SOUTHWESTERN LIFE CORP, 10-K/A, 1995-04-06

SOUTHWESTERN LIFE CORP
10-K/A, 1995-04-06
ACCIDENT & HEALTH INSURANCE

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K/A
(Amendment No. 1)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended December 31, 1994

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from ______________ to ______________

Commission File Number 1-7697
SOUTHWESTERN LIFE CORPORATION
(Exact name of Registrant as specified in its charter)

Delaware 43-6069928
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)

500 North Akard Street 75201
Dallas, Texas (Zip code)
(Address of principal executive offices)

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

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

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, American Stock Exchange
$1.00 par value and Chicago Stock Exchange

$1.75 Convertible Exchangeable American Stock Exchange
Preferred Stock, Series 1986-A,
$25.00 stated value

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

None

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

At March 27, 1995, the aggregate market value of the voting stock held by
nonaffiliates of the Registrant (excluding stock held by all directors and
executive officers, some of whom may not be affiliates) was approximately
$53,105,850.

At March 27, 1995, 47,205,200 shares of the Registrant's Common Stock,
par value $1.00 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The information in the indicated sections of the following document is
incorporated by reference into Part III of this Annual Report on Form 10-K:
Election of Directors, Executive Compensation, Security Ownership, Security
Ownership -- Compliance with Section 16(a) of the Securities Exchange Act of
1934, and Executive Compensation -- Certain Transactions in the Registrant's
definitive Proxy Statement to be filed pursuant to Regulation 14A in
connection with Registrant's 1995 annual meeting of stockholders.

==============================================================================

<PAGE>

FORM 10-K/A
AMENDMENT NO. 1
TO
ANNUAL REPORT ON FORM 10-K
OF
SOUTHWESTERN LIFE CORPORATION

This Amendment No. 1 amends Items 1 and 8 and Exhibit 23.1 of Item 14 to the
Form 10-K of Southwestern Life Corporation for the fiscal year ended
December 31, 1994.

<PAGE>

PART I

ITEM 1. BUSINESS.

GENERAL

Southwestern Life Corporation, a Delaware corporation ("SLC," the
"Company," or "Registrant"), is an insurance holding company that markets a
broad range of life insurance, accident and health insurance and annuity
products to individuals and groups in over forty states and the District of
Columbia. The Company's individual insurance and annuity products are
marketed through more than 11,000 active, independent agents. At December 31,
1994, the Company had consolidated assets of approximately $3.1 billion,
consolidated life insurance in force of approximately $19.3 billion,
annualized health insurance premiums in force of approximately $212.3 million
and annuity funds under management of approximately $581.7 million. A chart
illustrating SLC's holding company system and identifying each principal
subsidiary is included under "SLC Holding Company System" below in this ITEM
1.

On January 27, 1995, the Company announced a series of initial actions as
part of a longer-ranging process designed to address the serious problems
associated with the Registrant's capital structure and to preserve its
financial flexibility. These actions included the suspension of dividend
payments on the Company's preferred stock, the hiring of Donaldson, Lufkin
and Jenrette as a financial advisor to assist the Company in developing a
plan of capital restructuring and the initiation of a review of certain of
the Company's accounting policies, including primarily the accounting for
intangible assets. Despite the Company's difficulties, SLC's insurance
subsidiaries are financially sound and have the capital strength and
claims-paying ability to fulfill all policyholder obligations, with over $250
million of total adjusted capital and surplus, including asset valuation
reserves, at December 31, 1994.

As described in various portions of this document, the Company is
exploring all of its options with regard to improving its capital structure
by increasing the proportion of common equity to total capital and both
reducing and extending the maturity of its indebtedness. The ultimate result
of these efforts is uncertain and their effect on the Company's securities is
not known at this time. For more information see "Business-Business
Strategy," "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources of Parent Company," and
Notes 3 and 9 of Notes to Financial Statements and Schedule III.

BUSINESS STRATEGY

SLC's business strategy has undergone significant changes over the past
five years. After pursuing a strategy of growth through leveraged
acquisitions, SLC has, since 1989, sold a number of subsidiaries in
transactions designed to reduce leverage. Primarily as a result of sales of
subsidiaries, SLC's total consolidated assets declined from $8.6 billion at
December 31, 1989 to $3.1 billion at year-end 1994. In March 1990, SLC sold
certain subsidiaries, including Philadelphia Life Insurance Company, based in
Dallas, Texas, and Massachusetts General Life Insurance Company, situated in
Denver, Colorado, to Life Partners Group, Inc. In November 1992, SLC sold
Bankers Life and Casualty Company ("Bankers") and Bankers' subsidiary,
Certified Life Insurance Company ("Certified"), to Bankers Life Holding
Corporation ("BLHC"), an affiliate of Conseco, Inc. ("Conseco"). These sales
generated liquidity for the retirement of existing debt, and the transactions
with Life Partners Group, Inc. and BLHC were structured so that SLC retained
an interest in the subsidiaries sold, enabling it to benefit from their
future performance and appreciation.

Since year-end 1992, SLC has pursued a strategy of rebalancing and
simplifying its capital structure. The debt reduction SLC had accomplished
through December 1992 affected primarily the Company's senior secured loans,
which carried the lowest interest rates. During 1993, the Company targeted
the more expensive elements of its capital structure. On September 30, 1993,
SLC sold its remaining interest in Bankers, represented by 13,316,168 shares
of BLHC (approximately 24.4% of those outstanding) to Conseco and one of
Conseco's subsidiaries for $287.6 million, resulting in a gain of
$197.7 million. The sale of the BLHC stock enhanced the Company's common
equity, generated substantial liquidity for use in the Company's capital
restructuring and other corporate purposes, and enabled the Company to
retire its $5.50 Redeemable Preferred Stock, Series 1987-A, stated value
$50 million, held by a Conseco subsidiary. During the fourth quarter of
1993, SLC completed a voluntary exchange offer, pursuant to which it issued
$91.2 million 11 1/4% Senior Subordinated Notes due 2003 to existing

<PAGE>

security holders, in exchange for outstanding notes and debentures; it called
for redemption of all of its 16 1/2% Senior Subordinated Debentures due 1994
that remained outstanding following the exchange offer; and it redeemed its
$8.00 Redeemable Preferred Stock, Series 1987-C, stated value $50 million,
that carried a 16% annual dividend rate.

In February 1994, SLC retired its Class B Common Stock, a class of common
equity that carried special voting rights in the election of directors. The
Class B Common Stock had been issued to Consolidated National Corporation
("CNC") in 1985, and enabled CNC to elect 75% of the Company's directors, and
by virtue of such voting power, CNC had been considered to be SLC's
controlling stockholder. Effective February 11, 1994, the Company
repurchased, for $500,000, all of its Class B Common Stock from CNC,
concurrently with CNC's sale of 4,457,243 shares of SLC's Common Stock to
Torchmark Corporation ("Torchmark") and 4,236,820 shares to Stephens Inc.
("Stephens"). On such date, Consolidated Fidelity Life Insurance Company
("CFLIC"), a subsidiary of CNC, also sold 220,000 shares of SLC's Common
Stock to each of Torchmark and Stephens. The Company and CNC terminated the
Management and Consulting Agreement, pursuant to which CNC, through its
affiliates, Robert T. Shaw and C. Fred Rice, had provided management services
to SLC since 1985, and SLC entered into ten-year Independent Contractor and
Consulting Agreements with each of Messrs. Shaw and Rice. Mr. Rice is an
executive officer and director of SLC. As a result of these transactions, the
Company now has only one class of common equity securities, and, from and
after February 11, 1994, no stockholder has beneficially owned 10% or more of
SLC's outstanding Common Stock. Torchmark, a diversified insurance and
financial services company headquartered in Birmingham, Alabama, and
Stephens, an investment banking firm headquartered in Little Rock, Arkansas,
are the largest stockholders of the Company, beneficially owning, 9.89% and
9.86%, respectively, of the Common Stock of the Company as of December 31,
1994. In accordance with the terms of the related stock purchase agreements
entered into among CNC, SLC and each of Stephens and Torchmark, a
representative of each of Torchmark and Stephens was elected to the Company's
Board of Directors, and such representatives continue to serve on the
Company's Board. Further, pursuant to such agreements, SLC has agreed to
continue to have a representative nominated as a director from each such
company for as long as such company holds at least 5% of SLC's outstanding
Common Stock. See Note 4 of Notes to Financial Statements.

On June 30, 1994, the reinsurance agreements between Southwestern Life
Insurance Company, an SLC subsidiary, and Bankers that had been reinsured
through an independent third party to CFLIC were terminated, and the business
reinsured thereunder was recaptured, effective as of April 1, 1994.
Immediately prior to the termination of the CFLIC reinsurance agreements,
Union Bankers Insurance Company, an SLC subsidiary, utilized available cash
to purchase all of the outstanding stock of Marquette National Life Insurance
Company ("Marquette"), then a subsidiary of CFLIC, for $8.2 million.
Following completion of the terminations, CFLIC repurchased the shares of its
preferred stock held by the Company by transferring to the Company the senior
secured loan of the Company with an outstanding principal balance of $30
million, all of the outstanding shares of the Company's Series 1984-A
Preferred Stock, stated value of $22.2 million, all of the outstanding shares
of the Company's Series 1987-B Preferred Stock, stated value of $7.0 million,
a U.S. Treasury note, par value $1.1 million, and 620,423 shares of the
Company's Common Stock. Immediately following the repurchase of the CFLIC
preferred stock, SLC retired the senior secured loan and the SLC preferred
stocks. The shares of SLC Common Stock were placed in treasury and retired as
of year-end 1994. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Changes in Capital Structure" and Note 4
of Notes to Financial Statements.

During 1994, SLC reduced its notes payable by $48.6 million. As mentioned
above, $30.0 million of senior secured debt was retired in conjunction with
the recapture of the CFLIC business. On July 19, SLC purchased $10 million of
its 11 1/4% Senior Subordinated Notes due 1996 in the open market for $10.1
million plus accrued interest. On August 5, a $4.9 million secured loan was
paid with the proceeds from the sale of the airplane that collateralized the
note. Additionally, Modern American Life Insurance Company ("Modern
American"), an SLC subsidiary, paid dividends totaling $9.0 million in the
form of SLC's 11 1/4% Senior Subordinated Notes due 1996 and SLC purchased
from Modern American $3.0 million principal amount of such Notes, thereby
eliminating Modern American's holdings in SLC securities. On December 1, the
Company met its $100 million sinking fund requirement on its 11 1/4% Senior
Subordinated Notes due 1996 by tendering $12.9 million of such Notes held in
treasury and electing to utilize the $87.1 million in 11 1/4% Senior
Subordinated Notes due 1996 that were exchanged in 1993 for 11 1/4% Senior
Subordinated Notes due 2003 to satisfy the remainder. At year-end 1994, SLC
had reduced the amount of its notes payable to $369.4 million, from $1,179.6
million at December 31, 1989.

<PAGE>

In 1995, SLC is seeking to develop a plan to improve its capital structure
by increasing its proportion of common equity, reducing its debt and fixed
charges, and extending the maturities on any remaining debt. To assist with
the development of a plan to address the holding company's situation, in
January 1995, the Company engaged the investment banking firm of Donaldson,
Lufkin & Jenrette as a financial advisor. There can be no assurances,
however, that the Company will timely create and implement such a
restructuring or recapitalization plan or that any plan would receive the
requisite regulatory clearances or approvals or, if necessary, the approval
of the Company's stockholders or creditors. Further, even if a plan is
formulated and approved (as needed), there are no assurances that it will be
effective or successful in eliminating or affecting positively any of the
financial problems and constraints facing the Company. Numerous outside
factors over which the Company has no control could also adversely affect any
restructuring efforts by the Company, such as interest rate fluctuations,
regulatory and legislative actions, and economic conditions generally.
Additionally, it is likely that any restructuring plan involving SLC would
result in the substantial dilution of its existing stockholders, especially
its common stockholders, and could possibly result in a change in control of
SLC. See Note 3 of Notes to Financial Statements.

During 1995, the Company intends to continue its efforts to strengthen its
core insurance subsidiaries by attempting to improve operating earnings
through expense reductions, maintain sales momentum, achieve improved gross
margins, and increase efficiency and productivity. Further, management
intends to emphasize SLC's existing core businesses of individual life and
individual health insurance products, while pursuing the sale of
non-strategic subsidiaries.

On January 12, 1995, the Company sold its wholly-owned subsidiary,
Southeast Title and Insurance Company, for cash in the amount of $2,071,000.
In January 1995, SLC announced it had entered into a letter of intent to sell
Bankers Life Insurance Company of New York, subject to the execution of a
definitive agreement and the approval of applicable Boards of Directors and
state insurance regulatory authorities. On March 24, 1995, the Company signed
a definitive agreement to sell Integrity National Life Insurance Company,
subject to certain contingencies, including the approval of state regulatory
authorities, and a letter of intent to sell Constitution Life Insurance
Company after ceding 100% of Constitution's insurance contracts to another
insurer.

NOTE: The financial information presented in this Report on Form 10-K
includes the assets and results of operations of divested companies prior to
their sale and, in the cases of Bankers and Certified, includes the results
of their operations from November 1992 through September 1993, based on the
equity method of accounting following their sales. For this reason, the
financial data presented for years before, during, and after the years in
which sales of subsidiaries occurred may not be comparable. See Note 2 of
Notes to Financial Statements.

INSURANCE OPERATIONS

As of December 31, 1994, the SLC subsidiaries that are either significant
subsidiaries or are actively marketing insurance products are:

SOUTHWESTERN LIFE INSURANCE COMPANY ("SOUTHWESTERN LIFE"):
Headquartered in Dallas, Texas, Southwestern Life concentrates on the sale
of individual life insurance and annuity products through general agents and
brokers. On the basis of statutory accounting practices as required by state
insurance regulatory authorities ("SAP"), Southwestern Life had total assets
of $1.44 billion at December 31, 1994, and marketed products in 39 states,
the District of Columbia and Guam.

UNION BANKERS INSURANCE COMPANY ("UNION BANKERS"): Headquartered
in Dallas, Texas, Union Bankers markets individual health and life insurance
products and annuity products in 45 states and the District of Columbia
through general agents and brokers. It had total assets of $204.1 million at
December 31, 1994, based on SAP.

CONSTITUTION LIFE INSURANCE COMPANY ("CONSTITUTION LIFE"):
Headquartered in Louisville, Kentucky, Constitution Life is licensed in 48
states

<PAGE>

and the District of Columbia. Constitution Life had total assets, including
separate accounts, of $481.0 million at December 31, 1994, based on SAP.

PHILADELPHIA AMERICAN LIFE INSURANCE COMPANY ("PALICO"):
Headquartered in Houston, Texas, PALICO markets group life, health, and
disability insurance and provides fee-based, third party administrative
services to group plans in 47 states, the District of Columbia and the Virgin
Islands. PALICO had total assets of $54.0 million at December 31, 1994, based
on SAP.

BANKERS LIFE INSURANCE COMPANY OF NEW YORK ("BANKERS NEW YORK"):
Headquartered in Woodbury, New York, Bankers New York concentrates on the
sale of life insurance products and annuity products in eight states through
general agents, special marketing groups and relationships with financial
institutions. Bankers New York had total assets of $204.8 million at December
31, 1994, based on SAP.

INTEGRITY NATIONAL LIFE INSURANCE COMPANY ("INTEGRITY NATIONAL"):
Headquartered in Louisville, Kentucky, Integrity National markets home
service life insurance and health insurance through general agents in 19
states and the District of Columbia. Integrity National had total assets of
$41.3 million at December 31, 1994, based on SAP.

BANKERS MULTIPLE LINE INSURANCE COMPANY ("BML"): With operations
based in both Louisville, Kentucky, and Dallas, Texas, BML offers real
estate errors and omissions insurance products and group and individual
health insurance products through brokers and by direct mail. It is
licensed in all 50 states and the District of Columbia. BML had total
assets of $59.5 million at December 31, 1994, based on SAP.

OTHER SUBSIDIARIES: SLC has a number of direct and indirect
subsidiaries that do not have significant ongoing insurance operations,
including Modern American, Marquette and Western Pioneer Life Insurance
Company ("Western Pioneer"). Modern American, Western Pioneer and
Marquette have insurance in force, but are not marketing insurance products
at this time. Other subsidiaries of SLC include SWL Holding Corporation
("SWL Holding"), Care Financial Corporation ("Care Financial") and Facilities
Management Installation, Inc. ("FMI"). SWL Holding is the intermediate
holding company of Southwestern Life and its subsidiaries. Care Financial is
the intermediate holding company of BML, PALICO and Union Bankers, and its
subsidiary, Marquette. FMI provides substantially all of the management
services to SLC and its insurance subsidiaries.

<PAGE>

SLC HOLDING COMPANY SYSTEM

SLC was organized in 1966 as a Missouri corporation and was reincorporated
in Delaware during 1977. The following chart summarizes the relationships
among SLC and its significant direct and indirect subsidiaries. Each
percentage used in the chart represents the parent's percentage ownership
interest in the outstanding voting securities of the respective subsidiary
company. The years in which SLC formed, or acquired more than 50% of, the
indicated subsidiaries are set forth parenthetically.

[Diagram of SLC's holding company structure omitted in accordance with ']
Securities and Exchange Commission rules for graphic or image material in
electronic filings. The omitted material illustrates that FMI, SWL Holding,
Modern American, Care Financial, Integrity National and Western Pioneer are
each direct subsidiaries of the Company. The diagram further illustrates
that Southwestern Life is held by SWL Holding, and that Southwestern Life is
the parent of Bankers New York and Constitution Life. Further, the diagram
depicts that Care Financial holds Union Bankers, BML and PALICO, and that
Marquette is a subsidiary of Union Bankers.]

The following companies are also direct or indirect subsidiaries of SLC,
but do not have any significant operations: BML Agency, Inc.; SLC Financial
Services, Inc.; Philadelphia American Property Company; Quail Creek
Communications, Inc.; Quail Creek Recreation, Inc.; Quail Creek Water
Company, Inc.; and REO Holding Corporation.

<PAGE>

INSURANCE PREMIUMS AND ANNUITY CONSIDERATIONS

The following table summarizes on a consolidated basis the Company's (i)
premium income and other considerations and (ii) accumulation product premium
equivalents for the three-year period ended December 31, 1994. 1992 includes
amounts from Bankers and Certified, which were sold in November 1992. Premium
income represents gross receipts on traditional whole and term life and
health insurance products for individuals and groups, and other
considerations consist of policy charges for the cost of insurance, policy
administration charges, surrender charges and amortization of policy
initiation fees relating to universal and interest-sensitive life insurance
products and accumulation products, such as guaranteed investment contracts
("GICs") and certain annuities, as well as premiums collected on deferred
annuities. Premium equivalents consist of gross receipts on deposit type
annuities and guaranteed investment contracts. Premium equivalents are not
reported as premium revenues, but rather are reported as additions to
policyholder account balances. For additional information regarding SLC's
industry segments, see "Management's Discussion and Analysis of Condition and
Results of Operations-Analysis of Operating Results by Industry Segment" and
Note 17 of Notes to Financial Statements and Schedules V and VI of the
Financial Statement Schedules.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
PREMIUM CATEGORY (DOLLARS IN MILLIONS) 1994 1993 1992
- -------------------------------------------------------------------------------------
PREMIUM INCOME AND OTHER CONSIDERATIONS
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Individual life (including premium
equivalents) . . . . . . . . . . . . $162.4 39% $164.0 35% $267.9 19%
Less premium equivalents. . . . . . . (53.3) (13) (46.0) (10) (76.3) (5)
- -------------------------------------------------------------------------------------
Individual life . . . . . . . . . . . 109.1 26 118.0 25 191.6 14
Individual health . . . . . . . . . . 215.8 52 220.3 46 859.1 62
Group and other . . . . . . . . . . . 93.0 22 136.5 29 337.4 24
Accumulation products . . . . . . . . 0.1 0 0.2 0 0.7 0
- -------------------------------------------------------------------------------------
Total . . . . . . . . . . . . . . . $418.0 100% $475.0 100% $1,388.8 100%
- -------------------------------------------------------------------------------------
ACCUMULATION PRODUCT PREMIUM EQUIVALENTS
- -------------------------------------------------------------------------------------
Guaranteed investment contracts . . . $ 2.7 4% $ 5.3 6% $292.0 63%
Annuities . . . . . . . . . . . . . . 69.3 96 84.6 94 168.3 37
- -------------------------------------------------------------------------------------
Total . . . . . . . . . . . . . . . $72.0 100% $89.9 100% $460.3 100%
- -------------------------------------------------------------------------------------
</TABLE>

<PAGE>

LIFE INSURANCE BUSINESS

The following table provides certain information with respect to the
various categories of the life insurance business in force for the Company's
existing insurance subsidiaries and for subsidiaries sold by SLC during the
indicated periods. 1992 includes amounts from Bankers and Certified, which
were sold in November 1992. For purposes of the following table, "permanent"
refers to traditional whole life and universal and interest-sensitive
insurance products, "term" refers to term life products, and "group and
other" refers to life insurance products sold in connection with group
insurance products.

YEAR ENDED DECEMBER 31,
-------------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
In-force at beginning of period (1)(2):
Existing subsidiaries . . . . . . . . . . . . . . . $21,398 $21,437 $ 38,572
Subsidiaries sold during period . . . . . . . . . . 0 0 (15,546)
------- ------- --------
Total . . . . . . . . . . . . . . . . . . . . . . $21,398 $21,437 $ 23,026
- --------------------------------------------------------------------------------------
Face amount of new business issued during period (1):
Permanent . . . . . . . . . . . . . . . . . . . . . $ 682 $ 682 $ 729
Term. . . . . . . . . . . . . . . . . . . . . . . . 220 262 307
Group and other . . . . . . . . . . . . . . . . . . 99 968 389
------- ------- --------
Total . . . . . . . . . . . . . . . . . . . . . . $ 1,001 $ 1,912 $ 1,425
- --------------------------------------------------------------------------------------
Termination during period . . . . . . . . . . . . . . $ 1,486 $ 1,759 $ 2,055
Termination rate (3). . . . . . . . . . . . . . . . . 7.3% 8.2% 9.2%
- --------------------------------------------------------------------------------------
In-force at all subsidiaries at end of period (1)(2):
Permanent . . . . . . . . . . . . . . . . . . . . . $14,383 $14,838 $ 15,018
Term . . . . . . . . . . . . . . . . . . . . . . . 3,031 3,254 3,655
Group and other . . . . . . . . . . . . . . . . . . 1,870 3,306 2,764
------- ------- --------
Total . . . . . . . . . . . . . . . . . . . . . . $19,284 $21,398 $ 21,437
- --------------------------------------------------------------------------------------
Financial reinsurance ceded at end of period (4). . . $ 1,453 $ 1,677 $ 2,076
Reinsurance ceded at end of period (5). . . . . . . . 5,222 5,658 5,417
- --------------------------------------------------------------------------------------
<FN>
(1) Excludes participations in group underwriting pools for federal employees
(FEGLI) and service personnel (SGLI).

(2) Includes reinsurance assumed, but before deduction of reinsurance ceded.

(3) Represents the percentage of individual direct policies terminated during
the indicated period by lapse, surrender, conversion, maturity, or otherwise.

(4) Maintained under reinsurance agreements pursuant to which unaffiliated
insurers have assumed from certain of SLC's insurance subsidiaries large blocks
of life insurance in force, and the related policy reserves and premium income,
generally in return for fees. These agreements are treated as financing
arrangements under generally accepted accounting principles, and the in-force
amounts ceded or assumed under these agreements have been excluded from the
in-force amounts reflected in the table. See Note 11 of Notes to Financial
Statements and Schedule VI of the Financial Statement Schedules. These
agreements will terminate during the next few years, resulting in the ceding
companies' recapture of the reinsured business and policy reserves.

(5) Excludes reinsurance ceded to other of SLC's insurance subsidiaries.
</TABLE>

TRADITIONAL WHOLE LIFE. The Company's whole life policies are permanent
insurance products that combine life insurance protection with a savings
component or cash value that gradually increases in amount. Typically, a
guaranteed fixed premium, which is higher than for comparable term coverage
when the policyholder is younger, but less than comparable term coverage as
the policyholder grows older, is paid over a period of years. A policyholder
may borrow against the policy's accumulated cash value, but the amount of any
outstanding loans decreases the death benefit under the policy. A
policyholder may choose to surrender a policy and receive the accumulated
cash value rather than continue the insurance protection.

Relatively affluent, price-sensitive individuals historically were the
focus of the Company's marketing efforts for traditional whole life insurance
products. Over the past two years, however, the Company has offered whole
life insurance products with smaller face amounts (starting at $2,500)
designed to appeal to moderate income individuals.

<PAGE>

In addition, the Company now offers traditional whole life insurance products
that are designed to appeal to the senior citizen market. For example, in
1993, the Company introduced Life Made Simple, a whole life product that
provides benefits to pay final expenses, and Senior Survivorship Plan, a
first-to-die joint whole life product that helps offset the reduction in
social security retirement income that occurs upon the death of a spouse, and
in 1994 the Company introduced Future Leaders, a simplified whole life
product designed for people wanting to provide a savings accumulation plan
for their children and grandchildren. By introducing products targeted
towards the senior citizen market and by expanding its marketing efforts to
include moderate income individuals, the Company is attempting to benefit
from the growing senior citizen market and create additional selling
opportunities for its sales force of independent agents among moderate income
individuals. The Company has also consolidated the marketing operations of
Southwestern Life and Union Bankers to more effectively use its agency sales
force. This combined distribution system permits agents at Union Bankers who
have traditionally marketed only the Company's health insurance products to
now market and sell the Company's life insurance products as well. See
"-Distribution System." As of December 31, 1994, there were 311,000 whole
life policies in force with $1.9 billion in face amount and $460.6 million
in reserves.

UNIVERSAL AND INTEREST-SENSITIVE LIFE. The universal and
interest-sensitive life products offered by the Company provide whole life
insurance with adjustable rates of return related to current interest rates.
The principal difference between universal life and interest-sensitive life
products is the amount and timing of premium payments. Universal life
products permit policyholders to vary the frequency and size of their premium
payments, although policy benefits may also vary. Premium payments under
interest-sensitive life products are not generally variable by the
policyholders.

The majority of sales of individual life insurance products, measured by
premium volume, have been for universal and interest-sensitive life insurance
products. The Company's universal and interest-sensitive life products
provide advantages generally not available to its traditional whole life and
term life policyholders, such as flexibility in available coverages and, in
respect of universal life products, flexibility in the amount and timing of
premium payments. In addition, the Company's universal and interest-sensitive
life products can, in some respects, provide higher returns and greater cash
values to policyholders. The Company's universal life and interest-sensitive
life insurance products are marketed to individuals directly and through
qualified retirement plans, deferred compensation plans, and employer
sponsored payroll deduction plans. As of December 31, 1994, there were
132,000 universal and interest-sensitive life policies in force with $12.5
billion in face amount and $920.9 million in reserves.

TERM LIFE. Term life products offer pure insurance protection for a
specified period of time, typically one, five or ten years. No cash value is
built up. The Company offers a variety of term life products that include
some or all of the following features: current and guaranteed premium rates
that are level for either one, five or ten years; preferred smoker, preferred
nonsmoker, nonsmoker, and smoker underwriting classes; and conversion to
permanent insurance allowed to age 65 with premium credit. As of December 31,
1994, there were 36,000 term life policies in force with $3.0 billion in face
amount and $52.0 million in reserves.

Total sales of individual life insurance by SLC's insurance subsidiaries
increased approximately 28% in 1994, compared to declines of 6% in 1993 and
33% in 1992 (excluding Bankers and Certified). In the future, SLC intends to
continue to increase the amount of its life insurance business through
internal growth.

<PAGE>

HEALTH INSURANCE BUSINESS

Substantially all of SLC's consolidated premium income and other
considerations for individual health insurance are received from Medicare
supplement plans, comprehensive and major medical (collectively,
"comprehensive") health plans and long-term care plans. The following table
sets forth, by product type, the amounts and percentages of SLC's
consolidated premium income and other considerations for individual health
insurance during the indicated periods. 1992 includes amounts from Bankers
and Certified, which were sold in November 1992.

YEAR ENDED DECEMBER 31,
--------------------------------------------
HEALTH POLICY TYPE
(DOLLARS IN MILLIONS) 1994 1993 1992
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>

Medicare Supplement . . . . $124.3 58% $105.5 48% $502.2 58%
Comprehensive . . . . . . . 84.8 39 108.1 49 266.3 31
Long-term care. . . . . . . 6.7 3 6.7 3 90.6 11
- -----------------------------------------------------------------------------
Total. . . . . . . . . $215.8 100% $220.3 100% $859.1 100%
- -----------------------------------------------------------------------------

</TABLE>

MEDICARE SUPPLEMENT. Medicare supplement products provide coverage for
many of the medical expenses that the Medicare program does not cover, such
as deductible and coinsurance costs (in which the insured and Medicare share
the costs of medical expenses), and specified losses that exceed the federal
program's maximum benefits. Medicare supplement products, like other types of
health insurance, generate profits to the extent that the premium income and
investment income exceed benefit payments and other expenses.

The Company markets Medicare supplement products to individuals age 65
and older who are eligible for Medicare. Medicare supplement products are
highly regulated, standardized products. Such regulations impose minimum loss
ratios, restrict first year commissions payable to agents, require
standardized benefits and impose disclosure requirements. Due to product
standardization, insurance companies compete primarily on the basis of
marketing and distribution. As of December 31, 1994, there were 138,000
Medicare supplement policies in force representing $134.9 million in
annualized premiums and $84.2 million in reserves.

COMPREHENSIVE HEALTH PRODUCTS. The Company markets comprehensive health
products that provide hospital, medical, and surgical coverage within various
prescribed policy deductible and coinsurance limits. The Company's
comprehensive health products are marketed primarily to self-employed
individuals, workers who are not fully covered by group health insurance, and
early retirees. Inflation in the cost of health care continues to exceed the
overall inflation rate, and a "cost shifting" pattern from the public sector
to those privately insured has resulted in increases that have reduced the
affordability of comprehensive health products to consumers. Although the
comprehensive health products offered by the Company in many states have
certain built-in protections against rising policy claims due to escalating
health care costs, premiums on many traditional health plans offered by the
Company may not be increased without notice to or approval by insurance
regulatory authorities. Due to escalating health care costs and marginal
profitability, the Company began deemphasizing sales of comprehensive health
plans in late 1990 and has decreased the number of states in which these
plans are marketed. As of December 31, 1994, the Company had 67,000 policies
in force representing $70.5 million in annualized premiums and $42.0 million
in reserves.

LONG-TERM CARE. The Company's long-term care products are sold to
retirees, older self-employed individuals and other persons in middle income
levels. Like the market for Medicare supplement policies, the Company
believes that the market for long-term care insurance products is attractive
because of the general aging of the United States population. As of December
31, 1994, there were 6,600 long-term care policies in force representing $6.9
million in annualized premiums and $21.1 million in reserves.

ANNUITY BUSINESS

The principal annuity products marketed by the Company consist of
flexible premium deferred annuities ("FPDA") and single premium deferred
annuities ("SPDAs"). The Company also manages a seasoned block of GICs,
single premium immediate annuities and supplementary contracts. In 1993, the
Company made a strategic decision not

<PAGE>

to pursue growth in its accumulation business through the sale of GICs, with
the result that annuity products accounted for 94% of the Company's
accumulation product premium equivalents during 1994.

As of December 31, 1994, the guaranteed minimum crediting rates for the
life of the Company's deferred annuity products were as follows:

GUARANTEED MINIMUM FUNDS UNDER
CREDITING RATE MANAGEMENT
------------------ -------------
(DOLLARS IN MILLIONS)
<S> <C>
3.00% . . . . . . . . . . . . . $ 27.9
3.50% . . . . . . . . . . . . . 19.7
4.00% . . . . . . . . . . . . . 307.4
4.50% . . . . . . . . . . . . . 66.5
5.00% . . . . . . . . . . . . . 0.6
6.00% . . . . . . . . . . . . . 41.0
No guaranteed minimum . . . . . 15.9
-------
$ 479.0
=======

</TABLE>

At December 31, 1994, annuity liabilities were composed of $203.8
million of SPDA liabilities and $275.2 million of FPDA liabilities and $102.7
million of other annuity liabilities, for a total of $581.7 million of
annuity liabilities. Of such liabilities, $287.6 million were subject to
surrender charges averaging 7.0% at December 31, 1994.

The Company prices its annuity products based on assumptions concerning
prevailing and expected interest rates and other factors to achieve a
positive difference, or spread, between its expected return on investments
and the crediting rate. The Company achieves such spread through active
portfolio management by its outside, independent investment advisors,
focusing on matching the durations of invested assets and related liabilities
to minimize the exposure to fluctuations in interest rates and by the
adjustment of the crediting rate on annuity products. See "-Investments."
Although the Company believes that the strategies employed by its investment
advisors will continue to permit it to achieve a positive spread, a
significant decline in the yield on the Company's investments could adversely
affect the results of operations and financial condition of the Company.

Due to an annuity holder's right to withdraw funds and the volatility of
market interest rates, it is difficult to predict the timing of the Company's
obligations under its SPDAs and FPDAs. Consequently, the Company maintains a
portfolio of short-term investments that are readily marketable and
sufficient in management's judgment to satisfy liquidity requirements for the
SPDAs and FPDAs. See "-Investments."

GROUP BUSINESS

The group insurance market is highly competitive. The Company's group
insurance business primarily involves the marketing and sale of health
insurance products and the rendering of administrative services to group
plans. The Company's fully insured group plans offer both managed care and
traditional indemnity benefits. These plans are sold to small- and
medium-sized employers to provide basic health care and major medical
benefits to their employees. Most policies are written on a periodic basis,
and competitive bids are often sought prior to renewal. PALICO is the only
insurance subsidiary making any new sales to groups, although BML continues
to underwrite health insurance under an established association group plan.
In 1994, group insurance policies accounted for 17.1% of total consolidated
collected premiums.

PALICO also provides fee-based, administrative services consisting of
processing comprehensive health insurance claims under diverse group plans.
PALICO does not assume any underwriting risk under its administrative-only
arrangements, which are entered into with large- and medium-sized employers.
Instead, PALICO merely processes and pays claims for an administrative fee,
while the employer acts as a self-insurer and provides the policyholder
benefits. PALICO also provides groups with managed care plans, under which
it develops a network of providers with negotiated cost controls and
administers group claims and makes available stop loss coverage for group

<PAGE>

benefits. The total claims administered by PALICO under these fee-based,
administrative arrangements increased from $310.7 million during 1993 to
$340.1 million during 1994.

PALICO incurred significant losses in its group business during 1994
and 1993, resulting in pretax operating losses of $5.7 million and $12.9
million with respect to SLC's group business for 1994 and 1993, respectively.
Such losses resulted primarily from group business written in 1992 and 1993,
which was ultimately unprofitable, and inadequate pricing for services
provided under administrative services arrangements. See the subheading
"Group Insurance" under "Management's Discussion and Analysis and
Results of Operations-Analysis of Operating Results by Industry Segment" for
additional analysis of the factors contributing to the losses. Due to the
unprofitable performance of its group insurance plans during 1994 and 1993,
and the uncertainties created by the national health care reform efforts,
PALICO intends to further deemphasize the sale of fully insured traditional
indemnity group plans and fee-based, administrative services in favor of
managed health care programs.

DISTRIBUTION SYSTEM

The Company sells its individual life and health insurance and annuity
products primarily through more than 11,000 independent agents in over 40
states, and the District of Columbia. The following table identifies those
states that accounted for 5% or more of the Company's subsidiaries' combined
direct premiums from life, health, and annuity sales to residents in 1994.

PERCENTAGE 1994 DIRECT PREMIUMS
----------------------------------------------------------
5% TO 10% 11% TO 15% 16% OR MORE
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>

LIFE . . . . . . . . . . . California, New Jersey, Texas
New York

HEALTH . . . . . . . . . . Florida, Indiana Illinois Texas

ANNUITIES. . . . . . . . . Florida, New York Texas

TOTAL BUSINESS . . . . . . Florida, Illinois, Texas
New York
- ----------------------------------------------------------------------------------------------

</TABLE>

Substantially all independent agents selling insurance products for the
Company also represent other insurers. Group insurance is sold principally
through independent agencies that are assisted by group sales staffs employed
by an SLC subsidiary, and alternate funded plans are marketed directly by
employees of an SLC subsidiary. An alternate funded plan is a plan under
which the employer is self-insuring the basic benefits provided by the plan
and the Company contracts to provide administrative and claims processing
services as well as stop loss coverage for the plan.

An important element of the Company's marketing plan is the fostering of
a strong relationship between its insurance subsidiaries and the independent
agents and brokers that sell their insurance products. The administration of
insurance policies involves a high degree of interaction between the Company,
policyholders and agents in the application and underwriting process, as well
as during claims processing. The Company follows a service-oriented approach
towards administering its insurance business and seeks to provide agents and
policyholders with a timely and efficient response to claims, policyholder
questions, and agency matters. The efficiency and professionalism with which
these administrative matters are undertaken directly affect policyholders and
the Company's agents and influence the willingness of agents to promote the
Company's products. Management believes that the Company's reputation for
providing a quality, dependable service to its policyholders and agents is,
and will continue to be, fundamental to its business strategy and success.

The Company structures the commissions on its products so that agents
are provided meaningful financial incentives to increase the production of
new insurance and to promote continued renewals of in-force insurance. At the
same time, the Company employs financial discipline in setting agent
compensation arrangements and seeks to avoid sacrificing product
profitability and earnings growth through excessive or front-loaded
commissions. Commissions on life insurance products vary between products and
make up the largest element of acquisition costs. The Company

<PAGE>

believes commissions on annuity products are comparable and competitive with
hose paid on other investment-oriented products, such as bonds and mutual
funds.

The Company has also consolidated the marketing operations of
Southwestern Life and Union Bankers to more effectively use its agency sales
force. The Company believes that the combined distribution system allows
Southwestern Life and Union Bankers to provide their agents with a wider
range of insurance products that may be offered to existing and prospective
clients and thus capture sales that may otherwise have been directed to other
insurance companies.

UNDERWRITING

Premiums charged on insurance products are based, in part, on
assumptions about the incidence and timing of claims. The Company employs
professional underwriting staffs that have adopted and followed detailed
underwriting procedures designed to assess and quantify insurance risks
before issuing life and health insurance policies to individuals and groups.
Except with respect to Medicare supplement insurance, which is heavily
regulated, the underwriting practice of each SLC insurance subsidiary is to
require medical examinations (including blood tests, where permitted) of
applicants for certain health insurance and for life insurance in excess of
prescribed policy amounts. These requirements vary according to the
applicant's age and by policy type and amount, and streamlined procedures
have been developed based on the amount and type of coverage sought. The
Company also relies on medical records and each potential policyholder's
written application for insurance. In issuing health insurance, the Company
uses information from the application and, in some cases, inspection reports,
physician statements, or medical examinations to determine whether a policy
should be issued as applied for, issued with reduced coverage under a health
rider or rejected.

Acquired Immunity Deficiency Syndrome ("AIDS") claims identified to
date, as a percentage of total claims, have not been significant for SLC'S
subsidiaries. Evaluating the effect of future AIDS claims under the life and
health insurance policies issued by SLC is extremely difficult, in part due
to the insufficient and conflicting data regarding the number of persons now
infected by the virus that causes AIDS and uncertainty as to the speed at
which the disease may spread through the general population. The Company has
implemented, where legally permitted, underwriting procedures designed to
assist in the detection in applicants of the virus that causes AIDS.

INVESTMENTS

GENERAL. The Company's investment objectives are to maximize credit
quality, liquidity and return, while minimizing principal risk. The Company
seeks to attain these objectives through professional portfolio management
and monitoring of its investments. Since 1992, the Company has relied
primarily on independent investment advisors in the management of
investments. New England Asset Management, Inc. ("NEAM") provides advice in
the management of approximately $1.3 billion of the Company's investment
portfolio and has advised the Company in connection with the 1993 sale of
$144.7 million of the mortgage-backed residual interests and interest-only
certificates previously held in the Company's investment portfolio and the
reinvestment of a portion of the proceeds from such sale in trust
certificates sold by Fund America Investors Corporation II ("Fund America"),
which transaction is further described below. Conseco Capital Management,
Inc., the investment advisory subsidiary of Conseco, managed approximately
$443 million of investments during 1994. During 1994, Westridge Capital
Corporation managed the investment of approximately $150 million of the
assets and hedged the risk for one of Constitution's accumulation products.
See Note 5 of Notes to Financial Statements, which is incorporated herein by
reference, for additional information about the composition and performance
of SLC's investment portfolio.

The Company pursues an investment strategy principally designed to
balance the duration of investment assets against the liabilities of its
insurance subsidiaries for future policy and contract benefits and, under
certain circumstances, to manage its exposure to changes in market interest
rates, with separate investment segments for specific classes of product
liabilities. As part of this approach, investment guidelines are developed
for each product line that form the basis for distinct investment strategies
to manage each product's return and liquidity requirements. Any exceptions to
these guidelines must be approved by the Investment Committee of the
Company's Board of Directors. The Company seeks investments with duration and
return characteristics that match the duration, cash payment, and other
characteristics of the underlying liabilities. It is the Company's policy, as
well as a requirement

<PAGE>

of applicable state insurance laws, to diversify the investments in its
investment portfolio. The Company monitors the exposure of its investment
portfolio to particular borrowers, industries or types of investments and
geographic locations. It is the Company's policy not to make new investments
in commercial mortgage loans or real estate.

INVESTMENT STRATEGY. Since 1991, the Company has taken steps to
restructure its investment portfolio to improve the overall credit quality of
its portfolio. Specifically, the investment strategy has shifted to reducing
the investment in noninvestment-grade, fixed maturity securities and equity
securities and increasing the investments in investment-grade, fixed maturity
securities. The Company's policy on investing in mortgage-backed securities
and collateralized mortgage obligations (collectively, "CMOs") distinguishes
between CMOs that have predictable and stable cash flows ($793.6 million at
December 31, 1994) and which, therefore, do not present a high risk of loss
of principal while providing relatively stable returns, and CMOs that
represent mortgage-backed residual interests or interest-only certificates,
generally referred to as "derivative CMOs" (carrying value of only $20.8
million at December 31, 1994), which may fluctuate significantly in value
depending on levels of prepayments on the underlying mortgages. It is the
Company's policy not to make further investments in derivative CMOs. The
Company believes that its current investment strategy has resulted in a high
quality, liquid investment portfolio, with low principal risk, that is well
matched to the Company's liabilities. While these actions have resulted in
substantially reduced exposure to credit risks, average yields decreased from
8.3% in 1992 to 6.9% in 1993. Investment yields increased to 7.3% in 1994 as
general market interest rates increased during the year.

In accordance with applicable insurance laws, SLC's insurance
subsidiaries maintain substantial portfolios of investment assets that are
held, in large part, to fund their future contractual obligations to
policyholders. In structuring these portfolios, SLC has emphasized, and
expects to continue to emphasize, investments in fixed maturity securities.
In addition, SLC has maintained significant levels of short-term investments
to meet its liquidity needs. Since 1991, fixed maturity securities and
short-term investments have represented more than 75% of SLC's consolidated
investments, while no other category of investment has represented more than
10%. Additional information regarding the categories and amounts of SLC's
investment assets is reflected in Note 5 of Notes to Financial
Statements. State insurance laws also impose certain restrictions on the
nature and extent of investments by insurance companies and, in some states,
may require divestiture of assets contravening these restrictions. In
addition, the NAIC has begun drafting a model investment act which, if
adopted, could significantly affect the investments of SLC's insurance
subsidiaries. See "-Regulation."

INVESTMENT RESULTS. The following table summarizes, for the indicated
periods, certain results of the investments of SLC and its consolidated
subsidiaries. 1992 includes amounts for Bankers and Certified which were sold
in November 1992.

YEAR ENDED DECEMBER 31,
----------------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average cash and invested assets(1) . . . . . . . . . . . . . $2,498.3 $2,845.2 $4,035.1
Net investment income . . . . . . . . . . . . . . . . . . . . 182.0 195.6 333.1
Average yield(2). . . . . . . . . . . . . . . . . . . . . . . 7.3% 6.9% 8.3%
Realized investment gains (losses). . . . . . . . . . . . . . (96.9) 34.8 (119.1)
Change in unrealized investment gains (losses)(3) . . . . . . (75.8) 1.6 22.2
- -----------------------------------------------------------------------------------------------------

<FN>

(1) Represents the average of the aggregate cash and invested assets
amounts at the beginning and end of the period, excluding intercompany
investments.

(2) Represents net investment income divided by the average cost and
invested assets for the period.

(3) Generally represents increases or decreases in the value of equity
securities carried at fair value at the end of each period presented
and includes the difference in amortized cost and fair value of
available for sale fixed maturity securities, adjusted for the change
in amortization of deferred policy acquisition costs that would have
been recorded had the Company realized such gains (losses), net of
deferred income tax effects.

</TABLE>

<PAGE>

For the year ended December 31, 1994, net investment income decreased
$13.6 million, or 7%, as compared to 1993. Net investment income includes 1)
earnings on surplus investments and assets invested to support the reserve
liabilities of the Company's traditional and interest-sensitive life and
health insurance products (general investment portfolio) and 2) investment
activity related to separately held assets supporting a GIC product, the
credited rate on which is indexed to the S&P 500 Stocks Composite Average
("S&P 500"). In addition, in 1993 and 1992, net investment income included
investment income on certain CMOs held in a special purpose trust (the
"Trust"). The accounts of the Trust are no longer consolidated with those of
the Company for periods after July 30, 1993, as the result of SLC's sale of
a 75% interest in the Trust. Assets supporting the S&P 500 GIC product
include, among other investments, put and call options on various equity
based index futures, including the S&P 500. The return on such investments
is highly volatile and, under certain market conditions, such as the overall
decline in equity markets experienced during early 1994, can result in
investment losses, or negative investment yields. The reduction in investment
yield experienced in 1994 on the assets supporting the indexed GIC product
was more than offset by a reduction in GIC benefits. Following is a summary
of investment income (loss) for the three categories of investments as
described above for the three years ended December 31, 1994:

YEAR ENDED
DECEMBER 31,
(DOLLARS IN MILLIONS) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
General investment portfolio. . . . . . . . . . . . . . . . . . . $186.7 $168.2 $325.6
Investments supporting indexed GIC product. . . . . . . . . . . . 5.3 27.4 16.1
CMOs held in the Trust. . . . . . . . . . . . . . . . . . . . . . 13.0 5.0
------- ------ -------
Gross investment income. . . . . . . . . . . . . . . . . . . . . . 192.0 208.6 346.7
Investment expenses. . . . . . . . . . . . . . . . . . . . . . . . (10.0) (13.0) (13.6)
------- ------ -------
Net investment income. . . . . . . . . . . . . . . . . . . . . . $182.0 $195.6 $333.1
- ---------------------------------------------------------------------------------------------------
</TABLE>

At December 31, 1994, SLC had net pretax unrealized investment losses
totaling $94.3 million, consisting of $101.0 million of unrealized investment
losses related to available for sale fixed maturities, $1.0 million of
unrealized gains attributable to equity securities, $5.4 million of
unrealized gains attributable to investments in limited partnerships and $0.3
million of unrealized gains attributable to other invested assets. Such
unrealized investment losses are reflected in stockholder's equity, net of a
$9.1 million adjustment in deferred policy acquisition costs and unearned
revenue reserves and $29.8 million in deferred income tax effects. At
December 31, 1993, SLC had pretax unrealized investment gains totaling $33.9
million, consisting of $21.4 million of unrealized gains related to available
for sale fixed maturities, $7.2 million of unrealized gains attributable to
equity securities, and $5.3 million of unrealized gains attributable to
investments in limited partnerships. Such unrealized investment gains were
reflected in stockholders' equity, net of a $10.4 million adjustment in
deferred policy acquisition costs and unearned revenue reserves, a $5.2
million adjustment for the minority interest in certain unrealized investment
losses and $8.2 million in deferred income tax effects. The unrealized losses
related to available for sale fixed maturities at December 31, 1994 are
primarily as a result of declines in market interest rates since December 31,
1993. Except as may be required to meet its liquidity requirements, SLC has
no current plans and management does not believe that SLC will be required
over the near-term to liquidate a significant portion of such available for
sale fixed maturities and incur such losses. As a result of declining
long-term interest rates experienced during the first two months of 1995, the
unrealized losses on available for sale fixed maturity securities had
declined approximately $45.0 million, from $101.0 million at December 31,
1994, to approximately $56.0 million at February 28, 1995.

FIXED MATURITY SECURITIES. The Company's fixed maturity portfolio
generally includes government and corporate debt securities and CMOs.
Historically, this portfolio has been structured, in part, to balance
desirable yields with credit concerns. The Company has concentrated its fixed
maturity investments within categories that are rated investment-grade,
while, in certain instances, holding selected noninvestment-grade securities
that provide higher yields. The Company classifies its high-yield securities
as noninvestment-grade if they are unrated or are rated less than "BBB-" by
Standard & Poor's Corporation ("S&P") or Baa by Moody's Investor Service
("Moody's"). Based on such classifications, the Company's
noninvestment-grade, fixed maturity securities represented 4.2% of the
Company's consolidated cash and invested assets at December 31, 1994 as
compared to 4.0% at December 31, 1993 and 3.8%

<PAGE>

at December 31, 1992.

Following is a summary of the Company's fixed maturity investments
segregated by investment quality based on S&P ratings and the two categories
of such investments as reflected in SLC's consolidated balance sheet at
December 31, 1994 (in millions):

HELD TO
MATURITY PERCENT PERCENT
AVAILABLE AT TOTAL TOTAL OF TOTAL
FOR SALE AT AMORTIZED FIXED FIXED INVESTED
INVESTMENT QUALITY(1) FAIR VALUE COST MATURITIES MATURITIES ASSETS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AAA . . . . . . . . . . . . . . . . . . . . . . $680.6 $1.6 $682.2 41.2% 29.0%
AA . . . . . . . . . . . . . . . . . . . . . . 177.1 177.1 10.7 7.5
A . . . . . . . . . . . . . . . . . . . . . . . 396.0 396.0 23.9 16.8
BBB+ . . . . . . . . . . . . . . . . . . . . . 89.4 89.4 5.4 3.8
BBB . . . . . . . . . . . . . . . . . . . . . . 102.1 7.9 110.0 6.6 4.7
BBB-. . . . . . . . . . . . . . . . . . . . . . 99.5 99.5 6.0 4.2
------- ------ ------- ------- -------
Total investment-grade . . . . . . . . . . . . 1,544.7 9.5 1,554.2 93.8 66.0
------- ------ ------- ------- -------
BB+ . . . . . . . . . . . . . . . . . . . . . . 27.7 27.7 1.7 1.1
BB and BB-. . . . . . . . . . . . . . . . . . . 42.2 42.2 2.6 1.8
B and Below . . . . . . . . . . . . . . . . . . 24.3 6.4 30.7 1.9 1.3
------- ------ ------- ------- -------
Total noninvestment-grade. . . . . . . . . . . 94.2 6.4 100.6 6.2 4.2
------- ------ ------- ------- -------
Total fixed maturities . . . . . . . . . . . $1,638.9 $15.9 $1,654.8 100.0% 70.2%
- -------------------------------------------------------------------------------------------------------------------

<FN>

(1) Bonds not rated by S&P are classified according to the rating assigned
to them by the National Association of Insurance Commissioners (the
"NAIC") as follows: for the purposes of the table, NAIC Class 1 is
included in the "A" rating; Class 2, "BBB-"; Class 3, "BB-"; and
Classes 4-6, "B and Below."

</TABLE>

Noninvestment-grade debt securities generally provide higher yields, but
involve greater risks than investment-grade debt securities because these
securities are often unsecured and subordinated to other debt, and because
the issuers of noninvestment-grade debt securities typically are more highly
leveraged and, therefore, more vulnerable to adverse economic conditions than
issuers of investment-grade debt securities. In addition, the trading market
for these securities is usually more limited than for investment-grade debt
securities. The Company continually reviews the percentage of its portfolio
that is invested in noninvestment-grade debt securities (NAIC designations 3
through 6) and intends to maintain the percentage holdings of such securities
at or below the current level.

At December 31, 1994, corporate debt securities then defaulted as to
principal and/or interest had been marked to market and constituted less than
a 1% of the Company's total fixed maturity securities.

DERIVATIVE CMOS. SLC's insurance subsidiaries hold investments in two
derivative CMOs, generally known as "kitchen sink" bonds, that resulted from
actions taken in late 1992 and mid 1993 to reduce the Company's exposure to
further loss of principal on a substantial portfolio of directly-held
derivative CMOs. These investments include certain Class B pass-through
certificates issued by Fund America (the "Fund America Investment") and the
residual interest (the "SIST Residual") in a special purpose trust, the
Secured Investors Structured Trust, 1993-1 ("SIST"). Both the Fund America
Investment and the SIST Residual represent residual or junior interests in
the cash flows from two trusts created in 1993, as described below.
Substantially all of each trust's cash flows from the investments within
these trusts is applied first to the payment of interest on the trust's
outstanding senior debt, with the remainder being applied to reduce the
principal balance of the senior debt. Except for the cash flows from one
relatively small investment held in the Fund America Trust, SLC's insurance
subsidiaries, as holders of the residual interests in these trusts, are not
entitled to receive any of the cash flows from these trusts until the senior
debt has been fully repaid. Thereafter, all cash flows from the underlying
securities in these trusts will be paid to SLC's insurance subsidiaries. As
discussed below, primarily as a result of a rising interest rate environment
and resultant negative market perceptions relative to these types of
investments, the Company realized investment losses totaling $86.2 million on
these investments during 1994.

CMO investments generally offer relatively high yields and, because of
the quality of the underlying collateral, such as residential mortgage loans,
are usually given the highest credit ratings by S&P and Moody's. Beginning in
late

<PAGE>

1990 and continuing through 1991, management utilized a strategy of investing
in CMOs to enhance the credit quality of SLC's investment portfolio without
incurring a reduction in investment yields. A significant portion of these
investments were represented by conventional CMO obligations that had
predictable cash flows and little risk of loss of principal. However, the
Company also invested substantial amounts in derivative CMOs, such as
principal-only certificates, interest-only certificates, inverse floaters,
and residual interests. Although highly rated, such derivative CMOs can
produce yields substantially higher than conventional CMOs, but are sensitive
to changes in market interest rates and there is substantial risk of loss of
principal associated with such investments.

Beginning in the last half of 1991 and continuing throughout 1992,
market interest rates declined significantly and, as a consequence, mortgage
loan interest rates declined to their lowest levels in approximately 25
years. Concurrently, the levels of mortgage loan refinancings and prepayments
reached unprecedented high levels. Based on such factors, SLC incurred
significant losses relative to its derivative CMOs and realized investment
losses on such investments totaling $138.5 million during 1992.

Beginning in mid 1992, SLC began exploring ways to reduce its exposure
to the prepayment risks associated with its remaining portfolio of
derivative-type CMOs, including retaining an unaffiliated investment advisor
and an investment banking firm to examine strategic alternatives regarding
such investments. The primary objectives were to liquidate a substantial
portion of the Company's investments in these types of securities without
incurring significant additional losses, to protect the Company against
future economic losses, and to reduce the accounting volatility associated
with these types of investments. Following extensive analysis of SLC's
portfolio of derivative CMOs, it was the belief of management and SLC's
advisors that the marketplace had significantly underpriced the individual
securities within the portfolio and that a structure involving unaffiliated
parties could be formed that would allow SLC to meet all of its objectives.

In conjunction with the sale of Bankers in November 1992, derivative
CMOs previously owned by Bankers with a carrying value of $251.0 million were
placed in the Trust sponsored by I.C.H. Funding Corporation, an SLC
subsidiary ("ICH Funding"). Bankers was issued a $159.2 million bond
("collateralized mortage note obligation") and SLC retained a residual
interest in the Trust totaling $91.8 million. All cash flows from the Trust
were to be applied first to the repayment of the collateralized mortgage note
obligation due Bankers, with interest at 8.5%, and SLC was given an option to
purchase the remaining collateralized mortgage note obligation from Bankers
within 90 days following the sale of Bankers. Due to continuing high levels
of prepayments of the underlying mortgage loans, at year-end 1992, SLC
reflected a writedown of its investment in the Trust to its fair value of
approximately $79.7 million. In February 1993, the SIST was formed by
transferring substantially all of the remaining assets held in the Trust.
Interests in the SIST totaling $171.0 million were sold to unaffiliated
parties, including $111.0 million of bonds bearing interest at the floating
thirty-day London Interbank Offered Rate ("LIBOR") plus 2 1/2% and $60.0
million of bonds at a fixed rate of 8.0%. SLC utilized $142.1 million of the
proceeds to retire the remaining collateralized mortgage note obligation due
Bankers and, after underwriting expenses, SLC received $24.5 million in cash,
which was applied to reduce its remaining carrying value in the SIST Residual.

In structuring the SIST, additional securities were added at a cost of
$6.8 million solely to collateralize the SIST Residual, which had a carrying
value of $55.2 million following the formation of the SIST. These securities
consisted of the principal component of bonds (the "RFCO Strips") issued by
the Resolution Funding Corporation, a mixed-ownership government corporation
established for the sole purpose of providing financing for the Resolution
Trust Corporation, the agency charged with resolving failed savings and loan
associations. By its terms, the payment of the RFCO Strips are due in full in
a single payment of $58.0 million in January 2021, which amount management
believes to be sufficient to assure SLC's recovery of its carrying value in
the SIST Residual. Although not obligations of, or guaranteed as to principal
by the United States of America, the Offering Circular for the RFCO Strips
stated that the principal amounts of the RFCO Strips would be fully repaid
from proceeds of noninterest bearing obligations of the United States issued
by the Secretary of the Treasury and deposited in a separate account at the
Federal Reserve Bank in New York.

Effective July 30, 1993, SLC and its subsidiaries, along with CFLIC,
entered into a transaction designed to substantially reduce their exposure to
the prepayment risks associated with their remaining investments in
derivative CMOs, including liquidating a substantial portion of such
investments. SLC's subsidiaries and CFLIC sold directly-owned derivative CMOs
with carrying values of approximately $137.7 million and $26.5 million,
respectively, to an

<PAGE>

unaffiliated party, Fund America. In addition, SLC and CFLIC sold to Fund
America 75% of their rights with respect to the SIST Residual with carrying
values of $7.0 million and $33.7 million, respectively. CFLIC had acquired
its interest in the SIST Residual in conjunction with its acquisition from
SLC of an 83% interest in ICH Funding as discussed in Note 4 of Notes to
Financial Statements. Fund America sponsored the formation of a trust (the
"Fund America Trust") into which it deposited the purchased securities.
Interests in the Fund America Trust aggregating $218.0 million were sold to
unaffiliated parties, of which $217.0 million represented senior debt bearing
interest at the floating thirty-day LIBOR plus 2.0%. Of the gross sale
proceeds, $113.7 million was utilized to purchase securities which were added
to the Fund America Trust, $8.9 million was utilized to acquire RFCO Strips
to solely collateralize the Class B pass-through certificates, $5.0 million
was utilized to pay underwriting and other expenses, and $90.4 million was
utilized as partial consideration for the purchase of the securities from SLC
and its subsidiaries and CFLIC. The remainder of the consideration received
by SLC and it subsidiaries and CFLIC consisted of $101.0 million face value,
or 99%, of the Class B pass-through certificates issued by the Fund America
Trust with a fair value, as determined by the investment banking firm, of
$91.4 million, assuming an 11% discount rate. The Fund America Investment was
recorded at its fair value and SLC recognized a loss on the transaction
totaling $15.1 million. Such loss was offset, in part, by gains totaling
$11.8 million on the disposal of other securities utilized to hedge SLC's
investments in the derivative CMOs. The RFCO Strips added to collateralize
the Fund America Investment are to be paid in a single payment totaling
$102.0 million in April 2030, and management believes such amount are
sufficient to fully recover SLC's investment.

Management had originally intended to reflect the Fund America
Investment and the SIST Residual at their amortized cost in the held to
maturity category of fixed maturity securities to eliminate the accounting
volatility associated with these types of investments. In late 1993, the
Emerging Issues Task Force ("EITF") of the Financial Accounting Standards
Board ("FASB") issued EITF Issue No. 93-18, "Impairment Recognition for a
Purchased Investment in a Collateralized Mortgage Obligation Investment or in
a Mortgage-Backed Interest Only Certificate," which provided an analytical
framework for measuring the impairment of certain "high risk" CMOs and which
has been widely used to provide guidance as to when writedowns should be
taken on CMO investments in accordance with SFAS No. 115. Under EITF No.
93-18, if the future cash flows from an investment on a discounted basis
utilizing a "risk free" rate of return are projected to be less than the
investment's amortized cost, an "other than temporary" writedown to fair
value is required through a charge to earnings. In addition, authoritative
sources indicated that it was doubtful whether these types of investments
could ever be classified in the held to maturity category of fixed
maturities. Accordingly, at December 31, 1993, SLC classified its Fund
America Investment and the SIST Residual as available for sale and reduced
the carrying value of such investments from $95.5 million to their estimated
fair value, assuming an 11% annual return to maturity, of $67.1 million. Such
reduction, totaling $28.4 million, was reflected as an unrealized investment
loss through a charge to stockholders' equity.

The Fund America Investment and the SIST Residual are both highly
sensitive to changes in mortgage loan prepayment rates and changes in market
interest rates, particularly the one-month LIBOR upon which interest payments
to holders of senior classes of these investments are generally based. At
December 31, 1993, the one-month LIBOR was approximately 3.2% and, primarily
as a result of the rising interest rate environment experienced throughout
1994, had increased to approximately 5.9% as of December 31, 1994. Such
increase in LIBOR had a significant impact on the estimate of future cash
flows that would be required to service the senior classes of debt. The
ultimate expected maturities of the senior debt were extended approximately
five years in the case of the Fund America Trust and approximately three
years in the case of the SIST as a result of the increase in estimated cash
flows needed to service the interest portion of such debt. The rise in LIBOR
in 1994 and its effect on projected cash flows was offset, in part, by a
significant decline in mortgage loan prepayments and refinancings, and, as a
consequence, the assumed rate of prepayments on underlying CMO investments
held in the Fund America Trust and the SIST were appropriately adjusted.

Under the provisions of EITF No. 93-18, the determination of when a loss
is to be "triggered" and reflected as a charge to earnings is a function of
both future cash flows and the "risk free" rate used to discount such cash
flows to their present value. At December 31, 1993, the "risk free" rate used
to value the Fund America Investment and the SIST Residual was 5.0%, or the
equivalent yield on a five-year U.S. Treasury obligation. As a result of both
rising interest rates in 1994 and the lengthening of the period over which
cash flows from these investments are expected to be received, the "risk
free" rate utilized at December 31, 1994 was 7.8%, or the equivalent of a
thirty-year U.S.

<PAGE>

Treasury obligation. Such increase in the "risk free" rate substantially
lowered the threshold at which realized losses on these investments were
required to be recognized.

The determination of the fair values of the Fund America Investment and
the SIST Residual is primarily affected by the rate utilized to discount
future cash flows. At December 31, 1993, the discount rate assumed by an
investment banking firm to estimate the fair values of these investments was
11%, the same discount rate utilized to initially estimate the fair value of
these investments. Based, in part, on the perceived risks associated with
these types of investments and the turmoil experienced in the CMO marketplace
during 1994 as a result of significant losses incurred by certain investment
management funds investing in these types of instruments, the same investment
banking firm utilized a substantially higher 20.5% discount rate at December
31, 1994. Based on projected cash flows at December 31, 1994, this increase
in the assumed discount rate accounted for approximately $25 million of the
decrease in the fair value of these investments during 1994.

Due primarily to the increasing interest rate environment in 1994 and
its effect on the projected future cash flows of the Fund America Investment
and the SIST Residual as discussed above, realized investment losses on such
investments were "triggered" under the provisions of EITF No. 93-18 on two
occasions during 1994. For the three months ended March 31, 1994, SLC
reflected a charge to earnings for the writedown of these investments from
their GAAP book value totaling $96.4 million to their then fair value
totaling $50.0 million, or a total charge of $46.4 million. For the three
months ended December 31, 1994, SLC recorded an additional charge to earnings
for the writedown of the Fund America Investment from its GAAP book value
totaling $48.4 million to its estimated fair value of $8.6 million, or a
total charge of $39.7 million.

Following is information with respect to the amount and percentage of
senior debt outstanding at December 31, 1994 and 1993, relative to each of
the Fund America Trust and SIST, and the related book value, carrying value,
and projected cash flows attributable to the Company's Fund America
Investment and the SIST Residual:

- ---------------------------------------------------------------------------------------------------------------------
FUND AMERICA SIST
------------------ -----------------
(DOLLARS IN MILLIONS) 1994 1993 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Senior debt outstanding . . . . . . . . . . . . . . . . . . . . . . . . . $152.8 $190.7 $56.6 $90.8
Senior debt outstanding as a percentage of original senior debt. . . . . . 70.4% 87.9% 33.1% 53.1%

Book value of SLC investment. . . . . . . . . . . . . . . . . . . . . . . . $ 8.6 $ 81.7 $ 6.4 $13.8
Carrying value of SLC investment(1) . . . . . . . . . . . . . . . . . . . . 8.6 58.6 3.6 8.5
Projected future SLC cash flows(2). . . . . . . . . . . . . . . . . . . . . 267.2 315.7 40.5 49.7
Projected date of first receipt of cash flows(2). . . . . . . . . . . . . . 2004 1999 2001 1998
- ----------------------------------------------------------------------------------------------------------------------

<FN>
(1) Represents the fair value of the Company's investments as estimated by
an investment banking firm.

(2) Represents the projected future cash flow attributable to the Company's
99% ownership in the Class B pass-through certificates issued by the
Fund America Trust (87% at December 31, 1993) and the Company's 25%
ownership in the SIST. The projected future cash flows and the
projected date of first receipt of cash flows were estimated by the
Company's investment adviser, NEAM, under an assumed unchanged future
interest rate environment at each of the respective dates.

</TABLE>

The carrying values of the Fund America Investment and the SIST Residual
at December 31, 1994 approximates the fair value of the RFCO Strips included
in the trusts at December 31, 1994, and, therefore, management believes the
likelihood of additional writedowns in the foreseeable future is remote.

The declines in value of the Fund America Investment and the SIST
Residual have not had and are not expected to have any effect on the
Company's operating cash flows over the next several years. The writedowns
reflected relative to these investments will, however, have a significant
effect on earnings as reflected for financial reporting purposes. Prior to
the writedowns discussed above, the Company had accrued investment income on
these investments at 6.0% of their GAAP book value, or approximately $5.8
million of investment income in 1994.

<PAGE>

Beginning in 1995, investment income will be accrued on these investments at
an average 16.5% of their GAAP book value, or approximately $2.5 million of
investment income. For statutory reporting purposes, the Investment Working
Group of the NAIC has tentatively decided not to follow or adopt the GAAP
accounting standards of SFAS No. 115 and EITF No. 93-18 described above. At
December 31, 1994, the combined carrying value of the investments for SAP
totaled $78.8 million.

OTHER INVESTMENTS. At December 31, 1994, $127.0 million in book value of
the Company's investment portfolio consisted of mortgage loans representing
5.4% of SLC's investment portfolio. The Company has a stated policy of not
directly initiating or making new mortgage loans, except under limited
circumstances, including primarily to finance sales of company-owned real
estate. New mortgage loans have totaled $1.8 million, $3.1 million and $17.0
million during 1994, 1993 and 1992, respectively. During 1994, SLC acquired
$7.9 million of mortgages as a distribution from one of its limited
partnership investments and $5.2 million of mortgages in conjunction with the
recapture of the CFLIC reinsurance agreement. Substantially all other
mortgage loans owned by the Company were as a result of the acquisitions of
life insurance companies in 1986 and prior years. At December 31, 1994,
mortgage loans delinquent by more than 60 days amounted to approximately $3.5
million, or 2.8% of total mortgage loans. At December 31, 1994, SLC provided
a $3.0 million reserve for possible mortgage loan losses through a
charge to earnings.

Real estate investments totaling $57.1 million and home office real estate
totaling $13.0 million represented 2.4% and 0.6% of the Company's investment
portfolio, respectively, at December 31, 1994. The Company has a stated
policy of not making real estate investments, except for foreclosures on its
existing mortgage loans. During 1994, there were no significant mortgage loan
foreclosures. Mortgage loan foreclosures totaled $3.2 million and $5.7
million in 1993 and 1992, respectively. During 1993, SLC fulfilled its
obligation to purchase certain real estate from former subsidiaries for
approximately $19.0 million. In addition, in conjunction with the sale of
Bankers in 1992, SLC purchased all of the real estate held by Bankers,
primarily its home office real estate, for $9.0 million. In 1992, Bankers
entered into a long-term lease for a portion of the property sold to SLC and
in 1994 SLC sold a substantial portion of the remaining property at a gain.
The remaining real estate acquired from Bankers, with a carrying value of
$4.1 million at December 31, 1994, is held for sale.

At December 31, 1994, the Company held limited partnership interests in
various partnerships with a carrying value totaling $42.0 million, as
compared to $43.6 million at year-end 1993 and $39.8 million at year-end
1992. These investments were made primarily to participate in the potential
appreciation resulting from certain leveraged buyouts and corporate
reorganizations. In addition, included in such investments at December 31,
1994 was a $21.1 million investment, representing a 49% limited partnership
interest, in a partnership formed to acquire, through auction, certain
mortgage loans and real estate formerly held by failed savings and loan
associations for resale. The Company believes that, on a selective basis,
these investments offer attractive risk-adjusted returns; however, such
investments are not readily marketable and, in the event of a need for
liquidity, the Company may be unable to quickly convert such investments into
cash. See Note 6 of Notes to Financial Statements for additional
information regarding the Company's investments in limited partnerships.

The Company's investment portfolio at December 31, 1994, also included
approximately $229.5 million of cash and short-term investments, plus certain
fixed maturity investments (U.S. government agency-backed and mortgage-backed
securities and publicly traded, investment-grade bonds) that could be readily
converted to cash at or near carrying value with a carrying value of
approximately $1,625.6 million. At December 31, 1994, these liquid
investments constituted 79% of the Company's total cash and invested assets.

REINSURANCE

Indemnity reinsurance is an arrangement or "treaty" under which an
insurance company, the "reinsurer," agrees to indemnify another insurance
company, the "ceding company," for all or a portion of the insurance risks
underwritten by the ceding company. Generally, the Company enters into
indemnity reinsurance arrangements to assist in diversifying its risks and to
limit its maximum loss on large risks, including risks that exceed SLC's
applicable policy-retention limits, currently ranging up to $500,000 per
insured for individual life insurance products. Indemnity reinsurance does
not discharge the ceding insurer's liability to meet policy claims on the
reinsured business. The ceding

<PAGE>

insurer remains responsible for policy claims on the reinsured business to
the extent the reinsurer fails to pay such claims. The Company reinsures with
unaffiliated insurance companies, except that Southwestern Life reinsures a
block of interest-sensitive life business from Modern American. The in force
amount under this reinsurance treaty with Modern American at December 31,
1994 was approximately $455.7 million.

Under most of the Company's reinsurance arrangements, new insurance and
annuity sales are reinsured automatically rather than on a basis that would
require the reinsurer's prior approval. The Company pays reinsurance premiums
to such reinsurers which are, in general, based upon percentages of premiums
received by the Company on the business reinsured less, in certain cases,
ceding commissions and experience refunds paid by the reinsurer to the
Company. Such agreements are generally terminable at any time as to new risks
by either the Company or the reinsurer on appropriate notice; however, such
termination does not affect risks ceded during the term of the agreement,
which generally remain with the reinsurer, subject, in specified cases, to
specified rights on the part of the Company to recapture such risks.
Insurance in force ceded in 1994 under indemnity reinsurance agreements
totaled approximately $1.5 billion. See Note 11 of Notes to Financial
Statements.

In a few instances, SLC's subsidiaries have ceded blocks of insurance to
unaffiliated reinsurers to provide funds for enhancing surplus, financing
acquisitions, and other purposes. Under these financing arrangements,
statutorily determined profits on the reinsured business are accelerated
through the reinsurer's payment of ceding commissions representing the
present value of profits on the business over the reinsurance period. These
reinsurance transactions, or so-called "surplus relief reinsurance" represent
financing arrangements and, in accordance with GAAP, are not reflected in the
accompanying financial statements, except for the ceding fees paid to or
received from reinsurers. Statutory surplus provided by such treaties before
tax effects totaled $57.8 million at December 31, 1994, or approximately 12%
more than the $51.5 million of surplus relief at December 31, 1993 primarily
as a result of the $20.7 million net ceding fee incurred by Employers
Reassurance Corporation ("ERC") to effect the recapture of certain
reinsurance from CFLIC. See Note 4 of Notes to Financial Statements. These
arrangements are expected to terminate over the next several years through
the recapture of the ceded blocks of business and such recaptures will result
in a charge to the statutory earnings of the recapturing companies.

Historically, reinsurance has not had a significant effect on SLC'S
consolidated results of operations, with net ceded premium income and other
considerations representing 6% or less of total premium income and other
considerations in each of the past three years.

ADMINISTRATIVE OPERATIONS

The administrative operations of most of SLC's subsidiaries are
consolidated through FMI, the service corporation subsidiary of SLC.
Functioning as the employer of substantially all of the employees performing
services in SLC's insurance operations, FMI provides management and
administrative services to SLC companies directly and through arrangements with
third parties. Claims administration, risk underwriting, regulatory compliance,
and development and marketing of insurance products are consolidated on behalf
of all of SLC's insurance subsidiaries and are generally separated for
servicing and performed on the basis of insurance product or business segment
instead of on a per subsidiary basis. A significant portion of the data
processing services required in the administrative operations of SLC's
insurance subsidiaries is provided by a third party vendor.

Because of the operational interrelationships among SLC's insurance
subsidiaries, the sales of subsidiaries in prior years have required changes
in the administrative operations of various SLC companies, including changes
in executive responsibilities and personnel requirements. The complete
separation of the operations of SLC's subsidiaries and the subsidiaries
previously sold occurred in 1993, with the expiration of the servicing
arrangements that were entered into when the former subsidiaries were sold in
1989 and 1990. Following a full-scale review, the administrative operations
of SLC's subsidiaries have been reorganized to reduce inefficiencies,
redundancies and excess capacities, and the operations of several companies
have been consolidated across product lines in a primary location under a
common management team.

<PAGE>

COMPETITION

The insurance industry is highly competitive, with approximately 2,000
life and health insurance companies in the United States. Certain large
insurers and insurance holding company systems have substantially greater
capital and surplus, larger and more diversified portfolios of life and
health insurance policies, and larger agency sales operations than those of
SLC's insurance subsidiaries. Financial and claims paying ratings
assigned to insurers by the nationally recognized independent rating
agencies, always a key ingredient, have in some markets become preemptive,
especially in the area of accumulation products. SLC's insurance subsidiaries
also are encountering increased competition from banks, securities brokerage
firms, and other financial intermediaries marketing insurance products and
other investments, such as savings accounts and securities. SLC's life
insurance subsidiaries, like all life insurance companies, can expect greatly
increased competition from banks due to a recent judicial decision and
potential congressional action. In January, the U.S. Supreme Court held that
national banks may market and sell fixed, variable, and hybrid annuities.
Also in 1995, bills have been introduced in Congress that would substantially
widen the opportunities for banks to participate in the insurance industry,
including allowing banks to sell insurance products and bank holding
companies to own insurance companies.

SLC's insurance subsidiaries compete primarily on the basis of experience,
size, accessibility, cost structure and pricing, claims responsiveness,
product design and diversity, service, and distribution. SLC believes that
its insurance subsidiaries are generally competitive based on premium rates
and service, have longstanding relationships with their agents, and offer a
diverse portfolio of products.

RATINGS

SLC's subordinated debt and preferred stock are rated by Moody's and S&P.
These agencies, along with Duff & Phelps Credit Rating Company ("Duff &
Phelps"), have also rated the claims paying ability of certain of SLC's
insurance subsidiaries. In addition, A.M. Best, an agency specializing in the
rating of insurance companies, has assigned ratings to each of SLC's
insurance subsidiaries. Since 1992, substantially all of the ratings issued
by these agencies have reflected ratings downgrades due primarily to
continuing high levels of debt at the parent company level. As a result of
these downgrades, SLC has a subordinated debt rating of "C" by Moody's and
"C" by S&P, and a preferred stock rating of "C" by Moody's and "C" by S&P
(all of which are below investment grade). SLC's lead life insurance
subsidiary, Southwestern Life, has a "B+" rating by A.M. Best (very good), a
claims paying rating of "B" by Duff & Phelps, and "B+" by S&P. Additionally,
Moody's has assigned an insurance financial strength rating of "B2"
(poor) to Southwestern Life. Bankers New York has been assigned a rating of
"A-" and the remaining SLC subsidiaries have been assigned a rating of "B+"
by A.M. Best. For many of these ratings, SLC and its subsidiaries remain
under review, with negative implications.

The following ratings downgrades, beginning in 1991 and continuing into
1995, were precipitated by the amount of corporate debt remaining from SLC's
prior acquisitions, the perceived interdependence of the SLC's holding
company structure, high and continuing leverage at the parent company, and
losses incurred in connection with past investment strategies: Duff & Phelps
lowered the claims paying abilities of certain SLC subsidiaries in January
1993, October 1994, and January 1995; A.M. Best lowered its ratings in
February 1993 and January 1995; Moody's lowered the subordinated debt,
preferred stock, and insurance financial strength ratings in June 1993 and
January 1995; and S&P lowered the subordinated debt, preferred stock, and
claims paying ratings in November 1992 and January 1995. These factors have
also contributed to increased regulatory oversight of the SLC insurance holding
company organization.

The ratings assigned to SLC and its insurance subsidiaries have a
significant effect on SLC's ability to issue debt securities, as well as the
interest rates that SLC must pay in order to borrow funds. The claims paying
ratings assigned to SLC's subsidiaries could have a significant effect on a
given subsidiary's ability to market its products, as well as its ability to
retain its presently existing insurance in force.

REGULATION

GENERAL. SLC's insurance subsidiaries are subject to comprehensive
regulation in the various states in which they are authorized to do business.
The laws of these states establish supervisory agencies with broad
administrative

<PAGE>

powers, among other things, to grant and revoke licenses for transacting
business, to regulate trade practices, reserve requirements, the form and
content of policies, and the types and amounts of investments, and to review
premium rates for fairness and adequacy. These supervisory agencies
periodically examine the business and accounts of insurance companies,
including SLC's insurance subsidiaries, and require them to file detailed
annual financial statements and reports prepared in accordance with SAP. In
addition, as an insurance holding company, SLC is also subject to regulatory
oversight in the states in which its insurance subsidiaries are domiciled and
conduct business.

REGULATORY REVIEW. In recent years increased scrutiny has been placed upon
the insurance industry generally and the adequacy of the existing state
regulatory framework in particular. In light of these developments, the NAIC
and state insurance regulators have also become involved in the process of
reexamining existing laws and regulations and their application to insurance
companies. In addition, in connection with its accreditation of states to
conduct periodic examinations, the NAIC has encouraged and persuaded states
to adopt model NAIC laws on specific topics, such as holding company
regulations, the structure of reinsurance transactions and the definition of
extraordinary dividends. During 1992 and continuing through 1994, in part as
a result of these activities, SLC's insurance subsidiaries became subject to
substantially more oversight by insurance regulators than had been the case
in the past, and such increased oversight will likely continue in 1995 and
future periods.

During 1992, a special working group of the NAIC (the "Group"), which
included the representatives of the insurance departments of seven states,
conducted an extensive review of the operations and financial condition of
SLC and its respective insurance subsidiaries. Management believes that the
concerns raised in 1992 by the Group have been resolved. Nevertheless, the
Group has indicated it will continue to monitor, to the extent it deems
appropriate, the activities and the operations of SLC and its insurance
subsidiaries.

REGULATION OF DIVIDEND PAYMENTS. As a holding company with no other
business operations, SLC's primary sources of cash needed to meet its
obligations, including principal and interest payments on its outstanding
indebtedness, are sales of and interest on its investments and dividends from
its insurance subsidiaries. SLC's insurance subsidiaries are subject to
various regulatory restrictions on the maximum amount of payments, including
loans or cash advances, that they may make to SLC without obtaining prior
regulatory approval. See Note 9 of Notes to Financial Statements for
additional information regarding dividend restrictions.

MINIMUM CAPITAL REQUIREMENTS. Effective with statutory annual statements
filed for the year ended December 31, 1993, and thereafter, all life
insurance companies are required to calculate, utilizing NAIC formulas, their
levels of total adjusted capital and risk-based capital. A ratio (the "RBC
ratio") is then determined based on the company's level of adjusted capital
to its risk-based capital.

In states that have adopted the NAIC regulations, including each of the
states where the Company's insurance subsidiaries are domiciled, the RBC
requirements provide for four different levels of regulatory attention
depending on an insurance company's base adjusted capital ("BAC") ratio. The
BAC ratio is defined as two times the RBC ratio. The "Company Action Level"
is triggered if a company's BAC ratio is less than 200% but greater than or
equal to 150%, or if a negative trend has occurred (as defined by the
regulations) and the company's BAC ratio is less than 250%. At the Company
Action Level, the affected company must submit a comprehensive plan to its
regulatory authority that discusses proposed corrective actions to improve
its capital position. The "Regulatory Action Level" is triggered if a
company's BAC ratio is less than 150% but greater than or equal to 100%. At
the Regulatory Action Level, the regulatory authority will perform a special
examination of the affected company and issue an order specifying corrective
actions that must be followed. The "Authorized Control Level" is triggered if
a company's BAC ratio is less than 100% but greater than or equal to 70%, and
the regulatory authority may take any action it deems necessary, including
placing the company under regulatory control. The "Mandatory Control Level"
is triggered if a company's BAC ratio is less than 70%, and the regulatory
authority is mandated to place the affected company under its control.

Management believes that the levels of capital in SLC's insurance
subsidiaries are sufficient to meet RBC requirements. Based on the NAIC's
formulas, the BAC ratios for all but one of SLC's life insurance subsidiaries,
based on financial statements as filed with regulatory authorities, exceeded
300% at December 31, 1994. One subsidiary's

<PAGE>

BAC ratio approximated 208% and management is in the process of evaluating
alternatives to achieve at least a 300% BAC ratio for such subsidiary by
year-end 1995.

GUARANTY FUNDS. From time to time, assessments are levied on SLC's
insurance subsidiaries by life and health guaranty associations in those
states in which they are licensed to do business. Such assessments are made
primarily to cover the losses of policyholders of insolvent or rehabilitated
insurers. In some states, these assessments can be partially recovered
through a reduction in future premium taxes. SLC's insurance subsidiaries
paid assessments of $2.7 million in 1994.

CERTAIN AGREEMENTS WITH REGULATORY AUTHORITIES. Certain subsidiaries of
SLC have entered into agreements with state insurance departments which
impose restrictions or reporting requirements in connection with their
operations of business or their payments of dividends. In management's view,
none of these regulatory agreements have adversely affected the insurance
business of the Company.

In conjunction with the receipt of the approval of the Texas Department
required for the restructuring of SLC's insurance holding company
organization in September 1993, SLC and its Texas-based subsidiaries,
Southwestern Life and Union Bankers, entered into an agreement with the Texas
Department, which superseded a prior regulatory agreement they had entered
into on March 31, 1993. Among other things, the agreement with the Texas
Department requires SLC, Southwestern Life and Union Bankers to provide the
Texas Department with designated information on an on-going basis relating to
surrenders on Southwestern Life and its subsidiaries, Constitution Life and
Bankers New York, and departures of executive officers, among other areas;
requires Southwestern Life to provide 30 days prior notice of the payment of
any stockholder dividend, to limit the amount it invests in private placement
securities, and to not invest in interest-only CMOs; and requires 30 days
prior notice of any financial reinsurance transaction or acquisition of
business through assumption reinsurance by either Southwestern Life or Union
Bankers. See Note 9 of Notes to Financial Statements for additional
information regarding dividend restrictions.

REGULATION AT FEDERAL LEVEL. Although the federal government generally
does not directly regulate the insurance business, federal initiatives often
have effects on the business in a variety of ways. Current and proposed
federal measures that may significantly affect the insurance business include
limitations on antitrust immunity, minimum solvency requirements, the removal
of barriers restricting banks from engaging in the insurance and mutual fund
business and changes in the taxation of insurance companies and the products
they market. It is not possible to predict the outcome of any such
congressional activity or the potential effects thereof on the Company or its
business.

HEALTH REFORM LEGISLATION. Numerous legislative proposals have been
introduced or proposed in Congress and in some state legislatures that would
effect major changes in the U.S. health care system nationally or at the
state level. Certain proposals, such as cutbacks in the Medicare and Medicaid
programs, containment of health care costs on an interim basis by means that
could include a freeze on prices charged by physicians, hospitals and other
health care providers, and permitting states greater flexibility in the
administration of Medicaid, could adversely affect the Company. There can be
no assurance that currently proposed or future health care legislation or
other changes in the administration or interpretation of governmental health
care programs will not have a material adverse effect on the Company's
operating results.

OTHER REGULATION. During 1993, the NAIC initiated the process of drafting
a model investment act. In general, the currently drafted investment act is
more restrictive than the present investment laws of the states in which
SLC's insurance subsidiaries are domiciled. If adopted, it is likely that
such model investment act would limit the types of investments that can be
made by SLC's insurance subsidiaries in future periods, as well as the
amounts that could be invested in various investment categories, which could
result in an overall reduction in investment yields.

RESERVES

In accordance with applicable insurance laws, SLC's insurance subsidiaries
have established and carry as liabilities actuarial reserves to meet their
respective policy obligations. Life insurance reserves, when added to interest
thereon at certain assumed rates and premiums to be received on outstanding
policies, are calculated to be sufficient to meet policy obligations. The
actuarial factors used in determining such reserves are based on statutorily
prescribed

<PAGE>

mortality and interest rates. Reserves maintained for health insurance
include the unearned premiums under each policy, reserves for claims that
have been reported but are not yet due, and reserves for claims that have
been incurred but have not been reported. Furthermore, for all health
policies under which renewability is guaranteed, additional reserves are
maintained in recognition of the actuarially calculated probability that the
frequency and amount of claims will increase as the attained age of the
insured increases. SLC's insurance subsidiaries maintain reserves on
reinsured business once it is assumed by them and take credit for reserves on
reinsured business after it is ceded to other insurers by them. Reserves for
the assumed reinsurance are computed on bases essentially comparable to
direct insurance reserves. See Note 1 of Notes to Financial Statements for
additional information regarding reserve assumptions under GAAP.

EMPLOYEES

At March 1, 1995, SLC and its subsidiaries employed a total of
approximately 1,000 persons, excluding agents who are not employees but are
independent contractors. This reflects a decrease in employees from 1,300 at
December 31, 1993 and 1,500 at December 31, 1992 (excluding employees of
Bankers). The consolidation of most of the Company's operations in Dallas, Texas
in 1993 and 1994, and reductions-in-force instituted in such years to reduce
costs and increase operating efficiencies, primarily account for the reduction
in employees.

26
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES OF
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES

(Items 8, 14(a), and 14(c))

FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . 46
Consolidated Balance Sheets at December 31, 1994 and 1993 . . . 47
Consolidated Statements of Earnings (Loss) for the years ended
December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . 48
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1994, 1993 and 1992. . . . . . . . . . . . 49
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1993 and 1992. . . . . . . . . . . . . . . 50
Notes to Financial Statements . . . . . . . . . . . . . . . . . 51

FINANCIAL STATEMENT SCHEDULES

Schedule II - Condensed financial information of registrant. 89
Schedule III - Supplementary insurance information. . . . . . 93
Schedule IV - Reinsurance. . . . . . . . . . . . . . . . . . 94
Schedule V - Valuation and qualifying accounts and
reserves . . . . . . . . . . . . . . . . . . . 95
</TABLE>

All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and therefore have been omitted
or the information is presented in the consolidated financial statements or
related notes.

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
Southwestern Life Corporation

We have audited the consolidated financial statements and financial
statement schedules of Southwestern Life Corporation and Subsidiaries as
listed in the index on page 45 of this Form 10-K. These financial statements
and financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

As discussed in Note 3 to the consolidated financial statements, the
Company has significant debt requirements in 1995 and 1996. Management has
stated they have several alternatives which they believe will result in full
satisfaction of the 1995 requirements. However, at the present time, it appears
that to satisfy the requirements for both 1995 and 1996, a significant
restructuring of these debt obligations or a more comprehensive
recapitalization plan will be required. Such restructuring or recapitalization
would likely result in a substantial dilution of existing stockholders,
especially common stockholders, and could possibly result in a change in
control of the Company.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Southwestern
Life Corporation and Subsidiaries as of December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules referred to above, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the information required to be included therein.

As discussed in Note 7 to the Financial Statements, the Company changed its
method of assessing the recoverability of Excess Cost of Investments in
Subsidiaries over Net Assets Acquired in 1994.

As more fully described in Notes 14 and 5 to these consolidated financial
statements, effective January 1, 1993 and December 31, 1993, the Company
adopted statements of Financial Accounting Standards No. 106, "Employers'
Accounting for Post-retirement Benefits Other Than Pensions" and No. 115,
"Accounting for Certain Investments in Debt and Equity Securities,"
respectively.

Coopers & Lybrand L.L.P.

Dallas, Texas
March 30, 1995

<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1994 and 1993
(In Thousands)
ASSETS
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Investments:
Fixed maturities:
Available for sale at fair value . . . . . . . . . $1,638,867 $1,691,693
Held to maturity at amortized cost . . . . . . . . 15,915 26,149
Equity securities, at fair value . . . . . . . . . . 10,812 75,831
Mortgage loans on real estate, at amortized
cost. . . . . . . . . . . . . . . . . . . . . . . . 127,047 138,504
Real estate, at lower of cost or fair
value . . . . . . . . . . . . . . . . . . . . . . . 57,068 67,491
Policy loans . . . . . . . . . . . . . . . . . . . . 172,108 177,736
Collateral loans . . . . . . . . . . . . . . . . . . 55,466 34,099
Investments in limited partnerships. . . . . . . . . 42,027 43,640
Cash and short-term
investments . . . . . . . . . . . . . . . . . . . . 229,522 366,922
Other invested assets. . . . . . . . . . . . . . . . 9,666 16,058
---------- ----------
Total investments. . . . . . . . . . . . . . . . . 2,358,498 2,638,123

Due from reinsurers. . . . . . . . . . . . . . . . . . 236,272 388,083
Notes and accounts receivable and uncollected
premiums. . . . . . . . . . . . . . . . . . . . . . . 6,978 6,951
Accrued investment income. . . . . . . . . . . . . . . 31,825 31,633
Deferred policy acquisition costs. . . . . . . . . . . 208,952 168,525
Present value of future profits of acquired
business . . . . . . . . . . . . . . . . . . . . . . 68,805 50,705
Deferred income tax asset. . . . . . . . . . . . . . . 84,862 53,033
Excess cost of investments in subsidiaries over net
assets acquired, net of accumulated amortization. . . 80,500 307,604
Other assets . . . . . . . . . . . . . . . . . . . . . 70,032 53,206
---------- ----------
$3,146,724 $3,697,863
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY

Insurance liabilities:
Future policy benefits and other policy
liabilities . . . . . . . . . . . . . . . . . . . . $ 894,100 $ 927,303
Universal life and investment contract
liabilities . . . . . . . . . . . . . . . . . . . . 1,692,013 1,684,396
Notes payable:
Due within one year. . . . . . . . . . . . . . . . . 59,802 34,546
Due after one year . . . . . . . . . . . . . . . . . 309,592 383,435
Federal income taxes currently payable . . . . . . . . 39,628 29,015
Other liabilities . . . . . . . . . . . . . . . . . . 116,251 143,998
---------- ----------
3,111,386 3,202,693
---------- ----------

Commitments and contingencies
Stockholders' equity:
Preferred stock. . . . . . . . . . . . . . . . . . . 199,997 229,239
Common stock . . . . . . . . . . . . . . . . . . . . 48,983 71,594
Common stock, Class B. . . . . . . . . . . . . . . . 100
Additional paid-in capital . . . . . . . . . . . . . 126,583 155,499
Net unrealized investment gains (losses), net of
deferred income taxes . . . . . . . . . . . . . . . (55,359) 20,458
Retained earnings (deficit). . . . . . . . . . . . . (279,265) 71,833
---------- ----------
40,939 548,723
Notes receivable collateralized by common stock. . . (1,795) (1,729)
Treasury stock, at cost. . . . . . . . . . . . . . . (3,806) (51,824)
---------- ----------
35,338 495,170
---------- ----------
$3,146,724 $3,697,863
========== ==========
</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
For the Years Ended December 31, 1994, 1993 and 1992
(In Thousands, Except Per Share Data)

<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Income:
Premium income and other considerations. . $ 418,020 $ 475,026 $ 1,388,779
Net investment income. . . . . . . . . . . 182,044 195,632 333,138
Realized investment gains (losses) . . . . (96,928) 34,825 (119,088)
Equity in earnings of equity investees
and limited partnerships. . . . . . . . . 4,165 35,210 6,203
Other income . . . . . . . . . . . . . . . 26,355 44,660 20,521
Gain (loss) on sale of subsidiaries. . . . (4,200) 110,734
Gain on sale of investment in Bankers Life
Holding Corporation . . . . . . . . . . . 297,041
----------- ----------- -----------
529,456 1,082,394 1,740,287
----------- ----------- -----------
Benefits, expenses and costs:
Policyholder benefits . . . . . . . . . . . 377,984 428,332 1,205,445
Amortization of deferred policy acquisition
costs and present value of future
profits. . . . . . . . . . . . . . . . . . 62,099 48,900 133,457
Other operating expenses. . . . . . . . . . 152,598 223,788 329,844
Amortization of excess cost . . . . . . . . 16,421 9,591 10,981
Interest expense. . . . . . . . . . . . . . 48,251 66,153 78,961
Change in accounting for excess cost. . . . 210,683
----------- ----------- -----------
868,036 776,764 1,758,688
----------- ----------- -----------
Operating earnings (loss) before income
taxes. . . . . . . . . . . . . . . . . . . . (338,580) 305,630 (18,401)
Income tax expense (credit) . . . . . . . . . (1,140) 93,706 (69,256)
----------- ----------- -----------
Operating earnings (loss) . . . . . . . . . . (337,440) 211,924 50,855
Cumulative effect of changes in accounting
methods. . . . . . . . . . . . . . . . . . . (6,734)
Extraordinary losses, net of tax effects. . . (1,919) (4,342)
----------- ----------- -----------
Net earnings (loss) . . . . . . . . . . . . . (337,440) 203,271 46,513
Less dividends on preferred stock . . . . . . (13,658) (28,784) (30,800)
----------- ----------- -----------
Net earnings (loss) applicable to common
stock. . . . . . . . . . . . . . . . . . . $ (351,098) $ 174,487 $ 15,713
=========== =========== ===========
Weighted average common shares
outstanding. . . . . . . . . . . . . . . . 47,556,187 47,915,551 48,139,870
=========== =========== ===========
Primary earnings (loss) per common share:
Operating earnings (loss) . . . . . . . . $(7.38) $3.82 $ .42
Cumulative effect of changes in
accounting methods . . . . . . . . . . . (.14)
Extraordinary losses. . . . . . . . . . . (.04) (.09)
------ ----- -----
Net earnings (loss) . . . . . . . . . . . $(7.38) $3.64 $ .33
====== ===== =====
Fully diluted earnings (loss) per common share:
Operating earnings (loss) . . . . . . . . $(7.38) $3.53 $ .42
Cumulative effect of changes in
accounting methods . . . . . . . . . . . (.12)
Extraordinary losses. . . . . . . . . . . (.03) (.09)
------ ----- -----
Net earnings (loss) . . . . . . . . . . . $(7.38) $3.38 $ .33
====== ===== =====
</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1994, 1993 and 1992
(In Thousands)
<TABLE>
<CAPTION>

1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Preferred stock:
Balance at beginning of year. . . . . . . $ 229,239 $ 329,242 $ 329,242
Exchanged for common stock. . . . . . . . (3)
Redemption of shares. . . . . . . . . . . (29,242) (100,000)
---------- ---------- ----------
Balance at end of year. . . . . . . . . . 199,997 229,239 329,242
---------- ---------- ----------
Common stock:
Balance at beginning of year. . . . . . . 71,594 71,401 71,399
Exercise of stock options . . . . . . . . 58 192 2
Issuance of shares for Class B common
stock. . . . . . . . . . . . . . . . . . 100
Exchange of preferred stock . . . . . . . 1
Retirement of treasury shares . . . . . . (22,769)
---------- ---------- ----------
Balance at end of year. . . . . . . . . . 48,983 71,594 71,401
---------- ---------- ----------
Common stock, Class B:
Balance at beginning of year. . . . . . . 100 100 100
Purchase and cancellation of shares . . . (100)
---------- ---------- ----------
Balance at end of year. . . . . . . . . . 100 100
---------- ---------- ----------
Additional paid-in capital:
Balance at beginning of year. . . . . . . 155,499 155,391 155,389
Exercise of stock options . . . . . . . . 90 106 2
Exchange of preferred stock . . . . . . . 2
Retirement of treasury shares . . . . . . (29,006)
---------- ---------- ----------
Balance at end of year. . . . . . . . . . 126,583 155,499 155,391
---------- ---------- ----------
Net unrealized investment gains (losses):
Balance at beginning of year. . . . . . . 20,458 18,823 (3,384)
Change during year. . . . . . . . . . . . (75,817) 1,635 22,207
---------- ---------- ----------
Balance at end of year. . . . . . . . . . (55,359) 20,458 18,823
---------- ---------- ----------
Retained earnings (deficit):
Balance at beginning of year. . . . . . . 71,833 (102,654) (118,367)
Net earnings (loss) . . . . . . . . . . . (337,440) 203,271 46,513
Cash dividends on preferred stock . . . . (13,658) (28,784) (30,800)
---------- ---------- ----------
Balance at end of year. . . . . . . . . . (279,265) 71,833 (102,654)
---------- ---------- ----------
Notes receivable collateralized by common
stock:
Balance at beginning of year. . . . . . . (1,729) (2,163)
Additions during year . . . . . . . . . . (66) (154) (2,163)
Collections during year . . . . . . . . . 588
---------- ---------- ----------
Balance at end of year. . . . . . . . . . (1,795) (1,729) (2,163)
---------- ---------- ----------
Treasury stock, common:
Balance at beginning of year. . . . . . . (51,824) (50,891) (49,460)
Purchase of shares. . . . . . . . . . . . (3,757) (933) (1,431)
Retirement of treasury shares . . . . . . 51,775
---------- ---------- ----------
Balance at end of year. . . . . . . . . . (3,806) (51,824) (50,891)
---------- ---------- ----------
Total stockholders' equity. . . . . . . $ 35,338 $ 495,170 $ 419,249
========== ========== ==========

</TABLE>

The accompanying notes are an integral part of the financial statements.

49
<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1994, 1993 and 1992
(In Thousands)

<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Operating earnings (loss) . . . . . . . $(337,440) $ 211,924 $ 50,855
Items not requiring (providing) cash:
Adjustments relating to universal
life and investment products:
Interest credited to account
balances . . . . . . . . . . . . . 74,378 100,120 159,392
Charges for mortality and
administration . . . . . . . . . . (64,120) (71,375) (85,730)
Depreciation and amortization . . . . 17,800 26,639 23,454
Change in accounting for excess
cost . . . . . . . . . . . . . . . . 210,683
Increase (decrease) in future policy
benefits . . . . . . . . . . . . . . (27,209) 621 33,970
Decrease (increase) in deferred
policy acquisition costs . . . . . . 9,843 24 (10,219)
Increase (decrease) in currently
payable taxes. . . . . . . . . . . . 10,613 16,384 (45,986)
Increase (decrease) in policy
liabilities, other policyholder
funds, accounts payable and accrued
expenses . . . . . . . . . . . . . . (26,154) 27,745 7,649
Decrease in notes and accounts
receivable and accrued investment
income.. . . . . . . . . . . . . . . 841 7,838 15,903
Amortization of bond, mortgage and
collateral loan discount, net. . . . 1,612 7,484 (13,606)
Deferred income tax expense
(credit) . . . . . . . . . . . . . . 6,490 73,028 (70,092)
Equity in undistributed earnings of
equity investees and limited
partnerships . . . . . . . . . . . . (4,165) (34,276) (6,203)
Gain on Consolidated Fidelity Life
Insurance Company transaction. . . . (11,133)
Gain on sale of investment in
Bankers Life Holding Corporation . . (297,041)
Loss (gain) on sale of subsidiaries . 4,200 (110,734)
Realized investment (gains) losses. . 96,928 (34,825) 119,088
Gain on termination of reinsurance. . (22,642)
Other, net. . . . . . . . . . . . . . (8,160) (10,786) 12,347
--------- ----------- -----------
Net cash provided (used) by
operating activities . . . . . . . (44,993) 862 80,088
--------- ----------- -----------
Cash flows from investing activities:
Sales of fixed maturities . . . . . . . 430,392 640,168 1,410,441
Maturities and other redemptions of
fixed maturities . . . . . . . . . . . 228,328 610,809 881,534
Sales of other long-term invested
assets . . . . . . . . . . . . . . . . 169,851 252,883 175,995
Sale of investment in Bankers Life
Holding Corporation. . . . . . . . . . 287,639
Proceeds from sale of subsidiaries,
net of cash disposed . . . . . . . . . 89,672
Purchases of fixed maturities . . . . . (798,662) (1,186,502) (2,246,298)
Purchases of other long-term invested
assets . . . . . . . . . . . . . . . . (84,197) (120,696) (162,526)
Cash received (transferred) on
reinsurance transactions . . . . . . . 25,158 (43,152)
Additional investment in Consolidated
Fidelity Life Insurance Company
preferred stock, net of cash
recovered. . . . . . . . . . . . . . . (15,652)
Purchase of subsidiary, net of cash
acquired . . . . . . . . . . . . . . . (3,589)
Other . . . . . . . . . . . . . . . . . (8,001)
--------- ----------- -----------
Net cash provided (used) by
investing activities . . . . . . . (48,371) 441,149 140,817
--------- ----------- -----------
Cash flows from financing activities:
Proceeds of notes payable . . . . . . . 6,200
Proceeds of collateralized mortgage
note obligations . . . . . . . . . . . 171,000
Principal payments on collateralized
mortgage note obligations. . . . . . . (205,356)
Policyholder contract deposits. . . . . 177,708 200,439 615,171
Policyholder contract withdrawals . . . (188,918) (407,871) (603,833)
Principal payments on notes payable . . (8,587) (41,280) (169,229)
Repurchase of subordinated debt . . . . (10,081) (84,069) (1,694)
Redemption of preferred stock . . . . . (100,000)
Purchase of common stock for treasury . (500) (933) (1,431)
Dividends on preferred shares . . . . . (13,658) (28,784) (30,800)
--------- ----------- -----------
Net cash provided (used) by
financing activities . . . . . . . (44,036) (496,854) (185,616)
--------- ----------- -----------
Net increase (decrease) in cash and
short-term investments . . . . . . . . . (137,400) (54,843) 35,289
Cash and short-term investments at
beginning of year. . . . . . . . . . . . 366,922 421,765 386,476
--------- ----------- -----------
Cash and short-term investments at end
of year. . . . . . . . . . . . . . . . . $ 229,522 $ 366,922 $ 421,765
========= ========== ===========
</TABLE>

The accompanying notes are an integral part of the financial statements.

50
<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) BASIS OF PRESENTATION

Effective June 15, 1994, I.C.H. Corporation changed its name to
Southwestern Life Corporation (the Company or SLC).

The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries from date of acquisition
through date of divestiture. All significant intercompany accounts and
transactions have been eliminated in consolidation. Previously reported
amounts for 1993 and 1992 have in some instances been reclassified to conform
to the 1994 presentation. See Note 2 for organizational changes.

The Company's insurance subsidiaries maintain their accounts in conformity
with accounting practices prescribed or permitted by state insurance
regulatory authorities. In the accompanying financial statements such
accounts have been adjusted to conform with generally accepted accounting
principles (GAAP).

(B) INVESTMENTS

Fixed maturity investments include bonds and preferred stocks with
mandatory redemption features. The Company classifies all fixed maturity
investments into two categories as follows:

- Available for sale securities, representing securities that may be
sold prior to maturity due to changes that might occur in market
interest rate risks, changes in the security's prepayment risk,
management of the Company's income tax position, the Company's
general liquidity needs, increases in loan demand, the need to
increase regulatory capital, changes in foreign currency risk, or
similar factors. Available for sale securities are carried at fair
value.

- Held to maturity securities, representing securities such as private
placements which are not readily marketable and which the Company
has the ability and positive intent to hold to maturity. Held to
maturity securities are carried at amortized cost. The Company may
dispose of such securities under certain unforeseen circumstances,
such as issuer credit deterioration or regulatory requirements.

Fixed maturity investments and related futures contracts which are
denominated in or linked to foreign currencies are revalued to reflect
changes in the exchange rate as of the balance sheet date. Anticipated
prepayments on mortgage-backed securities are taken into consideration in
determining estimated future yields on such securities.

Equity securities include investments in common stocks and non-redeemable
preferred stocks and are carried at fair value. Policy loans and collateral
loans are stated at their current unpaid principal balance, net of
unamortized discount and related liabilities for which the Company has the
right to offset. Short-term investments include commercial paper, invested
cash and other investments purchased with maturities generally less than
three months and are carried at amortized cost. The Company considers all
short-term investments to be cash equivalents.

Mortgage loans are stated at the aggregate unpaid principal balances, less
unamortized discount and valuation allowances. Fees received and costs
incurred with origination of mortgage loans are deferred and amortized as
yield adjustments over the remaining lives of the mortgages. Real estate,
substantially all of which was acquired through foreclosure, is recorded at
the lower of fair value, minus estimated costs, to sell or cost. If the fair
value of the foreclosed real estate minus estimated costs to sell is less
than cost, a valuation allowance is provided for the deficiency. Increases or
decreases in the valuation allowance are charged or credited to income.

<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Investments in limited partnerships and 20% to 50% interests in the common
stocks of other entities, whose affairs are not controlled by the Company
(equity investees), are reflected on the equity method, or at cost, adjusted
for the Company's share, after allowance for possible dilution, of the
undistributed earnings and losses (both realized and unrealized) since
acquisition.

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

Net realized investment gains and losses, including gains and losses on
foreign currency transactions and held for sale securities, are included in
the determination of net earnings. Unrealized investment gains and losses on
available for sale securities and marketable equity securities are charged or
credited directly to stockholders' equity. The specific identification method
is used to account for the disposition of investments.

Amounts recoverable from reinsurers, including amounts equal to the assets
supporting insurance liabilities ceded to reinsurers and amounts due for the
reimbursement of related benefit payments, are reflected as receivables due
from reinsurers. Amounts due from reinsurers are evaluated as to their
collectibility and, if appropriate, reserves for doubtful collectibility are
established through a charge to earnings.

(D) EXCESS COST OF INVESTMENT IN SUBSIDIARIES OVER NET ASSETS ACQUIRED

Excess cost of investments in subsidiaries over net assets acquired, or
"goodwill," is amortized on the straight-line basis over a 40-year period.
The Company periodically assesses the recoverability of excess cost through
an actuarial projection of future earnings of the applicable insurance
subsidiaries (excluding excess cost amortization) over the remaining life of
such excess cost. Such projections include various interest rate scenarios,
with anticipated levels of new business production for only a five-year
period. Prior to 1994, projected future earnings were undiscounted. At
December 31, 1994, the Company adopted a change in accounting for assessing
the recoverability of excess cost by discounting projected future earnings of
the Company's insurance subsidiaries, using an economic rate of return (13%).
(See Note 7.)

(E) DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF FUTURE PROFITS OF
ACQUIRED BUSINESS

Costs which vary with and are related to the acquisition of new business
have been deferred to the extent that such costs are deemed recoverable
through future revenues. These costs include commissions, certain costs of
policy issuance and underwriting and certain variable agency expenses. For
traditional life and health products deferred costs are amortized with
interest over the premium paying period in proportion to the ratio of
anticipated annual premium revenue to the anticipated total premium revenue.
Deferred policy acquisition costs related to universal life,
interest-sensitive and investment products are amortized in relation to the
present value, using the assumed crediting rate, of expected gross profits on
the products, and retrospective adjustments of these amounts are made
whenever the Company revises its estimates of current or future gross profits
to be realized from a group of policies.

<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The present value of future profits on business in force of acquired
subsidiaries represents the portion of the cost to acquire such subsidiaries
that is allocated to the value of the right to receive future cash flows from
insurance contracts existing at the dates of acquisitions. Such value is the
actuarially determined present value of the future cash flows from the
acquired policies, based on projections of future premium collection,
mortality, morbidity, surrenders, operating expenses, investment yields, and
other factors. The account is amortized with interest over the estimated
remaining life of the acquired policies.

Recoverability of deferred policy acquisition costs and the present value
of future profits of acquired business is evaluated annually by comparing the
current estimate of discounted expected future cash flows to the unamortized
asset balance by line of insurance business. If such current estimate
indicates that the existing insurance liabilities, together with the present
value of future cash flows from the business, will not be sufficient to
recover the unamortized asset balance, the difference is charged to expense.
Amortization is adjusted in future years to reflect the revised estimate of
future profits.

Anticipated returns, including realized and unrealized gains and losses,
from the investment of policyholder balances are considered in determining
the amortization of deferred policy acquisition costs. When fixed maturities
are stated at their fair value, an adjustment is made to deferred policy
acquisition costs and unearned revenue reserves equal to the changes in
amortization that would have been recorded if those fixed maturities had been
sold at their fair value and the proceeds reinvested at current yields.
Furthermore, if future yields expected to be earned on fixed maturities
decline, it may be necessary to increase certain insurance liabilities.
Adjustments to such liabilities are required when their balances, in addition
to future net cash flows including investment income, are insufficient to
cover future benefits and expenses.

(F) FUTURE POLICY BENEFITS

The liability for future policy benefits of long duration contracts has
been computed by the net level premium method based on estimated future
investment yield, mortality, morbidity and withdrawal experience. Reserve
interest assumptions are graded and range from 6% to 10%. Mortality,
morbidity and withdrawal assumptions reflect the experience of the life
insurance subsidiaries modified as necessary to reflect anticipated trends
and to include provisions for possible unfavorable deviations. The
assumptions vary by plan, year of issue and duration. The future policy
benefit reserves include a provision for policyholder dividends based upon
dividend scales assumed at the date of purchase of acquired companies or as
presently contemplated.

(G) POLICY AND CONTRACT CLAIMS

Policy and contract claims include provisions for reported claims in
process of settlement, valued in accordance with the terms of the related
policies and contracts, as well as provisions for claims incurred and
unreported based on prior experience of the Company.

(H) UNIVERSAL LIFE AND INVESTMENT CONTRACT LIABILITIES

Benefit reserves for universal life, interest-sensitive and investment
products are determined following the retrospective deposit method and
consist principally of policy account values before any surrender charges,
plus certain deferred policy fees which are amortized using the same
assumptions and factors used to amortize deferred policy acquisition costs.

<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(I) INCOME TAXES

Deferred income taxes are recorded to reflect the tax consequences on
future years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year-end. Excess cost of
investment in subsidiaries over net assets acquired is reduced for the tax
benefits obtained from the utilization of an acquired company's tax
deductions.

(J) RECOGNITION OF PREMIUM REVENUE AND RELATED EXPENSES

Premium revenue for traditional life insurance products is reported as
earned when due. Accident and health premiums are earned over the period for
which premiums are paid. Benefits and expenses are associated with earned
premiums so as to result in recognition of profits over the premium paying
period. This association is accomplished by means of a provision for future
policy benefit reserves and the amortization of deferred policy acquisition
costs.

(K) PARTICIPATING POLICIES

Participating life insurance policies represent approximately 1% of the
total individual life insurance in force at December 31, 1994 and 1993,
respectively. The amount of dividends to be paid is determined annually by
the boards of directors of the life insurance subsidiaries. A portion of the
earnings of the Company is allocated to the participating policyholders and
included in other policyholder funds.

(L) FAIR VALUES OF FINANCIAL INSTRUMENTS

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

CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.

INVESTMENT SECURITIES: Fair values for fixed maturity securities
(including mandatorily redeemable preferred stocks) are based on quoted
market prices, where available. For fixed maturity securities not actively
traded, fair values are estimated using values obtained from independent
pricing services or are estimated based on expected future cash flows using a
current market rate applicable to the yield, credit quality, and maturity of
the investments. The fair values for equity securities are based on quoted
market prices and are recognized in the balance sheet. (See Note 5.)

MORTGAGE AND COLLATERAL LOANS: The fair values for mortgage and
collateral loans are estimated using discounted cash flow analyses, based on
interest rates currently being offered for similar loans to borrowers with
similar credit ratings. Loans with similar characteristics are aggregated for
purposes of the calculations. (See Note 5.)

POLICY LOANS: The Company does not believe an estimate of the fair value
of policy loans can be made without incurring excessive cost. Policy loans
have no stated maturities and are usually repaid by reductions to benefits
and surrenders. Because of the numerous assumptions which would have to be
made to estimate fair value, the Company further believes that such
information would not be meaningful.

INVESTMENTS IN LIMITED PARTNERSHIPS: Fair values for the Company's
investments in limited partnerships are based on the estimated fair values of
the partnership assets and liabilities, assuming a liquidation of the
partnership and distribution of proceeds to the partners. (See Note 6.)

<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

OFF-BALANCE-SHEET INSTRUMENTS: Fair values for the Company's
off-balance-sheet interest rate swaps are based on formulas using current
assumptions. (See Note 5.)

INVESTMENT CONTRACTS: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash flow
calculations, based on interest rates currently being offered for similar
contracts with maturities consistent with those remaining for the contracts
being valued. (See Note 8.)

NOTES PAYABLE: The fair value of the Company's subordinated long-term
debt is estimated using prices from public trades of the Company's
subordinated debt as of December 31, 1994. The fair value of other long-term
debt is estimated using discounted cash flow analyses, based on the
Company's implicit incremental borrowing rates from the fair value of the
Company's long-term debt. (See Note 3.)

(M) EARNINGS PER SHARE CALCULATIONS

Primary earnings per share are computed by dividing earnings, less
preferred dividend requirements, by the weighted average number of common
shares outstanding. In computing fully diluted earnings per share, the
weighted average number of common shares outstanding is adjusted to reflect
common stock equivalents resulting from stock options and the assumed
conversion of the Company's Series 1986-A Preferred Stock into common shares,
and preferred dividend requirements are adjusted to eliminate dividends on
the shares assumed to have been converted. The computation of fully diluted
earnings per share excludes the assumed conversion of such preferred shares
for each period in which the assumed conversion would be antidilutive.

2. ACQUISITIONS AND DISPOSITIONS

On November 9, 1992, the Company completed the sale of its wholly-owned
subsidiary, Bankers Life and Casualty Company (Bankers), and Bankers'
subsidiary, Certified Life Insurance Company (Certified), to an affiliate of
Conseco, Inc. (Conseco) for $600 million cash, subject to final adjustment.
Prior to the closing, Bankers transferred its ownership in all of its other
subsidiaries to the Company, and the Company and its subsidiaries purchased
certain other assets from Bankers, including primarily a residual interest in
certain mortgage-backed securities, Bankers' home office real estate, and
certain equity investments. The Company provided financing for the
acquisition totaling $101.4 million and, in return, retained an approximate
29.7% interest in Bankers. The financing consisted of a $16.7 million common
equity investment in Bankers Life Holding Corporation (BLHC), the Conseco
entity formed for the purpose of making the acquisition, and the purchase of
$34.7 million of BLHC 11% Junior Subordinated Debentures due 2003 and $50.0
million of a BLHC preferred stock yielding an 11% annual return. In addition,
Conseco Capital Partners, L.P. (CCP) acquired a 52.6% interest in BLHC, and
the Company, through one of its subsidiaries, made an additional $9.6 million
investment to acquire a 19.3% ownership interest in CCP. As a result of the
29.7% interest in BLHC and the indirect investment through CCP the Company
retained a residual interest in Bankers totaling approximately 39.9%. The
results of operations of Bankers and Certified were included in the Company's
consolidated results of operations through October 31, 1992, the effective
date of the sale for financial reporting purposes. Subsequent to that date,
the Company reflected its proportionate share of the operating results of CCP
and BLHC based on the equity method. Because of the significant ownership
interest in Bankers retained by the Company, the sale of Bankers was
accounted for as a step transaction in accordance with GAAP. Accordingly, the
Company reflected its residual interest in Bankers on its historical
accounting basis and reflected a gain on the approximate 60.1% interest in
Bankers deemed to have been sold totaling $110,734,000 in the Company's
consolidated statement of earnings for the year ended December 31, 1992. In
conjunction with the sale of Bankers, the Company indemnified the purchasers
against certain contingencies relating to taxes and other matters associated
with Bankers and Certified in periods prior to the closing date. The Company
believes its liability, if any, will not be material.

<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

2. ACQUISITIONS AND DISPOSITIONS (CONTINUED)

Effective March 31, 1993, BLHC completed an initial public offering
(Offering) of 19.55 million shares of its common stock, or an approximate
35.8% interest in BLHC at $22 per share. Proceeds of the Offering, after
underwriting expenses, approximated $405 million. Effective the same day, CCP
announced a plan of dissolution and BLHC shares held by CCP were subsequently
distributed to the respective partners in accordance with that plan. The
Company received 2,917,318 shares of BLHC common stock as a result of such
distribution, increasing its direct ownership in BLHC common stock to
13,316,168 shares, or approximately 24.4% of BLHC's outstanding common shares
following the Offering. The Company reflected a gain on the BLHC Offering
totaling $99,376,000, primarily representing the Company's 24.4% equity in
the net proceeds of such Offering. BLHC utilized a portion of the Offering
proceeds to redeem certain of its outstanding securities, including the $50
million stated value of BLHC preferred stock and the $34.7 million principal
amount of BLHC Junior Subordinated Notes held by the Company. Because a
portion of the purchase price paid for such investments had been allocated to
the Company's common equity investments in BLHC, such redemptions resulted in
additional gains totaling $8,252,000, which have been included as a component
of realized investment gains.

On September 30, 1993, the Company sold its investment in BLHC to Conseco
and one of Conseco's subsidiaries for $287,639,000 cash. The Company utilized
$50 million of the proceeds to redeem $50 million stated value of the Series
1987-A Preferred Stock of the Company from a Conseco subsidiary. The sale of
the BLHC shares resulted in a gain totaling $197,665,000. The gains resulting
from BLHC's Offering and the sale of the Company's interest in BLHC totaling
$297,041,000 have been reflected as a single line item in the consolidated
statement of earnings for the year ended December 31, 1993. The Company
continued to reflect its equity in the earnings of BLHC through the date of
sale.

Immediately prior to the termination of the reinsurance agreements with
Consolidated Fidelity Life Insurance Company (CFLIC) on June 30, 1994 (see
Note 4), Union Bankers Insurance Company (Union Bankers), a subsidiary of the
Company, utilized available cash to purchase all of the outstanding stock of
Marquette National Life Insurance Company (Marquette), a subsidiary of CFLIC,
for $8,215,000. The purchase price was based on the fair value of Marquette's
underlying net assets, consisting primarily of cash and U.S. Treasury
obligations, adjusted for the value of Marquette's various state licenses, as
determined by an independent actuarial firm. Marquette's results of
operations have been included in the Company's results of operations for
periods subsequent to June 30, 1994.

On January 12, 1995, the Company sold its wholly-owned subsidiary,
Southeast Title and Insurance Company (Southeast) for cash in the amount of
$2,071,000. The sales price approximated the GAAP book value of the Company's
investment in Southeast.

On January 20, 1995, the Company entered into a letter of intent to sell to
an unaffiliated party its wholly-owned subsidiary, Bankers Life Insurance
Company of New York (Bankers New York) for $35,000,000 cash, subject to
certain closing adjustments. At December 31, 1994, the Company reflected a
loss on the anticipated sale of Bankers New York totaling $4.2 million. The
transaction is subject to, among other conditions, completion of a definitive
agreement and receipt of required regulatory approvals.

On March 24, 1995, the Company entered into a definitive agreement to sell
to an unaffiliated party its ownership interest in its 98.8% owned
subsidiary, Integrity National Life Insurance Company (Integrity National),
for $9,578,000 cash, subject to closing adjustments. The transaction is
subject to, among other conditions, receipt of required regulatory approvals
and reinsurance of certain of Integrity National's business.

On March 24, 1995, the Company entered into a letter of intent to sell to
an unaffiliated third party its wholly-owned subsidiary Constitution Life
Insurance Company (Constitution) for $1.86 million cash plus Constitution's
adjusted capital and surplus. The transaction is subject to, among other
conditions, completion of a definitive agreement

<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

2. ACQUISITIONS AND DISPOSITIONS (CONTINUED)

and receipt of regulatory approvals. Also, as a condition to consummation of
the transaction, Constitution will be required to cede 100% of its insurance
contracts to another insurer.

3. NOTES PAYABLE

The carrying and fair values of notes payable at December 31, 1994 and 1993
are summarized as follows:

<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
--------------- --------------
1994 1993 1994 1993
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
11 1/4% Senior Subordinated Notes due 1996 (a). . $256,101 $266,101 $212,563 $263,440
11 1/4% Senior Subordinated Notes due 2003 (b). . 91,161 91,161 61,989 90,249
9 1/2% Unsecured Note due 1996 (c). . . . . . . . 21,900 25,550 20,486 25,071
Borrowings under senior secured loan (d). . . . . 30,000 30,000
Other . . . . . . . . . . . . . . . . . . . . . . 232 5,169 193 5,169
-------- -------- -------- --------
$369,394 $417,981 $295,231 $413,929
======== ======== ======== ========
<FN>
The prime rate at December 31, 1994 was 8.5%.
- -----------
(a) The 11 1/4% Senior Subordinated Notes due 1996 (Old Notes) require a
sinking fund payment of $100,000,000 on December 1, 1995. The Old Notes
are redeemable at the option of the Company by paying a premium of 2%
through November 30, 1995. Thereafter, the Old Notes may be redeemed at
their face amount. In addition, the Company may not declare or pay
dividends on its Common Stock without the consent of the holders of the
Old Notes if certain financial conditions set forth in the Indenture for
such Notes will be exceeded as a result of the dividends.

(b) On November 11, 1993, the Company completed an exchange offering whereby
$4,055,000 of the Company's Debentures and $87,106,000 of the Company's
Old Notes were exchanged for $91,161,000 of the Company's 11 1/4% Senior
Subordinated Notes due 2003 (New Notes). The terms and covenants of the
New Notes are substantially similar to those of the Old Notes, except that
the New Notes mature December 1, 2003 and are non-callable until
December 1, 1996, after which they will be callable at a premium of 3%
during the succeeding twelve month period and 2% during the twelve month
period commencing December 1, 1997.

(c) The 9 1/2% Unsecured Note requires principal installments of $3,650,000 on
December 31, 1995 and a final installment of $18,250,000 on December 31,
1996.

(d) The senior secured loan was initially obtained from various banks in
September 1990 in the original principal amount of $250,000,000, and
had been paid down to $160,000,000 by year-end 1991. On January 6, 1992,
the Company prepaid $45,000,000 of the outstanding loan and the remaining
$115,000,000 of the loan was purchased by CFLIC, a subsidiary of CNC, the
Company's then-controlling shareholder. On November 17, 1992, the Company
prepaid an additional $85,000,000 of the loan utilizing proceeds from the
sale of Bankers, and CFLIC agreed that a final installment of $30,000,000
would become due December 31, 1994. On June 30, 1994 the Company acquired
and cancelled the note as part of transactions with CFLIC (see Note 4).
</TABLE>

The following summary sets forth the maturities and sinking fund requirements
of notes payable during each of the five years following December 31, 1994 (in
thousands):

<TABLE>
<S> <C>
1995 . . . . . . . . . . . . . . . $ 59,802
1996 . . . . . . . . . . . . . . . 218,306
1997 . . . . . . . . . . . . . . . 60
1998 . . . . . . . . . . . . . . . 65
1999 and thereafter. . . . . . . . 91,161
--------
$369,394
========
</TABLE>

At December 31, 1994, SLC held $22,399,000 principal amount of the Old
Notes which, at the Company's option, can be used to partially satisfy its
100,000,000 sinking fund obligation relative to such notes due December 1,

57
<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

3. NOTES PAYABLE (CONTINUED)

1995. In addition, an SLC subsidiary holds $21,500,000 principal amount of
Old Notes. Regulatory approval will be required to transfer these Old Notes
to SLC in the form of a dividend. In the above schedule of maturities and
sinking fund requirements, it has been assumed that the aggregate $43,899,000
principal amount of the Old Notes held by SLC and its subsidiary will be
available for sinking fund purposes and that the sinking fund requirement in
1995 will total $56,101,000. At its option, the Company may alternatively
determine to use sinking fund provisions in 1995 to retire up to $100,000,000
principal amount of the Old Notes at their par value.

Due to the dividend restrictions at the subsidiary level as discussed in
Note 9, the Company's ability to meet its debt obligations of $59,802,000 in
1995 and $218,306,000 in 1996 is dependent on being able to effect a
restructuring or refinancing of certain significant debt obligations or to
sell certain assets to generate sufficient cash proceeds to meet such debt
obligations or obtain sufficient cash from another source, such as an equity
investor or an institutional lender. Such restructuring or recapitalization
may require regulatory, creditor or stockholder approvals and would likely
result in a substantial dilution of existing stockholders, especially common
stockholders, and could possibly result in a change in control of the
Company. Based on current conditions and circumstances, management intends
and believes SLC has the ability to effect the actions necessary to generate
sufficient cash proceeds to meet its debt obligations through December 1995.

At December 31, 1994 and 1993, the Company had notes receivable totaling
$27,000,000 and $26,500,000, respectively, which were collateralized by the
Company's note payable in the amount of $21,000,000 and $20,340,000,
respectively. The Company has the right to set off its obligation against the
notes receivable. In the accompanying balance sheets, the Company's notes
receivables have been reflected net of amounts due under the notes payable.

4. RELATED PARTY TRANSACTIONS

On June 15, 1993, the Company, the Company's then-controlling shareholder,
CNC, and CNC's subsidiary, CFLIC, entered into an agreement (the 1993
Agreement) under which (i) the Company was authorized, and undertook the
obligation, to negotiate the termination of reinsurance agreements pursuant
to which CFLIC reinsured certain annuity business written by Southwestern
Life Insurance Company (Southwestern Life), a subsidiary of the Company, and
Bankers, and (ii) the Company transferred assets, consisting of a limited
partnership interest at market value, which exceeded book value by
$13,002,000 (that has since been liquidated) and 83% of the outstanding
common stock of I.C.H. Funding Corporation (ICH Funding), to CFLIC to acquire
preferred stock of CFLIC, with a stated value of $63,000,000. Under the terms
of the 1993 Agreement, the CFLIC preferred stock was to be repurchased by
CFLIC immediately following the termination of the CFLIC reinsurance
agreements. Therefore, for financial reporting purposes, the recognition of
the unrealized gain on the limited partnership interest transferred and
subject to repurchase was deferred. The reinsurance agreements had been
entered into in 1990 in conjunction with the Company's sale of Marquette to
CNC and its stockholders. Under the reinsurance agreements, Employers
Reassurance Corporation (ERC), an independent third party insurer, retroceded
to CFLIC certain annuity business which was reinsured with ERC by each of
Southwestern Life and Bankers.

On June 30, 1994, the CFLIC reinsurance agreements were terminated, and the
business reinsured thereunder was recaptured, effective as of April 1, 1994.
Immediately prior to the termination of the CFLIC reinsurance agreements,
Union Bankers utilized available cash to purchase all of the outstanding
stock of Marquette, a subsidiary of CFLIC, for $8,215,000 (see Note 2).
Following completion of the terminations, CFLIC repurchased the shares of its
preferred stock held by the Company by transferring to the Company the senior
secured loan of the Company with an outstanding principal balance of
$30,000,000, all of the outstanding shares of the Company's Series 1984-A
Preferred Stock with a stated value of $22,242,000, all of the outstanding
shares of the Company's Series 1987-B Preferred Stock with a stated value of
$7,000,000, a U.S. Treasury note (par value $1,050,000), and 620,423 shares

<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

4. RELATED PARTY TRANSACTIONS (CONTINUED)

of the Company's Common Stock. Immediately following the repurchase of the
CFLIC preferred stock, SLC retired the senior secured loan and the SLC
preferred stocks. The shares of SLC Common Stock received were placed in
treasury and retired.

Upon termination of the CFLIC reinsurance agreement relating to the
business written by Southwestern Life, CFLIC transferred cash and invested
assets to ERC with a fair value equal to the reserve liabilities being
recaptured, net of the ceding fees payable. Due primarily to a requirement by
insurance regulatory authorities to transfer such investments upon
termination of the reinsurance agreements at their fair value, the Company
increased its basis in the CFLIC preferred stock by investing an additional
$26,212,000 (including $21,078,000 cash and a $5,134,000 receivable)
immediately prior to the terminations to enable CFLIC to have sufficient
assets (other than the Company's securities being transferred to the Company
upon redemption of the CFLIC preferred stock) to complete the terminations. A
substantial portion of such amount was attributable to a decline in the fair
value of the 83% interest in ICH Funding subsequent to the Company's transfer
of such investment to CFLIC in June 1993.

In conjunction with the termination of the CFLIC reinsurance agreement
relating to the business written by Southwestern Life, annuity reserve
liabilities totaling $323,305,000 were assumed by ERC and invested assets
with a fair value of $289,414,000 were transferred by CFLIC to ERC. The
difference between the reserve liabilities assumed by ERC and the assets
transferred from CFLIC, totaling $33,891,000, represented the aggregate
ceding fee paid to CFLIC to effect the termination. Immediately thereafter,
Southwestern Life recaptured $107,163,000 of the reserve liabilities from ERC
and received invested assets from ERC totaling $93,942,000. The assets
consisted of cash, short-term investments and marketable fixed maturity
investments totaling $25,455,000, CFLIC's investment in ICH Funding and
certain pass-through certificates issued by a special purpose trust with an
estimated fair value totaling $12,528,000, collateral loans due from James M.
Fail and CFSB Corporation totaling $50,640,000, and other assets, principally
mortgage loans, totaling $5,319,000. The difference between the reserve
liabilities recaptured by Southwestern Life and the assets transferred from
ERC, totaling $13,221,000, represented a ceding fee paid by Southwestern
Life, and reduced ERC's net ceding fees incurred to effect the CFLIC
reinsurance termination to $20,670,000. The reinsurance agreement between
Southwestern Life and ERC was amended to provide that ERC will be permitted
to recover the net ceding fees incurred out of the future profits on the
portion of Southwestern Life's annuity business it retained, together with
interest at 2% per annum on the unamortized balance of such ceding fees. For
financial reporting purposes, the reinsurance arrangement between
Southwestern Life and ERC has been reflected as a financing arrangement and,
accordingly, is not reflected in the Company's financial statement except for
the interest paid to ERC.

The amount of the ceding fees paid to CFLIC in connection with the
recapture was determined by management of the Company utilizing the
methodology developed by an independent actuarial firm, with appropriate
adjustments in assumptions to reflect changes in market interest rates and
other factors.

Pursuant to the 1993 Agreement, the Company agreed to bear the federal
income tax consequences resulting from the termination of the CFLIC
reinsurance agreements. Upon closing of the CFLIC termination, the Company
agreed to indemnify CNC and CFLIC for tax liabilities of CFLIC and Marquette
arising through June 30, 1994, and deposited into an escrow account
$8,825,000 of cash which the Company was to have received upon CFLIC's
repurchase of its preferred stock as a source of funds for the payment of
taxes for which the Company is responsible. With the payment of such tax
liabilities, the Company became entitled to all tax refunds to which CFLIC is
entitled through the carryback of capital losses resulting from the
termination of the CFLIC reinsurance agreements or as a result of any
redetermination of CFLIC's tax liabilities through the first taxable period
of CFLIC and Marquette ending after such termination. The amount deposited
into escrow along with the proceeds from CFLIC's tax refunds exceeded what
was required to pay CFLIC's tax liabilities and the $5,134,000 liability to
ERC by $5,426,000. These excess

<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

funds were returned to the Company and effectively reduced the Company's
increase in basis in the CFLIC preferred and its net cash outlay to
$15,652,000.

For financial reporting purposes, the Company recorded the redemption of
its preferred stocks received from CFLIC at their stated value which, in
management's opinion, approximated the fair value of such securities as of
the date the 1993 Agreement was entered into. The 620,423 shares of the
Company's Common Stock received from CFLIC were recorded at their market
value, or $5.25 per share, as of the date of closing. The termination of the
CFLIC reinsurance agreements, the receipt of a payment-in-kind dividend from
CFLIC representing dividends on such preferred stock from the date of
issuance through the date of redemption, and the redemption of the Company's
securities resulted in a pretax gain totaling approximately $11,133,000,
which included recognition of the $13,002,000 deferred unrealized gain on the
limited partnership interest that had been liquidated while held by CFLIC.

Experience refunds received from CFLIC under the Southwestern Life
reinsurance arrangement totaled $4,851,000 and $2,068,000 for the years ended
December 31, 1993 and 1992, respectively. An experience refund was not
received for the three months ended March 31, 1994 because the business
reinsured by Southwestern Life was not profitable that quarter due
principally to the sales of certain high yield securities and lower
reinvestment yields. The Bankers business reinsured by CFLIC was not
profitable in 1992 due primarily to a loss incurred relative to certain
reinsurance recoverables and, as a consequence, Bankers was not entitled to
an experience refund in 1992.

Bankers was a party to a service agreement with Marquette and CFLIC whereby
it provided investment management, administrative, data processing, and
general supervisory and management services related to business reinsured
with CFLIC, in exchange for annual fees equal to .45% of reserves on the
reinsured policies. Fees earned from providing such services totaled
$1,593,000 for the ten months ended October 31, 1992. Such fees were taken
into consideration in the determination of profitability of the reinsured
business. In addition, a subsidiary entered into a service agreement
effective January 1992, whereby the subsidiary provided administrative
services for Marquette. Fees earned from providing such services totaled
$449,000 and $2,016,000 for the years ended December 31, 1993 and 1992,
respectively.

On February 11, 1994, the Company purchased all of the 100,000 shares of
its Class B Common Stock held by CNC for total cash consideration of
$500,000. The Class B Common Stock had entitled CNC to elect 75% of the
Company's Board of Directors (see Note 10). Concurrently with the purchase of
such stock, the Company entered into Independent Contractor and Services
Agreements (Services Agreements) with Robert T. Shaw and C. Fred Rice, the
controlling shareholders of CNC. The Services Agreements provide for a lump
sum payment to Messrs. Shaw and Rice totaling $2 million as of the closing
date and additional payments totaling $8,575,000 over a ten-year period. In
addition, the Company agreed to provide customary employee benefits to
Messrs. Shaw and Rice and their dependents. In the event of the deaths of
Messrs. Shaw or Rice, any amounts not previously paid under the Services
Agreements will become immediately payable to their estates. In consideration
for the Services Agreements, Messrs. Shaw and Rice agreed that they would
attempt to identify business opportunities in the insurance industry which
may be suitable for the Company and to consult with the Company regarding
such other matters as the Company may reasonably request. In addition, Mr.
Rice will continue to serve as an executive officer of the Company and, if
re-elected, will continue to serve on the Company's Board of Directors. The
Services Agreements replaced a management and consulting contract with CNC
that provided for annual payments to CNC totaling $2,000,000. In addition,
Mr. Shaw was granted an option, exercisable within a six month period, to
acquire certain aircraft equipment owned by the Company at its depreciated
book value. In cash transactions completed on June 30 and August 5, 1994, an
entity controlled by Mr. Shaw purchased one aircraft for $1,144,000 and an
unrelated third party to whom Mr. Shaw assigned his option purchased the
other aircraft for $4,005,000, respectively. At December 31, 1994, the
Company has provided a liability for the present value of amounts payable
under the Services Agreements totaling $6,102,000.

At December 31, 1993, the Company held a $2 million promissory note from
CNC bearing interest at 10% and payable in December 1995. The note and
accrued interest were repaid on February 11, 1994.

<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. RELATED PARTY TRANSACTIONS (CONTINUED)

Through June 1993, FMI had leased office space under a ten-year lease in a
building owned by Messrs. Shaw and Rice. Effective March 30, 1990, FMI had
sublet substantially all of the office space to a former subsidiary which was
sold as of that date.

5. INVESTMENTS

Investment income by type of investment was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Gross investment income (loss):
Fixed maturities $144,027 $132,077 $253,740
Equity securities 4,911 3,852 5,699
Financial options and futures (8,743) 15,515 17,935
Mortgage loans 11,357 15,814 21,144
Policy loans 10,390 10,938 13,216
Short-term investments 11,636 13,069 13,162
Collateral loans 6,470 5,000 6,195
Real estate 8,243 6,982 6,380
Investments held in trust under
reinsurance treaty 5,795
Other 3,756 5,337 3,480
-------- -------- --------
192,047 208,584 346,746
Less: Investment expenses 10,003 12,952 13,608
-------- -------- --------
Net investment income $182,044 $195,632 $333,138
======== ======== ========
</TABLE>

Following is an analysis of realized gains (losses) on investments:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities $ 3,001 $12,360 $ 31,610
Collateralized mortgage obligations (97,803) (4,356) (138,519)
Equity securities (509) 37,620 (1,056)
Mortgage loans (3,124)
Investment in limited partnership (5,013)
Investment real estate (1,050) (4,220) (2,557)
Assets held by unaffiliated reinsurer (1,437)
Other 2,557 (6,298) (7,129)
-------- ------- ---------
(96,928) 30,093 (119,088)
Add minority interest in realized losses 4,732
-------- ------- ---------
$(96,928) $34,825 $(119,088)
======== ======= =========
</TABLE>

<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. INVESTMENTS (CONTINUED)

The following table reflects investment writedowns which were included in
realized investment gains or losses during each of the three years in the period
ended December 31, 1994:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities $ 4,400
Collateralized mortgage obligations $ 97,803 $138,519
Equity securities 430 2,100 6,200
Mortgage loans 3,000 400
Investment in limited partnership 4,998
Investment real estate 3,800 4,500 3,800
-------- ------- --------
Total writedowns $105,033 $15,998 $148,919
======== ======= ========
</TABLE>

Fixed maturities writedowns in 1993 were related to credit deterioration
of noninvestment-grade securities. CMO writedowns in 1994 included $86,187,000
of other than temporary writedowns of derivative CMO investments in Fund
America Investors Corporations II (Fund America Investment) and the Secured
Investors Secured Trust 1993-1 (SIST Residual), $7,248,000 of writedowns on
investments expected to be liquidated in 1995, and $4,368,000 of other than
temporary writedowns on other CMO investments. CMO writedowns in 1992 resulted
primarily from mortgage loan refinancing activity and the resultant effect of
prepayments on residual interest and interest-only CMOs. Writedowns of equity
securities in 1993 and 1992 primarily relate to non-redeemable preferred
stocks. The mortgage loan writedown in 1994 reflects the provision of a
reserve for mortgage loan losses. Investment real estate writedowns
reflect the general deterioration in real estate markets over the three
year period.

In 1993, the Company adopted the provisions of SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," and has classified its
fixed maturities into two categories, including available for sale and held to
maturity. SFAS No. 115 also establishes criteria for the recognition of a
permanent impairment in the carrying value of debt and equity securities.
During 1993, the Company reflected a charge for the cumulative effect of
writedowns of certain mortgage-backed securities required under the provisions
of SFAS No. 115 totaling $7,573,000. The cumulative charge was reflected net of
$2,651,000 in related income tax effects.

During 1994, the Company continued to evaluate its Fund America Investment
and the SIST Residual in accordance with SFAS No. 115 and Emerging Issues Task
Force (EITF) Issue No. 93-18, "Impairment Recognition for a Purchased
Investment in a Collateralized Mortgage Obligation Investment or in a Mortgage-
Backed Interest Only Certificate." Due primarily to the rising interest rate
environment experienced in 1994 and its effect on the projected future cash
flows of the Fund America Investment and the SIST Residual, realized investment
losses were triggered under the provisions of EITF No. 93-18 on two occasions
during 1994. For the three months ended March 31, 1994, the Company reflected a
charge to earnings for the writedown of these investments from their GAAP book
value of $96,384,000 to their then fair value totaling $49,936,000, or a total
charge of $46,448,000. For the three months ended December 31, 1994, the
Company recorded an additional charge to earnings for the writedown of the Fund
America Investment from its GAAP book value totaling $48,352,000 to its
estimated fair value of $8,613,000, or a total charge of $39,739,000. At
December 31, 1994, the combined GAAP book value and carrying value of these
investments totaled $15,000,000 and $12,253,000, respectively.

<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. INVESTMENTS (CONTINUED)

The amortized cost of investments in fixed maturities, the cost of equity
securities and the estimated values of such investments at December 31, 1994
and 1993 by categories of securities are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1994:
Available for sale:
United States Government,
government agencies and
authorities $ 60,261 $ 115 $ (1,855) $ 58,521
States, municipalities and
political subdivisions 13,542 109 (268) 13,383
Foreign government securities 20,928 27 (1,613) 19,342
Public utilities 149,045 54 (17,715) 131,384
Mortgage-backed securities 837,173 2,103 (45,754) 793,522
All other corporate 658,946 814 (37,045) 622,715
---------- ------ ---------- ----------
Subtotal, available for sale
fixed maturities 1,739,895 3,222 (104,250) 1,638,867
Held to maturity:
Mortgage-backed securities 15,915 (2,003) 13,912
---------- ------ ---------- ----------
Subtotal, all fixed maturities 1,755,810 3,222 (106,253) 1,652,779
---------- ------ ---------- ----------
Non-redeemable preferred stocks 8,345 248 8,593
Common stocks 1,444 1,015 (240) 2,219
---------- ------ ---------- ----------
Subtotal, equity securities 9,789 1,263 (240) 10,812
---------- ------ ---------- ----------
Total fixed maturities and
equity securities $1,765,599 $4,485 $ (106,493) $1,663,591
========== ====== ========== ==========
</TABLE>

<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. INVESTMENTS (CONTINUED)

<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1993:
Available for sale:
United States Government,
government agencies and
authorities $ 38,904 $ 1,649 $ (41) $ 40,512
States, municipalities and
political subdivisions 635 67 702
Public utilities 139,235 3,906 (1,584) 141,557
Mortgage-backed securities 801,646 18,194 (37,901) 781,939
All other corporate 689,849 39,719 (2,585) 726,983
---------- ------ ---------- ---------
Subtotal, available for sale
fixed maturities 1,670,269 63,535 (42,111) 1,691,693
Held to maturity:
Mortgage-backed securities 16,149 (1,954) 14,195
All other corporate 10,000 10,000
---------- ------ ---------- ---------
Subtotal, held to maturity 26,149 (1,954) 24,195
---------- ------ ---------- ---------
Subtotal, all fixed maturities 1,696,418 63,535 (44,065) 1,715,888
---------- ------ ---------- ---------
Non-redeemable preferred stocks 62,134 4,594 (94) 66,634
Common stocks 6,426 3,037 (266) 9,197
---------- ------ ---------- ---------
Subtotal, equity securities 68,560 7,631 (360) 75,831
---------- ------ ---------- ---------
Total fixed maturities and
equity securities $1,764,978 $71,166 $ (44,425) $1,791,719
========== ======= ========== ==========
</TABLE>

The amortized cost and estimated fair value of fixed maturities at
December 31, 1994, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.

ESTIMATED
AMORTIZED FAIR
COST VALUE
---- -----
(IN THOUSANDS)
<S> <C> <C>
Available for sale:
Due in one year or less $ 60,292 $ 59,188
Due after one year through five
years 200,018 194,091
Due after five years through ten
years 302,598 285,888
Due after ten years 339,814 306,178
---------- ---------
902,722 845,345
Mortgage-backed securities 837,173 793,522
---------- ---------
Subtotal, available for sale 1,739,895 1,638,867

Held to maturity:
Mortgage-backed securities 15,915 13,912
---------- ---------
$1,755,810 $1,652,779
========== ==========
</TABLE>

<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. INVESTMENTS (CONTINUED)

Excluding scheduled maturities and sales related to reinsurance
transactions, proceeds from sales of investments in debt securities during
1994, 1993 and 1992 and the related gross gains and gross losses realized on
such sales were as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Proceeds from sales $430,392 $ 640,168 $1,410,441
======== ========= ==========
Gross gains $ 6,424 $ 25,629 $ 38,935
======== ========= ==========
Gross losses $ (3,423) $ (19,671) $ (4,569)
======== ========= ==========
</TABLE>

Following are changes in unrealized appreciation (depreciation) on
investments (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Investments carried at amortized cost:
Fixed maturities held to maturity $ (49) $ 9,269 $ 38,269
========= ========= ========

Investments carried at fair value:
Available for sale fixed maturities $(122,452) $ 17,156 $ 4,268
Equity securities (6,248) (17,137) 26,585
Equity in unrealized gains of equity
investees and limited partnerships 75 4,472 758
Other 487 875 292
--------- -------- -------
(128,138) 5,366 31,903
Less effect on other balance sheet
accounts:
Deferred policy acquisition costs 34,478 (16,647)
Unearned revenue reserves (15,011) 6,266
Deferred income taxes 38,034 1,470 (9,696)
Minority interest in unrealized losses (5,180) 5,180
--------- -------- -------
Change in unrealized investment gains
and losses $ (75,817) $ 1,635 $ 22,207
========= ======== ========
</TABLE>

The carrying value of nonaffiliated invested assets for which no
investment income was recorded during the twelve months ended December 31,
1994, was as follows (in thousands):

<TABLE>
<CAPTION>
<S> <C>
Fixed maturities $ 1,834
Equity securities 308
Investment real estate 34,486
Mortgages 2,641
Investments in limited partnerships 9,282
Other invested assets 779
-------
$49,330
=======
</TABLE>

<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. INVESTMENTS (CONTINUED)

The Company has a diversified investment portfolio that includes
securities of over 750 issuers. Excluding investments in bonds or notes of the
United States Government or Government agencies or authorities, the carrying
value and fair values of investments by issuer which exceeded 10% of
stockholders' equity at December 31, 1994 were as follows (in thousands):

<TABLE>
<CAPTION>
CARRYING FAIR
ISSUER VALUE VALUE
- ------ ------- -------
<S> <C> <C>
FIXED MATURITIES
Citicorp Mortgage Securities $28,304 $28,304
Residential Funding Mortgage
Securities 1 Inc. 17,219 17,219
Green Tree Acceptance Inc. 14,261 14,261
Merrill Lynch Mortgage Insurance Inc. 12,737 12,737
Solomon, Inc. 11,956 11,956
News America Holdings 11,646 11,646
Hydro Quebec 11,516 11,516
Goldman Sachs 11,162 11,162
BankAmerica Corp. 10,198 10,198
Newfoundland Province CDA 10,154 10,154
Chrysler Financial Corp. 9,632 9,632
Pacific Gas & Electric Co. 9,506 9,506
Continental Corp. 9,341 9,341
Premier Auto Trust 9,273 9,273
LASMO (USA) Inc. 8,962 8,962
Canadian Imperial Bank 8,855 8,855
Philadelphia Electric Co. 8,813 8,813
Money Store 8,676 8,676
Fund America Investors Corp. 8,613 8,613
ITT Financial Corporation 8,472 8,472
Standard Credit Card 8,022 8,022
Transamerica Finance Corp. 8,000 8,000
Ultramar Credit 7,985 7,985
Bankers Trust - NY 7,969 7,969
Days Inns Mortgage Trust 7,931 7,353
Telecommunications Inc. 7,868 7,868
RJR Nabisco Inc. 7,725 7,725
Residential Funding Corp. 7,623 7,623
Aircraft Lease Portfolio 7,510 7,510
Norwest Financial Inc. 7,477 7,477
Long Island Lighting 7,411 7,411
Utilicorp United Inc. 7,379 7,379
Mortgage Capital Funding 7,292 7,292
Manufactured Housing 7,115 7,115
Signet Credit Card Trust 7,083 7,083
Chase Manhattan Credit Card 6,989 6,989
Chemical Banking Corp. 6,798 6,798
National Re Holding 6,470 6,470
237 Park Avenue Associates 6,381 6,121
Hong Kong Shanghi III 6,340 6,340
Boeing Company 6,278 6,278
Texas Utilities Electric Co. 6,271 6,271
WSGP International Diversified Funding 6,018 6,018
Corestates Capital 5,994 5,994
Occidental Petroleum 5,983 5,983
Oxford Acceptance Corp. 5,796 5,796
ERP Operating Ltd. Partnership 5,790 5,790
Discover Card Trust 5,724 5,724
Daimler-Benz Vehicle Trust 5,703 5,703
Time Warner Entertainment 5,648 5,648
Norwest Corporation 5,570 5,570
Fical Home Equity 5,397 5,397
MBIA, Inc. 5,360 5,360
American Airline 5,351 5,351
Ford Credit Grantor Trust 5,337 5,337
Ford Motor Co. 5,311 5,311
Sears Mortgage Securities Corp. 5,286 5,286
Fleet Finance Home Equity Trust 5,262 5,262
Coast Savings & Loan Association 5,256 5,256
USGI Inc. 5,224 5,224
Banc One Columbus 5,145 5,145
J.P. Morgan & Company 5,045 5,045
Standard Credit Card Trust 5,036 5,036
Travelers Inc. 5,026 5,026
Colonial Credit Card Trust 5,009 5,009
Wells Fargo & Company 5,005 5,005
GATX Capital Corp. 5,000 5,000
Bristol Oaks L.P. 5,000 5,000
Shearson Lehman Bros. Holding 5,000 5,000
Chevy Chase Master Card Trust 4,997 4,997
Los Angeles County Pension
Obligation 4,989 4,989
Budget Fleet Finance Corp. 4,963 4,963
Comerica 4,922 4,922
Finance Authority of Maine 4,903 4,903
NationsBank Corporation 4,855 4,855
Phillip Morris 4,850 4,850
Mississippi Power & Light Company 4,847 4,847
General Motors Acceptance Corp. 4,837 4,837
Prudential Securities Secured
Fin. Ln. 4,776 4,776
NP Funding II LP 4,746 4,746
First Union Corp. 4,744 4,744
CFI Timeshare Certificates 4,725 4,725
Golden West Financial Corp. 4,722 4,722
Morgan Stanley Group Inc. 4,713 4,713
Prime Finance Corporation 4,703 4,703
Coca Cola Enterprises Inc. 4,689 4,689
Southern Union Corp. 4,685 4,685
</TABLE>

<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>

CARRYING FAIR
ISSUER VALUE VALUE
- ------ ------- -------
<S> <C> <C>
FIXED MATURITIES (CONTINUED)
Ford Motor Credit Co. $ 4,647 $ 4,647
Merrill Lynch & Co. Inc. 4,631 4,631
Central Power & Light Co. FL 4,622 4,622
National City Corp. 4,601 4,601
Money Store Inc. (The) 4,566 4,566
Cleveland Electric Illumination 4,538 4,538
May Department Stores Co. 4,470 4,470
Commonwealth Edison Co. 4,435 4,435
Diamond Shamrock 4,421 4,421
Greenwich Capital Acceptance 4,390 4,390
Lockheed Corporation 4,357 4,357
NationsBank Credit Card Master
Trust 4,297 4,297
Public Service Enterprise 4,265 4,265
British Columbia Hydro & Power 4,185 4,185
Public Service Electric & Gas Company 4,168 4,168
First Chicago Corp. 4,140 4,140
Time Warner Inc. 4,105 4,105
Ontario, Province of Canada 4,030 4,030
Capital Home Equity Loan Trust 4,001 4,001
Bank Nova Scotia 4,000 4,000
Pacific Bell 3,995 3,995
Commercial Credit Group Inc. 3,958 3,958
B P America 3,956 3,956
General Electric Capital Corp. 3,889 3,889
Fleet/Norstar Financial Group 3,858 3,858
J C Penney Inc. 3,832 3,832
Shawmut National Corp. 3,778 3,778
First Bank N.A. 3,744 3,744
UFSB Trust 3,726 3,726
Service Corp International 3,709 3,709
G E Capital Mortgage Services 3,694 3,694
Weyerhauser Co 3,676 3,676
Guardian Savings & Loan Assn 3,646 3,646
Secured Investors Structured Trust 3,640 3,640

COLLATERAL LOANS
CFSB Corporation 29,306 29,306
James M. Fail 20,159 20,159
Victor Sayyah 6,001 6,001

EQUITIES
Sears Roebuck & Company 3,532 3,532

LIMITED PARTNERSHIPS
GSSW (real estate) 21,100 21,100
Hicks Muse/Trident 8,893 8,893

MORTGAGE LOANS
Ballard Texas Properties 8,664 7,120
Koger Properties Inc. 7,570 7,491
Bent Tree Tower 6,932 5,371
Citizens First National 6,894 6,414
Hamilton Partners 6,352 6,300
West Houston Hotel 5,110 5,110
Farb Investments 5,022 4,153
Central & South West 4,898 4,651

REAL ESTATE
Quail Creek, Arizona
(residential development) 6,805 6,805

SHORT TERM INVESTMENTS
State Street STIF 29,066 29,066
Bank of Louisville 24,365 24,365
Champion International Corp. 4,998 4,998
American Brands Inc. 4,158 4,158
Kerr McGee Corporation 3,999 3,999

</TABLE>

At December 31, 1994 and 1993, the Company held unrated
or noninvestment-grade fixed maturities with carrying values of $100,493,000
and $107,012,000, respectively, and aggregate fair values of $100,233,000 and
$106,197,000, respectively. These holdings amounted to 6.1% of the Company's
fixed maturity investments and 4.2% of total cash and invested assets at
December 31, 1994. The holdings of noninvestment-grade securities are widely
diversified and include securities of 63 issuers.

At December 31, 1994 and 1993, the Company held residual interest
mortgage-backed securities other than the Fund America Investment and the SIST
Residual with carrying values of $7,904,000 and $11,137,000, respectively, and
fair values of $4,223,000 and $8,481,000, respectively. The effective annual
yield on such investments based on their carrying value approximated 4.5% at
December 31, 1994.

<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. INVESTMENTS (CONTINUED)

At December 31, 1994 and 1993, the Company held mortgage loans principally
involving commercial real estate with carrying values of $127,047,000 and
$138,504,000, respectively, and estimated fair values of $119,065,000 and
$142,998,000, respectively. Approximately 62% of such mortgages involved
property located in Texas, consisting of first mortgage liens on completed
income-producing properties. No individual mortgage exceeds $8 million.

The Company's life insurance subsidiaries are required to maintain certain
amounts of assets on deposit with state regulatory authorities. Such assets
had an aggregate carrying value of $185,250,000 at December 31, 1994,
including securities of the Company with an estimated fair value of
$3,640,000, which have been eliminated in consolidation in the accompanying
balance sheet.

Certain of the Company's subsidiaries have entered into interest rate swap
arrangements to convert the interest rate characteristics of certain
investments to match those of related insurance liabilities. The agreements
expire from 1995 to 1997 and exchange fixed-rate payments ranging from 6.0%
to 8.44% for three month LIBOR-based interest payments on notional amounts of
$23.3 million. The interest rate differential to be received or paid is
recognized over the lives of the agreements as an adjustment to interest
expense. The subsidiaries are exposed to credit risk in the event of default
by counterparties to the extent of any amounts that have been recorded in the
balance sheet and market risk as a result of potential future increases in
LIBOR. The fair value of interest rate swap arrangements at December 31,
1994, approximated $336,000.

6. INVESTMENTS IN EQUITY INVESTEES AND LIMITED PARTNERSHIPS

Following is an analysis of the Company's investment in limited
partnerships (excluding the Company's investment in CCP at December 31, 1992,
which was reflected as an investment in equity investees):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year $ 43,640 $ 39,808 $ 36,917
Contributions and capitalized costs 2,161 5,696 23,747
Equity in operating earnings 4,165 6,093 2,938
Equity in extraordinary losses (1,082)
Equity in unrealized gains (losses) 75 5,349 7
Sale of partnership investment (4,998)
Writedown of partnership investment (5,013)
Distributions of earnings (123) (401) (9,496)
Other distributions (7,891) (2,894) (13,223)
--------- --------- ---------

Balance, end of year $ 42,027 $ 43,640 $ 39,808
========= ========= =========
</TABLE>

The fair value of the Company's investments in limited partnerships
approximated their carrying value of $42,027,000 and $43,640,000 at December
31, 1994 and 1993, respectively.

Included in limited partnerships at December 31, 1994, was a $21,100,000
investment, representing a 49% limited partnership interest, in a partnership
formed to acquire through auction for resale certain mortgage loans and real
estate formerly held by failed savings and loan associations. During 1994,
this limited partnership distributed $7,891,000 of mortgages to the Company.

<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. INVESTMENTS IN EQUITY INVESTEES AND LIMITED PARTNERSHIPS (CONTINUED)

At December 31, 1992, the Company owned a 39.9% indirect equity interest
in Bankers, consisting of a 29.7% equity interest in BLHC and 10.2% equity
interest through its limited partnership investment in CCP. In addition, the
Company owned $34.7 million principal amount of BLHC 11% Junior Subordinated
Debentures due 2003 and $50.0 million of a BLHC 11% preferred stock. The 1992
sale of Bankers was accounted for as a "step transaction" in accordance with
GAAP. Accordingly, gain recognition was limited to the 60.1% interest deemed
to have been sold. The excess of the sales price over the Company's basis in
Bankers on the 39.9% portion of the investment deemed to have been retained
by the Company (excess of sales price over basis in retained interest) was
reflected as a reduction in the carrying value of the Company's investments
in BLHC and CCP. Effective March 31, 1993, the Company's ownership interest
in BLHC was reduced to 24.4% as a result of BLHC's offering and on September
30, 1993, the Company sold its investment in BLHC (see Note 2).

At December 31, 1992, CCP had no assets or liabilities, other than its
investment in BLHC. Financial information of BLHC and the Company's carrying
value and equity in earnings of BLHC as of and for the two months ended
December 31, 1992, and the Company's equity in the earnings of BLHC for the
nine months ended September 30, 1993, is as follows (in thousands):

1993 1992
---- ----
<S> <C> <C>
Financial position:
Invested assets $ 1,847,000
Other assets 1,523,500
Insurance liabilities 2,490,200
Notes payable and other liabilities 709,300
Preferred stockholders' equity 160,800
Common stockholders' equity 10,200

Results of operations (unaudited):
Revenues $ 1,081,600 $ 222,500
Earnings from operations before
effect of accounting change 95,300 22,700
Cumulative effect of change in method
of accounting for post-retirement
benefits (13,300)
Extraordinary loss from early debt
retirement (5,600)
Net earnings attributable to common
stock 85,200 6,500

Amounts recorded by the Company:
Investment in 11% Junior Subordinated
Debt $ 30,551
Investment in 11% preferred stock 46,509
Equity investment in BLHC and CCP (35,739)
---------
$ 41,321
=========
</TABLE>

<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. INVESTMENTS IN EQUITY INVESTEES AND LIMITED PARTNERSHIPS (CONTINUED)

Following is an analysis of the Company's equity investments in BLHC and
CCP (in thousands):

1993 1992
---- ----
<S> <C> <C>
Equity investment, beginning of year $(35,739)
Cost of investment in BLHC $ 16,700
Cost of investment in CCP 9,640
Allocated cost of common stock equity
kickers received for purchase of
subordinated debt and preferred stock 8,117
Excess of sales price over basis in
retained interest (74,338)
Equity in earnings of BLHC and CCP,
including amortization of portion of
excess of sales price over basis 29,117 3,265
Equity in extraordinary losses of BLHC (1,370)
Equity in (elimination of equity in)
unrealized investment gains (877) 877
Cash dividends received from BLHC (533)
Equity in proceeds of BLHC initial
public offering 99,376
Reduction in investment upon sale (89,974)
-------- --------
Equity investment, end of year $ - $(35,739)
======== ========
</TABLE>

Included in the limited partnership investments at December 31, 1991, was
the Company's 21.4% interest in CCP (Predecessor CCP). On July 21, 1992,
Predecessor CCP formed a new insurance holding company, CCP Insurance, Inc.
(CCP Insurance) and completed an initial public offering (IPO) of common
stock in CCP Insurance. Predecessor CCP was liquidated and the Company
received 1,764,439 shares of CCP Insurance common stock in exchange for its
21.4% interest in Predecessor CCP. At the date of exchange, the Company's
carrying value in Predecessor CCP totaled $19,509,000, which became the
Company's basis in the shares of CCP Insurance common stock. The Company
subsequently reflected its investment in CCP Insurance, along with 525,000
shares of CCP Insurance purchased in the IPO, as marketable equity
securities. Effective September 29, 1993, CCP Insurance completed an
underwritten primary and secondary offering of shares of its common stock.
The Company sold all of the 1,764,439 shares of the common stock of CCP
Insurance in conjunction with the offering for $47,272,000 and realized
investment gains totaling $27,758,000. In addition, during 1994 and 1993, the
Company sold 12,000 and 455,375 shares of CCP Insurance common stock
respectively in open market transactions and realized gains totaling $140,000
in 1994 and $5,310,000 in 1993. At December 31, 1994, the Company continues
to hold 57,625 shares of CCP Insurance common stock with a fair value of
approximately $1.2 million.

<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

6. INVESTMENTS IN EQUITY INVESTEES AND LIMITED PARTNERSHIPS (CONTINUED)

Financial information of Predecessor CCP and the Company's equity in the
earnings of Predecessor CCP is as follows (in thousands):

<S> <C>
Results of operations (through July 1992):
Revenues. . . . . . . . . . . . . . . . . . . $281,800
Net operating earnings. . . . . . . . . . . . 17,663
Extraordinary loss. . . . . . . . . . . . . . (6,248)

Amounts recorded by the Company:
Equity in operating earnings. . . . . . . . . $ 3,550
Equity in extraordinary loss. . . . . . . . . (1,082)
Distributed earnings received . . . . . . . . 8,902

</TABLE>

Following is a summary of the equity in earnings of equity investees and
limited partnerships:

<TABLE>
<CAPTION> YEAR ENDED DECEMBER 31,
-----------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Operating earnings:
BLHC $29,117 $3,265
Limited partnerships. . . . . . . . . $ 4,165 6,093 2,938
------- ------- ------
Equity in operating earnings. . . . . . 4,165 35,210 6,203
Equity in extraordinary losses. . . . . (1,370) (1,082)
------- ------- ------
$ 4,165 33,840 $ 5,121
======= ======= =======
Distributed earnings received $ 123 $ 934 $ 9,496
======= ======= =======
</TABLE>

7. ACCOUNTING FOR EXCESS COST (GOODWILL)

SLC's accounting policy is to amortize goodwill on a straight-line basis
over a 40-year period. Historically, the Company periodically assessed the
recoverability of its goodwill through an actuarial projection of the
undiscounted future earnings of the Company's insurance subsidiaries (excluding
excess cost amortization) over the remaining life of such goodwill. Such
projections assumed anticipated levels of new production over a succeeding
five-year period.

Under its historical accounting practices, approximately $288,333,000 of
SLC's total $298,017,000 of unamortized goodwill at year-end 1994 was
attributable to SLC's acquisition of Southwestern Life in 1986. The Company
tested the recoverability of the Southwestern Life goodwill and, based on the
historical methodology utilized, management concluded that such goodwill
appeared to be fully recoverable.

In early 1995, the Company's Board of Directors approved a change in SLC's
strategy for dealing with its public debt obligations and fixed charges. As
publicly announced, the new strategy seeks to restructure SLC's capital in such
a way as to appropriately meet the Company's long term goals, and to
significantly increase SLC's common equity. Management believes that this
process will inevitably involve negotiations with third parties based on the
perceived fair values of SLC and its operating subsidiaries. Accordingly,
management concluded that the Company's accounting policy with respect to the
recoverability of goodwill should be changed to discount projections of future
earnings using an economic rate of return that would be customary for evaluating
the present value of future profits in connection with current life insurance
company transactions. As a result of this accounting change, the goodwill
attributable to the acquisition of Southwestern Life was reduced from
$288,333,000 to $77,650,000, or a total reduction of $210,683,000. Because such
a change in accounting was determined to be inseparable from a change in

<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

7. ACCOUNTING FOR EXCESS COST (GOODWILL) (CONTINUED)

an estimate, such reduction was reflected as a charge to operating earnings, as
opposed to being reflected as the cumulative effect of a change in an accounting
principle.

In addition to the reduction in goodwill related to Southwestern Life, SLC
evaluated the recoverability of its remaining goodwill totaling approximately
$9,683,000 and determined that $6,834,000 of such goodwill, substantially all of
which was related to the 1986 acquisition of Philadelphia American Life
Insurance Company (PALICO), was not recoverable through projected future
earnings. PALICO is the Company's principal provider of group health insurance
products and incurred substantial losses relative to such business over the past
two years. Accordingly, an additional charge to operating earnings of $6,834,000
was reflected at year-end 1994 and included in amortization of excess cost in
the consolidated statement of earnings.

8. INSURANCE LIABILITIES

Insurance liabilities consist of the following:

MORTALITY OR INTEREST
WITHDRAWAL MORBIDITY RATE DECEMBER 31, DECEMBER 31,
ASSUMPTIONS ASSUMPTIONS ASSUMPTIONS 1994 1993
----------- ------------ ----------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>

Future policy benefits:
Traditional life insurance
contracts . . . . . . . . . . . Company Company 6%-10% $ 498,866 $ 528,634
experience experience
Traditional annuity products . . N/A N/A N/A 137,764 138,244
Individual accident and health . Company Company 6%-10% 62,526 61,996
experience experience
Group life and health. . . . . . N/A N/A N/A 9,704 9,340
Unearned premiums . . . . . . . N/A N/A N/A 36,362 35,412
Claims and benefits payable. . . N/A N/A N/A 104,456 106,763
Dividend and coupon
accumulations and other . . . . N/A N/A N/A 44,422 46,914
--------- ---------
894,100 927,303
--------- ----------
Universal life and investment contract
liabilities:
Universal life and annuities . . . . . N/A N/A N/A 1,378,717 1,306,665
Guaranteed investment contracts. . . . N/A N/A N/A 313,296 377,731
--------- ---------
1,692,013 1,684,396
--------- ---------
$2,586,113 $2,611,699
========= =========
</TABLE>

The estimated fair value of guaranteed investment contracts approximated
their carrying value at December 31, 1994, because it is expected that
substantially all of such contracts will be terminated during 1995. The
estimated fair value of the liabilities for other investment contracts is
approximately equal to their carrying value at December 31, 1994, because
interest rates credited to account balances approximate current rates paid on
similar investments and are generally not guaranteed beyond one year. Fair
values for the Company's insurance liabilities other than those for
investment-type insurance contracts are not required to be disclosed. However,
the fair values of liabilities under all insurance contracts are taken into
consideration in the Company's overall management of interest rate risk, which
minimizes exposure to changing interest rates through the matching of investment
maturities with amounts due under insurance contracts.

<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

8. INSURANCE LIABILITIES (CONTINUED)

Activity in the liability for claims and benefits payable for the years
ended December 31, 1994, 1993 and 1992 is summarized as follows (1992 excludes
amounts for Bankers and Certified, which were sold in November 1992):

<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Claims and benefits payable at beginning of year. . . . . $106,763 $ 89,245 $ 90,278
Less reinsurance recoverables . . . . . . . . . . . . . . 4,224 1,282 1,025
-------- ------- -------
Net beginning balance. . . . . . . . . . . . . . . . . . 102,539 87,963 89,253

Add incurred losses net of reinsurance:
Current year . . . . . . . . . . . . . . . . . . . . . . 223,474 207,230 175,502
Prior years . . . . . . . . . . . . . . . . . . . . . . (7,514) (10,661) (3,404)
-------- -------- -------
215,960 196,569 172,098
-------- -------- -------
Deduct payments for claims, net of reinsurance:
Current year . . . . . . . . . . . . . . . . . . . . . . 163,805 126,204 131,460
Prior years . . . . . . . . . . . . . . . . . . . . . . 54,462 52,847 41,671
-------- -------- --------
218,267 179,051 173,131
-------- -------- -------

Claims and benefits payable, net of related
reinsurance recoverables at end of year . . . . . . . . 99,181 102,539 87,963
Plus reinsurance recoverables . . . . . . . . . . . . . . 5,275 4,224 1,282
-------- ------- ------
Balance at end of year. . . . . . . . . . . . . . . . . . $104,456 $106,763 $ 89,245
======== ======== ========
</TABLE>

The above reconciliation shows a consistent redundancy in the Company's
claims reserve due to the Company's conservative reserving methodology which has
been applied on a consistent basis from year to year.

9. STOCKHOLDERS' EQUITY AND RESTRICTIONS

At December 31, 1994, substantially all of consolidated stockholders'
equity represented net assets of the Company's insurance subsidiaries that
cannot be transferred to the Company in the form of dividends, loans or
advances. Generally, the net assets of the Company's insurance subsidiaries
available for transfer to the Company are limited to the greater of (except in
Kentucky where the applicable test is lesser of) the subsidiaries' net gain from
operations during the preceding year or 10% of the subsidiaries' net surplus as
of the end of the preceding year as determined in accordance with accounting
practices prescribed or permitted by insurance regulatory authorities. Payment
of dividends in excess of such amounts would generally require approval by the
regulatory authorities. At December 31, 1994, approximately $15 million was
available under existing laws for the payment of dividends by insurance
subsidiaries to the Company during 1995 without prior approval; however, Modern
American has agreed with its domiciliary state that it will not pay any
stockholder dividends without obtaining prior regulatory approval. Southwestern
Life has agreed in writing with its domiciliary state to give 30 days prior
notice before the payment of any stockholder dividends. Further, management has
given the Texas Department of Insurance assurances that neither Southwestern
Life nor Union Bankers will declare and pay any dividends in 1995 without the
prior approval of the Texas Insurance Commissioner.

At the request of the Illinois Department of Insurance, BML has informed
the Illinois Department in writing that it currently has no intention to declare
or pay any dividends in 1995 and that it will give the Illinois Department
advance notice if there is a change in the company's intention.

<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

9. STOCKHOLDERS' EQUITY AND RESTRICTIONS (CONTINUED)

Both Integrity National and PALICO have acknowledged in writing the
request of the Pennsylvania Department of Insurance that prior to paying any
dividends in 1995 each company, respectively, will notify in advance
and obtain the Pennsylvania Department's approval of such dividends, which
approval the Pennsylvania Department has agreed not to unreasonably withhold.

The Company's insurance subsidiaries prepare their statutory financial
statements in accordance with accounting practices prescribed or permitted by
their respective state insurance departments. Prescribed statutory accounting
practices include state laws, regulations, and general administrative rules, as
well as a variety of publications of the National Association of Insurance
Commissioners (NAIC). Permitted statutory accounting practices encompass all
accounting practices that are not prescribed; such practices differ from state
to state, and may differ from company to company within a state, and may change
in the future. Furthermore, the NAIC has a project to codify statutory
accounting practices, the result of which is expected to constitute the only
source of "prescribed" statutory accounting practices. Accordingly, that
project, which is expected to be completed in 1996, will likely change to some
extent prescribed statutory accounting practices, and may result in changes to
the accounting practices that insurance enterprises use to prepare their
statutory financial statements.

On the basis of reporting as prescribed by insurance regulatory
authorities, the combined stockholders' equity of the consolidated insurance
subsidiaries, after elimination of amounts attributable to investments in
consolidated insurance subsidiaries, amounted to approximately $219,357,000 and
$259,856,000 and the combined asset valuation reserve of SLC's insurance
subsidiaries amounted to $34,827,000 and $45,023,000 as of December 31, 1994 and
1993, respectively. Combined net income (loss) was as follows:

YEAR ENDED DECEMBER 31,
----------------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Operating income (loss) . . . . . . . . . $ (8,636) $ 628 $ 22,191
Realized investment gains (losses). . . . (13,437) 52,055 (68,482)
------- ------ -------
Net income (loss) . . . . . . . . . . . . $(22,073) $52,683 $(46,291)
======== ======== =========
</TABLE>

Gains and losses relative to individual investments are generally
reflected for statutory reporting purposes as unrealized investment gains or
losses until such time as the specific investments are sold or otherwise
disposed of. In addition, statutory investment gains and losses are reported net
of related income tax effects. Statutory realized investment losses in 1992
include losses on the disposition of First Executive Corporation common stock
totaling $118 million which were reflected prior to 1992 for financial reporting
purposes.

During 1992, certain employees who had previously purchased shares of the
Company's Common Stock under a Restricted Stock Purchase Agreement pledged the
shares of Common Stock to collateralize notes receivable which had been issued
to a former affiliate in 1982, but which were subsequently acquired by the
Company in 1985. The notes and accrued interest totaling $1,537,000 and
$1,471,000 at December 31, 1994 and 1993, respectively, bear interest at 9%,
mature in 1996 and were collateralized by 375,564 shares of the Company's Common
Stock at each of the respective dates. In addition, the Company has other notes
receivable with a carrying value of $258,000 at December 31, 1994 and 1993,
respectively, which are collateralized by 51,534 shares of the Company's Common
Stock. In the accompanying balance sheets, such notes and accrued interest have
been reflected as reductions in stockholders' equity.

<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

10. CAPITAL STOCK

At December 31, 1994, the Company had two classes of capital stock, Series
Preferred Stock (no par value), and Common Stock ($1.00 par value). The only
Preferred Stock outstanding at December 31, 1994 was the Series 1986-A (Series
1986-A Preferred Stock).

The holder of each outstanding share of Series 1986-A Preferred Stock is
entitled to cumulative annual dividends of $1.75 and liquidating distributions
of up to $25 per share. Such dividends and liquidating distributions are payable
in preference to the Common Stock. The Series 1986-A Preferred Stock may be
converted, at the option of the holder, at any time into shares of Common Stock
at the rate of .7692 shares of Common Stock for each share of Series 1986-A
Preferred Stock. The Company may redeem, at its option, any or all shares of the
Series 1986-A Preferred Stock at redemption prices declining annually to $25 per
share after December 1, 1996 plus accrued and unpaid dividends. The Series
1986-A Preferred Stock is exchangeable, in whole but not in part, at the
Company's option on any dividend payment date commencing December 1, 1988 for
the Company's 7% Convertible Subordinated Debentures due 2011 at the rate of $25
principal amount of Debentures for each share of Series 1986-A Preferred Stock.
The Series 1986-A Preferred Stock is nonvoting, except as required by law and
except that if six quarterly dividends are unpaid and past due the holders of
the Series 1986-A Preferred Stock may elect two directors to the Company's Board
of Directors. On January 27,1995, the Company's Board of Directors authorized
the suspension of the payments of dividends on the Series 1986-A Preferred Stock
until reinstated by action of the Board. At March 31, 1995, approximately $3.5
million of preferred dividends were in arrears.

Through February 10, 1994, the Common Stock and Class B Common Stock were
entitled to vote as separate classes on stockholder actions that directly or
indirectly could effect a change in the aggregate number or par value of shares
of Class B Common Stock or in the powers, preferences or rights of the holders
of Class B Common Stock. The Company's Board of Directors was classified by its
Certificate of Incorporation to require, so long as the Class B Common Stock was
outstanding, that at least 50% of the Company's directors were to be
independent, and that 75% of the directors were to be elected by the Class B
Common Stock and the remaining 25% were to be elected by the Common Stock and
voting Preferred Stock. The Class B Common Stock had the same rights to
dividends and liquidating distributions as the Common Stock. On February 11,
1994, the Company purchased all of the outstanding shares of Class B Common
Stock and immediately cancelled and retired such shares (see Note 4).

In connection with the CFLIC transaction on June 30, 1994 (see Note 4),
the Company redeemed all of the outstanding shares of the Series 1984-A
Preferred Stock and the 1987-B Preferred Stock.

In connection with the sale of the Company's investment in BLHC on
September 30, 1993 (see Note 2), the Company redeemed all of the outstanding
shares of its Series 1987-A Preferred Stock at their $50 per share stated value.
On December 2, 1993, the Company redeemed for cash all of the outstanding shares
of its Series 1987-C Preferred Stock at their $50 per share stated value. Annual
dividend requirements on the redeemed shares totaled $5.50 per share and $8.00
per share, respectively.

<PAGE>

10. CAPITAL STOCK (CONTINUED)

Capital stock activity for the three years ended December 31, 1994, was as
follows:

<TABLE>
<CAPTION> SHARES
AUTHORIZED
PER SERIES 1994 1993 1992
---------- ---- ---- ----
<S> <C> <C> <C> <C>
Preferred stock (authorized 50,000,000 shares):
Series 1984-A Preferred Stock . . . . . . . . . . 541,563
=========
Balance, beginning of year. . . . . . . . . . . 541,563 541,563 541,563
Shares redeemed in CFLIC transaction. . . . . . (541,563)
----------- ---------- ----------
Balance, end of year . . . . . . . . . 541,563 541,563
=========== ========== ==========
Series 1986-A Preferred Stock. . . . . . . . . . . 8,000,000
=========
Balance, beginning of year . . . . . . . . . . . 7,999,880 7,999,980 7,999,980
Shares retired upon exchange . . . . . . . . . . (100)
----------- ---------- ----------
Balance, end of year . . . . . . . . . . . . . . 7,999,880 7,999,880 7,999,980
=========== ========== ==========
Series 1987-A Preferred Stock. . . . . . . . . . . 2,000,000
=========
Balance, beginning of year . . . . . . . . . . . 1,000,000 1,000,000
Shares redeemed . . . . . . . . . . . . . . . . (1,000,000)
---------- ----------
Balance, end of year . . . . . . . . . . . . . . 1,000,000
========== ==========
Series 1987-B Preferred Stock. . . . . . . . . . . 140,000
=========
Balance, beginning of year . . . . . . . . . . . 140,000 140,000 140,000
Shares redeemed in CFLIC transaction . . . . . . (140,000)
----------- ---------- ----------
Balance, end of year . . . . . . . . . . . . . . 140,000 140,000
Series 1987-C Preferred St . . . . . . . . . . . . 1,000,000
========= =========== ========== ==========
Balance, beginning of year . . . . . . . . . . . 1,000,000 1,000,000
Shares redeemed . . . . . . . . . . . . . . . . (1,000,000)
---------- ----------
Balance, end of year . . . . . . . . . . . . . . 1,000,000
========== ==========

Common stock (authorized 200,000,000 shares):
Issued:
Balance, beginning of year . . . . . . . . . . . 71,593,610 71,401,004 71,398,954
Issued upon exchange of preferred stock. . . . . 76
Issued upon exercise of stock options. . . . . . 58,300 192,530 2,050
Issued for Class B shares acquired
for treasury . . . . . . . . . . . . . . . . 100,000
Retirement of treasury shares. . . . . . . . . . (22,768,528)
----------- ---------- ----------
Balance, end of year . . . . . . . . . . . . . . 48,983,382 71,593,610 71,401,004
----------- ---------- ----------
Held by subsidiaries and in treasury:
Balance, beginning of year . . . . . . . . . . . 23,766,471 23,610,789 23,317,203
Purchase of shares . . . . . . . . . . . . . . . 155,682 293,586
Shares redeemed issued for Class B shares . . . 100,000
Shares redeemed in CFLIC transaction . . . . . . 620,423
Retirement of treasury shares. . . . . . . . . . (22,768,528)
----------- ---------- ----------
Balance, end of year . . . . . . . . . . . . . . 1,718,366 23,766,471 23,610,789
----------- ---------- ----------
Outstanding, end of year . . . . . . . . . . . . . 47,265,016 47,827,139 47,790,215
=========== ========== ==========
Common stock, Class B (none currently authorized):
Balance, beginning of year . . . . . . . . . . . . 100,000 100,000 100,000
Purchase and cancellation of shares. . . . . . . . (100,000)
----------- ---------- ----------
Balance, end of year . . . . . . . . . . . . . . . 100,000 100,000
=========== ========== ==========

</TABLE>

<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

10. CAPITAL STOCK (CONTINUED)

Shares of Common Stock reserved for issuance at December 31, 1994:

<TABLE>
<S> <C>
Conversion of Series 1986-A Preferred Stock . . . 6,153,755
Exercise of incentive plan stock options . . . . 1,200,000
Stock options to be granted . . . . . . . . . . . 1,440,000
---------
Total . . . . . . . . . . . . . . . . . . . . . 8,793,755
=========
</TABLE>

11. REINSURANCE

The Company's life insurance subsidiaries have set their retention limit
for acceptance of risk on life insurance policies at various levels currently up
to $500,000. There are reinsurance agreements with various companies whereby
insurance in excess of the respective subsidiaries' retention limits is
reinsured. To the extent that reinsuring companies become unable to meet their
obligations under these agreements, the subsidiaries remain contingently liable.
Insurance in force ceded in 1994 and 1993 under risk sharing arrangements
totaled approximately $5.2 billion and $5.7 billion, respectively.

In 1993, the Company adopted the provisions of SFAS No. 113, "Accounting
and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts,"
which changes the accounting and reporting for reinsurance contracts. SFAS No.
113 requires that when a reinsurance contract does not relieve the reinsurer
from the legal liability to its policyholders, ceding insurers must report
amounts recoverable from reinsurers as assets rather than as a reduction of the
related policyholder liabilities. In addition, financial reporting disclosures
were amended to require information relative to the volume of premiums ceded to
and the benefits paid by reinsurers under related reinsurance arrangements. At
December 31, 1994 and 1993, the Company has reflected in its balance sheet an
asset for amounts due from reinsurers totaling $236,272,000 and $388,083,000,
respectively, and has correspondingly increased its insurance liabilities by the
same amounts in each respective year. Following is information relative to
premiums ceded to unaffiliated reinsurers and the related benefits incurred by
such reinsurers for the year ended December 31, 1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
1994
--------------------------------
TRADITIONAL DEPOSIT
REINSURANCE PRODUCTS TOTAL
----------- -------- -----
<S> <C> <C> <C>

Premiums and deposits ceded . . . . . . $34,840 $18,605 $53,445
====== ====== ======
Benefits and withdrawals ceded. . . . . $31,401 $ 2,855 $34,256
====== ====== ======
<CAPTION>
1993
--------------------------------
TRADITIONAL DEPOSIT
REINSURANCE PRODUCTS TOTAL
----------- -------- -----

<S> <C> <C> <C>
Premiums and deposits ceded . . . . . . $49,964 $19,849 $69,813
====== ====== ======
Benefits and withdrawals ceded. . . . . $35,486 $30,807 $66,293
====== ====== ======
</TABLE>

Amounts due from reinsurers at December 31, 1993, included $334,633,000
due from ERC relative to certain annuity business which ERC had retroceded to
CFLIC. The Company terminated the reinsurance arrangements with CFLIC during
1994 and reduced amounts due from ERC to $188,756,000 at December 31, 1994 (see
Note 4).

Certain of the Company's insurance subsidiaries have ceded blocks of
insurance under reinsurance treaties to provide funds for financing
acquisitions and other purposes. These reinsurance transactions, generally
known as "surplus relief reinsurance," represent financing
arrangements and, in accordance with GAAP, are not reflected in the

<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

11. REINSURANCE (CONTINUED)

accompanying financial statements except for the risk fees paid to reinsurers.
Statutory surplus provided by such treaties totaled $57.8 million and $51.5
million at December 31, 1994 and 1993, respectively. Risk fees paid to
reinsurers generally range from 2% to 4% of the net amount of surplus provided.

12. COMMITMENTS, LITIGATION AND CONTINGENT LIABILITIES

Rental expense for the years ended December 31, 1994, 1993 and 1992 was
approximately $8.7 million, $6.6 million and $11.4 million, respectively. At
December 31, 1994, the Company and its subsidiaries had long-term leases
covering certain of their facilities and equipment. The net minimum rental
commitments under noncancellable operating leases with lease terms in excess of
one year are $6.1 million, $0.7 million, $0.2 million and $0.1 million for the
years ending December 31, 1995, 1996, 1997 and 1998, respectively.

In addition, as a result of a judgement involving a mortgage loan
foreclosure, a subsidiary is obligated under a real property lease for payments
totaling $120,000 annually through November 2082.

At December 31, 1994, the Company had made investments during the year of
$1.8 million associated with an outstanding commitment to make limited
partnership investments of up to $25 million in Conseco Capital Partners II,
L.P. The partnership was formed to make corporate acquisitions of specialized
annuity, life and health insurance companies and related businesses.

The Company and its subsidiaries have been under examination by the
Internal Revenue Service (IRS) for the tax years 1983 through 1992. The IRS
completed its examination for the years 1983 through 1985 and issued preliminary
Notices of Deficiencies totaling approximately $17.5 million, before interest.
The Company protested such assessed deficiencies and subsequently reached a
final agreement with the IRS under which the Company and certain of its
subsidiaries paid approximately $4.0 million of additional taxes and interest.

In 1994, the IRS issued a preliminary Notice of Deficiency in the amount
of $127.7 million to the Company's insurance subsidiaries for the tax years 1986
through 1989, which included the disallowance of interest expense on the surplus
debentures issued by the Company's insurance subsidiaries. The issue involved
approximately $444 million of interest deductions claimed by the Company's
subsidiaries during the periods under examination and, if disallowed as
deductions, would have resulted in substantial additional tax and interest.
However, the Company protested this issue and subsequent to year-end 1994,
reached a tentative settlement for the tax years 1986 through 1989 which will
allow a full deduction for interest expense on surplus debentures. The tentative
settlement is subject to final approval by the congressional Joint Committee on
Taxation. Management believes that, based upon the tentative settlement and the
indemnification received from the seller relative to certain former and
presently owned subsidiaries, the ultimate liability for taxes and interest for
these years will not exceed amounts recorded in the Company's financial
statements.

The IRS has not completed its examination for the years 1990 through 1992
and therefore has not issued preliminary Notices of Deficiencies for those
years. Further, based on the current status of the examination of 1990 through
1992, no issues have been brought to the attention of management that would
result in a substantial liability for taxes and interest.

From time to time, assessments are levied on the Company's insurance
subsidiaries by life and health guaranty associations in states in which they
are licensed to do business. Such assessments are made primarily to cover the
losses of policyholders of insolvent or rehabilitated insurers. In some states,
these assessments can be partially recovered through a reduction in future
premium taxes. The Company's insurance subsidiaries paid assessments of $2.7
million, $3.2 million and $2.8 million in the years 1994, 1993 and 1992,
respectively. Based on information currently available, the Company's insurance
subsidiaries have accrued approximately $1.3 million for future assessments.

<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

12. COMMITMENTS, LITIGATION AND CONTINGENT LIABILITIES (CONTINUED)

Reference is hereby made to Item 3, Legal Proceedings, of this Form 10-K
with respect to a discussion of the CASTLE case and the MEYER case.

Various other lawsuits and claims are pending against the Company and its
subsidiaries. Based in part upon the opinion of counsel as to the ultimate
disposition of the above discussed and other matters, management believes that
the liability, if any, will not be material.

See Note 2 for a discussion regarding indemnifications made by the Company
with respect to the sale of Bankers.

13. FEDERAL INCOME TAXES

The Company, its non-life insurance subsidiaries and its life insurance
subsidiaries file a single consolidated tax return. ICH Funding filed a
separate income tax return subsequent to the Company's transfer of an 83%
ownership interest to CFLIC in June 1993 (see Note 4) and continued to do so
until the Company's reacquisition of such interest in June 1994. As an
indirect wholly-owned subsidiary of the Company, ICH Funding will request
permission from the IRS to rejoin the consolidated tax group for the period
subsequent to June 1994. Marquette, which was also acquired in June 1994, is
not eligible to join the Company's consolidated tax return for 60 months and,
therefore, will file a separate income tax return until such time has passed.

The Company's deferred federal income tax asset at December 31, 1994 and
1993, is comprised of the tax benefit (cost) associated with the following items
based on 35% tax rates in effect:

<TABLE>
<CAPTION>
1994 1993
---- ----
(IN THOUSANDS)
<S> <C> <C>
Items subject to ordinary tax treatment:
Deferred policy acquisition costs and present
value of future profits of acquired business . . . $(71,962) $(56,581)
Future policy benefits . . . . . . . . . . . . . . 67,503 62,815
Other assets and liabilities. . . . . . . . . . . . 57,902 29,657
Net operating loss carryforwards. . . . . . . . . . 15,233 13,644
------ ------
Deferred income tax asset . . . . . . . . . . . . 68,676 49,535
------ ------

Items subject to capital gains treatment:
Invested assets . . . . . . . . . . . . . . . . . . 49,056 692
Capital loss carryforwards. . . . . . . . . . . . . 5,209
------- ------
Deferred income tax asset . . . . . . . . . . . . 49,056 5,901
------- ------
Alternative minimum tax credit carryforwards. . . . . 8,595 13,948
Less: Valuation allowance . . . . . . . . . . . . . . (41,465) (16,351)
------ ------
Total deferred income tax asset . . . . . . . . . $ 84,862 $ 53,033
====== ======

</TABLE>
79

<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

13. FEDERAL INCOME TAXES (CONTINUED)

The provision (credit) for income taxes is included in the statements of
earnings as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993 1992
(IN THOUSANDS)
<S> <C> <C> <C>
Operating earnings (loss) . . . . . . . . $(1,140) $93,706 $(69,256)
Cumulative effect of changes in
accounting methods . . . . . . . . . . . (3,585)
Extraordinary losses. . . . . . . . . . . (1,033) (2,237)
------ ------ -------
$(1,140) $89,088 $(71,493)
====== ====== =======
</TABLE>

The components of the provision (credit) for income taxes on operating
earnings (loss) are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993 1992
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax expense (credit) . . . . . . . $(7,630) $20,678 $ 836
Deferred tax expense (credit) . . . . . . . 6,490 73,028 (70,092)
-------- -------- --------
Income tax expense (credit) . . . . . . . $(1,140) $93,706 $69,256)
======== ======== ========
</TABLE>

A reconciliation of the income tax provisions (credits) based on the
prevailing corporate tax rate of 35% in 1994 and 1993 and 34% in 1992 to the
provisions (credits) reflected in the consolidated financial statements is as
follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Computed expected income tax expense
(credit) at statutory regular tax rate . . $(118,503) $106,970 $ (6,256)
Change in accounting for excess cost . . . 73,739
Amortization of excess cost . . . . . . . . 5,748 3,357 3,734
Effect of change in income tax rate . . . . (3,509)
Reduction in (benefit from) utilization
of tax loss
carryforwards . . . . . . . . . . . . . . 4,005 (910) (5,158)
Additional tax basis gains on
sales of subsidiaries . . . . . . . . . . 16,206
Provision for tax settlement. . . . . . . . 7,981
Increase (reduction) in deferred tax
asset valuation allowance. . . . . . . . . 25,114 (8,554) (79,929)
Other . . . . . . . . . . . . . . . . . . . 776 (3,648) 2,147
------ ------ ------
Income tax expense (credit) . . . . . . $ (1,140) $ 93,706 $ (69,256)
====== ====== =======
</TABLE>

The benefit from the reduction in the deferred tax asset in 1993 as
reflected in the above reconciliation exceeds the actual change in the valuation
allowance as a result of the change in corporate tax rates during 1993.

<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

13. FEDERAL INCOME TAXES (CONTINUED)

At December 31, 1994, the Company and its subsidiaries had the following
income tax carryforwards available (in thousands):

<TABLE>
<CAPTION>
TAX EXPIRATION
PURPOSES DATES
-------- ----------
<S> <C> <C>
U.S. federal regular tax operating loss carryforwards . . . $43,523 2009
U.S. federal AMT credit carryforwards against regular tax . 8,595 Indefinite

</TABLE>

Management has periodically assessed the ability of the Company's insurance
subsidiaries to produce taxable income in future periods sufficient to fully
utilize their operating book/tax temporary differences and tax loss
carryforwards. These assessments have included actuarial projections under
alternative scenarios of future profits on the existing insurance in force of
the Company's insurance subsidiaries, including provisions for adverse
deviation and assumptions regarding new business, adjusted to reflect the
Company's anticipated debt service costs. Valuation allowances totaling
$41,465,000 and $16,351,000 were provided against the Company's deferred tax
assets at December 31, 1994 and 1993, respectively, to reflect the
uncertainties of realizing all of the benefits of temporary differences and
available tax loss carryforwards.

Included in the deferred income tax asset at December 31, 1994 are tax
effects totaling $29,809,000 associated with unrealized investment losses
included in stockholders' equity. Substantially all of such unrealized
investment losses at December 31, 1994, are attributable to SLC's insurance
subsidiaries' available for sale fixed maturities. The Company provided a
valuation allowance against the deferred income tax asset related to
unrealized investment losses as of the end of each interim period during
1994. At December 31, 1994, management assessed the level of its
subsidiaries' cash and short-term investments, the quality and duration of
their available for sale fixed maturity portfolios, and the likelihood that
its subsidiaries would be required to dispose of a substantial portion of
their available for sale fixed maturities and incur net capital losses in
order to meet their liquidity needs. These assessments included a review of
actuarial cash flow projections under various interest rate scenarios and
evaluations of historical data relative to benefits and surrender activity.
Management has concluded based on such assessment that it is unlikely that
the Company's subsidiaries would be required to incur significant capital
losses to meet anticipated liquidity needs over the near term and,
accordingly, the valuation allowance provided against the deferred income tax
asset arising from unrealized investment losses in 1994 interim periods was
eliminated at December 31, 1994.

The IRS is examining federal income tax returns of the Company and certain
insurance subsidiaries through 1992. See Note 12 for a discussion of certain
proposed deficiencies.

14. BENEFIT AND OPTION PLANS

The Company has not established retirement benefit plans for its
employees. However, Bankers had a noncontributory unfunded deferred compensation
plan for qualifying members of its career agency force. Net pension costs during
1992 included in other operating expenses included the following components (in
thousands):

<TABLE>
<CAPTION>
<S> <C>
Service cost-benefits earned during the period . . . $1,223
Interest cost on projected benefit obligation . . . 1,730
Net amortization . . . . . . . . . . . . . . . . . 150
-----
Net periodic pension cost. . . . . . . . . . . . . . $3,103
=====

</TABLE>

The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 8% and 5%, respectively.

<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

14. BENEFIT AND OPTION PLANS (CONTINUED)

During 1993, the Company entered into agreements with certain employees
providing for severance benefits supplemental to those available to all
employees under the Company's welfare benefit plans. The agreements generally
provide for a benefit of two times the annual salary of each covered employee
upon the voluntary or involuntary termination of their employment for any reason
other than gross misconduct, plus an additional benefit of up to one year's
salary if, in the aggregate, shares of the Company's Common Stock acquired by
such employees under the Company's incentive stock option plans or the stock
purchase plan of a predecessor company are disposed of at less than a minimum
specified price. For the year ended December 31, 1993, the Company reflected a
charge for the total anticipated cost of providing benefits under the agreements
totaling $2,820,000.

Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 106
requires that an enterprise accrue, during the years that an employee renders
the necessary service, the expected cost of providing postretirement life and
health care benefits to an employee and the employee's beneficiaries and covered
dependents. The Company's transition obligation as of January 1, 1993,
approximated $22,873,000. The Company reflected a charge for the cumulative
effect to January 1, 1993, of providing postretirement benefits for its
remaining employees totaling $2,746,000. The cumulative charge has been
reflected net of $934,000 in related income tax effects. The Company's
obligation for accrued postretirement benefits is unfunded. Following is an
analysis of the change in the liability for accrued postretirement benefits for
the year ended December 31, 1994 (in thousands):

<TABLE>
<S> <C>
Accrued postretirement benefits, beginning of year . . . . . . . . . $23,814
-------
Recognition of components of net periodic postretirement benefit cost:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . 517
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,777
Amortization of prior service costs . . . . . . . . . . . . . . . . (149)
------
Net periodic postretirement benefit cost. . . . . . . . . . . . . . 2,145
Benefit payments . . . . . . . . . . . . . . . . . . . . . . . . . . (1,399)
------
Net change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 746
------
Accrued postretirement benefits, end of year. . . . . . . . . . . . . $24,560
=======
</TABLE>

The liability for accrued postretirement benefits includes the following at
December 31, 1994 (in thousands):

<TABLE>
<S> <C>
Accumulated postretirement benefit obligation:
Retirees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,990
Active Eligible . . . . . . . . . . . . . . . . . . . . . . . . . . 1,844
Active Ineligible . . . . . . . . . . . . . . . . . . . . . . . . . 2,989
------
22,823
Unrecognized actuarial loss . . . . . . . . . . . . . . . . . . . . . 350
Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . 1,387
------
Accrued postretirement benefits . . . . . . . . . . . . . . . . . . . $24,560
======
</TABLE>

For measurement purposes, an 8% annual rate of increase in the health care
cost trend rate was assumed for 1994; the rate was assumed to decrease
gradually to 4.5% by the year 2015 and remain at that level thereafter. The
health care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed health care cost
trend rates by 1 percentage point in each year would increase the accumulated
postretirement health care benefit obligation as of December 31, 1994 by
$2,078,000 and the aggregate of the service and interest components of net
periodic postretirement health care benefit cost for 1994 by $355,000. The
weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 8.5%.

<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

14. BENEFIT AND OPTION PLANS (CONTINUED)

Southwestern Life and certain former subsidiaries provided certain health
care and life insurance benefits for retired employees. Employees meeting
certain age and length of service requirements become eligible for these
benefits. The cost of providing these benefits and similar benefits for active
employees is recognized as expenses as claims are incurred. These costs
approximated $2,430,000 for 1992.

Under provisions of the 1990 Stock Option Incentive Plan the Company is
authorized to grant options to certain key employees for the purchase of up to
2.9 million shares of the Company's Common Stock at a price not less than fair
market value at date of grant. The options are exercisable for up to ten years
from date of grant and become exercisable at various times ranging from six
months to three years. Stock options granted are summarized as follows:

EXERCISABLE
OPTION PRICES END OF PERIOD
------------------------ -----------------------
NUMBER OF AGGREGATE AGGREGATE
SHARES PER SHARE (000'S) PER SHARE (000'S)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Outstanding January 1, 1992 . . . . 1,366,780 $1.70-$6.00 $4,735 $1.70-$3.13 $1,157
======
Granted during 1992 . . . . . . . . 2,000,000 $3.97 7,938
Exercised during 1992 . . . . . . . (2,050) $1.70 (3)
Terminated during 1992. . . . . . . (585,000) $3.13-$6.00 (2,510)
---------- -------
Outstanding December 31, 1992 . . . 2,779,730 $1.70-$3.97 10,160 $1.70-$3.13 $1,154
======
Exercised during 1993 . . . . . . . (194,530) $1.70-$3.13 (445)
Terminated during 1993. . . . . . . (580,200) $1.70-$3.97 (2,042)
---------- -------
Outstanding December 31, 1993 . . . 2,005,000 $3.13-$3.97 7,673 $3.13-$3.97 $2,672
======
Granted during 1994 . . . . . . . . 250,000 $5.13 1,281
Exercised during 1994 . . . . . . . (180,000) $3.13-$3.97 (637)
Terminated during 1994 . . . . . . (875,000) $3.75-$3.97 (3,451)
---------- -------
Outstanding December 31, 1994 . . . 1,200,000 $3.13-$5.13 $4,866 $3.13-$3.97 $1,660
========= ====== =======

</TABLE>

15. EXTRAORDINARY LOSSES

For the years 1993 and 1992, the Company incurred extraordinary losses,
all related to early extinguishment of debt, as follows:

YEAR ENDED DECEMBER 31,
-----------------------
1993 1992
---- ----
(IN THOUSANDS)
<S> <C> <C>
Gains on early extinguishment of subordinated debt . . . $ 6
Writeoff of deferred loan costs resulting from early
extinguishment of debt . . . . . . . . . . . . . . . . $ (892) (2,561)
Costs incurred to effect early extinguishment of debt. . (690) (2,942)
Equity in extraordinary losses of equity investees
and partnerships resulting from early extinguishment
of debt . . . . . . . . . . . . . . . . . . . . . . . (1,370) (1,082)
------ ------
Extraordinary losses before tax effects . . . . . . . . (2,952) (6,579)
Tax effects. . . . . . . . . . . . . . . . . . . . . . . 1,033 2,237
------ ------
Extraordinary losses, net. . . . . . . . . . . . . . . . $(1,919) $(4,342)
====== ======

</TABLE>

Exclusive of scheduled sinking fund obligations, in 1993, the Company
redeemed $83,379,000 of its 16 1/2% Debentures utilizing proceeds from the
sales of Bankers and BLHC. In 1992, the Company prepaid $130 million of

<PAGE>

15. EXTRAORDINARY LOSSES (CONTINUED)

its senior secured loan utilizing proceeds from the sale of Bankers totaling $85
million and internally-generated funds totaling $45 million.

16. QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION> PRIMARY FULLY DILUTED PER
PER SHARE AMOUNTS SHARE AMOUNTS
------------------ -------------------
OPERATING NET OPERATING NET OPERATING NET
EARNINGS EARNINGS EARNINGS EARNINGS EARNINGS EARNINGS
REVENUES (LOSS) (LOSS) (LOSS) (LOSS) (LOSS) (LOSS)
-------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
1994:
First Quarter . . $103,718 $(39,369) $(39,369) $(.91) $(.91) $(.91) $(.91)
Second Quarter. . 175,058 4,738 4,738 .03 .03 .03 .03
Third Quarter . . 166,956 (145) (145) (.08) (.08) (.08) (.08)
Fourth Quarter. . 83,724 (302,663) (302,663) (6.45) (6.45) (6.45) (6.45)
1993:
First Quarter . . $337,834 $105,623 $102,580 $2.05 $1.98 $1.79 $1.74
Second Quarter. . 175,564 (8,476) (8,605) (.34) (.34) (.34) (.34)
Third Quarter . . 399,215 125,734 125,734 2.46 2.46 2.14 2.14
Fourth Quarter. . 169,781 (10,957) (16,438) (.35) (.46) (.35) (.46)

</TABLE>

Fully diluted earnings per share are independently calculated for each
interim period. In those periods where the results of such calculations would
be antidilutive, primary earnings per share are reflected in lieu of fully
diluted earnings per share. Therefore, the sum of the quarterly earnings per
share on a fully diluted basis will not necessarily equal fully diluted
earnings per share for the entire year.

The Company's fourth quarter 1994 operating results were affected by the
adoption of a change in accounting, numerous significant charges, and
significant changes in income tax provisions. At December 31, 1994, the
Company adopted a change in accounting for assessing the recoverability of
excess cost of investments in subsidiaries over net assets acquired, or
"goodwill." Such change in accounting resulted in a reduction in the
remaining unamortized balance of excess cost relative to the Company's
investment in Southwestern Life totaling $210,683,000, which was reflected as
a charge to operating earnings since such adjustment was considered to be
inseparable from a change in estimate. In addition, the Company reflected a
$6,834,000 writedown through a charge to operating earnings of other excess
cost, primarily the excess cost related to the Company's investment in
PALICO, based on the determination that it was likely that such excess cost
was not recoverable. Because there are no income tax consequences associated
with excess cost, the effect on 1994 fourth quarter operating results of the
change in accounting and the writedown of excess cost totaled $217,517,000,
or $4.60 per common share. See Note 7 for a discussion of the change in
accounting policy and the additional writedown taken with respect to excess
cost.

Pretax charges to operations in the 1994 fourth quarter included writedowns
related to certain investments totaling $58,216,000, a provision for the loss
on the anticipated sale of Bankers New York totaling $4,200,000, and a
provision for litigation costs and other contingencies totaling $7,830,000.
The investment writedowns included an other than temporary writedown of the
Company's Fund America Investment totaling $39,739,000 (see Note 5). Other
investment writedowns reflected in the 1994 fourth quarter included other
than temporary impairments in the values of certain other derivative CMOs,
real estate and mortgage loans totaling $10,800,000, and provisions for
losses on CMO investments expected to be disposed of in order to meet
liquidity needs totaling $7,677,000. The Company has entered into a letter of
intent with respect to the sale of Bankers New York and, accordingly,
reflected a charge to operating earnings during the 1994 fourth quarter
for the difference between the proceeds anticipated to be received

<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

16. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)

from such sale and the Company's carrying value of its investment in Bankers New
York (see Note 2). The net after-tax effect of the investment writedowns, the
estimated loss on the sale of Bankers New York and the provision for litigation
costs and other contingencies totaled $45,660,000, or $0.97 per common share.

Based on the current financial condition of the Company and the
uncertainties regarding SLC's ability to utilize its available loss
carryforwards and other temporary differences, SLC increased its valuation
allowance for deferred income tax assets in the 1994 fourth quarter by
$20,116,000. Further, based on the tentative resolution of certain issues
relative to an IRS audit for the tax years 1986 through 1989, the Company
increased its liability for income tax settlements by $7,981,000 and reflected
other adjustments to its income tax liabilities totaling $2,269,000. These
adjustments, totaling $30,366,000, or $0.64 per common share, were included in
the Company's 1994 fourth quarter income tax provision (see Note 13).

Exclusive of the above-described excess cost adjustments, other charges
and income tax provisions, the Company reported a net loss for the 1994 fourth
quarter totaling $9,120,000. After preferred dividend requirements, the net loss
attributable to common stock totaled $11,453,000, or $0.24 per common share.
Such 1994 fourth quarter operating results were effected by, among other things,
pretax losses in the Company's group insurance segment totaling approximately
$6,985,000, provisions for anticipated future guaranty fund assessments and
other miscellaneous taxes totaling approximately $3,700,000, and provisions for
the doubtful collectibility of certain receivables totaling $2,000,000.

Reporting results of insurance operations on a quarterly basis
necessitates numerous estimates throughout the year, principally in the
calculation of reserves and in the determination of the effective rate for
federal income taxes. It is the Company's practice to review its estimates at
the end of each quarter and, if necessary, make appropriate refinements, with
the resulting effect being reported in current operations. Only at year-end is
the Company able to retrospectively assess the precision of its previous
quarterly estimates. The Company's fourth quarter results contain the effect of
the difference between previous estimates and final year-end results and,
therefore, the results of an interim period may not be indicative of the results
for the entire year.

17. INDUSTRY SEGMENT DATA

The Company and its subsidiaries are principally engaged in the sale and
underwriting of individual life and health insurance, group insurance and
accumulation products. Total revenues by segment reflect sales to unaffiliated
customers. Operating earnings (loss) equal total revenues less operating
expenses.

Premium income and other considerations includes premium income, mortality
and administration charges, surrender charges and amortization of deferred
policy initiation fees. Net investment income and other income are allocated to
the segments based on rates ranging from 6% to 10% related to reserves generated
by each of the four insurance segments. Corporate revenues and operating
earnings include gains (losses) on the sales of subsidiaries, equity in earnings
(losses) of unconsolidated affiliates and limited partnerships, and the
remaining net investment income considered to be income applicable to the
investment of capital and surplus funds. Operating expenses are allocated to
each segment based on a number of assumptions and estimates and reported segment
operating results would change if different methods were applied.

<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

17. INDUSTRY SEGMENT DATA (CONTINUED)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Individual life (including premium
equivalents) . . . . . . . . . . . . . . $288,932 $311,570 $425,007
Less premium equivalents. . . . . . . . . (53,345) (45,942) (76,346)
------- ------- -------
235,587 265,628 348,661
Individual health . . . . . . . . . . . . 233,275 231,541 913,883
Group and other . . . . . . . . . . . . . 108,173 152,137 357,937
Accumulation products . . . . . . . . . . 32,580 52,645 121,310
Corporate . . . . . . . . . . . . . . . . 16,769 345,618 117,584
Realized investment gains (losses). . . . (96,928) 34,825 (119,088)
------- ------- -------
Total revenues . . . . . . . . . . . . $529,456 $1,082,394 $1,740,287
======= ========= =========

Operating earnings (loss):
Individual life . . . . . . . . . . . . . $31,247 $ 45,145 $ 42,464
Individual health . . . . . . . . . . . . 15,780 21,036 66,528
Group and other . . . . . . . . . . . . . (5,737) (12,892) 5,121
Accumulation products . . . . . . . . . . (13,092) (6,705) 418
Corporate . . . . . . . . . . . . . . . . 5,505 299,965 76,098
Realized investment gains (losses). . . . (96,928) 34,825 (119,088)
Amortization of excess cost . . . . . . . (16,421) (9,591) (10,981)
Change in accounting for excess cost. . . (210,683)
Corporate interest expense . . . . . . . (48,251) (66,153) (78,961)
------- ------- -------
Operating earnings (loss) before income
taxes and equity earnings (loss). . . $(338,580) $305,630 $ (18,401)
======== ======= ========

</TABLE>

18. SUPPLEMENTAL DATA TO CONSOLIDATED STATEMENTS OF CASH FLOWS

Fixed maturity investments held to maturity at amortized cost decreased
from $26,149,000 at December 31, 1993 to $15,915,000 at December 31, 1994. The
decrease was principally due to the redemption during 1994 of one security with
a book value of $10,000,000. No gain or loss was recorded on the redemption. No
purchases, sales or transfers of securities occurred in this category during
1994.

Cash payments (receipts) for interest expense and income taxes were as
follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest . . . . . . . . . . . . $51,484 $71,167 $77,211
Income taxes . . . . . . . . . . 2,560 (8,248) 6,537

</TABLE>

86
<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

18. SUPPLEMENTAL DATA TO CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

The following reflects assets acquired and liabilities assumed relative to
the acquisition of Marquette (see Note 2), consideration given for such
acquisition and the net cash flow relative to such acquisition during the year
ended December 31, 1994 (in thousands):

<TABLE>
<S> <C>
Assets of acquired subsidiary . . . . . . . . . $8,177
Liabilities of acquired subsidiary. . . . . . . (1,546)
Excess cost of investment in subsidiary over
net assets acquired. . . . . . . . . . . . . . 1,584
-----
Cost of acquisition . . . . . . . . . . . . . $8,215
=====

Net cash flow from acquisition:
Cash paid for acquisition. . . . . . . . . . $8,215
Cash of acquired subsidiary . . . . . . . . . (4,626)
-----
Net cash required by acquisition. . . . . . $3,589
=====
</TABLE>

The following reflects assets and liabilities disposed of relative to the
sale of Bankers and Certified (see Note 2) and net cash flow relative to such
sale during the year ended December 31, 1992 (in thousands):

Assets of subsidiaries sold . . . . . . . . . $2,191,519
Liabilities of subsidiaries sold . . . . . . . (1,837,230)
Excess cost of investment in subsidiaries
over net assets sold. . . . . . . . . . . . . 59,198
---------
Net investment in subsidiaries sold. . . . $ 413,487
=========

Net cash flow from sale:
Cash received from sale. . . . . . . . . . . $600,000
Cash of subsidiaries sold. . . . . . . . . . (398,811)
Investment in securities of purchaser. . . . (111,517)
--------
Net cash provided by sale of subsidiaries $ 89,672
========
</TABLE>

19. OTHER OPERATING INFORMATION

Other operating costs and expenses for the three years ended December 31,
1994, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>

Non-deferrable commission expense . . . . . . $32,042 $44,122 $44,662
Taxes, licenses and fees. . . . . . . . . . . 20,493 21,777 38,257
General and administrative expenses . . . . . 92,233 111,236 205,439
Settlement fee for modification of
data processing arrangement. . . . . . . . . 12,600
Consolidation expenses . . . . . . . . . . . 23,870 10,885
Provision for costs of litigation and
other contingencies . . . . . . . . . . . . 7,830 9,320
Placement fee for collateralized mortgage
note obligations . . . . . . . . . . . . . . 4,413
Services agreements with CNC principals
(see Note 4) . . . . . . . . . . . . . . . . 9,050
Litigation settlement . . . . . . . . . . . . 18,001
-------- -------- ---------
Other operating expenses. . . . . . . . . . $152,598 $223,788 $329,844
======== ======== ========

</TABLE>

87
<PAGE>

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

19. OTHER OPERATING INFORMATION (CONTINUED)

In October 1992, the Company entered into a settlement agreement and
agreed to pay a $12.6 million settlement fee to Perot Systems, Inc. to modify an
existing data processing services arrangement. Under the settlement agreement,
Perot Systems agreed to eliminate minimum fee requirements totaling $15.6
million annually through July 1992, to lower its unit transaction charges, and
to procure the release of the Company relative to its guarantee of certain
equipment lease obligations.

For the years ended December 31, 1993, and 1992, the Company reflected
consolidation and reorganization expenses totaling $23,870,000 and $10,885,000,
respectively. The expenses were associated with the operational consolidation of
three of the Company's Texas-based insurance subsidiaries. The 1993 expenses
include a $10,757,000 writedown of certain home office real estate, a $9,760,000
writeoff of certain capitalized data processing costs and $3,353,000 in
writeoffs of other property and equipment. The 1992 expense included an accrual
for the expenses anticipated to be incurred relative to such consolidation and
an $8,000,000 writedown of certain home office real estate. In addition, during
1994 and 1993, the Company assessed its exposure to the costs associated with
pending litigation and certain other contingencies and provided reserves
totaling $7,830,000 and $9,320,000, respectively, for the costs anticipated to
be incurred relative to such matters. The litigation settlement expense in 1992
related to a class action suit which had been filed by certain policyholders and
which was settled in that year.

Changes in the present value of future profits of acquired business for
the three years ended December 31, 1994, are as follows:

YEAR ENDED DECEMBER 31,
-------------------------
1994 1993 1992
----- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year . . . . . . . $50,705 $63,863 $116,430
Amortization:
Cash flow realized . . . . . . . . . . (12,884) (11,438) (24,980)
Interest capitalized . . . . . . . . . 5,682 5,049 9,996
Impairment resulting from increased
surrender activity . . . . . . . . . (8,588)
Sale of subsidiaries and reinsurance . . (6,769) (37,583)
Recapture of CFLIC business. . . . . . . 33,890
------ ------ -------
Balance, end of year . . . . . . . . . . $68,805 $50,705 $ 63,863
====== ====== =======
</TABLE>
Based on current conditions and assumptions as to future events on all
policies in force, approximately 10% and 9% of the present value of future
profits of acquired business as of December 31, 1994, are expected to be
amortized in each of the next two years, respectively, and 8% in each of the
succeeding three years. The interest accrual rate for the present value of
future profits of acquired business ranged from 8% to 10% during each of the
three years in the period ended December 31, 1994.

<PAGE>

SCHEDULE II

SOUTHWESTERN LIFE CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
December 31, 1994 and 1993
(In Thousands)

ASSETS
<TABLE> 1994 1993
<CAPTION> ---- ----

<S> <C> <C>
Fixed maturities, at fair
value . . . . . . . . . . . . . . . . . . . . $ 42,501 $ 59,504
Equity securities, affiliated, at fair value. . 54,000
Investments in limited partnerships . . . . . . 158 158
Real estate, at lower of cost or fair value . . 6,041 7,817
Collateral loans. . . . . . . . . . . . . . . . 6,001 6,160
Cash and short-term investments . . . . . . . . 16,733 71,845
Investments in and advances to subsidiaries:
Investments in subsidiaries 376,190 754,482
Advances to subsidiaries. . . . . . . . . . . 14,049 8,629
Notes and accounts receivable . . . . . . . . . 1,955 8,072
Federal income tax recoverable. . . . . . . . .
Deferred income tax asset . . . . . . . . . . . 435 12,615
Other assets . . . . . . . . . . . . . . . . . 1,570 4,076
------- -------
$465,633 $987,358
======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable:
Due within one year . . . . . . . . . . . . . $ 81,302 $ 34,687
Due after one year . . . . . . . . . . . . . 309,592 417,334
Advances from subsidiaries . . . . . . . . . . . 11,765 14,402
Federal income taxes currently payable . . . . . 8,483 3,664
Accrued expenses and other liabilities . . . . . 19,153 22,101
------ -------
430,295 492,188
======== ========
Stockholders' equity:
Preferred stock . . . . . . . . . . . . . . . 199,997 229,239
Common stock . . . . . . . . . . . . . . . . 48,983 71,594
Common stock, Class B. . . . . . . . . . . . 100
Additional paid-in capital . . . . . . . . . 126,583 155,499
Net unrealized investment gains (losses) . . (55,359) 20,458
Retained earnings (deficit) . . . . . . . . (279,265) 71,833
------- -------
40,939 548,723
Notes receivable collateralized by
common stock . . . . . . . . . . . . . . . (1,795) (1,729)
Treasury stock, at cost . . . . . . . . . . . (3,806) (51,824)
-------- --------
35,338 495,170
-------- -------
$465,633 $987,358
======== ========

</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>
SCHEDULE II (CONTINUED)

SOUTHWESTERN LIFE CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
STATEMENTS OF EARNINGS
For the Years Ended December 31, 1994, 1993 and 1992
(In Thousands)

<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Income:
Investment income....................................................... $ 10,873 $ 4,096 $ 1,400
Income from subsidiaries and equity investees:
Dividends........................................................... 47,815 43,681 22,842
Interest income..................................................... 491 7,347 37,221
Administrative services............................................. 39,964 106,589 170,165
Realized investment losses............................................ (6,829) (6,024) (46)
Gain on sale of investment in Bankers Life
Holding Corporation.................................................. 297,041
Other income.......................................................... (4,350) 2,722 1,628
------------ ----------- -----------
87,964 455,452 233,210
------------ ----------- -----------
Expenses:
Administrative and general expenses:
Subsidiaries and related parties.................................... 39,964 106,589 170,165
Other 10,582 26,403 10,166
Interest:
Subsidiaries........................................................ 3,409 4,554 6,859
Other............................................................... 48,251 60,135 76,680
------------ ----------- -----------
102,206 197,681 263,870
------------ ----------- -----------
Operating earnings (loss) before provision for federal
income taxes and equity in undistributed earnings
(loss) of subsidiaries and equity investees........................ (14,242) 257,771 (30,660)
Income tax expense (credit) 3,802 68,632 (47,234)
------------ ----------- -----------
Operating earnings (loss) before equity in undistributed
earnings (loss) of subsidiaries and equity investees............... (18,044) 189,139 16,574
Equity in undistributed earnings (loss) of subsidiaries
and equity investees................................................... (319,396) 22,785 34,281
------------ ----------- -----------
Operating earnings (loss)........................................... (337,440) 211,924 50,855
Cumulative effect of changes in accounting methods...................... (6,734)
Extraordinary gains (loss), net of tax effect........................... (1,919) (4,342)
------------ ----------- -----------
Net Earnings (loss)................................................. (337,440) 203,271 46,513
Less dividends on preferred stock....................................... (13,658) (28,784) (30,800)
------------ ----------- -----------
Net earnings (loss) applicable to common stock...................... $ (351,098) $ 174,487 $ 15,713
============ =========== ===========
</TABLE>

The accompanying notes are an integral part of the financial statements.

90
<PAGE>
SCHEDULE II (CONTINUED)

SOUTHWESTERN LIFE CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1994, 1993 and 1992
(In Thousands)

<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Operating earnings (loss)............................................. $ (337,440) $ 211,924 $ 50,855
Items not requiring (providing) cash:
Equity in undistributed (earnings) losses of subsidiaries
and related party.................................................. 319,396 (22,785) (34,281)
Increase (decrease) in accrued expenses and other liabilities....... (5,585) 18,025 (4,625)
Change in deferred tax asset........................................ 12,180 48,513 (49,121)
Gain on sale of investment in Bankers Life Holding Corporation...... (297,041)
Other, net.......................................................... 13,844 7,727 (11,754)
------------ ------------ ------------
Net cash used by operating activities............................. 2,395 (33,637) (48,926)
------------ ------------ ------------
Cash flows from investing activities:
Payments received on notes receivable, subsidiaries................... 147,267 359,500
Sale of investment in Bankers Life Holding Corporation................ 287,639
Purchase of long-term investments..................................... (615) (78,160)
Sales of long-term investments........................................ 11,475
Purchase of investments from subsidiaries............................. (34,457) (91,796)
Capital contributions to subsidiaries................................. (8,385)
Additional investment in Consolidated Fidelity Life Insurance Company
preferred stock, net of cash recovered............................... (15,652)
Other, net............................................................ (500) (11,626)
------------ ------------ ------------
Net cash provided by investing activities........................... (13,177) 321,789 256,078
------------ ------------ ------------
Cash flows from financing activities:
Proceeds of notes payable, unaffiliated............................... 6,200
Principal repayment on notes payable, unaffiliated.................... (8,569) (41,567) (165,132)
Principal repayment on notes payable, subsidiaries.................... (11,522) (7,334) (32,549)
Repurchases of subordinated debt...................................... (10,081) (89,439) (1,694)
Redemption of preferred stock......................................... (100,000)
Purchase of treasury shares........................................... (500) (933)
Dividends on preferred shares......................................... (13,658) (28,784) (30,800)
------------ ------------ ------------
Net cash used by financing activities............................... (44,330) (268,057) (223,975)
------------ ------------ ------------
Net increase (decrease) in cash and short-term investments.............. (55,112) 20,095 (16,823)
Cash and short-term investments at beginning of year.................... 71,845 51,750 68,573
------------ ------------ ------------
Cash and short-term investments at end of year.......................... $ 16,733 $ 71,845 $ 51,750
============ ============ ============

</TABLE>

The accompanying notes are an integral part of the financial statements.

91
<PAGE>
SCHEDULE II (CONTINUED)

SOUTHWESTERN LIFE CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS

The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of
Southwestern Life Corporation and Subsidiaries. Notes payable at December 31,
1994 and 1993, are summarized as follows:

<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
11 1/4% Senior Subordinated Notes due 1996(a)........................................... $ 277,601 $ 300,159
11 1/4% Senior Subordinated Notes due 2003.............................................. 91,161 91,161
9 1/2% unsecured note payable due 1996.................................................. 21,900 25,550
Borrowings under senior secured loan.................................................... 30,000
Other................................................................................... 232 5,151
----------- -----------
$ 390,894 $ 452,021
=========== ===========
<FN>
- ------------------------
(a) The principal amount of these notes held by subsidiaries at December 31,
1994 and 1993 was $21,500,000 and $34,058,000, respectively.
</TABLE>

The following summary sets forth the scheduled maturities and sinking fund
requirements of notes payable during each of the five years following December
31, 1994 (in thousands):

<TABLE>
<S> <C>
1995 ............................................................................ $ 81,302
1996 ............................................................................ 218,306
1997 ............................................................................ 60
1998 ............................................................................ 65
1999 and thereafter ............................................................. 91,161
---------
$ 390,894
=========
</TABLE>

Dividends from subsidiaries and equity investees consist of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash dividends................................................................. $ 38,800 $ 43,681 $ 12,000
Deemed dividend................................................................ 10,842
Dividends of Senior Subordinated Notes......................................... 9,015
--------- --------- ---------
$ 47,815 $ 43,681 $ 22,842
========= ========= =========
</TABLE>

Prior to the sale of Bankers, the parent company acquired certain assets
from Bankers at their fair value. The tax attributes related to such assets were
likewise transferred to SLC and the income tax consequences which had been
reflected for financial purposes have been reflected as a deemed dividend to the
parent company.

92
<PAGE>
SCHEDULE III

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
For the Years Ended December 31, 1994, 1993 and 1992
(In Thousands)
<TABLE>
<CAPTION>
FUTURE AMORTIZATION
DEFERRED POLICY OF DEFERRED
POLICY BENEFITS POLICY
ACQUISITION AND ACQUISITION
COSTS AND UNIVERSAL PREMIUM COSTS AND
PRESENT LIFE AND CLAIMS INCOME AND NET BENEFITS, PRESENT
VALUE OF INVESTMENT AND OTHER INVESTMENT CLAIMS VALUE OF
ACQUIRED PRODUCT UNEARNED BENEFITS CONSIDER- AND OTHER AND ACQUIRED
SEGMENT BUSINESS LIABILITIES PREMIUMS PAYABLE ATIONS INCOME LOSSES BUSINESS
- ---------------------- ----------- ---------- ----------- --------- ---------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended December
31, 1994:
Individual life..... $ 170,402 $1,611,139 $ 9,744 $ 109,116 $ 126,471 $ 138,185 $ 20,413
Individual health... 69,158 49,579 $ 36,090 63,266 215,817 17,458 145,929 30,542
Group and other..... 22,651 273 31,299 93,067 15,106 63,865
Accumulation
products........... 38,197 761,925 147 20 32,560 30,005 11,144
Corporate........... 16,769
--------- ---------- --------- --------- ---------- --------- ---------- ----------
$ 277,757 $2,445,294 $ 36,363 $ 104,456 $ 418,020 $ 208,364 $ 377,984 $ 62,099
========= ========== ========= ========= ========== ========= ========== ==========
Year ended December
31, 1993:
Individual life..... $ 140,459 $1,610,277 $ 8,110 $ 118,049 $ 147,579 $ 141,345 $ 16,728
Individual health... 68,854 46,933 $ 35,236 64,274 220,266 11,275 137,113 32,172
Group and other..... 24,403 176 34,165 136,486 15,651 99,509
Accumulation
products........... 9,917 787,911 214 225 52,420 50,365
Corporate........... 345,618
--------- ---------- --------- --------- ---------- --------- ---------- ----------
$ 219,230 $2,469,524 $ 35,412 $ 106,763 $ 475,026 $ 572,543 $ 428,332 $ 48,900
========= ========== ========= ========= ========== ========= ========== ==========
Year ended December
31, 1992:
Individual life..... $ 170,041 $1,670,703 $ 6,760 $ 191,555 $ 157,106 $ 238,100 $ 30,646
Individual health... 69,657 42,574 $ 33,346 63,086 859,094 54,789 583,487 101,267
Group and other..... 26,875 103 19,369 337,406 20,531 287,872
Accumulation
products........... 2,972 744,288 30 724 120,586 95,986 1,544
Corporate........... 117,584
--------- ---------- --------- --------- ---------- --------- ---------- ----------
$ 242,670 $2,484,440 $ 33,449 $ 89,245 $1,388,779 $ 470,596 $1,205,445 $ 133,457
========= ========== ========= ========= ========== ========= ========== ==========

OTHER
OPERATING
SEGMENT COSTS
- ---------------------- -----------
<S> <C>
Year ended December
31, 1994:
Individual life..... $ 45,742
Individual health... 41,024
Group and other..... 50,045
Accumulation
products........... 4,523
Corporate........... 11,264
---------
$ 152,598
=========
Year ended December
31, 1993:
Individual life..... $ 62,410
Individual health... 41,220
Group and other..... 65,520
Accumulation
products........... 8,985
Corporate........... 45,653
---------
$ 223,788
=========
Year ended December
31, 1992:
Individual life..... $ 37,451
Individual health... 162,601
Group and other..... 64,944
Accumulation
products........... 23,362
Corporate........... 41,486
---------
$ 329,844
=========
</TABLE>

93
<PAGE>
SCHEDULE IV

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
REINSURANCE
For the Years Ended December 31, 1994, 1993 and 1992
(Dollars in Thousands)

<TABLE>
<CAPTION>
PERCENTAGE OF
GROSS CEDED TO OTHER ASSUMED FROM AMOUNT ASSUMED
AMOUNT COMPANIES OTHER COMPANIES NET AMOUNT TO NET
----------- -------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Life insurance in force (A)..................... $18,411,768 $ 5,222,076 $ 871,776 $ 14,061,468 6.2%
=========== ============ ============ ============== ====
Premium income and other considerations:
Individual life (including premium
equivalents)................................. $ 168,598 $ 12,697 $ 6,560 $ 162,461 4.1%
Less premium equivalents...................... (58,219) (9,310) (4,436) (53,345)
----------- ------------ ------------ --------------
Individual life............................... 110,379 3,387 2,124 109,116
Individual health............................. 231,983 16,295 129 215,817 0.1%
Group and other............................... 108,223 15,156 93,067 0.0%
Accumulation products......................... 263 243 20 0.0%
----------- ------------ ------------ --------------
Total....................................... $ 450,848 $ 35,081 $ 2,253 $ 418,020
=========== ============ ============ ==============
Year ended December 31, 1993:
Life insurance in force (A)..................... $20,425,230 $ 5,658,090 $ 972,626 $ 15,739,766 6.2%
=========== ============ ============ ============== ====
Premium income and other considerations:
Individual life (including premium
equivalents)................................. $ 171,147 $ 12,498 $ 5,342 $ 163,991 3.2%
Less premium equivalents...................... (47,057) (3,351) (2,236) (45,942)
----------- ------------ ------------ --------------
Individual life............................... 124,090 9,147 3,106 118,049
Individual health............................. 231,856 11,870 280 220,266 .1%
Group and other............................... 165,405 28,948 29 136,486 0.0%
Accumulation products......................... 192 16 49 225 21.8%
----------- ------------ ------------ --------------
Total....................................... $ 521,543 $ 49,981 $ 3,464 $ 475,026
=========== ============ ============ ==============
Year ended December 31, 1992:
Life insurance in force (A)..................... $20,528,559 $ 5,417,485 $ 907,756 $ 16,018,830 5.7%
=========== ============ ============ ============== ====
Premium income and other considerations:
Individual life (including premium
equivalents)................................. $ 273,048 $ 10,512 $ 5,365 $ 267,901 2.0%
Less premium equivalents...................... (77,226) (3,987) (3,106) (76,345)
----------- ------------ ------------ --------------
Individual life............................... 195,822 6,525 2,259 191,556
Individual health............................. 855,428 1,591 5,257 859,094 0.6%
Group and other............................... 376,600 39,686 492 337,406 0.1%
Accumulation products......................... 7,063 6,418 78 723 11.0%
----------- ------------ ------------ --------------
Total....................................... $ 1,434,913 $ 54,220 $ 8,086 $ 1,388,779
=========== ============ ============ ==============
<FN>
- ------------------------------
(A) Excludes face amount of life insurance in force ceded to other unaffiliated
companies under financial reinsurance agreements with unaffiliated insurers
generally in return for fees, as follows (in thousands):

1994 1993 1992
------------- ------------- -------------
Ceded to other companies............................................... $ 1,453,263 $ 1,677,183 $ 2,076,293
</TABLE>

These agreements will terminate during the next few years.

94
<PAGE>
SCHEDULE V

SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31, 1994, 1993 and 1992
(In Thousands)

<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT ------------------------------------
BEGINNING CHARGED TO COSTS CHARGED TO OTHER BALANCE AT
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- ------------------------------------------------- ----------- ----------------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Allowance for mortgage loan losses............. $ 1,043 $ 3,000 $ 7(B) $ 4,036
Allowance for losses on real estate............ 17,615 3,800 1,780(B) 19,635
Allowance for doubtful accounts................ 2,863 99 $ 305(E) 1,380(C) 1,887
Accumulated depreciation on property
and equipment................................. 35,094 3,553 3,302(B) 35,345
Allowance for losses on property
and equipment................................. 8,000 8,000
Amortization of excess cost of investments
in subsidiaries over net assets acquired...... 78,120 16,421 305,224
210,683(F)
Accumulated depreciation on real estate........ 9,363 1,378 458(B) 10,283
----------- -------- ------- ----------- -------------
$ 152,098 $ 238,934 $ 305 $ 6,927 $ 384,410
=========== ========= ======= =========== =============
Year ended December 31, 1993:
Allowance for mortgage loan losses............. $ 1,450 $ 407(B) $ 1,043
Allowance for losses on real estate............ 14,557 $ 4,500 1,442(B) 17,615
Allowance for doubtful accounts................ 3,163 104 404(C) 2,863
Accumulated depreciation on property
and equipment................................. 23,439 7,390 $ 4,639 (A) 374(B) 35,094
Allowance for losses on property and
equipment..................................... 8,000 8,000
Amortization of excess cost of investments in
subsidiaries over net assets acquired......... 68,340 9,591 189 (A) 78,120
Accumulated depreciation on real estate........ 9,922 1,430 (1,367)(A) 622(B) 9,363
----------- -------- ------- ----------- -------------
$ 128,871 $ 23,015 $ 3,461 $ 3,249 $ 152,098
=========== ========= ======= =========== =============
Year ended December 31, 1992:
Allowance for mortgage loan losses............. $ 2,318 $ 407 $ 1,275(A) $ 1,450
Allowance for losses on real estate............ 13,778 2,312 $ 45 (A) 1,578(B) 14,557
Allowance for doubtful accounts................ 3,158 422 244(C) 3,163
173(D)
Allowance for other invested assets............ 18,392 18,392(C) --
Accumulated depreciation on property and
equipment..................................... 43,594 8,356 5,371(B) 23,439
23,140(D)
Allowance for losses on property and
equipment..................................... 8,000 8,000
Amortization of excess cost of investments in
subsidiaries over net assets acquired......... 71,798 10,981 14,439(D) 68,340
Accumulated depreciation on real estate........ 9,215 1,370 492(B) 9,922
171(D)
----------- -------- ------- ----------- -------------
$ 162,253 $ 31,848 $ 45 $ 65,275 $ 128,871
=========== ========= ======= =========== =============
<FN>
- ------------------------------
(A) Miscellaneous reclassification.

(B) Retirement upon sales of assets.

(D) Deduction upon sales of previously consolidated subsidiaries.

(E) Added from acquisition of subsidiary.

(F) Change in accounting for excess cost.
</TABLE>

<PAGE>

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

1. EXHIBITS. The exhibits listed on the Index to Exhibits appearing on
pages 99 through 106 of this Form 10-K and the footnotes thereto are
incorporated herein by reference. The exhibit descriptions incorporated by
reference identify by asterisk (*) each management contract or compensatory
plan or arrangement required to be filed as an exhibit to this Form 10-K
pursuant to ITEM 14(c).

2. FINANCIAL STATEMENTS. The list of audited consolidated financial
statements of SLC and the related auditor's report appearing under the heading
"Financial Statements" in the Index to Financial Statements and Financial
Statement Schedules of Southwestern Life Corporation and Subsidiaries in ITEM 8
on page 45 of this Form 10-K is incorporated herein by reference.

3. FINANCIAL STATEMENT SCHEDULES. The list of schedules appearing under
the heading "Financial Statement Schedules" in the Index to Financial Statements
and Financial Statement Schedules of Southwestern Life Corporation and
Subsidiaries in ITEM 8 on page 45 of this Form 10-K is incorporated herein by
reference.

4. FORM 8-K. During the quarter ended December 31, 1994, on October 13,
1994, SLC filed a Report on Form 8-K, dated October 10, 1994, to report under
ITEM 5 of that form, (1) realized losses in the amount of $46.4 million in
the value of certain of its investments in collateralized mortgage
obligations were appropriate as of the quarter ended March 31, 1994 and (2)
the resignation of Robert L. Beisenherz as the Chairman of the Board, Chief
Executive Officer and President of the Registrant and the appointment of
James R. Kerber as the Registrant's President and Chief Executive Officer and
as a director of the Registrant.

96
<PAGE>

On January 27, 1995, the Registrant filed a Report on Form 8-K dated January
18, 1995, to report under ITEM 5 of that form, that (i) Glenn H. Gettier, Jr.
was appointed Chairman of the Board and Chief Executive Officer of SLC effective
January 18, 1995, and James R. Kerber was appointed to the additional offices of
Vice Chairman of the Board and Chief Operating Officer, and (2) the Board
authorized a series of initial actions by SLC's senior management affecting the
Registrant.

<PAGE>

SIGNATURES

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

Southwestern Life Corporation

By: /s/ Glenn H. Gettier, Jr.
----------------------------
Glenn H. Gettier, Jr.
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER

By: /s/ John T. Hull
----------------------------
John T. Hull
EXECUTIVE VICE PRESIDENT,
TREASURER AND CHIEF
FINANCIAL OFFICER

Date: April 5, 1995

98
<PAGE>

INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
- ------ ----------- ----------
<S> <C> <C>
2.1 Stock Purchase Agreement dated June 29, 1990, among Consolidated
National Corporation, Robert T. Shaw and Bankers Life and Casualty Company with
respect to all outstanding capital stock of Marquette National Life Insurance
Company, including Exhibit 1.35 thereto governing the coinsurance relationship
between Southwestern Life Insurance Company and Marquette National Life
Insurance Company (filed as Exhibits 2.1 and 2.3 to the Registrant's Report on
Form 10-Q for the quarter ended June 30, 1990, and incorporated herein by
reference).......................................................................

2.2 Coinsurance Annuity Reinsurance Agreement-October 1, 1990, for Bankers
Life and Casualty Company (filed as Exhibit 19-1 to Registrant's Current Report
on Form 8-K dated November 9, 1990, and incorporated herein by reference) and
amendments thereto (filed as Exhibit 2.11 to the Registrant's Annual Report on
Form 10-K for year ended December 31, 1991, and Exhibit 2.11 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992, and each
incorporated herein by reference)................................................

2.3 Coinsurance Annuity Retrocession Agreement (Bankers Business)-October 1,
1990 for Marquette National Life Insurance Company (filed as Exhibit 19-2 to the
Registrant's Current Report on Form 8-K dated November 9, 1990, and incorporated
herein by reference) and amendments thereto (filed as Exhibit 2.12 to the
Registrant's Annual Report on Form 10-K for year ended December 31, 1991, and
Exhibit 2.12 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992, and each incorporated herein by reference)....................

2.4 Coinsurance Annuity and Supplemental Contract Reinsurance Agreement
II-June 30, 1990, for Southwestern Life Insurance Company (filed as Exhibit 19-3
to the Registrant's Current Report on Form 8-K dated November 9, 1990, and
incorporated herein by reference) and amendments thereto (filed as Exhibit 2.13
to the Registrant's Annual Report on Form 10-K for year ended December 31, 1991,
Exhibit 2.13 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992, Exhibit 2.18 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993, and Exhibit 2.23 to the Registrant's
Current Report on Form 8-K dated June 30, 1994, and each incorporated herein by
reference).......................................................................

2.5 Coinsurance Annuity and Supplementary Contract Retrocession Agreement
II-June 30, 1990, for Marquette National Life Insurance Company (filed as
Exhibit 19-4 to the Registrant's Current Report on Form 8-K dated November 9,
1990, and incorporated herein by reference) and amendments thereto (filed as
Exhibit 2.14 to the Registrant's Annual Report on Form 10-K for year ended
December 31, 1991, and Exhibit 2.14 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1992, Exhibit 2.19 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993, and each
incorporated herein by reference)..............................................
</TABLE>

99
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
- ------ ----------- ----------
<S> <C> <C>
2.6 Stock Purchase Agreement dated October 3, 1989, between the Registrant
and HMS Acquisition Corporation (filed as Exhibit 1 to the Registrant's Current
Report on Form 8-K dated October 3, 1989, and incorporated herein by reference),
and the amendment thereto dated March 29, 1990, (filed as Exhibit 19.4 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1989,
and incorporated herein by reference).............................................

2.7 Compromise and Settlement Agreement, dated September 1, 1990, relating
to the Stock Purchase Agreement referenced as Exhibit 2.6 above (filed as
Exhibit 2.8 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1990, and incorporated herein by reference)..........................

2.8 Stock Purchase Agreement dated December 11, 1989, as amended, between
the Registrant, Modern American Life Insurance Company and Financial Holding
Corporation (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K
dated December 29, 1989, and incorporated herein by reference)....................

2.9 Stock Acquisition Agreement dated February 20, 1992, between the
Registrant and Conseco, inc. (filed as Exhibit 2.10 to the Registrant's Current
Report on Form 8-K dated February 20, 1992 and incorporated herein by reference)
and amendments thereto (filed as Exhibit 2.15 to the Registrant's Annual Report
on Form 10-K for year ended December 31, 1991, and as Exhibit 2.16 of
Registrant's Report on Form 10-Q for the quarter ended September 30, 1992, and
each incorporated herein by reference)............................................

2.10 Stockholders' Agreement, dated November 9, 1992, among Bankers Life
Holding Corporation and its initial common stockholders, and the Registrant's
assumption thereof (filed as Exhibit 2.10 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by
reference)........................................................................

2.11 Letter Agreement of the Registrant, dated March 8, 1993, relating to the
Coinsurance Annuity Reinsurance Agreement referenced as Exhibit 2.2 above (filed
as Exhibit 2.15 of the Annual Report on Form 10-K for the year ended December
31, 1992, and incorporated herein by reference)...................................

2.12 Agreement of the Registrant, dated March 10, 1993, relating to the
Coinsurance Annuity and Supplemental Contract Reinsurance Agreement II
referenced as Exhibit 2.4 above (filed as Exhibit 2.16 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992, and
incorporated herein by reference).................................................

2.13 Agreement, dated June 15, 1993, among I.C.H. Corporation, Consolidated
National Corporation and Consolidated Fidelity Life Insurance Company (filed as
Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated June 15, 1993
and incorporated herein by reference).............................................

2.14 Agreement, dated June 3, 1994, between Consolidated Fidelity Life
Insurance Company and Union Bankers Insurance Company (filed as Exhibit 2.18 to
the Registrant's Current Report on Form 8-K dated June 30, 1994 and incorporated
herein by reference)..............................................................
</TABLE>

100
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
- ------ ----------- ----------
<S> <C> <C>
2.15 Termination and Recapture Agreement among Consolidated Fidelity Life
Insurance Company, Southwestern Life Corporation, Southwestern Life Insurance
Company and Employers Reassurance Corporation (filed as Exhibit 2.19 to their
Registrant's Current Report on Form 8-K dated June 30, 1994, and incorporated
herein by reference)..............................................................

2.16 Amendment to Agreement, effective April 1, 1994, among Consolidated
National Corporation, Consolidated Fidelity Life Insurance Company and
Southwestern Life Corporation (filed as Exhibit 2.20 to the Registrant's Current
Report on Form 8-K dated June 30, 1994, and incorporated herein by reference)......

2.17 Letter Agreement, dated June 30, 1994, among Southwestern Life
Corporation, Consolidated Fidelity Life Insurance Company and Consolidated
National Corporation (filed as Exhibit 2.21 to the Registrant's Current Report
on Form 8-K dated June 30, 1994, and incorporated herein by reference).............

2.18 Escrow Agreement, dated June 30, 1994, among Southwestern Life
Corporation, Consolidated Fidelity Life Insurance Company and Mid-America Bank
of Louisville and Trust Company (filed as Exhibit 2.22 to the Registrant's
Current Report on Form 8-K dated June 30, 1994, and incorporated herein by
reference).........................................................................

3.1 Restated Certificate of Incorporation of the Registrant dated October
10, 1994 (filed as Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994, and incorporated herein by reference)....

3.2 Bylaws of the Registrant, as amended and restated, dated October 7, 1994
(filed as Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1994, and incorporated herein by reference).............

4.1 Indenture dated as of November 15,1986, between the Registrant and
Mid-America Bank of Louisville and Trust Company, as trustee (filed as Exhibit
4.3 to the Registrant's Registration Statement on Form S-3 No. 33-9455, and
incorporated herein by reference)...................................................

4.2 Indenture dated as of November 12, 1993, between the Registrant and
Mid-America Bank of Louisville and Trust Company, as trustee (filed as Exhibit
4.5 to the Registrant's Annual Report on Form 10-K for the year ended December
31, 1993, and incorporated herein by reference).....................................

4.3 Agreement of Registrant to file long-term debt instruments (filed as
Exhibit 4.1 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992 and incorporated herein by reference).............................

10.1 Agreement dated October 8, 1984 between the Registrant and Robert T.
Shaw (filed as Exhibit I to Amendment No. 26-1 to the Schedule 13D filed by
Consolidated National Successor Corporation and certain affiliates relating to
shares of the Common Stock of the Registrant and incorporated herein by
reference)..........................................................................
</TABLE>

101
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
- ------ ----------- ----------
<S> <C> <C>
10.2 Stock Purchase Agreement dated July 31, 1986 between the Registrant and
Tenneco Inc. (filed as Exhibit 2.1 to the Registrant's Current Report on Form
8-K dated July 31, 1986 and incorporated herein by reference), and the Amendment
Agreement dated December 31, 1986 between the Registrant and Tenneco, Inc.
(filed as Exhibit 2.2 to the Registrant's Current Report on Form 8-K dated
December 31, 1986, and incorporated herein by reference)..........................

10.3* Management and Consulting Agreement effective January 22, 1985 among the
Registrant, Consolidated National Corporation and Consolidated National
Successor Corporation (filed as Exhibit 10.21 to the Registrant's Registration
Statement on Form S-14, No. 2-96685, and incorporated herein by reference)........

10.4* Termination Agreement, dated February 11, 1994, between the Registrant
and Consolidated National Corporation relating to the Management and Consulting
Agreement referenced as Exhibit 10.3 above (filed as Exhibit 10.2 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1993,
and incorporated herein by reference).............................................

10.5* Deferred Compensation Plan (filed as Exhibit 10.32 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1988, and
incorporated herein by reference).................................................

10.6* Salaried Employees Severance Pay Plan, as restated effective October 1,
1994 (filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q
for the period ended September 30, 1994, and incorporated herein by reference)....

10.7* Form of Indemnification Agreement relating to certain officers and
directors of the Registrant (filed as Exhibit 10.11 of Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993, and incorporated
herein by reference)..............................................................

10.8* Amended and Restated 1990 Stock Option Incentive Plan (filed as Exhibit
10.1 to the Registrant's Report on Form 10-Q for the quarter ended September 30,
1994, and incorporated herein by reference) and the form of the stock option
certificate (filed as Exhibit 19.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1991, and incorporated herein by reference)...

10.9* Restricted Stock Purchase Agreement, as amended, between System Services
Group and John T. Hull (filed as Exhibit 10.18 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1986, and incorporated herein by
reference).........................................................................

10.10 Lease between Lincoln Property Company No. 375, LTD. and Southwestern
Life Insurance Company, dated June 28, 1984 (filed as Exhibit 10.21 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1990,
and incorporated herein by reference)..............................................

10.11 Amendments to Lease referenced as Exhibit 10.9 above...............................

10.12 Data Processing Agreement between the Registrant and Perot Systems
Corporation dated September 29, 1993 (filed as Exhibit 10.15 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993, and
incorporated herein by reference)...................................................
</TABLE>

102
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
- ------ ----------- ----------
<S> <C> <C>

10.13 Processing Services Agreement between Facilities Management
Installation, Inc. and CYBERTEK Corporation dated September 20, 1994................

10.14 Enterprise License Agreement between Facilities Management Installation,
Inc. and CYBERTEK Corporation dated September 20, 1994..............................

10.15 Agreement of Lease between the Tilles Investment Company and Bankers
Life and Casualty Company of New York (filed as Exhibit 10.26 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1991,
and incorporated herein by reference)...............................................

10.16 The Assignment and Grant of Option executed by Consolidated Fidelity
Life Insurance Company and Registrant effective as of May 21, 1992 (filed as
Exhibit 38-1 to Amendment No. 38 to Schedule 13D filed by Consolidated National
Corporation relating to the common stock of Registrant and incorporated herein
by reference).......................................................................

10.17* Form of Amended and Restated Supplemental Benefit Agreement of
Registrant dated October 10, 1994 entered into by John T. Hull (filed as Exhibit
10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994, and incorporated herein by reference)...........................

10.18 Letter Agreements between the Registrant and Consolidated National
Corporation, dated March 29, 1993 and November 9, 1992 (incorporated by
reference to Exhibit 10.31 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1992)...................................................

10.19 Agreement, dated September 11, 1993, between the Registrant and Conseco,
Inc. (filed as Exhibit 4 to Amendment No. 1 to the Schedule 13D relating to the
common stock of Bankers Life Holding Corporation, filed by the Registrant,
Consolidated National Corporation, Robert T. Shaw and C. Fred Rice, dated
September 15, 1993, and incorporated herein by reference)...........................

10.20 Agreement, dated September 11, 1993, between the Registrant and Bankers
National Life Insurance Company (filed as Exhibit 5 to Amendment No. 1 to the
Schedule 13D relating to the common stock of Bankers Life Holding Corporation,
filed by the Registrant, Consolidated National Corporation, Robert T. Shaw and
C. Fred Rice, dated September 15, 1993, and incorporated herein by reference)........

10.21 Letter Agreement, dated September 11, 1993, among the Registrant,
Conseco, inc. and Bankers Life Holding Corporation (filed as Exhibit 6 to
Amendment No. 1 to the Schedule 13D relating to the common stock of Bankers Life
Holding Corporation, filed by the Registrant, Consolidated National Corporation,
Robert T. Shaw and C. Fred Rice, dated September 15, 1993, and incorporated
herein by reference)..................................................................

10.22 Stock Purchase Agreement, dated January 15, 1994, among Consolidated
National Corporation, Consolidated Fidelity Life Insurance Company, Robert T.
Shaw, D. Fred Rice, Registrant and Torchmark Corporation (filed as Exhibit No. 1
to the Registrant's Current Report on Form 8-K dated January 15, 1994, and
incorporated herein by reference), as amended (filed as Exhibit 10 to the
Registrant's Current Report on Form 8-K dated February 11, 1994, and
incorporated herein by reference).....................................................
</TABLE>

103
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
- ------ ----------- ----------
<S> <C> <C>

10.23 Stock Purchase Agreement, dated January 15, 1994, among Consolidated
National Corporation, Consolidated Fidelity Life Insurance Company, Robert T.
Shaw, C. Fred Rice, the Registrant and Stephens Inc. (filed as Exhibit No. 2 to
the Registrant's Current Report on Form 8-K dated January 15, 1994, and
incorporated herein by reference)..................................................

10.24 Letter from Registrant to Robert T. Shaw effective January 15, 1994
(filed as Exhibit 10.34 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993, and incorporated herein by reference).....................

10.25 Letter, dated January 15, 1994, from Registrant to Robert Shaw (filed as
Exhibit 5 of the Registrant's Current Report on Form 8-K dated January 15, 1994,
and incorporated herein by reference)..............................................

10.26 Letter, dated January 15, 1994, from Registrant to Consolidated National
Corporation (filed as Exhibit No. 6 to the Registrant's Current Report on Form
8-K dated January 15, 1994, and incorporated herein by reference)..................

10.27* Independent Contractor and Services Agreement, dated February 11, 1994,
between the Registrant and Robert T. Shaw (filed as Exhibit No. 7 to the
Registrant's Current Report on Form 8-K dated February 11, 1994, and
incorporated herein by reference)..................................................

10.28* Independent Contractor and Services Agreement, dated February 11, 1994,
between the Registrant and C. Fred Rice (filed as Exhibit No. 8 to the
Registrant's Current Report on Form 8-K dated February 11, 1994, and
incorporated herein by reference)..................................................

10.29 Mutual Release, dated February 11, 1994, among Registrant and
Consolidated National Corporation, Robert T. Shaw, C. Fred Rice and Edward J.
Carlisle (filed as Exhibit No. 9 to the Registrant's Current Report on Form 8-K
dated February 11, 1994, and incorporated herein by reference).....................

10.30 Stock Purchase Agreement, dated January 15, 1994, between Consolidated
National Corporation and the Registrant (filed as Exhibit No. 3 to the
Registrant's Current Report on Form 8-K dated January 15, 1994, and incorporated
herein by reference)................................................................

10.31 Promissory Note of James M. Fail, dated effective as of December 1,
1994, payable to Southwestern Life Insurance Company................................

10.32 First Amended and Restated Loan Agreement, dated as of December 1, 1994,
between James M. Fail and Southwestern Life Insurance Company.......................

10.33 First Amended and Restated Pledge Agreement dated as of December 1,
1994, between James M. Fail and Southwestern Life Insurance Company.................

10.34 First Amended and Restated Guaranty Agreement dated as of December 1,
1994, between James M. Fail and Southwestern Life Insurance Company................

10.35 Schedule of Omitted Documents.......................................................
</TABLE>

104
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
- ------ ----------- ----------
<S> <C> <C>

10.36 Assignment Agreement between Southwestern Life Insurance Company and
Consolidated Fidelity Life Insurance Company, dated June 30, 1994, relating to
Notes and Loan Agreements referenced as Exhibits 10.30, 10.31, 10.32 and 10.33
above (filed as Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994, and incorporated herein by reference).........

10.37 Participation Agreement between Registrant and Employers Reassurance
Corporation dated July 1, 1994 (filed as Exhibit 10.4 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 and
incorporated herein by reference)..................................................

10.38 Letter Agreement between Registrant and Consolidated Fidelity Life
Insurance Company Regarding Termination of Call and Put Option dated June 30,
1994 (filed as Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994, and incorporated herein by reference)....

10.39 Letter Agreement between Registrant and Stephens Inc. Regarding
Engagement to Perform Investment Advisory Services for the Registrant dated May
3, 1994 (filed as Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994, and incorporated herein by reference)....

10.40* Employment Agreement, dated June 9, 1994, between Facilities Management
Installation, Inc. and H. Don Rutherford...........................................

10.41* Compensation Arrangements with James R. Kerber as approved by the
Compensation Committee and Board of Directors, dated March 2, 1995.................

10.42* Compensation Arrangements with Glenn H. Gettier, Jr. as approved by the
Compensation Committee and Board of Directors, dated March 2, 1995.................

10.43 Consolidated Tax Allocation Agreement dated December 26, 1985, as
amended, among Registrant and certain of its subsidiaries..........................

10.44* Form of Executive Severance Benefit Agreements entered into between
Facilities Management, Inc. and certain key executive officers of the
Registrant, including Messrs. Gettier, Kerber, Gail, Hull, Greving and
Rutherford.........................................................................

10.45 Univision SI Application from Bob Shaw regarding issuance of an
individually owned policy, dated January 5, 1995...................................

10.46* Memorandum, dated March 8, 1994, amending Registrant's Deferred
Compensation Plan referenced as Exhibit 10.5 above.................................

10.47 Stock Purchase Agreement dated March 24, 1995 between Southwestern Life
Corporation and Citizens Financial Corporation regarding the sale of Integrity
National Life Insurance Company....................................................

11.1 Statement regarding computation of earnings (loss) per share of common
stock on average shares outstanding and fully diluted bases........................

12.1 Statement regarding computation of ratio of earnings to fixed charges
(including pro forma ratios).......................................................
</TABLE>

105

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
- ------ ----------- ----------
<S> <C> <C>

18.1 Letter dated March 30, 1995 from Coopers & Lybrand L.L.P.
regarding change in accounting principles .........................................

21.1 List of Subsidiaries of Registrant.................................................

23.1** Consent of Coopers & Lybrand L.L.P. ...............................................

27 Financial Data Schedule............................................................
<FN>
* MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED
PURSUANT TO ITEM 14(C) OF THIS ANNUAL REPORT.
** FILED WITH THIS FORM 10-K/A AMENDMENT NO. 1 TO REGISTRANT'S ANNUAL REPORT
ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1994.

Unless otherwise noted, all other exhibits were filed with Registrant's
original Form 10-K filing
</TABLE>

106

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the registration
statement of Southwestern Life Corporation on Form S-8 number 33-61766 of our
report, which includes explanatory paragraphs relating to adoption of, and
changes in, certain accounting principles and an emphasis paragraph relating
to the effects of a potential restructuring or recapitalization of the Company,
dated March 30, 1995, on our audits of the consolidated financial statements
and financial statement schedules of Southwestern Life Corporation as of
December 31, 1994 and 1993, and for the years ended December 31, 1994, 1993
and 1992, which report is included in this Annual Report on Form 10-K/A.

COOPERS & LYBRAND L.L.P.

Dallas, Texas
April 5, 1995