1
As Filed Pursuant to Rule 424(b)(4)
Registration No. 333-49805;
333-52125

PROSPECTUS
11,000,000 Shares

ARM Financial Group, Inc.
CLASS A COMMON STOCK
------------------------
OF THE 11,000,000 SHARES OF CLASS A COMMON STOCK BEING OFFERED HEREBY, 9,000,000
SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S.
UNDERWRITERS AND 2,000,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED
STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. ALL OF THE 11,000,000
SHARES OF CLASS A COMMON STOCK BEING OFFERED HEREBY ARE BEING OFFERED BY THE
SELLING STOCKHOLDERS (AS DEFINED HEREIN). SEE "PRINCIPAL AND SELLING
STOCKHOLDERS." THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF
SHARES OF CLASS A COMMON STOCK BY THE SELLING STOCKHOLDERS. THE CLASS A COMMON
STOCK IS LISTED ON THE NEW YORK STOCK EXCHANGE (THE "NYSE") UNDER THE SYMBOL
"ARM." ON MAY 7, 1998, THE REPORTED LAST SALE PRICE OF THE CLASS A COMMON STOCK
ON THE NYSE WAS $21 11/16 PER SHARE.

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. UPON CONSUMMATION OF THE OFFERING,
THERE WILL NO LONGER BE ANY SHARES OF CLASS B COMMON STOCK OUTSTANDING. SEE
"PRINCIPAL AND SELLING STOCKHOLDERS."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 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 $21 11/16 A SHARE
------------------------

UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS(1) STOCKHOLDERS(2)
-------- -------------- ---------------

Per Share........................... $21.6875 $.9200 $20.7675
Total(3)............................ $238,562,500 $10,120,000 $228,442,500

- ------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriters."
(2) Expenses estimated at $775,000 will be paid by the Company.
(3) The Selling Stockholders have granted the U.S. Underwriters an option,
exercisable within 30 days of the date hereof, to purchase up to an
aggregate of 1,388,725 additional shares of Class A Common Stock at the
Price to Public, 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 Selling Stockholders will be
$268,680,473, $11,397,627 and $257,282,846, respectively. See
"Underwriters."
------------------------
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 May 13, 1998 at the office of
Morgan Stanley & Co. Incorporated, New York, New York, against payment therefor
in immediately available funds.
------------------------
MORGAN STANLEY DEAN WITTER

DONALDSON, LUFKIN & JENRETTE
Securities Corporation
PAINEWEBBER INCORPORATED

SCHRODER & CO. INC.
May 8, 1998
2

NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
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 SELLING 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.

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

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, THE
SELLING STOCKHOLDERS 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.

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

TABLE OF CONTENTS

PAGE
----

Forward-Looking Statements............. 4
Prospectus Summary..................... 5
Risk Factors........................... 11
Use of Proceeds........................ 16
Price Range of Common Stock............ 17
Dividend Policy........................ 17
Capitalization......................... 18
Selected Historical Consolidated
Financial Data and Other Data........ 19
Recent Developments.................... 22
Management's Discussion and Analysis of
Results of Operations and Financial
Condition............................ 24
Business............................... 38
Management............................. 56

PAGE
----

Principal and Selling Stockholders..... 59
Shares Eligible for Future Sale........ 61
Description of Capital Stock........... 63
Certain United States Tax Consequences
to Non-U.S. Holders of Common
Stock................................ 69
Underwriters........................... 72
Legal Matters.......................... 75
Experts................................ 75
Available Information.................. 75
Incorporation of Certain Documents by
Reference............................ 76
Glossary of Selected Insurance Terms... 77
Index to Financial Statements.......... F-1

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

In this Prospectus, references to "dollars" 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.
------------------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."

2
3

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.

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

"S&P 500(R) Composite Stock 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.

3
4

FORWARD-LOOKING STATEMENTS

This Prospectus and the documents incorporated by reference herein contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). These statements are
based on management's beliefs and assumptions, relying on information currently
available to management, and are subject to risks and uncertainties.
Forward-looking statements include the information concerning possible or
assumed future results of operations of the Company set forth (i) under
"Prospectus Summary," "The Company," "Risk Factors," "Selected Historical and
Unaudited Consolidated Financial and Other Data," "Management's Discussion and
Analysis of Results of Operations and Financial Condition" and "Business"
herein; (ii) under "Business" and "Management's Discussion and Analysis" in the
Company's Annual Report on Form 10-K and in the Current Reports on Form 8-K
incorporated by reference herein; and (iii) in this Prospectus and the documents
incorporated by reference herein preceded by, followed by or that include the
words "believes," "expects," "anticipates," "intends," "plans," "estimates" 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 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.

Forward-looking statements are not guarantees of performance as they
involve risks, uncertainties and assumptions. The future results of the Company
may differ materially from those expressed in these forward-looking statements.
Many of the factors that will determine these results are beyond the Company's
ability to control or predict. Purchasers of the Class A Common Stock are
cautioned not to put undue reliance on any forward-looking statements. The
Company claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.

4
5

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.

Unless otherwise indicated: (i) "Company" means ARM Financial Group, Inc.
and, where appropriate, its subsidiaries; (ii) "Class A Common Stock" means the
Class A Convertible Common Stock, par value $.01 per share, of the Company,
"Class B Common Stock" means the Class B Convertible Non-Voting 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 11,000,000 shares of Class A Common Stock in the underwritten
public offering to which this Prospectus relates; (iv) "Morgan Stanley
Stockholders" or "Selling Stockholders" means, collectively, 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 (v) all share and per share
information assumes that the U.S. Underwriters' over-allotment option is not
exercised. Upon consummation of the Offering, there will no longer be any shares
of Class B Common Stock outstanding. See "Principal and Selling Stockholders."
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 principles.

THE COMPANY

ARM Financial Group, Inc. (the "Company") specializes in the growing asset
accumulation business with particular emphasis on retirement savings and
investment products. 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 independent
broker-dealers, independent agents, stockbrokers, and financial institutions.
The Company offers institutional products, such as funding agreements and
guaranteed investment contracts ("GICs"), directly to bank trust departments,
plan sponsors, cash management funds, corporate treasurers, and other
institutional investors.

The Company commenced its business operations in November, 1993 with the
acquisition of Integrity Holdings, Inc. ("Integrity Holdings"). The Company's
assets under management have grown from $2.3 billion as of November 26, 1993 to
$6.9 billion as of December 31, 1997. The Company attributes this growth to
internally generated sales, new product offerings and an opportunistic
acquisition. Operating earnings (net income applicable to common shareholders,
excluding, net of tax, realized investment gains and losses, non-recurring
charges and income from defined benefit pension plan asset management operations
which were sold during November 1997) have grown to $34.1 million in 1997 from
$22.2 million in 1996 and $4.5 million in 1995. In June 1997, the Company raised
$78.8 million through an initial public offering of its Class A Common Stock.

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
people.

The Company also expects to benefit from anticipated higher consumer
savings due to an overburdened social security system, extended life spans,
concerns about corporate restructurings and downsizing, and volatile financial
markets. Among the products expected to benefit are tax-advantaged annuities.
Annual industry sales of individual annuity products increased dramatically from
$65 billion in 1990 to a preliminary estimate of $124 billion in 1997, with
projected growth of 8% to 12% per year for the next few years, according to an
industry study conducted by LIMRA.

5
6

The Company also expects to benefit from growth in the institutional
marketplace, which is partially fueled by retirement and consumer savings. The
Company intends to expand its institutional deposit base by increasing
penetration in the stable value and fixed income markets and the development of
new products and applications.

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 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 the people
involved with its retail and institutional distribution 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. In 1997,
the Company enhanced its multi-manager variable annuity product, Pinnacle,
making it one of the first in the industry to offer Bankers Trust indexed funds,
along with a diverse selection of asset classes from well-known fund managers,
guaranteed rate options and the ability for systematic transfer of deposits over
time -- all in one product. In the institutional market, the Company offers a
short-term floating rate institutional spread-based product designed to meet the
market demand for products with attractive current yields and access to
liquidity. In 1997, the Company developed and funded a unique asset-backed
funding agreement, in alliance with Bayerische Landesbank Girozentrale, New York
Branch ("BLB"), a triple-A rated international banking institution. In
connection with another highly rated international bank, the Company is
developing a synthetic GIC product for the institutional spread 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 the Company's 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, in 1997, as a means to strengthen
its relationships with distributors, the Company implemented a program, called
AnnuiTRAC(SM), whereby certain distributors have the capability to remotely
access 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. In 1996, the Company began
offering variable annuities through banks and thrifts, and in late 1997
introduced a new variable annuity product customized for that distribution
channel. Additionally, the Company recognizes the importance of building and
maintaining a strong capital base.

6
7

million, five-year term offering, in alliance with BLB. In addition to offering
its current products, the Company intends to continue its growth in the
institutional market by (i) diversifying its product line with (a) customized
product features for alternative distribution channels, (b) fixed terms
extending beyond current product offerings and (c) on- and off-balance sheet
synthetic products or new funding agreement products in which the Company offers
certain performance guarantees; (ii) attracting new partners with larger and
stronger balance sheets to provide credit enhancement to help support and market
the new product structures and marketing initiatives; and (iii) expanding market
penetration within its existing clients while maintaining the persistency and
profitability of the current client base.

Enhancing Effective Use of Technology. The Company continues to invest in
technology designed to enhance the services provided to producers and customers,
increase the efficiency of operations and allow for 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 wide-area network technology. One such example is the
Company's 1997 introduction of AnnuiTRAC(SM), its Internet based producer
service program.

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 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 benefitted from economies of scale achieved as
a result of its strategic acquisitions. The Company believes that the relocation
of the Company's main processing center from Ohio to the Company's headquarters
in Louisville, Kentucky, which was substantially completed during 1997, has
provided benefits of consolidation and supplemented the effective delivery of
service.

Implementing an Advanced and Integrated Risk Management Process. 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 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 the experience of its
management team. This foundation is supported with sophisticated computer
software and an emphasis on 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 reinsured.

Maintaining Focus on Company Profitability. The Company designs products
and manages capital with a goal of achieving 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 and giving pro forma effect to the
Company's initial public offering of common stock) was 16.4% in 1997 and 13.5%
in 1996. 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 further reinforces 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 April 20, 1998, current
executive officers held shares and vested and unvested options to purchase
shares representing 7% of the Company's outstanding Common Stock.

7
8

THE OFFERING

Class A Common Stock Offered by the Selling
Stockholders:
U.S. Offering................................ 9,000,000 shares(1)
International Offering....................... 2,000,000 shares
-----------
Total................................ 11,000,000 shares(1)
===========
Common Stock to be outstanding following the
Offering..................................... 23,397,471 shares of Class A Common Stock(2)(3)
Use of Proceeds................................ The Company will not receive any proceeds from the Offering.
NYSE Symbol.................................... "ARM"(4)
Dividend Policy................................ Since the initial public offering of the Class A Common Stock in
June 1997, the Company has paid quarterly cash dividends of $.02
per share, commencing with the dividend paid in the third quarter
of 1997. While future dividends will be subject to the discretion
of the Company's Board of Directors and certain other factors,
the Board of Directors currently intends to declare and pay
regular quarterly cash dividends of $.04 per share, commencing
with the dividend payable in the second quarter of 1998. See
"Dividend Policy."

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

(1) Excludes up to an aggregate of 1,388,725 shares of Class A Common Stock that
may be sold by the Selling Stockholders pursuant to the U.S. Underwriters'
over-allotment option. See "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." Upon
consummation of the Offering, there will no longer be any shares of Class B
Common Stock outstanding. See "Principal and Selling Stockholders."

(3) Excludes 2,026,629 shares of Common Stock issuable upon exercise of vested
and unvested options outstanding at April 20, 1998 and approximately 400,000
shares of Common Stock issuable upon exercise of options which the Company
intends to grant under the ARM Financial Group, Inc. 1997 Equity Incentive
Plan (the "1997 Equity Plan") in the second quarter of 1998.

(4) On April 28, 1988 the Class A Common Stock began trading on the NYSE. From
June 19, 1997 to such date, the Class A Common Stock was traded on the
American Stock Exchange under the symbol "ARM."

RISK FACTORS

For a discussion of certain factors that should be considered in evaluating
an investment in the Class A Common Stock, see "Risk Factors."

8
9

SUMMARY HISTORICAL FINANCIAL INFORMATION

YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

INCOME STATEMENT DATA:
Investment income........................................... $ 329,979 $ 250,031 $ 196,024
Interest credited on customer deposits...................... (247,418) (182,161) (146,867)
---------- ---------- ----------
Net investment spread..................................... 82,561 67,870 49,157
Fee income:
Variable annuity fees..................................... 14,630 10,786 7,238
Asset management fees..................................... 8,595 5,780 3,161
Other fee income.......................................... 1,386 1,267 949
---------- ---------- ----------
Total fee income........................................ 24,611 17,833 11,348
Other income and expenses:
Surrender charges......................................... 4,482 5,024 3,339
Operating expenses........................................ (32,528) (31,055) (22,957)
Commissions, net of deferrals............................. (2,218) (2,372) (1,557)
Interest expense on debt.................................. (2,517) (3,146) (3,461)
Amortization:
Deferred policy acquisition costs....................... (10,416) (6,835) (2,932)
Value of insurance in force............................. (9,293) (7,320) (7,104)
Acquisition-related deferred charges.................... (503) (1,503) (9,920)
Goodwill................................................ (424) (488) (358)
Non-recurring charges(1):
Stock-based compensation................................ (8,145) -- --
Other................................................... (6,678) (5,004) --
Other, net................................................ (386) (5,366) (687)
---------- ---------- ----------
Total other income and expenses......................... (68,626) (58,065) (45,637)
Realized investment gains................................... 3,192 907 4,048
---------- ---------- ----------
Income before income taxes.................................. 41,738 28,545 18,916
Income tax expense.......................................... (14,139) (5,167) (7,026)
---------- ---------- ----------
Net income.................................................. 27,599 23,378 11,890
Dividends on preferred stock................................ (4,750) (4,750) (4,750)
---------- ---------- ----------
Net income applicable to common shareholders................ $ 22,849 $ 18,628 $ 7,140
========== ========== ==========
Net income per common and common equivalent share
(diluted)(2).............................................. $ 1.07 $ 1.06 $ .49
========== ========== ==========
Average common and common equivalent shares outstanding
(2)....................................................... 21,305 17,498 14,614
========== ========== ==========
OTHER OPERATING DATA:
Operating earnings(3)....................................... $ 34,149 $ 22,227 $ 4,509
========== ========== ==========
Operating earnings per common and common equivalent share
(diluted)(2).............................................. $ 1.60 $ 1.27 $ .31
========== ========== ==========
Pro forma operating earnings(4)............................. $ 36,343 $ 26,789
========== ==========
Pro forma operating earnings per common and common
equivalent share (diluted)(2)............................. $ 1.51 $ 1.13
========== ==========
BALANCE SHEET DATA (AT END OF PERIOD):
Total cash and investments.................................. $4,467,477 $3,347,477 $2,798,027
Assets held in separate accounts............................ 2,439,884 1,135,048 809,927
Total assets................................................ 7,138,424 4,701,664 3,793,580
Long-term debt.............................................. 38,000 40,000 40,000
Total liabilities........................................... 6,830,879 4,519,722 3,605,589
Shareholders' equity:
Carrying amount........................................... 307,545 181,942 187,991
Excluding the effects of SFAS No. 115(5).................. 287,245 178,273 159,461
Fair value(6)............................................. 321,087 224,276 187,721

- ---------------
(1) The Company recorded non-recurring charges of $14.8 million for 1997
including (i) a one-time non-cash stock-based compensation charge of $8.1
million related to the aggregate difference between the initial public
offering price of $15.00 per share of Class A Common Stock and the exercise
price of all of the then-outstanding options; and (ii) costs primarily
attributable to the relocation and consolidation of the Company's operations
facilities from Ohio to Louisville, Kentucky. The Company recorded a
non-recurring charge of $5.0 million in 1996 that also included $3.2 million
for facilities consolidation and costs of $1.8 million primarily related to
merger and acquisition activity that did not result in a transaction.
(2) Shares and per share amounts have been restated, for all periods presented,
to reflect the 706-for-1 stock split that occurred in June, 1997 in
conjunction with the initial public offering of the Company's Class A Common
Stock.
(3) "Operating earnings" is defined as net income applicable to common
shareholders excluding, net of tax, realized investment gains and losses,
non-recurring charges and income from defined benefit pension plan asset
management operations which were sold during November 1997.
(4) Operating earnings including a pro forma adjustment to reflect investment
income at an assumed rate of 7.5% on the net proceeds of the Company's
initial public offering of Class A Common Stock assuming it occurred at the
beginning of the period.
(5) Excludes from carrying amount of shareholders' equity the net unrealized
gains and losses on securities classified as available-for-sale, net of
related amortization and taxes.
(6) The methodologies used to estimate fair value are described in the notes to
the consolidated financial statements contained elsewhere in this
Prospectus.

9
10

RECENT DEVELOPMENTS

On April 28, 1998, the Class A Common Stock began trading on the NYSE. On
the same date, trading of the Class A Common Stock on the American Stock
Exchange was suspended pending final delisting.

On April 24, 1998, 312 Certificate Company, a bankruptcy-remote, restricted
special purpose corporation, and an indirect wholly-owned subsidiary of the
Company ("312"), issued a $500 million installment face amount certificate (the
"FAC") to a large institutional purchaser. Integrity Capital Advisors, Inc.
serves as the master portfolio manager for the assets acquired with the funds
received for the FAC. Simultaneously with the closing of this transaction,
Integrity Capital Advisors, Inc. subcontracted its investment management
responsibilities to New ARMCA (as defined herein). In order for 312 to retain
its bankruptcy-remote status, 312 is restricted from owning any assets or
issuing any obligations other than those contemplated in connection with this
transaction.

On April 21, 1998, the Company announced that its operating earnings for
the first quarter of 1998 were $10.0 million, or 41 cents per share, compared to
pro forma operating earnings of $7.0 million, or 29 cents per share, for the
same period in 1997, an increase of 41% per share. Operating earnings is defined
as net income applicable to common shareholders excluding, net of tax, realized
investment gains and losses, non-recurring charges and for 1997, income from
defined benefit pension plan asset management operations which were sold in
November 1997. Pro forma operating earnings in 1997 include a pro forma
adjustment to reflect investment income at an assumed rate of 7.5% on the net
proceeds of the Company's initial public offering of Class A Common Stock
assuming it occurred on January 1, 1997.

Total sales rose to $568.7 million for the first quarter of 1998 compared
to $353.7 million for the first quarter of 1997. This represents a 61% increase
over the same period one year ago. Total retail sales increased by 16% to $121.5
million due to new product introductions and expanded distribution capabilities.
Total institutional sales increased 80% to $447.2 million due to increased sales
of institutional funding agreements.

Net investment spread increased to $22.7 million for the first quarter of
1998 from $18.4 million for the same period in 1997. Net income applicable to
common shareholders increased to $9.8 million, or 40 cents per share, from $6.4
million, or 37 cents per share. Net income in the first quarter of 1998 includes
a one-time $3.6 million charge as part of a retirement arrangement for John
Franco, the Company's former co-chairman and co-chief executive officer. This
charge consists of a $2.1 million non-cash item in connection with the vesting
of the unvested portion of Mr. Franco's stock options and a $1.5 million item
for the remaining compensation under his employment agreement. Net income in
1998 also includes realized investment gains, net of tax, of $3.4 million. Net
income in the first quarter of 1997 included a charge of $1.4 million as part of
the Company's consolidation of operating facilities and realized investment
gains, net of tax, of $1.5 million.

The following table sets forth selected historical information of the
Company and its subsidiaries for the three months ended March 31, 1998 and 1997.

THREE MONTHS
ENDED
MARCH 31,
-------------------------------
1998 1997
------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)

INCOME STATEMENT DATA:
Net investment spread....................................... $ 22,726 $ 18,375
Fee income.................................................. 4,658 5,520
Other income and expenses................................... (16,069) (15,702)
Realized investment gains................................... 5,165 2,231
---------- ----------
Income before income taxes.................................. 16,480 10,424
Income tax expense.......................................... (5,499) (2,814)
---------- ----------
Net income.................................................. 10,981 7,610
Dividends on preferred stock................................ (1,188) (1,188)
---------- ----------
Net income applicable to common shareholders................ $ 9,793 $ 6,422
========== ==========
Net income per common and common equivalent share
(diluted)(1).............................................. $ 0.40 $ 0.37
========== ==========
Average common and common equivalent shares
outstanding(1)............................................ 24,352 17,506
========== ==========
OTHER OPERATING DATA:
Operating earnings (pro forma in 1997)(2)................... $ 10,006 $ 6,976
========== ==========
Operating earnings per common and common equivalent share
(diluted) (pro forma in 1997)(1).......................... $ 0.41 $ 0.29
========== ==========

- ---------------
(1) Shares and per share amounts for 1997 have been restated to reflect the
706-for-1 stock split that occurred in June, 1997 in conjunction with the
initial public offering of the Company's Class A Common Stock.

(2) "Operating earnings" is defined as net income applicable to common
shareholders (i) excluding, net of tax, realized investment gains and
losses, non-recurring charges and for 1997, income from defined benefit
pension plan asset management operations which were sold in November 1997;
and (ii) including, for 1997, the net pro forma effect on earnings of an
adjustment to reflect investment income at an assumed rate of 7.5% on the
net proceeds of the Company's initial public offering of Class A Common
Stock assuming it occurred on January 1, 1997.

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11

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 or incorporated herein by reference 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 to maintain the 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 sufficient higher-yielding
assets to fund higher crediting rates or to maintain full profit margins without
assuming excessive asset side risk. As a result, the Company may experience
either a decrease in sales and an increase in surrenders (as described below)
where it is able to maintain its spread by not raising its crediting rates, or
spread compression if it is willing or contractually required to 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 were unable or chose not to raise its crediting rates to keep them
competitive, the Company might 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 $4.5 million on net surrenders of
retail fixed and variable annuity products of $344.5 million in 1997. At
December 31, 1997, approximately 57% 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 41% of the Company's investment portfolio
as of December 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

11
12

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 the Company's MBSs were $44.5 million and $82.7 million,
respectively, at December 31, 1997.

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.

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, 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 (as defined herein). Although the Company reported net
income of $27.6 million, $23.4 million and $11.9 million for the years ended
December 31, 1997, 1996 and 1995, respectively, 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 economies of scale and greater access to distribution channels than the
Company's subsidiaries. Due to certain 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 Company, Inc. ("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, which owns
Integrity Life Insurance Company ("Integrity") and National Integrity Life
Insurance Company ("National Integrity" and, together with Integrity, the
"Integrity Companies") (domiciled in the States of Ohio and New York,
respectively), SBM Certificate Company

12
13

("SBM") and ARM Securities Corporation ("ARM Securities"). 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 Financial Resources" and
"Business -- Regulation."

The Company's credit agreement dated June 24, 1997, as amended (the "Credit
Agreement"), provides that the Company may not 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. 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 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 45% of total retail sales, and 11% of total retail and
institutional sales for the year ended December 31, 1997. No individual
broker-dealer affiliated with FMG accounted for more than 9% of total retail
sales for the year ended December 31, 1997. In addition to FMG, the Company
utilizes PaineWebber Incorporated ("PaineWebber") in the stockbroker channel for
the distribution of certain products. For the year ended December 31, 1997,
approximately 13% of the Company's total retail sales and approximately 3% of
total retail and institutional sales were made through PaineWebber. The Company
also relies on its joint venture with General American for the issuance of
funding agreements and 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 funding agreements and GICs marketed by the Company
and issued by General American under the joint venture with the Company. Sales
of funding agreements and GICs accounted for 82% of the Company's sales of
spread products for the year ended December 31, 1997. For the same period, 65%
of all institutional spread product sales were made through General American, or
48% of total retail and institutional sales. If demand for funding agreements
and 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 funding agreements and 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.

13
14

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") under
the Securities Act and the Investment Company Act of 1940, as amended (the
"Investment Company Act"). The Company's non-insurance operations are also
subject to extensive regulation, including regulation under 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.

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.
Significant purchases or sales of Common Stock by the Company or any
stockholder, including the Morgan Stanley Stockholders in connection with the
Offering, among other things, may raise issues relating to assignments of the
Company's investment management and investment advisory agreements. The Company
intends to seek the consent of its advisory clients, where necessary, to
continuing their advisory relationships with the Company. The Company believes
that the failure to obtain any such consents would not have a material adverse
effect on the Company's financial condition or results of operations.

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.
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."

14
15

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 recent years, several proposals have been made to change the federal
income tax system. These proposals have included various flat tax rate and
consumption taxes. Under a proposal currently included in the Clinton
Administration's Fiscal Year 1999 Budget, all exchanges involving a variable
annuity contract and all reallocations within variable annuity contracts would
be taxed. Such transfers are currently tax-free. An additional proposal would
reduce the policyholder's tax basis in an annuity contract by an amount equal to
specified expense charges. There can be no assurance that, if enacted, such
changes to existing federal income tax laws will not result in a material
decrease in the demand for the Company's annuity products. Such a decrease could
adversely affect the operations and business prospects of the Company.

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."

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 and certain provisions of the Delaware General Corporation Law 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."

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, there will be 23,397,471 shares of Common
Stock outstanding, of which 20,054,764 shares 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.

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

15
16

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 a Second Amended and
Restated Stockholders' Agreement (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 that the Morgan
Stanley Stockholders will continue to hold after the Offering. See "Shares
Eligible for Future Sale."

YEAR 2000

The Company is currently evaluating, on an ongoing basis, its computer
systems and the systems of other companies on which the Company's operations
rely to determine if they will function properly with respect to dates in the
year 2000 and beyond. These activities are designed to ensure that there is no
adverse effect on the Company's core business operations. While the Company
believes its planning efforts are adequate to address its Year 2000 concerns,
there can be no guarantee that the systems of other companies on which the
Company's operations rely will be converted on a timely basis and will not have
a material effect on the Company. The cost of the Company's Year 2000
initiatives is not expected to be material to the Company's results of
operations or financial condition.

USE OF PROCEEDS

The Company will not receive any of the proceeds from the sale of the
shares of Class A Common Stock by the Selling Stockholders in the Offering.

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17

PRICE RANGE OF COMMON STOCK

During the fiscal year ended December 31, 1996, there was no market for the
Class A Common Stock. The Class A Common Stock began trading on the American
Stock Exchange under the symbol "ARM" on June 19, 1997. On April 28, 1998, the
Class A Common Stock began trading on the NYSE. On the same date, trading of the
Class A Common Stock on the American Stock Exchange was suspended pending final
delisting. The following table sets forth, for the periods indicated, which
correspond to the Company's quarterly fiscal periods for financial reporting
purposes, the high and low reported sale prices per share of the Class A Common
Stock on the American Stock Exchange or the NYSE, as the case may be, and cash
dividends declared per share of Class A Common Stock.

CLASS A COMMON
STOCK PRICE CASH DIVIDENDS
--------------- DECLARED
HIGH LOW PER SHARE
----- ---- --------------

1997:
Second Quarter (from June 19, 1997)........ $20 $18 1/2 $ --
Third Quarter.............................. 23 13/16 19 7/16 0.02
Fourth Quarter............................. 26 3/8 20 0.02
1998:
First Quarter.............................. $26 3/4 $20 13/16 $0.02
Second Quarter (through May 7, 1998)....... 24 21 5/16 --(1)

- ---------------
(1) The Company intends to declare a cash dividend of $.04 per share, payable in
the second quarter of 1998. See "Dividend Policy."

On May 7, 1998, the reported last sales price of the Class A Common Stock
on the NYSE was $21 11/16 per share. Prospective purchasers of shares of Class A
Common Stock are urged to obtain current quotations for the market price of the
Class A Common Stock.

DIVIDEND POLICY

Since the initial public offering of the Class A Common Stock in June 1997,
the Company has paid quarterly cash dividends on the Common Stock of $.02 per
share, commencing with the dividend paid in the third quarter of 1997. While
future dividends will be subject to the discretion of the Company's Board of
Directors and the other factors described below, the Board of Directors
currently intends to declare and pay regular quarterly cash dividends of $.04
per share, commencing with the dividend payable in the second quarter of 1998.
Future dividends 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 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. There can be
no assurance as to whether or when the Company's Board of Directors will change
its current policy regarding dividends.

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 consist of the capital stock of Integrity Holdings (which owns
the Integrity Companies), SBM and ARM Securities. 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 1997 were $26
million; dividends in the amount of $26 million were paid during 1997. For 1998,
the maximum dividend payments that may be paid by Integrity to the Company
without prior regulatory approval are $38 million, of which $6 million has been
paid through March 31, 1998. See "Risk Factors -- Holding Company Structure;
Dividend Restrictions" and "Business -- Regulation -- Dividend Restrictions."

17
18

CAPITALIZATION

The following table sets forth the consolidated capitalization, based on
carrying amount, of the Company at December 31, 1997 and as adjusted to give
effect to the sale by the Morgan Stanley Stockholders of all of their shares of
Class B Common Stock which, upon such sale, will automatically be converted into
shares of Class A Common Stock. See "Principal and Selling Stockholders." 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 or incorporated by reference elsewhere in this Prospectus.

DECEMBER 31, 1997
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)

Long-term debt.............................................. $ 38,000 $ 38,000
-------- --------
Shareholders' equity:
Preferred Stock, $.01 par value, $25.00 stated value;
2,300,000 shares authorized; 2,000,000 shares issued
and outstanding........................................ 50,000 50,000
Class A Common Stock, $.01 par value; 150,000,000 shares
authorized, 21,316,068 shares issued and outstanding
and 23,263,714 shares issued and outstanding as
adjusted(a)............................................ 213 232
Class B Common Stock, $.01 par value, 50,000,000 shares
authorized, 1,947,646 shares issued and outstanding and
no shares issued and outstanding as adjusted........... 19 --
Additional paid-in capital................................ 211,430 211,430
Net unrealized gains on available-for-sale securities..... 20,300 20,300
Retained earnings......................................... 25,583 25,583
-------- --------
Total shareholders' equity............................. 307,545 307,545
-------- --------
Total capitalization.............................. $345,545 $345,545
======== ========

- ---------------
(a) Excludes 2,026,629 shares of Common Stock issuable upon exercise of vested
and unvested options outstanding at April 20, 1998 and approximately 400,000
shares of Common Stock issuable upon exercise of options which the Company
intends to grant under the 1997 Equity Plan in the second quarter of 1998.

18
19

SELECTED HISTORICAL
CONSOLIDATED FINANCIAL DATA AND OTHER DATA

The following table sets forth selected historical financial information of
the Company and its subsidiaries for the years ended December 31, 1997, 1996,
1995 and 1994, for the period from November 27, 1993 through December 31, 1993,
and for the period from January 1, 1993 through November 26, 1993 (for the
Historical Integrity Companies). The financial information has been derived from
consolidated financial statements of the Company, prepared in conformity with
GAAP, that have been audited by Ernst & Young LLP.

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 1997 and 1996 include full years of acquired SBM business operations
compared to seven months in 1995, the results of operations for 1997, 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 are presented for
purposes of comparison; however, because of purchase accounting adjustments, a
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.

19
20

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

INCOME STATEMENT DATA:
Investment income.................................. $ 329,979 $ 250,031 $ 196,024 $ 149,142 $ 16,260 $ 148,120
Interest credited on customer deposits............. (247,418) (182,161) (146,867) (116,463) (13,563) (116,341)
--------- --------- --------- --------- -------- ---------
Net investment spread............................ 82,561 67,870 49,157 32,679 2,697 31,779
Fee income:
Variable annuity fees............................ 14,630 10,786 7,238 4,291 91 1,000
Asset management fees............................ 8,595 5,780 3,161 -- -- --
Other fee income................................. 1,386 1,267 949 4,100 369 1,258
--------- --------- --------- --------- -------- ---------
Total fee income................................. 24,611 17,833 11,348 8,391 460 2,258
Other income and expenses:
Surrender charges................................ 4,482 5,024 3,339 2,356 145 1,615
Operating expenses............................... (32,528) (31,055) (22,957) (21,484) (1,423) (30,663)
Commissions, net of deferrals.................... (2,218) (2,372) (1,557) (2,551) (309) (4,877)
Interest expense on debt......................... (2,517) (3,146) (3,461) (3,136) (245) (133)
Amortization:
Deferred policy acquisition costs.............. (10,416) (6,835) (2,932) (1,296) (12) (1,470)
Value of insurance in force.................... (9,293) (7,320) (7,104) (3,830) (552) (6,444)
Acquisition-related deferred charges........... (503) (1,503) (9,920) (2,163) (249) --
Goodwill....................................... (424) (488) (358) -- -- --
Non-recurring charges(2):
Stock-based compensation....................... (8,145) -- -- -- -- --
Other.......................................... (6,678) (5,004) -- -- -- --
Other, net....................................... (386) (5,366) (687) 4,972 (46) --
--------- --------- --------- --------- -------- ---------
Total other income and expenses................ (68,626) (58,065) (45,637) (27,132) (2,691) (41,972)
Realized investment gains (losses)................. 3,192 907 4,048 (36,727) (79) (32,776)
--------- --------- --------- --------- -------- ---------
Income (loss) before income taxes.................. 41,738 28,545 18,916 (22,789) 387 (40,711)
Income tax benefit (expense)....................... (14,139) (5,167) (7,026) 6,018 (508) --
--------- --------- --------- --------- -------- ---------
Net income (loss).................................. 27,599 23,378 11,890 (16,771) (121) $ (40,711)
=========
Dividends on preferred stock....................... (4,750) (4,750) (4,750) (4,750) (462)
--------- --------- --------- --------- --------
Net income (loss) applicable to common
shareholders..................................... $ 22,849 $ 18,628 $ 7,140 $ (21,521) $ (583)
========= ========= ========= ========= ========
Net income (loss) per common and common
equivalent share (diluted)(3).................. $ 1.07 $ 1.06 $ .49 $ (2.03) $ (.06)
========= ========= ========= ========= ========
Average common and common equivalent shares
outstanding(3)................................... 21,305 17,498 14,614 10,590 10,590
========= ========= ========= ========= ========
OTHER OPERATING DATA:
Operating earnings (loss)(4)....................... $ 34,149 $ 22,227 $ 4,509 $ 2,352 $ (532)
========= ========= ========= ========= ========
Operating earnings (loss) per common and common
equivalent share (diluted)(3).................... $ 1.60 $ 1.27 $ .31 $ .22 $ (.05)
========= ========= ========= ========= ========
Pro forma operating earnings(5).................... $ 36,343 $ 26,789
========= =========
Pro forma operating earnings per common and common
equivalent share (diluted)(3).................... $ 1.51 $ 1.13
========= =========

DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)

BALANCE SHEET DATA (AT END OF PERIOD):
Total cash and investments(6)............................... $4,467,477 $3,347,477 $2,798,027 $1,782,501 $2,103,856
Assets held in separate accounts............................ 2,439,884 1,135,048 809,927 506,270 231,687
Total assets(6)............................................. 7,138,424 4,701,664 3,793,580 2,447,888 2,427,886
Long-term debt.............................................. 38,000 40,000 40,000 40,000 40,000
Total liabilities........................................... 6,830,879 4,519,722 3,605,589 2,462,021 2,315,535
Shareholders' equity:
Carrying amount(6)........................................ 307,545 181,942 187,991 (14,133) 112,351
Excluding the effects of SFAS No. 115(7).................. 287,245 178,273 159,461 90,816 n/a(9)
Fair value(8)............................................. 321,087 224,276 187,721 115,192 111,709

20
21

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

(2) The Company recorded non-recurring charges of $14.8 million for 1997
including (i) a one-time non-cash stock-based compensation charge of $8.1
million related to the aggregate difference between the initial public
offering price of $15.00 per share of Class A Common Stock and the exercise
price of all of the then-outstanding options; and (ii) costs primarily
attributable to the relocation and consolidation of the Company's operations
facilities from Ohio to Louisville, Kentucky. The Company recorded a
non-recurring charge of $5.0 million in 1996 that also included $3.2 million
for facilities consolidation and costs of $1.8 million primarily related to
merger and acquisition activity that did not result in a transaction.

(3) Shares and per share amounts have been restated, for all periods presented,
to reflect the 706-for-1 stock split that occurred in June, 1997 in
conjunction with the initial public offering of the Company's Class A Common
Stock.

(4) "Operating earnings" is defined as net income applicable to common
shareholders, excluding net of tax, realized investment gains and losses,
non-recurring charges and income from defined benefit pension plan asset
management operations which were sold during November 1997.

(5) Operating earnings including a pro forma adjustment to reflect investment
income at an assumed rate of 7.5% on the net proceeds of the Company's
initial public offering of Class A Common Stock assuming it occurred at the
beginning of the period.

(6) 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 Statement
of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."

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

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

(9) Not applicable.

21
22

RECENT DEVELOPMENTS

On April 28, 1998, the Class A Common Stock began trading on the NYSE. On
the same date, trading of the Class A Common Stock on the American Stock
Exchange was suspended pending final delisting.

On April 24, 1998, 312 Certificate Company, a bankruptcy-remote, restricted
special purpose corporation, and an indirect wholly-owned subsidiary of the
Company ("312") issued a $500 million installment face amount certificate (the
"FAC") to a large institutional purchaser. Integrity Capital Advisors, Inc.
serves as the master portfolio manager for the assets acquired with the funds
received for the FAC. Simultaneously with the closing of this transaction,
Integrity Capital Advisors, Inc. subcontracted its investment management
responsibilities to New ARMCA (as defined herein). In order for 312 to retain
its bankruptcy-remote status, 312 is restricted from owning any assets or
issuing any obligations other than those contemplated in connection with this
transaction.

The following table sets forth selected financial information of the
Company and its subsidiaries for the three months ended March 31, 1998 and 1997.

22
23

THREE MONTHS
ENDED
MARCH 31,
---------------------------
1998 1997
---------- ----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)

INCOME STATEMENT DATA:
Investment income........................................... $ 104,406 $ 69,700
Interest credited on customer deposits...................... (81,680) (51,325)
---------- ----------
Net investment spread..................................... 22,726 18,375
Fee income:
Variable annuity fees..................................... 4,426 3,239
Asset management fees..................................... -- 1,884
Other fee income.......................................... 232 397
---------- ----------
Total fee income........................................ 4,658 5,520
Other income and expenses:
Surrender charges......................................... 1,334 882
Operating expenses........................................ (7,550) (8,156)
Commissions, net of deferrals............................. (598) (638)
Interest expense on debt.................................. (617) (686)
Amortization:
Deferred policy acquisition costs....................... (2,724) (2,175)
Value of insurance in force............................. (1,531) (2,241)
Acquisition-related deferred charges.................... (126) (126)
Goodwill................................................ (94) (122)
Non-recurring charges..................................... (3,570) (1,445)
Other, net................................................ (593) (995)
---------- ----------
Total other income and expenses......................... (16,069) (15,702)
Realized investment gains................................... 5,165 2,231
---------- ----------
Income before income taxes.................................. 16,480 10,424
Income tax expense.......................................... (5,499) (2,814)
---------- ----------
Net income.................................................. 10,981 7,610
Dividends on preferred stock................................ (1,188) (1,188)
---------- ----------
Net income applicable to common shareholders................ $ 9,793 $ 6,422
========== ==========
Net income per common and common equivalent share
(diluted)(1).............................................. $ 0.40 $ 0.37
========== ==========
Average common and common equivalent shares outstanding
(1)....................................................... 24,352 17,506
========== ==========
OTHER OPERATING DATA:
Operating earnings (pro forma in 1997)(2)................... $ 10,006 $ 6,976
========== ==========
Operating earnings per common and common equivalent share
(diluted) (pro forma in 1997)(1).......................... $ 0.41 $ 0.29
========== ==========

- ---------------
(1) Shares and per share amounts have been restated for 1997 to reflect the
706-for-1 stock split that occurred in June, 1997 in conjunction with the
initial public offering of the Company's Class A Common Stock.
(2) "Operating earnings" is defined as net income applicable to common
shareholders (i) excluding, net of tax, realized investment gains and
losses, non-recurring charges and for 1997, income from defined benefit
pension plan asset management operations which were sold in November 1997;
and (ii) including, for 1997, the net pro forma effect on earnings of an
adjustment to reflect investment income at an assumed rate of 7.5% on the
net proceeds of the Company's initial public offering of Class A Common
Stock assuming it occurred on January 1, 1997.

23
24

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

GENERAL

The Company specializes in the growing asset accumulation business with
particular emphasis on retirement savings and investment products. The Company's
products and services are sold in two principal markets, the retail and
institutional markets, through a broad spectrum of distribution channels.

The Company derives its earnings from the investment spread and fee income
generated by the assets it manages. The Company earns a spread between what is
earned on invested assets and what is credited to customer accounts with its
retail spread products (primarily fixed annuities) and institutional spread
products (funding agreements and GICs). The Company receives a fee in exchange
for managing customers' deposits, and the customer accepts the investment risk
with its retail variable products (variable annuities). 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. In addition,
the Company expects to benefit from the growing institutional marketplace by
increasing penetration in the stable value and fixed income markets and
developing new products and applications. 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 its fee-based business,
such as expanded offerings of synthetic GICs. Fee-based business is less capital
intensive than spread-based business and provides the Company with diversified
sources of income.

On November 7, 1997, the Company transferred substantially all of the
assets and operations of ARM Capital Advisors, Inc. ("ARM Capital Advisors") to
ARM Capital Advisors, LLC ("New ARMCA") and sold an 80% interest in New ARMCA.
Although third-party assets managed by ARM Capital Advisors grew since 1995 when
ARM Capital Advisors began its operations, 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 constrained ARM Capital Advisors' growth.

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. Had the sale of ARM Capital Advisors' operations and
the sale of the management contracts for the State Bond Mutual Funds occurred on
January 1, 1995, they would not have had a material effect on the Company's net
income for the years ended December 31, 1997, 1996 and 1995.

The following discussion compares the results of operations for the Company
for the three years ended December 31, 1997. As the Company acquired
substantially all of the assets and business operations of SBM effective May 31,
1995, results for 1996 and 1997 each include a full year of acquired SBM
business operations compared to seven months in 1995. Therefore, results of
operations for 1995 are not completely comparable with 1996 and 1997. For
certain financial information regarding the Company's business segments, see
Note 13 to the consolidated financial statements contained elsewhere in this
Prospectus.

RESULTS OF OPERATIONS

1997 Compared to 1996

Net income during 1997 was $27.6 million compared to $23.4 million for
1996. Operating earnings (net income applicable to common shareholders,
excluding, net of tax, realized investment gains and losses, non-recurring
charges and income from defined benefit pension plan asset management operations
which were sold) were $34.1 million and $22.2 million for 1997 and 1996,
respectively. The increase in operating earnings is primarily attributable to an
increase in net investment spread due to both deposit growth from sales of
retail and institutional spread products and ongoing asset/liability management
and, to a lesser extent, an increase in fee income as a result of a larger base
of variable annuity deposits.

24
25

Pro forma operating earnings (operating earnings including a pro forma
adjustment to reflect investment income at an assumed rate of 7.5% on the net
proceeds of the Company's initial public offering of Class A Common Stock
assuming it occurred on January 1, 1996) were $36.3 million and $26.8 million
for 1997 and 1996, respectively. Pro forma operating earnings per share were
$1.51 and $1.13 for the same respective years. This pro forma information is not
necessarily indicative of what would have occurred had the offering occurred on
the date indicated.

Operating earnings for retail spread products were 1.36% and 1.30% of
average assets under management of $2.76 billion and $2.66 billion for that
segment during 1997 and 1996, respectively. This increase in retail spread
margins is primarily attributable to ongoing asset/liability management, which
generated higher net investment spreads. Operating earnings for institutional
spread products were .62% and .57% of average assets under management of $1.48
billion and $567.7 million for that segment during 1997 and 1996, respectively.
The increase in institutional spread margins is also primarily attributable to
ongoing asset/liability management. Operating earnings for retail variable
products (fee business) were .52% and .66% of average assets under management of
$970.3 million and $728.2 million for that segment during 1997 and 1996,
respectively. The decline in retail variable margins is primarily attributable
to lower amortization expense of deferred policy acquisition costs during 1996.
The Company's corporate and other segment primarily includes earnings on
insurance subsidiaries surplus and holding company cash and investments,
marketing partnership and broker-dealer fee income, and unallocated corporate
overhead. Income tax expense and preferred stock dividends are not allocated to
any segment.

Net investment spread for the years ended December 31, 1997 and 1996 was as
follows:

YEAR ENDED DECEMBER 31,
------------------------------
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT
AS NOTED)

Investment income.................................... $ 329,979 $ 250,031
Interest credited on customer deposits............... (247,418) (182,161)
--------- ---------
Net investment spread.............................. $ 82,561 $ 67,870
========= =========
Investment yield..................................... 7.60% 7.75%
Average credited rate................................ (5.83)% (5.67)%
--------- ---------
Investment spread rate............................. 1.77% 2.08%
========= =========
Average cash and investments (in billions)........... $4.34 $3.23
Average spread-based customer deposits (in
billions).......................................... $4.24 $3.21

The decrease in the overall investment spread rate from 2.08% in 1996 to
1.77% in 1997 is attributable to a greater proportion of institutional spread
product deposits in 1997, which generate lower spreads. Changes in investment
yield and interest credited rates must be analyzed in relation to the liability
portfolios to which they relate. When analyzed individually, investment spread
rates increased in 1997 for both retail and institutional spread products. The
investment yield on cash and investments, excluding assets supporting
institutional spread product deposits, was 8.04% for 1997, up from 8.01% in
1996. In comparison, the investment yield on cash and investments supporting
institutional spread product deposits was 6.74% and 6.53% for 1997 and 1996,
respectively. These increases reflect the benefits of ongoing investment
portfolio management. Average cash and investments related to institutional
spread product deposits grew from $567.7 million during 1996 to $1.48 billion
during 1997, causing the aggregate decrease in investment yields. The proceeds
from institutional spread product 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 market interest rates (which were somewhat higher on the
average in 1997), frequency of credited rate resets and business mix. Crediting
rates are reset monthly based on the London Interbank Offered Rate ("LIBOR") for
institutional spread products 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 an

25
26

adequate 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 $24.6 million in 1997 from $17.8 million in 1996.
This increase is attributable to variable annuity fees, which are based on the
market value of the mutual fund assets supporting variable annuity customer
deposits in nonguaranteed separate accounts. Variable annuity fees increased to
$14.6 million in 1997 from $10.8 million in 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.
Variable annuity deposits averaged $970.3 million in 1997, an increase from
$728.2 million in 1996. In addition, asset management fees earned by ARM Capital
Advisors on off-balance sheet assets, primarily related to defined benefit
pension plans, increased to $8.6 million in 1997 from $5.8 million in 1996
(which included fees from the State Bond Mutual Funds which were sold by the
Company in December 1996), reflecting a significant increase in the average fair
value of off-balance sheet assets managed due to sales. As a result of the sale
of ARM Capital Advisors' operations and the State Bond Mutual Funds management
contracts, asset management fee income will decrease in the future.

Assets under management as of December 31, 1997 and 1996 were as follows:

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

Retail spread products (primarily fixed and
indexed annuity and face-amount certificate
deposits).................................... $2,820.6 41% $2,646.2 55%
Institutional spread products (funding
agreement and GIC deposits).................. 2,542.3 37 891.9 18
Retail variable products (variable annuity
deposits invested in mutual funds)........... 1,129.1 16 844.3 17
Corporate and other:
Off-balance sheet deposits under marketing
partnership arrangements.................. 232.9 3 366.2 8
Cash and investments in excess of customer
deposits.................................. 180.8 3 77.0 2
-------- --- -------- ---
Total corporate and other.................... 413.7 6 443.2 10
-------- --- -------- ---
Total assets under management........ $6,905.7 100% $4,825.6 100%
======== === ======== ===

The increase in total assets under management was primarily attributable to
sales of floating rate funding agreements and GICs to institutional customers
and, to a lesser extent, an increase in retail variable product deposits
attributable to variable annuity sales and the investment performance of
variable annuity mutual funds due to strong stock market returns.

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

26
27

Sales by market and type of product for 1997 and 1996 were as follows:

YEAR ENDED DECEMBER 31,
------------------------
1997 1996
---------- ----------
(IN MILLIONS)

Retail:
Spread products....................................... $ 382.5 $ 130.6
Variable products..................................... 206.3 200.1
-------- --------
Total retail....................................... 588.8 330.7
Institutional:
Institutional spread products......................... 1,708.7 747.5
-------- --------
Total sales................................... $2,297.5 $1,078.2
======== ========

Total sales during 1997 rose to $2,297.5 million, an increase of
approximately 113% over 1996. The growth is primarily attributable to continued
diversification and expansion in the retail and institutional markets. The
growth in retail spread product sales is largely due to an increase in marketing
efforts for the Company's guaranteed rate option annuity products. Institutional
spread product sales increased as a result of (i) the addition of sales staff
and further penetration into institutional channels; and (ii) the launching of a
new funding agreement product. In November 1997, the Company received a deposit
of $500 million for the new product, which was sold in partnership with BLB and
initially matures in five years and is renewable annually thereafter.

Net surrenders of retail fixed and variable annuity products issued by the
Company's insurance subsidiaries were $344.5 million for 1997 compared to $326.2
million for 1996. Surrender charge income decreased to $4.5 million in 1997 from
$5.0 million in 1996. The decrease in surrender charge income is attributable to
a larger portion of the surrenders being partial surrenders which do not result
in a surrender charge penalty. Retail products 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 in 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 attempts to reduce
surrender activity and improve persistency through various programs.

Operating expenses increased to $32.5 million in 1997 from $31.1 million in
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, partially offset by a reduction in
state-mandated guaranty fund assessment accruals. The Company continues to
actively pursue and retain producers within its distribution channels to market
its products.

Amortization of deferred policy acquisition costs related to operations was
$10.4 million and $6.8 million in 1997 and 1996, respectively. This increase was
primarily the result of growth in the deferred policy acquisition cost asset due
to additional sales of retail fixed and variable annuity products. Amortization
specifically attributable to variable annuity products increased $1.9 million
during 1997. Variable costs of selling and issuing the Company's insurance
subsidiaries' products (primarily commissions and certain policy issuance and
marketing costs) are deferred and then amortized over the expected life of the
contract.

Amortization of value of insurance in force related to operations of $9.3
million and $7.3 million for 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. The
increase in amortization expense corresponds with lower than expected gross
margins for that block of annuity business.

27
28

The Company recorded non-recurring charges of $14.8 million for 1997
including (i) a one-time non-cash stock-based compensation charge of $8.1
million related to the aggregate difference between the initial public offering
price of $15.00 per share of Class A Common Stock and the exercise price of all
of the then-outstanding options; and (ii) other non-recurring costs primarily
attributable to the relocation and consolidation of the Company's operations
facilities from Ohio to Louisville, Kentucky. The Company recorded a non-
recurring charge of $5.0 million in 1996 that also included $3.2 million for
facilities consolidation and costs of $1.8 million primarily related to merger
and acquisition activity that did not result in a transaction.

Other expenses, net decreased to $.4 million in 1997 from $5.4 million in
1996. This decrease is attributable to higher mortality costs in 1996 related to
immediate annuity deposits. In addition, 1997 benefitted from mortgage loan
prepayment penalty income of $2.1 million and the favorable resolution of a
reinsurance claim of $2.4 million.

Realized investment gains, which are reported net of related amortization
of deferred policy acquisition costs and value of insurance in force, were $3.2
million in 1997 compared to $.9 million in 1996. Realized investment gains in
1997 include an estimated loss of $4.0 million related to the write-down to fair
value of an investment in a fixed income security. 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 fixed income security and a gain of $4.5
million, before selling expenses, related to the transfer of the State Bond
Mutual Funds management contracts. Other 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
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.

Income tax expense was $14.1 million and $5.2 million in 1997 and 1996,
respectively, reflecting effective tax rates of 33.9% and 18.1% as a percentage
of pretax income. If the nonrecurring stock-based compensation charge was added
back to pretax income, the effective tax rate for 1997 would be 28.3%. A tax
benefit was not recognized for the charge because a full valuation allowance was
provided on the Company's non-life deferred tax assets.

1996 Compared to 1995

During 1996, net income for the Company was $23.4 million compared to $11.9
million for 1995. Operating earnings (net income applicable to common
shareholders, excluding, net of tax, realized investment gains and losses,
non-recurring charges and income from defined benefit pension plan asset
management operations which were sold during November 1997) were $22.2 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 retail and institutional spread 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 business growth.

Operating earnings for retail spread products were 1.30% and .91% of
average assets under management of $2.66 billion and $2.43 billion for that
segment during 1996 and 1995, respectively. This increase in retail spread
margins is primarily attributable to ongoing asset/liability management, which
generated higher net investment spreads. Operating earnings for institutional
spread products were .57% and .60% of average assets under management of $567.7
million and $38.5 million for that segment during 1996 and 1995, respectively.
Operating earnings for retail variable products for 1996 were slightly higher
than the corresponding prior

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29

period as evidenced by the increase to .66% from .64% of average retail variable
assets under management of $728.2 million and $491.5 million during 1996 and
1995, respectively.

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

YEAR ENDED DECEMBER 31,
------------------------
1996 1995
--------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT AS NOTED)

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 rate........................... 2.08% 1.94%
========= =========
Average cash and investments (in billions)......... $3.23 $2.50
Average customer deposits (in billions)............ $3.21 $2.49

The decrease in investment yields on cash and investments primarily relates
to a significant increase in institutional spread product deposits which grew
from zero to $143.2 million during 1995 and to $891.9 million at December 31,
1996. The proceeds from institutional spread product sales are invested in
securities of shorter duration (which generally have lower investment yields)
than the Company's other investment portfolios. The investment yield on cash and
investments supporting institutional spread product deposits was 6.53% for 1996.
In comparison, the investment yield on cash and investments, excluding assets
supporting institutional spread product 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. 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.

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30

Assets under management as of December 31, 1996 and 1995 were as follows:

1996 1995
------------------- -------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- --------
(DOLLARS IN MILLIONS)

Retail spread products (primarily fixed and
indexed annuity and face-amount certificate
deposits)....................................... $2,646.2 55% $2,716.2 69%
Institutional spread products (funding agreement
and GIC deposits)............................... 891.9 18 143.2 4
Retail variable products (variable annuity
deposits invested in mutual funds).............. 844.3 17 617.3 16
Corporate and other:
Off-balance sheet deposits under marketing
partnership arrangements..................... 366.2 8 387.3 10
Cash and investments in excess of customer
deposits..................................... 77.0 2 61.1 1
-------- --- -------- ---
Total corporate and other.................... 443.2 10 448.4 11
-------- --- -------- ---
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 off-balance sheet assets in the State Bond Mutual
Funds. Including such assets, total assets under management at December 31,
1996 and 1995 were $7,553.0 million and $5,364.2 million, respectively.

The increase in total assets under management was primarily attributable to
an increase in sales of funding agreements and GICs to institutional customers
and, to a lesser extent, increased sales of retail variable products.

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

YEAR ENDED DECEMBER 31,
------------------------
1996 1995
---------- --------
(IN MILLIONS)

Retail:
Spread products...................................... $ 130.6 $115.4
Variable products.................................... 200.1 177.7
-------- ------
Total retail...................................... 330.7 293.1
Institutional:
Institutional spread products........................ 747.5 142.2
Fee-based marketing partnerships..................... -- 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
$342.8 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 investment portfolio options of variable annuity contracts due, in
part, to the strong stock market returns during 1996 and an increased emphasis
on marketing efforts of retail products during the fourth quarter, principally
through stockbrokers and independent agents. The Company's institutional spread
products were issued primarily through the marketing partnership arrangement
with General American. Expanded distribution of funding agreement products and
GIC products through bank trust departments, mutual fund companies, investment
managers, insurance companies and investment consultants contributed to the
increase in sales of such

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31

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 1995 and
1996 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.

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
benefitted 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.

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.

The Company recorded a $5.0 million non-recurring charge in 1996 including
$3.2 million related to the move of operations facilities from Ohio to
Louisville, Kentucky and costs of $1.8 million primarily related to mergers and
acquisitions activities that did not result in a transaction.

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 fixed income security and a gain of $4.5
million, before selling expenses, related to the transfer of the State Bond
Mutual Funds management contracts. Other 1996 and all 1995 realized investment
gains

31
32

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.

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.

ACQUISITION ACTIVITY

ARM Capital Advisors

Through its acquisition of the U.S. fixed income unit of Kleinwort Benson
Investment Management Americas, Inc. 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 managed the investment
portfolios of the Company's subsidiaries. Although third-party assets managed by
ARM Capital Advisors grew 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 constrained ARM Capital Advisors' growth.
Accordingly, on November 7, 1997, the Company transferred substantially all of
the assets and operations of ARM Capital Advisors to New ARMCA and sold an 80%
interest in New ARMCA.

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 (formerly known as SBM Financial Services, Inc.), as well as the
management contracts for the State Bond Mutual Funds. The aggregate purchase
price for the SBM acquisition was $38.8 million. The Company financed the
acquisition by issuing approximately 6.9 million shares of common stock,
primarily to the MSCP Funds, 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 make a $19.9 million capital
contribution to SBM Life and acquire SBM Certificate Company from SBM Life for
$3.3 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 securities with fixed maturities with the
objective of earning reasonable returns while limiting credit and liquidity
risks. At amortized cost, fixed maturities at December 31, 1997 totaled $4.0
billion, compared with $3.0 billion at December 31, 1996, both representing
approximately 91% of total cash and investments. This increase in investments in
fixed maturities primarily resulted from the investment of the proceeds from
sales of institutional spread products.

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33

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

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

Fixed maturities:
Corporate securities...................................... $1,390.3 31.5% $1,410.0
U.S. Treasury securities and obligations of U.S.
government agencies.................................... 318.6 7.2 319.7
Other government securities............................... 84.3 1.9 83.8
Asset-backed securities................................... 400.3 9.1 400.4
Mortgage-backed securities:
Agency pass-throughs................................... 268.9 6.1 271.1
Collateralized mortgage obligations:
Agency............................................... 423.3 9.6 432.0
Non-agency........................................... 1,135.8 25.7 1,151.4
-------- ----- --------
Total fixed maturities............................ 4,021.5 91.1 4,068.4
Equity securities (i.e., non-redeemable preferred stock).... 28.2 .6 28.3
Mortgage loans on real estate............................... 16.4 .4 16.4
Policy loans................................................ 126.1 2.8 126.1
Cash and cash equivalents................................... 228.2 5.1 228.2
-------- ----- --------
Total cash and investments........................ $4,420.4 100.0% $4,467.4
======== ===== ========

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 CMO investments at December 31, 1997, 90.2% used
mortgage loans or mortgage loan pools, letters of credit, agency mortgage
pass-through securities and other types of credit enhancement as collateral. The
remaining 9.8% of the nonagency CMOs used 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 may be 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 $44.5 million and $82.7 million,
respectively, at December 31, 1997. Although the interest rate environment has
experienced significant volatility during 1997, 1996 and 1995, prepayments and
extensions of cash flows from MBSs have not materially affected investment
income of the Company.

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34

Asset-backed securities ("ABSs") are securitized bonds which can be backed
by, but not limited to, collateral such as home equity loans, second mortgages,
automobile loans and credit card receivables. At December 31, 1997, home equity
loan collateral represented 53.8% of the Company's investments in the ABS
market. The typical structure of an ABS provides for favorable yields, high
credit rating and stable prepayments.

Total cash and investments were 95% and 96% investment grade or equivalent
as of December 31, 1997 and 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 has a diversified
foreign portfolio of Yankee Bonds, including a limited exposure to the Asian
market. The Company reduces the risks associated with buying foreign securities
by limiting the exposure to both issuer and country. The Company closely
monitors the creditworthiness of such issuers and the stability of each country.
Additionally, the Company's investment portfolio has minimal exposure to real
estate, mortgage loans and common equity securities, which represent less than
1% of cash and investments as of December 31, 1997.

The Company analyzes its investment portfolio, including below investment
grade securities, at least quarterly 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 December 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)....................................... $2,758.0 69% $2,793.6
2 (BBB).............................................. 1,023.8 25 1,041.6
3 (BB)............................................... 137.9 3 139.0
4 (B)................................................ 101.8 3 94.2
5 (CCC, CC, C)....................................... -- -- --
6 (Cl, D)............................................ -- -- --
-------- ----- --------
Total fixed maturities...................... $4,021.5 100% $4,068.4
======== ===== ========

Pursuant to Statement of Financial Accounting Standards ("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 fluctuations in interest rates during 1997 resulted in unrealized gains
on available-for-sale securities which totaled $20.3 million (net of $15.8
million of related amortization of deferred policy acquisition costs and value
of insurance in force and $10.9 million of deferred income taxes) at December
31, 1997, compared to unrealized gains of $3.7 million (net of $1.3 million of
related amortization of deferred policy acquisition costs and value of insurance
in force and $2.0 million of deferred income taxes) at December 31, 1996. This
change in net unrealized gains on available-for-sale securities for the year
ended December 31, 1997 increased reported shareholders' equity by $16.6 million
as compared to a decrease of $24.9 million for the year ended 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 other assets and all liabilities are carried

34
35

at historical values. At December 31, 1997 and 1996, shareholders' equity
excluding the effects of SFAS No. 115 was $287.2 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 or other assets creates volatility in reported shareholders' equity
but does not reflect the underlying economics of the Company's business. The
Company's accompanying consolidated financial statements include fair value
balance sheets which demonstrate that the general rise in interest rates during
1996 and subsequent decrease during 1997 did not have a material effect on the
financial position of the Company when all assets and liabilities are adjusted
to estimated fair values.

Assets held in the Company's guaranteed separate accounts include $1,255.5
million and $258.7 million of cash and investments at December 31, 1997 and
1996, of which approximately 87% and 89% were fixed maturities, respectively.
Total guaranteed separate account cash and investments were 99% and 98%
investment grade at December 31, 1997 and 1996, respectively. Separate accounts
are 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.

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 agreements, dividend payments
on its preferred stock, operating expenses not absorbed by management fees
charged to its subsidiaries, 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 common and preferred stock.

The ability of the Company's insurance subsidiaries to pay dividends and
enter into agreements with affiliates for the payment of service or other fees
is limited by state insurance laws. During 1997, the Company received dividends
consisting of cash and investment securities of $14.9 million from Integrity.
The maximum dividend payments that may be made by Integrity to the Company
during 1998 without the prior approval of the Ohio Insurance Director are $38.2
million of which $6.0 million was paid in the first quarter of 1998. The Company
had cash and investments at the holding company level of $41.9 million at
December 31, 1997. In addition, the Company has access to bank lines of credit
totaling $75.0 million at December 31, 1997, of which $37.0 million is available
to the Company. See Note 7 to the consolidated financial statements contained
elsewhere in this Prospectus for additional information regarding the Company's
debt.

In June 1997, the Company completed an initial public offering of 9.2
million shares of Class A Common Stock of which 5.75 million shares were sold by
the Company for net proceeds of $78.8 million. The remaining 3.45 million shares
were sold by the Morgan Stanley Stockholders. On June 30, 1997, the Company used
a portion of such net proceeds to make a $40 million capital contribution to its
primary insurance subsidiary, Integrity, thereby strengthening Integrity's
capital base to provide for future growth. The Company plans to also use the net
proceeds to enhance the Company's retail market presence, to consolidate
operating locations and for other corporate purposes, which may include
acquisitions.

After the completion of the Offering, the Company plans to file a shelf
registration statement (the "Shelf Registration Statement") for up to $200
million aggregate stated value of cumulative perpetual preferred stock having
terms (other than with respect to dividend amount) similar to the outstanding
Perpetual Preferred Stock. The proceeds of any offering under the shelf
registration statement will be used for general corporate purposes which may
include redemption of the Company's outstanding Perpetual Preferred Stock, which
may be redeemed on or after December 15, 1998.

35
36

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 years ended December 31, 1997, 1996 and 1995, the Company met
its liquidity needs entirely by cash flows from operating activities and
principal payments and redemptions of investments. At December 31, 1997, cash
and cash equivalents totaled $228.2 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 $216.1 million, $192.9 million and
$138.4 million from operating activities during the years ended December 31,
1997, 1996 and 1995, respectively. These cash flows resulted principally from
investment income, less commissions and operating expenses. Proceeds from sales,
maturities and redemptions of investments generated $3,884.2 million, $2,214.4
million and $1,463.3 million in cash flows during 1997, 1996 and 1995,
respectively, which were offset by purchases of investments of $4,782.6 million,
$2,772.0 million and $1,506.5 million, respectively. An increase in investment
purchases and sales activity during 1997 compared to 1996 reflects the Company's
ongoing management of its fixed maturity portfolio which has increased in size
due primarily to sales of retail and institutional spread products.

INCOME TAXES

At December 31, 1997, the Company reported an asset for deferred income
taxes of $31.0 million on the carrying amount balance sheet. Such amount is net
of a valuation allowance of $36.6 million. The net deferred tax asset represents
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
specific 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 generally be true if interest rates rise.

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37

YEAR 2000

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38

BUSINESS

THE COMPANY

The Company specializes in the growing asset accumulation business with
particular emphasis on retirement savings and investment products. 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 independent broker-dealers, independent agents,
stockbrokers, and financial institutions. The Company offers institutional
products, such as funding agreements and GICs, directly to bank trust
departments, plan sponsors, cash management funds, corporate treasurers, and
other institutional investors.

The Company commenced its business operations in November, 1993 with the
acquisition of Integrity Holdings. The Company's assets under management have
grown from $2.3 billion as of December 31, 1993 to $6.9 billion as of December
31, 1997. The Company attributes this growth to internally generated sales, new
product offerings and an opportunistic acquisition. Operating earnings (net
income applicable to common shareholders, excluding net of tax, realized
investment gains and losses, non-recurring charges and income from defined
benefit pension plan asset management operations which were sold during November
1997) have grown to $34.1 million in 1997 from $22.2 million in 1996 and $4.5
million in 1995. In June 1997, the Company raised $78.8 million through an
initial public offering of its Class A Common Stock.

STRATEGY

The Company's strategy is focused on the following:

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fund managers, guaranteed rate options and the ability for systematic transfer
of deposits over time -- all in one product. In the institutional market, the
Company offers a short-term floating rate institutional spread-based product
designed to meet the market demand for products with attractive current yields
and access to liquidity. In 1997, the Company developed and funded a unique
asset-backed funding agreement, in alliance with BLB, a triple-A rated
international banking institution. In connection with another highly rated
international bank, the Company is developing a synthetic GIC product for the
institutional spread marketplace that will provide institutional clients with
either absolute or relative investment performance guarantees.

Expanding and Diversifying the Deposit Base in the Institutional
Marketplace. Since the Company's inception, its institutional business has
grown to $2.5 billion of funding agreement deposits and GIC deposits on the
Company's December 31, 1997 balance sheet. The Company believes that its
integrated asset/liability management approach to the business, along with its
underwriting philosophy, has allowed it to build competitive advantages. The
Company has found it beneficial to form strategic partnerships with
organizations possessing strong financial ratings and market presence. Since
1995, the Company has written funding agreements and GICs primarily through a
relationship with General American under which the Company reinsures one-half of
the business written. In late 1997, the Company sold its first funding agreement
structure outside the General American relationship with a $500 million,
five-year term offering, in alliance with BLB. In addition to offering its
current products, the Company intends to continue its growth in the
institutional market by (i) diversifying its product line with (a) customized
product features for alternative distribution channels, (b) fixed terms
extending beyond current product offerings and (c) on- and off-balance sheet
synthetic products or new funding agreement products in which the Company offers
certain performance guarantees; (ii) attracting new partners with larger and
stronger balance sheets to provide credit enhancement to help support and market
the new product structures and marketing initiatives; and (iii) expanding market
penetration within its existing clients while maintaining the persistency and
profitability of the current client base.

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

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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 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 Company believes that the relocation of the Company's main
processing center from Ohio to the Company's headquarters in Louisville,
Kentucky, which was substantially completed during 1997, has provided benefits
of consolidation and supplemented the effective delivery of service.

SUBSIDIARIES

The Company conducts its different businesses through the following
subsidiaries:

- Integrity Life Insurance Company -- provides individual fixed, indexed
and variable annuities to retail customers and funding agreements and GICs
to institutional customers;

- National Integrity Life Insurance Company -- provides individual fixed
and variable annuities to retail customers and funding agreements and GICs
to institutional customers, primarily in New York (wholly owned subsidiary
of Integrity);

- SBM Certificate Company -- offers retail 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, and are not
subject to Federal Deposit Insurance Corporation ("FDIC") protection;

- ARM Securities Corporation (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

- 312 Certificate Company -- is a bankruptcy-remote, restricted special
purpose corporation formed to engage in the sale of a $500 million
installment face amount certificate to a large institutional purchaser.
See "Recent Developments."

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

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marketplace and generally seeks to have "a product for every market
environment." The Company's retail products include a variety of variable,
indexed and fixed annuities and face-amount certificates. The Company's retail
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 funding agreements and GICs to its
institutional clients and is currently developing a synthetic GIC product for
its institutional clients.

The Company derives its earnings from the net investment spread and fee
income generated by the assets it manages. With retail and institutional spread
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 (e.g., LIBOR or the S&P 500 (as defined below)). 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 retail variable products, the Company's subsidiaries receive a
fee in exchange for managing deposits, and the customer accepts investment risk
associated with their chosen mutual fund option. Because the investment risk is
borne by the customer, this business requires significantly less capital support
than spread-based business.

Retail and Institutional Spread Products

The Company seeks to limit the volatility of investment spreads in a
variety of interest rate environments. To this end, management (i) structures
investment asset durations, convexity and liquidity characteristics to match
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 retail and institutional spread products include retail
guaranteed rate options ("GROs") sold as a stand-alone product or as an
investment option within variable annuity contracts, flexible premium deferred
annuity ("FPDA") contracts, single premium deferred annuity ("SPDA") contracts,
face-amount certificates, and institutional funding agreements and GICs as
described below. Sales of such products include premiums and deposits received.
Sales of such retail and institutional spread products for the years ended
December 31, 1997, 1996 and 1995 were as follows:

YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN MILLIONS)

Retail spread product sales:
GRO................................................ $ 320.3 $ 83.6 $ 47.1
FPDA............................................... 31.1 29.9 12.5
SPDA............................................... .8 8.6 44.3
Face-amount certificates........................... 9.8 8.0 10.7
Other.............................................. 20.5(1) .5 .8
-------- -------- --------
Total retail spread products.................... 382.5 130.6 115.4
Institutional spread product sales:
Funding agreements and GICs(2).................. 1,708.7 747.5 142.2
-------- -------- --------
Total sales of spread products.................. $2,091.2 $ 878.1 $ 257.6
======== ======== ========

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

(1) Includes sales of $19.8 million of systematic transfer option products which
initially provide a fixed rate of return on deposits which are
systematically transferred into retail variable and/or retail spread
products within one year.

(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

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American. General American cedes 50% of new funding agreement and GIC
deposits to Integrity under the reinsurance agreement which the Company
records on its balance sheet. 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
sales.

Assets under management for retail and institutional spread products at
December 31, 1997, 1996 and 1995 were as follows:

DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995
------------------- ------------------- --------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)

Retail spread products:
GRO................................... $ 558.2 10.4% $ 223.1 6.3% $ 164.5 5.8%
FPDA.................................. 403.2 7.5 428.1 12.1 436.2(1) 15.2
SPDA.................................. 698.9 13.0 838.2 23.7 969.8(1) 33.9
SPIA.................................. 654.4 12.2 650.1 18.4 644.8 22.6
SPE................................... 383.3 7.2 396.7 11.2 403.3 14.1
Face-amount certificates.............. 45.1 .8 50.2 1.4 52.5(1) 1.8
Other................................. 77.5 1.5 59.8 1.7 45.1 1.6
-------- ----- -------- ----- -------- -----
Total retail spread products....... 2,820.6 52.6 2,646.2 74.8 2,716.2 95.0
Institutional spread products:
Funding agreements and GICs(2)........ 2,542.3 47.4 891.9 25.2 143.2 5.0
-------- ----- -------- ----- -------- -----
Total assets under management
for spread products......... $5,362.9 100.0% $3,538.1 100.0% $2,859.4 100.0%
======== ===== ======== ===== ======== =====

- ---------------
(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 arrangement with General American was converted
from a fee-based to primarily a spread-based arrangement late in 1995
through a reinsurance agreement with General American. See "-- Funding
Agreements and Guaranteed Investment Contracts."

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 guaranteed interest rate
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
dollar amount over the selected time horizon despite interest rate volatility,
while maintaining a tight duration match between the assets in the portfolio and
the customer deposits they support. Deposits into GROs are held in a guaranteed
separate account established by the insurance company.

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

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guaranteed for a specified initial period and reset annually or semi-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 of 1996 and developed a second generation of
equity-indexed product, OmniSelect, in 1997. The OMNI and OmniSelect products
furnish customers with the ability to allocate assets among equity index-based
returns and guaranteed rates of return. The index-based options offer upside
potential tied to a percentage of the appreciation in the S&P 500 Composite
Stock Price Index ("S&P 500"), 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 focuses on managing
the interest rate spread component.

Single Premium Deferred Annuity Contracts. Single premium deferred annuity
contracts have in the past been sold through independent broker-dealers,
independent agents, stockbrokers, 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
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. As a result of changes in the marketing
environment for this product and the increased competition in pricing, the
Company is not actively marketing this product.

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.

Single Premium Endowment Contracts. While single premium endowment ("SPE")
contracts continue to represent a 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, 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.

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 if they withdraw
their investment prior to the maturity date. The Company determines 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

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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.

Funding Agreements And Guaranteed Investment Contracts. Funding agreements
and guaranteed investment contracts are issued by the Company to institutional
customers primarily through a marketing partnership with General American, which
began as a fee-based arrangement in March 1993. Funding agreements are
investment contracts issued by the Company's insurance subsidiaries to the
nonqualified (i.e., non-retirement plans) market, and GICs are issued by the
Company's insurance subsidiaries to qualified pension plans. The marketing
partnership with General American permits the Company to use its established
distribution channel contacts to market funding agreements and GICs that are
backed by 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 coinsurance
agreement. Sales of funding agreements and GICs made through General American
accounted for 48% and 69% of total retail and institutional sales for the years
ended December 31, 1997 and 1996, respectively. The interest rate on funding
agreements and GICs is typically based upon a short-term floating rate, such as
the LIBOR, which periodically resets to provide current yields. Funding
agreement and GIC products offered by the Company are designed and have
historically been held by customers as long-term core cash investments, even
though under most contracts customers have the option to liquidate their
holdings with written notice of thirty days or less. The Company has experienced
withdrawals (excluding scheduled interest payments) by funding agreement and GIC
customers of approximately 4.5% and 0.0% of average funding agreement and GIC
customer deposits for the years ended December 31, 1997 and 1996, respectively.
The Company also broadened its institutional product lines and distribution
channels by launching a new funding agreement product. In November 1997, the
Company received a deposit of $500 million for the new product, which was sold
in partnership with BLB and initially matures in five years and is renewable
annually thereafter.

Retail Variable Products

The Company's retail variable products business is less capital intensive
than spread business and generally provides the Company with a 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 sales and the level of fee income
earned by the Company from variable annuities and, thereby, the Company's
results of operations.

The Company's retail variable products are the investment portfolio options
of variable annuity contracts. Sales of such products represent premiums and
deposits received. Sales of retail variable products for years ended December
31, 1997, 1996 and 1995 were as follows:

YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------
(IN MILLIONS)

Retail variable product sales:
Investment portfolio options of variable
annuities................................... $206.3 $200.1 $177.7
====== ====== ======

Assets under management for retail variable products at December 31, 1997,
1996 and 1995 were as follows:

DECEMBER 31,
----------------------------
1997 1996 1995
-------- ------ ------
(IN MILLIONS)

Retail variable product assets under management:
Investment portfolio options of variable
annuities.................................. $1,129.1 $844.3 $617.3
======== ====== ======

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
nonguaranteed separate

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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 from administrative
expense charges in connection with variable annuity contract deposits. 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, Integrity Capital Advisors, Inc. earns fee income
by serving as an advisory manager and by providing supervisory and
administrative services to the portfolios of the Legends Fund, Inc. (the
"Legends Fund"), a registered investment company. Shares of the Legends Fund are
offered only to nonguaranteed separate accounts of Integrity and National
Integrity.

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 independent broker-dealer,
independent agent, stockbroker, and financial institution channels. In addition,
registered representatives affiliated with ARM Securities sell the Company's
annuities and face-amount certificates and independent third-party mutual funds.

During 1996, the Company began the process of working with its producers 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 producers 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 1996. Based on these initial marketing efforts, the Company
developed OmniSelect, a second generation equity-indexed product that provides
enhanced benefits to customers in the independent agent channel and is more
appealing to other distribution channels. The Company's 1997 product development
efforts included the addition of new investment options to GrandMaster and
Pinnacle, the Company's variable annuity products, and the introduction of a new
variable annuity 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.

The Company uses third-party marketing organizations with sales networks to
distribute certain of its retail annuity products. One such organization, FMG,
supplements the Company's in-house wholesaling unit by performing this function
for certain independent broker-dealers. Broker-dealers affiliated with FMG
accounted for 45% and 61% of total retail sales, and 11% and 19% of total retail
and institutional sales, for the years ended December 31, 1997 and 1996,
respectively. No individual broker-dealer affiliated with FMG accounted for more
than 9% and 13% of total retail sales for the years ended December 31, 1997 and
1996, respectively. In addition to FMG, the Company utilizes PaineWebber in the
stockbroker channel for the distribution of certain products. For the years
ended December 31, 1997 and 1996, approximately 13% and 19% of the Company's
total retail sales, respectively, and approximately 3% and 6% of total retail
and institutional sales, respectively, were made through PaineWebber.

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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.

Retail sales by distribution channel for the years ended December 31, 1997
and 1996 were as follows:

YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996
------------------ ------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ --------
(DOLLARS IN MILLIONS)

Distribution channel:
Independent broker-dealers................... $264.5 44.9% $199.0 60.2%
Independent agents........................... 218.2 37.1 60.6 18.3
Stockbrokers................................. 96.7 16.4 70.2 21.2
Financial institutions....................... 9.4 1.6 .9 .3
------ ----- ------ -----
Total retail sales................... $588.8 100.0% $330.7 100.0%
====== ===== ====== =====

Institutional Distribution

In the institutional market, the Company has been able to generate a
significant level of sales volume with relatively minimal overhead or marketing
expenses. A small team of in-house marketing professionals markets and sells the
Company's products which 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. 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 credit-enhance the
performance guarantees.

ASSET/LIABILITY SPREAD MANAGEMENT

The Company views asset/liability spread management as an integrated
process, rather than as a series of segregated functions, and incorporates 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 customer
obligations and to maximize investment spreads on a consistent basis. Beginning
with product design and continuing through the product sale and contract
maturity, 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 a thorough periodic
analysis 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. 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 backing the product features under consideration,
will provide adequate cash flow and generate yields that achieve specified
minimum targets consistently over a reasonable range of interest rate
environments. If necessary, the Company redesigns investment strategies or
product features until these objectives are met.

The Company utilizes several key strategies in managing its spread-based
products. This approach allows the Company to leverage its resources and
expertise. One example is an immunization strategy currently used

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47

for the Company's GRO products, in which a portfolio of assets is constructed
and managed to provide a target dollar amount over a pre-established time
horizon. The Company engineers and packages its spread products to deliver
products to suit the needs of different types of customers in both the retail
and institutional marketplaces.

Once the Company has constructed an asset portfolio having the desired
performance characteristics, the Company's investment managers have the
flexibility to trade the portfolio in order to increase 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) limit exposure to credit risks; (ii) manage 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 and withdrawals for general account
retail spread products, expenses and dividends) without having to sell any
investments at a material loss.

Internal control measures are in place throughout the process to help
identify 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 GAAP. The Company also remodels its assets
and liabilities periodically to determine whether any significant changes in
assumptions or interest rates have changed the overall risk profile.

In pursuing its investment spread objectives, the Company focuses primarily
on cash flow risks that are quantifiable and measurable. 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 and more easily modeled and hedged, if appropriate.

The Company's array of retail and institutional spread 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
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,
1997, the Company had approximately $2.8 billion of customer deposits (43% of
total customer deposits), including $2.0 billion of institutional spread product
deposits, which were not subject to surrender charges or other restrictions on
withdrawal. During 1998, surrender charges will no longer apply to an additional
$206.3 million of customer deposits which were in force as of December 31, 1997.
During 1994 and continuing to date, the Company has implemented 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 most 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

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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 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 ceding
reinsurer 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. In
general, the rating agencies issue opinions on the insurance companies'
abilities to meet policyholder claims and obligations on a timely basis. 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 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. 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."

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 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 believes that it can strategically employ technology to
strengthen individual distributor and customer relationships by providing
superior service, reducing operating costs, improving work flow efficiency, and
reducing product development time.

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The Company's integrated approach to business requires that information be
shared within and across functional groups. Management, therefore, believes that
a PC-based client/server data processing platform provides users with direct
access to information more efficiently than a mainframe system. To facilitate
this process, the Company's principal locations in Kentucky, Ohio, New York and
Minnesota use linked voice and data communications technologies over a wide-area
network ("WAN"). With proper security clearance, employees can access databases
on file servers from any location. Some of these file servers are owned and
operated by the Company, while others and some main frame systems are owned and
operated by external entities. Using an automated interface system to access
these databases, the Company achieves reduced costs, strengthened internal
control, and decreased possibility for error from manual intervention. The
Company has and will continue to outsource systems or administrative functions
in which the Company does not possess critical mass. The Company improved the
productivity and effectiveness of its processing operations by relocating and
consolidating its Ohio office to the corporate headquarters in Louisville,
Kentucky. Final consolidation of non-critical operating functions in the Ohio
office is anticipated to be completed by the end of the second quarter of 1998.

The Company maintains a plan 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. Key functions are intended to be available
within a matter of a few hours. For recovery of computer systems accessed
through external parties, these vendors provide their own disaster recovery
plans. Off-site storage of magnetic media is intended to ensure that data
processing systems and the imaging system can also be restored in the event of a
disaster.

Additionally, in 1996, the Company expanded and improved the efficiency of
its work flow processing and management reporting systems by employing an image
based work flow system to route packets of information within and across
functional groups. Not only does this system reduce the amount of paper
generated in the back office, but it also reduces the manual work required to
process transactions and allows the Company to track transactions and measure
the performance of its personnel in order to improve operations and deliver more
effective results to customers. Continued software development and systems
migration projects will help eliminate computer redundancies in certain lines of
business and improve the Company's ability to quickly bring increasingly complex
and competitive products to market.

The Company believes that the World Wide Web will become an important
vehicle for conducting business in the financial services industry. In 1997, the
Company introduced its Internet based producer service program called
AnnuiTRAC(SM). The Company further believes that the convenience and ease of
using this system will help attract and retain producers. AnnuiTRAC(SM) uses
Web-based technology to provide producers with on-line access to policy and
product information, 24 hours a day, seven days a week. Not only does this
system automate account processing, but it also helps the Company meet the
demands of a growing sales force without significantly increasing operating
costs. Using this technology, producers can devote more time to selling new
business and the Company spends less time processing the paperwork. Previously,
when producers needed the status of pending accounts, historical transaction
data, or product summaries, they requested the information from the Company's
producer services unit and received it via facsimile or mail. With
AnnuiTRAC(SM), this process is simplified with an interactive software system.
Producers can now find valuable account information immediately and directly by
accessing AnnuiTRAC(SM) through the Internet.

The Company also uses technology to decrease the amount of time it takes to
develop new products. Additionally, in 1997, the Company developed an improved
policy administration system that allows it to quickly respond to changing
customer needs and reduces the amount of time required to modify software
necessary to implement new product features. The Company envisions using this
system to support various aspects of its business in the future.

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.

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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 and producer 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
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 pre-empted 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 creating 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 and producer
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 build market
share and compete with other insurance companies is dependent upon its ability
to expand and diversify its distribution channels and develop competitive
products with unique features and services that focus on the needs of targeted
market segments.

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

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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 were released for industry review and Statements of Statutory Accounting
Principles were issued by the NAIC in 1997, subject to final approval. In
certain states, this project will not undermine the states' authority to make a
final determination on acceptable and appropriate accounting practices as the
NAIC proposals may be 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
transactions between affiliates including insurance companies 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 both the Ohio Insurance Director and New York Insurance Superintendent. 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, as indirect or direct stockholders, would be
entitled to receive any distribution therefrom.

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Dividend Restrictions. The Company's ability to declare and pay dividends
is 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.

Integrity paid $26 million in dividends to the Company during 1997, the
maximum amount that was payable. For 1998, the maximum dividend payments that
may be paid by Integrity to the Company without prior regulatory approval are
$38 million.

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 capital and surplus of the Company's life
insurance subsidiaries totaled $211.8 million and $163.8 million at December 31,
1997 and 1996, respectively, and were substantially in excess of the minimum
level of RBC that would require regulatory action. In addition, the consolidated
statutory AVRs of the Company's insurance subsidiaries totaled $24.9 million and
$15.6 million at December 31, 1997 and 1996, respectively (excluding voluntary
reserves of $5.3 million and $12.5 million at December 31, 1997 and 1996,
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, including RBC.

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, 1997, 1996 and 1995 were approximately $1.6 million, $1.5 million
and $1.1 million,

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respectively. Of such amounts, approximately $.5 million, $.5 million and $.4
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 and 1995, the Company recorded
provisions for future state guaranty fund association assessments of $1.6
million and $.3 million, respectively. No provision was recorded during 1997. At
December 31, 1997, the Company's reserve for such assessments was $4.9 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 National Organization of Life and Health Guaranty
Associations. 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 1997 covered the periods 1993
through 1995 and also contained no material adverse findings.

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 1997, two IRIS ratios for Integrity and three IRIS ratios for National
Integrity fell outside the usual range due to normal business operations which
included the sale of a substantial volume of funding agreements and GICs
("institutional spread products"). For Integrity, the change in premium ratio
was +197%, as compared to the usual range of between +50% and -10%. This ratio
was above the usual range due to an increase in institutional spread product
premiums from $507.9 million in 1996 to $1.7 billion in 1997 and an increase in
guaranteed rate option annuity premiums from $51.6 million in 1996 to $210.4
million in 1997. Such increases were a result of increased marketing efforts.
Integrity's change in reserving ratio was -99% 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 retail
fixed, indexed and variable annuity products and institutional spread products
rather than life insurance, and due to its mix of life insurance reserves and
premiums. Over 85% 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 ($1.2 million in 1997) are
primarily generated

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from variable life business which is reinsured through a modified coinsurance
reinsurance treaty. This treaty generates premium flow but not reserve
adjustments. Thus, for Integrity, the ratio, in essence, compares SPE reserve
changes to variable life premiums.

For National Integrity, the change in premium ratio was -38%, as compared
to the usual range of between +50% and -10%. This ratio was below the usual
range due to a decrease in institutional spread product premiums from $239.6
million in 1996 to zero in 1997, partially offset by an increase in guaranteed
rate option annuity premiums from $31.9 million in 1996 to $125.3 million in
1997. National Integrity's change in product mix ratio was 9.9%, as compared to
the usual range of 5% or less. This ratio was slightly above the usual range due
to the decrease in sales of institutional spread products and the increase in
sales of guaranteed rate option annuities during 1997. National Integrity's
change in reserving ratio was -23% 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. Integrity Capital Advisors, Inc. is registered with the Commission
as an investment adviser under the Investment 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 Commission. In addition, variable annuities and the
related nonguaranteed separate accounts of the Company's insurance subsidiaries
are subject to regulation by the Commission under the Securities Act and the
Investment Company Act.

The Company's broker-dealer subsidiary, ARM Securities, is registered with
the Commission under the Exchange Act and is subject to regulation by the
Commission. 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
Commission 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 Commission
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.

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.

Examinations. During 1997, the Commission conducted an examination of
National Integrity's nonguaranteed separate account products, which are
registered. No material control deficiencies were found during this examination.
In addition, the Commission conducts routine examinations of the Company's

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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.

Federal Income Tax

In recent years, several proposals have been made to change the federal
income tax system. These proposals have included various flat tax rate and
consumption taxes. Under a proposal currently included in The Administration's
Fiscal Year 1999 Budget all exchanges involving a variable annuity contract and
all reallocations within variable annuity contracts would be taxed. It is
impossible to predict the effect on the Company's business of the adoption of
any of these proposals. It is possible that the adoption of a tax proposal that
reduces or eliminates the tax-deferred status of annuities could adversely
affect the Company's business.

EMPLOYEES

At December 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 62,000 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 has a standby letter of credit in the amount of approximately $1.7
million with one of its lending institutions to secure the Company's obligations
under the Lease.

In addition to its headquarters, the Company and its subsidiaries lease
approximately 72,000 square feet of space in the Columbus, Ohio vicinity, 15,000
square feet of space on Chamberlain Lane in Louisville, Kentucky and subleases
approximately 1,000 square feet of office space in New York City from New ARMCA.
The operations of the Company's New York insurance subsidiary, National
Integrity, are conducted from the New York facility. Additional office space
owned in New Ulm, Minnesota supports the distribution operations of SBM
Certificate Company. The Chamberlain Lane space in Louisville, Kentucky serves
as the Company's primary distribution center for all of its operations. The
Columbus office space was vacated upon the consolidation of the Company's
Columbus operations with the corporate headquarters in Louisville and the
Company intends to either sublease this space or buy out the remainder of the
lease at a discount.

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 the
commissions, fees, trailers, overwrites and bonuses paid to Multico in the
amount of approximately $9.3 million. On March 30, 1998, the Company entered
into a settlement agreement with regard to this litigation on terms that the
Company believes will not result in any material adverse impact to its results
of operations or financial condition. Currently, the settlement agreement is
pending court approval.

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.

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MANAGEMENT

The directors and executive officers of the Company, their ages, and
positions with the Company as of the date hereof, are set forth below. There are
no family relationships among any directors or executive officers of the
Company. On February 10, 1998, John Franco retired as the Company's Co-Chairman
of the Board and Co-Chief Executive Officer. After consummation of the Offering,
it is the intention of Messrs. Niehaus and Goldberg to resign from, and/or not
stand for reelection to, the Board of Directors of the Company.

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

Martin H. Ruby................. 47 Chairman of the Board and Chief Executive Officer and Director
John R. Lindholm............... 49 President -- Retail Business Division and Director
Dennis L. Carr................. 48 Executive Vice President and Chief Actuary
David E. Ferguson.............. 50 Executive Vice President and Chief Technology Officer
John R. McGeeney............... 41 Executive Vice President -- Retail Business Division
Robert H. Scott................ 51 Executive Vice President, General Counsel and Secretary
Patricia L. Winter............. 39 Executive Vice President -- Investment Assurance and
Institutional Products
Edward L. Zeman................ 43 Executive Vice President and Chief Financial Officer
Peter S. Resnik................ 37 Treasurer
Barry G. Ward.................. 36 Controller
Dudley J. Godfrey, Jr.......... 72 Director
Alan E. Goldberg............... 43 Director
Robert H. Niehaus.............. 42 Director
Edward D. Powers............... 65 Director
Colin F. Raymond............... 27 Director
Irwin T. Vanderhoof............ 70 Director

MARTIN H. RUBY has been a Director of the Company since July 1993. He has
been Chairman of the Board and Chief Executive Officer of the Company since
February 1998. Prior to that time, he had 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 the former
Capital Holding Corporation. From 1980 to 1986, Mr. Ruby held various other
positions with Capital Holding Corporation.

JOHN R. LINDHOLM was elected as a Director of the Company in April 1998. He
has served as President -- Retail Business Division of the Company since January
1997. He had been Executive Vice President and Chief Marketing Officer of both
the retail and institutional business units of the Company since July 1993.
Until November 1993, Mr. Lindholm 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 of ICH Corporation. From
1980 to 1990, he was employed by Capital Holding 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 Capital Holding Corporation. From July 1983 to July 1988, Mr. Carr was a
consulting actuary for Tillinghast, being named a principal of that firm in
1987.

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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.

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 Capital
Holding Corporation. He had also been an associate with the law firm of
Middleton & Reutlinger from 1986 until 1988.

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.

PATRICIA L. WINTER was named Executive Vice President -- Investment
Assurance and Institutional Products of the Company in February 1998. She had
been Senior Vice President -- Mergers/Acquisitions and Investment Assurance
since March 1997. Ms. Winter also served in other various positions within the
Company from April 1992 to February 1997, the last of which was Asset/Liability
Officer. Prior to that time, Ms. Winter was a Director -- Accumulation Product
Development of the ICH Capital Management Group of ICH Corporation from August
1990 to March 1992.

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.

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 Capital Holding 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, he served in various positions within Ernst & Young LLP's
Insurance Practice, the last of which was Audit Manager.

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. and Clarcor, Inc. and other closely and privately held
corporations.

ALAN E. GOLDBERG has been a Director of the Company since February 1998. He
is the head of the Private Equity Group of Morgan Stanley Dean Witter & Co.
("MSDW"), which includes Morgan Stanley Capital Partners, Morgan Stanley Venture
Partners and Morgan Stanley Global Emerging Markets. Mr. Goldberg has

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been a Managing Director of Morgan Stanley & Co. Incorporated ("MS&Co.") since
January 1988. Mr. Goldberg is also a Managing Director and a director of Morgan
Stanley Leveraged Equity Fund II, Inc. ("MSLEF II, Inc."), the general partner
of MSLEF II, and of Morgan Stanley Capital Partners III, Inc. ("MSCP III,
Inc."), the general partner of the general partner of the MSCP Funds. He also
serves as a director of Catalytica, Inc., Amerin Corporation, Jefferson Smurfit
Corporation, Direct Response Corporation, Homeowners Direct Corporation, SITA
Telecommunications Holdings N.V. and other privately held companies.

ROBERT H. NIEHAUS has been a Director of the Company since February 1998.
He has been a Managing Director of MS&Co. since January 1990. Mr. Niehaus is
also a Managing Director and a director of MSLEF II, Inc. and of MSCP III, Inc.
Mr. Niehaus also serves on the Board of Directors of American Italian Pasta
Company, Fort James Corporation, Silgan Holdings Inc., Waterford Wedgwood UK
plc. (of which he is Chairman) and several privately held companies.

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
Holdings 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 Inns Inc.

COLIN F. RAYMOND has been a Director of the Company since January 1997. He
has been an Associate of MS&Co. since April 1996, and is an Associate of MSCP
III, Inc. 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 several privately held companies.

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.

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PRINCIPAL AND SELLING STOCKHOLDERS

The following table provides information, as of April 16, 1998, concerning
beneficial ownership of the Common Stock by (i) the Selling Stockholders; (ii)
each director of the Company; (iii) the Company's Chief Executive Officer,
former Co-Chief Executive Officer and the Company's four other most highly
compensated executive officers for the year ended December 31, 1997; 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, exercised solely by the named person or shared with a spouse.

PRIOR TO THE OFFERING AFTER THE OFFERING
-------------------------------------- -------------------
CLASS A CLASS B CLASS A
COMMON STOCK COMMON STOCK SHARES TO COMMON STOCK
------------------ ----------------- BE SOLD IN -------------------
NUMBER %(2) NUMBER %(2) THE OFFERING(1) NUMBER %(2)
--------- ----- --------- ----- --------------- ---------- ------

The Morgan Stanley Leveraged
Equity Fund II, L.P.(3)(4)
1221 Avenue of the Americas
New York, NY 10020................. 6,001,846 28.0% 1,119,565 57.5% 6,323,130 798,281 3.4%
Morgan Stanley Capital
Partners III, L.P.(3)(4)
1221 Avenue of the Americas
New York, NY 10020................. 3,907,147 18.2 728,827 37.4 4,116,300 519,674 2.2
Morgan Stanley Capital
Investors, L.P.(3)(4)
1221 Avenue of the Americas
New York, NY 10020................. 114,847 * 21,423 1.1 120,995 15,275 *
MSCP III 892 Investors, L.P.(3)(4)
1221 Avenue of the Americas
New York, NY 10020................. 417,239 1.9 77,831 4.0 439,575 55,495 *
Directors and Named Executive
Officers:
Martin H. Ruby..................... 644,120(5) 2.9 -- -- -- 644,120(5) 2.7
(6) (6)
John Franco........................ 605,895(5) 2.8 -- -- -- 605,895(5) 2.5
John R. Lindholm................... 241,679(5) 1.1 -- -- -- 241,679(5) 1.0
David E. Ferguson.................. 178,404(5) * -- -- -- 178,404(5) *
(6) (6)
Edward L. Zeman.................... 18,781(5) * -- -- -- 18,781(5) *
Daniel R. Gattis................... --(5) -- -- -- -- --(5) --
Dudley J. Godfrey, Jr. ............ 35,843 * -- -- -- 35,843 --
Alan E. Goldberg................... -- -- -- -- -- -- --
Robert H. Niehaus.................. -- -- -- -- -- -- --
Edward D. Powers................... 53,985 * -- -- -- 53,985 *
Colin F. Raymond................... -- -- -- -- -- -- --
Irwin T. Vanderhoof................ 8,726 * -- -- -- 8,726 *
All directors and executive officers
as a group (18 persons)............ 2,120,524(5) 9.4 -- -- -- 2,120,524(5) 8.7
(6) (6)

- ---------------
(1) The shares to be sold by the Morgan Stanley Stockholders in the Offering (i)
exclude up to an aggregate of 1,388,725 shares of Class A Common Stock that
may be sold by the Selling Stockholders pursuant to the U.S. Underwriters'
over-allotment option; and (ii) include all of their shares of Class B
Common Stock, which will automatically be converted into shares of Class A
Common Stock upon such sale. See "Description of Capital Stock." As a
result, upon consummation of the Offering, there will no longer by any
shares of Class B Common Stock outstanding.

(2) Based on the number of shares outstanding at, or acquirable within 60 days
of, April 16, 1998.

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(3) Stock ownership information is based upon information set forth in Schedule
13G filed with the Commission with respect to beneficial ownership of the
Company's Class A Common Stock as of December 31, 1997.

(4) The general partner of MSLEF II and the general partner of the general
partner of the MSCP Funds are wholly owned subsidiaries of MSDW.

(5) Includes 432,194, 25,196, 216,218, 145,059, 15,281 and 1,047,834 shares for
Messrs. Ruby, Franco, Lindholm, Ferguson and Zeman, and all 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 16,
1998. Such options were granted pursuant to the ARM Financial Group, Inc.
Stock Option Plan effective as of June 14, 1995, as amended (the "Option
Plan"). Mr. Franco exercised 386,084 of his vested options on February 17,
1998. Mr. Franco's unvested options will continue to vest and become
exercisable in accordance with the terms of his retirement agreement and the
Option Plan. Mr. Gattis exercised his vested options and simultaneously sold
the underlying shares on April 6, 1998, in connection with his resignation
from the Company.

(6) All shares of Class A Common Stock are held directly with the following
exceptions: 32,285 shares held by Mr. Ruby are indirectly owned through
Woodstone Ventures LLC, a limited liability company ("Woodstone Ventures"),
the members of which are Mr. Ruby's two daughters, and 92,000 shares are
indirectly held through Ruby Ventures, L.P., a limited partnership pursuant
to which Mr. Ruby's wife and two daughters are the limited partners, and Mr.
Ruby is the general partner with sole investment control and voting power
over such shares; and Mr. Ferguson beneficially owns 1,412 shares which are
held in the IRA account of his wife.

* Less than one percent.

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SHARES ELIGIBLE FOR FUTURE SALE

Upon the completion of the Offering, the Company will have 23,397,471
shares of Common Stock outstanding, assuming no exercise of any options granted
by the Company. Of these shares, 20,054,764 shares 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 3,342,707 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 Commission. 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 and the Morgan
Stanley 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 in the case of stockholders who are executive
officers, the Company and such directors, executive officers and stockholders
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, lend 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 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 90 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. In addition, pursuant to an agreement entered into between the Company
and John Franco in connection with Mr. Franco's retirement as a director,
officer and employee of the Company, Mr. Franco agreed for the period expiring
on June 10, 1998, without the prior written consent of the Company, not to offer
to sell, contract to sell or otherwise sell, dispose of, loan, pledge or grant
any rights with respect to any shares of Class A Common Stock, any options or
warrants to purchase any shares of Class A Common Stock or any securities
convertible into or exchangeable for shares of Class A Common Stock owned by Mr.
Franco.

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. In connection with his
retirement arrangement, Mr. Franco received "piggyback" registration rights
entitling him to register his shares of Common Stock whenever the Morgan Stanley

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Shareholders exercise their registration rights. 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 90 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.

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.

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DESCRIPTION OF CAPITAL STOCK

GENERAL

The authorized capital stock of the Company consists of 150 million shares
of Class A Common Stock, 50 million shares of Class B Common Stock, and 10
million shares of preferred stock, par value $.01 per share (the "Preferred
Stock"). 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 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 23,397,471 shares of
Class A Common Stock and no shares of Class B Common Stock outstanding, assuming
no outstanding options are exercised.

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 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,

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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 shares of
Preferred Stock as the Perpetual Preferred Stock and has issued 2,000,000 of
such shares. The Perpetual Preferred Stock of the Company is traded on the
American Stock Exchange under the symbol ARM Pr. 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

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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

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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

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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 provides for the classification of the Board of Directors into
three classes with each class of directors serving staggered three-year terms.
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. 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 also provides 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 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. Upon consummation of the
Offering, the Morgan Stanley Stockholders will own in the aggregate less than
25% of the voting Common Stock of the Company. Accordingly, 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 provide that special meetings of
stockholders may only be called by the Chief Executive Officer 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 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 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

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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 provides 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 is 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 do not limit the liability
of directors under federal securities laws and do 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 the 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 has not made such an
election and, as a result, the Company is subject to the provisions of Section
203 of the DGCL.

LISTING

The Class A Common Stock is listed on the NYSE under the symbol "ARM."

REGISTRAR AND TRANSFER AGENT

ChaseMellon Shareholder Services LLC is the Registrar and Transfer Agent
for the Common Stock.

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CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-U.S. HOLDERS OF COMMON STOCK

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 individual resident of the United States, (ii) a
corporation or partnership or other business entity created or organized in or
under the laws of the United States or of any political subdivision thereof,
(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 persons 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%, 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 or, for payments made
after December 31, 1999, a Form W-8). 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%
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, after December 31, 1999, a Non-United States Holder
seeking a reduced rate of withholding under an income tax treaty generally would
be required to provide to the Company a valid Internal Revenue Service Form W-8
certifying that such Non-United States Holder is entitled to benefits under the
income tax treaty. Regulations also provide special rules for determining
whether, for purposes of assessing the applicability of an income tax treaty,
dividends paid to a

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Non-United States Holder that is an entity should be treated as being paid to
the entity itself or to the persons holding an interest in that entity. An
Non-United States Holder that is eligible for a reduced withholding rate may
obtain a refund of any excess amounts withheld by filing an appropriate claim
for a refund with the Internal Revenue Service.

In the case of dividends that are effectively connected with a Non-United
States Holder's conduct of a trade or business within 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% (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, (ii) attributable to a United
States permanent establishment of the Non-United States Holder if an income tax
treaty applies, or (iii) 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 falls under clause (i), (ii) or (iii)
above 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 also 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% 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% 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% on any such gain (less
certain capital losses, if any, from 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.

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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% 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% rate (or would be so subject but for an applicable income tax treaty
which reduces the rate or eliminates the withholding tax). 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, in the
case of dividends paid after December 31, 1999, a Non-United States Holder
generally would be subject to backup withholding at a 31% 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% or more of whose gross income for certain
periods is effectively connected with the conduct of a trade or business in the
United States, (iii) a foreign broker that is a "controlled foreign corporation"
for United States federal income tax purposes or (iv) after December 31, 1999, a
foreign partnership with certain connections to the United States, 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 in a timely manner to the IRS.

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UNDERWRITERS

Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the U.S.
Underwriters named below for whom MS&Co., Donaldson, Lufkin & Jenrette
Securities Corporation, PaineWebber Incorporated and Schroder & Co. Inc. are
acting as U.S. Representatives, and the International Underwriters named below
for whom Morgan Stanley & Co. International Limited, Donaldson, Lufkin &
Jenrette International, PaineWebber International (U.K.) Ltd. and J. Henry
Schroder & Co. Limited are acting as International Representatives, have
severally agreed to purchase, and the Selling Stockholders have 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......................... 1,812,500
Donaldson, Lufkin & Jenrette Securities Corporation....... 1,812,500
PaineWebber Incorporated.................................. 1,812,500
Schroder & Co. Inc. ...................................... 1,812,500
J.C. Bradford & Co. ...................................... 250,000
Chase Securities Inc. .................................... 250,000
Chatsworth Securities LLC................................. 125,000
Conning & Company......................................... 125,000
Credit Lyonnais Securities (USA) Inc. .................... 250,000
Fox-Pitt, Kelton Inc. .................................... 125,000
J.J.B. Hilliard, W.L. Lyons, Inc. ........................ 125,000
Morgan Keegan & Company, Inc. ............................ 125,000
NatCity Investments, Inc. ................................ 125,000
Piper Jaffray Inc. ....................................... 125,000
Wheat, First Securities, Inc. ............................ 125,000
----------
Subtotal............................................... 9,000,000
----------
International Underwriters:
Morgan Stanley & Co. International Limited................ 500,000
Donaldson, Lufkin & Jenrette International................ 500,000
PaineWebber International (U.K.) Ltd. .................... 500,000
J. Henry Schroder & Co. Limited........................... 500,000
----------
Subtotal............................................... 2,000,000
----------
Total............................................. 11,000,000
==========

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 described 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 within the United States or Canada or to a 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

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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 the 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 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 from 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,

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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 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
$.55 per share under the public offering price. Any Underwriter may allow, and
such dealers may reallow, a concession not in excess of $.10 per share to other
Underwriters or to certain dealers. After the initial offering of the Shares,
the offering price and other selling terms may from time to time be varied by
the Representatives.

Pursuant to the Underwriting Agreement, the Selling 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 1,388,725 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.

Each of the Company, its directors and executive officers and the Morgan
Stanley 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 limitations in the case of stockholders who are executive officers, the
Company and such directors, executive officers and stockholders 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, lend 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 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 90
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.

In order to facilitate the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
shares of Class A Common Stock. Specifically, the Underwriters may over-allot in
connection with the Offering, creating a short position in the shares of Class A
Common Stock for their own account. In addition, to cover over-allotments or to
stabilize the price of the shares of Class A Common Stock, the Underwriters may
bid for, and purchase, shares of 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 shares of Class A Common Stock
in the Offering, if the syndicate repurchases previously distributed shares of
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 shares of 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.

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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. Pursuant to the provisions of Rule 2720
of the Conduct Rules of the NASD, 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.

Certain of the Underwriters and their respective affiliates have, from time
to time, performed various investment banking and financial advisory services
for, and engaged in general financing and banking transactions with, the Company
for which they have received usual and customary fees.

Chase Securities Inc., one of the U.S. Underwriters, is an affiliate of the
Chase Manhattan Bank, which is the agent bank and a lender under the Credit
Agreement.

PaineWebber, one of the U.S. Underwriters, distributes certain of the
Company's insurance subsidiaries' products, for which it receives customary
commissions. See "Risk Factors -- Dependence on Certain Third-Party
Relationships."

The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act. The Company has agreed to pay the expenses of the Selling
Stockholders (excluding underwriting discounts and commissions) in connection
with the Offering.

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 MSDW, MS&Co., 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.

EXPERTS

The consolidated financial statements and financial statement schedules for
the Company at December 31, 1997 and 1996, and for each of three years in the
period ended December 31, 1997, appearing in and/or incorporated by reference
into this Prospectus and Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their reports thereon appearing
elsewhere herein and/or incorporated herein by reference, and are included
and/or incorporated by reference in reliance upon such reports 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 Commission. Such reports, proxy statements and
other information can be inspected and copied at the Public Reference Section of
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission'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
Commission, Washington, D.C. 20549, at prescribed rates. The Commission
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

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with the Commission. The Class A Common Stock is traded on the American Stock
Exchange and 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 Commission a Registration Statement on Form
S-3 under the Securities Act with respect to the securities offered by this
Prospectus. The Registration Statement has been filed electronically through the
Commission's Electronic Data Gathering, Analysis, and Retrieval System and may
be accessed electronically by means of the Commission's home page on the
Internet at http://www.sec.gov. As permitted by the rules and regulations of the
Commission, 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 Commission at its principal office in Washington, D.C. upon payment of
the charges prescribed by the Commission.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents filed by the Company with the Commission are
incorporated herein by reference:

(a) The Annual Report of the Company on Form 10-K for the year ended
December 31, 1997;

(b) The Current Reports of the Company on Form 8-K dated March 4, 1998
and April 22, 1998; and

(c) The description of Common Stock contained in the Company's
Registration Statement on Form 8-A filed with the Commission on May 23,
1997, including any amendment or report filed for the purposes of updating
such description.

All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering made hereby shall be
deemed to be incorporated by reference into this Prospectus and to be a part
hereof from the date of filing of such documents. Any statement contained herein
or in a document all or any portion of which is incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus. As used herein, the
terms "Prospectus" and "herein" mean this Prospectus, including the documents
incorporated by reference, as the same may be amended, supplemented, or
otherwise modified from time to time. Statements contained in this Prospectus as
to the contents of any contract or other documents referred to herein do not
purport to be complete and are qualified in all respects by reference to all of
the provisions of such contract or other document.

The Company will provide without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a copy
of any or all of the documents referred to above which have been or may be
incorporated in this Prospectus by reference, other than exhibits to such
documents which are not specifically incorporated by reference in such
documents. Requests for such documents should be directed to: Peter S. Resnik,
Treasurer, ARM Financial Group, Inc., 515 West Market Street, Louisville,
Kentucky 40202 (telephone (502) 582-7900).

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GLOSSARY OF SELECTED INSURANCE TERMS

Adjusted capital and
surplus....................... The sum of statutory-basis capital 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....... 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.

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.

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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 and funding
agreements.................... 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.

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).

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Nonguaranteed 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.

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.

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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: (i) an
investment portfolio owned directly by the
plan; and (ii) 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.

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 the 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.

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INDEX TO FINANCIAL STATEMENTS

PAGE
----

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES:
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets at December 31, 1997 and 1996... F-3
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995.......................... F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1997, 1996
and 1995.................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.......................... F-6
Notes to Consolidated Financial Statements.................. F-7

F-1
82

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

/s/ ERNST & YOUNG LLP

Louisville, Kentucky
February 10, 1998

F-2
83

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

CARRYING AMOUNT FAIR VALUE
----------------------- ------------------------
DECEMBER 31, DECEMBER 31,
----------------------- ------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(IN THOUSANDS)

ASSETS
Cash and investments:
Fixed maturities, available-for-sale, at fair value
(amortized cost: 1997 -- $4,021,495;
1996 -- $3,048,834)............................... $4,068,386 $3,054,513 $4,068,386 $3,054,513
Equity securities, at fair value (cost:
1997 -- $28,177; 1996 -- $21,268)................. 28,342 22,552 28,342 22,552
Mortgage loans on real estate....................... 16,429 36,879 16,429 36,879
Policy loans........................................ 126,114 123,466 126,114 123,466
Cash and cash equivalents........................... 228,206 110,067 228,206 110,067
---------- ---------- ---------- ----------
Total cash and investments........................ 4,467,477 3,347,477 4,467,477 3,347,477
Assets held in separate accounts:
Guaranteed.......................................... 1,266,796 261,823 1,266,796 261,823
Nonguaranteed....................................... 1,173,088 873,225 1,173,088 873,225
Accrued investment income............................. 44,546 36,233 44,546 36,233
Value of insurance in force........................... 25,975 52,024 -- --
Deferred policy acquisition costs..................... 87,170 59,001 -- --
Goodwill.............................................. 6,523 7,636 6,523 7,636
Deferred federal income taxes......................... 31,049 35,604 51,887 42,653
Other assets.......................................... 35,800 28,641 35,800 28,641
---------- ---------- ---------- ----------
Total assets................................. $7,138,424 $4,701,664 $7,046,117 $4,597,688
========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Customer deposits................................... $4,242,578 $3,294,174 $4,218,297 $3,199,638
Customer deposits in separate accounts:
Guaranteed........................................ 1,254,801 261,823 1,224,551 249,132
Nonguaranteed..................................... 1,160,595 868,336 1,109,277 829,253
Long-term debt...................................... 38,000 40,000 38,000 40,000
Accounts payable and accrued expenses............... 18,741 22,684 18,741 22,684
Payable for investment securities purchased......... 69,286 10,431 69,286 10,431
Payable to reinsurer................................ 8,800 10,000 8,800 10,000
Other liabilities................................... 38,078 12,274 38,078 12,274
---------- ---------- ---------- ----------
Total liabilities................................. 6,830,879 4,519,722 6,725,030 4,373,412
Contingencies.........................................
Shareholders' equity:
Preferred stock, $.01 par value, $25.00 stated
value; 2,300,000 shares authorized; 2,000,000
shares issued and outstanding..................... 50,000 50,000
Class A Common Stock, $.01 par value; 150,000,000
and 19,259,680 shares authorized, respectively;
21,316,068 and 16,799,976 shares issued and
outstanding, respectively......................... 213 *
Class B Common Stock, $.01 par value; 50,000,000 and
762,480 shares authorized, respectively; 1,947,646
and 706,000 shares issued and outstanding,
respectively...................................... 19 *
Additional paid-in capital.......................... 211,430 124,609
Net unrealized gains on available-for-sale
securities........................................ 20,300 3,669
Retained earnings................................... 25,583 3,664
---------- ----------
Total shareholders' equity........................ 307,545 181,942 321,087 224,276
---------- ---------- ---------- ----------
Total liabilities and shareholders' equity... $7,138,424 $4,701,664 $7,046,117 $4,597,688
========== ========== ========== ==========

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

See accompanying notes.
F-3
84

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Investment income....................................... $ 329,979 $ 250,031 $ 196,024
Interest credited on customer deposits.................. (247,418) (182,161) (146,867)
--------- --------- ---------
Net investment spread.............................. 82,561 67,870 49,157
Fee income:
Variable annuity fees................................. 14,630 10,786 7,238
Asset management fees................................. 8,595 5,780 3,161
Other fee income...................................... 1,386 1,267 949
--------- --------- ---------
Total fee income................................... 24,611 17,833 11,348
Other income and expenses:
Surrender charges..................................... 4,482 5,024 3,339
Operating expenses.................................... (32,528) (31,055) (22,957)
Commissions, net of deferrals......................... (2,218) (2,372) (1,557)
Interest expense on debt.............................. (2,517) (3,146) (3,461)
Amortization:
Deferred policy acquisition costs.................. (10,416) (6,835) (2,932)
Value of insurance in force........................ (9,293) (7,320) (7,104)
Acquisition-related deferred charges............... (503) (1,503) (9,920)
Goodwill........................................... (424) (488) (358)
Non-recurring charges:
Stock-based compensation........................... (8,145) -- --
Other.............................................. (6,678) (5,004) --
Other, net............................................ (386) (5,366) (687)
--------- --------- ---------
Total other income and expenses.................... (68,626) (58,065) (45,637)
Realized investment gains............................... 3,192 907 4,048
--------- --------- ---------
Income before income taxes.............................. 41,738 28,545 18,916
Income tax expense...................................... (14,139) (5,167) (7,026)
--------- --------- ---------
Net income.............................................. 27,599 23,378 11,890
Dividends on preferred stock............................ (4,750) (4,750) (4,750)
--------- --------- ---------
Net income applicable to common shareholders............ $ 22,849 $ 18,628 $ 7,140
========= ========= =========
Net income per common share (basic)..................... $ 1.11 $ 1.06 $ 0.49
========= ========= =========
Net income per common and common equivalent share
(diluted)............................................. $ 1.07 $ 1.06 $ 0.49
========= ========= =========
Cash dividends paid per common share.................... $ 0.04 $ -- $ --
========= ========= =========

See accompanying notes.
F-4
85

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

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

Balance, January 1, 1995........ $50,000 $ * $ * $ 62,920 $(104,949) $(22,104) $(14,133)
Issuance of 6,897,620 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 18,356 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
Recapitalization of Class A
and Class B common stock.... 156 19 (175) --
Issuance of 5,750,000 shares
of Class A Common Stock from
initial public offering..... 57 78,755 78,812
Issuance of 7,743 shares of
Class A Common Stock from
exercise of stock options... * 96 96
Net income.................... 27,599 27,599
Dividends on preferred
stock....................... (4,750) (4,750)
Dividends on common stock..... (930) (930)
Stock-based compensation
charge...................... 8,145 8,145
Change in net unrealized gains
on available-for-sale
securities.................. 16,631 16,631
------- ---- --- -------- --------- -------- --------
Balance, December 31, 1997...... $50,000 $213 $19 $211,430 $ 20,300 $ 25,583 $307,545
======= ==== === ======== ========= ======== ========

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

See accompanying notes.
F-5
86

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)

CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income.................................................. $ 27,599 $ 23,378 $ 11,890
Adjustments to reconcile net income to cash flows provided
by operating activities:
Interest credited on general account customer deposits.... 212,964 172,202 136,824
Stock-based compensation charge........................... 8,145 -- --
Realized investment gains................................. (3,192) (907) (4,048)
Amortization of value of insurance in force and deferred
policy acquisition costs................................ 19,709 14,155 10,036
Other amortization........................................ 1,426 1,374 12,406
Deferral of policy acquisition and other costs............ (40,033) (24,202) (24,505)
Deferred tax expense...................................... 1,003 2,554 6,385
(Increase) decrease in accrued investment income.......... (8,313) 149 (1,609)
Changes in other assets and liabilities................... (3,243) 4,171 (9,020)
----------- ----------- -----------
Cash flows provided by operating activities............. 216,065 192,874 138,359
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments:
Purchases................................................. (4,710,312) (2,716,010) (1,498,623)
Maturities and redemptions................................ 445,772 241,391 205,319
Sales..................................................... 3,355,461 1,922,689 1,197,468
Other investments:
Purchases................................................. (72,283) (55,995) (7,891)
Maturities and redemptions................................ 20,806 7,310 24,377
Sales..................................................... 62,196 42,961 36,119
Policy loans, net........................................... (2,648) (5,938) (6,428)
Transfers (to) from the separate accounts:
Purchase of assets held in separate accounts.............. (1,066,348) (302,993) (226,812)
Proceeds from sale of assets held in separate accounts.... 110,524 83,077 45,249
Cash and cash equivalents acquired in excess of purchase
price paid for substantially all assets of SBM Company.... -- -- 36,490
----------- ----------- -----------
Cash flows used in investing activities..................... (1,856,832) (783,508) (194,732)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Amounts received from customers from the sale of general and
separate account products................................. 2,268,496 1,072,323 425,628
Amounts paid to customers for benefits and withdrawals
related to general and separate account products.......... (579,618) (441,944) (406,977)
Net proceeds from issuance of common stock.................. 80,308 184 63,505
Organizational, debt and stock issuance costs............... (1,400) -- (2,000)
Principal payment on long-term debt......................... (2,000) -- --
Change in payable to reinsurer.............................. (1,200) 10,000 --
Dividends on common stock................................... (930) -- --
Dividends on preferred stock................................ (4,750) (4,750) (4,750)
Change in repurchase agreement liability.................... -- (12,008) 12,008
----------- ----------- -----------
Cash flows provided by financing activities................. 1,758,906 623,805 87,414
----------- ----------- -----------
Increase in cash and cash equivalents....................... 118,139 33,171 31,041
Cash and cash equivalents at beginning of year.............. 110,067 76,896 45,855
----------- ----------- -----------
Cash and cash equivalents at end of year.................... $ 228,206 $ 110,067 $ 76,896
=========== =========== ===========
Supplemental cash flow information:
Interest paid on debt..................................... $ 1,837 $ 2,613 $ 2,736
=========== =========== ===========
Income taxes paid......................................... $ 2,943 $ 7,230 $ --
=========== =========== ===========

See accompanying notes.
F-6
87

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 growing asset
accumulation business with particular emphasis on retirement savings and
investment products. 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 independent broker-dealers,
independent agents, stockbrokers, and financial institutions. The Company offers
institutional products, such as funding agreements and guaranteed investment
contracts ("GICs") directly to bank trust departments, plan sponsors, cash
management funds, corporate treasurers, and other institutional investors.

The Company derives its earnings from the net investment spread and fee
income generated by the assets it manages. With retail and institutional spread
products offered by the Company, 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 (e.g., LIBOR, S&P 500 -- both
defined below). 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 retail variable products offered by the
Company, the Company's subsidiaries receive a fee in exchange for managing
deposits, and the customer accepts investment risk associated with their chosen
mutual fund options. Because the investment risk is borne by the customer, this
business requires significantly less capital support than spread-based business.

The Company conducts its different businesses through a variety of
subsidiaries. Retail fixed, indexed and variable annuities and institutional
funding agreements and 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 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 received initial start-up capital as partial funding for the
acquisition of the Integrity Companies through the private issuance of common
stock in November 1993. In June 1995, the Company received additional capital to
fund the acquisition of substantially all of the assets and business operations
of SBM Company ("SBM") also through the private issuance of common stock. Such
capital was primarily provided by certain private equity funds sponsored by
Morgan Stanley Dean Witter & Co. (the "Morgan Stanley Stockholders"). In June
1997, the Company completed an initial public offering (the "Offering") of
common stock. The Morgan Stanley Stockholders owned approximately 91% of the
outstanding shares of the Company's common stock prior to the Offering and, as a
result of the Offering, owned approximately 53% at December 31, 1997. At
December 31, 1997, approximately 40% of the outstanding shares of the Company's
common stock was publicly held, with the remainder being nonregistered common
stock issued to certain original private investors of the Company (excluding the
Morgan Stanley Stockholders).

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 $6.9 billion as of
December 31, 1997.

Basis of Presentation

The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") and include the accounts of
the Company and its 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.

F-7
88
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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 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 in the consolidated statements of income.

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

F-8
89
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. The separate accounts include customer
deposits and related invested assets, for retail and institutional spread
products (guaranteed) and retail variable products (nonguaranteed). Separate
account assets and liabilities are carried at estimated fair values. Investment
income and interest credited on customer deposits related to spread product
deposits are included as such in the statements of income. The Company receives
administrative fees for managing retail variable product deposits and other fees
for assuming mortality and certain expense risks. Such fees are included in
Variable Annuity Fees in the statements of income.

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 S&P 500
Composite Stock Price 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. As of December 31, 1997 and 1996, 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, funding agreements, 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, 1997.

Recognition of Fee Income

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 statements of income.

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.

F-9
90
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Net Income Per Share of Common Stock

In 1997, the Company adopted the provisions of SFAS No. 128, "Earnings Per
Share," which superseded Accounting Principles Board Opinion No. 15 of the same
name. Earnings per share for all periods presented reflect the adoption of SFAS
No. 128. SFAS No. 128 requires companies to present basic earnings per share,
and, if applicable, diluted earnings per share, instead of primary and fully
diluted earnings per share. Basic earnings per share excludes dilution and is
computed by dividing net income applicable to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if options
to issue common stock were exercised into common stock.

2. ACQUISITIONS

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, State Bond and
Mortgage Life Insurance Company ("SBM Life"), 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 aggregate purchase price for the acquisition was $38.8 million. The
Company financed the acquisition by issuing approximately 6.9 million shares of
the Company's Class A common stock, primarily to the Morgan Stanley
Stockholders, for an aggregate sale price of $63.5 million. The Company used the
proceeds from the issuance of new common equity in excess of the aggregate
purchase price for the acquisition to make a $19.9 million capital contribution
to SBM Life and acquire all of the issued and outstanding capital stock of SBM
Certificate Company from SBM Life for a purchase price of $3.3 million.

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"), including its third-party account
asset management operations. KBIMA provided investment advisory services to the
Company during 1994. The business acquired became part of the then newly-formed
ARM Capital Advisors, Inc. ("ARM Capital Advisors"). ARM Capital Advisors is a
registered investment advisor and wholly owned subsidiary of the Company. ARM
Capital Advisors' management of third-party accounts generated asset management
fees of $8.6 million, $4.2 million and $2.2 million during 1997, 1996 and 1995,
respectively. Although third-party assets managed by ARM Capital Advisors grew
since the acquisition, the Company believes that market attitudes towards
developing an asset management business for defined benefit pension plans within
a holding company structure consisting predominantly of insurance companies
constrained ARM Capital Advisors' growth. Accordingly, on November 7, 1997, the
Company transferred substantially all of the assets and operations of ARM
Capital Advisors to a newly formed subsidiary, ARM

F-10
91
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Capital Advisors, LLC ("New ARMCA"), and sold an 80% interest therein to ARM
Capital Advisors Holdings, LLC, an entity controlled by Emad A. Zikry, the
President of ARM Capital Advisors prior to the sale. The Company recognized an
immaterial gain on the sale. The Company has continued to engage New ARMCA as
its investment adviser but will consider retaining other investment management
firms as it deems appropriate. The terms of the sale provided for a transition
period following the sale through December 31, 1997 whereby the Company (i)
provided all accounting and administrative services required by New ARMCA and
paid all of its costs and expenses and (ii) received all of the gross revenues
of New ARMCA. After the sale, ARM Capital Advisors was renamed Integrity Capital
Advisors, Inc.

Integrity Companies

On November 26, 1993, the Company completed the acquisition of the
Integrity Companies from the National Mutual Life Association of Austalasia
Limited ("National Mutual"). In connection with the acquisition, National Mutual
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.

3. INVESTMENTS

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

GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)

DECEMBER 31, 1997:
Fixed Maturities:
Mortgage-backed securities.............. $1,828,062 $29,881 $ 3,456 $1,854,487
Corporate securities.................... 1,390,274 35,875 16,134 1,410,015
Asset-backed securities................. 400,276 1,981 1,832 400,425
U.S. Treasury securities and obligations
of U.S. government agencies........... 318,583 1,464 371 319,676
Foreign governments..................... 79,466 1,633 1,867 79,232
Obligations of state and political
subdivisions.......................... 4,834 12 295 4,551
---------- ------- ------- ----------
Total fixed maturities................ 4,021,495 70,846 23,955 4,068,386
Equity securities..................... 28,177 309 144 28,342
---------- ------- ------- ----------
Total available-for-sale
securities....................... $4,049,672 $71,155 $24,099 $4,096,728
========== ======= ======= ==========
DECEMBER 31, 1996:
Fixed Maturities:
Mortgage-backed securities.............. $1,459,851 $19,393 $11,644 $1,467,600
Corporate securities.................... 992,003 13,260 13,693 991,570
Asset-backed securities................. 299,365 686 1,951 298,100
U.S. Treasury securities and obligations
of U.S. government agencies........... 247,041 1,363 1,481 246,923
Foreign governments..................... 45,611 611 462 45,760
Obligations of state and political
subdivisions.......................... 4,963 3 406 4,560
---------- ------- ------- ----------
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
========== ======= ======= ==========

F-11
92
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The amortized cost and estimated fair value of available-for-sale
securities, by contractual maturity, are shown below:

DECEMBER 31, 1997
------------------------
ESTIMATED
COST FAIR VALUE
---------- ----------
(IN THOUSANDS)

Due in one year or less............................. $ 13,522 $ 13,584
Due after one year through five years............... 143,662 143,102
Due after five years through ten years.............. 335,043 333,618
Due after ten years................................. 1,300,930 1,323,169
Asset-backed securities............................. 400,276 400,426
Mortgage-backed securities.......................... 1,828,062 1,854,487
Equity securities................................... 28,177 28,342
---------- ----------
Total available-for-sale securities....... $4,049,672 $4,096,728
========== ==========

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 1997, 1996 and 1995, gross gains of $45.0 million, $33.5 million and
$24.1 million, respectively, and gross losses of $36.0 million, $18.9 million
and $15.6 million, respectively, were realized on sales of fixed maturities. For
the years ended December 31, 1997 and 1996, the Company recorded losses of $4.0
million and $15.2 million related to write-downs to the fair value of
investments in fixed income securities. For the years ended December 31, 1997
and 1996, the recognition of net realized gains on investments supporting
customer deposits resulted in an increase in the amortization of value of
insurance in force of $3.0 million and $1.9 million, respectively, and in an
increase in the amortization of deferred policy acquisition costs of $0.4
million and $28,000, 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,
-------------------
1997 1996
-------- -------
(IN THOUSANDS)

Net unrealized gains on available-for-sale securities
before adjustments for the following:................. $ 47,056 $ 6,963
Amortization of value of insurance in force and
deferred policy acquisition costs.................. (15,825) (1,318)
Deferred federal income taxes......................... (10,931) (1,976)
-------- -------
Net unrealized gains on available-for-sale
securities....................................... $ 20,300 $ 3,669
======== =======

Investments, aggregated by issuer, in excess of 10% of shareholders' equity
(before net unrealized gains on available-for-sale securities) at December 31,
1997 and 1996, other than investments in affiliates and investments issued or
guaranteed by the United States government are as follows. Such securities were
99.8% and 97.4% investment grade at December 31, 1997 and 1996, respectively.

F-12
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ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

1997:
Fixed maturities:
Aames Mortgage Trust................. $ 31.7
Aircraft Lease Portfolio
Securities......................... 34.6
Bear Stearns Mortgage Securities .... 39.7
Countrywide Mortgage Backed.......... 39.1
CRAVE Trust.......................... 52.7
Delta Funding Home Equity Loan
Trust.............................. 31.6
DLJ Mortgage Acceptance
Corporation........................ 75.9
First Chicago/Lennar................. 34.5
General Electric Capital Mortgage
Services........................... 33.4
Greenwich Capital Acceptance......... 50.6
Headlands Mortgage Securities,
Inc................................ 30.5
J.P. Morgan & Company................ 35.9
LB Mortgage Trust.................... 62.9
Merit Securities Corporation......... 55.3
Norwest Asset Securities
Corporation........................ 64.5
PNC Mortgage Securities
Corporation........................ 46.7
Residential Accredit Loans........... 47.1
Residential Asset Securities Trust... 50.4
Residential Funding.................. 47.3
Salomon Brothers Mortgage Securities
VII................................ 95.4
Sears Mortgage Securities............ 29.8
Structured Asset Securities
Corporation........................ 64.6
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

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

1996 (CONTINUED):
Fixed maturities (continued):
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
Paine Webber 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
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

The components of investment income were:

YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)

Fixed maturities................................... $300,327 $228,473 $177,123
Policy loans....................................... 8,925 8,629 7,579
Mortgage loans on real estate...................... 4,038 4,321 6,712
Cash and cash equivalents.......................... 13,514 5,705 3,096
Income from other investments...................... 3,175 2,903 1,514
-------- -------- --------
Investment income............................. $329,979 $250,031 $196,024
======== ======== ========

F-13
94
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At December 31, 1997, the fair value of futures contracts, call and put
options and interest rate swaps held by the Company was $11.3 million. These
derivative financial instruments are used to hedge specific market value risks
associated with the Company's equity-indexed annuity products and separate
account seed money investments and interest rate risks associated with certain
institutional spread deposits. The derivative financial instruments are not held
for trading purposes and are classified on the Company's balance sheet as assets
held in guaranteed separate accounts. The derivative financial instruments hedge
items carried at fair value and are therefore marked to market with unrealized
gains and losses recognized through the separate account statements of
operations. The Company is exposed to credit-related losses in the event of
nonperformance by counter parties to the derivative financial instruments, but
does not expect any counter parties to fail to meet their obligations given
their high credit ratings.

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 and Policy Loans

The carrying amount of mortgage loans on real estate and 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

The fair value of assets held in guaranteed separate accounts is primarily
based on quoted market prices of fixed maturity securities held in such separate
accounts. The fair value of customer deposits in guaranteed separate accounts is
based on the account values of the underlying policies, plus or minus market
value

F-14
95
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

adjustments. Fair values of assets and customer deposits in nonguaranteed
separate accounts is based on the quoted market prices of the underlying mutual
funds. The reduction in fair values for customer deposits in separate accounts
reflect the present value of future gross margins from net investment spread,
product charges, distribution fees, and surrender charges.

Goodwill

The carrying amount of goodwill approximates fair value.

Deferred Policy Acquisition Costs and Value of Insurance In force

Deferred policy acquisition costs and value of insurance in force 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 customer deposits in separate accounts.

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

The fair value of customer deposits for single premium immediate annuity
contracts is based on discounted cash flow calculations using rates from a
current market yield curve for assets with similar durations. The fair value
amounts of the remaining customer deposits, primarily related to deferred
annuity contracts, single premium endowment contracts, and funding agreements
and GICs, represent the estimated present value of cash flows using current
market rates and the duration of the liabilities.

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.

F-15
96
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. VALUE OF INSURANCE IN FORCE

The following provides information on the value of insurance in force
during 1997, 1996 and 1995:

YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)

Amortization excluding effects of realized and unrealized
investment gains and losses.............................. $(11,798) $(10,474) $(10,490)
Interest accrued on unamortized balance.................... 2,505 3,154 3,386
-------- -------- --------
Net amortization as reported in the statements of income... (9,293) (7,320) (7,104)
Amortization related to realized investment gains and
losses(a)................................................ (2,987) (1,890) (2,562)
Change in amortization related to unrealized gains and
losses on available-for-sale securities(b)............... (13,769) 13,180 (14,170)
Addition resulting from the acquisition of SBM Life........ -- -- 61,131
Recognition of acquired tax benefits....................... -- (2,997) (18,004)
-------- -------- --------
Net change in value of insurance in force.................. (26,049) 973 19,291
Balance at beginning of period............................. 52,024 51,051 31,760
-------- -------- --------
Balance at end of period................................... $ 25,975 $ 52,024 $ 51,051
======== ======== ========

- ---------------
(a) Included in Realized Investment Gains in the statements of income.

(b) Included in Change in Net Unrealized Gains and Losses on Available-for-Sale
Securities in the statements 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: 1998 -- $7.0 million;
1999 -- $6.1 million; 2000 -- $4.9 million; 2001 -- $4.0 million; and
2002 -- $3.4 million.

6. NON-RECURRING CHARGES

The Company recorded non-recurring charges of $14.8 million for the year
ended December 31, 1997, including a one-time non-cash stock-based compensation
charge of $8.1 million (see Note 10), and costs primarily related to the
relocation and consolidation of the Company's operations facilities from
Columbus, Ohio to Louisville, Kentucky. The Company recorded a $5.0 million
non-recurring charge in 1996, including $3.2 million for facilities
consolidation charges and costs of $1.8 million primarily related to merger and
acquisition activities that did not result in a transaction.

7. DEBT

Long-Term Debt

On June 24, 1997, the Company entered into a Credit Agreement to provide
the Company with a new senior revolving credit facility. The maximum amount that
may be borrowed under this Credit Agreement is $75 million, of which $38 million
was drawn on June 24, 1997 and used to repay $38 million of outstanding
borrowings under the Company's prior Credit Agreement, which was terminated.
Borrowings under the new Credit Agreement bear a floating interest rate equal to
the London Interbank Offered Rate ("LIBOR") plus a percentage ranging from
0.325% to 0.875%, depending on the ratings of the Company's preferred stock. The
Credit Agreement has a variable annual commitment fee which can range from 0.10%
to 0.25% of the unused portion of the borrowing, depending on the ratings of the
Company's preferred stock. The Credit Agreement

F-16
97
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

matures on June 24, 2002, subject to optional prepayment and contingent upon the
Company's compliance with various financial covenants.

Payable to Reinsurer

The Company holds $8.8 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 quarterly installments over the next five
years.

8. INCOME TAXES

The components of the provision for income tax expense consist of the
following:

YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- ------ ------
(IN THOUSANDS)

Current......................................... $13,136 $2,613 $ 641
Deferred........................................ 1,003 2,554 6,385
------- ------ ------
Total income tax expense.............. $14,139 $5,167 $7,026
======= ====== ======

Significant components of the deferred tax liabilities and assets as of
December 31, 1997 and 1996 were:

1997 1996
------- -------
(IN THOUSANDS)

Deferred tax assets:
Difference between GAAP and tax reserves............... $78,404 $72,513
Net operating loss carryforward........................ 13,863 11,783
Other.................................................. 16,285 10,752
------- -------
Total deferred tax assets........................... 108,552 95,048
Valuation allowance for deferred tax assets............ (36,568) (38,798)
------- -------
Net deferred tax assets............................. 71,984 56,250
Deferred tax liabilities:
Deferred policy acquisition costs...................... 26,096 16,910
Net unrealized gains on available-for-sale
securities.......................................... 10,931 1,976
Other.................................................. 3,908 1,760
------- -------
Total deferred tax liabilities...................... 40,935 20,646
------- -------
Total deferred federal income taxes............ $31,049 $35,604
======= =======

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 the acquisition
date, 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 $8.0 million, $11.0 million and $27.9 million
during 1997, 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 $0.7 million during 1997 and $1.0 million during

F-17
98
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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 company income tax return.

Income tax expense differs from that computed using the federal income tax
rate of 35% for the following reasons:

YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------- ------- ------
(IN THOUSANDS)

Income tax expense at statutory rate........................ $14,608 $ 9,991 $6,621
Increase (decrease) in valuation allowance.................. (1,540) (5,490) 1,052
Other....................................................... 1,071 666 (647)
------- ------- ------
Total income tax expense.......................... $14,139 $ 5,167 $7,026
======= ======= ======

The Company had net operating loss carryforwards of approximately $39.6
million, $33.7 million and $43.8 million at December 31, 1997, 1996 and 1995,
respectively. The net operating loss carryforwards expire in years 2005 to 2012.

F-18
99
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 reported in the
accompanying statements of income:

YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
-------- ------- --------
(IN THOUSANDS)

Insurance subsidiaries (statutory-basis)(1)................. $ 49,718 $38,769 $ 31,179
Non-insurance companies(2).................................. 3,273 927 255
-------- ------- --------
Consolidated statutory-basis pretax operating income...... 52,991 39,696 31,434(3)
Reconciling items:
Amortization of interest maintenance reserve.............. (3,920) (4,091) (3,905)
Adjustments to customer deposits.......................... (16,004) (2,324) (5,994)
Interest expense on debt.................................. (2,517) (3,146) (3,461)
Deferral of policy acquisition costs, net of
amortization........................................... 29,331 16,223 16,650
Amortization of value of insurance in force............... (9,293) (7,320) (7,104)
Amortization of acquisition-related deferred charges and
goodwill............................................... (927) (1,991) (10,278)
Adjustments to invested asset carrying values at
acquisition date....................................... (107) (572) (769)
Non-recurring charges..................................... (14,823) (5,004) --
Realized investment gains................................. 3,192 907 4,048
Other..................................................... 3,815 (3,833) (1,705)
-------- ------- --------
GAAP-basis:
Income before income taxes................................ 41,738 28,545 18,916
Income tax expense........................................ (14,139) (5,167) (7,026)
-------- ------- --------
Net income................................................ 27,599 23,378 11,890
Dividends on preferred stock.............................. (4,750) (4,750) (4,750)
-------- ------- --------
Net income applicable to common shareholders.............. 22,849 18,628 7,140
Exclude, net of tax:
Realized investment gains.............................. (2,075) (590) (2,631)
Non-recurring charges.................................. 14,823 4,539 --
Income from defined benefit pension plan asset
management operations................................ (1,448) (350) --
-------- ------- --------
Operating earnings(4)..................................... $ 34,149 $22,227 $ 4,509
======== ======= ========

- ---------------
(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, non-recurring charges and income from
defined benefit pension plan asset management operations which were sold
during November 1997.

F-19
100
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. For 1998, the maximum dividend payments that may be paid by
Integrity to the Company without prior regulatory approval are $38.2 million.

The consolidated statutory capital and surplus of the Company's insurance
subsidiaries was $211.8 million and $163.8 million at December 31, 1997 and
1996, respectively. In addition, the consolidated statutory asset valuation
reserve ("AVR") of the Company's insurance subsidiaries was $24.9 million and
$15.6 million at December 31, 1997 and 1996, respectively (excluding statutory
voluntary investment reserves of $5.3 million and $12.5 million). The AVR is
generally added to statutory capital and surplus for purposes of assessing
capital adequacy against various measures used by rating agencies and
regulators.

The National Association of Insurance Commissioners 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, 1997 and 1996, 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 (equivalent to an annual amount of $2.375
per share). 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.

Initial Public Offering of Common Stock

In June 1997, the Company completed an initial public offering of 9.2
million shares of Class A common stock, par value $.01 per share (the "Class A
Common Stock"), of which 5.75 million shares were sold by the Company and 3.45
million shares were sold by the Morgan Stanley Stockholders. The net proceeds of
the Offering to the Company were $78.8 million, after deducting underwriting
discounts and commissions and other expenses of the Offering payable by the
Company. On June 30, 1997, the Company used a portion of such net proceeds to
make a capital contribution to its primary insurance subsidiary, Integrity,
thereby strengthening Integrity's capital base to provide for future growth. The
Company plans to also use the net proceeds to enhance the Company's retail
market presence, to consolidate operating locations and for other corporate
purposes, which may include acquisitions.

Concurrent with the closing of the Offering, the Company amended and
restated its Certificate of Incorporation to effectuate a recapitalization such
that (i) the common equity of the Company consists of Class A Common Stock and
Class B Non-Voting Common Stock, par value $.01 per share (the "Class B Common
Stock" and, together with the Class A Common Stock, the "Common Stock"), (ii)
authorized shares of the Class A Common Stock and Class B Common Stock were
increased to 150 million shares and 50 million shares, respectively, (iii) each
outstanding share of common stock of the Company was converted into

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

one share of Class A Common Stock, (iv) certain shares of the Class A Common
Stock owned by the Morgan Stanley Stockholders were converted into Class B
Common Stock such that, after giving effect to such conversion, but not giving
effect to the Offering, the Morgan Stanley Stockholders owned, in the aggregate,
49% of the outstanding Class A Common Stock, and (v) each share of Common Stock
was split into 706 shares of Common Stock. Holders of Class B Common Stock have
no right to vote on matters submitted to a vote of stockholders, except in
certain circumstances. Shares of the 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 (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 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.

All references to number of shares, per share amounts and stock option data
appearing in the financial statements and notes thereto have been restated, for
all periods presented, to reflect the stock split.

Stock Options

The Company's Amended and Restated Stock Option Plan (the "Plan"),
originally adopted in December 1993, provides for granting of options to
purchase up to 2,432,170 shares of Class A common stock. In connection with the
Offering, 512,980 unallocated options were granted on a pro rata basis to
participants of the Plan with the exercise prices and vesting schedules of such
options being the average weighted exercise prices and vesting percentages of
the options previously held by such holders. As of June 30, 1997, all options of
the Plan had been issued. At December 31, 1997 a total of 2,420,897 were
outstanding and 1,399,399 were exercisable at an average price of $11.44. Prior
to the Offering, the Plan provided that the option exercise price increased 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 remained unexercised.
Concurrent with the Offering, the exercise prices applicable to the outstanding
options were fixed at exercise prices ranging from $11.14 per share to $12.24
per share.

Information with respect to the stock option plan is as follows:

OUTSTANDING
----------------------
SHARES AVERAGE
SUBJECT TO EXERCISE
OPTION PRICE
---------- --------

Balance at December 31, 1994............................ 816,136 $ 7.93
Options granted....................................... 883,912 9.17
Options forfeited..................................... (14,120) 9.21
---------
Balance at December 31, 1995............................ 1,685,928 9.33
Options granted....................................... 240,040 10.01
Options exercised..................................... (3,530) 8.88
Options forfeited..................................... (38,830) 10.22
---------
Balance at December 31, 1996............................ 1,883,608 10.50
Options granted....................................... 887,587 11.45
Options exercised..................................... (7,743) 12.23
Options forfeited..................................... (342,555) 11.66
---------
Balance at December 31, 1997............................ 2,420,897 11.65
=========

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Shares under options that were exercisable were 633,282 and 306,404 as of
December 31, 1996 and 1995, respectively, at an average exercise price of $10.22
and $8.88. At December 31, 1997, outstanding option shares had exercise prices
ranging from $11.14 to $12.24 and average contractual life remaining of 1.8
years.

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. As a result of the
granting of previously unallocated options and the determination of the exercise
prices for all options of the Plan which occurred in conjunction with the
Offering, a one-time non-cash stock-based compensation charge of $8.1 million
was recorded during June 1997. Such charge equals the aggregate difference
between the $15 initial public offering price of the Class A Common Stock and
the exercise prices of all of the outstanding options.

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, 1996 and 1997 net income would have been immaterial.

In June 1997, the Company adopted the 1997 Equity Incentive Plan (the "1997
Equity Plan"). 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. The maximum amount of Class A Common Stock that may be
granted under the 1997 Equity Plan is 1.6 million shares, subject to adjustment
in accordance with the terms of the 1997 Equity Plan. No awards under the 1997
Equity Plan have been granted as of December 31, 1997.

Earnings per Share

The following is a reconciliation of the number of shares (denominator)
used in the basic and diluted earnings per share ("EPS") computations:

1997 1996 1995
------------------- ------------------- -------------------
PER SHARE PER SHARE PER SHARE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ --------- ------ --------- ------ ---------
(SHARES IN THOUSANDS)

Basic EPS........................ 20,579 $ 1.11 17,498 $1.06 14,614 $0.49
Effect of dilutive stock
options........................ 726 (0.04) -- -- -- --
------ ------ ------ ----- ------ -----
Diluted EPS...................... 21,305 $ 1.07 17,498 $1.06 14,614 $0.49
====== ====== ====== ===== ====== =====

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

1997:
Net investment spread............................ $ 18,375 $ 19,477 $ 22,087 $ 22,622
Fee income....................................... 5,520 5,538 6,470 7,083
Other income and expenses........................ (15,702) (22,107) (16,105) (14,712)
Realized investment gains........................ 2,231 420 376 165
-------- -------- -------- --------
Income before income taxes....................... 10,424 3,328 12,828 15,158
Income tax expense............................... (2,814) (3,185) (3,735) (4,405)
-------- -------- -------- --------
Net income....................................... 7,610 143 9,093 10,753
Dividends on preferred stock..................... (1,188) (1,188) (1,187) (1,187)
-------- -------- -------- --------
Net income (loss) applicable to common
shareholders.................................. 6,422 (1,045) 7,906 9,566
Exclude, net of tax:
Realized investment gains..................... (1,450) (273) (245) (107)
Non-recurring charges......................... 1,445 9,333 2,489 1,556
Income from defined benefit pension plan asset
management operations....................... (581) (272) (325) (270)
-------- -------- -------- --------
Operating earnings............................... $ 5,836 $ 7,743 $ 9,825 $ 10,745
======== ======== ======== ========
Per common and common equivalent share (diluted):
Net income (loss)............................. $ 0.37 $ (0.06) $ 0.33 $ 0.39
Operating earnings............................ $ 0.33 $ 0.42 $ 0.40 $ 0.44
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 income taxes....................... 6,058 7,193 5,280 10,014
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
Income from defined benefit pension plan asset
management operations....................... (88) (88) (87) (87)
-------- -------- -------- --------
Operating earnings............................... $ 3,471 $ 5,256 $ 4,715 $ 8,785
======== ======== ======== ========
Per common and common equivalent share (diluted):
Net income.................................... $ 0.19 $ 0.28 $ 0.18 $ 0.42
Operating earnings............................ $ 0.20 $ 0.30 $ 0.27 $ 0.50

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. SEGMENT INFORMATION

Effective December 31, 1997, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
superseded SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS No. 131 did not
affect results of operations or financial position, but did affect the
disclosure of segment information.

The Company currently has four reportable segments: retail spread products
(fixed and indexed annuities and face-amount certificates), institutional spread
products (funding agreements and GICs), retail variable products (variable
annuity mutual fund options), and corporate and other. The Company's corporate
and other segment includes earnings on surplus of insurance subsidiaries and
holding company cash and investments, fee income from marketing partnerships and
broker-dealer operations, unallocated amortization expenses, and other various
corporate expenditures that are not allocated to specific products.

The Company's reportable segments are based on the characteristics of the
product or service and the markets through which the product or service is sold.
The reportable segments are each managed separately because the impact of
fluctuating interest rates and changes in the equity market environment affects
each segments' products and services differently. The Company evaluates
performance based on operating earnings. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)

REVENUES
Retail spread products................................. $ 220,810 $ 206,296 $ 185,961
Institutional spread products.......................... 99,861 37,210 2,515
Retail variable products............................... 14,630 10,786 7,238
Corporate and other.................................... 19,289 13,572 11,658
---------- ---------- ----------
Consolidated total revenues (investment income and
fee income)..................................... $ 354,590 $ 267,864 $ 207,372
========== ========== ==========
AMORTIZATION EXPENSE
Retail spread products................................. $ 13,951 $ 10,804 $ 8,422
Retail variable products............................... 5,758 3,839 1,837
Corporate and other.................................... 927 1,503 10,055
---------- ---------- ----------
Consolidated total amortization expense........... $ 20,636 $ 16,146 $ 20,314
========== ========== ==========
EARNINGS SUMMARY
Retail spread products................................. $ 37,618 $ 34,440 $ 22,072
Institutional spread products.......................... 9,221 3,241 250
Retail variable products............................... 5,068 4,827 3,168
Corporate and other.................................... 14 (10,216) (10,622)
---------- ---------- ----------
Pretax operating earnings (before preferred stock
dividends)...................................... 51,921 32,292 14,868
Income taxes on operations............................. (13,022) (5,315) (5,609)
Preferred stock dividends.............................. (4,750) (4,750) (4,750)
---------- ---------- ----------
Operating earnings................................ 34,149 22,227 4,509
Realized investment gains.............................. 3,192 907 4,048
Non-recurring charges.................................. (14,823) (5,004) --
Income from defined benefit pension plan asset
management operations................................ 1,448 350 --
Income taxes not related to operating results.......... (1,117) 148 (1,417)
---------- ---------- ----------
Net income applicable to common shareholders...... $ 22,849 $ 18,628 $ 7,140
========== ========== ==========
ASSETS
Retail spread products................................. $3,153,040 $2,789,626 $2,887,920
Institutional spread products.......................... 2,542,350 891,936 143,156
Retail variable products............................... 1,192,875 883,483 647,132
Corporate and other.................................... 250,159 136,619 115,372
---------- ---------- ----------
Consolidated total assets......................... $7,138,424 $4,701,664 $3,793,580
========== ========== ==========

14. SUBSEQUENT EVENT

Effective February 10, 1998, John Franco, the Company's Co-Chairman and
Co-Chief Executive Officer retired. Mr. Franco had shared that title with Martin
H. Ruby since the Company was founded in 1993. As part of the retirement package
for Mr. Franco, the Company will take a one-time charge of approximately $3.5
million during the first quarter of 1998. The charge will consist of (i) a $2.0
million non-cash charge for accelerating the vesting period of options held by
Mr. Franco to purchase 232,647 shares of the Company's common stock and (ii) a
$1.5 million charge for fulfilling remaining compensation agreements related to
his employment agreement.

Concurrent with Mr. Franco's retirement, Mr. Ruby assumed the role of
Chairman and Chief Executive Officer of the Company.

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ARM FINANCIAL LOGO