAGE>



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.

     The  acquisition  of SW Financial  expanded the  Company's  fixed  benefits
products  to include  long term care and  medicare  supplement  policies.  Union
Bankers medicare  supplement  policies provide Medicare  enrollees with coverage
for certain medical  expenses not paid in full by Medicare.  In addition,  Union
Bankers  historically  marketed  non-fixed  benefit  products such as individual
major medical coverage and Preferred  Provider  Options  ("PPO").  Subsequent to
acquisition by the Company,  Union Bankers has stopped  accepting  major medical
and PPO applications, but continues to process renewals.

Life Insurance Products

     Of the policy revenues  attributable to life products,  approximately 51.7%
are related to interest  sensitive life insurance policies and the remainder are
related to traditional term and whole life insurance policies.

     The Company designs its interest sensitive life insurance policies to avoid
the early  accumulation  of cash values and to  discourage  early  surrenders or
terminations by imposing relatively high average surrender charges. This is done
to reduce the risk of the Company's  insurance  subsidiaries having to liquidate
investment  assets to meet a liquidity  demand  resulting  from the surrender of
large numbers of life  insurance  policies.  In addition to the basic  policies,
policyholders also may purchase  accidental death, waiver of premium and annuity
riders.  The  average  face  amount of the life  insurance  policies in force at
December 31, 1997 was $50,100.

Accumulation Products

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

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

     As  of  December  31,  1997,  the  Company   maintained   annuity  reserves
aggregating $1,458.7 million at an average credited rate of interest of 5.4%. Of
the $1,458.7 million of annuity  reserves,  approximately  48.7% were subject to
surrender charges averaging 5% or more of the contractholder's account balance.

INSURANCE UNDERWRITING

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

     In general,  the Company permits simplified  underwriting of life products,
unless the amount of requested coverage is greater than specified levels between
$25,000  and  $100,000,   depending  on  the  age  of  the  applicant.  If  full
underwriting  is required,  the Company  reviews the policy  application  and an
attending physician's report and may require a paramedical

                                       13

<PAGE>



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.
The life products are  specifically  designed and priced for the mortality risks
associated with the Company's simplified underwriting procedures.

     Although the increasing  incidence of AIDS is expected to affect  mortality
adversely for the life insurance  industry as a whole, the Company believes that
the impact of AIDS on its  operations  should not be  material  due to the small
average  size of the life  insurance  policies  sold.  The Company  requires and
considers  AIDS   information  to  the  fullest  extent   permitted  by  law  in
underwriting and pricing decisions.  During the twelve months ended December 31,
1997, 1996 and 1995, the Company estimated it paid  approximately  $2.1 million,
$3.2 million and $1.9 million, respectively in death benefits (representing less
than 3.2% of total death  benefits paid by the Company  during each such period)
under  individual  life  policies  due to deaths  believed  by the Company to be
AIDS-related.

INVESTMENT PORTFOLIO

     The  Company's  investment  portfolio  is managed  with the  objectives  of
maintaining high credit quality and liquidity,  maximizing current income within
acceptable  levels of risk,  minimizing  market and credit risk and matching the
anticipated maturities of investments to the Company's  liabilities.  To achieve
these objectives, the portfolio consists primarily of United States and Canadian
government and investment-grade  fixed maturity securities,  which together with
high quality short-term  investments accounted for approximately 78.4% and 79.7%
of  the  Company's  total  invested  assets  at  December  31,  1997  and  1996,
respectively.  The  Company  believes  that  the  nature  of its  fixed  benefit
products,  which have no inflation risk, and its life products,  which limit the
early  accumulation  of cash  values,  permit it to  utilize  this  conservative
investment strategy.

     At December 31, 1997,  54.1% of the  Company's  fixed  maturity  bonds were
rated AA or higher by Standard & Poor's and  approximately  92.5% 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  and  Canadian  governments  and
government agencies and authorities, no single issuer represented more than 0.1%
of total invested assets at December 31, 1997.


                                       14

<PAGE>



     The following table summarizes the Company's investments as of December 31,
1997:

<TABLE>
<CAPTION>
                                                                                             Percent of
                                                       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..............    $   135,256  $   142,686   $  142,686       4.3%
   Debt securities issued or guaranteed by
     foreign governments(2)......................         66,635       73,812       73,812       2.2
   Municipal bonds...............................         27,043       22,757       22,757       0.7
   Corporate bonds...............................      1,146,776    1,192,079    1,192,079      36.0
   Mortgage-backed bonds.........................      1,242,805    1,287,648    1,287,648      38.8
                                                     -----------  -----------   ----------     -----
     Total fixed maturity securities
       available for sale........................      2,618,515    2,718,982    2,718,982      82.0
Equity securities available for sale.............         30,084       30,257       30,257       0.9
Commercial mortgages.............................        205,960      215,553      205,960       6.2
Residential mortgages............................         34,919       32,499       34,919       1.1
Real estate......................................         17,807       17,807       17,807       0.5
Policy loans.....................................        145,108      145,108      145,108       4.4
Short-term investments...........................         84,141       84,141       84,141       2.5
Other investments................................         78,068       78,068       78,068       2.4
                                                     -----------  -----------   ----------     -----
     Total invested assets.......................    $ 3,214,602  $ 3,322,415   $3,315,242     100.0%
                                                     ===========  ===========   ==========     =====
--------------
(1) Fair values are obtained  principally from the Company's investment advisor.
(2) Consists principally of Canadian provincial government bonds and bonds
     issued or guaranteed by the Canadian federal government (in U.S. $).
</TABLE>


                                       15

<PAGE>



     The following table  summarizes the Company's  investments,  as of December
31, 1997, and includes SW Financial on a pro forma basis:

<TABLE>
<CAPTION>
                                                                                             Percent of
                                                       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..............    $   162,748  $   170,257   $  170,257       3.2%
   Debt securities issued or guaranteed by
     foreign governments(2)......................         87,160       95,158       95,158       1.8
   Municipal bonds...............................         49,512       45,461       45,461       0.8
   Corporate bonds...............................      1,899,222    1,955,772    1,955,772      36.7
   Mortgage-backed bonds.........................      2,063,642    2,129,842    2,129,842      39.9
                                                     -----------  -----------   ----------     -----
     Total fixed maturity securities
       available for sale........................      4,262,284    4,396,490    4,396,490      82.4
Equity securities available for sale.............         30,772       31,336       31,336       0.6
Commercial mortgages.............................        254,819      265,158      254,819       4.8
Residential mortgages............................         37,130       34,710       37,130       0.7
Real estate......................................         19,700       19,700       19,700       0.4
Policy loans.....................................        268,149      268,149      268,149       5.0
Short-term investments...........................        241,281      241,281      241,281       4.5
Other investments................................         85,606       86,529       86,529       1.6
                                                     -----------  -----------   ----------     -----
     Total invested assets.......................    $ 5,199,741  $ 5,343,353   $5,335,434     100.0%
                                                     ===========  ===========   ==========     =====
--------------
(1) Fair values are obtained  principally from the Company's investment advisor.
(2) Consists principally of Canadian provincial government bonds and bonds
     issued or guaranteed by the Canadian federal government (in U.S. $).
</TABLE>

     The table set forth below  indicates the composition of the Company's fixed
maturity portfolio by rating as of December 31, 1997:

<TABLE>
<CAPTION>
                                                                                      Percent of
                                                                            Total        Total
                                                                          Carrying     Carrying
Rating                                                                      Value        Value
------                                                                      -----        -----
<S>                                                                      <C>             <C>
AAA(1)................................................................   $1,396,576       51.4%
AA....................................................................       73,570        2.7
A.....................................................................      522,956       19.2
BAA...................................................................      522,187       19.2
                                                                         ----------      -----
  Total investment grade..............................................    2,515,289       92.5
                                                                         ----------      -----
BB....................................................................       90,233        3.3
B.....................................................................       77,285        2.9
                                                                         ----------      -----
  Total below-investment grade........................................      167,518        6.2
                                                                         ----------      -----
Nonrated..............................................................       36,175        1.3
                                                                         ----------      -----
  Total fixed maturities..............................................   $2,718,982      100.0%
                                                                         ==========      =====
--------------
(1)  Includes  approximately  $142.7  million of United  States  government  and
     agency  bonds  and  approximately  $73.8  million  of  Canadian  provincial
     government  bonds and bonds issued or  guaranteed  by the Canadian  federal
     government (in U.S. dollars).
</TABLE>



                                       16

<PAGE>



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

<TABLE>
<CAPTION>
                                                                FOR THE YEARS ENDED DECEMBER 31,
                                                 -----------------------------------------------------------
                                                                                                   Pro forma
                                                     1995            1996           1997             1997
                                                     ----            ----           ----             ----
<S>                                              <C>            <C>             <C>            <C>
   End of period total invested assets(1)......  $   2,286,203  $   3,673,504   $   3,339,979  $   5,510,039
   Net investment income(2)....................        102,291        210,734         273,237        393,021
   Net realized investment gains(3)............          3,770          1,257          17,487         19,327
   Average annual yield........................            7.3%           7.5%            7.6%           7.2%

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

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

REINSURANCE

     In keeping with industry  practice,  the Company reinsures  portions of its
life insurance exposure with unaffiliated  insurance companies under traditional
indemnity  reinsurance  agreements.  New  insurance  sales are  reinsured  above
prescribed  limits and do not  require  the  reinsurer's  prior  approval  under
contracts that are renewable on an annual basis.  Generally,  the Company enters
into indemnity  reinsurance  arrangements to assist in diversifying its risk and
to limit its maximum loss on risks that exceed the  Company's  policy  retention
limits  ranging from $25,000 to $500,000  per life,  depending on insurer  issue
age,  the product type and each  subsidiary's  historical  practice.  Generally,
accidental  death benefits in excess of $50,000 per life are reinsured on a bulk
basis.  Indemnity  reinsurance does not fully discharge the Company's obligation
to pay policy  claims on the  reinsured  business.  The ceding  insurer  remains
responsible  for policy  claims to the extent  the  reinsurer  fails to pay such
claims.  At no time during the past ten years has any present  reinsurer  of any
continuing  block of business  ceded by any of the Company's  insurance  company
subsidiaries  failed  to pay any  policy  claims  with  respect  to  such  ceded
business.  At December 31, 1997 and 1996, of the approximately $24.6 billion and
$31.5 billion of life  insurance in force,  approximately  $4.4 billion and $5.9
billion had been ceded to reinsurers,  respectively. As of December 31, 1997 the
Company's  principal  reinsurers  are  Transamerica  Occidental  Life  Insurance
Company,  Reassurance  Company of Hanover,  Cologne Life  Reinsurance  Co., Life
Reassurance  Corp.  of  America,  Worldwide  Assurance  Company,  Ltd.,  Lincoln
National  Life  Insurance  Company,  Swiss Re Life & Health  Insurance  Company,
Allianz Life Insurance  Company and Phoenix Home Life Mutual Insurance  Company,
which collectively have reinsured approximately 66.8% 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. "97" represents 1997). It is highly
likely that such systems will not be able to accurately  process data containing
date  information  for the year 2000 and  beyond.  The year  2000  issue has the
potential to affect the Company and its  subsidiaries  through the disruption of
the  processing  of business both  internally  and between the Company and other
businesses with which it interacts.

     To address the impacts of the year 2000 on its businesses,  the Company has
initiated a formal year 2000 assessment and  remediation  effort to identify and
correct  concerns  relating  to  both  the  Company's  own  processing  and  the
processing

                                       17

<PAGE>



activities  for which the Company is dependent upon its business  partners.  The
Company has engaged certain  outside vendors and focused certain  employees full
time  efforts  to help in the  full  array  of its year  2000  initiative.  This
includes  systems  assessment and monitoring  advice,  actual code  remediation,
communication  and consultation  with critical  business partners and additional
data  center  and  testing   resources.   During  1997,  the  Company   incurred
approximately  $1.9 million of cost associated  with year 2000 compliance  work.
Nearly all such costs were  associated  with outside  contractors  and advisors.
Over the next two years,  the Company  expects to incur  internal  and  external
costs associated with such expertise ranging from $9.3 million to $14.9 million,
which are likely to be incurred  primarily during 1998 and early 1999, and which
represents  approximately  25% of the Company's  technology  costs. Of the total
range of estimated costs the Company anticipates  approximately 42% of the costs
to be internal allocation of resources.

     Each  of  the  operating   divisions  is  primarily   responsible  for  its
remediation efforts with corporate oversight provided as necessary.  The Company
believes  that the Career Sales  Division has  substantially  completed its year
2000 assessment and remediation efforts,  which will be subject to ongoing tests
for the  remainder  of 1998.  The  Payroll  Sales  Division  has  completed  the
remediation  of its largest  administrative  platforms,  except for AA Life, and
anticipates  successful  remediation and testing of the remaining sub-system and
system interfaces during 1998. AA Life is in the process of upgrading its policy
administration  system to a year 2000  compliant  version.  AA Life will rely on
contracted  vendor  resources  in working to complete its upgrade  process.  The
Company's  Financial  Services  Division has only  recently  begun its year 2000
remediation  efforts.  Those efforts are dependent on the utilization of outside
resources.  The  Company  believes  that the  Financial  Services  Division  has
contracted  with  sufficient  resources  to be able to remediate  its  essential
business  systems.  In addition,  Union  Bankers has  committed to a strategy of
utilizing  third party  administrative  experts,  who have  indicated  year 2000
compliance,  to handle the  processing of its health  insurance  business,  thus
eliminating the need for the upgrade or modification of certain  existing health
administration systems.

     Although the Company believes that its operating divisions, outside vendors
and most critical business partners will be sufficiently compliant that the year
2000 issue should not cause a material  disruption  in the  Company's  business,
there can be no  assurance  that there will not be material  disruptions  to the
Company's  business or an increase  in the cost of the Company  doing  business.
Although  the  Company  believes  that the year 2000  issues  should not cause a
material  disruption  in  the  Company's  business,  the  Company  is  currently
evaluating various contingency plans associated with remediation tasks which the
Company believes are at a higher risk for potential failure.

COMPETITION

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

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

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

     Thus,  the  Company   competes   directly  with  other  insurers   offering
supplemental health insurance and believes that its current policies and premium
rates are generally  competitive  with those offered by other companies  selling
similar types of insurance.  Management  believes that the Company's product and
market  focuses  are  not  widespread  in the  insurance  industry  and  that it
generally  does  not face  direct  competition  from  major  national  insurers,
although the Company

                                       18

<PAGE>



experiences competition from smaller,  regional insurance companies.  Management
also believes that few major national  insurers  compete directly in the sale of
fixed benefit  products and life products to the primary  market sub segments to
which the Company is focused.

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

REGULATORY MATTERS

     Life insurance  companies are subject to regulation and  supervision by the
states in which they transact business. The laws of the various states establish
regulatory agencies with broad administrative and supervisory powers related to,
among other  things,  granting  and  revoking  licenses  to  transact  business,
regulating  trade  practices,  establishing  guaranty  associations,   licensing
agents,  approving  policy  forms,  filing  premium  rates on certain  business,
setting  reserve  requirements,  determining  the form and  content of  required
financial statements, determining the reasonableness and adequacy of capital and
surplus  and  prescribing  the type of  permitted  investments  and the  maximum
concentrations  of  certain  classes of  investments.  The  Company's  insurance
subsidiaries   are  subject  to  periodic   examinations  by  state   regulatory
authorities.

     During 1997, six of the Company's  insurance  subsidiaries  were subject to
financial  triennial  examinations.  Final  examination  reports  issued  by the
Departments  of  Insurance  for North  Carolina and  Pennsylvania  resulted in a
decrease in the  statutory  capital and surplus of  approximately  $37.1 million
(after giving  effect to certain  timing  differences)  and requests for certain
remedial   action  plans  which  the  Company  has  filed  with  the  respective
Departments of Insurance.  The most significant  adjustments related to: (i) the
disallowance of certain  reinsurance  credits,  (ii) reserve  strengthening  and
(iii)  issues of timing of  recognition  of certain  valuation  issues  that the
Company's insurance  subsidiaries  reflected in their 1997 statutory  statements
that were deemed by the  examination  teams to relate to periods  prior to 1997.
The Company does not expect such  examination  reports to have a material impact
on the Company's results of operations.  During 1998, the Company expects United
Life, and all of the Company's  Texas  domiciled  insurance  subsidiaries  to be
subject to examination in the normal course of exam scheduling.

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

     There  continues to be  substantial  scrutiny of the  insurance  regulatory
framework, and a number of state legislatures have enacted legislative proposals
that alter,  and in many cases increase,  state authority to regulate  insurance
companies  and their  holding  company  systems.  The  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.


                                       19

<PAGE>



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

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

     Texas  law  permits  PLAIC,  AA Life,  Professional,  Integon  Life,  OLIC,
Southwestern  Life and Union Bankers to pay a dividend  without prior consent of
the Texas  Insurance  Commissioner  if the amount paid,  together with all other
dividends  paid in the preceding 12 months,  does not exceed the greater of: (i)
10% of such insurer's  surplus as regards to policyholders as of the 31st day of
December next  preceding,  or (ii) the net gain from  operations of such insurer
for the 12 month  period  ending the 31st day of December  next  preceding.  Any
dividend above this amount would be considered an  "extraordinary"  dividend and
could not be paid until 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.

     Louisiana law permits  United Life to pay a dividend  without prior consent
of the Louisiana  Insurance  Commissioner if the amount paid,  together with all
other dividends paid in the preceding 12 months,  does not exceed the lesser of:
(i) 10% of such insurer's surplus as regards to policyholders as of the 31st day
of December next preceding, or (ii) the insurer's net gain from operations,  not
including realized capital gains, for the 12 month period ending the 31st day of
December next  preceding.  Any dividend above this amount would be considered an
"extraordinary" dividend and could not be paid until the earlier of: (i) 30 days
after  the  Louisiana   Insurance   Commissioner  has  received  notice  of  the
declaration  thereof and has not within such period disapproved such payment, or
(ii) the receipt of approval from the Louisiana Insurance Commissioner.  As part
of its July 1996  approval of the  Company's  acquisition  of United  Life,  the
Louisiana  Insurance  Commissioner  approved  a dividend  plan for  United  Life
pursuant to which United Life may pay a specified  amount of dividends  for each
of the five years following the acquisition, beginning in 1997, amounting to the
lesser of the pro forma dividend  amounts in such plan or the actual earnings of
United Life, and conditioned on United Life maintaining a risk-based  capital of
at least 300% authorized control level.

     On the basis of 1997 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.  PLAIC had three  ratios and  Pioneer
Security  had two ratios  outside of the usual  range  established  by the NAIC.
PLAIC and Pioneer Security are primarily  holding  companies for their principal
assets,   being  the  common  stock  of  certain  of  the  Company's   insurance
subsidiaries.  Integon Life had none of the twelve  ratios  outside of the usual
range.  PLIC had three of the twelve  ratios  outside of the usual range,  while
OLIC had four and Peninsular had two,  Professional  had two,  American-Amicable
had none,  Pioneer  American  had none and  United  Life had none of the  twelve
ratios outside of the usual ranges.  PLIC's variances were caused primarily as a
result of examination  adjustments  required by the  Pennsylvania  Department of
Insurance.  Remedial  action  was  taken  by  the  Company  in  1997  and  1998.
Professional's  variances were caused primarily as a result of statutory losses.
OLIC's and Peninsular's variances were caused primarily as a result of increased
reinsurance between these two companies.  Southwestern Life had no ratios, Union
Bankers had three ratios,  Marquette  National had three ratios and Constitution
had three ratios outside the usual ranges.


                                       20

<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  1997,  and there can be no  assurance  that such  insurance
departments will not take action against the insurance companies.

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

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

     Calculations  using the NAIC formula and the life  insurance  subsidiaries'
statutory  financial  statements as of December 31, 1997,  indicate that each of
the insurance subsidiaries' capital substantially exceeded RBC requirements.

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

     The Company may be required,  under the  solvency or guaranty  laws of most
states in which it does business,  to pay assessments (up to certain  prescribed
limits) to fund policyholder  losses or liabilities of insurance  companies that
become  insolvent.  Recent  insolvencies  of  insurance  companies  increase the
possibility  that such  assessments  may be required.  These  assessments may be
deferred  or  forgiven  under  most  guaranty  laws if they  would  threaten  an
insurer's  financial strength and, in certain  instances,  may be offset against
future  premium  taxes.  The  occurrence  and  amount of such  assessments  have
increased  in recent  years and  generally  are  expected  to increase in future
years.  The Company  paid  approximately  $2.5  million,  $2.6  million and $1.7
million for the years ended December 31, 1997, 1996 and 1995, respectively, as a
result of such  assessments.  The  likelihood  and  amount  of any other  future
assessments cannot be estimated and are beyond the control of the Company.

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

     In addition,  there were proposals  under  consideration  since 1994 at the
federal  and state  levels  regarding  reforms to the health  care system in the
United States.  Although these  proposals were not adopted at the federal level,
many states have  adopted  some form of health  care  reform  since then.  These
reforms have focused on the increasing cost of health care

                                       21

<PAGE>



and insurance plans that reimburse insureds or health care providers for medical
and  related  costs.  Because  the  Company's  fixed  benefit  products  provide
supplemental  income  payments  directly to the insured and are not  designed to
reimburse  health care  providers,  the Company  does not expect such reforms to
have a material adverse effect on its business.

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

RATINGS

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

Item 2. Properties

FACILITIES

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

     The  Company  leases   approximately  100  offices   throughout  its  sales
territories and has a separate  Canadian  business office facility that includes
office and storage  space.  SFSC  leases  approximately  125,000  square feet in
Dallas,  Texas.  American-Amicable  owns its home office facility in Waco, Texas
and United Life leases office space in Baton Rouge,  Louisiana. In addition, the
Company  leases  office space for its holding  company  operations  in Bethesda,
Maryland and New York City. The Company  believes that the current makeup of its
properties is adequate for its operations  and, based on its recent  experience,
that it will be able to find suitable replacement properties on acceptable terms
for any  properties  the  Company  chooses to  replace  or for which  leases are
terminated or not renewed.

Item 3. Legal Proceedings

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

                                       22

<PAGE>



fiduciary duty alleged in the complaint,  the imposition of a constructive trust
for the benefit of the Company on profits or benefits  obtained by any defendant
through the alleged  breaches of fiduciary duty,  attorney's fees and costs, and
such other relief as the court determines to be just, proper or equitable.

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

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

     On December 1, 1997, the defendants and the  plaintiffs'  counsel agreed in
principle to amend the Original Proposed Settlement (as so amended, the "Amended
Proposed Settlement") following the PennCorp Board's conclusion that it would be
appropriate  to increase  the amount paid to the  Knightsbridge  Fund for the SW
Financial  Controlling  Interest to compensate  the limited  partners for, among
other things,  the unexpected and substantial  delay in the  consummation of the
purchase  of the SW  Financial  Controlling  Interest.  The terms of the Amended
Proposed  Settlement  are  identical  to  the  terms  of the  Original  Proposed
Settlement,  except  that the  Amended  Proposed  Settlement  provides  that the
Company will acquire the SW Financial  Controlling  Interest for $73.8  million,
and will  provide  a  one-time  "price  protection"  payment  associated  with a
disposition  of the SW  Financial  Controlling  Interest by PennCorp  during the
12-month period ending November 25, 1998. The Amended  Proposed  Settlement also
requires Messrs.  Stone and Fickes to grant PennCorp a price protection right in
the event of a sale of their Portsmouth investment.

     The Amended  Proposed  Settlement  is subject to  approval by the  Chancery
Court after notice to PennCorp  stockholders.  A settlement hearing in the Court
of Chancery is scheduled for May 12, 1998. Messrs.  Stone and Fickes have agreed
that, if the Amended Proposed Settlement is approved by the Chancery Court, they
will  cancel  their  SW  Financial  common  stock  warrants  and  they  will not
participate  in the  increased  consideration  (other  than the  possible  price
protection  right) for the SW  Financial  Controlling  Interest to the extent it
relates  to their  $7.0  million  personal  investment  in SW  Financial,  which
together  will  reduce  the price to be paid by  PennCorp  for the SW  Financial
Controlling  Interest by approximately  $3.7 million.  Because the Knightsbridge
restructuring will have the effect of substantially eliminating potential future
conflicts of interest between Messrs. Stone and Fickes and PennCorp, and because
the Amended Proposed Settlement will have the effect of reducing the price to be
paid for the SW  Financial  Controlling  Interest  and will  obviate the need to
expend  considerable  management and director time to litigate the actions,  the
PennCorp Board has  determined  that the Amended  Proposed  Settlement is in the
best  interests  of PennCorp  and its  shareholders  and  confers a  substantial
economic benefit on PennCorp. Accordingly, the PennCorp Board has authorized the
payment to plaintiffs' counsel of legal fees of $785,000 and documented expenses
not to exceed $50,000 in connection with the lawsuits and the related settlement

                                       23

<PAGE>



negotiations,  if the Amended  Proposed  Settlement  is approved by the Delaware
Chancery  Court after notice to PennCorp  stockholders.  The Company has accrued
$835,000 for such costs as of December 31, 1997.

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

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

     The Company held its Annual Meeting of Shareholders on December 31, 1997.

     1.   The  election of three Class II  Directors,  each to hold office for a
          three year term  expiring at the 2000 annual  meeting of  shareholders
          and/or until such director's successor shall be elected and qualified.

                                     VOTING
--------------------------------------------------------------------------------
                                                  NUMBER OF          NUMBER OF
                               NUMBER OF           SHARES              BROKER
                              SHARES FOR          WITHHELD           NON-VOTES
                              ----------          --------           ---------

Allan D. Greenberg            21,980,530           448,648               0
Kenneth Roman                 22,260,060           169,118               0
Maurice W. Slayton            22,260,068           169,110               0

     2.   The adoption of certain  amendments to the Company's  1996 Stock Award
          and Stock Option Plan.

                                     VOTING
--------------------------------------------------------------------------------
                               NUMBER OF          NUMBER OF          NUMBER OF
      NUMBER OF                 SHARES             SHARES              BROKER
      SHARES FOR                AGAINST           ABSTAINED          NON-VOTES
      ----------                -------           ---------          ---------

      16,980,422               5,409,996           38,760                0

     3.   The  adoption  of  an  amendment  to  the  Company's  Second  Restated
          Certificate of  Incorporation  increasing the number of its authorized
          shares of common stock from 50,000,000 to 100,000,000.

                                     VOTING
--------------------------------------------------------------------------------
                               NUMBER OF          NUMBER OF          NUMBER OF
      NUMBER OF                 SHARES             SHARES              BROKER
      SHARES FOR                AGAINST           ABSTAINED          NON-VOTES
      ----------                -------           ---------          ---------

      21,504,840                905,670            18,668                0


                                       24

<PAGE>



     4.   The  adoption  of  an  amendment  to  the  Company's  Second  Restated
          Certificate of  Incorporation to reduce the minimum required number of
          members  constituting  the Company's  Board of Directors  from nine to
          seven.

                                     VOTING
--------------------------------------------------------------------------------
                               NUMBER OF          NUMBER OF          NUMBER OF
      NUMBER OF                 SHARES             SHARES              BROKER
      SHARES FOR                AGAINST           ABSTAINED          NON-VOTES
      ----------                -------           ---------          ---------

      19,738,244               2,673,644           17,290                0

     5.   The  approval  of the  purchase by the Company of The Fickes and Stone
          Knightsbridge Interests.

                                     VOTING
--------------------------------------------------------------------------------
                               NUMBER OF          NUMBER OF          NUMBER OF
      NUMBER OF                 SHARES             SHARES              BROKER
      SHARES FOR                AGAINST           ABSTAINED          NON-VOTES
      ----------                -------           ---------          ---------

      15,042,284               2,069,597          1,106,483          4,210,814

     6.   The  approval of the  purchase  by the Company of all the  outstanding
          common  stock and common  stock  warrants  of  Southwestern  Financial
          Corporation not already owned by the Company.

                                     VOTING
--------------------------------------------------------------------------------
                               NUMBER OF          NUMBER OF          NUMBER OF
      NUMBER OF                 SHARES             SHARES              BROKER
      SHARES FOR                AGAINST           ABSTAINED          NON-VOTES
      ----------                -------           ---------          ---------

      15,043,357               2,069,046          1,105,961          4,210,814

     7.   The  approval of the  adjournment  of the Annual  Meeting in the event
          there are not sufficient  votes to approve the above  proposals at the
          time of the Annual Meeting.

                                     VOTING
--------------------------------------------------------------------------------
                               NUMBER OF          NUMBER OF          NUMBER OF
      NUMBER OF                 SHARES             SHARES              BROKER
      SHARES FOR                AGAINST           ABSTAINED          NON-VOTES
      ----------                -------           ---------          ---------

      16,774,851               5,540,679           113,648               0


                                       25

<PAGE>



                                     PART II

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

MARKET FOR COMMON STOCK

     The shares of PennCorp  Financial  Group,  Inc.  are listed on the New York
Stock Exchange  ("NYSE") under the ticker symbol "PFG." The following table sets
forth for the calendar periods indicated, the high and low sales price per share
of the  Company's  Common Stock as reported on the NYSE and the  quarterly  cash
dividends  declared  on the Common  Stock with  respect  to each  quarter  since
January 1, 1996. The prices do not include mark-ups, mark-downs, or commissions.
As of February 27, 1998,  there are  approximately  179  shareholders  of record
throughout the United States and abroad.

     The price  history as  provided by NYSE and  dividends  for the years ended
December 31, 1997 and 1996, are presented below:

<TABLE>
<CAPTION>
                                                           SALES PRICE          DIVIDEND
FOR THE YEAR ENDED DECEMBER 31, 1997                     HIGH        LOW        DECLARED
------------------------------------                     ----        ---        --------

<S>                                                    <C>        <C>            <C>
Fourth quarter......................................   $ 35.875   $ 30.188       $ 0.05
Third quarter.......................................     40.375     29.500         0.05
Second quarter......................................     38.500     30.125         0.05
First quarter.......................................     39.000     32.000         0.05

                                                           SALES PRICE          DIVIDEND
FOR THE YEAR ENDED DECEMBER 31, 1996                     HIGH        LOW        DECLARED
------------------------------------                     ----        ---        --------

Fourth quarter.....................................    $ 36.375   $ 32.000       $ 0.05
Third quarter......................................      34.125     25.750         0.05
Second quarter.....................................      33.625     26.750         0.05
First quarter......................................      33.000     26.875         0.05
</TABLE>


                  (Remainder of Page Intentionally Left Blank)


                                       26

<PAGE>
Item 6. Selected Consolidated Financial Data

(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the years ended December 31,                              1997          1996         1995         1994         1993
--------------------------------                              ----          ----         ----         ----         ----
<S>                                                       <C>          <C>          <C>          <C>           <C>
Revenues:
   Policy revenues....................................    $  345,566   $  348,090   $  301,889   $  244,422    $ 201,788
   Net investment income..............................       273,237      210,734      102,291       51,850       43,114
   Other income(1)....................................        46,476       43,703       21,794        1,056        3,817
   Net gains (losses) from the sale of investments....        17,487        1,257        3,770       (3,556)       1,439
                                                          ----------   ----------   ----------   ----------    ----------
       Total revenues.................................       682,766      603,784      429,744      293,772      250,158
                                                          ----------   ----------   ----------   ----------    ----------
Benefits and expenses:
   Claims incurred....................................       202,472      188,727      141,876      112,650       95,232
   Change in liability for future policy benefits and
     other policy benefits............................       121,817       83,184       20,047       (9,329)     (13,857)
   Insurance and other operating expenses.............       264,607      181,678      164,126      111,524      113,114
   Interest and amortization of deferred
      debt issuance costs.............................        23,355       18,579       19,520       18,274        7,461
                                                          ----------   ----------   ----------   ----------    ----------
       Total benefits and expenses....................       612,251      472,168      345,569      233,119      201,950
                                                          ----------   ----------   ----------   ----------    ----------
Income before income taxes and extraordinary charge...        70,515      131,616       84,175       60,653       48,208
   Income taxes.......................................        20,375       40,957       27,829       22,163       17,336
                                                          ----------   ----------   ----------   ----------    ----------
Income before extraordinary charge....................        50,140       90,659       56,346       38,490       30,872
       Extraordinary charge, net of income taxes......           --        (2,372)         --           --        (3,322)
                                                          ----------   ----------   ----------   ----------    ----------
Net Income............................................        50,140       88,287       56,346       38,490       27,550
       Preferred stock dividend requirements..........        19,533       14,646        6,540        1,151          --
                                                          ----------   ----------   ----------   ----------    ----------
Net income applicable to common stock.................    $   30,607   $   73,641   $   49,806   $   37,339    $  27,550
                                                          ==========   ==========   ==========   ==========    ==========
(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.

Per Share Information:
Basic:
   Net income applicable to common stock
     before extraordinary charge.....................     $     1.09   $     2.79   $     2.26   $     1.95    $    1.71
   Net income applicable to common stock before net gains
     (losses) from the sale of investments, restructuring
     and transaction costs and extraordinary charge(2)    $     1.58   $     2.76   $     2.26   $     2.07    $    1.65
   Extraordinary charge, net of income taxes.........     $      --    $    (0.09)  $      --    $      --     $   (0.18)
   Common shares used in computing basic earnings
     per share.......................................         28,016       27,208       22,048       19,112       18,090
Diluted:
   Net income applicable to common stock before
      extraordinary charge...........................     $     1.07   $     2.49   $     2.12   $     1.88    $    1.63
   Net income applicable to common stock before net
     gains (losses) from the sale of investments,
      restructuring and transaction costs and
      extraordinary charge(2)........................     $     1.54   $     2.47   $     2.12   $     2.00    $    1.58
   Extraordinary charge, net of income taxes.........     $      --    $    (0.07)  $      --    $      --     $   (0.18)
   Common shares used in computing diluted
     earnings per share..............................         28,645       35,273       25,216       19,851       18,970
Cash dividends declared..............................     $     0.20   $     0.20   $     0.06   $     0.04    $    0.04
As of December 31,
Assets:
Investments and cash.................................     $3,340,114   $3,694,609   $2,288,979   $  822,778    $ 674,552
Insurance assets.....................................        617,318      639,798      499,668      342,547      256,066
Other assets.........................................        766,703      474,916      354,271      144,244      132,767
                                                          ----------   ----------   ----------   ----------    ----------
   Total assets......................................     $4,724,135   $4,809,323   $3,142,918   $1,309,569    $1,063,385
                                                          ==========   ==========   ==========   ==========    ==========
Liabilities and shareholders' equity:
Insurance liabilities................................     $3,289,925   $3,566,455   $2,221,161   $  788,223    $ 649,899
Long-term debt.......................................        359,755      210,325      307,271      229,041      150,812
Other liabilities....................................        194,352      170,302      125,351       58,903       73,924
Redeemable preferred stock...........................         19,867       32,864       30,007       37,256          --
Shareholders' equity.................................        860,236      829,377      459,128      196,146      188,750
                                                          ----------   ----------   ----------   ----------    ----------
   Total liabilities and shareholders' equity........     $4,724,135   $4,809,323   $3,142,918   $1,309,569    $1,063,385
                                                          ==========   ==========   ==========   ==========    ==========
(2)  Excludes  amortization  associated with net gains (losses) from the sale of
     investments  of $9.4  million  for the year ended  December  31,  1997.  In
     addition,  restructuring  accruals and period costs and  transaction  costs
     associated  with a  terminated  merger  agreement  during 1997 all of which
     aggregate   $29.0   million  have  been   excluded  for  purposes  of  such
     calculations.  In 1997,  common shares used for diluted  earnings per share
     calculation were 33,733.  During 1995, the Company  incurred  restructuring
     charges aggregating $3.9 million.
</TABLE>
                                       27

<PAGE>



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

CAUTIONARY STATEMENT

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

GENERAL

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

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

     Strategic  Review of Business Units.  As a result of the tremendous  growth
the Company has  experienced,  the  diversification  of the underlying  business
units resulting from  acquisitions over time, and the need for the Company to be
able to rapidly  integrate  future  acquisitions,  the Company began a strategic
business evaluation during the third quarter of 1996. The review resulted in the
Company establishing three primary 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  and period costs  aggregating $21.4 million for the
year ended December 31, 1997,  directly  associated with the initial  divisional
restructuring  which  will  have  no  future  economic  benefit  ("restructuring
costs"),  including the costs of employee  termination  benefits and relocation,
early service contract termination, and facility abandonment.

     In addition,  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 begun 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  administration  costs  incurred by the  Company  during 1997 were
approximately $7.6 million.

     On January 2, 1998,  the Company  acquired the  Controlling  Interest in SW
Financial. As a result of such acquisition,  the Company is able to complete its
divisional restructuring which began in 1997. As a result of the Company's plans
to consolidate certain of its operating locations and corporate  functions,  the
Company expects to incur restructuring and certain other charges during 1998 not
to exceed approximately $25.0 million.

     On February 18, 1998, the Company announced that it had engaged  investment
banking firms to review strategic alternatives for maximizing shareholder value,
including the sale of the Career Sales  Division.  The Company  anticipates  the
disposition of the Career Sales  Division  within one year. See Note 19 of Notes
to Consolidated Financial Statements.

                                       28

<PAGE>



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

     Each of the operating  considerations outlined above as well as the cost of
capital to the  Company,  expected  cash flows from the target  acquisition  and
actuarial factors,  such as future premium,  mortality,  morbidity,  surrenders,
operating  expenses  and yields on assets  held to back policy  liabilities  are
considered  and weighted in determining  the relative risk of financial  rewards
for taking on the acquisition target.

     On July 22,  1996,  the Company  acquired  United Life & Annuity  Insurance
Company ("United Life") from United Companies Financial Corporation. United Life
markets  fixed and variable  annuity  products  through  independent  agents and
financial institution marketing channels.

     On December 14, 1995,  Southwestern Financial Corporation ("SW Financial"),
a newly organized corporation formed by the Company and Knightsbridge (see Notes
15 and 16 to Notes to Consolidated Financial Statements), purchased Southwestern
Life  Insurance  Company,  Union  Bankers  Insurance  Company 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  owns 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
Knightsbridge. As a result, the Company has an economic interest in SW Financial
aggregating 78.0 percent (for additional  information regarding SW Financial see
Notes 6 and 19 of "Notes to Consolidated Financial Statements").

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

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

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

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

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

     Financings.  In March  1997,  the  Company  entered  into a $450.0  million
revolving  credit  agreement  with  a  syndicate  of  banks  ("the  bank  credit
agreement") which replaced the Company's  previously  outstanding $175.0 million
credit  agreement which had been entered into in May 1996.  Borrowings under the
bank  credit  agreement  during  1997  were  used  to:  (i)  retire   previously
outstanding  bank  indebtedness  aggregating  $92.0  million,  (ii) make capital
contributions to its

                                       29

<PAGE>



insurance  subsidiaries amounting to $14.9 million, (iii) the acquisition of the
SW  Financial   subordinated   indebtedness   and  preferred  stock  of  Acordia
aggregating a total of $65.6 million, (iv) repurchase the previously outstanding
Series B Redeemable  Preferred  Stock in the amount of $14.7  million,  (v) fund
restructuring costs incurred by various operating subsidiaries aggregating $14.9
million, and (vi) for other corporate purposes.

     During 1997, the Company announced a stock repurchase  program in which the
Company was  authorized  by its Board of Directors to purchase up to 4.5 million
shares of common stock in the open market,  through  arranged  transactions  and
otherwise.  During 1997,  the Company  borrowed  approximately  $28.8 million to
repurchase approximately 819,000 shares.

     On August 2, 1996, the Company issued  2,875,000  shares of $3.50 Series II
Convertible  Preferred Stock ("Series II Convertible  Preferred  Stock") for net
proceeds of $139.2  million.  The cash raised through this offering,  along with
borrowings under the Company's bank credit facility,  were utilized: (i) to fund
the cash  portion of the  purchase  price for United  Life,  aggregating  $100.4
million,  (ii) to fund a capital  contribution  of $57.3 million to United Life,
and (iii) to pay  related  expenses  of the  acquisition  of United Life of $9.7
million. The Company accrued or paid dividends of $10.1 million and $4.0 million
during  1997 and  1996,  respectively,  related  to the  Series  II  Convertible
Preferred Stock.

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

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

     On July 14, 1995,  PennCorp issued 2,300,000  shares of $3.375  Convertible
Preferred  Stock  ("Convertible  Preferred  Stock")  for net  proceeds of $110.5
million.  On March 16, 1995,  PennCorp issued  3,750,000 shares of Common Stock,
for net proceeds of  approximately  $51.2  million.  The proceeds from these two
offerings were used to: (i) consummate  the  acquisition of Integon Life,  which
utilized funds totaling $33.4 million (including a capital contribution of $15.0
million), (ii) repay $28.5 million outstanding under, and subsequently cancel, a
revolving  credit  facility,  (iii)  repurchase,  for $34.6 million,  all of the
Company's  Series A Preferred  Stock,  (iv) repay  $11.2  million due to Integon
Life's former parent company under a subordinated  debenture,  (v) pay the $15.4
million cash portion of the purchase price of Occidental Life Insurance  Company
of North Carolina  ("OLIC") (which  PennCorp  purchased from  Pennsylvania  Life
Insurance  Company and its  wholly-owned  subsidiary,  Penncorp  Life  Insurance
Company  (collectively  referred  to herein  as "Penn  Life")  and  subsequently
contributed  to Integon  Life),  (vi) prepay $20.0 million  principal  amount of
subsidiary indebtedness, and (vii) make payments for general corporate purposes,
including  interest  payments and the cancellation of certain interest rate swap
agreements.  The Company paid or accrued dividends on the Convertible  Preferred
Stock amounting to $7.8 million, $7.8 million and $3.6 million during 1997, 1996
and 1995, respectively.

     As part of the financing for the Integon Life acquisition,  PennCorp issued
Series B Preferred Stock with an initial value of $12.8 million,  which accretes
at 10.4% per annum until its maturity on June 30,  1997,  and Series C Preferred
Stock with an initial value (subject to offset) of $17.9 million, which accretes
at 9.3% per annum until its  maturity on June 30,  1998.  The Series C Preferred
Stock's   estimated   initial  value  for  financial   statement   purposes  was
approximately  $16.0 million.  Preferred stock  dividends  accreted during 1997,
1996 and 1995,  on the Series B and Series C  Preferred  Stock  amounted to $1.7
million,  $2.9 million and $1.3 million,  respectively.  On March 14, 1997,  the
Company redeemed all the

                                       30

<PAGE>



outstanding  Series B  Preferred  Stock for $14.7  million,  utilizing  proceeds
available under the bank credit  facility.  On March 31, 1998, the Company plans
to redeem the Series C Preferred Stock into shares of the Company's Common Stock
under provision of the Series C Preferred Stock certificate of designation.

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

     Surplus Debentures, Dividend Restrictions and Cash Flows. Cash generated by
the Company's insurance  subsidiaries is made available to PennCorp  principally
through periodic payments of principal and interest on surplus debentures issued
by Pacific Life and Accident  Insurance  Company  ("PLAIC") and Pioneer Security
Life Insurance Company  ("Pioneer  Security")  (collectively,  the "Surplus Note
Companies"). The amounts outstanding under the surplus debentures totaled $358.3
million and $367.9 million as of December 31, 1997 and 1996,  respectively.  The
surplus  debentures  generally  require  (subject to  availability  of statutory
capital and surplus and in some instances,  regulatory  approval)  principal and
interest  payments  to be made  periodically  in  amounts  sufficient  to  allow
PennCorp to meet its cash requirements.

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

     For the years ended December 31, 1997, 1996 and 1995, the Company  received
net payments from the Surplus Note Companies of $44.1 million, $31.9 million and
$19.1 million,  respectively. The Surplus Note Companies received $32.1 million,
$25.8 million and $21.6 million in dividends and tax sharing payments from their
respective insurance subsidiaries.

     The  primary  cash  requirements  of the  Company  are  interest  payments,
preferred  stock dividends and common stock  dividends  which  aggregated  $47.4
million, $33.9 million and $ 24.5 million for the years ended December 31, 1997,
1996 and 1995,  respectively.  For the years ended  December 31, 1997,  1996 and
1995,  cash  requirements  of the Company  exceeded  cash made  available to the
Company  through  payments  under the surplus  debentures by $3.3 million,  $2.0
million  and $ 5.4  million,  respectively.  During each of these  periods,  the
Company  utilized a balance of  dividends  and surplus  note  payments  from the
insurance  subsidiaries and borrowings under the Company's credit  facilities to
fund  PennCorp's  cash  requirements.  This balance  resulted in what management
believes to be, along with other factors, an appropriate  retention of statutory
capital and surplus to improve the  insurance  subsidiaries'  A.M.  Best ratings
without placing an undue debt burden upon the Company.

     During  1998,   the  maximum   dividends  and  tax  sharing   payments  and
corresponding surplus debenture payments, without prior regulatory approval, are
anticipated   to  be   approximately   $79.0  million  and  the  Company's  cash
requirements are anticipated to be approximately  $59.0 million.  As a result of
the  Company's  historical  policy  of  retaining  capital  and  surplus  at the
insurance  subsidiary level, and as a result of the Company's  simplification of
its corporate structure, including the statutory merger of a number of insurance
companies,   combined  with  realignment  of  the  insurance  subsidiaries  into
operating  divisions,  the Company  believes  that as of December 31, 1997,  its
insurance  subsidiaries  have excess  capital and  surplus.  The  Company's  own
established targets for estimated risk-based capital requirements  indicate that
the insurance  divisions  could make  available  approximately  $40.0 million to
PennCorp, subject to applicable regulatory approvals.

     Investments.  The  Company's  investment  portfolio  is  managed  with  the
objectives of maintaining high credit quality and liquidity,  maximizing current
income within acceptable levels of risk,  minimizing market and credit risk, and
matching the anticipated maturities of investments to the Company's liabilities.
The Company believes that a conservative

                                       31

<PAGE>



investment  strategy fits the nature of its insurance products which have little
or no inflation risk and limited build-up of cash accumulation values in earlier
years.

     The  Company  continuously  evaluates  its  investment  portfolio  and  the
conditions under which it might sell securities,  including  changes in interest
rates,  changes in prepayment risk,  liquidity needs, asset liability  matching,
tax planning  strategies and other economic  factors.  Those securities that the
Company  believes would be subject to sale prior to the specified  maturity date
are included in  "securities  available  for sale,"  which  amounted to $2,719.0
million and  $2,993.9  million at December 31, 1997 and 1996,  respectively.  Of
those securities  available for sale, 92.5% and 92.1% were rated Baa or above by
Moody's Investors Services, Inc. at December 31, 1997 and 1996, respectively.

     During the years ended  December 31, 1997,  1996 and 1995, the Company sold
$801.1  million,  $378.6 million and $109.8 million of fixed maturity and equity
securities, and purchased $1,021.5 million, $955.8 million and $217.8 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.  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  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 an increase in
shareholders'  equity,  net of applicable  income taxes, of  approximately  $1.8
million.  During 1996,  the Company sold one security in its held for investment
portfolio  aggregating  $4.9 million as a result of a dramatic  deterioration in
its credit rating.

     During 1995, the Company established a portfolio of "trading securities" to
provide the Company  with the  opportunity  to undertake  interest  rate hedging
strategies,  to participate in short-term relative value trades and to invest in
special situations with the goal of generating  short-term trading profits. As a
result of trading activities,  the Company recognized $1.1 million, $1.3 million
and $5.7 million of profits  during  1997,  1996 and 1995,  respectively.  As of
December 31, 1997, the Company held no investments in its trading portfolio.

     The Company held $1,287.6 million and $1,428.3  million of  mortgage-backed
bonds which  represented 38.8% and 38.9% of total invested assets as of December
31,  1997 and 1996,  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 updated on a
monthly basis and are designed to allow  accurate  measurement  of the convexity
risks inherent in that percentage of the portfolio  invested in  mortgage-backed
securities  and other  callable  securities.  The Company  manages the portfolio
convexity  risk within the context of the overall asset and liability  model and
the quantification of disintermediation risk.

     Mortgage  loans on real estate  amounted to 7.3% and 7.2% of total invested
assets as of  December  31,  1997 and  1996,  respectively.  United  Life is the
Company's only subsidiary which actively  originates new mortgage loans.  United
Life invests in first  mortgage  loans and provides a mortgage loan  warehousing
facility for its former  parent as a means of obtaining  higher  invested  asset
yields necessary to support  competitively priced annuity products.  The Company
has  established  a reserve for loan loss which  aggregated  $6.0  million as of
December  31,  1997.  As  of  December  31,  1997  and  1996,  the  Company  had
non-performing loans amounting to $698,000 and $1.4 million,  respectively.  The
Company is in various stages of foreclosure or sales of such loans.  The Company
believes its current loan loss  provision is adequate to cover any future losses
related to currently performing and non-performing loans.

     Cash and short-term  investments  totaled $109.0 million and $102.6 million
as of December 31, 1997 and 1996,  respectively.  At December 31, 1997 and 1996,
respectively,  the Company  held  approximately  $135,000  and $12.2  million in
short-term  investments  needed in the settlement of investment  trades early in
the following year.

     Final  Determination of  Pre-Acquisition  Contingencies  and Purchase Price
Allocation.  For each of the periods  presented,  the  Company has made  certain
valuation  determinations  with  respect  to  pre-acquisition  contingencies  or
allocations.  For the year ended December 31, 1997,  the Company  determined the
following with respect to certain material

                                       32

<PAGE>



acquisition contingencies or allocations: (i) the Company increased deferred tax
assets and reduced associated costs in excess of net assets acquired  associated
with the Integon Life  acquisition  by $19.6  million 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 $1.1 million 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 $1.1 million, associated with the acquisition of
United Life, as a result of final appraisals becoming available.

     For the year ended December 31, 1996, the Company  determined the following
with respect to certain material acquisition  contingencies or allocations:  (i)
the Company incurred  additional costs associated with the acquisition of United
Life of $2.5 million,  which  resulted in a  corresponding  increase to costs in
excess of net  assets  acquired,  (ii) the  Company  decreased  real  estate and
mortgage loan loss valuations of Integon Life by $6.8 million, which resulted in
a  decrease  in costs in excess  of net  assets  acquired  of $4.4  million  and
deferred tax assets of $2.4  million,  and (iii) the Company  increased  certain
policy reserves of Integon Life aggregating  $10.0 million,  which resulted in a
corresponding  increase  to costs in  excess  of net  assets  acquired  of $10.0
million.

     For the year ended December 31, 1995, the Company determined a reduction in
the valuation of the Series A Preferred Stock issued in conjunction  with the AA
Life  acquisition  of $3.9 million was  necessary  based upon final  settlement,
which  resulted in a  corresponding  reduction  in costs in excess of net assets
acquired.

     Disintermediation  Risk.  With the  acquisition  of United Life and Integon
Life, the Company  significantly  expanded its interest  sensitive  portfolio of
products  including  universal  life  and  accumulation  products.  The  Company
actively  manages the difference in interest  yields on assets backing  interest
sensitive  liabilities and amounts credited to policyholder  account balances so
as to provide a margin or  "spread."  For the years ended  December 31, 1997 and
1996, the Company had total interest sensitive liabilities  aggregating $2,563.9
million and $2,685.7  million and obtained a spread on such  liabilities of 2.5%
and 2.1%, respectively.  As part of the ongoing management of interest sensitive
business,  the Company annually undertakes "cash flow testing"  sensitivities in
which  Management  evaluates  a range of  interest  rate  scenarios  under which
credited  interest  rates and  asset/liability  durational  matching  may become
mismatched.  The Company believes that it has sufficient  liquidity to withstand
all reasonable scenarios established by Management.

     Cash Flows From Operations.  The periods covered by Management's Discussion
and Analysis of Financial  Condition  and Results of  Operations  indicate  cash
provided by operating  activities  of $53.3  million,  $152.1  million and $85.0
million  in 1997,  1996 and  1995,  respectively.  The  positive  cash flow from
operating activities is not necessarily indicative of the Company's cash flow as
$275.7  million,  $205.2 million and $53.2 million of cash was used to fund cash
flows for interest  sensitive life and  accumulation  products during 1997, 1996
and  1995,  respectively,  which  are  classified  as  financing  activities  in
accordance with generally accepted accounting principles.

     Inflation.   The  Company  sells  fixed  benefit,  life,  and  accumulation
products.  Approximately  48.9% of the Company's  total policy  revenues for the
year ended December 31, 1997,  were derived from fixed benefit  products.  These
products typically provide a predetermined fixed payment that will be paid under
specified  conditions.  Fixed  benefit  products  are not  designed  to  provide
reimbursement  for medical and related  costs  incurred as a result of accidents
and  sickness.  Accordingly,  payment  amounts are not affected by the insured's
actual cost of health care services. Because of the characteristics of its fixed
benefit  products,  the Company believes that inflation does not have a material
effect on its operations.

     Subsequent   Events.   On  December  31,  1997,  at  the  Company's  Annual
Shareholders'   Meeting,  the  shareholders  approved  the  acquisition  of  the
Controlling Interest in SW Financial and the acquisition of the Stone and Fickes
Knightsbridge  Interests.  On  January 2, 1998 and  January 5, 1998 the  Company
consummated the acquisitions of the Controlling Interest in SW Financial and the
Stone and Fickes Knightsbridge Interests,  respectively.  The acquisition of the
Controlling  Interest  in SW  Financial  will  expand  the  Company's  Financial
Services  and  Career  Sales  operations  with  similar  products,  distribution
channels  and asset  mixes  (see  Notes  15, 16 and 19 of Notes to  Consolidated
Financial Statements).


                                       33

<PAGE>



     On February 18, 1998, the Company announced that it had engaged  investment
banking firms to review strategic alternatives for maximizing shareholder value,
including the sale of the Company's Career Sales Division.  As a result,  in the
future  the  Company  intends  to  account  for the  Career  Sales  Division  as
"businesses  held for sale"  (see Note 19 of  "Notes to  Consolidated  Financial
Statements").

     The following  unaudited pro forma selected  financial data  represents the
Company's  consolidated  results of  operations,  as if the  acquisition  of the
Controlling  Interest in SW Financial  occurred on January 1, 1997,  and the pro
forma consolidated  financial  position,  as if such transaction  occurred as of
December 31, 1997. In addition,  the following pro forma  selected  consolidated
financial data presents the Company's consolidated results of operations for the
Company's "retained  businesses" (those businesses remaining after giving effect
to the  disposition of the Career Sales  Division) as if the  disposition of the
Career Sales Division and the consummation of the acquisition of the Controlling
Interest in SW Financial occurred January 1, 1997 and the pro forma consolidated
statement  of financial  position as if the Career  Sales  Division was held for
sale as of December 31, 1997.  The unaudited pro forma  selected  financial data
has been  prepared  for  comparative  purposes  only and does not  purport to be
indicative of what would have occurred had the transactions  been consummated as
of January 1, 1997,  or  December  31,  1997,  respectively,  or the  results of
operations  or financial  position  which may occur in the future.  The retained
business pro forma financial  information reflects the historical results of the
retained  businesses  and does not  consider  the use of  proceeds  likely to be
derived from the  disposition of the businesses  held for sale. The  significant
subsidiaries  included in businesses held for sale are PLIC and Union Bankers, a
subsidiary of SW Financial.

<TABLE>
<CAPTION>
                                                                                                       Retained
                                                                                    SW Financial      Businesses
                                                                    As reported      Pro forma         Pro forma
     For the year ended December 31,                                   1997             1997             1997
     -------------------------------                               ----------        ----------      ----------
     (In millions, except share amounts)
<S>                                                                <C>               <C>             <C>
     Total revenues............................................    $    663.8        $    950.9      $    666.6
     Income before income taxes, equity in earnings of
        unconsolidated affiliates, and extraordinary charge....          51.5              85.0            76.4
     Net income applicable to common stock before
        extraordinary charge...................................          30.6              31.8            27.5
     Diluted net income applicable to common stock  before
        extraordinary charge per share.........................          1.07              1.10              *

     As of December 31,
     ------------------
     Total assets..............................................    $  4,724.1        $  6,966.9      $  6,966.9
     Insurance and other liabilities...........................       3,484.2           5,527.8         5,682.3
     Long-term debt............................................         359.8             550.5           396.0
     Mandatory redeemable preferred stock......................          19.9              19.9            19.9
     Total shareholders' equity................................         860.2             868.7           868.7

   * Due to the fact that amounts and use of proceeds information is unavailable
     regarding  the  businesses  held for  sale,  per share  information  is not
     provided.
</TABLE>

     New Accounting Pronouncements.  In June 1997, the FASB issued SFAS No. 130,
"Reporting  Comprehensive  Income."  SFAS No.  130 is  effective  for annual and
interim periods  beginning  after December 15, 1997. This statement  establishes
standards for reporting and displaying  comprehensive  income and its components
and  requires  all  items  to  be  recognized  under  accounting   standards  as
comprehensive income be reported in a financial statement that is displayed with
the same  prominence  as other  financial  statements.  Examples  of items to be
included in the Company's  presentation of comprehensive  income, in addition to
net  income  applicable  to  common  stock,  are  unrealized   foreign  currency
translation  gains  and  losses  as well  as  unrealized  gains  and  losses  on
securities available for sale. The Company will adopt the provisions of SFAS No.
130 in 1998.

     SFAS No. 131,  "Disclosures  about  Segments of an  Enterprise  and Related
Information," was also issued in June 1997 by the FASB. This Statement  requires
that companies disclose segment data on the basis that is used internally

                                       34

<PAGE>



by management for evaluating  segment  performance  and allocating  resources to
segments.  This  Statement  requires that a company  report a measure of segment
profit or loss,  certain specific revenue and expense items, and segment assets.
It also requires various reconciliations of total segment information to amounts
in the consolidated  financial  statements.  The Company's current definition of
its business segments will not materially change from the current  presentation.
SFAS No. 131 is effective for fiscal years beginning after December 15, 1997.

     In December 1997, the American  Institute of Certified  Public  Accountants
issued Statement of Position  ("SOP") 97-3. SOP 97-3 provides:  (1) guidance for
determining  when an entity should recognize a liability for  guaranty-fund  and
other  insurance-related  assessments,  (2)  guidance  on  how  to  measure  the
liability,  (3) guidance on when an asset may be recognized for a portion or all
of the assessment  liability or paid  assessment  that can be recovered  through
premium tax offsets or policy surcharges, and (4) requirements for disclosure of
certain  information.  This SOP is effective for financial statements for fiscal
years  beginning  after  December  15,  1998.   Early  adoption  is  encouraged.
Previously issued annual financial statements are not restated. The Company will
report  the effect of  initially  adopting  this SOP in a manner  similar to the
reporting  of a  cumulative  effect of a change  in  accounting  principle.  The
Company is currently  evaluating the financial  impact,  which is expected to be
immaterial, as well as the changes to its related disclosures.

     In February  1998,  the FASB adopted SFAS No. 132  "Employers'  Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132 is effective for
fiscal  years  beginning  after  December  31,  1997.  Earlier   application  is
encouraged.   Restatement  of  disclosures  for  earlier  periods  provided  for
comparative  purposes  is  required.   SFAS  No.  132  standardizes   employers'
disclosures about pension and other postretirement benefits, requires additional
information on changes in the benefit obligations and fair values of plan assets
to facilitate financial analysis, and eliminates certain irrelevant disclosures.
The Company is currently evaluating the changes to its related disclosures.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                               1997       1996       1995
                                                               ----       ----       ----
<S>                                                            <C>        <C>        <C>
Ratios to revenues
Total policy benefits.......................................   51.7%      48.4%      38.9%
Insurance expenses(1).......................................   18.8       14.0       20.0
Other operating expenses(2).................................   13.8       14.8       16.8
Interest and amortization of deferred debt issuance costs...    3.7        3.3        4.7
Pretax operating margin.....................................   12.0       19.5       19.6
-------------------
(1)  Excludes  amortization  associated  with realized  gains  aggregating  $9.4
     million in 1997.
(2)  For the year ended December 31, 1997,  other  operating  expenses  excludes
     restructuring and transaction costs aggregating $29.0 million.
</TABLE>

     Operating Ratios. Pretax operating margin declined considerably to 12.0% of
revenues  during 1997 from 19.5% and 19.6% in 1996 and 1995,  respectively.  The
significant decline in operating ratios was primarily the result of increases in
benefits and insurance  expense ratios.  The continual  increase in the benefits
ratio was  anticipated  as a result of the  Company's  most recent  acquisitions
which shifted the product base away from lower benefit fixed benefit products to
life and accumulation products.

     The ratio of total  policy  benefits to revenues  increased  during 1997 to
51.7% from 48.4% and 38.9% in 1996 and 1995,  respectively.  The increase in the
ratio  of  total  policy   benefits  to  revenues   during  1997  was  primarily
attributable  to the  continued  increase  in life  and  accumulation  products,
relative to fixed benefit products,  since benefits for life insurance  products
are  typically  greater,  as a percentage  of revenues,  than benefits for fixed
benefit products. Additionally,

                                       35

<PAGE>



accumulation products,  such as deferred annuities,  are priced to allow for the
vast  majority  of  interest  earned on assets  backing  policy  reserves  to be
credited to the  policyholder  account  balance  resulting in a faster growth in
policy  benefits than policy benefits for fixed benefit  products.  During 1997,
Penn Life continued to experience an increase of its benefit  ratios,  resulting
in an increase in the Company's  overall  benefits  ratio of  approximately  1.8
percent.  The increase was  primarily a result of Penn Life's  strengthening  of
certain claims reserves and the impact of the 1996 conversion to a new valuation
system (see  below).  During  1996,  the Company  also  experienced  higher than
expected   mortality  and  morbidity  costs  for  Penn  Life  and  OLIC,   which
collectively  resulted in an approximately  2.0% increase in the claims incurred
ratio  for the  Company  as a  whole.  During  1996,  the  Company  refined  the
calculation  of certain policy benefit  reserves which  collectively  aggregated
approximately $443.0 million.  Such refinement resulted in an increase in future
policy  benefits of  approximately  $1.3 million for 1996. The  refinement  will
result in slightly  larger  increases in the change in future policy benefits in
near- term reporting periods.

     The Company's  insurance  expense ratio increased to 18.8% of revenues from
14.0% during 1996.  The increase in the insurance  expense ratio was primarily a
result of improved  gross  profit  margins  for OLIC and Integon  during 1997 as
compared with those of 1996, which resulted in greater  amortization of deferred
acquisition  costs  and  present  value of  insurance  in force  increasing  the
insurance  expense ratio by  approximately  1.8 percent.  Also  contributing  to
higher  insurance  expense  ratios was  amortization  associated  with  deferred
acquisition  costs for AA Life which added  approximately  0.7% to the insurance
expense ratio. AA Life anticipates increasing levels of amortization  associated
with its primary new sales  product,  the "wealth  builder."  For the year ended
December  31,  1996,   certain   interest   sensitive  blocks  of  business  had
significantly less amortization of deferred policy acquisition costs and present
value of  insurance  in force,  as  compared  to 1995 due to reduced  short-term
profit margins from adverse mortality.  The Company believes that profit margins
have   stabilized  and  recent   variability   will  not  impact  the  long-term
profitability  of  such  products.   However,  if  mortality   experience  would
deteriorate,  the ultimate  recoverability of deferred policy  acquisition costs
and present value of insurance in force could be adversely affected.

     Other  operating  expenses  declined as a  percentage  of revenues to 13.8%
during  1997,  from 14.8% and 16.8%  during  1996 and 1995,  respectively.  This
downward  trend was due to the  acquisitions  of United Life and  Integon  Life,
which are  administered  by the Company at overhead  expense rates less than the
business in force prior to their  respective  acquisitions.  Despite the growing
revenue  base,  the  Company's  total  underlying  expense   infrastructure  has
increased only moderately. In addition, expense costs have shifted from overhead
and maintenance  expenses to those more closely related to the production of new
business.

     During 1997, the Company's  interest cost ratio increased  modestly to 3.7%
from 3.3%  during  1996  after a decline  from the  interest  cost ratio of 4.7%
during  1995.  The  increase  during 1997 was  primarily  a result of  increased
borrowings under the Company's  revolving  credit facility to repurchase  common
stock,  contribute  capital to the  Company's  insurance  subsidiaries,  acquire
certain  invested assets by  non-insurance  subsidiaries and fund certain of the
Company's   restructuring   costs.  The  Company's   overall  weighted  cost  of
indebtedness  declined to 8.2% during 1997 from 8.8% during 1996.  The reduction
in  the  weighted  average  cost  of  indebtedness  was  due to  general  market
conditions as the Company  borrowings are primarily floating rate bank debt. The
Company  anticipates  that the ratio of interest  costs to total  revenues  will
increase during 1998 as a result of the Company's acquisition of the Controlling
Interest in SW Financial on January 2, 1998, on a leveraged basis.  During 1996,
the Company's  interest cost ratio  declined to 3.3% from 4.7% during 1995.  The
decline was primarily the result of the Company  utilizing  common and preferred
stock offerings to finance acquisition activities rather than debt. The weighted
average interest cost for outstanding  indebtedness dropped to 8.8% for the year
ended  December 31, 1996,  from 9.0% for the year ended  December 31, 1995.  The
reduction  in such  interest  costs  was the  result  of the  Company  replacing
subsidiary indebtedness with borrowings by the Company which carry substantially
lower interest rates.

     Policy Revenues.  Policy revenues remained  relatively constant during 1997
at $345.6 million  compared to $348.1 million during 1996 after  increasing from
$301.9  million during 1995. The very modest decline was primarily the result of
a  decline  in policy  charges  associated  with  accumulation  products  due to
increased surrenders.

     Fixed benefit policy  revenues  decreased by 0.2%,  3.1% and 1.2% to $169.0
million,  $169.3  million  and  $174.7  million  during  1997,  1996  and  1995,
respectively. During 1997, 1996 and 1995, the Company's operating focus was

                                       36

<PAGE>



concentrated  primarily on increasing  life policy revenues to achieve a balance
of life policy  revenues  with those of fixed  benefit  products.  In  addition,
during 1996 the Company  effectively  ceased marketing its "instant issue" fixed
benefit  products and as a result of higher than  anticipated  loss ratios which
resulted in a decline in fixed benefit policy revenues for 1997 and 1996.

     Life policy  revenues  remained  nearly constant at $169.5 million for 1997
after  increasing  43.9% and 75.0% to $170.0  million and $118.1 million for the
years ended 1996 and 1995, respectively.  The acquisition of United Life in July
1996,  and Integon Life in July 1995,  added $72.4  million and $22.9 million of
life policy revenues during 1996 and 1995, respectively.

     Net Investment  Income. The effects of a larger average invested asset base
and improved average  portfolio yields to 7.6% in 1997 from 7.5% during 1996 and
7.3% in 1995,  resulted in net investment income  increasing  29.7%,  106.0% and
97.1% in 1997,  1996 and 1995,  to $273.2  million,  $210.7  million  and $102.3
million,  respectively.  The  acquisitions of United Life,  which added invested
assets of $1,492.9  million in July 1996 and Integon Life,  which added invested
assets  of  $1,339.1  million  in July  1995,  contributed  to the  increase  in
investment income.  During 1997 and 1996, United life incrementally  added $61.4
and $49.3  million of  investment  income and Integon Life  incrementally  added
$57.6 million during 1996 as a result of being included for the entire year.

     Other income.  For purposes of  presentation of the summary of the Selected
Consolidated  Financial  Data,  "other  income"  includes  equity in earnings of
unconsolidated affiliates,  income as a result of trading portfolio activity and
the income  generated by the third party marketing  activities of Marketing One.
During 1997, 1996 and 1995,  income from  unconsolidated  affiliates  aggregated
$19.0 million,  $21.0 million and $4.7 million,  respectively,  including  $19.0
million,  $21.0  million  and  $910,000  as a result of the  Company's  economic
interest  in SW  Financial  during  1997,  1996  and  1995,  respectively.  (For
additional  information  on the operating  results of SW Financial see Note 6 of
Notes to Consolidated Financial  Statements).  During 1995, the Company included
its  portion  of the  operating  results  of its  49%  interest  in the  limited
partnership  which owned  Integon Life  aggregating  $3.8  million  prior to the
Company's  consummation  of the acquisition of the remaining 51% of Integon Life
in July 1995.

     In conjunction  with the Company's  acquisition and investment  activities,
Management is regularly  presented with  investment  opportunities  to invest in
substantially undervalued securities in corporations which will likely undertake
some form of restructuring.  In 1995, the Company established a trading security
account for such  investments.  The Company  reported trading gains amounting to
$1.1  million,  $1.3  million  and $5.7  million  during  1997,  1996 and  1995,
respectively.

     Revenues generated by Marketing One aggregated $17.1 million, $20.0 million
and $7.4 million  during 1997,  1996 and 1995,  respectively.  Marketing One was
acquired by the Company in August 1995.

     During  1997,  the Company  recognized a gain from the  disposition  of its
Panamanian operation aggregating $4.1 million.

     Net  Gains/Losses  From  Sale of  Investments.  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  during  1997,  1996 and  1995,  resulted  in the  Company
realizing  gains of $17.5  million,  $1.3 million and $3.8 million  during 1997,
1996 and 1995,  respectively.  During  1997,  the  Company  liquidated  the vast
majority  of its  equity  holdings  and  private  placement  bond  holdings.  In
addition, the Company liquidated other securities available for sale in order to
meet cash flow  demands  associated  with  policyholder  surrenders  that in the
aggregate  exceeded  policyholder  deposits by $275.7 million.  During 1995, the
Company  liquidated  its holdings in Conning & Co. which  resulted in a realized
gain of $3.2 million (see Note 15 of Notes to Consolidated  Financial Statements
contained elsewhere herein).

     Claims  Incurred.  Claims incurred  increased 7.5%,  33.0% and 25.9% during
1997,  1996 and 1995,  to $202.8  million,  $188.7  million and $141.9  million,
respectively. The increase in claims during 1997 resulted from strengthening

                                       37

<PAGE>



of  certain  claims  reserves  for  PennLife  of  approximately   $6.9  million,
additional  claims of $4.2 million as the result of the inclusion of the results
of United Life for the entire year and modestly  higher  claims  payments for AA
Life and Professional as a result of growth in the underlying business, which in
the aggregate increased $3.2 million. The increase in claims during 1996 was due
to the addition of United Life, $3.3 million,  the inclusion of Integon Life for
the full year, $35.1 million,  and adverse mortality experience at OLIC and Penn
Life of $4.2  million  and $2.6  million,  respectively,  when  compared  to the
previously  reported  period.  The Company is continuing to closely  monitor the
claims  activity in each  insurance  subsidiary.  During  1995,  the increase in
claims incurred  attributable to Integon Life and AA Life, was $22.8 million and
$10.3 million, respectively.

     Insurance   Related  Expenses.   Insurance   related  expenses   (including
commissions,  amortization of deferred policy acquisition costs and amortization
of the present value of insurance in force) increased  39.6%,  8.9% and 41.2% to
$127.0  million,  $91.0  million and $83.6 million  during 1997,  1996 and 1995,
respectively. The increase in insurance related expenses during 1997 as compared
with  1996  and 1995 was  primarily  related  to the  amortization  of  deferred
acquisition  costs and the value of  insurance in force as  commission  expenses
increased  slightly  to $34.9  million  for 1997 from  $34.7  million  and $31.9
million for the years ended 1996 and 1995,  respectively.  Of the $35.8  million
increase in amortization  during 1997, the inclusion of United Life for the full
year  resulted  in  additional   amortization  expense  of  $10.5  million,  the
amortization associated with realized gains on the sale of investments increased
$9.4 million,  increased gross profit margins and unlocking of lapse assumptions
for  increased  policy  surrenders   resulted  in  additional   amortization  of
approximately  $6.0 million with the remainder of the increase due to additional
amortization  associated with deferred  acquisition costs,  primarily associated
with AA Life's wealth builder  products and decreased  persistency of PennLife's
in force  block of  business.  The  increase  in the  amortization  of  deferred
acquisition  costs and value of insurance in force during 1996 was primarily the
result of the United Life  acquisition.  The increase during 1995 was the result
of the Integon  Life  acquisition  and a full year of  amortization  of value of
business in force associated with the AA Life acquisition.

     Other Operating  Expenses.  Other  operating  expenses  (including  general
operating,  overhead and policy maintenance  expenses)  increased during 1997 to
$128.1  million  compared to $90.1 million  during 1996 and $80.7 million during
1995.  During 1997 the $38.0 million increase in operating  expenses was due to:
(i) restructuring  and period costs associated with the Company's  restructuring
aggregating $21.4 million, (ii) transaction costs associated with the terminated
Washington  National merger  totaling $7.6 million,  (iii)  additional  expenses
aggregating  $4.6  million as a result of the  inclusion  of United Life for the
full year period, (iv) certain other non-recurring operating charges aggregating
$5.1 million and (vi) increased  operating  expenses  primarily  associated with
outside  contracting  costs for the Company's  year 2000  compliance  initiative
which were approximately $1.9 million. The increase in operating expenses during
1996 was  primarily a result of the inclusion of Marketing One for the full year
period  ended  December  31, 1996 which  increased  operating  expenses by $10.1
million.

     Also included in other  operating  expense is the  amortization of costs in
excess of net assets acquired which  aggregated  $9.5 million,  $8.6 million and
$6.5 million for 1997, 1996 and 1995, respectively.

     The Company  has  engaged  certain  outside  vendors  and  focused  certain
employees  full  time  efforts  to help  in the  full  array  of its  year  2000
initiative.  This includes systems assessment and monitoring advice, actual code
remediation,  communication and consultation with critical business partners and
additional  data center and  testing  resources.  The  Company  expects to incur
internal and external costs  associated  with such  expertise  ranging from $9.3
million to $14.9 million,  which are likely to be incurred primarily during 1998
and  early  1999,  and  which  represent  approximately  25%  of  the  Company's
technology  costs.  Of the range of  estimated  costs,  the Company  anticipates
approximately 42% of the costs to be internal allocation of resources.

     Each  of  the  operating   divisions  is  primarily   responsible  for  its
remediation efforts with corporate oversight provided as necessary.  The Company
believes  that the Career  Division has  substantially  completed  its year 2000
assessment and remediation  efforts,  which will be subject to ongoing tests for
the remainder of 1998. The Payroll Division has completed the remediation of its
largest administrative platforms, except for AA Life, and anticipates successful
remediation and testing of the remaining sub-system and system interfaces during
1998. AA Life is in the process of upgrading its policy administration system to
a year 2000 compliant version.  AA Life will rely on contracted vendor resources
in working to

                                       38

<PAGE>



complete its upgrade process. The Company's Financial Services Division has only
recently begun its year 2000 remediation efforts. Those efforts are dependent on
the utilization of outside  resources.  The Company  believes that the Financial
Services  Division  has  contracted  with  sufficient  resources  to be  able to
remediate its essential  business systems.  In addition,  the Financial Services
Division has  committed to a strategy of  utilizing  third party  administrative
experts,  who have indicated year 2000  compliance,  to handle the processing of
its health  insurance  business,  thus  eliminating  the need for the upgrade or
modification of certain existing health administration systems.

     Although the Company believes that its operating divisions, outside vendors
and most critical business partners will be sufficiently compliant that the year
2000 issue should not cause a material  disruption  in the  Company's  business,
there can be no  assurance  that there will not be material  disruptions  to the
Company's  business or an increase  in the cost of the Company  doing  business.
Although  the  Company  believes  that the year 2000  issues  should not cause a
material  disruption  in  the  Company's  business,  the  Company  is  currently
evaluating various contingency plans associated with remediation tasks which the
Company believes are at a higher risk for potential failure.

     Income  Taxes.  The  effective  tax rates for the years ended  December 31,
1997, 1996 and 1995,  were 39.5%,  37.0% and 35.0%,  respectively.  The 1997 and
1996 effective  rates are 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 tax credits utilized. The lower effective tax
rate for 1995 as compared to 1997 and 1996 is due to  previously  non-deductible
operating losses becoming available to reduce tax on operating earnings.

                  (Remainder of Page Intentionally Left Blank)


                                       39

<PAGE>



Item 8. Financial Statements and Supplementary Data

                                                                           Page

 Management's Responsibility for Financial Statements...................... 41

 PennCorp Financial Group, Inc. and Subsidiaries........................... 42

 Southwestern Financial Corporation and Subsidiaries....................... 78


                                       40

<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.

                  (Remainder of Page Intentionally Left Blank)


                                       41

<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, 1997 and 1996, and the
related consolidated  statements of income,  changes in shareholders' equity and
cash flows for each of the years in the  three-year  period  ended  December 31,
1997. 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, 1997 and 1996, and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.



KPMG PEAT MARWICK LLP
Raleigh, North Carolina
March 19, 1998


                                       42

<PAGE>



                 PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                             For the years ended December 31,
(In thousands, except per share amounts)                                   1997            1996           1995
                                                                         -----------   -----------   -----------
<S>                                                                      <C>           <C>           <C>
Revenues:
   Premiums, principally accident and sickness........................   $   254,020   $   256,859   $   239,010
   Interest sensitive policy product charges..........................        91,546        91,231        62,879
   Net investment income..............................................       273,237       210,734       102,291
   Other income.......................................................        27,504        22,666        17,076
   Net gains from the sale of investments.............................        17,487         1,257         3,770
                                                                         -----------   -----------   -----------
     Total revenues...................................................       663,794       582,747       425,026
                                                                         -----------   -----------   -----------
Benefits and expenses:
   Claims incurred....................................................       202,472       188,727       141,876
   Change in liability for future policy benefits and other
     policy benefits..................................................       121,817        83,184        20,047
   Amortization of present value of insurance in force and
     deferred policy acquisition costs................................        92,046        56,470        51,535
   Amortization of costs in excess of net assets acquired.............         9,545         8,648         6,486
   Underwriting and other administrative expenses.....................       146,245       116,560       102,162
   Interest and amortization of deferred debt issuance costs..........        23,355        18,579        19,520
   Restructuring charge...............................................        16,771           --          3,943
                                                                         -----------   -----------   -----------
     Total benefits and expenses......................................       612,251       472,168       345,569
                                                                         -----------   -----------   -----------
Income before income taxes, equity in earnings of unconsolidated
   affiliates and extraordinary charge................................        51,543       110,579        79,457
     Income taxes.....................................................        20,375        40,957        27,829
                                                                         -----------   -----------   -----------
Income before equity in earnings of unconsolidated affiliates and
   extraordinary charge...............................................        31,168        69,622        51,628
     Equity in earnings of unconsolidated affiliates..................        18,972        21,037         4,718
                                                                         -----------   -----------   -----------
Income before extraordinary charge....................................        50,140        90,659        56,346
     Extraordinary charge (net of income taxes of $--, $1,277 and $--)           --         (2,372)          --
                                                                         -----------   -----------   -----------
Net income............................................................        50,140        88,287        56,346
     Preferred stock dividend requirements............................        19,533        14,646         6,540
                                                                         -----------   -----------   -----------
Net income applicable to common stock.................................   $    30,607   $    73,641   $    49,806
                                                                         ===========   ===========   ===========
Per Share Information:
Basic:
   Net income applicable to common stock before extraordinary charge..   $      1.09   $      2.79   $      2.26
     Extraordinary charge, net of income taxes........................           --          (0.09)          --
                                                                         -----------   -----------   -----------
   Net income applicable to common stock..............................   $      1.09   $      2.70   $      2.26
                                                                         ===========   ===========   ===========
Common shares used in computing basic earnings per share..............        28,016        27,208        22,048
                                                                         ===========   ===========   ===========
Diluted:
   Net income applicable to common stock before extraordinary charge..   $      1.07   $      2.49   $      2.12
     Extraordinary charge, net of income taxes........................           --          (0.07)          --
                                                                         -----------   -----------   -----------
   Net income applicable to common stock..............................   $      1.07   $      2.42   $      2.12
                                                                         ===========   ===========   ===========

Common shares used in computing diluted earnings per share............        28,645        35,273        25,216
                                                                         ===========   ===========   ===========
</TABLE>

           See accompanying Notes to Consolidated Financial Statements


                                       43

<PAGE>



                 PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                          As of December 31,
(In thousands, except share amounts)                                                      1997         1996
                                                                                      -----------  -----------
Assets:
Investments:
<S>                                                                                   <C>          <C>
   Fixed maturity securities:
     Held for investment, at amortized cost (fair value $89,759 in 1996)............  $       --   $    87,330
     Available for sale, at fair value (amortized cost $2,618,515 in 1997 and
       $2,941,268 in 1996)..........................................................    2,718,982    2,993,925
   Equity securities available for sale, at fair value (cost $30,084 in 1997 and
       $17,511 in 1996).............................................................       30,257       20,867
   Trading securities, at fair value................................................          --        31,140
   Mortgage loans on real estate, net of allowance of $6,041 in 1997 and
       $4,211 in 1996..................................................................   240,879      264,732
   Policy loans.....................................................................      145,108      145,976
   Short-term investments...........................................................       84,141       63,113
   Other investments................................................................       95,875       48,062
                                                                                      -----------  -----------
     Total investments .............................................................    3,315,242    3,655,145
Cash................................................................................       24,872       39,464
Accrued investment income...........................................................       43,312       48,360
Accounts and notes receivable, net of allowance of $9,025 in 1997 and $6,528 in 1996       46,655       47,295
Investment in unconsolidated affiliate..............................................      183,158      140,526
Present value of insurance in force.................................................      263,889      339,010
Deferred policy acquisition costs...................................................      310,117      252,428
Costs in excess of net assets acquired..............................................      116,544      148,080
Other assets........................................................................      420,346      139,015
                                                                                      -----------  -----------
     Total assets ..................................................................  $ 4,724,135  $ 4,809,323
                                                                                      ===========  ===========

Liabilities:
Policy liabilities and accruals.....................................................  $ 3,289,925  $ 3,566,455
Income taxes, primarily deferred....................................................       59,125       55,840
Notes payable.......................................................................      359,755      210,325
Accrued expenses and other liabilities..............................................      135,227      114,462
                                                                                      -----------  -----------
     Total liabilities..............................................................    3,844,032    3,947,082
                                                                                      -----------  -----------

Mandatory redeemable preferred stock:
   Series B, $.01 par value, $100 initial redemption value; authorized, issued and
     outstanding 127,500 in 1996....................................................          --        14,689
   Series C, $.01 par value, $100 initial redemption value; authorized, issued and
     outstanding 178,500 in 1997 and 1996...........................................       19,867       18,175

Shareholders' equity:
$3.375 Convertible Preferred Stock, $.01 par value, $50 redemption value; authorized
   issued and outstanding 2,300,000 in 1997 and 1996................................      110,513      110,513
$3.50 Series II Convertible Preferred Stock, $.01 par value, $50 redemption value;
   authorized issued and outstanding 2,875,000 in 1997 and 1996.....................      139,157      139,157
Common stock, $.01 par value; authorized 100,000,000 in 1997 and 50,000,000 in 1996;
    issued and outstanding 28,860,206 in 1997 and 28,647,714 in 1996................          289          286
Additional paid-in capital..........................................................      397,590      393,156
Retained earnings...................................................................      211,055      186,032
Unrealized foreign currency translation losses......................................      (20,602)     (14,961)
Unrealized gains on securities available for sale...................................       55,636       20,064
Treasury shares (1,009,589 in 1997 and 189,750 in 1996).............................      (32,130)      (3,370)
Notes receivable secured by common stock............................................       (1,272)      (1,500)
                                                                                      -----------  -----------
     Total shareholders' equity.....................................................      860,236      829,377
                                                                                      -----------  -----------
     Total liabilities and shareholders' equity ....................................  $ 4,724,135  $ 4,809,323
                                                                                      ===========  ===========
</TABLE>


           See accompanying Notes to Consolidated Financial Statements

                                       44

<PAGE>



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

<TABLE>
<CAPTION>
                                                                              For the years ended December 31,
(In thousands)                                                              1997           1996          1995
                                                                         -----------   -----------   -----------
<S>                                                                      <C>           <C>           <C>
Convertible preferred stock:
   Balance at beginning of year.......................................   $   249,670   $   110,513   $       --
   Issuance of convertible preferred stock............................           --        139,157       110,513
                                                                         -----------   -----------   -----------
     Balance at end of year...........................................       249,670       249,670       110,513
                                                                         -----------   -----------   -----------

Common stock:
   Balance at beginning of year.......................................           286           229           191
   Issuance of common stock...........................................             1            56            38
   Exercise of stock options..........................................             2             1           --
                                                                         -----------   -----------   -----------
     Balance at end of year...........................................           289           286           229
                                                                         -----------   -----------   -----------

Additional paid-in capital:
   Balance at beginning of year.......................................       393,156       220,482       169,310
   Issuance of common stock...........................................         1,697       170,393        51,172
   Exercise of stock options..........................................         2,737         2,281           --
                                                                         -----------   -----------   -----------
       Balance at end of year.........................................       397,590       393,156       220,482
                                                                         -----------   -----------   -----------

Retained earnings:
   Balance at beginning of year.......................................       186,032       117,987        69,475
   Net income.........................................................        50,140        88,287        56,346
   Dividends on common stock..........................................        (5,618)       (5,630)       (1,327)
   Accretion of dividends on preferred stock..........................       (19,533)      (14,646)       (6,540)
   Earned portion of treasury stock awarded to employees..............            34            34            33
                                                                         -----------   -----------   -----------
       Balance at end of year.........................................       211,055       186,032       117,987
                                                                         -----------   -----------   -----------

Unrealized foreign currency translation losses:
   Balance at beginning of year.......................................       (14,961)      (15,529)      (17,875)
   Change in unrealized foreign currency translation losses during
     the year, net of income taxes....................................        (5,641)          568         2,346
                                                                         -----------   -----------   -----------
       Balance at end of year.........................................       (20,602)      (14,961)      (15,529)
                                                                         -----------   -----------   -----------

Unrealized gains on securities available for sale:
   Balance at beginning of year.......................................        20,064        30,353       (24,454)
   Change in equity in unrealized gains (losses) on securities
     available for sale of unconsolidated affiliate during the year...        24,277        (6,045)          --
   Change in unrealized gains on securities available for sale during
     the year, net of income taxes....................................        11,295        (4,244)       54,807
                                                                         -----------   -----------   -----------
       Balance at end of year.........................................        55,636        20,064        30,353
                                                                         -----------   -----------   -----------
Treasury stock:
   Balance at beginning of year.......................................        (3,370)       (3,370)         (386)
   Purchases of treasury stock........................................       (28,760)          --         (2,984)
                                                                         -----------   -----------   -----------
       Balance at end of year.........................................       (32,130)       (3,370)       (3,370)
                                                                         -----------   -----------   -----------
Notes receivable secured by common stock:.............................        (1,272)       (1,500)       (1,537)
                                                                         -----------   -----------   -----------
       Total shareholders' equity.....................................   $   860,236   $   829,377   $   459,128
                                                                         ===========   ===========   ===========
</TABLE>

           See accompanying Notes to Consolidated Financial Statements

                                       45

<PAGE>



                 PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                             For the years ended December 31,
(In thousands)                                                              1997          1996          1995
                                                                          ----------   -----------   -----------
<S>                                                                       <C>          <C>           <C>
Cash flows from operating activities:
   Income before equity in earnings of unconsolidated affiliates and
     extraordinary charge..........................................       $   31,168   $    69,622   $    51,628
   Adjustments to reconcile income before equity in earnings of
     unconsolidated affiliates and extraordinary charge to net cash
     provided by operating activities:
       Capitalization of deferred policy acquisition costs.........        (109 ,482)      (98,140)      (84,089)
       Amortization of present value of insurance in force, deferred
         policy acquisition costs, intangibles, depreciation
         and accretion, net........................................           91,902        63,588        54,160
       Increase (decrease) in policy liabilities and accruals and
         other policyholder funds..................................           (1,644)       77,549         4,531
       Purchases of trading securities.............................              --             --        (1,031)
       Sales of trading securities.................................           29,914        56,004        47,145
       Other, net..................................................           11,425       (16,476)       12,701
                                                                          ----------   -----------   -----------
         Net cash provided by operating activities.................           53,283       152,147        85,045
                                                                          ----------   -----------   -----------

Cash flows from investing activities:
   Cash expended in acquisition of businesses, net of cash acquired
      of $-0-, $-0- and $-0-.......................................              --        (99,596)      (18,363)
   Purchases of fixed maturity securities held for investment......              --        (27,000)      (15,950)
   Purchases of fixed maturity securities available for sale.......         (993,768)     (920,430)     (188,388)
   Purchases of equity securities..................................          (27,776)       (8,398)      (13,415)
   Purchase of interest in affiliate...............................              --            --       (107,366)
   Maturities of fixed maturity securities held for investment.....              --         42,351         6,214
   Maturities of fixed maturity securities available for sale......          439,938        81,538        27,198
   Sales of fixed maturity securities held for investment..........              --          4,910           --
   Sales of fixed maturity securities available for sale...........          777,960       368,331        99,804
   Sales of equity securities......................................           23,121         5,328         9,993
   Decrease (increase) in short-term investments, net (including
      changes in amounts due to broker)............................          (21,069)      412,687        39,392
   Acquisitions and originations of mortgage loans.................          (44,375)     (112,473)          --
   Sales of mortgage loans.........................................           13,643       151,972           --
   Principal collected on mortgage loans...........................           54,145        21,657           --
   Other, net......................................................          (49,671)        4,521        (3,288)
                                                                          ----------   -----------   -----------
         Net cash provided (used) by investing activities..........          172,148       (74,602)     (164,169)
                                                                          ----------   -----------   -----------

Cash flows from financing activities:
   Issuance of notes payable.......................................          250,000       230,000       130,783
   Issuance of common stock........................................              --        155,450        51,210
   Issuance of preferred stock.....................................              --        139,157       110,513
   Purchases of treasury stock.....................................          (28,760)          --         (2,984)
   Reduction of notes payable......................................         (100,570)     (330,624)      (91,507)
   Redemption of preferred stock...................................          (14,705)          --        (33,415)
   Receipts from interest sensitive products credited to
     policyholders' account balances...............................          186,166       160,403        91,175
   Return of policyholders' account balances on interest
     sensitive products............................................         (461,888)     (365,554)     (144,413)
   Repurchase agreement, net.......................................              --        (52,839)          --
   Cash transferred on reinsurance ceded to an affiliate...........          (50,000)          --            --
   Other, primarily dividends, net.................................          (20,266)      (14,399)       (4,950)
                                                                          ----------   -----------   -----------
         Net cash provided (used) by financing activities..........         (240,023)      (78,406)      106,412
                                                                          ----------   -----------   -----------
         Net increase (decrease) in cash...........................          (14,592)         (861)       27,288
Cash at beginning of year..........................................           39,464        40,325        13,037
                                                                          ----------   -----------   -----------
Cash at end of year................................................       $   24,872   $    39,464   $    40,325
                                                                          ==========   ===========   ===========
Supplemental disclosures:
   Income taxes paid (refunded)....................................       $   (1,554)  $    (4,992)  $       787
   Interest paid...................................................           20,946        18,185        20,001
Non-cash financing activities:
   Debt assumed with acquisition...................................       $      --    $       --    $    38,214
   Securities issued in conjunction with acquisition...............              --         14,999        28,750
   Amounts due on acquisition of interest in affiliate.............              --            --         11,114
   Other ..........................................................            1,281           948           --
</TABLE>

           See accompanying Notes to Consolidated Financial Statements

                                       46

<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"),
Peninsular  Life  Insurance  Company   ("Peninsular"),   Professional  Insurance
Corporation ("Professional"),  Pioneer Security Life Insurance Company ("Pioneer
Security") and its wholly-owned  subsidiaries  American-Amicable  Life Insurance
Company of Texas and Pioneer American  Insurance  Company (Pioneer  Security and
its subsidiaries  collectively referred to as "AA Life"), Integon Life Insurance
Corporation  ("Integon  Life"),  Occidental  Life  Insurance  Company  of  North
Carolina  ("OLIC"),  United Life & Annuity  Insurance  Company  ("United Life"),
Marketing One, Inc. ("Marketing One"), a third party marketing organization, 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.

     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  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the reported  amounts of assets and liabilities 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  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.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Investments

     Fixed  maturities  classified as held for  investment are recorded at cost,
adjusted for amortization of premium or discount,  as the Company has the intent
and ability to hold them to maturity.  Fixed  maturities  and equity  securities
classified as available for sale are recorded at fair value, as they may be sold
in response to changes in interest rates,  prepayment risk, liquidity needs, the
need or desire to increase income, capital or 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 income taxes.
Securities  classified  as trading  securities  are  reported at fair value with
realized gains and losses and changes in unrealized gains and losses included in
the   determination  of  net  income  as  a  component  of  other  income.   The
classification  of  securities  as held for  investment,  available  for sale or
trading is generally  determined at the date of purchase.  The Company carries a
certain equity investment in an affiliate 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, short-term investments,
and other investments are recorded at cost, which approximates fair value.

     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 No. 115, the

                                       47

<PAGE>



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.

     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.

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.

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 $192,049
and $144,327 as of December 31, 1997 and 1996, respectively.

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.

Costs in Excess of Net Assets Acquired

     Costs in excess of the fair value of net assets acquired are amortized on a
straight-line  basis  primarily  over 20  years.  Accumulated  amortization  was
$44,606 and $35,061 as of December 31, 1997 and 1996, respectively.

     For each of the periods  presented,  the Company has made certain valuation
determinations  with respect to pre-  acquisition  contingencies or allocations.
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  Integon  Life  acquisition  by $19.6
million  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 $1.1 million 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 $1.1
million,  associated  with the  acquisition of United Life, as a result of final
appraisals becoming available.

     For the year ended December 31, 1996, the Company  determined the following
with respect to certain material acquisition  contingencies or allocations:  (i)
the Company incurred  additional costs associated with the acquisition of United
Life of $2.5 million,  which  resulted in a  corresponding  increase to costs in
excess of net assets acquired, (ii) the Company

                                       48

<PAGE>



decreased real estate and mortgage loan loss  valuations of Integon Life by $6.8
million,  which resulted in a decrease in costs in excess of net assets acquired
of $4.4 million and deferred tax assets of $2.4  million,  and (iii) the Company
increased  certain policy  reserves of Integon Life  aggregating  $10.0 million,
which  resulted  in a  corresponding  increase  to costs in excess of net assets
acquired of $10.0 million.

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

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.

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.

Treasury Shares

     Shares  purchased  are  recorded  at cost as a reduction  of  shareholders'
equity.

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.

Net Income per Common Share

     In February 1997, the Financial  Accounting Standards Board ("FASB") issued
Statement of Financial  Accounting  Standard  ("SFAS")  No. 128,  "Earnings  Per
Share." SFAS No. 128 supersedes and simplifies the former computation,

                                       49

<PAGE>



presentation  and disclosure  requirements for earnings per share outlined under
Accounting  Principles  Board Opinion ("APB") No. 15, "Earnings Per Share." SFAS
No. 128 is effective  for both interim and annual  financial  statements  issued
after  December 15, 1997. The Company  adopted SFAS No. 128 to compute  earnings
per share for all periods presented.

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

<TABLE>
<CAPTION>
                                                                       1997           1996            1995
                                                                     --------       ---------      ---------
<S>                                                                  <C>            <C>            <C>
Reconciliation of net income applicable to common stock:
Basic net income applicable to common stock:
   Net income applicable to common stock before
          extraordinary charge...................................... $ 30,607       $  76,013      $  49,806
     Extraordinary charge.........................................        --           (2,372)           --
                                                                     --------       ---------      ---------
                                                                     $ 30,607       $  73,641      $  49,806
                                                                     ========       =========      =========
Diluted net income applicable to common stock:
   Net income applicable to common stock before
          extraordinary charge...................................... $ 30,607       $  76,013      $  49,806
     Common stock equivalents:
       Convertible preferred stock dividend requirements..........        --           11,788          3,558
                                                                     --------       ---------      ---------
                                                                                                      53,364
     Extraordinary charge.........................................        --           (2,372)           --
                                                                     --------       ---------      ---------
                                                                     $ 30,607       $  85,429      $  53,364
                                                                     ========       =========      =========
Common stock used to compute basic and diluted earnings per share:
Basic:
   Shares outstanding beginning of period.........................     28,648          22,880         19,130
   Common stock issuance:
     Issuance of 3,750 common shares on March 14, 1995............        --              --           3,010
     Issuance of 5,131 common shares on March 5, 1996.............        --            4,232            --
     Acquisition of United Life (483,839 common shares)...........        --              212            --
   Incremental shares applicable to Stock Warrants/Stock Options..        143              74            --
   Treasury shares................................................       (775)           (190)           (92)
                                                                     --------       ---------      ---------
                                                                       28,016          27,208         22,048
                                                                     ========       =========      =========
Diluted:
   Shares outstanding beginning of period.........................     28,648          22,880         19,130
   Common stock issuance:
     Issuance of 3,750 common shares on March 14, 1995............        --              --           3,010
     Issuance of 5,131 common shares on March 5, 1996.............        --            4,232            --
     Acquisition of United Life (483,839 common shares)...........        --              212            --
   Incremental shares applicable to Stock Warrants/Stock Options..        772           1,347            938
   Treasury shares................................................       (775)           (190)           (92)
   Conversion of $3.375 Convertible Preferred Stock at a rate
     of 2.2123 common shares to 1 preferred share.................        --            5,088          2,230
   Conversion of $3.50 Series II Convertible Preferred Stock at
     a rate of 1.4327 common shares to 1 preferred share..........        --            1,704            --
                                                                     --------       ---------      ---------
                                                                       28,645          35,273         25,216
                                                                     ========       =========      =========
</TABLE>

     The  Company   adopted  the  disclosure   requirements  of  SFAS  No.  123,
"Accounting for Stock-Based  Compensation,"  in 1996. This statement  provides a
choice for the  accounting of employee stock  compensation  plans. A company may
elect to use a new  fair-value  methodology,  under which  compensation  cost is
measured and  recognized  in results of  operations,  or continue to account for
these plans under APB No. 25,  "Accounting  for Stock Issued to Employees",  and
related  Interpretations.  Note  12  of  the  Notes  to  Consolidated  Financial
Statements  contains a summary of the pro forma  effects to reported  net income
applicable  to common stock and earnings per share for 1997 and 1996,  as if the
Company had elected to account for employee stock  compensation  plans utilizing
the fair value methodology prescribed by SFAS No. 123.


                                       50

<PAGE>



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

Reinsurance

     Financial  reinsurance that does not transfer significant insurance risk is
accounted  for as deposits.  The cost of  reinsurance  related to  long-duration
contracts is accounted for over the life of the underlying  reinsured  policies.
Balances  due to,  or  from,  reinsurers  have  been  reflected  as  assets  and
liabilities  rather than being  netted  against the  related  account  balances.
Realized  gains  on  retroactive  reinsurance   arrangements  are  deferred  and
amortized into net income over the estimated duration of the reinsured business.

Accounting Pronouncements Not Yet Adopted

     In June  1997,  the FASB  issued  SFAS No.  130,  "Reporting  Comprehensive
Income."  SFAS No. 130 is  effective  for annual and interim  periods  beginning
after December 15, 1997. This statement  establishes standards for reporting and
displaying  comprehensive income and its components and requires all items to be
recognized under accounting  standards as comprehensive  income be reported in a
financial  statement  that is  displayed  with  the  same  prominence  as  other
financial  statements.  Examples  of  items  to be  included  in  the  Company's
presentation of comprehensive  income,  in addition to net income  applicable to
common stock, are unrealized  foreign currency  translation  gains and losses as
well as  unrealized  gains and  losses on  securities  available  for sale.  The
Company will adopt the provisions of SFAS No. 130 in 1998.

     SFAS No. 131,  "Disclosures  about  Segments of an  Enterprise  and Related
Information," was also issued in June 1997 by the FASB. This Statement  requires
that  companies  disclose  segment data on the basis that is used  internally by
management  for  evaluating  segment  performance  and  allocating  resources to
segments.  This  Statement  requires that a company  report a measure of segment
profit or loss,  certain specific revenue and expense items, and segment assets.
It also requires various reconciliations of total segment information to amounts
in the consolidated  financial  statements.  The Company's current definition of
its business segments will not materially change from the current  presentation.
SFAS No. 131 is effective for fiscal years beginning after December 15, 1997.

     In December 1997, the American  Institute of Certified  Public  Accountants
issued Statement of Position  ("SOP") 97-3. SOP 97-3 provides:  (1) guidance for
determining  when an entity should recognize a liability for  guaranty-fund  and
other  insurance-related  assessments,  (2)  guidance  on  how  to  measure  the
liability,  (3) guidance on when an asset may be recognized for a portion or all
of the assessment  liability or paid  assessment  that can be recovered  through
premium tax offsets or policy surcharges, and (4) requirements for disclosure of
certain  information.  This SOP is effective for financial statements for fiscal
years  beginning  after  December  15,  1998.   Early  adoption  is  encouraged.
Previously issued annual financial statements are not restated. The Company will
report the effect of initially adopting this SOP in a manner similar

                                       51

<PAGE>



to the reporting of a cumulative effect of a change in accounting principle. The
Company is currently  evaluating the financial  impact,  which is expected to be
immaterial, as well as the changes to its related disclosures.

     In February  1998,  the FASB adopted SFAS No. 132  "Employers'  Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132 is effective for
fiscal  years  beginning  after  December  31,  1997.  Earlier   application  is
encouraged.   Restatement  of  disclosures  for  earlier  periods  provided  for
comparative  purposes  is  required.   SFAS  No.  132  standardizes   employers'
disclosures about pension and other postretirement benefits, requires additional
information on changes in the benefit obligations and fair values of plan assets
to facilitate financial analysis, and eliminates certain irrelevant disclosures.
The  Company is  currently  evaluating  the  necessary  changes  to its  related
disclosures.

Reclassifications

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

(3) ACQUISITIONS

     On July 22, 1996, the Company  consummated  the  acquisition of United Life
for a total purchase price of $110,056 including expenses incurred of $9,706 and
earnings through the date of consummation of the acquisition of $3,608. The fair
value of net assets  acquired  amounted to $82,580 (as  adjusted)  resulting  in
$27,476 (as  adjusted) of costs in excess of net assets  acquired  which will be
amortized over 20 years.

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

     On July 25, 1995, the Company  consummated  the acquisition of Integon Life
for a  total  purchase  price  of  $48,596  including  acquisition  expenses  of
approximately  $3,200. The fair value of net assets acquired amounted to $28,575
(as  adjusted)  resulting  in $20,021  (as  adjusted)  of costs in excess of net
assets acquired which will be amortized over 20 years.

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

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


                                       52

<PAGE>



     The following  unaudited pro forma  financial  information  represents  the
Company's  consolidated  results of operations as if the United Life acquisition
occurred as of January 1, 1996. This unaudited 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  acquisition  been made as of
January 1, 1996, or results which may occur in the future.

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

For the years ended December 31,                                                         1996
--------------------------------                                                         ----
<S>                                                                                   <C>
Total revenues......................................................................  $   652,781
Income before income taxes, equity in earnings of  unconsolidated
   affiliate and extraordinary charge...............................................      117,654
Net income applicable to common stock...............................................       74,894
Per share information:
  Net income applicable to common stock - basic.....................................         2.63
  Net income applicable to common stock - diluted...................................         2.38
</TABLE>

(4) FOREIGN INFORMATION AND BUSINESS SEGMENT INFORMATION

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

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

<TABLE>
<CAPTION>
                                                                        1997           1996          1995
                                                                     -----------    ----------    ----------
<S>                                                                  <C>            <C>           <C>
         Total revenues:
           Insurance operations
              U.S.
                Fixed benefit products ...........................   $   145,883    $  147,226    $  162,747
                Life products ....................................       269,209       252,902       174,934
                Accumulation products ............................       174,391       109,374        32,378
              Canada
                Fixed benefit products ...........................        45,686        45,695        40,596
                Life products ....................................         7,968         6,690         6,430
           Non-insurance operations, corporate and eliminations...        20,657        20,860         7,941
                                                                     -----------    ----------    ----------
                                                                     $   663,794    $  582,747    $  425,026
                                                                     ===========    ==========    ==========
         Income before  income  taxes,  equity  in  earnings  of  unconsolidated
              affiliates and extraordinary charge:
           Insurance operations
              U.S.
                Fixed benefit products ...........................   $    42,700    $   38,333    $   48,045
                Life products ....................................        33,881        47,920        27,202
                Accumulation products ............................        24,810        26,893        12,389
              Canada
                Fixed benefit products ...........................         8,636        15,435        15,568
                Life products ....................................         1,506           642         2,451
           Non-insurance operations, corporate and eliminations...       (59,990)      (18,644)      (26,198)
                                                                     -----------    ----------    ----------
                                                                     $    51,543    $  110,579    $   79,457
                                                                     ===========    ==========    ==========
</TABLE>


                                       53

<PAGE>



         Total assets were as follows as of December 31:

<TABLE>
<CAPTION>
                                                                        1997           1996
                                                                     ------------  ------------
         <S>                                                         <C>           <C>
         Total assets:
           Insurance operations
              U.S.
                Fixed benefit products............................   $    381,253  $    480,408
                Life products.....................................      1,909,985     1,677,150
                Accumulation products.............................      2,114,204     2,339,787
              Canada
                Fixed benefit products ...........................        112,319       139,887
                Life products.....................................         69,449        43,613
           Non-insurance operations, corporate and eliminations ..        136,925       128,478
                                                                     ------------  ------------
                                                                     $  4,724,135  $  4,809,323
                                                                     ============  ============
</TABLE>

(5) INVESTMENTS

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

<TABLE>
<CAPTION>
                                                                1996
                                                     --------------------------
                                                      Amortized         Fair
                                                        Cost           Value
                                                     -----------    -----------
<S>                                                  <C>            <C>
Canadian government obligations...................   $    80,492    $    88,671
                                                     ===========    ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                1996
                                                     ---------------------------------------------------------
                                                                        Gross          Gross
                                                      Amortized       Unrealized     Unrealized       Fair
                                                         Cost           Gains         Losses          Value
                                                     -----------     -----------    -----------   ------------
<S>                                                  <C>             <C>            <C>           <C>
   Mortgage-backed securities, principally
     obligations of U.S. Government agencies.......  $    34,546     $     2,307    $       --    $     36,853
   Corporate securities............................       52,784             124              2         52,906
                                                     -----------     -----------    -----------   ------------
                                                     $    87,330     $     2,431    $         2   $     89,759
                                                     ===========     ===========    ===========   ============
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                1997
                                                     ---------------------------------------------------------
                                                                        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.......  $  1,242,805    $    46,157    $     1,313   $  1,287,649
   U.S. Treasury securities and obligations of
     U.S. Government corporations and agencies.....       135,255          7,551            120        142,686
   Debt securities issued by foreign governments...        66,635          7,188             12         73,811
   Corporate securities............................     1,173,820         49,164          8,148      1,214,836
                                                     ------------    -----------    -----------   ------------
                                                     $  2,618,515    $   110,060    $     9,593   $  2,718,982
                                                     ============    ===========    ===========   ============
</TABLE>


                                       54

<PAGE>


<TABLE>
<CAPTION>
                                                                                1996
                                                     ---------------------------------------------------------
                                                                        Gross          Gross
                                                      Amortized       Unrealized     Unrealized       Fair
                                                         Cost           Gains         Losses          Value
                                                     -----------     -----------    -----------   ------------
<S>                                                  <C>             <C>            <C>           <C>
   Mortgage-backed securities, principally
     obligations of U.S. Government agencies.......  $  1,408,124    $    25,710   $      5,510   $  1,428,324
   U.S. Treasury securities and obligations of
     U.S. Government corporations and agencies.....       326,484          5,783          2,760        329,507
   Debt securities issued by foreign governments...        80,492          8,179            --          88,671
   Corporate securities............................     1,126,168         30,422          9,167      1,147,423
                                                     ------------    -----------   ------------   ------------
                                                     $  2,941,268    $    70,094   $     17,437   $  2,993,925
                                                     ============    ===========   ============   ============
</TABLE>

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

<TABLE>
<CAPTION>
                                                            Amortized        Fair
                                                              Cost           Value
                                                          -------------  -------------
<S>                                                       <C>            <C>
Due in one year or less ...............................   $      33,709  $      33,964
Due after 1 through 5 years ...........................         419,383        433,117
Due after 5 through 10 years ..........................         649,210        676,765
Due after 10 years ....................................         273,408        287,487
Mortgage-backed securities, principally
   obligations of U.S. Government agencies.............       1,242,805      1,287,649
                                                          -------------  -------------
                                                          $   2,618,515  $   2,718,982
                                                          =============  =============
</TABLE>

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

     Included in fixed  maturities  held for investment as of December 31, 1996,
are below investment-grade securities with an amortized cost, which approximates
fair value, of $34,624.

     Included in fixed maturities available for sale as of December 31, 1997 and
1996, are below  investment-grade  securities with an amortized cost of $165,511
and $91,590 and a fair value of $167,518 and $92,494, respectively.  Included in
fixed  maturities  available  for sale as of  December  31,  1997,  are  unrated
securities with an amortized cost of $26,563 and a fair value of $36,175.

     As of December 31, 1997, net unrealized  appreciation in equity  securities
available for sale of $173  consisted of gross  unrealized  gains of $242,  less
gross  unrealized  losses  of $69.  As of  December  31,  1996,  net  unrealized
appreciation  in equity  securities  available  for sale of $3,356  consisted of
gross unrealized gains of $4,047, less gross unrealized losses of $691.

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

     The Company's  commercial and residential  mortgage portfolios had carrying
values $240,879 and $264,732,  respectively,  and, fair values of  approximately
$248,052 and $269,142,  respectively, as of December 31, 1997 and 1996. The fair
values for mortgage  loans on real estate are estimated  using the quoted market
prices for securities collateralized

                                       55

<PAGE>



by similar mortgage loans, adjusted for the differences in loan characteristics.
For mortgage  loans on real estate where quoted market prices are not available,
the fair values are estimated  using  discounted cash flow analysis and interest
rates for loans with similar credit ratings.

     As  of  December  31,  1997,   commercial  and  residential  mortgage  loan
investments were concentrated in the following states:

<TABLE>
<CAPTION>
                                                                  Percent of Total
                                                Carrying Value     Carrying Value
                                                --------------     --------------
<S>                                               <C>                     <C>
 Georgia.....................................     $   47,834              19.9%
 Florida.....................................         37,312              15.5
 Colorado....................................         32,796              13.6
 Virginia....................................         19,484               8.1
 Tennessee...................................         13,540               5.6
 Alabama.....................................         12,410               5.2
 Arizona.....................................         11,837               4.9
 Texas.......................................         11,640               4.8
 Louisiana...................................          9,970               4.1
 All other (less than 4% individually).......         44,056              18.3
                                                  ----------             -----
                                                  $  240,879             100.0%
                                                  ==========             =====
</TABLE>

     Investments  with a carrying  value of $68,219 and $62,767  were on deposit
with  certain  regulatory   authorities  as  of  December  31,  1997  and  1996,
respectively.


                                       56

<PAGE>



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

<TABLE>
<CAPTION>
                                                                        1997           1996           1995
                                                                     -----------    ----------    ----------
<S>                                                                  <C>            <C>           <C>
       Realized gains (losses) on dispositions  of investments:
          Securities held for investment:
           Gross gains from sales................................    $       --     $      --     $      --
           Gross losses from sales...............................            --            (28)          --
           Net gains (losses) from redemptions...................            --           (105)            1
                                                                     -----------    ----------    ----------
                                                                             --           (133)            1
                                                                     -----------    ----------    ----------
         Securities available for sale:
           Gross gains from sales................................         22,076         2,562         6,185
           Gross losses from sales...............................         (6,186)       (1,800)       (2,616)
           Net gains (losses) from redemptions...................            --           (166)          200
                                                                     -----------    ----------    ----------
                                                                          15,890           596         3,769
                                                                     -----------    ----------    ----------

         Mortgage loans..........................................           (284)          794           --
         Other investments.......................................          1,881           --            --
                                                                     -----------    ----------    ----------
              Net realized gains.................................    $    17,487    $    1,257    $    3,770
                                                                     ===========    ==========    ==========

       Changes in unrealized gains:
         Securities held for investment..........................    $    (2,429)   $    2,441    $    3,563
         Securities available for sale...........................         44,627       (18,250)      111,732
                                                                     -----------    ----------    ----------
              Net change in unrealized gains.....................    $    42,198    $  (15,809)   $  115,295
                                                                     ===========    ==========    ==========

       Trading portfolio:
         Net gains (losses) from sales...........................    $      (142)   $    4,930    $    1,830
         Net change in unrealized gains (losses).................          1,258        (3,626)        3,880
                                                                     -----------    ----------    ----------
              Total net trading gains ...........................    $     1,116    $    1,304    $    5,710
                                                                     ===========    ==========    ==========

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

                                                                        1997           1996           1995

       Fixed maturity securities.................................    $   231,867    $  169,847    $   70,715
       Mortgage loans on real estate ............................         26,498        11,888         2,783
       Policy loans .............................................          9,037         8,409         5,240
       Short-term investments ...................................          6,366        12,966        16,891
       Other investments.........................................          9,177        13,100        10,168
                                                                     -----------    ----------    ----------
         Gross investment income ................................        282,945       216,210       105,797
       Less: investment expenses.................................          9,708         5,476         3,506
                                                                     -----------    ----------    ----------
         Net investment income ..................................    $   273,237    $  210,734    $  102,291
                                                                     ===========    ==========    ==========
</TABLE>

     The Company had non-income  producing  fixed maturity  investments  with an
amortized  cost  of $  --  and  $17,115  as  of  December  31,  1997  and  1996,
respectively.

     On  September 1, 1997,  the Company  purchased  $25,000 of ACO  Acquisition
Corp. (subsequently re-named Acordia, Inc. ("Acordia") subordinated indebtedness
and $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.  The ACO
preferred stock dividends are payable in cash (subject to certain restrictions),
or  in-kind  at the  option  of ACO,  at a rate  of 17  percent.  Acordia  is an
insurance  broker  specializing  in the  marketing  of  commercial  property and
casualty programs. Acordia is 28.6% owned by Knightsbridge Capital Fund I, L.P.

                                       57

<PAGE>



("Knightsbridge").  PennCorp  received fees aggregating  $1,100 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 from  Acordia for its role in  consummating  the
Acordia acquisition.

(6) SOUTHWESTERN LIFE INVESTMENT

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

     Through its initial  direct  investment  of $120,000 in SW  Financial  (the
"Southwestern  Life  Investment"),  the  Company  beneficially  owns 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
Knightsbridge. As a result, the Company has an economic interest in SW Financial
aggregating 78.0 percent. Retained earnings of the Company include undistributed
earnings of SW Financial  aggregating  $40,919,  $21,947 and $910 as of December
31, 1997, 1996 and 1995, respectively.

     On  August  5,  1997,  the  Company   purchased  $40,000  of  SW  Financial
Subordinated Notes (the "SW Financial Notes") from the liquidating trust for the
creditors of ICH  Corporation,  SW Financial's  former parent.  SW Financial had
issued the SW Financial Notes as part of the acquisition  consideration  paid to
the liquidating  trust.  The SW Financial Notes were purchased by the Company at
par and are included in other  investments.  Interest due under the SW Financial
Notes is currently set at 7.0%, per annum.

     On January 2, 1998,  the  Company  acquired  the SW  Financial  Controlling
Interest (see Note 19).


                                       58

<PAGE>



     The Company  accounts  for its  investment  in SW Financial  utilizing  the
equity method.  The consolidated  condensed  results of operations and financial
position of SW Financial, are provided below:

<TABLE>
<CAPTION>
                                                               For the years ended December 31,   For the period
                                                                      1997           1996       December 14-31, 1995
                                                                      ----           ----       --------------------
<S>                                                              <C>             <C>              <C>
       Revenues:
       Policy revenues........................................   $    145,818    $    196,912     $   12,668
       Net investment income..................................        126,427         128,692          6,015
       Other income (including limited partnership
         distributions of $15,811 in 1996)....................         16,039          27,439             54
       Net gains from the sale of investments.................          1,841             516            --
                                                                 ------------    ------------     ----------
              Total revenues..................................        290,125         353,559         18,737
                                                                 ------------    ------------     ----------
       Benefits and expenses:
       Claims incurred........................................        201,385         211,460         15,831
       Change in liability for future policy benefits and
         other policy benefits................................        (35,103)        (13,616)        (2,318)
       Insurance and other operating expenses.................         66,319          92,632          2,577
       Interest and amortization of deferred debt issuance costs       13,773           14,052           664
                                                                 ------------    ------------     ----------
           Total benefits and expenses........................        246,374         304,528         16,754
                                                                 ------------    ------------     ----------
       Income before income taxes.............................         43,751          49,031          1,983
         Income taxes.........................................         16,416          18,149            694
                                                                 ------------    ------------     ----------
       Net income ............................................         27,335          30,882          1,289
         Preferred stock dividend requirements................          3,012           2,754            205
                                                                 ------------    ------------     ----------
       Net income applicable to common stock..................   $     24,323    $     28,128     $    1,084
                                                                 ============    ============     ==========

       As of December 31,                                             1997           1996
       ------------------                                        ------------    ------------
       Assets:
       Invested assets.......................................    $  2,026,768    $  1,641,348
       Insurance assets......................................         114,395         107,230
       Other assets..........................................         283,717         459,324
                                                                 ------------    ------------
       Total assets..........................................    $  2,424,880    $  2,207,902
                                                                 ============    ============

       Liabilities and Shareholders' Equity:
       Insurance liabilities.................................    $  1,942,214    $  1,745,160
       Long-term debt........................................         154,750         159,750
       Other liabilities.....................................          98,509         127,237
       Redeemable preferred stock............................          36,891          33,879
       Shareholders' equity..................................         192,516         141,876
                                                                 ------------    ------------
         Total liabilities and shareholders' equity .........    $  2,424,880    $  2,207,902
                                                                 ============    ============
</TABLE>


                                       59

<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>
                                                                        1997           1996           1995
                                                                     -----------    ----------    ----------
<S>                                                                  <C>            <C>           <C>
         Balance as of January 1.................................    $   252,428    $  185,570    $  131,006
         Policy acquisition costs deferred:
           Commissions...........................................         59,238        49,775        50,528
           Underwriting and issue costs .........................         50,244        48,365        33,561
                                                                     -----------    ----------    ----------
                                                                         109,482        98,140        84,089
         Policy acquisition costs amortized .....................        (44,323)      (30,744)      (29,007)
         Unrealized investment loss adjustment ..................         (2,344)         (461)       (1,007)
         Foreign currency translation adjustment ................         (1,482)          (77)          489
         Impact of sale of certain foreign operations............         (3,644)          --            --
                                                                     -----------    ----------    ----------
           Balance as of December 31.............................    $   310,117    $  252,428    $  185,570
                                                                     ===========    ==========    ==========
</TABLE>

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

     The  methods  used by the  Company to value the fixed  benefit,  life,  and
accumulation  products  purchased are consistent with the valuation methods used
most commonly to value blocks of insurance business.  It is also consistent with
the basic methodology  generally used to value insurance assets. The method used
by the Company  includes  identifying  the future  cash flows from the  acquired
business,  the risks  inherent  in  realizing  those  cash flows 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.

     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. 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.  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.


                                       60

<PAGE>



     Information  related  to the  present  value  of  insurance  in force is as
follows:

<TABLE>
<CAPTION>
                                                                        1997           1996           1995
                                                                     -----------    ----------    ----------
<S>                                                                  <C>            <C>           <C>
       Balance as of January 1 ..................................    $   339,010    $  283,106    $  199,705
       Addition due to acquisition ..............................            --         69,077       132,949
       Accretion of interest ....................................         20,371        27,205        22,260
       Amortization .............................................        (68,094)      (52,931)      (44,788)
       Transfer to Southwestern Life Insurance Company
         pursuant to reinsurance transaction.....................         (2,291)          --            --
       Unrealized investment gain (loss) adjustment .............        (24,444)       12,582       (27,425)
       Foreign currency translation adjustment ..................           (663)          (29)          405
                                                                     -----------    ----------    ----------
         Balance as of December 31 ..............................    $   263,889    $  339,010    $  283,106
                                                                     ===========    ==========    ==========
</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:

<TABLE>
<CAPTION>
                                                Beginning        Gross         Accretion         Net
                                                  Balance     Amortization    of Interest    Amortization
                                                  -------     ------------    -----------    ------------
<S>                                              <C>            <C>            <C>             <C>
1998..........................................   $ 263,889      $  48,217      $  19,817       $ 28,400
1999..........................................     235,489         44,438         17,804         26,634
2000..........................................     208,855         39,980         16,010         23,970
2001..........................................     184,885         36,190         14,366         21,824
2002..........................................     163,061         32,652         12,917         19,735
</TABLE>

(8) FUTURE POLICY BENEFITS

     The  liability for future  policy  benefits  consists of reserves for fixed
benefit, life and accumulation products. For interest sensitive life 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.


                                       61

<PAGE>



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

<TABLE>
<CAPTION>
                                                                          1997            1996           1995
                                                                       ----------     ----------     ----------
<S>                                                                    <C>            <C>            <C>
   Claim liability as of January 1...................................  $  130,392     $  127,078     $  126,920
     Less reinsurance recoverables...................................       2,242          1,372          2,050
                                                                       ----------     ----------     ----------
       Net balance as of January 1...................................     128,150        125,706        124,870
                                                                       ----------     ----------     ----------

   Addition due to acquisition.......................................         --           1,079          1,095
                                                                       ----------     ----------     ----------

   Add claims incurred during the year related to:
     Current year....................................................      60,727         63,673         62,106
     Prior years.....................................................       6,344         (6,816)        (2,855)
                                                                       ----------     ----------     ----------
       Total claims incurred.........................................      67,071         56,857         59,251
                                                                       ----------     ----------     ----------

   Less claims paid during the year related to:
     Current year....................................................      28,268         19,057         20,346
     Prior years.....................................................      47,796         36,435         39,164
                                                                       ----------     ----------     ----------
       Total claims paid.............................................      76,064         55,492         59,510
                                                                       ----------     ----------     ----------

   Net balance as of December 31.....................................     119,157        128,150        125,706
     Plus reinsurance recoverables...................................       5,848          2,242          1,372
                                                                       ----------     ----------     ----------
       Claim liability as of December 31.............................  $  125,005     $  130,392     $  127,078
                                                                       ==========     ==========     ==========
</TABLE>

(9) NOTES PAYABLE

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

<TABLE>
<CAPTION>
                                                                            1997            1996
                                                                         ----------      -----------
<S>                                                                      <C>             <C>
Unsecured 9 1/4% Senior Subordinated Notes due 2003(a)..............     $  114,646      $   114,646
Revolving bank credit facility maturing 2002(b).....................        242,000           92,000
Other...............................................................          3,109            3,679
                                                                         ----------      -----------
                                                                         $  359,755      $   210,325
                                                                         ==========      ===========
-------------------
(a)  Interest costs under the Notes totaled $11,461,  $13,545 and $14,463 during
     1997, 1996 and 1995,  respectively.  As of December 31, 1997, the effective
     rate for the Notes was approximately 9.6 percent.
(b)  Interest costs under the $450,000  revolving credit facility totaled $9,188
     during  1997.  The  effective  rate of  interest  was  approximately  6.4%,
     including annual  commitment fee of 0.25%, as of December 31, 1997.  During
     1997 and 1996,  the Company had a $175,000  revolving  credit  facility for
     which it incurred interest costs of $1,855 and $1,558, respectively.
</TABLE>

     The fair value of amounts  outstanding as notes payable for the years ended
December 31, 1997 and 1996, amounted to $364,914 and $215,341, respectively. All
recorded amounts other than the Senior  Subordinated Notes approximate market as
they carry  variable  rates of interest which adjust at least every 90 days. The
fair value of the Senior Subordinated Notes is determined based upon quotes from
market makers.

     The aggregate  maturities  of notes  payable  during each of the five years
after December 31, 1997, are as follows:  1998,  $617;  1999,  $668; 2000, $724;
2001, $951; 2002, $242,149.


                                       62

<PAGE>



     All of the  Company's  debt  obligations  contain  financial  and operating
covenants.  The  Company and its  subsidiaries  were in  compliance  with or had
received waivers from all applicable covenants as of December 31, 1997.

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

(10) INCOME TAXES

     The  Company  and  a  number  of  its  non-insurance  subsidiaries  file  a
consolidated  federal  income tax return with a July 31 year end,  which differs
from  its  financial  year  end.  Marketing  One  and  its  subsidiaries  file a
consolidated  federal  income tax return with a December  31 year end.  The life
insurance  subsidiaries file federal income tax returns on a calendar year basis
with  either  PLAIC  or  Pioneer  Security  as  the  parent  of  the  particular
consolidated life insurance company tax group.

     Total income taxes were  allocated as follows for the years ended  December
31:

<TABLE>
<CAPTION>
                                                               1997           1996            1995
                                                            -----------    -----------    -----------
<S>                                                         <C>            <C>            <C>
Income from operations..................................    $    20,375    $    40,957    $    27,829
Extraordinary item......................................            --          (1,277)           --
Shareholders' equity....................................          5,412         (1,864)        28,493
                                                            -----------    -----------    -----------
                                                            $    25,787    $    37,816    $    56,322
                                                            ===========    ===========    ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                 1997           1996            1995
                                                              -----------    -----------    -----------
<S>                                                           <C>            <C>            <C>
Current U.S...............................................    $     3,775    $    (1,285)   $    (1,311)
Current foreign...........................................          3,598          2,319          4,519
Deferred U.S..............................................         10,984         35,482         22,516
Deferred foreign..........................................          2,018          4,441          2,105
                                                              -----------    -----------    -----------
  Income tax expense......................................    $    20,375    $    40,957    $    27,829
                                                              ===========    ===========    ===========
</TABLE>

     Taxes  computed  using the federal  statutory rate of 35% are reconciled to
the  Company's   actual  income  tax  expense   attributable  to  income  before
extraordinary charge as follows for the years ended December 31:

<TABLE>
<CAPTION>
                                                                 1997           1996            1995
                                                              -----------    -----------    -----------
<S>                                                           <C>            <C>            <C>
Tax expense computed at statutory rate....................    $    18,040    $    38,702    $    27,810
Dividends received deduction..............................         (1,450)          (977)           (85)
Amortization of costs in excess of net assets acquired....          3,341          3,040          2,275
Change in valuation allowance.............................           (525)        (1,265)        (5,102)
Foreign taxes net of U.S. tax benefit.....................            263          1,507          2,937
Other.....................................................            706            (50)            (6)
                                                              -----------    -----------    -----------
  Income tax expense......................................    $    20,375    $    40,957    $    27,829
                                                              ===========    ===========    ===========
</TABLE>


                                       63

<PAGE>



     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>
                                                             1997                       1996
                                                 -------------------------    ------------------------
                                                   Deferred      Deferred      Deferred      Deferred
                                                      Tax           Tax          Tax            Tax
                                                    Assets      Liabilities     Assets      Liabilities
                                                 ----------     ----------    ----------    ----------

<S>                                              <C>            <C>           <C>           <C>
Deferred policy acquisition costs.............   $      --      $   90,151    $      --     $   67,101
Present value of insurance in force...........          --          74,192           --         91,135
Future policy benefits........................       62,131            --         67,940           --
Net operating losses..........................       38,584            --         38,557           --
Foreign and alternative minimum tax credits...       22,851            --         21,252           --
Unrealized gain on investment securities......          --          20,140           --         13,650
Other.........................................       19,133          1,593        23,048        17,267
                                                 ----------     ----------    ----------    ----------
                                                    142,699        186,076       150,797       189,153
Valuation allowance...........................      (10,367)           --        (15,892)          --
                                                 ----------     ----------    ----------    ----------
                                                 $  132,332     $  186,076    $  134,905    $  189,153
                                                 ==========     ==========    ==========    ==========
</TABLE>

     The  valuation  allowance for deferred tax assets as of January 1, 1997 and
1996,  was  $15,892  and  $17,157,  respectively.  The net  change  in the total
valuation  allowance  for the years  ended  December  31,  1997 and 1996,  was a
decrease of $5,525  (including $5,000 that was used to reduce costs in excess of
net assets  acquired)  and $1,265,  respectively.  During  1997,  an  additional
$14,635 increase to the deferred tax asset was used to reduce costs in excess of
net assets acquired  related to the Integon Life acquisition as acquisition date
tax contingencies  were resolved.  If recognized as a tax benefit,  a portion of
the December 31, 1997, valuation allowance totaling $2,349 would be allocated to
reduce costs in excess of net assets acquired.

     In  assessing  the  realization  of deferred  taxes,  management  considers
whether it is more likely than not that some  portion or all of the deferred tax
assets will be  realized.  The  ultimate  realization  of deferred tax assets is
dependent on the generation of future taxable income during the periods in which
those  temporary   differences  become  deductible.   Management  considers  the
scheduled reversal of deferred tax liabilities,  projected future taxable income
and tax  planning  strategies  in  making  this  assessment.  Based  upon  those
considerations,  management believes it is more likely than not that the Company
will realize the benefits of these deductible  differences,  net of the existing
valuation allowance as of December 31, 1997.

     As of December 31, 1997,  the Company has life  consolidated  net operating
loss  carryforwards  of  approximately  $99,823  for  tax  return  purposes.  In
addition,  OLIC and  Peninsular  have  available,  on a separate  return  basis,
acquired  net  operating  loss  carryforwards  of  approximately   $10,417.  The
utilization of acquired net operating loss  carryforwards  is limited in any one
year to the lesser of (i) the life insurance group's consolidated taxable income
or (ii) the subsidiary's taxable income computed on a separate return basis.


                                       64

<PAGE>



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

<TABLE>
<CAPTION>
                                                                Life           Life
                                                            Consolidated     Separate
                                                               Return         Return
                                                             ----------     ----------
<S>                                                          <C>            <C>
2004.......................................................  $      --      $    5,335
2005.......................................................         560          4,982
2006.......................................................         --             --
2007.......................................................      15,967            --
2008.......................................................      37,609            100
2009.......................................................       6,311            --
2010.......................................................         --             --
2011.......................................................      26,812            --
2012.......................................................      12,564            --
                                                             ----------     ----------
                                                             $   99,823     $   10,417
                                                             ==========     ==========
</TABLE>

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

(11) PREFERRED AND COMMON STOCK

     The Company issued 2,875,000 shares of $50 redemption value $3.50 Series II
Convertible  Preferred  Stock (the "Series II Convertible  Preferred  Stock") on
August 2, 1996. The Series II Convertible  Preferred Stock is convertible at the
option of the holder,  unless previously redeemed,  into 1.4327 shares of common
stock for each share, subject to adjustment in certain events. Dividends accrued
and unpaid as of December  31, 1997 and 1996,  were  $1,677.  As of December 31,
1997,  the estimated fair value of the Series II  Convertible  Preferred  Stock,
based upon market-maker quotes, was $166,750.

     On July 25,  1995,  the  Company  issued  127,500  shares  of 10%  Series B
Preferred  Stock and  178,500  shares of 9% Series C  Preferred  Stock to fund a
portion of the Integon Life purchase price. The Series B Preferred Stock and the
Series C Preferred Stock are  mandatorily  redeemable on or before June 30, 1997
and June 30, 1998, respectively.  The redemption price of the Series C Preferred
Stock is subject to certain  offsets  related to the Integon Life stock purchase
agreement.  Dividends  accrued and unpaid were $ -- , and $1,939 on the Series B
Preferred  Stock  and  $3,867  and  $2,175  on the  Series  C  Preferred  Stock,
respectively,  as of December 31, 1997 and 1996. On March 15, 1997,  the Company
redeemed  all of the  previously  outstanding  Series B  preferred  stock at its
stated redemption value of $14,705.

     The  Company  issued  2,300,000  shares  of  $50  redemption  value  $3.375
Convertible  Preferred  Stock (the  "Convertible  Preferred  Stock") on July 14,
1995.  The  Convertible  Preferred  Stock is  convertible  at the  option of the
holder, unless previously redeemed,  into 2.2124 shares of common stock for each
share, subject to adjustment in certain events.  Dividends accrued and unpaid as
of  December  31,  1997 and 1996 were  $1,617.  As of  December  31,  1997,  the
estimated  fair value of the  Convertible  Preferred  Stock,  based upon  active
market quotes, was $186,599.

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


                                       65

<PAGE>



(12) STOCK OPTIONS AND WARRANTS

     The Company has  established  two management  stock option plans,  the 1992
Stock  Option  Plan which set aside up to 475,635  shares for grant and the 1996
Stock  Option  Plan which set aside up to  2,800,000  shares for grant.  Options
granted  under the 1992 Stock  Option  Plan are deemed to be in four equal units
which are  earned  over four  years  from the date of grant and are  exercisable
during a one-year  period  immediately  following the fourth  anniversary of the
date of grant.  The 1996 Stock Option Plan allows for awards of stock or options
subject to such terms, conditions, and restrictions, and/or limitations, if any,
as the Stock Option Committee of the Board of Directors deems appropriate.

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

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

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

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

<TABLE>
<CAPTION>
                                                  1997                    1996                     1995
                                           ---------  --------     ---------  ---------     ---------    -------
<S>                                        <C>        <C>          <C>        <C>           <C>          <C>
Number of shares subject to option/warrant:
   Outstanding at beginning of year.....   1,984,049  $  11.56     2,148,599  $   10.86     2,057,724    $  9.61
   Granted..............................   1,565,500  $  32.34        44,000  $   31.09       110,000    $ 17.64
   Expired/cancelled....................     (46,303) $  11.41       (59,000) $   13.82       (19,125)   $ 13.43
   Exercised............................    (158,769) $   7.97      (149,550) $    5.40           --     $   --
                                           ---------               ---------                ---------
     Outstanding at end of year ........   3,344,477  $  21.73     1,984,049  $   11.56     2,148,599    $ 10.86
                                           =========               =========                =========
Exercisable at end of year..............   2,036,442  $  15.38     1,808,207  $   11.40           --     $   --
                                           =========               =========                =========
Available for future grant at end of year  1,488,460               2,792,000                  144,063
                                           =========               =========                =========
</TABLE>


                                       66

<PAGE>



     The following  table  summarizes  information  concerning  outstanding  and
exercisable options and warrants as of December 31, 1997:

<TABLE>
<CAPTION>
                                     Options/Warrants Outstanding                   Options/Warrants Exercisable
                        -------------------------------------------------------     ------------------------------
                                              Weighted              Weighted                           Weighted
      Range of            Number          Average Remaining          Average          Number            Average
   Exercise Prices      Outstanding       Contractual Life       Exercise Price     Exercisable     Exercise Price
   ---------------      -----------       ----------------       --------------     -----------     --------------
<S>          <C>        <C>                      <C>               <C>               <C>                <C>
  $ 4.00-    $ 4.00       570,760                2.64              $   4.00            570,760          $  4.00
  $ 5.40-    $19.58     1,173,317                4.89              $  15.91          1,115,567          $ 15.89
  $27.25-    $38.40     1,600,400                3.15              $  32.32            350,115          $ 32.32
                        ---------                                                    ---------
                        3,344,477                                                    2,036,442
                        =========                                                    =========
</TABLE>

                  (Remainder of Page Intentionally Left Blank)


                                       67

<PAGE>



     As allowed under the  provisions  of SFAS No. 123, the Company  applies APB
Opinion 25 and related  Interpretations  in accounting  for its stock option and
warrant plans and,  accordingly,  does not recognize  compensation cost 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  applicable to common stock as well as earnings per share would have been
reduced by the pro forma amounts indicated in the following table:

<TABLE>
<CAPTION>
                                                                     1997            1996           1995
                                                                  -----------    -----------    -----------
<S>                                                               <C>            <C>            <C>
Reconciliation of net income applicable to common stock:
Basic net income applicable to common stock:
  Net income applicable to common stock before
    extraordinary charge (As reported)..........................  $    30,607    $    76,013    $    49,806
      Extraordinary charge......................................          --          (2,372)           --
                                                                  -----------    -----------    -----------
         Net income applicable to common stock (As reported)....       30,607         73,641         49,806
      Pro forma compensation expense............................      (10,229)          (287)          (719)
                                                                  -----------    -----------    -----------
         Net income applicable to common stock (Pro forma)......       20,378    $    73,354    $    49,087
                                                                  ===========    ===========    ===========

Diluted net income applicable to common stock:
  Net income applicable to common stock before
     extraordinary charge (As reported).........................  $    30,607    $    76,013    $    49,806
      Common stock equivalents:
         Convertible preferred stock dividend requirements......          --          11,788          3,558
      Extraordinary charge......................................          --          (2,372)           --
                                                                  -----------    -----------    -----------
         Net income applicable to common stock (As reported)....       30,607         85,429         53,364
      Pro forma compensation expense............................      (10,229)          (287)          (719)
                                                                  -----------    -----------    -----------
         Net income applicable to common stock (Pro forma)......  $    20,378    $    85,143    $    52,645
                                                                  ===========    ===========    ===========
Per share information:
Basic net income applicable to common stock:
  Net income applicable to common stock before extraordinary
    charge (As reported)........................................  $      1.09    $      2.79    $      2.26
      Extraordinary charge......................................          --           (0.09)           --
                                                                  -----------    -----------    -----------
         Net income applicable to common stock (As reported)....         1.09           2.70           2.26
      Pro forma compensation expense............................        (0.37)         (0.01)         (0.03)
                                                                  -----------    -----------    -----------
         Net income applicable to common stock (Pro forma)......  $      0.72    $      2.69    $      2.23
                                                                  ===========    ===========    ===========
Common shares used in computing basic earnings per share........       28,016         27,208         22,048
                                                                  ===========    ===========    ===========

Diluted net income applicable to common stock:
  Net income applicable to common stock before extraordinary
    charge (As reported)........................................  $      1.07    $      2.16    $      1.98
      Common stock equivalents:
         Convertible preferred stock dividend requirements......          --            0.33           0.14
      Extraordinary charge......................................          --           (0.07)           --
                                                                  -----------    -----------    -----------
         Net income applicable to common stock (As reported)....         1.07           2.42           2.12
      Pro forma compensation expense............................        (0.36)         (0.01)         (0.03)
                                                                  -----------    -----------    -----------
         Net income applicable to common stock (Pro forma)......  $      0.71    $      2.41    $      2.09
                                                                  ===========    ===========    ===========
Common shares used in computing diluted earnings per share......       28,645         35,273         25,216
                                                                  ===========    ===========    ===========
</TABLE>


                                       68

<PAGE>



(13) STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS

     Cash generated by the Company's insurance subsidiaries is made available to
PennCorp  principally  through  periodic  payments of principal  and interest on
surplus  debentures  issued by PLAIC and  Pioneer  Security  (collectively,  the
"Surplus Note Companies").  The amounts outstanding under the surplus debentures
totaled  $358,346 and  $367,900 as of December 31, 1997 and 1996,  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  periodically  in  amounts  sufficient  to  allow
PennCorp to meet its cash requirements.

     Dividend payments by the Company's  insurance  subsidiaries are limited by,
or  subject  to the  approval  of the  insurance  regulatory  authority  of each
subsidiary's  state  of  domicile.   Such  dividend  requirements  and  approval
processes  vary  significantly  from  state to  state.  In 1998,  the  insurance
subsidiaries  (including  SW  Financial),   subject  to  availability  of  cash,
statutory  capital and surplus and  regulatory  approval,  will be able to pay a
maximum of $56,749 in  dividends  to the Surplus Note  Companies  (including  SW
Financial). In 1998, the Surplus Note Companies, subject to availability of cash
and the dividend capacity of the insurance subsidiaries,  could pay a maximum of
$76,408 on surplus note payments to the Company.

     Statutory capital and surplus of the Company's life insurance  subsidiaries
as reported to  regulatory  authorities  at December 31, 1997 and 1996,  totaled
$299,062 and $264,080, respectively.  Shareholders' equity of the Company's life
insurance  subsidiaries  included  in the  consolidated  balance  sheet  totaled
$755,365 and $580,334 at December 31, 1997 and 1996, respectively. Statutory net
income  (loss) of the  Company's  life  insurance  subsidiaries  as  reported to
regulatory  authorities  totaled  $18,776,  ($28,600)  and $13,579 for the years
ended  December 31, 1997,  1996, and 1995,  respectively.  Surplus note interest
expense of $34,758,  $51,254 and $24,170 for the years ended  December 31, 1997,
1996, and 1995, respectively, is included in statutory net income (loss).

     The Company's  Canadian branch and Canadian  subsidiary  report to Canadian
regulatory  authorities based upon Canadian statutory accounting principles that
vary in some respects from U.S. statutory  accounting  principles.  Consolidated
Canadian net assets based upon Canadian  statutory  accounting  principles  were
$51,428 and $51,567 as of December 31, 1997 and 1996, respectively.

     Remittances  to PLIC from the  Canadian  operations  totaled $ --, $ -- and
$2,485 for the years ended December 31, 1997, 1996 and 1995, respectively.

(14) RETIREMENT AND PROFIT SHARING PLANS

     On  October  1,  1990,  the  Company  established  a  defined  contribution
retirement  plan (the  "Defined  Contribution  Plan") for all  employees  of the
Company  who have  attained  age 21, and for  certain  agents  whose  commission
earnings represent more than 50% of their income from the Company. Contributions
to the Defined  Contribution Plan are made pursuant to salary deferral elections
by participants in an amount equal to 1% to 15% of their annual compensation. In
addition,  the Company makes matching contributions in an amount equal to 50% of
each  participant's  salary deferral to a maximum of 3% of annual  compensation.
The Defined Contribution Plan also provides for a discretionary  employer profit
sharing contribution, which is determined annually by the Board of Directors for
the  succeeding  plan  year.  Profit  sharing   contributions  are  credited  to
participants'  accounts  on  the  basis  of  their  respective  compensation  in
accordance  with a formula that provides a higher  percentage  contribution  for
compensation in excess of the federal Social Security wage base. Salary deferral
contribution accounts are at all times fully vested, while matching contribution
accounts  vest  ratably  from one to two years of  service,  and profit  sharing
contribution  accounts  vest  ratably  from one to five  years of  service.  All
participant accounts are fully vested at death,  disability or attainment of age
65.  Payment  of vested  benefits  under the  Defined  Contribution  Plan may be
elected by a participant in a variety of forms of payment. The Company's funding
policy is to  contribute  annually an amount  that can be  deducted  for federal
income tax purposes.  Expenses related to this plan for the years ended December
31, 1997, 1996 and 1995, amounted to $1,483, $1,520 and $1,335, respectively.


                                       69

<PAGE>



     The  Company  has  an  established  bonus  plan  for  insurance  subsidiary
officers.  The amount  available to pay awards for any year is  determined  by a
committee of senior  executives  of the Company and is subject to the review and
recommendation  of the  Compensation  Committee  and  approval  of the  Board of
Directors of the Company. Awards are based primarily on the income growth of the
Company and the  performance of eligible  participants.  The Company  accrued or
paid $1,417, $1,144 and $691 under this plan during the years ended December 31,
1997, 1996 and 1995, respectively.

     If the Company meets established  performance goals, the Company's two most
senior  officers are eligible to receive annual cash bonuses based  primarily on
annual growth rates in diluted earnings per share. Bonus awards range from 0% to
200% of a predetermined  target annually.  During 1997 and 1996, the Company did
not accrue for such bonuses as the employment  arrangements containing the bonus
plan were  contingent  upon the  purchase by the Company of The Fickes and Stone
Knightsbridge Interests (see Notes 15 and 16 below).

     Postretirement  benefits are accrued (but not funded) for eligible retirees
only as all plans are closed to future  retirees.  The plans  principally  cover
certain costs associated with medical insurance coverage.

<TABLE>
<CAPTION>
                                                                            1997            1996
                                                                         ----------      -----------
<S>                                                                      <C>             <C>
Accumulated postretirement benefit obligation.......................     $   14,322      $    16,089
Unrecognized transition obligation..................................         (4,202)          (5,187)
Unrecognized losses.................................................           (224)            (366)
                                                                         ----------      -----------
  Accrued postretirement benefit....................................     $    9,896      $    10,536
                                                                         ==========      ===========
</TABLE>

     For the year ended December 31, 1997, the postretirement  benefit liability
was calculated  assuming an annual trend rate in health care  inflation  ranging
from 7% to 8% in 1998 grading  down to 5% in 2004 and after.  If the health care
cost trend rate  assumption  increased  by 1%,  the  accumulated  postretirement
benefit obligation as of December 31, 1997, would increase $419 or 3 percent.

(15) RELATED PARTY TRANSACTIONS

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

     During 1995, two of the Company's officers and directors, Messrs. Stone and
Fickes,  formed a fund,  Knightsbridge,  for the  purpose  of making  equity and
equity linked  investments in companies  engaged primarily in the life insurance
industry.  Knightsbridge has received subscriptions for approximately $92,000 in
limited  partnership  interests,  including  a  $15,000  subscription  from  the
Company.  The general partner of Knightsbridge  is Knightsbridge  Capital L.L.C.
("Knightsbridge Capital"), the members of which are David J. Stone and Steven W.
Fickes.  Allan D.  Greenberg,  a member  of the  Company's  Board of  Directors,
formerly  owned a 5% interest in  Knightsbridge  Capital  which was purchased by
Messrs. Stone and Fickes. The general partner of Knightsbridge cannot be removed
by the limited partners,  unless a court has finally determined that the general
partner has committed a willful and material  breach of the limited  partnership
agreement.

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

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


                                       70

<PAGE>



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

     On  December  31,  1997,  at the  Company's  annual  shareholders  meeting,
shareholders  approved a restructuring of the Knightsbridge  relationship  which
included the following transactions (see Notes 16 and 19); (i) Messrs. Stone and
Fickes entered into five-year employment agreements which include the contingent
issuance of options to purchase  559,000  shares of Common Stock to both Messrs.
Stone and Fickes,  (ii) the  acquisition  of The Fickes and Stone  Knightsbridge
Interests,  and (iii) the  acquisition  of The Fickes and Stone  Interests in SW
Financial, subject to certain contingencies.

     For the years ended  December 31,  1997,  1996 and 1995,  PennCorp  paid or
accrued $2,385, $2,548 and $3,900 in transaction fees and expenses to KM related
to  the  Washington  National,   United  Life  and  SW  Financial  transactions,
respectively.  During 1997 and 1996,  certain of the  Company's  affiliates  and
subsidiaries  paid  management  fees  to KM  amounting  to  $5,325  and  $3,333,
respectively.  SW Financial and United Life incurred KM investment advisory fees
totaling $4,358,  $2,426 and $ -- during 1997, 1996 and 1995,  respectively.  In
addition during 1996, PennCorp received a $1,000 stand-by commitment fee from SW
Financial for contingent  financing on a real estate  transaction.  SW Financial
did not draw upon the commitment which has expired.

     As required by the joint venture agreement, all bonuses paid to officers of
KM who are also  officers  of  PennCorp  must be  approved  by the  Compensation
Committee of the Board of Directors of PennCorp.  During 1995,  the Company paid
or accrued for KM incentive  bonuses to certain  individuals who are officers of
PennCorp and KM totaling $2,565.  Such bonuses were expensed in the accompanying
financial statements.

     In August 1995, the Company sold its preferred and common stock position in
a company which has historically  provided investment management services to the
PennCorp insurance  subsidiaries and for which a senior executive officer of the
investment management firm is a member of the PennCorp Board of Directors.  Fees
paid for such investment  management  services amounted to $1,083, $895 and $738
during 1997, 1996 and 1995, respectively.

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

     Certain  individuals,  who are shareholders and directors of PennCorp,  and
affiliates of these individuals,  provide services to the Company.  During 1997,
1996 and 1995, payments aggregating $250, $250 and $210, respectively, were made
to these  individuals and their  affiliates for services  provided in connection
with the Company's acquisition activity.

     At December 31, 1997,  an insurance  subsidiary  entered into a reinsurance
agreement with  Southwestern  Life to coinsure certain  annuities which had GAAP
policy liabilities of $256,673.  Cash of $50,000 and securities were transferred
which had fair values equal to statutory policy liabilities of $255,195. No gain
or loss was recognized on the transaction.

(16) OTHER COMMITMENTS AND CONTINGENCIES

     On December 31, 1997, PennCorp shareholders approved the acquisition of the
Controlling Interest in SW Financial through the assignment by Fickes, Stone and
Knightsbridge  ("the Controlling  Parties") of certain rights,  including common
stock and common stock equivalents of SW Financial. The controlling Parties will
receive  aggregate  cash  consideration  ranging  from  $73,777 to $77,444  (not
including expenses) depending upon the outcome of certain contingencies.

     In  addition,   PennCorp  shareholders  approved  the  acquisition  of  the
interests  of  Messrs.  Stone and  Fickes in  Knightsbridge  Management,  L.L.C.
("Knightsbridge  Management"),  Knightsbridge  Capital L.L.C. and  Knightsbridge
Consultants   L.L.C.   (collectively,   "The  Fickes  and  Stone   Knightsbridge
Interests") for total  consideration  estimated to be $10,000.  Fickes and Stone
will each receive consideration in the form of estimated annual payments of $330
due April 15,  1997,  each year through 2001 and issuance by PennCorp of 173,160
shares of PennCorp Common Stock to each of Fickes and Stone on April 15, 2001.

                                       71

<PAGE>




     As part of the Knightsbridge  restructuring plan as approved, PennCorp must
acquire  Fickes and Stone's co-  investment in Acordia for $5,200,  which amount
represents Fickes' and Stone's actual cost.

     The Company and its  subsidiaries  are obligated  under  operating  leases,
primarily for office space.  Rent expense,  net of sublease income,  was $5,178,
$8,416 and $8,489 in 1997, 1996 and 1995, respectively.

<TABLE>
<CAPTION>
Minimum lease commitments are:

          <S>                                                           <C>
          1998....................................................      $      5,305
          1999....................................................             3,895
          2000....................................................             2,606
          2001....................................................             1,583
          2002 and thereafter.....................................               358
                                                                        ------------
             Total minimum payments required......................      $     13,747
                                                                        ============
</TABLE>

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

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

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

                                       72

<PAGE>



     On December 1, 1997, the defendants and the  plaintiffs'  counsel agreed in
principle to amend the Original Proposed Settlement (as so amended, the "Amended
Proposed Settlement") following the PennCorp Board's conclusion that it would be
appropriate  to increase  the amount paid to the  Knightsbridge  Fund for the SW
Financial  Controlling  Interest to compensate  the limited  partners for, among
other things,  the unexpected and substantial  delay in the  consummation of the
purchase  of the SW  Financial  Controlling  Interest.  The terms of the Amended
Proposed  Settlement  are  identical  to  the  terms  of the  Original  Proposed
Settlement,  except  that the  Amended  Proposed  Settlement  provides  that the
Company will acquire the SW Financial  Controlling  Interest for $73.8  million,
and will  provide  a  one-time  "price  protection"  payment  associated  with a
disposition  of the SW  Financial  Controlling  Interest by PennCorp  during the
12-month period ending November 25, 1998. The Amended  Proposed  Settlement also
requires Messrs.  Stone and Fickes to grant PennCorp a price protection right in
the event of a sale of their Portsmouth investment.

     The Amended  Proposed  Settlement  is subject to  approval by the  Chancery
Court after notice to PennCorp  stockholders.  A settlement hearing is scheduled
for May 12, 1998 in the Chancery Court. As discussed  above,  Messrs.  Stone and
Fickes have agreed that, if the Amended  Proposed  Settlement is approved by the
Chancery  Court,  they will cancel their SW Financial  common stock warrants and
they  will  not  participate  in the  increased  consideration  (other  than the
possible price protection  right) for the SW Financial  Controlling  Interest to
the extent it relates to their $7,000 personal investment in SW Financial, which
together  will  reduce  the price to be paid by  PennCorp  for the SW  Financial
Controlling  Interest  by  approximately   $3,667.   Because  the  Knightsbridge
restructuring will have the effect of substantially eliminating potential future
conflicts of interest between Messrs. Stone and Fickes and PennCorp, and because
the Amended Proposed Settlement will have the effect of reducing the price to be
paid for the SW  Financial  Controlling  Interest  and will  obviate the need to
expend  considerable  management and director time to litigate the actions,  the
PennCorp Board has  determined  that the Amended  Proposed  Settlement is in the
best  interests  of PennCorp  and its  shareholders  and  confers a  substantial
economic benefit on PennCorp. Accordingly, the PennCorp Board has authorized the
payment to plaintiffs' counsel of legal fees of $785 and documented expenses not
to  exceed  $50 in  connection  with the  lawsuits  and the  related  settlement
negotiations,  if the Amended  Proposed  Settlement  is approved by the Delaware
Chancery Court after notice to PennCorp stockholders. Such amounts were expensed
in the accompanying financial statements.

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

     Effective January 1, 1996, the Company  outsourced the vast majority of its
data center operations and administrative  systems  programming to a third party
vendor. The processing  agreement extends through December 2002 and requires the
Company  or  its  insurance   subsidiaries   to  make   payments   ranging  from
approximately  $8,399 to $9,248 during each of the contract years.  The contract
has standard provisions for early cancellation, including breakage fees.

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

     The Company has a contingent  obligation for mortgage loans previously sold
aggregating $10,719 as a result of the Company acting as a servicing conduit.

(17) REINSURANCE

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

                                       73

<PAGE>



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:

<TABLE>
<CAPTION>
                                                                  1997            1996           1995
                                                              -----------    -----------    -----------
<S>                                                           <C>            <C>            <C>
Direct policy revenues and amounts assessed
     against policyholders..................................  $   375,538    $   358,825    $   310,693
Reinsurance assumed.........................................        2,527          1,320          2,307
Reinsurance ceded...........................................       32,499         12,055         11,111
                                                              -----------    -----------    -----------
     Net premiums and amounts earned........................  $   345,566    $   348,090    $   301,889
                                                              ===========    ===========    ===========
</TABLE>

     Fees incurred for financial  reinsurance were approximately,  $145 in 1997,
$265 in 1996, and $339 in 1995.

(18) RESTRUCTURING AND OTHER CHARGES

     As a result of the Company's  initiative to implement an operating division
structure,  the Company recorded a cumulative  pre-tax  restructuring  charge of
$19,071  during the three month period ended March 31, 1997.  The  restructuring
charge  recognizes:  (a)  severance and related  benefits  incurred due to staff
reductions ($5,355), (b) estimated holding costs of vacated facilities ($6,166),
(c) the write-off of certain fixed assets and other  impaired  assets  ($1,526),
(d) estimated  contract  termination  costs ($24),  and (e) the write-off of the
Company's  investment  in  certain  foreign  operations  which  will  be  closed
($6,000).  As of December  31, 1997 the Company had charged  against the accrual
$2,411 of severance and related  benefits,  $1,916 of vacated  facilities costs,
$332 of  fixed  asset  write-offs  and  $5,551  associated  with the exit of the
Company from  certain  foreign  operations.  During the three month period ended
December 31, 1997, the Company  re-evaluated  such charge and reduced  remaining
accruals by $2,300 as a result of final determination of certain obligations.

     The Company  incurred $4,652 of pre-tax  incremental  costs associated with
the restructuring during 1997. Such costs are included in the Company results of
operations as underwriting and other general and administrative costs.

     In addition  during the year ended December 31, 1997, the Company  incurred
$7,646 of pre-tax  transaction  costs associated with the terminated  Washington
National  merger  agreement.  Such costs are included in the Company  results of
operations.

     During 1995, the Company had a restructuring charge of $3,943.

(19) SUBSEQUENT EVENTS

     The Company initiated a redemption, effective March 31, 1998, of the Series
C Preferred  Stock into shares of the Company's  Common Stock under provision of
the Series C Preferred Stock certificate of designation.

     On January 2, 1998,  the Company  acquired the  Controlling  Interest in SW
Financial  for  aggregate  cash  consideration  ranging  from $73,777 to $77,444
(excluding  anticipated  acquisition  expenses)  depending  upon the  outcome of
certain  contingencies  (see Note 16).  As a result  of the  Company's  plans to
consolidate  certain of its operating  locations and  corporate  functions,  the
Company expects to incur restructuring and certain other charges during 1998 not
to exceed approximately $25.0 million.

     On January 5, 1998, the Company acquired the Fickes and Stone Knightsbridge
interests (see Note 16).

                                       74

<PAGE>



     On February 18, 1998, the Company announced that it had engaged  investment
banking firms to review strategic alternatives for maximizing shareholder value,
including the sale of the Company's Career Sales Division.

     The following  unaudited selected pro forma financial  information has been
prepared  to  illustrate  the pro forma  effects of (i) the  acquisition  of the
controlling  interest of SW Financial including the financing thereof,  (ii) the
acquisition  of the  Fickes and Stone  Knightsbridge  Interests,  including  the
financing  thereof ((i) and (ii)  collectively  the SW Financial  pro forma) and
(iii) the impact of the  Company's  decision  to  dispose  of the  Career  Sales
Division ((i), (ii) and (iii)  collectively the Retained  Businesses pro forma).
The pro forma statement of operations for the year ended December 31, 1997 gives
effect to the  foregoing  as though each had  occurred  on January 1, 1997.  The
selected pro forma  balance  sheet  information  as of December 31, 1997,  gives
effect to the  foregoing as through each had occurred on December 31, 1997.  The
selected pro forma financial information is not necessarily indicative of either
future  results or the results  that might have  occurred  had the  transactions
occurred on January 1, 1997 or December 31, 1997 as the case might be.

     The  acquisitions of the SW Financial  Controlling  Interest and the Fickes
and Stone  Knightsbridge  Interests  will be  accounted  for using the  purchase
method of  accounting.  The total  purchase  price of the  acquisitions  will be
allocated to the tangible and intangible  assets and liabilities  acquired based
upon  their  respective  values as of the  respective  consummation  dates.  The
allocation of the aggregate  purchase price  reflected in the selected pro forma
financial information is preliminary. The final allocation of the purchase price
is upon determination of the fair values of the acquired assets and liabilities;
however,  that  allocation  is  not  expected  to  differ  materially  from  the
preliminary  allocation.  The Company's  decision to dispose of the Career Sales
Division  in a period of time not likely to exceed  one year will  result in the
assets and liabilities of the Career Sales Division to be considered "assets and
liabilities  held for  sale," and as such will be  segregated  from those of the
retained  businesses  for purposes of  presentation  of the Company's  financial
position.  In  addition,  the  Company  will  be  required  to  provide  certain
information  regarding the impact of the Career Sales  Division on the Company's
consolidated  results.  The  following  unaudited  selected pro forma  financial
information is intended to summarize such transactions.  The retained businesses
pro forma information reflects the historical results of the retained businesses
and  does  not  consider  the use of  proceeds  likely  to be  derived  from the
disposition  of the  businesses  held for  sale.  The  significant  subsidiaries
included in businesses held for sale are PLIC and Union Bankers, a subsidiary of
SW Financial.


                                       75

<PAGE>


<TABLE>
<CAPTION>
                                                                                        (Unaudited)
                                                                            ---------------------------------
                                                                                                   Retained
                                                                             SW Financial         Businesses
                                                           As Reported         Pro forma           Proforma
     For the year ended December 31,                          1997               1997                1997
     -------------------------------                      ------------      ------------        -------------

     <S>                                                  <C>               <C>                 <C>
     Total revenues....................................   $    663,794      $    950,939        $     666,625

     Net income........................................         50,140            51,357               46,991

     Net income applicable to common stock.............         30,607            31,824               27,458

     Per share information:

         Net income applicable to common stock-basic...           1.09              1.12                    *
         Net income applicable to common stock-diluted.           1.07              1.10                    *

     As of December 31,
     ------------------
     Investments and cash..............................   $  3,340,114      $  5,326,882        $   4,655,522
     Insurance assets..................................        617,318           840,764              470,050
     Other assets......................................        766,703           799,242              623,300
     Assets of businesses held for sale................            --                --             1,218,016
                                                          ------------      ------------        -------------
       Total assets....................................   $  4,724,135      $  6,966,888        $   6,966,888
                                                          ============      ============        =============

     Insurance liabilities.............................   $  3,289,925      $  5,232,139        $   4,638,392
     Long-term debt....................................        359,755           550,505              395,955
     Other liabilities.................................        194,352           295,641              178,520
     Liabilities of businesses held for sale...........            --                --               865,418
     Redeemable preferred stock........................         19,867            19,867               19,867
     Shareholders' equity..............................        860,236           868,736              868,736
                                                          ------------      ------------        -------------
       Total liabilities and shareholders' equity......   $  4,724,135      $  6,966,888        $   6,966,888
                                                          ============      ============        =============

   * Due to the fact that amounts and use of proceeds information is unavailable
     regarding  the  businesses  held for  sale,  per share  information  is not
     provided.

</TABLE>


                  (Remainder of Page Intentionally Left Blank)

                                       76

<PAGE>



(20) UNAUDITED QUARTERLY FINANCIAL DATA

     The following is a summary of the quarterly  results of operations  for the
years ended December 31, 1997 and 1996:

<TABLE>
<CAPTION>
(In thousands, except per share amounts)
1997 Quarter-ended                                         March 31       June 30     September 30   December 31
------------------                                         --------       -------     ------------   -----------
<S>                                                       <C>          <C>            <C>            <C>
Total revenues........................................    $ 168,116    $   163,608    $   172,968    $   159,102
Net income (loss) applicable to common stock..........    $   7,436    $    13,209    $    26,070    $   (16,108)
Net income (loss) per share of common stock - basic...    $    0.26    $      0.47    $      0.93    $     (0.58)
Net income (loss) per share of common stock - diluted     $    0.25    $      0.45    $      0.80    $     (0.58)

1996 Quarter-ended                                         March 31       June 30     September 30   December 31
------------------                                         --------       -------     ------------   -----------

Total revenues........................................    $ 131,358    $   130,599    $   153,496    $   167,294
Net income applicable to common stock.................    $  15,157    $    18,754    $    18,701    $    21,029
Net income per share of common stock - basic..........    $    0.63    $      0.67    $      0.66    $      0.74
Net income per share of common stock - diluted........    $    0.56    $      0.60    $      0.60    $      0.66
</TABLE>

     The Company's  fourth  quarter 1997 reported loss was primarily a result of
reserve  strengthening  aggregating  $12,373 associated with the businesses held
for sale and certain  non-recurring  charges including transaction costs, period
restructuring  costs and other costs  aggregating  $5,222,  associated  with the
retained  businesses.  In  addition,  the  Company  unlocked  certain  actuarial
assumptions  on interest  sensitive  blocks of business  resulting in additional
amortization of deferred policy acquisition costs and present value of insurance
in force amounting to $6,944.


                                       77

<PAGE>












                          INDEPENDENT AUDITORS' REPORT


Board of Directors
Southwestern Financial Corporation:

     We  have  audited  the   accompanying   consolidated   balance   sheets  of
Southwestern  Financial Corporation and subsidiaries as of December 31, 1997 and
1996 and the related consolidated  statements of income,  shareholders'  equity,
and cash flows for the years 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 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 Southwestern
Financial  Corporation and subsidiaries as of December 31, 1997 and 1996 and the
results  of their  operations  and their  cash flows for the years then ended in
conformity with generally accepted accounting principles.



KPMG Peat Marwick LLP
Dallas, Texas
March 19, 1998


                                       78

<PAGE>



               SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                         as of December 31,1997 and 1996
                    (In thousands, except share information)
<TABLE>
<CAPTION>
                                                                                        1997              1996
                                                                                    ------------     -------------
<S>                                                                                 <C>              <C>
ASSETS
Investments:
   Fixed maturities available for sale at fair value (cost $1,643,769
      and $1,270,507).............................................................  $  1,677,508     $   1,255,270
   Equity securities available for sale at fair value (cost $688 and $959)........         1,079             1,129
   Mortgage loans on real estate, net of allowance of $680 in 1997 and
      $1,000 in 1996..............................................................        51,070            59,993
   Policy loans...................................................................       123,041           128,551
   Short-term investments.........................................................       157,140           135,203
   Collateral loans...............................................................           --             21,308
   Real estate....................................................................         1,893             7,649
   Other investments..............................................................         8,461             5,553
                                                                                    ------------     -------------
     Total investments............................................................     2,020,192         1,614,656
Cash..............................................................................         6,576            26,692
Due from reinsurers...............................................................       109,051           259,288
Accrued investment income.........................................................        25,224            20,802
Accounts and notes receivable, net of allowance of $181 and $561..................         5,507            13,773
Present value of insurance in force...............................................        58,565            71,333
Deferred policy acquisition costs.................................................        30,606            15,095
Deferred income taxes, net........................................................        34,746            47,954
Other assets......................................................................        19,025            18,549
Costs in excess of net assets acquired............................................       115,388           119,760
                                                                                    ------------     -------------
     Total assets.................................................................  $  2,424,880     $   2,207,902
                                                                                    ============     =============
LIABILITIES
Policy liabilities and accruals:
   Future policy benefits on traditional products.................................  $    554,998     $     584,179
   Universal life and investment contract liabilities.............................     1,315,496         1,088,335
   Policy and contract claims ....................................................        57,517            55,011
   Other policyholder funds.......................................................        14,203            17,635
                                                                                    ------------     -------------
     Total policy liabilities and accruals........................................     1,942,214         1,745,160
Federal income taxes payable......................................................         1,298             9,118
Notes payable.....................................................................       154,750           159,750
Accrued expenses and other liabilities............................................        97,211           118,119
                                                                                    ------------     -------------
     Total liabilities............................................................     2,195,473         2,032,147
                                                                                    ------------     -------------
Mandatorily redeemable preferred stock:
   Series  A  10%,  $.01  par  value,  $100  redemption  value;  500,000  shares
      authorized, 257,070 and 232,890 issued and outstanding at
      December 31, 1997 and 1996, respectively....................................        25,707            23,289
   5.5% preferred stock $.01 par value, $10,000 redemption value; 2,000 shares
     authorized, 1,118 and 1,059 shares issued and outstanding at
     December 31, 1997 and 1996, respectively.....................................        11,184            10,590

SHAREHOLDERS' EQUITY
Common Stock, Class A, $.01 par value; 18,000,000 shares authorized;
   3,500,000 shares issued and outstanding........................................            35                35
Common Stock, Class B, non-voting $.01 par value; 10,000,000 shares authorized;
   8,400,000 shares issued and outstanding........................................            84                84
Additional paid in capital........................................................       116,992           120,626
Unrealized gains (losses) on securities available for sale,
   net of tax (benefit) of $11,776 and ($4,224)...................................        21,870            (8,081)
Retained earnings.................................................................        53,535            29,212
                                                                                    ------------     -------------
     Total shareholders' equity...................................................       192,516           141,876
                                                                                    ------------     -------------
     Total liabilities and shareholders' equity...................................  $  2,424,880     $   2,207,902
                                                                                    ============     =============
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.

                                       79

<PAGE>



               SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                 for the Years Ended December 31, 1997 and 1996
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                        1997              1996
                                                                                    ------------     -------------
<S>                                                                                 <C>              <C>
Revenues:
   Premiums.......................................................................  $    103,138     $     152,803
   Interest sensitive policy product charges......................................        42,680            44,109
   Net investment income..........................................................       126,427           128,692
   Net gains from sale of investments.............................................         1,841               516
   Other income, including $15,811 in earnings of limited partnership in 1996.....        16,039            27,439
                                                                                    ------------     -------------
     Total revenues...............................................................       290,125           353,559
                                                                                    ------------     -------------

Benefits and expenses:
   Policyholder benefits incurred.................................................       201,385           234,773
   Change in liability for future policy benefits and other policy benefits.......       (35,103)          (36,929)
   Amortization of present value of insurance
     in force and deferred policy acquisition costs...............................        21,589            23,392
   Amortization of costs in excess of net assets acquired.........................         4,130             4,130
   Underwriting and other administrative expenses.................................        40,600            65,110
   Interest and amortization of deferred debt issuance costs......................        13,773            14,052
                                                                                    ------------     -------------
     Total benefits and expenses..................................................       246,374           304,528
                                                                                    ------------     -------------

Income before income taxes........................................................        43,751            49,031
     Income taxes.................................................................        16,416            18,149
                                                                                    ------------     -------------
Net income........................................................................        27,335            30,882
     Preferred stock dividend requirements........................................         3,012             2,754
                                                                                    ------------     -------------
Net income available to common shareholders.......................................  $     24,323     $      28,128
                                                                                    ============     =============
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.


                                       80

<PAGE>



               SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                 for the Years Ended December 31, 1997 and 1996
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                             Unrealized
                                                                             Gain (Loss)
                                      Common       Common     Additional   on Securities
                                       Stock        Stock       Paid in       Available     Retained
                                      Class A      Class B      Capital     for Sale, Net   Earnings       Total
                                    -----------  -----------  -----------   -----------   -----------   ----------
<S>                                 <C>          <C>          <C>           <C>           <C>           <C>
Balance at December 31, 1995.....   $        35  $        84  $   120,626   $     2,413   $     1,084   $  124,242
Net income.......................           --           --           --            --         30,882       30,882
Preferred dividends..............           --           --           --            --         (2,754)      (2,754)
Unrealized loss on securities
   available for sale, net.......           --           --           --        (10,494)          --       (10,494)
                                    -----------  -----------  -----------   -----------   -----------   ----------
Balance at December 31, 1996.....            35           84      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.


                                       81

<PAGE>



               SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 for the Years Ended December 31, 1997 and 1996
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                          1997           1996
                                                                                      ----------     ----------
<S>                                                                                   <C>            <C>
Cash flows from operating activities:
   Net income.....................................................................    $   27,335     $   30,882

   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         56,203
       Charges for mortality and administration...................................       (50,687)       (50,689)
     Capitalization of deferred policy acquisition costs..........................       (24,808)       (16,806)
     Amortization of intangibles, depreciation and accretion, net.................        26,545         29,427
     Decrease in policy liabilities, accruals and other policyholder funds........       (24,319)       (54,427)
     Decrease in accrued expenses and other liabilities...........................       (19,673)        (7,477)
     Decrease (increase) in notes and accounts receivable and
       accrued investment income..................................................         3,844         (3,000)
     (Decrease) increase in taxes payable.........................................        (7,820)         5,218
     Deferred income taxes........................................................          (836)        12,847
     Equity in undistributed earnings of limited partnership......................           --         (15,811)
     Net gains from sales of investments..........................................        (1,841)          (516)
     Other, net...................................................................         5,330          7,916
                                                                                      ----------     ----------
       Net cash used by operating activities......................................       (11,795)        (6,233)
                                                                                      ----------     ----------
Cash flows from investing activities:
   Sales of fixed maturities available for sale...................................       201,402         52,085
   Maturities and other redemptions of fixed maturities available for sale........       129,600        147,114
   Sales of mortgages, real estate and other investments..........................         7,512         57,278
   Principal collected on mortgage loans and collateral loans.....................        28,030          4,687
   Change in short-term investments, net..........................................       (21,929)        19,369
   Distributions from limited partnership.........................................           --          53,520
   Purchases of fixed maturities available for sale...............................      (419,525)      (323,585)
   Purchases of other investments.................................................          (764)          (694)
                                                                                      ----------     ----------
       Net cash (used) provided by investing activities...........................       (75,674)         9,774
                                                                                      ----------     ----------
Cash flows from financing activities:
   Receipts from interest sensitive products credited to
     policyholders' account balances..............................................       103,243         99,409
   Return of policyholders' account balances on interest sensitive products.......      (102,112)      (117,806)
   Cash provided by reinsurance recapture.........................................        21,222            --
   Cash provided by assumed reinsurance with affiliate............................        50,000            --
   Reduction of notes payable.....................................................        (5,000)          (250)
                                                                                      ----------     ----------
       Net cash provided (used) by financing activities...........................        67,353        (18,647)
                                                                                      ----------     ----------
Decrease in cash..................................................................       (20,116)       (15,106)
Cash at beginning of year.........................................................        26,692         41,798
                                                                                      ----------     ----------
Cash at end of year...............................................................    $    6,576     $   26,692
                                                                                      ==========     ==========
Supplemental disclosures:
   Income taxes paid..............................................................    $   25,072     $       84
   Interest paid..................................................................        12,305         12,714
Non-cash financing activities:
   Preferred stock issued as dividends............................................         3,012          2,754
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.

                                       82

<PAGE>


               SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1997 and 1996
                                 (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.  Minority
interest in ICH  Funding,  totaling  $1,486 at December  31, 1996 is included in
accrued expenses and other liabilities as of December 31, 1996.

     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

                                       83

<PAGE>


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



2. Summary of Significant Accounting Policies (Continued)

     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.

     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

                                       84

<PAGE>


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



2. Summary of Significant Accounting Policies (Continued)

     reviewed and compared with actual experience. Liabilities for future policy
     benefits for interest  sensitive  products include the balance that accrues
     to the benefit of the  policyholders and amounts that have been assessed to
     compensate the life insurance  subsidiaries  for services to be provided in
     the future.

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

(d) Accounts and Notes Receivable

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

(e) Deferred Policy Acquisition Costs

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

(f) Present Value of Insurance In Force

     The present value of insurance in force  represents the  anticipated  gross
     profits to be realized  from future  revenues on  insurance in force at the
     date such  insurance was  purchased,  discounted to provide an  appropriate
     rate of return and amortized,  with interest,  based on 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 and
     $22,889 as of December 31, 1997 and 1996, respectively.

(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 and
     $3,309  which are net of  accumulated  amortization  of $1,580  and $801 at
     December 31, 1997 and 1996, respectively.

(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
     and $4,130 at December 31, 1997 and 1996, respectively.

                                       85

<PAGE>


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



2. Summary of Significant Accounting Policies (Continued)

(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 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 and 1996 are listed below:

<TABLE>
<CAPTION>
                                                                  1997                       1996
                                                        -------------------------- --------------------------
                                                                      Percent of                 Percent of
                                                         Carrying    Shareholders'   Carrying   Shareholders'
                                                           Value        Equity         Value       Equity
                                                           -----        ------         -----       ------
<S>                                                     <C>             <C>        <C>             <C>
Fund America Investors Corp., Ser. 93-C,
  Class B Certificates................................  $  19,271       10.0%      $  16,250       11.2%
James M. Fail and Stone Capital, Inc.
  Collateral loans....................................        --          --          21,308       14.7
</TABLE>


                                       86

<PAGE>


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



3. Investments (Continued)

     The  amortized  cost and  fair  value of  investments  in fixed  maturities
available for sale at December 31, 1997 and 1996 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
                                                          ============  ============  ============  =============

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

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

<TABLE>
<CAPTION>
                                                                             Amortized       Fair
                                                                                Cost         Value
                                                                           ------------  ------------
<S>                                                                        <C>           <C>
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
                                                                           ============  ============
</TABLE>

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


                                       87

<PAGE>


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



3. Investments (Continued)

     Investments with a fair value of $119,695 and $121,617 were on deposit with
certain regulatory authorities at December 31, 1997 and 1996, respectively.

     Included in fixed  maturities  available  for sale at December 31, 1997 and
1996, are below investment-grade  securities with amortized costs of $71,467 and
$40,177,  respectively,  and fair values of $74,227 and  $39,955,  respectively.
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:

<TABLE>
<CAPTION>
                                    Amortized
                                                        Cost         Fair Value
                                                    -------------  -------------
 <S>                                                <C>            <C>
 Fixed maturities................................   $         487  $          66
 Equity securities...............................             688          1,079
 Other investments...............................           5,778          5,791
                                                    -------------  -------------
                                                    $       6,953  $       6,936
                                                    =============  =============
</TABLE>

     At December 31, 1997 net unrealized  appreciation  of equity  securities of
$391 consisted of gross unrealized gains of $415, less unrealized losses of $24.
At December  31, 1996 net  unrealized  appreciation  of $170  consisted of gross
unrealized gains of $207, less unrealized losses of $37.


                                       88

<PAGE>


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



3. Investments (Continued)

     Following is an analysis of net gains (losses) from sale of investments for
the years ended December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                             1997           1996
                                                        -------------  -------------
<S>                                                     <C>            <C>
 Fixed maturities................................       $         553  $       1,385
 Equity securities...............................                 --             (43)
 Other investments...............................               1,146          1,736
 Real estate.....................................                 134           (125)
 Mortgage loans..................................                 --          (2,437)
 Short-term investments..........................                   8            --
                                                        -------------  -------------
                                                        $       1,841  $         516
                                                        =============  =============
</TABLE>

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

     Following  are  changes  in  unrealized   appreciation   (depreciation)  on
investments for the years ended December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                           1997              1996
                                                                       ------------     -------------
<S>                                                                    <C>              <C>
Investments carried at fair value:
   Fixed maturities..................................................  $     48,976     $     (18,991)
   Equity securities.................................................           221               194
   Other investments.................................................          (713)            1,652
                                                                       ------------     -------------
                                                                             48,484           (17,145)

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)            1,362
   Deferred income taxes.............................................       (16,000)            5,524
   Minority interest in unrealized losses............................           235              (235)
                                                                       ------------     -------------
Change in unrealized investment gains and losses.....................  $     25,790     $     (10,494)
                                                                       ============     =============
</TABLE>


                                       89

<PAGE>


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



3. Investments (Continued)

     Major categories of net investment  income for the years ended December 31,
1997 and 1996 consist of the following:

<TABLE>
<CAPTION>
                                                                 1997              1996
                                                             ------------     -------------
<S>                                                          <C>              <C>
   Fixed maturities........................................  $     98,906     $      87,348
   Equity securities.......................................           --                 58
   Mortgage loans..........................................         5,490            11,156
   Policy loans............................................         7,621             8,011
   Short-term investments..................................         4,442             7,738
   Collateral loans........................................         2,218             2,947
   Real estate.............................................           441             3,956
   Investments held in trust under reinsurance treaty(a)...         9,617            12,130
   Other investments.......................................         1,250             1,503
   Investment expenses.....................................        (3,558)           (6,155)
                                                             ------------     -------------
                                                             $    126,427     $     128,692
                                                             ============     =============
-------------------
(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).
</TABLE>


     At December 31, 1997 and 1996 the Company held mortgage  loans  principally
involving  commercial  real estate with carrying  values of $51,070 and $59,993,
respectively,  net of an allowance for losses of $680 and $1,000 at December 31,
1997 and 1996,  respectively.  Estimated  fair values of mortgage  loans totaled
$51,816  and $59,993 at December  31, 1997 and 1996,  respectively.  The average
outstanding  loan  balances were  approximately  $1,027 and $955 at December 31,
1997 and 1996, respectively. At December 31, 1997 mortgage loan investments were
concentrated in the following states:

<TABLE>
<CAPTION>
                                                                                   Percent of Total
                                                                  Carrying Value    Carrying Total
                                                                  --------------    --------------
<S>                                                                <C>                   <C>
 Texas...........................................................  $   23,832            46.7%
 Illinois........................................................       7,029            13.7
 Oklahoma........................................................       4,915             9.6
 Florida.........................................................       3,180             6.3
 Kansas..........................................................       2,527             4.9
 All other.......................................................       9,587            18.8
                                                                   ----------           -----
 Balance, end of period..........................................  $   51,070           100.0%
                                                                   ==========           =====
</TABLE>


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


                                       90

<PAGE>


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



3. Investments (Continued)

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

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

     At December 31, 1997 and 1996, the accounts of GSSW are  consolidated  into
the accompanying consolidated balance sheet.

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.


                                       91

<PAGE>


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



4. Policy Liabilities and Accruals (Continued)

     Total  policy  liabilities  and  accruals  consist of the  following  as of
December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                        1997             1996
                                                                   -------------     -------------
<S>                                                                <C>               <C>
 Future policy benefits on traditional products:
   Traditional life insurance contracts..........................  $     335,283     $     344,520
   Traditional annuity products..................................        105,663           105,246
   Individual accident and health................................         87,152           104,071
   Unearned premiums.............................................         26,900            30,342
                                                                   -------------     -------------
      Total future policy benefits                                       554,998           584,179
                                                                   -------------     -------------
 Universal life and investment contract liabilities:
   Universal life and annuities..................................      1,315,333         1,086,632
   Guaranteed investment contracts...............................            163             1,703
                                                                   -------------     -------------
      Total universal and investment contract liabilities........      1,315,496         1,088,335
                                                                   -------------     -------------
 Policy and contract claims......................................         57,517            55,011
 Other policyholder funds........................................         14,203            17,635
                                                                   -------------     -------------
      Total policy liabilities and accruals......................  $   1,942,214     $   1,745,160
                                                                   =============     =============
</TABLE>

     The following  table  presents  information on changes in the liability for
policy and contract claims for the years ended December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                                1997             1996
                                                                           -------------     -------------
<S>                                                                        <C>               <C>
         Policy and contract claims at January 1.........................  $      55,011     $      62,140
         Less reinsurance recoverables...................................            153               118
                                                                           -------------     -------------
           Net balance at January 1......................................         54,858            62,022
                                                                           -------------     -------------
         Add claims incurred, net of reinsurance related to:
           Current year..................................................         81,168            91,496
           Prior years...................................................         (6,012)           (2,646)
                                                                           -------------     -------------
                                                                                  75,156            88,850
                                                                           -------------     -------------
         Deduct claims paid, net of reinsurance related to:
           Current year..................................................         58,658            52,240
           Prior years...................................................         13,839            43,774
                                                                           -------------     -------------
                                                                                  72,497            96,014
                                                                           -------------     -------------
         Policy and contract claims, net of related reinsurance
            recoverables at December 31..................................         57,517            54,858
         Plus reinsurance recoverables...................................            --                153
                                                                           -------------     -------------
         Policy and contract claims at December 31.......................  $      57,517     $      55,011
                                                                           =============     =============
</TABLE>

     As a result of changes in estimates of insured  events in prior years,  the
liability  for policy and contract  claims  decreased,  net of  reinsurance,  by
$6,012 in 1997 and $2,646 in 1996.


                                       92

<PAGE>


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



5. Notes Payable

     The outstanding principal amounts of notes payable at December 31, 1997 and
1996 consist of the following:

<TABLE>
<CAPTION>
                                                                        1997             1996
                                                                   -------------     -------------
<S>                                                                <C>               <C>
 Revolving bank debt.............................................  $      90,250     $      95,000
 Bank debt with quarterly principal requirements.................         24,500            24,750
 7.0% convertible subordinated note..............................         40,000            40,000
                                                                   -------------     -------------
                                                                   $     154,750     $     159,750
                                                                   =============     =============
</TABLE>

     Interest  costs under the revolving bank debt totaled $7,860 and $8,128 for
the years ended December 31, 1997 and 1996,  respectively.  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 and $2,250 for the
years ended December 31, 1997 and 1996,  respectively.  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  under  the
Convertible Notes totaled $2,800 for the years ended December 31, 1997 and 1996.
The Company agreed to maintain  sufficient cash and cash equivalents to fund the
interest  payments  on the  Convertible  Notes for the  first  three  years.  At
December  31,  1997 and  December  31,  1996,  restricted  cash  and  short-term
investments totaled $3,339 and $5,959, respectively.

     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

                                       93

<PAGE>


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



6. Preferred and Common Stock (Continued)

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 years ended  December  31, 1997 and
1996, 24,180 and 21,900 additional shares were issued with a redemption value of
$2,418  and  $2,190,   respectively   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 years  ended  December  31,  1997 and 1996,  59 and 59
additional  shares  were  issued  with a  redemption  value  of $594  and  $590,
respectively 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 years ended  December 31, 1997 and 1996 are as
follows:

<TABLE>
<CAPTION>
                                                                      1997             1996
                                                                 -------------     -------------
<S>                                                              <C>               <C>
Current........................................................  $      17,252     $       5,302
Deferred.......................................................           (836)           12,847
                                                                 -------------     -------------
                                                                 $      16,416     $      18,149
                                                                 =============     =============
</TABLE>

     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 years ended December 31, 1997 and 1996, as follows:

<TABLE>
<CAPTION>
                                                                      1997             1996
                                                                 -------------     -------------
<S>                                                               <C>               <C>
Tax expense computed at statutory rate..........................  $      15,313     $      17,161
Amortization of costs in excess of net assets acquired..........          1,445             1,445
Change in deferred tax asset valuation allowance................            364              (183)
Other...........................................................           (706)             (274)
                                                                  -------------     -------------
                                                                  $      16,416     $      18,149
                                                                  =============     =============
</TABLE>

                                       94

<PAGE>


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



7. Income Taxes (Continued)

     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 and 1996 relate to the following:

<TABLE>
<CAPTION>
                                                                         1997             1996
                                                                    -------------     -------------
<S>                                                                 <C>               <C>
  Deferred tax assets:
    Deferred policy acquisition costs.............................  $       9,548     $      10,407
    Future policy benefits........................................         73,660           112,408
    Invested assets, subject to capital gains treatment...........         24,907            16,770
    Net unrealized loss...........................................            --              4,224
                                                                    -------------     -------------
                                                                          108,115           143,809
                                                                    -------------     -------------
  Deferred tax liabilities:
    Present value of insurance in force...........................        (20,498)          (24,967)
    Other assets and liabilities..................................        (20,123)          (50,280)
    Net unrealized gain...........................................        (11,776)              --
                                                                    -------------     -------------
                                                                          (52,397)          (75,247)
                                                                    -------------     -------------
    Net deferred tax asset........................................         55,718            68,562
    Valuation allowance...........................................        (20,972)          (20,608)
                                                                    -------------     -------------
                                                                    $      34,746     $      47,954
                                                                    =============     =============
</TABLE>

     The valuation allowances at December 31, 1997 and 1996, are 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.


                                       95

<PAGE>


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



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
years ended December 31, 1997 and 1996, is as follows:

<TABLE>
<CAPTION>
                                                                         1997             1996
                                                                   -------------     -------------
<S>                                                                <C>               <C>
 Balance at beginning of period..................................  $      15,095     $         --
 Policy acquisition costs deferred:
   Commissions...................................................         17,443            11,810
   Underwriting and issue costs..................................          7,366             4,996
 Released by 80% coinsurance of Medicare business (see Note 10)              --             (1,243)
 Policy acquisition costs amortized..............................         (9,092)             (503)
 Unrealized investment (gain) loss adjustment....................           (206)               35
                                                                   -------------     -------------
 Unamortized deferred policy acquisition costs at period end.....  $      30,606     $      15,095
                                                                   =============     =============
</TABLE>

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

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

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

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


                                       96

<PAGE>


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



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

     Information  related to the  present  value of  insurance  in force for the
years ended December 31, 1997 and 1996 is as follows:

<TABLE>
<CAPTION>
                                                                         1997             1996
                                                                   -------------     -------------
<S>                                                                <C>               <C>
 Balance at beginning of year....................................  $      71,333     $     115,831
 Released by 80% coinsurance of Medicare business (see Note 10)              --            (22,936)
 Accretion of interest...........................................          3,806             4,415
 Amortization....................................................        (16,303)          (27,304)
 Transferred on assumed reinsurance contract with affiliate......          2,291               --
 Unrealized investment (gain) loss adjustment....................         (2,562)            1,327
                                                                   -------------     -------------
   Balance at end of year........................................  $      58,565     $      71,333
                                                                   =============     =============
</TABLE>

     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

                                       97

<PAGE>


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



9. Statutory Accounting and Dividend Restrictions (Continued)

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 and 1996  totaled
approximately $174,715 and $177,510,  respectively.  Statutory net income (loss)
of  the  Company's  life  insurance   subsidiaries  as  reported  to  regulatory
authorities  totaled  ($2,521) and $24,919 for the years ended December 31, 1997
and 1996.

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 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 years ended December 31, 1997 and 1996 is as follows:

<TABLE>
<CAPTION>
                                                                           1997             1996
                                                                      -------------     -------------
<S>                                                                   <C>               <C>
Direct policy revenues and amounts assessed against policyholders...  $     252,656     $     255,352
Reinsurance assumed.................................................          1,182             3,483
Reinsurance ceded...................................................       (108,020)          (61,923)
                                                                      -------------     -------------
Net premiums and amounts earned.....................................  $     145,818     $     196,912
                                                                      =============     =============
Policyholder benefits ceded.........................................  $      78,767     $      25,513
                                                                      =============     =============
</TABLE>

     Effective July 1, 1996, Union Bankers entered into  reinsurance  agreements
with  Cologne  Life  Reinsurance  Company  ("Cologne")  to  coinsure  80% of its
Medicare supplement business in force on July 1, 1996 and to coinsure 80% of its
Medicare  policies  issued on or after  July 1,  1996.  The  Company  recorded a
deferred gain on the  transaction of $53,893 as of July 1, 1996,  which is being
amortized into income over the life of the business. For the year ended December
31, 1997 and for the period from July 1, 1996 to December  31, 1996  $14,222 and
$6,445, respectively 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,

                                       98

<PAGE>


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



10. Reinsurance (Continued)

1997.Statutory  surplus  provided by this treaty  totaled $8,714 at December 31,
1996.  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
and $222 for the years ended December 31, 1997 and 1996,  respectively.  Amounts
due from  reinsurers  included  amounts due from ERC of $121,016 at December 31,
1996. The underlying assets held by ERC had carrying values of $121,016 and fair
values of $122,639 at December 31, 1996.

     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 years ended
December 31, 1997 and 1996 amounted to $936 and $696, respectively.

     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 and
$1,700  under  this plan  during the years  ended  December  31,  1997 and 1996,
respectively.

     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

                                       99

<PAGE>


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



11. Retirement and Profit Sharing Plans (Continued)

health and welfare benefits is unfunded.  Following is an analysis of the change
in the  liability  for  accrued  postretirement  benefits  for the  years  ended
December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                            1997             1996
                                                                       -------------     -------------
<S>                                                                    <C>               <C>
 Accrued postretirement benefits, beginning of year .................  $      12,686     $      12,821
                                                                       -------------     -------------
 Recognition of components of net periodic postretirement benefit cost:
   Service cost .....................................................            269               244
   Interest cost.....................................................            930               834
                                                                       -------------     -------------
   Net periodic postretirement benefit cost..........................          1,199             1,078
 Benefit payments....................................................         (1,290)           (1,213)
                                                                       -------------     -------------
 Net change..........................................................            (91)             (135)
                                                                       -------------     -------------
 Accrued postretirement benefits, end of year........................  $      12,595     $      12,686
                                                                       =============     =============

     The liability for accrued postretirement benefits includes the following at
December 31, 1997 and 1996:

 Accumulated postretirement benefit obligation:
   Retirees..........................................................  $      11,167     $      10,884
   Active eligible...................................................          1,076             1,194
   Active ineligible.................................................            944               831
                                                                       -------------     -------------
                                                                              13,187            12,909
 Unrecognized actuarial loss.........................................           (592)             (223)
                                                                       -------------     -------------
 Accrued postretirement benefits.....................................  $      12,595     $      12,686
                                                                       =============     =============
</TABLE>

     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 years  ended  December  31,  1997 and  1996,  fees
incurred totaled $1,871 and $1,658, respectively.


                                       100

<PAGE>


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



12. Related Party Transactions (Continued)

     The Company agreed to pay PennCorp,  a  shareholder,  $1,000 in conjunction
with the GSSW  transaction  in 1996 (see Note 3). The Company  paid  interest of
$1,400 in 1997 in conjunction with PennCorp's  acquisition of the Company's 7.0%
convertible subordinated note.

     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 and $2,058 in 1996.
There was no significant sublease income in 1997 or 1996.

<TABLE>
<CAPTION>
Minimum lease commitments are:
    <S>                                                             <C>
    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
                                                                    ===========
</TABLE>

     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 and  $1,357  in 1996.  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.



                                       101

<PAGE>


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



14. Other Operating Information

     Underwriting and other administrative expenses for the years ended December
31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                                   1997             1996
                                                              -------------     -------------
<S>                                                           <C>               <C>
Non-deferrable commission expense...........................  $      19,746     $      30,768
Commission allowances on reinsurance ceded..................        (12,696)           (8,331)
Taxes, licenses and fees....................................          7,492             9,214
General and administrative expenses.........................         34,467            39,241
Expense allowance on reinsurance ceded......................         (8,409)           (5,782)
                                                              -------------     -------------
  Underwriting and other administrative expenses............  $      40,600     $      65,110
                                                              =============     =============
</TABLE>

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 and 1996:

<TABLE>
<CAPTION>
                                                                        1997                      1996
                                                              ------------------------  ------------------------
                                                               Carrying         Fair       Carrying       Fair
                                                                 Value         Value        Value        Value
                                                              -----------  -----------  -----------  -----------
<S>                                                           <C>          <C>          <C>          <C>
Assets:
   Cash and short-term investments..........................  $   163,716  $   163,716  $   161,895  $   161,895
   Fixed maturities.........................................    1,677,508    1,677,508    1,255,270    1,255,270
   Equity securities........................................        1,079        1,079        1,129        1,129
   Mortgage loans...........................................       51,070       51,816       59,993       59,993
   Policy loans.............................................      123,041      123,041      128,551      128,551
   Collateral loans.........................................          --           --        21,308       21,308
   Other investments........................................        8,461        8,461        5,553        5,553
   Interest rate cap........................................           41          --           145          --
   Agent and premium receivables............................        5,508        5,508       13,773       13,773
Liabilities:
   Notes payable............................................      154,750      154,750      159,750      159,750
   Universal life and investment contract liabilities.......    1,315,496    1,315,496    1,088,335    1,088,335
</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.


                                       102

<PAGE>


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



15. Financial Instruments (Continued)

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

     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.

     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  writeoff  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.


                                       103

<PAGE>


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



     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

     Information required by this Item is incorporated by reference to "Election
of Directors" and "Executive  Officers" in the Company's Proxy Statement for its
1998 Annual Meeting of the Shareholders.

Item 11. Executive Compensation

     Information   required  by  this  Item  is  incorporated  by  reference  to
"Director-Fees",    "Executive   Compensation   and   Other   Information"   and
"Compensation  Committee Interlocks and Insider  Participation" in the Company's
Proxy  Statement  for its 1998 Annual  Meeting of  Shareholder,  except that the
information required by paragraphs (k) and (l) of Item 402 of Regulation S-K and
set forth in such Proxy Statement is specifically not incorporated by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

     Information required by this Item is incorporated by reference to "Security
Ownership of Certain  Beneficial  Owners and  Management" in the Company's Proxy
Statement for its 1998 Annual Meeting of Shareholders.

Item 13. Certain Relationships and Related Transactions

     Information   required  by  this  Item  is  incorporated  by  reference  to
"Compensation  Committee  Interlocks  and Insider  Participation"  and  "Certain
Transactions" in the Company's Proxy Statement for its 1998 Annual Meeting of
Shareholders.

                  (Remainder of Page Intentionally Left Blank)



                                       104

<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 43 through  77, and the  Independent  Auditors'
Report set forth on page 42 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 111 of this filing.

     3. Exhibits

          2.1  Purchase   Agreement  among  I.C.H.   Corporation,   SWL  Holding
               Corporation,  Care Financial  Corporation,  Facilities Management
               Installation,   Inc.  and  Southwestern   Financial  Corporation,
               Southwestern   Financial   Services   Corporation   and  PennCorp
               Financial Group,  Inc., dated as of December 1, 1995 and Addendum
               to Purchase Agreement dated as of December 14, 1995. (6)

          2.2  Amended and Restated  Stock  Purchase  Agreement  between  United
               Companies  Financial  Corporation  and Pacific  Life and Accident
               Insurance Company dated as of July 24, 1996. (4)

          3.1  Restated By-Laws of PennCorp Financial Group, Inc. (12)

          3.2  Third Restated Certificate of Incorporation of PennCorp Financial
               Group, Inc. (20)

          4.1  Certificate  of  Elimination  for Series A  Cumulative  Preferred
               Stock. (5)

          4.2  Certificate of Designation of Series B Preferred Stock. (5)

          4.3  Certificate of Designation of Series C Preferred Stock. (5)

          4.4  Corrected   Certificate  of  Designation  of  $3.375  Convertible
               Preferred Stock. (5)

          4.5  Certificate   of  Designation  of  $3.50  Series  II  Convertible
               Preferred Stock (3)

          4.6  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. (11)

          10.1 Surplus Debenture Number Four in the original principal amount of
               $162,539,890,  issued  by  Pacific  Life and  Accident  Insurance
               Company to PennCorp Financial Group, Inc., dated January 1, 1994.
               (10)

          10.2 Surplus Debenture Number Five in the original principal amount of
               $17,606,203,  issued  by  Pacific  Life  and  Accident  Insurance
               Company to PennCorp Financial Group, Inc., dated September 29,
               1994. (9)

          10.3 Surplus Debenture Number Six in the original  principal amount of
               $55,000,000,  issued  by  Pacific  Life  and  Accident  Insurance
               Company to PennCorp Financial Group, Inc., dated July 24, 1996.
               (14)

          10.4 10%  Promissory  Note  in  the  original   principal   amount  of
               $30,661,996,   issued   by   American-Holdings   Corporation   to
               Pennsylvania Life Insurance Company, dated July 1, 1996. (14)

                                       105

<PAGE>



          10.5 Certificate of Contribution in the original  principal  amount of
               $54,332,790   issued  by   Integon   Financial   Life   Insurance
               Corporation to Integon Life Corporation, dated July 25, 1995. (5)

                             MANAGEMENT COMPENSATION
                               RELATED AGREEMENTS

              10.6  Intentionally omitted.

              10.7  PennCorp Financial, Inc. Retirement and Savings Plan. (13)

              10.8  PennCorp  Financial,  Inc. Executive Officer Incentive Plan.
                    (13)

              10.9  PennCorp Financial Group, Inc. 1992 Stock Option Plan. (13)

              10.10 PennCorp  Financial Group,  Inc. Senior  Management  Warrant
                    Award Program. (13)

              10.11 Form of Restricted  Stock Agreement by and between  PennCorp
                    Financial Group, Inc. and certain participants, effective as
                    of April 1, 1994. (9)

              10.12 Employment  Agreement between PennCorp Financial Group, Inc.
                    and David J. Stone entered into June 7, 1996. (14)

              10.13 Employment  Agreement between PennCorp Financial Group, Inc.
                    and Steven W. Fickes entered into June 7, 1996. (14)

              10.14 Amendment  Number  One  to  Employment   Agreement   between
                    PennCorp  Financial  Group,  Inc.  and David J. Stone  dated
                    April 28, 1997. (15)

              10.15 Amendment  Number  One  to  Employment   Agreement   between
                    PennCorp  Financial  Group,  Inc. and Steven W. Fickes dated
                    April 28, 1997. (15)

              10.16 Amendment No. 2 to  Employment  Agreement  between  PennCorp
                    Financial  Group,  Inc.  and  David J.  Stone  entered  into
                    January 5, 1998. (1)

              10.17 Amendment No. 2 to  Employment  Agreement  between  PennCorp
                    Financial  Group,  Inc.  and Steven W. Fickes  entered  into
                    January 5, 1998. (1)

              10.18 Executive  Retention  Agreement between Charles  Lubochinski
                    and PennCorp Financial Group, Inc. (1)

              10.19 Schedule of similar Executive Retention Agreements. (1)

              10.20 PennCorp  Financial  Group,  Inc. 1996 Stock Award and Stock
                    Option Plan. (14)

              10.21 Amendment Number One to PennCorp  Financial Group, Inc. 1996
                    Stock Award and Stock Option Plan. (20)

              10.22 PennCorp  Financial Group, Inc. 1996 Senior Executive Annual
                    Incentive Award Plan. (14)

         10.23 Real Estate Purchase and Sale Agreement  between Peoples Security
               Life Insurance Company and PennCorp  Financial Group, Inc., dated
               March 24, 1995. (8)


                                       106

<PAGE>



         10.24 Registration  Rights  Agreement  dated as of December  14,  1995,
               between PennCorp Financial Group, Inc., I.C.H.  Corporation,  SWL
               Holding Corporation and Care Financial Corporation. (6)

         10.25 Conversion,  Standstill and Registration Rights Agreement between
               United  Companies  Financial  Corporation and PennCorp  Financial
               Group, Inc. dated as of July 24, 1996. (14)

         10.26 Registration  Rights Agreement dated as of August 2, 1996, by and
               among  PennCorp   Financial  Group,   Inc.,  Smith  Barney  Inc.,
               Donaldson,  Lufkin & Jenrette Securities  Corporation and Merrill
               Lynch, Pierce, Fenner & Smith Incorporated. (14)

         10.27 Stockholders   Agreement   dated   December   14,  1995   between
               Southwestern  Financial  Corporation  and  the  Security  holders
               listed on the signature pages thereof. (6)

         10.28 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. (16)

         10.29 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. (17)

         10.30 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.
               (17)

         10.31 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. (17)

         10.32 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. (17)

         10.33 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. (17)

         10.34 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. (17)

         10.35 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. (17)

         10.36 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. (17)


                                       107

<PAGE>



         10.37 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. (17)

         10.38 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. (17)

         10.39 Note Purchase,  Release and Settlement Agreement,  dated July 13,
               1997, executed by Lone Star Liquidating Trust, PennCorp Financial
               Group, Inc. and Southwestern Financial Corporation . (18)

         10.40 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. (19)

         10.41 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. (19)

         12    Computation of ratio of earnings to fixed charges. (1)

         21    List of subsidiaries of the Registrant. (1)

         22.1  Auditors consent. (1)

         22.2  Auditors consent. (1)

         27    Financial Data Schedule. (1)

(1)  Filed herewith.

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

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

(5)  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.

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

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


                                       108

<PAGE>



(8)  Such exhibit is incorporated  by reference to the Quarterly  Report on Form
     10-Q for the three months ended June 30, 1995 of PennCorp  Financial Group,
     Inc.

(9)  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.

(10) 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.

(11) 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.

(12) 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.

(13) 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.

(14) 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.

(15) 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.

(16) 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.

(17) 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.

(18) 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.

(19) 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.

(20) 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.

     (b)  Reports on Form 8-K.

          A report on Form 8-K,  dated  November  14,  1997,  was filed with the
          Securities and Exchange  Commission by PennCorp  Financial Group, Inc.
          on November 14,  1997,  providing  restated  financial  statements  of
          PennCorp Financial Group, Inc. for each of the years in the three year
          period  ended  December  31, 1996 as well as the three  month  periods
          ended  March 31,  1997 and 1996 and the  three  and six month  periods
          ended June 30, 1997 and 1996.


                                       109

<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/ David J. Stone
                              ------------------------
                              David J. Stone
                              Chairman of the Board, Chief Executive Officer and
                              Director (Principal Executive Officer)
                        Date: March 30, 1998

     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/ Steven W. Fickes
----------------------------------
Steven W. Fickes
President, Chief Financial Officer
and Director(Principal Financial
and Accounting Officer)

Date: March 30, 1998


/s/ Kenneth Roman
----------------------------------
Kenneth Roman
Director

Date: March 30, 1998


/s/ Maurice W. Slayton
----------------------------------
Maurice W. Slayton
Director

Date: March 30, 1998


/s/ Allan D. Greenberg
----------------------------------
Allan D. Greenberg
Director

Date: March 30, 1998


/s/ Thomas A. Player
----------------------------------
Thomas A. Player
Director

Date: March 30, 1998


/s/ Bruce W. Schnitzer
----------------------------------
Bruce W. Schnitzer
Director

Date: March 30, 1998


/s/ David C. Smith
----------------------------------
David C. Smith
Director

Date: March 30, 1998


/s/ David J. Stone
----------------------------------
David J. Stone
Chairman of the Board, Chief Executive
Officer and Director (Principal
Executive Officer)

Date: March 30, 1998
                                       110

<PAGE>



                 PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

Financial Statements:

     Reference  is made to data  appearing  on pages 43  through  77, and to the
Independent Auditors' Report appearing on page 42 hereof.

  Schedules:*                                                            Page

  Independent Auditors' Report - Financial Statement Schedules....      Ex. 22

  Schedule II       Condensed Financial Information of Registrant.        112
  Schedule III      Supplementary Insurance Information...........        115
  Schedule IV       Reinsurance...................................        116
  Schedule V        Valuation and Qualifying Accounts.............        117

   * 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.


                                       111

<PAGE>



                                                                     SCHEDULE II

                         PENNCORP FINANCIAL GROUP, INC.
                              (PARENT COMPANY ONLY)

                         CONDENSED  STATEMENTS  OF INCOME  For the  years  ended
              December 31, 1997, 1996 and 1995
                                ($ in thousands)
<TABLE>
<CAPTION>
                                                                          1997            1996           1995
                                                                       -----------    -----------    -----------
<S>                                                                    <C>            <C>            <C>
Revenue:
   Interest income from subsidiaries.................................  $    21,173    $    35,525    $    27,680
   Other interest income.............................................        3,547          2,428            638
   Other income......................................................          249            423          3,985
                                                                       -----------    -----------    -----------
     Total revenue...................................................       24,969         38,376         32,303
                                                                       -----------    -----------    -----------

Operating expenses:
   General and administrative expenses...............................       36,939          2,493          2,257
   Interest and amortization of deferred debt issuance costs.........       23,103         17,920         15,938
                                                                       -----------    -----------    -----------
     Total operating expenses........................................       60,042         20,413         18,195
                                                                       -----------    -----------    -----------

Income (loss) before income taxes, equity in earnings of
   subsidiaries and extraordinary charge.............................      (35,073)        17,963         14,108
     Income tax expense (benefit)....................................       (8,689)           251          4,139
                                                                       -----------    -----------    -----------
Income (loss) before equity in earnings of subsidiaries
   and extraordinary charge..........................................      (26,384)        17,712          9,969
     Equity in earnings of subsidiaries..............................       76,524         72,305         46,377
                                                                       -----------    -----------    -----------
Income before extraordinary charge...................................       50,140         90,017         56,346
     Extraordinary charge, net of tax benefits of $--, $932 and $--....          --          (1,730)           --
                                                                       -----------    -----------    -----------
Net income...........................................................  $    50,140    $    88,287    $    56,346
                                                                       ===========    ===========    ===========
</TABLE>


                 See accompanying independent auditors' report.


                                       112

<PAGE>



                                                                     SCHEDULE II

                         PENNCORP FINANCIAL GROUP, INC.
                              (PARENT COMPANY ONLY)

                            CONDENSED BALANCE SHEETS
                        As of December 31, 1997 and 1996
                                ($ in thousands)

<TABLE>
<CAPTION>
                                                                              1997           1996
                                                                          -----------    -----------
<S>                                                                       <C>            <C>
ASSETS
   Investments:
     Investment in subsidiaries.........................................  $   932,931    $   830,946
     Notes receivable from subsidiaries.................................      235,146        235,146
     Equity securities available for sale...............................       22,948            --
     Other..............................................................        4,075            --
                                                                          -----------    -----------
       Total investments................................................    1,232,100      1,066,092

   Cash and short term investments......................................        4,464          2,099
   Accrued investment income due from subsidiaries......................        8,697          3,918
   Deferred debt issuance costs.........................................          --           2,482
   Furniture and fixtures...............................................          --             463
   Other assets.........................................................        9,068         10,728
                                                                          -----------    -----------
                                                                          $ 1,254,329    $ 1,085,782
                                                                          ===========    ===========
LIABILITIES
   Notes payable........................................................      356,646        206,646
   Due to subsidiaries..................................................        8,404         12,778
   Accrued expenses and other liabilities...............................        9,176          4,117
                                                                          -----------    -----------
       Total liabilities................................................      374,226        223,541
                                                                          -----------    -----------

   Mandatory redeemable preferred stock, Series B.......................          --          14,689
   Mandatory redeemable preferred stock, Series C.......................       19,867         18,175

SHAREHOLDERS' EQUITY
   $3.375 Convertible preferred stock...................................      110,513        110,513
   $3.50 Series II convertible preferred stock..........................      139,157        139,157
   Common stock.........................................................          289            286
   Additional paid in capital...........................................      397,590        393,156
   Retained earnings....................................................      211,055        186,032
   Unrealized foreign currency translation adjustment...................      (20,602)       (14,961)
   Unrealized gains on securities available for sale....................       55,636         20,064
   Treasury stock.......................................................      (32,130)        (3,370)
   Notes receivable from officers and employees for stock purchases.....       (1,272)        (1,500)
                                                                          -----------    -----------
       Total shareholders' equity.......................................      860,236        829,377
                                                                          -----------    -----------
       Total liabilities and shareholders' equity.......................  $ 1,254,329    $ 1,085,782
                                                                          ===========    ===========
</TABLE>


                 See accompanying independent auditors' report.


                                       113

<PAGE>


                                                                     SCHEDULE II
                         PENNCORP FINANCIAL GROUP, INC.
                              (PARENT COMPANY ONLY)

                       CONDENSED  STATEMENTS  OF CASH FLOWS For the years  ended
              December 31, 1997, 1996 and 1995
                                ($ in thousands)

<TABLE>
<CAPTION>
                                                                          1997            1996           1995
                                                                       -----------    -----------    -----------
<S>                                                                    <C>            <C>            <C>
Cash flows from operating activities:
   Net earnings......................................................  $    50,140    $    88,287    $    56,346
   Adjustments to reconcile net earnings to net cash
     provided (used) in operating activities:
       Amortization of intangibles and depreciation..................        1,389          1,238          1,121
       Equity in earnings of subsidiaries............................      (76,524)       (72,305)       (46,377)
       Increase (decrease) in liabilities and due to subs............       12,870           (544)         7,898
       Other, net....................................................       (9,227)            79        (23,754)
                                                                       -----------    -----------    -----------
         Net cash provided (used) by operations......................      (21,352)        16,755         (4,766)
                                                                       -----------    -----------    -----------

Cash flows from investing activities:
   Cash expended in acquisition of business..........................          --             --         (18,363)
   Purchase of affiliate.............................................          --             --        (115,454)
   Purchase of equity security.......................................      (20,000)           --             --
   Issuance of surplus note to subsidiary............................          --        (155,000)           --
   Principal payment on surplus note.................................          --         100,000            --
   Dividend received from subsidiary.................................       14,677         11,283          1,603
   Capital contribution to subsidiary................................      (14,889)      (208,708)       (54,399)
   Other, net........................................................      (42,142)           --             --
                                                                       -----------    -----------    -----------
       Net cash used by investing activities.........................      (62,354)      (252,425)      (186,613)
                                                                       -----------    -----------    -----------

Cash flows from financing activities:
   Issuance of notes payable.........................................      250,000        230,000        101,500
   Issuance of common stock..........................................          --         155,450         51,210
   Issuance of preferred stock.......................................          --         139,157        110,513
   Purchase of treasury stock........................................      (28,760)           --          (2,984)
   Reduction of notes payable........................................     (100,000)      (273,353)       (30,000)
   Redemption of preferred stock.....................................      (14,705)           --         (33,415)
   Other, primarily dividends, net...................................      (20,464)       (15,198)        (4,950)
                                                                       -----------    -----------    -----------
       Net cash provided by financing activities.....................       86,071        236,056        191,874
                                                                       -----------    -----------    -----------

Increase in cash.....................................................        2,365            386            495
Cash at beginning of year............................................        2,099          1,713          1,218
                                                                       -----------    -----------    -----------
Cash at end of year..................................................  $     4,464    $     2,099    $     1,713
                                                                       ===========    ===========    ===========
Supplemental Disclosure:
   Interest paid.....................................................  $    20,946    $    16,921    $    15,308
   Taxes paid........................................................          --             200            --
Non-cash financing activities:
   Securities issued in conjunction with acquisition.................  $       --     $    14,999    $    28,750
   Note transferred in purchase of affiliate.........................          --             --          28,538
   Other ............................................................        1,281            948            --
</TABLE>

                 See accompanying independent auditors' report.

                                       114

<PAGE>



                                                                    SCHEDULE III


                         PENNCORP FINANCIAL GROUP, INC.

                       SUPPLEMENTARY INSURANCE INFORMATION
              For the years ended December 31, 1997, 1996 and 1995
                                ($ in thousands)

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

1996
----
Fixed benefit.......  $   127,091   $   294,068  $   169,311  $    22,730  $    63,663  $    16,446  $    55,161
Life................      105,063     1,212,374      169,974       88,220      137,867       12,010       48,706
Accumulation........       20,274     2,060,013        8,805       99,784       70,381        2,288       12,693
                      -----------   -----------  -----------  -----------  -----------  -----------  -----------
   Total............  $   252,428   $ 3,566,455  $   348,090  $   210,734  $   271,911  $    30,744  $   116,560
                      ===========   ===========  ===========  ===========  ===========  ===========  ===========

1995
----
Fixed benefit.......  $    93,735   $   290,156  $   174,708  $    22,946  $    64,465  $    15,580  $    48,373
Life................       80,243     1,098,375      119,062       55,457       77,468        9,741       45,324
Accumulation........       11,592       832,630        8,119       23,888       19,990        3,686        8,465
                      -----------   -----------  -----------  -----------  -----------  -----------  -----------
   Total............  $   185,570   $ 2,221,161  $   301,889  $   102,291  $   161,923  $    29,007  $   102,162
                      ===========   ===========  ===========  ===========  ===========  ===========  ===========
</TABLE>


                  See accompanying independent auditors' report


                                       115

<PAGE>



                                                                     SCHEDULE IV

                         PENNCORP FINANCIAL GROUP, INC.

                                   REINSURANCE
              For the years ended December 31, 1997, 1996, and 1994
                                ($ in thousands)

<TABLE>
<CAPTION>
                                                                                                     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, 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.....        204,027        29,962           2,527         176,592       1.4%
                                       -------------  ------------    ------------   -------------
                                       $     375,538  $     32,499    $      2,527   $     345,566
                                       =============  ============    ============   =============
Year ended December 31, 1996:
     Life insurance in force.........  $  31,498,035  $  5,884,609    $  1,779,439   $  27,392,865
                                       =============  ============    ============   =============
Premiums:
     Accident and health insurance...  $     169,727  $        416    $        --    $     169,311       -- %
     Life insurance/accumulation.....        189,098        11,639           1,320         178,779       0.7%
                                       -------------  ------------    ------------   -------------
                                       $     358,825  $     12,055    $      1,320   $     348,090
                                       =============  ============    ============   =============
Year ended December 31, 1995:
     Life insurance in force.........  $  25,913,359  $  3,621,309    $    404,852   $  22,696,902
                                       =============  ============    ============   =============
Premiums:
     Accident and health insurance...  $     175,517  $      1,036    $        227   $     174,708       0.1%
     Life insurance/accumulation.....        135,176        10,075           2,080         127,181       1.6%
                                       -------------  ------------    ------------   -------------
                                       $     310,693  $     11,111    $      2,307   $     301,889
                                       =============  ============    ============   =============
</TABLE>

                                  See accompanying independent auditors' report.


                                                        116

<PAGE>



                                                                      SCHEDULE V

                                          PENNCORP FINANCIAL GROUP, INC.

                                         VALUATION AND  QUALIFYING  ACCOUNTS For
                               the years ended December 31, 1997, 1996 and 1995
                                                  (In thousands)

<TABLE>
<CAPTION>
                                          Balance at      Charge to      Charge to                     Balance at
                                           Beginning      Cost and       to Other                        End of
                                           Of Period      Expenses       Accounts       Deductions       Period
                                           ---------      --------       --------       ----------       ------
<S>                                     <C>            <C>             <C>            <C>            <C>
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

1996:
Mortgage loans on real estate.........        4,211(a)         --              --             --           4,211
Allowance for bond losses.............          189(a)         --              --             --             189
Unearned loan charges.................          266(a)         --              --             --             266
Accounts and notes receivable.........        8,388          4,082             --           5,942          6,528

1995:
Mortgage loans on real estate.........        2,314(b)         --              --           2,314            --
Accounts and notes receivable.........        8,392            615             --             619          8,388

-------------------
(a)  Amount  recorded as a purchase  GAAP  adjustment  in  conjunction  with the
     acquisition of United Life.
(b)  Amount  recorded as a purchase  GAAP  adjustment  in  conjunction  with the
     acquisition of Integon Life.
</TABLE>


                 See accompanying independent auditors' report.


                                       117

<PAGE>



                                INDEX TO EXHIBITS

          2.1  Purchase   Agreement  among  I.C.H.   Corporation,   SWL  Holding
               Corporation,  Care Financial  Corporation,  Facilities Management
               Installation,   Inc.  and  Southwestern   Financial  Corporation,
               Southwestern   Financial   Services   Corporation   and  PennCorp
               Financial Group,  Inc., dated as of December 1, 1995 and Addendum
               to Purchase Agreement dated as of December 14, 1995. (6)

          2.2  Amended and Restated  Stock  Purchase  Agreement  between  United
               Companies  Financial  Corporation  and Pacific  Life and Accident
               Insurance Company dated as of July 24, 1996. (4)

          3.1  Restated By-Laws of PennCorp Financial Group, Inc. (12)

          3.2  Third Restated Certificate of Incorporation of PennCorp Financial
               Group, Inc. (20)

          4.1  Certificate  of  Elimination  for Series A  Cumulative  Preferred
               Stock. (5)

          4.2  Certificate of Designation of Series B Preferred Stock. (5)

          4.3  Certificate of Designation of Series C Preferred Stock. (5)

          4.4  Corrected   Certificate  of  Designation  of  $3.375  Convertible
               Preferred Stock. (5)

          4.5  Certificate   of  Designation  of  $3.50  Series  II  Convertible
               Preferred Stock (3)

          4.6  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. (11)

          10.1 Surplus Debenture Number Four in the original principal amount of
               $162,539,890,  issued  by  Pacific  Life and  Accident  Insurance
               Company to PennCorp Financial Group, Inc., dated January 1, 1994.
               (10)

          10.2 Surplus Debenture Number Five in the original principal amount of
               $17,606,203,  issued  by  Pacific  Life  and  Accident  Insurance
               Company to PennCorp Financial Group, Inc., dated September 29,
               1994. (9)

          10.3 Surplus Debenture Number Six in the original  principal amount of
               $55,000,000,  issued  by  Pacific  Life  and  Accident  Insurance
               Company to PennCorp Financial Group, Inc., dated July 24, 1996.
               (14)

          10.4 10%  Promissory  Note  in  the  original   principal   amount  of
               $30,661,996,   issued   by   American-Holdings   Corporation   to
               Pennsylvania Life Insurance Company, dated July 1, 1996. (14)

          10.5 Certificate of Contribution in the original  principal  amount of
               $54,332,790   issued  by   Integon   Financial   Life   Insurance
               Corporation to Integon Life Corporation, dated July 25, 1995. (5)

                             MANAGEMENT COMPENSATION
                               RELATED AGREEMENTS

              10.6  Intentionally omitted.

              10.7  PennCorp Financial, Inc. Retirement and Savings Plan. (13)

                                       118

<PAGE>


              10.8  PennCorp  Financial,  Inc. Executive Officer Incentive Plan.
                    (13)

              10.9  PennCorp Financial Group, Inc. 1992 Stock Option Plan. (13)

              10.10 PennCorp  Financial Group,  Inc. Senior  Management  Warrant
                    Award Program. (13)

              10.11 Form of Restricted  Stock Agreement by and between  PennCorp
                    Financial Group, Inc. and certain participants, effective as
                    of April 1, 1994. (9)

              10.12 Employment  Agreement between PennCorp Financial Group, Inc.
                    and David J. Stone entered into June 7, 1996. (14)

              10.13 Employment  Agreement between PennCorp Financial Group, Inc.
                    and Steven W. Fickes entered into June 7, 1996. (14)

              10.14 Amendment  Number  One  to  Employment   Agreement   between
                    PennCorp  Financial  Group,  Inc.  and David J. Stone  dated
                    April 28, 1997. (15)

              10.15 Amendment  Number  One  to  Employment   Agreement   between
                    PennCorp  Financial  Group,  Inc. and Steven W. Fickes dated
                    April 28, 1997. (15)

              10.16 Amendment No. 2 to  Employment  Agreement  between  PennCorp
                    Financial  Group,  Inc.  and  David J.  Stone  entered  into
                    January 5, 1998. (1)

              10.17 Amendment No. 2 to  Employment  Agreement  between  PennCorp
                    Financial  Group,  Inc.  and Steven W. Fickes  entered  into
                    January 5, 1998. (1)

              10.18 Executive  Retention  Agreement between Charles  Lubochinski
                    and PennCorp Financial Group, Inc. (1)

              10.19 Schedule of similar Executive Retention Agreements. (1)

              10.20 PennCorp  Financial  Group,  Inc. 1996 Stock Award and Stock
                    Option Plan. (14)

              10.21 Amendment Number One to PennCorp  Financial Group, Inc. 1996
                    Stock Award and Stock Option Plan. (20)

              10.22 PennCorp  Financial Group, Inc. 1996 Senior Executive Annual
                    Incentive Award Plan. (14)

         10.23 Real Estate Purchase and Sale Agreement  between Peoples Security
               Life Insurance Company and PennCorp  Financial Group, Inc., dated
               March 24, 1995. (8)

         10.24 Registration  Rights  Agreement  dated as of December  14,  1995,
               between PennCorp Financial Group, Inc., I.C.H.  Corporation,  SWL
               Holding Corporation and Care Financial Corporation. (6)

         10.25 Conversion,  Standstill and Registration Rights Agreement between
               United  Companies  Financial  Corporation and PennCorp  Financial
               Group, Inc. dated as of July 24, 1996. (14)

                                       119

<PAGE>



         10.26 Registration  Rights Agreement dated as of August 2, 1996, by and
               among  PennCorp   Financial  Group,   Inc.,  Smith  Barney  Inc.,
               Donaldson,  Lufkin & Jenrette Securities  Corporation and Merrill
               Lynch, Pierce, Fenner & Smith Incorporated. (14)

         10.27 Stockholders   Agreement   dated   December   14,  1995   between
               Southwestern  Financial  Corporation  and  the  Security  holders
               listed on the signature pages thereof. (6)

         10.28 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. (16)

         10.29 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. (17)

         10.30 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.
               (17)

         10.31 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. (17)

         10.32 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. (17)

         10.33 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. (17)

         10.34 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. (17)

         10.35 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. (17)

         10.36 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. (17)

         10.37 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. (17)

         10.38 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. (17)

                                       120

<PAGE>



         10.39 Note Purchase,  Release and Settlement Agreement,  dated July 13,
               1997, executed by Lone Star Liquidating Trust, PennCorp Financial
               Group, Inc. and Southwestern Financial Corporation . (18)

         10.40 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. (19)

         10.41 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. (19)

         12    Computation of ratio of earnings to fixed charges. (1)

         21    List of subsidiaries of the Registrant. (1)

         22.1  Auditors consent. (1)

         22.2  Auditors consent. (1)

         27    Financial Data Schedule. (1)

(1)  Filed herewith.

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

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

(5)  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.

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

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

(8)  Such exhibit is incorporated  by reference to the Quarterly  Report on Form
     10-Q for the three months ended June 30, 1995 of PennCorp  Financial Group,
     Inc.

(9)  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.

                                       121

<PAGE>



(10) 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.

(11) 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.

(12) 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.

(13) 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.

(14) 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.

(15) 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.

(16) 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.

(17) 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.

(18) 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.

(19) 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.

(20) 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.


                                       122