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                                  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, 2000

                         Commission File Number 1-11422

                        SOUTHWESTERN LIFE HOLDINGS, INC.
             (Exact name of Registrant as specified in its charter)

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

       717 North Harwood Street
             Dallas, Texas                               75201
(Address of principal executive offices)               (Zip code)


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

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

                                      None.

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

                          Common Stock, $.01 par value
                               Title of Each Class

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  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 amendment to this
Form 10-K. [ ]

Indicate  by check mark  whether  the  Registrant  has filed all  documents  and
reports  required  to be filed by  Sections  12, 13, or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court. Yes [X] No [ ]

The aggregate market value of the voting common stock held by non-affiliates of
the registrant as of March 30, 2001: $55,709,255.

The number of Common Stock shares outstanding as of March 30, 2001, was
9,059,000.

                       DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Form 10-K  incorporates by reference  certain  information from
the Registrant's  definitive  proxy statement for the 2001 annual  stockholders'
meeting.

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



<PAGE>



                           ANNUAL REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 2000

                                TABLE OF CONTENTS

                                                                            Page
PART I
Item 1.  Business  ............................................................3
Item 2.  Properties...........................................................18
Item 3.  Legal Proceedings....................................................18
Item 4.  Submission of Matters to a Vote of Security Holders..................21

PART II
Item 5.  Market for the Registrant's Common Equity and
           Related Shareholder Matters........................................22
Item 6.  Selected Consolidated Financial Data.................................23
Item 7.  Management's Discussion and Analysis of Financial Condition and
           Results of Operations..............................................24
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...........44
Item 8.  Financial Statements and Supplementary Data..........................48
Item 9.  Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure...............................................96

PART III
Item 10. Directors and Executive Officers of the Registrant...................96
Item 11. Executive Compensation...............................................96
Item 12. Security Ownership of Certain Beneficial Owners and Management.......96
Item 13. Certain Relationships and Related Transactions.......................96

PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....97



                                        2

<PAGE>



                                     PART I

Item 1.   Business

GENERAL DESCRIPTION AND HISTORY

     Southwestern  Life  Holdings,  Inc.  ("SWL  Holdings"  or  the  "Company"),
formerly known as PennCorp Financial Group, Inc.  ("PennCorp"),  incorporated in
Delaware in 1989, is principally an insurance  holding company.  The name of the
Company was  changed  effective  June 13,  2000,  the date the  recapitalization
transactions  (as further  discussed below) were  consummated.  The Company owns
100% of SWFC Nevada, Inc. ("SWFC"),  formerly Southwestern Financial Corporation
("SW Financial").  SWFC's wholly-owned life insurance  subsidiary,  Pacific Life
and  Accident  Insurance  Company  ("PLAIC"),  owns  100% of  Southwestern  Life
Insurance Company  ("Southwestern  Life"). As part of a subsidiary  realignment,
Security  Life  and  Trust  Insurance  Company  ("Security  Life"),  formerly  a
wholly-owned life insurance company, was merged into Southwestern Life effective
June  30,  2000.  Additionally,   the  Company  owns  KB  Management,  LLC  ("KB
Management"), which provides management and advisory services to the Company and
its insurance  subsidiaries,  and Southwestern  Financial  Services  Corporation
("SFSC"),  which has a services agreement with the life insurance  affiliates to
provide personnel, data processing and other operational services at cost.

     The Company  markets  and  underwrites  a broad range of life,  annuity and
accident  and  health  insurance  products  to lower and  middle-income  markets
throughout  the  United  States.   Life  products   include  term  products  and
traditional  whole life or universal  life  products that build cash values that
are   available  to  the   policyholder.   Annuity   products  are  utilized  by
policyholders primarily as a means of tax deferred savings.  Accident and health
products are currently limited to long-term care, cancer and accident coverages.
The Company's insurance products are sold through both independent and exclusive
agents.

     Previously,   PennCorp  also  owned  Pennsylvania  Life  Insurance  Company
("PLIC")  and its  wholly-owned  subsidiary,  PennCorp  Life  Insurance  Company
(collectively  referred to as "Penn Life", sold July 30, 1999);  Peninsular Life
Insurance  Company("Peninsular",  sold July 30,  1999);  Professional  Insurance
Company  ("Professional",  sold March 31, 1999); Pioneer Security Life Insurance
Company ("Pioneer Security") and its wholly-owned subsidiaries American-Amicable
Life Insurance Company of Texas and Pioneer American  Insurance Company (Pioneer
Security and its subsidiaries are  collectively  referred to as "AA Life",  sold
February 4, 2000);  Constitution  Life Insurance Company  ("Constitution",  sold
July 30, 1999); Union Bankers Insurance Company ("Union Bankers",  sold July 30,
1999);  Marquette  National Life Insurance Company  ("Marquette",  sold July 30,
1999); Occidental Life Insurance Company ("OLIC", sold February 4, 2000); United
Life and Annuity  Insurance  Company  ("United  Life",  sold April 30, 1999); UC
Mortgage  Corp.  ("UC",  sold  April  30,  1999);  Cyberlink  Development,  Inc.
("Cyberlink",  sold April 30, 1999);  and KIVEX,  Inc.  ("KIVEX",  sold June 30,
1999),  an internet  service  provider.  United Life, UC,  Cyberlink and certain
assets of Marketing  One,  Inc.  ("Marketing  One", a  wholly-owned  third party
marketing  organization  sold  November 30, 2000)  collectively  are referred to
herein as "United  Life  Assets."  Penn Life,  Peninsular,  Constitution,  Union
Bankers and  Marquette  collectively  are  referred  to herein as "Career  Sales
Division."  AA Life and  Occidental  collectively  are  referred  to  herein  as
"Payroll  Sales  Division." As a result of the material  impact of the companies
sold to the aggregate  operating  results of the Company,  this Annual Report on
Form 10-K includes a discussion of these  companies which are referred to herein
as "Businesses Sold" or "Businesses Held for Sale."

     On  January  10,  2000,  PennCorp  announced  that  it had  agreed  to sell
Southwestern  Life and Security Life to Reassure America Life Insurance  Company
("Reassure  America"),  a  subsidiary  of Swiss  Reinsurance  Company  of Zurich
("Swiss  Re"),  for $260  million  subject  to  certain  adjustments,  and would
accomplish the transaction through the filing of a voluntary petition for relief
under Chapter 11 of the Federal Bankruptcy Code.

     On February 7, 2000,  PennCorp filed a voluntary  petition for relief under
Chapter 11 of the Bankruptcy Code in the United States  Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court").  From the petition date, PennCorp
continued   to   operate   and   manage   its   assets   and   business   as   a
debtor-in-possession as authorized by provisions of the Bankruptcy Code. None of
PennCorp's insurance subsidiaries were involved in the bankruptcy filing.


                                        3

<PAGE>



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

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

     On April 14,  2000,  the Texas  Department  of  Insurance  issued its order
approving the Form A acquisition  statement  submitted by Rapoport and Inverness
pursuant to the  Recapitalization  Plan. On June 5, 2000, the  Bankruptcy  Court
confirmed the Recapitalization Plan.

     On June 13, 2000, the Company  consummated  the  Recapitalization  Plan and
emerged  from the  Chapter  11  proceedings  as SWL  Holdings.  Pursuant  to the
Recapitalization  Plan, the Company issued  5,175,000  shares of common stock in
exchange for all of the  outstanding  preferred  stock of PennCorp.  The Company
also issued  1,960,000  shares of common  stock  pursuant  to a rights  offering
underwritten by Inverness and Vicuna and 1,840,000 shares to Rapoport and Sharpe
in  connection  with their  investments.  These shares were issued at a price of
$12.50 per share and the Company  received $46.0 million in cash (net of related
expenses of $1.5 million).  Additionally,  the Company  awarded 60,000 shares to
two  executive  officers and 24,000  shares to a former  officer and director of
PennCorp in consideration of consulting services rendered in connection with the
recapitalization  transaction. All shares of PennCorp's former common stock were
canceled for no value. In addition,  the Company consummated a new $95.0 million
credit facility and borrowed $81.0 million under it at closing. According to the
Recapitalization  Plan,  the  Company  received  $49.1  million  from  PLAIC  as
principal  and  interest  payments on an  existing  surplus  debenture  and $5.9
million  as  dividends.  The $55.0  million  was made  available  to PLAIC  from
Southwestern  Life and Security Life as an extraordinary  dividend.  The Company
used these  proceeds to repay the principal  balances of  PennCorp's  senior and
subordinated  debt  aggregating  $179.6  million  and to pay a break fee of $6.0
million to Reassure  America  upon the  termination  of its contract to purchase
Southwestern Life and Security Life. Any and all other claims and liabilities of
PennCorp were paid in accordance with their terms.

     Shares  of the  common  stock of SWL  Holdings  are  listed  on the  Nasdaq
National Market under the symbol "SWLH."

ORGANIZATIONAL CHANGES

     The Company has experienced significant changes in the past three years. On
January  2,  1998,  PennCorp  acquired  the  remaining  equity  interests  in SW
Financial,  which became a wholly-owned  subsidiary.  This was accomplished with
the acquisition of the SW Financial Controlling Interest (the holdings of common
stock and/or common stock warrants of SW Financial)  from KB Investment  Fund I,
LP ("KB Fund") and Messrs. Steven W. Fickes and David J. Stone, former executive
officers and directors of PennCorp. On January 5, 1998, PennCorp consummated the
acquisition of the interest of Messrs.  Fickes and Stone in KB  Management,  LLC
("KB  Management"),  KB Fund and KB  Consultants,  LLC (the  "Fickes  and  Stone
Knightsbridge   Interests").   In  order  to  stabilize  the  Company's  capital
structure, increase liquidity and materially reduce its indebtedness the Company
sought to sell certain assets.  Professional was sold March 31, 1999, the United
Life  Assets  were sold  April 30,  1999,  KIVEX was sold June 30,  1999 and the
Career Sales Division was sold on July 30, 1999. On February 4, 2000 the Company
consummated  the sale of the Payroll  Sales  Division and sold  Marketing One on
November 30, 2000.


                                        4

<PAGE>



     The  following  chart  summarizes  the   classification  of  the  Company's
principal operating subsidiaries for the years ended December 31, 2000, 1999 and
1998:

<TABLE>
<CAPTION>
                                        2000                               1999                                 1998
                                       ------                             ------                               -----

                                            Businesses                     Businesses Held for                  Businesses Held for
                              Ongoing          Sold           Ongoing     Sale/Businesses Sold     Ongoing     Sale/Businesses Sold
                              -------          ----           -------     --------------------     -------     --------------------
<S>                             <C>              <C>             <C>                <C>               <C>              <C>
Ongoing Operations:
Corporate
SWL Holdings/PennCorp.           X                               X                                    X
KB Management(1)                 X                               X                                    X
SWFC/SW Financial(2)             X                               X                                    X
SFSC                             X                               X                                    X
Life Insurance Companies
Southwestern Life(2)             X                               X                                    X
Security Life(3)                N/A                              X                                    X
PLAIC                            X                               X                                    X
Businesses Sold:
United Life(4)                                                                      X                                    X
Professional(5)                                                                     X                                    X
Marketing One(6)                                X                X                                    X
KIVEX(7)                                                                            X                                    X
Payroll Sales Division
   AA Life(8)                                   X                X                                    X
   OLIC(8)                                      X                X                                    X
Career Sales Division
   PennLife(9)                                                                      X                                    X
   Peninsular(9)                                                                    X                                    X
   Union Bankers(10)                                                                X                                    X
   Constitution(10)                                                                 X                                    X
   Marquette(10)                                                                    X                                    X
</TABLE>

 (1)  Acquired January 5, 1998.
 (2)  Became wholly-owned subsidiaries with acquisition of remaining interests
          on January 2, 1998.
 (3)  Merged into Southwestern Life effective June 30, 2000.
 (4)  Transferred to Businesses Held for Sale in 1998 and sold April 30, 1999.
 (5)  Transferred to Businesses Held for Sale in 1998 and sold March 31, 1999.
 (6)  Sold November 30, 2000.
 (7)  Transferred to Businesses Held for Sale in 1998 and sold June 30, 1999.
 (8)  Sold February 4, 2000.
 (9)  Transferred to Businesses Held for Sale in 1998 and sold July 30, 1999.
 (10) Became wholly-owned subsidiaries with acquisition of remaining
      interests on January 2, 1998; transferred to Businesses Held for
      Sale in 1998 and sold July 30, 1999.


                                        5

<PAGE>



CURRENT STRUCTURE

         The current organization structure of the Company is as follows:
[GRAPHIC OMITTED]

---------------
(1)  Includes ROP Financial Group ("ROP"),  SW Houston Hotel, Ltd. ("SW Hotel"),
     SWL Marketing Services, Inc. and SWL Preneed Services, Inc.

DISPOSITIONS

     On November 30, 2000, the Company sold  Marketing One for nominal  proceeds
and recognized a loss of $14,000 from the sale.

     On February 4, 2000,  PennCorp  consummated  the sale of the Payroll  Sales
Division  receiving  total cash proceeds of $103.3  million.  As a result of the
sale,  unrealized  losses on  securities  available  for sale  decreased by $9.9
million. PennCorp recognized a loss of $8.4 million from the sale. PennCorp used
$100.0 million of the proceeds to repay a then-existing bank credit facility.

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

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

     On April 30, 1999, PennCorp  consummated the sale of the United Life Assets
to ING  America  Insurance  Holdings,  Inc.  ("ING").  United  Life  principally
marketed fixed and variable annuities through financial institutions and

                                        6

<PAGE>



independent general agents, primarily in the southern and western United States.
The purchase  consideration  totaled $154.1 million including a dividend of $2.1
million  that  was  paid by  United  Life at  closing.  The  cash  consideration
ultimately was reduced as a result of PennCorp's  obligation to purchase certain
mortgages and other assets from United Life as well as for  transaction  related
costs at  closing.  PennCorp  received  net cash  proceeds  of  $136.5  million.
PennCorp realized a loss from the sale totaling $3.9 million. As a result of the
sale,  unrealized  gains on securities  held for sale decreased by $1.7 million.
PennCorp  subsequently  sold  substantially  all of the  mortgages  retained  by
PennCorp as a part of the sale of the United Life Assets and  received  proceeds
aggregating $8.0 million.  The Company may be obligated to repurchase certain of
the  mortgages  sold. At December 31, 2000,  the Company had  established a $1.2
million liability related to these contingencies.

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

ACQUISITION OF SW FINANCIAL CONTROLLING INTEREST AND KB INTERESTS

     On January 2, 1998,  PennCorp acquired the remaining equity interests in SW
Financial,  which became a wholly-owned  subsidiary.  The remaining interest was
acquired  from KB Fund and Messrs.  Steven W. Fickes and David J. Stone,  former
executive officers and directors of PennCorp, for an aggregate purchase price of
$73.7 million (not including acquisition expenses).

     On January 5, 1998, PennCorp  consummated the acquisition of the Fickes and
Stone  Knightsbridge  Interests  for total  consideration  of $10.6 million (not
including acquisition expenses). Under the terms of the transaction,  Mr. Fickes
was to receive  consideration in the form of estimated annual interest payments,
ranging from $301,000 to $330,000, on April 15 each year through 2001 and was to
be issued 173,160 shares of PennCorp's  common stock on April 15, 2001. Prior to
the  recapitalization,  PennCorp's Board of Directors approved a settlement with
Mr. Fickes pursuant to which PennCorp paid him approximately  $700,000 to settle
all outstanding claims including claims arising from this transaction.  PennCorp
issued  173,160  shares to Mr.  Stone in July  1998.  These  shares  were  later
cancelled for no consideration pursuant to the Recapitalization Plan.

     Information  relating to the relationship between PennCorp and the KB Fund,
the  acquisition  of the  Fickes  and  Stone  Knightsbridge  Interests  and  the
Southwestern  Financial  Controlling  Interest  appears  in Note 3 of  Notes  to
Consolidated Financial Statements.

INSURANCE OPERATIONS AT DECEMBER 31, 2000

     The remaining insurance companies (Southwestern Life and PLAIC) market life
insurance  and, to a lesser  extent,  annuity and accident  and health  products
through  independent  and  exclusive  agents who sell  directly  to  individuals
primarily in the southwestern and southeastern United States.

PRODUCTS

General

     Southwestern Life and PLAIC underwrite a variety of insurance products with
the  primary  emphasis  on modest  premium  policies  in the life,  annuity  and
accident and health  product  sectors.  Life products  include term products and
traditional  whole life or universal  life products which build cash values that
are available to the  policyholder.  Annuity  products  include various forms of
annuity products which are utilized by policyholders primarily as a means of tax
deferred  savings.  Accident and health products include  long-term care, cancer
and accident only.


                                        7

<PAGE>



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

     The following  table presents  revenues and  percentages of revenues of the
Company's  insurance  operations  derived from these product types for the years
ended December 31, 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                              2000                      1999                      1998
                                    ------------------------  ------------------------  ------------------------
        Insurance Product Type       Revenues         %        Revenues          %        Revenues         %
     ----------------------------   -----------  -----------  -----------  -----------  -----------  -----------
                                                                   ($ in millions)

     <S>                            <C>              <C>      <C>              <C>      <C>              <C>
     Life.......................    $     216.5       87.9%   $     252.8       81.9%   $     246.9       78.0%
     Accident and health.........           1.1        0.4            0.3        0.1            2.6        0.8
     Annuities...................          28.7       11.7           55.5       18.0           67.1       21.2
                                    -----------  ---------    -----------  ---------    -----------   --------
       Total.....................   $     246.3      100.0%   $     308.6      100.0%   $     316.6      100.0%
                                    ===========  =========    ===========  =========    ===========   ========
</TABLE>

     The following  discussion of the Company's  principal  products  relates to
Southwestern Life and PLAIC at December 31, 2000.

Life Insurance Products

     Traditional  Whole Life.  The  Company's  whole life policies are permanent
insurance  products  that  combine  life  insurance  protection  with a  savings
component  or cash value  that  gradually  increases  in  amount.  Typically,  a
guaranteed fixed premium, which is higher than for comparable term coverage when
the  policyholder  is younger,  but less than  comparable  term  coverage as the
policyholder  grows older,  is paid over a period of years. A  policyholder  may
borrow  against  the  policy's  accumulated  cash  value,  but the amount of any
outstanding  loans  decreases  the cash  value and the death  benefit  under the
policy.  A policyholder  may surrender a policy and receive the  accumulated net
cash value. As of December 31, 2000, there were approximately 195,000 whole life
policies in force with $505 million in gross face amount of insurance and $364.4
million in future policy benefit reserves.

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

     The majority of sales of individual  life insurance  products,  measured by
premium  volume,  has been derived from  universal and  interest-sensitive  life
insurance products. The Company's universal and interest-sensitive life products
provide  advantages  generally not available to its  traditional  whole life and
term  life  policyholders,  such  as  flexibility  in  available  coverages  and
flexibility  in the  amount and timing of premium  payments.  In  addition,  the
Company's universal and interest-sensitive  life products can, in some respects,
provide higher returns and greater cash values to policyholders as compared with
traditional  whole life  insurance  products.  The Company's  universal life and
interest-sensitive  life insurance products are marketed to individuals directly
and  through  qualified  retirement  plans,  deferred  compensation  plans,  and
employer  sponsored payroll deduction plans. As of December 31, 2000, there were
approximately  155,000 universal and  interest-sensitive  life policies in force
with $13.2 billion in gross face amount of insurance and $1.3 billion in account
value and other policy liabilities.

     Term  Life.  Term life  products  offer  pure  insurance  protection  for a
specified period of time, typically one, five or ten years. The Company offers a
variety  of  term  life  products  that  include  some  or all of the  following
features:  current and  guaranteed  premium rates that are level for a specified
number of years; preferred smoker,  preferred nonsmoker,  nonsmoker,  and smoker
underwriting  classes;  and conversion to permanent  insurance allowed to age 65
with premium  credit.  The Company also offers a 10-year level premium term life
policy which is renewable to age 70 and features  smoker and non-smoker  premium
classes, a death benefit equal to the face amount, an accelerated benefit of 50%
of the face amount for certain critical illnesses and a 100% accelerated benefit
payable upon diagnosis of some

                                        8

<PAGE>



forms of cancer. As of December 31, 2000, there were  approximately  42,000 term
life  policies in force with $6.6 billion in gross face amount of insurance  and
$27.5 million in future policy benefit reserves.

     Total sales of individual  life  insurance by  Southwestern  Life and PLAIC
were approximately $12.4 million,  $20.1 million and $26.6 million for the years
ended December 31, 2000, 1999 and 1998, respectively.

Annuity Products

     The principal  annuity products  marketed by Southwestern Life and PLAIC at
December 31, 2000 consist of flexible premium deferred  annuities  ("FPDAs") and
single premium deferred annuities ("SPDAs").

     Effective May 1, 2000, Southwestern Life and Security Life each consummated
with RGA Reinsurance Company ("RGA") a 100% indemnity  coinsurance  agreement of
all of their respective deferred annuity business.  (See Management's Discussion
and  Analysis of Financial  Condition  and Results of  Operations  and Note 3 of
Notes to Consolidated Financial  Statements).  The Company continues to reinsure
to RGA 100% of its deferred annuities sold since May 1, 2000. As of December 31,
2000,  the Company had  reinsured  with RGA deferred  annuities  with an account
value of $397.4 million.

     At  December  31,  2000,  annuity  liabilities  not  reinsured  by RGA were
composed of $617,000 of SPDA liabilities  issued by PLAIC, which were subject to
surrender  charges  averaging 8% as of December  31, 2000 and $116.7  million of
other annuity liabilities (principally in benefit annuities).

     Total sales of annuities by Southwestern Life and PLAIC were  approximately
$2.8 million,  $9.8 million and $31.6  million for the years ended  December 31,
2000, 1999 and 1998, respectively.

Accident and Health Products

     Historically,  most of the Company's  sales of accident and health products
were produced by Businesses Held for Sale.

     Southwestern Life underwrites long-term care products which are marketed to
retirees,  older  self-employed  individuals  and other persons in middle income
levels.  The  Company  believes  that the market for  long-term  care  insurance
products  is  attractive  because  of the  general  aging of the  United  States
population  and the lack of savings  resources to cover  prolonged  illnesses or
convalescent  care.  As of December 31,  2000,  there were  approximately  3,000
long-term care policies in force  representing  $3.9 million in gross annualized
premiums  and $4.0 million in future  policy  benefit  reserves.  Total sales of
long-term  care products by  Southwestern  Life during 2000,  1999 and 1998 were
approximately $1.7 million, $2.9 million and $1.0 million, respectively.

     The Company  recently began offering an accident only policy which includes
a specified benefit for each day of hospital confinement,  an emergency accident
benefit,  an  accidental  death  and  dismemberment  benefit,  and  an  optional
recuperation benefit which provides a monthly income for up to six months. Sales
in 2000 were minimal.

     The Company  recently  introduced  a cancer  indemnity  product that pays a
specified benefit of up to $500 per day for each day the insured is hospitalized
due to cancer.  There is no lifetime maximum;  however,  at age 65, the benefits
are reduced to 50%. The product has an optional  benefit  returning all premiums
paid,  less any  benefits  paid,  if the policy  remains in force until the 20th
policy anniversary. No policies were sold in 2000.


                                        9

<PAGE>



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

<TABLE>
<CAPTION>
                                                2000                        1999                         1998
                                    ---------------------------- --------------------------- -----------------------------
                                             Accident                     Accident                     Accident
                                      Life  and Health Annuities  Life   and Health Annuities  Life   and Health Annuities
                                    ------- ---------- --------- ------- ---------- --------- ------- ---------- ---------
<S>                                 <C>       <C>       <C>      <C>       <C>       <C>      <C>      <C>        <C>
Policies in force - January 1..     585,420    45,019    28,318  779,932   697,018    86,612  506,913   654,936    69,769
   New issues..................      17,461     1,196       237   90,921     9,932     1,189   72,080    89,218     8,715
   Business acquired, net......          --        --        --       --        --        --  301,537   112,098    35,511
   Businesses sold(1), net.....    (175,038)  (42,519)   (2,901)(212,718) (652,417)  (53,343)      --        --        --
   Policies terminated/reinsured    (35,689)     (343)  (19,269) (72,715)   (9,514)   (6,140)(100,598) (159,234)  (27,383)
                                    -------  --------  --------  -------  -------- --------- --------  --------  --------
   Policies in force - December 31  392,154     3,353     6,385  585,420    45,019    28,318  779,932   697,018    86,612
                                    =======  ========  ========  =======  ========= ========= ======== ========  ========
</TABLE>

(1)  Reflects  amounts  as if  Businesses  Held  for  Sale  were  sold as of the
     beginning of the year.

MARKETING AND DISTRIBUTION

     Southwestern  Life is  licensed  to market  its  insurance  products  in 41
states, the District of Columbia,  and in Guam. PLAIC is licensed only in Texas.
The Company markets and distributes  its products  through both  independent and
exclusive agents who sell on an individual basis.

     The  following  tables  illustrate,  by direct cash premium  collected  (as
reported to insurance  regulatory  authorities)  and relative  percentages,  the
principal states in which  Southwestern Life and PLAIC collected in excess of 4%
of policy revenues for the year ended December 31, 2000.

<TABLE>
<CAPTION>
                                Direct Premium Collected
                                ------------------------
               Jurisdiction                    Amount       Percentage
               ------------                    ------       ----------
                                           ($ in thousands)
<S>                                        <C>                <C>
               Texas....................   $   43,223          26.0%
               North Carolina............      22,542          13.6
               Georgia...................      15,627           9.4
               California................      10,425           6.3
               Florida...................       9,710           5.8
               Virginia..................       7,477           4.5
                                           ----------       -------
                 Subtotal................     109,004          65.6
               All Others................      57,242          34.4
                                           ----------       -------
                 Total..................   $  166,246         100.0%
                                           ==========       =======
</TABLE>

Distribution Systems

     The  Company's  products are  distributed  by  independent  brokerages  and
exclusive agents to individual  customers utilizing  independent field marketing
directors,  state  and  area  sales  managers,   affiliations  with  independent
marketing  organizations,  financial  institutions,  and financial planners. The
sales  agents make sales  presentations  on a  one-on-one  basis with  potential
prospects,  and are often  faced  with  competition  from  other  agents  and/or
products  from  other  companies.  Exclusive  agents  are  provided  with  leads
generated  through  direct  mail  inquiries  and contact  with small  companies,
employer  groups,  and  associations.  In order to receive  these  pre-qualified
leads, the Company requires these agents to market the Company's life and health
products exclusively.


                                       10

<PAGE>



     The following tables set forth information  regarding  Southwestern  Life's
independent brokerage and exclusive agent distribution system.

<TABLE>
<CAPTION>
                                                                                  1998       1999       2000
                                                                                --------  ---------  ---------
                                                                                          ($ in thousands)
<S>                                                                             <C>       <C>         <C>
     Agents under contract...................................................     16,607    14,663       8,124
     Number of agents annually producing new business........................      4,353     3,955       2,397
     Paid annualized new life and health business premiums..................    $ 13,134  $ 15,587    $ 11,356
     Paid annualized new business premium per agent.........................    $    3.0  $    3.9    $    4.7
</TABLE>

INSURANCE UNDERWRITING

     The Company generally utilizes the underwriting manual of a large reinsurer
as a guide for risk selection. The Company considers its underwriting philosophy
to be in  line  with  the  majority  of the  life  insurance  industry.  If full
underwriting  is required,  the Company  reviews the policy  application  and an
attending  physician's  report  and may  require a  paramedical  examination  or
complete  physical  examination  depending on the age of the  applicant  and the
amount of coverage  requested.  If the total amount of coverage applied for plus
any  coverage  in  force  with  the  Company  exceeds  $100,000,  a  prospective
policyholder  must submit a screening for antibodies  related to acquired immune
deficiency syndrome ("AIDS"), to the extent permitted by law. Life products that
are  specifically  designed  for  simplified  issue are priced  for the  greater
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 extent  permitted by law in underwriting  and
pricing  decisions.  During the twelve months ended December 31, 2000,  1999 and
1998, the Company  estimated its Insurance  Operations paid  approximately  $1.2
million,  $459,000 and $327,000,  respectively,  in death benefits (representing
less  than 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.

     The Company has  identified a block of  approximately  272 policies  with a
total face amount of  approximately  $27.4 million which it suspects  could have
been issued on applications containing material misrepresentations, particularly
concerning  the  treatment  for or the  diagnosis of AIDS or HIV. The Company is
investigating  these  policies  and is taking  steps to rescind any  contestable
policy where material  misrepresentations are found.  Approximately 194 policies
with a face amount totaling  approximately  $20.9 million have been rescinded to
date as part of this  effort.  Of the  remaining  policies  which  have not been
rescinded,  32 (total face amount  approximately  $2.7  million) have lapsed and
three (total face amount approximately $282,000) have been surrendered,  leaving
43 of these policies (total face amount  approximately $3.5 million) in force at
present.

INVESTMENT PORTFOLIO

     The Company's  investment  portfolio  (including  total invested assets and
cash and cash  equivalents)  is managed with the objectives of maintaining  high
credit quality and liquidity, maximizing current income within acceptable levels
of risk,  minimizing  market  and  credit  risk  and  matching  the  anticipated
maturities  of  investments  to the  Company's  liabilities.  To  achieve  these
objectives,  the portfolio consists primarily of investment-grade fixed maturity
securities,  which  accounted for  approximately  79.1% of the  Company's  total
invested  assets at December 31, 2000. The remainder of the portfolio  consisted
of  non-investment  grade  fixed  maturities  (6.8% of total  invested  assets),
commercial mortgages,  equities,  policy loans and other investments,  which are
principally  limited  partnerships.  The Company believes that the nature of its
life products,  which limit the early accumulation of cash values, permits it to
utilize this conservative investment strategy.

     At December 31, 2000,  54.5% of the  Company's  fixed  maturity  bonds were
rated AA or higher by Standard & Poor's and  approximately  92.1% 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.


                                       11

<PAGE>



     Other than issues of the United States  government and government  agencies
and authorities,  no single issuer  represented more than 1.5% of total invested
assets at December 31, 2000.

     The following table summarizes the Company's investments as of December 31,
2000:

<TABLE>
<CAPTION>
                                                                                       Percent of
                                                                                          Total
                                                      Amortized      Fair     Carrying  Carrying
                                                        Cost       Value(1)     Value     Value
                                                        ----       --------     -----     -----
                                                                   ($ in thousands)
         <S>                                         <C>        <C>          <C>          <C>
         Fixed maturities available for sale:
         U.S. Government and agency bonds........... $  111,184 $   112,786  $  112,786    6.6%
         Debt securities issued or guaranteed by
           foreign governments......................     18,196      18,296      18,296    1.1
         Municipal bonds............................     47,087      41,717      41,717    2.4
         Corporate bonds............................    737,869     696,334     696,334   40.5
         Mortgage-backed bonds......................    611,135     605,450     605,450   35.3
                                                    ----------- ----------- ----------- ------
           Total fixed maturity securities
              available for sale....................  1,525,471   1,474,583   1,474,583   85.9

         Equity securities available for sale.......        621         420         420     --
         Commercial mortgages.......................      9,967       9,967       9,967    0.6
         Policy loans...............................    147,373     147,373     147,373    8.6
         Other investments..........................     24,841      24,841      24,841    1.4
                                                    ----------- ----------- ----------- ------
           Total invested assets....................  1,708,273   1,657,184   1,657,184   96.5
         Cash and cash equivalents..................     59,956      59,956      59,956    3.5
                                                    ----------- ----------- ----------- ------
           Total investment portfolio.............. $ 1,768,229 $ 1,717,140 $ 1,717,140  100.0%
                                                    =========== =========== =========== ======
</TABLE>
--------------
(1)  Fair  values  are  obtained   principally  from  the  Company's  investment
     advisors.


                                       12

<PAGE>



     The table set forth below  indicates the composition of the Company's fixed
maturity  portfolio  based on ratings by  Standard  & Poor's  Corporation  as of
December 31, 2000:

<TABLE>
<CAPTION>
                                                                        Percent of
                                                           Total           Total
                                                         Carrying        Carrying
   Rating                                                  Value           Value
   ------                                                  -----           -----
                                                     ($ in thousands)

   <S>                                                <C>                  <C>
   AAA(1)............................................ $  691,850            46.9%
   AA................................................    112,449             7.6
   A ................................................    257,909            17.5
   BBB...............................................    295,423            20.1
                                                       ---------         -------
     Total investment grade..........................  1,357,631            92.1
                                                       ---------         -------

   BB................................................     50,281             3.4
   B or below(2).....................................     49,219             3.3
                                                       ---------         -------
     Total below-investment grade....................     99,500             6.7
                                                       ---------         -------

   Nonrated..........................................     17,452             1.2
                                                       ---------         -------
     Total fixed maturities.......................... $1,474,583           100.0%
                                                      ==========         =======
--------------
(1)  Includes  approximately  $112.8  million of United  States  government  and
     agency bonds.
(2)  Includes  $4.9  million of Pacific  Gas & Electric  first  mortgage  bonds.
     Pacific Gas & Electric  filed for  reorganization  under  Chapter 11 of the
     U.S. Bankruptcy Code on April 6, 2001 as a result of the California utility
     crisis.
</TABLE>

     The following table reflects investment results for the Company's insurance
operations for each of the years ended December 31, 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                            2000          1999         1998
                                                                         -----------  -----------  -----------
                                                                                    ($ in thousands)
     <S>                                                                <C>          <C>          <C>
     End of period total investment portfolio(1)....................... $  1,709,136 $  2,221,927 $  2,474,174
     Net investment income(2)..........................................      136,213      163,969      181,839
     Net realized investment gains (losses)(3).........................      (12,947)        (737)       1,566
     Average annual yield..............................................          7.0%         7.1%         7.1%
--------------
(1)  Consists of total  investment  portfolio,  less  amounts due to brokers for
     securities committed to be purchased at end of period.
(2)  Net investment income is net of investment expenses, excludes capital gains
     or losses and is before income taxes.
(3)  Amounts  shown  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  $95.0 million bank credit
facility.   These  laws  and   provisions   prescribe  the  kind,   quality  and
concentration  of  investments  that  may be  made  by the  Company  and/or  its
insurance subsidiaries.



                                       13

<PAGE>



REINSURANCE

     In keeping with industry  practice,  the Company reinsures  portions of its
life insurance exposure with unaffiliated  insurance companies under traditional
indemnity reinsurance  agreements.  Some new insurance sales are reinsured above
prescribed  limits and others are  reinsured as a  percentage  of each dollar of
coverage up to prescribed limits;  these cessions 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 up to $500,000 per life,  depending on
insured issue age, the product type and the Company's historical  practice.  All
accidental  death benefits are reinsured on a bulk basis.  Long term care is 80%
reinsured on a coinsurance basis. Indemnity reinsurance does not fully discharge
the Company's  obligation to pay policy  claims on the reinsured  business.  The
ceding insurer remains responsible for policy claims to the extent the reinsurer
fails to pay such claims.

     At December 31, 2000 and 1999, of the approximately $20.2 billion and $21.3
billion of life insurance in force,  approximately $5.1 billion and $4.8 billion
had  been  ceded  to  reinsurers,  respectively.  As of  December  31,  2000 the
Company's  principal  reinsurers  are  RGA  Reinsurance  Company,  Allianz  Life
Insurance Company,  Life Reassurance Corp. of America,  Transamerica  Occidental
Life  Insurance  Company,  Reassurance  Company of  Hanover  and Swiss Re Life &
Health Insurance Company, which collectively have reinsured  approximately 75.6%
of the ceded business.

COMPETITION

     The life insurance industry is highly competitive.  Numerous life insurance
companies and other entities,  including banks and other financial institutions,
compete with the Company,  many of which have substantially  greater capital and
surplus,  higher  A.M.  Best  Company  ("A.M.  Best")  ratings,  larger and more
diversified  product  portfolios,  and access to larger agency sales forces. The
Company believes that the principal competitive factors in the sale of insurance
products are product features, price, commission structure,  perceived stability
of the insurer, claims-paying ratings, value-added service and name recognition.
The  Company's  ability to compete  for sales is  dependent  upon its ability to
address these competitive factors.

     As a result of the high  percentage of life and annuity  product revenue as
compared to total revenue, the Company faces a broad market of competition.  The
sale of life insurance  products,  and to a greater extent,  the sale of annuity
products is very sensitive to an organization's  A.M. Best rating,  its size and
perceived   financial  strength  and  the   competitiveness  and  the  financial
performance  of the products  themselves.  The Company  believes that its target
market is not widely served by many of the large,  national  insurers,  but that
the Company does face direct  competition from smaller regional and niche-market
focused companies.

     During  December 2000,  A.M. Best raised its financial  strength  rating of
Southwestern Life to B++ (Very Good) from B+ (Very Good). While this should have
a positive  effect on new business  production,  Southwestern  Life's ability to
effectively  compete  in some  markets  would be  enhanced  by an A  (Excellent)
category  rating.  During 1998,  each of the  Company's  insurance  subsidiaries
received downgrades in their respective A.M. Best ratings, primarily as a result
of  concerns  regarding  the  financial  strength  of the  Company.  The Company
believes  that,  as  a  result  of  that  ratings  action,   certain   insurance
subsidiaries  experienced slight declines in new business  production and modest
increases  in  policyholder  surrenders.  Certain  of  the  Company's  insurance
subsidiaries  market insurance products that are highly sensitive to competitive
factors  including  financial  strength  and ratings.  During 2000,  the Company
introduced new products that are targeted for  middle-income  families which are
less  sensitive  to  the  Company's  ratings.  These  products  are  distributed
primarily  through  captive  agents.  For additional  information on ratings see
"Business-Ratings" included elsewhere herein.

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 and regulating premium rates on certain
lines  of  business,  setting  reserve  requirements,  determining  the form and
content of required financial statements, determining

                                       14

<PAGE>



the reasonableness and adequacy of capital and surplus and prescribing the types
of permitted  investments and the maximum  concentrations  of certain classes of
investments.

     Most states have enacted legislation  regulating  insurance holding company
systems,  including  acquisitions of control of insurance companies,  dividends,
the terms of surplus  debentures,  the terms of  transactions  with  affiliates,
investments in subsidiaries and other related matters.  The Company entered into
an agreement  with the Texas  Department of Insurance  dated  September 22, 1998
which established  procedures  resulting in greater oversight of the Company and
its insurance  subsidiaries  by the Texas  Department  of  Insurance.  The Texas
Department  of Insurance  terminated  the agreement on the  consummation  of the
recapitalization transactions. The Company is registered as an insurance holding
company system in Texas (the domiciliary state of its insurance companies),  and
routinely reports to other jurisdictions in which its insurance subsidiaries are
licensed.

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

     In connection  with its  accreditation  of states,  the NAIC has encouraged
states to adopt  model NAIC laws on  specific  topics,  such as holding  company
regulation  and the definition of  extraordinary  dividends.  Model  legislation
proposed  by the NAIC to  control  the amount of  dividends  that may be paid by
insurance  companies without prior regulatory  approval has been adopted in most
states and is being considered by the  legislatures of the other states.  Texas,
the state of domicile  for the  Company's  insurance  subsidiaries,  has adopted
dividend  tests that are  substantially  similar  to those of the  NAIC's  model
legislation. Texas allows dividends to be paid only out of unassigned funds.

     Texas law  permits  each of PLAIC and  Southwestern  Life to pay a dividend
without prior consent of the Texas  Insurance  Commissioner  if the amount paid,
together  with all other  dividends  paid in the  preceding 12 months,  does not
exceed the greater of: (i) 10% of  statutory  surplus as of the end of the prior
calendar year or (ii) net income from  operations  for the prior  calendar year.
Any dividend above this amount would be considered an  "extraordinary"  dividend
and  could  not be paid  until  the  earlier  of:  (i) 30 days  after  the Texas
Insurance  Commissioner  has received notice of the declaration  thereof and has
not within  such  period  disapproved  such  payment,  or (ii)  approval of such
payment by the Texas Insurance Commissioner.

     On the  basis of  statutory  financial  statements  filed  with  the  state
insurance  regulators,  the NAIC calculates  twelve  financial  ratios to assist
state regulators in monitoring the financial condition of insurance companies. A
"usual range" of results for each ratio is used as a benchmark.  Departure  from
the usual  range on four or more of the  ratios  could  lead to  inquiries  from
individual state insurance  departments.  The Company's  businesses  experienced
during 2000 departures from the usual ranges on the following ratios.

          Southwestern Life had one ratio outside the usual range established by
     the NAIC reflecting the decrease in its statutory capital and surplus after
     restating  the prior  year to  reflect  the  merger of  Security  Life into
     Southwestern  Life as if the merger had occurred at the  beginning of 1999.
     The decrease in capital and surplus resulted from  transactions  associated
     with the recapitalization.

          PLAIC had six ratios  outside of the usual  range  established  by the
     NAIC.  PLAIC is primarily a holding  company for its principal  asset,  the
     common stock of Southwestern  Life. PLAIC's ratios outside the usual ranges
     principally  result from the sale of insurance  subsidiaries  in 1999,  the
     acquisition of Southwestern  Life in 1999, the acquisition of Security Life
     in 2000 and the recapitalization transactions.


                                       15

<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  2000,  and there can be no  assurance  that such  insurance
departments  will not take action against the insurance  companies on account of
such ratio results.

     In December 1992, the NAIC adopted the Risk Based Capital  ("RBC") for Life
and/or  Health  Insurers  Model Act (the "Model  Act").  The main purpose of the
Model Act is to provide a tool for insurance  regulators to evaluate the capital
of insurers  with  respect to the risks  assumed by them and  determine  whether
there is a need for corrective action.

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

     Texas, the state of domicile for the Company's insurance subsidiaries owned
at  December  31,  2000,  has  through  regulation  adopted an RBC regime  which
references,  but is not identical to, that of the NAIC. The Texas RBC regulation
provides that RBC is to be computed in a manner  similar to that provided by the
NAIC, but instead of  establishing  multiple  levels of regulatory  action,  the
Texas  regulation  provides that the  commissioner of insurance is authorized to
take  enumerated   actions,   including,   but  not  limited  to,   supervision,
conservation or impairment or hazardous financial condition  determinations,  as
to any insurer that failed to maintain,  at a minimum,  total  adjusted  capital
equal to 70% of the authorized control level RBC.

     Calculations  using the NAIC formula and the life  insurance  subsidiaries'
statutory  financial  statements as of December 31, 2000,  indicate that each of
the  insurance   subsidiaries'   capital   exceeded  Company  Action  Level  RBC
requirements.  In addition,  calculations  using the Texas regulations  indicate
that each of the  insurance  subsidiaries'  capital  exceeded 70% of  authorized
control level RBC.

     The  Company's  life  insurance  subsidiaries  may be  required,  under the
solvency  or  guaranty  laws of most  states in which it does  business,  to pay
assessments (up to certain  prescribed  limits) to fund  policyholder  losses or
liabilities of insurance companies that become insolvent. Recent insolvencies of
insurance  companies  increase  the  possibility  that such  assessments  may be
required. These assessments may be deferred or forgiven under most guaranty laws
if  they  would  threaten  an  insurer's  financial  strength  and,  in  certain
instances,  may be offset against future  premium  taxes.  The Company  received
premium tax refunds of $342,000 and $223,000 in 2000 and 1999, respectively. The
Company paid  $300,000 for the year ended  December 31, 1998 as a result of such
assessments. At December 31, 2000, the Company's life insurance subsidiaries had
accrued assessment liability totaling $1.1 million.

     On March  16,  1998,  the  NAIC  approved  the  codification  of  statutory
accounting  practices.  The  codification  will  constitute  the only  source of
"prescribed"  statutory accounting practices and has been substantially  adopted
by the Texas  Department  of  Insurance,  the state of domicile of the Company's
insurance  subsidiaries.  The  Statements  of  Statutory  Accounting  Principles
established  under the codification  was effective  January 1, 2001. The Company
has not fully determined the impact the adoption of the  codification  will have
on unassigned surplus of each insurance subsidiary although the Company does not
believe it will be material.


                                       16

<PAGE>



     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.

     There  can  be  no  assurance  that  existing  insurance-related  laws  and
regulations  will not become more  restrictive  in the future and thereby have a
material  adverse  effect on the operations of the Company and on the ability of
the  insurance  companies  to  pay  dividends.  Additionally,  there  can  be no
assurance that existing  insurance-related  laws and regulations will not have a
material  adverse effect on the ability of PLAIC to make payments on its surplus
debenture.  For further information related to the PLAIC surplus debenture,  see
Item 7.  Management's  Discussion  and  Analysis  of Results of  Operations  and
Financial  Condition--Financial  Condition,  Liquidity and Capital Resources and
Note 13 of Notes to Consolidated Financial Statements.

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

     The Company is continually evaluating actuarial assumptions associated with
interest-sensitive life insurance contracts in which the determination of policy
reserves is highly  sensitive to  assumptions  such as lapse  rates,  investment
earnings rates,  mortality rates, and premium  persistency.  Policy reserves and
account values associated with such contracts  aggregated  approximately  $555.0
million  and $527.1  million as of  December  31,  2000 and 1999,  respectively.
Should lapse rates  experienced  on these  policies be less than  expected,  the
Company  would be required to record  additional  reserves or reduce  intangible
assets,  which could have a material impact on the Company's  financial position
and results of  operations.  For example,  a decrease of 1% in the assumed lapse
rate would  increase  policy  reserves  associated  with such contracts by $13.9
million.  Management  continues to assess the potential impact of future actions
that might mitigate the financial impact of these trends.  Examples include, but
are not  limited  to,  the  redetermination  of  non-guaranteed  charges  and/or
benefits under the contracts,  asset  segmentation,  and reinsurance.  There are
risks associated with management  action,  including  potential sales disruption
and the  threat  of  litigation.  During  1999,  the  Company  modified  certain
assumptions  associated  with the  blocks of  business  including  lowering  the
aggregate expected lapse rate. In addition,  during 1999 the Company implemented
a plan to continue  charging  certain  expense  loads  associated  with  certain
interest-sensitive life insurance contracts. As a result of the aggregate impact
of the changes in assumptions and management actions,  the Company increased the
amount of reserves  associated with these policies by approximately $6.2 million
during the fourth quarter of 1999.

     Southwestern Life is required,  at least annually, to perform cash flow and
asset adequacy analysis under differing interest rate scenarios.  Based upon the
results  of these  tests,  Southwestern  Life  has  determined  that  additional
statutory reserves were not needed at December 31, 2000.

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 SWL Holdings' common stock. During December 2000,
A.M.  Best raised its financial  strength  rating of  Southwestern  Life to "B++
(Very  Good)"  from "B+ (Very  Good)." A "B++ (Very  Good)"  rating is the fifth
highest letter rating.

EMPLOYEES

     At December 31, 2000, the Company had 187 full time employees.  None of the
Company's employees were represented by any union.



                                       17

<PAGE>



Item 2.  Properties

FACILITIES

     The Company's primary  administrative offices are located in Dallas, Texas.
Southwestern Financial Services Corporation ("SFSC") leases approximately 75,000
square feet in Dallas,  Texas at an annual cost of $1.2 million  (excluding  the
assigned office space as discussed below). The Company believes that its current
office space is adequate for its operations.  During the year ended December 31,
2000, the Company agreed to assign its lease on certain  vacated office space to
a third party and was released from  obligations  related to the vacated  office
space beginning January 1, 2001.

Item 3.  Legal Proceedings

IN RE PENNCORP FINANCIAL GROUP, INC. SECURITIES LITIGATION

     During the third quarter of 1998, the first of ten class-action  complaints
was filed in the United States  District Court for the Southern  District of New
York against  PennCorp and certain of its then current or former  directors  and
officers.  None of the individual defendants are currently officers or directors
of the Company.  During a pre-trial  conference on November 9, 1998, all parties
agreed to  consolidation  of all of the  actions  and the court  appointed  lead
plaintiffs on behalf of certain  shareholders  and  noteholders.  The court also
approved  the  selection  of  three  law  firms as  co-lead  counsel  for  those
shareholders and noteholders.  A consolidated and amended complaint was filed on
January 22,  1999,  and a First  Consolidated  Amended  Class  Action  Complaint
naming,  as  defendants,  PennCorp,  David J.  Stone,  formerly a  director  and
chairman and chief executive officer, and Steven W. Fickes,  formerly a director
and  president  and chief  financial  officer,  was filed on March 15, 1999 (the
"Complaint").

     The Complaint alleged that defendants  violated the Securities Exchange Act
of 1934 by,  among  other  things,  issuing  a series  of  materially  false and
misleading statements and omitting to state certain material facts regarding the
Company's financial condition, including the value of certain of its assets, and
by failing to timely  disclose that the Company was under  investigation  by the
Securities and Exchange  Commission  (the "SEC").  Plaintiffs  sought to recover
damages in unspecified  amounts on behalf of themselves and all other purchasers
of  PennCorp's  common stock and  purchasers of  PennCorp's  subordinated  notes
during the period from February 8, 1996 through November 16, 1998.

         The parties entered into a Stipulation of Settlement dated May 24, 2000
providing for payment of $9.0 million of cash, plus interest accruing through
the date of consummation of the settlement, in full and final settlement of all
claims. Of that sum, $1.5 million was paid by PennCorp during the fourth quarter
of 1999 into an interest-bearing escrow account established by plaintiffs'
counsel and $7.5 million plus interest is to be paid by PennCorp's third party
director and officer liability insurance carrier upon finalization of the
settlement.

     The settlement  received  preliminary  approval from the court in June 2000
and was  submitted  to the court for final  approval  at a hearing  set for that
purpose in November  2000. No objections  regarding the terms of the  settlement
were  presented to the court at such final hearing and the court  indicated that
it would  issue a ruling  after  further  review.  At present  the court has not
issued its final ruling in this matter.  The Company  expects the  settlement to
receive final approval during 2001.

SEC INVESTIGATION

     On  October  10,  2000,  the SEC  notified  the  Company  that  its  formal
investigation  into possible  violations of the federal securities laws had been
terminated and no enforcement action had been recommended.

PICOW, ET AL. V. SECURITY LIFE & TRUST INSURANCE COMPANY

     In May 1998,  the North  Carolina  Attorney  General's  Office (the "NCAG")
initiated an inquiry  concerning  certain life insurance  products  historically
sold by Security  Life and  representations  allegedly  made by Security  Life's
agents and  officers  that  non-smoker  insureds  would not be  charged  cost of
insurance  after the eighth policy year.  The NCAG  indicated that Security Life
may be estopped to change its practice of not charging the cost of insurance for

                                       18

<PAGE>



non-smoking policyholders after the eighth policy year on these policies because
of  certain  representations  made by agents  and  officers  of  Security  Life.
Although  Security  Life has not charged the cost of  insurance  for  non-smoker
policyholders  after the eighth policy year on these policies,  this practice is
not guaranteed  under the life insurance  contracts,  which  specifically  allow
Security Life the right to change the cost of insurance rates in accordance with
the parameters set forth in the contracts. Security Life responded to the NCAG's
inquiry by denying that it is estopped from changing the cost of insurance rates
on these  policies  based on the alleged  representations,  and is continuing to
reserve its contractual rights to charge the cost of insurance on these policies
in accordance with the parameters set forth in the life insurance contracts.  In
June 1998 the NCAG  informed  Security  Life that it could not  adjudicate  this
matter and left it mutually unresolved.

     In June 1999 the North  Carolina  Department of Insurance  ("NCDOI")  asked
Security Life about the status of its practice of not charging cost of insurance
after the eighth contract year for non-smokers on these same insurance  products
and  requested  to be informed if  Security  Life were to change that  practice.
Security Life responded to the NCDOI's inquiry by verifying that no decision had
been  made to date to  change  such  practice  and that  such  practice  had not
changed;  and confirmed  that the NCDOI would be notified in the event that such
practice were to be changed.

     During 1999  Security  Life  initiated a voluntary  exchange  program which
enabled  policyholders  of such  life  insurance  products  to  terminate  their
policies  and, in exchange  for the  termination  of the  original  policy and a
release,   obtain  either  (i)  the  refund  of  all  premiums  paid  and  other
consideration or (ii) another Security Life life insurance product.

     On November  5, 1999,  Security  Life was served  with a petition  filed in
state  District  Court  in  Dallas  County,  Texas,  asserting  a  class  action
concerning  such  policies.  The petition  alleged that Security Life waived the
right  to  charge  cost  of  insurance  after  the  eighth  policy  year on such
non-smoker  policies and to increase  cost of  insurance  charges on such smoker
policies.  The petition  alleged  Security Life made these  waivers  through its
marketing pieces and statements by its officers.  The petition also alleged that
not all of the facts were  outlined  in  Security  Life's  communication  to its
policyholders  describing  the voluntary  exchange  program and  therefore  that
program was deceptive.

     The petition asked for  declaratory  judgment  concerning the rights of the
plaintiffs  and the class of  policyholders  of such policies and for attorney's
fees. The petition also asked for, among other things,  an injunction to prevent
Security  Life from charging  cost of insurance on such  non-smoker  policies or
increasing  cost of insurance  charges on such smoker  policies after the eighth
policy year,  and  requested  the court to rule that the releases  signed by any
such  policyholders  under the voluntary exchange program were null and void and
those  policyholders  who signed the releases be given the option of reinstating
their policies.  On August 30, 2000, the lawsuit was amended to add a claim that
Security Life had improperly  reduced the interest rates credited to accumulated
values in such policies in an effort to offset losses  incurred by Security Life
on those policies.

     Security  Life  denied  all of the  allegations  in the  lawsuit.  However,
because of the substantial expense and uncertainty  associated with class action
litigation,  Security Life entered into an agreement to settle the lawsuit dated
September 7, 2000 pursuant to which (i) legal fees of approximately $1.3 million
were to be paid to plaintiffs' counsel,  (ii) certain changes were to be made to
the terms of Concept 90 policies  remaining in force or  reinstated  pursuant to
the settlement,  and (iii) certain  optional  in-kind relief (which included the
option to seek  reinstatement  of Concept 90 policies no longer in force) was to
be  provided  to  the  plaintiffs  pursuant  to  elections  made  by  individual
plaintiffs within a specified time period and in a specified manner with respect
to their current or former  Concept 90 policies.  The  settlement  was expressly
subject to approval by the court.

     On  September  8,  2000,  the court  granted  preliminary  approval  of the
settlement  and  ordered  that  notice be sent to all class  members.  The court
granted final approval of the settlement at a hearing held on November 17, 2000,
and the period for appeal of that ruling expired prior to the end of 2000. Thus,
the settlement is now final and is being implemented.

     As of December 31, 2000,  the Company had incurred $1.3 million of expenses
for legal fees to be paid to plaintiffs' counsel and had accrued $4.7 million of
additional policy  liabilities in connection with the settlement.

                                       19

<PAGE>



The  recorded  liability  reflects  costs  the  Company  considers  likely to be
incurred in  connection  with the  settlement  based only on known or reasonably
estimable or determinable factors.  Therefore,  the ultimate cost to the Company
may be greater  than  estimated  and may have a material  adverse  effect on the
Company's financial condition, results of operations and cash flows.

SCHNOEBELEN V. UNITED LIFE & ANNUITY INSURANCE COMPANY, ET AL.

     Schnoebelen was an independent  insurance  broker whose marketing  contract
with United  Life  provided  that he would be  entitled to an annual  commission
based on the total accumulated value of annuity contracts in force for 13 months
or more with  United  Life which  were sold by  Schnoebelen  and his  designees.
Schnoebelen  generally ceased writing new business with United Life in 1993, and
his marketing contract was terminated in 1997.

     In 1998,  Schnoebelen  brought suit in the United States District Court for
the Southern District of California in San Diego, California against United Life
alleging  that United Life had not paid him all of the  commissions  to which he
was entitled and alleging  various  contractual  and tortious  causes of action.
When  PennCorp  sold United  Life in 1999,  it and PLAIC  indemnified  the buyer
against   certain   losses   resulting   from  this  lawsuit  and  retained  the
responsibility for defending it.

     The  Company  denied  Schnoebelen's  claims  and  vigorously  defended  the
lawsuit.  On July 20, 2000, a jury returned a verdict against United Life in the
amount of approximately $1.125 million,  composed of approximately  $288,000 for
past economic  damages and  approximately  $838,000 for the net present value of
future  economic  damages,  upon which  judgment  was entered by the court.  The
Company has established a liability reserve of approximately  $1.125 million for
this judgment.

     The Company filed post-judgment motions for relief which were denied by the
trial court. The Company has appealed the judgment to the United States Court of
Appeals for the Ninth  Circuit,  believes  that it has valid grounds to obtain a
reversal of the  judgment  in whole or in part on appeal,  and intends to pursue
its appeal vigorously.  The Company also believes that a significant  portion of
the judgment may not be covered by the indemnity agreement and thus would be the
responsibility of the buyer of United Life.

MARTINDALE, ET AL. V. SOUTHWESTERN LIFE INSURANCE COMPANY, ET AL.

     A petition was filed on September 7, 2000 in state  District  Court located
in  Jasper,  Texas  asserting  claims  against  Southwestern  Life and its agent
co-defendant  on behalf of a  purported  class of persons  who had an  ownership
interest  in   universal   life   insurance   policies   or   interest-sensitive
non-participating  whole life insurance  policies  issued by  Southwestern  Life
during the period from January 1, 1981 to the present and who were  residents of
the United States on the date(s) of issuance of such  policy(ies).  The petition
alleges that Southwestern Life and/or its agent  co-defendant  committed,  among
other things,  breach of contract,  breach of fiduciary duty,  breach of duty of
good faith and fair dealing,  negligent  misrepresentation,  unfair or deceptive
acts, and fraud in connection  with the sale of such  policies,  and seeks class
certification,  equitable relief and recovery of actual,  statutory and punitive
damages in unspecified amounts as well as costs and attorneys' fees.

     Both  Southwestern  Life and the agent  co-defendant  timely filed  answers
denying all allegations  made in the original  petition and contesting venue for
the  action,  and  Southwestern  Life  subsequently  filed a notice  of  removal
removing the case to the United States  District Court for the Eastern  District
of Texas located in Beaumont, Texas.

     Only  limited  written  discovery  has  been  taken  in this  case to date.
Southwestern  Life  denies  any and all  allegations  made in the  petition  and
intends  to  defend  this  case  vigorously.  There  can  be no  assurance  that
Southwestern Life will be able to defend or resolve the issues presented in this
action  successfully or at all or that any verdict or other resolution would not
have a material adverse effect on the Company's financial condition,  results of
operations or cash flows.



                                       20

<PAGE>



DEMAND BY FRED ROSEN, MARIAN ROSEN AND NORMAN BOCK

     On or about February 19, 2001,  Southwestern  Life received a demand letter
from  attorneys  representing  Fred Rosen,  Marian Rosen and Norman  Bock.  This
demand letter  asserts,  on behalf of the named  claimants  individually  and on
behalf of all other persons who purchased a universal life insurance policy from
Georgia  International  Life Insurance Company ("Georgia  International"),  that
Georgia  International  and its successors in interest,  including  Southwestern
Life,  misrepresented  the cost of such  policies  and  concealed  the fact that
premiums on such policies  would  substantially  increase over the life of same.
Further,   the  demand  letter  alleges  that   Southwestern  Life  has  assumed
responsibility  for these policies and demands that  Southwestern Life place all
members of the purported class of claimants in the same position they would have
been in had the  policies  in  question  performed  as  originally  represented.
Litigation  is  threatened  for,  among  other  things,  violation  of the Texas
Deceptive  Trade Practices Act should  Southwestern  Life not provide the relief
demanded.

     Southwestern Life is investigating the allegations  contained in the demand
letter and has not yet responded. It believes, however, that the allegations are
without  basis and  intends  to defend  vigorously  against  the  demand and any
subsequent  litigation  arising  therefrom.  There  can  be  no  assurance  that
Southwestern Life will be able to defend or resolve the issues presented in this
matter  successfully or at all or that any verdict or other resolution would not
have a material adverse effect on the Company's financial condition,  results of
operations or cash flows.

PLASTER, TRUSTEE V. SOUTHWESTERN LIFE INSURANCE COMPANY, ET AL.

     Stephen R. Plaster,  Trustee of the Robert W. Plaster Irrevocable Trust, as
holder of three universal life insurance policies issued by Southwestern Life on
the life of Robert W. Plaster having a combined  death benefit of  approximately
$20.9  million,  brought suit against  Southwestern  Life in state Circuit Court
located in Camden County,  Missouri on May 20, 1999, claiming,  in essence, that
Southwestern Life committed fraud by misrepresenting the terms,  characteristics
and  performance  of its  universal  life  insurance  policies  at the  time  of
purchase.  The plaintiff specifically alleges that the policies were represented
to be  "single  premium"  policies  not  requiring  payment  of  any  additional
premiums,  but that instead Southwestern Life has demanded payment of additional
premiums in order to keep the policies in force. Plaintiff seeks recovery of all
premiums paid to  Southwestern  Life to date (alleged to be  approximately  $2.9
million), all additional premiums demanded by Southwestern Life to date (alleged
to be approximately $3.7 million),  interest,  punitive damages,  legal fees and
expenses, and reformation and specific performance of the policies.

     Southwestern  Life's  attempt  to  remove  this case to  federal  court was
unsuccessful  and the  case is now in the  discovery  stage.  Southwestern  Life
denies plaintiff's claims and intends to defend this case vigorously.  There can
be no  assurance  that  Southwestern  Life will be able to defend or resolve the
issues  presented in this action  successfully  or at all or that any verdict or
other  resolution  would not have a  material  adverse  effect on the  Company's
financial condition, results of operations or cash flows.

OTHER MATTERS

     The life insurance subsidiaries of the Company are parties to various other
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's
subsidiaries.

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

          None.


                                       21

<PAGE>



                                     PART II

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

MARKET FOR COMMON STOCK

     Shares of SWL  Holdings  common  stock are  listed on the  Nasdaq  National
Market under the symbol "SWLH." As of March 7, 2001,  there were 22 shareholders
of record.  During the period  from June 13,  2000 to  December  31,  2000,  SWL
Holdings did not pay any dividends.

     The SWL Holdings common stock started trading on the Nasdaq National Market
on  September  28,  2000.  During the period  from June 13,  2000,  the date the
Recapitalization  Plan was  consummated,  to September  27, 2000,  shares of SWL
Holdings  common stock traded  over-the-counter.  The following table sets forth
the high and low prices for the common stock as reported by the Nasdaq  National
Market for the period  September  28, 2000 to December 31, 2000 and the high and
low bid prices for the common  stock as quoted by the  National  Association  of
Securities  Dealers,  Inc.  for the period from June 13, 2000 to  September  27,
2000. The bid quotations  reflect  inter-dealer  prices,  without retail markup,
markdown or commission and may not necessarily reflect actual transactions.

<TABLE>
<CAPTION>
                                                                              Share Price
                                                                              -----------
                                                                           High        Low
                                                                           ----        ---
     <S>                                                                <C>       <C>
     Fourth quarter 2000............................................... $  13.938 $   11.750
     Third quarter 2000
       September 28 to September 30....................................    12.375     12.188
       July 1 to September 27..........................................    13.875     11.500
     Second quarter 2000
       June 13 to June 30..............................................    13.438     13.000
</TABLE>

     Until January 10, 2000,  shares of  PennCorp's  common stock were traded on
the New York  Stock  Exchange  ("NYSE").  As a result of  PennCorp's  Chapter 11
filing,  its common stock was  delisted  from the NYSE and  subsequently  traded
over-the-counter  until June 13, 2000.  PennCorp's  common stock was canceled on
June 13, 2000 as a result of  consummation  of the  Recapitalization  Plan.  The
following  table sets forth the high and low share prices for PennCorp's  common
stock as reported  on the NYSE from  January 1, 1999 to January 10, 2000 and the
high and low bid prices for  PennCorp's  common  stock as quoted by the National
Association of Securities Dealers,  Inc. for the period from January 11, 2000 to
June 12, 2000. The bid quotations reflect  inter-dealer  prices,  without retail
markup,   markdown  or  commission  and  may  not  necessarily   reflect  actual
transactions.  No cash dividends  were paid on the PennCorp  common stock during
the period from  January 1, 1999 to June 12,  2000.

<TABLE>
<CAPTION>
                                                                              Share Price
                                                                              -----------
                                                                           High        Low
                                                                           ----        ---
     <S>                                                                <C>       <C>
     Second quarter 2000
       April 1 to June 12.............................................. $0.040    $   0.005
     First quarter 2000
       January 11 to March 31..........................................  0.040        0.020
       January 1 to January 10.........................................  0.469        0.375
     Fourth quarter 1999...............................................  0.750        0.312
     Third quarter 1999................................................  0.688        0.281
     Second quarter 1999...............................................  0.750        0.438
     First quarter 1999................................................  1.312        0.500
</TABLE>

     As a holding company,  SWL Holdings is largely dependent upon dividends and
surplus debenture  payments from its insurance  subsidiaries to pay dividends to
its shareholders.  See Note 13 of the Notes to Consolidated Financial Statements
for a description of restrictions  on the ability of the Company's  subsidiaries
to pay  dividends  and on  PLAIC's  ability  to  make  payments  on the  surplus
debenture.  The Company's bank credit  facility also  restricts  payments on the
PLAIC surplus debenture and the Company's  ability to pay dividends.  See Note 8
of the Notes to Consolidated Financial Statements.

                                       22

<PAGE>
Item 6.  Selected Consolidated Financial Data

     The Company has experienced  significant  organizational changes during the
time periods covered by the financial data presented below, which may affect the
comparability  of this  data.  See  "Management's  Discussion  and  Analysis  of
Financial  Condition and Results of  Operations,"  "Bankruptcy  Proceedings  and
Recapitalization"   and   "General."

<TABLE>
<CAPTION>
                                                               For  the   years   ended   December   31,
                                                  ----------------------------------------------------------------
                                                     2000          1999         1998         1997         1996
                                                  -----------  -----------  -----------  -----------   -----------
                                                            (In  thousands,   except  per  share  amounts)
<S>                                               <C>          <C>          <C>          <C>           <C>
Revenues:
Policy revenues.................................  $   123,815  $   339,008  $   459,158  $   345,566   $   348,090
Net investment  income..........................      139,257      257,600      369,052      273,237       210,734
Other  income (1)...............................        9,545       33,932       37,717       46,476        43,703
Net gains (losses) from the sale of investments.      (12,922)        (502)      14,068       17,487         1,257
Net gains from sales of subsidiaries (2)........       (8,397)       6,602           --           --            --
                                                  -----------  -----------  -----------  -----------   -----------
     Total revenues.............................      251,298      636,640      879,995      682,766       603,784
                                                  -----------  -----------  -----------  -----------   -----------
Benefits and expenses:
   Policy benefits..............................      198,186      377,587      541,762      324,289       271,911
   Insurance and other operating expenses.......      102,646      236,826      376,941      264,607       181,678
   Interest and amortization of deferred debt
     issuance costs.............................       16,209       40,222       42,960       23,355        18,579
   Impairment of intangibles....................           --       95,522           --           --            --
   Impairment provision associated with assets of
     Businesses Held for Sale...................           --       58,486      342,960           --            --
                                                  -----------  -----------  -----------  -----------   -----------
      Total benefits and expenses...............      317,041      808,643    1,304,623      612,251       472,168
                                                  -----------  -----------  -----------  -----------   -----------
Income (loss) before income taxes and
  extraordinary charge..........................      (65,743)    (172,003)    (424,628)      70,515       131,616
     Income taxes (benefits)....................          924       28,709       (3,369)      20,375        40,957
                                                  -----------  -----------  -----------  -----------   -----------
Income (loss) before extraordinary charge.......      (66,667)    (200,712)    (421,259)      50,140        90,659
     Extraordinary charge, net of income taxes..       (2,443)          --       (1,671)          --        (2,372)
                                                  -----------  -----------  -----------  -----------   -----------
Net Income (loss)..............................   $   (69,110) $  (200,712) $  (422,930) $    50,140   $    88,287
                                                  ===========  ===========  ===========  ===========   ===========
------------------------------
(1)  Includes  $19.0  million  and  $21.0  million  of  equity  in  earnings  of
     unconsolidated affiliates for the years ended 1997 and 1996, respectively.
(2)  Includes foreign currency  translation  losses of $25.0 million realized on
     sale of the Career Sales Division for the year ended December 31, 1999.

Per Share Information(1):
Basic:
   Net income (loss)...........................   $     (7.63)    $ (22.16) $    (46.69) $     5.53    $     9.75
   Common shares used in computing basic earnings
     per share..................................        9,059        9,059        9,059       9,059         9,059
Diluted:
   Net income (loss)...........................   $     (7.63)    $ (22.16) $    (46.69) $     5.53    $     9.75
   Common shares used in computing diluted earnings
     per share..................................        9,059        9,059        9,059       9,059         9,059
Cash dividends declared(2)......................  $        --     $     --  $     2,860  $    5,618    $    5,630
------------------------------
(1)Restated to reflect outstanding common shares as a result of recapitalization
   effective June 13, 2000 as if recapitalization occurred at beginning of
   period.
(2)Represents total amounts of cash dividend declared, not on a per share basis.

                                                                            As of December 31,
                                                  ----------------------------------------------------------------
                                                     2000          1999         1998         1997         1996
                                                  -----------  -----------  -----------  -----------   -----------
Assets:
Investments and cash............................  $ 1,717,140 $  2,751,223  $ 2,957,080  $ 3,340,114   $ 3,694,609
Insurance assets................................      604,281      305,391      430,326      617,318       639,798
Other assets....................................      201,356      231,534      179,035      766,703       474,916
Assets of Businesses Held for Sale..............           --           --    2,417,583           --            --
                                                  ----------- ------------  -----------  -----------   -----------
   Total assets.................................  $ 2,522,777 $  3,288,148  $ 5,984,024  $ 4,724,135   $ 4,809,323
                                                  =========== ============  ===========  ===========   ===========
Liabilities and shareholders' equity:
Insurance liabilities...........................  $ 2,190,890 $  2,756,957$   2,819,661  $ 3,289,925   $ 3,566,455
Notes payable...................................       84,000       279,646     550,923      359,755       210,325
Other liabilities...............................       80,329       98,579      114,187      194,352       170,302
Liabilities of Businesses Held for Sale.........           --           --    2,063,312           --            --
Redeemable preferred stock......................           --           --           --       19,867        32,864
Shareholders' equity............................      167,558      152,966      435,941      860,236       829,377
                                                  ----------- ------------  -----------  -----------   -----------
   Total liabilities and shareholders' equity...  $ 2,522,777 $  3,288,148  $ 5,984,024  $ 4,724,135   $ 4,809,323
                                                  =========== ============  ===========  ===========   ===========
</TABLE>
                                       23
<PAGE>



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

     This  "Management's  Discussion  and  Analysis of Financial  Condition  and
Results of  Operations"  reviews the  consolidated  financial  condition  of the
Company as of December 31, 2000 and 1999, the consolidated results of operations
for the three years ended December 31, 2000, and where appropriate, factors that
may affect future financial performance.

     The  following   discussion   should  be  read  in  conjunction   with  the
Consolidated  Financial  Statements and related notes included in Item 8 of this
Annual Report on Form 10-K.

CAUTIONARY STATEMENT

     All  statements,  trend  analyses and other  information  contained in this
report  relative  to  markets  for SWL  Holdings'  products  and  trends  in SWL
Holdings' operations or financial results, as well as other statements contained
in  this  report  including  words  such  as  "anticipate,"  "believe,"  "plan,"
"estimate," "expect," "intend," "should," "could," "goal," "target," "on track,"
"comfortable  with,"  "outlook"  and  other  similar   expressions,   constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995. These  forward-looking  statements are subject to known and unknown risks,
uncertainties  and other factors which may cause actual results to be materially
different  from those  contemplated  by such  forward-looking  statements.  Such
factors include,  among other things: (1) general economic  conditions and other
factors,  including  prevailing interest rate levels and stock and credit market
performance,  which may affect,  among other things, the ability of SWL Holdings
to sell its  products,  the market value of SWL  Holdings'  investments  and the
lapse rate and profitability of insurance products; (2) SWL Holdings' ability to
achieve   anticipated   levels  of  operational   efficiencies  and  cost-saving
initiatives;  (3) customer response to new products,  distribution  channels and
marketing  initiatives;  (4) mortality,  morbidity,  and other factors which may
affect the profitability of SWL Holdings' insurance products; (5) changes in the
federal  income  tax laws and  regulations  which may affect  the  relative  tax
advantages of some of SWL Holdings' products;  (6) increasing competition in the
sale  of  insurance  and  annuities;   (7)  regulatory  changes  or  actions  or
limitations, including those relating to regulation of insurance products and of
insurance   companies;   (8)  ratings   assigned  to  SWL  Holdings'   insurance
subsidiaries by independent  rating  organizations  such as A.M. Best, which SWL
Holdings  believes are  particularly  important to the sale of annuity and other
accumulation  products;  (9) cash flow testing at  Southwestern  Life;  and (10)
unanticipated litigation and unanticipated results in pending litigation.  There
can be no assurance  that these and other factors not currently  anticipated  by
management will not materially and adversely affect SWL Holdings.

BANKRUPTCY PROCEEDINGS AND RECAPITALIZATION

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

     On February 7, 2000,  PennCorp filed a voluntary  petition for relief under
Chapter 11 of the United States  Bankruptcy Code in the Bankruptcy  Court.  From
the  petition  date,  PennCorp  continued  to operate  and manage its assets and
business as a debtor-in-possession as authorized by provisions of the Bankruptcy
Code. None of PennCorp's insurance  subsidiaries were involved in the bankruptcy
filing.

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

     On March 15,  2000,  PennCorp  received  a  competing  bid in the form of a
recapitalization  plan  submitted  by  Inverness  and  Vicuna  on  behalf of the
unofficial ad hoc committee of preferred stockholders,  and Rapoport and Sharpe.
On March 23, 2000,  PennCorp's Board of Directors selected the  Recapitalization
Plan as the final accepted offer pursuant to the bidding procedures  approved as
part of the sales  procedure  order.  On March 24, 2000,  the  Bankruptcy  Court
approved the Board of  Director's  selection of the  Recapitalization  Plan.  On
April 14, 2000, the Texas Department of Insurance issued its order approving the
Form A acquisition statement submitted by Rapoport and Inverness.


                                       24

<PAGE>



     On June 13, 2000, the Company  consummated  the  Recapitalization  Plan and
emerged  from the  Chapter  11  proceedings  as SWL  Holdings.  Pursuant  to the
Recapitalization  Plan, the Company issued  5,175,000  shares of common stock in
exchange for all of the  outstanding  preferred  stock of PennCorp.  The Company
also issued 1,  960,000  shares of common  stock  pursuant to a rights  offering
underwritten by Inverness and Vicuna and 1,840,000 shares to Rapoport and Sharpe
in  connection  with their  investments.  These shares were issued at a price of
$12.50 per share and the Company  received $46.0 million in cash (net of related
expenses of $1.5 million).  Additionally,  the Company  awarded 60,000 shares to
two  executive  officers and 24,000  shares to a former  officer and director of
PennCorp in consideration of his consulting services rendered in connection with
the  recapitalization  transaction.  All shares of PennCorp's  common stock were
canceled for no value. In addition,  the Company consummated a new $95.0 million
credit facility and borrowed $81.0 million under it at closing. According to the
Recapitalization  Plan,  the  Company  received  $49.1  million  from  PLAIC  as
principal  and  interest  payments on an  existing  surplus  debenture  and $5.9
million  as  dividends.  The $55.0  million  was made  available  to PLAIC  from
Southwestern  Life and Security Life as an extraordinary  dividend.  The Company
used these  proceeds to repay the principal  balances of  PennCorp's  senior and
subordinated  debt  aggregating  $179.6  million  and to pay a break fee of $6.0
million to  Reassure  America  upon  termination  of its  contract  to  purchase
Southwestern Life and Security Life. Any and all other claims and liabilities of
PennCorp were paid or accrued in accordance with their terms.

     The Company issued non-qualified  options to purchase 890,000 shares of its
common  stock at prices  ranging  from  $12.50 to $15.00 per share.  Included in
these options were options to acquire 55,000 shares that were awarded to certain
consultants  at a price of $12.50  per share  for which the  Company  recognized
expense of  $426,000.  With the  resignation  of one of the  executive  officers
effective August 1, 2000, the Company recognized expense of $75,000 with respect
to previously  granted stock options to acquire  150,000  shares.  These options
subsequently expired without being exercised.

GENERAL

     Southwestern Life and PLAIC underwrite a variety of insurance products with
the  primary  emphasis  on modest  premium  policies  in the life,  annuity  and
accident and health  product  sectors.  Life products  include term products and
traditional  whole life or universal  life products which build cash values that
are available to the  policyholder.  Annuity  products  include various forms of
annuity products which are utilized by policyholders primarily as a means of tax
deferred  savings.  Accident and health products include  long-term care, cancer
and accident only.

     The Company's financial condition and results of operations for the periods
covered by this and future  reports  were or will be affected by several  common
factors discussed below.

     Dispositions.  On  November  30, 2000 the Company  sold  Marketing  One for
nominal proceeds and recorded a loss of $14,000 from the sale.

     Effective May 1, 2000, Southwestern Life and Security Life each consummated
with RGA  Reinsurance  Company  ("RGA") a 100% indemnity  coinsurance  agreement
relating to all of their respective deferred annuity business. Southwestern Life
and Security Life  transferred to RGA cash of $433.0 million,  which is equal to
the amount of the reinsured statutory policy liabilities net of ceding allowance
of $15.1  million.  The  Company  recorded  a  deferred  gain of $10.2  million,
representing  the difference  between ceded policy  liabilities  calculated on a
GAAP  basis,  net of deferred  policy  acquisition  costs and  present  value of
insurance in force associated with these policies,  and the cash transferred net
of the ceding  allowance.  The deferred gain is being recognized in other income
over the life of the reinsured block of business. During the period from closing
to December 31, 2000, the Company  recognized  $810,000 of such deferred  gains.
Southwestern  Life and Security Life retained the  administration  for the ceded
block of business and are reimbursed by RGA for administrative costs at the rate
of $5.00 per  annuity  contract  in force  per month and will  receive a monthly
trail  commission  equal  to  one-twelfth  of  0.32%  of  outstanding  statutory
reserves.  (As a result of the merger of Security  Life into  Southwestern  Life
effective June 30, 2000,  Southwestern  Life succeeded to all of Security Life's
rights and  obligations  under its agreement  with RGA.) The Company  recognized
$5.3  million in pre-tax  capital  losses from  liquidating  invested  assets to
provide the cash required to consummate the reinsurance transaction. The Company
has  established  an  additional  tax  valuation   allowance  for  capital  loss
carryforwards  associated  with the sale of  invested  assets  which  may not be
recoverable prior to their expiration dates.


                                       25

<PAGE>



     On February 4, 2000,  PennCorp  consummated  the sale of the Payroll  Sales
Division for cash proceeds of $103.3  million.  PennCorp used $100.0  million of
the proceeds to repay its then-existing bank credit facility.

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

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

     On April 30, 1999, PennCorp  consummated the sale of the United Life Assets
to ING. The purchase  consideration  totaled $154.1 million including a dividend
of $2.1 million that was paid by United Life at closing.  The cash consideration
ultimately was reduced as a result of PennCorp's  obligation to purchase certain
mortgages and other assets from United Life as well as for  transaction  related
costs at  closing.  PennCorp  received  net cash  proceeds  of  $136.5  million.
PennCorp realized a loss from the sale totaling $3.9 million. As a result of the
sale, unrealized gains on securities held for sale decreased by $1.7 million. As
of December 31, 1999,  PennCorp sold substantially all of the mortgages retained
by the  Company as a part of the sale of the United  Life  Assets for  aggregate
consideration  of $8.0  million.  The Company  may be  obligated  to  repurchase
certain of the mortgages sold. At December 31, 2000, the Company had established
a $1.2  million  liability  related to these  contingencies.  In  addition,  the
Company settled with ING a dispute over certain federal income tax  calculations
under the  provisions  of the United Life  Assets  purchase  and sale  agreement
relating  to the  differential  in tax  amounts  between  closing  and the final
return. The Company paid $721,000 with respect to the settlement.

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

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


                                       26

<PAGE>

<TABLE>
<CAPTION>
                                                                                               (Unaudited)
                                                                                As Reported     Pro Forma
                                                                                   2000           2000
                                                                                ----------     -----------
                                                                                   (In thousands, except
                                                                                     per share amounts)
         <S>                                                                  <C>          <C>
         Total revenues...................................................... $   251,298  $    247,945
         Loss before extraordinary charge....................................     (66,667)      (61,103)
         Per share information(1):
           Net loss before extraordinary charge--basic....................... $     (7.36) $      (6.75)
           Net loss before extraordinary charge--diluted.....................       (7.36)        (6.75)

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

         Total revenues...................................................... $   636,640  $    310,823
         Loss before extraordinary charge....................................    (200,712)      (69,642)
         Per share information(1):
           Loss before extraordinary charge--basic........................... $    (22.16) $     (7.69)
           Loss before extraordinary charge--diluted.........................      (22.16)       (7.69)

----------------
(1)  Restated   to   reflect   outstanding   common   shares   as  a  result  of
     recapitalization effective June 13, 2000 as if recapitalization occurred at
     beginning of period and the  computation of loss per share does not include
     the preferred stock dividend requirements.
</TABLE>

     Acquisitions.  On January 2, 1998,  PennCorp  acquired the remaining equity
interests in SW Financial, which became a wholly-owned subsidiary. The remaining
interest  was  acquired  from KB Fund and Messrs.  Steven W. Fickes and David J.
Stone,  former  executive  officers  and  directors of PennCorp for an aggregate
purchase price of $73.7 million (not including acquisition expenses).

     On January 5,  1998,  following  shareholder  approval  at the 1997  annual
meeting of shareholders,  PennCorp consummated the acquisition of the Fickes and
Stone  Knightsbridge  Interests  for total  consideration  of $10.6 million (not
including acquisition expenses).  Under the transaction terms, Mr. Fickes was to
receive consideration in the form of estimated annual interest payments, ranging
from  $301,000 to  $330,000,  on April 15 each year  through  2001 and was to be
issued 173,160 shares of the PennCorp's common stock on April 15, 2001. Prior to
the  recapitalization,  PennCorp's Board of Directors approved a settlement with
Mr. Fickes pursuant to which PennCorp paid him approximately  $700,000 to settle
all outstanding claims including claims arising from this transaction. Mr. Stone
was  issued  his  173,160  shares in July 1998  which he  pledged  to  financial
institutions in connection with his appeal of a judgment awarded against him and
his spouse.  These shares were later cancelled for no consideration  pursuant to
the Recapitalization Plan.

     Restructuring and Other Costs.  PennCorp developed  restructuring  plans to
realign or  consolidate  certain  operations  resulting in  restructuring  costs
incurred during 2000,  1999, the fourth quarter of 1998 and the first quarter of
1998.

2000 Plan

     In connection with the merger of Security Life into  Southwestern  Life and
the   consummation  of  the   Recapitalization   Plan,  the  Company  adopted  a
restructuring plan during the quarter ended June 30, 2000.  Pursuant to the 2000
Plan, the Company reduced its workforce in most areas of the Company  (including
finance,  policyholder  services,  marketing,  information  technology and human
resources) by a total of 52 employees. The 2000 Plan was substantially completed
as of  December  31,  2000  and is  expected  to  result  in  operating  expense
reductions and cash

                                       27

<PAGE>



savings  of   approximately   $2.4  million   annually.   The  Company  incurred
restructuring  costs aggregating  approximately  $1.0 million for the year ended
December 31, 2000 associated with such restructuring.

     The following  reflects the impact of activity for the year ended  December
31, 2000 on the restructuring  provision and accrual balance under the 2000 Plan
(in thousands):

<TABLE>
<CAPTION>
                                                                        Paid or
                                                                        Charged                      Balance at
                                                          2000          Against                     December 31,
                                                        Provision      Liability     Adjustments        2000
                                                        ---------      ---------     -----------        ----

   <S>                                               <C>             <C>            <C>            <C>
   Severance and related benefits..................  $       1,020   $        (835) $          (7) $         178
                                                     =============   =============  =============  =============
</TABLE>

1999 Plan

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

     The following  reflects the impact of activity for the years ended December
31, 1999 and 2000 on the restructuring  accrual balances under the 1999 Plan (in
thousands):

<TABLE>
<CAPTION>
                                         1999 Activities                        2000 Activities
                                    ------------------------               ------------------------
                                      Paid or                                Paid or
                                      Charged                 Balance at     Charged                 Balance at
                          1999        Against                 December 31,   Against                 December 31,
                       Provision     Liability   Adjustments     1999       Liability   Adjustments      2000
                      -----------   -----------  -----------  -----------  -----------  -----------  -----------
   <S>                <C>           <C>          <C>          <C>          <C>          <C>          <C>
   Severance and
     related benefits $     3,185   $      (663) $      (148) $     2,374  $    (2,309) $       (65) $        --
   Estimated holding
     costs of vacated
     facilities.....        2,122            --           --        2,122       (1,453)         (45)         624
                      -----------   -----------  -----------  -----------  -----------  -----------  -----------
                      $     5,307   $      (663) $      (148) $     4,496  $    (3,762) $      (110) $       624
                      ===========   ===========  ===========  ===========  ===========  ===========  ===========
</TABLE>

     The 1999 Plan provided for the  termination  of 50 employees  consisting of
divisional  management and staff in Dallas over a nine-month  period.  The staff
reduction  was  completed  in 2000.  The 1999 Plan also  provided  for  vacating
certain  floors  of the  Company's  Dallas  leased  offices.  The  restructuring
provision of $2.1 million  represented  the  estimated  net present value of the
rent on the office  space to be vacated  net of the  estimated  sublease  rental
income to be received by the  Company.  During the quarter  ended June 30, 2000,
the  Company  agreed to assign its lease on certain  vacated  office  space to a
third party and was  released  from  obligations  related to the vacated  office
space beginning January 1, 2001. As a part of this agreement, the new lessee has
the use of furniture  located in the vacated  space but the Company  retains the
furniture lease obligation which totals approximately  $184,000 per year through
2004. The Company adjusted the remaining  accruals pursuant to these agreements.
The Company  anticipates  realizing operating expense reductions of $3.9 million
and cash savings of  approximately  $3.4 million per year from  implementing the
1999 Plan.

4th Quarter 1998 Plan

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


                                       28

<PAGE>

     The following  reflects the impact of activity for the years ended December
31, 1998, 1999 and 2000 on the  restructuring  accrual balances under the fourth
quarter 1998 Plan (in thousands):

<TABLE>
<CAPTION>
                         1998 Activities                  1999 Activities                  2000 Activities
                       --------------------            ---------------------            ---------------------
                        Paid or                         Paid or                          Paid or
                        Charged             Balance at  Charged            Balance at    Charged              Balance at
               1998     Against            December 31, Against            December 31,  Against             December 31,
             Provision Liability Adjustments   1998    Liability Adjustments   1999     Liability Adjustments    2000
              ------    -------    -------   -------    -------    -------    -------    -------    ------      ------
<S>           <C>       <C>        <C>       <C>       <C>        <C>        <C>        <C>        <C>         <C>
Severance and
   related
   benefits.  $6,259    $(3,985)   $    --   $ 2,274   $ (1,396)  $   189    $ 1,067   $ (1,067)   $  --      $    --
Estimated
   holding costs
   of vacated
   facilities. 2,954     (2,954)        --        --         --        --         --         --        --          --
Estimated
   contract
   terminations
   costs.....     61        (29)        --        32       (40)         8         --         --        --          --
              ------    -------    -------   -------   -------    -------    -------    -------    ------      ------
              $9,274    $(6,968)   $    --   $ 2,306   $(1,436)   $   197    $ 1,067    $(1,067)   $   --      $   --
              ======    =======    =======   =======   =======    =======    =======    =======    ======      ======
</TABLE>

     The fourth quarter 1998 Plan provided for the  termination of 43 employees,
including  substantially  all of the executive and  administrative  employees in
PennCorp's Bethesda and New York offices, based on the decision to shut down the
Bethesda  and New York  offices by May 31, 1999.  Severance  payments  under the
fourth quarter 1998 Plan were completed in 2000. PennCorp incurred costs of $4.0
million,  $1.4 million and $1.1 million  which were charged  against the accrual
during 1998, 1999 and 2000, respectively, for terminated employees.

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

1st Quarter 1998 Plan

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

     The following  reflects the impact of activity for the years ended December
31, 1998, 1999 and 2000 on the  restructuring  accrual  balances under the first
quarter 1998 Plan (in thousands):
<TABLE>
<CAPTION>
                         1998 Activities                  1999 Activities                  2000 Activities
                       --------------------            ---------------------            ---------------------
                        Paid or                         Paid or                          Paid or
                        Charged             Balance at  Charged            Balance at    Charged              Balance at
               1998     Against            December 31, Against            December 31,  Against             December 31,
             Provision Liability Adjustments   1998    Liability Adjustments   1999     Liability Adjustments    2000
              ------    -------    -------   -------    -------    -------    -------    -------    ------      ------
<S>           <C>       <C>        <C>       <C>       <C>        <C>        <C>        <C>        <C>         <C>
Severance and
   related
   benefits.. $  3,831  $  (4,417) $ 1,205   $   619   $  (297)   $  (322)   $   --     $    --    $   --      $   --
Estimated
   holding costs
   of vacated
   facilities.   2,205         --       --     2,205      (350)       (41)    1,814      (1,646)     (168)         --
Write-off of
   certain fixed
   assets....    1,131       (831)    (300)       --        --         --        --          --        --          --
Estimated
   contract
   terminations
   costs.....    4,600     (3,247)  (1,353)       --        --         --        --          --        --          --
                ------    -------  -------   -------   -------    -------    -------    -------    ------      ------
               $11,767    $(8,495) $  (448)  $ 2,824   $  (647)   $  (363)   $ 1,814    $(1,646)   $ (168)     $   --
                ======    =======  =======   =======   =======    =======    =======    =======    ======      ======
</TABLE>


                                       29

<PAGE>


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

     The first  quarter 1998 Plan  provided for vacating  certain  Dallas office
space. In connection with the plan, PennCorp recorded estimated holding costs of
vacated  facilities of $2.2 million which  represented  the net present value of
the rent on the office space to be vacated net of the estimated sublease rent to
be received.  During 1999 and 2000,  PennCorp charged $350,000 and $1.6 million,
respectively, of rent expense on vacated office space against the accrual.

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

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

Other Costs

     PennCorp  incurred  approximately  $6.3  million  of pre-tax  period  costs
("period costs") associated with the corporate  restructuring for the year ended
December  31,  1998.  Such  costs are  included  in the  Company's  Consolidated
Statements of Operations and  Comprehensive  Income (Loss) as  underwriting  and
other administrative expenses.

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

     PennCorp  evaluated  the  recoverability  of all  intangible  assets of the
Payroll  Sales  Division  based  upon  the  sales  proceeds  received  from  the
disposition  of the remaining  Payroll Sales  Division  companies on February 4,
2000.  As a result,  an  impairment  provision  for  certain  intangible  assets
aggregating  $95.5 million was reflected in the Statement of Operations  for the
year  ended  December  31,  1999.  All  remaining  costs in excess of net assets
acquired in the Payroll Sales Division,  totaling $19.3 million,  were impaired.
In addition, PennCorp impaired all remaining present value of insurance in force
and a portion of deferred  policy  acquisition  costs totaling $67.5 million and
$49.7 million, respectively, net of deferred taxes of $41.0 million.

YEAR 2000 ISSUES

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

     The  Company  provided  certain  representations  and  warranties  to  each
respective  purchaser  of the  businesses  sold with  respect  to each  entity's
ability  to process  date-sensitive  information  for the year 2000 and  beyond.
Although the Company believes that it is in compliance with, and is not aware of
any breach of the year 2000 representations and

                                       30

<PAGE>



warranties  provided to the  respective  purchasers,  there can be no assurances
that the Company is in compliance with all such  representations and warranties.
A breach by the Company of such  representations  and warranties could result in
indemnification obligations owed by the Company to the purchasers.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Parent Company

     General. SWL Holdings ("parent company"),  formerly known as PennCorp, is a
legal entity,  separate and distinct from its  subsidiaries  and has no material
business  operations.  The parent  company  needs cash for:  (i)  principal  and
interest on debt; (ii) holding  company  administrative  expenses;  (iii) income
taxes and (iv) investments in subsidiaries.  The primary sources of cash to meet
parent company  obligations  include  statutorily  permitted  payments from life
insurance subsidiaries,  including: (i) surplus debenture interest and principal
payments;  and (ii) dividend  payments.  The parent company may also obtain cash
through the sale of subsidiaries or other assets.

     Between  February 7, 2000 and June 13,  2000,  PennCorp  was  managing  its
assets as a "debtor-in-possession" as a result of the bankruptcy petition filing
(see Note 3 of Notes to Consolidated Financial Statements).

     On June 13, 2000, the Company  established a $95.0 million credit facility.
The Company used $81.0  million of the new credit  facility  along with proceeds
from the issuance of SWL Holdings  common stock pursuant to the rights  offering
and Rapoport and Sharpe investments and $55.0 million in extraordinary dividends
to repay the entire principal balance of PennCorp's senior and subordinated debt
and related interest (see Note 8 of Notes to Consolidated Financial Statements).


                                       31

<PAGE>



     The following  table shows the cash sources and uses of the parent  company
on a projected  basis for 2001 and on an actual  basis for the periods  June 13,
2000 to December  31,  2000,  February  8, 2000 to June 12,  2000 (as  debtor-in
-possession),  January  1, 2000 to  February  7, 2000  (prior to the  bankruptcy
filing) and years ended December 31, 1999 and 1998:


<TABLE>
<CAPTION>
                                                        Period       Period       Period
                                         Projected     June 13,    February 8,  January 1,
                                        year ended      2000 to      2000 to      2000 to         Year ended
                                       December 31,  December 31,   June 12,    February 7,      December 31,
                                                                                             -------------------
                                          2001(1)        2000         2000         2000        1999       1998
                                        -----------  -----------  -----------   ---------  ----------  ----------
                                                                        ($ in thousands)
   <S>                                  <C>          <C>          <C>           <C>        <C>         <C>
   Cash sources:
     Cash from subsidiaries...........  $    34,085  $    64,461  $     4,105   $ 130,127  $  349,881  $   73,521
     Issuance of common stock.........           --       46,004           --          --          --          --
     Sale of directly owned
       subsidiaries...................           --           --           --          --       5,989
     Other investment income..........           --           64          245          44         754       2,865
     Sale of equity securities........           --           --           --          --          --      30,500
     Additional borrowings............           --       89,000           --          --          --     203,000
     Sales of/collection on
       assets held....................           --          171           57          --      11,642          --
     Other, net.......................          272           73           32          26         215       1,306
                                        -----------  -----------  -----------   ---------  ----------  ----------
           Total sources..............       34,357      199,773        4,439     130,197     368,481     311,192
                                        -----------  -----------  -----------   ---------  ----------  ----------
   Cash uses:
     Acquisition of businesses........           --            --          --          --          --      73,858
     Interest paid on debt............        7,969        11,437       2,254       3,057      38,014      37,849
     Operating expenses, including
       restructuring charges..........        1,273         7,481       1,029      18,575      20,984      36,217
     Reduction of notes payable.......       25,625       179,646       5,000     100,000     269,000     126,015
     Costs of recapitalization........           --        11,274          --          --          --          --
     Capital contributions to
       subsidiaries...................           --           --           --          --      27,668       7,853
     Costs to dispose of Businesses
       Held for Sale..................           --           --           --          --      14,991          --
     Purchase of equity securities....           --           --           --          --          --       5,000
     Dividends on preferred and
       common stock...................           --           --           --          --          --      16,210
     Other, net.......................        1,007        1,544          877          --          --          --
                                        -----------  -----------  -----------   ---------  ----------  ----------
           Total uses.................       35,874      211,382        9,160     121,632     370,657     303,002
                                        -----------  -----------  -----------   ---------  ----------  ----------
   Increase (decrease) in cash and
     cash equivalents.................       (1,517)     (11,609)      (4,721)      8,565      (2,176)      8,190
   Cash and cash equivalents at
     beginning of period..............        2,713       14,322       19,043      10,478      12,654       4,464
                                        -----------  -----------  -----------   ---------  ----------  ----------
   Cash and cash equivalents at
     end of period....................  $     1,196  $     2,713  $    14,322   $  19,043  $   10,478  $   12,654
                                        ===========  ===========  ===========   =========  ==========  ==========
--------------
(1)  The  unused  portion  of the  Company's  revolving  credit  facility  as of
     December 31, 2001 is projected to be $15.0 million.
</TABLE>

Cash Sources

     Cash  from  Subsidiaries.   Cash  generated  by  the  Company's   insurance
subsidiaries  is made  available to SWL Holdings  principally  through  periodic
payments  of  principal  and  interest  on surplus  debentures  issued by PLAIC,
Constitution  (sold July 30, 1999) and Pioneer  Security (sold February 4, 2000)
(collectively,  the "Surplus Note Companies").  The surplus debentures issued by
PLAIC and Constitution were repaid in full in connection with the

                                       32

<PAGE>

consummation  of the sale of the Career  Sales  Division  and the surplus  notes
issued  by  Pioneer  Security  were  repaid  in  full  in  connection  with  the
consummation of the sale of the Payroll Sales Division.  As part of a subsidiary
realignment in conjunction  with the Career Sales  Division  divestiture,  PLAIC
issued a new surplus  debenture to SW Financial in the amount of $150.0  million
to acquire  the  common  stock of  Southwestern  Life.  As part of a  subsidiary
realignment in conjunction  with the Payroll Sales Division  divestiture,  PLAIC
issued a new surplus debenture to SW Financial in the amount of $35.0 million to
acquire the common stock of Security Life. With respect to Constitution, Pioneer
Security and PLAIC (as to its surplus debenture issued as of July 30, 1999), the
surplus  debenture  payments were made to non-  insurance  intermediate  holding
companies and  subsequently  paid to the Company in the form of  dividends.  The
amount  outstanding  under the surplus  debentures  as of December  31, 1999 was
$258.3  million.  At December  31,  2000,  there is only one  remaining  surplus
debenture with an outstanding principal balance of $94.9 million. This debenture
was issued by PLAIC and is held by SWFC.  The PLAIC surplus  debenture  requires
principal and interest payments to be made periodically in amounts sufficient to
allow SWL Holdings to meet its cash requirements.  These payments are subject to
PLAIC's maintenance of capital and surplus of at least $1.2 million in excess of
its investment in  Southwestern  Life.  Any deviation  from  scheduled  payments
requires regulatory approval.

     Currently  PLAIC  relies  upon  dividends  and tax  sharing  payments  from
Southwestern Life, which is in turn subject to regulatory restrictions under the
Texas  insurance  laws and  regulations  with  respect to the maximum  amount of
dividends  that can be paid to PLAIC within a twelve month period  without prior
regulatory approval. Such dividend restrictions are generally the greater of 10%
of  statutory  surplus  or  prior  year's  statutory   earnings.   See  Item  1.
Business--Regulatory  Matters  and Note 13 of Notes  to  Consolidated  Financial
Statements for additional discussions of dividend restrictions.

Projected Cash Sources and Uses for 2001

     Projected  cash  sources for 2001  include  $24.1  million of interest  and
principal payments on PLAIC's surplus  debenture.  SWL Holdings also anticipates
receiving  approximately  $10.0 million of cash dividends from ROP and SW Hotel.
Such  dividends  are  dependent  on the ability of ROP and SW Hotel to liquidate
certain  assets.  There can be no assurances  that the PLAIC  surplus  debenture
payments can be made,  or that the ROP and SW Hotel assets can be  liquidated in
the  periods  expected  or, if  completed,  that the  Company  will  receive net
proceeds projected.  Projected cash uses include scheduled payments of principal
of $8.6 million,  discretionary payments of principal (including payments on the
revolving  credit facility) of $17.0 million and interest of $8.0 million on the
new credit  facility  and  payments  for  operating  expenses  of $1.3  million.
Projected  cash uses also  include  the  release  of an escrow  account  of $1.0
million that was  established  in  connection  with the sale of the Career Sales
Division.

     Management  believes  the Company  will likely  have  sufficient  financial
flexibility and projected  liquidity sources to meet all cash  requirements.  At
December  31,  2000,  the  amount  available  to be drawn  under the new  credit
facility was $11.0 million.

Cash Sources and Uses for the Period June 13, 2000 to December 31, 2000

     During the period June 13, 2000 to December 31, 2000, the Company  received
capital  contributions  of $46.0 million (net of related  expenses)  through the
issuance of 3,800,000  shares of common stock  pursuant to the  Recapitalization
Plan.  In addition,  the Company  borrowed  $89.0  million  under the new credit
facility.  The Company also  received  $58.2 million from PLAIC as principal and
interest  payments  on the  existing  surplus  debenture  and  $5.9  million  as
dividends.  These  payments  were funded in part by $55.0  million that was made
available to PLAIC from  Southwestern Life and Security Life as an extraordinary
dividend.  Additionally,  the Company  received a dividend  of  $350,000  from a
non-insurance subsidiary. The Company used these proceeds to repay the principal
balances of PennCorp's senior and subordinated  debt aggregating  $174.6 million
and related interest and premiums on redemption aggregating $6.4 million. During
the period from June 13 to December 31, 2000, the Company made interest payments
on the new credit  facility  totaling $5.0 million and incurred  cash  operating
expenses of $7.5 million  including a $6.0 million fee paid for the  termination
of the contract to sell  Southwestern  Life and Security  Life. The Company paid
costs associated with the  Recapitalization  Plan of $11.3 million. In addition,
the  Company  established  an escrow  account in the  amount of $1.4  million in
connection with posting bond for appeal of an adverse  judgment  rendered in the
Schnoebelen  lawsuit  (see Item 3. Legal  Proceedings).  The  Company  also paid
$27,000 for the interest rate cap agreement (see Note 8 of Notes to Consolidated
Financial Statements).

                                       33

<PAGE>

Cash Sources and Uses for the Period February 8, 2000 to June 12, 2000

     During the period from  February 8, 2000 to June 12,  2000,  PennCorp (as a
debtor-in-possession)  received $4.1 million of dividends and surplus  debenture
principal and interest from  subsidiaries and $245,000 of short-term  investment
income,  $57,000 of  proceeds  from sale of  mortgage  loans and  collection  of
receivables and $32,000 from tax refunds. PennCorp paid $2.3 million in interest
on its senior debt and incurred  $1.0 million of  operating  expenses.  PennCorp
made a $5.0  million  principal  payment on its credit  facility and payments of
$855,000 to a non-insurance subsidiary representing a return of the subsidiary's
funds previously swept to the cash collateral account.

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

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

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

Cash Sources and Uses for the Years Ended December 31, 1999 and 1998

     Cash from  Subsidiaries.  For each of the years ended December 31, 1999 and
1998,  PennCorp received surplus debenture  interest and principal payments from
PLAIC of $223.5 million and $26.2 million,  respectively, and received dividends
and tax sharing payments of $126.4 million and $47.3 million, respectively, from
non-insurance  intermediate holding companies.  Substantially all of the surplus
debenture  dividends  and tax  sharing  payments  made by PLAIC  were the direct
result of proceeds received by PLAIC from the disposition of Businesses Sold.

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

     Other Investment  Income.  During 2000, 1999 and 1998, the Company received
investment  income from short- term  invested  assets of $353,000,  $754,000 and
$2.9 million, respectively.

     Sales of Equity Securities. During 1998, PennCorp liquidated its common and
preferred  stock  holdings in ACO Brokerage  Holding Corp.  ("ACO"),  the parent
company of Acordia Inc. Total  proceeds  received from the sale of the preferred
and common stock aggregated  $30.5 million.  PennCorp had acquired the preferred
stock  interests  in ACO for $20.0  million  during  1997 and the  common  stock
interests  in January  1998 for $5.0  million as part of  PennCorp's  and the KB
Fund's  investment  in ACO.  See  Note 17 of  Notes  to  Consolidated  Financial
Statements for additional information regarding PennCorp's investment in ACO.

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


                                       34

<PAGE>



     Additional  Borrowings.  During 1998, PennCorp borrowed under then existing
bank  credit  facilities  primarily  to  fund  acquisitions  or  repay  existing
indebtedness.  See  "Acquisition of Businesses" and "Reduction of Notes Payable"
below for the use of proceeds from the additional borrowings.

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

     Interest  Paid on  Indebtedness.  During  the  two  year  period,  PennCorp
utilized  varying  amounts of leverage in its capital  structure.  For the years
ended  December  31,  1999  and  1998,  the  average  indebtedness   outstanding
aggregated $366.9 million and $452.6 million, respectively.  PennCorp's weighted
average costs of borrowings  increased  significantly  during 1999 and 1998 as a
result of PennCorp's  increased  leverage ratio and projected weakness in future
liquidity.  For additional  information  regarding  indebtedness,  see Note 8 of
Notes to Consolidated Financial Statements and Parent Company--General above.

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

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

     In  conjunction  with  PennCorp's  1998  acquisition  of the  SW  Financial
Controlling  Interest,  PennCorp  borrowed  under its existing $450 million bank
credit facility to repay indebtedness of SW Financial aggregating $115.0 million
upon acquisition.  In addition,  during 1998 PennCorp used existing liquidity to
repay $11.0 million of indebtedness under its bank credit facility.

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

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

     Dividends of Preferred and Common Stock.  During 1998, PennCorp paid common
and preferred stock dividends aggregating $16.2 million.  PennCorp halted common
and  preferred  stock  dividend  payments  during 1998 as a result of  impending
liquidity concerns.

Subsidiaries, Principally Insurance Operations

     The  insurance  subsidiaries'  principal  sources of cash are  premiums and
investment income. The insurance  subsidiaries'  primary uses of cash are policy
claims, commissions, operating expenses, income taxes and payments to

                                       35

<PAGE>


the Company for principal and interest due under surplus debentures, tax sharing
payments  and   dividends.   Both  sources  and  uses  of  cash  are  reasonably
predictable.

     Cash Flow from Operating  Activities.  Cash flow from operating activities,
excluding  the  parent  company,  was $14.0  million,  $54.9  million  and $34.2
million, respectively, for the years ended December 31, 2000, 1999 and 1998. The
decrease in cash flow from operating  activities  during the year ended December
31,  2000  principally  resulted  from the sale of  certain  subsidiaries  which
collectively  provided  cash flow of only $3.8 million  during 2000  compared to
$48.0 million and $123.7 million for the years ended December 31, 1999 and 1998,
respectively.  This was  partially  offset by increases in cash flow of retained
companies.  The increase  principally  resulted from decreasing costs associated
with year 2000  remediation and reduced costs as a result of strategic  business
evaluation and  associated  restructuring  of the Company.  The increase in cash
flow from operating  activities for the year ended December 31, 1999 compared to
1998 is also  attributable to the sale of KIVEX,  which used cash from operating
activities due to its rapid growth.

     Cash Flow from  Investing  Activities.  During the years ended December 31,
2000,  1999 and 1998, the Company's  subsidiaries  sold $559.4  million,  $603.5
million  and  $1,019.9  million of fixed  maturity  and equity  securities,  and
purchased $161.4 million,  $814.2 million and $1,054.7 million of fixed maturity
and equity  securities,  respectively.  Sales  exceeded  purchases  during  2000
primarily in order to meet cash flow demands  associated with the reinsurance of
deferred annuities with RGA.

     Cash Flow from  Financing  Activities.  Cash used by financing  activities,
excluding the parent  company,  were $666.8  million,  $492.3 million and $391.4
million for the years ended  December  31,  2000,  1999 and 1998,  respectively.
During the year ended  December 31, 2000, the Company's  insurance  subsidiaries
transferred  cash of $433.0  million  associated  with an indemnity  coinsurance
agreement with RGA.  Dividends and surplus  debenture  payments during 2000 were
the  result  of the  sale of the  Payroll  Sales  Division  and a $55.0  million
extraordinary   dividend  in   connection   with  the   Recapitalization   Plan.
Substantially all of the increases in dividends and surplus  debenture  payments
during  1999 were the  direct  result of  proceeds  received  by PLAIC  from the
disposition  of  Businesses  Held for  Sale.  The  cash  outflow  also  reflects
policyholder  surrenders  exceeding  deposits by $34.5  million in 2000,  $191.7
million  in 1999 and $354.1  million in 1998.  Cash  outflows  during  2000 also
included payment of dividends and surplus debenture principal aggregating $199.3
million made to the parent company  compared to $326.3 million in 1999 and $44.3
million in 1998.

RESULTS OF OPERATIONS

     For the years  ended  December  31,  2000,  1999 and 1998,  the Company has
prepared  the  following  unaudited  selected  financial   information  for  the
Company's Insurance  Operations (PLAIC and Southwestern Life, including Security
Life  which  was  merged  into  Southwestern  Life  effective  June  30,  2000),
Businesses  Sold (Payroll Sales Division,  Career Sales Division,  Professional,
the United Life Assets,  KIVEX and Marketing One) and corporate  activities.  On
November  30,  2000,  Marketing  One was sold and the results of  operations  of
Marketing One have been included in "Businesses Sold" for all periods presented.
"Operating  Income  (Loss),"  as  used  below,   excludes  the  impact  of:  (i)
restructuring  costs,  (ii) gains or losses on the sale of investments and (iii)
the impact of the Company's decision to dispose of the Businesses Held for Sale.
The Company considers  operating income (loss) to reflect "core earnings (loss)"
and to be the most relevant and useful  information to evaluate trends impacting
the Company's  operations.  This information is used by the Company's  principal
decision  makers to evaluate  its  performance  as it  eliminates  the impact of
transactions  that the  Company  considers  to be  unrelated  to core  operating
results.  Other companies that operate primarily in the life insurance  industry
may or may not use similar measures.

     The  Company  has  prepared  such  information  as  it  believes  that  the
disposition  of the  Businesses  Held for Sale and the  restructuring  costs are
material  enough to make  historical  comparative  results  not  meaningful.  In
addition, the Company believes that the following selected financial information
and subsequent discussion will assist the reader in understanding how management
views and evaluates the operations of the Company.


                                       36

<PAGE>

<TABLE>
<CAPTION>
                         SELECTED FINANCIAL INFORMATION
                                                                               Year ended December 31,
                                                                     -------------------------------------------
                                                                         2000           1999            1998
                                                                     -------------  -------------  -------------
                                                                                    ($ in thousands)
   <S>                                                               <C>            <C>            <C>
   Insurance Operations:
     Operating income (loss)......................................   $      (3,549) $      28,343  $      21,361
     Net investment gains (losses)................................         (12,947)          (737)         1,566
     Restructuring costs..........................................            (735)        (5,165)        (3,803)
                                                                     -------------  -------------  -------------
                                                                           (17,231)        22,441         19,124
                                                                     -------------  -------------  -------------
   Businesses Sold:
     Operating income (loss)......................................           3,447         29,033        (23,015)
     Net investment gains (losses)................................             (39)           307          9,033
     Restructuring costs..........................................              --            202         (2,643)
     Net gains from sale of subsidiaries (including realized
       losses on foreign currency of $24,978 for 1999)............          (8,397)         6,602             --
     Impairment provision associated with assets of Businesses Sold        (58,486)      (342,960)
     Impairment of intangibles....................................              --        (95,522)            --
                                                                     -------------  -------------  -------------
                                                                            (4,989)      (117,864)      (359,585)
                                                                     -------------  -------------  -------------
   Corporate Activities:
     Interest and amortization of deferred debt interest cost.....         (16,209)       (40,222)       (42,960)
     Net investment income and other income.......................           1,595          2,751          4,727
     Corporate expenses...........................................         (28,973)       (39,007)       (40,972)
     Net investment gains.........................................              64            (72)         3,469
     Restructuring costs..........................................              --            (30)        (8,431)
                                                                     -------------  -------------  -------------
                                                                           (43,523)       (76,580)       (84,167)
                                                                     -------------  -------------  -------------

   Loss before income taxes and extraordinary charge..............         (65,743)      (172,003)      (424,628)

   Income taxes (benefits)........................................             924         28,709         (3,369)
                                                                     -------------  -------------  -------------
   Loss before extraordinary charge...............................         (66,667)      (200,712)      (421,259)
   Extraordinary charge...........................................          (2,443)            --         (1,671)
                                                                     -------------  -------------  -------------
   Net loss.......................................................   $     (69,110) $    (200,712) $    (422,930)
                                                                     =============  =============  =============
</TABLE>

INSURANCE OPERATIONS

     The  Insurance  Operations  include the  operations  of  Southwestern  Life
(including  Security Life) and PLAIC.  Southwestern  Life markets life insurance
and, to a lesser  extent,  annuity and accident and health  insurance  products,
through  independent  and  exclusive  agents who sell  directly  to  individuals
primarily in the  southwestern  and  southeastern  United States.  The Company's
sales of accident and health insurance  products  historically have been limited
and, in management's view, have not had and do not have a material effect on the
Company's results of operations.  Accordingly, the Company's accident and health
insurance  products  are not  discussed  separately  but are included in tabular
presentations of related financial information where appropriate.


                                       37

<PAGE>

<TABLE>
<CAPTION>
                         SELECTED FINANCIAL INFORMATION

                                                                               Year ended December 31,
                                                                     -------------------------------------------
                                                                         2000           1999            1998
                                                                     -------------  -------------  -------------
                                                                                    ($ in thousands)
<S>                                                                  <C>            <C>            <C>
Revenues:
   Policy revenues................................................   $     116,240  $     134,064  $     129,519
   Net investment income..........................................         136,213        163,969        181,839
   Other income...................................................           6,781         11,261          3,678
                                                                     -------------  -------------  -------------
                                                                           259,234        309,294        315,036
                                                                     -------------  -------------  -------------
Benefits and expenses:
   Total policyholder benefits....................................         192,844        213,405        215,665
   Insurance related expenses.....................................          31,241         28,653         29,598
   Other operating expenses.......................................          38,698         38,893         48,412
                                                                     -------------  -------------  -------------
                                                                           262,783        280,951        293,675
                                                                     -------------  -------------  -------------
     Pre-tax operating income.....................................   $      (3,549) $      28,343  $      21,361
                                                                     =============  =============  =============
</TABLE>

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

     Premiums, net of reinsurance, by major product line and policy revenues for
the years ended December 31, 2000, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                                                                                   Year ended December 31,
                                                                           -------------------------------------
                                                                               2000         1999         1998
                                                                           -----------  -----------  -----------
                                                                                        ($ in thousands)
   <S>                                                                     <C>          <C>          <C>
   Life premiums:
     Universal life (first year).........................................  $     7,449  $     9,474  $    11,146
     Universal life (renewal)............................................      103,776       73,776       97,299
     Yearly renewable term reinsurance on universal life.................      (22,295)     (22,024)     (23,969)
     Traditional life (first year).......................................        3,485        9,578       12,964
     Traditional life (renewal)..........................................       32,251       32,969       36,655
                                                                           -----------  -----------  -----------
       Life premiums collected, net of reinsurance.......................      124,666      103,773      134,095
                                                                           -----------  -----------  -----------

   Annuity premiums......................................................        3,066        8,678       16,189
                                                                           -----------  -----------  -----------

   Accident and health premiums:
       Long-term care premiums net of reinsurance........................          840          254          456
                                                                           -----------  -----------  -----------

   Premiums, net of reinsurance..........................................      128,572      112,705      150,740
   Less premiums on universal life and annuities which are recorded as
     additions to insurance liabilities..................................     (114,291)     (91,928)    (124,634)
                                                                           -----------  -----------  -----------
       Premiums on products with mortality or morbidity risk.............       14,281       20,777       26,106
   Fees and surrender charges on interest-sensitive products.............      101,959      113,287      103,413
                                                                           -----------  -----------  -----------
       Policy revenues...................................................  $   116,240  $   134,064  $   129,519
                                                                           ===========  ===========  ===========
</TABLE>

     Policy revenues decreased 13.3% during 2000 to $116.2 million compared with
1999.  Policy  revenues  increased  3.5% to $134.1 million in 1999 compared with
1998. Life premiums collected,  net of reinsurance,  were $124.7 million, $103.8
million  and $134.1  million in 2000,  1999 and 1998,  respectively.  First year
universal  life  premiums  decreased  21.4% and 15.0% to $7.4  million  and $9.5
million in 2000 and 1999,  respectively.  The  decline in new life sales  during
2000 reflects the impact of ratings downgrades and uncertainties surrounding the
parent company's bankruptcy and recapitalization.  In addition,  the decision to
cease new life sales at Security Life was announced  during the third quarter of
1999 as a result of  management's  decision to reduce costs and  concentrate its
marketing  efforts at Southwestern  Life. The decrease in first year traditional
life premiums is also attributable to a decrease in single

                                       38

<PAGE>



premiums of $3.2 million and $387,000 during 2000 and 1999, respectively. Single
premiums can vary significantly from period to period.

     Universal  life and  traditional  life  renewal  premiums  increased  $29.3
million or 27.4% in 2000 and decreased $27.2 million or 20.3% for 1999. The 1999
premiums reflected negative premiums  associated with the Security Life exchange
or refund  program.  The exchange or refund  program was  instituted by Security
Life on January 1, 1999 for policyholders of certain types of interest-sensitive
insurance  contracts  and resulted in a refund of premiums of $23.0 million (see
below).  The refund  program was completed at December 31, 1999. The decrease in
universal life and traditional  life premiums also reflects  ratings  downgrades
and the impact of certain  management  actions  instituted by Southwestern  Life
which resulted in the reduced  renewal  premiums in 2000 and may result in lower
renewal premiums in subsequent years.

     Annuity  premiums have  declined  64.7% to $3.1 million in 2000 compared to
1999 after  declining  $7.5  million or 46.4% in 1998.  The  decrease in annuity
premiums in 2000  principally  reflects the  consummation of the RGA reinsurance
transaction whereby Southwestern Life and Security Life reinsured  substantially
all of their existing deferred annuity blocks of business  effective May 1, 2000
(see Note 3 of Notes to  Consolidated  Financial  Statements).  The  decline  in
annuity sales is also  attributable  to a shift in the overall annuity market to
sales of variable  products (which  Southwestern Life does not offer) from fixed
products  due to  historically  low  interest  rates and  consumer  interest  in
equities.  Annuity  sales are  likely  to  continue  to  decline  unless  market
conditions for fixed annuities become more favorable and ratings of Southwestern
Life improve.

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

     Long-term  care  premiums  increased  $586,000  in  2000  after  decreasing
$202,000 in 1999.  Premiums for 1999  reflected  the  retroactive  effects of an
amendment to the reinsurance  contract which increased the cession amount to 80%
retroactively to 1998.

     Net Investment  Income.  Net  investment  income  decreased  16.9% or $27.8
million in 2000 after  declining  $17.9 million or 9.8% in 1999. The decrease is
primarily due to a decline in invested assets.  Average invested assets declined
by $379.9 million or 16.1% in 2000 compared with 1999 and $180.9 million or 7.1%
in 1999 compared with 1998.  The decrease in 2000 resulted from the  reinsurance
of substantially  all of the deferred annuity business and the need to liquidate
invested assets to provide cash for the $55.0 million extraordinary dividend. At
the  consummation of the reinsurance  transaction,  invested assets  aggregating
$433.0 million were transferred to the reinsurer.  The decrease in 1999 resulted
principally  from the need to liquidate  invested assets to provide cash to fund
the surrenders of annuities and universal life products which exceeded  deposits
by $128.8  million.  Weighted  average yields on invested assets were 7.0%, 6.9%
and 7.1% in 2000,  1999 and 1998,  respectively.  Weighted  average  yields were
impacted  slightly  for 2000 as a result of  maintaining  higher  cash  balances
resulting   from  sales  of  securities  in  order  to  consummate  the  annuity
reinsurance  transaction  and pay the  special  dividends  associated  with  the
recapitalization.  Impacting  investments  yields in 1999  were  lower new money
rates  available  to  the  Company  for  investment  as a  result  of  extensive
maturities and calls of higher yielding investments.

     Other Income.  Other income  totaled $6.8  million,  $11.3 million and $3.7
million in 2000, 1999 and 1998, respectively.  Included in other income for 2000
is $1.9  million  of  ceding  allowances  associated  with  the RGA  reinsurance
transaction and the amortization of deferred gain on the reinsurance of deferred
annuities of  $810,000.  Other  income for 1999  included  $5.7 million from the
distribution of assets of a joint venture investment  resulting from the sale of
most of the operations and assets of the joint venture. During 1998, the Company
received approximately $1.0 million from a settlement associated with securities
owned in the  past.  The most  significant  remaining  item in other  income  is
consideration received on supplemental contracts.  Supplemental contract revenue
is derived from annuity

                                       39

<PAGE>



contracts  which have  reached  the  annuitization  period.  Consideration  from
supplemental  contracts  recognized  as other  income is offset by  policyholder
benefits, resulting in no effect on the Company's results of operations.

     Total  Policyholder  Benefits.  The following table shows the components of
total  policyholder  benefits for the years ended  December  31, 2000,  1999 and
1998:

<TABLE>
<CAPTION>
                                                                               Year ended December 31,
                                                                     -------------------------------------------
                                                                         2000           1999            1998
                                                                     -------------  -------------  -------------
                                                                                    ($ in thousands)
   <S>                                                               <C>            <C>            <C>
   Death benefits.................................................   $      76,246  $      80,658  $      87,578
   Other insurance policy benefits and change in
     future policy benefits.......................................         116,598        132,747        128,087
                                                                     -------------  -------------  -------------
   Total policyholder benefits....................................   $     192,844  $     213,405  $     215,665
                                                                     =============  =============  =============
</TABLE>


     Policyholder  benefits  decreased  9.6% to $192.8  million in 2000 compared
with 1999.  Death benefits  decreased $4.4 million or 5.5% in 2000 compared with
1999. Death benefits may vary significantly from period to period.  Other policy
benefits and change in future policy  benefits  decreased $16.1 million or 12.2%
during 2000 and increased  $4.7 million or 3.6% in 1999. The decrease in 2000 is
attributable to a decline in interest credited on deferred  annuities which were
reinsured  effective May 1, 2000. The decrease is also attributable to a decline
in interest  credited to universal life policies at Security Life as a result of
fewer policies in force following the exchange program,  surrender  activity and
the absence of new business  production.  The decreases were partially offset by
increases to certain  deficiency  reserves and unearned  revenue reserves during
2000 of $5.2  million as a result of  unlocking  assumptions,  including  future
lapsation,  on certain  interest-sensitive  blocks of business of Security Life.
Also partially offsetting the decreases was an increase to policy liabilities of
$4.7 million  during 2000 pursuant to settlement of a class action  lawsuit (see
Item 3. Legal  Proceedings).  The recorded  liability reflects costs the Company
considers  likely to be  incurred  based only on known or  reasonably  estimable
factors.  Therefore,  the  ultimate  cost to the  Company  may be  greater  than
estimated  and may have a material  adverse  effect on the  Company's  financial
condition,  results of operations  and cash flows.  During the fourth quarter of
2000,  the Company  undertook an analysis of its reserving  and other  actuarial
practices.  As part of this  review,  the  Company  discovered  that the  method
utilized to calculate  deferred policy  acquisition costs and policy liabilities
on certain term policies was not correctly  reflecting  reinsurance  ceded. As a
result  of   correcting   this   methodology,   policy   liabilities   increased
approximately $1.0 million.

     During  1999,  policyholder  benefits  decreased  1.0%  to  $213.4  million
compared with 1998. Death benefits  decreased $6.9 million or 7.9% compared with
1998.  Change in other  benefits and future policy  benefits  increased  3.6% to
$132.7  million in 1999.  During 1999,  future policy  benefits  were  increased
approximately  $6.2  million  as  a  result  of  the  re-estimation  of  certain
deficiency reserves on a block of Southwestern Life interest-sensitive business.
Certain  assumptions  related to the  expected  future  experience  for  lapses,
premiums,  mortality and interest were adjusted to reflect recent experience. In
addition,  management  began  implementing  a plan that  included  contractually
allowable increases to expense charges.

     The Company is continually evaluating actuarial assumptions associated with
interest-sensitive life insurance contracts in which the determination of policy
reserves is highly  sensitive to  assumptions  such as lapse  rates,  investment
earnings rates,  mortality rates, and premium  persistency.  Policy reserves and
account values associated with such contracts  aggregated  approximately  $555.0
million  and $527.1  million as of  December  31,  2000 and 1999,  respectively.
Should  withdrawal  rates  experienced be less than the expected level of lapses
associated with such interest-sensitive blocks of business, the Company would be
required to record additional reserves or reduce intangible assets,  which could
have a  material  impact on the  Company's  financial  position  and  results of
operations.  For  example,  a  decrease  of 1% in the  assumed  lapse rate would
increase  policy  reserves  associated  with such  contracts  by $13.9  million.
Management continues to assess the potential impact of future actions that might
mitigate the financial  impact of these trends.  Examples  include,  but are not
limited to, the redetermination of non-guaranteed  charges and/or benefits under
the contracts, asset segmentation,  and reinsurance.  There are risks associated
with management action,  including  potential sales disruption and the threat of
litigation.


                                       40

<PAGE>



     Insurance   Related  Expenses.   Insurance   related  expenses   (including
non-deferrable  commissions,  amortization of deferred policy  acquisition costs
and  amortization of present value of insurance in force) increased $2.6 million
during  2000  compared  with 1999.  The net  increase in 2000 is due to: (i) the
increase in amortization of deferred  acquisition costs of $8.8 million;  (ii) a
decrease in the  amortization  of present  value of  insurance  in force of $8.1
million;  and (iii) an increase in  non-deferrable  commissions of $1.9 million.
During the fourth  quarter of 2000,  the  Company  undertook  an analysis of its
reserving and other  actuarial  practices.  As part of this review,  the Company
discovered  that the method utilized to calculate  deferred  policy  acquisition
costs  and  policy  liabilities  on  certain  term  policies  was not  correctly
reflecting  reinsurance  ceded.  As a result  of  correcting  this  methodology,
deferred policy  acquisition  costs decreased  approximately  $6.5 million.  The
remaining  increase in amortization  compared to 1999 results from a decrease in
amortization of  approximately  $2.0 million in 1999 at  Southwestern  Life as a
result of unlocking  assumptions during the third quarter of 1999.  Amortization
of present value of future profits in 2000  decreased  $8.1 million  compared to
1999.  The  amortization  of  present  value of  insurance  in  force  decreased
approximately  $1.6  million  during the  second  quarter of 2000 as a result of
unlocking    assumptions,    including    future    lapsation,    for    certain
interest-sensitive  blocks of  business  at  Security  Life.  In  addition,  the
remaining  balances of present value of insurance in force  associated  with the
annuities  reinsured  to RGA were written off against  deferred  gain during the
second  quarter of 2000 and,  consequently,  required  no further  amortization.
Non-deferrable  commissions  increased  approximately  $1.9  million  due to the
decision by management to accelerate  payment of  approximately  $2.2 million of
accumulation  bonuses owed to agents. This was partially offset by a decrease to
non-deferrable  commissions at Security Life resulting from decreases in new and
renewal  premium and an adjustment  of $700,000  based upon a  re-evaluation  of
credit balances with terminated or inactive agents.

     Insurance  related  expenses  decreased  $945,000 or 3.2% to $28.7  million
during 1999 compared  with 1998.  The small  decrease in 1999  reflects  reduced
insurance related expenses at Security Life as a result of declining  production
of new business for several years and a diminished block of in force business as
a result of policy surrenders.

     Other Operating  Expenses.  Other  operating  expenses  (including  general
operating,  overhead and policy maintenance) decreased $195,000 to $38.7 million
in 2000 compared  with 1999 and decreased  $9.5 million to $38.9 million in 1999
compared with 1998. The liabilities held at Southwestern  Life and Security Life
for expected  assessments to life and health guaranty  associations of states in
which the  companies  were  licensed to do business were reduced by $3.4 million
during 1999 as a result of completing these companies' evaluation of third party
guaranty fund assessment data on a corporate-wide basis, including the impact of
the  disposition  of the  Businesses  Sold.  Expenses in 2000 also included $1.3
million of fees paid to plaintiffs' counsel in connection with the settlement of
a lawsuit  (see Item 3.  Legal  Proceedings).  Without  this 1999  reduction  in
guaranty  fund  liabilities  and the  fees  paid in 2000 to  settle  litigation,
operating  expenses  would have  decreased $4.5 million in 2000 compared to 1999
reflecting  the  Company's  efforts to reduce  expenses.  The  decrease  in 1999
compared to 1998 is attributable to ongoing  reductions in costs associated with
the restructuring of the Dallas operations,  a reduction in expenses  associated
with year 2000  remediation  efforts and systems  conversions for Security Life.
The  decrease  in 1999  compared  to 1998 is also  impacted  by a charge of $2.3
million during 1998 for uncollectible agents' debit balances at Security Life as
well as by the $3.4 million reduction in guarantee fund liabilities in 1999.

BUSINESSES SOLD

     Businesses  Sold include the operations of the Payroll Sales Division (sold
February 4, 2000) the Career Sales  Division  (sold July 30, 1999),  KIVEX (sold
June 30, 1999), Professional (sold March 31, 1999), the United Life Assets (sold
April 30, 1999) and  Marketing One (sold  November 30, 2000).  The Payroll Sales
Division  included  the  operations  of AA Life and OLIC.  AA Life  marketed and
underwrote  customized  life  insurance  and annuity  products to U.S.  military
personnel and federal  employees  through a general agency force.  OLIC provided
accident and health and life products  utilizing a network of independent agents
primarily in the southeastern  United States through employer- sponsored payroll
deduction programs. The Career Sales Division,  which included the operations of
Penn Life, marketed and underwrote accident and health products and, to a lesser
extent, life products through a sales force exclusive to PennCorp throughout the
United  States  and  Canada.  With the  January  2,  1998,  consummation  of the
acquisition of the SW Financial Controlling Interest,  PennCorp integrated Union
Bankers, Marquette and Constitution with the Career Sales Division. KIVEX was an
internet service provider.  Professional provided individual accident and health
and life products  utilizing a network of  independent  agents  primarily in the
southeastern United States through employer-

                                       41

<PAGE>



sponsored payroll deduction programs. United Life principally marketed fixed and
variable  annuities  through  financial  institutions  and  independent  general
agents, primarily in the southern and western United States.

<TABLE>
<CAPTION>
                         SELECTED FINANCIAL INFORMATION

                                                                               Year ended December 31,
                                                                     -------------------------------------------
                                                                         2000           1999            1998
                                                                     -------------  -------------  -------------
                                                                                    ($ in thousands)
<S>                                                                  <C>            <C>            <C>
Revenues:
   Policy revenues................................................   $       7,575  $     204,944  $     329,639
   Net investment income..........................................           2,910         92,597        184,283
   Other income...................................................           1,304         20,953         32,240
                                                                     -------------  -------------  -------------
                                                                            11,789        318,494        546,162
                                                                     -------------  -------------  -------------
Benefits and expenses:
   Total policyholder benefits....................................           5,341        164,182        326,096
   Insurance related expenses.....................................             978         59,468        128,845
   Other operating expenses.......................................           2,023         65,811        114,236
                                                                     -------------  -------------  -------------
                                                                             8,342        289,461        569,177
                                                                     -------------  -------------  -------------
     Pre-tax operating income (loss)..............................   $       3,447  $      29,033  $     (23,015)
                                                                     =============  =============  =============
</TABLE>

     The  significant  decreases  in  revenues,  benefits  and  expenses in 2000
compared  to  1999  and  1998  are  primarily   attributable   to  the  sale  of
Professional,  the United Life Assets,  the Career Sales  Division,  the Payroll
Sales  Division and  Marketing One on March 31, 1999,  April 30, 1999,  July 30,
1999, February 4, 2000 and November 30, 2000, respectively.

CORPORATE ACTIVITIES

     Interest and  Amortization  of Deferred Debt Issuance  Costs.  Interest and
amortization  of deferred debt issuance  costs  decreased  $24.0 million in 2000
compared  to 1999 and  decreased  $2.7  million in 1999  compared  to 1998.  The
decrease is principally a result of principal  repayments  under PennCorp's bank
credit facility.  As a result of the sales of the Payroll Sales Division in 2000
and the Career Sales Division, KIVEX, the United Life Assets and Professional in
1999,  PennCorp  reduced its then  outstanding  bank  credit  facility by $367.0
million.  PennCorp also repaid an additional  $2.0 million of  indebtedness as a
result of liquidity at the parent  company  above the amount  prescribed  in the
bank credit facility. In addition, at emergence from the Chapter 11 proceedings,
the Company  repaid the remaining  amounts  outstanding  under  PennCorp's  bank
credit facility and its senior  subordinated  notes  aggregating  $179.6 million
with existing cash,  borrowings of $81.0 million from the $95.0 million new bank
credit facility (the "New Credit Facility") (see Note 8 of Notes to Consolidated
Financial  Statements),  the $46.0 million capital  contribution (net of related
expenses) in connection with the recapitalization  transaction and $55.0 million
extraordinary  dividends from  Southwestern  Life and Security  Life.  Since the
consummation  of  the  Recapitalization   Plan,  the  Company  has  borrowed  an
additional $3.0 million, net of repayments,  under the new credit facility.  The
decrease in 1999 was partially offset by the higher borrowing costs,  additional
costs  associated  with  credit  facility  fees and costs  incurred to amend the
credit  agreement  as a direct  result  of  PennCorp's  deteriorating  financial
position. In addition, during 1999, PennCorp accelerated amortization of certain
deferred  loan costs in the amount of $2.1 million in  accordance  with Emerging
Issue Task Force ("EITF") Issue No. 98-14,  "Debtor's  Accounting for Changes in
Line-of-Credit or Revolving-Debt-  Arrangement," as a result of the amendment to
the bank credit facility. EITF Issue No. 98-14 requires the unamortized deferred
loan costs to be amortized in  proportion  to the impact of period  changes in a
credit facility as compared with its original terms.

     On  September  8, 2000,  the  Company  entered  into an  interest  rate cap
agreement  with a bank to  hedge a  notional  amount  of  $40.0  million  of its
outstanding  floating rate notes for a term of 21 months effective  December 12,
2000. Pursuant to the agreement,  the Company will receive interest differential
from the  counter-party if the London Inter Bank Offering Rate ("LIBOR") exceeds
8.5%. At December 31, 2000, LIBOR was 6.6%.


                                       42

<PAGE>



     Net investment  income and other income.  Net  investment  income and other
income were $1.6  million,  $2.7  million  and $4.7  million for the years ended
December  31,  2000,  1999  and  1998,  respectively.  The  decreasing  trend is
principally the result of reduced balances of cash and cash equivalents.

     Corporate Expenses.  Corporate expenses and other costs were $29.0 million,
$39.0 million and $41.0 million for the years ended December 31, 2000,  1999 and
1998, respectively. The decrease in 2000 compared to 1999 reflects the effect of
management's  efforts subsequent to the recapitalization to substantially reduce
corporate  overhead.  The decrease was  partially  offset by a break fee of $6.0
million that was paid to Reassure  America upon the  termination of its contract
to purchase  Southwestern  Life and Security Life and costs  associated with the
recapitalization of $5.4 million. Included in the 1999 results are non-recurring
costs  including  additional  amortization  of costs  in  excess  of net  assets
acquired  associated with KB Management  reflecting the decision to terminate KB
Management and KB Investment as administrator and general partner  respectively,
of KB Fund, a previous  affiliate,  additional  costs associated with efforts to
develop  recapitalization and restructuring  alternatives,  consulting and legal
fees  associated  with  the  disposal  of the  Businesses  Sold as well as other
corporate matters.

     The decrease in 1999 compared to 1998 principally reflects the cost savings
realized by the decision to close  PennCorp's New York and Bethesda  offices and
eliminate  personnel  located  in those  offices.  This is  partially  offset by
additional   amortization   of  costs  in  excess  of  net  assets  acquired  of
approximately   $7.6  million  in  1999  associated  with  KB  Management.   The
accelerated  amortization  reflected  PennCorp's Board of Directors' decision to
terminate  KB  Fund,  for  which  KB  Management  and  KB  Investment  acted  as
administrator  and general  partner,  respectively.  PennCorp  also incurred (i)
additional  costs  associated  with  efforts  to  develop  recapitalization  and
restructuring  alternatives aggregating $2.2 million; (ii) additional consulting
and legal fees of $1.8 million  associated with  negotiation and  implementation
of, and compliance with, the amended bank credit facility,  pending class action
securityholder  litigation and the SEC investigation;  (iii) additional deferred
compensation of $3.2 million associated with the two year employment  agreements
of PennCorp's  senior  executives  which were entered into in May 1998; and (iv)
provisions of $2.3 million to settle shareholder and other litigation.

     Net  Investment  Gains  (Losses).   The  Company  maintains  an  investment
portfolio  that focuses on maximizing  investment  income,  without  exposure to
unwarranted  interest rate and credit risk. The Company  actively  manages asset
duration  and  liquidity  risks.  As a  result  of this  strategy,  the  Company
routinely  sells  positions in  securities no longer  meeting its criteria.  The
Company realized capital gains (losses) of ($12.9 million), ($502,000) and $14.1
million  during 2000,  1999 and 1998,  respectively.  During  2000,  the Company
liquidated  invested  assets to provide the cash required to consummate  the RGA
reinsurance  transaction  and recognized $5.3 million in pre-tax capital losses.
During 2000, the Company also recognized a permanent  impairment of $5.4 million
on fixed maturity issues in default and a loss of $673,000 on an investment in a
limited partnership.  The Company also liquidated  securities available for sale
in order to meet cash flow demands associated with policyholder  surrenders that
in the aggregate exceeded policyholder deposits by $34.5 million, $191.7 million
and $354.1 million during 2000, 1999 and 1998, respectively.

     Income Taxes  (Benefits).  For the years ended December 31, 2000,  1999 and
1998, the Company  recognized income tax expense  (benefits) of $924,000,  $28.7
million and ($3.4 million), on pretax loss of $65.7 million,  $172.0 million and
$424.6 million,  respectively.  The decrease in tax for 2000 results principally
from losses incurred by the life companies,  which includes  interest on PLAIC's
surplus  debentures.  The  unusual  effective  tax  rates  for  these  years are
substantially due to the non-deductibility of the reduction in carrying value of
the assets  associated  with the sale of Businesses  Sold and an increase in the
tax valuation  allowance.  The valuation allowance associated with tax assets is
continually  monitored  by the Company in light of the  dramatic  changes in the
operating  structure  and  financial  results  of the  Company.  As a result  of
analysis the Company increased the valuation  allowances by $9.0 million,  $38.9
million and $23.5 million during 2000, 1999 and 1998,  respectively.  In each of
the periods, the valuation allowance was incurred as the result of the increased
likelihood  that certain net  operating  losses and capital  loss  carryforwards
would not be  utilized  and the  impact  or  potential  impact  of a "change  in
control" as defined by the Internal  Revenue Code Section 382, which occurred in
2000. Change of control provisions of Section 382 limit the Company's ability to
utilize  certain tax benefits  including net  operating  loss  carryforwards  in
future periods.

     Extraordinary Items.  Extraordinary items for 2000 reflect premiums of $1.1
million  paid on the  redemption  of  PennCorp's  then-existing  senior  debt as
required by the indenture for early payoff and $1.3 million of unamortized  loan
costs that were  written  off as all of  PennCorp's  senior debt and bank credit
facility were repaid. For 1998 PennCorp

                                       43

<PAGE>



realized an extraordinary charge of $1.7 million which represented the write-off
of the deferred  financing costs associated with the refinance of a SW Financial
then-existing  note that PennCorp assumed as a part of the acquisition of the SW
Financial Controlling Interest.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

     The Company analyzes and reviews the risks arising from market exposures of
financial  instruments.  From an overall  perspective,  the Company's investment
portfolio is managed with the objectives of maintaining  high credit quality and
liquidity,   maximizing   current  income  within  acceptable  levels  of  risk,
minimizing  market and credit risk, and matching the  anticipated  maturities of
investments  to  the  Company's   liabilities.   The  Company  believes  that  a
conservative  investment  strategy  fits the nature of its  insurance  products,
which have minimal inflation risk.

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

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

INTEREST RATE RISK

     Annuity and Investment Oriented Insurance Products.  General account assets
supporting  annuity and investment  oriented insurance products totaled $1,225.9
million  or 71.9% and  $1,726.8  million  or 76.8% of total  invested  assets at
December  31, 2000 and 1999,  respectively.  These  insurance  products  include
single   premium   and   flexible   premium   fixed   deferred   annuities   and
interest-sensitive  life,  primarily  universal life.  Fixed maturity and equity
securities are carried at fair value. Mortgage loans on real estate are recorded
at cost,  adjusted by provision for loan loss,  if  necessary.  Policy loans are
recorded at cost. Short-term  investments,  considered as cash equivalents,  are
recorded  at  amortized  cost.  Policy  liabilities  are  generally  carried  at
policyholder  account values with an adjustment,  when the policyholder  account
values are deemed inadequate.  With respect to these products, the Company seeks
to earn a stable and profitable  spread between  investment  income and interest
credited to policyholder  account values.  As of December 31, 2000 and 1999, the
weighted average interest spread on interest-sensitive insurance liabilities was
1.70%  and  1.85%,  respectively.  If the  Company  has  adverse  experience  on
investments  that cannot be passed onto its customers,  its spreads are reduced.
Alternately,  the Company may seek to maintain  spreads which may result in non-
competitive credited interest rates to customers.  This strategy could result in
adverse surrender experience and cause the Company to liquidate a portion of its
portfolio to fund excess cash surrender benefits.  As a result of flexibility in
adjusting  crediting  rate levels and  protection  afforded by policy  surrender
charges,  the Company  does not view the near term risk to spreads over the next
twelve months to be material.

     Fixed  Deferred  Annuities.  Effective May 1, 2000,  Southwestern  Life and
Security Life each consummated with RGA a 100% indemnity  coinsurance  agreement
covering all of their respective  deferred annuity  business.  (See Management's
Discussion  and Analysis of Financial  Condition and Results of  Operations  and
Note 3 of Notes to Consolidated Financial Statements).  The Company continues to
reinsure to RGA 100% of its  deferred  annuities  sold since May 1, 2000.  As of
December 31, 2000, the Company had reinsured with RGA deferred annuities with an
account value of $397.4  million.  This  transaction  substantially  reduces the
company's  exposure to movements in market interest rates because of the reduced
portfolio of invested assets required to support those policies.

     Universal Life. Assets of $1,255.9 million and $1,234.1 million at December
31, 2000 and 1999,  respectively,  support  the largest  category of annuity and
investment oriented insurance products,  universal and other  interest-sensitive
life  products.  For  these  contracts,  the  Company  has the  right to  adjust
renewal-crediting rates subject to guaranteed

                                       44

<PAGE>



minimums  from 3.5% to 6.0%.  Similar to  annuities,  universal  life  insurance
policyholders  have the right to surrender their contracts at account value less
a surrender  charge.  Generally,  the surrender charge  protection ranges over a
longer period of years than those  applicable to annuity  policies,  and in some
cases may be much larger in size relative to account  values being  surrendered.
The Company  limits  interest rate risk by analyzing  projected  liability  cash
flows  and   structuring   investment   portfolios   with   similar   cash  flow
characteristics.

     Other Annuities. Assets aggregating $117.1 million and $121.1 million as of
December  31,  2000  and  1999,   respectively,   support  immediate  annuities,
traditional fixed benefit annuities, group deferred annuities, deposit funds and
supplementary contracts. Generally, the cash flows expected on these liabilities
do not vary with  fluctuations in market  interest  rates,  and imputed rates of
interest are not  adjustable by the Company.  Accordingly,  spreads will tend to
fall below  expectations  if experience is adverse  relative to the  assumptions
used to price  these  products  at  issue.  The  Company  attempts  to limit its
exposure to these products by being  conservative in pricing,  thereby  limiting
sales  and  lessening  the  possibility  of  adverse  experience.  Many of these
contracts are not surrenderable at the option of the policyholder.

     Other General Account  Insurance  Products.  The Company had $374.5 million
and $400.2  million of assets as of December  31,  2000 and 1999,  respectively,
supporting  general  account  products,  including  traditional  and  term  life
insurance,  accidental and health insurance,  and long-term care insurance.  For
these products,  the liability cash flows have actuarial  uncertainty.  However,
their  amounts  and timing do not vary  significantly  with  changes in interest
rates.

     Decreasing Interest Rates. Under scenarios in which interest rates fall and
remain at levels significantly lower than rates prevailing at December 31, 2000,
minimum guarantees for annuity and universal life policies will cause the spread
between the portfolio yield and the interest rate credited to  policyholders  to
narrow.  The earned rate on the annuity and universal life insurance  portfolios
averaged  7.19% as of December  31,  2000,  providing  some  cushion for further
decline in earned  interest rates before there is  insufficient  margin to cover
minimum  guaranteed  interest rates plus the required spread for  profitability.
The maturity structure and call provisions of the related investment  portfolios
also protect the imbedded  interest rate cushion for a period of time.  However,
spreads are at risk if interest rates fall below current levels and remain lower
for a  sustained  period  of time.  The  Company  believes  that the  portfolios
supporting its annuity and investment oriented insurance products have a prudent
degree of call protection.

     The Company held $605.5 million and $931.7 million of mortgage-backed bonds
which  represented  35.3% and 33.9% of total invested  assets as of December 31,
2000 and 1999, respectively.  The Company invests in mortgage- backed securities
in order to enhance  portfolio  yields and maintain a reliable  cash flow stream
from the invested asset portfolio. The Company maintains sophisticated models to
measure the effective duration and option-adjusted  duration of the consolidated
investment portfolio. These models are designed to allow accurate measurement of
the convexity  risks  inherent in that  percentage of the portfolio  invested in
mortgage-backed securities and other callable securities. Convexity is a measure
of the  responsiveness  of the price of a  security  to changes in yields and is
normally a positive attribute of a portfolio.  The Company manages the portfolio
convexity  risk within the context of the overall asset and liability  model and
the quantification of disintermediation risk. Generally,  disintermediation risk
is a risk that net cash outflows may occur at a time when the sale of assets can
only be  accomplished  at undesirable  prices.  Due to the combination of recent
lower interest rates and increased  efficiency by mortgage holders in exercising
their  prepayment  options,  the  riskiness of these  securities  has  increased
without a compensating adjustment to risk premiums. Accordingly, the Company may
consider  reducing its exposure to the  mortgage-backed  bonds in future  years,
reducing its ability to enhance yield with these types of securities.

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

                                       45

<PAGE>

in interest  rates may be adverse  thereby  exceeding  corporate  risk tolerance
levels.  The risk of increasing  interest rates is reduced to the extent renewal
premiums are collected on periodic premium paying products.

RISK MANAGEMENT

     The  Company  seeks to invest  its  available  funds in a manner  that will
maximize its investment  return and fund future  obligations  to  policyholders,
subject to  appropriate  risk  considerations.  The  Company  seeks to meet this
objective  through  investments  that (i) have  similar  characteristics  to the
liabilities they support;  (ii) are diversified  among  industries,  issuers and
geographic locations;  and (iii) make up a predominantly  investment-grade fixed
maturity  securities  portfolio.  The Company's products  incorporate  surrender
charges, or other features to encourage persistency.  Approximately 75.4% of the
total  insurance  liabilities at December 31, 2000,  had surrender  penalties or
other restrictions and approximately 4.9% are not subject to surrender.

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

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

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

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

     If Treasury yields were to decrease by 100 basis points from their December
31, 2000 levels, the fair value of these insurance businesses, as defined above,
would be $14.7  million  less than the fair value  assuming  no change  from the
December  31,  2000  levels.  Management  believes  this level of market risk is
comparable to that at December 31, 1999.

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



                                       46

<PAGE>



DEBT STRUCTURE

     Borrowed  capital at December 31, 2000  includes  outstanding  principal of
$80.0  million  of a term note  maturing  September  2006 and $4.0  million of a
revolving  loan  maturing June 2005 under a senior  credit  agreement.  Interest
expense on the bank credit  facility,  which contains  floating rate debt,  will
fluctuate as prevailing  interest rates change. At December 31, 2000, a relative
100 basis point increase in interest rates would increase  interest expense on a
pre-tax basis by approximately $800,000.

INVESTMENTS AND RISK OF DEFAULT

     The  Company  continuously  evaluates  its  investment  portfolio  and  the
conditions under which it might sell securities,  including  changes in interest
rates,  changes in prepayment risks,  liquidity needs, asset liability matching,
tax planning  strategies and other economic  factors.  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 $1,474.6
million and  $2,363.7  million at December 31, 2000 and 1999,  respectively.  Of
those  securities  available for sale 92.1% and 93.2% were rated BBB or above by
Standard & Poor's at December 31, 2000 and 1999, respectively.

     During the years ended  December 31, 2000 and 1999,  Southwestern  Life and
Security  Life sold $549.3  million  and $337.5  million of fixed  maturity  and
equity  securities,  and purchased  $159.5  million and $461.3  million of fixed
maturity and equity  securities,  respectively.  Such sales and  purchases  were
often  effected to improve the quality of the  investment  portfolio or to avoid
prepayment risks.

     Mortgage  loans on real estate  amounted to 0.6% and 0.7% of total invested
assets as of December 31, 2000 and 1999, respectively.  As of December 31, 2000,
there were no non-performing loans.

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


                                       47

<PAGE>



Item 8.   Financial Statements and Supplementary Data

                                                                            Page

Management's Responsibility for Financial Statements......................... 49

Southwestern Life Holdings, Inc. and Subsidiaries............................ 50


                                       48

<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.

     The Company's independent auditors are engaged to express an opinion on the
financial statements, 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 primarily
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
auditors,  to review matters of a material nature related to financial reporting
and the  planning,  results  and  recommendations  of  audits.  The  independent
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.




Bernard Rapoport               David A. Commons
Chief Executive Officer        Senior Vice President and Chief Financial Officer


                                       49

<PAGE>



INDEPENDENT AUDITORS' REPORT

     The Shareholders and Board of Directors of Southwestern Life Holdings, Inc.

     We  have  audited  the   accompanying   consolidated   balance   sheets  of
Southwestern  Life Holdings,  Inc. and  subsidiaries as of December 31, 2000 and
1999, and the related  consolidated  statements of operations and  comprehensive
loss,  changes in  shareholders'  equity and cash flows for each of the years in
the three-year  period ended  December 31, 2000.  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
Life Holdings,  Inc. and  subsidiaries as of December 31, 2000 and 1999, and the
results  of their  operations  and their cash flows for each of the years in the
three-year  period ended  December  31,  2000,  in  conformity  with  accounting
principles generally accepted in the United States of America.

     As discussed in Note 7, the Company  changed its method of recording  claim
reserves associated with disability income products of the Career Sales Division
during the year ended December 31, 1998. The effect of the change in methodology
is  inseparable  from the effect of the change in  accounting  estimates  and is
accordingly  reflected in operations as a change in accounting  estimate for the
year ended December 31, 1998.





KPMG LLP
Dallas, Texas
April 8, 2001


                                       50

<PAGE>
                SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                      (In thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                         As of December 31,
                                                                                      ------------------------
ASSETS:                                                                                   2000         1999
                                                                                      ----------- ------------
<S>                                                                                   <C>         <C>
Investments:
   Fixed maturities available for sale, at fair value (amortized cost $1,525,471 in
     2000 and $2,485,996 in 1999).....................................................$ 1,474,583 $  2,363,690
   Equity securities available for sale, at fair value (cost $621 in 2000 and
     $2,008 in 1999)..................................................................        420        2,008
   Mortgage loans on real estate, net of allowance of $--in 2000 and $682 in 1999.....      9,967       20,032
   Policy loans.......................................................................    147,373      197,287
   Other investments..................................................................     24,841       26,570
                                                                                      ----------- ------------
     Total investments ...............................................................  1,657,184    2,609,587
Cash and cash equivalents.............................................................     59,956      141,636
Accrued investment income.............................................................     23,494       37,922
Accounts and notes receivable, net of allowance of $2,514 in 2000 and $5,910 in 1999..        780       11,935
Present value of insurance in force...................................................     85,982      119,766
Deferred policy acquisition costs.....................................................     63,552      113,726
Costs in excess of net assets acquired................................................     76,336       79,725
Income taxes, primarily deferred......................................................     74,834      111,517
Due from reinsurers...................................................................    431,253       33,977
Other assets..........................................................................     49,406       28,357
                                                                                      ----------- ------------
     Total assets ................................................................... $ 2,522,777 $  3,288,148
                                                                                      =========== ============

LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy liabilities and accruals.......................................................$ 2,190,890 $  2,756,957
Notes payable.........................................................................     84,000      279,646
Accrued expenses and other liabilities................................................     80,329       98,579
                                                                                      ----------- ------------
     Total liabilities................................................................  2,355,219    3,135,182
                                                                                      ----------- ------------

Shareholders' equity:
$3.375 Convertible Preferred Stock, $.01 par value, $50 redemption value; authorized
   issued and outstanding 2,300,000 in 1999...........................................         --      120,216
$3.50 Series II Convertible Preferred Stock, $.01 par value, $50 redemption value;
   authorized issued and outstanding 2,875,000 in 1999................................         --      151,736
Common stock, $.01 par value; authorized 15,000,000; issued and
   outstanding 9,059,000..............................................................         91           --
Common stock, $.01 par value; authorized 100,000,000; issued and
   outstanding 30,143,416 in 1999.....................................................         --          303
Additional paid-in capital............................................................    724,726      428,974
Accumulated other comprehensive income, net of income taxes...........................    (30,206)     (62,712)
Accumulated deficit...................................................................   (527,053)    (453,487)
Treasury shares (928,685 in 1999).....................................................         --      (30,829)
Notes receivable and other assets secured by common stock.............................         --       (1,235)
                                                                                      ----------- ------------
     Total shareholders' equity.......................................................    167,558      152,966
                                                                                      ----------- ------------
     Total liabilities and shareholders' equity ......................................$ 2,522,777 $  3,288,148
                                                                                      =========== ============
</TABLE>
           See accompanying Notes to Consolidated Financial Statements


                                       51
<PAGE>
                SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                    (In thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                                             For the years ended December 31,
                                                                         ---------------------------------------
                                                                            2000           1999          1998
                                                                         -----------   -----------   -----------
<S>                                                                      <C>           <C>           <C>
REVENUES:
   Premiums............................................................  $    19,666   $   197,452   $   321,221
   Interest-sensitive policy product charges...........................      104,149       141,556       137,937
   Net investment income...............................................      139,257       257,600       369,052
   Other income........................................................        9,545        33,932        37,717
   Net gains (losses) from the sale of investments.....................      (12,922)         (502)       14,068
   Net gains (losses) from sales of subsidiaries (including foreign
     currency translation losses of $24,978 realized in 1999 on sale)..       (8,397)        6,602            --
                                                                         -----------   -----------   -----------
       Total revenues..................................................      251,298       636,640       879,995
                                                                         -----------   -----------   -----------
BENEFITS AND EXPENSES:
   Policy benefits.....................................................      198,186       377,587       541,762
   Amortization of present value of insurance in force and deferred
     policy acquisition costs..........................................       31,288        67,137       115,107
   Amortization of costs in excess of net assets acquired and
     other intangibles.................................................        3,389        13,316        15,121
   Underwriting and other administrative expenses......................       67,234       151,380       231,836
   Interest and amortization of deferred debt issuance costs...........       16,209        40,222        42,960
   Restructuring charge................................................          735         4,993        14,877
   Impairment of intangibles...........................................           --        95,522            --
   Impairment provision associated with assets of Businesses Held for Sale        --        58,486       342,960
                                                                         -----------   -----------   -----------
       Total benefits and expenses.....................................      317,041       808,643     1,304,623
                                                                         -----------   -----------   -----------
Loss before income taxes (benefits) and extraordinary charge...........      (65,743)     (172,003)     (424,628)
     Income taxes (benefits)...........................................          924        28,709        (3,369)
                                                                         -----------   -----------   -----------
Loss before extraordinary charge.......................................      (66,667)     (200,712)     (421,259)
     Extraordinary charge (net of income taxes of $--, $--and $900).....      (2,443)           --        (1,671)
                                                                         -----------   -----------   -----------
Net loss  ............................................................   $   (69,110)  $  (200,712)  $  (422,930)
                                                                         ===========   ===========   ===========
PER SHARE INFORMATION(1):
Basic:
   Net loss before extraordinary charge................................  $     (7.36)  $    (22.16)  $    (46.50)
     Extraordinary charge, net of income taxes.........................        (0.27)           --         (0.19)
                                                                         -----------   -----------   -----------
   Net loss ...........................................................  $     (7.63)  $    (22.16)  $    (46.69)
                                                                         ===========   ===========   ===========
Common shares used in computing basic loss per share...................        9,059         9,059         9,059
                                                                         ===========   ===========   ===========
Diluted:
   Net loss before extraordinary charge................................  $     (7.36)  $    (22.16)  $    (46.50)
     Extraordinary charge, net of income taxes.........................        (0.27)           --         (0.19)
                                                                         -----------   -----------   -----------
   Net loss ..........................................................   $     (7.63)  $    (22.16)  $    (46.69)
                                                                         ===========   ===========   ===========
Common shares used in computing diluted loss per share.................        9,059         9,059         9,059
                                                                         ===========   ===========   ===========
--------------------
(1)Restated to reflect outstanding common shares as a result of recapitalization
   effective June 13, 2000 as if recapitalization occurred at beginning of 1998.

COMPREHENSIVE LOSS INFORMATION:
   Net loss ...........................................................  $   (69,110)  $  (200,712)  $  (422,930)
                                                                         -----------   -----------   -----------
   Other comprehensive income (loss), before tax:
   Unrealized foreign currency translation loss:
     Change in unrealized foreign currency translation loss during the year       --         1,713        (6,089)
     Reclassification adjustment resulting from sale of subsidiaries...           --        24,978            --
   Unrealized losses on securities:
     Unrealized holding gains (losses) during the period...............       21,281      (167,940)          784
     Reclassification adjustment for (gains) losses included in net loss      13,522          (418)      (14,552)
     Reclassification adjustment resulting from sale of subsidiaries...       15,206            55            --
                                                                         -----------   -----------   -----------
                                                                              50,009      (141,612)      (19,857)
   Income tax (expense) benefit related to items of other
     comprehensive income (loss).......................................      (17,503)       58,905         4,818
                                                                         -----------   -----------   -----------
   Other comprehensive income (loss), net of tax.......................       32,506       (82,707)      (15,039)
                                                                         -----------   -----------   -----------
       Comprehensive loss..............................................  $   (36,604)  $  (283,419)  $  (437,969)
                                                                         ===========   ===========   ===========
</TABLE>

           See accompanying Notes to Consolidated Financial Statements

                                       52
<PAGE>

                SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                              For the years ended December 31,
                                                                         ---------------------------------------
                                                                            2000           1999          1998
                                                                         -----------   -----------   -----------
<S>                                                                      <C>            <C>          <C>
Convertible preferred stock:
   Balance at beginning of year........................................  $   271,952   $   254,127   $   249,670
   Accrual of dividends in arrears.....................................        4,456        17,825         4,457
   Exchanged for SWL Holdings common stock.............................     (276,408)           --            --
                                                                         -----------   -----------   -----------
       Balance at end of year..........................................           --       271,952       254,127
                                                                         -----------   -----------   -----------

Common stock:
   Balance at beginning of year........................................          303           301           289
   Issuance of common stock of PennCorp................................           --             2            10
   Exercise of stock options issued by PennCorp........................           --            --             2
   Cancellation of PennCorp common stock as a result of
     recapitalization..................................................         (303)           --            --
   Issuance of SWL Holdings common stock as a result of
     recapitalization..................................................           91            --            --
                                                                         -----------   -----------   -----------
       Balance at end of year..........................................           91           303           301
                                                                         -----------   -----------   -----------

Additional paid-in capital:
   Balance at beginning of year........................................      428,974       430,321       397,590
   Issuance of common stock of PennCorp................................           --           100        30,717
   Exercise of stock options issued by PennCorp........................           --            --         2,014
   Reissuance of treasury stock of PennCorp............................           --        (1,447)           --
   Cancellation of PennCorp common stock...............................      (31,457)           --            --
   Cash received on issuance of SWL Holdings common stock..............       46,004            --            --
   Issuance of SWL Holdings common stock as a result of
     recapitalization..................................................      280,704            --            --
   Issuance of SWL Holdings stock options..............................          501            --            --
                                                                         -----------   -----------   -----------
       Balance at end of year..........................................      724,726       428,974       430,321
                                                                         -----------   -----------   -----------

Accumulated other comprehensive income: Unrealized foreign
     currency translation losses:
     Balance at beginning of year......................................           --       (26,691)      (20,602)
     Change in unrealized foreign currency translation gains (losses)
       during the year, net of income taxes............................           --         1,713        (6,089)
     Decrease in unrealized foreign currency translation loss resulting
       from sale of subsidiary.........................................           --        24,978            --
                                                                         -----------   -----------   -----------
         Balance at end of year........................................           --            --       (26,691)
                                                                         -----------   -----------   -----------
   Unrealized gains on securities available for sale:
     Balance at beginning of year......................................      (62,712)       46,686        55,636
                                                                         -----------   -----------   -----------
     Unrealized holding gains (losses) during the period...............       21,281      (167,940)          784
     Reclassification adjustments for (gains) losses included in
       net loss........................................................       13,522          (418)      (14,552)
     Reclassification resulting from sale of subsidiaries..............       15,206            55            --
                                                                         -----------   -----------   -----------
                                                                              50,009      (168,303)      (13,768)
     Income taxes......................................................      (17,503)       58,905         4,818
                                                                         -----------   -----------   -----------
       Net change in unrealized gains (losses).........................       32,506      (109,398)       (8,950)
                                                                         -----------   -----------   -----------
         Balance at end of year........................................      (30,206)      (62,712)       46,686
                                                                         -----------   -----------   -----------
         Total other comprehensive income (loss).......................      (30,206)      (62,712)       19,995
                                                                         -----------   -----------   -----------
</TABLE>
                            (Continued on Next Page)

                                       53

<PAGE>



                SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
     CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                              For the years ended December 31,
                                                                         ---------------------------------------
                                                                            2000           1999          1998
                                                                         -----------   -----------   -----------
<S>                                                                      <C>            <C>          <C>
Retained earnings (deficit):
   Balance at beginning of year........................................     (453,487)     (234,921)      211,055
   Net loss............................................................      (69,110)     (200,712)     (422,930)
   Dividends on common stock of PennCorp...............................           --            --        (2,860)
   Dividends on preferred stock of PennCorp............................       (4,456)      (17,825)      (18,273)
   Redemption of Series C preferred stock of PennCorp..................           --            --        (1,913)
   Earned portion of treasury stock awarded to employees...............           --           (29)           --
                                                                         -----------   -----------   -----------
         Balance at end of year........................................     (527,053)     (453,487)     (234,921)
                                                                         -----------   -----------   -----------

Treasury shares:
   Balance at beginning of year........................................      (30,829)      (32,391)      (32,130)
   Purchases of treasury stock of PennCorp.............................           --            --          (261)
   Reissuance of treasury stock of PennCorp............................           --         1,562            --
   Cancellation of treasury stock of PennCorp as a result of
     recapitalization..................................................       30,829            --            --
                                                                         -----------   -----------   -----------
         Balance at end of year........................................           --       (30,829)      (32,391)
                                                                         -----------   -----------   -----------

Notes receivable and other assets secured by common stock:.............           --        (1,235)       (1,491)
                                                                         -----------   -----------   -----------
       Total shareholders' equity......................................  $   167,558   $   152,966   $   435,941
                                                                         ===========   ===========   ===========
</TABLE>

           See accompanying Notes to Consolidated Financial Statements

                                       54

<PAGE>
                SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                 For the years ended December 31,
                                                                                 ---------------------------------
                                                                                   2000        1999        1998
                                                                                 --------    --------    ---------
<S>                                                                              <C>        <C>          <C>
Cash flows from operating activities:
   Loss before extraordinary charge..........................................    $(66,667)  $(200,712)   $(421,259)
   Adjustments to reconcile loss before extraordinary charge to net cash
     provided by operating activities:
       Impairment provision associated with assets of Businesses Held for Sale         --      58,486      342,960
       Impairment of intangibles..............................................         --      95,522           --
       Net loss (gain) from sales of subsidiaries.............................      8,397      (6,602)          --
       Capitalization of deferred policy acquisition costs....................    (17,066)    (72,620)    (126,253)
       Amortization of present value of insurance in force, deferred policy
         acquisition costs, intangibles, depreciation and accretion, net......     30,382      73,753      120,971
       Increase (decrease) in policy liabilities and accruals and other
         policyholder funds...................................................    (22,594)     15,984       57,730
       Deferred income taxes (benefit)........................................    (12,916)     29,868        7,884
       Other, net.............................................................     41,515      26,977       10,757
                                                                                 --------    --------    ---------
         Net cash provided (used) by operating activities.....................    (38,949)     20,656       (7,210)
                                                                                 --------    --------    ---------
Cash flows from investing activities:
   Cash received from sales of subsidiaries, net of cash and short-term
     investments of $39,186 and $138,902 of subsidiaries sold in 2000 and 1999     64,140     138,718           --
   Cash and short-term investments acquired in acquisition of businesses,
     net of cash expended of $82,771 in 1998..................................         --          --       91,492
   Purchases of fixed maturity securities available for sale..................   (160,761)   (814,215)  (1,049,341)
   Purchases of equity securities available for sale..........................       (671)         --       (5,391)
   Maturities of fixed maturity securities available for sale.................    107,829     354,346      304,122
   Sales of fixed maturity securities available for sale......................    559,051     603,496      987,788
   Sales of equity securities available for sale..............................        393          21       32,062
   Acquisitions and originations of mortgage loans............................         --      (1,082)     (36,965)
   Sales of mortgage loans....................................................      6,093      15,129       20,867
   Principal collected on mortgage loans......................................      4,811      34,069       50,794
   Other, net.................................................................     (1,892)     28,956       21,203
                                                                                 --------    --------    ---------
         Net cash provided by investing activities............................    578,993     359,438      416,631
                                                                                 --------    --------    ---------
Cash flows from financing activities:
   Additional borrowings......................................................     89,000          --      203,000
   Issuance of common stock...................................................     46,004          --            3
   Reduction of notes payable.................................................   (285,792)   (271,277)    (126,839)
   Receipts from interest-sensitive products credited to policyholders'
     account balances.........................................................    116,690     181,322      251,627
   Return of policyholders' account balances on interest-sensitive products...   (151,176)   (372,977)    (605,757)
   Cash transferred to reinsurer..............................................   (433,037)         --           --
   Dividends..................................................................         --          --      (13,372)
   Other, net.................................................................     (3,413)        216       (2,838)
                                                                                 --------    --------    ---------
         Net cash used by financing activities................................   (621,724)   (462,716)    (294,176)
                                                                                 --------    --------    ---------
         Net increase (decrease) in cash......................................    (81,680)    (82,622)     115,245
Cash and cash equivalents at beginning of year (including $131,531 of cash and
   cash equivalents classified as Businesses Held for Sale in 1999)...........    141,636     224,258      109,013
                                                                                 --------    --------    ---------
Cash and cash equivalents at end of year (including $131,531 of cash and
   cash equivalents classified as assets of Businesses Held for Sale in 1998).   $ 59,956    $141,636    $ 224,258
                                                                                 ========    ========    =========
Supplemental disclosures:
   Income taxes paid (refunded)...............................................   $  3,198    $ (5,780)   $   5,814
   Interest paid..............................................................     16,748      38,014       38,017
Non-cash financing activities:
   Stock received in consideration for notes receivable.......................        959          --           --
   Cancellation of preferred stock and related dividends in exchange
     for common stock.........................................................    279,746          --           --
   Cancellation of common stock and treasury shares...........................        931          --           --
   Issuance of stock grants...................................................      1,050          --           --
   Stock options issued to consultants and former president of the company....        501          --           --
   Redemption of Series C Preferred Stock.....................................         --          --       22,227
   Debt assumed with acquisition..............................................         --          --      115,015
   Issuance of common stock associated with the acquisition of the Fickes
     and Stone Knightsbridge Interests........................................         --          --        8,500
   Accrued and unpaid preferred stock dividends...............................         --      17,825        4,457
   Reissuance of treasury stock...............................................         --       1,562           --
   Other .....................................................................         --          --          261
</TABLE>

           See accompanying Notes to Consolidated Financial Statements

                                       55

<PAGE>

                SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION

     Southwestern  Life  Holdings,  Inc.  ("SWL  Holdings"  or  the  "Company"),
formerly known as PennCorp Financial Group, Inc.  ("PennCorp"),  is an insurance
holding  company.  The name of the Company was changed  effective June 13, 2000,
the date the recapitalization transactions (see Note 3) were consummated.

     As further  discussed  in Note 3, on  February  7, 2000,  PennCorp  filed a
voluntary petition for relief under Chapter 11 ("Chapter 11") of title 11 of the
United States  Bankruptcy Code ("Bankruptcy  Code"). On June 13, 2000,  PennCorp
consummated a Recapitalization  Plan and emerged from the Chapter 11 proceedings
as SWL Holdings.  The Company owns 100% of SWFC Nevada,  Inc.  ("SWFC") formerly
known as Southwestern  Financial  Corporation ("SW  Financial").  Through SWFC's
wholly-owned  life  insurance  subsidiary,  Pacific Life and Accident  Insurance
Company ("PLAIC"), and its wholly-owned life insurance subsidiary,  Southwestern
Life Insurance Company  ("Southwestern  Life"), the Company offers a broad range
of life,  annuity  and  accident  and health  insurance  products  through  both
independent and exclusive agents. Additionally,  the Company owns KB Management,
LLC ("KB  Management")  which provides  management and advisory  services to the
Company and its  insurance  subsidiaries  and  Southwestern  Financial  Services
Corporation  ("SFSC")  which has a services  agreement  with the life  insurance
affiliates to provide personnel,  data processing and other operational services
at cost. As part of a subsidiary realignment,  Security Life and Trust Insurance
Company ("Security Life"),  formerly a wholly-owned life insurance company,  was
merged into Southwestern Life effective June 30, 2000.

     Previously,   PennCorp  also  owned  Pennsylvania  Life  Insurance  Company
("PLIC")  and its  wholly-owned  subsidiary,  PennCorp  Life  Insurance  Company
(collectively  referred to as "Penn Life", sold July 30, 1999);  Peninsular Life
Insurance  Company  ("Peninsular",  sold July 30, 1999;  Professional  Insurance
Company  ("Professional",  sold March 31, 1999); Pioneer Security Life Insurance
Company    ("Pioneer    Security");    and   its    wholly-owned    subsidiaries
American-Amicable Life Insurance Company of Texas and Pioneer American Insurance
Company (Pioneer  Security and its subsidiaries are collectively  referred to as
"AA  Life",  sold  February  4,  2000);   Constitution  Life  Insurance  Company
("Constitution",  sold July 30, 1999);  Union Bankers  Insurance Company ("Union
Bankers",  sold  July 30,  1999);  Marquette  National  Life  Insurance  Company
("Marquette",  sold July 30, 1999);  Occidental Life Insurance  Company ("OLIC",
sold  February 4, 2000);  United Life and  Annuity  Insurance  Company  ("United
Life",  sold April 30, 1999);  UC Mortgage  Corp.  ("UC",  sold April 30, 1999);
Cyberlink  Development,  Inc.  ("Cyberlink",  sold April 30, 1999);  KIVEX, Inc.
("KIVEX",  sold June 30, 1000), an internet service provider; and Marketing One,
Inc.  ("Marketing  One",  sold November 30, 3000),  a  wholly-owned  third party
marketing organization.

     Operating  results of all  subsidiaries  sold have been reported  herein as
"Businesses Held for Sale" or "Businesses  Sold." United Life, UC, Cyberlink and
certain assets of Marketing One  collectively  are referred to herein as "United
Life Assets." Penn Life, Peninsular,  Constitution,  Union Bankers and Marquette
collectively  are  referred to herein as "Career  Sales  Division."  AA Life and
Occidental collectively are referred to herein as "Payroll Sales Division."

     The accompanying  consolidated financial statements include the accounts of
the Company and its  subsidiaries.  All  significant  intercompany  accounts and
transactions have been eliminated.

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

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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 and equity securities classified as available for sale are
recorded at fair  value,  as they may be sold in response to changes in interest
rates,  prepayment risk, liquidity needs, the need or desire to increase income,
capital or other economic  factors.  Fair values are determined  based on quoted
market prices,  where available.  For fixed maturities and equity securities not
actively   traded,   fair  values  are  estimated  using  values  obtained  from
independent  pricing  services or are  estimated  based on expected  future cash
flows using a current  market rate  applicable to the yield,  credit quality and
maturity of the  investments.  Changes in unrealized gains and losses related to
securities  available for sale are recorded as accumulated  other  comprehensive
income, a separate  component of shareholders'  equity, net of applicable income
taxes and amount  attributable to deferred policy  acquisition costs and present
value of insurance  in force  related to  universal  life and annuity  products.
Mortgage-backed  fixed maturity  securities held for investment or available for
sale are amortized using the interest method including  anticipated  prepayments
at the date of  purchase.  Significant  changes  in  estimated  cash  flows from
original assumptions are reflected in the period of such change.  Mortgage loans
on real estate are  recorded at cost,  adjusted for  amortization  of premium or
discount and provision for loan loss, if necessary.  Policy loans and short-term
investments are recorded at cost.  Other invested assets include  investments in
limited   partnerships   stated  at  cost  and   adjusted   for   contributions,
distributions  and  undistributed  income  and other  miscellaneous  investments
carried at cost.

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

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

Cash and Cash Equivalents

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

Accounts and Notes Receivable

     Accounts and notes  receivable  consist  primarily of agents'  balances and
premiums  receivable  from  agents  and  policyholders.   Agents'  balances  are
partially  secured  by  commissions  due to agents in the  future  and  premiums
receivable are secured by policy liabilities. An allowance for doubtful accounts
is established,  based upon specific  identification and general provision,  for
amounts which the Company  estimates  will not  ultimately be collected.  During
2000,  1999 and 1998, the Company wrote off  receivables  totaling $3.3 million,
$1.5 million and $2.0 million, respectively.

Intangible Assets

     The Company  continually  monitors the recoverability of the carrying value
of intangible assets using the methodology  prescribed in Statement of Financial
Accounting  Standards  ("SFAS") No. 121 and Accounting  Principles Board ("APB")
No. 17  "Intangible  Assets." The Company  evaluates  long-lived  assets and the
related  intangible  assets  for  impairment   whenever  events  or  changes  in
circumstances  indicate  the  carrying  amounts  of  these  assets  may  not  be
recoverable.  Recoverability  of these  assets  is  determined  by  comparing  a
forecast of the undiscounted net cash flows

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<PAGE>



of the entity to the asset  carrying  amount.  If the entity is determined to be
unable to recover  the  carrying  amount of its  assets,  intangible  assets are
written  down  initially,  followed  by  the  other  long-lived  assets  of  the
operation,  to fair value.  Fair value is determined  based upon discounted cash
flows or appraised values, depending on the nature of the associated assets.

     During 1999 and 1998, the Company recognized an aggregate $58.5 million and
$343.0 million,  respectively,  of non-cash charges related to the fair value of
consideration  to be received upon  disposition of certain  operating  companies
which are aggregated  for purposes of  presentation  of the Company's  financial
information as "assets and liabilities of Businesses Held for Sale."

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

     The Company  evaluated the  recoverability  of all intangible assets of the
Payroll  Sales  Division  based upon the sales  proceeds  received from the sale
which was entered into on January 8, 2000 and consummated  February 4, 2000 (see
Notes 3 and 23).  As a result,  an  impairment  provision  of $95.5  million was
reflected in the Statement of Operations for the year ended December 31, 1999.

Deferred Policy Acquisition Costs

     Estimated  costs  of  acquiring  new  business  which  vary  with,  and are
primarily related to, the production of new business,  have been deferred to the
extent  that such  costs are  deemed  recoverable  from  future  revenues.  Such
estimated  costs  include   commissions,   certain  costs  of  policy  issuance,
underwriting,  certain  variable  agency and marketing  expenses and other costs
directly associated with these functions to the extent such costs are determined
to vary with and are primarily related to the production of new business.  Costs
deferred  associated with accident and 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.

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 $97.4
million and $119.3 million as of December 31, 2000 and 1999, respectively.

Costs in Excess of Net Assets Acquired

     Costs in excess of the fair  value of net  assets  acquired  are  primarily
amortized on a  straight-line  basis  ranging  from 25 to 30 years.  Accumulated
amortization  was $24.0  million and $32.9  million as of December  31, 2000 and
1999, respectively.  In 1999, unamortized costs in excess of net assets acquired
in  the  amount  of  $19.3  million  was  impaired  due  to  the  evaluation  of
recoverability of intangible assets of the Payroll Sales Division as a result of
its sale on February 4, 2000 (see Notes 3 and 23). During 1999,  costs in excess
of net  assets  acquired  of a  non-insurance  subsidiary  in the amount of $7.6
million  was  written  off as the result of the  decision  to cease  operations.
During 1998, unamortized costs in excess of net assets acquired in the amount of
$22.8 million were  transferred to assets of Businesses Held for Sale and $114.5
million was written off in connection with the impairment  provision  associated
with assets of Businesses Held for Sale.


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     For the  year  ended  December  31,  1998,  the  Company  made a  valuation
determination with respect to certain preacquisition contingencies.  The Company
reduced tax  liabilities  and associated  costs in excess of net assets acquired
associated  with the SW Financial and United Life  acquisitions  by $6.4 million
and  $647,000,  respectively,  as a  result  of the  Company  resolving  certain
acquisition date contingencies.

Policy Liabilities

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

     Policy and contract claims represent  estimates of both reported claims and
claims incurred but not reported based on experience.  Prior to disposition, the
Company had been closely monitoring the development of claims reserve experience
for Penn  Life.  The  methodology  previously  utilized  had  experienced,  what
appeared to be, a deterioration  of the adequacy of claims  reserves  associated
with disability  income products sold prior to the Company's  ownership.  During
1998, the Company  changed its  methodology  in recording  these  reserves.  The
effect of the change in methodology is inseparable from the effect of the change
in accounting estimate and is accordingly reflected in operations as a change in
accounting estimate for 1998.

Income Taxes

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

     In  assessing  the  realization  of deferred  taxes,  management  considers
whether it is more likely than not that some  portion or all of the deferred tax
assets will be  realized.  The  ultimate  realization  of deferred tax assets is
dependent on the generation of future taxable income during the periods in which
those  temporary   differences  become  deductible.   Management  considers  the
scheduled reversal of deferred tax liabilities,  projected future taxable income
and tax planning strategies in making this assessment.

Treasury Shares

     Shares  purchased  are  recorded  at cost as a reduction  of  shareholders'
equity. Shares abandoned by the associated shareholders are recorded at no cost.
The cost basis of shares  reissued from treasury are  determined on the basis of
specific  identification.  During 2000, all treasury  shares were cancelled as a
result of the consummation of the recapitalization transaction (see Note 3).

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

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<PAGE>



charged to expenses include benefit claims incurred during the period in excess
of policy account balances and interest credited to policy account balances.

Net Loss per Common Share

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

     Loss per share for each of the  three  years  ended  December  31,  2000 is
computed based on outstanding  common shares of the recapitalized  company as if
the  recapitalization  occurred  at the  beginning  of 1998.  As a  result,  the
computation  of loss per share does not include  the  preferred  stock  dividend
requirements.

     SFAS No. 123, "Accounting for Stock-Based Compensation," requires increased
disclosure of stock options and other stock based  compensation.  This statement
provides a choice for the  accounting of employee  stock  compensation  plans. A
company may elect to use a new fair-value methodology,  under which compensation
cost is measured and recognized in results of operations, or continue to account
for these plans under APB No. 25,  "Accounting  for Stock Issued to  Employees,"
and related Interpretations. Note 12 contains a summary of the pro forma effects
to reported net loss and net loss per share for 2000,  1999 and 1998,  as if the
Company had elected to account for employee stock  compensation  plans utilizing
the fair value methodology prescribed by SFAS No. 123.

Business Combinations

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

Foreign Currency Translation

     The financial statement accounts of the Company's Canadian operations (sold
July 30, 1999),  which are denominated in Canadian dollars,  are translated into
U.S.  dollars as follows:  (i)  Canadian  currency  assets and  liabilities  are
translated  at the  rates of  exchange  as of the  balance  sheet  dates and the
related  unrealized  translation  adjustments are included as accumulated  other
comprehensive  income, a separate  component of shareholders'  equity,  and (ii)
revenues, expenses and cash flows, expressed in Canadian dollars, are translated
using a weighted average of exchange rates for each of the periods presented.

Reinsurance

     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.  Financial  reinsurance  contracts
that do not transfer  significant  insurance  risk are  accounted  for utilizing
deposit accounting.



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Accounting Pronouncements Not Yet Adopted

     In June 1998,  the FASB  issued SFAS No. 133,  "Accounting  for  Derivative
Instruments and Hedging Activities." SFAS No. 133 defines derivative instruments
and  provides   comprehensive   accounting  and  reporting   standards  for  the
recognition  and  measurement  of derivative and hedging  activities  (including
certain instruments embedded in other contracts).  It requires derivatives to be
recorded  in the  Consolidated  Balance  Sheet  at fair  value  and  establishes
criteria for hedges of changes in the fair value of assets,  liabilities or firm
commitments,  hedges of  variable  cash flows of  forecasted  transactions,  and
hedges of foreign currency  exposures of net investments in foreign  operations.
Changes in the fair value of derivatives not meeting  specific hedge  accounting
criteria would be recognized in the  Consolidated  Statement of  Operations.  In
June 2000, SFAS No. 138 was issued amending certain  provisions of SFAS No. 133.
The  Company  will adopt  SFAS No. 133 and SFAS No. 138 on January 1, 2001.  The
Company  evaluated  SFAS  No.133  and SFAS No.  138 and  does not  expect  their
adoption to have a material effect on the consolidated financial statements.

     In September  2000,  the Emerging  Issues Task Force  ("EITF")  issued EITF
99-20,  "Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized  Financial Assets". EITF 99-20 requires that
holders  of  certain  securitized  financial  assets  evaluate  whether  current
projected  cash  flows are  different  from the  projected  cash  flows when the
security was acquired. If the present value of the original projected cash flows
exceeds the present  value of the current  estimated  cash flows,  the  security
would be  considered  impaired to the extent  amortized  cost  exceeded its fair
market value.  The difference  would be recorded as a realized  investment loss.
EITF 99- 20 is effective for fiscal quarters beginning after March 15, 2001. The
Company is  currently  evaluating  the impact of EITF 99-20 on the  consolidated
financial statements.

Reclassifications

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

(3) RECAPITALIZATION, DISPOSITIONS, ACQUISITIONS AND OTHER EVENTS

Recapitalization and Petition for Relief under Chapter 11

     On  January  10,  2000,  PennCorp  announced  that  it had  agreed  to sell
Southwestern  Life and Security Life to Reassure America Life Insurance  Company
("Reassure  America") for $260.0  million  subject to certain  adjustments,  and
would accomplish such transaction through the filing of a voluntary petition for
relief under Chapter 11 of the Bankruptcy Code.

     On  February  7, 2000 (the  "Petition  Date"),  PennCorp  filed a voluntary
petition for relief under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). From the
Petition Date,  PennCorp continued to operate and manage its assets and business
as a  debtor-in-possession  as authorized by provisions of the Bankruptcy  Code.
None of  PennCorp's  insurance  subsidiaries  were  involved  in the  bankruptcy
filing.

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

     On March 15,  2000,  PennCorp  received  a  competing  bid in the form of a
recapitalization  plan submitted by Inverness/Phoenix  Capital LLC ("Inverness")
and Vicuna Advisors, LLC ("Vicuna") on behalf of the unofficial ad hoc committee
of preferred  stockholders,  and Mr. Bernard Rapoport  ("Rapoport") and Mr. John
Sharpe ("Sharpe") (the  "Recapitalization  Plan"). On March 23, 2000, PennCorp's
Board of Directors  selected  the  Recapitalization  Plan as the final  accepted
offer pursuant to the bidding procedures approved as part of the Sales Procedure
Order. On March 24, 2000, the Bankruptcy  Court approved the Board of Directors'
selection of the Recapitalization  Plan. On April 14, 2000, the Texas Department
of  Insurance  issued  its  order  approving  the Form A  acquisition  statement
submitted by Rapoport and Inverness  pursuant to the  Recapitalization  Plan. On
June 5, 2000, the Bankruptcy Court confirmed the Recapitalization Plan.

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     On June 13, 2000, the Company  consummated  the  Recapitalization  Plan and
emerged  from the  Chapter  11  proceedings  as SWL  Holdings.  Pursuant  to the
Recapitalization  Plan, the Company issued  5,175,000  shares of common stock in
exchange for all of the  outstanding  preferred  stock of PennCorp.  The Company
also issued  1,960,000  shares of common  stock  pursuant  to a rights  offering
underwritten by Inverness and Vicuna and 1,840,000 shares to Rapoport and Sharpe
in  connection  with their  investments.  These shares were issued at a price of
$12.50 per share and the Company  received $46.0 million in cash (net of related
expenses of $1.5 million).  Additionally,  the Company  awarded 60,000 shares to
two  executive  officers and 24,000  shares to a former  officer and director of
PennCorp in consideration of consulting services rendered in connection with the
recapitalization  transaction. All shares of PennCorp's former common stock were
canceled for no value.  Shares of SWL Holdings are listed on the Nasdaq National
Market under the symbol  "SWLH" and started  trading on September  28, 2000.  In
addition,  the Company  consummated  a new $95.0  million  credit  facility  and
borrowed  $81.0 million under it at closing.  According to the  Recapitalization
Plan,  the Company  received  $49.1 million from PLAIC as principal and interest
payments on an existing  surplus  debenture and $5.9 million as  dividends.  The
$55.0 million was made  available to PLAIC from  Southwestern  Life and Security
Life as an extraordinary  dividend. The Company used these proceeds to repay the
principal balances of PennCorp's senior and subordinated debt aggregating $179.6
million  (see Note 8) and to pay a break fee $6.0  million to  Reassure  America
upon the termination of its contract to purchase  Southwestern Life and Security
Life. Any and all other claims and  liabilities of PennCorp were paid or accrued
in accordance  with their terms.  The Company has  established an additional tax
valuation allowance on certain net operating loss  carryforwards,  which may not
be recoverable as a result of the recapitalization and other factors.

Disposition of Businesses and Other Events

     On March 31, 1999,  PennCorp  consummated  the sale of  Professional  to GE
Financial  Assurance Holdings,  Inc. ("GE Financial").  The operating results of
Professional  are included in the consolidated  operating  results through March
31,  1999.  On  September  15,  1999,  as a result  of  certain  settlement  and
consideration  adjustment provisions included in the purchase and sale agreement
PennCorp reduced the consideration received by $1.2 million. PennCorp realized a
gain from the sale totaling $1.1  million.  As a result of the sale,  unrealized
gains on securities available for sale decreased by $488,000.

     On April 30, 1999,  PennCorp  consummated the sale of United Life Assets to
ING America Insurance  Holdings,  Inc. ("ING").  The operating results of United
Life Assets are included in the consolidated operating results through April 30,
1999.  PennCorp realized a loss from the sale totaling $3.9 million. As a result
of the sale,  unrealized  gains on  securities  held for sale  decreased by $1.7
million.  The  purchase  and sale  agreement  includes  certain  settlement  and
consideration  adjustment  provisions  relating to certain mortgages retained by
PennCorp and federal  income tax  calculations  (see Note 19). In addition,  the
Company settled with ING a dispute over certain federal income tax  calculations
under the  provisions  of the United Life  Assets  purchase  and sale  agreement
relating  to the  differential  in tax  amounts  between  closing  and the final
return. The Company paid $721,000 with respect to the settlement.

     On June 30,  1999,  PennCorp  completed  the  sale of  KIVEX to  Allegiance
Telecom,  Inc. The operating  results of KIVEX are included in the  consolidated
operating  results  through  June 30,  1999.  PennCorp  recorded a gain of $30.9
million on the sale.

     On July  30,  1999,  PennCorp  consummated  the  sale of the  Career  Sales
Division to Universal American Financial Corp.  ("Universal  American").  During
1999 and prior to the consummation of the sale,  PennCorp incurred an additional
impairment provision of $58.5 million related to the Career Sales Division. This
resulted  from the  decrease  in the  nominal  purchase  consideration  of $38.0
million  partially  offset by an  estimated  discount to the stated value of the
note to be received.  In addition,  impairment  provision included the impact of
the  true-up of  statutory  capital  and  surplus of the Career  Sales  Division
companies  to  levels   specified  in  the  sale  agreement   which   aggregated
approximately  $24.2 million.  Other factors  modestly  impacting the impairment
provision included additional transaction costs, changes in unrealized gains and
losses of securities, foreign currency translation and net income not considered
in the determination of sale consideration.  The operating results of the Career
Sales Division are included in the consolidated  operating  results through July
30,  1999.  On  December  29,  1999,  as a  result  of  certain  settlement  and
consideration adjustment provisions, included in the purchase and sale agreement
PennCorp reduced the consideration received by $2.6 million. PennCorp realized a
foreign  currency  transaction  loss on the sale of the  Career  Sales  Division
totaling $25.0 million,  which  represented  previously  unrealized  translation
losses on PennCorp's Canadian insurance operations,

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partially offset by a gain of $3.5 million on the disposition resulting in a net
loss of $21.5 million. In addition, as a result of the sale, unrealized gains on
securities available for sale and unrealized foreign currency translation losses
decreased by $2.3 million and $25.0 million, respectively.

     During 1999,  PennCorp  used $267.0  million of the net proceeds from these
sales to pay down the outstanding  balance under the  then-existing  bank credit
facility.   In  addition,   PennCorp   repaid  an  additional  $2.0  million  of
indebtedness  during 1999 as a result of liquidity at the parent  company  above
the amounts prescribed in the then-existing bank credit facility, as amended.

     On February 4, 2000,  PennCorp  consummated  the sale of the Payroll  Sales
Division  receiving  total cash proceeds of $103.3  million.  As a result of the
sale,  unrealized  losses on  securities  available  for sale  decreased by $9.9
million. PennCorp recognized a loss of $8.4 million from the sale. PennCorp used
$100.0 million of the proceeds to repay a then-existing bank credit facility.

     Effective May 1, 2000, Southwestern Life and Security Life each consummated
with RGA  Reinsurance  Company  ("RGA") a 100% indemnity  coinsurance  agreement
relating to all of their respective deferred annuity business. Southwestern Life
and Security Life  transferred to RGA cash of $433.0 million,  which is equal to
the  amount  of the  reinsured  statutory  policy  liabilities  net of a  ceding
allowance  of $15.1  million.  The  Company  recorded a  deferred  gain of $10.2
million, representing the difference between ceded policy liabilities calculated
on a GAAP basis, net of deferred policy  acquisition  costs and present value of
insurance in force associated with these policies,  and the cash transferred net
of the ceding  allowance.  The deferred gain is being recognized in other income
over the life of the reinsured block of business. During the period from closing
to December 31, 2000,  the Company  recognized  $810,000 of the deferred  gains.
Southwestern  Life and Security Life retained the  administration  for the ceded
block of business and are reimbursed by RGA for administrative costs at the rate
of $5.00 per annuity  contract in force per month. (As a result of the merger of
Security Life into Southwestern Life effective June 30, 2000,  Southwestern Life
succeeded to all of Security Life's rights and  obligations  under its agreement
with RGA). The Company  recognized  $5.3 million in pre-tax  capital losses from
liquidating  invested  assets to provide  the cash  required to  consummate  the
reinsurance  transaction.  In  addition,  the Company  receives a monthly  trail
commission equal to one-twelfth of 0.32% of outstanding statutory reserves.  The
Company also established an additional tax valuation  allowance for capital loss
carryforwards  associated  with  the  sale of  invested  assets,  which  may not
recoverable prior to their expiration dates.

     On November 30, 2000,  the Company  completed the sale of Marketing One and
recognized  a loss of  $14,000.  The  operating  results  of  Marketing  One are
included in the consolidated operating results through November 30, 2000.

Acquisitions of SW Financial Controlling Interest, Knightsbridge Interests

     On January 2, 1998,  PennCorp acquired the remaining equity interests in SW
Financial,  which became a wholly-owned  subsidiary.  This was accomplished with
the acquisition of the SW Financial Controlling Interest (the holdings of common
stock and/or common stock warrants of SW Financial)  from KB Investment  Fund I,
LP ("KB Fund") and Messrs. Steven W. Fickes and David J. Stone, former executive
officers and  directors of PennCorp  for an  aggregate  purchase  price of $73.7
million  (not  including  acquisition  expenses).  The fair  value of net assets
acquired amounted to $45.5 million resulting in $28.1 million of costs in excess
of net  assets  acquired  which  is  amortized  over  30  years.  As part of the
acquisition  of the SW  Financial  Controlling  Interest on January 2, 1998,  SW
Financial Subordinated Notes in the amount of $40.0 million previously purchased
by PennCorp were reclassified to purchase  consideration  for SW Financial.  The
acquisition of the SW Financial Controlling Interest has been accounted for as a
step purchase  transaction  in accordance  with  generally  accepted  accounting
principles, and accordingly, fair values of assets and liabilities acquired have
been determined as of January 2, 1998.

     On January 5, 1998,  PennCorp  consummated the acquisition of the interests
of Messrs.  Fickes and Stone in KB Management,  KB Fund and KB  Consultants  LLC
(formerly known as Knightsbridge Consultants LLC) (collectively, the "Fickes and
Stone  Knightsbridge  Interests") for total  consideration of $10.6 million (not
including acquisition expenses).  Under the transaction terms, Mr. Fickes was to
receive consideration in the form of estimated annual interest payments, ranging
from  $301,000 to  $330,000,  on April 15 each year  through  2001 and was to be
issued 173,160 shares of the PennCorp's common stock on April 15, 2001. Prior to
the  recapitalization,  PennCorp's Board of Directors approved a settlement with
Mr. Fickes pursuant to which PennCorp paid him approximately

                                       63

<PAGE>



$700,000 to settle all  outstanding  claims  including  claims arising from this
transaction.  Mr.  Stone was  issued  his  173,160  shares in July 1998 which he
pledged to financial  institutions  in connection  with his appeal of a judgment
awarded  against him and his spouse.  These shares were later  cancelled  for no
consideration  pursuant  to the  Recapitalization  Plan.  The fair  value of net
assets acquired  amounted to net liabilities of $1.7 million  resulting in $12.3
million of costs in excess of net assets  acquired  which will be amortized over
seven years. The acquisition of the Fickes and Stone Knightsbridge Interests has
been  accounted  for as a purchase  transaction  in  accordance  with  generally
accepted  accounting  principles,  and  accordingly,  fair  values of assets and
liabilities  acquired were recorded as of the acquisition  date which became the
new accounting basis.

(4) BUSINESS SEGMENT INFORMATION

     The  Company  adopted  SFAS No.  131,  "Disclosures  about  Segments  of an
Enterprise  and Related  Information"  which  requires that  companies  disclose
segment data on a basis that is used  internally  by management  for  evaluating
segment  performance  and  allocating  resources  to  segments.  The Company has
prepared  the  following  selected  financial   information  for  the  Company's
Insurance Operations (PLAIC and Southwestern Life, including Security Life which
was merged into  Southwestern  Life  effective June 30, 2000),  Businesses  Sold
(Payroll Sales Division,  Career Sales Division,  Professional,  the United Life
Assets,  KIVEX and Marketing One) and corporate  activities.  As a result of the
sale of Payroll Sales Division on February 4, 2000 and Marketing One on November
30, 2000,  the operating  results of these  companies  have been included in the
Businesses Sold for all the periods presented.

     "Operating  Income  (Loss),"  as used  below,  excludes  the  impact of (i)
federal income tax expense (benefit) (ii)  restructuring  costs,  (iii) gains or
losses on the sale of  investments  and (iv) the  impact of the  disposition  of
Businesses Sold. The Company considers  operating income (loss) to reflect "Core
earnings (loss)" and to be the most relevant and useful  information to evaluate
trends  impacting  the Company's  operations.  This  information  is used by the
Company's principal decision makers to evaluate its performance as it eliminates
the impact of  transactions  that the Company  considers to be unrelated to core
operating results.  Other companies that operate primarily in the life insurance
industry may or may not use similar measures.

     The  Company  prepared  such  information  as it  believes  that:  (i)  the
disposition of the Businesses Sold and (ii) the restructuring costs are material
enough to make historical comparative results not meaningful.

<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                                     -----------------------------------------
                                                                        2000           1999            1998
                                                                     -----------    -----------    -----------
                                                                                    (In thousands)
     <S>                                                             <C>            <C>            <C>
     Premiums and policy product charges:
         Insurance Operations.....................................   $   116,240    $   134,064    $   129,519
         Businesses Sold (United States)..........................         7,575        177,074        284,709
         Businesses Sold (Canada).................................            --         27,870         44,930
                                                                     -----------    -----------    -----------
                                                                     $   123,815    $   339,008    $   459,158
                                                                     ===========    ===========    ===========

     Net investment income:
         Insurance Operations.....................................   $   136,213    $   163,969    $   181,839
         Businesses Sold..........................................         2,910         92,597        184,283
                                                                     -----------    -----------    -----------
                                                                     $   139,123    $   256,566    $   366,122
                                                                     ===========    ===========    ===========

     Operating profit (loss):
         Insurance Operations.....................................   $    (3,549)   $    28,343    $    21,361
         Businesses Sold..........................................         3,447         29,033        (23,015)
                                                                     -----------    -----------    -----------
                                                                     $      (102)   $    57,376    $    (1,654)
                                                                     ===========    ===========    ===========

     Amortization of present value of insurance in force and
       deferred policy acquisition costs:
         Insurance Operations.....................................   $    30,310    $    27,100    $    23,783
         Businesses Sold..........................................           978         40,037         91,324
                                                                     -----------    -----------    -----------
                                                                     $    31,288    $    67,137    $   115,107
                                                                     ===========    ===========    ===========
</TABLE>

                                       64

<PAGE>

<TABLE>
<CAPTION>
                                                                         As of December 31,
                                                                        2000           1999
                                                                     -----------    -----------
                                                                           (In thousands)
     <S>                                                             <C>            <C>
     Total assets:
         Insurance Operations.....................................   $ 2,502,464    $ 2,675,304
         Businesses Sold (United States)..........................            --        598,647
                                                                     -----------    -----------
                                                                     $ 2,502,464    $ 3,273,951
                                                                     ===========    ===========
</TABLE>

     Reconciliations  of segment data to the Company's  consolidated data are as
follows:

<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                                     -----------------------------------------
                                                                        2000           1999            1998
                                                                     -----------    -----------    -----------
                                                                                    (In thousands)
     <S>                                                             <C>            <C>            <C>
     Total revenues:
         Segments--premiums and policy product charges.............  $   123,815    $   339,008    $   459,158
         Segments--net investment income...........................      139,123        256,566        366,122
         Corporate--net investment income..........................          134          1,034          2,930
         Other income..............................................        9,545         33,932         37,717
         Net gains (losses) from sale of investments...............      (12,922)          (502)        14,068
         Net gains (losses) from sales of subsidiaries (including
           realized losses on foreign currency of $24,978 in 1999).       (8,397)         6,602             --
                                                                     -----------    -----------    -----------
                                                                     $   251,298    $   636,640    $   879,995
                                                                     ===========    ===========    ===========

     Income (loss) before taxes, equity in earnings of unconsolidated
        affiliates and extraordinary charge:
         Segments.................................................   $      (102)   $    57,376    $    (1,654)
         Corporate net investment income and other income.........         1,595          2,751          4,727
         Corporate expenses.......................................       (28,973)       (39,007)       (40,972)
         Impairment of intangibles................................            --        (95,522)            --
         Impairment provision associated with
           assets of Businesses Sold..............................            --        (58,486)      (342,960)
         Interest and amortization of deferred debt
           issuance costs.........................................       (16,209)       (40,222)       (42,960)
         Net gains (losses) from sale of subsidiaries (including
           realized losses on foreign currency of $24,978 in 1999)        (8,397)         6,602             --
         Net gains (losses) on the sale of investments............       (12,922)          (502)        14,068
         Restructuring costs......................................          (735)        (4,993)       (14,877)
                                                                     -----------    -----------    -----------
                                                                     $   (65,743)   $  (172,003)   $  (424,628)
                                                                     ===========    ===========    ===========

                                                                         As of December 31,
                                                                        2000           1999
                                                                     -----------    -----------
                                                                           (In thousands)
     Total assets:
         Segments.................................................   $ 2,502,464    $ 3,273,951
         Corporate and other......................................        20,313         14,197
                                                                     -----------    -----------
                                                                     $ 2,522,777    $ 3,288,148
                                                                     ===========    ===========
</TABLE>

                                       65

<PAGE>

(5) INVESTMENTS

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

<TABLE>
<CAPTION>
                                                                                2000
                                                     ---------------------------------------------------------
                                                                        Gross          Gross
                                                      Amortized       Unrealized     Unrealized       Fair
                                                        Cost            Gains          Losses         Value
                                                     -----------     -----------    -----------    -----------
                                                                           (In thousands)
   <S>                                               <C>             <C>            <C>           <C>
   Mortgage-backed securities, principally
     obligations of U.S. Government agencies.......  $   611,135     $    12,437    $   (18,122)  $    605,450
   U.S. Treasury securities and obligations of
     U.S. Government corporations and agencies.....      158,271           4,011         (7,779)       154,503
   Debt securities issued by foreign governments...       18,196             293           (193)        18,296
   Corporate securities............................      737,869           4,981        (46,516)       696,334
                                                     -----------     -----------    -----------    -----------
                                                     $ 1,525,471     $    21,722    $   (72,610)   $ 1,474,583
                                                     ===========     ===========    ===========    ===========

                                                                                1999
                                                     ---------------------------------------------------------
                                                                        Gross          Gross
                                                      Amortized       Unrealized     Unrealized       Fair
                                                        Cost            Gains          Losses         Value
                                                     -----------     -----------    -----------    -----------
                                                                           (In thousands)
   Mortgage-backed securities, principally
     obligations of U.S. Government agencies.......  $   972,425     $     5,922    $   (46,684)   $   931,663
   U.S. Treasury securities and obligations of
     U.S. Government corporations and agencies.....      279,402           2,236        (22,130)       259,508
   Debt securities issued by foreign governments...       23,677             101         (1,260)        22,518
   Corporate securities............................    1,210,492           3,999        (64,490)     1,150,001
                                                     -----------     -----------    -----------    -----------
                                                     $ 2,485,996     $    12,258    $  (134,564)   $ 2,363,690
                                                     ===========     ===========    ===========    ===========
</TABLE>

     The amortized cost and fair value of fixed maturities available for sale as
of December 31, 2000, by contractual maturity, are shown below:

<TABLE>
<CAPTION>
                                                                       Amortized        Fair
                                                                         Cost           Value
                                                                     -------------  -------------
                                                                            (In thousands)
           <S>                                                       <C>            <C>
           Due in one year or less ...............................   $      21,573  $      21,633
           Due after 1 through 5 years ...........................         204,712        204,527
           Due after 5 through 10 years ..........................         307,529        288,892
           Due after 10 years ....................................         380,522        354,081
           Mortgage-backed securities, principally
              obligations of U.S. Government agencies.............         611,135        605,450
                                                                     -------------  -------------
                                                                     $   1,525,471  $   1,474,583
                                                                     =============  =============
</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 available for sale as of December 31, 2000 and
1999,  are below  investment-grade  securities  with an amortized cost of $126.4
million and $161.8 million and a fair value of $99.5 million and $139.5 million,
respectively. Included in fixed maturities available for sale as of December 31,
2000, are unrated  securities with an amortized cost of $21.9 million and a fair
value of $17.5 million.  Included in fixed  maturities  available for sale as of
December 31, 1999 are unrated securities with an amortized cost of $33.0 million
and a fair value of $21.1 million.  Investments  in a single entity,  other than
obligations of the U.S. government or agencies thereof, totaling in excess of

                                       66

<PAGE>



10% of the Company's  equity at December 31, 2000  consisted of an investment in
Episode IV Loan Trust with carrying value and fair value of $25.0 million.

     Included  in  fixed  maturities  are  retained   interests  in  securitized
transactions  known as Fund  America  93-C Class B (Fund  America)  and  Secured
Investors  Trust 93-1  Residual  (SIST).  At December  31, 2000 and 1999,  these
investments  had a combined  amortized  cost of $15.5 million and $14.9 million,
respectively  and a fair value and  carrying  value of $16.0  million  and $13.3
million  respectively.   The  fair  values  were  estimated  by  an  independent
investment  advisor  and are based on the future  cash  flows of the  underlying
collateral.  A 100 basis point basis point rise in interest rates would decrease
the estimated  fair value by $3.4 million,  while a 100 basis point  decrease in
interest rates would increase the estimated fair value by $4.5 million.

     As of December 31, 2000, net unrealized  appreciation in equity  securities
available  for sale  consisted of gross  unrealized  gains of $157,000 and gross
unrealized losses of $358,000.  As of December 31, 1999, there was no unrealized
appreciation or loss in equity securities available for sale.

     The Company's  commercial  mortgage  portfolio had a net carrying  value of
$10.0 million and $20.0 million,  respectively, and fair values of $10.0 million
and $20.3 million, respectively, as of December 31, 2000 and 1999.

     As  of  December  31,  2000,  commercial  mortgage  loan  investments  were
concentrated in the following states:
<TABLE>
<CAPTION>
                                                                           Percent of Total
                                                        Carrying Value      Carrying Value
                                                        --------------      --------------
                                                        (In thousands)
 <S>                                                      <C>                    <C>
 Texas...............................................     $    3,206             32.2%
 Alabama.............................................          1,671             16.8
 Illinois............................................          1,627             16.3
 Kansas..............................................          1,611             16.1
 Louisiana...........................................            875              8.8
 North Carolina......................................            401              4.0
 All other (less than 4% individually)...............            576              5.8
                                                          ----------            -----
                                                          $    9,967            100.0%
                                                          ==========            =====
</TABLE>

     Investments with a carrying value of $111.5 million and $216.6 million were
on deposit with certain regulatory authorities as of December 31, 2000 and 1999,
respectively.  Amounts on deposit for 1999 were temporarily approximately $100.0
million higher as a result of a change in custodians.


                                       67

<PAGE>



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

<TABLE>
<CAPTION>
                                                                             2000         1999         1998
                                                                         -----------  -----------  -----------
                                                                                      (In thousands)
     <S>                                                                 <C>             <C>          <C>
     Realized gains (losses) on dispositions of investments: Securities
       available for sale:
         Gross gains from sales........................................  $     4,664  $     6,853  $    20,509
         Gross losses from sales.......................................      (18,186)      (6,435)      (5,960)
         Net gains (losses) from redemptions...........................           --           --            3
                                                                         -----------  -----------  -----------
                                                                             (13,522)         418       14,552

       Mortgage loans..................................................          901           38       (6,545)
       Other investments...............................................         (301)        (958)       6,061
                                                                         -----------  -----------  -----------
           Net realized gains (losses)................................   $   (12,922) $      (502) $    14,068
                                                                         ===========  ===========  ===========

     Change in unrealized gains (losses):
       Securities available for sale...................................  $    56,011  $  (219,314) $  (27,038)
       Less effect on other balance sheet accounts:
         Value of business acquired, deferred acquisition costs and
           unearned revenue on interest-sensitive products.............      (21,208)      50,956       13,270
         Deferred income (taxes) benefits..............................      (17,503)      58,905        4,818
         Decrease in unrealized holding gains resulting from the sale
           of subsidiaries.............................................       15,206           55           --
                                                                         -----------  -----------  -----------
           Net change in unrealized gains (losses).....................  $    32,506  $  (109,398) $    (8,950)
                                                                         ===========  ===========  ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                            2000          1999         1998
                                                                         -----------  -----------  -----------
                                                                                      (In thousands)
     <S>                                                                 <C>          <C>          <C>
     Fixed maturity securities.........................................  $   125,361  $   231,196  $   310,798
     Mortgage loans on real estate ....................................        1,596        9,610       27,773
     Policy loans .....................................................        9,288       13,996       16,235
     Cash and cash equivalents.........................................        5,765        7,548        9,016
     Other investments.................................................          382        2,422       13,553
                                                                         -----------  -----------  -----------
       Gross investment income ........................................      142,392      264,772      377,375
     Less: investment expenses.........................................        3,135        7,172        8,323
                                                                         -----------  -----------  -----------
       Net investment income ..........................................  $   139,257  $   257,600  $   369,052
                                                                         ===========  ===========  ===========
</TABLE>

     The Company had non-income producing  investments at December 31, 2000 with
an amortized cost, fair value and carrying value as follows:

<TABLE>
<CAPTION>
                                                                          Amortized       Fair      Carrying
                                                                            Cost          Value       Value
                                                                         -----------  -----------  -----------
                                                                                       (In thousands)
     <S>                                                                 <C>          <C>          <C>
     Bonds.............................................................  $     6,339  $       697  $       697
     Common stock......................................................          621          420          420
     Other investments.................................................       16,625       17,297       17,297
                                                                         -----------  -----------  -----------
                                                                         $    23,585  $    18,414  $    18,414
                                                                         ===========  ===========  ===========
</TABLE>

     As  of  December  31,  1999,  Southwestern  Life  owned  66,555  shares  of
redeemable preferred stock of Portsmouth  Financial Group, Inc.  ("Portsmouth"),
an affiliate.  During the first quarter of 2000,  Portsmouth was reorganized and
merged into ROP Financial Group ("ROP"), and became a wholly-owned subsidiary of
the Company.  ROP has been  included in the  consolidated  financial  statements
since March 31, 2000.

                                       68

<PAGE>

(6) 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>
                                                                            2000          1999         1998
                                                                         -----------  -----------  -----------
                                                                                      (In thousands)
       <S>                                                               <C>          <C>          <C>
       Balance as of January 1.........................................  $   113,726  $   139,708  $   310,117
       Policy acquisition costs deferred:
         Commissions...................................................       12,498       50,878       84,102
         Underwriting and issue costs .................................        4,568       21,742       42,151
         Addition due to acquisition, including $171 of unrealized loss           --           --       30,606
                                                                         -----------  -----------  -----------
                                                                             130,792      212,328      466,976
       Policy acquisition costs amortized .............................      (15,065)     (42,567)     (76,952)
       Adjustment to correct for reinsurance on certain term policies..       (6,523)          --           --
       Unrealized investment (gain) loss adjustment ...................       (1,592)       5,348       (1,213)
       Transfer pursuant to reinsurance transaction....................       (3,513)         499           --
       Foreign currency translation adjustment ........................           --           --       (1,038)
       Reduction due to sale of blocks of business.....................           --           --       (4,129)
       Impairment for Businesses Held for Sale.........................           --           --     (191,595)
       Impairment related to recoverability analysis associated with
         subsequent sale of Payroll Sales Division.....................           --      (49,668)          --
       Amounts transferred to assets of Businesses Held for Sale.......           --           --      (52,341)
       Reduction due to sale of Payroll Sales Division in 2000
         and Career Sales Division in 1999.............................      (40,547)     (12,214)          --
                                                                         -----------  -----------  -----------
         Balance as of December 31....................................   $    63,552  $   113,726  $   139,708
                                                                         ===========  ===========  ===========
</TABLE>

     During the fourth quarter of 2000, the Company undertook an analysis of its
reserving and other  actuarial  practices.  As part of this review,  the Company
discovered  that the method utilized to calculate  deferred  policy  acquisition
costs  and  policy  liabilities  on  certain  term  policies  was not  correctly
reflecting  reinsurance  ceded.  As a result  of  correcting  this  methodology,
deferred policy acquisition costs decreased approximately $6.5 million.

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

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

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

     Recoverability  of the present  value of  insurance  in force is  evaluated
annually and  appropriate  adjustments  are then determined and reflected in the
financial  statements for the applicable  period utilizing  expected future cash
flows.  Expected future cash flows used in determining  such values are based on
actuarial  determinations of future premium  collection,  mortality,  morbidity,
surrenders,  operating  expenses  and  yields  on  assets  held to  back  policy
liabilities as

                                       69

<PAGE>



well as other factors. Variances from original projections,  whether positive or
negative, are included in income as they occur and will affect the present value
of insurance in force  amortization  rates for insurance  products accounted for
under SFAS No. 97,  "Accounting  and  Reporting  by  Insurance  Enterprises  for
Certain Long-Duration  Contracts and for Realized Gains and Losses from Sales of
Investments." To the extent that these variances indicate that future cash flows
will differ from those included in the original  scheduled  amortization  of the
present value of insurance in force, future amortization may be adjusted.

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

<TABLE>
<CAPTION>
                                                                            2000          1999         1998
                                                                         -----------  -----------  -----------
                                                                                      (In thousands)
     <S>                                                                 <C>          <C>          <C>
     Balance as of January 1 ..........................................  $   119,766  $   170,729  $   263,889
     Addition due to acquisition, including $1,235 of unrealized loss..           --           --       58,564
     Accretion of interest ............................................        5,420       14,497        4,693
     Amortization .....................................................      (15,120)     (39,067)     (42,848)
     Transfer pursuant to reinsurance transactions.....................       (7,808)       5,144           --
     Impairment for Business Held for Sale.............................           --           --      (98,164)
     Impairment related to recoverability analysis associated with
       subsequent sale of Payroll Sales Division.......................           --      (67,617)          --
     Unrealized investment (gain) loss adjustment .....................      (16,276)      34,550       14,025
     Foreign currency translation adjustment ..........................           --           --         (333)
     Amounts transferred to assets of Businesses Held for Sale.........           --        1,530      (25,987)
     Reduction due to sale of block of business and other..............           --           --       (3,110)
                                                                         -----------  -----------  -----------
       Balance as of December 31 ......................................  $    85,982  $   119,766  $   170,729
                                                                         ===========  ===========  ===========
</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
                                                   -------     ------------     -----------    ------------
                                                                       (In thousands)
 <S>                                              <C>            <C>            <C>             <C>
 2001..........................................   $  85,982      $  13,535      $   4,771       $  8,764
 2002..........................................      77,218         12,844          4,260          8,584
 2003..........................................      68,634         11,833          3,769          8,064
 2004..........................................      60,570         10,591          3,312          7,279
 2005..........................................      53,291          9,465          2,902          6,563
</TABLE>

(7) FUTURE POLICY BENEFITS

     The  liability for future  policy  benefits  consists of reserves for life,
annuity  and  accident  and health  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.  Accident  and health  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  accident  and health  products  future  policy
benefits may also be determined using Company

                                       70

<PAGE>

experience  as to  mortality,  morbidity and lapses with a provision for adverse
deviation. The Company may vary assumptions by year of policy issue.

     The Company is continually evaluating actuarial assumptions associated with
interest-sensitive life insurance contracts in which the determination of policy
reserves is highly  sensitive to  assumptions  such as lapse  rates,  investment
earnings rates,  mortality rates, and premium  persistency.  Policy reserves and
account values associated with such contracts  aggregated  approximately  $555.0
million  and $527.1  million as of  December  31,  2000 and 1999,  respectively.
Should lapse rates  experienced  on these  policies be less than  expected,  the
Company  would be required to record  additional  reserves or reduce  intangible
assets,  which could have a material impact on the Company's  financial position
and results of  operations.  For example,  a decrease of 1% in the assumed lapse
rate would  increase  policy  reserves  associated  with such contracts by $13.9
million.  Management  continues to assess the potential impact of future actions
that might mitigate the financial impact of these trends.  Examples include, but
are not  limited  to,  the  redetermination  of  non-guaranteed  charges  and/or
benefits under the contracts,  asset  segmentation,  and reinsurance.  There are
risks associated with management  action,  including  potential sales disruption
and the  threat  of  litigation.  During  1999,  the  Company  modified  certain
assumptions  associated  with the  blocks of  business  including  lowering  the
aggregate  expected lapse rate. In addition,  the Company  implemented a plan to
continue charging certain  non-guaranteed  expense loads associated with certain
interest-sensitive  life insurance  contracts.  As a result of the actions,  the
Company  increased  the amount of  reserves  associated  with these  policies by
approximately $6.2 million during the fourth quarter of 1999.

     During the fourth quarter of 2000, the Company undertook an analysis of its
reserving and other  actuarial  practices.  As part of this review,  the Company
discovered  that the method utilized to calculate  deferred  policy  acquisition
costs  and  policy  liabilities  on  certain  term  policies  was not  correctly
reflecting reinsurance ceded. As a result of correcting this methodology, policy
liabilities increased approximately $1.0 million.

     Total future  policy  benefits  consist of the following as of December 31,
2000 and 1999:

<TABLE>
<CAPTION>
                                                                                   2000           1999
                                                                                ----------     -----------
                                                                                       (In thousands)
         <S>                                                                    <C>           <C>
         Future policy benefits on traditional products:
           Traditional life insurance contracts..............................   $  488,747     $   736,931
           Accident and health...............................................        3,952          13,629
           Unearned premiums.................................................           --           1,809
           Other policyholder funds..........................................      116,715          73,411
                                                                                ----------     -----------
                                                                                   609,414         825,780
         Interest-sensitive products:
           Universal life....................................................    1,141,490       1,353,224
           Annuities.........................................................      398,011         528,184
                                                                                ----------     -----------
                                                                                 1,539,501       1,881,408
         Policy and contract claims:
           Accident and health...............................................          363          13,231
           Life and other....................................................       41,612          36,538
                                                                                ----------     -----------
              Total future policy benefits...................................   $2,190,890     $ 2,756,957
                                                                                ==========     ===========
</TABLE>


                                       71

<PAGE>

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

<TABLE>
<CAPTION>
                                                                        2000         1999         1998
                                                                     -----------  -----------  -----------
                                                                                  (In thousands)
         <S>                                                         <C>          <C>          <C>
         Claim liability as of January 1..........................   $    13,909  $    14,463  $   125,005
           Less reinsurance recoverables..........................           678        1,390        5,848
                                                                     -----------  -----------  -----------
              Net balance as of January 1.........................        13,231       13,073      119,157
                                                                     -----------  -----------  -----------
         Addition due to acquisition..............................            --           --       26,229
                                                                     -----------  -----------  -----------

         Add claims incurred during the year related to:
           Current year...........................................           210        8,125      116,170
           Prior years............................................           (30)       1,217       31,545
                                                                     -----------  -----------  -----------
              Total claims incurred...............................           180        9,342      147,715
                                                                     -----------  -----------  -----------

         Less claims paid during the year related to:
           Current year...........................................            42        3,687       57,370
           Prior years............................................            66        5,497       65,736
                                                                     -----------  -----------  -----------
              Total claims paid...................................           108        9,184      123,106
                                                                     -----------  -----------  -----------

         Less reduction for liabilities of Business Held for Sale.        12,940           --      156,922
                                                                     -----------  -----------  -----------

         Net balance as of December 31............................           363       13,231       13,073
           Plus reinsurance recoverables..........................           884          678        1,390
                                                                     -----------  -----------  -----------
              Claim liability as of December 31..................    $     1,247  $    13,909  $    14,463
                                                                     ===========  ===========  ===========
</TABLE>

     As a result of changes in  estimates  of insured  events in prior years and
changes in methodology  (described  below),  the liability for health policy and
contract  claims  decreased net of reinsurance by $30,000 in 2000, and increased
by $1.2 million in 1999 and $31.5 million in 1998.

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

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

                                       72

<PAGE>



Life  increased  by $25.7  million  during  1998.  The  effect of the  change in
methodology is inseparable from the effect of the change in accounting  estimate
and is accordingly reflected in operations for the year ended December 31, 1998.

(8) NOTES PAYABLE

     On June 13, 2000, the Company  established a $95.0  million,  senior credit
facility (the "New Credit Facility") consisting of a $80.0 million term loan and
a $15.0 million revolving commitment.  The Company used $81.0 million of the new
credit facility along with the proceeds from the issuance of SWL Holdings common
stock pursuant to the rights offering,  Rapoport and Sharpe  investments and the
extraordinary  dividends from its insurance  subsidiaries to repay the principal
balances of the PennCorp senior and subordinated debt and related interest.

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

<TABLE>
<CAPTION>
                                                                                      2000             1999
                                                                                   -----------     -----------
                                                                                          (In thousands)
     <S>                                                                           <C>             <C>
     Term loan under the senior New Bank Credit Facility maturing 2006(a).......   $    80,000     $        --
     Senior revolving New Bank Credit Facility maturing 2005(b)..................        4,000              --
     Unsecured 9 1/4% Senior Subordinated Notes due 2003(c)......................           --         114,646
     PennCorp's bank credit facility maturing 2000(d)............................           --         165,000
                                                                                   -----------     -----------
                                                                                   $    84,000     $   279,646
                                                                                   ===========     ===========
--------------
(a)  Interest  costs on the term loan under the senior New Bank Credit  Facility
     maturing 2006 totaled $4.7 million from June 13, 2000, the closing date, to
     December 31, 2000. The effective rate for the term loan was 10.56%.
(b)  Interest costs on the revolving loan under senior New Bank Credit  Facility
     maturing  2005 totaled  $363,000  from June 13, 2000,  the closing date, to
     December 31, 2000. The effective rate for the term loan was 10.56%.
(c)  Interest  costs under the  unsecured 9 1/4% senior  subordinated  notes due
     2003 totaled $4.8 million,  $10.6  million and $10.6  million  during 2000,
     1999 and 1998, respectively.
(d)  Interest  costs  under the  PennCorp  bank  credit  facility  totaled  $4.5
     million,  $25.5  million  and $30.7  million  during  2000,  1999 and 1998,
     respectively.
</TABLE>

     The maturities of the term loan during each of the five year after December
31, 2000 are as follows:  2001, $8.6 million;  2002, $12.1 million;  2003, $12.3
million; 2004, $12.4 million and 2005, $12.5 million.

     The New Credit Facility imposes certain covenants on the Company, including
covenants  restricting  the amount of  additional  indebtedness  the Company may
incur,  limiting  the  Company's  ability to engage in future  acquisitions  and
certain other  business  transactions,  and limiting the amount of dividends the
Company may declare and pay,  and  requiring  the Company to maintain  specified
financial  ratios and meet specified  financial tests. At December 31, 2000, the
Company was in compliance with all applicable covenants.

     As a holding company,  SWL Holdings is largely dependent upon dividends and
surplus debenture payments from its insurance subsidiaries to make principal and
interest  payments under its New Credit  Facility (see Note 13). At December 31,
2000, the amount  available to be drawn under the New Credit  Facility was $11.0
million.  Management believes the Company will likely have sufficient  financial
flexibility and projected liquidity sources to meet its cash requirements.

     On  September  8, 2000,  the  Company  entered  into an  interest  rate cap
agreement  with a bank to  hedge a  notional  amount  of  $40.0  million  of its
outstanding  floating rate notes for a term of 21 months effective  December 12,
2000. Pursuant to the agreement,  the Company will receive interest differential
from the  counter-party if the London Inter Bank Offering Rate ("LIBOR") exceeds
8.5%. At December 31, 2000,  LIBOR was 6.6%.  The Company paid a fixed amount of
$27,000 which is being amortized over the term of the agreement.

     Extraordinary  Charges.  For the year ended  December 31, 1998, the Company
realized an after-tax  extraordinary charge of $1.7 million which represents the
write-off of the deferred financing costs associated with the

                                       73

<PAGE>

refinance of a SW Financial  existing note that the Company assumed as a part of
the acquisition of SW Financial Controlling Interest.

     As  a  result  of  the  Company's   repayment  of  PennCorp's   senior  and
subordinated debt as part of the  recapitalization,  the Company realized during
2000  an  after-tax  extraordinary  charge  of  $2.4  million  representing  the
write-off of deferred costs and a 1% premium paid to holders of the subordinated
debt as required by the terms of the indenture due to the early payoff.

(9) INCOME TAXES (BENEFITS)

     The  Company  and  a  number  of  its  non-insurance  subsidiaries  file  a
consolidated  federal income tax return.  The life insurance  subsidiaries  file
federal income tax returns with either PLAIC, or Pioneer Security (sold February
4, 2000), or  Constitution  (sold July 30, 1999) as the parent of the particular
consolidated life insurance company tax group.

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

<TABLE>
<CAPTION>
                                                                            2000          1999         1998
                                                                         -----------  -----------  -----------
                                                                                      (In thousands)
       <S>                                                               <C>          <C>          <C>
       Income (loss) before income taxes, equity in earnings of
         unconsolidated affiliates and extraordinary charge............  $       924  $    28,709  $    (3,369)
       Extraordinary charge............................................           --           --         (900)
                                                                         -----------  -----------  -----------
                                                                         $       924  $    28,709  $    (4,269)
                                                                         ===========  ===========  ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                            2000          1999         1998
                                                                         -----------  -----------  -----------
                                                                                      (In thousands)
     <S>                                                                 <C>          <C>          <C>
     Current U.S.......................................................  $    13,840  $    (2,226) $   (12,031)
     Current foreign...................................................           --        1,067          778
     Deferred U.S......................................................      (12,916)      30,934       10,108
     Deferred foreign..................................................           --       (1,066)      (2,224)
                                                                         -----------  -----------  -----------
       Income tax expense (benefit)....................................  $       924  $    28,709  $    (3,369)
                                                                         ===========  ===========  ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                            2000          1999         1998
                                                                         -----------  -----------  -----------
                                                                                      (In thousands)
     <S>                                                                 <C>          <C>          <C>
     Tax expense (benefit) computed at statutory rate..................  $   (23,010) $   (60,201) $  (148,620)
     Dividends received deduction......................................         (175)        (216)        (268)
     Amortization of costs in excess of net assets acquired............        1,186        4,661        3,678
     Impairment of intangibles related to sale of Payroll Sales Division          --       33,432           --
     Impairment on assets held for sale................................           --       20,292      116,886
     Change in valuation allowance.....................................        9,006       38,890       23,492
     Adjustment to loss carryover......................................       12,139           --           --
     Foreign taxes net of U.S. tax benefit.............................           --           --         (181)
     Sale of subsidiaries..............................................        2,939      (13,360)          --
     Other      .......................................................       (1,161)       5,211        1,644
                                                                         -----------  -----------  -----------
       Income tax expense (benefit)...................................   $       924  $    28,709  $    (3,369)
                                                                         ===========  ===========  ===========
</TABLE>
                                       74

<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>
                                                                    2000                       1999
                                                        -------------------------  ------------------------
                                                          Deferred      Deferred    Deferred      Deferred
                                                            Tax           Tax         Tax            Tax
                                                          Assets      Liabilities    Assets      Liabilities
                                                        ----------    -----------  ----------    -----------
                                                                             (In thousands)
       <S>                                              <C>           <C>          <C>           <C>
       Deferred policy acquisition costs..............  $       --    $     5,915  $       --    $   10,758
       Present value of insurance in force............          --         29,319          --        35,447
       Future policy benefits.........................      78,073             --      92,164            --
       Net operating losses...........................      45,150             --      47,462            --
       Capital losses.................................      42,762             --      41,428            --
       Unrealized gain/loss on investment securities..      16,262             --      33,765            --
       Other..........................................      26,335             --      22,798            --
                                                        ----------    -----------   ---------    ----------
                                                           208,582         35,234     237,617        46,205
       Valuation allowance............................     (92,210)            --     (83,674)           --
                                                        ----------    -----------   ---------    ----------
                                                        $  116,372    $    35,234   $ 153,943    $   46,205
                                                        ==========    ===========   =========    ==========
</TABLE>

     The valuation allowance for deferred tax assets as of December 31, 2000 and
1999,  was $92.2 and $83.7  million,  respectively.  The net change in the total
valuation  allowance  for the years ended  December  31,  2000 and 1999,  was an
increase  of $9.0 and  $38.9  million,  respectively.  The  valuation  allowance
associated  with tax assets is continually  monitored by the Company in light of
the dramatic  changes in the operating  structure  and financial  results of the
Company.  As a result of such  analysis  the  Company  increased  the  valuation
allowance during 2000 and 1999. In each of the periods,  the valuation allowance
was  incurred  as the  result  of the  increased  likelihood  that  certain  net
operating  losses and capital loss  carryforwards  would not be utilized and the
impact or  potential  impact of a "change in control" as defined by the Internal
Revenue Code Section 382. Change of control  provisions of Section 382 limit the
Company's  ability to utilize certain tax benefits  including net operating loss
carryforwards in future periods.

     In  assessing  the  realization  of deferred  taxes,  management  considers
whether it is more likely than not that some  portion or all of the deferred tax
assets will be  realized.  The  ultimate  realization  of deferred tax assets is
dependent on the generation of future taxable income during the periods in which
those  temporary   differences  become  deductible.   Management  considers  the
scheduled reversal of deferred tax liabilities,  projected future taxable income
and tax planning strategies in making this assessment. Management believes it is
more likely than not that the Company  will  realize the  remaining  benefits of
these  deductible  differences,  net of the existing  valuation  allowance as of
December 31, 2000.

     As of  December  31,  2000 and  1999,  valuation  allowances  have not been
established  for the  deferred  tax asset  relating  to the  unrealized  loss on
investment  securities.  Management  believes  that  the  recognition  of  these
unrealized  losses can be managed through a tax planning strategy of holding the
investment securities to maturity or until market conditions improve.

     The Company's recording of impairment  provisions  associated with the sale
of the Payroll Sales Division results in a reduction in deferred tax liabilities
of $41.1 million during 1999 related to such assets.

     As of December 31, 2000,  the Company has life  consolidated  net operating
loss carryforwards of approximately $33.2 million for tax return purposes which,
if not utilized, will begin to expire in 2008. The Company has life consolidated
capital  loss  carryforwards  of  approximately  $17.4  million  which,  if  not
utilized,  will begin to expire in 2002.  These  losses are subject to an annual
IRC Section 382 limitation.

     As of  December  31,  2000,  the  Company  has  non-life  consolidated  net
operating loss  carryforwards  of  approximately  $95.8 million for tax purposes
which,  if not  utilized,  will begin to expire in 2007.  The Company has $104.8
million of non-life capital loss carryforwards which if not utilized, will begin
to expire in 2004.


                                       75

<PAGE>



     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  $29.3 million 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.  As it is not currently
considered likely that a tax would become due on any such balances,  no deferred
income taxes have been provided. However, if such tax were to become payable, it
would amount to approximately $10.3 million.

(10) COMPUTATION OF LOSS PER SHARE

     Loss per  share is  computed  based on  outstanding  common  shares  of the
recapitalized company for all years reported as if the recapitalization occurred
at the beginning of 1998. As a result,  the  computation  of loss per share does
not include the preferred stock dividend requirements.

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

<TABLE>
<CAPTION>
                                                                            2000          1999         1998
                                                                         -----------  -----------  -----------
                                                                                      (In thousands)
<S>                                                                      <C>          <C>          <C>
Reconciliation of net loss applicable to common stock:
Basic net loss:
     Net loss before extraordinary charge..............................  $   (66,667) $  (200,712) $  (421,259)
     Extraordinary charge..............................................       (2,443)          --       (1,671)
                                                                         -----------  -----------  -----------
                                                                         $   (69,110) $  (200,712) $  (422,930)
                                                                         ===========  ===========  ===========
Diluted net loss:
     Net loss before extraordinary charge..............................  $   (66,667) $  (200,712) $  (421,259)
     Extraordinary charge..............................................       (2,443)          --       (1,671)
                                                                         -----------  -----------  -----------
                                                                         $   (69,110) $  (200,712) $  (422,930)
                                                                         ===========  ===========  ===========
Common stock used to compute basic and diluted loss per share:
Basic:
     Average shares outstanding during the year........................        9,059        9,059        9,059
                                                                         ===========  ===========  ===========
Diluted:
     Average shares outstanding during the year........................        9,059        9,059        9,059
                                                                         ===========  ===========  ===========
</TABLE>

(11) COMMON AND PREFERRED STOCK

     Pursuant to the Recapitalization Plan, SWL Holdings issued 5,175,000 shares
of common stock in exchange for all of the outstanding shares of preferred stock
of PennCorp.  The Company also issued  1,960,000 shares of common stock pursuant
to a right offering underwritten by Inverness and Vicuna and 1,840,000 shares to
Rapoport  and Sharpe in  connection  with their  investments.  These shares were
issued at $12.50 per share and the Company  received  $46.0 million in cash (net
of related expenses of $1.5 million). All shares of PennCorp's common stock were
canceled for no value.

     In addition,  the Company  awarded 60,000 shares to two executive  officers
and 24,000 shares to a former officer and director of PennCorp in  consideration
of his  consulting  services  rendered in connection  with the  recapitalization
transaction.

     At December 31, 2000, the Company had  15,000,000  shares of $.01 par value
common stock authorized and 9,059,000 shares issued and outstanding.  The common
stock has no preemptive or other subscription rights and there are no conversion
rights, redemption or sinking fund provisions with respect to such shares.


                                       76

<PAGE>



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

     A portion of the  consideration for the acquisition of the Fickes and Stone
Knightsbridge  Interests  included 173,160 shares of PennCorp's common stock due
each of  Messrs.  Fickes  and  Stone  on April  15,  2001.  As a  result  of the
acquisition,  common stock and additional paid in capital  increased  $3,000 and
$8.5 million,  respectively, for the year ended December 31, 1998. Common shares
due Mr. Stone were issued during 1998.  These shares were later cancelled for no
consideration   pursuant   to   the   Recapitalization   Plan.   Prior   to  the
recapitalization,  PennCorp's Board of Directors  approved a settlement with Mr.
Fickes pursuant to which PennCorp paid him approximately  $700,000 to settle all
outstanding claims arising from this transaction.

     During the year ended December 31, 1999,  PennCorp issued 188,235 shares of
treasury  stock to the  chairman of the board of directors of PennCorp as a part
of a special bonus award. The result was to decrease  additional paid in capital
and treasury shares by $1.4 million and $1.6 million, respectively. In addition,
PennCorp recorded compensation expense of $115,000.

     During 1999,  PennCorp issued 71,072 shares to certain members of the board
of directors as compensation.  During the year ended December 31, 1998,  certain
employees  exercised  stock  options and  warrants  resulting in the issuance of
616,572 shares of PennCorp's  common stock.  The result of such exercises was to
increase common stock and additional paid in capital by $2,000 and $2.0 million,
respectively.

     During  the year  ended  December  31,  1998,  83,260  stock  options  were
exercised and issued to certain employees as discounted  restricted common stock
of PennCorp with vesting periods of three and four years.  During the year ended
December 31, 1998,  PennCorp  recognized $2.8 million of deferred  compensation,
associated with the issuance of this common stock.  For the years ended December
31, 1999 and 1998, PennCorp recognized $180,000 and $2.3 million,  respectively,
of  compensation  expense.  As of  December  31,  1999,  the balance of deferred
compensation  was  $304,000  and was  recorded as a reduction  to  shareholders'
equity.

     Associated with the  restructuring  and the  consolidation of all corporate
functions into the Company's  Dallas location,  certain  employees were severed.
For the year ended December 31, 1998, notes  receivable  secured by 7,500 shares
of common stock were discharged and 9,051 and 88,280 shares of common stock were
abandoned as a result of the severance during 1999 and 1998,  respectively.  The
result was to increase treasury stock, and decrease notes receivable  secured by
common stock, $261,000. During 1999, PennCorp reversed accrued interest on notes
receivable secured by common stock totaling $146,000. During 2000, the remaining
notes  receivable  were  cancelled  as a  result  of  the  consummation  of  the
Recapitalization Plan.

     PennCorp  issued  2,875,000  shares of $50  redemption  value  (liquidation
preference,  $50 plus accrued and unpaid  dividends) $3.50 Series II Convertible
Preferred  Stock (the "Series II Convertible  Preferred  Stock").  The Series II
Convertible  Preferred Stock was 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.  These shares were  exchanged  for shares of
common  stock  of  SWL  Holdings  on  a  one  for  one  basis  as  part  of  the
Recapitalization Plan.

     PennCorp  issued  2,300,000  shares of $50  redemption  value  (liquidation
preference,  $50 plus accrued and unpaid dividends) $3.375 Convertible Preferred
Stock (the "Convertible  Preferred Stock"). The Convertible  Preferred Stock was
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.
These shares were  exchanged for shares of common stock of SWL Holdings on a one
for one basis as part of the Recapitalization Plan.

     As of December 31, 1999, the cumulative accrued and unpaid dividends on the
$3.375 Convertible Preferred Stock amounted to $11.3 million. As of December 31,
1999,  the  cumulative  accrued and unpaid  dividends  on the $3.50  Convertible
Preferred Stock amounted to $14.3 million. The accrued and unpaid dividends were
cancelled as a result of the consummation of the Recapitalization Plan.


                                       77

<PAGE>



     PennCorp  suspended the payment of cash dividends  during the third quarter
of 1998 on its outstanding $3.375  Convertible  Preferred Stock, $3.50 Series II
Convertible Preferred Stock and Common Stock.

     On July 25, 1995,  PennCorp  issued 178,500 shares of 9% Series C Preferred
Stock to fund a portion  of the  Security  Life  purchase  price.  The  Series C
Preferred Stock was mandatorily redeemable on or before June 30, 1998. Effective
March 31,  1998,  PennCorp  redeemed all of the  outstanding  Series C Preferred
Stock into 691,528  shares of  PennCorp's  common stock under  provisions of the
Series  C  Preferred  Stock  certificate  of  designation.  The  result  of such
redemption was to increase common stock and additional paid in capital by $7,000
and $22.2 million,  respectively,  as well as reduce  retained  earnings by $1.9
million reflecting the difference between the reported and redemption amounts of
the Series C Preferred Stock.

(12) STOCK OPTIONS

     At the  consummation  of the  Recapitalization  Plan,  SWL Holdings  issued
non-qualified  options to  purchase  890,000  shares of the  Company's  stock at
prices  ranging  from  $12.50 to $15.00  per share.  Options  granted to certain
directors and executive  officers vested  immediately.  Options granted to other
officers vest during a four-year period.  All options are exercisable during the
period  commencing  from the date they vest  until  expiration  ten years  after
grant. Included in these options were 55,000 shares that were awarded to certain
consultants  at a price of $12.50  per share  for which the  Company  recognized
expense of  $426,000.  With the  resignation  of one of the  executive  officers
effective August 1, 2000, the Company recognized expense of $75,000 with respect
to previously  granted stock options to acquire  150,000  shares.  These options
subsequently expired without being exercised.

     All stock options, stock awards and stock warrants granted under PennCorp's
various stock plans were canceled at the  consummation  of the  Recapitalization
Plan.

     The following table summarizes data relating to SWL Holding's stock options
activity and associated  weighted  average option  exercise  information for the
year ended December 31, 2000:

<TABLE>
<CAPTION>
                                              Options      Price
                                            ----------  ----------
   <S>                                      <C>         <C>

   Outstanding at beginning of year.......          --  $       --
   Granted ...............................     984,000  $    13.23
   Expired/cancelled......................    (244,900) $    13.47
                                            ----------  ----------
                                               739,100  $    13.15
                                            ==========  ==========
</TABLE>

     The following  table  summarizes  information  concerning  outstanding  and
exercisable options as of December 31, 2000:

<TABLE>
<CAPTION>
                                        Options Outstanding                           Options 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>
   $12.50 --  $13.25        569,000           9.48              $  12.59           544,000            $  12.60
   $15.00 --  $15.00        170,000           9.38              $  15.00           137,100            $  15.00
                        -----------                                            -----------
                            739,100                                                681,100
                        ===========                                            ===========
</TABLE>


                                       78

<PAGE>



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

<TABLE>
<CAPTION>
                                                               2000                    1999
                                                      ----------------------     -------------------
                                                        Options      Price        Options     Price
                                                      ----------    --------     ---------  --------
              <S>                                     <C>           <C>          <C>        <C>
              Outstanding at beginning of year.......  2,533,760    $  22.40     3,429,477  $  24.70
              Granted ...............................         --    $                   --  $     --
              Expired/cancelled...................... (2,533,760)   $  22.40      (895,717) $  28.81
              Exercised..............................         --    $                   --  $     --
                                                      ----------                 ---------
                Outstanding at end of year...........         --    $            2,533,760  $  22.40
                                                      ==========                 =========
              Exercisable at end of year.............         --    $            2,369,006  $  21.71
                                                      ==========                 =========
              Available for future grant at end of
                year.................................         --                 1,550,937
                                                      ==========                 =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                              2000         1999         1998
                                                                          -----------  -----------  -----------
                                                                                       (In thousands)
     <S>                                                                  <C>          <C>          <C>
     Reconciliation of net income (loss):
     Basic net loss:
       Net loss before extraordinary charge (as reported)...............  $   (66,667) $  (200,712) $  (421,259)
           Extraordinary charge.........................................       (2,443)          --       (1,671)
                                                                          -----------  -----------  -----------
              Net loss (as reported)....................................      (69,110)    (200,712)    (422,930)
           Pro forma compensation expense, net of tax benefits..........       (3,338)      (2,269)     (10,836)
                                                                          -----------  -----------  -----------
              Net loss (pro forma).....................................   $   (72,448) $  (202,981) $  (433,766)
                                                                          ===========  ===========  ===========

     Diluted net loss:
       Net loss before extraordinary charge (as reported)...............  $   (66,667) $  (200,712) $  (421,259)
           Extraordinary charge.........................................       (2,443)          --       (1,671)
                                                                          -----------  -----------  -----------
              Net loss (as reported)....................................      (69,110)    (200,712)    (422,930)
           Pro forma compensation expense, net of tax benefits..........       (3,338)      (2,269)     (10,836)
                                                                          -----------  -----------  -----------
              Net loss (pro forma).....................................   $   (72,448) $  (202,981) $  (433,766)
                                                                          ===========  ===========  ===========
</TABLE>


                                       79

<PAGE>

<TABLE>
<CAPTION>
                                                                              2000         1999         1998
                                                                          -----------  -----------  -----------
     <S>                                                                  <C>          <C>          <C>
     Per share information:
     Basic net loss:
       Net loss before extraordinary charge (as reported)...............  $     (7.36) $    (22.16) $    (46.50)
           Extraordinary charge.........................................        (0.27)          --        (0.19)
                                                                          -----------  -----------  -----------
              Net loss (as reported)....................................        (7.63)      (22.16)      (46.69)
           Pro forma compensation expense...............................        (0.37)       (0.25)       (1.19)
                                                                          -----------  -----------  -----------
              Net loss (pro forma)......................................  $     (8.00) $    (22.41) $    (47.88)
                                                                          ===========  ===========  ===========
     Common shares used in computing basic loss per share...............        9,059        9,059        9,059
                                                                          ===========  ===========  ===========
     Diluted net loss:
       Net loss before extraordinary charge (as reported)...............  $     (7.36) $    (22.16) $    (46.50)
           Extraordinary charge.........................................        (0.27)          --        (0.19)
                                                                          -----------  -----------  -----------
              Net loss (as reported)....................................        (7.63)      (22.16)      (46.69)
           Pro forma compensation expense...............................        (0.37)       (0.25)       (1.19)
                                                                          -----------  -----------  -----------
              Net loss (pro forma)......................................  $     (8.00) $    (22.41) $    (47.88)
                                                                          ===========  ===========  ===========
     Common shares used in computing diluted loss per share.............        9,059        9,059        9,059
                                                                          ===========  ===========  ===========
</TABLE>

     The fair value of each option grant used to determine the pro forma amounts
indicated  in the  previous  table is  estimated  on the date of grant using the
following weighted average assumptions for 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                             2000          1999         1998
                                                                          -----------  -----------  -----------
     <S>                                                                  <C>          <C>          <C>
     Weighted average risk-free interest rate..........................      6.01%        --%            6.06%
     Weighted average dividend yields..................................        --%        --%              --%
     Volatility factors................................................      0.47%        --%            0.83%
     Weighted average expected life (years)............................       3.9         --             1.90
     Weighted average fair value per share............................    $  4.76      $  --        $   15.02
</TABLE>

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

(13) STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS

     Cash generated by the Company's insurance subsidiaries is made available to
SWL Holdings  principally through periodic payments of principal and interest on
surplus  debentures  issued  by PLAIC,  Constitution  (sold  July 30,  1999) and
Pioneer  Security  (sold  February 4, 2000)  (collectively,  the  "Surplus  Note
Companies"). The surplus debentures issued by PLAIC and Constitution were repaid
in full in  connection  with the  consummation  of the sale of the Career  Sales
Division and the surplus notes issued by Pioneer Security were repaid in full in
connection with the  consummation of the sale of the Payroll Sales Division.  As
part of a subsidiary  realignment in conjunction  with the Career Sales Division
divestiture,  PLAIC issued a new surplus debenture to SW Financial in the amount
of $150.0 million.  As part of a subsidiary  realignment in conjunction with the
Payroll Sales Division  divestiture,  PLAIC issued a new surplus debenture to SW
Financial in the amount of $35.0 million. With respect to Constitution,  Pioneer
Security and PLAIC (as a result of its surplus  debentures issued as of July 30,
1999 and January 31,  2000),  the surplus  debenture  payments have been made to
non-insurance  intermediate  holding  companies  and  subsequently  paid  to the
Company in the form of  dividends.  The  amount  outstanding  under the  surplus
debentures  as of December  31, 1999 was $258.3  million.  At December 31, 2000,
there is only one remaining  surplus  debenture with an  outstanding  balance of
$94.9

                                       80

<PAGE>



million.  The  debenture  was  issued  by PLAIC  and is held by SWFC.  The PLAIC
surplus  debenture   requires   principal  and  interest  payments  to  be  made
periodically  in  amounts  sufficient  to allow  SWL  Holdings  to meet its cash
requirements.  These payments are subject to PLAIC's  maintenance of capital and
surplus of at least $1.2  million in excess of its  investment  in  Southwestern
Life. Any deviation from scheduled payments requires regulatory approval.

     Statutes  in  Texas,  the  domiciliary  state  of the  Company's  insurance
subsidiaries  owned at December 31,  2000,  restrict the payment of dividends by
insurance  companies  to the  available  surplus  funds  derived  from their net
profits.  The maximum  amount of cash  dividends  that may be  declared  without
regulatory  approval  in any  twelve-month  period is the greater of ten percent
(10%) of the insurer's  statutory surplus, as shown by its last annual statement
on file with the Texas Department of Insurance, or one hundred percent (100%) of
statutory  net  gain  from  operations  for the  preceding  year.  In  addition,
dividends  may only be paid  from  earned  surplus.  Currently  PLAIC  relies on
dividends and tax sharing payments from Southwestern Life. Because of the larger
than normal dividends paid in 2000 associated with the recapitalization, most of
the  dividends in 2001 will be  considered  "extraordinary"  under Texas law and
will  require   insurance   department   approval.   Any   dividend   considered
"extraordinary"  can 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.  The
Department  has  indicated  verbally  that it will approve  Southwestern  Life's
requests to pay  extraordinary  dividends in 2001 but that indication is subject
to earned surplus and demonstration of adequate statutory capital and surplus.

     Statutory capital and surplus of the Company's life insurance  subsidiaries
as reported to  regulatory  authorities  at December 31, 2000 and 1999,  totaled
$116.1 million and $253.4 million, respectively.  Statutory net income (loss) of
the Company's life insurance  subsidiaries as reported to regulatory authorities
totaled $11.3 million,  $116.1  million and $(44.6  million) for the years ended
December 31, 2000,  1999 and 1998,  respectively.  The 1999 statutory net income
included gains on sales of subsidiaries  totaling  $127.4 million.  Surplus note
interest expense of $14.4 million, $34.6 million and $40.5 million for the years
ended December 31, 2000, 1999 and 1998,  respectively,  is included in statutory
net income (loss).

     In December 1992, the NAIC adopted the RBC for Life and/or Health  Insurers
Model Act (the "Model  Act").  The main purpose of the Model Act is to provide a
tool for  insurance  regulators to evaluate the capital of insurers with respect
to the risks assumed by them and determine  whether there is a need for possible
corrective action with respect to them.

     Texas, the state of domicile for the Company's insurance subsidiaries owned
at  December  31,  2000,  has  through  regulation  adopted an RBC regime  which
references,  but is not identical to, that of the NAIC. The Texas RBC regulation
provides that RBC is to be computed in a manner  similar to that provided by the
NAIC, but instead of  establishing  multiple  levels of regulatory  action,  the
Texas  regulation  provides that the  commissioner of insurance is authorized to
take  enumerated   actions,   including,   but  not  limited  to,   supervision,
conservation or impairment or hazardous financial condition  determinations,  as
to any insurer that failed to maintain,  at a minimum,  total  adjusted  capital
equal to 70% of the authorized control level RBC.

     Calculations  using the NAIC formula and the life  insurance  subsidiaries'
statutory  financial  statements as of December 31, 2000,  indicate that each of
the  insurance   subsidiaries'   capital   exceeded  Company  Action  Level  RBC
requirements.  In addition,  calculations using the Texas regulations indicating
that of the insurance  subsidiaries'  capital exceeded 70% of authorized control
level RBC.

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


                                       81

<PAGE>



     Southwestern Life is required,  at least annually, to perform cash flow and
asset adequacy analysis under differing interest rate scenarios.  Based upon the
results  of these  tests,  Southwestern  Life  has  determined  that  additional
statutory reserves were not needed at December 31, 2000.

(14) RETIREMENT AND PROFIT SHARING PLANS

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

     On October 1, 1990, the Company  established the PennCorp  Financial,  Inc.
Retirement  and  Savings  Plan,  a defined  contribution  retirement  plan,  for
eligible  employees.  This plan and the Marketing One Incorporated 401(k) Profit
Sharing Plan merged with the Southwestern Financial Services Corporation Savings
Investment  Plan effective  January 1, 1998 and the name of the plan was changed
to the PennCorp Financial Group, Inc. Retirement and Savings Plan ("the PennCorp
Plan"). The Company is in the process of changing the names of its benefit plans
to be under the name of Southwestern Life. Employees are eligible to participate
in the plan after six months of  employment  in which they are credited with 500
hours  of  service.  Participants  may  contribute  from  1 to  15%  of  pre-tax
compensation  and/or from 1 to 10% of after tax  compensation.  Each  subsidiary
participating in the plan matches each pay-period,  50% of pre-tax contributions
up to 6% of compensation. If approved by the Board of Directors, each subsidiary
may make a  discretionary  profit  sharing  contribution  annually  on behalf of
employees  eligible to participate in the plan based on their  compensation  for
the prior plan year.  Employee  contributions are fully vested at all times. The
employer  matching  contributions  made for  employees who  participated  in the
PennCorp Plan prior to January 1, 1998 vest at the rate of 50% per calendar year
of service. The employer matching  contributions made for all other participants
and the employer discretionary contribution vests at the rate of 20% per year of
service. All participants are fully vested at death, disability or attainment of
age 65.  The  assets  of each  account  are  invested  at the  direction  of the
participant.  Eleven funds with various  investment  objectives are available to
the participants. Distributions are normally made in a lump sum. Participants of
the  PennCorp  Plan  prior to January 1, 1998 may elect to receive an annuity in
various forms of payment. Expenses related to this plan for years ended December
31, 2000, 1999 and 1998 amounted to $1.0 million, $1.5 million and $3.3 million.
During  2000,  1999  and  1998,  the  sales  of  Businesses  Held  for  Sale and
restructuring  constituted a partial plan termination of the PennCorp Plan. As a
result, terminated employees became fully vested.

     The  Company has a bonus plan for  officers.  The amount  available  to pay
awards for any year is  determined  by a committee of senior  executives  of the
Company  and is subject to the review  and  recommendation  of the  Compensation
Committee  and approval of the Board of  Directors  of the  Company.  Awards are
based  primarily on the  achievement of specified  operating  objectives and the
performance of eligible  participants.  The Company  recognized  expense of $1.2
million,  $1.9 million and $3.4  million  under this plan during the years ended
December 31, 2000, 1999 and 1998, respectively.

     In May 1998, the three senior  executives of PennCorp entered into two year
employment  agreements  with PennCorp which have various annual bonus,  deferred
payment and  termination  provisions.  As of December  31,  1999,  PennCorp  had
accrued liabilities  aggregating $1.8 million for the annual 1999 bonus and $8.3
million for deferred compensation provisions, respectively associated with these
employment  agreements.  The deferred compensation  provisions were payable upon
the earliest of:  expiration of the  employment  agreement;  termination  of the
executive by PennCorp  without cause;  or termination by the executive for "good
reason" as defined in the employment  agreements.  As a result of the agreements
to sell the Payroll Sales  Division,  Southwestern  Life and Security  Life, the
three  senior  executives  of the Company  became  entitled to  terminate  their
existing employment  agreements for "Good Reason" (as defined therein). In order
to ensure the continued  services of the  executives,  on January 28, 2000,  the
Company  entered into an agreement  with each  executive,  pursuant to which the
Company and each executive  terminated their existing employment  agreements and
entered into new executive employment agreements.  As a result, the Company paid
a total of $10.0 million in employment contract  obligations to the three senior
executives of the Company.

     The Company and certain of its subsidiaries provide certain  postretirement
benefits to eligible  retirees.  The plans provide  certain health care and life
insurance  benefits for retired  employees.  Employees  meeting  certain age and
length of service  requirements become eligible for these benefits.  The Company
closed new  enrollments  for the plan  effective  October 1, 2000. The Company's
obligation for accrued postretirement benefits is unfunded. Following is an

                                       82

<PAGE>



analysis of the  accumulated  benefit  obligation  and the liability for accrued
postretirement benefits for the year ended December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                                 2000         1999
                                                                              ----------   ----------
                                                                                  (In thousands)
           <S>                                                                <C>          <C>
           Benefit obligation at beginning of year........................... $   18,622   $   26,602
           Service cost......................................................        139          283
           Interest cost.....................................................      1,215        1,384
           Plan participants' contributions..................................        360          238
           Amendments and curtailment........................................     (2,536)          --
           Actuarial (gain) loss.............................................      1,763       (2,826)
           Acquisition/sale..................................................       (906)      (4,717)
           Benefit paid......................................................     (1,991)      (2,342)
                                                                              ----------   ----------
              Benefit obligation at end of year.............................. $   16,666   $   18,622
                                                                              ==========   ==========
</TABLE>

     The  liability  for accrued  benefit  obligation  includes the following at
December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                                 2000         1999
                                                                              ----------   ----------
                                                                                  (In thousands)
           <S>                                                                <C>          <C>
           Accumulated benefit obligation.................................... $   16,666   $   18,622
           Unrecognized prior service cost...................................        914          108
           Unrecognized transition obligation................................        364       (2,029)
           Unrecognized actuarial loss.......................................      2,374        4,290
                                                                              ----------   ----------
              Benefit obligation at end of year.............................  $   20,318   $   20,991
                                                                              ==========   ==========
</TABLE>

     Components of net periodic  benefit cost include the following for the year
ended December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                                 2000         1999
                                                                              ----------   ----------
                                                                                  (In thousands)
           <S>                                                                <C>          <C>
           Service cost.....................................................  $       85   $      229
           Interest cost.....................................................      1,263        1,407
           Amortization of transition obligation.............................         82          158
           Curtailment gain..................................................       (246)          --
           Recognized net actuarial loss.....................................       (249)        (125)
                                                                              ----------   ----------
             Net periodic benefit cost......................................  $      935   $    1,669
                                                                              ==========   ==========
</TABLE>

     For measurement purposes, an annual rate increase ranging from 5.5% to 6.5%
in the health care cost trend rate was assumed for 2000; the rate was assumed to
decrease gradually to 5.5% by year 2015 and remain at that level thereafter. The
weighted   average   discount   rates  used  in  determining   the   accumulated
postretirement  benefit  obligation  ranged from 7.5% to 7.75%.  The health care
cost trend rate assumption has a significant  effect on the amounts reported.  A
one-percentage-point  change in assumed  health care cost trend rates would have
the following effects:

<TABLE>
<CAPTION>
                                                                                 One          One
                                                                              Percentage   Percentage
                                                                                Point        Point
                                                                               Increase     Decrease
                                                                              ----------   ----------
                                                                                   (In thousands)
         <S>                                                                  <C>          <C>
         Effect on total of service and interest cost components............. $       66   $      (57)
         Effect on postretirement benefit obligation.........................        833         (745)
</TABLE>


                                       83

<PAGE>



(15) IMPAIRMENT PROVISIONS

     During 1999 and 1998, PennCorp recorded impairment  provisions  aggregating
$58.5 million and $343.0 million, respectively,  associated with Businesses Held
for Sale.  PennCorp  recorded an  impairment  provision  in order to reflect the
difference in PennCorp's  accounting  basis in the Businesses  Held for Sale and
the fair value of the consideration that PennCorp would be likely to receive for
such businesses.

     The  fair  value of the  consideration  likely  to be  received  was  based
primarily  upon  the  terms  of  definitive  sales  agreements.  The  impairment
provisions  of $58.5  million  recorded  in 1999 for the Career  Sales  Division
resulted from a renegotiation  of the purchase and sale agreement which included
a decrease in the nominal  purchase  consideration  of $38.0  million  which was
partially offset by an estimated  discount to the stated value of the note to be
received.  In addition,  impairment provision included the impact of the true-up
of  statutory  capital and surplus of the Career  Sales  Division  companies  to
levels  specified in the sale agreement  which  aggregated  approximately  $24.2
million.  Other factors  modestly  impacting the impairment  provision  included
additional  transaction  costs,  changes  in  unrealized  gains  and  losses  of
securities,  foreign  currency  translation and net income not considered in the
determination  of sale  consideration.  PennCorp  realized  a  foreign  currency
transaction  loss on the  sale  of the  Career  Sales  Division  totaling  $25.0
million,   which  represented   previously  unrealized   translation  losses  on
PennCorp's  Canadian  insurance  operations,  partially offset by a gain of $3.1
million on the disposition resulting in a net loss of $21.9 million.

     PennCorp  impaired  costs in excess of net assets  acquired  for the Career
Sales  Division,  Professional  and the  United  Life  Assets  in 1998 by $100.1
million,  $3.3 million and $11.1 million,  respectively.  To the extent that the
impairment  provision exceeded costs in excess of net assets acquired associated
with each company to be disposed,  additional impairment was necessary.  As this
was the case for the Career Sales Division,  PennCorp  reduced other  intangible
assets in accordance  with APB No. 17. As a result,  PennCorp fully impaired the
present  value of  insurance  in force and  deferred  policy  acquisition  costs
resulting in charges of $98.2 million and $191.6 million,  respectively,  net of
related deferred taxes of $95.1 million.  Additionally,  PennCorp  established a
liability  aggregating $33.8 million for the remaining impairment as a result of
all monetary assets of the Career Sales Division being recorded at fair value.

(16) PRO FORMA FINANCIAL INFORMATION

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

<TABLE>
<CAPTION>
                                                                                           (Unaudited)
                                                                              As Reported   Pro Forma
                                                                                 2000         2000
                                                                              ----------   ----------
                                                                                (In thousands, except
                                                                                  per share amounts)
         <S>                                                                  <C>          <C>
         Total revenues...................................................... $  251,298   $  247,945
         Loss before extraordinary charge....................................    (66,667)     (61,103)
         Per share information(1):
           Net loss before extraordinary charge basic........................ $    (7.36)  $    (6.75)
           Net loss before extraordinary charge diluted......................      (7.36)       (6.75)
</TABLE>


                                       84

<PAGE>

<TABLE>
<CAPTION>
                                                                                          (Unaudited)
                                                                             As Reported   Pro Forma
                                                                                  1999        1999
                                                                              ----------   ----------
                                                                                (In thousands, except
                                                                                  per share amounts)
         <S>                                                                  <C>          <C>
         Total revenues...................................................... $  636,640   $  310,823
         Loss before extraordinary charge....................................   (200,712)     (69,642)
         Per share information(1):
           Loss before extraordinary charge basic............................ $   (22.16)  $    (7.69)
           Loss before extraordinary charge diluted..........................     (22.16)       (7.69)
---------------
(1)  Restated   to   reflect   outstanding   common   shares   as  a  result  of
     recapitalization  effective  13,  2000 as if  recapitalization  occurred at
     beginning  of 1998 and the  computation  of loss per share does not include
     the preferred stock dividend requirements.
</TABLE>

(17) RELATED PARTY TRANSACTIONS

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

     As of December 31, 2000 and 1999,  the Company had invested a total of $3.7
million and $13.5  million,  respectively,  in  transactions  sponsored  by Wand
Partners L.L.C.  ("Wand Partners") in which a director of PennCorp is a managing
member.  The Company has  commitments to invest up to an additional $2.5 million
in future  transactions  sponsored by Wand  Partners.  This  individual is not a
director of SWL Holdings.

     During 2000,  1999 and 1998,  the  Company's  insurance  subsidiaries  paid
management and commitment fees  aggregating  $204, 000,  $488,000 and $ 718,000,
respectively,  to  investment  funds  managed by a former member of the PennCorp
board of directors.

     During  1998,  PennCorp  liquidated  its common stock and  preferred  stock
holdings in ACO Brokerage Holdings  Corporation ("ACO"). ACO was an affiliate of
KB Fund  (see Note 3), KB Fund  owned a 28.6%  interest  in  Acordia,  Inc.  (an
affiliate of ACO).  Total  proceeds  received from the sale of the preferred and
common  stock  aggregated  $30.5  million.  PennCorp  acquired  the common stock
interest in January 1, 1998 for $5.0 million.

(18) OTHER COMMITMENTS AND CONTINGENCIES

     The Company and its  subsidiaries  are obligated  under  operating  leases,
primarily  for office  space.  Rent expense,  net of sublease  income,  was $1.1
million, $2.8 million and $5.3 million in 2000, 1999 and 1998, respectively.

     Minimum lease commitments at December 31, 2000 are (in thousands):

 2001.............................................................. $  1,994
 2002..............................................................    1,942
 2003..............................................................    1,693
 2004..............................................................    1,705
 2005..............................................................    1,235
 2006 and thereafter...............................................    2,677
                                                                    --------
    Total minimum payments required................................ $ 11,246
                                                                    ========

     During 2000, as a part of the  Company's  restructuring  plan,  the Company
assigned  its lease on certain  vacated  office  space to a third  party and was
released from obligations  related to the vacated office space beginning January
1,  2001.  As a part of the  lease  assignment,  the new  lessee  has the use of
furniture  located  in the  vacated  space but the  Company  retains  the future
furniture lease obligation which totals approximately  $184,000 per year through
2004.


                                       85

<PAGE>

IN RE PENNCORP FINANCIAL GROUP, INC. SECURITIES LITIGATION

     During the third quarter of 1998, the first of ten class-action  complaints
was filed in the United States  District Court for the Southern  District of New
York against  PennCorp and certain of its then current or former  directors  and
officers.  None of the individual defendants are currently officers or directors
of the Company.  During a pre-trial  conference on November 9, 1998, all parties
agreed to  consolidation  of all of the  actions  and the court  appointed  lead
plaintiffs on behalf of certain  shareholders  and  noteholders.  The court also
approved  the  selection  of  three  law  firms as  co-lead  counsel  for  those
shareholders and noteholders.  A consolidated and amended complaint was filed on
January 22,  1999,  and a First  Consolidated  Amended  Class  Action  Complaint
naming,  as  defendants,  PennCorp,  David J.  Stone,  formerly a  director  and
chairman and chief executive officer, and Steven W. Fickes,  formerly a director
and  president  and chief  financial  officer,  was filed on March 15, 1999 (the
"Complaint").

     The Complaint alleged that defendants  violated the Securities Exchange Act
of 1934 by,  among  other  things,  issuing  a series  of  materially  false and
misleading statements and omitting to state certain material facts regarding the
Company's financial condition, including the value of certain of its assets, and
by failing to timely  disclose that the Company was under  investigation  by the
Securities and Exchange  Commission  (the "SEC").  Plaintiffs  sought to recover
damages in unspecified  amounts on behalf of themselves and all other purchasers
of  PennCorp's  common stock and  purchasers of  PennCorp's  subordinated  notes
during the period from February 8, 1996 through November 16, 1998.

     The parties  entered into a Stipulation  of  Settlement  dated May 24, 2000
providing for payment of $9.0 million of cash,  plus interest  accruing  through
the date of consummation of the settlement,  in full and final settlement of all
claims. Of that sum, $1.5 million was paid by PennCorp during the fourth quarter
of 1999 into an  interest-bearing  escrow  account  established  by  plaintiffs'
counsel and $7.5 million plus interest is to be paid by  PennCorp's  third party
director  and officer  liability  insurance  carrier  upon  finalization  of the
settlement.

     The settlement  received  preliminary  approval from the court in June 2000
and was  submitted  to the court for final  approval  at a hearing  set for that
purpose in November  2000. No objections  regarding the terms of the  settlement
were  presented to the court at such final hearing and the court  indicated that
it would  issue a ruling  after  further  review.  At present  the court has not
issued its final ruling in this matter.  The Company  expects the  settlement to
receive final approval during 2001.

SEC INVESTIGATION

     On  October  10,  2000,  the SEC  notified  the  Company  that  its  formal
investigation  into possible  violations of the federal securities laws had been
terminated and no enforcement action had been recommended.


PICOW, ET AL. V. SECURITY LIFE & TRUST INSURANCE COMPANY

     In May 1998,  the North  Carolina  Attorney  General's  Office (the "NCAG")
initiated an inquiry  concerning  certain life insurance  products  historically
sold by Security  Life and  representations  allegedly  made by Security  Life's
agents and  officers  that  non-smoker  insureds  would not be  charged  cost of
insurance  after the eighth policy year.  The NCAG  indicated that Security Life
may be estopped to change its practice of not charging the cost of insurance for
non-smoking policyholders after the eighth policy year on these policies because
of  certain  representations  made by agents  and  officers  of  Security  Life.
Although  Security  Life has not charged the cost of  insurance  for  non-smoker
policyholders  after the eighth policy year on these policies,  this practice is
not guaranteed  under the life insurance  contracts,  which  specifically  allow
Security Life the right to change the cost of insurance rates in accordance with
the parameters set forth in the contracts. Security Life responded to the NCAG's
inquiry by denying that it is estopped from changing the cost of insurance rates
on these  policies  based on the alleged  representations,  and is continuing to
reserve its contractual rights to charge the cost of insurance on these policies
in accordance with the parameters set forth in the life insurance contracts.  In
June 1998 the NCAG  informed  Security  Life that it could not  adjudicate  this
matter and left it mutually unresolved.

     In June 1999 the North  Carolina  Department of Insurance  ("NCDOI")  asked
Security Life about the status of its practice of not charging cost of insurance
after the eighth contract year for non-smokers on these same insurance

                                       86

<PAGE>



products  and  requested  to be informed  if  Security  Life were to change that
practice.  Security Life  responded to the NCDOI's  inquiry by verifying that no
decision had been made to date to change such  practice  and that such  practice
had not  changed;  and  confirmed  that the NCDOI would be notified in the event
that such practice were to be changed.

     During 1999  Security  Life  initiated a voluntary  exchange  program which
enabled  policyholders  of such  life  insurance  products  to  terminate  their
policies  and, in exchange  for the  termination  of the  original  policy and a
release,   obtain  either  (i)  the  refund  of  all  premiums  paid  and  other
consideration or (ii) another Security Life life insurance product.

     On November  5, 1999,  Security  Life was served  with a petition  filed in
state  District  Court  in  Dallas  County,  Texas,  asserting  a  class  action
concerning  such  policies.  The petition  alleged that Security Life waived the
right  to  charge  cost  of  insurance  after  the  eighth  policy  year on such
non-smoker  policies and to increase  cost of  insurance  charges on such smoker
policies.  The petition  alleged  Security Life made these  waivers  through its
marketing pieces and statements by its officers.  The petition also alleged that
not all of the facts were  outlined  in  Security  Life's  communication  to its
policyholders  describing  the voluntary  exchange  program and  therefore  that
program was deceptive.

     The petition asked for  declaratory  judgment  concerning the rights of the
plaintiffs  and the class of  policyholders  of such policies and for attorney's
fees. The petition also asked for, among other things,  an injunction to prevent
Security  Life from charging  cost of insurance on such  non-smoker  policies or
increasing  cost of insurance  charges on such smoker  policies after the eighth
policy year,  and  requested  the court to rule that the releases  signed by any
such  policyholders  under the voluntary exchange program were null and void and
those  policyholders  who signed the releases be given the option of reinstating
their policies.  On August 30, 2000, the lawsuit was amended to add a claim that
Security Life had improperly  reduced the interest rates credited to accumulated
values in such policies in an effort to offset losses  incurred by Security Life
on those policies.

     Security  Life  denied  all of the  allegations  in the  lawsuit.  However,
because of the substantial expense and uncertainty  associated with class action
litigation,  Security Life entered into an agreement to settle the lawsuit dated
September 7, 2000 pursuant to which (i) legal fees of approximately $1.3 million
were to be paid to plaintiffs' counsel,  (ii) certain changes were to be made to
the terms of Concept 90 policies  remaining in force or  reinstated  pursuant to
the settlement,  and (iii) certain  optional  in-kind relief (which included the
option to seek  reinstatement  of Concept 90 policies no longer in force) was to
be  provided  to  the  plaintiffs  pursuant  to  elections  made  by  individual
plaintiffs within a specified time period and in a specified manner with respect
to their current or former  Concept 90 policies.  The  settlement  was expressly
subject to approval by the court.

     On  September  8,  2000,  the court  granted  preliminary  approval  of the
settlement  and  ordered  that  notice be sent to all class  members.  The court
granted final approval of the settlement at a hearing held on November 17, 2000,
and the period for appeal of that ruling expired prior to the end of 2000. Thus,
the settlement is now final and is being implemented.

     As of December 31, 2000,  the Company had incurred $1.3 million of expenses
for legal fees to be paid to plaintiffs' counsel and had accrued $4.7 million of
additional  policy  liabilities in connection with the settlement.  The recorded
liability  reflects  costs  the  Company  considers  likely  to be  incurred  in
connection  with the settlement  based only on known or reasonably  estimable or
determinable factors. Therefore, the ultimate cost to the Company may be greater
than estimated and may have a material adverse effect on the Company's financial
condition, results of operations and cash flows.

SCHNOEBELEN V. UNITED LIFE & ANNUITY INSURANCE COMPANY, ET AL.

     Schnoebelen was an independent  insurance  broker whose marketing  contract
with United  Life  provided  that he would be  entitled to an annual  commission
based on the total accumulated value of annuity contracts in force for 13 months
or more with  United  Life which  were sold by  Schnoebelen  and his  designees.
Schnoebelen  generally ceased writing new business with United Life in 1993, and
his marketing contract was terminated in 1997.


                                       87

<PAGE>

     In 1998,  Schnoebelen  brought suit in the United States District Court for
the Southern District of California in San Diego, California against United Life
alleging  that United Life had not paid him all of the  commissions  to which he
was entitled and alleging  various  contractual  and tortious  causes of action.
When  PennCorp  sold United  Life in 1999,  it and PLAIC  indemnified  the buyer
against   certain   losses   resulting   from  this  lawsuit  and  retained  the
responsibility for defending it.

     The  Company  denied  Schnoebelen's  claims  and  vigorously  defended  the
lawsuit.  On July 20, 2000, a jury returned a verdict against United Life in the
amount of approximately $1.125 million,  composed of approximately  $288,000 for
past economic  damages and  approximately  $838,000 for the net present value of
future  economic  damages,  upon which  judgment  was entered by the court.  The
Company has established a liability reserve of approximately  $1.125 million for
this judgment.

     The Company filed post-judgment motions for relief which were denied by the
trial court. The Company has appealed the judgment to the United States Court of
Appeals for the Ninth  Circuit,  believes  that it has valid grounds to obtain a
reversal of the  judgment  in whole or in part on appeal,  and intends to pursue
its appeal vigorously.  The Company also believes that a significant  portion of
the judgment may not be covered by the indemnity agreement and thus would be the
responsibility of the buyer of United Life.

MARTINDALE, ET AL. V. SOUTHWESTERN LIFE INSURANCE COMPANY, ET AL.

     A petition was filed on September 7, 2000 in state  District  Court located
in  Jasper,  Texas  asserting  claims  against  Southwestern  Life and its agent
co-defendant  on behalf of a  purported  class of persons  who had an  ownership
interest  in   universal   life   insurance   policies   or   interest-sensitive
non-participating  whole life insurance  policies  issued by  Southwestern  Life
during the period from January 1, 1981 to the present and who were  residents of
the United States on the date(s) of issuance of such  policy(ies).  The petition
alleges that Southwestern Life and/or its agent  co-defendant  committed,  among
other things,  breach of contract,  breach of fiduciary duty,  breach of duty of
good faith and fair dealing,  negligent  misrepresentation,  unfair or deceptive
acts, and fraud in connection  with the sale of such  policies,  and seeks class
certification,  equitable relief and recovery of actual,  statutory and punitive
damages in unspecified amounts as well as costs and attorneys' fees.

     Both  Southwestern  Life and the agent  co-defendant  timely filed  answers
denying all allegations  made in the original  petition and contesting venue for
the  action,  and  Southwestern  Life  subsequently  filed a notice  of  removal
removing the case to the United States  District Court for the Eastern  District
of Texas located in Beaumont, Texas.

     Only  limited  written  discovery  has  been  taken  in this  case to date.
Southwestern  Life  denies  any and all  allegations  made in the  petition  and
intends  to  defend  this  case  vigorously.  There  can  be no  assurance  that
Southwestern Life will be able to defend or resolve the issues presented in this
action  successfully or at all or that any verdict or other resolution would not
have a material adverse effect on the Company's financial condition,  results of
operations or cash flows.

DEMAND BY FRED ROSEN, MARIAN ROSEN AND NORMAN BOCK

     On or about February 19, 2001,  Southwestern  Life received a demand letter
from  attorneys  representing  Fred Rosen,  Marian Rosen and Norman  Bock.  This
demand letter  asserts,  on behalf of the named  claimants  individually  and on
behalf of all other persons who purchased a universal life insurance policy from
Georgia  International  Life Insurance Company ("Georgia  International"),  that
Georgia  International  and its successors in interest,  including  Southwestern
Life,  misrepresented  the cost of such  policies  and  concealed  the fact that
premiums on such policies  would  substantially  increase over the life of same.
Further,   the  demand  letter  alleges  that   Southwestern  Life  has  assumed
responsibility  for these policies and demands that  Southwestern Life place all
members of the purported class of claimants in the same position they would have
been in had the  policies  in  question  performed  as  originally  represented.
Litigation  is  threatened  for,  among  other  things,  violation  of the Texas
Deceptive  Trade Practices Act should  Southwestern  Life not provide the relief
demanded.

     Southwestern Life is investigating the allegations  contained in the demand
letter and has not yet responded.  It believes,  however,  that the  allegations
made in the demand letter are without basis and intends to defend vigorously

                                       88

<PAGE>



against the demand and any subsequent litigation arising therefrom. There can be
no assurance that Southwestern Life will be able to defend or resolve the issues
presented  in this  matter  successfully  or at all or that any verdict or other
resolution would not have a material  adverse effect on the Company's  financial
condition, results of operations or cash flows.

PLASTER, TRUSTEE V. SOUTHWESTERN LIFE INSURANCE COMPANY, ET AL.

     Stephen R. Plaster,  Trustee of the Robert W. Plaster Irrevocable Trust, as
holder of three universal life insurance policies issued by Southwestern Life on
the life of Robert W. Plaster having a combined  death benefit of  approximately
$20.9  million,  brought suit against  Southwestern  Life in state Circuit Court
located in Camden County,  Missouri on May 20, 1999, claiming,  in essence, that
Southwestern Life committed fraud by misrepresenting the terms,  characteristics
and  performance  of its  universal  life  insurance  policies  at the  time  of
purchase.  The plaintiff specifically alleges that the policies were represented
to be  "single  premium"  policies  not  requiring  payment  of  any  additional
premiums,  but that instead Southwestern Life has demanded payment of additional
premiums in order to keep the policies in force. Plaintiff seeks recovery of all
premiums paid to  Southwestern  Life to date (alleged to be  approximately  $2.9
million), all additional premiums demanded by Southwestern Life to date (alleged
to be approximately $3.7 million),  interest,  punitive damages,  legal fees and
expenses, and reformation and specific performance of the policies.

     Southwestern  Life's  attempt  to  remove  this case to  federal  court was
unsuccessful  and the  case is now in the  discovery  stage.  Southwestern  Life
denies plaintiff's claims and intends to defend this case vigorously.  There can
be no  assurance  that  Southwestern  Life will be able to defend or resolve the
issues  presented in this action  successfully  or at all or that any verdict or
other  resolution  would not have a  material  adverse  effect on the  Company's
financial condition, results of operations or cash flows.

OTHER MATTERS

     The life insurance subsidiaries of the Company are parties to various other
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's
subsidiaries.

     The life insurance  subsidiaries  of the Company are required to be members
of various state insurance guaranty associations in order to conduct business in
those states.  These  associations have the authority to assess member companies
in the event that an  insurance  company  conducting  business  in that state is
unable  to  meet  its  policyholder   obligations.   Assessments  from  guaranty
associations,  which have not been  material,  are recorded in  accordance  with
Statement of Position  97-3 issued by the AICPA,  "Accounting  by Insurance  and
Other Enterprises for Insurance-Related Assessments."

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

     Each of the  definitive  purchase  and  sale  agreements  the  Company  has
consummated for  Professional,  the United Life Assets,  KIVEX, the Career Sales
Division,  the Payroll Sales Division and Marketing One contain  indemnification
provisions  which  survive  the  closing of each sales  transaction  for varying
periods  of  time.  The  indemnification  provisions  would  be  invoked  by the
purchasers should the Company be found in breach of certain  representation  and
warranty  provisions or upon the occurrence of specified events contained in the
purchase and sale  agreements.  The Company has  purchased  representations  and
warranty insurance to cover potential  indemnification claims arising under each
of the definitive  purchase and sale agreements in an aggregate  amount of $20.0
million for all indemnification claims.


                                       89

<PAGE>



     Southwestern Life is required,  at least annually, to perform cash flow and
asset adequacy analysis under differing interest rate scenarios.  Based upon the
results  of these  tests,  Southwestern  Life  has  determined  that  additional
statutory reserves were not needed at December 31, 2000.

     The Company's  insurance  subsidiaries at December 31, 2000 had outstanding
commitments to invest up to $4.8 million in various  limited  partnership  funds
and other investments.

     As of  December  31,  2000,  the  Company  sold  substantially  all  of the
mortgages  originally  held by United Life but retained by the Company as a part
of the  sale  of the  United  Life  Assets.  The  Company  may be  obligated  to
repurchase  certain of the mortgages sold. At December 31, 2000, the Company had
established a $1.2 million liability related to these contingencies.

     At December 31, 2000, the Company had a contingent  obligation for mortgage
loans previously sold aggregating $3.2 million as a result of the Company acting
as a servicing conduit.

(20) REINSURANCE

     In the normal course of business, the Company reinsures portions of certain
policies  that it  underwrites  to limit  disproportionate  risks.  The  Company
retains  varying  amounts of individual  insurance up to a maximum  retention of
$500,000  on any  life.  Amounts  not  retained  are  ceded to  other  insurance
enterprises  or reinsurers  on an automatic or  facultative  basis.  The Company
cedes varying amounts of certain accident and health policies up to 80%.

     Effective May 1, 2000, Southwestern Life and Security Life each consummated
with RGA a 100%  indemnity  coinsurance  agreement  of all of  their  respective
deferred annuity business (see Note 3).

     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>
                                                                            2000          1999         1998
                                                                         -----------  -----------  -----------
                                                                                      (In thousands)
     <S>                                                                 <C>          <C>          <C>
     Direct policy revenues and amounts assessed
       against policyholders...........................................  $   157,664  $   423,030  $   586,317
     Reinsurance assumed...............................................          992        2,492        6,018
     Reinsurance ceded.................................................      (34,841)     (86,514)    (133,177)
                                                                         -----------  -----------  -----------
       Net premiums and amounts earned.................................  $   123,815  $   339,008  $   459,158
                                                                         ===========  ===========  ===========

     Policyholder benefits ceded......................................   $    14,892  $    70,397  $   109,079
                                                                         ===========  ===========  ===========
</TABLE>

     Fees incurred for financial  reinsurance  were  approximately  $372,000 and
$675,000  during  1999 and 1998,  respectively.  The  Company  had no  financial
reinsurance during 2000.

(21) RESTRUCTURING AND OTHER COSTS

     The Company has  developed  restructuring  plans to realign or  consolidate
certain  operations  resulting in  restructuring  costs incurred during 2000 and
1999, the fourth quarter of 1998 and the first quarter of 1998.


2000 Plan

     In connection with the merger of Security Life into  Southwestern  Life and
the   consummation  of  the   Recapitalization   Plan,  the  Company  adopted  a
restructuring plan during the quarter ended June 30, 2000.  Pursuant to the 2000
Plan, the Company reduced its workforce in most areas of the Company  (including
finance, policyholder

                                       90

<PAGE>

services,  marketing,  information technology and human resources) by a total of
52 employees. The 2000 Plan was substantially completed as of December 31, 2000.
The Company incurred restructuring costs aggregating  approximately $1.0 million
for the year ended December 31, 2000 associated with such restructuring.

     The following  reflects the impact of activity for the year ended  December
31, 2000 on the restructuring provision and accrual balance under the 2000 Plan:

<TABLE>
<CAPTION>
                                                                        Paid or
                                                                        Charged                      Balance at
                                                          2000          Against                     December 31,
                                                        Provision      Liability     Adjustments        2000
                                                     -------------   -------------  -------------  -------------
                                                                            (In thousands)
   <S>                                               <C>             <C>            <C>            <C>
   Severance and related benefits..................  $       1,020   $        (835) $          (7) $         178
                                                     =============   =============  =============  =============
</TABLE>

1999 Plan

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

     The following  reflects the impact of activity for the years ended December
31, 1999 and 2000 on the restructuring accrual balances under the 1999 Plan:

<TABLE>
<CAPTION>
                                         1999 Activities                         2000 Activities
                                     -----------------------                -----------------------
                                      Paid or                                Paid or
                                      Charged                 Balance at      Charged                 Balance at
                          1999        Against                 December 31,    Against                December 31,
                       Provision     Liability   Adjustments      1999      Liability   Adjustments     2000
                      -----------   -----------  -----------  -----------  -----------  -----------  -----------
                                                              (In thousands)
   <S>                <C>           <C>          <C>          <C>          <C>          <C>          <C>
   Severance and
     related benefits $     3,185   $      (663) $      (148) $     2,374  $    (2,309) $       (65) $        --
   Estimated holding
     costs of vacated
     facilities.....        2,122            --           --        2,122       (1,453)         (45)         624
                      -----------   -----------  -----------  -----------  -----------  -----------  -----------
                      $     5,307   $      (663) $      (148) $     4,496  $    (3,762) $      (110) $       624
                      ===========   ===========  ===========  ===========  ===========  ===========  ===========
</TABLE>

     The 1999 Plan provided for the  termination  of 50 employees  consisting of
divisional  management and staff in Dallas over a nine-month  period.  The staff
reduction  was  completed  in 2000.  The 1999 Plan also  provided  for  vacating
certain  floors  of the  Company's  Dallas  leased  offices.  The  restructuring
provision of $2.1 million  represented  the  estimated  net present value of the
rent on the office  space to be vacated  net of the  estimated  sublease  rental
income to be received by the  Company.  During the quarter  ended June 30, 2000,
the  Company  agreed to assign its lease on certain  vacated  office  space to a
third party and was  released  from  obligations  related to the vacated  office
space beginning January 1, 2001. As a part of this agreement, the new lessee has
the use of furniture  located in the vacated  space but the Company  retains the
furniture lease obligation which totals approximately  $184,000 per year through
2004. The Company adjusted the remaining accruals pursuant to these agreements.

4th Quarter 1998 Plan

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


                                       91

<PAGE>



     The following  reflects the impact of activity for the years ended December
31, 1998, 1999 and 2000 on the  restructuring  accrual balances under the fourth
quarter 1998 Plan:

<TABLE>
<CAPTION>
                          1998 Activities                   1999 Activities                    2000 Activities
                       ---------------------             ---------------------              ---------------------
                        Paid or                           Paid or                            Paid or
                        Charged              Balance at   Charged               Balance at   Charged              Balance at
                1998    Against              December 31, Against              December 31,  Against              December 31,
             Provision Liability Adjustments     1998    Liability Adjustments     1999     Liability Adjustments    2000
             --------- --------- ----------- ----------- --------- ----------- ------------ --------- ----------- ------------
                                                             (In thousands)
<S>          <C>       <C>       <C>         <C>         <C>       <C>         <C>          <C>       <C>         <C>
Severance and
   related
   benefits  $   6,259 $  (3,985)$        -- $     2,274 $  (1,396)$       189 $      1,067 $  (1,067)$        -- $         --
Estimated
   holding costs
   of vacated
   facilities    2,954    (2,954)         --          --        --          --           --        --          --           --
Estimated
   contract
   terminations
   costs.....       61       (29)         --          32       (40)          8           --        --          --           --
             --------- --------- ----------- ----------- --------- ----------- ------------ --------- ----------- ------------
             $   9,274 $  (6,968)$        -- $     2,306 $  (1,436)$       197 $      1,067 $  (1,067)$        -- $         --
             ========= ========= =========== =========== ========= =========== ============ ========= =========== ============
</TABLE>

     The fourth quarter 1998 Plan provided for the  termination of 43 employees,
including  substantially  all of the executive and  administrative  employees in
PennCorp's Bethesda and New York offices, based on the decision to shut down the
Bethesda  and New York  offices by May 31, 1999.  Severance  payments  under the
fourth quarter 1998 Plan were completed in 2000. PennCorp incurred costs of $4.0
million,  $1.4 million and $1.1 million  which were charged  against the accrual
during 1998, 1999 and 2000, respectively, for terminated employees.

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

1st Quarter 1998 Plan

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

     The following  reflects the impact of activity for the years ended December
31, 1998, 1999 and 2000 on the  restructuring  accrual  balances under the first
quarter 1998 Plan:

<TABLE>
<CAPTION>
                          1998 Activities                   1999 Activities                    2000 Activities
                       ---------------------             ---------------------              ---------------------
                        Paid or                           Paid or                            Paid or
                        Charged              Balance at   Charged               Balance at   Charged              Balance at
                1998    Against              December 31, Against              December 31,  Against              December 31,
             Provision Liability Adjustments     1998    Liability Adjustments     1999     Liability Adjustments    2000
             --------- --------- ----------- ----------- --------- ----------- ------------ --------- ----------- ------------
                                                             (In thousands)
<S>          <C>       <C>       <C>         <C>         <C>       <C>         <C>          <C>       <C>         <C>
Severance and
   related
   benefits..$   3,831  $ (4,417)$     1,205 $       619 $    (297) $     (322) $        -- $      -- $        -- $         --
Estimated
   holding costs
   of vacated
   facilities.   2,205        --          --       2,205      (350)        (41)       1,814    (1,646)       (168)          --
Write-off of
   certain fixed
   assets....    1,131      (831)       (300)         --        --          --           --        --          --           --
Estimated
   contract
   terminations
   costs.....    4,600    (3,247)     (1,353)         --        --          --           --        --          --           --
             --------- --------- ----------- ----------- --------- ----------- ------------ --------- ----------- ------------
             $  11,767 $  (8,495)$      (448)$     2,824 $    (647)$      (363)$      1,814 $  (1,646)$      (168)$         --
             ========= ========= =========== =========== ========= =========== ============ ========= =========== ============
</TABLE>

                                       92

<PAGE>



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

     The first  quarter 1998 Plan  provided for vacating  certain  Dallas office
space. In connection with the plan, the Company recorded estimated holding costs
of vacated facilities of $2.2 million which represented the net present value of
the rent on the office space to be vacated net of the estimated sublease rent to
be  received.  During  1999 and 2000,  the  Company  charged  $350,000  and $1.6
million,  respectively,  of rent  expense on vacated  office  space  against the
accrual.

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

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

Other Costs

     PennCorp  incurred  approximately  $6.3  million  of pre-tax  period  costs
("period costs") associated with the corporate  restructuring for the year ended
December  31,  1998.  Such  costs are  included  in the  Company's  Consolidated
Statements of Operations and  Comprehensive  Income (Loss) as  underwriting  and
other  administrative  expenses.  The Company did not incur  period costs during
2000 and 1999.

(22) FINANCIAL INSTRUMENTS

     The  following  is a summary  of the  carrying  value and fair value of the
Company's financial instruments at December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                    2000                      1999
                                                          -----------------------    -----------------------
                                                           Carrying       Fair        Carrying       Fair
                                                             Value        Value        Value         Value
                                                          ----------    ---------    ----------   ----------
                                                                                (In thousands)
<S>                                                       <C>           <C>          <C>          <C>
Assets:
Cash and cash equivalents................................ $   59,956    $  59,956    $  141,636   $  141,636
Fixed maturities.........................................  1,474,583    1,474,583     2,363,690    2,363,690
Equity securities........................................        420          420         2,008        2,008
Mortgage loans...........................................      9,967        9,967        20,032       20,285
Policy loans.............................................    147,373      147,373       197,287      197,287
Other investments........................................     24,841       24,841        26,570       26,570
Accounts and notes receivable............................        780          780        11,935       11,935

Notes payable............................................     84,000       84,000       279,646      262,441
Universal life and investment contract liabilities.......  1,539,501    1,325,693     1,881,408    1,650,444
</TABLE>



                                       93

<PAGE>



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

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

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

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

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

     Other   Investments:   Other  investments   consist  primarily  of  limited
     partnerships.  Carrying  value  represents  the  underlying  equity  of the
     limited partnerships at cost which approximates fair value.

     Notes Payable:  The carrying value for outstanding notes payable other than
     the senior  subordinated  notes  approximates  the fair value as they carry
     variable  interest  rates of interest  which adjust at least every 90 days.
     The fair value of the senior subordinated notes as of December 31, 1999 was
     determined based upon quotes from market makers.

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

(23) UNAUDITED QUARTERLY FINANCIAL DATA

     The following is a summary of the quarterly  results of operations  for the
years ended December 31, 2000 and 1999 (in thousands, except per share amounts):

<TABLE>
<CAPTION>
2000 Quarter-ended                                      March 31        June 30      September 30    December 31
---------------------------------------------------    ----------    ------------    ------------    -----------
<S>                                                    <C>           <C>             <C>             <C>
Total revenues.....................................    $   73,222    $     52,837    $     63,140    $    62,099
Net loss ..........................................    $  (28,087)   $    (34,852)   $     (1,400)   $    (4,771)
Net loss per share of common stock--basic(1).......    $    (3.10)   $      (3.85)   $      (0.15)   $     (0.53)
Net loss per share of common stock--diluted(1).....    $    (3.10)   $      (3.85)   $      (0.15)   $     (0.53)

1999 Quarter-ended                                      March 31        June 30      September 30    December 31
---------------------------------------------------    ----------    ------------    ------------    -----------

Total revenues.....................................    $  214,099    $    205,171    $    112,806    $   104,564
Net loss ..........................................    $  (41,655)   $    (19,216)   $    (28,098)   $  (111,743)
Net loss per share of common stock--basic(1).......    $    (4.60)   $      (2.12)   $      (3.10)   $    (12.34)
Net loss per share of common stock--diluted(1).....    $    (4.60)   $      (2.12)   $      (3.10)   $    (12.34)
---------------
(1)  Restated   to   reflect   outstanding   common   shares   as  a  result  of
     recapitalization effective June 13, 2000 as if recapitalization occurred at
     beginning  of 1999 and the  computation  of loss per share does not include
     the preferred stock dividend requirements.
</TABLE>


                                       94

<PAGE>



     The Company's  fourth quarter 2000 loss primarily  resulted from a decrease
in  deferred  policy  acquisition  costs of  approximately  $6.5  million and an
increase in policy  liabilities  of  approximately  $1.0  million as a result of
correcting  the method of  calculation  to properly  incorporate  the effects of
reinsurance on certain term life policies.  These adjustments resulted in a loss
of approximately $7.5 million during the fourth quarter.

     The Company's fourth quarter 1999 reported loss primarily  resulted from an
impairment of  intangibles  totaling $95.5  million.  The Company  evaluated the
intangible assets of the Payroll Sales Division based upon the proceeds received
from the sale of the  Payroll  Sales  Division on February 4, 2000 (see Note 3).
The Company  increased the valuation  allowances  associated  with tax assets by
$17.9 million as the result of the increased  likelihood that certain  operating
losses and capital  loss  carryforwards  would not be utilized and the impact or
potential  impact of a "change in  control" as defined by the  Internal  Revenue
Code Section 382.


                                       95

<PAGE>



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

         None.

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

     Information  required  by this Item is  incorporated  by  reference  to the
Company's Proxy Statement for its 2001 Annual Meeting of Shareholders.

Item 11. Executive Compensation

     Information  required  by this Item is  incorporated  by  reference  to the
Company's  Proxy Statement for its 2001 Annual Meeting of  Shareholders,  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 the
Company's Proxy Statement for its 2001 Annual Meeting of Shareholders.

Item 13. Certain Relationships and Related Transactions

     Information  required  by this Item is  incorporated  by  reference  to the
Company's Proxy Statement for its 2001 Annual Meeting of Shareholders.


                                       96

<PAGE>



                                     PART IV

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

(a)  Documents

     1.   The  financial  statements of  Southwestern  Life  Holdings,  Inc. and
          Subsidiaries  set forth on pages 51 through  95,  and the  Independent
          Auditors  Report  set forth on page 50 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 103 of this filing.

     3.   Exhibits

           2.1 Amended and Restated Purchase Agreement dated as of July 2, 1999,
               among Universal  American  Financial  Corp.,  PennCorp  Financial
               Group,   Inc.,  Pacific  Life  and  Accident  Insurance  Company,
               Pennsylvania  Life  Insurance  Company,   Southwestern  Financial
               Corporation,  Constitution Life Insurance  Company,  and PennCorp
               Financial Services, Inc. (3)

           2.2 Stock Purchase Agreement dated as of December 31, 1998 between GE
               Financial Assurance Holdings,  Inc. and Pacific Life and Accident
               Insurance Company. (5)

           2.3 Agreement  dated as of  December  31, 1998  between GE  Financial
               Assurance Holdings, Inc. and PennCorp Financial Group, Inc. (5)

           2.4 Purchase  Agreement  dated  February 21, 1999,  among ING America
               Insurance Holdings, Inc., PennCorp Financial Group, Inc., Pacific
               Life and Accident  Insurance  Company,  Marketing  One  Financial
               Corporation and Marketing One, Inc. (4)

           2.5 Purchase  Agreement dated June 11, 1999, by and between  PennCorp
               Financial Services, Inc. and Allegiance Telecom, Inc. (6)

           2.6 First Amendment to Stock Purchase  Agreement dated as of June 30,
               1999,  by and  between  PennCorp  Financial  Services,  Inc.  and
               Allegiance Telecom, Inc. (3)

           2.7 Stock  Purchase  Agreement,  dated as of January 8, 2000,  by and
               between Pioneer-Occidental Holdings Company and American-Amicable
               Holdings Corporation (7)

           2.8 Amendment  to Stock  Purchase  Agreement  dated as of February 4,
               2000, by and between  American-Amicable  Holdings Corporation and
               Pioneer-Occidental Holdings Company. (8)

           2.9 Stock Purchase  Agreement,  dated as of January 7, 2000,  between
               Reassure  America Life Insurance  Company and PennCorp  Financial
               Group, Inc. (7)

          2.10 Plan of Reorganization under Chapter 11 of the Bankruptcy Code of
               the Registrant. (13)

           3.1 Amended and Restated Certificate of Incorporation of Southwestern
               Life Holdings, Inc. (2)

           3.2 Amended and Restated Bylaws of Southwestern  Life Holdings,  Inc.
               (2)

           4.1 Form of  Specimen  Stock  Certificate  for the  Common  Stock  of
               Southwestern  Life  Holdings,  Inc.  (2) (See  also  Articles  of
               Incorporation filed herewith as Exhibit 3.1)

                                       97

<PAGE>



           4.2 Surplus  Debenture Number Seven in the original  principal amount
               of  $150,000,000,  issued by Pacific Life and Accident  Insurance
               Company to Southwestern Financial  Corporation,  dated as of July
               30, 1999. (10)

           4.3 Amendment  to Surplus  Debenture  Number  Seven in the  principal
               amount of  $150,000,000  by Pacific Life and  Accident  Insurance
               Company to  Southwestern  Financial  Corporation,  dated June 13,
               2000. (15)

           4.4 Surplus  Debenture Number Eight in the original  principal amount
               of  $35,000,000,  issued by Pacific Life and  Accident  Insurance
               Company to Southwestern Financial Corporation,  dated January 31,
               2000. (12)

           4.5 $95.0 million Senior Credit Agreement, dated June 13, 2000, among
               the  Registrant,  as Borrower,  the lenders party thereto and ING
               (U.S.) Capital, LLC as Administrative Agent. (13)

           4.6 First  Amendment,  dated as of August 8, 2000,  to $95.0  million
               Senior  Credit  Agreement,  dated as of June 13, 2000,  among the
               Registrant, as Borrower, the lenders party thereto and ING (U.S.)
               Capital, LLC as Administrative Agent. (1)

           4.7 Second  Amendment,  dated as of March 14, 2001,  to $95.0 million
               Senior Credit  Agreement among the Registrant,  as Borrower,  the
               lenders   party   thereto   and  ING  (U.S.)   Capital,   LLC  as
               Administrative Agent. (1)

          10.1 Executive  Employment  Agreement  dated  January 28, 2000, by and
               between PennCorp Financial Group, Inc. and Keith A. Maib.* (8)

          10.2 Agreement  dated  January  28,  2000,  by  and  between  PennCorp
               Financial Group, Inc. and Keith A. Maib.* (8)

          10.3 Executive  Employment  Agreement  dated  January 28, 2000, by and
               between PennCorp  Financial Group,  Inc. and James P. McDermott.*
               (8)

          10.4 Agreement  dated  January  28,  2000,  by  and  between  PennCorp
               Financial Group, Inc. and James P. McDermott.* (8)

          10.5 Executive  Employment  Agreement  dated  January 28, 2000, by and
               between PennCorp  Financial Group,  Inc. and Scott D. Silverman.*
               (8)

          10.6 Agreement  dated  January  28,  2000,  by  and  between  PennCorp
               Financial Group, Inc. and Scott D. Silverman.* (8)

          10.7 Agreement  dated  September  9,  1999  between  David  C.  Smith,
               chairman  of the  Board of the  Company  and  PennCorp  Financial
               Group, Inc.* (9)

          10.8 Executive  Stock and  Employment  Agreement  dated as of June 13,
               2000, between the Registrant and Bernard Rapoport.* (13)

          10.9 Employment  Agreement  dated as of June  13,  2000,  between  the
               Registrant and Steve Johnson.* (13)

         10.10 Separation  Agreement  dated as of August 1,  2000,  between  the
               Registrant and Steve Johnson.* (14)


                                       98

<PAGE>



         10.11 Employment  Agreement  dated as of June  13,  2000,  between  the
               Registrant and David Little.* (13)

         10.12 Employment  Agreement  dated as of June  13,  2000,  between  the
               Registrant and Ron Archer.* (13)

         10.13 Employment  Agreement  dated as of June  13,  2000,  between  the
               Registrant and David Commons.* (13)

         10.14 Consulting  Agreement  dated as of June  13,  2000,  between  the
               Registrant and John Sharpe.* (13)

         10.15 Option Agreement dated June 13, 2000,  between the Registrant and
               John Sharpe.* (13)

         10.16 Consulting  Agreement  dated as of June  13,  2000,  between  the
               Registrant and William McCormick.* (13)

         10.17 Offer  Letter   dated  as  of  March  15,  2000,   by  and  among
               Inverness/Phoenix  Capital,  LLC, Vicuna  Advisors,  LLC, Bernard
               Rapoport, John Sharpe and PennCorp Financial Goup, Inc. (11)

         10.18 Offer Supplement  Letter dated as of March 20, 2000, by and among
               Inverness/Phoenix  Capital,  LLC, Vicuna  Advisors,  LLC, Bernard
               Rapoport, John Sharpe and PennCorp Financial Group, Inc. (11)

         10.19 Equity  Commitment  Letter  dated as of March 15, 2000 by Bernard
               Rapoport. (11)

         10.20 Equity  Commitment  Letter  dated  as of March  15,  2000 by John
               Sharpe. (11)

         10.21 Revised Standby Underwriting  Commitment Letter dated as of March
               22, 2000, by and among  Inverness/Phoenix  Capital,  LLC,  Vicuna
               Advisors, LLC and PennCorp Financial Group, Inc. (11)

         10.22 Amended  and  Restated  Escrow  Agreement  dated as of March  21,
               2000,  by  and  among  Inverness/Phoenix   Capital,  LLC,  Vicuna
               Advisors,  LLC, PennCorp Financial Group, Inc., Bernard Rapoport,
               John Sharpe and Citibank N.A., as the escrow agent. (11)

         10.23 Lock-Up  Agreement  dated as of March 15,  2000,  by and  between
               PennCorp Financial Group, Inc. and certain preferred stockholders
               listed therein. (11)

         10.24 Subscription  Agreement  dated as of June  13,  2000,  among  the
               Registrant,  Bernard Rapoport, SLM Investment,  LP, Sharpe Taylor
               Investments, Ltd, and JTS Family Limited Partnership #14. (13)

         10.25 Registration  Agreement  dated as of June  13,  2000,  among  the
               Registrant,  Inverness/Phoenix Capital LLC, Bernard Rapoport, SLM
               Investment,  LP,  Sharpe  Taylor  Investments,  Ltd,  JTS  Family
               Limited Partnership #14, John Sharpe and Steve Johnson. (13)

         10.26 Basic  Lease,  dated as of March 27, 1997,  between  Southwestern
               Financial   Services   Corporation   and  Maxus   Tower   Limited
               Partnership. (1)

         10.27 Assignment  and  Assumption  of  Lease  Obligations  dated  as of
               August  15,  2000   between   Southwestern   Financial   Services
               Corporation and Middleberg, Riddle & Gianna. (16)


                                       99

<PAGE>



         10.28 Consent to Partial  Assignment and Lease Amendment No. 1 dated as
               of  August  30,  2000  between  Southwestern  Financial  Services
               Corporation and Middleberg, Riddle & Gianna. (16)

         10.29 Letter  Agreement  fixing  effective  date of  Consent to Partial
               Assignment  and Lease  Amendment  No. 1 dated as of September 19,
               2000 between  Southwestern  Financial  Services  Corporation  and
               BRE/Maxus. (16)

            11 Computation of Loss Per Share (1)

            21 List of subsidiaries of Registrant (1)

FOOTNOTES

           *   Management Compensation Related Agreements.

          (1)  Filed herewith.

          (2)  Such exhibit is incorporated by reference to the  Registration of
               Certain  Classes of Securities on Form 8-A of  Southwestern  Life
               Holdings,  Inc. filed with the Securities and Exchange Commission
               on June 13, 2000.

          (3)  Such exhibit is  incorporated  by reference to the Form 8-K dated
               June 25, 1999 which was filed with the  Securities  and  Exchange
               Commission  by PennCorp  Financial  Group,  Inc. on July 13, 1999
               relating  to the sale of the Career  Sales  Division  and related
               assets,   First  Amendment  to  Stock  Purchase  Agreement;   and
               Amendment No's. 7, 8, 9 and 10 to Credit Agreement.

          (4)  Such exhibit is  incorporated  by reference to the Form 8-K dated
               March 31, 1999 which was filed with the  Securities  and Exchange
               Commission  by PennCorp  Financial  Group,  Inc. on April 5, 1999
               relating  to the  sale of the  United  Life &  Annuity  Insurance
               Company,  CyberLink Development,  Inc., UC Mortgage Corp., United
               Variable  Services,  Inc. and certain  assets of  Marketing  One,
               Inc.; and Amendment No. 6 to Credit Agreement

          (5)  Such exhibit is  incorporated  by reference to the Form 8-K dated
               January 11, 1999 which was filed with the Securities and Exchange
               Commission by PennCorp  Financial Group, Inc. on January 11, 1999
               relating  to the sale of  Pennsylvania  Life  Insurance  Company,
               Union Bankers Insurance Company and related entities, the sale of
               Professional  Insurance  Company,  and  Amendment No. 5 to Credit
               Agreement.

          (6)  Such exhibit is  incorporated  by reference to the Form 8-K dated
               June 11, 1999 which was filed with the  Securities  and  Exchange
               Commission  by PennCorp  Financial  Group,  Inc. on June 18, 1999
               relating to the sale of Kivex, Inc.

          (7)  Such exhibit is  incorporated  by reference to the Form 8-K dated
               January 10, 2000 which was filed with the Securities and Exchange
               Commission by PennCorp  Financial Group, Inc. on January 10, 2000
               relating to the sale of Pioneer Security Life Insurance  Company,
               Occidental  Life  Insurance   Company,   American-Amicable   Life
               Insurance  Company  of  Texas  and  Pioneer  American   Insurance
               Company;  and the sale of Southwestern Life Insurance Company and
               Security Life and Trust Insurance Company.





                                       100

<PAGE>



          (8)  Such exhibit is  incorporated  by reference to the Form 8-K dated
               February 4, 2000 which was filed with the Securities and Exchange
               Commission by PennCorp Financial Group, Inc. on February 11, 2000
               relating to the sale of Pioneer Security Life Insurance  Company,
               Occidental  Life  Insurance   Company,   American-Amicable   Life
               Insurance  Company  of  Texas  and  Pioneer  American   Insurance
               Company; and new Agreements and Executive  Employment  Agreements
               for Keith A. Maib, James P. McDermott and Scott D. Silverman.

          (9)  Such exhibit is incorporated by reference to the Quarterly Report
               on Form 10-Q for the three months ended June 30, 1999 of PennCorp
               Financial Group, Inc.

          (10) Such exhibit is incorporated by reference to the Quarterly Report
               on Form 10-Q for the three  months  ended  September  30, 1999 of
               PennCorp Financial Group, Inc.

          (11) Such exhibit is  incorporated  by reference to the Form 8-K dated
               March 23, 2000 which was filed with the  Securities  and Exchange
               Commission by PennCorp  Financial  Group,  Inc. on March 30, 2000
               relating to the  recapitalization  transaction which was approved
               by the Bankruptcy Court for the District of Delaware.

          (12) Such exhibit is incorporated by reference to the annual Report on
               Form 10-K for the fiscal year ended December 31, 1999 of PennCorp
               Financial Group, Inc.

          (13) Such exhibit is  incorporated  by reference to the Form 8-K dated
               June 13, 2000 which was filed with the  Securities  and  Exchange
               Commission by Southwestern  Life Holdings,  Inc. on June 20, 2000
               relating to the  consummation of the  reorganization  of PennCorp
               Financial Group, Inc.

          (14) Such exhibit is  incorporated  by reference to the Form 8-K dated
               August 1, 2000 which was filed with the  Securities  and Exchange
               Commission by Southwestern Life Holdings,  Inc. on August 7, 2000
               relating the resignation of Steve Johnson.

          (15) Such exhibit is incorporated by reference to the Quarterly Report
               on  Form  10-Q  for the  three  months  ended  June  30,  2000 of
               Southwestern Life Holdings, Inc.

          (16) Such exhibit is incorporated by reference to the Quarterly Report
               on Form 10-Q for the three  months  ended  September  30, 2000 of
               Southwestern Life Holdings, Inc.

     (b)  Reports on Form 8-K.

          On December 12, 2000,  the Company filed a current  report on Form 8-K
          with the Securities and Exchange  Commission,  reporting  under Item 5
          the upgrading of the financial  strength rating of  Southwestern  Life
          Insurance  Company to B++ (Very  Good) from B+ (Very Good) by the A.M.
          Best Company.


                                       101

<PAGE>



                                   SIGNATURES

     Pursuant  to  the  requirements  of  Section  13 or  Section  15(d)  of the
Securities  Exchange  Act of 1934,  Southwestern  Life  Holdings,  Inc. has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                   SOUTHWESTERN LIFE HOLDINGS, INC.
                                  (Registrant)


                                   By:  /s/ Bernard Rapoport
                                      ------------------------------------------
                                        Bernard Rapoport
                                        President and Chief Executive Officer

                                   Date: April 9, 2001


                                   By:  /s/ David A. Commons
                                      ------------------------------------------
                                        David A. Commons
                                        Chief Financial Officer and
                                        Principal Accounting Officer

                                   Date: April 9, 2001

     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/ James C. Comis, III
---------------------------
James C. Comis, III
Director

Date: April 9, 2001


/s/ Frank W. Harrison
---------------------------
Frank W. Harrison
Director

Date: April 9, 2001


/s/ Larry D. Jaynes
---------------------------
Larry D. Jaynes
Director

Date: April 9, 2001


/s/ Bernard Rapoport
---------------------------
Bernard Rapoport
Chairman of the Board and Director

Date: April 9, 2001


/s/ John T. Sharpe
---------------------------
John T. Sharpe
Director

Date: April 9, 2001


/s/ Robert N. Sheehy, Jr.
----------------------------
Robert N. Sheehy, Jr.
Director

Date: April 9, 2001

<PAGE>

                SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

Financial Statements:

Reference  is made  to  data  appearing  on  pages  51  through  95,  and to the
Independent Auditors' Report appearing on page 50 hereof.

 Schedules:*                                                                Page
 ---------                                                                  ----

 Independent Auditors' Report - Financial Statement Schedules................104

 Schedule II Condensed Financial Information of Registrant...................105
 Schedule III Supplementary Insurance Information............................108
 Schedule IV Reinsurance.....................................................109
 Schedule V Valuation and Qualifying Accounts................................110

*    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.


                                       102

<PAGE>



INDEPENDENT AUDITORS' REPORT

     The Shareholders and Board of Directors of Southwestern Life Holdings, Inc.

     Under date of April 8, 2001, we reported on the consolidated balance sheets
of Southwestern Life Holdings, Inc. and subsidiaries as of December 31, 2000 and
1999, and the related  consolidated  statements of operations and  comprehensive
loss,  changes in  shareholders'  equity and cash flows for each of the years in
the three-year period ended December 31, 2000, as contained in the annual report
on  Form  10-K  for  the  year  2000.  In  connection  with  our  audits  of the
aforementioned  consolidated  financial statements,  we also audited the related
consolidated  financial statement schedules as listed in the accompanying index.
These  financial  statement  schedules are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statement schedules based on our audits.

     In our opinion,  such financial  statement  schedules,  when  considered in
relation  to the  basic  consolidated  financial  statements  taken  as a whole,
present fairly, in all material respects, the information set forth therein.




KPMG LLP
Dallas, Texas
April 8, 2001


                                       103

<PAGE>
                                                                     SCHEDULE II

                        SOUTHWESTERN LIFE HOLDINGS, INC.
                              (PARENT COMPANY ONLY)

                            CONDENSED BALANCE SHEETS
                        As of December 31, 2000 and 1999
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                          2000           1999
                                                                                      -----------    -----------
<S>                                                                                   <C>           <C>
ASSETS
   Investments:
     Investment in subsidiaries.....................................................  $   256,527   $    435,077
     Notes receivable from subsidiaries.............................................           --          7,665
                                                                                      -----------    -----------
       Total investments............................................................      256,527        442,742

   Cash and cash equivalents........................................................        2,713         10,478
   Deferred debt issuance costs.....................................................        2,937          2,051
   Other assets.....................................................................        3,038            221
                                                                                      -----------    -----------
       Total assets.................................................................  $   265,215    $   455,492
                                                                                      ===========    ===========
LIABILITIES
   Notes payable....................................................................  $    84,000    $   279,646
   Due to (from) subsidiaries.......................................................          (12)         2,552
   Accrued expenses and other liabilities...........................................       13,669         20,328
                                                                                      -----------    -----------
       Total liabilities............................................................       97,657        302,526
                                                                                      -----------    -----------
SHAREHOLDERS' EQUITY
   $3.375 Convertible preferred stock...............................................           --        120,216
   $3.50 Series II convertible preferred stock......................................           --        151,736
   Common stock, $.01 par value; authorized 15,000,000;
     issued and outstanding 9,059,000...............................................           91             --
   Common stock, $.01 par value; authorized 100,000,000;
     issued and outstanding 30,143,416..............................................           --            303
   Additional paid in capital.......................................................      724,726        428,974
   Accumulated other comprehensive income...........................................      (30,206)       (62,712)
   Accumulated deficit..............................................................     (527,053)      (453,487)
   Treasury shares..................................................................           --        (30,829)
   Notes receivable and other assets secured by common stock........................           --         (1,235)
                                                                                      -----------    -----------
       Total shareholders' equity...................................................      167,558        152,966
                                                                                      -----------    -----------
       Total liabilities and shareholders' equity...................................  $   265,215    $   455,492
                                                                                      ===========    ===========
</TABLE>

                 See accompanying independent auditors' report.


                                       104

<PAGE>


                                                                     SCHEDULE II

                        SOUTHWESTERN LIFE HOLDINGS, INC.
                              (PARENT COMPANY ONLY)

                       CONDENSED STATEMENTS OF OPERATIONS
              For the years ended December 31, 2000, 1999 and 1998
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                          2000            1999           1998
                                                                       -----------    -----------    -----------
<S>                                                                    <C>            <C>            <C>
Revenue:
   Interest income from subsidiaries.................................  $        65    $    19,349    $    19,663
   Other interest income.............................................          333            754          2,865
   Net gains from sale of investments................................           64             --            577
   Net loss from sale of subsidiaries................................          (14)        (1,898)            --
   Other income......................................................          114            143            589
                                                                       -----------    -----------    -----------
       Total revenue.................................................          562         18,348         23,694
                                                                       -----------    -----------    -----------
Operating expenses:
   General and administrative expenses...............................       23,160         20,116         19,429
   Interest and amortization of deferred debt issuance costs.........       15,576         40,176         42,730
   Restructuring charges.............................................           --             30          4,529
   Impairment provision associated with assets of
     Businesses Held for Sale........................................           --             --          9,000
                                                                       -----------    -----------    -----------
       Total operating expenses......................................       38,736         60,322         75,688
                                                                       -----------    -----------    -----------

Loss before income tax benefits, equity in earnings (loss)
   of subsidiaries and extraordinary charge..........................      (38,174)       (41,974)       (51,994)
     Income taxes (benefit)..........................................        9,500         (1,249)        (3,132)
                                                                       -----------    -----------    -----------
Loss before equity in losses of subsidiaries and extraordinary charge      (47,674)       (40,725)       (48,862)
     Equity in losses of subsidiaries................................      (18,993)      (159,987)      (374,068)
                                                                       -----------    -----------    -----------
Loss before extraordinary item.......................................      (66,667)      (200,712)      (422,930)
Extraordinary charge.................................................       (2,443)            --             --
                                                                       -----------    -----------    -----------
   Net loss..........................................................  $   (69,110)   $  (200,712)   $  (422,930)
                                                                       ===========    ===========    ===========
</TABLE>

                 See accompanying independent auditors' report.



                                       105

<PAGE>


                                                                     SCHEDULE II
                        SOUTHWESTERN LIFE HOLDINGS, INC.
                              (PARENT COMPANY ONLY)

                       CONDENSED STATEMENTS OF CASH FLOWS
              For the years ended December 31, 2000, 1999 and 1998
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                          2000            1999           1998
                                                                       -----------    -----------    -----------
<S>                                                                    <C>            <C>            <C>
Cash flows from operating activities:
   Loss before extraordinary........................................   $   (66,667)   $  (200,712)   $  (422,930)
   Adjustments to reconcile net loss to net cash
     provided (used) in operating activities:
       Amortization of intangibles and depreciation..................        1,232          4,010          1,966
       Impairment provision associated with assets of
         Businesses Held for Sale....................................           --             --          9,000
       Equity in (earnings) losses of subsidiaries...................       18,993        159,987        374,068
       Increase (decrease) in liabilities and due to subsidiaries....       (3,313)        (1,839)        (6,164)
       Loss on sale of subsidiaries..................................           14          1,898             --
       Other, net....................................................       (3,120)         3,914          2,644
                                                                       -----------    -----------    -----------
         Net cash used by operations.................................      (52,861)       (32,742)       (41,416)
                                                                       -----------    -----------    -----------

Cash flows from investing activities:
   Acquisition of businesses.........................................           --             --        (73,858)
   Purchase of equity security.......................................           --             --         (5,000)
   Sale of equity security...........................................           --             --         30,500
   Settlement on sale of subsidiaries................................           --         (9,002)            --
   Collections on mortgage loans.....................................           --          1,238             --
   Sale of mortgage loans and limited partnerships...................           64         10,238             --
   Principal payment on notes receivable from subsidiaries...........           --        204,211             --
   Dividends received from subsidiaries..............................      198,693        120,549         44,327
   Capital contributions to subsidiaries.............................           --        (27,668)        (7,853)
   Other, net........................................................           --             --            712
                                                                       -----------    -----------    -----------
       Net cash provided (used) by investing activities..............      198,757        299,566        (11,172)
                                                                       -----------    -----------    -----------

Cash flows from financing activities:
   Issuance of notes payable.........................................       89,000             --        203,000
   Issuance of common stock..........................................       46,004             --              3
   Reduction of notes payable........................................     (285,792)      (269,000)      (126,015)
   Payments of debt issuance costs...................................       (3,413)            --             --
   Dividends.........................................................           --             --        (13,372)
   Other, net........................................................           --             --         (2,838)
                                                                       -----------    -----------    -----------
       Net cash used by financing activities.........................     (154,201)      (269,000)        60,778
                                                                       -----------    -----------    -----------

Net increase (decrease) in cash......................................       (8,305)        (2,176)         8,190
Cash and cash equivalents at beginning of year.......................       10,478         12,654          4,464
                                                                       -----------    -----------    -----------
Cash and cash equivalents at end of year.............................  $     2,173    $    10,478    $    12,654
                                                                       ===========    ===========    ===========
Supplemental Disclosure:
   Interest paid.....................................................  $    16,748    $    38,014    $    37,849
   Taxes paid (refunded).............................................           --            (55)          (213)
Non-cash financing activities:
   Stock received in consideration for notes receivable..............          959             --             --
   Cancellation of preferred stock and related dividends in
     exchange for common stock.......................................      279,746             --             --
   Cancellation of common stock and treasury shares..................          931             --             --
   Issuance of stock grants..........................................        1,050             --             --
   Stock options issued to consultants and former
     president of the Company........................................          501             --             --
   Redemption of Series C Preferred Stock............................           --             --         22,227
   Debt assumed with acquisition.....................................           --             --        115,015
   Issuance of common stock associated with the acquisition of the
     Fickes and Stone Knightsbridge Interests........................           --             --          8,500
   Accrued and unpaid preferred stock dividends......................           --         17,825          4,457
   Reissuance of treasury stock......................................           --          1,562             --
   Other ............................................................           --             --            261
</TABLE>

                 See accompanying independent auditors' report.

                                       106

<PAGE>


                                                                    SCHEDULE III


                        SOUTHWESTERN LIFE HOLDINGS, INC.

                       SUPPLEMENTARY INSURANCE INFORMATION
              For the years ended December 31, 2000, 1999 and 1998
                                 (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>
2000
Accident and
   health........... $      636   $     4,490  $    1,899   $      355   $    1,354   $     176    $       --
Life ...............     62,897     1,671,674     120,676      105,880      173,160      21,382        48,019
Annuities...........         19       514,726       1,240       33,022       23,672          30        19,215
                     ----------   -----------  ----------   ----------   ----------   ---------    ----------
   Total...........  $   63,552   $ 2,190,890  $  123,815   $  139,257   $  198,186   $  21,588    $   67,234
                     ==========   ===========  ==========   ==========   ==========   =========    ==========

1999
Accident and
   health........... $      456   $    27,503  $  106,411   $   14,559   $   74,079   $   6,957    $   53,537
Life ...............    109,042     2,061,540     226,110      160,218      242,903      32,618        80,591
Annuities...........      4,228       667,914       6,487       82,823       60,605       2,992        17,252
                     ----------   -----------  ----------   ----------   ----------   ---------    ----------
   Total............ $  113,726   $ 2,756,957  $  339,008   $  257,600   $  377,587   $  42,567    $  151,380
                     ==========   ===========  ==========   ==========   ==========   =========    ==========

1998
Accident and
   health........... $       --   $    24,190  $  216,219   $   25,826   $  160,135   $  27,251    $  107,772
Life ...............    136,420     2,064,035     234,540      174,249      267,074      46,926       101,245
Annuities...........      3,288       731,436       8,399      168,977      114,553       2,775        22,819
                     ----------   -----------  ----------   ----------   ----------   ---------    ----------
   Total...........  $  139,708   $ 2,819,661  $  459,158   $  369,052   $  541,762   $  76,952    $  231,836
                     ==========   ===========  ==========   ==========   ==========   =========    ==========
</TABLE>

                  See accompanying independent auditors' report


                                       107

<PAGE>


                                                                     SCHEDULE IV

                        SOUTHWESTERN LIFE HOLDINGS, INC.

                                   REINSURANCE
              For the years ended December 31, 2000, 1999, and 1998
                                 (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>
Year ended December 31, 2000:
     Life insurance in force.........  $  11,416,403  $  2,708,936  $          815   $    8,708,282
                                       =============  ============  ==============   ==============

Premiums:
     Accident and health insurance...  $       4,352  $      3,512  $           --   $          840        --%
     Life insurance/annuities........        153,312        31,329             992          122,975       0.8%
                                       -------------  ------------  --------------   --------------
                                       $     157,664  $     34,841  $          992   $      123,815
                                       =============  ============  ==============   ==============

Year ended December 31, 1999:
     Life insurance in force......... $  29,573,138   $  5,511,902  $    1,090,479   $   25,151,715
                                      =============   ============  ==============   ==============

Premiums:
     Accident and health insurance... $     162,027   $     55,376  $           (9)  $      106,642        --%
     Life insurance/annuities........       261,003         31,138           2,501          232,366       1.1%
                                      -------------   ------------  --------------   --------------
                                      $     423,030   $     86,514  $        2,492   $      339,008
                                      =============   ============  ==============   ==============

Year ended December 31, 1998:
     Life insurance in force......... $  35,350,735   $  5,501,096  $    1,325,067   $   31,174,706
                                      =============   ============  ==============   ==============

Premiums:
     Accident and health insurance... $     310,477   $     96,770  $        2,047   $      215,754       0.9%
     Life insurance/annuities........       275,840         36,407           3,971          243,404       1.6%
                                      -------------   ------------  --------------   --------------
                                      $     586,317   $    133,177  $        6,018   $      459,158
                                      =============   ============  ==============   ==============
</TABLE>

                 See accompanying independent auditors' report.


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<PAGE>


                                                                      SCHEDULE V

                        SOUTHWESTERN LIFE HOLDINGS, INC.

                        VALUATION AND QUALIFYING ACCOUNTS
              For the years ended December 31, 2000, 1999, and 1998
                                 (In thousands)
<TABLE>
<CAPTION>
                                      Balance at      Charge to      Charge to                     Balance at
                                       Beginning      Cost and         Other                        End of
                                       Of Period      Expenses       Accounts       Deductions      Period
                                       ---------      --------       --------       ----------     ---------
<S>                                    <C>            <C>            <C>            <C>            <C>
2000:
Mortgage loans on real estate......... $     682      $     --       $     --       $     (682)    $      --
Accounts and notes receivable.........     5,910           300             --           (3,696)        2,514

1999:
Mortgage loans on real estate......... $   4,295      $     --       $  3,494       $    7,107     $     682
Accounts and notes receivable.........     6,201         1,250             --            1,541         5,910

1998:
Mortgage loans on real estate......... $   6,721(a)   $ 11,425       $     --       $   13,851(b)  $   4,295
Unearned loan charges.................     1,569            --             --            1,569(b)         --
Accounts and notes receivable.........     9,205(a)      4,449             --            7,453(b)      6,201

--------------
(a)  Includes amounts recorded as a purchase GAAP adjustment in conjunction with
     the acquisition of SW Financial.
(b)  Includes amounts transferred to assets of Businesses Held for Sale.
</TABLE>


                 See accompanying independent auditors' report.


                                       109

<PAGE>


                                                                      EXHIBIT 11

                SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
                          COMPUTATION OF LOSS PER SHARE
                                 (In thousands)
<TABLE>
<CAPTION>
                                                            For the Years Ended December 31,
                                                       ----------------------------------------
                                                           2000           1999         1998
                                                       ------------  ------------  ------------
<S>                                                    <C>           <C>           <C>
Basic net loss:
   Loss before extraordinary charge..................  $    (66,667) $   (200,712) $   (421,259)
   Extraordinary charge..............................        (2,443)           --        (1,671)
                                                       ------------  ------------  ------------
                                                       $    (69,110) $   (200,712) $   (422,930)
                                                       ============  ============  ============
Diluted net loss:
   Loss before extraordinary charge..................  $    (66,667) $   (200,712) $   (421,259)
   Extraordinary charge..............................        (2,443)           --        (1,671)
                                                       ------------  ------------  ------------
                                                       $    (69,110) $   (200,712) $   (422,930)
                                                       ============  ============  ============
Basic(1):
   Average shares outstanding during the period......         9,059         9,059         9,059
                                                       ============  ============  ============
Diluted(1):
   Average shares outstanding during the period......         9,059         9,059         9,059
                                                       ============  ============  ============
---------------
(1)  Restated   to   reflect   outstanding   common   shares   as  a  result  of
     recapitalization effective June 13, 2000 as if recapitalization occurred at
     beginning of 1998.
</TABLE>



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