10-Q 1 f033101-10q.txt QUARTERLY REPORT ON FORM 10-Q FOR MARCH 31, 2001 -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 Commission File Number 1-11422 SOUTHWESTERN LIFE HOLDINGS, INC. (Exact name of Registrant as specified in its charter) Delaware 13-3543540 (State or other jurisdiction of (I.R.S. employer identification no.) incorporation or organization) 717 North Harwood Street 75201 Dallas, Texas (Zip code) (Address of principal executive offices) Registrant's telephone number, including area code: (214) 954-7111 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 whether the Registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] The number of Common Stock shares outstanding as of May 11, 2001, was 9,059,000. -------------------------------------------------------------------------------- 1 SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES TABLE OF CONTENTS Page PART I-- FINANCIAL INFORMATION Item 1. Financial Statements..........................................3 Consolidated Balance Sheets..................................3 Consolidated Statements of Operations and Comprehensive Income (Loss)................................4 Consolidated Statements of Cash Flows........................5 Notes to Unaudited Consolidated Financial Statements.........6 Independent Auditors' Review Report.........................15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................16 Item 3. Quantitative and Qualitative Disclosures About Market Risk...25 PART II-- OTHER INFORMATION Item 1. Legal Proceedings............................................26 Item 6. Exhibits and Reports on Form 8-K.............................30 SIGNATURE INDEX TO EXHIBITS 2 PART I -- FINANCIAL INFORMATION Item 1. Financial Statements SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)

See accompanying Notes to Unaudited Consolidated Financial Statements. 3 SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (In thousands, except per share amounts) (Unaudited)

See accompanying Notes to Unaudited Consolidated Financial Statements. 4 SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)

See accompanying Notes to Unaudited Consolidated Financial Statements. 5 SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share amounts and per share amounts) 1. BASIS OF PRESENTATION Southwestern Life Holdings, Inc. ("SWL Holdings" or the "Company") is an insurance holding company which owns 100% of SWFC Nevada, Inc. ("SWFC"). Through SWFC's wholly-owned life insurance subsidiary, Pacific Life and Accident Insurance Company ("PLAIC"), and its wholly-owned life insurance subsidiary, Southwestern Life Insurance Company ("Southwestern Life"), the Company offers a broad range of life, annuity and accident and health insurance products through both independent and exclusive agents. Additionally, the Company owns KB Management, LLC ("KB Management") which provides management and advisory services to the Company and its insurance subsidiaries and Southwestern Financial Services Corporation ("SFSC") which has a services agreement with the life insurance affiliates to provide personnel, data processing and other operational services at cost. The Company previously owned the Payroll Sales Division that consisted of Pioneer Security Life Insurance Company ("Pioneer Security"); its wholly-owned subsidiaries, American-Amicable Life Insurance Company of Texas and Pioneer American Insurance Company (Pioneer Security and its subsidiaries are collectively referred to as "AA Life", sold February 4, 2000) and Occidental Life Insurance Company ("OLIC", sold February 4, 2000). AA Life marketed and underwrote customized life insurance and annuity products to U.S. military personnel and federal employees through a general agency force. OLIC provided accident and health and life products utilizing a network of independent agents primarily in the southeastern United States through employer-sponsored payroll deduction programs. The Company also owned Marketing One, Inc. ("Marketing One", sold November 30, 2000), a third party marketing organization. The Payroll Sales Division and Marketing One are collectively referred herein as "Businesses Sold". The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). These principles are established primarily by the Financial Accounting Standards Board ("FASB") and the American Institute of Certified Public Accountants ("AICPA"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as revenues and expenses. Accounts that the Company deems to be acutely sensitive to changes in estimates include deferred policy acquisition costs, policy liabilities and accruals, present value of insurance in force, costs in excess of net assets acquired and deferred taxes. In addition, the Company must determine the requirements for disclosure of contingent assets and liabilities as of the date of the financial statements based upon estimates. As additional information becomes available, or actual amounts are determinable, the recorded estimates may be revised and reflected in operating results. Although some variability is inherent in these estimates, management believes the amounts provided are adequate. In all instances, actual results could differ from estimates. Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138, which amended certain provisions of SFAS No. 133. The adoption of SFAS No. 133 and No. 138 did not have a material effect on the consolidated financial statements. Income (loss) per share is computed based on outstanding common shares of the recapitalized company for all periods reported as if the recapitalization occurred at the beginning of the reporting periods. As a result, the computation of loss per share does not include the preferred stock dividend requirements. Certain prior period amounts have been reclassified to conform to current period presentation. The financial statements should be read in conjunction with the financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 6 SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED In September 2000, the Emerging Issues Task Force ("EITF") issued EITF 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets" which requires that holders of certain securitized financial assets evaluate whether current projected cash flows are different from the projected cash flows when the security was acquired. If the present value of the original projected cash flows exceeds the present value of the current estimated cash flows, the security would be considered impaired to the extent amortized cost exceeded its fair market value. The difference would be recorded as a realized investment loss. EITF 99-20 is effective for quarters beginning after March 15, 2001. The Company is currently evaluating the impact of EITF 99-20 on a consolidated basis. 3. SELECTED PRO FORMA FINANCIAL INFORMATION The following selected pro forma financial information has been prepared to illustrate the pro forma effects of the sales of the Payroll Sales Division (sold February 4, 2000) and Marketing One (sold November 30, 2000) (see Note 1). The pro forma statement of operations information for the three month period ended March 31, 2000 gives effect to such sales as if they had occurred on January 1, 2000. The selected pro forma financial information has been prepared for comparative purposes only and does not purport to be indicative of what would have occurred had such sales been made as of January 1, 2000, or results which may occur in the future.

(1) Restated to reflect outstanding common shares as a result of recapitalization effective June 13, 2000 as if recapitalization occurred at beginning of period and the computation of loss per share does not include the preferred stock dividend requirements. 4. RESTRUCTURING CHARGES As a result of the merger of Security Life and Trust Insurance Company ("Security Life") into Southwestern Life and the consummation of the recapitalization plan, the Company adopted a restructuring plan during the quarter ended June 30, 2000 (the "2000 Plan"). Prior to 2000, the Company developed restructuring plans to realign or consolidate certain operations resulting in restructuring costs incurred in 1999 (the "1999 Plan"), the fourth quarter of 1998 (the "4th Quarter 1998 Plan") and the first quarter of 1998 (the "1st Quarter 1998 Plan"). The following reflects the impact of activity for the three months ended March 31, 2001 and 2000 on the restructuring accrual balances under the 2000 Plan, the 1999 Plan, the 4th Quarter 1998 Plan and the 1st Quarter 1998 Plan. 7 SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. RESTRUCTURING CHARGES (Continued)

Accrual balances as of March 31, 2000 under the 4th Quarter 1998 Plan and the 1st Quarter 1998 Plan were paid or charged against the liability during the remainder of 2000. 5. BUSINESS SEGMENT INFORMATION As a result of the sale of the Payroll Sales Division on February 4, 2000 and the sale of Marketing One on November 30, 2000, the operating results of the Payroll Sales Division and Marketing One have been included in Businesses Sold for the three months ended March 31, 2000. Segment data as of March 31, 2001 and December 31, 2000, and for the three months ended March 31, 2001 and 2000, are as follows:

8 SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. BUSINESS SEGMENT INFORMATION (Continued)

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

6. COMMITMENTS AND CONTINGENCIES IN RE PENNCORP FINANCIAL GROUP, INC. SECURITIES LITIGATION During the third quarter of 1998, the first of ten class-action complaints was filed in the United States District Court for the Southern District of New York against PennCorp and certain of its then current or former directors and officers. None of the individual defendants are currently officers or directors of the Company. During a pre-trial conference on November 9, 1998, all parties agreed to consolidation of all of the actions and the court appointed lead plaintiffs on behalf of certain shareholders and noteholders. The court also approved the selection of three law firms as co-lead counsel for those shareholders and noteholders. A consolidated and amended complaint was filed on January 22, 1999, and a First Consolidated Amended Class Action Complaint naming, as defendants, PennCorp, David J. Stone, formerly a director and chairman and chief executive officer, and Steven W. Fickes, formerly a director and president and chief financial officer, was filed on March 15, 1999 (the "Complaint"). The Complaint alleged that defendants violated the Securities Exchange Act of 1934 by, among other things, issuing a series of materially false and misleading statements and omitting to state certain material facts regarding the Company's financial condition, including the value of certain of its assets, and by failing to timely disclose that the Company was under investigation by the Securities and Exchange Commission (the "SEC"). Plaintiffs sought to recover damages in 9 SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. COMMITMENTS AND CONTINGENCIES (Continued) unspecified amounts on behalf of themselves and all other purchasers of PennCorp's common stock and purchasers of PennCorp's subordinated notes during the period from February 8, 1996 through November 16, 1998. The parties entered into a Stipulation of Settlement dated May 24, 2000 providing for payment of $9.0 million of cash, plus interest accruing through the date of consummation of the settlement, in full and final settlement of all claims. Of that sum, $1.5 million was paid by PennCorp during the fourth quarter of 1999 into an interest-bearing escrow account established by plaintiffs' counsel and $7.5 million plus interest is to be paid by PennCorp's third party director and officer liability insurance carrier upon finalization of the settlement. The settlement received preliminary approval from the court in June 2000, was submitted to the court for final approval at a hearing set for that purpose in November 2000 and received final approval from the court in April 2001. Once the period for appeal of the court's final ruling has expired with no appeal having been made, the settlement will become final. PICOW, ET AL. V. SECURITY LIFE & TRUST INSURANCE COMPANY In May 1998, the North Carolina Attorney General's Office (the "NCAG") initiated an inquiry concerning certain life insurance products historically sold by Security Life and Trust Insurance Company ("Security Life," merged into Southwestern Life on June 30, 2000) and representations allegedly made by Security Life's agents and officers that non- smoker insureds would not be charged cost of insurance after the eighth policy year. The NCAG indicated that Security Life may be estopped to change its practice of not charging the cost of insurance for non-smoking policyholders after the eighth policy year on these policies because of certain representations made by agents and officers of Security Life. Although Security Life has not charged the cost of insurance for non-smoker policyholders after the eighth policy year on these policies, this practice is not guaranteed under the life insurance contracts, which specifically allow Security Life the right to change the cost of insurance rates in accordance with the parameters set forth in the contracts. Security Life responded to the NCAG's inquiry by denying that it is estopped from changing the cost of insurance rates on these policies based on the alleged representations, and is continuing to reserve its contractual rights to charge the cost of insurance on these policies in accordance with the parameters set forth in the life insurance contracts. In June 1998 the NCAG informed Security Life that it could not adjudicate this matter and left it mutually unresolved. In June 1999 the North Carolina Department of Insurance ("NCDOI") asked Security Life about the status of its practice of not charging cost of insurance after the eighth contract year for non-smokers on these same insurance products and requested to be informed if Security Life were to change that practice. Security Life responded to the NCDOI's inquiry by verifying that no decision had been made to date to change such practice and that such practice had not changed; and confirmed that the NCDOI would be notified in the event that such practice were to be changed. During 1999 Security Life initiated a voluntary exchange program which enabled policyholders of such life insurance products to terminate their policies and, in exchange for the termination of the original policy and a release, obtain either (i) the refund of all premiums paid and other consideration or (ii) another Security Life life insurance product. On November 5, 1999, Security Life was served with a petition filed in state District Court in Dallas County, Texas, asserting a class action concerning such policies. The petition alleged that Security Life waived the right to charge cost of insurance after the eighth policy year on such non-smoker policies and to increase cost of insurance charges on such smoker policies. The petition alleged Security Life made these waivers through its marketing pieces and statements by its officers. The petition also alleged that not all of the facts were outlined in Security Life's communication to its policyholders describing the voluntary exchange program and therefore that program was deceptive. The petition asked for declaratory judgment concerning the rights of the plaintiffs and the class of policyholders of such policies and for attorney's fees. The petition also asked for, among other things, an injunction to prevent Security Life from charging cost of insurance on such non-smoker policies or increasing cost of insurance charges on such smoker 10 SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. COMMITMENTS AND CONTINGENCIES (Continued) policies after the eighth policy year, and requested the court to rule that the releases signed by any such policyholders under the voluntary exchange program were null and void and those policyholders who signed the releases be given the option of reinstating their policies. On August 30, 2000, the lawsuit was amended to add a claim that Security Life had improperly reduced the interest rates credited to accumulated values in such policies in an effort to offset losses incurred by Security Life on those policies. Security Life denied all of the allegations in the lawsuit. However, because of the substantial expense and uncertainty associated with class action litigation, Security Life entered into an agreement to settle the lawsuit dated September 7, 2000 pursuant to which (i) legal fees of approximately $1.3 million were to be paid to plaintiffs' counsel, (ii) certain changes were to be made to the terms of Concept 90 policies remaining in force or reinstated pursuant to the settlement, and (iii) certain optional in-kind relief (which included the option to seek reinstatement of Concept 90 policies no longer in force) was to be provided to the plaintiffs pursuant to elections made by individual plaintiffs within a specified time period and in a specified manner with respect to their current or former Concept 90 policies. The settlement was expressly subject to approval by the court. On September 8, 2000, the court granted preliminary approval of the settlement and ordered that notice be sent to all class members. The court granted final approval of the settlement at a hearing held on November 17, 2000, and the period for appeal of that ruling expired prior to the end of 2000. Thus, the settlement is now final and is being implemented. As of March 31, 2001, the Company had accrued $4.7 million of additional policy liabilities in connection with the settlement. The recorded liability reflects costs the Company considers likely to be incurred in connection with the settlement based only on known or reasonably estimable or determinable factors. Therefore, the ultimate cost to the Company may be greater than estimated and may have a material adverse effect on the Company's financial condition, results of operations and cash flows. SCHNOEBELEN V. UNITED LIFE & ANNUITY INSURANCE COMPANY, ET AL. Schnoebelen was an independent insurance broker whose marketing contract with United Life and Annuity Insurance Company ("United Life," sold April 30, 1999) provided that he would be entitled to an annual commission based on the total accumulated value of annuity contracts in force for 13 months or more with United Life which were sold by Schnoebelen and his designees. Schnoebelen generally ceased writing new business with United Life in 1993, and his marketing contract was terminated in 1997. In 1998, Schnoebelen brought suit in the United States District Court for the Southern District of California in San Diego, California against United Life alleging that United Life had not paid him all of the commissions to which he was entitled and alleging various contractual and tortious causes of action. When PennCorp sold United Life in 1999, it and PLAIC indemnified the buyer against certain losses resulting from this lawsuit and retained the responsibility for defending it. The Company denied Schnoebelen's claims and vigorously defended the lawsuit. On July 20, 2000, a jury returned a verdict against United Life in the amount of approximately $1.125 million, composed of approximately $288,000 for past economic damages and approximately $838,000 for the net present value of future economic damages, upon which judgment was entered by the court. The Company has established a liability reserve of approximately $1.125 million for this judgment. The Company filed post-judgment motions for relief which were denied by the trial court. The Company has appealed the judgment to the United States Court of Appeals for the Ninth Circuit, believes that it has valid grounds to obtain a reversal of the judgment in whole or in part on appeal, and intends to pursue its appeal vigorously. The Company also believes that a significant portion of the judgment may not be covered by the indemnity agreement and thus would be the responsibility of the buyer of United Life. 11 SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. COMMITMENTS AND CONTINGENCIES (Continued) MARTINDALE, ET AL. V. SOUTHWESTERN LIFE INSURANCE COMPANY, ET AL. A petition was filed on September 7, 2000 in state District Court located in Jasper, Texas asserting claims against Southwestern Life and its agent co-defendant on behalf of a purported class of persons who had an ownership interest in universal life insurance policies or interest-sensitive non-participating whole life insurance policies issued by Southwestern Life during the period from January 1, 1981 to the present and who were residents of the United States on the date(s) of issuance of such policy(ies). The petition alleges that Southwestern Life and/or its agent co-defendant committed, among other things, breach of contract, breach of fiduciary duty, breach of duty of good faith and fair dealing, negligent misrepresentation, unfair or deceptive acts, and fraud in connection with the sale of such policies, and seeks class certification, equitable relief and recovery of actual, statutory and punitive damages in unspecified amounts as well as costs and attorneys' fees. Both Southwestern Life and the agent co-defendant timely filed answers denying all allegations made in the original petition and contesting venue for the action, and Southwestern Life subsequently filed a notice of removal removing the case to the United States District Court for the Eastern District of Texas located in Beaumont, Texas. Only limited written discovery has been taken in this case to date. Southwestern Life denies any and all allegations made in the petition and intends to defend this case vigorously. There can be no assurance that Southwestern Life will be able to defend or resolve the issues presented in this action successfully or at all or that any verdict or other resolution would not have a material adverse effect on the Company's financial condition, results of operations or cash flows. DEMAND BY FRED ROSEN, MARIAN ROSEN AND NORMAN BOCK On or about February 19, 2001, Southwestern Life received a demand letter from attorneys representing Fred Rosen, Marian Rosen and Norman Bock. This demand letter asserts, on behalf of the named claimants individually and on behalf of all other persons who purchased a universal life insurance policy from Georgia International Life Insurance Company ("Georgia International"), that Georgia International and its successors in interest, including Southwestern Life, misrepresented the cost of such policies and concealed the fact that premiums on such policies would substantially increase over the life of same. Further, the demand letter alleges that Southwestern Life has assumed responsibility for these policies and demands that Southwestern Life place all members of the purported class of claimants in the same position they would have been in had the policies in question performed as originally represented. Litigation is threatened for, among other things, violation of the Texas Deceptive Trade Practices Act should Southwestern Life not provide the relief demanded. Southwestern Life is investigating the allegations contained in the demand letter. Southwestern Life believes that the allegations made in the demand letter are without basis and intends to defend vigorously against the demand and any subsequent litigation arising therefrom. There can be no assurance that Southwestern Life will be able to defend or resolve the issues presented in this matter successfully or at all or that any verdict or other resolution would not have a material adverse effect on the Company's financial condition, results of operations or cash flows. PLASTER, TRUSTEE V. SOUTHWESTERN LIFE INSURANCE COMPANY, ET AL. Stephen R. Plaster, Trustee of the Robert W. Plaster Irrevocable Trust, as holder of three universal life insurance policies issued by Southwestern Life on the life of Robert W. Plaster having a combined death benefit of approximately $20.9 million, brought suit against Southwestern Life in state Circuit Court located in Camden County, Missouri on May 20, 1999, claiming, in essence, that Southwestern Life committed fraud by misrepresenting the terms, characteristics and performance of its universal life insurance policies at the time of purchase. The plaintiff specifically alleges that the policies were represented to be "single premium" policies not requiring payment of any additional premiums, but that instead Southwestern Life has demanded payment of additional premiums in order to keep the policies in force. Plaintiff seeks recovery of all premiums paid to Southwestern Life to date (alleged to be approximately $2.9 million), all 12 SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. COMMITMENTS AND CONTINGENCIES (Continued) additional premiums demanded by Southwestern Life to date (alleged to be approximately $3.7 million), interest, punitive damages, legal fees and expenses, and reformation and specific performance of the policies. Southwestern Life's attempt to remove this case to federal court was unsuccessful and the case is now in the discovery stage. Southwestern Life denies plaintiff's claims and intends to defend this case vigorously. There can be no assurance that Southwestern Life will be able to defend or resolve the issues presented in this action successfully or at all or that any verdict or other resolution would not have a material adverse effect on the Company's financial condition, results of operations or cash flows. OTHER MATTERS The life insurance subsidiaries of the Company are parties to various other pending or threatened legal actions arising in the ordinary course of business, some of which include allegations of insufficient policy illustrations and agent misrepresentations. Although the outcome of such actions is not presently determinable, management does not believe that such matters, individually or in the aggregate, would have a material adverse effect on the Company's financial position or results of operations if resolved against the Company's subsidiaries. The life insurance subsidiaries of the Company are required to be members of various state insurance guaranty associations in order to conduct business in those states. These associations have the authority to assess member companies in the event that an insurance company conducting business in that state is unable to meet its policyholder obligations. Assessments from guaranty associations, which have not been material, are recorded in accordance with Statement of Position 97-3 issued by the AICPA, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments." Each of the definitive purchase and sale agreements the Company has consummated for Professional Insurance Company (sold March 31, 1999), United Life and certain related assets (sold April 30, 1999), KIVEX, Inc. (sold June 30, 1999), the Career Sales Division (sold July 31, 1999, consisted of Pennsylvania Life Insurance Company, PennCorp Life Insurance Company, Peninsular Life Insurance Company, Constitution Life Insurance Company, Union Bankers Insurance Company and Marquette National Life Insurance Company), the Payroll Sales Division and Marketing One contain indemnification provisions which survive the closing of each sales transaction for varying periods of time. The indemnification provisions would be invoked by the purchasers should the Company be found in breach of certain representation and warranty provisions or upon the occurrence of specified events contained in the purchase and sale agreements. The Company has purchased representations and warranty insurance to cover potential indemnification claims arising under each of the definitive purchase and sale agreements in an aggregate amount of $20.0 million for all covered indemnification claims. The Company's insurance subsidiaries at March 31, 2001 had outstanding commitments to invest up to $3.8 million in various limited partnership funds and other investments. As of March 31, 2001, the Company sold substantially all of the mortgages originally held by United Life but retained by the Company as a part of the sale of the United Life. The Company may be obligated to repurchase certain of the mortgages sold. At March 31, 2001, the Company had a liability of approximately $1.1 million related to these contingencies. At March 31, 2001, the Company had a contingent obligation for mortgage loans previously sold aggregating $3.0 million for which the Company also acts as a servicing conduit. 13 SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. SUBSEQUENT EVENT On April 27, 2001, the Company entered into a definitive agreement pursuant to which Swiss Re Life & Health America Holding Company, a subsidiary of Swiss Reinsurance Company ("Swiss Re"), will acquire the Company in a cash tender offer and subsequent merger. Under the agreement, an acquisition subsidiary of Swiss Re has commenced a tender offer to purchase all outstanding common shares of the Company for $18.50 per share in cash. The closing price for the Company's common stock on Tuesday, April 24, 2001, the last day on which a trade was made prior to the announcement of the Swiss Re transaction, was $12.00 per share. The tender offer, subject to the tendering of a majority of the Company's common stock, regulatory approval and other customary conditions, is expected to close in the second quarter of 2001. Certain directors have agreed to tender, and vote in favor of the merger, an aggregate of 4,911,695 shares as well as up to 480,000 shares issuable on exercise of stock options, representing 55.1% of the shares on a fully- diluted basis. Based upon the terms and conditions of the definitive agreement, the Company evaluated recoverability of intangible assets as of March 31, 2000 and recognized an impairment of costs in excess of net assets acquired of approximately $6.8 million. 14 INDEPENDENT AUDITORS' REVIEW REPORT The Board of Directors and Shareholders of Southwestern Life Holdings, Inc. We have reviewed the accompanying condensed consolidated balance sheet of Southwestern Life Holdings, Inc. and subsidiaries as of March 31, 2001, and the related condensed consolidated statements of operations and comprehensive income (loss) for the three month period ended March 31, 2001 and 2000, and condensed consolidated statements of cash flows for the three month period ended March 31, 2001 and 2000. These condensed financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United Sates of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Southwestern Life Holdings, Inc. as of December 31, 2000, and the related consolidated statements of operations and comprehensive income (loss), shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated April 8, 2001, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the financial information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2000, is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /S/KPMG LLP Dallas, Texas May 11, 2001 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with the comparable discussion contained in the Company's annual report to the Securities and Exchange Commission on Form 10-K for the fiscal year ended December 31, 2000. The following discussion should also be read in conjunction with the unaudited consolidated financial statements and related notes contained in this Quarterly Report on Form 10-Q. CAUTIONARY STATEMENT All statements, trend analyses and other information contained in this report relative to markets for SWL Holdings' products and trends in SWL Holdings' operations or financial results, as well as all other statements contained in this report including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "should", "could", "goal", "target", "on-track", "comfortable with" and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results to be materially different from those contemplated by such forward-looking statements. Such factors include, among other things: (1) general economic conditions and other factors, including prevailing interest rate levels and stock and credit market performance, which may affect, among other things, the ability of SWL Holdings to sell its products, the market value of SWL Holdings' investments and the lapse rate and profitability of insurance products; (2) SWL Holdings' ability to achieve anticipated levels of operational efficiencies and cost-saving initiatives; (3) customer response to new products, distribution channels and marketing initiatives; (4) mortality, morbidity, and other factors which may affect the profitability of SWL Holdings' insurance products; (5) changes in the Federal income tax laws and regulations which may affect the relative tax advantages of some of SWL Holdings' products; (6) increasing competition in the sale of insurance and annuities; (7) regulatory changes or actions, including those relating to regulation of insurance products and of insurance companies; (8) ratings assigned to SWL Holdings' insurance subsidiaries by independent rating organizations such as A.M. Best, which the Company believes are particularly important to the sale of annuity and other accumulation products; (9) cash flow testing at Southwestern Life; and (10) unanticipated litigation and unanticipated results in pending litigation. There can be no assurance that these and other factors not currently anticipated by management will not materially and adversely affect the Company. GENERAL Southwestern Life and PLAIC underwrite a variety of insurance products with the primary emphasis on modest premium policies in the life, annuity and accident and health product sectors. Life products include term products and traditional whole life or universal life products which build cash values that are available to the policyholder. Annuity products include various forms of annuity products which are utilized by policyholders primarily as a means of tax deferred savings. Accident and health products include long-term care, cancer and accident only. The Company's financial condition and results of operations for the periods covered by this and future reports are or will be affected by the subsequent event and restructuring costs discussed below. Subsequent Event. On April 27, 2001, the Company entered into a definitive agreement pursuant to which Swiss Re Life & Health America Holding Company, a subsidiary of Swiss Reinsurance Company ("Swiss Re"), will acquire the Company in a cash tender offer and subsequent merger. Under the agreement, an acquisition subsidiary of Swiss Re has commenced a tender offer to purchase all outstanding common shares of the Company for $18.50 per share in cash. The closing price for the Company's common stock on Tuesday, April 24, 2001, the last day on which a trade was made prior to the announcement of the Swiss Re transaction, was $12.00 per share. The tender offer, subject to the tendering of a majority of the Company's common stock, regulatory approval and other customary conditions, is expected to close in the second quarter of 2001. Certain directors have agreed to tender, and vote in favor of the merger, an aggregate of 4,911,695 shares as well as up to 480,000 shares issuable upon exercise of stock options, representing 55.1% of the shares on a fully-diluted basis. Based upon the terms and conditions of the definitive agreement, the Company evaluated recoverability of intangible assets as of March 31, 2000 and recognized an impairment of costs in excess of net assets acquired of approximately $6.8 million. 16 Restructuring Costs. As a result of the merger of Security Life and Trust Insurance Company ("Security Life") into Southwestern Life and the consummation of the recapitalization plan, the Company adopted a restructuring plan during the quarter ended June 30, 2000 (the "2000 Plan"). Prior to 2000, the Company developed restructuring plans to realign or consolidate certain operations resulting in restructuring costs incurred in 1999 (the "1999 Plan"), the fourth quarter of 1998 (the "4th Quarter 1998 Plan") and the first quarter of 1998 (the "1st Quarter 1998 Plan"). The following reflects the impact of activity for each of the three months ended March 31, 2001 and 2000 on the restructuring accrual balances under the 2000 Plan, the 1999 Plan, the 4th Quarter 1998 Plan and the 1st Quarter 1998 Plan.

Accrual balances as of March 31, 2000 under the 4th Quarter 1999 Plan and the 1st Quarter 1998 Plan were paid or charged against the liability during the remainder of 2000. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Parent Company General. SWL Holdings ("parent company") is a legal entity, separate and distinct from its subsidiaries and has no material business operations. The parent company needs cash for: (i) principal and interest on debt; (ii) holding company administrative expenses; (iii) income taxes; and (iv) investments in subsidiaries. The primary sources of cash to meet these obligations include statutorily permitted payments from life insurance subsidiaries, including surplus debenture interest and principal payments and dividend payments, and the sale of assets from non-insurance subsidiaries. 17 The following table shows the cash sources and uses of the parent company on a projected basis for the remainder of 2001 as if the Company continued in existence in its present form. The consummation of the proposed tender offer and merger by Swiss Re (see Note 7 of Notes to Consolidated Financial Statements) would likely result in repayment in full of remaining obligations under the bank credit facility. The table also shows on an actual basis cash sources and uses for the parent company for the three month period ended March 31, 2001, and for the periods February 8, 2000 to March 31, 2000 (as a debtor-in-possession) and January 1, 2000 to February 7, 2000 (in thousands):

---------------- (1) Company's unused and available revolving credit facility as of December 31, 2001 is projected to be $15.0 million. Cash Sources Cash from Subsidiaries. Cash generated by the Company's insurance subsidiaries is made available to SWL Holdings principally through periodic payments of principal and interest on surplus debentures issued by PLAIC and Pioneer Security (sold February 4, 2000) (collectively, the "Surplus Note Companies"). The surplus notes issued by Pioneer Security were repaid in full in connection with the consummation of the sale of the Payroll Sales Division on February 4, 2000. Surplus debenture payments are made to non-insurance intermediate holding companies and subsequently are paid to the Company in the form of dividends. The amount outstanding under the one remaining surplus debenture totaled $92.0 million and $94.9 million as of March 31, 2001 and December 31, 2000, respectively. This debenture was issued by PLAIC and is held by SWFC. The PLAIC surplus debenture requires principal and interest payments to be made periodically in amounts sufficient to allow SWL Holdings to meet its cash requirements. These payments are subject to PLAIC's maintenance of capital and surplus of at least $1.2 million in excess of its investment in Southwestern Life. Any deviation from scheduled payments requires regulatory approval. Currently PLAIC relies upon dividends and tax sharing payments from Southwestern Life, which is in turn subject to regulatory restrictions under Texas insurance laws and regulations. Statutes in Texas, the domiciliary state of Southwestern Life, restrict the payment of dividends by insurance companies to the available surplus funds derived from their net profits. The maximum amount of cash dividends that may be declared without regulatory approval in any twelve-month period is the greater of ten percent (10%) of the insurer's statutory surplus, as shown by its last annual statement on file with the Texas Department of Insurance, or one hundred percent (100%) of statutory net gain from operations for the preceding year. In addition, dividends may only be paid from earned surplus. Because of the larger than normal dividends paid in 2000 associated with the recapitalization, most of the dividends in 2001 will be considered "extraordinary" under Texas law and will require insurance department approval. Any dividend considered 18 "extraordinary" cannot be paid until the earlier of: (i) 30 days after the Texas Insurance Commissioner has received notice of the declaration thereof and has not within such period disapproved such payment, or (ii) the Texas Insurance Commissioner shall have approved such payment within the 30 day period. The Department has indicated verbally that it will approve Southwestern Life's requests to pay extraordinary dividends in 2001 but that indication is subject to available earned surplus and demonstration of adequate statutory capital and surplus. Projected Cash Sources and Uses for the Remaining Nine Months of 2001 Projected cash sources for the remainder of 2001 include $16.8 million of scheduled principal and interest payments on PLAIC's surplus debenture and an additional $5.5 million of prepaid principal. SWL Holdings also anticipates receiving approximately $10.4 million of cash dividends from two non-insurance subsidiaries. Such dividends are dependent on the ability of the non-insurance subsidiaries to liquidate certain assets. In April 2001, one such subsidiary liquidated an asset and transferred $4.4 million as a cash dividend to SWL Holdings. There can be no assurances that the PLAIC surplus debenture payments can be made, or that the other non-insurance subsidiary's remaining assets can be liquidated in the periods expected or, if completed, that the Company will receive net proceeds projected. Projected cash uses include scheduled payments of principal of $5.7 million, discretionary payments of principal (including payments on the revolving credit facility) of $21.0 million and interest of $5.6 million. Projected cash operating expenses of the holding company for the remainder of 2001 are $768,000, excluding any expenses associated with the proposed tender offer and merger by Swiss Re. Cash Sources and Uses for the Three Months Ended March 31, 2001 During the three months ended March 31, 2001 the Company received $1.4 million from PLAIC as principal and interest payments on the existing surplus debenture. The Company also received a dividend of $200,000 from a non-insurance subsidiary. In addition, the Company borrowed $5.0 million under the bank credit facility. Other cash sources included the settlement of intercompany balances of $172,000 and funds totaling $255,000 made available by closing bank accounts of certain non-insurance subsidiaries merged into the Company. During the three months ended March 31, 2001 the Company made principal and interest payments on the credit facility of $4.7 million and $2.1 million, respectively. The principal payments included a mandatory repayment of $3.7 million based on excess cash available as defined in the credit agreement. The Company incurred cash operating expenses of $758,000 during the three months ended March 31, 2001 and made capital contributions totaling $326,000 to certain non-insurance subsidiaries principally in the form of income taxes paid on their behalf. Other cash uses included the release of an escrow account of $1.0 million that was established in connection with the sale of certain subsidiaries in 1999. Cash Sources and Uses for the Period February 8, 2000 to March 31, 2000 During the period from February 8, 2000 to March 31, 2000 the Company (as debtor-in-possession) received $49,000 of short-term investment income and $27,000 from a tax refund. The Company paid $436,000 in interest on its senior debt and incurred $384,000 of operating expenses. The Company made payments of $855,000 to a non-insurance subsidiary representing a return of the subsidiary's funds previously swept to the cash collateral account. Cash Sources and Uses for the Period January 1, 2000 to February 7, 2000 As part of a series of restructuring transactions approved by the Texas Department of Insurance, Security Life became a wholly-owned subsidiary of PLAIC. In addition, PLAIC was permitted to prepay $20.4 million of principal and interest on its surplus debenture to SW Financial, which then paid these funds as a dividend to the Company, then named PennCorp Financial Group, Inc. ("PennCorp"). On February 4, 2000, AA Holdings sold the companies in the Payroll Sales Division for $103.3 million. The net proceeds to PennCorp after repayment of intercompany borrowings to insurance company affiliates of PennCorp was $97.0 million. In addition, PennCorp received a $12.7 million dividend from AA Holdings. Of the proceeds, $100.0 million were used to repay a portion of PennCorp's bank credit facility. For the period from January 1, 2000 to February 7, 2000, PennCorp paid $10.0 million in employment contract obligations and $280,000 in transaction bonuses ($8.3 million had been accrued and expensed prior to December 31, 1999) under executive employment agreements with certain senior executives of PennCorp and its subsidiaries. In addition, PennCorp paid $2.0 million for insurance coverage, principally to cover possible indemnification claims arising from a breach of the representations and warranties contained in each of the subsidiary and asset sale agreements, $1.9 19 million in retainers to professional services firms and $3.5 million for other professional and legal services. Interest totaling $3.1 million was paid during the period in order to bring PennCorp's bank credit facility current. Subsidiaries, Principally Insurance Operations The insurance subsidiaries' principal sources of cash are premiums and investment income. The insurance subsidiaries' primary uses of cash are policy claims, commissions, operating expenses, income taxes and payments to the Company for principal and interest due under surplus debentures, tax sharing payments and dividends. Both sources and uses of cash are reasonably predictable. Cash Flow from Operating Activities. Cash provided by operating activities, excluding the parent company, were $11.3 million and $13.1 million for the three months ended March 31, 2001 and 2000, respectively. The decrease in cash flows from operating activities principally resulted from the sales of subsidiaries, which provided $3.8 million of cash from operations for the three months ended March 31, 2000. The decrease in cash inflows was partially offset by a decrease in insurance operating expenses for the three months ended March 31, 2001. Cash Flow from Investing Activities. During the three months ended March 31, 2001 and 2000, the Company's subsidiaries sold $114.7 million and $36.0 million, respectively, of fixed maturity and equity securities, and purchased $130.8 million and $73.6 million of fixed maturity and equity securities, respectively. Such sales and purchases were primarily effected in order to reinvest cash from maturities of fixed maturity securities and improve the quality of the investment portfolio or avoid prepayment risks. Cash Flow from Financing Activities. Cash provided (used) by financing activities, excluding the parent company, were $1.1 million and $(157.4 million) for the three months ended March 31, 2001 and 2000, respectively. Cash inflows during the three months ended March 31, 2001 reflect policyholder deposits exceeding surrenders by $2.4 million and capital contributions of $326,000 from the parent company to certain non-insurance subsidiaries for the payment of income taxes. These cash inflows were partially offset by dividend payments of $1.6 million. Cash outflows during the three months ended March 31, 2000 include dividends and surplus debenture principal payments aggregating $130.1 million made to the parent company. In addition, policyholder surrenders exceeded deposits by $27.3 million for the three months ended March 31, 2000. RESULTS OF OPERATIONS For the three months ended March 31, 2001 and 2000, the Company has prepared the following selected financial information for the Company's Insurance Operations (PLAIC and Southwestern Life) and Businesses Sold (Payroll Sales Division and Marketing One). As a result of the sale of the Payroll Sales Division on February 4, 2000 and the sale of Marketing One on November 30, 2000, the operating results of the Payroll Sales Division and Marketing One have been included in the Businesses Sold for all periods presented. "Operating Income (Loss)," as used below, excludes the impact of: (i) federal income tax expense (benefit), (ii) gains or losses on the sale of investments and (iii) impairment of intangibles associated with agreement to sell the Company. The Company considers operating income (loss) to reflect a division's "core earnings (loss)" and to be the most relevant and useful information to evaluate trends impacting the Company's operations. This information is used by the Company's principal decision makers to evaluate performance as it eliminates the impact of transactions that the Company considers to be unrelated to the core operating results. Other companies that operate primarily in the life insurance industry may or may not use similar measures. 20 SELECTED FINANCIAL INFORMATION

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

Policy Revenues. Policy revenues include: (i) premiums received on traditional life products and a small amount of long- term care and traditional annuities (ii) mortality and administrative fees earned on universal life insurance and annuities 21 and (iii) surrender charges on terminated universal life and annuity policies. In accordance with GAAP, premiums on universal life and annuity products are accounted for as deposits to insurance liabilities. Premiums, net of reinsurance, by major product line for the three months ended March 31, 2001 and 2000 are as follows (in thousands):

Life premiums net of reinsurance decreased 10.9% during the three months ended March 31, 2001. Life premiums collected, net of reinsurance, were $30.5 million for the three months ended March 31, 2001 compared with $34.2 million in the comparable periods of 2000. First year universal life premiums decreased 44.9% in the three months ended March 31, 2001 to $1.2 million. First year traditional life premiums decreased 71.1% in the three months ended March 31, 2001 to $419,000. The decline in new life sales reflects the impact of ratings downgrades and uncertainties surrounding the parent company's bankruptcy and recapitalization. In addition, the decision to cease new life sales at Security Life was announced during the third quarter of 1999 as a result of management's decision to reduce costs and concentrate its marketing efforts at Southwestern Life. The decrease in first year traditional life premiums is also due to a decrease in single premiums of $433,000 during the three month period of 2000. Single premiums can vary significantly from period to period. Universal life and traditional life renewal premiums decreased $1.6 million for the three months ended March 31, 2001, as compared with the comparable 2000 period. Annuity premiums of $614,000 for the three months ended March 31, 2001, were less than the premiums of $1.9 million in the comparable periods of 2000. The decrease in annuity premiums principally reflects the reinsurance transaction whereby Southwestern Life reinsured substantially all of their existing deferred annuity blocks of business effective May 1, 2000. Long-term care premiums increased $116,000 for the three months ended March 31, 2001 compared with the comparable 2000 period. Net Investment Income. Net investment income decreased 24.9% to $30.1 million for the three months ended March 31, 2001 compared with the 2000 comparable period. The decrease is primarily due to a decline in invested assets. Average invested assets declined by $547.6 million or 23.7% in the three months ended March 31, 2001 compared with the comparable 2000 period. The decrease in the 2001 period principally resulted from transfer of invested assets at the consummation of the reinsurance of substantially all of the deferred annuity business. Weighted average yields on invested assets were 6.8% and 6.9% for the three months ended March 31, 2001 and 2000, respectively. 22 Other Income. Other income was $1.6 million and $1.7 million for the three months ended March 31, 2001 and 2000, respectively. Included in other income for the three months ended March 31, 2001 was the amortization of deferred gain on the reinsurance of deferred annuities of $291,000. The most significant remaining item in other income is consideration received on supplemental contracts. Supplemental contract revenue is derived from annuity contracts that have reached the annuitization period. Consideration from supplemental contracts recognized as other income is offset by policyholder benefits, resulting in no effect on the Company's results of operations. Total Policyholder Benefits. The following table shows the components of total policyholder benefits for the three months ended March 31, 2001 and 2000 (in thousands):

Policyholder benefits decreased 3.4% to $50.1 million for the three months ended March 31, 2001. Death benefits increased $3.2 million or 14.0% for the three months ended March 31, 2001 compared with the comparable 2000 period. Death benefits may vary significantly from period to period. Other policy benefits and change in future policy benefits decreased $5.0 million or 17.3% during the three months ended March 31, 2001. The decrease is attributable to a decline in interest credited on deferred annuities which were reinsured effective May 1, 2000. The decrease is also attributable to a decline in interest credited to universal life policies as a result of fewer policies in force following an exchange program, surrender activity and the absence of new business production. The Company is continually evaluating actuarial assumptions associated with interest-sensitive life insurance contracts in which the determination of policy reserves is highly sensitive to assumptions such as lapse rates, investment earnings rates, mortality rates, and premium persistency. Policy reserves and account values associated with such contracts aggregated approximately $563.6 million as of March 31, 2001 and $555.0 million as of December 31, 2000. Should lapse rates experienced be less than the expected level of the lapses associated with such interest-sensitive blocks of business, the Company would be required to record additional reserves or reduce intangible assets, which could have a material impact on the Company's financial position and results of operations. For example, a decrease of 1% in the assumed lapse rate would increase policy reserves associated with such contracts by $13.9 million. Management continues to assess possible future actions that might mitigate the financial impact of these trends. Examples include, but are not limited to, the redetermination of non-guaranteed charges and/or benefits under the contracts, asset segmentation, and reinsurance. There are risks associated with management actions including potential sales disruption and the threat of litigation. Insurance Related Expenses. Insurance related expenses (including non-deferrable commissions, amortization of deferred policy acquisition costs and amortization of present value of insurance in force) decreased $5.8 million during the three months ended March 31, 2001 compared with the comparable 2000 period. The decrease partially reflects the decision by management to accelerate payment of approximately $2.2 million during the three months ended March 31, 2000 of accumulation bonuses owed to agents. The decrease is also attributable to additional ceding allowances principally from the reinsurance of deferred annuities. In addition, the amortization of present value of insurance in force was higher in the three months ended March 31, 2000 as a result of adjustments to amortization of present value of insurance in force at Security Life. Other Operating Expenses. For the three months ended March 31, 2001, other operating expenses (including general operating, overhead and policy maintenance) decreased $2.1 million from the comparable period in 2000. The decreases result principally from a reduction in expenses as a result of efforts to reduce costs. 23 BUSINESSES SOLD Businesses Sold include the operations of the Payroll Sales Division (sold February 4, 2000) and Marketing One (sold November 30, 2000) (see Note 1 of Notes to Consolidated Financial Statements). SELECTED FINANCIAL INFORMATION

Sales of the Payroll Sales Division and Marketing One were completed in February 2000 and November 2000, respectively. GENERAL CORPORATE Interest and Amortization of Deferred Debt Issuance Costs. Interest and amortization of deferred debt issuance costs decreased $3.7 million for the three months ended March 31, 2001, compared to the comparable 2000 period. The decrease is principally a result of principal repayments under PennCorp's bank credit facility. As a result of the sale of the Payroll Sales Division in 2000, PennCorp reduced its outstanding bank credit facility by $100.0 million. In addition, at emergence from the Chapter 11 proceedings, the Company repaid the remaining amounts outstanding under PennCorp's bank credit facility and its senior subordinated notes aggregating $179.6 million and established a new $95.0 million bank credit facility. At March 31, 2001, the Company had borrowed $84.3 million on the new bank credit facility at an effective interest rate of 10.4%. Corporate Expenses. Corporate expenses and other costs were $1.2 million and $14.5 million for the three months ended March 31, 2001 and 2000, respectively. Included in the three months ended March 31, 2000 was a break fee of $6.0 million that was accrued to be paid upon the termination of a contract to sell Southwestern Life and Security Life and increased legal, advisory and other costs associated with the sale of the Payroll Sales Division and the bankruptcy filing. Other decreases during the 2001 period reflect the effect of management's efforts subsequent to the recapitalization to substantially reduce corporate overhead. Net Investment Gains (Losses). The Company maintains an investment portfolio that focuses on maximizing investment income, without exposure to unwarranted interest rate and credit risk. The Company actively manages asset duration and liquidity risks. As a result of this strategy, the Company routinely sells positions in securities no longer meeting its criteria. The Company realized capital losses of $3.5 million and $2.8 million during the three months ended March 31, 2001 and 2000, respectively. The capital loss realized during the three months ended March 31, 2001 included a write- down of $3.2 million on one mortgage-backed security. Income Taxes (Benefits). For the three months ended March 31, 2001, the Company recognized income taxes (benefits) of $(3.1 million) and $838,000 on loss before taxes of $15.4 million and $27.2 million. The tax benefit for the three months ended March 31, 2001 results in an effective tax rate of 20.4%. This varies from the statutory rate of 35% principally as a result of the impairment associated with the agreement to sell the Company totaling $6.8 million. The unusual effective tax rates for the three months ended March 31, 2000 are substantially due to the non-deductibility of 24 the reduction in carrying value of the assets associated with Businesses Sold and a tax valuation allowance, primarily representing unrecoverable net operating loss and capital loss carryforwards. Item 3. Quantitative and Qualitative Disclosures About Market Risk. The Company analyzes and reviews the risks arising from market exposures of financial instruments. Downward movement in market interest rates during the first three months of 2001 resulted in a decline in the unrealized depreciation of the bond portfolio since the end of 2000. With respect to the Company's assets and liabilities portfolio, its exposure to market risk has not changed materially from its position at December 31, 2000. For disclosures about the Company's market risk exposures of financial instruments for its Retained Businesses, see the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 25 PART II -- OTHER INFORMATION Item 1. Legal Proceedings IN RE PENNCORP FINANCIAL GROUP, INC. SECURITIES LITIGATION During the third quarter of 1998, the first of ten class-action complaints was filed in the United States District Court for the Southern District of New York against PennCorp and certain of its then current or former directors and officers. None of the individual defendants are currently officers or directors of the Company. During a pre-trial conference on November 9, 1998, all parties agreed to consolidation of all of the actions and the court appointed lead plaintiffs on behalf of certain shareholders and noteholders. The court also approved the selection of three law firms as co-lead counsel for those shareholders and noteholders. A consolidated and amended complaint was filed on January 22, 1999, and a First Consolidated Amended Class Action Complaint naming, as defendants, PennCorp, David J. Stone, formerly a director and chairman and chief executive officer, and Steven W. Fickes, formerly a director and president and chief financial officer, was filed on March 15, 1999 (the "Complaint"). The Complaint alleged that defendants violated the Securities Exchange Act of 1934 by, among other things, issuing a series of materially false and misleading statements and omitting to state certain material facts regarding the Company's financial condition, including the value of certain of its assets, and by failing to timely disclose that the Company was under investigation by the Securities and Exchange Commission (the "SEC"). Plaintiffs sought to recover damages in unspecified amounts on behalf of themselves and all other purchasers of PennCorp's common stock and purchasers of PennCorp's subordinated notes during the period from February 8, 1996 through November 16, 1998. The parties entered into a Stipulation of Settlement dated May 24, 2000 providing for payment of $9.0 million of cash, plus interest accruing through the date of consummation of the settlement, in full and final settlement of all claims. Of that sum, $1.5 million was paid by PennCorp during the fourth quarter of 1999 into an interest-bearing escrow account established by plaintiffs' counsel and $7.5 million plus interest is to be paid by PennCorp's third party director and officer liability insurance carrier upon finalization of the settlement. The settlement received preliminary approval from the court in June 2000, was submitted to the court for final approval at a hearing set for that purpose in November 2000 and received final approval from the court in April 2001. Once the period for appeal of the court's final ruling has expired with no appeal having been made, the settlement will become final. PICOW, ET AL. V. SECURITY LIFE & TRUST INSURANCE COMPANY In May 1998, the North Carolina Attorney General's Office (the "NCAG") initiated an inquiry concerning certain life insurance products historically sold by Security Life and representations allegedly made by Security Life's agents and officers that non-smoker insureds would not be charged cost of insurance after the eighth policy year. The NCAG indicated that Security Life may be estopped to change its practice of not charging the cost of insurance for non-smoking policyholders after the eighth policy year on these policies because of certain representations made by agents and officers of Security Life. Although Security Life has not charged the cost of insurance for non-smoker policyholders after the eighth policy year on these policies, this practice is not guaranteed under the life insurance contracts, which specifically allow Security Life the right to change the cost of insurance rates in accordance with the parameters set forth in the contracts. Security Life responded to the NCAG's inquiry by denying that it is estopped from changing the cost of insurance rates on these policies based on the alleged representations, and is continuing to reserve its contractual rights to charge the cost of insurance on these policies in accordance with the parameters set forth in the life insurance contracts. In June 1998 the NCAG informed Security Life that it could not adjudicate this matter and left it mutually unresolved. In June 1999 the North Carolina Department of Insurance ("NCDOI") asked Security Life about the status of its practice of not charging cost of insurance after the eighth contract year for non-smokers on these same insurance products and requested to be informed if Security Life were to change that practice. Security Life responded to the NCDOI's inquiry by verifying that no decision had been made to date to change such practice and that such practice had not changed; and confirmed that the NCDOI would be notified in the event that such practice were to be changed. 26 During 1999 Security Life initiated a voluntary exchange program which enabled policyholders of such life insurance products to terminate their policies and, in exchange for the termination of the original policy and a release, obtain either (i) the refund of all premiums paid and other consideration or (ii) another Security Life life insurance product. On November 5, 1999, Security Life was served with a petition filed in state District Court in Dallas County, Texas, asserting a class action concerning such policies. The petition alleged that Security Life waived the right to charge cost of insurance after the eighth policy year on such non-smoker policies and to increase cost of insurance charges on such smoker policies. The petition alleged Security Life made these waivers through its marketing pieces and statements by its officers. The petition also alleged that not all of the facts were outlined in Security Life's communication to its policyholders describing the voluntary exchange program and therefore that program was deceptive. The petition asked for declaratory judgment concerning the rights of the plaintiffs and the class of policyholders of such policies and for attorney's fees. The petition also asked for, among other things, an injunction to prevent Security Life from charging cost of insurance on such non-smoker policies or increasing cost of insurance charges on such smoker policies after the eighth policy year, and requested the court to rule that the releases signed by any such policyholders under the voluntary exchange program were null and void and those policyholders who signed the releases be given the option of reinstating their policies. On August 30, 2000, the lawsuit was amended to add a claim that Security Life had improperly reduced the interest rates credited to accumulated values in such policies in an effort to offset losses incurred by Security Life on those policies. Security Life denied all of the allegations in the lawsuit. However, because of the substantial expense and uncertainty associated with class action litigation, Security Life entered into an agreement to settle the lawsuit dated September 7, 2000 pursuant to which (i) legal fees of approximately $1.3 million were to be paid to plaintiffs' counsel, (ii) certain changes were to be made to the terms of Concept 90 policies remaining in force or reinstated pursuant to the settlement, and (iii) certain optional in-kind relief (which included the option to seek reinstatement of Concept 90 policies no longer in force) was to be provided to the plaintiffs pursuant to elections made by individual plaintiffs within a specified time period and in a specified manner with respect to their current or former Concept 90 policies. The settlement was expressly subject to approval by the court. On September 8, 2000, the court granted preliminary approval of the settlement and ordered that notice be sent to all class members. The court granted final approval of the settlement at a hearing held on November 17, 2000, and the period for appeal of that ruling expired prior to the end of 2000. Thus, the settlement is now final and is being implemented. As of March 31, 2001, the Company had accrued $4.7 million of additional policy liabilities in connection with the settlement. The recorded liability reflects costs the Company considers likely to be incurred in connection with the settlement based only on known or reasonably estimable or determinable factors. Therefore, the ultimate cost to the Company may be greater than estimated and may have a material adverse effect on the Company's financial condition, results of operations and cash flows. SCHNOEBELEN V. UNITED LIFE & ANNUITY INSURANCE COMPANY, ET AL. Schnoebelen was an independent insurance broker whose marketing contract with United Life provided that he would be entitled to an annual commission based on the total accumulated value of annuity contracts in force for 13 months or more with United Life which were sold by Schnoebelen and his designees. Schnoebelen generally ceased writing new business with United Life in 1993, and his marketing contract was terminated in 1997. In 1998, Schnoebelen brought suit in the United States District Court for the Southern District of California in San Diego, California against United Life alleging that United Life had not paid him all of the commissions to which he was entitled and alleging various contractual and tortious causes of action. When PennCorp sold United Life in 1999, it and PLAIC indemnified the buyer against certain losses resulting from this lawsuit and retained the responsibility for defending it. The Company denied Schnoebelen's claims and vigorously defended the lawsuit. On July 20, 2000, a jury returned a verdict against United Life in the amount of approximately $1.125 million, composed of approximately $288,000 for past economic damages and approximately $838,000 for the net present value of future economic damages, upon which 27 judgment was entered by the court. The Company has established a liability reserve of approximately $1.125 million for this judgment. The Company filed post-judgment motions for relief which were denied by the trial court. The Company has appealed the judgment to the United States Court of Appeals for the Ninth Circuit, believes that it has valid grounds to obtain a reversal of the judgment in whole or in part on appeal, and intends to pursue its appeal vigorously. The Company also believes that a significant portion of the judgment may not be covered by the indemnity agreement and thus would be the responsibility of the buyer of United Life. MARTINDALE, ET AL. V. SOUTHWESTERN LIFE INSURANCE COMPANY, ET AL. A petition was filed on September 7, 2000 in state District Court located in Jasper, Texas asserting claims against Southwestern Life and its agent co-defendant on behalf of a purported class of persons who had an ownership interest in universal life insurance policies or interest-sensitive non-participating whole life insurance policies issued by Southwestern Life during the period from January 1, 1981 to the present and who were residents of the United States on the date(s) of issuance of such policy(ies). The petition alleges that Southwestern Life and/or its agent co-defendant committed, among other things, breach of contract, breach of fiduciary duty, breach of duty of good faith and fair dealing, negligent misrepresentation, unfair or deceptive acts, and fraud in connection with the sale of such policies, and seeks class certification, equitable relief and recovery of actual, statutory and punitive damages in unspecified amounts as well as costs and attorneys' fees. Both Southwestern Life and the agent co-defendant timely filed answers denying all allegations made in the original petition and contesting venue for the action, and Southwestern Life subsequently filed a notice of removal removing the case to the United States District Court for the Eastern District of Texas located in Beaumont, Texas. Only limited written discovery has been taken in this case to date. Southwestern Life denies any and all allegations made in the petition and intends to defend this case vigorously. There can be no assurance that Southwestern Life will be able to defend or resolve the issues presented in this action successfully or at all or that any verdict or other resolution would not have a material adverse effect on the Company's financial condition, results of operations or cash flows. DEMAND BY FRED ROSEN, MARIAN ROSEN AND NORMAN BOCK On or about February 19, 2001, Southwestern Life received a demand letter from attorneys representing Fred Rosen, Marian Rosen and Norman Bock. This demand letter asserts, on behalf of the named claimants individually and on behalf of all other persons who purchased a universal life insurance policy from Georgia International Life Insurance Company ("Georgia International"), that Georgia International and its successors in interest, including Southwestern Life, misrepresented the cost of such policies and concealed the fact that premiums on such policies would substantially increase over the life of same. Further, the demand letter alleges that Southwestern Life has assumed responsibility for these policies and demands that Southwestern Life place all members of the purported class of claimants in the same position they would have been in had the policies in question performed as originally represented. Litigation is threatened for, among other things, violation of the Texas Deceptive Trade Practices Act should Southwestern Life not provide the relief demanded. Southwestern Life is investigating the allegations contained in the demand letter. Southwestern Life believes that the allegations are without basis and intends to defend vigorously against the demand and any subsequent litigation arising therefrom. There can be no assurance that Southwestern Life will be able to defend or resolve the issues presented in this matter successfully or at all or that any verdict or other resolution would not have a material adverse effect on the Company's financial condition, results of operations or cash flows. PLASTER, TRUSTEE V. SOUTHWESTERN LIFE INSURANCE COMPANY, ET AL. Stephen R. Plaster, Trustee of the Robert W. Plaster Irrevocable Trust, as holder of three universal life insurance policies issued by Southwestern Life on the life of Robert W. Plaster having a combined death benefit of approximately $20.9 million, brought suit against Southwestern Life in state Circuit Court located in Camden County, Missouri on May 20, 1999, claiming, in essence, that Southwestern Life committed fraud by misrepresenting the terms, characteristics and performance of its universal life insurance policies at the time of purchase. The plaintiff specifically alleges that the 28 policies were represented to be "single premium" policies not requiring payment of any additional premiums, but that instead Southwestern Life has demanded payment of additional premiums in order to keep the policies in force. Plaintiff seeks recovery of all premiums paid to Southwestern Life to date (alleged to be approximately $2.9 million), all additional premiums demanded by Southwestern Life to date (alleged to be approximately $3.7 million), interest, punitive damages, legal fees and expenses, and reformation and specific performance of the policies. Southwestern Life's attempt to remove this case to federal court was unsuccessful and the case is now in the discovery stage. Southwestern Life denies plaintiff's claims and intends to defend this case vigorously. There can be no assurance that Southwestern Life will be able to defend or resolve the issues presented in this action successfully or at all or that any verdict or other resolution would not have a material adverse effect on the Company's financial condition, results of operations or cash flows. OTHER MATTERS The life insurance subsidiaries of the Company are parties to various other pending or threatened legal actions arising in the ordinary course of business, some of which include allegations of insufficient policy illustrations and agent misrepresentations. Although the outcome of such actions is not presently determinable, management does not believe that such matters, individually or in the aggregate, would have a material adverse effect on the Company's financial position or results of operations if resolved against the Company's subsidiaries. 29 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 11 Computation of loss per share (1) 15 Independent Auditors' Report (2) ------------------ (1) Filed herewith. (2) Included in Item 1 of Part I of this Form 10-Q. (b) Reports on Form 8-K On April 27, 2001, the Company filed a Current Report on Form 8-K reporting in Item 5 the execution of a definitive merger agreement pursuant to which Swiss Re Life & Health America Holding Company would acquire the Company through a cash tender offer and subsequent merger. 30 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized. SOUTHWESTERN LIFE HOLDINGS, INC. By:/s/David A. Commons ----------------------------------------- David A. Commons Senior Vice President, Chief Financial Officer and Treasurer (Authorized officer and principal accounting and financial officer of the Registrant) Date: May 14, 2001 31 INDEX TO EXHIBITS Exhibit Numbers 11 Computation of loss per share (1) 15 Independent Auditors' Report (2) ------------------ (1) Filed herewith. (2) Included in Item 1 of Part I of this Form 10-Q. 32 EXHIBIT 11 SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES COMPUTATION OF LOSS PER SHARE (In thousands) (Unaudited)

SOUTHWESTERN LIFE HOLDINGS INC 10-Q