AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 23, 1997

REGISTRATION NO. 333-14693
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

ARM FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 63 61-1244251
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer identification number)
incorporation or organization) classification code number)

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

ARM FINANCIAL GROUP, INC.
515 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202
(502) 582-7900
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------

ROBERT H. SCOTT
ARM FINANCIAL GROUP, INC.
515 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202
(502) 582-7900
(Name, address, including zip code, and telephone number, including area code,
of agent for service for the registrant)
------------------------------

COPIES TO:

FAITH D. GROSSNICKLE PETER R. O'FLINN
SHEARMAN & STERLING LARS BANG-JENSEN
599 LEXINGTON AVENUE LEBOEUF, LAMB, GREENE & MACRAE, L.L.P.
NEW YORK, NEW YORK 10022 125 WEST 55TH STREET
(212) 848-4000 NEW YORK, NEW YORK 10019-5389
(212) 424-8000

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ___________________

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / /
___________________

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

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EXPLANATORY NOTE

This registration statement contains two forms of prospectus: one to be used
in connection with a United States and Canadian offering of the registrant's
Class A Common Stock (the "U.S. Prospectus") and one to be used in connection
with a concurrent international offering of the Class A Common Stock (the
"International Prospectus" and, together with the U.S. Prospectus, the
"Prospectuses"). The International Prospectus will be indentical to the U.S.
Prospectus except that it will have a different front cover page. The U.S.
Prospectus is included herein and is followed by the front cover page to be used
in the International Prospectus. The front cover page for the International
Prospectus included herein has been labeled "Alternate Page for International
Prospectus."

If required pursuant to Rule 424(b) of the General Rules and Regulations
under the Securities Act of 1933, as amended, ten copies of each of the
Prospectuses in the forms in which they are used will be filed with the
Securities and Exchange Commission.

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

PROSPECTUS (SUBJECT TO COMPLETION)

ISSUED MAY 23, 1997

5,750,000 SHARES

ARM FINANCIAL GROUP, INC.

CLASS A COMMON STOCK
---------------------

OF THE 5,750,000 SHARES OF CLASS A COMMON STOCK BEING OFFERED, 4,600,000 SHARES
ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S.
UNDERWRITERS AND 1,150,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE
UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. ALL SHARES OF
CLASS A COMMON STOCK BEING OFFERED HEREBY ARE BEING SOLD BY THE
COMPANY. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR
THE CLASS A COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED
THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $12 AND $14
PER SHARE. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS TO
BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE.

THE COMPANY HAS TWO CLASSES OF AUTHORIZED COMMON STOCK CONSISTING OF THE CLASS A
COMMON STOCK OFFERED HEREBY AND CLASS B COMMON STOCK (COLLECTIVELY, THE "COMMON
STOCK"). SEE "DESCRIPTION OF CAPITAL STOCK." HOLDERS OF CLASS A COMMON STOCK
ARE ENTITLED TO ONE VOTE PER SHARE ON EACH MATTER SUBMITTED TO A VOTE OF
STOCKHOLDERS. THE CLASS B COMMON STOCK IS NON-VOTING EXCEPT UNDER
CERTAIN LIMITED CIRCUMSTANCES AND AS REQUIRED BY LAW. ALL HOLDERS OF
COMMON STOCK ARE ENTITLED TO RECEIVE SUCH DIVIDENDS AND
DISTRIBUTIONS, IF ANY, AS MAY BE DECLARED FROM TIME TO TIME BY THE
BOARD OF DIRECTORS.

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APPLICATION HAS BEEN MADE TO HAVE THE CLASS A COMMON STOCK APPROVED FOR LISTING
ON THE AMERICAN STOCK EXCHANGE UNDER THE TRADING SYMBOL "ARM".

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

SEE "RISK FACTORS" BEGINNING ON PAGE 10 OF THIS PROSPECTUS FOR INFORMATION THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------

PRICE $ A SHARE
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
--------------------- --------------------- ---------------------

PER SHARE................................. $ $ $
TOTAL(3).................................. $ $ $

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(1) THE COMPANY AND THE MORGAN STANLEY STOCKHOLDERS (AS DEFINED HEREIN) HAVE
AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN LIABILITIES,
INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SEE
"UNDERWRITERS."

(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $1,000,000.

(3) THE MORGAN STANLEY STOCKHOLDERS HAVE GRANTED THE U.S UNDERWRITERS AN
OPTION, EXERCISABLE WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO
AN AGGREGATE OF 862,500 ADDITIONAL SHARES OF CLASS A COMMON STOCK AT THE
PRICE TO PUBLIC SHOWN ABOVE LESS UNDERWRITING DISCOUNTS AND COMMISSIONS,
FOR THE PURPOSE OF COVERING OVER-ALLOTMENTS, IF ANY. IF THE U.S.
UNDERWRITERS EXERCISE SUCH OPTION IN FULL, THE TOTAL PRICE TO PUBLIC,
UNDERWRITING DISCOUNTS AND COMMISSIONS AND PROCEEDS TO THE MORGAN STANLEY
STOCKHOLDERS WILL BE $ , $ AND $ ,
RESPECTIVELY. SEE "PRINCIPAL STOCKHOLDERS" AND "UNDERWRITERS."

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THE SHARES OF CLASS A COMMON STOCK ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN,
AS AND IF ACCEPTED BY THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF
CERTAIN LEGAL MATTERS BY LEBOEUF, LAMB, GREENE & MACRAE, L.L.P., COUNSEL FOR THE
UNDERWRITERS. IT IS EXPECTED THAT DELIVERY OF THE SHARES OF CLASS A COMMON STOCK
WILL BE MADE ON OR ABOUT , 1997, AT THE OFFICE OF MORGAN STANLEY & CO.
INCORPORATED, NEW YORK, NEW YORK, AGAINST PAYMENT THEREFOR IN IMMEDIATELY
AVAILABLE FUNDS.

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

MORGAN STANLEY & CO.
INCORPORATED

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

OPPENHEIMER & CO., INC.

, 1997

NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE MORGAN STANLEY STOCKHOLDERS
OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF CLASS A
COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF.

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NO ACTION HAS BEEN OR WILL BE TAKEN IN ANY JURISDICTION BY THE COMPANY OR BY
ANY UNDERWRITER THAT WOULD PERMIT A PUBLIC OFFERING OF THE CLASS A COMMON STOCK
OR POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS IN ANY JURISDICTION WHERE
ACTION FOR THAT PURPOSE IS REQUIRED, OTHER THAN IN THE UNITED STATES. PERSONS
INTO WHOSE POSSESSION THIS PROSPECTUS COMES ARE REQUIRED BY THE COMPANY AND THE
UNDERWRITERS TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO
THE OFFERING OF THE CLASS A COMMON STOCK AND THE DISTRIBUTION OF THIS
PROSPECTUS.
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TABLE OF CONTENTS

PAGE
-----

Prospectus Summary.............................. 4
Risk Factors.................................... 10
Use of Proceeds................................. 18
Dividend Policy................................. 18
Dilution........................................ 19
Capitalization.................................. 20
Selected Historical Financial Information....... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 24
Business........................................ 42
Management...................................... 65
Certain Relationships and Related Party
Transactions.................................. 79

PAGE
-----

Principal Stockholders.......................... 81
Description of Certain Indebtedness............. 83
Description of Capital Stock.................... 85
Shares Eligible for Future Sale................. 92
Certain United States Federal Income Tax
Consequences to Non-United States Holders..... 94
Underwriters.................................... 97
Legal Matters................................... 100
Experts......................................... 101
Available Information........................... 101
Glossary of Selected Insurance Terms............ 102
Index to Financial Statements................... F-1

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In this Prospectus, references to "dollar" and "$" are to United States
dollars, and the terms "United States" and "U.S." mean the United States of
America, its states, territories, possessions and all areas subject to its
jurisdiction.

"S&P 500-Registered Trademark- Price Index" is a trademark of The
McGraw-Hill Companies, Inc. and has been licensed for use by the Company. OMNI,
the Company's equity-indexed annuity product, is not sponsored, endorsed, sold
or promoted by Standard & Poor's Corporation ("S&P"), and S&P makes no
representation regarding the advisability of investing in OMNI.

The principal executive offices of the Company are located at 515 West
Market Street, Louisville, Kentucky 40202, and the Company's telephone number is
(502) 582-7900.
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CERTAIN PERSONS ENGAGING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON STOCK
OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE
SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITERS."

FOR NORTH CAROLINA INVESTORS: THE COMMISSIONER OF INSURANCE OF THE STATE OF
NORTH CAROLINA HAS NOT APPROVED OR DISAPPROVED THIS OFFERING, NOR HAS SUCH
COMMISSIONER PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.

STATE INSURANCE HOLDING COMPANY STATUTES APPLICABLE TO THE COMPANY DUE TO
ITS INSURANCE COMPANY SUBSIDIARIES GENERALLY PROVIDE THAT NO PERSON MAY ACQUIRE
CONTROL OF THE COMPANY, AND THUS INDIRECT CONTROL OF ITS INSURANCE SUBSIDIARIES,
WITHOUT PRIOR APPROVAL OF THE APPROPRIATE INSURANCE REGULATORS. GENERALLY, ANY
PERSON WHO ACQUIRES BENEFICIAL OWNERSHIP OF 10% OR MORE OF THE OUTSTANDING
SHARES OF THE COMPANY'S CLASS A COMMON STOCK WOULD BE PRESUMED TO HAVE ACQUIRED
SUCH CONTROL UNLESS THE APPROPRIATE INSURANCE REGULATORS UPON APPLICATION
DETERMINE OTHERWISE. BENEFICIAL OWNERSHIP INCLUDES THE ACQUISITION, DIRECTLY OR
INDIRECTLY (BY REVOCABLE PROXY OR OTHERWISE), OF VOTING STOCK OF THE COMPANY.
THE COMPANY CONTROLS INSURANCE COMPANY SUBSIDIARIES DOMICILED IN OHIO AND NEW
YORK. IF ANY PERSON ACQUIRES 10% OR MORE OF THE OUTSTANDING SHARES OF THE
COMPANY'S CLASS A COMMON STOCK IN VIOLATION OF SUCH PROVISIONS, THE INSURER OR
THE INSURANCE REGULATOR IS ENTITLED TO INJUNCTIVE RELIEF, INCLUDING ENJOINING
ANY PROPOSED ACQUISITION, OR SEIZING SHARES OWNED BY SUCH PERSON, AND SUCH
SHARES WOULD NOT BE ENTITLED TO BE VOTED.

PROSPECTUS SUMMARY

THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH HEREIN
UNDER THE CAPTION "RISK FACTORS" AND ARE URGED TO READ THIS PROSPECTUS IN ITS
ENTIRETY.

PRIOR TO THE CONSUMMATION OF THE OFFERING, THE COMPANY WILL AMEND AND
RESTATE ITS CERTIFICATE OF INCORPORATION AND EFFECT A RECAPITALIZATION (THE
"RECAPITALIZATION") PURSUANT TO WHICH (I) EACH SHARE OF COMMON STOCK OF THE
COMPANY OUTSTANDING IMMEDIATELY PRIOR TO THE RECAPITALIZATION WILL BE CONVERTED
INTO ONE SHARE OF CLASS A COMMON STOCK; (II) THE MORGAN STANLEY STOCKHOLDERS
WILL CONVERT CERTAIN OF THEIR SHARES OF CLASS A COMMON STOCK INTO CLASS B COMMON
STOCK; AND (III) EACH SHARE OF COMMON STOCK OUTSTANDING WILL BE SPLIT INTO 706
SHARES. SEE "DESCRIPTION OF CAPITAL STOCK -- GENERAL." UNLESS OTHERWISE
INDICATED: (I) "COMPANY" MEANS ARM FINANCIAL GROUP, INC. AND, WHERE APPROPRIATE,
ITS SUBSIDIARIES; (II) "CLASS A COMMON STOCK" MEANS THE CLASS A COMMON STOCK,
PAR VALUE $.01 PER SHARE, OF THE COMPANY, "CLASS B COMMON STOCK" MEANS THE CLASS
B COMMON STOCK, PAR VALUE $.01 PER SHARE, OF THE COMPANY AND "COMMON STOCK"
MEANS, COLLECTIVELY, THE CLASS A COMMON STOCK AND THE CLASS B COMMON STOCK;
(III) "OFFERING" MEANS THE OFFERING OF 5,750,000 SHARES OF CLASS A COMMON STOCK
IN THE UNDERWRITTEN PUBLIC OFFERING TO WHICH THIS PROSPECTUS RELATES; AND (IV)
ALL SHARE AND PER SHARE INFORMATION ASSUMES THAT THE U.S. UNDERWRITERS' OVER-
ALLOTMENT OPTION IS NOT EXERCISED AND, EXCEPT WITH RESPECT TO THE FINANCIAL
STATEMENTS OF THE COMPANY BEGINNING ON PAGE F-1 OF THIS PROSPECTUS, HAS BEEN
ADJUSTED TO GIVE EFFECT TO THE RECAPITALIZATION. SEE "GLOSSARY OF SELECTED
INSURANCE TERMS" FOR THE DEFINITIONS OF CERTAIN TERMS USED HEREIN.

UNLESS OTHERWISE INDICATED, FINANCIAL INFORMATION AND OPERATING STATISTICS
APPLICABLE TO THE COMPANY SET FORTH IN THIS PROSPECTUS ARE BASED ON UNITED
STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP") AND NOT STATUTORY
ACCOUNTING PRACTICES.

THE COMPANY

ARM Financial Group, Inc. specializes in the asset accumulation business,
providing retail and institutional customers with products and services designed
to serve the growing long-term savings and retirement markets. The Company's
earnings are derived from investment spread (the difference between income
earned on investments and interest credited on customer deposits) and fee
income. The Company's retail products include a variety of fixed, indexed and
variable annuities and face-amount certificates sold through a broad spectrum of
distribution channels including stockbrokers, independent agents, independent
broker-dealers and financial institutions. The Company offers guaranteed
investment contracts ("GICs") to its institutional clients and markets its
institutional products and services to bank trust departments, plan sponsors,
cash management funds, other institutional funds and insurance companies
directly as well as through investment consultants.

The Company was established in July 1993 and completed its first acquisition
in November 1993. The Company's assets under management have grown from $2.3
billion as of November 26, 1993 to $5.1 billion as of March 31, 1997 (after
giving effect to the pending sale of its investment adviser subsidiary, ARM
Capital Advisors (as defined herein). See "Business -- History"). The Company
attributes this growth to internally generated sales, new product offerings and
opportunistic acquisitions. Operating earnings (net income applicable to common
shareholders, excluding, net of tax, realized investment gains and losses and
non-recurring charges) have grown from $2.4 million in 1994 to $4.5 million in
1995 and $22.6 million in 1996. Operating earnings for the three months ended
March 31, 1997 were $6.4 million.

The Company expects to benefit from demographic trends and a growing demand
for retirement savings. As the U.S. population has aged, demand for retirement
savings has accelerated. According to U.S. Census Bureau information,
approximately 30% of today's population was born during the Baby Boom (1946 to
1964). By the time the Baby Boom generation begins to reach age 65 in 2011, the

population between the ages of 45 and 64 -- the peak period for asset
accumulation -- is projected to increase by approximately 45% to 79 million.

The Company also expects to benefit from anticipated higher consumer savings
due to concerns about an overburdened social security system, extended life
spans, corporate restructuring and downsizing, and volatile financial markets.
Among the products expected to benefit are tax-advantaged annuities. Annual
industry sales of individual annuity products increased from $65.1 billion in
1990 to $111.4 billion in 1996, with projected growth of at least 9% per year
for the next few years, according to an industry study conducted by LIMRA.

STRATEGY

The Company's strategy is focused on the following:

DEVELOPING AND MARKETING A BROAD ARRAY OF CUSTOMIZED PRODUCTS. The Company
believes that long-term success in the asset accumulation industry will depend
upon the Company's ability to adapt to rapidly changing consumer preferences in
fluctuating interest rate and equity market environments. The Company
continually redesigns existing products with enhanced features and continues to
develop and sell new and innovative products in the marketplace with a
particular focus on minimizing its dependence on any one product and meeting a
variety of needs for consumers and distribution channels. The Company works
closely with its distributors to develop products that are customized to suit
their customers' particular needs. The Company was one of the first to recognize
the market opportunity for equity-indexed annuities and in 1996 introduced OMNI,
the Company's equity-indexed annuity product. Following initial sales in 1996,
the Company expects to introduce a second generation product with enhanced
features in mid-1997. In the institutional market, the Company offers a
short-term floating rate GIC designed to meet the market demand for products
with attractive current yields and access to liquidity. In 1997, the Company
anticipates introducing products for the synthetic GIC marketplace that will
provide institutional clients with either absolute or relative investment
performance guarantees.

CAPTURING A GROWING SHARE OF SALES IN RETAIL DISTRIBUTION CHANNELS. Over
the past few years, the Company has built the infrastructure necessary to
support increased growth in the retail market. The Company believes that it can
distinguish itself by strengthening its relationships with individual
distributors, often referred to as producers. To accomplish this objective, the
Company seeks to (i) provide superior service to producers through an expanded
and dedicated producer services unit, (ii) enhance the Company's technological
platform to permit superior and immediate access for producers to the Company's
administrative systems for transacting business, (iii) heighten producers'
awareness of its products and insurance affiliates through focused
advertisements in industry publications and selective promotional programs and
(iv) quickly develop innovative products with new features and services which
are responsive to market needs. For example, as a means to strengthen its
relationships with distributors, the Company is in the process of implementing a
program whereby certain distributors will have the capability to access remotely
the Company's systems and transact business with the Company on-line. The
Company also seeks to increase its retail market share by expanding and
diversifying its retail distribution channels. For example, in 1996 the Company
began offering variable annuities through banks and thrifts. Additionally, the
Company recognizes the importance of building and maintaining a strong capital
base. Partly as a result of the Company's strengthened financial condition, A.M.
Best Company, Inc. ("A.M. Best") raised the claims-paying ability rating of the
Company's insurance subsidiaries from "A-(Excellent)" to "A(Excellent)" in 1995.
A further upgrade could help the Company expand its penetration of existing
distribution channels.

respond quickly to customer needs for new products by reducing product
development time. In additon, to supplement traditional inquiry and transaction
processing methods, the Company's client/server network can provide producers,
customers and employees with services and information easily accessible through
Internet, voice response and wide-area network ("WAN") technology.

MINIMIZING FIXED COST STRUCTURE. The Company attempts to minimize fixed
distribution costs by marketing its products through fiduciaries and other third
parties. Unlike many of its competitors, the Company does not maintain its own
field sales force, and distributors are primarily paid based on production. As a
consequence of its low fixed distribution costs, the Company has greater
flexibility to shift the mix of its sales and distribution channels in order to
respond to changes in market demand. In addition, the Company believes that its
administrative cost structure has benefited from economies of scale achieved as
a result of its strategic acquisitions. The relocation of the Company's main
processing center in Worthington, Ohio to the Company's headquarters in
Louisville, Kentucky during 1997 is expected to provide further consolidation
benefits, in addition to enhancing customer and producer service. The Company
will continue to evaluate whether certain non-strategic systems and
administrative functions should be outsourced to third-party providers.

IMPLEMENTING AN ADVANCED AND INTEGRATED RISK MANAGEMENT PROCESS. The
Company designs its products and manages its capital to achieve a superior
return on common equity. The Company's return on average common equity (based on
operating earnings and equity before unrealized gains and losses) improved to
19% in 1996 from 6% in 1995, and in the first quarter of 1997 was 20% on an
annualized basis. Using its experience in offering investment guarantees in the
insurance market sector, the Company employs a highly analytical and disciplined
asset/liability risk management approach to develop new products and monitor its
investment portfolios and liabilities. The Company does not view asset/liability
management as a discrete function to be performed by a separate committee.
Instead, asset/liability management permeates every aspect of the Company's
operations. Beginning with product design and continuing through the product
sale and eventual payout, professionals in each functional area (such as
marketing, actuarial, investments, legal, finance and administration) work
jointly with a common set of risk/return characteristics to achieve the
Company's overall liquidity and profit objectives (rather than the specific
objectives of any particular functional area). The Company implements this
process with the analytical risk and capital management skills and experience of
its management team, supported with sophisticated computer software, and an
emphasis on investment securities whose cash flows can be modeled extensively
against liability cash flows under different interest rate scenarios. Risk
components that cannot be appropriately modeled are typically hedged or
outsourced. The Company's investment portfolios are currently being managed by
ARM Capital Advisors (see "Business -- History"); however, the Company may use
additional unaffiliated investment management firms to supplement the services
of ARM Capital Advisors in the future. Importantly, the Company has and will
continue to monitor the investment practices of these firms to ensure that the
Company's prescribed guidelines are followed.

CONTINUING SUCCESSFUL ACQUISITION RECORD. The Company's first acquisition
occurred in 1993 with the acquisition of Integrity Life Insurance Company
("Integrity") and National Integrity Life Insurance Company ("National
Integrity") (collectively, the "Integrity Companies"). In 1995, the Company
acquired the assets and business operations of SBM Company ("SBM"). By acquiring
SBM, the Company met its objectives of growing and diversifying its product
offerings and distribution channels and achieving further economies of scale.
The Company increased the investment yields of the SBM portfolio while improving
its associated risk profile through a restructuring of the investment portfolio,
reduced expenses by merging back-office operations into the Company's existing
operations and expanded the Company's distribution channels. The Company
continues to seek opportunities to purchase interests in blocks of annuity
business, other financial service companies and distributors and to enter into
marketing partnerships and reinsurance ventures with other insurance companies,
all with the goal of achieving greater profitability through growth in market
share and further economies of scale.

MAINTAINING FOCUS ON COMPANY PROFITABILITY. The Company's focus on
profitability is supported by an integrated team approach to developing products
and operating the Company's business. The Company's compensation system and the
equity investments of certain of its employees further reinforce the Company's
focus on the objective of profitability. Employees at all levels of the Company
are eligible to receive bonuses based on profitability. As of March 31, 1997,
executive officers, other employees and directors of the Company controlled,
directly or indirectly, 9% of the Company's outstanding common stock.

The Company conducts its different businesses through the following
subsidiaries:

- INTEGRITY -- provides retail, fixed, indexed and variable annuities and
institutional GICs;

- NATIONAL INTEGRITY -- provides retail, fixed and variable annuities and
institutional GICs, primarily in New York (wholly owned subsidiary of
Integrity);

- SBM CERTIFICATE COMPANY -- offers face-amount certificates which guarantee
a fixed rate of return to investors at a future date. Face-amount
certificates are similar to bank-issued certificates of deposit but are
regulated by the Investment Company Act of 1940, as amended (the
"Investment Company Act") and are not subject to Federal Deposit Insurance
Corporation ("FDIC") protection;

- ARM SECURITIES CORPORATION ("ARM SECURITIES") (FORMERLY KNOWN AS SBM
FINANCIAL SERVICES, INC.) -- this broker-dealer supports the Company's
retail annuity operations and the Company's sales of independent
third-party mutual funds; and

- ARM TRANSFER AGENCY, INC. ("ARM TRANSFER AGENCY") -- provides transfer
agent services as needed to support the Company's retail business
operations.

In addition, ARM Capital Advisors, which will remain a 20% owned affiliate
after the pending sale (see "Business -- History"), offers fixed income asset
management services to third-party institutional clients (currently consisting
primarily of defined benefit pension plans).

THE OFFERING

Class A Common Stock (1):
United States Offering........ 4,600,000 shares
International Offering........ 1,150,000 shares
Total....................... 5,750,000 shares

Common Stock to be outstanding
following the Offering.......... 23,255,971 shares(2)(3)

Use of Proceeds................. The net proceeds of the Offering to the Company are
intended to be used to strengthen the Company's existing
capital base, to enhance the Company's retail market
presence, to consolidate operating locations and for other
corporate purposes, which may include acquisitions. See
"Use of Proceeds."

Proposed American Stock Exchange
Symbol.......................... "ARM"

Dividend Policy................. The Company currently intends to pay regular quarterly
cash dividends of $.02 per share on its Common Stock
subject to declaration by the Company's Board of
Directors. See "Dividend Policy."

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

(1) Does not include up to an aggregate of 862,500 shares of Class A Common
Stock that may be sold by the Morgan Stanley Stockholders pursuant to the
U.S. Underwriters' over-allotment option. See "Principal Stockholders" and
"Underwriters."

(2) As used herein, "Common Stock" collectively refers to the Class A Common
Stock and the Class B Common Stock. See "Description of Capital Stock."

(3) Excludes 2,428,640 shares of Common Stock issuable upon exercise of
outstanding options. See "Management."

SUMMARY HISTORICAL FINANCIAL INFORMATION

THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995(1) 1994
--------- --------- --------- --------- ---------

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Investment income..................................... $ 69,700 $ 55,353 $ 250,031 $ 196,024 $ 149,142
Interest credited on customer deposits................ (51,325) (41,198) (182,161) (146,867) (116,463)
--------- --------- --------- --------- ---------
Net investment spread............................. 18,375 14,155 67,870 49,157 32,679
Fee income:
Variable annuity fees............................... 3,239 2,362 10,786 7,238 4,291
Asset management fees............................... 1,884 1,515 5,780 3,161 --
Other fee income.................................... 397 271 1,267 949 4,100
--------- --------- --------- --------- ---------
Total fee income.................................. 5,520 4,148 17,833 11,348 8,391
Other income and expenses:
Surrender charges................................... 882 1,570 5,024 3,339 2,356
Operating expenses.................................. (8,156) (6,983) (31,055) (22,957) (21,484)
Commissions, net of deferrals....................... (638) (544) (2,372) (1,557) (2,551)
Interest expense on debt............................ (686) (787) (3,146) (3,461) (3,136)
Amortization:
Deferred policy acquisition costs................. (2,175) (1,687) (6,835) (2,932) (1,296)
Value of insurance in force....................... (2,241) (2,057) (7,320) (7,104) (3,830)
Acquisition-related deferred charges.............. (126) (500) (1,503) (9,920) (2,163)
Goodwill.......................................... (122) (122) (488) (358) --
Non-recurring charges............................... (1,445) -- (5,004) -- --
Other, net.......................................... (995) (732) (5,366) (687) 4,972
--------- --------- --------- --------- ---------
Total other income and expenses................... (15,702) (11,842) (58,065) (45,637) (27,132)
Realized investment gains (losses).................... 2,231 (403) 907 4,048 (36,727)
--------- --------- --------- --------- ---------
Income (loss) before federal income taxes............. 10,424 6,058 28,545 18,916 (22,789)
Federal income tax benefit (expense).................. (2,814) (1,573) (5,167) (7,026) 6,018
--------- --------- --------- --------- ---------
Net income (loss)..................................... 7,610 4,485 23,378 11,890 (16,771)
Dividends on preferred stock.......................... (1,188) (1,188) (4,750) (4,750) (4,750)
--------- --------- --------- --------- ---------
Net income (loss) applicable to common shareholders... $ 6,422 $ 3,297 $ 18,628 $ 7,140 $ (21,521)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per common share (2)................ $ .37 $ .19 $ 1.06 $ .49 $ (2.03)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Average common shares outstanding (2)................. 17,506 17,489 17,498 14,614 10,590
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
OTHER OPERATING DATA:
Operating earnings (3)................................ $ 6,417 $ 3,559 $ 22,577 $ 4,509 $ 2,352
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Operating earnings per common share (2)............... $ .37 $ .20 $ 1.29 $ .31 $ .22
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
BALANCE SHEET AND OTHER DATA (AT END OF PERIOD):
Total cash and investments ........................... $3,499,000 $2,999,621 $3,347,477 $2,798,027 $1,782,501
Assets held in separate accounts...................... 1,201,621 867,732 1,135,048 809,927 506,270
Total assets.......................................... 4,943,221 4,084,022 4,701,664 3,793,580 2,447,888
Long-term debt........................................ 38,000 40,000 40,000 40,000 40,000
Total liabilities..................................... 4,785,247 3,930,046 4,519,722 3,605,589 2,462,021
Shareholders' equity:
Carrying amount..................................... 157,974 153,976 181,942 187,991 (14,133)
Excluding the effects of SFAS No. 115 (4)........... 184,695 162,789 178,273 159,461 90,816
Fair value (5)...................................... 225,177 194,770 224,276 187,721 115,192

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

(1) Effective May 31, 1995, the Company acquired substantially all of the assets
and business operations of SBM.

(2) For all periods presented, includes the effects of a 706-for-1 stock split
to be consummated in conjunction with the Offering.

(3) "Operating earnings" is defined as net income applicable to common
shareholders, excluding, net of tax, realized investment gains and losses
and non-recurring charges.

(4) Excludes from carrying amount shareholders' equity the net unrealized gains
and losses on securities classified as available-for-sale, net of related
amortization and taxes.

(5) The methodologies used to estimate fair value are described in the notes to
the consolidated financial statements contained elsewhere in this
Prospectus.

RISK FACTORS

AN INVESTMENT IN THE CLASS A COMMON STOCK INVOLVES A SIGNIFICANT DEGREE OF
RISK. IN DETERMINING WHETHER TO MAKE AN INVESTMENT IN THE CLASS A COMMON STOCK,
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY ALL OF THE INFORMATION SET FORTH
IN THIS PROSPECTUS AND, IN PARTICULAR, THE FOLLOWING FACTORS.

INTEREST RATE RISK

The Company's spread-based business is subject to several inherent risks
arising from movements in interest rates, especially if the Company fails to
anticipate or respond to such movements. First, interest-rate changes can cause
compression of the Company's net spread between interest earned on investments
and interest credited on customer deposits, thereby adversely affecting the
Company's results. Second, if interest-rate changes produce an unanticipated
increase in surrenders of the Company's spread-based products, the Company may
be forced to sell investment assets at a loss in order to fund such surrenders.
Finally, changes in interest rates can have significant effects on the
performance of the Company's portfolio of mortgage-backed securities ("MBSs"),
including its collateralized mortgage obligations ("CMOs"), as a result of
changes in the prepayment rate of the loans underlying such securities.

SPREAD COMPRESSION. The Company will experience spread compression when it
is unable or chooses not to maintain the same margin between its investment
earnings and its crediting rates. When interest rates rise, the Company may not
be able to replace the assets in its investment portfolio with the higher-
yielding assets that will be necessary to fund the higher crediting rates
necessary to keep its products competitive. As a result, the Company may
experience either a decrease in sales and an increase in surrenders (as
described below) if it chooses to maintain its spread by not raising its
crediting rates, or spread compression if it does increase its crediting rates.
Conversely, when interest rates fall, the Company would have to reinvest the
cash received from its investments (i.e., interest and payments of principal
upon maturity or redemption) in the lower-yielding instruments then available.
If the Company chose not to or was unable (i.e., due to guaranteed minimum or
fixed crediting rates or limitations on the frequency of crediting-rate resets)
to reduce the crediting rate on its spread-based products or acquire relatively
higher-risk securities yielding higher rates of return, spread compression would
occur.

INCREASE IN SURRENDERS. If, as a result of interest rate increases, the
Company was unable or chose not to raise its crediting rates to keep them
competitive, the Company may experience an increase in surrenders. If the
Company lacked sufficient liquidity, the Company might have to sell investment
securities to fund associated surrender payments. Because the value of such
securities would likely have decreased in response to the increase in interest
rates, the Company would realize a loss on such sales. Although certain of the
Company's products contain market value adjustment features which approximate
and transfer such loss to the customer if the selected time horizon for the
fixed return investment is terminated prior to maturity, there can be no
assurance that the Company would be fully insulated from realizing any losses on
sales of its securities. In addition, regardless of whether the Company realizes
an investment loss, the surrenders would produce a decrease in invested assets,
with an adverse effect on future earnings therefrom. Finally, premature
surrenders also cause the Company to accelerate amortization of deferred policy
acquisition costs and value of insurance in force which would otherwise be
amortized over a longer period, but the impact of such acceleration generally
would be offset to some extent by surrender charge fees. Policies issued by the
Company's insurance subsidiaries include lapse protection provisions that help
to deter surrenders when interest rates rise. Surrender charges are generally
assessable within the first five to seven years after a policy is issued. The
Company realized surrender charge income of $5.0 million on net surrenders of
$326.2 million in 1996. At March 31, 1997, approximately 59% of the Company's
insurance subsidiaries' customer deposits had surrender penalties or other such
restrictions or were not subject to withdrawal.

MBS PREPAYMENT AND EXTENSION. MBSs, including CMOs, are subject to
prepayment risks that vary with, among other things, interest rates. Such
securities accounted for approximately 43% of the Company's investment portfolio
as of March 31, 1997. During periods of declining interest rates, MBSs generally
prepay faster as the underlying mortgages are prepaid and refinanced by the
borrowers in order to take advantage of the lower rates. MBSs that have an
amortized cost that is greater than par (i.e., purchased at a premium) will
incur a reduction in yield or a loss as a result of such prepayments. In
addition, during such periods, the Company will generally be unable to reinvest
the proceeds of any such prepayment at comparable yields. Conversely, during
periods of rising interest rates, prepayments generally slow. MBSs that have an
amortized value that is less than par (i.e., purchased at a discount) will incur
a decrease in yield or a loss as a result of slower prepayments. The gross
unamortized premiums and unaccreted discounts of MBSs were $32.7 million and
$39.0 million, respectively, at March 31, 1997. As of that date, approximately
1.2% of the MBS portfolio consisted of interest-only securities. The Company
acquired such interest-only securities as a hedge against certain securities
acquired in the SBM acquisition.

The Company follows asset/liability strategies that are designed to mitigate
the effect of interest rate changes on the Company's profitability. However,
there can be no assurance that management will be successful in implementing
such strategies and achieving adequate investment spreads. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Asset Portfolio Review" and "Business -- Asset/Liability Spread Management."

RECENT NET LOSSES; LIMITED OPERATING HISTORY; VARIABILITY OF OPERATING RESULTS

The Company has a limited operating history and sustained net losses for the
years ended December 31, 1994 and 1993 of $16.8 million and $40.8 million,
respectively. In 1994, these losses principally related to realized investment
losses due to the sale of fixed-maturity securities during a period of rising
interest rates (see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Results of Operations"), and in 1993, these losses
related primarily to writedowns due to other-than-temporary impairments in the
value of certain investments in real estate and joint ventures that occurred
prior to the acquisition of the Integrity Companies. Although the Company
reported net income of $23.4 million and $11.9 million for the years ended
December 31, 1996 and 1995, respectively, and $7.6 million for the three months
ended March 31, 1997, there can be no assurance that the Company will be able to
sustain profitable operations in the future. In addition, the Company may
experience substantial variability in its earnings from period to period,
especially in view of the Company's active management of its investment
portfolio which may produce significant realized investment gains or losses in a
particular period as a result of changes in prevailing interest rates.

COMPETITION; RATINGS

The Company operates in a highly competitive industry. The Company's
insurance subsidiaries compete in their markets with numerous major national
life insurance companies and insurance holding companies, many of which have
substantially greater capital and surplus, larger and more diversified
portfolios of life insurance policies and annuities, higher credit ratings,
greater economics of scale and greater access to distribution channels than the
Company's subsidiaries. Due to recent Supreme Court decisions, a ruling by the
office of the Comptroller of the Currency and other legislative and industry
developments, the Company's insurance subsidiaries also encounter increasing
competition from banks, securities brokerage firms and other financial
intermediaries marketing insurance products, annuities and other forms of
savings and pension products. Competition in the insurance industry is based on
many factors, including the overall financial strength and reputation of the
insurer, pricing and other terms and conditions of the offered product, levels
of customer service, access to distributor channels and experience in the
business, ratings assigned by A.M. Best, and the claims-paying ability ratings
assigned by nationally recognized statistical rating organizations. Many
financial institutions and broker-dealers focus on the A.M. Best and claims
paying ability ratings of an insurer in determining whether to market the
insurer's

annuities. As a result, if any of the Company's insurance subsidiaries' ratings
were downgraded from their current levels or if the ratings of the Company's
competitors improved and those of the Company's insurance subsidiaries did not,
the ability of the Company to distribute its products and the persistency of its
existing business could be adversely affected. Each of the rating agencies
reviews its ratings periodically, and there can be no assurance that the
Company's insurance subsidiaries' current ratings will be maintained in the
future. See "Business -- Ratings and Rating Agencies" and "-- Competition."

HOLDING COMPANY STRUCTURE; DIVIDEND RESTRICTIONS

The Company is a holding company with no direct operations, and its
principal assets consist of the capital stock of Integrity Holdings, Inc.
("Integrity Holdings"), which owns Integrity and National Integrity (domiciled
in the States of Ohio and New York, respectively), ARM Capital Advisors and SBM
Certificate Company. The Company relies primarily on management fees, dividends
and other distributions from its insurance and non-insurance subsidiaries to
meet ongoing cash requirements, including amounts required for payment of
interest and principal on outstanding debt obligations, preferred stock
dividends and corporate expenses. The ability of the Integrity Companies to pay
dividends to the Company in the future is subject, among other things, to
regulatory restrictions of their respective states of domicile and will depend
on their statutory surplus and earnings. Because National Integrity is a
subsidiary of Integrity, dividend payments by National Integrity to Integrity
must be made in compliance with New York standards, and the ability of Integrity
to pass those dividends on to the Company is subject to compliance with Ohio
standards. From time to time, the National Association of Insurance
Commissioners (the "NAIC") and various state insurance regulators have
considered, and may in the future consider, proposals to further restrict
dividend payments that may be made by an insurance company without regulatory
approval. No assurance can be given that there will not be any further
regulatory action restricting the ability of the Company's insurance
subsidiaries to pay dividends. Inability on the part of Integrity or National
Integrity to pay dividends to the Company in an amount sufficient to enable the
Company to meet its debt service and other cash requirements (including dividend
payments on the Common Stock) could have a material adverse effect on the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Business --
Regulation."

The ability of the Company to pay dividends on the Common Stock is also
subject to the prior declaration and payment of accrued cumulative dividends on
the Company's 9 1/2% Cumulative Perpetual Preferred Stock (the "Perpetual
Preferred Stock") and to limitations contained in the Company's credit
facilities with banks. See "Description of Certain Indebtedness" and
"Description of Capital Stock -- Preferred Stock."

DEPENDENCE ON CERTAIN THIRD-PARTY RELATIONSHIPS

The Company uses third-party marketing organizations with sales networks to
distribute certain of its retail annuity products. One such organization,
Financial Marketing Group, Inc. ("FMG"), supplements the Company's in-house
wholesaling unit by performing this function for certain independent broker-
dealers. Under this arrangement, the Company signs sales agreements with each
individual broker-dealer recruited by FMG and pays an override commission to FMG
based on the sales of those broker-dealers. Broker-dealers affiliated with FMG
accounted for 41% and 61% of total retail sales, and 12% and 19% of total retail
and institutional sales, for the three months ended March 31, 1997 and for the
year ended December 31, 1996, respectively. No individual broker-dealer
affiliated with FMG accounted for more than 10% and 13% of total retail sales
for the three months ended March 31, 1997 and for the year ended December 31,
1996, respectively. In addition to FMG, the Company utilizes PaineWebber
Incorporated ("PaineWebber") in the stockbroker channel for the distribution of
certain products. For the three months ended March 31, 1997 and for the year
ended December 31, 1996, approximately 15% and 19% of the Company's total retail
sales, respectively, and approximately 4% and 6% of total retail and
institutional

sales, respectively, were made through PaineWebber. The Company also relies on
its joint venture with General American Life Insurance Company ("General
American") for the issuance of GIC policies to institutional customers. In
recent periods, internal growth of the Company's spread-based business has been
largely dependent on the sales of GICs marketed by the Company and issued by
General American under the joint venture with the Company. Sales of GICs
accounted for 78% and 85% of the Company's spread-based sales for the three
months ended March 31, 1997 and for the year ended December 31, 1996,
respectively. For the same periods, substantially all spread-based institutional
product sales were made through General American, or 70% and 69%, respectively,
of total retail and institutional sales. If demand for GIC products, or the
Company's ability to market such products, were to decrease, the Company's
results of operations could be adversely affected. The loss of the wholesaler
FMG, of PaineWebber or of General American as a marketing partner, or the
impairment of the reputation or creditworthiness of any of them, could
materially adversely affect the Company's ability to market its retail products
or GICs until another distribution source or marketing partner could be found.
There can be no assurance that the Company would be able to find an alternate
source of distribution in a timely manner. See "Business -- Distribution."

REGULATION

The Company's businesses and operations are subject to various federal and
state laws and regulations which, among other things, grant supervisory agencies
broad administrative powers over such businesses and operations, including the
power to limit or restrict such businesses if they fail to comply with
applicable laws and regulations.

The Company's insurance subsidiaries are regulated by insurance regulators
in Ohio and New York as well as in other jurisdictions in which they are
licensed or authorized to do business. Insurance laws and regulations, among
other things, establish minimum capital requirements and limit the amount of
dividends and other payments insurance companies can make without prior
regulatory approval and impose restrictions on the amount and type of
investments such companies may hold. In addition, variable annuities and related
separate accounts of the Company's insurance subsidiaries are subject to
regulation by the Securities and Exchange Commission (the "Commission" or "SEC")
under the Securities Act of 1933, as amended (the "Securities Act"), and the
Investment Company Act. The Company's non-insurance operations are also subject
to extensive regulation, including regulation under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), the Investment Advisers Act of 1940,
as amended (the "Advisers Act"), the Investment Company Act, various other
federal and state securities laws and regulations and by the National
Association of Securities Dealers, Inc. (the "NASD"). The Company cannot
predict, and no assurance can be given as to, the effect that any future
regulation or changes in interpretation of existing regulation may have on the
financial condition or operations of the Company. See "Business -- Regulation."

As required by the Investment Company Act and the Advisers Act, the
Company's standard investment management and investment advisory agreements
provide that such agreements with registered investment companies terminate
automatically upon their assignment and agreements with other persons may not be
assigned by a party without the prior written consent of the other party. The
Investment Company Act and the Advisers Act define the term "assignment" to
include any "direct or indirect transfer" of a "controlling block of the voting
securities" of the Company. The Investment Company Act presumes that any person
holding more than 25% of the voting stock of any person "controls" such person.
Following completion of the Offering, significant purchases or sales of Common
Stock by the Company or any stockholder, including The Morgan Stanley Leveraged
Equity Fund II, L.P. ("MSLEF II") and Morgan Stanley Capital Partners III, L.P.,
Morgan Stanley Capital Investors, L.P. and MSCP III 892 Investors, L.P.
(collectively, the "MSCP Funds" and, together with MSLEF II, the "Morgan Stanley
Stockholders"),

among other things, may raise issues relating to assignments of the Company's
investment management and investment advisory agreements.

Under the insurance guaranty fund laws existing in each state, insurers
licensed to do business in such state can be assessed for certain obligations of
insolvent insurance companies to policyholders and claimants. Because such
assessments are typically not made for several years after an insurer fails and
depend upon the final outcome of liquidation or rehabilitation proceedings, the
Company cannot accurately determine the precise amount or timing of its exposure
to known insurance company insolvencies at this time. In connection with the
acquisition by the Company of the Integrity Companies from The National Mutual
Life Association of Australasia Limited ("National Mutual"), National Mutual
agreed to indemnify the Company with regard to guaranty fund assessments levied
in respect of companies declared insolvent or subject to conservatorship prior
to November 26, 1993. No assurance can be given that the Company's reserve for
assessments or such indemnity will be adequate in the event of any loss suffered
by the Company in respect of any assessment made under state insurance guaranty
fund laws. The Company estimates its reserve for assessments using information
provided by the National Organization of Life and Health Guaranty Associations
("NOLHGA"). The reserve does not include any provision for future assessments
related to unknown failures or to known failures for which no estimate of the
Company's exposure can currently be made. The insolvency of large life insurance
companies in future years could result in additional material assessments to the
Company by state guaranty funds that could have a material adverse impact on the
Company's future earnings and liquidity. See "Business -- Regulation."

SIGNIFICANT OWNERSHIP BY MORGAN STANLEY STOCKHOLDERS

After giving effect to the Offering, the Morgan Stanley Stockholders will
own approximately 68% of the outstanding Common Stock of the Company. If the
U.S. Underwriters' over-allotment option is exercised in full, the Morgan
Stanley Stockholders will own approximately 64% of the outstanding Common Stock
of the Company. The Morgan Stanley Stockholders have informed the Company that,
upon consummation of the Offering and the exercise of the over-allotment option,
if any, they intend to convert such number of their shares of Class B Common
Stock into shares of Class A Common Stock so that, following such conversion,
the Morgan Stanley Stockholders will own, in the aggregate, 49% of the
outstanding Class A Common Stock (which is voting common stock) of the Company.
The general partner of MSLEF II and the general partner of the general partner
of each of the MSCP Funds are wholly owned subsidiaries of Morgan Stanley Group
Inc. ("MS Group"). Currently, three of the nine directors of the Company are
employees of a wholly owned subsidiary of MS Group. Pursuant to the terms of the
Second Amended and Restated Stockholders' Agreement, to be entered into prior to
the consummation of the Offering (the "Stockholders' Agreement"), among the
Morgan Stanley Stockholders, the Company and certain other stockholders of the
Company, the Morgan Stanley Stockholders will have the right to designate
nominees for one-half of the members of the Board of Directors of the Company
for so long as the total number of shares of Common Stock of the Company owned
by the Morgan Stanley Stockholders constitutes at least 50% of the outstanding
Common Stock of the Company. See "Certain Relationships and Related Party
Transactions -- Stockholders' Agreement." As a result of their ownership
interest in the Company and certain rights pursuant to the Stockholders'
Agreement, the Morgan Stanley Stockholders have a substantial influence over the
affairs of the Company. See "Certain Relationships and Related Party
Transactions" and "Principal Stockholders."

FEDERAL INCOME TAX TREATMENT OF ANNUITY PRODUCTS

Current United States federal income tax laws generally permit the
tax-deferred accumulation of earnings on the premiums paid by the holder of an
annuity. Taxes, if any, are payable on the accumulated tax-deferred earnings
when these earnings are paid to such holder. In the event that the United States
federal income tax laws are changed such that accumulated earnings on annuity
products do not enjoy the

tax deferral described above or that another product acquires similar or
preferred tax-advantaged status, consumer demand for annuity products may
decline substantially.

In addition, a reduction in the capital gains tax rate may reduce the
product demand for tax-deferred annuities. As a result, both the persistency of
the Company's existing products and the Company's ability to sell its products
in the future could be materially adversely affected. From time to time
proposals to this effect have been made and no assurance can be given that such
a tax law change will not occur in the future. The operations and business
prospects of the Company could be materially and adversely affected by any
material decrease in the demand for its annuity products.

DEPENDENCE ON KEY PERSONNEL

The success of the Company will depend, to a significant extent, upon the
continued services of the key executive officers of the Company. The loss or
unavailability of such key executive officers or the inability to attract or
retain key employees in the future could have an adverse effect upon the
Company's operations. See "Management -- Directors and Executive Officers."

RESTRICTIONS IN FINANCING DOCUMENTS

Certain provisions of the Credit Agreement dated as of November 14, 1993, as
amended (the "Credit Agreement"), among the Company, The Chase Manhattan Bank,
N.A. and certain other parties, impose restrictions on the Company's operations,
including restrictions on its ability to pay dividends or make distributions
with respect to shares of the Common Stock absent compliance with certain
prepayment obligations under the Credit Agreement. On each date that the Company
pays a dividend in respect of any shares of Common Stock, the Credit Agreement
provides that the Company prepay, in an aggregate principal amount equal to the
aggregate amount of the dividends paid on such date, any borrowings outstanding
under the term loan facility and, to the extent such term loan borrowings are
fully prepaid, reduce any commitments to make revolving loans under the
revolving credit facility. The New Credit Agreement (as defined herein) will not
contain such prepayment obligations; however, the Company will not be permitted
to pay dividends or make distributions with respect to shares of Common Stock
that exceed the greater of one-third of the Company's net income (in the
preceding fiscal year) and $3 million. Certain of the Company's assets and all
of the Company's interest in the securities of its subsidiaries, as well as all
of Integrity Holdings' interest in the capital stock of Integrity, have been
pledged under the Credit Agreement and will be pledged under the New Credit
Agreement. Future indebtedness could contain similar or additional covenants or
security arrangements. If the Company fails to comply with the covenants under
the Credit Agreement, the New Credit Agrement or other senior credit facilities,
the lenders thereunder may accelerate the indebtedness and exercise remedies
under the pledge agreements and any other security document with respect to the
disposition of such collateral. See "Description of Certain Indebtedness."

ANTI-TAKEOVER PROVISIONS

Under applicable state insurance laws and regulations, no person may acquire
control of any of the insurance subsidiaries of the Company or any corporation
controlling them unless such person has filed a statement containing specified
information with appropriate regulatory authorities and approval for such
acquisition is obtained. Under applicable laws and regulations, any person
acquiring, directly by stock ownership or indirectly (by revocable proxy or
otherwise), 10% or more of the voting stock of any other person is presumed to
have acquired control of such person, and a person who beneficially acquires 10%
or more of the Class A Common Stock of the Company without obtaining the
approval of the applicable state insurance regulator would be in violation of
such state's insurance holding company act and would be subject to injunctive
action requiring disposition or seizure of the shares and prohibiting the voting
of such shares, as well as other action determined by the applicable regulatory
authority.

Certain provisions of the Restated Certificate of Incorporation (the
"Certificate of Incorporation") and the Restated By-laws (the "By-laws") of the
Company that will be in effect upon the consummation of the Offering, certain
provisions of the Delaware General Corporation Law and the significant ownership
position of the Morgan Stanley Stockholders may also have the effect of
discouraging or making more difficult a takeover attempt that a stockholder
might consider in its best interest. See "Description of Capital Stock --
Preferred Stock," "-- Restated Certificate of Incorporation and By-laws" and "--
Section 203 of the Delaware General Corporation Law."

DILUTION

Based on an assumed initial public offering price of $13 per share (the
midpoint of the estimated price range for the Offering) of Class A Common Stock,
the Company's net tangible book value per share of Class A Common Stock as of
March 31, 1997, after giving effect to the Offering, would be $7.27 per share.
Accordingly, purchasers of Class A Common Stock offered hereby would suffer
immediate dilution in the Company's net tangible book value of $5.73 per share.
See "Dilution."

POTENTIAL DILUTION OF VOTING POWER UPON CONVERSION INTO CLASS A COMMON STOCK

After giving effect to the Offering and the Morgan Stanley Stockholders'
intended conversion of shares of Class B Common Stock into Class A Common Stock
such that, following such conversion, the Morgan Stanley Stockholders will own,
in the aggregate, 49% of the outstanding voting Common Stock of the Company,
there will be 8,712,352 shares of Class B Common Stock outstanding,
representing, in the aggregate, approximately 37% of the total outstanding
Common Stock (7,427,228 shares of Class B Common Stock, representing, in the
aggregate, approximately 32% of the total outstanding Common Stock if the U.S.
Underwriters' over-allotment option is exercised in full). Conversion of shares
of Class B Common Stock into shares of Class A Common Stock would result in a
decrease in the voting power of the investors in the Class A Common Stock
offered hereby. Upon any disposition by the Morgan Stanley Stockholders of any
of their Class B Common Stock, such shares of Class B Common Stock will be
automatically converted into shares of Class A Common Stock. According to the
terms of the Certificate of Incorporation, the Morgan Stanley Stockholders may
not, in the aggregate, own more than 49% of the outstanding shares of Class A
Common Stock. See "Principal Stockholders" and "Description of Capital Stock."

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, there will be 23,255,971 shares of Common
Stock outstanding, of which the 5,750,000 shares sold pursuant to the Offering
and an additional 105,194 shares that were outstanding prior to the Offering
will be tradeable without restrictions by persons other than "affiliates" (as
defined in the Securities Act) of the Company. The remaining shares of Common
Stock will be "restricted" securities within the meaning of the Securities Act
and may not be sold in the absence of registration under the Securities Act or
an exemption therefrom, including the exemptions contained in Rule 144 under the
Securities Act.

The Company has reserved 2,428,640 shares and 1,600,000 shares of Class A
Common Stock for issuance upon exercise of options outstanding or to be granted
pursuant to the Option Plan and the 1997 Equity Plan (as such terms are defined
below), respectively. It is anticipated that all options under the Option Plan
will be granted upon consummation of the Offering. See "Management -- Stock
Option Plan."

Sales of substantial amounts of Common Stock (including shares issued upon
the exercise of stock options) in the public market, or the perception that such
sales may occur, could adversely affect the market price prevailing from time to
time of the Class A Common Stock in the public market and could impair the
Company's ability to raise additional capital through the sale of its equity
securities. Pursuant to

the Stockholders' Agreement, the Company has granted the Morgan Stanley
Stockholders certain "demand" and "piggyback" registration rights with respect
to the shares of Common Stock held by the Morgan Stanley Stockholders. See
"Certain Relationships and Related Party Transactions -- Stockholders'
Agreement" and "Shares Eligible for Future Sale."

ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE AND OF THE
SECURITIES MARKET

Prior to the Offering, there has been no public market for the Class A
Common Stock. Although the Company has applied to have the Class A Common Stock
approved for listing on the American Stock Exchange, there can be no assurance
that an active trading market for the Class A Common Stock will develop or
continue after the Offering or that the Class A Common Stock offered hereby will
trade at or above the initial public offering price. The initial public offering
price for the Class A Common Stock will be determined by negotiations among the
Company and the Underwriters in accordance with the recommendation of Donaldson,
Lufkin & Jenrette Securities Corporation, the "qualified independent
underwriter," as is required by Rule 2720 of the Conduct Rules of the NASD, and
may not be indicative of the market price for the Class A Common Stock after the
Offering.

The market price of the Class A Common Stock could be subject to significant
fluctuations in response to variations in the Company's quarterly financial
results and other factors such as announcements of new products by the Company
or by the Company's competitors, interest rate movements, changes in applicable
laws and regulations, the state of the insurance and asset management industry,
product pricing and developments in the Company's relationships with its
customers and distributors. In addition, the stock market has in recent years
experienced significant price fluctuations. These fluctuations often have been
unrelated to the operating performance of specific companies and therefore have
been due to factors which are beyond the control of the Company. Broad market
fluctuations as well as economic conditions generally, and in the insurance and
asset management and related industries specifically, may adversely affect the
market price or liquidity of the Class A Common Stock and the price of
securities generally.

FORWARD-LOOKING STATEMENTS

The Company has made a number of forward-looking statements in this
Prospectus that are subject to risks and uncertainties. Forward-looking
statements include the information concerning possible or assumed future results
of operations and those preceded by, followed by or that include the words
"believes," "expects," "anticipates" or similar expressions. Such
forward-looking statements are based on the Company's beliefs as to its
competitive position in its industry and the factors affecting its business. In
particular, the statements of the Company's belief as to (i) the stimulation of
future demand for long-term savings and retirement products, including variable,
indexed and fixed annuity products and (ii) information relating to insurance
regulatory matters, under the heading "Business -- Regulation" are
forward-looking statements. Factors that could cause actual results to differ
materially from the forward-looking statements related to the demand for
variable, indexed and fixed annuity products include, but are not limited to, a
change in population demographics, development of alternative investment
products, a change in economic conditions, and changes in current federal income
tax laws. In addition, there can be no assurance that (i) the Company has
correctly identified and assessed all of the factors affecting its business;
(ii) the publicly available and other information on which the Company has based
its analyses is complete or correct; (iii) the Company's analyses are correct;
or (iv) the Company's strategy, which is based in part on these analyses, will
be successful.

USE OF PROCEEDS

The net proceeds of the Offering to the Company are estimated to be
approximately $68.5 million, assuming an initial public offering price of $13
per share (the midpoint of the estimated price range for the Offering), after
deducting estimated underwriting discounts and commissions and other expenses of
the Offering payable by the Company. The Company intends to use such net
proceeds to strengthen the Company's existing capital base, to enhance the
Company's retail market presence, to consolidate operating locations and for
other corporate purposes, which may include acquisitions. Pending such uses, the
net proceeds will be invested in intermediate and short-term securities.

The Company will not receive any of the proceeds from any sale of shares of
Class A Common Stock by the Morgan Stanley Stockholders, pursuant to any
exercise of the U.S. Underwriters' over-allotment option.

DIVIDEND POLICY

The Board of Directors of the Company currently intends to establish an
initial policy of declaring regular quarterly cash dividends of $.02 per share
on its Common Stock, commencing in the first quarter following completion of the
Offering. There can be no assurance, however, as to the payment or amount of
future dividends, which will be at the discretion of the Board of Directors and
will depend on various factors, including the Company's results of operations,
financial condition, capital requirements, investment opportunities and legal
and regulatory restrictions on the payment of dividends to the Company by its
insurance subsidiaries. The payment of dividends will also be subject to
compliance with the financial covenants and restrictions contained in the
Company's debt agreements including, under the New Credit Agreement, a
restriction on the Company's ability to pay dividends or make distributions with
respect to shares of Common Stock that exceed the greater of one-third of the
Company's net income (in the preceding fiscal year) and $3 million. See
"Description of Certain Indebtedness."

Under the terms of the Perpetual Preferred Stock, before dividends may be
declared or paid on the Common Stock, the Company must pay all accrued
cumulative quarterly dividends on the Perpetual Preferred Stock. Dividends
accrue on the Perpetual Preferred Stock at an annual rate of 9 1/2% or an
aggregate of $4.8 million annually.

The Company is a holding company with no direct operations, and its
principal assets are the capital stock of Integrity Holdings (which owns the
Integrity Companies), ARM Capital Advisors and SBM Certificate Company. The
Company relies primarily on management fees, dividends and other distributions
from its insurance and non-insurance subsidiaries to meet ongoing cash
requirements, including amounts required for payment of interest and principal
on outstanding debt obligations, preferred stock dividends and corporate
expenses. The Integrity Companies are subject to the laws of the states in which
they are domiciled that limit the amount of dividends that an insurance company
can pay. The maximum dividend payments that could be made by Integrity to the
Company during 1996 were $17.6 million; dividends in the amount of $16.0 million
were paid during 1996. For 1997, the maximum dividend payments that may be paid
by Integrity to the Company without prior regulatory approval are $26.0 million,
of which $7.0 million has been paid through March 31, 1997. See "Risk Factors --
Holding Company Structure; Dividend Restrictions" and "Business -- Regulation."

DILUTION

The Company's net tangible book value to common shareholders as of March 31,
1997 was $100.5 million or $5.74 per share of outstanding Common Stock. After
giving effect to the sale of 5,750,000 shares of Class A Common Stock offered by
the Company hereby at an assumed initial public offering price of $13 per share
(the midpoint of the estimated price range for the Offering), the Company's pro
forma net tangible book value to common shareholders as of March 31, 1997 would
have been approximately $169.0 million or $7.27 per share, representing an
immediate dilution of $5.73 per share to investors purchasing shares in the
Offering. The following table illustrates this per share dilution:

Assumed initial public offering price per common share....................... $ 13.00
Net tangible book value per common share at March 31, 1997(1).............. $ 5.74
Increase in net tangible book value per common share attributable
to new investors......................................................... 1.53
---------
Pro forma net tangible book value per common share after the Offering........ 7.27
---------
Dilution of net tangible book value per common share to new
investors(2)(3)............................................................ $ 5.73
---------
---------

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

(1) Net tangible book value per common share prior to the Offering has been
determined by dividing the net tangible book value (total assets, not
including goodwill, less total liabilities and preferred stock) by the sum
of the number of shares of Common Stock outstanding as of March 31, 1997.

(2) Dilution per share to new investors would be $10.70 if the net tangible book
value was determined with deferred policy acquisition costs and value of
insurance in force (which aggregated $115.5 million at March 31, 1997) being
considered intangible assets.

(3) Dilution per share to new investors would be $2.84 if the net tangible book
value was determined based on fair values of assets and liabilities
determined in accordance with the methodologies used to estimate fair value,
which are described in the notes to the consolidated financial statements
contained elsewhere in this Prospectus.

The following table sets forth on a pro forma basis as of March 31, 1997 the
number and percentage of total outstanding shares of Common Stock purchased from
the Company, the total consideration and percentage of total consideration paid
to the Company and the weighted average price paid per share by existing
stockholders and by purchasers of the Class A Common Stock offered by the
Company hereby. The calculations in this table with respect to Common Stock to
be purchased by new investors in the Offering reflect an assumed initial public
offering price of $13 per share (the midpoint of the estimated price range for
the Offering).

WEIGHTED
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- --------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------ ----------- -------------- ----------- -----------

Existing stockholders................................ 17,505,971 75% $ 134,039,822 64% $ 7.66
New investors........................................ 5,750,000 25 74,750,000 36 13.00
------------ --- -------------- ---
Total............................................ 23,255,971 100% $ 208,789,822 100% $ 8.98
------------ --- -------------- ---
------------ --- -------------- ---

CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company at March 31, 1997 after giving effect to the Recapitalization and as
adjusted to give effect to the sale by the Company of 5,750,000 shares of Class
A Common Stock pursuant to the Offering at an assumed initial public offering
price of $13 per share (the midpoint of the estimated price range for the
Offering), net of estimated underwriting discounts and commisions and expenses
of the Offering. This table should be read in conjunction with the Company's
consolidated financial statements and the notes thereto and other financial and
operating information included elsewhere in this Prospectus.

MARCH 31, 1997
------------------------------------------------

CARRYING AMOUNT FAIR VALUE(A)
----------------------- -----------------------

ACTUAL AS ADJUSTED ACTUAL AS ADJUSTED
---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)

Long-term debt................................................. $ 38,000 $ 38,000 $ 38,000 $ 38,000
Shareholders' equity:
Preferred Stock, $.01 par value, 10,000,000 shares
authorized; 2,000,000 shares of Perpetual Preferred Stock,
$25.00 stated value, issued and outstanding................ 50,000 50,000
Class A Common Stock, $.01 par value, 150,000,000 shares
authorized, 3,269,109 shares issued and outstanding and
14,543,619 shares issued and outstanding as adjusted(b).... 33 145
Class B Common Stock, $.01 par value, 50,000,000 shares
authorized, 14,236,862 shares issued and outstanding and
8,712,352 shares issued and outstanding as adjusted........ 142 87
Additional paid-in capital................................... 124,434 192,895
Net unrealized losses on available-for-sale securities....... (26,721) (26,721 )
Retained earnings............................................ 10,086 10,086
---------- -----------
Total shareholders' equity................................. 157,974 226,492 225,177 293,695
---------- ----------- ---------- -----------
Total capitalization....................................... $ 195,974 $ 264,492 $ 263,177 $ 331,695
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------

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

(a) The methodologies used to estimate fair value are described in the notes to
the consolidated financial statements contained elsewhere in this
Prospectus.

(b) Excludes 1,915,660.40 shares of Class A Common Stock issuable upon the
exercise of outstanding stock options at exercise prices ranging from $11.14
to $12.24 per share. See "Management." Upon completion of the Offering there
will be 2,428,640 options outstanding. See "Management -- Stock Option
Plan."

SELECTED HISTORICAL FINANCIAL INFORMATION

The following table sets forth selected historical financial information of
the Company for the years ended December 31, 1996, 1995 and 1994, for the period
from November 27, 1993 through December 31, 1993, for the period from January 1,
1993 through November 26, 1993 (for the Historical Integrity Companies) and for
the year ended December 31, 1992 (for the Historical Integrity Companies). The
financial information for the years ended December 31, 1996, 1995 and 1994 and
for the periods from January 1, 1993 through November 26, 1993 and November 27,
1993 through December 31, 1993 has been derived from consolidated financial
statements of the Company, prepared in conformity with generally accepted
accounting principles, that have been audited by Ernst & Young LLP. The
financial information for the Historical Integrity Companies for the year ended
December 31, 1992 has been derived from financial statements of the Historical
Integrity Companies.

The following table also sets forth selected historical financial
information of the Company for the three months ended March 31, 1997 and 1996.
The information presented for the interim periods is unaudited, but, in the
opinion of management, such information reflects all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of the financial
data for the interim periods. The results for the interim periods presented are
not necessarily indicative of the results for a full year.

Effective May 31, 1995, the Company acquired substantially all of the assets
and business operations of SBM. This acquisition was accounted for as a
purchase, and the results of operations of the acquired businesses are included
in the Company's historical financial information from the date of acquisition.
Because 1996 includes a full year of acquired SBM business operations compared
to seven months in 1995, the results of operations for the years ended December
31, 1996, 1995 and 1994 are not completely comparable. "Historical Integrity
Companies" refers to operations, for accounting and reporting purposes, prior to
the Company's November 26, 1993 acquisition of the Integrity Companies. The
Historical Integrity Companies' results of operations for 1993 and 1992 are
presented for purposes of comparison; however, because of purchase accounting
adjustments, the new capital structure and new management team resulting from
that acquisition, the Company's results have differed from the results of the
Historical Integrity Companies.

The selected historical financial information set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Company's consolidated financial statements and
the notes thereto and other financial and operating information included
elsewhere in this Prospectus.

HISTORICAL
THE COMPANY INTEGRITY COMPANIES(1)
------------------------------------------------------------------- ---------------------------
PERIOD FROM PERIOD FROM
THEE MONTHS ENDED NOVEMBER 27, JANUARY 1,
MARCH 31, YEAR ENDED DECEMBER 31, 1993 THROUGH 1993 THROUGH YEAR ENDED
-------------------- ------------------------------- DECEMBER 31, NOVEMBER 26, DECEMBER 31,
1997 1996 1996 1995 1994 1993 1993 1992
--------- --------- --------- --------- --------- ------------ ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

INCOME STATEMENT DATA:
Investment income........ $ 69,700 $ 55,353 $ 250,031 $ 196,024 $ 149,142 $ 16,260 $ 148,120 $ 158,037
Interest credited on
customer deposits...... (51,325) (41,198) (182,161) (146,867) (116,463) (13,563) (116,341) (122,190)
--------- --------- --------- --------- --------- ------------ ------------ -------------
Net investment
spread............... 18,375 14,155 67,870 49,157 32,679 2,697 31,779 35,847
Fee income:
Variable annuity
fees................... 3,239 2,362 10,786 7,238 4,291 91 1,000 123
Asset management fees.. 1,884 1,515 5,780 3,161 -- -- -- --
Other fee income....... 397 271 1,267 949 4,100 369 1,258 2,063
--------- --------- --------- --------- --------- ------------ ------------ -------------
Total fee income..... 5,520 4,148 17,833 11,348 8,391 460 2,258 2,186
Other income and
expenses:
Surrender charges...... 882 1,570 5,024 3,339 2,356 145 1,615 1,837
Operating expenses..... (8,156) (6,983) (31,055) (22,957) (21,484) (1,423) (30,663) (25,461)
Commissions, net of
deferrals............ (638) (544) (2,372) (1,557) (2,551) (309) (4,877) (1,766)
Interest expense on
debt................... (686) (787) (3,146) (3,461) (3,136) (245) (133) (546)
Amortization:
Deferred policy
acquisition
costs.............. (2,175) (1,687) (6,835) (2,932) (1,296) (12) (1,470) (1,045)
Value of insurance in
force.............. (2,241) (2,057) (7,320) (7,104) (3,830) (552) (6,444) (41,594)
Acquisition-related
deferred charges... (126) (500) (1,503) (9,920) (2,163) (249) -- --
Goodwill............. (122) (122) (488) (358) -- -- -- (8,978)
Non-recurring
charges.............. (1,445) -- (5,004) -- -- -- -- --
Other, net............. (995) (732) (5,366) (687) 4,972 (46) -- (6,434)
--------- --------- --------- --------- --------- ------------ ------------ -------------
Total other income
and expenses....... (15,702) (11,842) (58,065) (45,637) (27,132) (2,691) (41,972) (83,987)
Realized investment gains
(losses)............... 2,231 (403) 907 4,048 (36,727) (79) (32,776) (9,759)
--------- --------- --------- --------- --------- ------------ ------------ -------------
Income (loss) before
federal income taxes... 10,424 6,058 28,545 18,916 (22,789) 387 (40,711) (55,713)
Federal income tax
benefit (expense)...... (2,814) (1,573) (5,167) (7,026) 6,018 (508) -- --
--------- --------- --------- --------- --------- ------------ ------------ -------------
Net income (loss)........ 7,610 4,485 23,378 11,890 (16,771) (121) $ (40,711) $ (55,713)
------------ -------------
------------ -------------
Dividends on preferred
stock.................. (1,188) (1,188) (4,750) (4,750) (4,750) (462)
--------- --------- --------- --------- --------- ------------
Net income (loss)
applicable to common
shareholders........... $ 6,422 $ 3,297 $ 18,628 $ 7,140 $ (21,521) $ (583)
--------- --------- --------- --------- --------- ------------
--------- --------- --------- --------- --------- ------------
Net income (loss) per
common share (2)....... $ .37 $ .19 $ 1.06 $ .49 $ (2.03) $ (.06)
--------- --------- --------- --------- --------- ------------
--------- --------- --------- --------- --------- ------------
Average common shares
outstanding (2)........ 17,506 17,489 17,498 14,614 10,590 10,590
--------- --------- --------- --------- --------- ------------
--------- --------- --------- --------- --------- ------------
OTHER OPERATING DATA:
Operating earnings
(loss) (3)............. $ 6,417 $ 3,559 $ 22,577 $ 4,509 $ 2,352 $ (532)
--------- --------- --------- --------- --------- ------------
--------- --------- --------- --------- --------- ------------
Operating earnings (loss)
per common share (2)... $ .37 $ .20 $ 1.29 $ .31 $ .22 $ (.05)
--------- --------- --------- --------- --------- ------------
--------- --------- --------- --------- --------- ------------

THE COMPANY HISTORICAL
---------------------------------------------------------------- INTEGRITY
COMPANIES
MARCH 31, DECEMBER 31, ------------
-------------------- ------------------------------------------ DECEMBER 31,
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ------------
(IN THOUSANDS)

BALANCE SHEET AND OTHER DATA:
Total cash and investments (4)... $3,499,000 $2,999,621 $3,347,477 $2,798,027 $1,782,501 $2,103,856 $1,838,435
Assets held in separate
accounts....................... 1,201,621 867,732 1,135,048 809,927 506,270 231,687 38,952
Total assets (4)................. 4,943,221 4,084,022 4,701,664 3,793,580 2,447,888 2,427,886 1,991,205
Long-term debt................... 38,000 40,000 40,000 40,000 40,000 40,000 --
Total liabilities................ 4,785,247 3,930,046 4,519,722 3,605,589 2,462,021 2,315,535 1,857,978
Shareholders' equity:
Carrying amount (4)............ 157,974 153,976 181,942 187,991 (14,133) 112,351 133,227
Excluding the effects of SFAS
No. 115 (5).................. 184,695 162,789 178,273 159,461 90,816 n/a(6) n/a(6)
Fair value (7)................. 225,177 194,770 224,276 187,721 115,192 111,709 n/a(6)

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

(1) The Company had no significant business activity until November 26, 1993,
when it acquired the Integrity Companies from National Mutual. Results of
operations prior to the acquisition for the period from January 1, 1993
through November 26, 1993 and the year ended December 31, 1992 are presented
for comparative purposes.

(2) For all periods presented, includes the effects of a 706-for-1 stock split
to be consummated in conjunction with the Offering.

(3) "Operating earnings" is defined as net income applicable to common
shareholders, excluding, net of tax, realized investment gains and losses
and non-recurring charges.

(4) Total cash and investments, total assets and carrying amount shareholders'
equity for the periods ending subsequent to December 31, 1993 reflect a
change in accounting principle for the January 1, 1994 adoption of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities."

(5) Excludes from carrying amount shareholders' equity the net unrealized gains
and losses on securities classified as available-for-sale, net of related
amortization and taxes.

(6) Not applicable.

(7) The methodologies used to estimate fair value are described in the notes to
the consolidated financial statements contained elsewhere in this
Prospectus.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

GENERAL

The Company's revenues are derived from its spread-based business and its
fee-based business. The products and services comprising the spread-based and
fee-based businesses are sold in two principal markets, the retail and
institutional markets, through a broad spectrum of distribution channels. In the
spread-based line of business the Company earns a spread between what is earned
on invested assets and what is credited to customer accounts. In the fee-based
line of business the Company receives a fee in exchange for managing customers'
deposits, and the customer accepts the investment risk. The Company believes
that market forces and population demographics are producing and will continue
to generate strong consumer demand for long-term savings and retirement
products, including variable, indexed and fixed annuity products. Acquisitions
by the Company have provided it with the opportunity to leverage its resources
and enter into new markets in order to try to meet this demand. Although the
Company's core business is developing and managing spread-based investment
products, it has also focused on the development of its fee-based variable
annuity business in addition to exploring other alternatives to increase the
size of the fee-based business line. Fee-based business is less capital
intensive than the spread-based business and provides the Company with
diversified sources of income. Although the Company believes it is desirable to
achieve a reasonable business mix between its spread-based and fee-based
businesses, the business mix may vary from time to time, due to opportunistic
acquisitions and market conditions.

Although third-party assets managed by ARM Capital Advisors have grown since
the Company acquired these operations in 1995, the Company believes that market
attitudes towards developing an asset management service for defined benefit
pension plans within a holding company structure consisting predominantly of
insurance companies has constrained ARM Capital Advisors' growth. Accordingly,
the Company is selling an 80% interest in the assets and operations of ARM
Capital Advisors. ARM Capital Advisors' management of defined benefit pension
plan accounts generated asset management fees of $1.9 million, $1.1 million,
$4.2 million and $2.2 million during the three months ended March 31, 1997 and
1996 and for the years ended December 31, 1996 and 1995, respectively.

On December 13, 1996, the Company transferred its contracts to perform
management and advisory services for the State Bond Mutual Funds (as defined
below) to Federated Investors for $4.5 million. Asset management fee income of
$1.6 million and $1.0 million was recorded by the Company during 1996 and 1995,
respectively, with respect to management of such funds. Had the sale of ARM
Capital Advisors and the sale of the management contracts for the State Bond
Mutual Funds occurred on January 1, 1995, they would have had an immaterial
effect on the Company's net income for the three months ended March 31, 1997 and
1996 and for the years ended December 31, 1996 and 1995.

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related Interpretations in
accounting for its employee stock options. Under the variable plan accounting
requirements of APB No. 25, no stock-based compensation expense has been
recognized through March 31, 1997 for the Option Plan (as defined herein).
However, upon consummation of the Offering, the Company will record a one-time
non-cash stock-based compensation expense charge related to the Option Plan
equal to the aggregate difference between the initial public offering price of
the Class A Common Stock and the exercise price of the all options issued under
the Option Plan. Based on the estimated range of the initial public offering
price, the one-time non-cash stock-based compensation charge may be between $1
million and $6 million.

The following discussion compares the results of operations for the Company
for the three months ended March 31, 1997 and 1996 and for the three years ended
December 31, 1996. As the Company acquired substantially all of the assets and
business operations of SBM effective May 31, 1995, results for 1996 include a
full year of acquired SBM business operations compared to seven months in 1995.
Therefore, results of operations for the years ended December 31, 1996, 1995 and
1994 are not completely comparable.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996

Net income during the first quarter of 1997 was $7.6 million compared to
$4.5 million for the first quarter of 1996. Operating earnings (net income
applicable to common shareholders, excluding, net of tax, realized investment
gains and losses and non-recurring charges) were $6.4 million and $3.6 million
for the first quarters of 1997 and 1996, respectively. The increase in operating
earnings is primarily attributable to (i) an increase in net investment spread
due to ongoing asset/liability management and deposit growth from sales of
spread-based products and (ii) an increase in fee income as a result of a
growing base of variable annuity deposits. Such increases in revenues were
partially offset by an increase in operating expenses as a result of increased
marketing efforts.

Annualized spread-based operating earnings were 1.10% and .92% of average
spread-based assets under management of $3.65 billion and $2.92 billion during
the first quarters of 1997 and 1996, respectively. This increase in spread-based
margins is primarily attributable to ongoing asset/liability management, which
generated higher net investment spreads. Annualized fee-based operating earnings
were .15% and .19% of average fee-based assets under management of $4.27 billion
and $2.75 billion during the first quarters of 1997 and 1996, respectively.
Fee-based margins for the first quarter of 1997 decreased from the corresponding
prior period due to the growth of institutional fee-based assets under
management which generate lower margins than the Company's variable annuity
deposits. Certain expenses including federal income taxes and unallocated
corporate overhead are not reflected in annualized spread-based and fee-based
operating earnings.

Net investment spread for the three months ended March 31, 1997 and 1996 was
as follows:

THREE MONTHS ENDED
MARCH 31,
--------------------------

1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
Investment income................................................. $ 69,700 $ 55,353
Interest credited on customer deposits............................ (51,325) (41,198)
------------ ------------
Net investment spread......................................... $ 18,375 $ 14,155
------------ ------------
------------ ------------
Annualized investment yield....................................... 7.61% 7.58%
Annualized average credited rate.................................. 5.65% 5.64%
------------ ------------
Annualized investment spread.................................. 1.96% 1.94%
------------ ------------
------------ ------------
Average cash and investments...................................... $ 3,662,948 $ 2,922,814
Average spread-based customer deposits............................ $ 3,634,028 $ 2,920,419

Changes in investment yield must be analyzed in relation to the liability
portfolios that they support. The annualized investment yield on cash and
investments, excluding assets supporting GIC deposits, was 7.98% for the first
quarter of 1997, up from 7.66% for the comparable 1996 period. This increase
reflects the benefits of ongoing investment portfolio management. In comparison,
the annualized investment yield on cash and investments supporting GIC deposits
was 6.61% and 6.47% for the first quarters of 1997 and 1996, respectively. GIC
deposits grew from $383.3 million at March 31, 1996 to $1,141.3 million at

March 31, 1997. The proceeds from GIC sales are invested in securities of
shorter duration (which generally have lower investment yields) than the
Company's other investment portfolios. The average credited rate pattern is
dependent upon the general trend of interest rates, frequency of credited rate
resets and business mix. Crediting rates are reset monthly based on LIBOR for
GICs and semi-annually or annually for certain fixed annuities. To date, the
Company has been able to react to changes in market interest rates and maintain
a desired investment spread without a significant effect on surrender and
withdrawal activity although there can be no assurance that the Company will be
able to continue to do so.

Fee income increased to $5.5 million in the first quarter of 1997 from $4.1
million in the first quarter of 1996. This increase is primarily attributable to
variable annuity fees, which are based on the market value of the mutual fund
assets supporting variable annuity customer deposits in separate accounts.
Variable annuity fees increased to $3.2 million in the first quarter of 1997
from $2.4 million in the first quarter of 1996 principally due to asset growth
from the receipt of variable annuity deposits and from a market-driven increase
in the value of existing variable annuity deposits invested in mutual funds.
Fee-based variable annuity deposits averaged $861.3 million in the first quarter
of 1997, an increase from $649.3 million in the first quarter of 1996. In
addition, asset management fees earned by ARM Capital Advisors on off-balance
sheet assets, primarily related to defined benefit pension plans (and, in 1996
only, fees from the State Bond Mutual Funds), increased to $1.9 million in the
first quarter of 1997 from $1.5 million in the first quarter of 1996, reflecting
a significant increase in the average fair value of off-balance sheet assets
managed, from $1.72 billion during the first quarter of 1996 to $3.04 billion in
the first quarter of 1997. As a result of the pending sale of ARM Capital
Advisors' operations and the sale of the State Bond Mutual Funds, asset
management fee income is expected to decrease in the future.

Assets under management by type of product and service as of March 31, 1997
and 1996 were as follows:

MARCH 31,
--------------------------------------------------
1997 1996
------------------------ ------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
--------- ------------- --------- -------------
(DOLLARS IN MILLIONS)

Spread-based:
Retail (fixed and indexed annuity and face-amount certificate
deposits)...................................................... $ 2,653.5 52% $ 2,662.7 64%
Institutional (GIC deposits)..................................... 1,141.3 22 383.3 9
--------- --- --------- ---
Total spread-based......................................... 3,794.8 74 3,046.0 73
Fee-based:
Retail (variable annuity deposits invested in mutual funds)...... 859.5 17 681.2 16
Institutional (off-balance sheet deposits under marketing
partnership arrangements)...................................... 368.7 7 385.3 9
--------- --- --------- ---
Total fee-based*........................................... 1,228.2 24 1,066.5 25
Corporate and other (primarily cash and investments in excess of
customer deposits)............................................... 75.1 2 52.8 2
--------- --- --------- ---
Total assets under management*..................................... $ 5,098.1 100% $ 4,165.3 100%
--------- --- --------- ---
--------- --- --------- ---

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

* Does not include off-balance sheet assets managed by ARM Capital Advisors
for institutional clients and, for 1996 only, off-balance sheet assets in
the State Bond Mutual Funds. Including such assets, total fee-based assets
under management at March 31, 1997 and 1996 were $4,520.1 million and
$2,903.3 million, respectively, and total assets under management at March
31, 1997 and 1996 were $8,390.0 million and $6,002.1 million, respectively.

The increase in spread-based deposits was attributable to sales of GICs to
institutional customers. The increase in the fee-based line of business is
attributable to variable annuity sales. The Company continues to focus on its
fee-based variable annuity business to diversify its spread-based and fee-based
products and their associated channels of distribution.

Sales of spread-based products include premiums and deposits received for
products issued by the Company's insurance and face-amount certificate
subsidiaries. Sales of fee-based products include premiums for the investment
portfolio options of variable annuity products issued by the Company's insurance
subsidiaries.

Sales by market and type of business for the three months ended March 31,
1997 and 1996 were as follows:

THREE MONTHS ENDED
MARCH 31,
--------------------

1997 1996
--------- ---------

(IN MILLIONS)

Retail:
Spread-based................................................................................. $ 68.8 $ 11.9
Fee-based.................................................................................... 36.3 57.0
--------- ---------
Total retail............................................................................... 105.1 68.9
Institutional:
Spread-based................................................................................. 248.6 239.6
--------- ---------
Total sales*................................................................................... $ 353.7 $ 308.5
--------- ---------
--------- ---------

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

* Does not include new deposits related to off-balance sheet assets managed by
ARM Capital Advisors for institutional clients and, for 1996 only, new
deposits in the State Bond Mutual Funds. Including such deposits, total
retail sales for the three months ended March 31, 1997 and 1996 were $105.1
million and $72.7 million, respectively, and total institutional sales for
the three months ended March 31, 1997 and 1996 were $881.9 million and
$669.4 million, respectively.

The increase in retail sales was attributable to an increase in marketing
efforts related to the Company's spread-based guaranteed rate option annuity
product, partially offset by a decrease in fee-based variable annuity sales as a
result of weakening stock market returns. The Company's sales strategy is to
broaden its mix of products, services and distribution channels to enable it to
achieve its target sales within different interest rate environments.

Net surrenders of annuity products issued by the Company's insurance
subsidiaries were $76.1 million in the first quarter of 1997 compared to $88.6
million in the first quarter of 1996. Surrender charge income decreased to $.9
million in the first quarter of 1997 from $1.6 million in the first quarter of
1996. The decrease in surrender charge income is primarily attributable to an
increase in partial surrenders which did not result in a surrender charge
penalty. Policies issued by the Company's insurance subsidiaries generally
include lapse protection provisions that provide a deterrent to surrenders when
interest rates rise. These provisions can include surrender charges and market
value adjustments on annuity withdrawals. During the period that surrender
charges are assessable, generally the first five to seven years after a policy
is issued, surrenders are relatively low. The surrender and withdrawal activity
during the first quarters of 1996 and 1997 was generally expected by the Company
due to the level of customer deposits written several years ago that were
subject to declining or expiring surrender charges, and the Company's strategy
of maintaining investment spreads. The Company has programs designed to reduce
surrender activity and improve persistency.

Operating expenses increased to $8.2 million in the first quarter of 1997
from $7.0 million in the first quarter of 1996. The increase is primarily
attributable to increased marketing efforts (including an increase in marketing
staff and additional investments in technology) to expand and enhance the
support of distribution channels in the retail and institutional markets. The
Company is actively pursuing and retaining producers within these distribution
channels to market its products.

Commissions, net of deferrals were $.6 million and $.5 million for the three
months ended March 31, 1997 and 1996, respectively, and represent renewal and
trailer commissions under certain deferred annuity contracts acquired through
the acquisition of SBM.

Amortization of deferred policy acquisition costs related to operations was
$2.2 million and $1.7 million during the three months ended March 31, 1997 and
1996, respectively. This increase was the result of growth in the deferred
policy acquisition cost asset due to additional sales of fixed and variable
annuity products. Variable costs of selling and issuing the Company's insurance
subsidiaries' products (primarily first-year commissions) are deferred and then
amortized over the expected life of the contract.

Amortization of value of insurance in force related to operations of $2.2
million and $2.1 million for the three months ended March 31, 1997 and 1996,
respectively, primarily reflects the amortization of the value of insurance in
force established as an asset by the Company in connection with the acquisition
of SBM's insurance subsidiary.

Amortization of acquisition-related deferred charges of $.1 million and $.5
million for the three months ended March 31, 1997 and 1996, respectively,
reflects amortization of certain costs incurred in connection with the Company's
acquisitions. The decrease was primarily attributable to certain deferred
charges related to the SBM acquisition being fully amortized at December 31,
1996.

The Company recorded non-recurring charges of $1.4 million in the first
quarter of 1997 including $1.0 million related to relocating the Company's main
processing center from Columbus, Ohio to Louisville, Kentucky and costs of $.4
million for merger and acquisition activities that did not result in a
transaction. Costs associated with the relocation are expected to continue
through the end of 1997.

Other expenses, net, includes premiums paid on agreements to reinsure
substantially all mortality risks associated with single premium endowment and
variable annuity deposits and benefits paid or provided to contract holders.

Realized investment gains, which are reported net of related amortization of
deferred policy acquisition costs and value of insurance in force, were $2.2
million in the first quarter of 1997 compared to realized investment losses of
$.4 million in the first quarter of 1996. Such realized investment gains and
losses were interest-rate related and attributable to the ongoing management of
the Company's fixed maturity securities classified as available-for-sale which
can result in period-to-period swings in realized investment gains and losses
since securities are sold during both rising and falling interest rate
environments. The ongoing management of securities is a significant component of
the Company's
asset/liability management strategy. The ongoing portfolio management process
involves evaluating the various asset sectors (i.e., security types and industry
classes) and individual securities comprising the Company's investment
portfolios and, based on market yield rates, repositioning holdings from sectors
perceived to be relatively overvalued to sectors perceived to be undervalued
with the aim of improving cash flows. The Company endeavors to accomplish this
repositioning without materially changing the overall credit, asset duration,
convexity and liquidity characteristics of its investment portfolios.

Federal income tax expense was $2.8 million and $1.6 million for the
quarters ended March 31, 1997 and 1996, respectively, reflecting effective tax
rates of 27.0% and 26.0%.

YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995

During 1996, net income for the Company was $23.4 million compared to $11.9
million for 1995. Operating earnings were $22.6 million and $4.5 million for
1996 and 1995, respectively. The increase in operating earnings is primarily
attributable to (i) an increase in net investment spread due to ongoing
asset/liability management and deposit growth from the full year's effects of
the May 31, 1995 acquisition of the SBM assets and business operations and
additional sales of spread-based products and (ii) an increase in fee income as
a result of a growing base of variable annuity deposits and institutional assets
under management. Such increases in revenues were partially offset by an
increase in operating expenses as a result of business growth.

Spread-based operating earnings were 1.05% and .90% of average spread-based
assets under management of $3.22 billion and $2.47 billion during 1996 and 1995,
respectively. This increase in spread-based margins is primarily attributable to
ongoing asset/liability management, which generated higher net investment
spreads. Fee-based operating earnings were .15% and .19% of average fee-based
assets under management of $3.28 billion and $1.84 billion during 1996 and 1995,
respectively. Fee-based margins for the 1996 period were slightly lower compared
to the corresponding prior period primarily from the growth of institutional
fee-based assets under management which generated lower margins than the
Company's variable annuity deposits.

Net investment spread for the years ended December 31, 1996 and 1995 was as
follows:

YEAR ENDED DECEMBER 31,
--------------------------

1996 1995
------------ ------------

(DOLLARS IN THOUSANDS)

Investment income............................................... $ 250,031 $ 196,024
Interest credited on customer deposits.......................... (182,161) (146,867)
------------ ------------
Net investment spread......................................... $ 67,870 $ 49,157
------------ ------------
------------ ------------

Investment yield................................................ 7.75% 7.84%
Average credited rate........................................... 5.67% 5.90%
------------ ------------
Investment spread............................................. 2.08% 1.94%
------------ ------------
------------ ------------

Average cash and investments.................................... $ 3,227,825 $ 2,501,125
Average spread-based customer deposits.......................... $ 3,213,313 $ 2,488,866

The decrease in investment yields on cash and investments primarily relates
to a significant increase in GIC deposits which grew from zero to $143.2 million
during 1995 and to $891.9 million at December 31, 1996. The proceeds from GIC
sales are invested in securities of shorter duration than the Company's other
investment portfolios. The investment yield on cash and investments supporting
GIC deposits was 6.53% for 1996. In comparison, the investment yield on cash and
investments, excluding assets supporting GIC deposits, was 8.01% for 1996, up
from 7.85% for 1995, which reflects the benefits of the ongoing management of
the Company's investment portfolios. The decrease in the average rate of
interest credited on customer deposits during 1996 was due primarily to annual
or semi-annual crediting rate resets occurring at a time when the overall
interest rate environment was generally lower (the last half of 1995 and the
first half of 1996 compared to the last half of 1994 and the first half of
1995).

Fee income increased to $17.8 million in 1996 from $11.3 million in 1995.
This increase is in part attributable to variable annuity fees which are based
on the market value of assets supporting the investment portfolio options of
variable annuity customer deposits in separate accounts. Variable annuity fees
increased to $10.8 million in 1996 from $7.2 million in 1995 principally due to
asset growth from the receipt of variable annuity deposits and from a
market-driven increase in the value of existing variable annuity deposits
invested in mutual funds. Fee-based variable annuity deposits increased to
$844.3 million

in 1996 from $617.3 million in 1995. In addition, asset management fees earned
by ARM Capital Advisors on off-balance sheet assets, related to defined benefit
pension plans and the State Bond Mutual Funds, increased to $5.8 million in 1996
from $3.2 million in 1995. This increase in asset management fees reflects a
significant increase in the average amount of corresponding off-balance sheet
assets managed due to new defined benefit pension plan accounts. The average
amount of off-balance sheet assets managed by ARM Capital Advisors was $2.16
billion in 1996 compared to $1.10 billion in 1995.

Assets under management by type of product and service as of December 31,
1996 and 1995 were as follows:

1996 1995
---------------------- ----------------------

PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- ----------- --------- -----------

(DOLLARS IN MILLIONS)

Spread-based:
Retail (fixed and indexed annuity
and face-amount certificate deposits)............................... $ 2,646.2 55% $ 2,716.2 69%
Institutional (GIC deposits).......................................... 891.9 18 143.2 4
--------- --- --------- ---
Total spread-based.................................................. 3,538.1 73 2,859.4 73
Fee-based:
Retail (variable annuity deposits invested in mutual funds)........... 844.3 17 617.3 16
Institutional (off-balance sheet deposits under marketing partnership
arrangements)....................................................... 366.2 8 387.3 10
--------- --- --------- ---
Total fee-based*.................................................... 1,210.5 25 1,004.6 26
Corporate and other (primarily cash and investments in excess of
customer deposits).................................................... 77.0 2 61.1 1
--------- --- --------- ---
Total assets under management*.......................................... $ 4,825.6 100% $ 3,925.1 100%
--------- --- --------- ---
--------- --- --------- ---

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

* Does not include off-balance sheet assets managed by ARM Capital Advisors
for institutional clients and the State Bond Mutual Funds. Total fee-based
assets under management at December 31, 1996 and 1995 were $3,937.9 million
and $2,443.7 million, respectively, and total assets under management at
December 31, 1996 and 1995 were $7,553.0 million and $5,364.2 million,
respectively, including such assets.

The increase in spread-based deposits was attributable to sales of GICs to
institutional customers. The increase in the fee-based line of business was
primarily attributable to variable annuity sales.

Sales by market and type of business for 1996 and 1995 were as follows:

YEAR ENDED DECEMBER
31,
--------------------

1996 1995
--------- ---------

(IN MILLIONS)

Retail:
Spread-based........................................................... $ 130.6 $ 115.4
Fee-based.............................................................. 200.1 177.7
--------- ---------
Total retail*........................................................ 330.7 293.1
Institutional:
Spread-based........................................................... 747.5 142.2
Fee-based.............................................................. -- 272.9
--------- ---------
Total institutional*................................................. 747.5 415.1
--------- ---------
Total sales.............................................................. $ 1,078.2 $ 708.2
--------- ---------
--------- ---------

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

* Does not include new deposits related to off-balance sheet assets managed by
ARM Capital Advisors for institutional clients and the State Bond Mutual
Funds. Total retail sales for the years ended December 31, 1996 and 1995
were $342.7 million and $300.9 million, respectively, and total
institutional sales for the years ended December 31, 1996 and 1995 were
$2,401.5 million and $886.9 million, respectively, including such deposits.

The increase in retail sales was primarily attributable to an increase in
sales of fee-based investment portfolio options of variable annuity contracts
due, in part, to the continuing strong stock market returns during 1996 and an
increased emphasis on marketing efforts of both spread-based and fee-based
products during the fourth quarter, principally through stockbrokers and
independent agents. The Company's institutional spread-based products (i.e.,
GICs) are issued primarily through a marketing partnership with another
insurance company. Expanded distribution of GIC products through bank trust
departments, mutual fund companies, investment managers, insurance companies and
investment consultants contributed to the increase in sales of such products.
The decrease in institutional fee-based sales was attributable to the Company's
marketing partnership arrangement with General American which was converted from
a fee-based to primarily a spread-based arrangement in late 1995.

Net surrenders of annuity products issued by the Company's insurance
subsidiaries were $326.2 million and $319.8 million in 1996 and 1995,
respectively. Of these amounts, $106.9 million and $62.8 million, respectively,
can be attributed to fixed annuity business acquired from SBM. Surrender charge
income increased to $5.0 million in 1996 from $3.3 million in 1995, due to
higher average surrender charges associated with SBM products compared to other
products of the Company's insurance subsidiaries and to the overall increase in
the volume of surrenders. The surrender and withdrawal activity during 1996 and
1995 was generally expected by the Company due to the level of customer deposits
written several years ago that were subject to declining or expiring surrender
charges and the Company's strategy of maintaining investment spreads. The
Company has programs designed to reduce surrender activity and improve
persistency. During 1996 and 1995, through one such program, $21.0 million and
$42.0 million, respectively, of new annuity contracts were issued to customers
that had initiated a withdrawal request. The Company excludes this activity from
its net surrenders and sales disclosures because such amounts have no impact on
net cash flow. Other programs involve direct contact with customers and are
designed to inform customers of the financial strength of the Company and its
insurance subsidiaries and to describe other product offerings available.

Operating expenses increased to $31.1 million in 1996 from $23.0 million in
1995. The increase was primarily attributable to (i) the inclusion of twelve
months of incremental operating expenses related to the acquired SBM operations
in the 1996 results versus seven months for the comparable 1995 period,

(ii) the expansion of product distribution channels, and (iii) a charge of $1.6
million to increase the reserve for anticipated future guaranty fund
assessments.

Commissions, net of deferrals, were $2.4 million and $1.6 million in 1996
and 1995, respectively. The increase was primarily attributable to the inclusion
in 1996 results of twelve months' renewal and trailer commissions under certain
deferred annuity contracts acquired through the SBM acquisition versus seven
months for the comparable 1995 period.

Amortization of deferred policy acquisition costs related to operations was
$6.8 million and $2.9 million during 1996 and 1995, respectively. This increase
was the result of growth in the deferred policy acquisition cost asset due to
additional sales of fixed and variable annuity products.

Amortization of value of insurance in force related to operations increased
to $7.3 million in 1996 from $7.1 million in 1995. The increase is attributable
to amortization of the value of insurance in force established as an asset by
the Company on May 31, 1995 in connection with the acquisition of SBM's
insurance subsidiary.

Amortization of acquisition-related deferred charges was $1.5 million and
$9.9 million in 1996 and 1995, respectively. The decrease was primarily
attributable to the accelerated amortization during the third quarter of 1995 of
certain costs and charges deferred during 1993 and 1994. During the third
quarter of 1995, Company management determined that changes in facts and
circumstances had resulted in a change in their original estimate of the periods
benefited by these costs and charges. As a result of this change in estimate,
the remaining unamortized balances of these deferred costs and charges were
fully amortized as of September 30, 1995, resulting in lower amortization in
future periods.

The Company recorded a $5.0 million non-recurring charge in 1996 including
$3.2 million related to the move of operations facilities from Columbus, Ohio to
Louisville, Kentucky; costs of $1.0 million for merger and acquisition
activities that did not result in a transaction; and costs of $.8 million
related to the Offering.

Other expenses, net were $5.4 million in 1996 compared to $.7 million in
1995. The increase is primarily attributable to an increase in premiums and fees
paid or accrued in 1996, net of a reduction in net benefits paid, under
reinsurance agreements. Through the reinsurance agreements, one of which
commenced December 31, 1995, substantially all mortality risks associated with
single premium endowment deposits have been reinsured.

Realized investment gains, which are reported net of related amortization of
deferred policy acquisition costs and value of insurance in force, were $.9
million in 1996 compared to $4.0 million in 1995. Realized investment gains in
1996 include an estimated loss of $15.2 million related to the write-down to
fair value of an investment in a corporate fixed maturity security and a gain of
$4.5 million, before selling expenses, related to the sale of the State Bond
Mutual Funds. Other 1996 and all 1995 realized investment gains and losses were
interest-rate related and attributable to the ongoing management of the
Company's fixed maturity securities classified as available-for-sale.

Federal income tax expense was $5.2 million and $7.0 million in 1996 and
1995, respectively, reflecting effective tax rates of 18.1% and 37.1%. The lower
effective tax rate in 1996 resulted primarily from the recognition of benefits
associated with certain deferred tax assets established in connection with the
Company's acquisition of the Integrity Companies on November 26, 1993 for which
a full valuation allowance was originally provided. These deferred tax benefits
are being recognized based on the taxable income generated by the Integrity
Companies in the post-acquisition period and projections of future taxable
income.

YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994

During 1995, net income for the Company was $11.9 million compared to a net
loss of $16.8 million for 1994. Operating earnings were $4.5 million and $2.4
million for 1995 and 1994, respectively. The improvement in operating earnings
in 1995 was primarily attributable to an increase in net investment spread, the
acquired operations of SBM which generated operating earnings of approximately
$3.5 million during the period from June 1, 1995 to December 31, 1995 and an
increase in fee income from a growing base of variable annuity deposits and
institutional assets under management. Such increases in operating earnings were
partially offset by the accelerated amortization of certain acquisition-related
deferred charges.

Spread-based operating earnings were .90% and .81% of average spread-based
assets under management of $2.47 billion and $2.00 billion during 1995 and 1994,
respectively. This increase in spread-based margins was primarily attributable
to ongoing asset/liability management, which generated higher net investment
spreads. Fee-based operating earnings were .19% and .51% of average fee-based
assets under management of $1.84 billion and $421.7 million during 1995 and
1994, respectively. The decrease in fee-based margins was primarily attributable
to the growth in off-balance sheet fee-based assets managed by ARM Capital
Advisors for institutional clients, which generate lower margins than the
Company's other fee-based products, specifically variable annuities. For
example, margins on the Company's variable annuities were .64% and .66% during
1995 and 1994, respectively.

Net investment spread for the years ended December 31, 1995 and 1994 were as
follows:

YEAR ENDED DECEMBER 31,
--------------------------
1995 1994
------------ ------------

(DOLLARS IN THOUSANDS)
Investment income............................................... $ 196,024 $ 149,142
Interest credited on customer deposits.......................... (146,867) (116,463)
------------ ------------
Net investment spread......................................... $ 49,157 $ 32,679
------------ ------------
------------ ------------

Investment yield................................................ 7.84% 7.30%
Average credited rate........................................... 5.90% 5.88%
------------ ------------
Investment spread............................................. 1.94% 1.42%
------------ ------------
------------ ------------

Average cash and investments.................................... $ 2,501,125 $ 2,042,785
Average spread-based customer deposits.......................... $ 2,488,866 $ 1,980,807

The increase in investment yield was primarily attributable to benefits from
ongoing management of the Company's investment portfolios, the rising interest
rate environment during 1994 and lower amortization of invested asset write-ups
resulting from purchase accounting adjustments.

Fee income increased to $11.3 million in 1995 from $8.4 million in 1994.
This increase is in part attributable to variable annuity fees which are based
on the market value of assets supporting the investment portfolio options of
variable annuity deposits in separate accounts. Variable annuity fees increased
to $7.2 million in 1995 from $4.3 million in 1994 principally due to asset
growth from the receipt of variable annuity deposits and from increased market
values. In addition, ARM Capital Advisors, which began operations in January
1995, added asset management fees earned on off-balance sheet assets managed for
institutional clients. Offsetting these increases was a reduction in other fee
income from $4.1 million in 1994 to $.9 million in 1995 primarily related to
variable life insurance business which was sold in 1994.

Assets under management by type of product and service as of December 31,
1995 and 1994 were as follows:

1995 1994
---------------------- ----------------------

PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- ----------- --------- -----------

(DOLLARS IN MILLIONS)

Spread-based:
Retail (fixed and indexed annuity
and face-amount certificate deposits).......................... $ 2,716.2 69% $ 1,990.0 78%
Institutional (GIC deposits)..................................... 143.2 4 -- --
--------- --- --------- ---
Total spread-based............................................. 2,859.4 73 1,990.0 78

Fee-based:
Retail (variable annuity deposits invested in mutual funds)...... 617.3 16 388.9 15
Institutional (off-balance sheet deposits under
marketing partnership arrangements)............................ 387.3 10 121.0 5
Total fee-based................................................ 1,004.6* 26 509.9 20
Corporate and other (primarily cash and investments in excess of
customer deposits)............................................... 61.1 1 60.3 2
--------- --- --------- ---
Total assets under management...................................... $ 3,925.1* 100% $ 2,560.2 100%
--------- --- --------- ---
--------- --- --------- ---

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

* Does not include off-balance sheet assets managed by ARM Capital Advisors
for institutional clients and the State Bond Mutual Funds. Total fee-based
assets under management and total assets under management at December 31,
1995 were $2,443.7 million and $5,364.2 million, respectively, including
such assets. Both ARM Capital Advisors and the State Bond Mutual Funds were
acquired in 1995.

The increase in the spread-based deposits was primarily attributable to the
SBM acquisition and sales of GICs. The increase in the fee-based line of
business is primarily due to fees related to funds managed by ARM Capital
Advisors under investment management and investment advisory contracts that were
acquired on January 5, 1995, assets managed under contract for the State Bond
Mutual Funds that were acquired effective May 31, 1995, and new sales.

Sales by market and type of business during 1995 and 1994 were as follows:

YEAR ENDED DECEMBER
31,
--------------------

1995 1994
--------- ---------

(IN MILLIONS)

Retail:
Spread-based.......................................................... $ 115.4 $ 131.1
Fee-based............................................................. 177.7 231.1
--------- ---------
Total retail........................................................ 293.1* 362.2

Institutional:
Spread-based.......................................................... 142.2 --
Fee-based............................................................. 272.9 59.3
--------- ---------
Total institutional................................................. 415.1* 59.3
--------- ---------
Total sales............................................................. $ 708.2 $ 421.5
--------- ---------
--------- ---------

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

* Does not include new deposits related to off-balance sheet fee-based assets
managed by ARM Capital Advisors for institutional clients and the State Bond
Mutual Funds. Total retail and institutional sales for the year ended
December 31, 1995 were $300.9 million and $886.9 million, respectively,
including such deposits. Both ARM Capital Advisors and the State Bond Mutual
Funds were acquired in 1995.

The decrease in retail sales was primarily attributable to greater
industry-wide competition from banks and other financial services institutions
for savings products. However, the Company believes yield curve flattening
benefited sales of institutional spread-based products (i.e., GICs), resulting
in total overall sales growth of spread-based products. The increase in sales of
institutional fee-based products and services is primarily attributable to the
increase in GIC deposits from the Company's arrangement with General American.

Net surrenders of annuity products issued by the Company's insurance
subsidiaries were $319.8 million (including $62.8 million attributable to
business acquired from SBM) in 1995, compared to $221.8 million in 1994. This
resulted in an increase in surrender charge income to $3.3 million in 1995 from
$2.4 million in 1994. The surrender and withdrawal activity during 1994 and 1995
was generally expected by the Company due to the level of customer deposits
written several years ago that were subject to declining or expiring surrender
charges during 1994 and 1995, and the Company's strategy of maintaining
investment spreads. During the third quarter of 1994 and continuing to date, the
Company began implementing programs designed to reduce surrender activity and
improve persistency. During 1995, through one such program, $42.0 million of new
annuity contracts were issued to customers that had initiated a withdrawal
request.

Operating expenses increased to $23.0 million in 1995 from $21.5 million in
1994. The increase was primarily attributable to additional expenses
attributable to ARM Capital Advisors, which began operations in 1995, and the
acquired SBM businesses.

Commissions, net of deferrals were $1.6 million for the year ended December
31, 1995 consisting primarily of renewal and trailer commissions of
approximately $1.3 million on fixed annuities acquired in connection with the
SBM acquisition. Commissions, net of deferrals for the corresponding period in
1994 were $2.6 million which included $2.5 million of commissions on variable
life insurance contracts. The majority of the variable life block of business
was sold in December 1994.

Amortization of deferred policy acquisition costs related to operations was
$2.9 million and $1.3 million during 1995 and 1994, respectively. The increase
in amortization was related to growth in the deferred policy acquisition cost
asset.

Amortization of value of insurance in force related to operations increased
to $7.1 million in 1995 from $3.8 million in 1994 reflecting amortization of the
value of insurance in force established as an asset by the Company on May 31,
1995 in connection with the acquisition of SBM's insurance subsidiary.

Amortization of acquisition-related deferred charges was $9.9 million in
1995 compared to $2.2 million in 1994. The increase was primarily attributable
to the accelerated amortization of $4.3 million of certain costs and charges
deferred during 1993 and 1994. During the third quarter of 1995, Company
management determined that changes in facts and circumstances had resulted in a
change in their original estimate of the periods benefited by these costs and
charges. As a result of this change in estimate, the remaining unamortized
balances of these deferred costs and charges were fully amortized as of
September 30, 1995.

Other expenses, net were $.7 million in 1995 compared to other income, net
of $5.0 million in 1994. The 1994 results include the benefits of favorable
mortality experience and a gain from the sale of the Company's variable life
business.

Realized investment gains were $4.0 million in 1995, compared to realized
investment losses of $36.7 million in 1994. Such realized investment gains and
losses were primarily interest-rate related and attributable to the ongoing
management of the Company's fixed maturity securities classified as available-
for-sale. The 1994 realized investment losses were a result of the market
interest rate environment at November 26, 1993 when the acquisition of the
Integrity Companies occurred. This acquisition was accounted for under the
purchase method which required that the Integrity Companies' investment
portfolio be marked-to-market on November 26, 1993, at which time the yield on
ten-year U.S. Treasury Notes was 5.74%. The yield on such notes increased
steadily during 1994 and at year-end was 7.83%. As a result of the acquisition
and mark-to-market occurring in a low interest rate environment and ongoing
portfolio management during the rising interest-rate environment of 1994,
realized investment losses of $36.7 million were generated.

Federal income tax expense during 1995 was $7.0 million compared to a
federal income tax benefit during 1994 of $6.0 million. This change was
attributable to income before federal income taxes of $18.9 million in 1995
compared to a loss before federal income taxes of $22.8 million in 1994.

ACQUISITION ACTIVITY

INTEGRITY COMPANIES

Effective November 26, 1993, the Company acquired N.M. U.S. Limited (the
holding company for the U.S. operations of National Mutual) and its wholly owned
subsidiaries, Integrity and National Integrity, from National Mutual, for an
aggregate purchase price of $121.0 million. Immediately following the
acquisition, N.M. U.S. Limited changed its name to Integrity Holdings, Inc. The
Company financed the acquisition by issuing new common equity and its Perpetual
Preferred Stock for proceeds of approximately $70.0 million and $50.0 million,
respectively, and through $40.0 million of bank financing.

ARM CAPITAL ADVISORS

Through its acquisition of the U.S. fixed income unit of Kleinwort Benson
Investment Management Americas, Inc. ("KBIMA") in January 1995, the Company
obtained a recognized fixed income management service which became part of the
then newly-formed ARM Capital Advisors. In addition to providing asset
management services to institutional clients, ARM Capital Advisors manages the
investment portfolios of the Company's subsidiaries. Assets managed by ARM
Capital Advisors under contracts with institutional clients acquired from KBIMA
and new contracts with other institutional clients increased from $.8 billion as
of January 5, 1995 to $3.3 billion as of March 31, 1997. Although third-party
assets managed by ARM Capital Advisors have grown since the acquisition, the
Company believes that market attitudes towards developing an asset management
service for defined benefit pension plans within a holding company structure
consisting predominantly of insurance companies have constrained ARM

Capital Advisors' growth. Accordingly, the Company is selling an 80% interest in
the assets and operations of ARM Capital Advisors (see "Business -- History").

SBM COMPANY

Effective May 31, 1995, the Company completed the acquisition of
substantially all of the assets and business operations of SBM, including all of
the issued and outstanding capital stock of SBM's subsidiaries, SBM Life and ARM
Securities, as well as SBM's management contracts with six mutual funds (the
"State Bond Mutual Funds"). The aggregate purchase price for the SBM acquisition
was $38.8 million. The Company financed the acquisition by issuing a total of
6,897,620 shares of new common equity to the MSCP Funds and to New ARM, LLC (a
limited liability company owning 120,020 shares of the Company's Class A Common
Stock) and certain directors of the Company for an aggregate sale price of $63.5
million. The Company used proceeds from the issuance of the new common equity in
excess of the adjusted purchase price for the acquisition to (i) make a $19.9
million capital contribution to SBM Life; (ii) acquire SBM Certificate Company
from SBM Life for $3.3 million; and (iii) along with approximately $1.0 million
of additional cash from the Company, provide for fees and expenses related to
the acquisition of approximately $2.5 million. The capital contribution to SBM
Life of $19.9 million was used to strengthen SBM Life's financial position and
allowed for a significant investment portfolio restructuring immediately
following the acquisition with no net adverse effect on statutory adjusted
capital and surplus. On December 31, 1995, SBM Life was merged with and into
Integrity to create certain operating efficiencies. The SBM acquisition provided
the Company with expanded distribution channels, as well as a deposit base in
the 403(b) tax-deferred annuity marketplace. On December 13, 1996, the Company
transferred its responsibility for performing management and investment advisory
services for the State Bond Mutual Funds to Federated Investors for $4.5
million. The State Bond Mutual Funds had aggregate assets of $236.9 million on
December 13, 1996.

ASSET PORTFOLIO REVIEW

The Company primarily invests in fixed maturities with the objective of
earning reasonable returns while limiting credit and liquidity risks. The
amortized cost of fixed maturities at March 31, 1997 totaled $3.24 billion,
compared with $3.05 billion at December 31, 1996, representing 91% of total cash
and investments at both dates. This increase in fixed maturities is primarily
attributable to the investment of the proceeds from the sales of GICs.

The Company's cash and investments as of March 31, 1997 are detailed as
follows:

AMORTIZED COST
----------------------
PERCENT OF ESTIMATED
AMOUNT TOTAL FAIR VALUE
--------- ----------- -----------
(DOLLARS IN MILLIONS)

Fixed maturities:
Corporate securities......................................................... $ 1,114.1 31.5% $ 1,088.0
U.S. Treasury securities and obligations of U.S. government agencies......... 169.7 4.8 169.0
Other government securities.................................................. 49.8 1.4 46.9
Asset-backed securities...................................................... 380.0 10.7 376.4
Mortgage-backed securities ("MBSs"):
Agency pass-through certificates........................................... 262.7 7.4 262.3
Collateralized mortgage obligations ("CMOs"):
Agency................................................................... 326.0 9.2 323.1
Non-agency............................................................... 914.3 25.8 906.3
Interest only............................................................ 18.7 .5 19.1
--------- ----- -----------
Total fixed maturities......................................................... 3,235.3 91.3 3,191.1
Equity securities (i.e., non-redeemable preferred stocks)...................... 21.4 .6 22.2
Mortgage loans on real estate.................................................. 29.0 .8 29.0
Policy loans................................................................... 123.3 3.5 123.3
Cash and cash equivalents...................................................... 133.4 3.8 133.4
--------- ----- -----------
Total cash and investments..................................................... $ 3,542.4 100.0% $ 3,499.0
--------- ----- -----------
--------- ----- -----------

Agency pass-through certificates are MBSs which represent an undivided
interest in a specific pool of residential mortgages. The payment of principal
and interest is guaranteed by the U.S. government or U.S. government agencies.
CMOs are pools of mortgages that are segregated into sections, or tranches,
which provide prioritized retirement of bonds rather than a pro rata share of
principal return as in the pass-through structure. The underlying mortgages of
agency CMOs are guaranteed by the U.S. government or U.S. government agencies.
Of the Company's non-agency CMOs, 67.3% (on an amortized cost basis) use
mortgage loans or mortgage loan pools, letters of credit, agency mortgage
pass-through securities and other types of credit enhancement as collateral. The
remaining 32.7% of the non-agency CMOs use commercial mortgage loans as
collateral.

The Company manages prepayment exposure on CMO holdings by diversifying not
only within the more stable CMO tranches, but across alternative collateral
classes such as commercial mortgages and Federal Housing Administration project
loans, which are generally less volatile than agency-backed, residential
mortgages. Additionally, prepayment sensitivity is evaluated and monitored,
giving full consideration to the collateral characteristics such as weighted
average coupon rate, weighted average maturity and the prepayment history of the
specific collateral. MBSs are subject to risks associated with prepayments of
the underlying collateral pools. Prepayments cause these securities to have
actual maturities different from those projected at the time of purchase.
Securities that have an amortized cost that is greater than par (i.e., purchased
at a premium) that are backed by mortgages that prepay faster than expected will
incur a reduction in yield or a loss, versus an increase in yield or a gain if
the mortgages prepay slower than expected. Those securities that have an
amortized cost that is less than par (i.e., purchased at a discount) that are
backed by mortgages that prepay faster than expected will generate an increase
in yield or a gain, versus a decrease in yield or a loss if the mortgages prepay
slower than expected. The reduction or increase in yields is partially offset as
funds from prepayments are reinvested at current interest rates. The degree to
which a security is susceptible to either gains or losses is influenced by the
difference between its amortized cost and par, the relative sensitivity of the
underlying mortgages backing the assets to prepayments in a changing interest
rate environment and the repayment priority of the securities in the overall
securitization structure. The Company had gross unamortized premiums and

unaccreted discounts of MBSs of $32.7 million and $39.0 million, respectively,
at March 31, 1997. Although the interest rate environment has experienced
significant volatility during 1996 and the first quarter of 1997, prepayments
and extensions of cash flows from MBSs have not materially affected investment
income of the Company.

Asset-backed securities ("ABSs") are securitized bonds which are backed by
collateral such as, but not limited to, home equity loans, second mortgages,
automobile loans, and credit card receivables. Home equity loan collateral
represents 61.7% of the Company's investments in the ABS market. The typical
structure of an ABS provides for favorable yields, high credit ratings and
stable prepayments.

Total cash and investments (on an amortized cost basis) were 93% and 96%
investment grade or equivalent at March 31, 1997 and December 31, 1996,
respectively. Investment grade securities are those classified as 1 or 2 by the
NAIC or, where such classifications are not available, having a rating on the
scale used by S&P of BBB- or above. Yields available on non-investment grade
securities are generally higher than are available on investment grade
securities. However, credit risk is greater with respect to such non-investment
grade securities. The Company attempts to reduce the risks associated with
non-investment grade securities by limiting the exposure to any one issuer and
by closely monitoring the creditworthiness of such issuers. Additionally, the
Company's investment portfolio has minimal exposure to real estate, non-
indemnified mortgage loans and common equity securities, which represented less
than .1% of cash and investments as of March 31, 1997.

The Company continually monitors and analyzes its investment portfolio,
including below investment grade securities, in order to determine if its
ability to realize its carrying value on any investment has been impaired. For
fixed maturity and equity securities, if impairment in value is determined to be
other than temporary (i.e., if it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the security), the
cost basis of the impaired security is written down to fair value, which becomes
the security's new cost basis. The amount of the write-down is included in
earnings as a realized loss. Future events may occur, or additional or updated
information may be received, which may necessitate future write-downs of
securities in the Company's portfolio. Significant write-downs in the carrying
value of investments could materially adversely affect the Company's net income
in future periods.

At March 31, 1997 the ratings assigned by the NAIC and comparable S&P
ratings on the Company's fixed maturity portfolio, and the percentage of total
fixed maturity investments classified in each category, were as follows:

AMORTIZED COST
----------------------

PERCENT ESTIMATED
NAIC DESIGNATION (COMPARABLE S&P RATING) AMOUNT OF TOTAL FAIR VALUE
- --------------------------------------------------------------------------------- --------- ----------- -----------

(DOLLARS IN MILLIONS)

1 (AAA, AA, A) $ 2,263.1 70% $ 2,237.3
2 (BBB) 730.6 23 722.0
3 (BB) 165.9 5 157.8
4 (B) 71.0 2 69.3
5 (CCC, CC, C) 4.7 * 4.7
6 (CI, D) -- -- --
--------- --- -----------
Total fixed maturities $ 3,235.3 100% $ 3,191.1
--------- --- -----------
--------- --- -----------

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

* Less than 1%.

Pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," the Company classifies its entire fixed maturities portfolio
as available-for-sale. Fixed maturities classified as available-for-sale are
carried at fair value and changes in fair value, net of related value of
insurance in

force and deferred policy acquisition cost amortization and deferred income
taxes, are charged or credited directly to shareholders' equity.

The rise in interest rates during the first quarter of 1997 resulted in net
unrealized losses on available-for-sale securities which totaled $26.7 million
(net of $2.4 million of related amortization and $14.4 million in deferred
income taxes) at March 31, 1997, compared to net unrealized gains of $3.7
million (net of $1.3 million of related amortization and $2.0 million in
deferred income taxes) at December 31, 1996. This volatility in reported
shareholders' equity occurs as a result of SFAS No. 115 which requires that
available-for-sale securities be carried at fair value while corresponding
customer deposit liabilities are carried at historical values. At March 31, 1997
and December 31, 1996, shareholders' equity excluding the effects of SFAS No.
115 was $184.7 million and $178.3 million, respectively.

The Company manages assets and liabilities in a closely integrated manner,
with the aim of reducing the volatility of investment spreads during a changing
interest rate environment. As a result, adjusting shareholders' equity for
changes in the fair value of the Company's fixed maturities and equity
securities without reflecting offsetting changes in the value of the Company's
liabilities creates volatility in reported shareholders' equity but does not
fully reflect the underlying economics of the Company's business. The Company's
consolidated financial statements included elsewhere in this Prospectus include
fair value balance sheets which demonstrate that the general rise in interest
rates during the first three months of 1997 have not had a material effect on
the financial position of the Company when all assets and liabilities are
adjusted to estimated fair values.

Mortgage loans on real estate represented approximately 1% of total cash and
investments at March 31, 1997 and December 31, 1996. Pursuant to the terms of
the acquisition of certain of the Company's insurance operations, National
Mutual has indemnified the Company with respect to principal (up to 100% of the
investments' year-end 1992 statutory book value) and interest with respect to
approximately 99% of these loans at March 31, 1997. In support of its
indemnification obligations, National Mutual placed $23.0 million into escrow in
favor of the Company's insurance subsidiaries, which will remain available until
the subject commercial and agricultural loans have been paid in full.

LIQUIDITY AND FINANCIAL RESOURCES

HOLDING COMPANY OPERATIONS

The Company's principal need for liquidity has historically consisted of
debt service obligations under its bank financing agreement (see "Description of
Certain Indebtedness"), dividend payments on its preferred stock (see
"Description of Capital Stock -- Preferred Stock"), operating expenses, and
corporate development expenditures. The Company is dependent on dividends from
Integrity and management and service fee income from the Company's subsidiaries
to meet ongoing cash needs, including amounts required to pay dividends on its
preferred stock.

The ability of the Company's insurance subsidiaries to pay dividends and
enter into agreements with affiliates is limited by state insurance laws. In
March 1997, the Company received a dividend of $7.0 million from Integrity. The
maximum dividend payments that may be made by Integrity to the Company during
1997 without prior approval of the Ohio Insurance Director are $26.0 million.
The Company had cash and investments at the holding company level of $8.8
million at March 31, 1997. In addition, $20.0 million was available on unused
bank lines of credit at March 31, 1997.

INSURANCE SUBSIDIARIES OPERATIONS

The primary sources of liquidity of the Company's insurance subsidiaries are
investment income and proceeds from maturities and redemptions of investments.
The principal uses of such funds are benefits, withdrawals and loans associated
with customer deposits, commissions, operating expenses, and the purchase of new
investments.

The Company develops cash flow projections under a variety of interest rate
scenarios generated by the Company. The Company attempts to structure asset
portfolios so that the interest and principal payments, along with other fee
income, are more than sufficient to cover the cash outflows for benefits,
withdrawals and expenses under the expected scenarios developed by the Company.
In addition, the Company maintains other liquid assets and aims to meet
unexpected cash requirements without exposure to material realized losses during
a higher interest rate environment. These other liquid assets include cash and
cash equivalents and high-grade floating-rate securities held by both the
Company and its insurance subsidiaries.

During the quarters ended March 31, 1997 and 1996, the Company met its
liquidity needs entirely by cash flows from operating activities and principal
payments on and redemptions of investments. At March 31, 1997, cash and cash
equivalents totaled $133.5 million compared to $110.1 million at December 31,
1996. The Company's aim is to manage its cash and cash equivalents position in
order to satisfy short-term liquidity needs. In connection with this management
of cash and cash equivalents, the Company may invest idle cash in short-duration
fixed maturities to capture additional yield when short-term liquidity
requirements permit.

The Company generated cash flows of $46.7 million and $36.5 million from
operating activities during the quarters ended March 31, 1997 and 1996,
respectively. These cash flows resulted principally from investment income, less
commissions and operating expenses. Proceeds from sales, maturities and
redemptions of investments generated $1,026.2 million and $714.1 million in cash
flows during the quarters ended March 31, 1997 and 1996, respectively, which
were offset by purchases of investments of $1,209.7 million and $791.8 million,
respectively. The increase in investment purchases and sales activity during the
first quarter of 1997 reflects the Company's ongoing management of its fixed
maturity portfolio which has increased in size due to sales of spread-based
products.

The Company intends to use the net proceeds it receives from the Offering to
strengthen its existing capital base, to enhance its retail market presence, to
consolidate operating locations and for other corporate purposes, which may
include acquisitions. Pending such uses, the net proceeds will be invested in
intermediate and short-term securities.

INCOME TAXES

At March 31, 1997, the Company reported an asset for deferred federal income
taxes of $53.2 million on the carrying amount balance sheet. Such amount
reflects deferred tax assets of $73.1 million, net of valuation allowance of
$37.4 million, in excess of deferred tax liabilities of $20.0 million. The net
deferred tax assets represent deductible temporary differences and net operating
loss carryforwards. Based on historical operating results and projections of
future taxable ordinary income, management believes that the net tax benefit
recorded will be fully utilized.

DERIVATIVES

The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well defined interest rate risks and, with respect to the Company's
equity-indexed annuity deposits, equity market risks.

EFFECTS OF INFLATION AND INTEREST RATE CHANGES

The Company believes that inflation will not have a material adverse effect
on results of operations. The Company manages its investment portfolios in part
to reduce its exposure to interest rate fluctuations. In general, the fair value
of the Company's fixed maturities portfolio increases or decreases inversely
with fluctuations in interest rates, and the Company's investment income
increases or decreases directly with interest rate changes. For example, if
interest rates decline, the Company's fixed maturity investments generally will
increase in fair value, while investment income will decrease as fixed income
investments are sold or mature and proceeds are reinvested at declining rates.
The converse will be true if interest rates rise.

BUSINESS

GENERAL

The Company specializes in the asset accumulation business, providing retail
and institutional customers with products and services designed to serve the
growing long-term savings and retirement markets. The Company's earnings are
derived from investment spread (the difference between income earned on
investments and interest credited on customer deposits) and fee income. The
Company's retail products include a variety of fixed, indexed and variable
annuities and face-amount certificates sold through a broad spectrum of
distribution channels including stockbrokers, independent agents, independent
broker-dealers and financial institutions. The Company offers GICs to its
institutional clients and markets its institutional products and services to
bank trust departments, plan sponsors, cash management funds, other
institutional funds and insurance companies directly as well as through
investment consultants.

The Company was established in July 1993 and completed its first acquisition
in November 1993. The Company's assets under management have grown from $2.3
billion as of November 26, 1993 to $5.1 billion as of March 31, 1997 (after
giving effect to the pending sale of its investment adviser subsidiary, ARM
Capital Advisors). See "-- History." The Company attributes this growth to
internally generated sales, new product offerings and opportunistic
acquisitions. Operating earnings (net income applicable to common shareholders,
excluding, net of tax, realized investment gains and losses and non-recurring
charges) have grown from $2.4 million in 1994 to $4.5 million in 1995 and $22.6
million in 1996, and operating earnings for the three months ended March 31,
1997 were $6.4 million.

STRATEGY

The Company's strategy is focused on the following:

anticipates introducing products for the synthetic GIC marketplace that will
provide institutional clients with either absolute or relative investment
performance guarantees.

CAPTURING A GROWING SHARE OF SALES IN RETAIL DISTRIBUTION CHANNELS. Over
the past few years, the Company has built the infrastructure necessary to
support increased growth in the retail market. The Company believes that it can
distinguish itself by strengthening its relationships with individual
distributors, often referred to as producers. To accomplish this objective, the
Company seeks to (i) provide superior service to producers through an expanded
and dedicated producer services unit, (ii) enhance the Company's technological
platform to permit superior and immediate access for producers to the Company's
administrative systems for transacting business, (iii) heighten producers'
awareness of its products and insurance affiliates through focused
advertisements in industry publications and selective promotional programs and
(iv) quickly develop innovative products with new features and services which
are responsive to market needs. For example, as a means to strengthen its
relationships with distributors, the Company is in the process of implementing a
program whereby certain distributors will have the capability to access remotely
the Company's systems and transact business with the Company on-line. The
Company also seeks to increase its retail market share by expanding and
diversifying its retail distribution channels. For example, in 1996 the Company
began offering variable annuities through banks and thrifts. Additionally, the
Company recognizes the importance of building and maintaining a strong capital
base. Partly as a result of the Company's strengthened financial condition, A.M.
Best raised the claims-paying ability rating of the Company's insurance
subsidiaries from "A-(Excellent)" to "A(Excellent)" in 1995. A further upgrade
could help the Company expand its penetration of existing distribution channels.

ENHANCING EFFECTIVE USE OF TECHNOLOGY. The Company continues to invest in
technology designed to enhance the service it provides to producers and
customers, increase the efficiency of its operations and allow administration of
innovative and complex products. The Company's technology also allows it to
respond quickly to customer needs for new products by reducing product
development time. In addition, to supplement traditional inquiry and transaction
processing methods, the Company's client/server network can provide producers,
customers and employees with services and information easily accessible through
Internet, voice response and WAN technology.

marketing, actuarial, investments, legal, finance and administration) work
jointly with a common set of risk/return characteristics to achieve the
Company's overall liquidity and profit objectives (rather than the specific
objectives of any particular functional area). The Company implements this
process with the analytical risk and capital management skills and experience of
its management team, supported with sophisticated computer software, and an
emphasis on investment securities whose cash flows can be modeled extensively
against liability cash flows under different interest rate scenarios. Risk
components that cannot be appropriately modeled are typically hedged or
outsourced. The Company's investment portfolios are currently being managed by
ARM Capital Advisors; however, the Company may use additional unaffiliated
investment management firms to supplement the services of ARM Capital Advisors
in the future. Importantly, the Company has and will continue to monitor the
investment practices of these firms to ensure that the Company's prescribed
guidelines are followed.

CONTINUING SUCCESSFUL ACQUISITION RECORD. The Company's first acquisition
occurred in 1993 with the acquisition of Integrity and National Integrity. In
1995, the Company acquired the assets and business operations of SBM. By
acquiring SBM, the Company met its objectives of growing and diversifying its
product offerings and distribution channels and achieving further economies of
scale. The Company increased the investment yields of the SBM portfolio while
improving its associated risk profile through a restructuring of the investment
portfolio, reduced expenses by merging back-office operations into the Company's
existing operations and expanded the Company's distribution channels. The
Company continues to seek opportunities to purchase interests in blocks of
annuity business, other financial service companies and distributors and to
enter into marketing partnerships and reinsurance ventures with other insurance
companies, all with the goal of achieving greater profitability through growth
in market share and further economies of scale.

MAINTAINING FOCUS ON COMPANY PROFITABILITY. The Company's focus on
profitability is supported by an integrated team approach to developing products
and operating the Company's business. The Company's compensation system and the
equity investments of certain of its employees further reinforce the Company's
focus on the objective of profitability. Employees at all levels of the Company
are eligible to receive bonuses based on profitability, and as of March 31,
1997, executive officers, other employees and directors of the Company
controlled, directly or indirectly, 9% of the Company's outstanding common
stock.

The Company conducts its different businesses through the following
subsidiaries:

- INTEGRITY -- provides retail, fixed, indexed and variable annuities and
institutional GICs;

- NATIONAL INTEGRITY -- provides retail, fixed and variable annuities and
institutional GICs, primarily in New York (wholly owned subsidiary of
Integrity);

- ARM SECURITIES (FORMERLY KNOWN AS SBM FINANCIAL SERVICES, INC.) -- this
broker-dealer supports the Company's retail annuity operations and the
Company's sales of independent third-party mutual funds; and

- ARM TRANSFER AGENCY -- provides transfer agent services as needed to
support the Company's retail business operations.

In addition, ARM Capital Advisors, which will remain a 20% owned affiliate
after the pending sale (see " -- History"), offers fixed income asset management
services to third-party institutional clients (currently consisting primarily of
defined benefit pension plans).

HISTORY

INTEGRITY COMPANIES

The Company was established in July 1993 by MSLEF II, an investment fund
sponsored by Morgan Stanley Group, Inc., and Analytical Risk Management, Ltd.
(now known as Oldarm L.P.) to acquire Integrity Holdings, Inc. (formerly N.M.
U.S. Limited) from National Mutual. In connection with the acquisition, which
occurred on November 26, 1993, National Mutual replaced all equity securities,
investments in real estate and joint ventures and fixed maturity securities
classified as "6" by the NAIC, with cash in an amount equal to the statutory
book value of such assets as of December 31, 1992 adjusted for any additional
cash investments or distributions during the period from January 1, 1993 to
November 26, 1993. In addition, National Mutual (i) strengthened statutory
policyholder reserves and surplus by $24.3 million, (ii) indemnified the
Integrity Companies with respect to the payment of principal and interest due on
$146.6 million of commercial and agricultural mortgage loans (since reduced
through repayments to $36.7 million at December 31, 1996) and supported the
indemnification with a $23.0 million escrow arrangement, (iii) provided
indemnification as to the availability of net operating and capital loss
carryforwards and various tax deductions, (iv) provided the Integrity Companies
with indemnification as to future claims for taxes, assessments from guaranty
funds and claims from litigation which arise from pre-closing events, (v)
terminated all surplus relief reinsurance arrangements, (vi) assumed all
obligations under the Integrity Companies' lease for certain office space and
(vii) assumed all obligations for retirement and severance benefits incurred by
the Integrity Companies prior to closing.

ARM CAPITAL ADVISORS

Through its acquisition of the U.S. fixed income unit of KBIMA in January
1995, the Company obtained a recognized fixed income management service, which
became part of the then newly-formed ARM Capital Advisors Inc. to manage the
investment portfolios of the Company's subsidiaries. In addition, the
acquisition provided for asset management services to institutional clients.
Although third-party assets managed by ARM Capital Advisors have grown since the
acquisition, the Company believes that market attitudes towards developing an
asset management service for defined benefit pension plans within a holding
company structure consisting predominantly of insurance companies has
constrained ARM Capital Advisors' growth. Accordingly, the Company has entered
into a purchase agreement dated May 21, 1997, pursuant to which the Company has
agreed to transfer substantially all of the operations of ARM Capital Advisors,
Inc. to a newly formed subsidiary, ARM Capital Advisors, LLC, and to sell an 80%
interest in ARM Capital Advisors, LLC to ARM Capital Advisors Holdings, LLC, an
entity controlled by Emad A. Zikry, President of ARM Capital Advisors, Inc. As
used in this Prospectus, "ARM Capital Advisors" means ARM Capital Advisors, Inc.
before the consummation of the sale and ARM Capital Advisors, LLC after the
consummation of the sale. The Company expects to recognize an immaterial gain on
the sale. Under the terms of the sale, ARM Capital Advisors will continue to
provide the Company's subsidiaries with investment management services through
December 31, 1997 on the same basis as in the past. The terms of the sale
further provide that after December 31, 1997, the Company can continue to engage
and have access to the expertise of ARM Capital Advisors as its investment
advisor at agreed upon rates, but the Company may also consider retaining other
investment management firms. In connection with the sale, Dr. Zikry will
terminate his employment with the Company. After consummation of the pending
sale of ARM Capital Advisors, the Company through a subsidiary will continue to
act as investment advisor to The Legends Fund, Inc. (the "Legends Fund"), a
series-type registered investment company, the investment portfolios of which
are offered through one of the Company's variable annuity products.

SBM COMPANY

In June 1995, the Company completed the acquisition of substantially all of
the assets and business operations of SBM, including all of the issued and
outstanding capital stock of SBM's subsidiaries, SBM

Life (which was subsequently merged with and into Integrity to create certain
operating efficiencies), SBM Financial Services, Inc. (which subsequently
changed its name to ARM Securities), SBM Certificate Company, and the State Bond
Mutual Funds. The Company issued approximately 6.9 million shares of Common
Stock (after giving effect to the Recapitalization), primarily to the MSCP Funds
and used the proceeds from the issuance of new common equity to acquire the
assets and business operations of SBM and to make a $19.9 million capital
contribution to SBM Life. On December 13, 1996, the Company transferred its
contracts to perform management and advisory services for the State Bond Mutual
Funds to Federated Investors for $4.5 million. The State Bond Mutual Funds had
aggregate assets of $236.9 million on December 13, 1996 and were not considered
a strategic line of business for the Company.

Had the pending sale of ARM Capital Advisors and the sale of the management
contracts for the State Bond Mutual Funds occurred on January 1, 1995, they
would have had an immaterial effect on the Company's pro forma net income for
the years ended December 31, 1996 and 1995.

PRODUCTS AND SERVICES

The Company offers a diversified array of products and services to meet the
needs of a variety of customers. The Company endeavors to adapt its products to
respond to changes in the retail and institutional marketplace and generally
seeks to have "a product for every market environment." The Company's retail
products include a variety of fixed and variable annuities and face-amount
certificates. In addition, the Company's variable annuity products offer
customers participation in various investment portfolios, some of which are
offered exclusively by the Company's insurance subsidiaries. The Company also
offers GICs to its institutional clients.

The Company derives its earnings from its spread-based and fee-based
products and services. With spread-based products, the Company's insurance and
face-amount certificate subsidiaries agree to return customer deposits with
interest at a specified rate or based on a specified index. As a result, the
Company's insurance and face-amount certificate subsidiaries accept investment
risk in exchange for the opportunity to achieve a spread between what the
Company earns on invested assets and what it pays or credits on customer
deposits. With fee-based products and services, the Company's subsidiaries
receive a fee in exchange for managing deposits, and the customer accepts the
investment risk. Because the investment risk is borne by the customer, this line
of business requires significantly less capital support than the spread-based
business.

SPREAD-BASED BUSINESS

The Company seeks to maintain level investment spreads regardless of the
interest rate environment. To this end, management (i) structures investment
asset durations, convexity and liquidity characteristics in conjunction with
customer deposit characteristics, (ii) regularly trades investment assets to
improve yield while maintaining other portfolio characteristics, (iii) offers an
array of products whose credited rates are based on differing points on the
yield curve and (iv) actively manages the trade-off between credited rates and
persistency.

The Company's spread-based products include retail single premium deferred
annuity ("SPDA") contracts, flexible premium deferred annuity ("FPDA")
contracts, single premium endowment ("SPE") contracts, guaranteed rate options
("GROs") of variable annuity contracts and certain FPDA contracts, single
premium immediate annuity ("SPIA") contracts, face-amount certificates and
institutional GICs as described below. Sales for spread-based business include
premiums and deposits received under these

products. Spread-based sales for the three months ended March 31, 1997 and for
the years ended December 31, 1996, 1995 and 1994 were as follows:

THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED MARCH 31, -------------------------------
1997 1996 1995 1994
----------------- --------- --------- ---------

(DOLLARS IN MILLIONS)
Retail:
SPDA..................................... $ .4 $ 8.6 $ 44.3(1) $ 50.5
FPDA..................................... 10.0 29.9 12.5(2) --
GRO...................................... 56.4 83.6 47.1 73.4
Face-amount certificates................. 1.7 8.0 10.7(3) --
Other.................................... .3 .5 .8 7.2
------ --------- --------- ---------
Total Retail............................... 68.8 130.6 115.4 131.1
Institutional:
GIC(4)................................... 248.6 747.5 142.2 --
------ --------- --------- ---------
Total spread-based sales................... $ 317.4 $ 878.1 $ 257.6 $ 131.1
------ --------- --------- ---------
------ --------- --------- ---------

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

(1) SPDA sales for the year ended December 31, 1995 include $6.2 million
attributable to the sale of SBM products following the SBM acquisition.

(2) FPDA sales for the year ended December 31, 1995 include $12.5 million
attributable to the sale of SBM products following the SBM acquisition.

(3) Attributable to the sale of SBM products following the SBM acquisition.

(4) The marketing partnership with General American was converted from a
fee-based to primarily a spread-based arrangement in late 1995 through a
reinsurance agreement with General American. General American cedes 50% of
new deposits to Integrity under the reinsurance agreement which the Company
recognizes in its spread-based line of business. The Company receives
nominal fee income for the 50% portion retained by General American (which
the Company recognizes as "other fee income"); accordingly, such deposits
are not included in fee-based sales.

Spread-based assets under management at March 31, 1997 and at December 31,
1996, 1995 and 1994 were as follows:

DECEMBER 31,
----------------------------------------------------------------------
MARCH 31, 1997 1996 1995 1994
---------------------- ---------------------- ---------------------- ----------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- ----------- --------- ----------- --------- ----------- --------- -----------

(DOLLARS IN MILLIONS)
Retail:
SPDA......................... $ 808.6 21.3% $ 838.2 23.7% $ 969.8(1) 33.9% $ 804.7 40.4%
FPDA......................... 398.8 10.5 409.5 11.6 436.2(1) 15.2 -- --
SPE.......................... 393.0 10.4 396.7 11.2 403.3 14.1 409.3 20.6
SPIA......................... 650.6 17.1 650.1 18.4 644.8 22.6 639.0 32.1
GRO.......................... 274.7 7.2 223.1 6.3 164.5 5.8 92.6 4.7
Face-amount certificates..... 49.5 1.3 50.2 1.4 52.5(1) 1.8 -- --
Other........................ 78.3 2.1 78.4 2.2 45.1 1.6 44.4 2.2
--------- ----- --------- ----- --------- ----- --------- -----
Total retail............... 2,653.5 69.9 2,646.2 74.8 2,716.2 95.0 1,990.0 100.0
Institutional:
GIC(2)....................... 1,141.3 30.1 891.9 25.2 143.2 5.0 -- --
--------- ----- --------- ----- --------- ----- --------- -----
Total spread-based assets
under management......... $ 3,794.8 100.0% $ 3,538.1 100.0% $ 2,859.4 100.0% $ 1,990.0 100.0%
--------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- -----

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

(1) Includes amounts acquired in 1995 in connection with the SBM acquisition of
$297.7 million (SPDA), $436.2 million (FPDA) and $52.5 million (face-amount
certificates).

(2) The marketing partnership agreement with General American was converted from
a fee-based to primarily a spread-based arrangement in late 1995 through a
reinsurance agreement with General American. See " -- Guaranteed Investment
Contracts."

SINGLE PREMIUM DEFERRED ANNUITY CONTRACTS. Single premium deferred annuity
contracts are sold through stockbrokers, independent broker-dealers and
financial institutions. Under these contracts, the issuing insurance company
guarantees the customer's principal and credits the accumulated deposit with a
rate of interest that is guaranteed for a specified initial period and reset
annually or semi-annually thereafter, subject to guaranteed minimum crediting
rates set forth in the contracts (currently 3% or 4%). The Company generally
determines the crediting rate by reference to current yields along the
intermediate term section of the yield curve. No front-end sales charges are
imposed for purchases of such contracts, but all such contracts contain
surrender charges for withdrawals in excess of a specified amount during the
surrender charge period. These surrender charges vary depending upon the
guarantee periods in the contracts.

FLEXIBLE PREMIUM DEFERRED ANNUITY CONTRACTS. Flexible premium deferred
annuity contracts are marketed primarily through independent agents. Under these
contracts, the issuing insurance company guarantees the customer's principal and
credits the accumulated deposit with a rate of interest that is guaranteed for a
specified initial period and reset annually thereafter. FPDA contract holders
can make additional contributions, subject to minimums, after the contract is
issued. The Company generally determines the crediting rate by reference to
current yields along the intermediate term section of the yield curve. Certain
FPDA contracts, which were acquired as a result of the SBM acquisition and which
are not currently marketed by the Company, are qualified under section 403(b) of
the Internal Revenue Code of 1986, as amended, and were sold to qualified
employers such as public school districts and churches. The Company developed a
new FPDA product, OMNI, in 1995, with sales commencing in February 1996. This
new product furnishes customers with the ability to allocate assets among equity
index-based returns and guaranteed rates of return. The index-based options
offer the upside potential tied to a percentage of the

appreciation in the S&P 500 Price Index, but protect the customer against the
related downside risk through a guarantee of principal by the issuing insurance
company. By hedging the equity-based risk component of the product through the
purchase of call options or other investment strategies, the Company is
separately able to concentrate on managing the interest rate spread component.

SINGLE PREMIUM ENDOWMENT CONTRACTS. While single premium endowment
contracts continue to represent a significant portion of the Company's insurance
subsidiaries' business in force, as a result of changes in applicable tax laws,
the Company is no longer selling this product. Under these contracts, principal
is guaranteed, and the face amount of the policy is paid upon the death of the
insured. The contracts are credited with a specified rate of interest that is
guaranteed for a period of time and then reset annually thereafter, subject to
guaranteed minimums and certain other restrictions. The Company generally
determines the crediting rate by reference to current yields along the
intermediate term section of the yield curve. Due to changes in applicable tax
laws, and the consequential loss of tax benefits associated with SPEs in the
event of a withdrawal, and because the interest rate on SPEs is reset annually
based on the intermediate term section of the yield curve, the Company believes
that the level of surrenders of SPEs associated with increases in interest rates
will be lower than would otherwise be the case.

SINGLE PREMIUM IMMEDIATE ANNUITY CONTRACTS. Single premium immediate
annuity contracts were historically marketed by the Company to insurance
companies and defendants in connection with lawsuits involving structured
liability settlements. As a result of changes in the marketing environment for
this product and the increased competition in pricing, the Company's insurance
subsidiaries are not currently focusing on this segment of the immediate annuity
marketplace. SPIA contracts provide guaranteed payments to contract holders and
are not subject to surrender. Pricing is determined by reference to the
long-term end of the yield curve.

GUARANTEED RATE OPTIONS. Guaranteed rate options provide a fixed-rate
investment alternative for holders of the Company's variable annuity contracts
and are also issued as a separate product by the Company's insurance
subsidiaries. GROs, which were first introduced by the Company's insurance
subsidiaries in 1994, allow customers to lock in a fixed return for three, five,
seven or ten years. There are no up-front or annual fees attached to these
options, but surrender charges apply to withdrawals in excess of a stated
maximum. Funds may be transferred to or from any of the guarantee periods (or
other investment options within the variable annuity contract) subject to a
market value adjustment ("MVA"). The MVA can be either positive or negative, but
the customer is guaranteed principal by the issuing insurance company plus a
return of 3%, before surrender charges. Transfers at the end of a guarantee
period are not subject to the MVA provision. The MVA provision is intended to
offset the gain or loss attributable to the impact of changes in interest rates
on the market value of assets that would be sold to fund surrenders occurring
prior to the end of the guarantee period. The Company currently uses an
immunized investment strategy designed to achieve a target return over the
selected time horizon despite interest rate volatility. Deposits into GROs are
held in a separate account established by the insurance company.

FACE-AMOUNT CERTIFICATES. Face-amount certificates are obligations of SBM
Certificate Company which require it to pay holders the original invested amount
of the certificate, plus a three-year fixed-rate return, at a given maturity
date. Holders are required to accept a reduced rate of interest it they withdraw
their investment prior to the maturity date. The Company selects the interest
rate offered on face-amount certificates based on the short to intermediate term
sections of the yield curve. Face-amount certificates, which are similar to bank
certificates of deposit, generally compete with various types of individual
savings products offered by banks and insurance companies that provide a fixed
rate of return on investors' money. Face-amount certificates are regulated under
the Investment Company Act and, unlike bank certificates of deposit of less than
$100,000, are not guaranteed by the FDIC. The Company continues to investigate
opportunities to expand upon its face-amount certificate retail distribution
channels.

GUARANTEED INVESTMENT CONTRACTS. Guaranteed investment contracts are issued
to institutional customers by the Company primarily through a marketing
partnership with General American, which began originally as a fee-based
arrangement in March 1993. The marketing partnership with General American
permits the Company to use its established distribution channel contacts to
market GICs in conjunction with the financial strength of General American's
higher claims-paying ability ratings. The Company markets General American
contracts which have been designed by the Company to meet customer needs. Since
September 1995, General American has ceded 50% of new deposits to Integrity
under a reinsurance agreement. The interest rate on GICs is typically based upon
a short-term floating rate, such as the London Interbank Offered Rate ("LIBOR"),
which periodically resets to provide current yields. GIC products offered by the
Company are designed and have historically been held by customers as long-term
core investments, even though under many contracts customers have the option to
liquidate their holdings with written notice of thirty days or less. The Company
has experienced withdrawals by GIC customers of less than 6% of average GIC
deposits during 1996 and 1995 and the first quarter of 1997. Such withdrawals
primarily consist of scheduled interest payments.

FEE-BASED BUSINESS

The Company's fee-based business is less capital intensive than the
spread-based business and generally provides the Company with a more diversified
source of income, due to the relative insensitivity of fee-based income to
changes in interest rates. However, significant decreases in price levels in the
securities market could adversely affect the level of fee income earned by the
Company from variable annuities and, thereby, the Company's results of
operations.

Fee-based products include investment portfolio options of variable annuity
contracts and services in connection with the Company's marketing arrangements
for GIC products. Sales for fee-based business represent premiums and deposits
for the investment portfolio options of variable annuity contracts and off-
balance sheet deposits under marketing partnerships. The marketing partnership
arrangement with General American was converted from a fee-based to primarily a
spread-based arrangement in late 1995 through a reinsurance agreement executed
with General American. General American cedes 50% of new deposits to Integrity
under the reinsurance agreement which the Company reports in its spread-based
line of business. The Company receives nominal fee income for the 50% portion
retained by General American, which the Company reports as "other fee income."
Fee-based sales for the three months ended March 31, 1997 and for the years
ended December 31, 1996, 1995 and 1994 were as follows:

THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED MARCH 31, -------------------------------
1997 1996 1995 1994
----------------- --------- --------- ---------

(DOLLARS IN MILLIONS)
Retail:
Investment portfolio options of variable annuities........ $ 36.3 $ 200.1 $ 177.7 $ 230.2
Other..................................................... -- -- -- .9
----- --------- --------- ---------
Total retail............................................ 36.3 200.1 177.7 231.1
Institutional:
Marketing partnerships(1)................................. --(2) --(2) 272.9 59.3
----- --------- --------- ---------
Total fee-based sales(3)................................ $ 36.3 $ 200.1 $ 450.6 $ 290.4
----- --------- --------- ---------
----- --------- --------- ---------

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

(1) Off-balance sheet item.

(2) The marketing partnership arrangement with General American was converted
from a fee-based to primarily a spread-based arrangement in late 1995
through a reinsurance agreement with General American.

(3) Does not include new deposits related to off-balance sheet assets managed by
ARM Capital Advisors for institutional clients and the State Bond Mutual
Funds. Total fee-based sales for the three months ended March 31, 1997 and
for the years ended December 31, 1996 and 1995 were $669.6 million, $1,866.1
million and $930.2 million, respectively, including such deposits.

Fee-based assets under management at March 31, 1997 and at December 31,
1996, 1995 and 1994 were as follows:

DECEMBER 31,
----------------------------------------------------------------------
MARCH 31, 1997 1996 1995 1994
---------------------- ---------------------- ---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ----------- --------- ----------- --------- ----------- --------- -----------

(DOLLARS IN MILLIONS)
Retail:
Investment portfolio options of
variable annuities............ $ 859.5 70.0% $ 844.3 69.7% $ 617.3 61.4% $ 388.9 76.3%
Institutional:
Marketing partnerships(1)....... 368.7 30.0 366.2 30.3 387.3 38.6 121.0 23.7
--------- ----- --------- ----- --------- ----- --------- -----
Total fee-based assets under
management(2)................... $ 1,228.2 100.0% $ 1,210.5 100.0% $ 1,004.6 100.0% $ 509.9 100.0%
--------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- -----

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

(1) Off-balance sheet item.

(2) Does not include off-balance sheet assets managed by ARM Capital Advisors
for institutional clients and the State Bond Mutual Funds. Total fee-based
assets under management at March 31, 1997, December 31, 1996 and 1995 were
$4,520.1 million, $3,937.9 million and $2,443.7 million, respectively,
including such assets.

VARIABLE ANNUITY CONTRACTS. Variable annuity contracts issued by the
Company's insurance subsidiaries are distributed through independent
broker-dealers, stockbrokers and financial institutions. Under variable annuity
contracts, customers may allocate all or a portion of their account values to a
separate account that invests in shares of one or more investment portfolios
(registered investment companies). Values in the separate account will vary with
the investment performance of the underlying investment portfolio. The Integrity
Companies receive income in the form of mortality and expense fees based
primarily on the market value of the invested deposits and of administrative
expense charges in connection with variable annuity contract deposits in
investment portfolios. The Company reinsures most of the mortality risk
associated with its variable annuity contracts. The Integrity Companies also
receive spread income from deposits allocated to the Company's GRO products.
Because the investment risk under the investment portfolio options of variable
annuity products is borne by the customer, these products are treated as
securities under federal securities laws and, therefore, the salespeople are
both appointed as insurance agents for the Company's insurance subsidiaries and
registered as securities representatives. In addition, the Company earns fee
income through a subsidiary that serves as an advisory manager and provides
supervisory and administrative services to the portfolios of the Legends Fund.
Shares of the Legends Fund are offered only to the separate accounts of
Integrity and National Integrity.

MARKETING PARTNERSHIP ARRANGEMENTS. The Company is currently party to a
marketing partnership arrangement with General American (with respect to GICs)
and, as part of such arrangement, the Company receives fees for certain
administrative, asset/liability, product development and marketing support
activities associated with GIC deposits that are recorded on General American's
balance sheet. In addition, the Company's fee-based marketing and product
development relationship with General American has led to opportunities for
spread-based business through reinsurance of the products involved, currently
GICs. Since September 1995, the Company's insurance subsidiaries have been
participants in reinsurance agreements with General American, assuming 50% of
certain GIC business on a coinsurance basis. The Company may enter into
marketing partnership arrangements with other unaffiliated insurance companies
in the future.

DISTRIBUTION

RETAIL DISTRIBUTION

The Company's retail distribution strategy is focused on diversifying sales
of its products across various distribution channels, reducing its reliance on
any one third-party marketing organization and providing superior services to
its producers and customers. Currently, the Company's fixed, variable and
equity-indexed annuities are sold through the stockbroker, independent agent,
independent broker-dealer and financial institution channels. In addition,
registered representatives affiliated with ARM Securities sell the Company's
face-amount certificates and independent third-party mutual funds.

During 1996, the Company began the process of working with its distribution
channels to enhance its existing products and develop new products that are
customized to meet the needs of customers in each channel. The Company has
initiated a streamlined product development process designed to enable the
Company to respond quickly to changes in the marketplace and reduce the time
required to introduce new or enhanced products. By working with distribution
channels in this manner, the Company was one of the first to recognize the
market opportunity for equity-indexed annuities and introduced OMNI, the
Company's equity-indexed annuity product in mid-1996. Based on these initial
marketing efforts, the Company is currently developing a second generation of
equity-indexed products that will provide enhanced benefits to customers in the
independent agent channel and will be more appealing to other distribution
channels. The Company's 1997 product development efforts will also include the
addition of new investment options to GRANDMASTER and PINNACLE, the Company's
variable annuity products, and the introduction of a new product customized for
the financial institution channel.

In addition to diversifying sales across distribution channels, the Company
is focused on reducing its reliance on any one third-party marketing
organization. During 1996, this effort involved the development of an in-house
wholesaling unit, a function that in 1995 was performed by an outside marketing
organization. This unit works in the stockbroker and independent agent channels
and is responsible for generating sales from existing producers, recruiting and
developing new producers and promoting the features and benefits of the
Company's products through seminars and one-on-one meetings with producers. As a
result of these efforts, sales in the stockbroker channel increased to 22.2% of
total sales for the three months ended March 31, 1997 from 21.2% and 16.8% for
the years ended December 31, 1996 and 1995, respectively, and sales in the
independent agent channel increased to 34.1% of total sales for the three months
ended March 31, 1997 from 18.3% and 7.5% for the years ended December 31, 1996
and 1995, respectively.

To strengthen relationships with existing producers and assist the
wholesaling unit in recruiting new producers, the Company has significantly
expanded its in-house capability to provide service to producers and to promote
the Company's products and services. Company representatives directly servicing
producers have immediate system response capabilities for virtually any service
request through the Company's PC-based client/server system. Service requests
can also be turned into sales opportunities by keeping producers informed of new
product features and current rate and performance information. In addition,
through this servicing group, the Company works with producers and customers to
retain existing business. As a result of a program implemented in 1994 to
improve persistency, the Company was able to retain $21.0 million and $42.0
million in retail annuity business during 1996 and 1995, respectively, from
customers who had initiated requests to surrender their policies and were
provided with additional choices and incentives to keep their deposits with the
Company.

By diversifying distribution channels, the Company can reduce the impact of
losing any one channel. The Company seeks to expand the depth and breadth of
existing channels to capture additional market share without relying on the
capabilities and influence of a small number of producers.

Retail sales by market and distribution channel for the three months ended
March 31, 1997 and for the years ended December 31, 1996 and 1995 were as
follows:

THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------------------

1997 1996 1995
---------------------- ---------------------- ----------------------

PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- ----------- --------- ----------- --------- -----------
(DOLLARS IN MILLIONS)

Distribution channel:
Independent broker-dealers..................... $ 43.6 41.5% $ 199.0 60.2% $ 212.6 72.5%
Stockbrokers................................... 23.3 22.2 70.2 21.2 49.3 16.8
Financial institutions......................... 2.3 2.2 .9 .3 9.1 3.2
Independent agents............................. 35.9 34.1 60.6 18.3 22.1 7.5
--------- ----- --------- ----- --------- -----
Total sales*................................. $ 105.1 100.0% $ 330.7 100.0% $ 293.1 100.0%
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----

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

* Does not include new deposits related to off-balance sheet assets managed by
ARM Capital Advisors for the State Bond Mutual Funds. Total retail sales for
the three months ended March 31, 1997 and for the years ended December 31,
1996 and 1995 were $105.1 million, $342.7 million and $300.9 million,
respectively, including such deposits.

INSTITUTIONAL DISTRIBUTION

In the institutional market, a significant level of assets can be brought
under management with relatively minimal overhead or marketing expenses. A small
team of in-house marketing professionals is able to market and sell the
Company's products. The Company's products are distributed directly to defined
contribution plans, bank trust departments, investment managers, consultants,
corporate treasurers, cash management funds, endowments and foundations, and
other insurance companies. With products where the Company's financial strength
ratings constrain its ability to underwrite products directly, the Company
structures arrangements with highly rated and respected partners, in essence, to
raise the level of credit strength backing the performance guarantees.

Institutional sales by in-house marketing professionals for the three months
ended March 31, 1997 and for the years ended December 31, 1996 and 1995 were
$248.6 million, $747.5 million and $415.1 million, respectively. These sales do
not include deposits related to off-balance sheet assets managed by ARM Capital
Advisors for institutional clients. Institutional sales including such deposits
for the three months ended March 31, 1997 and for the years ended December 31,
1996 and 1995 were $881.9 million, $2,401.5 million and $886.9 million,
respectively.

ASSET/LIABILITY SPREAD MANAGEMENT

The Company views asset/liability spread management as an integrated
process, rather than as a series of segregated functions, and integrates this
process into each aspect of its operations. The Company's overall goal is to
ensure that invested asset cash flows will be sufficient to meet all customer
obligations and to maximize investment spreads on a consistent basis. Beginning
with product design and continuing through the product sale and eventual payout,
professionals in each functional area (such as marketing, actuarial,
investments, legal, finance and administration) work jointly with a common set
of risk/return characteristics toward the goal of achieving the Company's
liquidity and profit objectives (rather than the

specific objectives of any particular functional area). The Company also
conducts periodic thorough analyses of its assets and liabilities using
sophisticated software to model the effect of changes in economic conditions on
both its assets and liabilities.

During product development, the Company sets product features and rate
crediting strategies only after it has devised an appropriate investment
strategy that matches the features of the product. The Company employs an
extensive, iterative modeling process to test various asset combinations against
proposed product features over sets of randomly generated interest rate
scenarios. The modeling evaluates whether a particular investment strategy, when
matched with the product features under consideration, will provide adequate
cash flow and generate returns that exceed specified minimum targets
consistently and without significant fluctuations. If necessary, the Company
redesigns investment strategies or product features until these objectives are
met.

The Company utilizes a few key strategies in managing its spread-based
products. One example is an immunization strategy currently used for the
Company's GRO products, in which a portfolio of assets is constructed and
managed to seek a predictable return over a pre-established time horizon. The
Company engineers and packages these products so that it is able to deliver
products to suit the needs of different types of customers in both the retail
and institutional marketplaces. This approach also allows the Company to
leverage its resources and expertise.

Once the Company has identified an asset portfolio having the desired
performance characteristics, the Company's investment managers have the
flexibility to trade the portfolio in order to maximize yields while remaining
within well defined risk parameters (such as duration, convexity, credit quality
and liquidity). In so doing, these professionals follow prescribed measures
designed to (i) minimize anticipated defaults, (ii) minimize anticipated call,
prepayment or extension losses and (iii) enhance yield through sector rotation
and security selection. In addition, the Company aims to generate and maintain
liquidity from scheduled interest and principal payments, projected prepayments
and early calls, cash on hand, floating rate securities and lines of credit (but
not from new product sales), sufficient to presently cover approximately two
times expected cash needs (for benefits, withdrawals, expenses and dividends)
without having to sell any investments at a material loss.

Internal control measures are in place throughout the process to make any
necessary adjustments in the investment portfolio as promptly as possible. For
example, company personnel assess, independently of portfolio managers, whether
trades would alter portfolio characteristics and how investment yields or
realized gains or losses would be accounted for under statutory accounting
practices and generally accepted accounting principles. The Company also
remodels its assets and liabilities periodically to determine whether any
significant changes in assumptions or interest rates have occurred or have been
overlooked.

In pursuing its investment spread objectives, the Company focuses primarily
on cash flows to expected maturities on its investments, which are quantifiable
and measurable, rather than on estimated total returns to expected maturities or
to some intermediate date. This approach permits the Company to measure
specifically the changes in yield and cash flow on its investments at any given
time. This approach emphasizes securities which are liquid and easily tradeable.
For certain investments, such as common equities, real estate investments and
direct mortgages, the fair market value may be relatively difficult to determine
or predict, thereby further increasing the difficulty of calculating total
return. As a result, the Company invests primarily in fixed-income securities,
which can be more easily modeled and hedged.

The Company's array of spread-based deposits, with crediting rates pegged to
various points on the interest rate yield curve, also supports the Company's
approach to asset/liability management. The liability structures, in combination
with asset structures, generally are aimed at providing balance in the portfolio
as interest rates fluctuate. As a result, the Company believes it is better
positioned to achieve stable margins. In addition, the Company believes that
this diversity gives it flexibility to respond to changing market conditions and
to take advantage of investment opportunities.

SURRENDERS

To encourage persistency and discourage withdrawals, the Company's spread-
and fee-based insurance products generally incorporate surrender charges, market
value adjustments and/or other features which may discourage or prevent such
surrenders or withdrawals for a specified number of years. As of December 31,
1996, the Company had approximately $1.7 billion of customer deposits (39% of
total customer deposits) which were no longer subject to surrender charges or
other restrictions on withdrawal. During 1997, surrender charges will no longer
apply to an additional $153.8 million of customer deposits which were in force
as of December 31, 1996. During the third quarter of 1994 and continuing to
date, the Company began implementing programs designed to improve persistency.
Such programs involve direct contact with customers and are designed to inform
customers of the financial strength of the Company and its insurance
subsidiaries and to describe other product offerings available.

REINSURANCE CEDED

The Company's insurance subsidiaries reinsure risks under certain of their
products with other insurance companies through reinsurance agreements. Through
these reinsurance agreements, substantially all mortality risks associated with
SPE and variable annuity deposits, and substantially all risks associated with
the variable life business have been reinsured. The Company's primary reinsurers
in respect of mortality risks associated with SPE deposits are Swiss Reinsurance
Company, RGA Reinsurance Company and The Equitable Life Assurance Society, which
are respectively rated A+, A+ and A by A.M. Best. Connecticut General Life
Insurance Company is the Company's principal reinsurer of the mortality risks
associated with variable annuity deposits and is rated A+ by A.M. Best. Phoenix
Home Life Mutual and American Franklin Life are the Company's principal
reinsurers in respect of risks associated with the variable life business and
are respectively rated A and A++ by A.M. Best. In addition, Integrity cedes a
block of SBM Life SPDAs on a coinsurance basis to Harbourton Reassurance, Inc.,
and in accordance with the treaty all assets supporting the liabilities are held
in trust. Reinsurance does not fully discharge the Company's obligation to pay
policy claims on the reinsured business; the Company remains responsible for
policy claims to the extent the reinsurer fails to pay such claims.

RATINGS AND RATING AGENCIES

Insurance companies are rated by independent rating agencies to provide both
industry participants and insurance consumers meaningful information on specific
insurance companies. Higher ratings generally indicate a higher relative level
of financial stability and a stronger ability to pay claims. The basis for an
opinion on a particular rating includes such factors as capital resources,
financial strength, demonstrated management expertise and stability of cash flow
as well as the quality of investment operations, administration and marketing.
These particular types of ratings are based upon factors relevant to
policyholders and are not directed toward protection of stockholders. Such
ratings are neither a rating of securities nor a recommendation to buy, hold or
sell any security. The Company's insurance subsidiaries currently hold ratings
from four such rating agencies: A.M. Best, S&P, Duff & Phelps and Moody's
Investors Service ("Moody's").

The Company's insurance subsidiaries are currently classified "A
(Excellent)" by A.M. Best, reflecting an upgrade from A- in October 1995. A.M.
Best's ratings are based upon an evaluation of the insurer's financial and
operating performance. A.M. Best's ratings range from "A++ (Superior)" to "F (in
liquidation)," and some companies are not rated.

The Company's insurance subsidiaries currently hold an "A (Good)"
claims-paying ability rating from S&P. This rating is based on current
information provided by the Company and other reliable sources on a voluntary
basis. The S&P claims-paying ability rating categories range from "AAA
(Superior)" to "D (Liquidation)."

In addition, the Company's insurance subsidiaries currently hold an "A-1"
short-term rating from S&P. The short-term rating is used for any obligation
whose maturity is typically one year or less or would apply to a put option or
demand feature which would give the policyholder the right to receive their
funds within one year. The S&P short-term rating categories range from "A-1+" to
"D."

Duff & Phelps provides claims-paying ability ratings which concern only the
likelihood of timely payment of policyholder obligations, and not the ability to
pay non-policyholder obligations. The Company's insurance subsidiaries currently
have a claims-paying ability rating from Duff & Phelps of "A+ (High)" and a
short-term claims paying ability of "D-1." Duff & Phelps claims-paying ability
ratings range from "AAA" to "DD" and short-term claims paying ability ratings
range from "D-1+" to "D-5".

Moody's has currently assigned the Company's insurance subsidiaries a "Baa1
(Adequate)" insurance financial strength rating. Moody's financial strength
rating reflects an insurance company's ability to pay policyholder obligations
and claims. Moody's ratings range from "Aaa (Exceptional)" to "C (Lowest)," and
some companies are not rated.

Customers and many financial institutions and broker-dealers tend to focus
on the A.M. Best ratings of an insurer in determining whether to buy or market
the insurer's annuities. If any of the Company's ratings were downgraded from
their current levels or if the ratings of the Company's competitors improved and
the Company's did not, the ability of the Company to distribute its products and
the persistency of its existing business could be adversely affected. Each of
the rating agencies reviews its ratings periodically, and there can be no
assurance that the Company's current ratings will be maintained in the future.

PRODUCER AND CUSTOMER SERVICE, TECHNOLOGY AND ADMINISTRATION

The Company seeks to build a strong customer base by offering high quality
and easily accessible service. To this end, the Company's objective is to
maintain an administrative infrastructure utilizing up-to-date technology,
efficient and effective work flow processes and well-trained personnel. This
infrastructure helps to bring new products to market quickly, enhance product
features and provide timely, accurate information to producers, customers and
management.

Sharing information across the organization supports the integrated nature
of the Company's business operations. Management believes that a PC-based
client/server data processing platform provides users with direct access to
information on a more efficient basis than a mainframe system. A WAN links all
voice and data communications in the Company's principal locations of Kentucky,
Ohio, New York and, following the SBM acquisition, Minnesota. With proper
security clearances, employees may access data bases on file servers at any
location. In addition, the Company has expanded automated interfaces between
systems to help minimize the potential for error from manual intervention,
reduce costs and strengthen internal controls. Some of these servers are owned
and operated directly by the Company. Other servers and some mainframe systems
are operated by external entities with whom the Company contracts to perform
certain investment and administrative related functions. In 1997, the Company's
main processing center in Worthington, Ohio is being moved to and consolidated
with the corporate headquarters in Louisville in order to improve the
effectiveness of service delivery. The Company is planning to outsource certain
systems or administrative functions in which the Company does not possess
critical mass at this time.

In addition to expanding its WAN during 1996, the Company completed a
restructuring of its organizational and work flow management processes with the
objective of creating additional operating efficiencies. The Company has
implemented an image management and automated workflow management system in
order to significantly reduce the amount of paper and manual work that is
required to process transactions and to perform customer service. Software
development efforts and systems migration projects are intended to eliminate
computer processing redundancies in some lines of business and enhance the
Company's capability to bring increasingly complex and competitive products and
services to market. Producer customer service capabilities have expanded with
the Company's introduction in 1996 of

an automated voice response system for a majority of its retail customers. These
customers now have twenty-four hour access to account and unit values of their
annuities. This alternative supplements producers and customers speaking
directly with the Company's representatives or sending service requests through
traditional mail services or the Internet.

A significantly expanded Producer Services unit is dedicated to supporting
producers and promoting Company products and services to them. Through "one-stop
shopping," producers have direct telecommunications access to these
representatives. These representatives have immediate system response
capabilities for virtually any service request through the Company's PC-based
client/server system. Service requests can also be turned into sales
opportunities by keeping producers informed on new product features or current
rate and performance information.

Technology also allows the Company's producers and customers to be more
closely linked to the Company. The Company has developed and is in the process
of implementing technology which will expand its existing on-line Internet
services and provide new services to its producers and customers. For example,
through either the Internet or direct high speed phone lines, the Company can
equip bank representatives with the ability to offer the issuance of annuities
instantaneously in their branch offices. In addition, the Company's producers
and customers will have similar access to certain service features and inquiry
functions such as daily account values, investment transfers, policy forms and
sales literature.

The Company's Producer Services unit, through direct customer contact, has
also achieved measurable success with the retention of business. As a result of
a program implemented in 1994 to improve persistency, the Company was able to
retain $21.0 million and $42.0 million in annuity business during 1996 and 1995,
respectively, from customers who had initiated requests to surrender their
policies. These customers were provided with additional choices and incentives
to keep their deposits with the Company. This same unit proactively communicates
with annuity customers to advise them of the insurance subsidiaries' financial
strength and recent activities.

The Company maintains current plans to recover its systems and operations
promptly in the event of a disaster. For critical WAN applications, redundant
servers with backed-up data are in place in New York City and Louisville,
Kentucky, the Company's primary operating sites. Key functions are intended to
be available within a matter of a few hours. The Company intends to develop
revised disaster recovery plans with the anticipated move of operations to
Louisville to provide a similar level of recovery. For recovery of computer
systems accessed through external parties, these vendors provide their own
disaster recovery plans. Offsite storage of magnetic media ensures that data
processing systems and the imaging system can be restored in the event of a
disaster.

COMPETITION

The financial services industry is highly competitive, and each of the
Company's subsidiaries competes with companies that are significantly larger and
have greater access to financial and other resources.

The life insurance industry comprises approximately 1,800 companies in the
United States and is highly competitive, with no one company dominating any of
the principal markets in which the Company's insurance subsidiaries operate.
Many insurance companies and insurance holding companies have substantially
greater capital and surplus, larger and more diversified portfolios of life
insurance policies and annuities, higher ratings and greater access to
distribution channels than the Company's insurance subsidiaries. Competition is
based upon many factors, such as the form and content of annuity policies,
premiums charged, investment return, customer service, access to distribution
channels, financial strength and ratings of the company, experience and
reputation. The Company's insurance subsidiaries also encounter increasing
competition from banks, securities brokerage firms, mutual funds and other
financial intermediaries marketing insurance products, annuities and other forms
of savings and pension products.

On January 18, 1995, the United States Supreme Court held in NationsBank of
North Carolina v. Variable Annuity Life Insurance Company that annuities are not
insurance for purposes of the National Bank Act. In addition, the Supreme Court
also held on March 26, 1996 in Barnett Bank of Marion County v. Nelson that
state laws prohibiting national banks from selling insurance in small town
locations are preempted by federal law. The Office of the Comptroller of the
Currency also adopted a ruling in November 1996 that permits national banks,
under certain circumstances, to expand into other financial services, thereby
increasing potential competition for the Company. At present, the extent to
which banks can sell insurance and annuities without regulation by state
insurance departments is being litigated in various courts in the United States.
Although the effect of these recent developments on the Company and its
competitors is uncertain, the Company may encounter increased competition from
banks in the future. The Company believes that the fact that it is not hampered
with a large captive sales force like many insurance companies is an advantage
in enabling the Company to create strategic alliances with banks and other
financial institutions.

The principal competitive factors in the sale of annuity products are
product features, perceived stability of the insurer, customer service, name
recognition, crediting rates, and commissions. The Company's insurance
subsidiaries compete in their markets with numerous major national life
insurance companies. Management believes that its ability to compete with other
insurance companies is dependent upon its ability to develop competitive
products with unique features and services that focus on the needs of targeted
market segments and to build market share.

REGULATION

The Company's business activities are subject to extensive regulation. Set
forth below is a summary discussion of the principal regulatory requirements
applicable to the Company.

INSURANCE REGULATION

The Company's insurance subsidiaries are subject to regulation and
supervision by the states in which they are organized and in the other
jurisdictions where they are authorized to transact business. State insurance
laws establish supervisory agencies with broad administrative and supervisory
powers including granting and revoking licenses to transact business, regulation
of marketing and other trade practices, operating guaranty associations,
licensing agents, approving policy forms, regulating certain premium rates,
regulating insurance holding company systems, establishing reserve requirements,
prescribing the form and content of required financial statements and reports,
performing financial and other examinations, determining the reasonableness and
adequacy of statutory capital and surplus, regulating the type and amount of
investments permitted, limiting the amount of dividends that can be paid without
first obtaining regulatory approval, and other related matters. The primary
purpose of such supervision and regulation under the insurance statutes of Ohio
and New York, as well as other jurisdictions, is the protection of policyholders
rather than investors or shareholders of an insurer. State insurance departments
also conduct periodic examinations of the affairs of insurance companies and
require the filing of annual and other reports relating to the financial
condition of insurance companies.

In recent years, the insurance regulatory framework has been placed under
increased scrutiny by various states, the federal government and the NAIC.
Various states have considered or enacted legislation that changes, and in many
cases increases, the states' authority to regulate insurance companies. Over the
past few years, the NAIC has approved and recommended to the states for adoption
and implementation several regulatory initiatives designed to reduce the risk of
insurance company insolvencies. These initiatives include new investment reserve
requirements, risk-based capital standards and restrictions on an insurance
company's ability to pay dividends to its stockholders. Specifically, the NAIC
"Codification of Statutory Accounting Principles" project may revamp the current
statutory accounting practices for the Company's insurance subsidiaries. Certain
proposals under consideration may have a negative impact on the statutory
surplus of the Company's insurance subsidiaries and thus their ability to pay
dividends to the

Company. Issue papers have been released for industry review and a first draft
of the accounting practices manual is expected to be issued by the NAIC in 1997.
This project will not undermine the states' authority to make a final
determination on acceptable and appropriate accounting practices as the NAIC
proposals are subject to implementation only upon legislative enactment by the
applicable state legislature. The Company is monitoring developments in the
regulatory area and assessing the potential effects any changes would have on
the Company.

Although the federal government currently does not directly regulate the
business of insurance generally, federal initiatives can significantly affect
the insurance business. Legislation has been introduced from time to time in
Congress that could result in the federal government assuming a role in the
regulation of insurance companies. Congress and certain federal agencies are
investigating the current condition of the insurance industry in the United
States in order to decide whether some form of federal regulation of insurance
companies would be appropriate. It is not possible to predict the outcome of any
such congressional activity, which could result in the federal government
assuming some role in the regulation of the insurance industry, or the potential
effects thereof on the Company.

INSURANCE HOLDING COMPANY REGULATION. The Company and its affiliates are
subject to regulation under the insurance holding company statutes of Ohio, the
domiciliary state of Integrity, and of New York, the domiciliary state of
National Integrity, and under the insurance statutes of other states in which
the Integrity Companies are licensed to transact the business of insurance. Most
states have enacted legislation which regulates insurance holding company
systems, including acquisitions, extraordinary dividends, the terms of affiliate
transactions and other related matters. The Integrity Companies are required to
file certain reports in Ohio, New York and certain other states, including
information concerning their capital structure, ownership, financial condition
and general business operations. The Ohio and New York insurance laws also
require prior notice or approval of changes in control of an insurer or its
holding companies and of material intercorporate transfers of assets and
material agreements between an insurer and affiliates within the holding company
structure. Under the Ohio and New York insurance laws, any person, corporation
or other entity which seeks to acquire, directly or indirectly, 10% or more of
the voting securities of an Ohio or New York insurance company or any of its
parent companies is presumed to acquire "control" of such insurance company and
must obtain the prior approval of the Ohio Insurance Director and New York
Insurance Superintendent, respectively. Prior to acquiring such control, the
proposed acquirer must either file an application containing certain information
including, but not limited to, the identity and background of the acquirer and
its affiliates and the source and amount of funds to be used to effect the
acquisition, or obtain an exemption from the approval requirement.

In the event of a default on the Company's debt or the insolvency,
liquidation or other reorganization of the Company, the creditors and
stockholders of the Company will have no right to proceed against the assets of
Integrity or National Integrity or to cause their liquidation under federal or
state bankruptcy laws. Insurance companies are not subject to such bankruptcy
laws but are, instead, governed by state insurance laws relating to liquidation
or rehabilitation due to insolvency or impaired financial condition. Therefore,
if Integrity or National Integrity were to be liquidated or be the subject of
rehabilitation proceedings, such liquidation or rehabilitation proceedings would
be conducted by the Ohio Insurance Director and the New York Insurance
Superintendent, respectively, as the receiver with respect to all of Integrity's
or National Integrity's assets and business. Under the Ohio and New York
insurance laws, all creditors of Integrity or National Integrity, including
policyholders, would be entitled to payment in full from such assets before the
Company or Integrity Holdings, Inc., as indirect or direct stockholders, would
be entitled to receive any distribution therefrom.

DIVIDEND RESTRICTIONS. The Company's ability to declare and pay dividends
will be affected by Ohio and New York laws regulating the ability of National
Integrity to pay dividends to Integrity and the ability of Integrity to pay
dividends to the Company.

Under Ohio law, an Ohio domestic life insurance company may not make,
without the prior approval of the Ohio Insurance Director, dividend payments in
excess of the greater of (i) 10% of such insurance company's statutory capital
and surplus as of the preceding December 31 and, (ii) such insurance company's
statutory net income for the preceding year. Under New York insurance law,
National Integrity may pay dividends to Integrity only out of its earnings and
surplus and may not distribute any dividends without at least 30 days' prior
written notice to the New York Insurance Superintendent, who may disapprove a
proposed dividend upon a determination that National Integrity's financial
condition does not warrant such distribution. Because National Integrity is a
subsidiary of Integrity, dividend payments made by National Integrity to
Integrity must be made in compliance with New York standards, and the ability of
Integrity to pass those dividends on to the Company is subject to compliance
with Ohio standards.

The maximum dividend payments that Integrity could have made to the Company
during 1996 were $17.6 million; dividends in the amount of $16.0 million were
paid during 1996. For 1997, the maximum dividend payments that may be paid by
Integrity to the Company without prior regulatory approval are $26.0 million, of
which $7.0 million was paid in the first quarter.

MANDATORY INVESTMENT RESERVE. Under NAIC rules, life insurance companies
must maintain an asset valuation reserve ("AVR"), supplemented by an interest
maintenance reserve ("IMR"). These reserves are recorded for purposes of
statutory accounting practices; they are not recorded under the provisions of
GAAP and therefore have no impact on the Company's reported results of
operations or financial position. These reserves affect the determination of
statutory surplus, and changes in such reserves may impact the ability of the
Integrity Companies to pay dividends or other distributions to the Company. The
extent of the impact of the AVR will depend upon the future composition of the
investment portfolio of the Integrity Companies. The extent of the impact of the
IMR will depend upon the extent of the gains and losses of the Integrity
Companies' investment portfolio and the related amortization thereof. Based on
the current investment portfolio of the Company's insurance subsidiaries, the
Company does not anticipate that expected provisions for the AVR and IMR will
materially adversely affect the ability of the Integrity Companies to pay
dividends or other distributions to the Company.

RISK-BASED CAPITAL REQUIREMENTS. The NAIC Risk-Based Capital ("RBC")
requirements evaluate the adequacy of a life insurance company's adjusted
statutory capital and surplus in relation to investment, insurance and other
business risks. The RBC formula is used by the states as an early warning tool
to identify potential weakly capitalized companies for the purpose of initiating
regulatory action and is not designed to be a basis for ranking the financial
strength of insurance companies. In addition, the formula defines a minimum
capital standard which supplements the previous system of low fixed minimum
capital and surplus requirements. The RBC requirements provide for four
different levels of regulatory attention depending on the ratio of a company's
adjusted capital and surplus to its RBC.

The consolidated statutory-basis capital and surplus of the Company's life
insurance subsidiaries totaled $163.8 million and $146.0 million at December 31,
1996 and 1995, respectively, and were substantially in excess of the minimum
level of RBC that would require regulatory action. In addition, the consolidated
statutory-basis AVRs of the Company's insurance subsidiaries totaled $15.6
million and $14.4 million at December 31, 1996 and 1995, respectively (excluding
voluntary reserves of $12.5 million and $5.0 million at December 31, 1996 and
1995, respectively). AVRs are generally added to statutory capital and surplus
for purposes of assessing capital adequacy against various measures used by
rating agencies and regulators.

GUARANTY FUND ASSESSMENTS. Under the insurance guaranty fund laws existing
in each state, insurers licensed to do business in the state can be assessed for
certain obligations of insolvent insurance companies to policyholders and
claimants. In connection with the acquisition by the Company of the Integrity
Companies from National Mutual, National Mutual agreed to indemnify the Company
for guaranty fund assessments levied in respect of companies declared insolvent
or subject to conservatorship prior to

November 26, 1993. The amounts actually assessed to and paid by the Company's
insurance subsidiaries for the years ended December 31, 1996, 1995 and 1994 were
approximately $1.5 million, $1.1 million and $.7 million, respectively. Of such
amounts, approximately $.5 million, $.4 million and $.7 million, respectively,
were reimbursed by National Mutual under its indemnity obligation to the
Company. Because such assessments are typically not made for several years after
an insurer fails and depend upon the final outcome of liquidation or
rehabilitation proceedings, the Company cannot accurately determine the precise
amount or timing of its exposure to known insurance company insolvencies at this
time. During 1996, 1995 and 1994, the Company recorded provisions for future
state guaranty fund association assessments of $1.6 million, $.3 million and $.4
million, respectively. At December 31, 1996, the Company's reserve for such
assessments was $6.6 million. No assurance can be given that the Company's
reserve for assessments or such indemnity will be adequate in the event of any
loss suffered by the Company in respect of any assessment made under state
insurance guaranty fund laws. The reserve does not include any provision for
future assessments related to unknown failures or to known failures for which no
estimate of the Company's exposure currently can be made. The Company estimates
its reserve for assessments using information provided by the NOLHGA. The
insolvency of large life insurance companies in future years could result in
additional material assessments to the Company by state guaranty funds that
could have a material adverse impact on the Company's future earnings and
liquidity.

TRIENNIAL EXAMINATIONS. The Ohio and New York insurance departments usually
conduct an examination of Integrity and National Integrity, respectively, every
three years, and may do so at such other times as are deemed advisable by the
Ohio Insurance Director and New York Insurance Superintendent. The report with
respect to the most recent triennial examination of Integrity issued in 1997
covered the periods 1993 through 1995 and contained no material adverse
findings. The report with respect to the most recent triennial examination of
National Integrity issued in 1994 covered the periods 1990 through 1992 and also
contained no material adverse findings. National Integrity is currently
undergoing a triennial examination by the New York insurance department.

INSURANCE REGULATORY INFORMATION SYSTEM. The NAIC has developed a set of
financial relationships or "tests" called the Insurance Regulatory Information
System ("IRIS") that were designed for early identification of companies that
may require special attention by insurance regulatory authorities. These tests
were developed primarily to assist state insurance departments in executing
their statutory mandate to oversee the financial condition of insurance
companies. Insurance companies submit data on an annual basis to the NAIC, which
in turn analyzes the data using ratios covering twelve categories of financial
data with defined "usual ranges" for each category.

Falling outside the usual range of IRIS ratios is not considered a failing
result; rather, unusual values are viewed as a part of the regulatory early
warning monitoring system. Furthermore, in some years, it may not be unusual for
financially sound companies to have several ratios with results outside the
usual ranges. An insurance company may fall outside of the usual range for one
or more ratios because of specific transactions that are in themselves
immaterial or eliminated at the consolidated level. Generally, an insurance
company will become subject to increased regulatory scrutiny if it falls outside
the usual ranges of four or more of the ratios. In normal years, 15% of the
companies included in the IRIS system are expected by the NAIC to be outside the
usual range on four or more ratios.

In 1996, four IRIS ratios for Integrity and two IRIS ratios for National
Integrity fell outside the usual range due to normal business operations which
included the sale of a substantial volume of GICs. For Integrity, the adequacy
of investment income ratio was 125%, as compared to a usual range of between
900% and 125%. This ratio was below the usual range due to the substantial
growth of Integrity's GIC deposit liabilities from $25.4 million at December 31,
1995 to $891.9 million at December 31, 1996. Investments supporting GIC deposits
generated investment income of $28.6 million during 1996 while interest credited
on GIC deposits was $25.1 million, representing an adequacy of investment income
ratio of 114%. Excluding the GIC line of business, the ratio was 128%, which
falls within the usual range. The Company considers the 114% adequacy of
investment income ratio for GIC business to be reasonable due

to the shorter duration of this product and of the investments supporting it. In
addition, the ratio excludes amortization of the interest maintenance reserve.
If 1996 amortization of $3.1 million were included in the calculation, the ratio
would have been 128%. Integrity's change in premium ratio was 215%, as compared
to the usual range of between +50% and -10%. This ratio was above the usual
range due to an increase in GIC premiums from $25.0 million in 1995 to $507.9
million in 1996 attributable to the assumption of $507.9 million in GIC premiums
through a 50% coinsurance reinsurance agreement that commenced April 1, 1996.
Excluding GIC premiums, the ratio would be 10%. The core of Integrity's business
is developing and managing spread-based investment products, which include GICs.
Integrity intends to acquire additional GIC deposits through reinsurance and
through direct sales. Integrity's change in product mix ratio was 12.4%, as
compared to the usual range of 5% or less. This ratio was above the usual range
due also to the increase in GIC premiums. Excluding GIC premiums, the ratio
would be .8%. Finally, Integrity's change in reserving ratio was 342% as
compared to the usual range of between +20% and -20%. This ratio measures the
difference in reserves as a percentage of premiums from one year to the next for
business classified as life insurance for statutory accounting and reporting
purposes. This ratio is not meaningful as it applies to Integrity because
Integrity primarily writes fixed, indexed and variable annuity products rather
than life insurance, and due to its mix of life insurance reserves and premiums.
Over 95% of Integrity's life insurance reserves are a closed block of SPE
contracts which have reserve changes from year to year, but generate no
premiums. Integrity's life insurance premiums ($1.1 million in 1996) are
primarily generated from variable life business which is assumed through a
modified coinsurance reinsurance treaty. This treaty generates premium flow but
no reserve adjustments. Thus for Integrity, the ratio, in essence, compares SPE
reserve changes to variable life premiums.

For National Integrity, the change in product mix ratio was 5.2%, as
compared to the usual range of 5% or less. This ratio was slightly above the
usual range due to the increase in sales of GICs during 1996. National
Integrity's change in reserving ratio was 999% as compared to the usual range of
between +20% and -20%. This ratio is not meaningful as it applies to National
Integrity because National Integrity primarily writes fixed and variable annuity
products rather than life insurance, and due to its mix of life insurance
reserves and premiums.

OTHER REGULATION

The Company's non-insurance activities are also subject to extensive
regulation. ARM Capital Advisors is registered with the SEC as an investment
adviser under the Advisers Act and is subject to regulation and examination
under ERISA by the U.S. Department of Labor and under the Advisers Act by the
SEC. In addition, variable annuities and the related separate accounts of the
Company's insurance subsidiaries are subject to regulation by the SEC under the
Securities Act and the Investment Company Act.

The Company's broker-dealer subsidiary, ARM Securities, is registered with
the SEC under the Exchange Act and is subject to regulation by the SEC. ARM
Securities is also subject to regulation, supervision and examination by the
states in which it transacts business, as well as by the NASD. The NASD has
broad administrative and supervisory powers relative to all aspects of ARM
Securities' business and may examine its business and accounts at any time.

SBM Certificate Company is subject to regulation and supervision by federal
and state regulators. The Investment Company Act and rules issued by the SEC
thereunder specify certain terms applicable to face-amount certificates, the
method for calculating reserve liabilities on outstanding certificates, the
minimum amounts and types of investments to be deposited with a qualified
custodian to support such reserve liabilities, and a variety of other
restrictions on the operation and governance of a face-amount certificate
company. Pursuant to statutory authority, the Minnesota Department of Commerce
(the "MDC") exercises supervisory powers over SBM Certificate Company's
face-amount certificate business similar to those exercised by the SEC under the
Investment Company Act. In addition, the MDC conducts annual

examinations of SBM Certificate Company. The offer and sale of its face-amount
certificates also are subject to federal and state securities laws.

ARM Transfer Agency was established to provide transfer agent services to
the Company as needed. ARM Transfer Agency, a wholly owned subsidiary of the
Company, is registered with the SEC and is subject to examination by the SEC.

The securities laws and regulations referred to above generally grant
supervisory agencies and bodies broad administrative powers, including the power
to fine, limit or restrict a firm from conducting its business in the event that
it fails to comply with such laws and regulations. In addition to maintaining
registrations, the regulatory requirements include reporting, maintaining books
and records in prescribed forms, maintaining certain mandatory custodial
arrangements, approving employees, representatives and, in some cases, owners,
and other compliance procedures. Possible sanctions that may be imposed in the
event of noncompliance include, without limitation, the suspension of individual
employees, limitations on the firm's engaging in business for specified periods
of time, revocation of the firm's registration as an investment advisor or
broker-dealer, censures and fines. The regulators make periodic examinations and
review annual, monthly and other reports on the operations of the Company or its
subsidiaries. Changes in these laws or regulations could have a material adverse
impact on the profitability and mode of operations of the Company.

The Company's and ARM Capital Advisors' investment management agreements
expressly provide that they may not be assigned by a party without the prior
written consent of the other party. Under the Advisers Act and the Investment
Company Act, an investment management agreement of any firm is deemed to have
been assigned when there is a "change in control" of the firm, either directly
or indirectly, as through a transfer of a "controlling block" of the firm's
voting securities or, under certain circumstances, upon the transfer of a
"controlling block" of the voting securities of its parent corporation. The
Investment Company Act presumes that any person holding more than 25% of the
voting stock of any person "controls" such person, and provides that investment
advisory contracts with registered investment companies terminate automatically
upon their assignment. If such a change in control were to occur, all investment
management agreements between the firm and its clients would terminate, unless
the clients consent to the continuation of the agreements. Under the Investment
Company Act, substantially similar change of control principles apply with
respect to investment management agreements with mutual funds and mandate
stockholder approval for deemed assignments of investment management agreements.
Following completion of the Offering, significant purchases or sales of Common
Stock by the Company or any stockholder, including the Morgan Stanley
Stockholders, among other things, may raise issues relating to a deemed
assignment of the Company's investment management agreements under such
statutes.

EXAMINATIONS. The SEC conducts routine examinations of the Company's
registered investment adviser operations to ensure compliance with the
requirements prescribed by the Advisers Act. Similarly, the NASD regulates the
activities of the Company's broker-dealer operations and conducts routine
examinations thereof.

EMPLOYEES

At March 31, 1997, the Company and its subsidiaries had approximately 300
employees, none of whom was represented by a labor union. The Company believes
that its relations with its employees are good.

PROPERTIES

The Company leases approximately 31,000 square feet of office space in
Louisville, Kentucky under a lease agreement (the "Lease") which expires on
September 1, 2006, and which is subject to two five-year renewal options. This
office space accommodates the executive, marketing, product development,
actuarial, accounting, corporate finance and legal functions of the Company. The
Company is also

negotiating an amendment to the Lease with respect to an additional 31,000
square feet in the Louisville office to accommodate the relocation of the
Company's main processing center, including information systems, licensing,
customer service and policy issuance activities, which is currently housed in
the Columbus, Ohio vicinity. The Company has a standby letter of credit in the
amount of approximately $1.1 million with one of its lending institutions to
secure the Company's obligations under the Lease which letter of credit will be
increased to $1.7 million upon execution of the amendment.

In addition to its headquarters, the Company and its subsidiaries lease
approximately 62,000 square feet of office space in the Columbus, Ohio vicinity
and approximately 7,500 square feet of office space in New York, New York. The
Columbus office space houses the Company's main processing center which is being
relocated and consolidated with the corporate headquarters in Louisville as
mentioned above. Upon completion of the relocation, the Company plans to
sublease substantially all of the office space in Columbus except for certain
office space which the Company will retain to support its Louisville operations.
The operations of the Company's asset management subsidiary, ARM Capital
Advisors, and New York insurance subsidiary, National Integrity, are conducted
from the New York facility. Following completion of the pending sale of ARM
Capital Advisors, it is anticipated that ARM Capital Advisors will assume the
obligations under the New York office lease and that the Company will reimburse
ARM Capital Advisors for the portion of space used by National Integrity.
Additional office space owned in New Ulm, Minnesota supports the distribution
operations of SBM Certificate Company.

LEGAL PROCEEDINGS

As a consequence of the acquisition of SBM Life and SBM Life's merger with
and into Integrity, Integrity became a party to a marketing agreement with
Multico Marketing Corporation ("Multico"). In reliance upon the marketing
agreement, Integrity eliminated commissions to Multico on new product sales on a
prospective basis effective July 1, 1995. Multico filed a lawsuit in the United
States District Court for the Western District of Kentucky against Integrity on
February 23, 1996, alleging breach of contract and breach of the covenant of
good faith and fair dealing, and seeking a trial by jury and compensatory and
punitive damages of approximately $61 million. Integrity filed a counterclaim
against Multico seeking a declaration that Integrity's actions in revising
commissions did not constitute a breach of contract, and the recovery of
commissions, fees, trailers, overwrites and bonuses paid to Multico in the
amount of approximately $9.3 million. Discovery is proceeding between the
parties. On May 23, 1996, Integrity filed a motion for summary judgment in the
litigation; this motion was denied by the court on March 10, 1997. It is
anticipated that the parties will proceed with further discovery. Company
management believes that the ultimate resolution of this litigation will not
result in any material adverse impact to the financial position of the Company.

Except as described above, the Company is currently involved in no material
legal or administrative proceedings that could result in a material adverse
impact on the financial position of the Company.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company, their ages, and
positions with the Company as of May 23, 1997 are set forth below. There are no
family relationships among any directors or executive officers of the Company.

NAME AGE TITLE
- --------------------------------- --- ----------------------------------------------------

John Franco...................... 55 Co-Chairman of the Board and Co-Chief Executive
Officer
Martin H. Ruby................... 47 Co-Chairman of the Board and Co-Chief Executive
Officer
John R. Lindholm................. 48 President--Retail Business Division
Dennis L. Carr................... 47 Executive Vice President and Chief Actuary
David E. Ferguson................ 49 Executive Vice President and Chief Technology
Officer
Daniel R. Gattis................. 54 Executive Vice President--Institutional Business
Group
John R. McGeeney................. 40 Executive Vice President--Retail Business Division
Robert H. Scott.................. 50 Executive Vice President, General Counsel and
Secretary
Edward L. Zeman.................. 42 Executive Vice President and Chief Financial Officer
Patricia L. Winter............... 38 Senior Vice President--Mergers/Acquisitions and
Investment Assurance
Peter S. Resnik.................. 36 Treasurer
Barry G. Ward.................... 35 Controller
James S. Cole.................... 60 Director
Warren M. Foss................... 50 Director
Dudley J. Godfrey, Jr............ 71 Director
Edward D. Powers................. 65 Director
Colin F. Raymond................. 26 Director
Frank V. Sica.................... 46 Director
Irwin T. Vanderhoof.............. 69 Director

JOHN FRANCO has served as Co-Chairman of the Board and Co-Chief Executive
Officer of the Company since July 1993. From January 1993 until November 1993,
Mr. Franco served as Co-Chief Executive Officer of Oldarm L.P. and was Co-Chief
Executive Officer of its predecessor from March 1992 until December 1992. From
November 1989 to November 1991, Mr. Franco was the Chief Executive Officer and a
director of ICH Corporation. From 1979 to 1989, Mr. Franco was employed by
Capital Holding Corporation (now known as Providian Corporation) in various
positions, including Vice Chairman of the Board and President, Accumulation and
Investment Group (September 1987 to October 1989), President, Agency Group
(April 1984 to September 1987), and Executive Vice President and Chief Financial
Officer (September 1979 to April 1984).

MARTIN H. RUBY has served as Co-Chairman of the Board and Co-Chief Executive
Officer of the Company since July 1993. From its inception in March 1992 until
November 1993, Mr. Ruby served as Co-Chief Executive Officer of Oldarm L.P. From
May 1990 to January 1992, Mr. Ruby was President and Managing Director of the
ICH Capital Management Group, ICH Corporation, and the President of Constitution
Life Insurance Company, the accumulation product subsidiary of ICH Corporation.
From 1986 to 1989, Mr. Ruby was the Chief Executive Officer and Managing
Director of Capital Initiatives

Corporation, a subsidiary of Providian Corporation. From 1980 to 1986, Mr. Ruby
held various other positions with Providian Corporation.

JOHN R. LINDHOLM has served as President--Retail Business Division of the
Company since January 1997. He had been Executive Vice President and Chief
Marketing Officer of the Company since July 1993. Until November 1993, he served
as the Chief Marketing Officer of Oldarm L.P., a position he held since its
inception in March 1992. From June 1990 to February 1992, Mr. Lindholm was the
Chief Marketing Officer and a Managing Director of the ICH Capital Management
Group, ICH Corporation. From 1980 to 1990, Mr. Lindholm was employed by
Providian Corporation, first as Vice President--Compensation and Benefits and
then as Chief Marketing Officer and Managing Director of its Accumulation and
Investment Group. Mr. Lindholm is also Chairman of the Board of The Legends
Fund, Inc.

DENNIS L. CARR has served as Executive Vice President and Chief Actuary of
the Company since June 1996. He had been Executive Vice President and Chief
Product Development Officer of the Company since September 1993, and was
appointed Actuary in June 1995. Prior to joining the Company in September 1993,
he was Director of Product Development for the Accumulation and Investment Group
of Providian Corporation. From July 1983 to July 1988, Mr. Carr was a consulting
actuary for Tillinghast-- Towers Perrin, being named a principal of that firm in
1987.

DAVID E. FERGUSON has served as Executive Vice President and Chief
Technology Officer of the Company since January 1997. He had been Executive Vice
President and Chief Administrative Officer of the Company since July 1993. He
also served as Chief Technology Officer of Oldarm L.P. from January 1993 until
November 1993, and was Chief Technology Officer of Franco Associates, Ltd. from
its inception in March 1992 to its merger with Oldarm L.P. in December 1992.
From 1990 to March 1992, Mr. Ferguson was employed as the President and Chief
Executive Officer of the James Graham Brown Foundation, Inc., a private
philanthropic association in Louisville, Kentucky. From 1984 to 1990, Mr.
Ferguson was a partner at Ernst & Young LLP (or its predecessor Arthur Young)
and National Director of their Insurance Industry Consulting groups.

DANIEL R. GATTIS has served as Executive Vice President--Institutional
Business Group of the Company since January 1997. He had been a Senior Marketing
Officer of the Company since January 1996. From May 1991 to October 1995, Mr.
Gattis was President of The Chalke Consulting Group. Prior to that time, he was
a Senior Vice President with SEI Corporation from May 1988 to May 1991. From
December 1983 to May 1988, Mr. Gattis was a partner of KPMG Peat Marwick, and
served as National Consulting Partner for the firm's Insurance Industry
Practice.

JOHN R. MCGEENEY has served as Executive Vice President--Retail Business
Division of the Company since January 1997. He had been Co-General Counsel of
the Company since January 1994, was Assistant General Counsel of the Company
from October 1993 to December 1993 and served as Secretary from December 1993 to
December 1995. From February 1988 to October 1993, Mr. McGeeney served as
Assistant General Counsel for the Accumulation and Investment Group of Providian
Corporation. He had also been an associate with the law firm of Middleton &
Reutlinger. Mr. McGeeney is Chairman of the Board of SBM Certificate Company.

ROBERT H. SCOTT has served as Executive Vice President and General Counsel
of the Company since January 1997, and was appointed Secretary of the Company in
December 1995. He had been Co-General Counsel of the Company since January 1994,
and was Assistant General Counsel of the Company from July 1993 to December
1993. From June 1993 until November 1993, he served as Assistant General Counsel
of Oldarm L.P. Mr. Scott also served as Deputy General Counsel for ICH
Corporation from June 1990 to March 1993. Prior to that time, he was employed by
Providian Corporation from November 1976 to May 1990 in various tax positions,
the last of which was Second Vice President--Tax.

EDWARD L. ZEMAN has been Executive Vice President and Chief Financial
Officer of the Company since September 1995. Prior to joining the Company, Mr.
Zeman served in various positions with SBM Company from June 1990 to June 1995,
the last of which was Vice President, Chief Operating Officer, Chief Financial
Officer and Treasurer. He also served in various positions with Deloitte &
Touche LLP, a

certified public accounting firm, from 1977 through 1990, the last of which was
Senior Manager. Mr. Zeman currently serves on the Board of Directors of
Dotronix, Inc.

PATRICIA L. WINTER was named Senior Vice President--Mergers/Acquisitions and
Investment Assurance in March 1997. She had served in other various positions
within the Company since April 1992, the last of which was Asset/Liability
Officer. Prior to that time, Ms. Winter had been a Director--Accumulation
Product Development of the ICH Capital Management Group, ICH Corporation from
August 1990 to March 1992.

PETER S. RESNIK has been the Treasurer of the Company since December 1993.
From December 1992 to November 1993, he served in various financial and
operational positions for Oldarm L.P. From June 1986 through July 1992, he
served as Assistant Vice President of Commonwealth Life Insurance Company, a
subsidiary of Providian Corporation in various management positions, the last of
which was Director of Planning and Budgets in the Agency Group Division.

BARRY G. WARD has served as Controller of the Company since April 1996. From
October 1993 to April 1996, Mr. Ward served as financial officer directly
responsible for the Company's financial reporting function. From January 1989 to
October 1993, Mr. Ward served in various positions within Ernst & Young LLP's
Insurance Industry Accounting and Auditing Practice, the last of which was
Manager.

JAMES S. COLE has been a Director of the Company since February 1994. He has
also served as Director of Finance of MS & Co.'s Merchant Banking Division since
1988. From 1980 to 1988, he served as Controller for North American Philips.
Prior to that time, Mr. Cole was Chief Financial Officer for GE Plastics from
1976 to 1980. He served in various positions from 1959 to 1976 within the
financial function of General Electric Company.

WARREN M. FOSS has been a Director of the Company since June 1996. He has
been a Senior Managing Director of Bear, Stearns & Co. Inc. since September
1996. Mr. Foss had been self-employed as a financial consultant, handling
various assignments for corporate clients from April 1996 to August 1996. From
January 1993 until March 1996, Mr. Foss served as a Managing Director and
Principal of Donaldson, Lufkin & Jenrette Securities Corp. Prior to January
1993, Mr. Foss was a founding partner of Scully Brothers & Foss, an investment
banking firm founded in February 1988.

DUDLEY J. GODFREY, JR. has been a Director of the Company since February
1994. He has been a senior shareholder in the law firm of Godfrey & Kahn, S.C.,
Milwaukee, Wisconsin, since 1957. Mr. Godfrey serves on the Board of Directors
of Manpower, Inc., Clarcor, Inc., Fort Howard Corporation and other closely and
privately held corporations.

EDWARD D. POWERS has been a Director of the Company since September 1994.
Mr. Powers currently serves as Chairman and Chief Executive Officer of Powers
Holding Co. He served as Chairman and Chief Executive Officer of Burnham Service
Co., Columbus, Georgia, from 1989 through 1993. Prior to 1989, he served as
Chairman and Chief Executive Officer of The Mueller Co., Decatur, Illinois. Mr.
Powers also serves on the Board of Directors of Red Roof Inn Inc.

COLIN F. RAYMOND has been a Director of the Company since January 1997. He
has been an Associate of Morgan Stanley since April 1996, and is an Associate of
Morgan Stanley Capital Partners III, Inc. (the general partner of the general
partner of the MSCP Funds). From January 1995 to April 1996, Mr. Raymond was an
Associate with Wolfensohn & Co. Prior to that time, he had been an Associate in
J.P. Morgan & Co.'s corporate finance division. Mr. Raymond also serves on the
Board of Directors of Consolidated Hydro, Inc.

FRANK V. SICA has been a Director of the Company since July 1993. He has
been a Managing Director of MS & Co. since 1988 and is a Vice Chairman and a
Director of Morgan Stanley Leveraged Equity Fund II, Inc. (the general partner
of MSLEF II), and of Morgan Stanley Capital Partners III, Inc. (the general
partner of the general partner of the MSCP Funds). Mr. Sica is also on the Board
of Directors of Consolidated Hydro, Inc., CSG Systems International, Inc., Fort
Howard Corporation, Kohl's Corporation, PageMart Wireless, Inc. and Sullivan
Communications, Inc.

IRWIN T. VANDERHOOF has been a Director of the Company since November 1993.
Mr. Vanderhoof has been a clinical professor of Finance at the Stern School of
Business at New York University since 1989. He is the principal of Actuarial
Investment Consulting. Prior to 1988, Mr. Vanderhoof was the Chief Actuary and
Investment Officer for the individual lines of business of The Equitable Life
Assurance Company of the United States.

CLASSIFIED BOARD OF DIRECTORS

The Certificate of Incorporation that will be in effect upon the
consummation of the Offering provides that the Board of Directors will be
divided into three classes of directors serving staggered three-year terms. The
classes of directors will be as nearly equal in number as possible. The term of
the initial Class I directors, consisting of Messrs. Cole, Franco and Godfrey,
will terminate on the date of the 1998 annual meeting of stockholders; the term
of the initial Class II directors, consisting of Messrs. Powers, Raymond and
Ruby, will terminate on the date of the 1999 annual meeting of stockholders; and
the term of the initial Class III directors, consisting of Messrs. Foss, Sica
and Vanderhoof, will terminate on the date of the 2000 annual meeting of
stockholders. Beginning in 1998, at each annual meeting of stockholders,
successors to the class of directors whose term expires at that annual meeting
will be elected for a three-year term. Accordingly, approximately one-third of
the Company's Board of Directors will be elected each year. See "Description of
Capital Stock --Restated Certificate of Incorporation and By-laws -- Classified
Board of Directors and Related Provisions."

COMMITTEES OF THE BOARD

AUDIT COMMITTEE. The Company's Board of Directors has established an Audit
Committee comprised of directors who are independent of the management of the
Company and are free of any relationship that, in the opinion of the Board of
Directors, would interfere with their exercise of independent judgment as
committee members. The Audit Committee's primary responsibilities include:
engaging independent accountants; appointing the chief internal auditor;
approving independent audit fees; reviewing quarterly and annual financial
statements, audit results and reports, including management comments and
recommendations thereto; reviewing the Company's system of controls and
policies, including those covering conflicts of interest and business ethics;
evaluating reports of actual or threatened litigation; considering significant
changes in accounting practices; and examining improprieties or suspected
improprieties, with the authority to retain outside counsel or experts. Messrs.
Raymond, Foss, Godfrey, Powers and Vanderhoof are members of the Audit
Committee.

COMPENSATION COMMITTEE. The Board of Directors has established a
Compensation Committee, the members of which are directors who are not employees
of the Company. The Compensation Committee's responsibilities are to make
determinations with respect to salaries and bonuses payable to the Company's
executive officers and to administer the Option Plan (defined below) and the
1997 Equity Plan (defined below). Messrs. Powers and Sica are the members of the
Compensation Committee.

COMPENSATION OF DIRECTORS

The Company's four independent directors, Messrs. Vanderhoof, Powers,
Godfrey and Foss, are compensated annually in the amount of $10,000 plus $1,000
per Board meeting attended and their expenses of each attendance. Messrs.
Vanderhoof, Powers, Godfrey and Foss are also directors of National Integrity,
and each receive $20,000 annually plus $1,000 per Board meeting attended and the
expenses of attendance (unless such Board meeting is held concurrently with a
Board meeting of the Company, in which case these directors receive a total of
$1,000 and the expenses of attendance at the concurrent meetings). In addition,
Messrs. Vanderhoof, Powers, Godfrey and Foss serve on the Audit Committee for
both the Company and National Integrity and receive $1,000 per committee meeting
attended if held separately from the respective Board meetings.

EXECUTIVE COMPENSATION

The following table sets forth compensation information for the Co-Chief
Executive Officers of the Company and the four other most highly compensated
executive officers (the "Named Executive Officers") during the years ended
December 31, 1996, 1995 and 1994:

SUMMARY COMPENSATION TABLE

LONG-TERM
COMPENSATION
AWARDS
-------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
--------------------------------- OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS GRANTED(2) COMPENSATION(3)
- --------------------------------------------------- --------- ----------- --------- ------------- -----------------

John Franco........................................ 1996 $ 400,000 $ 314,000 49,420 $ 20,000
Co-Chief Executive Officer and 1995 $ 375,000 $ 224,300 218,154 $ 7,500
Co-Chairman of the Board 1994 $ 375,000 $ 246,000 -- $ 7,500

Martin H. Ruby..................................... 1996 $ 400,000 $ 314,000 49,420 $ 20,000
Co-Chief Executive Officer and 1995 $ 375,000 $ 224,300 218,154 $ 7,500
Co-Chairman of the Board 1994 $ 375,000 $ 246,000 -- $ 7,500

John R. Lindholm................................... 1996 $ 300,000 $ 185,000 14,120 $ 15,000
President--Retail Business Division 1995 $ 250,000 $ 146,400 112,254 $ 7,500
1994 $ 250,000 $ 164,000 37,418 $ 7,500

Emad A. Zikry (4).................................. 1996 $ 300,000 $ 700,000(6) 14,120 $ 7,500
Executive Vice President and 1995 $ 250,000 $ 520,000(6) 112,254 $ 7,500
Chief Investment Officer 1994 $ 42,628(5) $1,500,000(6) 112,254 --

David E. Ferguson.................................. 1996 $ 279,500 $ 170,000 -- $ 13,975
Executive Vice President and 1995 $ 215,000 $ 133,900 79,778 $ 7,500
Chief Technology Officer 1994 $ 215,000 $ 141,000 -- $ 7,500

Dennis L. Carr..................................... 1996 $ 200,000 $ 120,000 -- $ 10,000
Executive Vice President and 1995 $ 160,000 $ 67,600 36,712 $ 7,500
Chief Actuary 1994 $ 160,000 $ 75,000 -- $ 6,000

- ------------------------
(1) Includes amounts contributed by each of the Named Executive Officers to
various deferred compensation plans of the Company.

(2) All stock options are for shares of Class A Common Stock of the Company. The
total number of options granted to the Named Executive Officers in 1995
includes a certain number of replacement options that were issued in
exchange for Series 2 Options (as defined herein under the heading "Stock
Option Plan") originally granted in 1993 and 1994 as part of the amendment
and restatement of the ARM Financial Group, Inc. Stock Option Plan effective
as of June 14, 1995 (as amended through the date hereof, the "Option Plan"),
as more fully described herein under the heading "Stock Option Plan." The
number of options has been restated to give effect to the Recapitalization.

(3) The amounts presented in this column represent matching contributions made
by the Company under the ARM Financial Group, Inc. Savings Plan (the
"Savings Plan"), and the ARM Financial Group, Inc. Nonqualified Savings Plan
(the "Nonqualified Plan"). Under the Savings Plan, which is generally
available to all salaried employees, the Company currently matches a
participant's tax-deferred contributions by an amount equal to 100% of such
contribution for each year, subject to a maximum of 5% of the participant's
compensation for the year. Under the Nonqualified Plan, the Company
currently matches the tax-deferred contributions made by a select group of
management or highly compensated employees in an amount equal to 100% of
such contribution for each year, subject to a maximum of 5% of the
participant's compensation for the year, less any matching contributions
allocated to the participant's account in the Savings Plan. Participants may
allocate their contributions to the Savings Plan and Nonqualified Plan among
seven investment funds. In 1996, the Company contributed $7,500 to each of
the Named Executive Officers under the Savings Plan. Under the Nonqualified
Plan, the following contributions were made in 1996: Mr. Franco received
$12,500, Mr. Ruby received $12,500, Mr. Lindholm received $7,500, Mr.
Ferguson received $6,475, and Mr. Carr received $2,500.

(4) Dr. Zikry resigned as Executive Vice President and Chief Investment Officer
of the Company effective March 27,
1997, but remains in his capacity as President of ARM Capital Advisors and
as an employee of the Company.
See " -- Employment Contracts."

(5) The 1994 salary figure for Dr. Zikry reflects two months of compensation
included in 1994 (November and December).

(6) Pursuant to Dr. Zikry's employment agreement, he was entitled to a minimum
bonus for each of the 1995 and 1996 calendar years and an initial bonus upon
accepting employment with the Company in 1994, as more fully described
herein under the heading "Employment Contracts."

OPTION GRANTS

The following table sets forth information regarding those Named Executive
Officers who received stock option grants during the year ended December 31,
1996:

OPTIONS GRANTED DURING 1996

INDIVIDUAL GRANTS
----------------------------------------------------------------

POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES OF
SECURITIES % OF TOTAL STOCK PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED FOR OPTION TERM(3)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION --------------------------
NAME GRANTED(1) 1996 PER SHARE(2) DATE 5% 10%
- ------------------------------- --------------- --------------- ----------------- ----------- ------------ ------------
John Franco.................... 49,420 21% $ 11.97 01/01/2006 $ 198,147 $ 665,915
Martin H. Ruby................. 49,420 21% $ 11.97 01/01/2006 $ 198,147 $ 665,915
John R. Lindholm............... 14,120 6% $ 11.97 01/01/2006 $ 56,614 $ 190,262
Emad A. Zikry.................. 14,120 6% $ 11.97 01/01/2006 $ 56,614 $ 190,262
David E. Ferguson.............. -- -- -- -- --
Dennis L. Carr................. -- -- -- -- --

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

(1) Subject to certain rounding calculations, the options granted during 1996
will become exercisable in equal installments on the first through fifth
anniversaries of the date of the respective date of grant.

(2) Upon grant, the options had an exercise price of $9.81 per share of Class A
Common Stock, the fair market value of the Class A Common Stock on the date
of grant. Such exercise price increased by 3% on each three-month
anniversary of the date of grant. Pursuant to the terms of the Option Plan,
on the date of the consummation of the Offering, the exercise prices
applicable to the options granted in fiscal year 1996 will be fixed at
$11.97.

(3) Such numbers are not intended to forecast future price appreciation of the
Class A Common Stock.

OPTION EXERCISES

The following table sets forth as to each of the Named Executive Officers
information with respect to options exercised during 1996 and the status of
their options on December 31, 1996:

AGGREGATED OPTION EXERCISES DURING 1996 AND OPTION VALUES
AT DECEMBER 31, 1996

VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS AT YEAR END OPTIONS AT YEAR END(*)
------------------------ --------------------------

NUMBER OF SHARES
ACQUIRED UPON NON- NON-
NAME EXERCISE OF OPTIONS EXERCISABLE EXERCISABLE EXERCISABLE EXERCISABLE
- ---------------------------------------- ----------------------- ----------- ----------- ------------ ------------
John Franco............................. -- 151,790 261,926 $ 123,973 $ 102,036
Martin H. Ruby.......................... -- 151,790 261,926 $ 123,973 $ 102,036
John R. Lindholm........................ -- 77,660 123,550 $ 63,461 $ 49,435
Emad A. Zikry........................... -- 57,186 144,024 $ 42,309 $ 70,586
David E. Ferguson....................... -- 53,656 76,248 $ 44,252 $ 21,259
Dennis L. Carr.......................... -- 25,416 36,712 $ 20,667 $ 15,568

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

(*) In accordance with the SEC's rules, values are calculated by subtracting the
exercise price from the fair market value of the underlying Class A Common
Stock. For purposes of this table, fair market value is deemed to be $10.98,
the base price at which New Options (as defined below) were granted by the
Stock Option Committee as of January 1, 1997, to certain employees of the
Company in accordance with the terms of the Option Plan.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Prior to establishing the Compensation Committee, the full Board of
Directors of the Company, including Mr. Franco and Mr. Ruby, had approved the
employment agreements described herein and performed the functions of a
compensation committee. The Board of Directors of the Company has appointed a
Compensation Committee, the members of which are directors who are not employees
of the Company.

STOCK OPTION PLAN

The Option Plan is administered by the Compensation Committee. The Option
Plan provides for the grant of options to purchase Class A Common Stock to
officers and other key employees of the Company. The maximum aggregate number of
shares of Class A Common Stock that may be issued under the Option Plan is
2,428,640 (subject to adjustment in accordance with the terms of the Option
Plan), consisting of 1,242,560 Old Options and 1,186,080 New Options (as such
terms are defined below). Approximately 46 individuals participate in the Option
Plan. As of April 30, 1997, 3,530 Old Options had been exercised, and an
aggregate of 831,668 Old Options and 1,083,992 New Options were outstanding and
unexercised. Upon completion of the Offering, 1,246,090 Old Options and
1,186,080 New Options will be outstanding as a result of the allocation of all
unallocated Old Options and New Options in connection therewith.

As originally adopted, the Option Plan provided for the grant of options to
purchase Class A Common Stock of the Company with an exercise price that
increased at a rate equal to 12% per annum ("Series 1 Options") or 30% per annum
("Series 2 Options"), in each case compounded annually. As of June 14, 1995 (the
"Amendment Date"), outstanding Series 2 Options were replaced by a number of
options with an exercise price that increases by 3% on each three-month
anniversary of the date of grant. All options granted prior to the Amendment
Date and all options granted to replace Series 2 Options are referred to as "Old
Options" and all options that were or will be granted on or after the Amendment
Date (other than the options issued to replace Series 2 Options) are referred to
as "New Options."

Pursuant to the terms of the Option Plan, upon the consummation of the
Offering, the exercise prices applicable to Old Options and New Options
outstanding will be fixed at exercise prices ranging from $11.14 per share to
$12.24 per share.

Pursuant to the terms of the Option Plan, the exercisability of the Old
Options and the New Options will be accelerated upon the occurrence of certain
specified events, including, without limitation, a Change in Control or a sale
by the Company of all or substantially all of its business to a third party. For
purposes of the Option Plan, a "Change in Control" means the acquisition of
equity securities of the Company, directly or indirectly, through a merger or
otherwise, in a single transaction or a series of transactions, by a person,
entity or group that is not, directly or indirectly, in control of, controlled
by, or under common control with the Company, MS & Co., MSLEF II or the MSCP
Funds, entitling such person, entity or group to elect a majority of the members
of the Board of Directors.

Following a holder's termination of employment by the Company for cause (as
defined in the Option Plan) on or prior to the fifth anniversary of the date on
which options were granted to the employee, such holder's vested and unvested
options are automatically forfeited and cancelled and must be surrendered
without payment and the shares previously issued upon exercise of the options
will be subject to repurchase by the Company at its discretion. In the event of
such a repurchase, Option Shares (as defined in the Option Plan and specifically
including any Option Shares transferred to permitted transferees under the
Stockholders Agreement) will be repurchased at a price based on their original
purchase price (or, if less, the then Applicable Value (as defined in the Option
Plan) of the shares).

If, on or prior to the fifth anniversary of the date on which options were
granted, the holder resigns other than for good reason (as defined in the Option
Plan), such holder's unvested options will be forfeited and cancelled and must
be surrendered without payment, such holder's vested options will generally

remain exercisable for 30 days and the shares previously issued upon exercise of
the options will be subject to repurchase by the Company. In the event of such a
repurchase, Option Shares will be repurchased at a price equal to the then
Applicable Value. If a holder's employment is terminated by reason of death or
permanent disability, such holder's options will become 50%-vested if such
options were less than 50%-vested at the time of termination. If a holder's
employment is terminated due to his resignation for good reason, all unvested
options will vest. The Option Plan further provides that if a holder is
terminated without cause, resigns for good reason or terminates employment by
reason of death or permanent disability (or terminates employment for any other
reason following the fifth anniversary of the date on which options were granted
to the holder), (i) all vested options (including options that vest as a
consequence of such termination of employment) will generally remain exercisable
for 90 days (or one year in the event of death or permanent disability)
following the date of termination and (ii) no options or Option Shares shall be
subject to repurchase by the Company.

Under certain circumstances, the Option Plan permits the holders to satisfy
the payment of the exercise price by delivery of shares of Class A Common Stock
previously owned by the holder for at least a six-month period and to satisfy
their withholding obligations by delivery of such shares or by having the
Company retain a number of Option Shares that would otherwise be issued upon the
exercise of such holder's options.

All options are nontransferable except by will or the laws of descent and
distribution, and all shares of Class A Common Stock issued upon exercise of any
option will be subject to the Stockholders' Agreement.

Upon completion of the Offering, all unallocated Old Options and New Options
will be allocated PRO RATA to existing holders of Old Options and New Options,
respectively, with the exercise prices and vesting schedules of such Old Options
and New Options being the average weighted exercise prices and vesting
percentages of the Old Options and New Options previously held by such holders.
As a result of this allocation and based on the estimated range of the initial
public offering price, a non-cash charge of between $1 million and $6 million
may be recorded. Such charge will equal the aggregate difference between the
initial public offering price of the Class A Common Stock and the exercise price
for such options. Set forth below is a chart summarizing the grants that will be
made in accordance with such allocation:

NEW PLAN BENEFITS

AMENDED AND RESTATED STOCK OPTION PLAN

OLD OPTIONS NEW OPTIONS
----------------------- ---------------------------
DOLLAR NUMBER OF DOLLAR VALUE NUMBER OF
NAME VALUE ($) OLD OPTIONS ($) NEW OPTIONS
- ---------------------------------------------------------- ---------- ----------- ------------- ------------

John Franco............................................... 181,662 97,668 16,683 20,345
Martin H. Ruby............................................ 181,662 97,668 16,683 20,345
John R. Lindholm.......................................... 93,419 50,225 7,500 9,375
Emad A. Zikry............................................. 93,419 50,225 7,500 9,375
David E. Ferguson......................................... 64,882 34,883 4,245 5,585
Dennis L. Carr............................................ 31,148 16,746 2,021 2,659
Executive Group........................................... 709,118 381,246 65,425 79,440
Non-Employee Director Group............................... 0 0 0 0
Non-Executive Officer Employee Group...................... 49,784 29,646 18,217 22,647

(1) Assumes an initial public offering price of $13 per share of Class A Common
Stock (the midpoint of the estimated price range for the Offering).

Upon consummation of the Offering and as a result of the allocation
described above, all options available for grant under the Option Plan will have
been granted and, accordingly, there will be no further options available for
grant thereunder. In the event that options expire or are surrendered or
forfeited without being exercised in full after the consummation of the
Offering, such options will be allocated in the manner described above, provided
that no options to purchase fractional shares shall be granted in connection
with such allocation. The purchase agreement relating to the pending sale of ARM
Capital Advisors provides that Dr. Zikry will surrender all options granted to
him under the Option Plan, in conjunction with the closing of such sale. In such
event, the surrendered options will be allocated in the manner described above.

The federal income tax consequences of the options granted under the Option
Plan are substantially similar to those for nonqualified options to be granted
under the 1997 Equity Plan (as defined below). See "-- 1997 Equity Incentive
Plan -- Certain Federal Income Tax Consequences of Options."

EMPLOYMENT CONTRACTS

The Company has entered into employment agreements with Messrs. Franco,
Ruby, Lindholm and Ferguson and Dr. Zikry. The employment agreements with
respect to Messrs. Franco, Ruby, Lindholm and Ferguson terminate on July 1,
1999, and the employment agreement with respect to Dr. Zikry terminates on
October 31, 1997. Each of such agreements may be extended automatically for
additional one-year periods by means of the Board of Directors giving written
notice to such executive of its intention to extend the term at least sixty days
(in the case of Mr. Franco and Mr. Ruby, twelve months) prior to the expiration
of the then effective term. Each employment agreement specifies salary levels
and describes the bonus plan, employee benefits and perquisites available. The
present base salaries for Messrs. Franco, Ruby, Lindholm and Ferguson and Dr.
Zikry are $416,000, $416,000, $312,000, $290,000 and $300,000, respectively. It
is anticipated that Dr. Zikry's employment will be terminated without any
severance obligation on the part of the Company in connection with the proposed
sale of ARM Capital Advisors as more fully discussed herein under the heading
"Business -- History." As stated above, it is also anticipated that Dr. Zikry
will surrender all options granted to him under the Option Plan on the closing
date of such sale.

The employment agreements with respect to Messrs. Franco and Ruby (i) fix
such executives' responsibilities and titles as Co-Chief Executive Officers and
directors of the Company and (ii) provide that such executives' base salary may
be increased by the Board of Directors at any time, but may not be decreased.
The employment agreement with respect to Dr. Zikry (i) establishes his
responsibilities and title as President of ARM Capital Advisors and (ii)
provides that his base salary may be increased at any time, but may not be
decreased, upon recommendation of the Company's Co-Chief Executive Officers and
review by the Board of Directors. The employment agreements with respect to
Messrs. Lindholm and Ferguson prohibit any decrease in base salary, but, in
contrast to the agreements for Messrs. Franco and Ruby and Dr. Zikry, do not fix
such executives' responsibilities or titles (other than providing that each will
serve the Company in a professional capacity). Each of the employment agreements
provides that the executives shall be entitled to participate in the Company's
bonus plan. In addition, Dr. Zikry's employment agreement provided for a
guaranteed $1,500,000 one-time initial bonus upon accepting employment with the
Company in 1994 and a guaranteed minimum bonus of $500,000 for each of the 1995
and 1996 calendar years.

The benefits provided by the employment agreements include, to the extent
each executive is eligible, any plans, programs or arrangements of the Company
providing for retirement benefits, incentive compensation, profit sharing,
bonuses, disability benefits, health, dental and life insurance, or vacation and
paid holidays. The executives will also receive indemnification from the Company
to the fullest extent permitted by Delaware law and the Certificate of
Incorporation and By-Laws of the Company as currently in effect and the Company
will procure and maintain insurance policies, to the extent reasonably
available, for the benefit of its directors and officers, including the
executives.

Generally, the employment agreements provide that, upon a termination of an
executive's employment by the Company without "cause" or a resignation for "good
reason" (as such terms are defined in the employment agreements; among other
things, a termination by the executive following a Change in Control (as
previously defined under "-- Stock Option Plan") is a resignation with "good
reason"), the executive will receive (i) severance pay in an amount equal to the
base salary for the greater of the remainder of the employment term or two years
and (ii) additional severance amounts for each full or partial calendar year
during the severance period in cash equal to the same percentage of base salary
as of the date of termination as the percentage of base salary used in
calculating the bonus paid to the executive for the year preceding the year of
termination. Severance pay will be subject to each executive's compliance with
certain restrictive covenants. In the event an executive's employment is
terminated by the Company for cause or the executive resigns without good
reason, he will be entitled only to base salary through the relevant date of
termination or resignation of employment. In the event an executive dies or is
permanently disabled, he (or his beneficiary or estate in the event of his
death) will be entitled to receive base salary and benefits (including a PRO
RATA cash bonus for the year of death or disability) for the period ending on
the date of death or, in the case of disability, through the later of the date
of termination or the date (not later than one year following the date of
termination) on which the executive commences to receive disability benefits.

1997 EQUITY INCENTIVE PLAN

The Company has adopted the 1997 Equity Incentive Plan (the "1997 Equity
Plan"). The 1997 Equity Plan is administered by the Compensation Committee. The
1997 Equity Plan provides for the granting of incentive stock options (within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code")) and nonqualified stock options, stock appreciation rights, restricted
stock, performance units and performance shares (individually, an "Award," or
collectively, "Awards") to those officers, and other key employees and
consultants with potential to contribute to the future success of the Company or
its subsidiaries; provided, that only employees may be granted incentive stock
options. The Compensation Committee has discretion to select the persons to whom
Awards will be granted (from among those eligible), to determine the type, size
and terms and conditions applicable to each Award and the authority to
interpret, construe and implement the provisions of the 1997 Equity Plan;
provided, that in accordance with the requirements under Section 162(m) of the
Code, no participant may receive an award with respect to more than 240,000
shares of Class A Common Stock in any Plan year. The Compensation Committee's
decisions are binding on the Company and persons eligible to participate in the
1997 Equity Plan and all other persons having any interest in the 1997 Equity
Plan. It is presently anticipated that approximately 100 individuals will
initially participate in the 1997 Equity Plan.

The maximum number of shares of Class A Common Stock that may be subject to
Awards under the 1997 Equity Plan is 1,600,000 shares, subject to adjustment in
accordance with the terms of the 1997 Equity Plan. Class A Common Stock issued
under the 1997 Equity Plan may be either authorized but unissued shares,
treasury shares or any combination thereof. Any shares of Class A Common Stock
subject to an Award which lapses, expires or is otherwise terminated prior to
the issuance of such shares may become available for new Awards. In addition,
any shares tendered to, or withheld by, the Company to satisfy the exercise
price or tax withholding obligations applicable to an Award will be available
for new Awards.

Set forth below is a description of the types of Awards which may be granted
under the 1997 Equity Plan:

STOCK OPTIONS. Options (each, an "Option") to purchase shares of Class A
Common Stock, which may be nonqualified or incentive stock options, may be
granted under the 1997 Equity Plan at an exercise price (the "Option Price")
determined by the Compensation Committee in its discretion, provided that the
Option Price of incentive stock options may be no less than the fair market
value of the underlying Class A

Common Stock on the date of grant (110% of fair market value in the case of an
incentive stock option granted to a ten percent shareholder).

Options will expire not later than ten years after the date on which they
are granted (five years in the case of an incentive stock option granted to a
ten percent shareholder). Options become exercisable at such times and in such
installments as determined by the Compensation Committee, and such
exercisability may be based on (i) length of service or (ii) the attainment of
performance goals established by the Compensation Committee. The Compensation
Committee may also accelerate the time or times at which any or all Options held
by an optionee may be exercised. Payment of the Option Price must be made in
full at the time of exercise in cash, certified or bank check, or other
instrument acceptable to the Compensation Committee. In the discretion of the
Compensation Committee, payment of the Option Price in full or in part may also
be made by the optionee tendering to the Company shares of Class A Common Stock
owned for at least a six-month period and having a fair market value equal to
the Option Price (or such portion thereof) or by means of a "cashless exercise"
procedure to be approved by the Compensation Committee.

STOCK APPRECIATION RIGHTS. A stock appreciation right ("SAR") is an Award
entitling the recipient to receive an amount equal to (or less than, if the
Compensation Committee so determines at the time of grant) the excess of the
fair market value of a share of Class A Common Stock on the date of exercise
over the exercise price per share specified for the SAR, multiplied by the
number of shares of Class A Common Stock with respect to which the SAR is then
being exercised. An SAR granted in connection with an Option will be exercisable
to the extent that the related Option is exercisable. Upon the exercise of an
SAR related to an Option, the Option related thereto will be cancelled to the
extent of the number of shares covered by such exercise and such shares will no
longer be available for grant under the 1997 Equity Plan. Upon the exercise of a
related Option, the SAR will be cancelled automatically to the extent of the
number of shares covered by the exercise of the Option. SARs unrelated to an
Option will contain such terms and conditions as to exercisability, vesting and
duration as the Committee may determine, but such duration will not be greater
than ten years. The Compensation Committee may accelerate the period for the
exercise of an SAR. Payment upon exercise of an SAR will be made, at the
election of the Compensation Committee, in cash, in shares of Class A Common
Stock or a combination thereof.

The Compensation Committee may grant limited stock appreciation rights (an
"LSAR") under the 1997 Equity Plan. An LSAR is an SAR which becomes exercisable
only in the event of a Change in Control (as defined below). Any such LSAR will
be settled solely in cash in an amount equal to the number of shares of Class A
Common Stock with respect to which the LSAR is then being exercised multiplied
by the excess of (i) the greater of (A) the highest price per share of Class A
Common Stock paid in connection with the Change in Control or (B) the highest
fair market value per share of Class A Common Stock in the 90-day period
preceding the Change in Control over (ii) the fair market value of a share of
Class A Common Stock on the date the LSAR was granted. An LSAR must be exercised
within the 30-day period following a Change in Control.

RESTRICTED STOCK. An Award of restricted stock ("Restricted Stock") is an
Award of Class A Common Stock which is subject to such restrictions as the
Compensation Committee deems appropriate, including forfeiture conditions and
restrictions against transfer for a period specified by the Compensation
Committee. Restricted Stock Awards may be granted under the 1997 Equity Plan for
or without consideration. Restrictions on Restricted Stock may lapse in
installments based on factors selected by the Compensation Committee. The
Compensation Committee, in its sole discretion, may waive or accelerate the
lapsing of restrictions in whole or in part. Prior to the expiration of the
restricted period, except as otherwise provided by the Compensation Committee, a
grantee who has received a Restricted Stock Award has the rights of a
shareholder of the Company, including the right to vote and to receive cash
dividends on the shares subject to the Award. Stock dividends issued with
respect to shares covered by a Restricted Stock Award will be treated as
additional shares under such Award and will be subject to the

same restrictions and other terms and conditions that apply to the shares with
respect to which such dividends are issued.

PERFORMANCE SHARES; PERFORMANCE UNITS. A performance share Award (a
"Performance Share") is an Award which represents the right to receive a
specified number of shares of Class A Common Stock upon satisfaction of certain
specified performance criteria, and is subject to such other terms and
conditions as the Compensation Committee deems appropriate. A performance unit
(a "Performance Unit") is an Award of a number of units entitling the recipient
to receive an amount equal to (or less than, if the Compensation Committee so
determines at the time of grant) the excess of the fair market value of a share
of Class A Common Stock on the relevant date over the price per share specified
for the Performance Unit, multiplied by the number of Units, upon satisfaction
of certain specified performance criteria, subject to such other terms and
conditions as the Compensation Committee deems appropriate. Performance
objectives will be established before, or as soon as practicable after, the
commencement of the performance period (the "Performance Period") and may be
based on net earnings, operating earnings or income, absolute and/or relative
return on equity or assets, earnings per share, cash flow, pre-tax profits,
earnings growth, revenue growth, book value per share, stock price, comparisons
to peer companies, any combination of the foregoing and/or such other measures,
including individual measures of performance, as the Compensation Committee
deems appropriate. Prior to the end of a Performance Period, the Compensation
Committee, in its discretion and only under conditions which do not affect the
deductibility of compensation attributable to Performance Shares or Performance
Units, as the case may be, under Section 162(m) of the Code, may adjust the
performance objectives to reflect a Change in Capitalization (as defined in the
Option Plan) or an event which may materially affect the performance of the
Company, a subsidiary or a division, including, but not limited to, market
conditions or a significant acquisition or disposition of assets or other
property by the Company, a subsidiary or a division. The extent to which a
grantee is entitled to payment in settlement of a Performance Share Award or a
Performance Unit Award at the end of the Performance Period will be determined
by the Compensation Committee in its sole discretion, based on whether the
performance criteria have been met.

Payment in settlement of a Performance Share Award or a Performance Unit
Award will be made as soon as practicable following the last day of the
Performance Period, or at such other time as the Committee may determine, in
shares of Class A Common Stock or cash, respectively.

ADDITIONAL INFORMATION. Under the 1997 Equity Plan, if there is any change
in the outstanding shares of Class A Common Stock by reason of any stock
dividend, recapitalization, merger, consolidation, stock split, combination or
exchange of shares or other form of reorganization, or any significant corporate
event affecting the Class A Common Stock, such proportionate adjustments as may
be necessary (in the form determined by the Compensation Committee) to reflect
such change will be made to prevent dilution or enlargement of rights with
respect to the aggregate number of shares of Class A Common Stock for which
Awards in respect thereof may be granted under the 1997 Equity Plan, the number
of shares of Class A Common Stock covered by each outstanding Award and the
price per share in respect thereof. Generally, an individual's rights under the
1997 Equity Plan may not be assigned or transferred (except in the event of
death).

In the event of a change in control: (i) all Options or SARs then
outstanding will become fully exercisable as of the date of the change in
control, whether or not then exercisable; (ii) all restrictions and conditions
of all Restricted Stock Awards then outstanding will lapse as of the date of the
change in control; (iii) all Performance Share Awards and Performance Unit
Awards will be deemed to have been fully earned as of the date of the change in
control and (iv) in the case of a change in control involving a merger of, or
consolidation involving, the Company in which the Company is (A) not the
surviving corporation (the "Surviving Entity") or (B) becomes a wholly owned
subsidiary of the Surviving Entity or a parent thereof, each outstanding Option
granted under the Plan and not exercised (a "Predecessor Option") will be
converted into an option (a "Substitute Option") to acquire common stock of the
Surviving Entity or its parent, which Substitute Option will have substantially
the same terms and

conditions as the Predecessor Option, with appropriate adjustments as to the
number and kind of shares and exercise prices. For purposes of the 1997 Equity
Plan, a "change in control" shall have occurred when (A) any person or "group"
within the meaning of Sections 13(d) or 14(d)(2) of the Exchange Act (other than
(x) the Company, any subsidiary of the Company, any employee benefit plan of the
Company or of any subsidiary of the Company, or any person or entity organized,
appointed or established by the Company or any subsidiary of the Company for or
pursuant to the terms of any such plans or (y) MS & Co., MSLEF II or the MSCP
Funds or any of their respective affiliates, alone or together with its
affiliates and associates (collectively, an "Acquiring Person")) shall become
the beneficial owner of 20% or more of either (i) the then outstanding shares of
Class A Common Stock or (ii) the combined voting power of the Company's then
outstanding voting securities, (B) during any period of two consecutive years,
individuals who at the beginning of such period constitute the Board of
Directors and any new director (other than a director who is a representative or
nominee of an Acquiring Person) whose election by the Board of Directors or
nomination for election by the Company's shareholders was approved by a vote of
at least a majority of the directors then still in office who either were
directors at the beginning of the period or whose election or nomination for
election was previously so approved (collectively, the "Continuing Directors"),
no longer constitute a majority of the Board of Directors, (C) the shareholders
of the Company approve a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the Surviving Entity or a parent thereof) at least 51%
of the combined voting power of the voting securities of the Company or such
Surviving Entity or a parent thereof outstanding immediately after such merger
or consolidation; or (D) the shareholders of the Company approve a plan of
reorganization (other than a reorganization under the United States Bankruptcy
Code) or complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's assets;
provided, however, that a change in control shall not be deemed to have occurred
in the event of (x) a sale or conveyance in which the Company continues as a
holding company of an entity or entities that conduct all or substantially all
of the business or businesses formerly conducted by the Company or (y) any
transaction undertaken for the purpose of reincorporating the Company under the
laws of another jurisdiction, if such sale, conveyance or transaction does not
materially affect the beneficial ownership of the Company's capital stock.

The 1997 Equity Plan will remain in effect until terminated by the Board of
Directors and thereafter until all Awards granted thereunder are either
satisfied by the issuance of shares of Class A Common Stock or the payment of
cash or terminated pursuant to the terms of the 1997 Equity Plan or under any
Award agreements. Notwithstanding the foregoing, no Awards may be granted under
the 1997 Equity Plan after the tenth anniversary of the effective date of the
1997 Equity Plan. The Board of Directors may at any time terminate, modify,
suspend or amend the 1997 Equity Plan; provided, however, that no such
amendment, modification, suspension or termination may adversely affect an
optionee's or grantee's rights under any Award theretofore granted under the
1997 Equity Plan, except with the consent of such optionee or grantee, and no
such amendment or modification will be effective unless and until the same is
approved by the shareholders of the Company where such shareholder approval is
required to comply with any applicable law, regulation or Nasdaq National Market
or stock exchange rule. In addition, the Board of Directors may not, without
shareholder approval, increase the maximum number of shares issuable under the
1997 Equity Plan.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF OPTIONS. Certain of the Federal
income tax consequences to optionees and the Company of Options granted under
the 1996 Equity Plan should generally be as set forth in the following summary.

An employee to whom an incentive stock option ("ISO") which qualifies under
Section 422 of the Code is granted will not recognize income at the time of
grant or exercise of such Option. However, upon the exercise of an ISO, any
excess in the fair market price of the Class A Common Stock over the Option

Price constitutes a tax preference item which may have alternative minimum tax
consequences for the employee. If the employee sells such shares more than one
year after the date of transfer of such shares and more than two years after the
date of grant of such ISO, the employee will generally recognize a long-term
capital gain or loss equal to the difference, if any, between the sale prices of
such shares and the Option Price. The Company will not be entitled to a federal
income tax deduction in connection with the grant or exercise of the ISO. If the
employee does not hold such shares for the required period, when the employee
sells such shares, the employee will recognize ordinary compensation income and
possibly capital gain or loss (long-term or short-term, depending on the holding
period of the stock sold) in such amounts as are prescribed by the Code and the
regulations thereunder and the Company will generally be entitled to a Federal
income tax deduction in the amount of such ordinary compensation income
recognized by the employee.

An employee to whom a nonqualified stock option ("NSO") is granted will not
recognize income at the time of grant of such Option. When such employee
exercises such NSO, the employee will recognize ordinary compensation income
equal to the excess, if any, of the fair market value, as of the date of Option
exercise, of the shares the employee receives upon such exercise over the Option
Price paid. The tax basis of such shares to such employee will be equal to the
Option Price paid plus the amount, if any, includible in the employee's gross
income, and the employee's holding period for such shares will commence on the
date on which the employee recognizes taxable income in respect of such shares.
Gain or loss upon a subsequent sale of any Class A Common Stock received upon
the exercise of a NSO generally would be taxed as capital gain or loss
(long-term or short-term, depending upon the holding period of the stock sold).
Certain additional rules apply if the Option Price is paid in shares previously
owned by the participant. Subject to the applicable provisions of the Code and
regulations thereunder, the Company will generally be entitled to a Federal
income tax deduction in respect of a NSO in an amount equal to the ordinary
compensation income recognized by the employee. This deduction will, in general,
be allowed for the taxable year of the Company in which the participant
recognizes such ordinary income.

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

STOCKHOLDERS' AGREEMENT

Prior to consummation of the Offering, the Company, MSLEF II, Oldarm L.P.,
Mr. Franco, Mr. Ruby, the MSCP Funds, New ARM, LLC and the other stockholders of
the Company will enter into the Stockholders' Agreement, which will set forth
certain rights and obligations of each such holder of Common Stock. Pursuant to
the terms of the Stockholders' Agreement, no stockholder may make or solicit the
sale of, or create, incur, solicit or assume the encumbrance of, any share of
Common Stock except in a public offering, in accordance with Rule 144 or
otherwise in compliance with the Securities Act and applicable state securities
law.

The Stockholders' Agreement grants the Morgan Stanley Stockholders the right
on up to three occasions to require the Company to file a registration statement
under the Securities Act with respect to the registration of shares of Common
Stock then held by the Morgan Stanley Stockholders. In addition to such demand
rights, the Morgan Stanley Stockholders will be entitled, subject to certain
limitations, to register shares of Common Stock in connection with a
registration statement prepared by the Company. The Stockholders' Agreement
contains customary terms and provisions with respect to, among other things,
registration procedures and certain rights to indemnification granted by the
parties thereunder in connection with any such registration of Common Stock.

The Stockholders' Agreement also provides that the Morgan Stanley
Stockholders will have the right to designate nominees for one-half of the
members of the Board of Directors of the Company for so long as the total number
of shares of Common Stock of the Company owned by the Morgan Stanley
Stockholders constitutes at least 50% of the outstanding Common Stock of the
Company. If such ownership falls below 50%, the number of nominees for directors
that the Morgan Stanley Stockholders will have the right to designate will be
reduced to the number of directors which constitutes a percentage representation
on the Board equal to the Morgan Stanley Stockholders' aggregate percentage
ownership of the outstanding Common Stock of the Company; provided that so long
as the Morgan Stanley Stockholders own at least 5% of the outstanding Common
Stock of the Company, the Morgan Stanley Stockholders will have the right to
designate at least one director. After giving effect to the Offering, the Morgan
Stanley Stockholders will own 68% of the Common Stock of the Company (64% if the
Underwriters' over-allotment option is exercised in full). The Morgan Stanley
Stockholders have informed the Company that they intend, upon consummation of
the Offering, to convert such number of their shares of non-voting Common Stock
so that, following such conversion, the Morgan Stanley Stockholders will own, in
the aggregate, 49% of the outstanding voting stock of the Company.

OTHER TRANSACTIONS

From time to time MS & Co. performs financial advisory services for the
Company in connection with specific transactions. The Company paid MS & Co. or
accrued approximately $70,500 in 1996, $655,000 in 1995, and $3.1 million in
1994, for these and other miscellaneous services. In 1977, Bear, Stearns & Co.
Incorporated ("Bear Stearns") performed financial services for the Company in
connection with a specific transaction. The Company paid Bear Stearns or accrued
approximately $280,000 in the first quarter of 1997 for these services.

During 1996, in the ordinary course of business, certain of the Company's
subsidiaries purchased and sold debt securities in public offerings with an
aggregate market value of approximately $397 million through Bear Stearns.
During 1995, in the ordinary course of business, certain of the Company's
subsidiaries purchased debt and equity securities in public offerings with an
aggregate market value of approximately $118 million through MS & Co. of which
approximately $16.5 million of securities were purchased or sold where MS & Co.
was the sole, lead or co-manager or underwriter. The Company entered into an
interest rate collar agreement in 1994 with MS & Co. under which MS & Co. was
paid a one-time fee of $480,000.

Based on transactions of similar size and nature, the Company believes that
the foregoing fees received by MS & Co. and Bear Stearns were no less favorable
to the Company than would be available from unaffiliated third parties.

CERTAIN RELATIONSHIPS AND RELATED PARTIES

Four of the Named Executive Officers and certain of the directors of the
Company are limited partners of, or are the beneficial owners of limited
partnership interests in, Oldarm L.P. Two of the Named Executive Officers manage
New ARM, LLC which following consummation of the Offering will own shares of
the Class A Common Stock. Three of the Company's nine directors are employees of
MS & Co. and officers (including, in one case, a director) of affiliates of MS &
Co. which control the Morgan Stanley Stockholders. One of the Company's
directors is an officer of Bear Stearns.

The Company is selling an 80% interest in ARM Capital Advisors to an entity
controlled by Emad A. Zikry, President of ARM Capital Advisors. The Company
expects to recognize an immaterial gain on the sale. Under the terms of the
sale, ARM Capital Advisors will continue to provide the Company's subsidiaries
with investment management services through December 31, 1997 on the same basis
as in the past. The terms of the sale further provide that, after December 31,
1997, the Company can continue to engage ARM Capital Advisors as its investment
advisor at agreed upon rates, but the Company may also consider retaining other
investment management firms. In connection with the sale, Mr. Zikry will
terminate his employment with the Company without any severance obligation on
the part of the Company.

PRINCIPAL STOCKHOLDERS

The following table provides information, as of April 30, 1997 after giving
effect to the Recapitalization, concerning beneficial ownership of the Common
Stock and Perpetual Preferred Stock by (i) the Morgan Stanley Stockholders and
each other person or entity known by the Company to beneficially own more than
5% of the outstanding Class A Common Stock, (ii) each director of the Company,
(iii) each Named Executive Officer, and (iv) all directors and executive
officers of the Company as a group. The information in the table is based on
information from the named persons regarding ownership of Common Stock. Unless
otherwise indicated, each of the stockholders has sole voting and investment
power with respect to the shares shown as beneficially owned by them.

TOTAL
COMMON
CLASS A COMMON STOCK CLASS B COMMON STOCK STOCK
------------------------------------------ -------------------------------------------- ---------
TO BE OWNED TO BE OWNED
OWNED PRIOR TO AFTER THE OWNED PRIOR TO AFTER THE AFTER THE
THE OFFERING OFFERING THE OFFERING OFFERING OFFERING
-------------------- -------------------- ---------------------- -------------------- ---------
NUMBER %(1) NUMBER %(1) NUMBER %(1) NUMBER %(1) NUMBER
--------- --------- --------- --------- ----------- --------- --------- --------- ---------

The Morgan Stanley Leveraged
Equity Fund II, L.P.(2)(3)... 920,800 28.2 4,096,453 28.2 8,183,775 57.5 5,008,122 57.5 9,104,575
1221 Avenue of the Americas
New York, New York 10020

Morgan Stanley Capital
Partners III, L.P.(2)(3)..... 599,429 18.3 2,666,754 18.3 5,327,567 37.4 3,260,242 37.4 5,926,996
1221 Avenue of the Americas
New York, New York 10020

Morgan Stanley Capital
Investors, L.P.(2)(3)....... 17,621 * 78,387 * 156,597 1.1 95,832 1.1 174,219
1221 Avenue of the Americas
New York, New York 10020

MSCP III 892 Investors,
L.P.(2)(3)................... 64,013 2.0 284,779 2.0 568,923 4.0 348,156 4.0 632,935
1221 Avenue of the Americas
New York, New York 10020

Oldarm L.P.(4)............... 706,000 21.6 706,000 4.9 -- -- -- -- 706,000
515 West Market Street, 8th
Floor
Louisville, Kentucky
40202-3271

Directors and Named Executive
Officers:

John Franco(5)............. 548,138(6) 15.8 613,944(7) 4.1 -- -- 613,944(7)
Martin H. Ruby(5).......... 336,338(6) 9.7 402,144(7) 2.7 -- -- 402,144(7)
Dennis L. Carr(5).......... 59,868(6) 1.8 70,979(7) * -- -- 70,979(7)
David E. Ferguson(5)....... 93,615(6) 2.8 116,778(7) * -- -- 116,778(7)
John R. Lindholm(5)........ 115,642(6) 3.4 149,261(7) 1.0 -- -- 149,261(7)
Emad A. Zikry.............. 77,659 2.3 101,233(7) * -- -- 101,233(7)
James S. Cole.............. -- -- -- -- -- -- --
Warren M. Foss............. 14,826 * 14,826 * -- -- 14,826
Dudley J. Godfrey, Jr...... 21,723 * 21,723 * -- -- 21,723
Edward D. Powers........... 21,723 * 21,723 * -- -- 21,723
Colin F. Raymond........... -- -- -- -- -- --
Frank V. Sica.............. -- -- -- -- -- --
Irwin T. Vanderhoof........ 7,060 * 7,060 * -- -- 7,060

All directors and executive
officers as a group.......... 1,447,954(6) 36.2 1,694,073(7) 10.9 -- -- 1,694,073(7)

PERPETUAL
PREFERRED
STOCK
----------------------

AFTER THE
OFFERING
----------------------
%(1) NUMBER %
--------- ----------- ---

The Morgan Stanley Leveraged
Equity Fund II, L.P.(2)(3)... 39.1 -- --
1221 Avenue of the Americas
New York, New York 10020
Morgan Stanley Capital
Partners III, L.P.(2)(3)..... 25.5 -- --
1221 Avenue of the Americas
New York, New York 10020
Morgan Stanley Capital
Investors, L.P.(2)(3)....... * -- --
1221 Avenue of the Americas
New York, New York 10020
MSCP III 892 Investors,
L.P.(2)(3)................... 2.7 -- --
1221 Avenue of the Americas
New York, New York 10020
Oldarm L.P.(4)............... 3.0 -- --
515 West Market Street, 8th
Floor
Louisville, Kentucky
40202-3271
Directors and Named Executive
Officers:
John Franco(5)............. 2.6 61,650(8) 3.08%
Martin H. Ruby(5).......... 1.7 1,600(8) *
Dennis L. Carr(5).......... * 500(8) *
David E. Ferguson(5)....... * 3,800(8) *
John R. Lindholm(5)........ * 800 *
Emad A. Zikry.............. * -- --
James S. Cole.............. -- -- --
Warren M. Foss............. * -- --
Dudley J. Godfrey, Jr...... * -- --
Edward D. Powers........... * -- --
Colin F. Raymond........... -- -- --
Frank V. Sica.............. -- -- --
Irwin T. Vanderhoof........ * -- --
All directors and executive
officers as a group.......... 7.0 69,150 3.46%

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

(1) Based on the number of shares outstanding at, or acquirable within 60 days
of, April 30, 1997.

(2) The general partner of MSLEF II and the general partner of the general
partner of the MSCP Funds are wholly owned subsidiaries of MS Group, the
parent of MS & Co.

(3) Pursuant to the Underwriting Agreement, the U.S. Underwriters have agreed to
purchase shares of Class A Common Stock from the Morgan Stanley
Stockholders, if and to the extent the U.S. Underwriters' over-allotment
option is exercised, in proportion to the Morgan Stanley Stockholders'
respective ownership interests in the Company.

(4) Oldarm GP Partnership, the general partner of Oldarm L.P., has the power to
vote, or direct the voting of, the shares of Class A Common Stock owned by
Oldarm L.P. Messrs. Franco and Ruby may, by virtue of their positions as
Co-Chief Executive Officers of Oldarm GP Partnership, be deemed to be
beneficial owners of the Class A Common Stock owned by Oldarm L.P; however,
Messrs. Franco and Ruby disclaim any such beneficial ownership, except to
the extent of their pecuniary interest therein. As of the date hereof, the
Named Executive Officers, excluding Mr. Carr and Dr. Zikry, and certain of
the directors of the Company were limited partners of, or beneficial owners
of, limited partnership interests in Oldarm L.P.

(5) All shares of Class A Common Stock are held directly with the following
exceptions: Mr. Ferguson beneficially owns 1,412 shares which are held in
the IRA account of his wife Jeanne Ferguson; Messrs. Ruby, Lindholm,
Ferguson, and all directors and executive officers as a group hold 141,200
shares, 2,824 shares, 21,886 shares and 192,738 shares, respectively, in
trust for the purpose of securing personal loans, and over which they have
full voting, but limited investment power. In their capacity as managers of
New ARM, LLC, which is the direct owner of 120,020 shares of the Class A
Common Stock, Messrs. Franco and Ruby acting in concert would have voting
and limited investment power over, but no pecuniary interest in, the 120,020
shares of Class A Common Stock (included above), of which they each disclaim
beneficial ownership. 700,600 shares of Class A Common Stock are directly
owned by Oldarm L.P. Despite the fact that the named beneficial owners of
Class A Common Stock as a group hold a majority of the stock of Oldarm GP
Partnership, the general partner of Oldarm L.P., and therefore may be deemed
to beneficially own such shares, each such individual disclaims any
beneficial ownership of the Class A Common Stock owned by Oldarm L.P.,
except to the extent of their pecuniary interest therein. None of the shares
of Class A Common Stock held directly by Oldarm L.P. or New ARM, LLC are
included in the calculation of beneficial ownership by directors and named
executive officers of the Company.

(6) Includes 195,138, 195,138, 31,628, 66,081, 97,992, 77,659 and 733,808 shares
for Messrs. Franco, Ruby, Carr, Ferguson and Lindholm and Dr. Zikry and all
current directors and executive officers as a group, respectively, that may
be acquired upon the exercise of options that are exercisable within 60 days
after April 30, 1997. Such options were granted pursuant to the Option Plan.

(7) Includes the 65,806, 65,806, 11,111, 23,163, 33,619, 23,574 and 246,119 pro
rata distributions of the unallocated Old Options and New Options to Messrs.
Franco, Ruby, Carr, Ferguson and Lindholm and Dr. Zikry and all current
officers and directors as a group, respectively, that may be exercised
within 60 days after April 30, 1997 upon completion of the Offering as
described herein under the heading "Stock Option Plan".

(8) Mr. Franco holds shared investment power over 25,400 shares of the Perpetual
Preferred Stock which are indirectly held by the John and Mary Franco Family
Foundation, Inc. Mr. Franco also disclaims beneficial ownership of such
shares of Perpetual Preferred Stock held by the John and Mary Franco Family
Foundation in accordance with the Foundation's 501(c)(3) tax-exempt status.
In addition, 3,950 shares of Perpetual Preferred Stock are owned indirectly
by Mr. Franco's minor daughter under the Uniform Transfer to Minors Act.
1,600 shares of Perpetual Preferred Stock held by Mr. Ruby are indirectly
owned through Woodstone Ventures LLC, a Limited Liability Company, the
members of which are Mr. Ruby's two minor daughters. Mr. Ferguson owns 3,500
shares of Perpetual Preferred Stock jointly with his wife. Dennis Carr owns
500 shares of Perpetual Preferred Stock jointly with his wife.

* Less than one percent.

DESCRIPTION OF CERTAIN INDEBTEDNESS

The following summary of the Credit Agreement does not purport to be
complete and is qualified in its entirety by reference to the Credit Agreement,
a copy of which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part. Capitalized terms used but not defined herein
have the meanings given to them in the Credit Agreement.

Pursuant to the Credit Agreement, a syndicate of banks provides the Company
with a term loan facility in the principal amount of $40 million bearing a
floating interest rate equal to 7/8 of 1% over LIBOR (6.48% at December 31,
1996). By virtue of an interest rate cap agreement which expires on March 20,
1998, the interest rate on the term loan facility was effectively 6.2% at
December 31, 1996. The loan, which is secured by a pledge of the Company's
assets and all of the Company's interest in the securities of its subsidiaries,
as well as all of Integrity Holdings' interest in the capital stock of
Integrity, matures September 30, 2001, is subject to optional prepayment and
requires compliance by the Company with various financial covenants. At March
31, 1997, aggregate maturities of such indebtedness were: 1997 -- $2 million;
1998 -- $6 million; 1999 -- $8 million; 2000 -- $10 million and 2001 -- $12
million.

The Credit Agreement also provides a revolving credit facility. The maximum
amount that the Company may borrow thereunder is $20 million. The facility is
available through September 30, 2001, and has an annual commitment fee equal to
.25% on the unused portion. The Company has not made any borrowings under the
revolving credit facility to date.

The Credit Agreement contains certain negative covenants which impose
certain restrictions on the Company's operations, including the following:
restrictions on the Company's ability to pay dividends or make distributions
with respect to shares of Common Stock absent compliance with certain prepayment
obligations under the Credit Agreement, restrictions on the incurrence of
indebtedness, restrictions on capital expenditures in excess of $2.0 million per
year plus 50% of the amount of capital expenditures permitted but not made in
the previous fiscal year, prohibiting the ratio of total funded indebtedness to
total capital at the end of any fiscal quarter from exceeding .35 to 1.00,
prohibiting, at the last day of any fiscal quarter of the Company, the fixed
charge ratio from falling below 1.75 to 1.00 and prohibiting, at the last day of
any fiscal quarter of the Company, the surplus relief ratio (as such term is
defined by the NAIC and as computed and consolidated in accordance with IRIS) of
the Integrity Companies (taken together) for any period of four consecutive
fiscal quarters of the Company from exceeding 10% of the surplus of the
Integrity Companies during such period.

In addition, (i) the Company, SBM Certificate Company, ARM Capital Advisors
and ARM Securities may not permit, at any time, the aggregate amount of their
non-subsidiary investments (the "Non-Subsidiary Investments") and the total
admitted assets (other than separate account assets) of the Integrity Companies
(taken as a whole) (the "Total Admitted Assets"), in each case not rated at
least NAIC 1 at such time, to exceed the sum of 40% of the aggregate amount of
the Non-Subsidiary Investments and 40% of the aggregate amount of the Total
Admitted Assets and (ii) the Company, SBM Certificate Company, ARM Capital
Advisors and ARM Securities may not permit, at any time, the aggregate amount of
the Non-Subsidiary Investments and the Total Admitted Assets, in each case that
are not Investment Grade Securities, to exceed the sum of 10% of the aggregate
amount of the Non-Subsidiary Investments and 10% of the aggregate amount of the
Total Admitted Assets.

The Company has entered into a commitment letter with The Chase Manhattan
Bank to provide the Company with a senior secured revolving credit facility (the
"New Revolving Credit Facility"). Pursuant to such commitment letter, the
Company contemplates entering into a new credit agreement (the "New Credit
Agreement") contemporaneous with or subsequent to the consummation of the
Offering. The maximum amount that may be borrowed under the New Revolving Credit
Facility is $75 million. Approximately $38 million will be drawn under the New
Revolving Credit Facility to repay all amounts outstanding under the Credit
Agreement. Loans under the New Revolving Credit Facility will bear a floating
interest rate equal to LIBOR plus a percentage ranging from .325% to .875%,
depending on the

ratings of the Perpetual Preferred Stock. The New Revolving Credit Facility will
be available for a period of five years from the date of the New Credit
Agreement, and has a variable annual commitment fee which can range from .10% to
.25% of the unused portion, depending on the ratings of the Perpetual Preferred
Stock. The New Revolving Credit Facility will be secured in the same manner as
the loans under the Credit Agreement.

As with the Credit Agreement, the New Credit Agreement will contain certain
negative covenants which will impose certain restrictions on the Company's
operations, including the following: a restriction on the Company's ability to
pay dividends or make distributions with respect to shares of Common Stock that
exceed the greater of one-third of the Company's net income (in the preceding
fiscal year) and $3 million, restrictions on the incurrence of indebtedness, a
prohibition on the ratio of total funded indebtedness to total capital at the
end of any fiscal quarter exceeding .30 to 1.00, a prohibition on the ratio of
EBITDA (to be defined in the New Credit Agreement) to Interest Expense to be
less than 2.00 to 1.00 at the last day of any fiscal quarter, and the
restriction on the surplus relief ratio described above. The New Credit
Agreement will not contain the prepayment obligations relating to payments of
dividends and distributions with respect to shares of Common Stock that are
contained in the Credit Agreement.

In addition, the Company, SBM Certificate Company, ARM Capital Advisors and
ARM Securities may not permit, at any time, the aggregate amount of the
Non-Subsidiary Investments and the Total Admitted Assets, in each case that are
not Investment Grade Securities, to exceed the sum of 10% of the aggregate
amount of the Non-Subsidiary Investments and 10% of the aggregate amount of the
Total Admitted Assets.

DESCRIPTION OF CAPITAL STOCK

GENERAL

Prior to the Recaptialization, the Company's authorized capital stock
consisted of 27,280 shares of Class A Common Stock (the "Old Class A Common
Stock"), 1,080 shares of Class B Common Stock (the "Old Class B Common Stock")
and 2,300,100 shares of Preferred Stock, of which 2,300,000 shares were
designated as Perpetual Preferred Stock. The Old Class A Common Stock had a
liquidation preference of $5,000 per share over the Old Class B Common Stock.

In connection with the Offering, the Company will amend and restate its
Certificate of Incorporation and By-laws. Upon such amendment and restatement,
the authorized capital stock of the Company will consist of 150 million shares
of Class A Common Stock, par value $.01 per share (the "Class A Common Stock"),
50 million shares of Class B Common Stock (the "Class B Common Stock"; the Class
A Common Stock and the Class B Common Stock being, collectively, the "Common
Stock"), and 10 million shares of preferred stock, par value $.01 per share (the
"Preferred Stock"). In connection with such amendment and restatement of the
Certificate of Incorporation, the Company will effect the Recapitalization
pursuant to which (i) each outstanding share of Old Class A Common Stock and Old
Class B Common Stock will be converted into one share of Class A Common Stock;
(ii) the Morgan Stanley Stockholders will convert shares of Class A Common Stock
held by them into Class B Common Stock such that, after giving effect to such
conversion, but not giving effect to the Offering, the Morgan Stanley
Stockholders will own, in the aggregate, 49% of the outstanding Class A Common
Stock; and (iii) each share of Common Stock outstanding will be split into 706
shares.

The following summary does not purport to be complete and is subject to the
detailed provisions of, and qualified in its entirety by reference to, the
Certificate of Incorporation and By-laws of the Company, forms of which have
been filed as exhibits to the Registration Statement of which this Prospectus is
a part, and to the applicable provisions of the General Corporation Law of the
State of Delaware (the "DGCL").

COMMON STOCK

Upon completion of the Offering, the Company will have 14,543,619 shares of
Class A Common Stock and 8,712,352 shares of Class B Common Stock outstanding.

CLASS A COMMON STOCK. Holders of Class A Common Stock are entitled to one
vote for each share of Class A Common Stock on each matter submitted to a vote
of stockholders, including the election of directors. Holders of Class A Common
Stock are not entitled to cumulative voting. Shares of Class A Common Stock have
no preemptive or other subscription rights and are convertible by the Morgan
Stanley Stockholders into an equal number of shares of Class B Common Stock.

CLASS B COMMON STOCK. Holders of Class B Common Stock have no right to vote
on matters submitted to a vote of stockholders, except (i) as otherwise required
by law; and (ii) that the holders of Class B Common Stock shall have the right
to vote as a class on any amendment, repeal or modification to the Certificate
of Incorporation that adversely affects the powers, preferences or special
rights of the holders of the Class B Common Stock. Shares of Class B Common
Stock have no preemptive or other subscription rights and are convertible into
an equal number of shares of Class A Common Stock (x) at the option of the
holder thereof to the extent that, following such conversion, the Morgan Stanley
Stockholders will not, in the aggregate, own more than 49% of the outstanding
shares of Class A Common Stock; and (y) automatically upon the transfer of such
shares by any Morgan Stanley Stockholder to a person that is not a Morgan
Stanley Stockholder or an affiliate of a Morgan Stanley Stockholder.

DIVIDENDS. All holders of Common Stock are entitled to receive such
dividends or other distributions, if any, as may be declared from time to time
by the Board of Directors in its discretion out of funds legally available
therefor, subject to the prior rights of any Preferred Stock then outstanding,
and to

share equally, share for share, in such dividends or other distributions as if
all shares of Common Stock were a single class. Dividends or other distributions
declared or paid in shares of Common Stock, or options, warrants or rights to
acquire such stock or securities convertible into or exchangeable for shares of
such stock, are payable to all of the holders of Common Stock ratably according
to the number of shares held by them, in shares of Class A Common Stock to
holders of that class of Stock and in shares of Class B Common Stock to holders
of that class of stock. Delaware law generally requires that dividends be paid
only out of the Company's surplus or current net profits in accordance with the
DGCL. See "Dividend Policy."

LIQUIDATION. Subject to the rights of any holders of Preferred Stock
outstanding, upon the dissolution, liquidation or winding up of the Company, the
holders of Common Stock are entitled to share equally and ratably in the assets
available for distribution after payments are made to the Company's creditors.

FULL PAYMENT AND NONASSESSABILITY. All of the outstanding shares of Common
Stock are, and the Common Stock offered by the Company hereby will be, fully
paid and nonassessable.

PREFERRED STOCK

GENERAL

Under the Certificate of Incorporation, the Company's Board of Directors is
authorized, without further stockholder action, to issue any or all the
authorized Preferred Stock from time to time in one or more series, and for such
consideration, and with such voting powers (not to exceed one vote per share) as
the Board may determine and to determine the designations, preferences and
relative participating, optional or other special rights, and qualifications,
limitations, or restrictions thereon. Stockholders do not have any preemptive
rights with respect to any of the presently authorized but unissued shares of
authorized Preferred Stock. Other than the Perpetual Preferred Stock described
below, as of the date of this Prospectus, the Board of Directors of the Company
has not authorized any series of Preferred Stock and there are no plans,
agreements or understandings for the issuance of any shares of Preferred Stock.

PERPETUAL PREFERRED STOCK

The Company has designated 2,300,000 shares of authorized but previously
undesignated shares of Preferred Stock as the Perpetual Preferred Stock and has
issued 2,000,000 of such shares. The following description of the Perpetual
Preferred Stock is qualified in its entirety by reference to the Company's
Certificate of Incorporation and the Certificate of Designations, Preferences
and Rights relating to the Perpetual Preferred Stock (the "Certificate of
Designations") filed with the Secretary of State of the State of Delaware, which
is filed as an exhibit to the Registration Statement of which this Prospectus is
a part.

Holders of the Perpetual Preferred Stock do not have, by virtue of such
ownership, any preemptive rights with respect to any shares of capital stock of
the Company or any other securities of the Company convertible into or carrying
rights or options to purchase any such shares. The Perpetual Preferred Stock has
a perpetual maturity and is not subject to any sinking fund or other obligation
of the Company to redeem or retire the Perpetual Preferred Stock.

DIVIDENDS. Holders of shares of the Perpetual Preferred Stock are entitled
to receive, when, as and if declared by the Board of Directors of the Company,
cash dividends at a rate of 9 1/2% per annum per share, payable quarterly on the
fifteenth day of March, June, September and December of each year, or, if such
date is not a business day, on the next succeeding business day. Dividends are
cumulative, accrue from the date of original issue and are payable to holders of
record of the Perpetual Preferred Stock as they appear on the books of the
Company on such respective dates, not exceeding 60 days preceding such dividend
payment date, as may be fixed by the Board of Directors of the Company in
advance of the payment of

each particular dividend. Dividends on the Perpetual Preferred Stock accrue
whether or not the Company has earnings, whether or not there are funds legally
available for the payment of such dividends and whether or not such dividends
are declared and will accumulate to the extent they are not paid on the dividend
payment date for the quarter for which they accrue. All dividends paid with
respect to shares of Perpetual Preferred Stock are paid PRO RATA to the holders
entitled thereto. Accruals of dividends do not bear interest.

The Perpetual Preferred Stock ranks prior to the Common Stock of the
Company. Before any dividends (other than dividends payable in Common Stock) on
any class or series of stock of the Company ranking junior to the Perpetual
Preferred Stock as to dividends or upon liquidation shall be declared or paid or
set apart for payment, the holders of shares of the Perpetual Preferred Stock
are entitled to receive full cumulative cash dividends, but only when and as
declared by the Board of Directors, at the annual rate set forth above. When
dividends are not paid in full upon the Perpetual Preferred Stock, any dividends
declared or paid upon shares of Perpetual Preferred Stock and any class or
series of stock ranking on a parity with the Perpetual Preferred Stock
("Dividend Parity Stock") shall be declared or paid, as the case may be, PRO
RATA so that the amount of dividends declared or paid, as the case may be, per
share on the Perpetual Preferred Stock and such Dividend Parity Stock in all
cases bear to each other the same ratio that accumulated and unpaid dividends
per share on the shares of Perpetual Preferred Stock and such Dividend Parity
Stock bear to each other. Unless full accumulated dividends on all outstanding
shares of the Perpetual Preferred Stock have been paid, the Company may not
declare or pay or set apart for payment any dividends or make any distribution
in cash or other property on, or redeem, purchase or otherwise acquire, any
other class or series of stock ranking junior to the Perpetual Preferred Stock
either as to dividends or upon liquidation.

The amount of dividends payable per share for each full quarterly dividend
period is computed by dividing the 9 1/2% annual rate by four and multiplying
the resulting rate by $25. The amount of dividends payable for the initial
dividend period or any period shorter than a full dividend period is computed on
the basis of a 360-day year of twelve 30-day months.

OPTIONAL REDEMPTION. The shares of Perpetual Preferred Stock may not be
redeemed prior to December 15, 1998. On or after December 15, 1998, the Company
may, at its option, redeem all or a part of the shares of Perpetual Preferred
Stock at any time and from time to time, upon at least 30 but not more than 60
days' notice, at a redemption price of $25 per share, plus an amount equal to
all accrued and unpaid dividends and distributions thereon (the "redemption
price"), whether or not declared, to the date fixed for redemption.

The Company shall, on or prior to the date fixed for redemption, but not
earlier than 45 days prior to the redemption date, deposit with its transfer
agent or other redemption agent, as a trust fund, a sum sufficient to redeem the
shares called for redemption, with irrevocable instructions and authority to
such agent to give or complete the required notice of redemption and to pay the
holders of such shares the redemption price upon surrender of their
certificates. Such deposit shall be deemed to constitute full payment of such
shares to their holders and from and after the date of such deposit,
notwithstanding that any certificates for such shares shall not have been
surrendered for cancellation, the shares represented thereby shall no longer be
deemed outstanding, the right to receive dividends and distributions shall cease
to accrue from and after the redemption date, and all rights of the holders of
the Perpetual Preferred Stock called for redemption as stockholders of the
Company will cease and terminate, except the right to receive the redemption
price, without interest, upon the surrender of their respective certificates.

Unless full accumulated dividends on all outstanding shares of the Perpetual
Preferred Stock shall have been or contemporaneously are declared and paid or
set apart for payment for all past dividend periods, the Perpetual Preferred
Stock may not be redeemed unless all the outstanding Perpetual Preferred Stock
is redeemed and neither the Company nor any subsidiary may purchase any shares
of the Perpetual Preferred Stock otherwise than pursuant to a purchase offer
made on the same terms to all

holders of Perpetual Preferred Stock, provided that the Company may complete the
purchase or redemption of shares of Perpetual Preferred Stock for which a
purchase contract was entered into, or notice of redemption of which was
initially given, prior to any time at which the Company becomes in arrears with
respect to any dividends.

Notice of redemption shall be mailed to each holder of Perpetual Preferred
Stock to be redeemed at the address shown on the books of the Company not fewer
than 30 days nor more than 60 days prior to the redemption date. If less than
all of the outstanding shares of Perpetual Preferred Stock are to be redeemed,
the Company will select the shares to be redeemed by lot, PRO RATA (as nearly as
may be practicable), or in such other equitable manner as the Board of Directors
may determine.

VOTING RIGHTS. Except as indicated herein or provided by law, the holders
of Perpetual Preferred Stock are not entitled to vote.

Whenever dividends on the Perpetual Preferred Stock are in arrears for at
least six quarterly dividends, whether or not consecutive, the holders of
Perpetual Preferred Stock (voting as a class with all other series of authorized
Preferred Stock ranking on a parity with the Perpetual Preferred Stock either as
to dividends or upon liquidation and upon which like voting rights have been
conferred and are exercisable) will be entitled to vote for the election of two
additional directors on the terms set forth below until, in the case of the
Perpetual Preferred Stock, all past dividends in arrears on the Perpetual
Preferred Stock shall have been paid in full. Holders of all such series of
authorized Preferred Stock which are granted such voting rights (none of which
is currently outstanding), together with the Perpetual Preferred Stock, will
vote as a single class. In such case, the Board of Directors of the Company will
be increased by two directors, and the holders of all such series of authorized
Preferred Stock, together with the holders of Perpetual Preferred Stock, will
have the exclusive right as a class, as outlined above, to elect two directors
(the "Additional Directors") at the next annual meeting of stockholders or at a
special meeting of holders of all such series of authorized Preferred Stock and
the Perpetual Preferred Stock. At any time when such voting rights shall have
vested, a proper officer of the Company shall, upon written request of holders
of record of 10% of the shares of Perpetual Preferred Stock then outstanding,
call a special meeting of holders of all such series of authorized Preferred
Stock and the Perpetual Preferred Stock for the purpose of such election. For
purposes of the foregoing, each share of Perpetual Preferred Stock shall have
one vote per share, except that when any other series of authorized Preferred
Stock shall have the right to vote with the Preferred Stock as a single class on
any matter, then the Preferred Stock and such other series of authorized
Preferred Stock shall have with respect to such matters one vote per $25 of
stated liquidation preference. Upon termination of the right of the holders of
all such series of authorized Preferred Stock to vote for directors, the term of
office of all directors then in office elected by all such series of authorized
Preferred Stock voting as a class shall terminate. For so long as the holders of
all such series of authorized Preferred Stock shall have the right to vote for
directors, any vacancy in the office of an Additional Director may be filled
(except in the case of the removal of an Additional Director) by a person
appointed by the remaining Additional Director. In the case of the removal of an
Additional Director, or, if there is no remaining Additional Director, the
vacancy may be filled by a person elected by the holders of all such series of
authorized Preferred Stock.

The affirmative vote or consent of the holders of at least two-thirds of the
outstanding shares of the Perpetual Preferred Stock, voting as a class, will be
required to (i) authorize, create or issue, or increase the authorized or issued
amount of shares of, any class or series of stock ranking prior to the Perpetual
Preferred Stock, either as to dividends or upon liquidation, or (ii) amend,
alter or repeal (whether by merger, consolidation or otherwise) any provision of
the Certificate of Incorporation or of the Certificate of Designations so as to
materially and adversely affect the preferences, special rights or powers of the
Preferred Stock; provided, however, that any increase in the authorized
Preferred Stock or the creation and issuance of any other series of authorized
Preferred Stock ranking on a parity with or junior to the Perpetual Preferred
Stock shall not be deemed to materially and adversely affect such preferences,
special rights or powers.

Except as set forth above or as required by law, the holders of Perpetual
Preferred Stock will not be entitled to vote on any merger or consolidation
involving the Company or a sale of all or substantially all of the assets of the
Company.

LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary, before any payment
or distribution of the assets of the Company or proceeds thereof (whether
capital or surplus) shall be made to or set apart for the holders of any class
or series of stock of the Company ranking junior to the Perpetual Preferred
Stock upon liquidation, holders of the Perpetual Preferred Stock shall be
entitled to receive $25 per share (the "stated liquidation preference"), plus an
amount equal to all dividends (whether or not earned or declared) accrued and
unpaid to the date of final distribution (together with the stated liquidation
preference, the "preferential amount"), but such holders shall not be entitled
to any further payment. If, upon any liquidation, dissolution or winding-up of
the Company the assets of the Company, or proceeds thereof, distributable among
the holders of shares of Preferred Stock and any other class or series of stock
ranking on a parity with the Preferred Stock as to payments upon liquidation,
dissolution or winding-up shall be insufficient to pay in full the preferential
amount payable on all such shares of stock, then such assets, or the proceeds
thereof, shall be distributed among such holders ratably in accordance with the
respective amounts that would be payable on such shares if all amounts payable
thereon were paid in full. The voluntary sale, conveyance, lease, exchange or
transfer (for cash, shares of stock, securities or other consideration) of all
or substantially all the property or assets of the Company to, or a
consolidation or merger of the Company with or into, one or more other
corporations (whether or not the Company is the corporation surviving such
consolidation or merger) will not be deemed to be a liquidation, dissolution or
winding-up, voluntary or involuntary.

TRANSFER AGENT. The transfer agent, dividend disbursing agent and registrar
for the Perpetual Preferred Stock is ChaseMellon Shareholder Services LLC.

RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS

Stockholders' rights and related matters are governed by the DGCL, the
Certificate of Incorporation and the By-laws. Certain provisions of the
Certificate of Incorporation and By-laws, which are summarized below, may have
the effect, either alone or in combination with each other, of discouraging or
making more difficult a tender offer or takeover attempt that is opposed by the
Company's Board of Directors but that a stockholder might consider to be in its
best interest. Such provisions may also adversely affect prevailing market
prices for the Common Stock. See "Risk Factors -- Anti-Takeover Provisions."

CLASSIFIED BOARD OF DIRECTORS AND RELATED PROVISIONS. The Certificate of
Incorporation will provide that the Board of Directors be divided into three
classes of directors serving staggered three-year terms. The classes of
directors will be as nearly equal in number as possible. The term of the initial
Class I directors will terminate on the date of the 1998 annual meeting of
stockholders; the term of the initial Class II directors will terminate on the
date of the 1999 annual meeting of stockholders; and the term of the initial
Class III directors shall terminate on the date of the 2000 annual meeting of
stockholders. At each annual meeting of stockholders beginning in 1998,
successors to the class of directors whose term expires at that annual meeting
will be elected for a three-year term. Accordingly, approximately one-third of
the Company's Board of Directors will be elected each year. See "Management --
Directors and Executive Officers." In addition, subject to certain limited
exceptions, if the number of directors is changed, any increase or decrease
shall be apportioned among the classes so as to maintain the number of directors
in each class as nearly equal as possible, and any additional director of any
class elected to fill a vacancy resulting from an increase in such class shall
hold office for a term that shall coincide with the remaining term of that
class, but in no case will a decrease in the number of directors shorten the
term of any incumbent director. Subject to the rights of holders of any
outstanding preferred stock issued by the Company, vacancies on the Board of
Directors may be filled only by the Board of Directors, the

stockholders acting at an annual meeting or, if the vacancy is with respect to a
director elected by a voting group, by action of any other directors elected by
such voting group or such voting group.

The Certificate of Incorporation will also provide that, subject to the
rights of holders of any preferred stock then outstanding and any requirements
of law, directors may be removed only for cause.

ACTION BY WRITTEN CONSENT; SPECIAL MEETING. The Certificate of
Incorporation and By-laws will provide that so long as the Morgan Stanley
Stockholders own in the aggregate at least 25% of the voting Common Stock of the
Company, an action required or permitted to be taken at an annual or special
meeting of stockholders may be taken with the written consent of the holder or
holders of shares having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. From and after the time that
the Morgan Stanley Stockholders no longer own in the aggregate at least 25% of
the voting Common Stock of the Company, an action required or permitted to be
taken at an annual or special meeting of stockholders will not be permitted to
be taken by written consent in lieu of a meeting of stockholders, and, thus,
stockholders will only be permitted to take action at an annual or special
meeting called in accordance with the By-laws. The Certificate of Incorporation
and By-laws will provide that special meetings of stockholders may only be
called by one of the Co-Chief Executive Officers of the Company or by a majority
of the Board of Directors. Special meetings may not be called by the
stockholders.

ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. The Certificate of Incorporation and By-laws will establish
advance notice procedures with regard to stockholder proposals and the
nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as directors. These procedures
provide that the notice of stockholder proposals and stockholder nominations for
the election of directors at an annual meeting must be in writing and received
by the Secretary of the Company not less than 60 days nor more than 90 days
prior to the anniversary date of the previous year's annual meeting or, if the
date of the annual meeting is not within 30 days before or after the anniversary
date of the previous year's annual meeting, not later than the close of business
on the tenth day following the day on which notice of the date of such meeting
was mailed or public disclosure of the date of the meeting of stockholders was
made, whichever first occurs. The notice of stockholder nominations must set
forth certain information with respect to the stockholder giving the notice and
with respect to each nominee.

INDEMNIFICATION. The Certificate of Incorporation and By-laws will provide
that the Company shall advance expenses to and indemnify each director and
officer of the Company to the fullest extent permitted by law.

AMENDMENTS. Stockholders may adopt, alter, amend or repeal provisions of
the By-laws only by vote of the holders of 80% or more of the outstanding Common
Stock and any other voting securities. In addition, the affirmative vote of the
holders of 80% or more of the outstanding Common Stock and any other voting
securities is required to amend certain provisions of the Certificate of
Incorporation, including filling vacancies on the Board of Directors, removal of
directors only for cause, prohibiting stockholder action by written consent,
prohibiting the calling of special meetings by stockholders, approval of
amendments to the By-laws and the provisions referred to above relating to the
classification of the Company's Board of Directors.

LIMITATIONS ON DIRECTORS' LIABILITY

The Certificate of Incorporation will provide that no director of the
Company shall be personally liable to the Company or its stockholders for
monetary damages for any breach of fiduciary duty as a director, except for
liability: (i) for any breach of the director's duty of loyalty to the Company
or its stockholders; (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii) in respect
of certain unlawful dividend payments or stock redemptions or

purchases or (iv) for any transaction from which the director derived an
improper personal benefit. The effect of these provisions will be to eliminate
the rights of the Company and its stockholders (through stockholders' derivative
suits on behalf of the Company) to recover monetary damages against a director
for breach of fiduciary duty as a director (including breaches resulting from
grossly negligent behavior), except in the situations described above. These
provisions will not limit the liability of directors under federal securities
laws and will not affect the availability of equitable remedies such as an
injunction or rescission based upon a director's breach of his duty of care.

SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW

Section 203 of DGCL prohibits certain transactions between a Delaware
corporation and an "interested stockholder," which is defined as a person who,
together with any affiliates and/or associates of such person, beneficially
owns, directly or indirectly, 15% or more of the outstanding voting shares of a
Delaware corporation. This provision prohibits certain business combinations
(defined broadly to include mergers, consolidations, sales or other dispositions
of assets having an aggregate value of 10% or more of the consolidated assets of
the corporation, and certain transactions that would increase the interested
stockholder's proportionate share ownership in the corporation) between an
interested stockholder and a corporation for a period of three years after the
date the interested stockholder acquired its stock, unless: (i) the business
combination is approved by the corporation's board of directors prior to the
date the interested stockholder acquired shares; (ii) the interested stockholder
acquired at least 85% of the voting stock of the corporation in the transaction
in which it became an interested stockholder or (iii) the business combination
is approved by a majority of the board of directors and by the affirmative vote
of two-thirds of the outstanding voting stock owned by disinterested
stockholders at an annual or special meeting. A Delaware corporation, pursuant
to a provision in its certificate of incorporation or by-laws, may elect not to
be governed by Section 203 of the DGCL. The Company anticipates that it will not
make such an election and, as a result, the Company will be subject to the
provisions of Section 203 of the DGCL following completion of the Offering.

LISTING

The Company has applied to have the Class A Common Stock approved for
listing on the American Stock Exchange under the symbol "ARM".

REGISTRAR AND TRANSFER AGENT

ChaseMellon Shareholder Services LLC will act as Registrar and Transfer
Agent for the Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE

Upon the completion of the Offering, the Company will have 23,255,971 shares
of Common Stock outstanding, assuming no exercise of any options granted by the
Company. Of these shares, the 5,750,000 shares of Common Stock issued in the
Offering will be tradeable without restriction or further registration under the
Securities Act, except for any of such shares held by "affiliates" (as defined
under the Securities Act) of the Company. The remaining 17,505,971 shares of
Common Stock will be deemed "restricted" securities within the meaning of Rule
144. Neither shares held by an affiliate nor restricted securities may be
publicly sold in the absence of registration under the Securities Act unless an
exemption from registration is available, including the exemptions contained in
Rule 144.

Generally, Rule 144 provides that a person who has owned restricted
securities for at least one year, or who may be deemed an "affiliate" of the
Company, is entitled to sell, within any three-month period, up to the number of
restricted securities that does not exceed the greater of (i) one percent of the
then outstanding shares of Common Stock or (ii) the average weekly trading
volume during the four calendar weeks preceding the date on which notice of sale
is filed with the SEC. Sales under Rule 144 are subject to certain restrictions
relating to manner of sale, volume of sales and the availability of current
public information about the Company. In addition, restricted securities that
have been held for at least two years by a person who has not been an
"affiliate" of the Company during the preceding three months may be sold under
Rule 144(k) without regard to the volume limitations or current public
information or manner of sale requirements of Rule 144. As defined in Rule 144,
an "affiliate" of an issuer is a person that directly, or indirectly through the
use of one or more intermediaries, controls, or is controlled by, or is under
the common control with such issuer.

Each of the Company, its directors and executive officers, the Morgan
Stanley Stockholders and the Company's other stockholders has agreed that,
without the prior written consent of the U.S. Representatives (as defined
herein), in the case of the Morgan Stanley Stockholders, and MS & Co., in the
case of the Company and all other stockholders, and subject to certain
limitations, it will not (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of Class A Common Stock or any securities
convertible into or exercisable or exchangeable for Class A Common Stock
(provided that such shares or securities are either owned on the date of this
Prospectus or are thereafter acquired prior to or in connection with the
Offering) or (ii) enter into any swap or other arrangement that transfers, in
whole or in part, any of the economic consequences of ownership of the Class A
Common Stock, whether any such transaction described in clause (i) or (ii) of
this sentence is to be settled by delivery of Class A Common Stock or such other
securities, in cash or otherwise, for a period of 180 days after the date of
this Prospectus, other than (a) the shares of Class A Common Stock to be sold
hereby; (b) the issuance by the Company of shares of Class A Common Stock upon
the exercise of an option or warrant or the conversion of a security outstanding
on the date of this Prospectus; and (c) the issuance by the Company of any
shares of Class A Common Stock or other securities or the grant by the Company
of any options to purchase shares of Class A Common Stock issued pursuant to the
Company's employee benefit plans.

Pursuant to the Stockholders' Agreement, the Company has granted the Morgan
Stanley Stockholders certain "demand" registration rights with respect to the
shares of Common Stock held by the Morgan Stanley Stockholders. In addition to
such demand rights, the Morgan Stanley Stockholders will be entitled, subject to
certain limitations, to register shares of Common Stock in connection with a
registration statement prepared by the Company. See "Certain Relationships and
Related Party Transactions -- Stockholders' Agreement." Each of the Morgan
Stanley Stockholders has agreed that, without the prior written consent of the
U.S. Representatives, it will not, during the period ending 180 days after the
date of this Prospectus, make any demand for, or exercise any right with respect
to, the registration of any shares of Class A Common Stock or any security
convertible into or exercisable or exchangeable for Class A Common Stock.

Subject to the lock-up period described above, the Morgan Stanley
Stockholders may choose to dispose of the Common Stock owned by them. The timing
of such sales or other dispositions by such stockholders (which could include
distributions to the Morgan Stanley Stockholders' limited partners) will depend
on market and other conditions, but could occur relatively soon after the
lock-up period, including pursuant to the exercise of their registration rights.
The Morgan Stanley Stockholders are unable to predict the timing of sales by any
of their limited partners in the event of a distribution to them. Such
dispositions could be privately negotiated transactions or public sales.

Prior to the Offering, there has been no public market for the Class A
Common Stock. Although the Company has applied to have the Class A Common Stock
approved for listing on the American Stock Exchange, there can be no assurance
that an active trading market for the Class A Common Stock will develop or
continue after the Offering or that the Class A Common Stock offered hereby will
trade at or above the initial public offering price. No prediction can be made
as to the effect, if any, that future sales of shares, or the availability of
shares for future sale, will have on the market price prevailing from time to
time. Sales of substantial amounts of Class A Common Stock (including shares
issued upon the exercise of stock options in the public market, or the
perception that such sales could occur) could adversely affect the prevailing
market price of the Class A Common Stock in the public market or the ability of
the Company to raise additional capital through the sale of its equity
securities. See "Risk Factors -- Absence of Prior Public Market; Possible
Volatility of Stock Price and of the Securities Market."

At the time the Offering is consummated, the Company will have granted
2,428,640 options under the Option Plan and has reserved 2,428,640 shares of
Class A Common Stock in connection with the exercise of such options.
Additionally, the Company will have reserved 1,600,000 shares of Class A Common
Stock for use in connection with the grant of future options under the 1997
Equity Plan.

CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS

The following is a general discussion of certain United States federal tax
consequences expected to result from the ownership and disposition of the Class
A Common Stock by a holder that, for United States federal income tax purposes,
is not a "United States person" (each such person is referred to herein as a
"Non-United States Holder"). For purposes of this discussion, the term "United
States person" means a person that, for United States federal income tax
purposes, is (i) a citizen or resident of the United States, (ii) a corporation
or partnership created or organized in or under the laws of the United States or
of any State, (iii) an estate the income of which is subject to United States
federal income tax, regardless of its source, or (iv) a trust if (a) a court
within the United States is able to exercise primary supervision over the
administration of the trust and (b) one or more United States fiduciaries have
the authority to control all substantial decisions of the trust. Holders who are
resident alien individuals as to the United States will be subject to United
States federal taxation with respect to the Class A Common Stock as if they were
United States citizens, and thus, are not Non-United States Holders for purposes
of this discussion.

This discussion is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), the applicable Treasury regulations ("Regulations"), and public
administrative and judicial interpretations of the Code and Regulations as of
the date hereof, all of which are subject to change, which changes could be
applied retroactively. This discussion does not purport to cover all aspects of
United States federal taxation that may be relevant to, or the actual tax effect
that any of the matters described herein will have on, any particular Non-United
States Holder and does not address any tax consequences arising under the laws
of any foreign, state, or local taxing jurisdiction.

The Company has not obtained an opinion of counsel with respect to the
matters discussed below, and nothing contained herein should be construed as
constituting such an opinion. Moreover, this discussion does not consider any
specific facts or circumstances that may apply to a particular Non-United States
Holder.

THIS DISCUSSION IS FOR GENERAL INFORMATION PURPOSES ONLY. EACH PROSPECTIVE
INVESTOR IS EXPECTED AND URGED TO CONSULT ITS OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO SUCH PERSON OF OWNING AND DISPOSING OF CLASS A
COMMON STOCK (INCLUDING SUCH PERSON'S STATUS AS A UNITED STATES PERSON OR A
NON-UNITED STATES PERSON) AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS
OF ANY FOREIGN, STATE, OR LOCAL TAXING JURISDICTION.

DIVIDENDS

Dividends paid by the Company to a Non-United States Holder will generally
be subject to withholding of United States federal income tax at the rate of 30
percent, or such lower rate as may be specified by an applicable income tax
treaty, unless the dividend is effectively connected with the conduct of a trade
or business within the United States by the Non-United States Holder or, if any
income tax treaty applies, is attributable to a United States permanent
establishment of the Non-United States Holder and the Non-United States Holder
provides the payor with proper documentation (Form 4224). In order to claim the
benefit of an applicable tax treaty, a Non-United States Holder may have to file
with the Company or its dividend paying agent an exemption or reduced treaty
rate certificate or letter in accordance with the terms of the treaty. Under
current Regulations, for purposes of determining whether tax is to be withheld
at a 30 percent rate or at a reduced rate as specified by an income tax treaty,
the Company ordinarily will presume that dividends paid to an address in a
foreign country are paid to a resident of such country absent knowledge that
such presumption is not warranted. However, under proposed Regulations which
have not yet been put into effect, additional certification requirements would
apply after December 31, 1997. See "--Information Reporting and Backup
Withholding."

In the case of dividends that are effectively connected with a Non-United
States Holder's conduct of a trade or business in the United States or, if an
income tax treaty applies, are attributable to a United States permanent
establishment of the Non-United States Holder, the Non-United States Holder will
generally be subject to the same United States federal income tax on net income
that applies to United States persons. A Non-United States Holder that is a
corporation receiving effectively connected dividends may also be subject to an
additional branch profits tax which is imposed, under certain circumstances, at
a rate of 30 percent (or such lower rate as may be specified by an applicable
treaty) of the corporate Non-United States Holder's "effectively connected
earnings and profits," subject to certain adjustments.

GAIN ON DISPOSITION

Except under special rules for individuals described below, a Non-United
States Holder generally will not be subject to United States federal income tax
on gain resulting from a sale or other disposition of Class A Common Stock
unless the gain is (i) effectively connected with the conduct of a United States
trade or business by the Non-United States Holder or (ii) treated as effectively
connected with such a trade or business because the Company is or has been a
"United States real property holding corporation" within the meaning of Section
897(c)(2) of the Code and certain other conditions are satisfied as discussed
below. Any gain from the disposition of Class A Common Stock that is (or is
treated as) effectively connected with a United States trade or business will be
subject to substantially the same United States federal income tax treatment
that applies to United States persons (and, in the case of corporate Non-United
States Holders, may be subject to the branch profits tax), except as otherwise
provided by an applicable United States income tax treaty.

A corporation is generally a "United States real property holding
corporation" for United States federal income tax purposes if the fair market
value of its United States real property interests equals or exceeds 50 percent
of the sum of the fair market value of its worldwide real property interests
plus its other assets used or held for use in a trade or business both within
and outside of the United States. The Company does not believe that it is a
United States real property holding corporation; however, there can be no
assurance that the Company will not become, or be determined to be or have been,
such a corporation. Even if the Company becomes a United States real property
holding corporation, such status will not cause gain from the disposition of
Class A Common Stock to be treated as effectively connected with a United States
trade or business so long as (i) the Class A Common Stock is regularly traded on
an established securities market (as defined in Regulations) and (ii) the
Non-United States Holder has not held, directly or indirectly, more than 5
percent of the Class A Common Stock at any time during the five-year period
ending on the date of disposition.

Special rules apply to individual Non-United States Holders. An individual
Non-United States Holder who recognizes gain from the disposition of Class A
Common Stock held as a capital asset and is present in the United States for a
period or periods aggregating 183 days or more during the taxable year of
disposition generally will be taxed at a rate of 30 percent on any such gain
(less certain capital losses, if any, form United States sources), if the
Non-United States Holder either (i) has a "tax home" in the United States (as
defined in Regulations) or (ii) maintains an office or other fixed place of
business in the United States to which such gain is attributable. In addition,
certain individual Non-United States Holders who once were United States
citizens may be subject to special rules applicable to United States
expatriates.

FEDERAL ESTATE TAXES

Class A Common Stock owned or treated as owned by an individual who is not a
citizen or resident (as specially defined for United States federal estate tax
purposes) of the United States at the date of death will be included in such
individual's estate for United States federal estate tax purposes and thus will
be subject to United States federal estate tax, unless an applicable estate or
other tax treaty provides otherwise.

INFORMATION REPORTING AND BACKUP WITHHOLDING

The Company must report annually to the United States Internal Revenue
Service ("IRS") and to each Non-United States Holder the amount of dividends
paid to, and the tax withheld with respect to, such Non-United States Holder,
regardless of whether any tax was actually withheld because, for example, the
dividends were effectively connected with a trade or business of the Non-United
States Holder in the United States or the withholding requirement was reduced or
eliminated under an applicable United States income tax treaty. That information
may also be made available to the tax authorities of the country in which the
Non-United States Holder resides under the provisions of an applicable income
tax treaty or agreement.

United States backup withholding (which generally is imposed at the rate of
31 percent on certain payments to persons not otherwise exempt who fail to
furnish certain identifying information to the IRS) will generally not apply to
dividends paid to a Non-United States Holder that are subject to withholding at
the 30 percent rate (or would be so subject but for a reduced rate under an
applicable income tax treaty). In addition, under current law the payor of
dividends may rely on the payee's foreign address in determining that the payee
is exempt from backup withholding, unless the payor has knowledge that the payee
is in fact a United States person. However, under proposed Regulations, in the
case of dividends paid after December 31, 1997 (December 31, 1999, in the case
of dividends paid to accounts in existence on or before the date that is 60 days
after the proposed Regulations are published as final Regulations), a Non-United
States Holder generally would be subject to backup withholding at a 31 percent
rate, unless certain certification procedures (or, in the case of payments made
outside the United States with respect to an offshore account, certain
documentary evidence procedures) are complied with directly or through an
intermediary.

These backup withholding and information reporting requirements also apply
to the gross proceeds paid to a Non-United States Holder upon the disposition of
Class A Common Stock by or through a United States office of a United States or
foreign broker, unless the Non-United States Holder certifies to the broker
under penalties of perjury as to its name and address and the holder either is a
Non-United States Holder or otherwise establishes an exemption from the
requirements. Generally, United States information reporting and backup
withholding will not apply to a payment of disposition proceeds if the payment
is made outside the United States through a non-United States office of a
non-United States broker. However, information reporting requirements (but not
backup withholding) will apply to a payment of the proceeds of a disposition of
Class A Common Stock by or through a foreign office of (i) a United States
broker, (ii) a foreign broker 50 percent or more of whose gross income for
certain periods is effectively connected with the conduct of a trade or business
in the United States, or (iii) a foreign broker that is a "controlled foreign
corporation" for United States federal income tax purposes, unless the broker
has documentary evidence in its records that the holder is a Non-United States
Holder and certain other conditions are met, or the holder otherwise establishes
an exemption from the requirements. Neither backup withholding nor information
reporting will generally apply to a payment of the proceeds of a disposition of
Class A Common Stock by or through a foreign office of a foreign broker not
described in the preceding sentence.

Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Non-United
States Holder's United States federal income tax liability, provided that
required information is furnished to the IRS.

UNDERWRITERS

Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the U.S.
Underwriters named below for whom Morgan Stanley & Co. Incorporated, Donaldson,
Lufkin & Jenrette Securities Corporation and Oppenheimer & Co., Inc. are acting
as U.S. Representatives, and the International Underwriters named below for whom
Morgan Stanley & Co. International Limited, Donaldson, Lufkin & Jenrette
Securities Corporation and Oppenheimer & Co., Inc. are acting as International
Representatives, have severally agreed to purchase, and the Company has agreed
to sell to them, severally, the respective number of shares of Class A Common
Stock set forth opposite the names of such Underwriters below:

NUMBER OF
NAME SHARES
- --------------------------------------------------------------------------------------------------- -------------

U.S. Underwriters:
Morgan Stanley & Co. Incorporated................................................................
Donaldson, Lufkin & Jenrette Securities Corporation..............................................
Oppenheimer & Co., Inc...........................................................................
-------------
Subtotal.....................................................................................
-------------

International Underwriters:
Morgan Stanley & Co. International Limited.......................................................
Donaldson, Lufkin & Jenrette Securities Corporation..............................................
Oppenheimer & Co., Inc...........................................................................
-------------
Subtotal.....................................................................................
-------------
Total....................................................................................
-------------
-------------

The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives, are collectively referred
to as the "Underwriters" and the "Representatives," respectively. The
Underwriting Agreement provides that the obligations of the several Underwriters
to pay for and accept delivery of the shares of Class A Common Stock offered
hereby are subject to the approval of certain legal matters by their counsel and
to certain other conditions. The Underwriters are obligated to take and pay for
all of the shares of Class A Common Stock offered hereby (other than those
shares covered by the U.S. Underwriters' over-allotment option described below)
if any such shares are taken.

Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (i)
it is not purchasing any Shares (as defined herein) for the account of anyone
other than a United States or Canadian Person (as defined herein) and (ii) it
has not offered or sold, and will not offer or sell, directly or indirectly, any
Shares or distribute any prospectus relating to the Shares outside the United
States or Canada or to anyone other than a United States or Canadian Person.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that, with certain
exceptions: (i) it is not purchasing any Shares for the account of any United
States or Canadian Person and (ii) it has not offered or sold, and will not
offer or sell, directly or indirectly, any Shares or distribute any prospectus
relating to the Shares in the United States or Canada or to any United States or
Canadian Person. With respect to any Underwriter that is a U.S. Underwriter and
an International Underwriter, the foregoing representations and agreements (i)
made by it in its capacity as a U.S. Underwriter apply only to it in its
capacity as a U.S. Underwriter and (ii) made by it in its capacity as an
International Underwriter apply only to it in its capacity as an International
Underwriter. The foregoing limitations do not apply to stabilization
transactions or to certain other transactions specified in the Agreement between
U.S. and International Underwriters. As used herein, "United States or Canadian
Person" means any national or resident of the

United States or Canada, or any corporation, pension, profit-sharing or other
trust or other entity organized under the laws of the United States or Canada or
of any political subdivision thereof (other than a branch located outside the
United States and Canada of any United States or Canadian Person), and includes
any United States or Canadian branch of a person who is otherwise not a United
States or Canadian Person. All shares of Class A Common Stock to be purchased by
Underwriters under the Underwriting Agreement are referred to herein as the
"Shares."

Pursuant to the Agreement between U.S. and International Underwriters, sales
may be made between the U.S. Underwriters and the International Underwriters of
any number of Shares as may be mutually agreed. The per share price of any
Shares sold shall be the public offering price set forth on the cover page
hereof, in United States dollars, less an amount not greater than the per share
amount of the concession to dealers set forth below.

Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any Shares, directly or indirectly, in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and has
represented that any offer or sale of Shares in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer or sale is made. Each U.S.
Underwriter has further agreed to send to any dealer who purchases from it any
of the Shares a notice stating in substance that, by purchasing such Shares,
such dealer represents and agrees that it has not offered or sold, and will not
offer or sell, directly or indirectly, any of such Shares in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and that
any offer or sale of Shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the province or territory of Canada
in which such offer or sale is made, and that such dealer will deliver to any
other dealer to whom it sells any of such Shares a notice containing
substantially the same statement as is contained in this sentence.

Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not offered
or sold and, prior to the date six months after the closing date for the sale of
the Shares to the International Underwriters, will not offer or sell, any Shares
to persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Shares in, from or otherwise involving
the United Kingdom; and (iii) it has only issued or passed on and will only
issue or pass on in the United Kingdom any document received by it in connection
with the offering of the Shares to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996, or is a person to whom such document may otherwise
lawfully be issued or passed on.

Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell, directly or indirectly, in Japan or
to or for the account of any resident thereof, any of the Shares acquired in
connection with the distribution contemplated hereby, except for offers or sales
to Japanese International Underwriters or dealers and except pursuant to any
exemption from the registration requirements of the Securities and Exchange Law
and otherwise in compliance with applicable provisions of Japanese law. Each
International Underwriter has further agreed to send to any dealer who purchases
from it any of the Shares a notice stating in substance that, by purchasing such
Shares, such dealer represents and agrees that it has not offered or sold, and
will not offer or sell, any of such Shares, directly or indirectly, in Japan or
to or for the account of any resident thereof except for offers or sales to
Japanese

International Underwriters or dealers and except pursuant to any exemption from
the registration requirements of the Securities and Exchange Law and otherwise
in compliance with applicable provisions of Japanese law, and that such dealer
will send to any other dealer to whom it sells any of such Shares a notice
containing substantially the same statement as is contained in this sentence.

The Underwriters initially propose to offer part of the shares of Class A
Common Stock directly to the public at the public offering price set forth on
the cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ a share to other Underwriters or to certain dealers. After
the initial offering of the shares of Class A Common Stock, the offering price
and other selling terms may from time to time be varied by the Representatives.

Pursuant to the Underwriting Agreement, the Morgan Stanley Stockholders have
granted to the U.S. Underwriters an option, exercisable for 30 days from the
date of this Prospectus, to purchase up to an aggregate of 862,500 additional
shares of Class A Common Stock at the public offering price set forth on the
cover page hereof, less underwriting discounts and commissions. The U.S.
Underwriters may exercise such option to purchase solely for the purpose of
covering over-allotments, if any, made in connection with the offering of the
shares of Class A Common Stock offered hereby. To the extent such option is
exercised, each U.S. Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares of Class A Common Stock as the number set forth next to such U.S.
Underwriter's name in the preceding table bears to the total number of shares of
Class A Common Stock set forth next to the names of all U.S. Underwriters in the
preceding table.

The Company has applied to have the Class A Common Stock approved for
listing on the American Stock Exchange under the symbol "ARM".

Each of the Company, its directors and executive officers, the Morgan
Stanley Stockholders and the Company's other stockholders has agreed that,
without the prior written consent of the U.S. Representatives, in the case of
the Morgan Stanley Stockholders, and MS & Co., in the case of the Company and
all other stockholders, and subject to certain exceptions, it will not (i)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of, directly or indirectly, any shares
of Class A Common Stock or any securities convertible into or exercisable or
exchangeable for Class A Common Stock (provided that such shares or securities
are either owned on the date of this Prospectus or are hereafter acquired prior
to or in connection with the Offering) or (ii) enter into any swap or other
arrangement that transfers, in whole or in part, any of the economic
consequences of ownership of the Class A Common Stock, whether any such
transaction described in clause (i) or (ii) of this sentence is to be settled by
delivery of Class A Common Stock or such other securities, in cash or otherwise,
for a period of 180 days after the date of this Prospectus, other than (a) the
shares of Class A Common Stock to be sold hereby, (b) the issuance by the
Company of shares of Class A Common Stock issued upon the exercise of an option
or warrant or the conversion of a security outstanding on the date of the
Prospectus and (c) the issuance by the Company of any shares of Class A Common
Stock or other securities or the grant by the Company of any options to purchase
shares of Class A Common Stock issued pursuant to the Company's employee benefit
plans.

Prior to the Offering, there has been no public market for the Class A
Common Stock. Based on the ownership interests of the Morgan Stanley
Stockholders in the Company, the Company may be deemed to be an affiliate of MS
& Co. pursuant to Rule 2720 of the Conduct Rules of the NASD. The initial public
offering price for the Class A Common Stock will be determined by negotiations
among the Company and the Underwriters in accordance with the recommendation of
Donaldson, Lufkin & Jenrette Securities Corporation, the "qualified independent
underwriter," as is required by Rule 2720 of the Conduct Rules of the NASD.
Among the factors to be considered in such negotiations are the sales, earnings
and certain other financial and operating information of the Company in recent
periods, the future prospects of the

Company and its industry in general, certain ratios, market prices and such
other factors as are deemed relevant, including the general condition of the
securities markets. The initial public offering price does not necessarily bear
any relationship to the Company's assets, book value, revenues or other
established criteria of value, and should not be considered indicative of the
actual value of the Class A Common Stock. The Company has agreed to indemnify
Donaldson, Lufkin & Jenrette Securities Corporation against certain liabilities,
including liabilities under the Securities Act.

Pursuant to the provisions of Rule 2720 of the Conduct Rules of the NASD,
NASD members or affiliates of NASD members may not execute transactions in the
Class A Common Stock offered hereby to any accounts over which they exercise
discretionary authority without prior written approval of the customer.

The Underwriters have informed the Company that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
Class A Common Stock offered by them.

At the request of the Company, the Underwriters have reserved 460,000 shares
of the Class A Common Stock for sale at the initial public offering price to
employees of the Company, to New ARM LLC and to certain partners of Oldarm L.P.
The number of shares available for sale to the public will be reduced to the
extent such individuals purchase such reserved shares. Reserved shares purchased
by such individuals will, except as restricted by applicable securities laws and
NASD rules be available for resale following the Offering.

In order to facilitate the offering of the Class A Common Stock, the
Underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Class A Common Stock. Specifically, the Underwriters may
over-allot in connection with the Offering, creating a short position in the
Class A Common Stock for their own account. In addition, to cover
over-allotments or to stabilize the price of the Class A Common Stock, the
Underwriters may bid for, and purchase, shares of the Class A Common Stock in
the open market. Finally, the underwriting syndicate may reclaim selling
concessions allowed to an Underwriter or a dealer for distributing the Class A
Common Stock in the Offering, if the syndicate repurchases previously
distributed Class A Common Stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Class A Common Stock above
independent market levels. The Underwriters are not required to engage in these
activities, and may end any of these activities at any time.

The Company, the Morgan Stanley Stockholders and the Underwriters have
agreed to indemnify each other against certain liabilities, including
liabilities arising under the Securities Act.

From time to time, MS & Co. has provided, and continues to provide,
investment banking and financial advisory services to the Company and its
affiliates for which they have received customary fees and commissions. Three of
the Company's nine directors are employees of MS & Co.

After giving effect to the Offering, affiliates of MS & Co. will own
approximately 68% of the outstanding shares of Common Stock (64% if the U.S.
Underwriters' over-allotment option is exercised in full). For a description of
certain transactions between the Company and MS & Co., see "Certain
Relationships and Related Party Transactions."

LEGAL MATTERS

Certain legal matters in connection with the Class A Common Stock offered
hereby are being passed upon for the Company by Shearman & Sterling, New York,
New York. Shearman & Sterling regularly represents MS & Co., MS Group, MSLEF II
and the MSCP Funds on a variety of legal matters. Certain legal matters are
being passed upon for the Underwriters by LeBoeuf, Lamb, Greene & MacRae,
L.L.P., a limited liability partnership including professional corporations, New
York, New York. LeBoeuf, Lamb, Greene & MacRae, L.L.P. regularly represents the
Company on insurance related matters. Donald B. Henderson, Jr., a partner of
LeBoeuf, Lamb, Greene & MacRae, L.L.P., is a director of National Integrity.

100

EXPERTS

The consolidated financial statements of the Company at December 31, 1996
and 1995, and for each of the three years in the period ended December 31, 1996,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, is required to file reports, proxy statements and
other information with the SEC. Such reports, proxy statements and other
information can be inspected and copied at the Public Reference Section of the
SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
SEC's regional offices at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of the reports, proxy statements and other information can be
obtained from the Public Reference Section of the SEC, Washington, D.C. 20549,
at prescribed rates. The SEC maintains a web site on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
The preferred stock of the Company is traded on the American Stock Exchange
(Symbol: ARM Pr). Such reports, proxy statements and other information
concerning the Company also can be inspected at the offices of the American
Stock Exchange, 86 Trinity Place, New York, New York 10006.

The Company has filed with the SEC a Registration Statement on Form S-1
under the Securities Act with respect to the securities offered by this
Prospectus. The Registration Statement has been filed electronically through the
SEC's Electronic Data Gathering, Analysis, and Retrieval System and may be
accessed electronically by means of the SEC's home page on the Internet at
http://www.sec.gov. As permitted by the rules and regulations of the SEC, this
Prospectus does not contain all of the information set forth in the Registration
Statement. For further information about the Company and the securities offered
hereby, reference is made to the Registration Statement and to the financial
statements, exhibits and schedules filed therewith. The statements contained in
this Prospectus about the contents of any contract or other document referred to
are not necessarily complete, and in each instance, reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. Copies of each such document may be obtained from the SEC at its
principal office in Washington, D.C. upon payment of the charges prescribed by
the SEC.

101

GLOSSARY OF SELECTED INSURANCE TERMS

Adjusted capital and surplus................. The sum of statutory-basis capital and
surplus and asset valuation reserves and
asset valuation reserves of wholly owned
insurance subsidiaries.

Annuity...................................... A contract that provides for a fixed or
variable periodic payment for a specified
period of time.

Asset valuation reserve ("AVR").............. A formula-driven liability on an insurer's
statutory-basis financial statements designed
to provide over time for potential losses
associated with investments. The AVR
establishes statutory reserves for mortgage
loans, equity real estate and joint ventures
as well as for fixed maturities and common
and preferred stock. The AVR generally
captures all realized and unrealized gains
and losses on such assets, other than those
resulting from changes in interest rates, and
cushions surplus from large swings related to
capital gains or losses. The AVR has no
effect on financial statements prepared in
conformity with GAAP.

Assets under management...................... Spread-based and fee-based customer deposits,
off-balance sheet fee-based deposits under
marketing partnership arrangements and
surplus assets.

Capital and surplus.......................... Consists of capital stock, paid-in or
contributed surplus, special surplus funds
and unassigned surplus determined in
accordance with statutory accounting
practices.

Cede......................................... To transfer to a reinsurer all or part of the
insurance written by an insurance entity.

Crediting rates.............................. Interest rates applied to annuity contracts
and life insurance policies during the
accumulation period, whether a guaranteed
fixed rate or variable rate or some
combination thereof.

Customer deposits............................ Funds received from a customer under an
insurance contract which accumulate interest
or investment income performance, depending
on the contract.

Deferred annuity............................. An annuity purchased with a single premium or
a series of installment premiums that
provides for the income payments to begin at
some future date.

Deferred policy acquisition costs............ Policy acquisition costs (as defined
elsewhere in this Glossary) that are deferred
and amortized based on the present value of
estimated gross profits, for investment-type
products, related to the issued policy in
conformity with GAAP.

102

Disintermediation............................ The risk to a financial institution of a loss
due to the movement of customers' funds at
book value (i.e., without a market value
adjustment) when interest rates are higher
than at contract inception.

Fixed annuity................................ An annuity that guarantees the preservation
of the assets contributed to the contract and
the interest rate those contributions will
earn. The guaranteed rate can vary in
duration depending on whether the contract is
in the accumulation or pay-out phase. The
guaranteed rate may change periodically
during the accumulation phase depending on
financial market interest rates.

Flexible premium deferred annuities.......... Deferred annuities (as defined elsewhere in
this Glossary) that permit the contractholder
to vary the amounts and timing of premium
payments.

403(b) tax-deferred annuities................ Annuities issued by life insurance companies
that are available only to employees of
educational and charitable organizations.
Tax-deferred contributions are allowed for
such employees through voluntary salary
reduction or pursuant to an employer-funded
plan.

General account.............................. All of the assets of an insurance company
held for the purposes of the insurance
company's general business, as distinguished
from separate account assets (as defined
elsewhere in this Glossary).

Guaranteed investment contracts.............. Contracts sold to the qualified and
non-qualified institutional markets for use
in public and private retirement plans,
municipal funds, endowment and foundation
funds, mutual funds, government funds and
trust funds. These contracts guarantee
principal and a stated interest rate for a
specified period of time.

Guaranteed rate options ("GROs")............. Fixed rate options within both fixed and
variable annuity contracts which allow
customers to lock in a fixed return for a
specified number of years. Deposits into GROs
are held in a separate account established by
the insurance company. Funds may be
transferred to or from any of the guarantee
period options (or to other investment
options within the annuity contract) subject
to a market value adjustment.

103

Guaranteed separate account.................. Assets held in an insurer's separate account,
where the insurer provides some form of
guarantee on the rate credited to the annuity
contract. This guarantee is backed by the
general account assets of the insurer. Assets
held in guaranteed separate accounts usually
contain a market value adjustment to protect
the insurer against disintermediation risk.

Immediate annuity............................ An annuity that begins payments to the
contractholder after a single premium payment
is made.

Interest maintenance reserve ("IMR")......... A liability on an insurer's statutory-basis
financial statements which is increased or
decreased with the portion of realized
capital gains or losses, respectively, that
result from the sale of fixed-income
securities and that are attributable to
changes in interest rates. The IMR is
required to be amortized against earnings on
a basis reflecting the remaining period to
maturity of the fixed-income securities sold.
The IMR has no effect on financial statements
prepared in accordance with GAAP.

Investment spread............................ The difference between income earned on
investments and interest credited on customer
deposits.

Lapse or lapsation........................... The termination or forfeiture of an insurance
policy prior to maturity.

Market value adjustment...................... For GROs, an adjustment, either positive or
negative, made to the contractholder's
account value for any transfer, partial
withdrawal in excess of the free withdrawal
amount or surrender (as defined elsewhere in
this Glossary).

Non-guaranteed separate account.............. Assets held in an insurer's separate account
as to which the insurer does not guarantee
any minimum return to the contractholder.
Rather, any investment income and net
realized capital gains and losses with
respect to these assets accrue directly to
the contractholder.

Non-qualified annuities...................... Annuities which do not comply with the
requirements of tax qualified retirement
plans.

Off-balance sheet assets..................... Assets that are not recorded on the Company's
balance sheet and which the Company manages
for a fee.

104

Persistency.................................. The maintenance of insurance policies in full
force until completion of the term for which
the policy was written (with respect to life
insurance this includes death or maturity).
The term may also refer to continuance and
renewal of insurance and annuity contracts.

Policy acquisition costs..................... Costs incurred in the marketing and issuance
(i.e., acquisition) of new and renewal
insurance and annuity contracts. Acquisition
costs include those costs that vary with and
are primarily related to the acquisition of
insurance and annuity contracts (for example,
agent and broker commissions and certain
underwriting and policy issue costs).

Premiums and deposits........................ The amount of money that the contractholder
pays to the insurance company for an
insurance policy or annuity. Deposits under
investment-type products are not recognized
as premium income under GAAP.

Reinsurance.................................. The acceptance by one or more insurers,
called reinsurers, of a portion of the risk
underwritten by another insurer, called the
ceding company, who has directly written the
coverage. However, the legal rights of the
insured generally are not affected by the
reinsurance transaction and the ceding
company remains liable to the insured for
payment of policy benefits.

Separate account............................. Investment accounts maintained by an insurer
to which funds have been allocated for
certain policies under provisions of relevant
state law. The investments in each separate
account are maintained separately from those
in other separate accounts and from the
general account. Separate accounts may be of
a guaranteed or non-guaranteed nature.

Single premium deferred annuities............ Annuities that require a one-time lump sum
premium payment upon the issuance of the
contract and that begin payments to the
holder at a specified later date.

Single premium endowment contracts........... Contracts under which principal is
guaranteed, and the face amount of the policy
is paid upon the death of the insured. The
contracts are credited with a specified rate
of interest that is guaranteed for a period
of time and reset periodically thereafter.

Single premium immediate annuities........... Annuities that require a one-time lump sum
premium payment upon the issuance of the
contract and that begin payments to the
holder immediately after issuance.

105

Statutory accounting practices............... Those accounting practices prescribed or
permitted by an insurer's domiciliary state
insurance regulatory authority for purposes
of recording transactions and preparing
financial statements. Statutory accounting
practices emphasize solvency rather than
matching revenues and expenses during an
accounting period.

Surplus...................................... As determined in accordance with statutory
accounting practices, the amount remaining
after all statutory liabilities are
subtracted from all admitted assets.
Statutory surplus includes common stock,
paid-in and contributed surplus, special
surplus funds and earned (unassigned)
surplus.

Surrender.................................... The act of terminating an annuity contract
during the accumulation period where the
contractholder receives the contract's
account value less any applicable surrender
charges (cash surrender value).

Surrender charge............................. The fee charged to a contractholder when an
annuity is surrendered for its cash value
during a specified term. Such charge is
intended to recover unamortized deferred
policy acquisition costs and to discourage
premature termination. Surrender charges
typically apply over a specified period of
time and decline over that period as a
percentage of the account value in relation
to the anticipated amortization of the
deferred policy acquisition costs.

Synthetic guaranteed investment contracts
("Synthetic GICs")......................... An investment product for the institutional
defined contribution retirement plan market.
Synthetic GICs have two components: an
investment portfolio owned directly by the
plan and a book value "wrapper" which
promises to pay authorized plan benefits at
par value, regardless of the actual
investment experience of the fund. Under all
synthetic product structures, the
contractholder maintains direct ownership of
their assets held in a custodial trust.

Tax qualified annuities...................... Annuities which are issued pursuant to a tax
qualified retirement plan.

Underwriting................................. An insurer's process of examining, accepting
or rejecting insurance risks, and classifying
those accepted, in order to charge the
appropriate premium for each accepted risk.

106

Value of insurance in force ("VIF").......... An asset created on the GAAP-basis balance
sheet of an insurance company when it
acquires a block of insurance business, equal
to the actuarially determined present value
of the expected pretax future profits of
business acquired. VIF is amortized based on
the present value of estimated future gross
profits over the term of the underlying
policies.

Variable annuity............................. An annuity in which premium payments are used
to purchase accumulation units of separate
accounts. The value of a unit fluctuates in
accordance with the investment experience of
the related separate account. Variable
annuity contracts may include a general
account guaranteed interest investment option
or a GRO. At the time of benefit payments to
the annuitant, the annuitant can generally
elect from a number of payment options which
provide either fixed or variable benefit
payments.

107

INDEX TO FINANCIAL STATEMENTS

PAGE
---------

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES:

Audited Financial Statements:

Report of Independent Auditors........................................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995............................................. F-3
Consolidated Statements of Operations for the Years
Ended December 31, 1996, 1995 and 1994................................................................. F-4
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994................................................................. F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994................................................................. F-6
Notes to Consolidated Financial Statements............................................................... F-7
Unaudited Interim Financial Statements:

Condensed Consolidated Balance Sheet at March 31, 1997 (Unaudited)....................................... F-29
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 1997 and 1996
(Unaudited)............................................................................................ F-30
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1997 and 1996
(Unaudited)............................................................................................ F-31
Notes to Condensed Consolidated Financial Statements (Unaudited)......................................... F-32

F-1

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Shareholders
ARM Financial Group, Inc.

We have audited the accompanying consolidated carrying amount balance sheets
of ARM Financial Group, Inc. and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these 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 the
Company's management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

We have also audited in accordance with generally accepted auditing
standards the consolidated supplemental fair value balance sheets of ARM
Financial Group, Inc. and subsidiaries as of December 31, 1996 and 1995. As
described in Note 4, the consolidated supplemental fair value balance sheets
have been prepared by management to present relevant financial information that
is not provided by the carrying amount balance sheets and is not intended to be
a presentation in conformity with generally accepted accounting principles. In
addition, the consolidated supplemental fair value balance sheets do not purport
to present the net realizable, liquidation or market value of ARM Financial
Group, Inc. as a whole. Furthermore, amounts ultimately realized by ARM
Financial Group, Inc. from the disposal of assets may vary significantly from
the fair values presented. In our opinion, the consolidated supplemental fair
value balance sheets referred to above present fairly, in all material respects,
the information set forth therein as described in Note 4.

In our opinion, the financial statements referred to in paragraph one above
present fairly, in all material respects, the consolidated financial position of
ARM Financial Group, Inc. and subsidiaries at December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

Louisville, Kentucky
February 12, 1997, except for Note 10, as to which
the date is May 23, 1997

F-2

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

CARRYING AMOUNT FAIR VALUE
-------------------------- --------------------------
DECEMBER 31, DECEMBER 31,
(IN THOUSANDS) 1996 1995 1996 1995
- --------------------------------------------------------- ------------ ------------ ------------ ------------

ASSETS
Cash and investments:
Fixed maturities, available-for-sale, at fair value
(amortized cost: 1996--$3,048,834; 1995--
$2,493,403).......................................... $ 3,054,513 $ 2,550,567 $ 3,054,513 $ 2,550,567
Equity securities, at fair value (cost: 1996-- $21,268;
1995--$8,196)........................................ 22,552 9,093 22,552 9,093
Mortgage loans on real estate.......................... 36,879 43,943 36,879 43,943
Policy loans........................................... 123,466 117,528 123,466 117,528
Cash and cash equivalents.............................. 110,067 76,896 110,067 76,896
------------ ------------ ------------ ------------
Total cash and investments........................... 3,347,477 2,798,027 3,347,477 2,798,027
Assets held in separate accounts......................... 1,135,048 809,927 1,135,048 809,927
Accrued investment income................................ 36,233 36,382 36,233 36,382
Value of insurance in force.............................. 52,024 51,051 112,389 98,977
Deferred policy acquisition costs........................ 59,001 43,113 -- --
Goodwill................................................. 7,636 8,124 7,636 8,124
Deferred federal income taxes............................ 35,604 19,776 42,653 48,642
Other assets............................................. 28,641 27,180 28,641 27,180
------------ ------------ ------------ ------------
Total assets......................................... $ 4,701,664 $ 3,793,580 $ 4,710,077 $ 3,827,259
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Customer deposits...................................... $ 3,294,174 $ 2,708,260 $ 3,260,253 $ 2,742,209
Customer deposits in separate accounts................. 1,130,159 808,345 1,130,159 808,345
Long-term debt......................................... 40,000 40,000 40,000 40,000
Accounts payable and accrued expenses.................. 22,684 15,496 22,684 15,496
Payable for investment securities purchased............ 10,431 8,538 10,431 8,538
Payable to reinsurer................................... 10,000 -- 10,000 --
Other liabilities...................................... 12,274 24,950 12,274 24,950
------------ ------------ ------------ ------------
Total liabilities.................................... 4,519,722 3,605,589 4,485,801 3,639,538
Contingencies
Shareholders' equity:
Preferred stock, $.01 par value, $25.00 stated value;
2,300,100 shares authorized; 2,000,000 shares issued
and outstanding...................................... 50,000 50,000
Class A common stock, $.01 par value; 27,280 and 27,100
shares authorized, respectively; 23,796 and 23,770
shares issued and outstanding, respectively.......... * *
Class B common stock, $.01 par value; 1,080 shares
authorized; 1,000 shares issued and outstanding...... * *
Additional paid-in capital............................. 124,609 124,425
Net unrealized gains on available-for-sale
securities........................................... 3,669 28,530
Retained earnings...................................... 3,664 (14,964)
------------ ------------
Total shareholders' equity........................... 181,942 187,991 224,276 187,721
------------ ------------ ------------ ------------
Total liabilities and shareholders' equity........... $ 4,701,664 $ 3,793,580 $ 4,710,077 $ 3,827,259
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

- ------------------------
* Less than $1,000.

See accompanying notes.

F-3

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31,
-----------------------------------

(IN THOUSANDS, EXCEPT SHARE AMOUNTS AND PER SHARE AMOUNTS) 1996 1995 1994
- ---------------------------------------------------------------------------- ---------- ---------- -----------
Investment income........................................................... $ 250,031 $ 196,024 $ 149,142
Interest credited on customer deposits...................................... (182,161) (146,867) (116,463)
---------- ---------- -----------
Net investment spread................................................... 67,870 49,157 32,679
Fee income:
Variable annuity fees..................................................... 10,786 7,238 4,291
Asset management fees..................................................... 5,780 3,161 --
Other fee income.......................................................... 1,267 949 4,100
---------- ---------- -----------
Total fee income........................................................ 17,833 11,348 8,391
Other income and expenses:
Surrender charges......................................................... 5,024 3,339 2,356
Operating expenses........................................................ (31,055) (22,957) (21,484)
Commissions, net of deferrals............................................. (2,372) (1,557) (2,551)
Interest expense on debt.................................................. (3,146) (3,461) (3,136)
Amortization:
Deferred policy acquisition costs....................................... (6,835) (2,932) (1,296)
Value of insurance in force............................................. (7,320) (7,104) (3,830)
Acquisition-related deferred charges.................................... (1,503) (9,920) (2,163)
Goodwill................................................................ (488) (358) --
Non-recurring charges..................................................... (5,004) -- --
Other, net................................................................ (5,366) (687) 4,972
---------- ---------- -----------
Total other income and expenses......................................... (58,065) (45,637) (27,132)
Realized investment gains (losses).......................................... 907 4,048 (36,727)
---------- ---------- -----------
Income (loss) before federal income taxes................................... 28,545 18,916 (22,789)
Federal income tax benefit (expense)........................................ (5,167) (7,026) 6,018
---------- ---------- -----------
Net income (loss)........................................................... 23,378 11,890 (16,771)
Dividends on preferred stock................................................ (4,750) (4,750) (4,750)
---------- ---------- -----------
Net income (loss) applicable to common shareholders......................... $ 18,628 $ 7,140 $ (21,521)
---------- ---------- -----------
---------- ---------- -----------
Net income (loss) per common share.......................................... $ 751.58 $ 344.94 $ (1,434.73)
---------- ---------- -----------
---------- ---------- -----------
Average common shares outstanding........................................... 24,785 20,699 15,000
---------- ---------- -----------
---------- ---------- -----------

See accompanying notes.

F-4

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

NET
UNREALIZED
GAINS
(LOSSES) ON
CLASS A CLASS B ADDITIONAL AVAILABLE- TOTAL
PREFERRED COMMON COMMON PAID-IN FOR-SALE RETAINED SHAREHOLDERS'
(IN THOUSANDS) STOCK STOCK STOCK CAPITAL SECURITIES EARNINGS EQUITY
- --------------------------------------- ----------- --------- --------- ----------- ----------- ----------- -------------

Balance, January 1, 1994............... $ 50,000 $ * $ * $ 62,920 $ -- $ (569) $ 112,351
Adjustment to beginning balance for
change in accounting method, net of
income taxes of $1,579............. (7,445) (7,445)
Net loss............................. (16,771) (16,771)
Dividends on preferred stock......... (4,750) (4,750)
Change in net unrealized losses on
available-for-sale securities...... (97,504) (97,504)
Change in cumulative translation
adjustment......................... (14) (14)
----------- --------- --------- ----------- ----------- ----------- -------------
Balance, December 31, 1994............. 50,000 * * 62,920 (104,949) (22,104) (14,133)
Issuance of 9,770 shares of Class A
common stock....................... * 61,505 61,505
Net income........................... 11,890 11,890
Dividends on preferred stock......... (4,750) (4,750)
Change in net unrealized losses on
available-for-sale securities...... 133,479 133,479
----------- --------- --------- ----------- ----------- ----------- -------------
Balance, December 31, 1995............. 50,000 * * 124,425 28,530 (14,964) 187,991
Issuance of 26 shares of Class A
common stock....................... * 184 184
Net income........................... 23,378 23,378
Dividends on preferred stock......... (4,750) (4,750)
Change in net unrealized gains on
available-for-sale securities...... (24,861) (24,861)
----------- --------- --------- ----------- ----------- ----------- -------------
Balance, December 31, 1996............. $ 50,000 $ * $ * $ 124,609 $ 3,669 $ 3,664 $ 181,942
----------- --------- --------- ----------- ----------- ----------- -------------
----------- --------- --------- ----------- ----------- ----------- -------------

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

* Less than $1,000.

See accompanying notes.

F-5

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31,
-------------------------------

(IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------------------- --------- --------- ---------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss)................................................................ $ 23,378 $ 11,890 $ (16,771)
Adjustments to reconcile net income (loss) to cash flows provided by operating
activities:
Interest credited on general account customer deposits....................... 172,202 136,824 108,495
Realized investment (gains) losses........................................... (907) (4,048) 36,727
Amortization of value of insurance in force and deferred policy acquisition
costs........................................................................ 14,155 10,036 5,126
Other amortization........................................................... 1,374 12,406 9,402
Deferral of policy acquisition and other costs............................... (24,202) (24,505) (25,273)
Deferred tax expense (benefit)............................................... 2,554 6,385 (3,823)
(Increase) decrease in accrued investment income............................. 149 (1,609) 2,590
Changes in other assets and liabilities...................................... 4,171 (9,020) (10,770)
--------- --------- ---------
Cash flows provided by operating activities...................................... 192,874 138,359 105,703
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments:
Purchases...................................................................... (2,716,010) (1,498,623) (835,792)
Maturities and redemptions..................................................... 241,391 205,319 159,684
Sales.......................................................................... 1,922,689 1,197,468 522,175
Other investments:
Purchases...................................................................... (55,995) (7,891) (18,562)
Maturities and redemptions..................................................... 7,310 24,377 79,236
Sales.......................................................................... 42,961 36,119 --
Policy loans, net................................................................ (5,938) (6,428) (4,637)
Purchase of separate account assets.............................................. (302,993) (226,812) (306,097)
Proceeds from sale of separate account assets.................................... 83,077 45,249 19,895
Cash and cash equivalents acquired in excess of purchase price paid for:
Integrity Holdings, Inc........................................................ -- -- 3,250
Substantially all assets of SBM Company........................................ -- 36,490 --
--------- --------- ---------
Cash flows used in investing activities.......................................... (783,508) (194,732) (380,848)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from issuance of common stock........................................... 184 63,505 --
Organizational, debt and stock issuance costs.................................... -- (2,000) (2,104)
Preferred stock dividends........................................................ (4,750) (4,750) (5,014)
Amounts received from customers.................................................. 1,072,323 425,628 375,580
Amounts paid to customers........................................................ (441,944) (406,977) (301,330)
Change in payable to reinsurer................................................... 10,000 -- --
Change in repurchase agreement liability......................................... (12,008) 12,008 --
--------- --------- ---------
Cash flows provided by financing activities...................................... 623,805 87,414 67,132
--------- --------- ---------
Net change in cash and cash equivalents.......................................... 33,171 31,041 (208,013)
Cash and cash equivalents at beginning of year................................... 76,896 45,855 253,868
--------- --------- ---------
Cash and cash equivalents at end of year......................................... $ 110,067 $ 76,896 $ 45,855
--------- --------- ---------
--------- --------- ---------
Supplemental cash flow information:
Interest paid on debt.......................................................... $ 2,613 $ 2,736 $ 2,275
--------- --------- ---------
--------- --------- ---------
Income taxes paid.............................................................. $ 7,230 $ -- $ 3,017
--------- --------- ---------
--------- --------- ---------

See accompanying notes.

F-6

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

ARM Financial Group, Inc. (the "Company") specializes in the asset
accumulation business, providing retail and institutional customers with
products designed to serve the growing long-term savings and retirement markets.
The Company's retail products include a variety of fixed and variable annuities
and face-amount certificates sold through a broad spectrum of distribution
channels including independent broker-dealers, independent agents, stockbrokers
and financial institutions. The Company offers asset management services and
guaranteed investment contracts ("GICs") to its institutional clients, which
include defined benefit pension plans, defined contribution or 401(k) pension
plans and insurance companies. The Company markets its institutional products
and services directly to bank trust departments, plan sponsors, cash management
funds, other institutional funds and insurance companies as well as through
industry consultants.

The Company conducts its different businesses through a variety of
subsidiaries. Retail fixed and variable annuities and institutional GICs are
issued by the Company's insurance subsidiaries Integrity Life Insurance Company
("Integrity") and National Integrity Life Insurance Company ("National
Integrity") (collectively, the "Integrity Companies"). ARM Capital Advisors,
Inc. ("ARM Capital Advisors"), an SEC-registered investment advisor based in New
York City, offers fixed income asset management services (see Note 2 related to
the proposed sale of ARM Capital Advisors). ARM Securities Corporation ("ARM
Securities"), a registered broker-dealer, provides a distribution channel for
selling affiliated and nonaffiliated retail products. SBM Certificate Company is
an issuer of face-amount certificates, a retail product similar to certificates
of deposit issued by banks.

The Company was established in July 1993 by The Morgan Stanley Leveraged
Equity Fund II, L.P. ("MSLEF II") and Analytical Risk Management, Ltd. (now
known as Oldarm L.P.). MSLEF II is an investment fund sponsored by Morgan
Stanley Group Inc. ("Morgan Stanley"). As a result of an additional investment
(described in Note 2), certain other private equity funds sponsored by Morgan
Stanley, together with MSLEF II, own approximately 91% of the outstanding shares
of common stock of the Company. Oldarm L.P., New ARM, LLC and certain employees,
management and independent directors of the Company and its subsidiaries own in
the aggregate approximately 9% of the common stock of the Company. The Company
had no significant business activity until November 26, 1993, when it acquired
the Integrity Companies resulting in $2.3 billion of assets under management.
Assets under management have grown to $4.8 billion as of December 31, 1996 after
giving effect to the proposed sale of ARM Capital Advisors.

F-7

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION

The consolidated financial statements are prepared in accordance with
generally accepted accounting principles ("GAAP") and include the accounts of
the Company and all of its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain amounts from prior years have been reclassified to conform to the
current year's presentation. Such reclassifications had no effect on previously
reported net income or shareholders' equity.

The consolidated statements of operations represent a presentation of the
Company's results using the reporting format followed by banks and some
insurance companies whose products involve only minimal amounts of mortality
risk. The Company's focus on products and services for the retirement and
long-term savings markets creates many similarities to non-insurance financial
services companies. Management of the Company believes that these statements of
operations provide financial statement readers with more relevant information
than under the format generally followed by traditional life insurance
companies, which was used by the Company prior to 1995. These statements
highlight the Company's spread-based segment's net investment spread and provide
details of the sources of fee income for the Company's fee-based segment.

The consolidated balance sheets include a dual presentation of carrying
amount and fair value balances. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," fixed maturities classified as available-for-sale
are reported at fair value in the carrying amount balance sheets; however,
corresponding customer deposits are reported at historical values. In contrast,
in the fair value balance sheets, both assets and liabilities are reported at
fair value. As permitted by SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments," the fair value balance sheets are presented as a
supplemental disclosure to provide a more meaningful picture of the Company's
financial position. Note 4 describes the methods and assumptions used by the
Company in estimating fair value.

INVESTMENTS

All of the Company's fixed maturities and equity securities are classified
as available-for-sale and stated at fair value. Unrealized gains and losses on
available-for-sale securities are reported as a separate component of
shareholders' equity, net of adjustments to value of insurance in force and
deferred policy acquisition costs equal to the change in amortization that would
have been recorded if these securities had been sold as of the balance sheet
date, and net of deferred income taxes. The amortized cost of fixed maturities
is adjusted for amortization of premiums and accretion of discounts to maturity,
or in the case of mortgage-backed and asset-backed securities, over the
estimated life of the security. Such amortization and accretion is computed
using the interest method and is included in investment income. Anticipated
prepayments on mortgage-backed and asset-backed securities are considered in
determining the effective yield on such securities. If a difference arises
between anticipated and actual prepayments, the carrying value of the investment
is adjusted with a corresponding charge or credit to investment income. Interest
and dividends are included in investment income. Mortgage loans on real estate
and policy loans are carried at their unpaid principal balances. Cash and cash
equivalents consist of highly liquid investments with maturities of three months
or less at their time of purchase.

Realized gains and losses on the sale of investments are determined based
upon the average cost method and include provisions for other-than-temporary
impairments where appropriate. In addition, the

F-8

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amortization of value of insurance in force and deferred policy acquisition
costs is adjusted for gains and losses realized on sales of investments which
support customer deposits. The adjustment to amortization associated with such
realized gains and losses is included in Realized Investment Gains (Losses) in
the statement of operations.

At the time of adoption of SFAS No. 115, the Company classified its
portfolio of privately placed fixed maturity securities as held-to-maturity.
Although the Company had the ability to hold these securities to maturity, its
original intention of holding them as such changed during 1995. Effective April
1, 1995, the Company transferred all of its fixed maturities classified as
held-to-maturity (primarily private placement securities) to the
available-for-sale category. The April 1, 1995 amortized cost of the fixed
maturities transferred was $129.7 million, resulting in an unrealized loss of
$1.9 million, net of deferred income tax assets.

VALUE OF INSURANCE IN FORCE, DEFERRED POLICY ACQUISITION COSTS, AND GOODWILL

A portion of the purchase price paid for the insurance subsidiaries was
allocated to the value of insurance in force based on the actuarially-determined
present value of the expected pretax future profits from the business assuming a
discount rate of 13%. This present value amount was reduced to the extent that
the fair value of the net assets acquired including the value of insurance in
force exceeded the purchase price allocated to the insurance subsidiaries.
Interest is accrued on the balance annually at a rate consistent with the rate
credited on the acquired policies on the acquisition date. Recoverability of the
value of insurance in force is evaluated quarterly by comparing the current
estimate of the present value of expected pretax future profits to the
unamortized asset balance. If such current estimate is less than the existing
asset balance, the difference would be charged to expense. To the extent
recoverable from future gross profits, costs of producing new business
(primarily commissions and certain policy issuance and marketing costs) which
vary with and are primarily related to the production of new business are
deferred. Value of insurance in force and deferred policy acquisition costs are
amortized in proportion to the emergence of future gross profits, including
related realized investment gains and losses, over the estimated term of the
underlying policies. In addition, an adjustment is made to value of insurance in
force and deferred policy acquisition costs equal to the change in amortization
that would have been recorded if unrealized gains and losses on
available-for-sale securities had been realized as of the balance sheet date.

A portion of the purchase price paid for subsidiaries was allocated to
goodwill representing the excess of the purchase price paid over the fair value
of net assets acquired. Goodwill currently recorded is amortized over a period
not exceeding twenty years using the straight-line method.

Incremental costs directly related to the integration of acquired companies
are deferred, to the extent recoverable from future gross profits of the
acquired companies. Such deferred transition costs are amortized using the
straight-line method over the estimated term of the policies underlying the
acquired companies.

ASSETS HELD IN SEPARATE ACCOUNTS AND CUSTOMER DEPOSITS IN SEPARATE ACCOUNTS

Assets held in separate accounts of the Company's insurance subsidiaries are
segregated from other investments and are not subject to claims that arise out
of any other business of the Company. Separate accounts include both
spread-based and fee-based deposits representing guaranteed and non-guaranteed
business, respectively, primarily of variable annuity customers. Assets held in
separate accounts are carried

F-9

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
at estimated fair values. Customer deposits in guaranteed separate accounts are
recorded at customer account values, plus or minus a market value adjustment
calculated using credited rates for new business. Customer deposits in
non-guaranteed separate accounts are recorded at customer account values before
applicable surrender charges, which reflects the market value of the underlying
separate account investments. The Company receives administrative fees for
managing non-guaranteed deposits and other fees for assuming mortality and
certain expense risks. Such fees are included in Variable Annuity Fees in the
statement of operations. Investment income and interest credited on customer
deposits for guaranteed separate account deposits are included as such in the
statement of operations.

During 1996, the Company began offering an equity-indexed annuity product
through its separate accounts which aims to meet consumer demand for equity
investments with downside protection. In connection with this product, the
Company's separate accounts purchased call options based on the Standard &
Poor's 500 Composite Stock Index ("S&P 500"). The options perform as a hedge
against the Company's obligation to pay equity-indexed annuity policyholders
returns tied to the S&P 500. These options are carried at fair value and
unrealized gains and losses increase or decrease obligations to policyholders.

CUSTOMER DEPOSITS

For single and flexible premium deferred annuities, single premium
endowments, face-amount certificates and guaranteed investment contracts,
customer deposits represent account values before applicable surrender charges.
Such account values represent premiums and deposits received, plus interest
credited, less withdrawals and assessed fees. For structured settlements and
other single premium immediate annuities, customer deposits represent the
present value of future benefit payments and maintenance expenses. The interest
rate used in determining such present value was approximately 7.35% as of
December 31, 1996.

RECOGNITION OF FEE INCOME AND EXPENSES

Variable annuity fees and asset management fees are recorded in income as
earned. Other fee income includes marketing partnership fees earned related to
ventures with other insurance companies and certain fees earned by ARM
Securities (primarily net retained commissions). Premiums and deposits received
from customers are not included in the statement of operations. Other expenses
include benefit payments paid in excess of a customer's account value and
related reinsurance costs.

FEDERAL INCOME TAXES

Deferred income tax reflects the net tax effects of (i) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes and (ii)
operating and capital losses.

NET INCOME PER SHARE OF COMMON STOCK

Net income per share is computed by dividing net income or loss, less
dividends on preferred stock, by the weighted average number of common shares
outstanding for the period, considering the effects of any dilutive common stock
equivalents. The rights of the holders of the Company's Class A and Class B

F-10

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
common stock are identical except that the Class A shares have a liquidation
preference over the Class B Shares.

USE OF ESTIMATES

The preparation of financial statements in conformity with GAAP requires
management of the Company to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.

2. ACQUISITIONS

SBM COMPANY

In June 1995, the Company completed the acquisition of substantially all of
the assets and business operations of SBM Company ("SBM"), including all of the
issued and outstanding capital stock of SBM's subsidiaries, State Bond and
Mortgage Life Insurance Company ("SBM Life") and SBM Financial Services, Inc.
(which subsequently changed its name to ARM Securities), SBM Certificate
Company, and SBM's management contracts with six mutual funds (the "State Bond
Mutual Funds"). The designated effective date of the acquisition was May 31,
1995.

The aggregate purchase price for the acquisition was $38.8 million. The
Company financed the acquisition by issuing a total of 9,770 shares of the
Company's Class A common stock to Morgan Stanley Capital Partners III, L.P.,
Morgan Stanley Capital Investors, L.P., and MSCP III 892 Investors, L.P.
(collectively, the "MSCP Funds"), New ARM, LLC, and certain directors of the
Company for an aggregate sale price of $63.5 million. The MSCP Funds are private
equity funds sponsored by Morgan Stanley. The Company used the proceeds from the
issuance of new common equity in excess of the aggregate purchase price for the
acquisition to (i) make a $19.9 million capital contribution to SBM Life, (ii)
acquire all of the issued and outstanding capital stock of SBM Certificate
Company from SBM Life for a purchase price of $3.3 million and (iii) provide for
fees and expenses related to the acquisition. Transition costs of $1.1 million
and $2.2 million directly related to the acquisition were deferred during 1996
and 1995, respectively.

The capital contribution to SBM Life was used to strengthen SBM Life's
financial position and allowed for a significant investment portfolio
restructuring immediately following the acquisition with no net adverse effect
on statutory adjusted capital and surplus. On December 31, 1995, SBM Life was
merged with and into Integrity to create certain operating efficiencies intended
to benefit the Company and its customers. On December 13, 1996, the Company
transferred its contracts to perform management and advisory services for the
State Bond Mutual Funds to Federated Investors for $4.5 million. Asset
management fee income of $1.6 million and $1.0 million was recorded by the
Company during 1996 and 1995, respectively, with respect to the management of
such funds. The State Bond Mutual Funds had aggregate assets of $236.9 million
on December 13, 1996.

ARM CAPITAL ADVISORS

On January 5, 1995, the Company completed the acquisition of substantially
all the assets and business of the U.S. fixed income unit of Kleinwort Benson
Investment Management Americas Inc. ("KBIMA"). KBIMA provided investment
advisory services to the Company during 1994 and received fees of $2.1 million
for such services. The business acquired became part of the then newly-formed
ARM Capital

F-11

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. ACQUISITIONS (CONTINUED)
Advisors. Assets managed by ARM Capital Advisors under contracts acquired from
KBIMA and new contracts with third parties, primarily defined benefit pension
plans, have increased from $0.8 billion as of January 5, 1995 to $2.7 billion as
of December 31, 1996. ARM Capital Advisors' management of third-party accounts
generated asset management fees of $4.2 million and $2.2 million during 1996 and
1995, respectively. In addition to providing asset management services to
institutional clients, ARM Capital Advisors manages the investment portfolios of
the Company's subsidiaries. Although third-party assets managed by ARM Capital
Advisors have grown since the acquisition, the Company believes that market
attitudes towards developing an asset management service for defined benefit
pension plans within a holding company structure consisting predominantly of
insurance companies has constrained ARM Capital Advisors' growth. Accordingly,
the Company is in the process of transferring the operations and assets of ARM
Capital Advisors into a newly-formed limited liability company to be named ARM
Capital Advisors, LLC, and thereafter selling an 80% interest in such company to
an entity controlled by Emad A. Zikry, President of ARM Capital Advisors. Under
the proposed terms of the sale, which are being negotiated, the newly-formed
company will continue to provide the Company's subsidiaries with investment
management services through December 31, 1997 on the same basis as in the past.
The proposed terms of the sale further provide that after December 31, 1997, the
Company can continue to engage the newly-formed company as its investment
advisor at agreed upon rates, but, beginning in 1998, the Company may consider
retaining other investment management firms.

INTEGRITY COMPANIES

On November 26, 1993, the Company completed the acquisition of the Integrity
Companies from The National Mutual Life Association of Australasia Limited
("National Mutual"). In connection with the acquisition, National Mutual
replaced all equity securities, investment real estate and joint ventures and
fixed maturity investments classified as "6" by the National Association of
Insurance Commissioners ("NAIC") with cash in an amount equal to the statutory
book value of such assets as of December 31, 1992 adjusted for any additional
cash investments or distributions during the period from January 1, 1993 to
November 26, 1993. In addition, National Mutual (i) strengthened Integrity's
statutory policyholder reserves and surplus by $24.3 million, (ii) indemnified
the Integrity Companies with respect to the payment of principal and interest
due on all commercial and agricultural mortgage loans and supports the
indemnification with a $23.0 million escrow arrangement, (iii) provided
indemnification as to the availability of net operating and capital loss
carryforwards and of Section 338(h)(10) tax deductions, (iv) provided the
Integrity Companies with indemnification as to future claims for taxes,
assessments from guaranty funds, and claims from litigation, which arise from
preclosing events, and (v) terminated all surplus relief reinsurance
arrangements.

Income related to National Mutual indemnifications was $2.6 million and $1.3
million for the years ended December 31, 1996 and 1995, respectively. The
indemnification income is primarily related to indemnified guaranty fund
assessments, franchise taxes and mortgage loan investment income.

F-12

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. INVESTMENTS

The amortized cost and estimated fair values of available-for-sale
securities were as follows:

AVAILABLE-FOR-SALE SECURITIES
----------------------------------------------------

GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
(IN THOUSANDS) COST GAINS LOSSES FAIR VALUE
- ------------------------------------------------------------- ------------ ----------- ----------- ------------
DECEMBER 31, 1996:
Fixed Maturities:
U.S. Treasury securities and obligations of U.S.
government agencies.................................... $ 247,041 $ 1,363 $ 1,481 $ 246,923
Obligations of state and political subdivisions.......... 4,963 3 406 4,560
Foreign governments...................................... 45,611 611 462 45,760
Corporate securities..................................... 992,003 13,260 13,693 991,570
Asset-backed securities.................................. 299,365 686 1,951 298,100
Mortgage-backed securities............................... 1,459,851 19,393 11,644 1,467,600
------------ ----------- ----------- ------------
Total fixed maturities..................................... 3,048,834 35,316 29,637 3,054,513
Equity securities.......................................... 21,268 1,286 2 22,552
------------ ----------- ----------- ------------
Total available-for-sale securities...................... $ 3,070,102 $ 36,602 $ 29,639 $ 3,077,065
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
DECEMBER 31, 1995:
Fixed Maturities:
U.S. Treasury securities and obligations of
U.S. government agencies................................. $ 248,838 $ 4,345 $ 32 $ 253,151
Obligations of state and political subdivisions.......... 10,126 29 467 9,688
Foreign governments...................................... 80,394 3,828 727 83,495
Corporate securities..................................... 954,453 38,418 17,776 975,095
Asset-backed securities.................................. 150,732 1,730 1,116 151,346
Mortgage-backed securities............................... 1,048,860 30,607 1,675 1,077,792
------------ ----------- ----------- ------------
Total fixed maturities..................................... 2,493,403 78,957 21,793 2,550,567
Equity securities.......................................... 8,196 897 -- 9,093
------------ ----------- ----------- ------------
Total available-for-sale securities...................... $ 2,501,599 $ 79,854 $ 21,793 $ 2,559,660
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------

F-13

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of available-for-sale
securities, by contractual maturity, are shown below:

DECEMBER 31, 1996
--------------------------
ESTIMATED
(IN THOUSANDS) COST FAIR VALUE
- ------------------------------------------------------------------ ------------ ------------

Due in one year or less........................................... $ 26,365 $ 26,382
Due after one year through five years............................. 182,680 182,378
Due after five years through ten years............................ 238,769 240,178
Due after ten years............................................... 841,804 839,875
Asset-backed securities........................................... 299,365 298,100
Mortgage-backed securities........................................ 1,459,851 1,467,600
Equity securities................................................. 21,268 22,552
------------ ------------
Total available-for-sale securities............................... $ 3,070,102 $ 3,077,065
------------ ------------
------------ ------------

Expected maturities will differ from contractual maturities because
borrowers may have the right to call or repay obligations with or without call
or prepayment penalties and because mortgage-backed and asset-backed securities
(including floating-rate securities) provide for periodic payments throughout
their lives.

During 1996, 1995 and 1994, gross gains of $33.5 million, $24.1 million and
$2.1 million, respectively, and gross losses of $18.9 million, $15.6 million and
$37.2 million, respectively, were realized on sales of fixed maturities. For the
year ended December 31, 1996, the Company recorded a loss of $15.2 million
related to the write-down to fair value of an investment in a corporate fixed
maturity security. For the years ended December 31, 1996 and 1995, the
recognition of realized investment gains resulted in an increase in the
amortization of value of insurance in force of $1.9 million and $2.6 million,
respectively, and in an increase in the amortization of deferred policy
acquisition costs of $28,000 and $318,000, respectively.

In accordance with SFAS No. 115, net unrealized gains and losses on
investments classified as available-for-sale were reduced by deferred federal
income taxes and adjustments to value of insurance in force and deferred policy
acquisition costs that would have been required had such gains and losses been
realized. Net unrealized gains on available-for-sale securities reflected as a
separate component of shareholders' equity are summarized as follows:

DECEMBER 31,
--------------------
(IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------------------- --------- ---------

Net unrealized gains on available-for-sale securities before adjustments for the
following:................................................................................. $ 6,963 $ 58,061
Amortization of value of insurance in force and deferred policy acquisition costs.......... (1,318) (14,170)
Deferred federal income taxes.............................................................. (1,976) (15,361)
--------- ---------
Net unrealized gains on available-for-sale securities.................................. $ 3,669 $ 28,530
--------- ---------
--------- ---------

Pursuant to the terms of the acquisition of the Integrity Companies,
National Mutual has indemnified principal (up to 100% of the investments'
year-end 1992 statutory book value) and interest with respect to $36.7 million
or 99.6% of the Company's investment in mortgage loans on real estate as of
December 31,

F-14

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. INVESTMENTS (CONTINUED)
1996. In support of its indemnification obligations, National Mutual has placed
$23.0 million into escrow in favor of the Integrity Companies, which will remain
available until the subject commercial and agricultural loans have been paid in
full.

Investments, aggregated by issuer, in excess of 10% of shareholders' equity
(before net unrealized gains on available-for-sale securities) at December 31,
1996 and 1995, other than investments in affiliates and investments issued or
guaranteed by the United States government are as follows. Such securities were
97.4% and 96.7% investment grade at December 31, 1996 and 1995, respectively.

CARRYING
(IN MILLIONS) AMOUNT
- ---------------------------------------------------------------------------- -----------------

1996
Fixed maturities:
ABN AMRO Bank............................................................. $ 19.3
Advanta Corporation....................................................... 20.1
Aircraft Lease Portfolio Securities....................................... 27.4
American President Company................................................ 18.4
Amresco Residential Mortgage Loan......................................... 23.8
Augusta Funding LTD VI.................................................... 20.0
Augusta Funding LTD VIII.................................................. 24.8
Bear Stearns Company...................................................... 30.4
Chevy Chase Master Credit Card Trust...................................... 20.0
Commonwealth Edison Company............................................... 19.2
Conseco Commercial Mortgage............................................... 20.2
Countrywide Home Loans.................................................... 29.1
Countrywide Mortgage Backed............................................... 50.7
Delta Funding Home Equity Loan Trust...................................... 17.9
DLJ Acceptance Corporation................................................ 58.7
First USA Credit Card Trust............................................... 25.0
Ford Motor Corporation.................................................... 25.0
General Electric Capital Mortgage......................................... 91.3
Greenwich Capital Acceptance.............................................. 36.8
Guardian National Acceptance Corporation.................................. 21.4
J.P. Morgan & Company..................................................... 24.8
LB Mortgage Trust......................................................... 27.3
Lehman Brothers Holdings.................................................. 23.5
Matterhorn One, Ltd....................................................... 45.2
Merit Securities Corporation.............................................. 30.0
Mobil Producing Nigeria................................................... 19.0
National Westminster Bank................................................. 22.3
PaineWebber Group, Incorporated........................................... 29.4
Philadelphia Electric..................................................... 18.5
Residential Funding Mortgage.............................................. 44.0
Resolution Trust Corporation.............................................. 47.0
Ryland Mortgage Securities Corporation.................................... 34.4
Salomon Brothers Mortgage Securities VII.................................. 22.2

F-15

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. INVESTMENTS (CONTINUED)

CARRYING
(IN MILLIONS) AMOUNT
- ---------------------------------------------------------------------------- -----------------

Structured Asset Securities Corporation................................... $ 106.2
TCI Communications, Incorporated.......................................... 23.9
Tenaga Nasional Berhad.................................................... 19.2
Time Warner Entertainment Company, L.P.................................... 21.6
TMS Home Equity Loan Trust................................................ 48.0
Wilshire Manufactured Housing Trust....................................... 22.9
Equity securities:
Santander Finance, Ltd.................................................... 19.2
1995
Fixed maturities:
ABN AMRO Bank............................................................. 18.5
AETNA Life & Casualty..................................................... 16.5
American President Company................................................ 19.7
CNA Financial............................................................. 21.3
Commonwealth Edison Company............................................... 21.2
Conseco Commercial Mortgage............................................... 20.7
Contimortgage Home Equity Loan Trust...................................... 27.2
Countrywide Mortgage Backed............................................... 36.7
General Electric Capital Mortgage......................................... 39.6
Georgia Pacific........................................................... 22.3
Home Holdings............................................................. 19.3
Hydro-Quebec.............................................................. 23.0
Korea Electric & Power.................................................... 17.1
Nationwide CSN Trust...................................................... 17.2
Nomura Asset Security Corporation......................................... 24.2
Pohang Iron and Steel..................................................... 16.0
RJR Nabisco, Incorporated................................................. 16.6
Ryland Mortgage Securities Corporation.................................... 20.5
Salomon, Incorporated..................................................... 18.8
Structured Asset Securities Corporation................................... 73.3
Swedish Export Credit..................................................... 19.9
Telephone & Data Systems, Incorporated.................................... 18.7
Time Warner Entertainment Company, L.P.................................... 22.5
Torchmark Corporation..................................................... 17.2
Western Financial Grantor Trust........................................... 17.3

F-16

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. INVESTMENTS (CONTINUED)
The components of investment income were:

YEAR ENDED DECEMBER 31,
----------------------------------
(IN THOUSANDS) 1996 1995 1994
- ----------------------------------------------------------------------------- ---------- ---------- ----------

Fixed maturities............................................................. $ 228,473 $ 177,123 $ 129,211
Policy loans................................................................. 8,629 7,579 6,767
Mortgage loans on real estate................................................ 4,321 6,712 9,379
Cash and cash equivalents.................................................... 5,705 3,096 3,222
Income from other investments................................................ 2,903 1,514 563
---------- ---------- ----------
Investment income.......................................................... $ 250,031 $ 196,024 $ 149,142
---------- ---------- ----------
---------- ---------- ----------

4. FAIR VALUE BALANCE SHEETS

SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of fair value information about all financial instruments,
including insurance liabilities classified as investment contracts, unless
specifically exempted. The accompanying fair value balance sheets reflect fair
values for those financial instruments specifically covered by SFAS No. 107,
along with fair value amounts for other assets and liabilities for which
disclosure is permitted but not required.

The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the aggregate fair value amounts presented do not
necessarily represent the underlying value of the Company.

The Company's management of interest rate risk reduces its exposure to
changing interest rates through a close matching of duration, convexity and cash
flow characteristics of both assets and liabilities while maintaining liquidity
redundancies (i.e., sources of liquidity in excess of projected liquidity
needs). As a result, fair values of the Company's assets and liabilities will
tend to respond similarly to changes in interest rates.

The following methods and assumptions were used in estimating fair values:

FIXED MATURITIES AND EQUITY SECURITIES

Fair values for fixed maturities and equity securities are based on quoted
market prices, where available. For fixed maturities for which a quoted market
price is not available, fair values are estimated using internally calculated
estimates or quoted market prices of comparable instruments.

MORTGAGE LOANS ON REAL ESTATE

Pursuant to the terms of the acquisition of the Integrity Companies,
payments of principal and interest on mortgage loans acquired on November 26,
1993 are guaranteed by National Mutual. Principal received in excess of
statutory book value is to be returned to National Mutual. Accordingly, book
value is deemed to be fair value for these mortgage loans.

F-17

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. FAIR VALUE BALANCE SHEETS (CONTINUED)
POLICY LOANS

The carrying amount of policy loans approximates their fair value.

CASH AND CASH EQUIVALENTS AND ACCRUED INVESTMENT INCOME

The carrying amount of cash and cash equivalents and accrued investment
income approximates their fair value given the short-term nature of these
assets.

ASSETS HELD IN SEPARATE ACCOUNTS AND CUSTOMER DEPOSITS IN SEPARATE ACCOUNTS

Fair values of assets held in separate accounts are based on the quoted
market prices of the underlying mutual funds for assets invested in variable
options. The fair value of assets held in separate accounts invested in
guaranteed rate options is primarily based on quoted market prices of fixed
maturity securities. The fair value of customer deposits in separate accounts is
based on the account values of the underlying policies, plus or minus market
value adjustments applicable to certain customers who are guaranteed a fixed
rate of return.

GOODWILL

The carrying amount of goodwill approximates fair value.

DEFERRED FEDERAL INCOME TAXES

The deferred federal income tax asset and related valuation allowance were
adjusted for federal income tax which may be incurred as a result of the
differences between the estimated fair values and carrying amounts of the assets
and liabilities.

CUSTOMER DEPOSITS AND VALUE OF INSURANCE IN FORCE

The fair value of customer deposits for single premium immediate annuity
contracts is based on discounted cash flow calculations using a current market
yield rate for assets with similar durations (i.e., indexed to the U.S. Treasury
yield curve). The fair value of customer deposits for single premium immediate
annuity contracts represents the fair values of those contracts as a whole which
implicitly eliminates the corresponding value of insurance in force. The fair
value amounts of the remaining customer deposits, primarily related to deferred
annuity contracts, single premium endowment contracts, and guaranteed investment
contracts, represent the account values of the underlying contracts before
applicable surrender charges. The fair value of the value of insurance in force
represents the estimated present value of future profits for all customer
deposits, excluding single premium immediate annuity contracts, assuming a
discount rate of 13%. Deferred policy acquisition costs do not appear on the
fair value presentation because those values are implicitly considered in the
determination of the fair value of the corresponding customer deposits and value
of insurance in force.

LONG-TERM DEBT AND PAYABLE TO REINSURER

The carrying amounts of long-term debt and payable to reinsurer approximate
fair value.

F-18

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. FAIR VALUE BALANCE SHEETS (CONTINUED)
OTHER ASSETS AND LIABILITIES

The fair values of other assets and liabilities are reported at their
financial statement carrying amounts.

5. VALUE OF INSURANCE IN FORCE

The following provides information on the value of insurance in force during
1996, 1995 and 1994:

YEAR ENDED DECEMBER 31,
---------------------------------
(IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------------------------------------- ---------- ---------- ---------

Amortization excluding effects of realized and unrealized investment gains and
losses....................................................................... $ (10,474) $ (10,490) $ (5,874)
Interest accrued on unamortized balance........................................ 3,154 3,386 2,044
---------- ---------- ---------
Net amortization as reported in the statement of operations.................... (7,320) (7,104) (3,830)
Amortization related to realized investment gains and losses(1)................ (1,890) (2,562) --
Change in amortization related to unrealized gains and losses on
available-for-sale securities(2)............................................. 13,180 (14,170) --
Addition resulting from the acquisition of SBM Life............................ -- 61,131 --
Recognition of acquired tax benefits........................................... (2,997) (18,004) (5,415)
---------- ---------- ---------
Net change in value of insurance in force...................................... 973 19,291 (9,245)
Balance at beginning of period................................................. 51,051 31,760 41,005
---------- ---------- ---------
Balance at end of period....................................................... $ 52,024 $ 51,051 $ 31,760
---------- ---------- ---------
---------- ---------- ---------

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

(1) Included in Realized Investment Gains (Losses) in the statement of
operations.

(2) Included in Change in Net Unrealized Gains and Losses on Available-for-Sale
Securities in the statement of shareholders' equity.

The interest rates used to accrue interest on the unamortized value of
insurance in force are consistent with the rates credited on acquired policies
and range from 5% to 8%. Net amortization of the value of insurance in force,
excluding the effects of realized and unrealized investment gains and losses, in
each of the following years is estimated to be: 1997--$8.2 million; 1998--$6.8
million; 1999--$5.7 million; 2000--$4.9 million; and 2001--$4.1 million.

F-19

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. NON-RECURRING CHARGES

The Company recorded a $5.0 million non-recurring charge in 1996 including
$3.2 million related to the relocation and consolidation of operations
facilities from Columbus, Ohio to Louisville, Kentucky; costs of $1.0 million
for mergers and acquisitions activities that did not result in a transaction;
and costs of $.8 million related to the Company's filing of a public offering of
common stock.

During the fourth quarter of 1996, the Company developed a plan to relocate
and consolidate its main processing center. The $3.2 million charge in 1996
relates to certain direct costs associated with the plan. Additional
non-recurring transition costs of approximately $5.0 million which are deemed to
provide future economic benefits to the Company are expected to be incurred in
1997.

7. DEBT

LONG-TERM DEBT

The Company is a party to a Credit Agreement, as amended, providing a term
loan facility in the principal amount of $40 million bearing a floating interest
rate indexed to the London Interbank Offered Rate ("LIBOR"). The loan matures
September 30, 2001, subject to optional prepayment and contingent upon the
Company's compliance with various financial covenants. The loan amount is
secured by a pledge of the shares of common stock of the Company's subsidiaries
(except National Integrity). At December 31, 1996, aggregate maturities of such
debt were as follows: 1997 -- $4 million; 1998 -- $6 million; 1999 -- $8
million; 2000 -- $10 million; 2001 -- $12 million.

REVOLVING CREDIT FACILITY

The Credit Agreement, as amended, also provides a revolving credit facility.
The maximum borrowing allowed under this facility is $20 million. The facility
is available through September 30, 2001, and has an annual commitment fee of
.25% on the unused portion. There have been no borrowings under this facility.

PAYABLE TO REINSURER

The Company holds $10.0 million of funds withheld under a modified
coinsurance reinsurance agreement related to a block of variable annuity
contracts. This liability bears a floating interest rate indexed to the LIBOR.
Repayment is scheduled for equal annual installments over the next five years.

8. FEDERAL INCOME TAXES

The components of the provision for federal income tax expense (benefit)
consist of the following:

YEAR ENDED DECEMBER 31,
-------------------------------

(IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------- --------- --------- ---------
Current......................................................... $ 2,613 $ 641 $ (2,195)
Deferred........................................................ 2,554 6,385 (3,823)
--------- --------- ---------
Total federal income tax expense (benefit)...................... $ 5,167 $ 7,026 $ (6,018)
--------- --------- ---------
--------- --------- ---------

F-20

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. FEDERAL INCOME TAXES (CONTINUED)
Significant components of the asset related to deferred federal income taxes
as of December 31, 1996 and December 31, 1995 were:

(IN THOUSANDS) 1996 1995
- ------------------------------------------------------------------------ --------- ---------

Deferred tax assets:
Difference between GAAP and tax reserves.............................. $ 72,513 $ 68,708
Value of insurance in force........................................... 724 --
Capital loss carryforward............................................. 2,736 4,483
Net operating loss carryforward....................................... 11,783 15,341
Intangibles........................................................... 1,331 1,618
Alternative minimum tax credit carryforward........................... 2,029 1,209
Other investments..................................................... 294 --
Other................................................................. 3,638 5,399
--------- ---------
Total deferred tax assets........................................... 95,048 96,758
Valuation allowance for deferred tax assets........................... (38,798) (37,336)
--------- ---------
Net deferred tax assets............................................. 56,250 59,422
Deferred tax liabilities:
Deferred policy acquisition costs..................................... 16,910 10,848
Value of insurance in force........................................... -- 8,891
Fixed maturities...................................................... 1,760 1,727
Other investments..................................................... -- 2,819
Net unrealized gains on available-for-sale securities................. 1,976 15,361
--------- ---------
Total deferred tax liabilities...................................... 20,646 39,646
--------- ---------
Total deferred federal income taxes..................................... $ 35,604 $ 19,776
--------- ---------
--------- ---------

In the event that deferred tax assets are recognized on deductible temporary
differences for which a valuation allowance was provided at the date of an
acquisition, such benefits will be applied to first reduce the balance of
intangible assets related to the acquisition, such as value of insurance in
force and goodwill. A full valuation allowance was provided on the difference
between deferred tax assets and liabilities of the Integrity Companies as of
November 26, 1993, resulting in zero deferred federal income taxes at that date.
Based on the Integrity Companies' ability to generate taxable income in the
post-acquisition period and projections of future taxable income, the Integrity
Companies' valuation allowance was reduced by $11.0 million and $27.9 million
during 1996 and 1995, respectively. As a result of realizing such benefits, the
value of insurance in force was reduced by $3.0 million and $18.0 million during
1996 and 1995, respectively. The balance of goodwill was also reduced by $1.0
million during 1995. Additionally, the Company has established a full valuation
allowance on its non-life net operating loss carryforwards. Realization of these
carryforward benefits is dependent on future non-life earnings and the
generation of future capital gains.

F-21

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. FEDERAL INCOME TAXES (CONTINUED)
The Company files a consolidated federal income tax return with its non-life
subsidiaries, but is not currently eligible to file with its life insurance
subsidiaries. Accordingly, Integrity and National Integrity file a consolidated
federal life insurance income tax return.

Federal income taxes differ from that computed using the federal income tax
rate of 35% for 1996, 1995 and 1994 as follows:

YEAR ENDED DECEMBER 31,
-------------------------------

(IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------------------------------------------ --------- --------- ---------
Income tax expense (benefit) at statutory rate...................................... $ 9,991 $ 6,621 $ (7,976)
Increase (decrease) in valuation allowance.......................................... (5,490) 1,052 1,977
Net operating losses not currently deductible....................................... -- (271) --
Other............................................................................... 666 (376) (19)
--------- --------- ---------
Total federal income tax expense (benefit)........................................ $ 5,167 $ 7,026 $ (6,018)
--------- --------- ---------
--------- --------- ---------

The Company had net operating loss carryforwards of approximately $33.7
million, $43.8 million and $47.0 million at December 31, 1996, 1995 and 1994,
respectively, expiring in years 2005 to 2011.

F-22

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. STATUTORY INFORMATION

Following is a reconciliation of income based on statutory accounting
practices prescribed or permitted by insurance regulatory authorities for the
Company's insurance subsidiaries with GAAP net income (loss) reported in the
accompanying statements of operations:

YEAR ENDED DECEMBER 31,
-------------------------------

(IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------------------- --------- --------- ---------
Insurance subsidiaries (statutory-basis)(1)...................................... $ 38,769 $ 31,179 $ 27,079
Non-insurance companies(2)....................................................... 927 255 (1,909)
--------- --------- ---------
Consolidated statutory-basis pretax operating income........................... 39,696 31,434(3) 25,170
Reconciling items:
Amortization of interest maintenance reserve................................... (4,091) (3,905) (5,796)
Adjustments to invested asset carrying values at acquisition date.............. (572) (769) (3,726)
Adjustments to customer deposits............................................... (2,324) (5,994) (15,773)
Interest expense on debt....................................................... (3,146) (3,461) (3,136)
Deferred policy acquisition costs, net of amortization......................... 16,223 16,650 23,976
Amortization of value of insurance in force.................................... (7,320) (7,104) (3,830)
Amortization of acquisition-related deferred charges........................... (1,503) (9,920) (2,163)
Amortization of goodwill....................................................... (488) (358) --
Non-recurring charges.......................................................... (5,004) -- --
Realized investment gains (losses)............................................. 907 4,048 (36,727)
Other.......................................................................... (3,833) (1,705) (784)
--------- --------- ---------
GAAP-basis:
Income (loss) before federal income taxes...................................... 28,545 18,916 (22,789)
Federal income tax benefit (expense)........................................... (5,167) (7,026) 6,018
--------- --------- ---------
Net income (loss).............................................................. 23,378 11,890 (16,771)
Dividends on preferred stock................................................... (4,750) (4,750) (4,750)
--------- --------- ---------
Net income applicable to common shareholders................................... 18,628 7,140 (21,521)
Exclude, net of tax:
Realized investment (gains) losses........................................... (590) (2,631) 23,873
Non-recurring charges........................................................ 4,539 -- --
--------- --------- ---------
Operating earnings(4).......................................................... $ 22,577 $ 4,509 $ 2,352
--------- --------- ---------
--------- --------- ---------

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

(1) Insurance company general account and separate account statutory-basis
pretax income excluding realized gains and losses.

(2) Non-insurance company pretax income excluding amortization of
acquisition-related deferred charges, interest expense on debt, realized
investment gains and losses, and non-recurring corporate costs and charges
related to acquisition, financing and restructuring activities.

(3) Includes the results of operations of the acquired SBM businesses for the
seven months ended December 31, 1995.

(4) Net income applicable to common shareholders, excluding, net of tax,
realized investment gains and losses and non-recurring charges.

F-23

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. STATUTORY INFORMATION (CONTINUED)
On December 30, 1994, Integrity redomesticated from Arizona to Ohio.
Dividends that the Company may receive from Integrity in any year without prior
approval of the Ohio Insurance Director are limited by statute to the greater of
(i) 10% of Integrity's statutory capital and surplus as of the preceding
December 31 and, (ii) Integrity's statutory net income for the preceding year.
The maximum dividend payments that may be made by Integrity to the Company
during 1997 are $26.0 million.

The consolidated statutory-basis capital and surplus of the Company's
insurance subsidiaries totaled $163.8 million and $146.0 million at December 31,
1996 and 1995, respectively. In addition, the consolidated statutory-basis asset
valuation reserves of the Company's insurance subsidiaries totaled $28.1 million
and $19.4 million at December 31, 1996 and 1995, respectively. These reserves
are generally added to statutory capital and surplus for purposes of assessing
capital adequacy against various measures used by rating agencies and
regulators.

The NAIC Risk-Based Capital ("RBC") requirements attempt to evaluate the
adequacy of a life insurance company's statutory-basis adjusted capital and
surplus in relation to investment, insurance and other business risks. The RBC
formula is used by the states as an early warning tool to identify possible
weakly capitalized companies for the purpose of initiating regulatory action and
is not designed to be a basis for ranking the financial strength of insurance
companies. In addition, the formula establishes a minimum capital standard which
supplements the prevailing system of low fixed minimum capital and surplus. The
RBC requirements provide for four different levels of regulatory attention
depending on the ratio of the company's adjusted capital and surplus to its RBC.
As of December 31, 1996 and 1995, the adjusted capital and surplus of Integrity
and National Integrity are substantially in excess of the minimum level of RBC
that would require regulatory response.

10. SHAREHOLDERS' EQUITY

PREFERRED STOCK

During 1993, the Company issued 2,000,000 shares of non-voting 9.5%
Cumulative Perpetual Preferred Stock, stated value $25, in connection with the
acquisition of the Integrity Companies. Cash dividends at a rate of 9.5% per
annum per share are payable quarterly. The shares of preferred stock may not be
redeemed prior to December 15, 1998. On or after December 15, 1998, the Company
may, at its option, redeem all or part of the shares at a redemption price of
$25 per share.

PUBLIC OFFERING OF COMMON STOCK

The Company filed a registration statement with the Securities and Exchange
Commission on October 23, 1996 and amendments thereto, with respect to the
public offering (the "Offering") of 5,750,000 shares of Class A common stock,
par value $.01 per share (the "New Class A Common Stock"). The Company's
decision to proceed with the Offering is subject to market and other conditions.
Prior to the consummation of the Offering, the Company expects to amend and
restate its Certificate of Incorporation and By-Laws to effectuate a
recapitalization such that (i) the common equity of the Company will consist of
New Class A Common Stock and Class B Common Stock, par value $.01 per share (the
"New Class B Common Stock," and, together with the New Class A Common Stock, the
"New Common Stock"), (ii) each outstanding share of common stock of the Company
will be converted into one share of New Class A Common Stock, (iii) certain
shares of the New Class A Common Stock owned by

F-24

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. SHAREHOLDERS' EQUITY (CONTINUED)

private equity funds sponsored by Morgan Stanley (the "Morgan Stanley
Stockholders") will be converted into New Class B Common Stock such that, after
giving effect to such conversion, but not giving effect to the proposed
Offering, the Morgan Stanley Stockholders will own, in the aggregate, 49% of the
outstanding New Class A Common Stock, and (iv) each share of New Common Stock
will be split into 706 shares of New Common Stock. Holders of New Class B Common
Stock will have no right to vote on matters submitted to a vote of stockholders,
except in certain circumstances. Shares of the New Class B Common Stock will
have no preemptive or other subscription rights and will be convertible into an
equal number of shares of New Class A Common Stock (1) at the option of the
holder thereof to the extent that, following such conversion, the Morgan Stanley
Stockholders will not, in the aggregate, own more than 49% of the outstanding
shares of New Class A Common Stock, and (2) automatically upon the transfer of
such shares by any Morgan Stanley Stockholder to a person that is not a Morgan
Stanley Stockholder.

The pro forma effects of the 706-for-one stock split on average common
shares outstanding and net income (loss) per common share are shown below:

YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------

Average common shares outstanding (in thousands).......... 17,498 14,614 10,590
Net income (loss) per common share........................ $ 1.06 $ .49 $ (2.03)

Stock options outstanding after giving pro forma effect to the 706-for-one
stock split as of December 31, 1996, 1995 and 1994 would have been 1,883,608,
1,685,928 and 816,136, respectively. After giving pro forma effect to the
706-for-one stock split the average exercise prices of stock options granted,
exercised and forefeited during 1996 were $10.01, $8.88 and $10.22,
respectively, and the average exercise price of stock options outstanding as of
December 31, 1996 was $10.50. Financial information appearing elsewhere in these
consolidated financial statements has not been adjusted to reflect the impact of
the stock split.

STOCK OPTIONS

The Company's Stock Option Plan adopted in December 1993, as amended (the
"Plan"), provides for granting of options to purchase up to 3,445 shares of
Class A common stock. A total of 2,668 options were outstanding as of December
31, 1996, of which 897 were exercisable at the average exercise price of $7,213.
Each option has an exercise price set initially at fair market value on the date
of the grant, as determined by the Board of Directors of the Company. The option
price increases at the end of every three month period following the date of
grant at a rate of 12% per annum, compounded annually, while the option remains
issued but unexercised (or if shorter, up to the date the Plan is terminated or
there are certain changes in the ownership of the Company). Such options become
exercisable in equal installments on the first through fifth anniversaries of
the date of grant.

The Company has elected to follow Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its employee stock options. Under the variable
plan accounting requirements of APB No. 25, no stock-based compensation expense
has been recognized through December 31, 1996 for the Plan. However, upon the
effective date of the Offering, assuming it is consummated, the Company will
record a one-time non-cash stock-based compensation expense charge related to
the Plan equal to the aggregate difference between the initial public offering
price of the New Class A Common Stock and the exercise price of all the options

F-25

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. SHAREHOLDERS' EQUITY (CONTINUED)

under the Plan. Based on the estimated range of the initial public offering
price, the one-time non-cash stock-based compensation expense charge is expected
to be between $1 million and $6 million.

The Company adopted the disclosure-only option under SFAS No. 123,
"Accounting for Stock-Based Compensation," as of December 31, 1995. If the
accounting provisions of SFAS No. 123 had been adopted as of the beginning of
1995, the effects on 1995 and 1996 net income would have been immaterial.

Information with respect to the incentive stock option plan is as follows:

OUTSTANDING
------------------------

SHARES AVERAGE
SUBJECT TO EXERCISE
OPTION PRICE
----------- -----------

Balance at December 31, 1993............................................ 1,020 $ 5,000

Options granted......................................................... 144 5,600

Options forfeited....................................................... (8) 5,000
-----

Balance at December 31, 1994............................................ 1,156 5,600

Options granted......................................................... 1,252 6,475

Options forfeited....................................................... (20) 6,500
-----

Balance at December 31, 1995............................................ 2,388 6,585

Options granted......................................................... 340 7,067

Options exercised....................................................... (5) 6,272

Options forfeited....................................................... (55) 7,217
-----

Balance at December 31, 1996............................................ 2,668 7,415
-----
-----

Shares under options that were exercisable were 434 and 202 as of December
31, 1995 and 1994, respectively, at an average exercise price of $6,272 and
$5,600. At December 31, 1996, outstanding option shares had exercise prices
ranging from $7,025 to $7,754 and average contractual life remaining of 2.9
years. Upon certain events, such as the Offering, options not previously granted
will be automatically granted on a PRO RATA basis to participants of the Plan.

11. CONTINGENCIES

The Company is a defendant in various lawsuits in connection with the normal
conduct of its operations. Company management believes the ultimate resolution
of such litigation will not result in any material adverse impact to the
financial position of the Company.

The number of insurance companies that are under regulatory supervision has
resulted in and is expected to continue to result in assessments by state
guaranty funds to cover losses to policyholders of insolvent or rehabilitated
companies. The Company has accrued for expected non-indemnified assessments.

F-26

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

(IN THOUSANDS,
EXCEPT PER SHARE DATA) 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- ------------------------------------------------------------ ----------- ----------- ----------- -----------

1996:
Net investment spread..................................... $ 14,078 $ 17,773 $ 18,003 $ 18,016
Fee income................................................ 4,162 4,201 4,964 4,506
Other income and expenses................................. (11,779) (13,967) (16,572) (15,747)
Realized investment gains (losses)........................ (403) (814) (1,115) 3,239
----------- ----------- ----------- -----------
Income before federal income taxes........................ 6,058 7,193 5,280 10,014
Federal income tax expense................................ (1,573) (1,190) (956) (1,448)
----------- ----------- ----------- -----------
Net income................................................ 4,485 6,003 4,324 8,566
Dividends on preferred stock.............................. (1,188) (1,188) (1,187) (1,187)
----------- ----------- ----------- -----------
Net income applicable to common shareholders.............. 3,297 4,815 3,137 7,379
Exclude, net of tax:
Realized investment (gains) losses...................... 262 529 725 (2,106)
Non-recurring charges................................... -- -- 940 3,599
----------- ----------- ----------- -----------
Operating earnings........................................ $ 3,559 $ 5,344 $ 4,802 $ 8,872
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Per share:
Net Income.............................................. $ 133.09 $ 194.35 $ 126.51 $ 297.59
Operating earnings...................................... $ 143.66 $ 215.70 $ 193.66 $ 357.80
1995:
Net investment spread..................................... $ 9,443 $ 11,238 $ 14,582 $ 13,894
Fee income................................................ 2,010 2,507 3,363 3,468
Other income and expenses................................. (8,572) (9,523) (17,540) (10,002)
Realized investment gains (losses)........................ (2,511) 5,205 (1,818) 3,172
----------- ----------- ----------- -----------
Income (loss) before federal income taxes................. 370 9,427 (1,413) 10,532
Federal income tax benefit (expense)...................... (196) (4,742) 332 (2,420)
----------- ----------- ----------- -----------
Net income (loss)......................................... 174 4,685 (1,081)* 8,112
Dividends on preferred stock.............................. (1,188) (1,188) (1,187) (1,187)
----------- ----------- ----------- -----------
Net income (loss) applicable to common shareholders....... (1,014) 3,497 (2,268) 6,925
Exclude, net of tax:
Realized investment (gains) losses...................... 1,632 (3,383) 1,182 (2,062)
----------- ----------- ----------- -----------
Operating earnings........................................ $ 618 $ 114 $ (1,086) $ 4,863
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Per share:
Net Income (loss)....................................... $ (67.60) $ 191.54 $ (91.56) $ 279.57
Operating earnings (loss)............................... $ 41.20 $ 6.24 $ (43.84) $ 196.33

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

* Net loss for the quarter includes an after-tax charge of $4.9 million
related to the amortization of acquisition-related deferred charges due to a
change in accounting estimate.

F-27

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. SEGMENT INFORMATION

The Company classifies its products and services as either spread-based or
fee-based and manages these two distinct segments separately. Corporate and
other revenues represent earnings on cash and investments in excess of customer
deposits (i.e., surplus assets) and fee-income from broker-dealer operations. In
addition to normal operating expenses associated with these revenue generating
activities, corporate and other pretax income includes unallocated corporate
overhead, non-recurring charges and realized investment gains and losses.
Consolidated federal income taxes and dividends on preferred stock are included
in corporate and other operating earnings. Segment information is presented for
the years ended December 31, 1996, 1995 and 1994 as follows:

CORPORATE
(IN THOUSANDS) SPREAD-BASED FEE-BASED AND OTHER CONSOLIDATED
- -------------------------------------------------------------- ------------ ----------- ----------- ------------

YEAR ENDED DECEMBER 31, 1996:
Revenues.................................................... $ 243,506 $ 17,032 $ 7,326 $ 267,864
Operating earnings (loss)................................... 33,876 5,050 (16,349) 22,577
Income (loss) before federal income taxes................... 33,876 5,050 (10,381) 28,545
Assets...................................................... 3,681,562 883,483 136,619 4,701,664
Amortization................................................ 10,804 3,839 1,503 16,146
YEAR ENDED DECEMBER 31, 1995:
Revenues.................................................... $ 188,476 $ 10,682 $ 8,214 $ 207,372
Operating earnings (loss)................................... 22,322 3,525 (21,338) 4,509
Income (loss) before federal income taxes................... 22,322 3,525 (6,931) 18,916
Assets...................................................... 3,031,076 647,132 115,372 3,793,580
Amortization................................................ 8,422 1,837 10,055 20,314
YEAR ENDED DECEMBER 31, 1994:
Revenues.................................................... $ 143,890 $ 4,459 $ 9,184 $ 157,533
Operating earnings (loss)................................... 16,200 2,141 (15,989) 2,352
Income (loss) before federal income taxes................... 16,200 2,141 (41,130) (22,789)
Assets...................................................... 1,948,240 409,291 90,357 2,447,888
Amortization................................................ 3,956 900 2,433 7,289

F-28

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)

MARCH 31, 1997

CARRYING FAIR
AMOUNT VALUE
------------ ------------

(IN THOUSANDS)
- --------------------------------------------------------------------------------------

ASSETS
Cash and investments:
Fixed maturities available-for-sale, at fair value (amortized cost: $3,235,336)..... $ 3,191,109 $ 3,191,109
Equity securities, at fair value (cost: $21,405).................................... 22,160 22,160
Mortgage loans on real estate....................................................... 28,963 28,963
Policy loans........................................................................ 123,297 123,297
Cash and cash equivalents........................................................... 133,471 133,471
------------ ------------
Total cash and investments............................................................ 3,499,000 3,499,000

Assets held in separate accounts...................................................... 1,201,621 1,201,621
Accrued investment income............................................................. 35,694 35,694
Value of insurance in force........................................................... 50,798 124,191
Deferred policy acquisition costs..................................................... 64,747 --
Goodwill.............................................................................. 7,448 7,448
Deferred federal income taxes......................................................... 53,182 45,763
Other assets.......................................................................... 30,731 30,731
------------ ------------
Total assets.......................................................................... $ 4,943,221 $ 4,944,448
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Customer deposits................................................................... $ 3,499,471 $ 3,433,495
Customer deposits in separate accounts.............................................. 1,196,830 1,196,830
Long-term debt...................................................................... 38,000 38,000
Accounts payable and accrued expenses............................................... 17,325 17,325
Payable for investment securities purchased......................................... 8,378 8,378
Payable to reinsurer................................................................ 10,000 10,000
Other liabilities................................................................... 15,243 15,243
------------ ------------
Total liabilities..................................................................... 4,785,247 4,719,271
Contingencies
Shareholders' equity:
Preferred stock, $25.00 stated value................................................ 50,000
Class A common stock, $.01 par value, 23,796 shares issued.......................... *
Class B common stock, $.01 par value, 1,000 shares issued........................... *
Additional paid-in capital.......................................................... 124,609
Net unrealized losses on available-for-sale securities.............................. (26,721)
Retained earnings................................................................... 10,086
------------
Total shareholders' equity............................................................ 157,974 225,177
------------ ------------
Total liabilities and shareholders' equity............................................ $ 4,943,221 $ 4,944,448
------------ ------------
------------ ------------

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

* Less than $1,000.

See accompanying notes.

F-29

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996

1997 1996
---------- ----------

(IN THOUSANDS, EXCEPT SHARE AMOUNTS AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------------------

Investment income......................................................................... $ 69,700 $ 55,353
Interest credited on customer deposits.................................................... (51,325) (41,198)
---------- ----------
Net investment spread............................................................... 18,375 14,155
Fee income:
Variable annuity fees................................................................... 3,239 2,362
Asset management fees................................................................... 1,884 1,515
Other fee income........................................................................ 397 271
---------- ----------
Total fee income.................................................................... 5,520 4,148

Other income and expenses:
Surrender charges....................................................................... 882 1,570
Operating expenses...................................................................... (8,156) (6,983)
Commissions, net of deferrals........................................................... (638) (544)
Interest expense on debt................................................................ (686) (787)
Amortization:
Deferred policy acquisition costs..................................................... (2,175) (1,687)
Value of insurance in force........................................................... (2,241) (2,057)
Acquisition-related deferred charges.................................................. (126) (500)
Goodwill.............................................................................. (122) (122)
Non-recurring charges................................................................... (1,445) --
Other, net.............................................................................. (995) (732)
---------- ----------
Total other income and expenses..................................................... (15,702) (11,842)
Realized investment gains (losses)........................................................ 2,231 (403)
---------- ----------
Income before federal income taxes........................................................ 10,424 6,058
Federal income tax expense................................................................ (2,814) (1,573)
---------- ----------
Net income................................................................................ 7,610 4,485
Dividends on preferred stock.............................................................. (1,188) (1,188)
---------- ----------
Net income applicable to common shareholders.............................................. $ 6,422 $ 3,297
---------- ----------
---------- ----------
Net income per common share............................................................... $ 258.99 $ 133.09
---------- ----------
---------- ----------
Average common shares outstanding......................................................... 24,796 24,772
---------- ----------
---------- ----------

See accompanying notes.

F-30

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996

1997 1996
------------- -----------

(IN THOUSANDS)
- --------------------------------------------------------------------------------------

CASH FLOWS PROVIDED BY OPERATING ACTIVITIES........................................... $ 46,677 $ 36,533

CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments:
Purchases........................................................................... (1,199,200) (767,864)
Maturities and redemptions.......................................................... 59,905 46,702
Sales............................................................................... 947,397 663,577
Other investments:
Purchases........................................................................... (10,489) (23,893)
Maturities and redemptions.......................................................... 8,029 1,011
Sales............................................................................... 10,892 2,827
Policy loans, net..................................................................... 169 (1,971)
Purchase of separate account assets................................................... (102,059) (59,616)
Proceeds from sale of separate account assets......................................... 20,383 22,272
------------- -----------
Cash flows used in investing activities............................................... (264,973) (116,955)

CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Amounts received from customers....................................................... 357,581 309,293
Amounts paid to customers............................................................. (112,693) (115,687)
Change in repurchase agreement liability.............................................. -- (12,008)
Principal payment on long-term debt................................................... (2,000) --
Dividends on preferred stock.......................................................... (1,188) (1,188)
------------- -----------
Cash flows provided by financing activities........................................... 241,700 180,410
------------- -----------
Net increase in cash and cash equivalents............................................. 23,404 99,988
Cash and cash equivalents at beginning of period...................................... 110,067 76,896
------------- -----------
Cash and cash equivalents at end of period............................................ $ 133,471 $ 176,884
------------- -----------
------------- -----------

See accompanying notes.

F-31

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1997

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 1997 are not
necessarily indicative of those to be expected for the year ending December 31,
1997. For further information, refer to the consolidated financial statements
and footnotes thereto included in the annual report on Form 10-K of ARM
Financial Group, Inc. (the "Company") for the year ended December 31, 1996.

Certain amounts from prior years have been reclassified to conform to the
current year's presentation. Such reclassifications had no effect on previously
reported net income or shareholders' equity.

2. FAIR VALUE BALANCE SHEETS

SFAS No. 107 requires disclosure of fair value information about all
financial instruments, including insurance liabilities classified as investment
contracts, unless specifically exempted. The accompanying fair value balance
sheets reflect fair values for those financial instruments specifically covered
by SFAS No. 107, along with fair value amounts for other assets and liabilities
for which disclosure is permitted but not required.

The following methods and assumptions were used in estimating fair values:

F-32

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1997 (CONTINUED)

2. FAIR VALUE BALANCE SHEETS (CONTINUED)

FIXED MATURITIES AND EQUITY SECURITIES

MORTGAGE LOANS ON REAL ESTATE

Pursuant to the terms of the acquisition of certain of the Company's
insurance operations, payments of principal and interest on substantially its
entire mortgage loan portfolio are guaranteed by The National Mutual Life
Association of Australasia Limited ("National Mutual"). Principal received in
excess of statutory book value is to be returned to National Mutual.
Accordingly, book value is deemed to be fair value for these mortgage loans.

POLICY LOANS

The carrying amount of policy loans approximates their fair value.

CASH AND CASH EQUIVALENTS AND ACCRUED INVESTMENT INCOME

The carrying amount of cash and cash equivalents and accrued investment
income approximates their fair value given the short-term nature of these
assets.

ASSETS HELD IN SEPARATE ACCOUNTS AND CUSTOMER DEPOSITS IN SEPARATE ACCOUNTS

Fair value of assets held in separate accounts is based on the quoted market
prices of the underlying mutual funds for assets invested in variable options.
The fair value of assets held in separate accounts invested in guaranteed rate
options is primarily based on quoted market prices of fixed maturity securities.
The fair value of customer deposits in separate accounts is based on the account
values of the underlying policies, plus or minus market value adjustments
applicable to certain customers who are guaranteed a fixed rate of return.

GOODWILL

The carrying amount of goodwill approximates fair value.

DEFERRED FEDERAL INCOME TAXES

CUSTOMER DEPOSITS AND VALUE OF INSURANCE IN FORCE

F-33

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1997 (CONTINUED)

2. FAIR VALUE BALANCE SHEETS (CONTINUED)

immediate annuity contracts represents the fair values of those contracts as a
whole which implicitly eliminates the corresponding value of insurance in force.
The fair value amounts of the remaining customer deposits, primarily related to
deferred annuity contracts, single premium endowment contracts and guaranteed
investment contracts ("GICs"), represent the account values of the underlying
contracts before applicable surrender charges. The fair value of the value of
insurance in force represents the estimated present value of future profits for
all customer deposits, excluding single premium immediate annuity contracts,
assuming a discount rate of 13%. Deferred policy acquisition costs do not appear
on the fair value presentation because those values are implicitly considered in
the determination of the fair value of the corresponding customer deposits and
value of insurance in force.

LONG-TERM DEBT AND PAYABLE TO REINSURER

The carrying amounts of long-term debt and payable to reinsurer approximate
fair value.

OTHER ASSETS AND LIABILITIES

The fair values of other assets and liabilities are reported at their
financial statement carrying amounts.

3. FEDERAL INCOME TAXES

Federal income taxes are different from the amount determined by multiplying
pretax earnings by the expected federal income tax rate of 35%. The differences
are primarily attributable to changes in valuation allowances related to
deferred federal income tax assets.

F-34

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1997 (CONTINUED)

4. STATUTORY INFORMATION

Following is a reconciliation of income based on statutory accounting
practices prescribed or permitted by insurance regulatory authorities for the
Company's insurance subsidiaries with GAAP net income reported in the
accompanying condensed consolidated statements of operations:

THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
--------- ---------

(IN THOUSANDS)
- ------------------------------------------------------------------------------
Insurance subsidiaries (statutory-basis)(1)................................... $ 9,886 $ 8,258
Non-insurance companies(2).................................................... 527 133
--------- ---------
Consolidated statutory-basis pretax operating income........................ 10,413 8,391
Reconciling items:
Amortization of interest maintenance reserve................................ (926) (1,112)
Adjustments to invested asset carrying values at acquisition date........... (9) (158)
Adjustments to customer deposits............................................ (1,272) 146
Interest expense on debt.................................................... (686) (787)
Deferred policy acquisition costs, net of amortization...................... 4,872 3,148
Amortization of value of insurance in force................................. (2,241) (2,057)
Amortization of acquisition-related deferred charges........................ (126) (500)
Amortization of goodwill.................................................... (122) (122)
Non-recurring charges....................................................... (1,445) --
Realized investment gains (losses).......................................... 2,231 (403)
Other....................................................................... (265) (488)
--------- ---------
GAAP-basis:
Income before federal income taxes.......................................... 10,424 6,058
Federal income tax expense.................................................. (2,814) (1,573)
--------- ---------
Net income.................................................................. 7,610 4,485
Dividends on preferred stock................................................ (1,188) (1,188)
--------- ---------
Net income applicable to common shareholders................................ 6,422 3,297
Exclude, net of tax:
Realized investment (gains) losses........................................ (1,450) 262
Non-recurring charges..................................................... 1,445 --
--------- ---------
Operating earnings(3)......................................................... $ 6,417 $ 3,559
--------- ---------
--------- ---------

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

(1) Insurance company statutory-basis pretax income excluding realized gains and
losses.

(3) Net income applicable to common shareholders, excluding, net of tax,
realized investment gains and losses and non-recurring charges.

F-35

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1997 (CONTINUED)

5. NON-RECURRING CHARGES

The Company recorded non-recurring charges of $1.4 million in the first
quarter of 1997 including $1.0 million related to the relocation and
consolidation of the Company's main processing center from Columbus, Ohio to
Louisville, Kentucky and $.4 million related to merger and acquisition
activities which did not result in a transaction. Additional costs associated
with the relocation and consolidation of approximately $4 million are expected
to be incurred through the end of 1997.

6. SHAREHOLDERS' EQUITY

PUBLIC OFFERING OF COMMON STOCK

The Company filed a registration statement with the Securities and Exchange
Commission on October 23, 1996, and amendments thereto on March 27, 1997 and May
7, 1997 with respect to the public offering (the "Offering") of 5,750,000 shares
of Class A Common Stock, par value $.01 per share (the "New Class A Common
Stock"). The Company's decision to proceed with the Offering is subject to
market and other conditions. Prior to the consummation of the Offering, the
Company expects to amend and restate its Certificate of Incorporation and
By-Laws to effectuate a recapitalization such that (i) the common equity of the
Company will consist of New Class A Common Stock and Class B Common Stock, par
value of $.01 per share (the "New Class B Common Stock" and, together with the
New Class A Common Stock, the "New Common Stock"), (ii) each outstanding share
of common stock of the Company will be converted into one share of New Class A
Common Stock, (iii) certain shares of the New Class A Common Stock owned by
private equity funds sponsored by Morgan Stanley Group Inc. (the "Morgan Stanley
Stockholders," which at March 31, 1997 owned approximately 91% of the
outstanding shares of common stock of the Company) will be converted into New
Class B Common Stock such that, after giving effect to such conversion, but not
giving effect to the proposed Offering, the Morgan Stanley Stockholders will
own, in the aggregate, 49% of the outstanding New Class A Common Stock, and (iv)
each share of New Common Stock will be split into 706 shares of New Common
Stock. Holders of New Class B Common Stock will have no right to vote on matters
submitted to a vote of stockholders, except in certain circumstances. Shares of
the New Class B Common Stock will have no preemptive or other subscription
rights and will be convertible into an equal number of shares of New Class A
Common Stock (1) at the option of the holder thereof to the extent that,
following such conversion, the Morgan Stanley Stockholders will not, in the
aggregate, own more than 49% of the outstanding shares of New Class A Common
Stock, and (2) automatically upon the transfer of such shares by any Morgan
Stanley Stockholder to a person that is not a Morgan Stanley Stockholder or an
affiliate of a Morgan Stanley Stockholder.

The pro forma effects of the 706-for-one stock split on average common
shares outstanding and net income per common share are shown below:

THREE MONTHS ENDED
MARCH 31,
--------------------------
1997 1996
------------ ------------

Average common shares outstanding (in thousands).................. 17,506 17,489
Net income per common share....................................... $ .37 $ .19

Financial information appearing elsewhere in these condensed consolidated
financial statements has not been adjusted to reflect the impact of the stock
split.

F-36

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1997 (CONTINUED)

6. SHAREHOLDERS' EQUITY (CONTINUED)

STOCK OPTIONS

The Company's Stock Option Plan adopted in December 1993, as amended (the
"Plan"), provides for granting of options to purchase up to 3,445 shares of
Class A Common Stock. A total of 2,713 options were outstanding as of March 31,
1997, of which 946 were exercisable. Each option has an exercise price set
initially at fair market value on the date of the grant, as determined by the
Board of Directors of the Company. The option exercise price increases at the
end of every three month period following the date of grant at a rate of 12% per
annum, compounded annually, while the option remains issued but unexercised (or,
if shorter, up to the date the Plan is terminated or there are certain changes
in the ownership of the Company). Such options become exercisable in equal
installments on the first through fifth anniversaries of the date of grant. Upon
certain events, such as the Offering, options not previously granted will be
automatically granted on a pro rata basis to participants of the Plan.

The Company has elected to follow Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations in accounting for its employee stock options. Under the variable
plan accounting requirements of APB No. 25, no stock-based compensation expense
has been recognized through March 31, 1997 for the Plan (as defined herein).
However, upon consummation of the Offering, assuming it is consummated, the
Company will record a one-time non-cash stock-based compensation expense charge
related to the Plan equal to the aggregate difference between the initial public
offering price of the New Class A Common Stock and the exercise price of all the
options under the Plan. Based on the estimated range of the initial public
offering price, the one-time non-cash stock-based compensation charge is
expected to be between $1 million and $6 million.

Upon completion of the Offering, the Company will adopt the 1997 Equity
Incentive Plan (the "1997 Equity Plan"). The 1997 Equity Plan will be
administered by the Compensation Committee upon establishment thereof, and by
the Board of Directors prior to that time. The 1997 Equity Plan provides for the
granting of incentive stock options and nonqualified stock options, stock
appreciation rights, restricted stock, performance units, and performance shares
to those officers, and other key employees and consultants with potential to
contribute to the future success of the Company or its subsidiaries; provided
that only employees may be granted incentive stock options.

EARNINGS PER SHARE

In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," which is required to be adopted by the Company on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of SFAS No.
128 on the calculation of fully diluted earnings per share is not expected to be
material.

F-37

[LOGO]

PROSPECTUS (SUBJECT TO COMPLETION)

ISSUED MAY 23, 1997

5,750,000 SHARES

ARM FINANCIAL GROUP, INC.

CLASS A COMMON STOCK
---------------------

OF THE 5,750,000 SHARES OF CLASS A COMMON STOCK BEING OFFERED, 1,150,000 SHARES
ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE
INTERNATIONAL UNDERWRITERS AND 4,600,000 SHARES ARE BEING OFFERED INITIALLY
IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. ALL SHARES OF
CLASS A COMMON STOCK BEING OFFERED HEREBY ARE BEING SOLD BY THE
COMPANY. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR
THE CLASS A COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED
THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $12 AND
$14 PER SHARE. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE
FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC
OFFERING PRICE.

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

APPLICATION HAS BEEN MADE TO HAVE THE CLASS A COMMON STOCK APPROVED FOR LISTING
ON THE AMERICAN STOCK EXCHANGE UNDER THE TRADING SYMBOL "ARM".

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

SEE "RISK FACTORS" BEGINNING ON PAGE 10 OF THIS PROSPECTUS FOR INFORMATION THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.

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

PRICE $ A SHARE
------------------------

UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
--------------------- --------------------- ---------------------

PER SHARE................................. $ $ $
TOTAL(3).................................. $ $ $

(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $1,000,000.

(3) THE MORGAN STANLEY STOCKHOLDERS HAVE GRANTED THE U.S. UNDERWRITERS AN
OPTION, EXERCISABLE WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO
AN AGGREGATE OF 862,500 ADDITIONAL SHARES OF CLASS A COMMON STOCK AT THE
PRICE TO PUBLIC SHOWN ABOVE LESS UNDERWRITING DISCOUNTS AND COMMISSIONS,
FOR THE PURPOSE OF COVERING OVER-ALLOTMENTS, IF ANY. IF THE U.S.
UNDERWRITERS EXERCISE SUCH OPTION IN FULL, THE TOTAL PRICE TO PUBLIC,
UNDERWRITING DISCOUNTS AND COMMISSIONS AND PROCEEDS TO THE MORGAN STANLEY
STOCKHOLDERS WILL BE $ , $ AND $ ,
RESPECTIVELY. SEE "PRINCIPAL STOCKHOLDERS" AND "UNDERWRITERS."

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

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

MORGAN STANLEY & CO.

INTERNATIONAL

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

OPPENHEIMER & CO., INC.

, 1997

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table shows the expenses payable by the Company (net of costs
expensed in fiscal 1996), other than underwriting discounts and commissions, to
be incurred in connection with the sale and distribution of the securities being
registered. All amounts are estimates (except for the Securities and Exchange
Commission (the "SEC") registration fee, the National Association of Securities
Dealers, Inc. ("NASD") filing fee and the American Stock Exchange listing fee).

SEC registration fee............................................ $ 34,848
NASD filing fee................................................. 12,000
American Stock Exchange listing fee............................. 45,000
Printing and engraving expenses................................. 325,000
Legal fees and expenses......................................... 200,000
Accountants' fees and expenses.................................. 200,000
Blue Sky qualification fees and expenses........................ 15,000
Transfer Agent and Registrar fees............................... 15,000
Miscellaneous................................................... 153,152
---------
Total................................................... $1,000,000
---------
---------

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

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law provides, in summary,
that directors and officers of Delaware corporations are entitled, under certain
circumstances, to be indemnified against all expenses and liabilities (including
attorneys' fees) incurred by them as a result of suits brought against them in
their capacity as a director or officer, if they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, if they
had no reasonable cause to believe their conduct was unlawful; PROVIDED that no
indemnification may be made against expenses in respect of any claim, issue or
matter as to which they shall have been adjudged to be liable to the
corporation, unless and only to the extent that the court in which such action
or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, they
are fairly and reasonably entitled to indemnity for such expenses which the
court shall deem proper. Any such indemnification may be made by the corporation
only as authorized in each specific case upon a determination by the
stockholders or disinterested directors that indemnification is proper because
the indemnitee has met the applicable standard of conduct.

The Certificate of Incorporation of the Registrant (the "Certificate of
Incorporation") provides that no director of the Registrant shall be personally
liable to the Registrant or its stockholders for monetary damages for any breach
of fiduciary duty as a director, except for liability: (i) for any breach of the
director's duty of loyalty to the Registrant or its stockholders; (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) in respect of certain unlawful dividend payments
or stock redemptions or purchases or (iv) for any transaction from which the
director derived an improper personal benefit.

The Certificate of Incorporation and the By-laws of the Registrant provide
for indemnification of its directors and officers to the fullest extent
permitted by Delaware law, as the same may be amended from time to time. In
addition, MS Group indemnifies those directors of the Registrant who are also
officers of MS & Co.

II-1

The Underwriting Agreement (Exhibit 1.1 hereto) contains provisions for
certain indemnification rights to the directors and officers of the Registrant.

In addition, the Registrant and MS Group maintains directors' and officers'
liability insurance for their respective directors and officers.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Within the past three years, the Registrant has issued securities without
registration under the Act, as follows (the share amounts set forth below have
not been adjusted to give effect to the Recapitalization):

(a) Common Stock

(i) On June 14, 1995, in connection with the acquisition of
substantially all of the assets and business operations of SBM Company, the
Registrant issued 9,770 shares of its Class A Common Stock to the Morgan
Stanley Capital Partners III, L.P., Morgan Stanley Capital Investors, L.P.,
MSCP III 892 Investors, L.P., New Arm, LLC, Dudley J. Godfrey, Jr. and
Edward D. Powers for an aggregate offering price of $63,505,000.

(ii) On February 23, 1996, the Registrant issued 5 shares of its Class A
Common Stock to Patty Winter in connection with the exercise of options for
an aggregate offering price of $31,360.

(iii) On July 1, 1996, the Registrant issued 21 shares of its Class A
Common Stock to Warren M. Foss for an aggregate offering price of $152,880.

(b) Grants and Exercises of Stock Options

As of May 23, 1997, options to purchase 2,713.40 shares of Class A Common
Stock were outstanding and unexercised under the Registrant's Stock Option Plan.
On February 23, 1996, the Registrant issued 5 shares of Class A Common Stock
upon exercise of options granted under such plan for an aggregate consideration
of approximately $31,360. As of May 23, 1997, there were 3,440 shares of Common
Stock reserved for issuance under this plan.

The securities issued in the transactions described in paragraph (a) above
were issued in reliance on the exemption from registration under Section 4(2)
and/or Regulation D of the Securities Act as transactions not involving a public
offering. The recipients in each such case represented their intentions to
acquire the securities for investment purposes only and not with a view to
distribution thereof, and appropriate restrictive legends were affixed to the
securities issued in each transaction. All recipients were furnished or had
adequate access, through employment or other relationships, to information about
the Registrant.

The options granted under the Stock Option Plan and the shares issued upon
exercise of the options described in paragraph (b) above were issued in reliance
on the exemption from registration under Section 4(2) and/or Regulation D of the
Securities Act as transactions not involving a public offering. The recipients,
by virtue of their employment or other relationships with the Registrant, had
adequate access to information about the Registrant. Upon exercise of the
options, the recipients represented their intentions to acquire the shares for
investment purposes only and not with a view to distribution thereof, and
appropriate restrictive legends were affixed to the certificates evidencing such
shares.

II-2

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------------

1.1 *** --Form of Underwriting Agreement.
2.1 --Asset Purchase Agreement, dated as of January 5, 1995, among Kleinwort Benson Investment
Management Holdings Ltd., Kleinwort Benson Investment Management Americas Inc., ARM Financial
Group, Inc., and ARM Capital Advisors, Inc.++
2.2 --Amended and Restated Stock and Asset Purchase Agreement, dated as of April 7, 1995, by and
between SBM Company and ARM Financial Group, Inc.+++, amending the Stock and Asset Purchase
Agreement, dated as of February 16, 1995.++
2.3 --Subscription Agreement dated as of June 12, 1995, among ARM Financial Group, Inc. and Morgan
Stanley Capital Partners III, L.P., Morgan Stanley Capital Investors, L.P. and MSCP III 892
Investors, L.P.+++++
2.4 --Subscription Agreement dated as of June 12, 1995, among ARM Financial Group, Inc. and New ARM,
LLC, Dudley J. Godfrey, Jr. and Edward Powers.+++++
2.5 ** --Subscription Agreement dated as of July 1, 1996, between ARM Financial Group, Inc. and Warren M.
Foss.
3(i).1 --Certificate of Incorporation of ARM Financial Group, Inc.+
3(i).2 --Certificate of Amendment to the Certificate of Incorporation of ARM Financial Group, Inc., filed
with the Delaware Secretary of State on October 5, 1993.+
3(i).3 --Certificate of Amendment to the Certificate of Incorporation of ARM Financial Group, Inc., filed
with the Delaware Secretary of State on November 10, 1993.+++++
3(i).4 --Certificate of Designations of Cumulative Perpetual Preferred Stock of ARM Financial Group, Inc.,
filed with the Delaware Secretary of State on November 23, 1993.+
3(i).5 --Certificate of Amendment to the Certificate of Incorporation of ARM Financial Group, Inc., filed
with the Delaware Secretary of State on June 12, 1995.+++++
3(i).6 ** --Certificate of Amendment to the Certificate of Incorporation of ARM Financial Group, Inc., filed
with the Delaware Secretary of State on May 8, 1996.
3(i).7 * --Form of Restated Certificate of Incorporation of ARM Financial Group, Inc. to be in effect upon
completion of the Offering.
3(ii).1 --By-laws of ARM Financial Group, Inc.+
3(ii).2 --Amendment to By-laws of ARM Financial Group, Inc., adopted by the Board of Directors on November
9, 1994.++
3(ii).3 * --Form of Amended and Restated By-laws of ARM Financial Group, Inc. to be in effect upon completion
of the Offering.
4.1 --Amended and Restated Stockholders Agreement dated as of June 14, 1995, among ARM Financial Group,
Inc., The Morgan Stanley Leveraged Equity Fund II, L.P., John Franco, Martin H. Ruby, Oldarm
L.P., Morgan Stanley Capital Partners III, L.P., Morgan Stanley Capital Investors, L.P., MSCP III
892 Investors, L.P. and New ARM, LLC.+++++
4.2 * --Form of Second Amended and Restated Stockholders Agreement dated as of , 1997, among ARM
Financial Group, Inc., The Morgan Stanley Leveraged Equity Fund II, L.P., John Franco, Martin H.
Ruby, Oldarm L.P., Morgan Stanley Capital Partners III, L.P., Morgan Stanley Capital Investors,
L.P., MSCP III 892 Investors, L.P. and New ARM, LLC.
5.1 * --Opinion of Shearman & Sterling as to the validity of the Common Stock.

II-3

EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------------

10.1 --ARM Financial Group, Inc. Amended and Restated Stock Option Agreement dated as of June 14,
1995.+++++
10.2 --Amendment, Waiver and Consent dated as of March 27, 1995 to (a) the Credit Agreement dated as of
November 15, 1993 (as amended, the "Credit Agreement"), among ARM Financial Group, Inc.,
Integrity Holdings, Inc., the financial institutions listed on Schedule 2.01 to the Credit
Agreement (the "Lenders"), The Chase Manhattan Bank, N.A. ("Chase"), and Chemical Bank
("Chemical"), as managing agents for the Lenders, (b) the Security Agreement dated as of November
26, 1993 (as amended, the "Security Agreement"), between ARM Financial Group, Inc. and Chase, and
(c) the Pledge Agreement dated as of November 26, 1993 (as amended, the "Pledge Agreement"),
among ARM Financial Group, Inc., Integrity Holdings, Inc. and Chase.++++
10.3 --Second Amendment to the Credit Agreement, Security Agreement and Pledge Agreement dated as of
June 29, 1995.++++
10.4 --Third Amendment to the Credit Agreement, Security Agreement and Pledge Agreement dated as of
December 13, 1995.+++++
10.5 --Fourth Amendment to the Credit Agreement dated as of June 28, 1996.++++++
10.6 --Fifth Amendment to the Credit Agreement dated as of December 31, 1996.+++++++
10.7 --Guaranty dated as of December 13, 1995, made by ARM Financial Group, Inc. in favor of First Bank,
FSB, in connection with sale of certain SBM Certificate Company mortgage loans.+++++
10.8 --Guaranty dated as of December 13, 1995, made by ARM Financial Group, Inc. in favor of First Bank,
FSB, in connection with the sale of certain State Bond and Mortgage Life Insurance Company
mortgage loans.+++++
10.9 --Assignment and Assumption of Lease dated January 5, 1995, between Kleinwort Benson International
Investments, Ltd., and ARM Capital Advisors, Inc. (obligations of ARM Capital Advisors, Inc. have
been fully guaranteed by ARM Financial Group, Inc.)++
10.10** --Administrative Services Agreement dated as of September 28, 1994 between ARM Financial Group,
Inc. and National Integrity Life Insurance Company.
10.11** --Administrative Services Agreement dated as of January 1, 1995 between ARM Financial Group, Inc.
and ARM Capital Advisors, Inc.
10.12 --Administrative Services Agreement dated as of January 1, 1995, between ARM Financial Group, Inc.
and Integrity Life Insurance Company.+++++
10.13 --Administrative Services Agreement dated as of June 14, 1995, between ARM Financial Group, Inc.
and SBM Certificate Company.+++++
10.14 --Administrative Services Agreement dated as of June 14, 1995, between ARM Financial Group, Inc.
and ARM Financial Services, Inc.+++++
10.15** --Investment Advisory Agreement dated as of July 29, 1994 between ARM Financial Group, Inc. and
National Integrity Life Insurance Company.
10.16 --Investment Services Agreement dated as of January 1, 1995, between ARM Financial Group, Inc. and
Integrity Life Insurance Company.+++++
10.17 --Investment Services Agreement dated as of June 14, 1995, between ARM Financial Group, Inc. and
SBM Certificate Company.+++++
10.18 --Tax Allocation Agreement dated as of March 21, 1996 by and among ARM Financial Group, Inc. and
certain of its subsidiaries for taxable periods beginning January 1, 1995.+++++

II-4

EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------------

10.19 --Lease made as of June 14, 1996 by and between Northwestern National Life Insurance Company and
ARM Financial Group, Inc.++++++
10.20** --Assignment and Assumption Agreement dated as of June 28, 1996 between Northwestern National Life
Insurance Company and ARM Financial Group, Inc.
10.21** --Employment Agreement dated as of July 1, 1996 between ARM Financial Group, Inc. and John Franco.
10.22** --Employment Agreement dated as of July 1, 1996 between ARM Financial Group, Inc. and Martin H.
Ruby.
10.23** --Employment Agreement dated as of July 1, 1996 between ARM Financial Group, Inc. and David E.
Ferguson.
10.24** --Employment Agreement dated as of July 1, 1996 between ARM Financial Group, Inc. and John R.
Lindholm.
10.25* --Amendment No. 2 to the Amended and Restated Stock Option Plan.
10.26* --1997 Equity Incentive Plan.
10.27* (c) --Engagement Agreement, dated March 12, 1993, between Analytical Risk Management, LTD and General
American Life Insurance Company--Group Pension.
10.28** --Consent to Assignment of Engagement Agreement, dated September 8, 1993, by General American Life
Insurance Company--Group Pension.
10.29** --Amendment #1 to Engagement Agreement, dated as of August 14, 1995, between General American Life
Insurance Company and ARM Financial Group, Inc.
10.30** --Amendment #2 to Engagement Agreement, dated September 1, 1995, between General American Life
Insurance Company and ARM Financial Group, Inc.
10.31* (c) --Reinsurance Agreement between General American Life Insurance Company and Integrity Life
Insurance Company.
21.1 ** --Subsidiaries of the Registrant.
23.1 * --Consent of Shearman & Sterling (included in its opinion delivered under Exhibit
No. 5)
23.2 ** --Consent of Ernst & Young LLP.
24.1 ** --Powers of Attorney.

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

* Filed herewith.

** Previously filed.

*** To be filed by amendment.

(c) Portions of the exhibit have been omitted pursuant to a request for
confidential treatment filed with the Securities and Exchange Commission
under Rule 406. The omitted material has been filed separately with the
SEC.

+ Incorporated by reference to the Registration Statement on Form S-1 of
the Registrant, File No. 33-67268.

++ Incorporated by reference to the Form 10-K filed by the Registrant on
March 30, 1995.

+++ Incorporated by reference to the Form 10-Q filed by the Registrant on
May 15, 1995.

++++ Incorporated by reference to the Form 10-Q filed by the Registrant on
August 14, 1995.

+++++ Incorporated by reference to the Form 10-K filed by the Registrant on
March 29, 1996.

++++++ Incorporated by reference to the Form 10-Q filed by the Registrant on
August 13, 1996.

+++++++ Incorporated by reference to the Form 10-K filed by the Registrant on
March 27, 1997.

II-5

(b) Financial Statement Schedules

The following schedules are included in this Part II of the Registration
Statement:

Report of Independent Public Accountant on Financial Statement Schedules

Schedule I--Summary of Investments (Other than Investments in Related
Parties)

Schedule II--Condensed Financial Information of Registrant

Schedule III--Supplementary Insurance Information

Schedule IV--Reinsurance

Schedule V--Valuation and Qualifying Accounts

Schedules otherwise required by Article 7 of Regulation S-X other than those
listed are omitted because they are not required, are not applicable, or
equivalent information has been included in the financial statements and notes
thereto, or elsewhere herein.

ITEM 17. UNDERTAKINGS

(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the provisions
described under Item 14 above or otherwise, the Registrant has been advised that
in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

(b) The undersigned Registrant hereby undertakes that:

(i) For the purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(ii) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-6

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Louisville,
Commonwealth of Kentucky on the 23rd day of May, 1997.

ARM FINANCIAL GROUP, INC.

By: /s/ JOHN FRANCO
-----------------------------------------
John Franco
CO-CHAIRMAN OF THE BOARD OF DIRECTORS
AND CO-CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)

/s/ MARTIN H. RUBY
-----------------------------------------
Martin H. Ruby
CO-CHAIRMAN OF THE BOARD OF DIRECTORS
AND CO-CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)

Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.

SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------

/s/ JOHN FRANCO
- ------------------------------ May 23, 1997
John Franco Co-Chairman of the Board of
Directors and Co-Chief
Executive Officer
(Principal Executive
Officer)

/s/ MARTIN H. RUBY
- ------------------------------ May 23, 1997
Martin H. Ruby Co-Chairman of the Board of
Directors and Co-Chief
Executive Officer
(Principal Executive
Officer)

*
- ------------------------------ May 23, 1997
Edward L. Zeman Executive Vice
President--Chief
Financial Officer
(Principal Financial
Officer)

*
- ------------------------------ May 23, 1997
Barry G. Ward Controller (Principal
Accounting Officer)

*
- ------------------------------ Director May 23, 1997
James S. Cole

*
- ------------------------------ Director May 23, 1997
Warren M. Foss

*
- ------------------------------ Director May 23, 1997
Dudley J. Godfrey, Jr.

*
- ------------------------------ Director May 23, 1997
Edward D. Powers

II-7

SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------

*
- ------------------------------ Director May 23, 1997
Colin F. Raymond

*
- ------------------------------ Director May 23, 1997
Frank V. Sica

*
- ------------------------------ Director May 23, 1997
Irwin T. Vanderhoof

/s/ JOHN FRANCO
------------------------------------------
John Franco
*By: ATTORNEY-IN-FACT

/s/ MARTIN H. RUBY
------------------------------------------
Martin H. Ruby
ATTORNEY-IN-FACT

II-8

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES

The following financial statement schedules of ARM Financial Group, Inc. and
subsidiaries and the related Report of Independent Auditors are included in Item
14(d):

PAGE
---------

Report of Independent Auditors on Financial Statement Schedules........................................... S-2
Schedule I --Summary of Investments (Other than Investments in Related Parties)...................... S-3
Schedule II --Condensed Financial Information of Registrant........................................... S-4
Schedule III --Supplementary Insurance Information..................................................... S-8
Schedule IV --Reinsurance............................................................................. S-9
Schedule V --Valuation and Qualifying Accounts....................................................... S-10

Schedules required by Article 7 of Regulation S-X other than those listed
are omitted because they are not required, are not applicable, or equivalent
information has been included in the financial statements and notes thereto, or
elsewhere herein.

S-1

REPORT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULES

Board of Directors and Shareholders
ARM Financial Group, Inc.

We have audited the consolidated financial statements of ARM Financial
Group, Inc. as of December 31, 1996 and 1995, and for each of the three years in
the period ended December 31, 1996, and have issued our report thereon dated
February 12, 1997, except for Note 10, as to which the date is May 23, 1997,
included elsewhere in this Registration Statement (Form S-1, Registration No.
333-14693). Our audits also included the financial statement schedules listed in
Item 16(b) of this Registration Statement (Form S-1, Registration No.
333-14693). These schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits.

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

/s/ ERNST & YOUNG LLP

Louisville, Kentucky
February 12, 1997, except for Note 10
to the consolidated financial statements,
as to which the date is May 23, 1997

S-2

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

SCHEDULE I--SUMMARY OF INVESTMENTS

(OTHER THAN INVESTMENTS IN RELATED PARTIES)
DECEMBER 31, 1996

AMOUNT AT
WHICH
SHOWN
IN THE
BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
- ----------------------------------------------------------------------- ------------ ------------ ------------

(IN THOUSANDS)
Fixed maturities:
Bonds:
U.S. government and government agencies and authorities............ $ 906,674 $ 913,343 $ 913,343
States, municipalities and political subdivisions.................. 4,963 4,560 4,560
Foreign governments................................................ 45,611 45,760 45,760
Public utilities................................................... 100,208 99,485 99,485
Industrial and miscellaneous....................................... 1,991,378 1,991,365 1,991,365
------------ ------------ ------------
Total fixed maturities........................................... 3,048,834 3,054,513 3,054,513
Equity securities:
Non-redeemable preferred stocks.................................... 21,156 22,440 22,440
Common stocks...................................................... 112 112 112
Mortgage loans on real estate.......................................... 36,879 36,879 36,879
Policy loans........................................................... 123,466 123,466 123,466
Cash and cash equivalents.............................................. 110,067 110,067 110,067
------------ ------------ ------------
Total cash and investments....................................... $ 3,340,514 $ 3,347,477 $3,347,477
------------ ------------ ------------
------------ ------------ ------------

S-3

ARM FINANCIAL GROUP, INC. (PARENT COMPANY)

SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS

DECEMBER 31,
----------------------

1996 1995
---------- ----------

(IN THOUSANDS)

ASSETS
Fixed maturities, available-for-sale, at fair value..................................... $ -- $ 1,537
Equity securities, at fair value........................................................ 109 109
Cash and cash equivalents............................................................... 3,317 2,484
Investments in subsidiaries*............................................................ 212,423 222,465
Receivable from subsidiaries*........................................................... 5,185 1,155
Goodwill................................................................................ 2,670 2,816
Other assets............................................................................ 8,550 4,971
---------- ----------
Total assets........................................................................ $ 232,254 $ 235,537
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and other liabilities................................................ $ 10,312 $ 7,546
Long-term debt........................................................................ 40,000 40,000
---------- ----------
Total liabilities................................................................... 50,312 47,546
Shareholders' equity:
Preferred stock....................................................................... 50,000 50,000
Common stock.......................................................................... ** **
Additional paid-in capital............................................................ 124,609 124,425
Net unrealized gains on available-for-sale securities................................. 3,669 28,530
Retained earnings (including undistributed net income of subsidiaries*: 1996--$19,110;
1995--$4,293)....................................................................... 3,664 (14,964)
---------- ----------
Total shareholders' equity.......................................................... 181,942 187,991
---------- ----------
Total liabilities and shareholders' equity.......................................... $ 232,254 $ 235,537
---------- ----------
---------- ----------

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

* Eliminated in consolidation.

** Less than $1,000.

See accompanying note.

S-4

ARM FINANCIAL GROUP, INC. (PARENT COMPANY)

SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

CONDENSED STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31,
--------------------------------

1996 1995 1994
--------- --------- ----------

(IN THOUSANDS)

Revenues:
Dividends from subsidiary*.................................................... $ 16,000 $ 12,800 $ --
Management and service fee income*............................................ 28,901 19,040 19,090
Investment and other income................................................... 1,332 689 694
Realized investment gains (losses)............................................ 3,712 (45) --
--------- --------- ----------
Total revenues.............................................................. 49,945 32,484 19,784
Expenses:
Operating expenses............................................................ 31,813 22,735 19,453
Interest expense.............................................................. 3,161 3,461 3,136
Amortization of acquisition-related deferred charges.......................... 1,503 9,695 2,163
Amortization of goodwill...................................................... 145 84 --
Non-recurring charges......................................................... 5,004 -- --
--------- --------- ----------
Total expenses.............................................................. 41,626 35,975 24,752
--------- --------- ----------
Income (loss) before federal income tax benefit and equity in undistributed net
income (loss) of subsidiaries................................................. 8,319 (3,491) (4,968)
Federal income tax benefit...................................................... 242 271 --
--------- --------- ----------
Income (loss) before equity in undistributed net income (loss) of
subsidiaries.................................................................. 8,561 (3,220) (4,968)
Equity in undistributed net income (loss) of subsidiaries*...................... 14,817 15,110 (11,803)
--------- --------- ----------
Net income (loss)............................................................... $ 23,378 $ 11,890 $ (16,771)
--------- --------- ----------
--------- --------- ----------

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

* Eliminated in consolidation.

See accompanying note.

S-5

ARM FINANCIAL GROUP, INC. (PARENT COMPANY)

SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

CONDENSED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- ---------- ----------

(IN THOUSANDS)
Net cash flows provided by (used in) operating activities....................... $ 2,962 $ 1,175 $ (19,211)
Cash flows provided by (used in) investing activities:
Net sales (purchases) of investments.......................................... 2,437 5,986 (6,847)
Acquisition of subsidiaries................................................... -- (42,134) 3,250
Contribution of capital to subsidiaries....................................... -- (21,100) --
--------- ---------- ----------
Net cash flows provided by (used in) investing activities................... 2,437 (57,248) (3,597)
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock........................................ 184 63,505 --
Organization, debt and stock issuance costs................................... -- (2,000) --
Preferred stock dividends..................................................... (4,750) (4,750) (5,014)
--------- ---------- ----------
Net cash flows provided by (used in) financing activities................... (4,566) 56,755 (5,014)
--------- ---------- ----------
Net change in cash and cash equivalents..................................... 833 682 (27,822)
Cash and cash equivalents at beginning of year.................................. 2,484 1,802 29,624
--------- ---------- ----------
Cash and cash equivalents at end of year........................................ $ 3,317 $ 2,484 $ 1,802
--------- ---------- ----------
--------- ---------- ----------

See accompanying note.

S-6

ARM FINANCIAL GROUP, INC. (PARENT COMPANY)

SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

NOTE TO CONDENSED FINANCIAL STATEMENTS

DECEMBER 31, 1996

1. BASIS OF PRESENTATION

The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes of ARM
Financial Group, Inc. and subsidiaries for the year ended December 31, 1996
included herein.

S-7

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION

CUSTOMER
DEPOSITS AND
DEFERRED SEPARATE INTEREST
POLICY ACCOUNT CREDITED ON OTHER INCOME
ACQUISITION CUSTOMER INVESTMENT CUSTOMER AND
SEGMENT COSTS DEPOSITS INCOME* DEPOSITS FEE INCOME EXPENSES*
- ------------------------------------------ ----------- ------------ ----------- ----------- ----------- -------------

(IN THOUSANDS)
December 31, 1996:
Spread-Based............................ $ 19,919 $3,538,116 $ 243,389 $ 181,471 $ 117 $ (28,159)
Fee-Based............................... 39,082 844,330 -- -- 17,032 (11,982)
Corporate and Other..................... -- 41,887 6,642 690 684 (17,924)
----------- ------------ ----------- ----------- ----------- -------------
Consolidated............................ $ 59,001 $4,424,333 $ 250,031 $ 182,161 $ 17,833 $ (58,065)
----------- ------------ ----------- ----------- ----------- -------------
----------- ------------ ----------- ----------- ----------- -------------
December 31, 1995:
Spread-Based............................ $ 14,787 $2,859,339 $ 188,476 $ 146,141 $ -- $ (20,013)
Fee-Based............................... 28,326 617,312 -- -- 10,682 (7,157)
Corporate and Other..................... -- 39,954 7,548 726 666 (18,467)
----------- ------------ ----------- ----------- ----------- -------------
Consolidated............................ $ 43,113 $3,516,605 $ 196,024 $ 146,867 $ 11,348 $ (45,637)
----------- ------------ ----------- ----------- ----------- -------------
----------- ------------ ----------- ----------- ----------- -------------
December 31, 1994:
Spread-Based............................ $ 9,526 $1,977,758 $ 143,890 $ 115,771 $ -- $ (11,919)
Fee-Based............................... 17,141 388,888 -- -- 4,459 (2,318)
Corporate and Other..................... -- 34,594 5,252 692 3,932 (12,895)
----------- ------------ ----------- ----------- ----------- -------------
Consolidated.............................. $ 26,667 $2,401,240 $ 149,142 $ 116,463 $ 8,391 $ (27,132)
----------- ------------ ----------- ----------- ----------- -------------
----------- ------------ ----------- ----------- ----------- -------------

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

* Allocation of "investment income" and "other income and expenses" is based
on a number of assumptions and estimates, the results of which would change
if different methods were applied.

S-8

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

SCHEDULE IV--REINSURANCE

PERCENTAGE
CEDED ASSUMED OF AMOUNT
GROSS TO OTHER FROM OTHER ASSUMED TO
AMOUNT COMPANIES COMPANIES NET AMOUNT NET AMOUNT
------------ ------------ ------------ ------------ -------------

(IN THOUSANDS EXCEPT PERCENTAGES)
Year Ended December 31, 1996
Life insurance in force................... $ 1,214,895 $ 2,056,073 $ 1,852,732 $ 1,011,554 183.2%
Year Ended December 31, 1995
Life insurance in force................... $ 1,309,604 $ 1,728,116 $ 985,870 $ 567,358 173.8%
Year Ended December 31, 1994
Life insurance in force................... $ 1,301,723 $ 1,166,982 $ 810,450 $ 945,191 85.7%

S-9

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS

ADDITIONS
-----------------------

CHARGED TO
BEGINNING CHARGED TO OTHER END OF
DESCRIPTION OF YEAR EXPENSE ACCOUNTS DEDUCTIONS YEAR
- -------------------------------------------------- ----------- ----------- ---------- ----------- ---------

(IN THOUSANDS)

Valuation allowance on deferred tax assets:
$ (39,004)
1995............................................ $ 66,489 $ 5,895 $ 3,956 (1) (2) $ 37,336
$ (11,004)
1996............................................ $ 37,336 $ 2,517 $ 9,949 (3) (2) $ 38,798

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

(1) Related to deferred tax assets on acquired capital losses established on May
31, 1995 in connection with the SBM acquisition.

(2) In the event that deferred tax assets are recognized on deductible temporary
differences for which a valuation allowance was provided at the date of an
acquisition, such benefits are applied to first reduce the balance of
intangible assets related to the acquisition, and then income tax expense.
As such, the Company reduced its valuation allowance with an offsetting
reduction to acquisition-related intangible assets such as value of
insurance in force and goodwill. In addition, after acquisition-related
intangible assets were reduced to zero for one of the Company's insurance
subsidiaries, a portion of the reduction in valuation allowance resulted in
a reduction of income taxes. The portion of the December 31, 1994 valuation
allowance related to deferred tax assets for net unrealized losses on
available-for-sale securities was reduced to zero as of December 31, 1995.
The Company's available-for-sale portfolios had net unrealized gains at
December 31, 1996 and 1995 which did not require a valuation allowance.

(3) As the acquisition-related valuation allowance described in (2) above was
initially released, the reduction in the intangible assets related to the
acquisition generated additional deferred tax assets. A valuation allowance
was provided for these additional deferred tax assets.

Information required in Schedule V for 1994 is ascertainable from the notes
to the consolidated financial statements.

S-10

INDEX TO EXHIBITS

EXHIBITS
- ---------

1.1 *** --Form of Underwriting Agreement.
2.1 --Asset Purchase Agreement, dated as of January 5, 1995, among Kleinwort Benson Investment Management
Holdings Ltd., Kleinwort Benson Investment Management Americas Inc., ARM Financial Group, Inc., and
ARM Capital Advisors, Inc.++
2.2 --Amended and Restated Stock and Asset Purchase Agreement, dated as of April 7, 1995, by and between
SBM Company and ARM Financial Group, Inc.+++, amending the Stock and Asset Purchase Agreement,
dated as of February 16, 1995.++
2.3 --Subscription Agreement dated as of June 12, 1995, among ARM Financial Group, Inc. and Morgan
Stanley Capital Partners III, L.P., Morgan Stanley Capital Investors, L.P. and MSCP III 892
Investors, L.P.+++++
2.4 --Subscription Agreement dated as of June 12, 1995, among ARM Financial Group, Inc. and New ARM, LLC,
Dudley J. Godfrey, Jr. and Edward Powers.+++++
2.5 ** --Subscription Agreement dated as of July 1, 1996, between ARM Financial Group, Inc. and Warren M.
Foss.
3(i).1 --Certificate of Incorporation of ARM Financial Group, Inc.+
3(i).2 --Certificate of Amendment to the Certificate of Incorporation of ARM Financial Group, Inc., filed
with the Delaware Secretary of State on October 5, 1993.+
3(i).3 --Certificate of Amendment to the Certificate of Incorporation of ARM Financial Group, Inc., filed
with the Delaware Secretary of State on November 10, 1993.+++++
3(i).4 --Certificate of Designations of Cumulative Perpetual Preferred Stock of ARM Financial Group, Inc.,
filed with the Delaware Secretary of State on November 23, 1993.+
3(i).5 --Certificate of Amendment to the Certificate of Incorporation of ARM Financial Group, Inc., filed
with the Delaware Secretary of State on June 12, 1995.+++++
3(i).6 ** --Certificate of Amendment to the Certificate of Incorporation of ARM Financial Group, Inc., filed
with the Delaware Secretary of State on May 8, 1996.
3(i).7 * --Form of Restated Certificate of Incorporation of ARM Financial Group, Inc. to be in effect upon
completion of the Offering.
3(ii).1 --By-laws of ARM Financial Group, Inc.+
3(ii).2 --Amendment to By-laws of ARM Financial Group, Inc., adopted by the Board of Directors on November 9,
1994.++
3(ii).3 * --Form of Amended and Restated By-laws of ARM Financial Group, Inc. to be in effect upon completion
of the Offering.
4.1 --Amended and Restated Stockholders Agreement dated as of June 14, 1995, among ARM Financial Group,
Inc., The Morgan Stanley Leveraged Equity Fund II, L.P., John Franco, Martin H. Ruby, Oldarm L.P.,
Morgan Stanley Capital Partners III, L.P., Morgan Stanley Capital Investors, L.P., MSCP III 892
Investors, L.P. and New ARM, LLC.+++++
4.2 * --Form of Second Amended and Restated Stockholders Agreement dated as of , 1997, among ARM
Financial Group, Inc., The Morgan Stanley Leveraged Equity Fund II, L.P., John Franco, Martin H.
Ruby, Oldarm L.P., Morgan Stanley Capital Partners III, L.P., Morgan Stanley Capital Investors,
L.P., MSCP III 892 Investors, L.P. and New ARM, LLC.
5.1 * --Opinion of Shearman & Sterling as to the validity of the Common Stock.
10.1 --ARM Financial Group, Inc. Amended and Restated Stock Option Agreement dated as of June 14,
1995.+++++

EXHIBITS
- ---------

10.2 --Amendment, Waiver and Consent dated as of March 27, 1995 to (a) the Credit Agreement dated as of
November 15, 1993 (as amended, the "Credit Agreement"), among ARM Financial Group, Inc., Integrity
Holdings, Inc., the financial institutions listed on Schedule 2.01 to the Credit Agreement (the
"Lenders"), The Chase Manhattan Bank, N.A. ("Chase"), and Chemical Bank ("Chemical"), as managing
agents for the Lenders, (b) the Security Agreement dated as of November 26, 1993 (as amended, the
"Security Agreement"), between ARM Financial Group, Inc. and Chase, and (c) the Pledge Agreement
dated as of November 26, 1993 (as amended, the "Pledge Agreement"), among ARM Financial Group,
Inc., Integrity Holdings, Inc. and Chase.++++
10.3 --Second Amendment to the Credit Agreement, Security Agreement and Pledge Agreement dated as of June
29, 1995.++++
10.4 --Third Amendment to the Credit Agreement, Security Agreement and Pledge Agreement dated as of
December 13, 1995.+++++
10.5 --Fourth Amendment to the Credit Agreement dated as of June 28, 1996.++++++
10.6 --Fifth Amendment to the Credit Agreement dated as of December 31, 1996.+++++++
10.7 --Guaranty dated as of December 13, 1995, made by ARM Financial Group, Inc. in favor of First Bank,
FSB, in connection with sale of certain SBM Certificate Company mortgage loans.+++++
10.8 --Guaranty dated as of December 13, 1995, made by ARM Financial Group, Inc. in favor of First Bank,
FSB, in connection with the sale of certain State Bond and Mortgage Life Insurance Company mortgage
loans.+++++
10.9 --Assignment and Assumption of Lease dated January 5, 1995, between Kleinwort Benson International
Investments, Ltd., and ARM Capital Advisors, Inc. (obligations of ARM Capital Advisors, Inc. have
been fully guaranteed by ARM Financial Group, Inc.)++
10.10** --Administrative Services Agreement dated as of September 28, 1994 between ARM Financial Group, Inc.
and National Integrity Life Insurance Company.
10.11** --Administrative Services Agreement dated as of January 1, 1995 between ARM Financial Group, Inc. and
ARM Capital Advisors, Inc.
10.12 --Administrative Services Agreement dated as of January 1, 1995, between ARM Financial Group, Inc.
and Integrity Life Insurance Company.+++++
10.13 --Administrative Services Agreement dated as of June 14, 1995, between ARM Financial Group, Inc. and
SBM Certificate Company.+++++
10.14 --Administrative Services Agreement dated as of June 14, 1995, between ARM Financial Group, Inc. and
ARM Financial Services, Inc.+++++
10.15** --Investment Advisory Agreement dated as of July 29, 1994 between ARM Financial Group, Inc. and
National Integrity Life Insurance Company.
10.16 --Investment Services Agreement dated as of January 1, 1995, between ARM Financial Group, Inc. and
Integrity Life Insurance Company.+++++
10.17 --Investment Services Agreement dated as of June 14, 1995, between ARM Financial Group, Inc. and SBM
Certificate Company.+++++
10.18 --Tax Allocation Agreement dated as of March 21, 1996 by and among ARM Financial Group, Inc. and
certain of its subsidiaries for taxable periods beginning January 1, 1995.+++++
10.19 --Lease made as of June 14, 1996 by and between Northwestern National Life Insurance Company and ARM
Financial Group, Inc.++++++
10.20** --Assignment and Assumption Agreement dated as of June 28, 1996 between Northwestern National Life
Insurance Company and ARM Financial Group, Inc.
10.21** --Employment Agreement dated as of July 1, 1996 between ARM Financial Group, Inc. and John Franco.

EXHIBITS
- ---------

10.22** --Employment Agreement dated as of July 1, 1996 between ARM Financial Group, Inc. and Martin H. Ruby.
10.23** --Employment Agreement dated as of July 1, 1996 between ARM Financial Group, Inc. and David E.
Ferguson.
10.24** --Employment Agreement dated as of July 1, 1996 between ARM Financial Group, Inc. and John R.
Lindholm.
10.25* --[Amendment No. 2 to Amended and Restated Stock Option Plan].
10.26* --1997 Equity Incentive Plan.
10.27* (c) --Engagement Agreement, dated March 12, 1993, between Analytical Risk Management, LTD and General
American Life Insurance Company--Group Pension.
10.28** --Consent to Assignment of Engagement Agreement, dated September 8, 1993, by General American Life
Insurance Company--Group Pension.
10.29** --Amendment #1 to Engagement Agreement, dated as of August 14, 1995, between General American Life
Insurance Company and ARM Financial Group, Inc.
10.30** --Amendment #2 to Engagement Agreement, dated September 1, 1995, between General American Life
Insurance Company and ARM Financial Group, Inc.
10.31* (c) --Reinsurance Agreement between General American Life Insurance Company and Integrity Life Insurance
Company.
21.1 ** --Subsidiaries of the Registrant.
23.1 * --Consent of Shearman & Sterling (included in its opinion delivered under Exhibit
No. 5)
23.2 * --Consent of Ernst & Young LLP.
24.1 ** --Powers of Attorney.

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

* Filed herewith.

** Previously filed.

*** To be filed by amendment.

+ Incorporated by reference to the Registration Statement on Form S-1 of
the Registrant, File No. 33-67268.

++ Incorporated by reference to the Form 10-K filed by the Registrant on
March 30, 1995.

+++ Incorporated by reference to the Form 10-Q filed by the Registrant on
May 15, 1995.

++++ Incorporated by reference to the Form 10-Q filed by the Registrant on
August 14, 1995.

+++++ Incorporated by reference to the Form 10-K filed by the Registrant on
March 29, 1996.

++++++ Incorporated by reference to the Form 10-Q filed by the Registrant on
August 13, 1996.

+++++++ Incorporated by reference to the Form 10-K filed by the Registrant on
March 27, 1997.