<PAGE>   1
 
                       SECURITIES AND EXCHANGE COMMISSION
 
                             WASHINGTON, D.C. 20549
                               ------------------
 
                                   FORM 10-K
 
                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995                COMM. FILE NO. 0-8483
 
                        CENTRAL RESERVE LIFE CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                                 <C>
                    Ohio                                          34-1017531             
        ---------------------------                   ---------------------------------  
      (STATE OR OTHER JURISDICTION OF               I.R.S. EMPLOYER IDENTIFICATION NUMBER
       INCORPORATION OR ORGANIZATION)
                                                          
                                                          
                                                          
 
    17800 Royalton Road, Strongsville, Ohio                         44136
    ---------------------------------------                       ---------
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</TABLE>
 
                                 (216) 572-2400
                ------------------------------------------------
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
       Securities Registered Pursuant to Section 12(b) of the Act:  None
 
          Securities Registered Pursuant to Section 12(g) of the Act:
 
                        Common Shares, without par value
                     -------------------------------------
                                (TITLE OF CLASS)
 
     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
                                YES /X/  NO / /
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the 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.  [  ]
 
     State the aggregate market value of the voting stock held by non-affiliates
of the Registrant.
 
             $36,842,188 computed based on the closing price of the
                        Common Shares on March 18, 1996.
 
     The number of Common Shares, without par value, outstanding as of March 18,
1996:  4,037,500.
--------------------------------------------------------------------------------
 
                      DOCUMENTS INCORPORATED BY REFERENCE:
 
Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May
16, 1996, into Part III, Items 10, 11, 12, and 13.
--------------------------------------------------------------------------------
<PAGE>   2
 
                                     PART I
 
ITEM 1. BUSINESS
 
(a) GENERAL DEVELOPMENT OF BUSINESS
 
     Central Reserve Life Corporation (the "Registrant") was incorporated in
1964 as Citation Life Insurance Company under the laws of the State of Ohio. The
present name was adopted in 1976. Unless the context indicates otherwise, the
term "Company" as herein used will refer to Central Reserve Life Corporation
only.
 
     The Company is a holding company conducting its business through several
subsidiaries. More detailed information regarding the Company's subsidiaries is
set forth below.
 
  (1) INSURANCE OPERATIONS
 
     The Company owns 100% of Central Reserve Life Insurance Company
("Central"), which is its principal operating subsidiary.
 
     Central is an Ohio domiciled Life and Accident and Health insurance
company. Central was incorporated in 1963 and commenced business in 1965. The
Company acquired Central in 1973. As of December 31, 1995, Central was licensed
to transact business in Alabama, Arizona, Arkansas, Colorado, Delaware, Florida,
Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Michigan,
Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Carolina,
North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South
Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, Wisconsin and Wyoming
(35 states).
 
  (2) OTHER OPERATIONS
 
     In March 1983, the Company acquired Western Reserve Administrative
Services, Inc. ("Western"), an Ohio corporation which administers claims for
self-insured companies. Western also administers Central's Gemini product which
is a partially self-funded group plan for small companies.
 
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
 
     Effective December 31, 1995, the Company redefined its reporting segments,
merging the group life and group accident and health segments together, as well
as combining the life and annuity segments. These alignments fit the Company's
current operating organization and produce three segments: group life and
health; life insurance and annuities; and corporate and other.
 
     The following table presents the revenues and income (loss) on a GAAP basis
for the last three years attributable to the Company's industry segments. The
Company is not able to allocate investment assets or identifiable assets by
industry segment.
 
<TABLE>
<CAPTION>
                                                   1995             1994             1993
                                               ------------     ------------     ------------
<S>                                            <C>              <C>              <C>
Revenues:
  Group Life and Health......................  $237,257,385     $228,313,768     $212,837,282
  Life Insurance and Annuities...............     2,170,138        1,729,842        1,168,542
  Corporate and Other........................       381,571          157,601          805,603
                                               ------------     ------------     ------------
                                               $239,809,094     $230,201,211     $214,811,427
                                                ===========      ===========      ===========
Income (loss) before Federal income taxes:
  Group Life and Health......................  $  6,180,636     $  7,577,364     $  3,918,302
  Life Insurance and Annuities...............      (241,685)        (927,206)        (553,163)
  Corporate and Other........................         8,274          222,831         (260,600)
                                               ------------     ------------     ------------
                                               $  5,947,225     $  6,872,989     $  3,104,539
                                                ===========      ===========      ===========
</TABLE>
 
                                        1
<PAGE>   3
 
(c) NARRATIVE DESCRIPTION OF BUSINESS
 
     The operational aspects of the Company's business are primarily in Central;
therefore, this section will contain information that only pertains to Central.
 
  (1) BUSINESS AND PRINCIPAL PRODUCT
 
Products
 
     Central specializes in meeting the insurance needs of small to midsized
businesses and individuals. Among the products Central offers are life
insurance, annuities, accident and health insurance, long-term disability and
short-term major medical.
 
     Central's principal product is group insurance, which accounted for about
98% of its premiums in 1995. Approximately 2% of the group premiums were for
life insurance and 98% were for accident and health insurance.
 
     Central provides for its customers a comprehensive package of more than 25
managed care controls which help (a) keep insureds' out-of-pocket expenses down,
(b) ensure affordability of the plans, and (c) keep rates attractive at renewal
time. Among these managed care controls are hospital inpatient and outpatient
billing review, independent utilization management, physician code review,
hospital audit review, premium reduction renewal options, a hospice care
program, and the National Physician Data Bank Review(SM), a refinement of
Central's former reasonable and customary charge controls.
 
     Also included as a part of Central's managed care programs are Preferred
Provider Organization (PPO) health plans which are available to both group and
individuals. Through its PPO plans, Central is able to offer customers a network
of hospitals and physicians that provide medical services at discounted rates.
PPO networks which Central contracts with are situated in 16 states. For
customers located outside the existing PPO service areas, Central offers a
supplemental hospital program, through which it offers discounted hospital rates
by contracting with national PPO networks.
 
Marketing
 
     Central's products are marketed through the establishment of general
agencies in Midwestern, Southeastern, and Southwestern states. Regional sales
managers are responsible for recruiting and training the general agents. The
general agents are required to recruit agents in their area, conduct seminars
for the agents and train them in the benefits, underwriting requirements and
general conditions under which Central's insurance plans operate.
 
     Central supports the general agents in the recruiting and training of
agents through sales brochures and literature, assistance with seminars, and a
video training program. Central enhances and enables the general agents' and
writing agents' sales efforts through its Co-op Advertising Program, sales and
promotional literature and various sales contests.
 
     Internally, Central's organization supports the agents and emphasizes
customer service with a unique "team" approach. Organized around geographically
dedicated groups of employees, each team consists of several specialists for
each region.
 
Underwriting
 
     Central controls the quality of its group accident and health business by
maintaining specific underwriting standards and guidelines. Where not restricted
by state regulatory agencies, Central medically underwrites each individual by
requiring enrollment applications, medical health history questionnaires and, in
some cases, medical records.
 
     While members of each group are individually underwritten, Central takes
into account certain group characteristics, such as size, location and industry.
For a discussion of certain business risks, other than underwriting, see Note 1
to the consolidated financial statements.
 
                                        2
<PAGE>   4
 
  (2) INSURANCE VOLUME, POLICIES AND CERTIFICATES
 
     Although insurance volume (amount of life insurance) is generally a guide
to statistical information for most insurance companies, policies and
certificates in force are a more informative statistic for Central due to the
large percent of business generated in the group accident and health area.
Central requires each insured to carry group life insurance, but the average
requirement is only $10,000, accordingly, it is more informative to focus on the
number of certificates in force as opposed to volume of insurance.
 
     Following are tables reflecting statistical information on Central's
business.
 
<TABLE>
<CAPTION>
                                               1995               1994               1993
                                          --------------     --------------     --------------
<S>                                       <C>                <C>                <C>
LIFE INSURANCE VOLUME:
  Insurance Written.....................  $  467,588,000     $  459,830,000     $  517,829,000
  In force..............................  $1,175,823,000     $1,012,860,000     $1,016,513,000
  Reinsured.............................  $   50,751,000     $   41,424,000     $   13,608,000

GROUP POLICIES:
  Beginning of Year.....................          41,385             40,491             31,654
  Issued during Year....................          21,926             22,400             26,764
  Terminations..........................         (21,427)           (21,506)           (17,927)
                                          --------------     --------------     --------------
  End of Year...........................          41,884             41,385             40,491
                                           =============      =============      =============
GROUP CERTIFICATES:
  Beginning of Year.....................         102,959            105,536             96,175
  Issued during Year (new)..............          44,398             31,270             36,586
  Terminations (net of additions).......         (33,637)           (33,847)           (27,225)
                                          --------------     --------------     --------------
  End of Year...........................         113,720            102,959            105,536
                                           =============      =============      =============
</TABLE>
 
  (3) GEOGRAPHIC DISTRIBUTION
 
     The geographic distribution of direct premiums and annuity considerations
received (before reinsurance) by Central during 1995 is as follows:
 
<TABLE>
<CAPTION>
                                                            PERCENT OF
                  STATE                      AMOUNT           TOTAL
                  -----                   ------------     ------------
<S>                                       <C>              <C>
Ohio....................................  $ 79,153,784          33.5%
Indiana.................................    23,164,269           9.8
Arizona.................................    16,640,603           7.0
Michigan................................    14,519,531           6.1
Colorado................................    13,970,100           5.9
Tennessee...............................    12,008,647           5.1
Alabama.................................    11,999,140           5.1
Pennsylvania............................    11,531,221           4.9
Virginia................................     8,837,449           3.7
North Carolina..........................     8,560,752           3.6
West Virginia...........................     8,411,565           3.6
Missouri................................     8,202,333           3.5
Other...................................    19,330,053           8.2
                                          ------------        ------
          Total.........................  $236,329,447         100.0%
                                          ============        ======   
</TABLE>
 
  (4) AGENTS
 
     Central's insurance policies are sold by licensed agents and general agents
(brokers). Regional Sales Managers service the brokers. Central does not have
agents who sell exclusively for it. The licensed agents and brokers who produce
insurance business for Central generally have affiliations with and serve in a
similar capacity for one or more other companies which may be competitive with
Central, and a portion of their business may be written by such other companies.
Such agents and brokers are compensated by Central for business produced by them
on a cash commission basis at rates which are believed to be competitive with
those of other life insurance companies.
 
     As of December 31, 1995, Central had 81 brokers/general agents and 13,103
agents licensed.
 
                                        3
<PAGE>   5
 
  (5) INVESTMENTS
 
     An important earnings factor for Central, as well as all insurance
companies, is the income from the investment portfolio. The investment
objectives for insurance companies are designed to maximize yields, preserve
principal and maintain liquidity. Investments must comply with the insurance
laws of the state of domicile. These laws prescribe the kind, quality and
concentration of investments which may be made. Due to the restrictive nature of
these laws, there may be occasions when Central may be precluded from making
certain otherwise attractive investments. As of December 31, 1995, 99% of the
$80,652,527 invested in fixed maturities, was of investment grade quality.
Central and the Company do not invest in "junk" bonds or derivatives such as
futures, forwards, swaps, and option contracts, and other financial instruments
with similar characteristics. However, Central does invest in mortgage-backed
securities of which some are collateralized mortgage obligations (CMO's). These
investments, besides having a credit risk, also have the risk of prepayment,
during rising interest rates, and the risk of extension during a decline in
interest rates. Central constantly monitors these securities and has reduced its
exposure in CMO's in 1995 by selling certain securities and investing the
proceeds in short term maturities.
 
     The following tables show various aspects of the fixed maturities
investment portfolio of the Company as of December 31, 1995:
 
<TABLE>
<CAPTION>
                                                                           CARRYING
                                                                             VALUE        PERCENT
                                                                          -----------     --------
<S>                                                                       <C>             <C>
PORTFOLIO MATURITY
  Due in one year or less..........................................       $ 3,024,688         3.7%
  Due after one year through five years............................        17,185,552        21.0
  Due after five years through ten years...........................        26,567,888        32.5
  Due after ten years..............................................         3,231,876         3.9
                                                                          -----------
                                                                           50,010,004
  Mortgage-backed securities (5.2 average years)...................        31,817,051        38.9
                                                                          -----------     --------
                                                                          $81,827,055       100.0%
                                                                          ===========     ========
</TABLE>
 
<TABLE>
<CAPTION>
                                                                               CARRYING VALUE
                                         AMORTIZED         FAIR           ------------------------
                                           COST            VALUE            AMOUNT        PERCENT
                                        -----------     -----------       -----------     --------
<S>                                     <C>             <C>               <C>             <C>
PORTFOLIO DISTRIBUTION
  U.S. Treasury securities............  $17,995,752     $18,507,131       $18,452,254        22.6%
  U.S. Agencies.......................    2,498,844       2,506,085         2,506,085         3.1
  Obligations of states,
     municipalities and political
     subdivisions.....................    1,671,612       1,710,484         1,710,484         2.1
  Corporate bonds.....................   25,999,185      26,555,156        26,555,156        32.5
  Convertible bonds...................      379,189         342,525           342,525          .4
  Foreign bonds.......................      502,781         443,500           443,500          .5
  Mortgage-backed securities:
     Federal Home Loan Mortgage.......   13,591,275      13,841,978        13,834,195        16.9
     Federal National Mortgage........    8,234,519       8,391,211         8,377,382        10.2
     Other............................    9,779,370       9,611,923         9,605,474        11.7
                                        -----------     -----------       -----------     --------
                                        $80,652,527     $81,909,993       $81,827,055       100.0%
                                        ===========     ===========       ===========     ========
</TABLE>
 
                                        4
<PAGE>   6
 
<TABLE>
<CAPTION>
                                                                           AMORTIZED
                                                                             COST         PERCENT
                                                                          -----------     --------
<S>                                                                       <C>             <C>
QUALITY RATING
  Government.......................................................       $17,995,752        22.3%
  Government Agencies..............................................        24,324,639        30.1
  Aaa..............................................................         5,696,691         7.1
  Aa...............................................................         4,881,702         6.1
  A................................................................        18,568,502        23.0
  Baa..............................................................         8,935,448        11.1
  Ba...............................................................           104,920          .1
  NR...............................................................           144,873          .2
                                                                          -----------     --------
                                                                          $80,652,527       100.0%
                                                                          ===========     ========
</TABLE>
 
  (6) RESERVES
 
     Central is required by the insurance laws of the states in which it is
licensed to set up statutory reserves to meet policy obligations on its ordinary
life policies. These reserves are amounts which, with additions from premiums to
be received and with interest on such reserves compounded annually at certain
assumed rates, are calculated to be sufficient to meet policy obligations as
they mature. The various actuarial factors are determined from mortality tables
and interest rates in effect when the policy is issued. The ordinary life
policies currently issued by Central are valued on the Commissioner's Standard
Ordinary Table of Mortality of 1980 under the Commissioners' Reserve Valuation
Method and the Net Level Premium Method. The guaranteed interest rate on
policies currently being issued is 4.5%. On policies issued previously to the
current series, guaranteed interest rates were as specified in the various
policies and range from 2.5% to 6%. Under the Commissioners' Reserve Valuation
Method, the amount of reserve provided in the first policy year is less than
under the Net Level Premium Method, but in subsequent years greater additions to
reserves are required. To the extent that the rate of income realized on
investments is greater or less than the assumed interest rate used in the
calculation of reserves, reported earnings are increased or decreased, as the
case may be.
 
     The majority of Central's reserves and liabilities for claims, however, are
for its group accident and health business. Statutory and regulatory
requirements are generally less explicit for health insurance reserves and
liabilities than for ordinary life insurance. For its group accident and health
business Central establishes an Active Life Reserve plus a liability for due and
unpaid claims, claims in course of settlement, and incurred but unreported
claims as well as a reserve for the present value of amounts not yet due on
claims. These reserves and liabilities are dependent upon many factors, such as
economic and social conditions, inflation (overall and hospital costs
specifically), changes in doctrines of legal liability and damage awards for
pain and suffering. Therefore, the reserves and liabilities established are
necessarily based on extensive estimates and prior years' statistics.
 
  (7) REINSURANCE
 
     As is customary among most insurance companies, Central reinsures portions
of the life insurance policies it writes, thereby providing a greater
diversification of risk and minimizing Central's exposure on major risks. While
the effect of reinsurance is to lessen risks to the writing company, it may also
lower income. Although the ceding of reinsurance does not discharge the original
insurer from its primary liability to its policyholder, the insurance company
that assumes the coverage assumes the related liability and becomes the ultimate
source of payment. The maximum amount of exposure that Central retains on any
life is $50,000 on ordinary life and $25,000 on group life on ages through 70.
No retention is maintained over age 70. Maximum retention on impaired risks is
$10,000. Central also has reinsurance on group accident and health claims.
Effective January 1, 1995, Central's reinsurance treaty provides that all
individual claims in excess of $500,000 are 100% reinsured. The overall effect
of reinsurance is not material to the Company's financial condition. Reinsurance
treaties in effect at December 31, 1995 were with The Cologne Life Reinsurance
Company, Life ReAssurance Corporation of America and Business Men's Assurance
Company.
 
                                        5
<PAGE>   7
 
  (8) REGULATION
 
     Central, in common with other insurance companies operating in the states
in which it is licensed, is subject to regulation and supervision by state
insurance regulatory agencies. These regulatory bodies have broad administrative
powers relating to standards of solvency, which must be met on a continuing
basis, granting and revoking of licenses, licensing of agents, approval of
policy forms, maintenance of adequate reserves, form and content of financial
statements, types of investments permitted, issuance and sale of stock and other
matters pertaining to insurance. Central is required to file detailed annual
statements with the respective state regulatory bodies and is subject to
periodic examination by the regulators. The most recent regulatory examination
for Central was made as of December 31, 1992. The next examination is for the
three year period ending December 31, 1995 and will begin in March 1996.
 
  (9) COMPETITION
 
     The insurance business is highly competitive. There are over 1,600 legal
reserve life insurance companies in the United States, of which over 650 are
operating in Ohio, Central's principal state of operation. Many of these have
been in business for long periods of time, and have substantially greater
financial resources, larger selling organizations and broader diversification of
risks than Central. Many of these companies are mutual companies, whose earnings
inure to the benefit of their policyholders. However, the Company believes that
the policies and premium rates of Central are generally competitive with those
offered by other companies selling similar types of insurance in Ohio.
 
  (10) EMPLOYEES
 
     As of December 31, 1995 Central had 510 employees. The Registrant has no
employees of its own.
 
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
 
     The Company has no foreign operations. Its domestic operations during 1995
were primarily in Ohio.
 
ITEM 2. PROPERTIES
 
     The Company owns its home office building, located at 17800 Royalton Road,
Strongsville, Ohio. The building, which consists of 121,625 square feet of gross
floor area, was occupied in late 1990 by the Company and all its subsidiaries.
Central, the principal operating subsidiary, entered into a 15 year triple net
lease agreement with the Company for 100% of the space. All operations are
conducted in this building. As indicated in the Capital Resources section, of
Item 7, the Company is planning an addition to the existing building, but no
capital commitments have been made as of March 18, 1996.
 
ITEM 3. LEGAL PROCEEDINGS
 
     Other than ordinary routine litigation incidental to the business, neither
the Company nor any of its subsidiaries is party to any material pending legal
proceeding nor is any of their property the subject thereof.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders through the solicitation of
proxies or otherwise.
 
EXECUTIVE OFFICERS OF THE COMPANY AND CENTRAL
 
     Pursuant to Instruction 3 to Item 401(b) of Regulation S-K, the following
information is reported below.
 
                                        6
<PAGE>   8
 
     (a) The executive officers of the Company and Central are as follows:
 
<TABLE>
<CAPTION>
        NAME OF                                                                    OFFICER
   EXECUTIVE OFFICER         AGE                     POSITION                       SINCE
-----------------------    --------     -----------------------------------    ----------------
<S>                        <C>          <C>                                    <C>
Fred Lick, Jr.                64        Chairman of the Board,                       2/74
                                        Chief Executive Officer, President
                                        and Director
Frank W. Grimone              60        Executive Vice President,                    5/74
                                        Chief Financial Officer and
                                        Treasurer
Glen A. Laffoon               56        Executive Vice President and Chief          12/74
                                        Administrative Officer
</TABLE>
 
     The current one year terms of office of the executive officers listed above
began May 18, 1995, with their election to office by the Board of Directors at
its meeting following the annual meeting of shareholders held on such date.
There are no arrangements or understandings known to the Company between any
executive officer and any other person pursuant to which any officer was elected
to office. There is no family relationship between any director or executive
officer and any other director or executive officer of the Company.
 
                                        7
<PAGE>   9
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
 
     (a) The Company's Common Shares are traded on the Nasdaq Stock Market tier
of The Nasdaq Stock Market(SM) under the symbol CRLC. The following table shows
the representative high and low prices of the Common Shares for the calendar
quarters indicated. These prices were taken from the Nasdaq Monthly Statistical
Reports.
 
<TABLE>
<CAPTION>
                                    HIGH         LOW         DIVIDENDS
                                  --------     --------     ------------
<S>                              <C>           <C>          <C>
1995
     First Quarter............   $ 8 1/2       $7 1/8          $  .12
     Second Quarter...........     8 1/4        7 1/8             .12
     Third Quarter............    10            7 5/8             .12
     Fourth Quarter...........    10            8 3/4             .12
1994
     First Quarter............   $ 8           $7              $  .11
     Second Quarter...........     8 7/8        6 3/4             .11
     Third Quarter............     8 5/8        7 3/4             .11
     Fourth Quarter...........     8 1/2        7 7/8             .11
</TABLE>
 
     (b) As of March 18, 1996, there were 1,687 record holders of the Common
Shares.
 
     (c) The cash dividends paid by the Company in the past two years are
indicated in the table above. The Company's present source of income, other than
a nominal amount of investment income, is dividends and rent from Central.
Central, the main operating subsidiary, is subject to certain restrictions which
are contained in the Insurance Holding Company statute (Ohio Revised Code
3901.34) which prevent Central from paying the Company, without the approval of
the Ohio Superintendent of Insurance, any dividend from other than earned
surplus (as defined in the statute) or any dividend whose value, together with
the value of other dividends paid or distributions made within the preceding 12
months, exceeds the greater of (i) 10% of Central's surplus as regards
policyholders as of the December 31 next preceding the dividend payment, or (ii)
the net income of Central for the 12-month period ended the December 31 next
preceding the dividend payment. The Company believes it will be able to continue
paying dividends. Payment, however, will be determined by the Company's Board of
Directors based on an analysis of the Company's earnings, applicable regulatory
restrictions, the competitive climate in which the Company operates, and other
relevant considerations.
 
                                        8
<PAGE>   10
 
ITEM 6. SELECTED FINANCIAL DATA
 
<TABLE>
<CAPTION>
                               1995             1994             1993             1992             1991
                           ------------     ------------     ------------     ------------     ------------
<S>                        <C>              <C>              <C>              <C>              <C>
FOR THE YEAR:
Premiums.................  $233,168,529     $223,679,071     $208,730,840     $172,010,014     $140,982,753
Net Investment Income....     6,454,038        6,515,927        5,367,184        4,606,036        4,481,145
Gain (loss) on Sale of
  Investments............       149,527          (23,024)         707,741          514,679          165,416
Other Income.............        37,000           29,237            5,662            1,697           33,060
                           ------------     ------------     ------------     ------------     ------------
Total Revenues...........  $239,809,094     $230,201,211     $214,811,427     $177,132,426     $145,662,374
                            ===========      ===========      ===========      ===========      ===========
Income before Federal
  Income Taxes...........  $  5,947,225     $  6,872,989     $  3,104,539     $  3,489,636     $  4,217,522
Federal Income Taxes
  (Benefit)..............     1,442,618        2,059,228          714,190          (34,581)       1,118,577
Cumulative effect of
  Statement 109 as of
  January 1, 1991........            --               --               --               --          170,669
                           ------------     ------------     ------------     ------------     ------------
Net Income...............  $  4,504,607     $  4,813,761     $  2,390,349     $  3,524,217     $  2,928,276
                            ===========      ===========      ===========      ===========      ===========
Net Income Per Share.....         $1.07            $1.14            $ .57            $ .85            $ .71
Cash Dividends Per
  Share..................         $ .48            $ .44            $ .40            $ .36            $ .32
AT YEAR END:
Investments..............  $ 91,310,781     $ 83,230,323     $ 79,030,628     $ 59,305,499     $ 44,645,676
Total Assets.............  $117,329,039     $107,944,158     $103,613,338     $ 85,028,970     $ 69,921,639
Mortgage Note Payable....  $  8,599,067     $  8,685,754     $  8,764,615     $  8,836,356     $  8,904,022
Future Policy Benefits
  and Claims Payable.....  $ 65,317,522     $ 62,716,877     $ 56,148,504     $ 38,836,847     $ 28,931,749
Retained Earnings........  $ 27,030,102     $ 24,463,447     $ 21,422,301     $ 20,640,995     $ 18,553,097
Shareholders' Equity.....  $ 33,300,980     $ 24,530,732     $ 26,856,896     $ 26,015,001     $ 23,798,571
Equity Per Share:
  After net unrealized
     holding gain
     (loss)..............         $8.25            $6.08            $6.67            $6.49            $6.00
  Before net unrealized
     holding gain
     (loss)..............         $8.06            $7.42              N/A              N/A              N/A
</TABLE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATION
 
LIQUIDITY:
 
     Liquidity is the ability of an enterprise to generate adequate amounts of
cash to meet its financial commitments. The major needs for cash for the Company
are Central Reserve Life Insurance Company's (Central) ability to pay claims and
expenses as they come due. Central's primary sources of cash are premiums and
investment income. Central's payments consist of current claim payments to
insureds, managed care expenses, operating expenses such as salaries, employee
benefits, commissions, taxes, etc., and shareholder dividends payable to the
Company. By statute, the state regulatory authorities set minimum liquidity
standards to protect both policyholders and shareholders and limit the dividends
payable by Central to the Company. See Item 5.
 
     The majority of the Company's assets are in investments which were
$91,310,781, after a net unrealized holding gain of $1,174,528, before taxes,
(see below), or 78% of the total assets at December 31, 1995. Fixed
 
                                        9
<PAGE>   11
 
maturities are the primary investment of the Company and were $81,827,055 or 90%
of total investments at December 31, 1995. The Company is carrying fixed
maturities of $11,995,728 at amortized cost (held to maturity) and fixed
maturities of $69,831,327 at fair value (available for sale) at December 31,
1995. The Company does not hold any so-called "junk" bonds or what are generally
considered high-yield type securities, and 99% of the bonds are of investment
grade quality. In accordance with SFAS 115, the Company recorded an increase in
investments of $1,174,528 to reflect the reporting of investments classified as
available for sale at fair value (estimated market value) which was higher than
amortized cost. The credit is reflected in shareholders' equity as a "net
unrealized holding gain". In addition to the fixed maturities, the Company also
had $5.2 million in unrestricted cash and $9.4 million in short term investments
at December 31, 1995. Central also has an unused $1 million line of credit with
a major bank. During 1995, total assets increased about $9.3 million, or 9% to
$117,329,038, mainly due to a positive cash flow from operations during the year
from premiums, investment income and the $1,174,528 net unrealized holding gain.
 
     Liabilities accrued for future policy benefits and policy claims payable
increased 4%, or about $2.6 million to $65,317,522 primarily because of a
strengthening of reserves and increased premiums. Shareholders' equity increased
$8,770,248 after paying dividends of $1,937,952 and an increase of $6,202,243
for a net unrealized holding gain.
 
CAPITAL RESOURCES:
 
     The only long-term debt the Company has at December 31, 1995, is
$8,599,067, which is the principal amount payable under a loan secured by a
mortgage on the Company's home office building. The Company entered into the
loan agreement in 1990 for $9 million for a term of 10 years bearing interest at
9 1/2% per annum with a 30 year amortization period payment schedule. At the
same time, the Company also entered into a 15 year lease agreement with Central
for 100% of the space. The Company will use the monthly rental payments to pay,
among other expenses, the required mortgage loan payments. In 1995, the Company
started a search for a new computer system for claims and administration which
includes, among other things, billing, rating and commission functions. The
increase in the Company's business, new state mandates and new products have
created the need for this new system. A system of this nature is expected to
cost between $5 million and $7 million, including software, hardware and
implementation, over an estimated three year period. The Company estimates these
costs could be recovered over a 4 to 5 year period, through a combination of
payroll cost savings, expense controls and new production capacity. The Company
has not entered into any contract or commitment for the purchase of such a
computer system, although such an acquisition is planned for 1996. In light of
the Company's growth over the last several years, the Company is also planning
an addition to its existing headquarters building. The addition would provide
space for training, Managed Care and computer facilities. The preliminary plans
indicate an estimated cost between $6 million and $7 million however, the
Company has not made any capital commitment with respect to the addition as of
March 18, 1996.
 
RESULTS OF OPERATIONS:
 
  1995 compared to 1994
 
     During 1995, premiums increased 4% to $233,168,529 from $223,679,071 in
1994. The increase was primarily in the group life and health division which
accounted for about 98% of total premiums. Group certificates in force increased
about 10% to 113,720 in 1995 from 102,959 in 1994. Certificates issued for new
group policies were 44,398 in 1995, up 42%, from 31,270 in 1994. The increase
came primarily from a new product, the Professional Multi-Option (PMO), which
was introduced in late 1994 and targets small businesses with 2 to 25 lives.
Total lapses (net of additions/decreases) in 1995 were 33,637, down slightly
from 33,847 in 1994. Overall, the lapse ratio was in line with the Company's
expectations and was lower than the industry average for small group business.
 
     Not included in premiums, for generally accepted accounting principles
(GAAP) purposes, were annuity considerations in the amounts of $3,498,442 and
$3,492,402 for 1995 and 1994.
 
     Net investment income decreased about 1% to $6,454,038 in 1995 from
$6,515,927 in 1994. The decrease was primarily due to the overall decrease in
interest rates during 1995. Also, during 1995 the Company
 
                                       10
<PAGE>   12
 
reduced its holdings in mortgage-backed securities and convertible bonds. The
proceeds were invested in short term government type securities at lower
interest rates, but produced a more liquid and stable position.
 
     Benefits and claims incurred expenses increased 7% in 1995 to $165,472,603
from $155,257,560 in 1994. This compares to a 6% increase in 1994 over 1993. The
incurred loss ratio was 71% for 1995 and 69.4% for 1994. The major increase in
claims was during the last quarter, primarily the last month. The loss ratio
increased to 73.6% for the fourth quarter of 1995 compared to 67.7% in the same
quarter in 1994. During the fourth quarter the Company experienced, as many
small group carriers did, an increase in claims due to utilization, state
mandates and accidents. This trend continued into January 1996. In response, the
Company has increased premium rates, not renewed certain blocks of business and
is updating several managed care controls.
 
     Commissions decreased slightly to $33,411,203 in 1995 from $33,573,278 in
1994 and were 14.3% of premiums in 1995 compared to 15% in 1994. The decrease is
attributed to a lower commission rate for the new product (PMO) sold in 1995 and
the growth in renewal premiums which carry a lower commission rate. Expenses,
such as salaries, premium taxes, fees, etc., increased, in total, 1% in 1995
over 1994. However, as a percentage of premiums the ratio was lower in 1995,
15.0% compared to 15.4% in 1994.
 
     Net income tax as a percentage of pretax income was 24% in 1995 compared to
30% in 1994. The current portion of the tax decreased to $1,419,026 in 1995 from
$1,535,817 in 1994. The main reason for the decrease was the decrease in pretax
income. The decrease in the deferred tax expense is primarily due to the change
in the valuation allowance due to an unrealized holding gain in 1995 compared to
an unrealized holding loss in 1994.
 
     Net income for 1995 was $4,504,607 or $1.07 per share compared to
$4,813,761 or $1.14 per share in 1994. The decrease is primarily due to the
increase in the benefit loss ratio to 71% from 69.4% and a 1% decrease in
investment income for the year. Because group accident and health represents 98%
of Central's business, a higher loss ratio from this division has a negative
effect on the Company's earnings. The statutory loss ratio in the group accident
and health division increased to 69.4% in 1995 from 67.9% in 1994.
 
     The Federal income tax returns for the Company and its subsidiaries have
been examined by the Internal Revenue Service (IRS) for 1991 and 1992. During
the third quarter of 1994, the IRS issued a proposal for adjustments to the
Company's returns for 1991 and 1992. The proposed deficiencies are approximately
$2.4 million of which $215,303, pertaining to some non deductible expenses and
certain assets expensed and not capitalized, was agreed to and paid in 1994. The
balance primarily deals with whether or not the Company's subsidiary, Central,
qualified as a life company, for tax purposes. The Company is vigorously
protesting the proposed deficiency and management believes existing law supports
the Company's position. Therefore, the Company has not recorded a liability for
the difference.
 
     If the IRS were to pursue litigation and prevail in its position that
Central no longer qualifies as a life company for tax purposes, Federal income
taxes would increase in the future. Presently, as a small life company, Central
is permitted, among other things, a deduction from the first $3 million of
income of 60% or $1.8 million. As Central's income increases above $3 million,
the special deduction is reduced proportionately. Besides relying on favorable
existing case law, Central may have, under certain circumstances, the ability to
change and market policies that could insure its qualification as a life company
for tax purposes in the future, if the need arises.
 
RESULTS OF OPERATIONS:
 
  1994 compared to 1993
 
     During 1994, premiums increased 7% to $223,679,071 from $208,730,840 in
1993. The increase was primarily in the group division which accounted for about
99% of total premiums. Group certificates in force decreased to 102,959 in 1994
from 105,536 in 1993. Certificates issued for new group policies were 31,270 in
1994, down from 36,586 in 1993. Management believes that the health care reform
bill activity in 1994 caused many policyholders to remain with their existing
coverage and others not to seek new coverage. Also certain new state mandates
curtailed some sales in some states, until the Company made certain adjustments
to comply with those mandates. Total lapses (net of additions/decreases) in 1994
were 33,847 compared to
 
                                       11
<PAGE>   13
 
27,225 in 1993. The increase is due to a combination of certain groups that were
not renewed and the continued higher lapses in an association type product which
is being used as a short term policy.
 
     Not included in premiums, for generally accepted accounting principles
(GAAP) purposes, are annuity considerations in the amounts of $3,492,402 and
$8,728,902 for 1994 and 1993. The decrease in annuity considerations was
primarily due to increasing interest rates available in other investments.
 
     Net investment income increased 21% to $6,515,927 from $5,367,184 in 1993.
Favorable cash flows in 1994 and 1993 aided in the increase in investments,
primarily fixed maturities which generated the majority of the investment
income. Offsetting the effect of the increase in investments was the effect of
lower interest rates during the first half of 1994.
 
     Benefits and claims incurred expenses increased 6% in 1994 to $155,257,560
from $146,017,738 in 1993. This compares to a 28% increase in 1993 over 1992.
The incurred loss ratio was 69.4% in 1994 and 69.9% in 1993. The improvement can
be attributed to managed care cost controls, certain rate adjustments, reduction
in large claims and an overall moderation in the medical inflation rate for
1994.
 
     Commissions increased 5% to $33,573,278 in 1994 from $32,120,808 in 1993
and were 15% of premiums in 1994 compared to 15.4% in 1993. The decrease in the
ratio is primarily due to the increase in renewal premiums, which carry a lower
commission than new business. Expenses increased 3% in 1994 over 1993 and were
15.4% of premiums compared to 16.1% in 1993.
 
     Net income tax expense as a percentage of pretax income was 30% in 1994
compared to 23% in 1993. The current portion of the tax, increased to $1,534,817
from $769,833 in 1993. The main reason for the increase in current taxes is the
increase in pretax income. The increase in the deferred tax expense is primarily
due to the increase in the valuation allowance. Since the Company's recovery
rates for prior years were lower than current tax rates a higher valuation
allowance is required. Also in the valuation allowance is $1,845,199 recorded
directly to shareholders' equity for the net unrealized holding loss, offsetting
the same amount shown as a deferred tax asset.
 
     Net income for 1994 was $4,813,761 or $1.14 per share compared to
$2,390,349 or $.57 per share in 1993. The increase is primarily due to a 21%
increase in investment income, slightly lower benefit loss ratio of 69.4%
compared to 69.9% in 1993 and a decrease in the ratio of operating expenses to
premiums from 16.1% to 15.4%. Because group accident and health represents 97%
of Central's business, investment income and a lower loss ratio from this
division has a positive effect on the Company's earnings. Along with an increase
in investment income in the group accident and health division, the statutory
loss ratio decreased to 67.9% in 1994 from 69.5% in 1993.
 
IMPACT OF INFLATION:
 
     Inflation rates impact the Company's financial condition and operating
results in several areas. Changes in inflation rates impact the market value of
the investment portfolio and yields on new investments.
 
     Inflation has had an impact on claim costs and overall operating costs and
although it has been lower in the last few years, hospital and medical costs
have still increased at a higher rate than general inflation. While to a certain
extent these increased costs are offset by interest rates (investment income),
hospital charges increased, while the rate of income from investments decreased.
The Company will continue to establish premium rates in accordance with trends
in hospital and medical costs along with concentrating on various cost
containment programs.
 
LEGISLATIVE DEVELOPMENTS:
 
     It appears that no major Federal health care reform is scheduled to take
effect in 1996. However, incremental changes such as portability and limited
pre-existing conditions, are probable and even more likely to be enacted on the
state level. The Company cannot predict the ultimate timing or effect of any
legislative efforts, and no assurance can be given that any such efforts will
not have a material adverse effect on the Company's business and results of
operations.
 
                                       12
<PAGE>   14
 
NEW ACCOUNTING STANDARDS:
 
     In December 1991, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures about
Fair Value of Financial Instruments". The statement requires disclosure about
the fair value of financial instruments and was adopted by the Company in 1995.
 
     In October 1994, the FASB issued SFAS 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments". This statement
requires disclosure about derivative financial instruments and amends existing
requirements of SFAS Nos. 105 and 107. SFAS 119 is effective for financial
statements issued for fiscal years ending after December 15, 1995, for entities
with less than $150 million in total assets. However, as of December 31, 1995,
the Company does not own nor has it purchased any derivatives as defined in SFAS
119.
 
     In 1995, the Company adopted SFAS No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The focus of SFAS 106 is
principally on postretirement health care benefits and the effect on the
consolidated financial statements is discussed in the notes to the consolidated
financial statements.
 
     In March 1995, FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS 121
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. The statement is effective for fiscal years
beginning after December 15, 1995. Previously issued consolidated financial
statements will not be restated. The Company will adopt SFAS 121 in 1996 and the
impact on the consolidated financial statements of adopting SFAS 121 is not
expected to be material.
 
     In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". The Company did not grant any of its shares of stock or other
equity instruments to employees in 1995 and therefore has not adopted SFAS 123
as of December 31, 1995.
 
                                       13
<PAGE>   15
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
 
                        CENTRAL RESERVE LIFE CORPORATION
 
                                     INDEX
 
<TABLE>
<CAPTION>
                                                                                   PAGE
                                                                                   ----
          <S>                                                             <C>
          Independent Auditors' Report....................................          15
          Consolidated Balance Sheets as of December 31, 1995 and 1994....          16
          Consolidated Statements of Income for the years ended
            December 31, 1995, 1994 and 1993..............................          17
          Consolidated Statements of Shareholders' Equity for the years
            ended December 31, 1995, 1994 and 1993........................          18
          Consolidated Statements of Cash Flows
            for the years ended December 31, 1995, 1994 and 1993..........          19
          Notes to Consolidated Financial Statements for the years
            ended December 31, 1995, 1994 and 1993........................          20
          Schedule I -- Summary of Investments -- Other than Investments
            in Related Parties............................................          35
          Schedule II -- Condensed Financial Information of
            Registrant -- Central Reserve Life Corporation (Parent
            Only).........................................................          36
          Schedule III -- Supplementary Insurance Information.............          39
          Schedule IV -- Reinsurance......................................          40
</TABLE>
 
                                       14
<PAGE>   16
 
                          INDEPENDENT AUDITORS' REPORT
 
The Board of Directors and Shareholders
Central Reserve Life Corporation:
 
     We have audited the consolidated financial statements of Central Reserve
Life Corporation and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated 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.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Central
Reserve Life Corporation and subsidiaries as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
 
                                                  KPMG Peat Marwick LLP
 
Columbus, Ohio
February 28, 1996
 
                                       15
<PAGE>   17
 
               CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                           DECEMBER 31, 1995 AND 1994
================================================================================
 
<TABLE>
<CAPTION>
                                                                     1995             1994
                                                                 ------------     ------------
<S>                                                              <C>              <C>
ASSETS
Investments (Note 2):
  Fixed maturities held to maturity, at amortized cost.......    $ 11,995,728     $ 13,468,956
  Fixed maturities available for sale, at fair value.........      69,831,327       67,409,309
                                                                 ------------     ------------
            Total fixed maturities...........................      81,827,055       80,878,265
  Policy loans...............................................         106,441          101,146
  Short-term investments, at cost which approximate market...       9,377,285        2,250,912
                                                                 ------------     ------------
            Total investments................................      91,310,781       83,230,323
Cash (Note 2)................................................       9,102,020        7,654,487
Accrued investment income....................................         973,380        1,315,937
Premiums receivable..........................................       1,853,105        1,656,225
Property and equipment, at cost, net of accumulated
  depreciation of $6,660,708 and $5,642,595, respectively
  (Note 1)...................................................      11,635,993       12,053,737
Deferred federal income taxes (Note 5).......................         512,350          935,282
Federal income taxes recoverable.............................         326,380          245,406
Other assets.................................................       1,615,030          852,761
                                                                 ------------     ------------
                                                                 $117,329,039     $107,944,158
                                                                  ===========      ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
  Future policy benefits, losses and claims..................    $ 30,192,055     $ 27,496,885
  Other policy claims and benefits payable (Note 3)..........      35,125,467       35,219,992
  Other policyholders' funds.................................       5,222,968        5,751,966
  Other liabilities..........................................       4,888,502        6,258,829
                                                                 ------------     ------------
                                                                   75,428,992       74,727,672
Mortgage note payable (Note 6)...............................       8,599,067        8,685,754
                                                                 ------------     ------------
            Total liabilities................................      84,028,059       83,413,426
                                                                 ------------     ------------
Commitments and contingencies (Notes 5, 7, 8 and 9)
Shareholders' equity: (Notes 4 and 10)
  Non-Voting Preferred shares, no par value, authorized
     2,000,000 none issued...................................              --               --
  Common shares, no par value, stated value $.50, authorized
     10,000,000, issued and outstanding 4,037,500 in 1995 and
     4,037,300 in 1994 (322,770 are reserved for options)....       2,018,750        2,018,650
  Additional paid-in capital.................................       3,476,940        3,475,690
  Net unrealized holding gain (loss).........................         775,188       (5,427,055)
  Retained earnings..........................................      27,030,102       24,463,447
                                                                 ------------     ------------
            Total shareholders' equity.......................      33,300,980       24,530,732
                                                                 ------------     ------------
                                                                 $117,329,039     $107,944,158
                                                                  ===========      ===========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       16
<PAGE>   18
 
               CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
 
                       CONSOLIDATED STATEMENTS OF INCOME
 
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
================================================================================
 
<TABLE>
<CAPTION>
                                                         1995             1994             1993
                                                     ------------     ------------     ------------
<S>                                                  <C>              <C>              <C>
Revenues:
  Premiums.......................................    $233,168,529     $223,679,071     $208,730,840
  Net investment income (Note 2).................       6,454,038        6,515,927        5,367,184
  Net realized gains (losses) (Note 2)...........         149,527          (23,024)         707,741
  Other income...................................          37,000           29,237            5,662
                                                     ------------     ------------     ------------
                                                      239,809,094      230,201,211      214,811,427
                                                     ------------     ------------     ------------
Benefits, losses and expenses:
  Benefits, claims, losses and settlement
     expenses....................................     165,472,603      155,257,560      146,017,738
  Commissions....................................      33,411,203       33,573,278       32,120,808
  Salaries and benefits..........................      15,066,432       14,387,949       14,025,177
  Taxes, licenses and fees.......................       5,541,570        5,296,613        5,168,061
  Other operating expenses.......................      13,548,624       13,983,649       13,538,631
  Interest expense...............................         821,437          829,173          836,473
                                                     ------------     ------------     ------------
                                                      233,861,869      223,328,222      211,706,888
                                                     ------------     ------------     ------------
Income before Federal income taxes...............       5,947,225        6,872,989        3,104,539
Federal income tax expense (Note 5)..............       1,442,618        2,059,228          714,190
                                                     ------------     ------------     ------------
Net income (Note 4)..............................    $  4,504,607     $  4,813,761     $  2,390,349
                                                      ===========      ===========      ===========
Net income per share (Note 1)....................         $  1.07          $  1.14          $   .57
                                                          =======          =======          =======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       17
<PAGE>   19
 
               CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
================================================================================
 
<TABLE>
<CAPTION>
                                                                                   NET UN-
                                                                                  REALIZED
                                                                 ADDITIONAL         GAIN
                                                   COMMON          PAID-IN        (LOSS) ON       RETAINED
                                                   SHARES          CAPITAL       INVESTMENTS      EARNINGS
                                                 -----------     -----------     -----------     -----------
<S>                                              <C>             <C>             <C>             <C>
Balance, December 31, 1992...................    $ 2,004,101     $ 3,369,905     $        --     $20,640,995
  Cash dividends ($.40 per share)............             --              --              --      (1,609,043)
  Net income.................................             --              --              --       2,390,349
  Exercise of stock options (Note 10)........          8,090          52,499              --              --
                                                 -----------     -----------     -----------     -----------
Balance, December 31, 1993...................      2,012,191       3,422,404              --      21,422,301
  Cash dividends ($.44 per share)............             --              --              --      (1,772,615)
  Net income.................................             --              --              --       4,813,761
  Exercise of stock options (Note 10)........          6,459          53,286              --              --
  Adjustment for change in accounting for
     fixed maturities at January 1, 1994, net
     of deferred tax of $601,224.............             --              --       1,167,080              --
  Change in net unrealized holding loss, net
     of deferred tax benefit of $601,224.....             --              --      (6,594,135)             --
                                                 -----------     -----------     -----------     -----------
Balance, December 31, 1994...................      2,018,650       3,475,690      (5,427,055)     24,463,447
  Cash dividends ($.48 per share)............             --              --              --      (1,937,952)
  Net income.................................             --              --              --       4,504,607
  Exercise of stock options (Note 10)........            100           1,250              --              --
  Change in net unrealized holding gain, net
     of deferred tax liability of $399,340...             --              --       6,202,243              --
                                                 -----------     -----------     -----------     -----------
Balance, December 31, 1995...................    $ 2,018,750     $ 3,476,940     $   775,188     $27,030,102
                                                  ==========      ==========      ==========      ==========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       18
<PAGE>   20
 
               CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                  YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
================================================================================
 
<TABLE>
<CAPTION>
                                                        1995            1994            1993
                                                     -----------     -----------     -----------
<S>                                                  <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income.....................................    $ 4,504,607     $ 4,813,761     $ 2,390,349
  Adjustments to reconcile net income to cash
     provided by operating activities:
       Depreciation and amortization.............      1,111,718         974,410       1,168,324
       Net realized (gains) losses...............       (149,527)         23,024        (707,741)
       Deferred federal income taxes.............         23,592         524,411         (55,693)
       Changes in assets and liabilities:
          Premiums receivable....................       (196,880)        253,071         715,915
          Federal income taxes recoverable.......        (80,974)        100,044         769,883
          Accrued investment income..............        342,557        (306,827)       (478,481)
          Other assets...........................       (762,269)        (68,187)        646,701
          Future policy benefits, claims and
            funds payable........................       (558,269)      3,421,129       7,519,405
          Other liabilities......................     (1,370,327)        385,691         631,010
                                                     -----------     -----------     -----------
          Net cash provided by operating
            activities...........................      2,864,228      10,120,527      12,599,672
                                                     -----------     -----------     -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Net additions to furniture and equipment.......       (738,537)       (461,773)       (361,576)
  Net proceeds (purchase) of investments --
     short-term..................................     (7,126,373)      4,249,097        (500,009)
  Purchase of investments -- fixed maturities
     held to maturity............................             --      (1,354,688)             --
  Purchase of investments -- fixed maturities
     available for sale..........................    (15,995,248)    (28,293,915)             --
  Purchase of investments........................             --              --     (40,866,696)
  Policy loans...................................         (5,295)         (9,168)         (2,648)
  Proceeds from sale, call or maturity of fixed
     maturities available for sale...............     20,368,903      12,746,906       5,693,954
  Proceeds from calls/maturity of fixed
     maturities held to maturity.................      1,473,228       3,451,020      16,918,316
                                                     -----------     -----------     -----------
          Net cash used in investing
            activities...........................     (2,023,322)     (9,672,521)    (19,118,659)
                                                     -----------     -----------     -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net increase in annuity contract liabilities...      2,629,916       2,929,025       8,993,293
  Principal payments on long-term debt...........        (86,687)        (78,861)        (71,741)
  Proceeds from exercise of stock options........          1,350          59,745          60,589
  Dividends......................................     (1,937,952)     (1,772,615)     (1,609,043)
                                                     -----------     -----------     -----------
          Net cash provided by financing
            activities...........................        606,627       1,137,294       7,373,098
                                                     -----------     -----------     -----------
          Net increase in cash...................      1,447,533       1,585,300         854,111
Cash at beginning of year........................      7,654,487       6,069,187       5,215,076
                                                     -----------     -----------     -----------
Cash at end of year..............................    $ 9,102,020     $ 7,654,487     $ 6,069,187
                                                      ==========      ==========      ==========
Supplemental disclosures of cash flow
  information:
  Cash paid during the year for interest.........    $   821,437     $   829,173     $   836,473
  Cash paid during the year for income taxes.....    $ 1,500,000     $ 1,434,773     $        --
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       19
<PAGE>   21
 
               CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                        DECEMBER 31, 1995, 1994 AND 1993
================================================================================
 
NOTE 1 -- SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
 
     The significant accounting policies followed by the Company that materially
affect financial reporting are summarized below. The accompanying financial
statements have been prepared in accordance with generally accepted accounting
principles (GAAP) which differ from statutory accounting practices prescribed or
permitted by regulatory authorities (see Note 4).
 
  (a) CONSOLIDATION POLICY
 
     The consolidated financial statements include the accounts of Central
Reserve Life Corporation (Company) and its wholly-owned subsidiaries, Central
Reserve Life Insurance Company (Central), Western Reserve Administrative
Services, Inc. (Western) and CRL Asset Management Corporation (AMC). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
 
  (b) DESCRIPTION OF BUSINESS
 
     Central is a life and accident and health insurer licensed in 35 states.
Central principally sells group insurance, however, it offers a full range of
life, health, and annuity products through general agents and independent
writing agents and is subject to competition from other insurers throughout the
United States. Central is subject to regulation by the insurance department of
states in which it is licensed, and undergoes periodic examinations by those
departments.
 
     The following is a description of certain risks facing life and accident
and health insurers and how Central mitigates those risks:
 
          Legal/Regulatory Risk is the risk that, changes in the legal or
     regulatory environment in which an insurer operates, will create additional
     expenses not anticipated by the insurer in pricing its products. That is,
     regulatory initiatives designed to reduce insurer profits or otherwise
     affecting the industry in which the insurer operates, new legal theories or
     insurance company insolvencies through guaranty fund assessments, may
     create costs for the insurer beyond those recorded in the financial
     statements. Central attempts to mitigate this risk by offering a wide range
     of products and by operating in 35 states, thus reducing its exposure to
     any single product or non-Federal jurisdiction, and also by employing
     underwriting practices which identify and minimize the adverse impact of
     this risk.
 
          It appears that no major Federal health care reform will take place in
     1996. However, incremental changes are more probable than major changes and
     it is more likely this will be on the state level than Federal. The Federal
     government has already enacted a series of health care mandates which has
     resulted in cost shifting from the Federal government to state government
     and the private sector. The Company cannot predict the ultimate timing or
     effect of such legislative efforts, and no assurance can be given that any
     such efforts will not have a material adverse effect on the Company's
     business and results of operations.
 
          Credit Risk is the risk that issuers of securities owned by Central
     will default or that other parties, including reinsurers that have
     obligations to Central, will not pay or perform. Central attempts to
     minimize this risk by adhering to a conservative investment strategy and by
     maintaining sound reinsurance and credit and collection policies.
 
          Interest Rate Risk is the risk that interest rates will change and
     cause a decrease in the value of an insurer's investments. This change in
     rates may cause certain interest-sensitive products to become uncompetitive
     or may cause disintermediation. Central attempts to mitigate this risk by
     charging fees for non-conformance with certain policy provisions and/or by
     attempting to match the maturity schedule of
 
                                       20
<PAGE>   22
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1995, 1994 AND 1993
================================================================================
 
     its assets with the expected payouts of its liabilities. To the extent that
     liabilities come due more quickly than assets mature, an insurer would have
     to sell assets prior to maturity and recognize a gain or loss.
 
     In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and revenues and expenses for the reporting period.
Actual results could differ significantly from those estimates.
 
     The estimates susceptible to significant change are those used in
determining the liability for future policy benefits, losses and claims.
Although some variability is inherent in these estimates, management believes
the amounts provided are adequate.
 
  (c) INVESTMENTS
 
     Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities". SFAS 115 requires that investments in all debt
securities and those equity securities with readily determinable market values
be classified into one of three categories: held to maturity, trading or
available for sale. Classification of investments is based upon management's
current intent. Debt securities which management has a positive intent and
ability to hold until maturity are classified as securities held to maturity and
are carried at amortized cost. Unrealized holding gains and losses on securities
held to maturity are not reflected in the consolidated financial statements.
Debt and equity securities that are purchased for short-term resale are
classified as trading securities. Trading securities are carried at market
value, with unrealized holding gains and losses included in earnings. All other
debt and equity securities not included in the above two categories are
classified as securities available for sale. Securities available for sale are
carried at market value, with unrealized holding gains and losses reported as a
separate component of shareholders' equity, net of tax. At December 31, 1995 the
Company did not have any investments classified as trading securities.
 
  (d) DEFERRED POLICY ACQUISITION COSTS
 
     Certain costs, principally commissions, which vary with and are directly
related to the production of ordinary life business, have been deferred. The
deferred costs are being amortized through the use of factors over the benefit
period of the related policies. These factors were developed using assumptions
which are consistent with those used in setting rates. Due to the nature of the
business and its persistency experience, the Company does not defer acquisition
costs for Central's group business. Deferred policy acquisition costs at
December 31, 1995 and 1994 were $209,760 and $149,926, respectively. The net
amounts amortized to income were $59,834 in 1995, $60,116 in 1994 and $16,849 in
1993.
 
  (e) PROPERTY AND EQUIPMENT
 
     Included in the $11.6 million for property and equipment is approximately
$10 million (net of depreciation) for the home office, of which $1.4 million is
for land. Depreciation for the building is primarily over 31.5 years, except for
certain components which will be over 15 years. The straight-line method is
used.
 
     Other property and equipment, primarily furniture, fixtures and data
processing equipment, is carried at cost less allowances for depreciation and
amortization. Depreciation is computed on the straight-line method over the
estimated useful lives of the equipment, principally five and seven years.
 
  (f) POLICY RESERVES
   
     Liabilities for future policy benefits on ordinary life insurance have
generally been provided on a net-level premium method based upon estimates of
future investment yield, mortality and withdrawals using Central's
 
                                       21
<PAGE>   23
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1995, 1994 AND 1993
================================================================================
 
experience and actuarial judgement with an allowance for possible unfavorable
deviation from the expected experience. The Company amortizes deferred costs of
all ordinary life policies for Central over the benefit period. The liability
for future policy benefit reserves has been computed using the following
assumptions:
 
     (1) The guaranteed interest rate on policies currently being issued is
         4.5%.
 
     (2) Estimates of future mortality and withdrawals are based on experience
         and established industry tables.
 
  (g) LIFE AND ACCIDENT AND HEALTH CLAIM RESERVES
 
     The liabilities for unpaid accident and health and death claims are
estimated principally based upon past experience for pending, incurred but not
reported, and reopened claims. The liability includes a provision for the
estimated cost of investigating and settling the claim liability. The liability
is particularly sensitive to recent claims frequency and severity experience of
Central. Management believes the liabilities for unpaid claims are adequate. A
consulting actuary is retained by Central to assist in the estimation process
and to certify to the statutory reserves.
 
  (h) RECOGNITION OF PREMIUM REVENUES AND BENEFITS
 
     Life premiums are recognized as revenues as they become due. Benefits and
expenses are reported in a manner which results in the recognition of profits
over the life of the policy. Such recognition is accomplished through the
provision of liabilities for future benefits over the life of the contract and
the amortization of acquisition costs over the benefit period.
 
     Accident and health insurance premiums are recognized as revenue over the
terms, principally monthly, of the policies. Policy claims are charged to
expense in the period that the claims are incurred.
 
     Contracts that do not subject Central to risks arising from policyholder
mortality or morbidity are referred to as investment contracts. Certain deferred
and flexible annuities are considered investment contracts. Amounts received as
payments for such contracts are accounted for as deposits and included in future
policy benefits, losses and claims.
 
  (i) EARNINGS PER SHARE
 
     Net income per share is computed using the weighted average number of
common shares outstanding. The number of shares was increased to reflect shares
issuable on the exercise of options, reduced by the number of shares assumed to
have been purchased with the proceeds from the exercise of these common stock
equivalents. The number of shares used to calculate the earnings per share was
4,221,636 in 1995, 4,201,069 in 1994 and 4,182,384 in 1993.
 
  (j) FEDERAL INCOME TAXES
 
     The Company follows SFAS No. 109, "Accounting for Income Taxes". Under the
asset and liability method of SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
 
                                       22
<PAGE>   24
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1995, 1994 AND 1993
================================================================================
 
NOTE 2 -- CASH AND INVESTMENTS
 
     The following is the breakdown of net investment income by category of
investments for the years ending December 31:
 
<TABLE>
<CAPTION>
                                          1995           1994           1993
                                       ----------     ----------     ----------
<S>                                    <C>            <C>            <C>
Fixed maturities...................    $5,570,307     $5,931,835     $4,920,894
Policy loans.......................         5,517          5,065          4,768
Short-term investments.............       683,170        553,140        440,147
Other..............................       195,044         25,887          1,375
                                       ----------     ----------     ----------
                                       $6,454,038     $6,515,927     $5,367,184
                                        =========      =========      =========
</TABLE>
 
     Realized gains and losses are summarized as follows:
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                   ---------------------------------------
                                                     1995           1994           1993
                                                   ---------     ----------     ----------
<S>                                                <C>           <C>            <C>
Realized gains:
  Fixed maturities...............................  $ 203,502     $  236,385     $  754,980
                                                   ---------     ----------     ----------
Realized losses:
  Fixed maturities...............................     52,462        127,601         47,239
  Equipment......................................      1,513        131,808             --
                                                   ---------     ----------     ----------
          Total losses...........................     53,975        259,409         47,239
                                                   ---------     ----------     ----------
Net realized gains (losses)......................  $ 149,527     $  (23,024)    $  707,741
                                                    ========      =========      =========
</TABLE>
 
     The amortized cost and fair value of securities held to maturity and
available for sale as of December 31, 1995 are as follows. The estimated fair
value is based on quoted market prices, where available, or on values obtained
from independent pricing services.
 
<TABLE>
<CAPTION>
                                                           DECEMBER 31, 1995
                                          ----------------------------------------------------
                                                        UNREALIZED    UNREALIZED
                                           AMORTIZED      HOLDING      HOLDING      ESTIMATED
                                             COST          GAINS        LOSSES     FAIR VALUE
                                          -----------   -----------   ----------   -----------
     <S>                                  <C>           <C>           <C>          <C>
     Held to maturity:
       U.S. Treasury securities.........  $ 7,583,168   $    84,155   $ (29,278 )  $ 7,638,045
       Mortgage-backed securities:
          Federal Home Loan
            Mortgage....................    2,900,327        10,939      (3,156 )    2,908,110
          Federal National Mortgage.....    1,356,316        13,829          --      1,370,145
          Other.........................      155,917         6,449          --        162,366
                                          -----------   -----------   ----------   -----------
               Total held to maturity...  $11,995,728   $   115,372   $ (32,434 )  $12,078,666
                                           ==========    ==========   =========     ==========
</TABLE>
 
                                       23
<PAGE>   25
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1995, 1994 AND 1993
================================================================================
 
<TABLE>
<CAPTION>
                                                           DECEMBER 31, 1995
                                          ----------------------------------------------------
                                                        UNREALIZED    UNREALIZED
                                           AMORTIZED      HOLDING      HOLDING      ESTIMATED
                                             COST          GAINS        LOSSES     FAIR VALUE
                                          -----------   -----------   ----------   -----------
     <S>                                  <C>           <C>           <C>          <C>
     Available for sale:
       U.S. Treasury securities.........  $10,412,584   $   456,502   $      --    $10,869,086
       U.S. Agencies....................    2,498,844         7,241          --      2,506,085
       Obligations of states,
          municipalities and political
          subdivisions..................    1,671,612        38,996        (124)     1,710,484
       Corporate bonds..................   25,999,185       942,926    (386,955)    26,555,156
       Convertible bonds................      379,189         1,705     (38,369)       342,525
       Foreign bonds....................      502,781            --     (59,281)       443,500
       Mortgage-backed securities:
          Federal Home Loan
            Mortgage....................   10,690,948       252,974     (10,054)    10,933,868
          Federal National Mortgage.....    6,878,203       153,776     (10,913)     7,021,066
          Other.........................    9,623,453       177,535    (351,431)     9,449,557
                                          -----------   -----------   ----------   -----------
               Total available for
                 sale...................  $68,656,799   $ 2,031,655   $(857,127)   $69,831,327
                                           ==========    ==========   =========     ==========
</TABLE>
 
     The amortized cost and estimated fair value of securities held to maturity
and available for sale as of December 31, 1994 are as follows. The fair value is
based on quoted market prices, where available, or on values obtained from
independent pricing services.
 
<TABLE>
<CAPTION>
                                                           DECEMBER 31, 1994
                                          ----------------------------------------------------
                                                        UNREALIZED   UNREALIZED
                                           AMORTIZED     HOLDING       HOLDING      ESTIMATED
                                             COST         GAINS        LOSSES      FAIR VALUE
                                          -----------   ----------   -----------   -----------
     <S>                                  <C>           <C>          <C>           <C>
     Held to maturity:
       U.S. Treasury securities.......... $ 8,901,299    $ 53,311    $  (711,900)  $ 8,242,710
       Mortgage-backed securities:
          Federal Home Loan
            Mortgage.....................   2,899,219          --       (341,719)    2,557,500
          Federal National Mortgage......   1,354,688          --       (161,888)    1,192,800
          Other..........................     313,750      14,854         (1,929)      326,675
                                          -----------   ----------   -----------   -----------
               Total held to maturity.... $13,468,956    $ 68,165    $(1,217,436)  $12,319,685
                                           ==========   =========     ==========    ==========
</TABLE>
 
                                       24
<PAGE>   26
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1995, 1994 AND 1993
================================================================================
 
<TABLE>
<CAPTION>
                                                           DECEMBER 31, 1994
                                          ----------------------------------------------------
                                                        UNREALIZED   UNREALIZED
                                           AMORTIZED     HOLDING       HOLDING      ESTIMATED
                                             COST         GAINS        LOSSES      FAIR VALUE
                                          -----------   ----------   -----------   -----------
     <S>                                  <C>           <C>          <C>           <C>
     Available for sale:
       U.S. Treasury securities.......... $ 9,215,421    $ 21,899    $  (305,973)  $ 8,931,347
       Obligations of states,
          municipalities and political
          subdivisions...................   1,250,018       4,697       (111,623)    1,143,092
       Corporate bonds...................  25,598,088      19,889     (2,474,687)   23,143,290
       Convertible bonds.................   2,008,831      50,121        (72,351)    1,986,601
       Foreign...........................     503,133          --        (72,683)      430,450
       Mortgage-backed securities:
          Federal Home Loan
            Mortgage.....................  13,382,043       6,862       (708,647)   12,680,258
          Federal National Mortgage......   9,812,126          --       (868,467)    8,943,659
          Other..........................  11,066,704      23,935       (940,027)   10,150,612
                                          -----------   ----------   -----------   -----------
               Total available for
                 sale.................... $72,836,364    $127,403    $(5,554,458)  $67,409,309
                                           ==========   =========     ==========    ==========
</TABLE>
 
     The proceeds, gross realized gains and gross realized losses from the sale
(excluding calls, maturities and pay downs) of fixed maturities available for
sale during each year were as follows:
 
<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                   -----------------------------------------
                                                      1995            1994           1993
                                                   -----------     ----------     ----------
<S>                                                <C>             <C>            <C>
Proceeds.........................................  $13,537,157     $1,820,867     $5,693,954
Gross realized gains.............................      179,825        124,067        388,026
Gross realized losses............................       48,854         87,428         23,375
                                                    ==========      =========      =========
</TABLE>
 
     The amortized cost and estimated fair value of fixed maturities at December
31, 1995, by contractual maturity, are as follows. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without penalties.
 
<TABLE>
<CAPTION>
                                                                    DECEMBER 31, 1995
                                                               ---------------------------
                                                                AMORTIZED         FAIR
                                                                  COST            VALUE
                                                               -----------     -----------
     <S>                                                       <C>             <C>
     Held to maturity:
       Due after one year through five years.................  $ 6,560,182     $ 6,626,015
       Due after five years through ten years................    1,022,986       1,012,030
                                                               -----------     -----------
                                                                 7,583,168       7,638,045
       Mortgage-backed securities (5.7 average years)........    4,412,560       4,440,621
                                                               -----------     -----------
               Total held to maturity........................  $11,995,728     $12,078,666
                                                                ==========      ==========
</TABLE>
 
                                       25
<PAGE>   27
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1995, 1994 AND 1993
================================================================================
 
<TABLE>
<CAPTION>
                                                                    DECEMBER 31, 1995
                                                               ---------------------------
                                                                AMORTIZED         FAIR
                                                                  COST            VALUE
                                                               -----------     -----------
     <S>                                                       <C>             <C>
     Available for sale:
       Due in one year or less...............................  $ 2,971,347     $ 3,024,688
       Due after one year through five years.................   10,379,387      10,625,370
       Due after five years through ten years................   25,103,634      25,544,902
       Due after ten years...................................    3,009,827       3,231,876
                                                               -----------     -----------
                                                                41,464,195      42,426,836
       Mortgage-backed securities (5.1 average years)........   27,192,604      27,404,491
                                                               -----------     -----------
               Total available for sale......................  $68,656,799     $69,831,327
                                                                ==========      ==========
</TABLE>
 
     At December 31, 1995 cash includes approximately $3.1 million held for
self-funded accident and health accounts, which is restricted as to its use. A
corresponding amount is included in liabilities in the accompanying consolidated
financial statements.
 
     At December 31, 1995 Central had certificates of deposit and fixed
maturities on deposit with various state insurance departments, carried at
$3,392,004, for the protection of policyholders.
 
     At December 31, 1995, short term investments include a repurchase agreement
with a carrying value of $400,000. The repurchase agreement is collateralized by
U. S. Treasury Notes and Bonds with a market value in excess of $400,000.
 
NOTE 3 -- LIABILITY FOR OTHER POLICY CLAIMS AND BENEFITS PAYABLE
 
     The following table reflects the activity in the liability for Other Policy
Claims and Benefits Payable, including the claims adjustment expenses (CAE) as
follows:
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                              ----------------------------------------------
                                                  1995             1994             1993
                                              ------------     ------------     ------------
     <S>                                      <C>              <C>              <C>
     Balance at beginning of year...........  $ 35,219,992     $ 32,003,500     $ 25,288,000
     Incurred claims and CAE for:
          Current year......................   161,454,853      153,942,398      142,012,399
          Prior years.......................       225,632       (2,407,635)        (212,850)
                                              ------------     ------------     ------------
               Total incurred...............   161,680,485      151,534,763      141,799,549
                                              ------------     ------------     ------------
     Paid claims and CAE, net of
       reinsurance, for:
          Current year......................   126,329,386      118,722,406      110,008,899
          Prior years.......................    35,445,624       29,595,865       25,075,150
                                              ------------     ------------     ------------
               Total paid...................   161,775,010      148,318,271      135,084,049
                                              ------------     ------------     ------------
     Balance at end of year.................  $ 35,125,467     $ 35,219,992     $ 32,003,500
                                               ===========      ===========      ===========
</TABLE>
 
NOTE 4 -- DIVIDEND RESTRICTION AND STATUTORY FINANCIAL INFORMATION
 
     At December 31, 1995, $27,477,972 of consolidated shareholders' equity
represents net assets of the Company's insurance subsidiary which is subject to
certain regulatory restrictions on paying dividends and making loans or advances
to the parent company. Generally, the net assets of the Company's insurance
subsidiary available for transfer to the parent company are limited to the
amounts by which the insurance subsidiary's net assets, as determined in
accordance with statutory accounting practices, exceed minimum statutory
requirements. In addition, payments of such amounts as dividends are subject to
approval by
 
                                       26
<PAGE>   28
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1995, 1994 AND 1993
================================================================================
 
regulatory authorities when (i) any such dividend is proposed to be paid from
other than earned surplus (as defined in the applicable statute) or (ii) the
value of any such dividend, together with the value of other dividends paid or
distributions made within the preceding 12 months, exceeds the greater of (a)
ten percent of the insurer's surplus as regards policyholders as of the 31st day
of December next preceding the dividend payment, or (b) the net income of such
insurer for the 12-month period ended the December 31st next preceding the
dividend payment.
 
     Shareholders' capital and surplus and net income as determined in
accordance with statutory accounting practices for Central differ from GAAP.
Following is a reconciliation showing those differences.
 
<TABLE>
<CAPTION>
                                                        YEARS ENDED DECEMBER 31,
                                               -------------------------------------------
                                                  1995            1994            1993
                                               -----------     -----------     -----------
<S>                                            <C>             <C>             <C>
Statutory capital and surplus of insurance
  subsidiary.................................  $27,477,972     $25,098,580     $21,548,063
Shareholders' equity of non-insurance
  subsidiaries...............................    2,399,919       2,257,634       2,247,673
Add (deduct):
  Net unrealized holding gain (loss).........      775,188      (5,427,055)             --
  Deferred policy acquisition costs..........      209,760         149,926          89,810
  Policyholder reserve adjustments...........     (333,383)       (429,487)       (503,102)
  Asset valuation and interest maintenance
     reserve.................................    1,220,336       1,129,787       1,062,554
  Non-admitted assets and other adjustments,
     net.....................................    1,038,838         816,065         952,205
  Deferred Federal income taxes..............      512,350         935,282       1,459,693
                                               -----------     -----------     -----------
          Shareholders' equity per
            accompanying consolidated
            financial statements.............  $33,300,980     $24,530,732     $26,856,896
                                                ==========      ==========      ==========
</TABLE>
 
<TABLE>
<CAPTION>
                                                        YEARS ENDED DECEMBER 31,
                                               -------------------------------------------
                                                  1995            1994            1993
                                               -----------     -----------     -----------
<S>                                            <C>             <C>             <C>
Statutory net income of insurance
  subsidiary.................................  $ 4,569,765     $ 4,989,122     $ 2,685,908
Net income (loss) of non-insurance
  subsidiaries...............................     (220,452)        222,831        (260,601)
Adjustments to restate to the basis of
  generally accepted accounting principles:
     Increases (decreases):
       Policyholder reserves.................       96,104          73,615        (609,386)
       Deferred Federal income tax expense
          (benefit)..........................      (23,592)       (524,411)         55,693
       Deferred policy acquisition costs.....       59,834          60,116          72,961
       Net change in interest maintenance
          reserve............................       22,948          (7,512)        445,774
                                               -----------     -----------     -----------
          Net income per accompanying
            consolidated financial
            statements.......................  $ 4,504,607     $ 4,813,761     $ 2,390,349
                                                ==========      ==========      ==========
</TABLE>
 
     Central's statutory accounting practices are all prescribed by the Ohio
Department of Insurance.
 
     In December 1992, the National Association of Insurance Commissioners
(NAIC) adopted the Life Risk-Based Capital (RBC) formula. This model act
requires every life and health insurer to calculate its total adjusted capital
and RBC requirement, and provides for an insurance commissioner to intervene if
the insurer experiences financial difficulty. The formula includes components
for asset risk, liability risk, interest rate exposure and other factors. The
RBC requirement is for statutory financial statements and was effective
 
                                       27
<PAGE>   29
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1995, 1994 AND 1993
================================================================================
 
December 31, 1993. The model act was adopted in Ohio, Central's state of
domicile, in 1995. Based upon the December 31, 1995 statutory financial
statements, Central exceeded all the required RBC levels.
 
NOTE 5 -- FEDERAL INCOME TAXES
 
     The Company files a consolidated Federal income tax return with its
subsidiaries. The provision for Federal income tax does not bear the customary
relationship to pretax accounting income because of special tax provisions
available to life insurance companies. Central receives a benefit provided for
"small" life insurance companies.
 
     Under the Life Insurance Company Income Tax Act of 1959, a portion of
insurance companies' net income, prior to 1984, is not subject to Federal income
taxes (within certain limitations) until it is distributed to stockholders, at
which time it is taxed at regular corporate rates. For Federal income tax
purposes, this untaxed income is accumulated in a memorandum account designated
"policyholders' surplus". The accumulated untaxed policyholders' surplus for
Central is $2,869,768.
 
     Federal income tax expense is composed of the following:
 
<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                                                  ------------------------------------------
                                                     1995            1994            1993
                                                  ----------      ----------      ----------
      <S>                                         <C>             <C>             <C>
      Current..................................   $1,419,026      $1,534,817      $  769,883
      Deferred.................................       23,592         524,411         (55,693)
                                                  ----------      ----------      ----------
                                                  $1,442,618      $2,059,228      $  714,190
                                                   =========       =========       =========
</TABLE>
 
     Income tax expense attributable to income from operations differs from the
amounts computed by applying the U.S. Federal income tax rate of 35%. Those
effects are as follows:
 
<TABLE>
<CAPTION>
                                                     1995            1994            1993
                                                  ----------      ----------      ----------
      <S>                                         <C>             <C>             <C>
      Computed "expected" tax expense..........   $2,081,529      $2,405,546      $1,086,589
      Special life insurance deduction.........     (486,193)       (458,228)       (590,004)
      Tax exempt interest......................      (13,206)        (21,589)        (50,006)
      Change in the beginning-of-the-year
        balance of the valuation allowance for
        deferred tax assets allocated to income
        tax expense............................     (187,513)        397,127          12,000
      Tax rate differential....................      (59,472)        (68,730)        (31,046)
      Accrual adjustment.......................       46,026          25,636         237,812
      IRS audit adjustment.....................           --         215,303              --
      Alternative minimum tax..................           --        (300,060)         48,845
      Other....................................       61,447        (135,777)             --
                                                  ----------      ----------      ----------
                                                  $1,442,618      $2,059,228      $  714,190
                                                   =========       =========       =========
</TABLE>
 
     The Federal income tax returns for the Company and its subsidiaries have
been examined by the Internal Revenue Service (IRS) for 1991 and 1992. During
the third quarter of 1994, the IRS issued a proposal for adjustments to the
Company's returns for 1991 and 1992. The proposed deficiencies are approximately
$2.4 million of which $215,303, pertaining to some non deductible expenses and
certain assets expensed and not capitalized, was agreed to and paid in 1994. The
balance primarily deals with whether or not the Company's subsidiary, Central,
qualified as a life company, for tax purposes. The Company intends to vigorously
protest
 
                                       28
<PAGE>   30
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1995, 1994 AND 1993
================================================================================
 
the proposed deficiency and management believes existing law supports the
Company's position. Therefore, the Company has not recorded a liability for the
difference.
 
     If the IRS were to pursue litigation and prevail in its position that
Central no longer qualifies as a life company for tax purposes, Federal income
taxes would increase in the future. Presently, as a small life company, Central
is permitted, among other things, a deduction from the first $3 million of
income of 60% or $1.8 million. As Central's income increases above $3 million,
the special deduction is reduced proportionately. Besides relying on favorable
existing case law, Central may have, under certain circumstances, the ability to
change and market policies that could insure its qualification as a life company
for tax purposes in the future, if the need arises.
 
     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 and 1994 are presented below:
 
<TABLE>
<CAPTION>
                                                                  1995            1994
                                                               ----------      ----------
      <S>                                                      <C>             <C>
      Deferred tax assets:
        Deferred acquisition costs..........................   $  666,210      $  899,219
        Net unrealized holding loss.........................           --       1,845,199
        Difference in reserves established for financial
           statement purposes and those for income tax
           purposes.........................................      722,530         884,145
        Other...............................................       87,035          22,100
                                                               ----------      ----------
             Gross deferred tax assets......................    1,475,775       3,650,663
             Less valuation allowance.......................     (314,614)     (2,347,326)
                                                               ----------      ----------
                Net deferred assets.........................    1,161,161       1,303,337
                                                               ----------      ----------
      Deferred tax liabilities:
        Net unrealized holding gain.........................      399,340              --
        Bond discount accretion.............................       74,636          76,223
        Difference in book and tax depreciation.............       47,034         150,940
        Other...............................................      127,801         140,892
                                                               ----------      ----------
             Gross deferred tax liabilities                       648,811         368,055
                                                               ----------      ----------
             Deferred tax asset.............................   $  512,350      $  935,282
                                                                =========       =========
</TABLE>
 
     The Company establishes a valuation allowance based on its analysis
(scheduling) of future deductible amounts. A valuation allowance is currently
established to the extent future deductible amounts cannot offset future taxable
amounts or recover Federal income taxes paid within the statutory carryback
period. Fluctuation in the valuation allowance is attributed to changes in the
effect of the small life insurance company deduction and to a 100% valuation
allowance on the deferred tax benefits on the net unrealized holding loss at
December 31, 1994 and no valuation allowance applicable to the deferred tax
expense on the net unrealized holding gain at December 31, 1995.
 
NOTE 6 -- MORTGAGE NOTE PAYABLE
 
     The Company executed a note payable, in December 1990, for $9,000,000
bearing interest at 9 1/2% per annum for 10 years. The Company received
$8,500,000 of the funds in December 1990 and the remaining $500,000 in December
1991. The mortgage note is collateralized by the home office building and by an
assignment of the tenant lease for the building. The Company has been required
to make monthly payments, since January 1991, based on a 30 year amortization
schedule, of $75,677 for 10 years. After five years, the
 
                                       29
<PAGE>   31
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1995, 1994 AND 1993
================================================================================
 
Company has the right to prepay the loan with a 3% prepayment fee. Principal
payments due in the next five years, assuming no prepayments, are $95,291 in
1996, $104,748 in 1997, $115,145 in 1998, $126,572 in 1999 and $139,134 in 2000.
 
NOTE 7 -- LEASES
 
     Central has operating leases for certain computer processing equipment and
laser printing, publishing equipment which expire at various dates through 2000.
 
     Charges for the leases were $1,069,723, $854,358 and $533,329 for 1995,
1994 and 1993, respectively. Future net minimum payments for the operating
leases are as follows:
 
<TABLE>
<CAPTION>
  YEARS ENDING DECEMBER 31,     COMPUTER    LASER       TOTAL
------------------------------  --------   --------   ----------
<S>                             <C>        <C>        <C>
1996..........................  $415,301   $144,720   $  560,021
1997..........................   206,320    144,720      351,040
1998..........................    20,368    144,720      165,088
1999..........................     1,524    144,720      146,244
2000..........................        --     24,120       24,120
                                --------   --------   ----------
                                $643,513   $603,000   $1,246,513
                                =========  ========    =========
</TABLE>
 
NOTE 8 -- EMPLOYMENT CONTRACT
 
     The Company's employment agreement with its Chief Executive Officer was
entered into in 1982 and amended in 1983. The agreement expires December 31,
2001 and calls for annual increases of 11% per year through 1996. The 1995
compensation under the agreement was $871,166. The agreement has a change of
control provision, which if exercised, upon such a change would require a lump
sum payment for the unexpired term.
 
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
 
     In the ordinary course of business, Central cedes reinsurance to other
insurers. These arrangements limit the maximum net policy benefit potential on
individual risks. Although the ceding of reinsurance does not discharge the
original insurer from its primary liability to its policyholders, the insurance
company that assumes the coverage also assumes the related liability.
 
     The maximum amount of exposure that Central retains on any life is $50,000
on ordinary life and $25,000 on group life on ages through 70. No retention is
maintained over age 70. Maximum retention on impaired risks is $10,000. Central
also has reinsurance on group accident and health claims. Effective January 1,
1995, Central's reinsurance treaty provides that all individual claims in excess
of $500,000 are 100% reinsured. The overall effect of reinsurance is not
material to the Company's financial condition. Reinsurance treaties in effect at
December 31, 1995 were with The Cologne Life Reinsurance Company, Life
ReAssurance Corporation of America and Business Men's Assurance Company.
 
     Central has a $1 million line of credit with a major bank, which was unused
as of December 31, 1995 and 1994.
 
     The Company is involved in litigation and may become involved in potential
litigation arising in the ordinary course of business. In the opinion of
management, the effects, if any, of such litigation are not expected to be
material to the Company's consolidated financial condition.
 
                                       30
<PAGE>   32
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1995, 1994 AND 1993
================================================================================
 
NOTE 10 -- STOCK OPTIONS AND STOCK ISSUED
 
     Outstanding stock options consist of options granted by the Company at
prices equal to or above market price on the date of grant. On March 15, 1983,
an Incentive Stock Option Plan was adopted. The plan, which expired in May 1993,
provided that key full-time employees of the Company and its subsidiaries were
eligible for participation in the Plan. Also 300,000 options were granted to the
CEO in 1984, expiring in 1997, of which 255,000 at $2.83 per share remain
outstanding at December 31, 1995. No options are available for future grants.
The following table summarizes data regarding all stock options:
 
<TABLE>
<CAPTION>
                                                       1995             1994             1993
                                                   ------------     ------------     ------------
<S>                                                <C>              <C>              <C>
Number of shares subject to options:
  Outstanding at beginning of year.............         325,970          355,670          299,150
     Granted...................................              --               --           76,700
     Expired/cancelled.........................          (3,000)         (16,782)          (4,000)
     Exercised.................................            (200)         (12,918)         (16,180)
                                                   ------------     ------------     ------------
  Outstanding at end of year...................         322,770          325,970          355,670
                                                    ===========      ===========      ===========
  Price range of options exercised.............    $       6.75     $ 2.83-$6.75     $ 2.83-$6.75
</TABLE>
 
     The exercise price of options outstanding at December 31, 1995, were $2.83
and $6.75 per share and those options expire in 1997 and 1998.
 
NOTE 11 -- PREFERRED SHARES
 
     The Company has authorized 2,000,000 Non-Voting Preferred Shares, without
par value. The Company has never issued any Non-Voting Preferred Shares,
however, the Board of Directors is authorized at any time to provide for the
issuance of, such shares in one or more series, and to determine the
designations, preferences, limitations and other rights of the shares issued.
Holders of Non-Voting Preferred Shares shall have no voting rights except as
required by law. For each series, the Board of Directors shall determine, prior
to the issuance of any shares thereof, the designations, preferences,
limitations and relative or other rights thereof, including but not limited to
the dividend rate, liquidation price, redemption rights and price, sinking fund
requirements, conversion rights and restrictions on the issuance of such shares.
 
NOTE 12 -- PENSION PLAN
 
     The Company adopted a noncontributory pension plan in 1978. The plan is a
defined contribution money purchase pension plan with an outside company,
covering substantially all full-time employees of age 20 1/2 or more who have
completed six months or more of service. Participants in the plan begin vesting
after two years of service and are fully vested after seven years. The
contribution was approximately $1,137,000 for 1995, $1,013,000 for 1994 and
$1,000,000 for 1993.
 
NOTE 13 -- OTHER BENEFIT PLANS
 
     In addition to the Company's defined contribution pension plan, the
Company, beginning in 1995, sponsors a retiree health benefit program for
certain officer-class employees who meet specified age and service criteria. The
Company and, as applicable, eligible retirees, fund the payment of benefits
under the program in amounts and at such times as claims are incurred. Benefits
for under age 65 retirees are based on continuation of prevailing active
employee health coverage, and for over age 65 retirees are based on
reimbursement of expenses for Medicare Part B and a Medicare Supplement
Insurance Policy. The Company and, as applicable, eligible retirees, fund the
payment of benefits under the program in amounts and at such times as premium
payments or reimbursement of premium payments are incurred.
 
                                       31
<PAGE>   33
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1995, 1994 AND 1993
================================================================================
 
     The program's net periodic postretirement benefit cost for the reported
period is as follows:
 
<TABLE>
<CAPTION>
                                                                1995
                                                              --------
                    <S>                                       <C>
                    Service Cost............................  $ 44,000
                    Interest Cost...........................    38,000
                    Amortization of Transition Obligation...    24,000
                                                              --------
                              Total.........................  $106,000
                                                              ========
</TABLE>
 
The program's funded status as of the reported date is as follows:
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                                  1995
                                                              ------------
                    <S>                                       <C>
                    Accumulated Postretirement Benefit
                    Obligation (APBO):
                      Retirees..............................           --
                      Fully Eligible Actives................   $ (156,000)
                      Other Actives.........................     (354,000)
                                                              ------------
                              Total APBO....................     (510,000)
                    Assets..................................           --
                    Unrecognized Prior Service Cost.........           --
                    Unrecognized Net Gain...................      (46,000)
                    Transition Obligation...................      450,000
                                                              ------------
                    Prepaid/(Accrued) Cost..................   $ (106,000)
                                                              ============
</TABLE>
 
     The assumed annual health care cost trend rate used to measure the expected
cost of benefits under the program is initially 10%, declining by approximately
1% per annum to an ultimate assumed trend rate of 5% in the year 2003.
 
     The assumed health care cost trend rates have a significant effect on
determining the cost of benefits provided under the program. The effect of a 1%
increase in the health care cost trend rates as noted above would be an increase
of $18,000 or 22% in the service and interest cost components of net periodic
benefit cost for the period reported, and an increase of $98,000 or 19% in the
accumulated postretirement benefit obligation amount as of the date reported.
 
     The discount rate used to measure the program's obligations was 7%.
 
                                       32
<PAGE>   34
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1995, 1994 AND 1993
================================================================================
 
NOTE 14 -- FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
 
     Effective December 31, 1995, the Company redefined its reporting segments,
merging the group life and group accident health segments together, as well as
combining the life and annuity segments. These alignments fit the Company's
current operating organization and produce three segments: group life and
health; life insurance and annuities; and corporate and other.
 
     The following table presents the revenues and income (loss), on a GAAP
basis, attributable to the Company's consolidated industry segments. The Company
is not required to allocate investment assets or identifiable assets by industry
segments.
 
<TABLE>
<CAPTION>
                                              1995             1994             1993
                                          ------------     ------------     ------------
<S>                                       <C>              <C>              <C>
Revenues:
     Group Life and Health..............  $237,257,385     $228,313,768     $212,837,282
     Life Insurance and Annuities.......     2,170,138        1,729,842        1,168,542
     Corporate and Other................       381,571          157,601          805,603
                                          ------------     ------------     ------------
                                          $239,809,094     $230,201,211     $214,811,427
                                           ===========      ===========      ===========
Income (loss) before Federal income
  taxes:
     Group Life and Health..............  $  6,180,636     $  7,577,364     $  3,918,302
     Life Insurance and Annuities.......      (241,685)        (927,206)        (553,163)
     Corporate and Other................         8,274          222,831         (260,600)
                                          ------------     ------------     ------------
                                          $  5,947,225     $  6,872,989     $  3,104,539
                                           ===========      ===========      ===========
</TABLE>
 
NOTE 15 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     Statement of Financial Accounting Standards No. 107 (SFAS 107) "Disclosures
about Fair Value of Financial Instruments" requires disclosure of fair value
information about existing on and off-balance sheet financial instruments. In
cases where quoted market prices are not available, fair value is based on
estimates using present value or other valuation techniques.
 
     These techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. Although fair
value estimates are calculated using assumptions that management believes are
appropriate, changes is assumptions could cause these estimates to vary
materially. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in the immediate settlement of the instruments. SFAS 107 excludes
certain assets and liabilities from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented do not represent the underlying value
of the Company.
 
     The tax ramifications of the related unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in the
estimates.
 
     The following methods and assumptions were used by the Company in
estimating its fair value disclosures:
 
     INVESTMENT SECURITIES:  Fair value for fixed maturity securities is based
on quoted market prices, where available. For fixed maturity securities not
actively traded, fair value is estimated using values obtained from independent
pricing services or, in the case of private placements, is estimated by
discounting expected future cash flows using a current market rate applicable to
the yield, credit quality and maturity of the investments.
 
     CASH, SHORT-TERM INVESTMENTS, PREMIUMS RECEIVABLE AND POLICY LOANS:  The
carrying amount reported in the balance sheets for these instruments approximate
their fair value.
 
                                       33
<PAGE>   35
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1995, 1994 AND 1993
================================================================================
 
     ANNUITY POLICIES:  The fair value for the annuity reserves is the amount
payable on demand.
 
     OTHER POLICYHOLDERS' FUNDS:  The carrying amount reported in the
consolidated balance sheets for these instruments approximate their fair value.
 
     MORTGAGE NOTE PAYABLE:  The carrying amount reported in the consolidated
balance sheets for the mortgage note payable approximates its fair value.
 
     Carrying amount and estimated fair value of financial instruments subject
to SFAS 107 are as follows as of December 31:
 
<TABLE>
<CAPTION>
                                                        1995                        1994
                                              -------------------------   -------------------------
                                               CARRYING      ESTIMATED     CARRYING      ESTIMATED
                                                AMOUNT      FAIR VALUE      AMOUNT      FAIR VALUE
                                              -----------   -----------   -----------   -----------
<S>                                           <C>           <C>           <C>           <C>
ASSETS
Investments:
  Fixed maturities held to maturity.........  $11,995,728   $12,078,666   $13,468,956   $12,319,685
  Fixed maturities available for sale.......   69,831,327    69,831,327    67,409,309    67,409,309
  Policy loans..............................      106,441       106,441       101,146       101,146
  Short-term investments....................    9,377,285     9,377,285     2,250,912     2,250,912
Cash........................................    9,102,020     9,102,020     7,654,487     7,654,487
Premiums receivable.........................    1,853,105     1,853,105     1,656,225     1,656,225
LIABILITIES
Annuity reserves............................  $21,511,411   $20,984,000   $18,883,495   $18,326,392
Other policyholders' funds..................    5,222,968     5,222,968     5,751,966     5,751,966
Mortgage note payable.......................    8,599,067     8,599,067     8,685,754     8,685,754
</TABLE>
 
NOTE 16 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
 
     The following is a summary of quarterly results of operations for the years
ended December 31, 1995 and 1994.
 
<TABLE>
<CAPTION>
                                              1ST             2ND             3RD             4TH
                                          -----------     -----------     -----------     -----------
<S>                                       <C>             <C>             <C>             <C>
1995
Revenues................................  $58,675,479     $59,458,791     $60,176,963     $61,497,861
Benefits and expenses...................   57,099,579      57,569,824      58,092,593      61,099,873
Net income..............................    1,100,900       1,289,967       1,272,370         841,370
Earnings per share......................          .26             .31             .30             .20
                                           ==========      ==========      ==========      ==========
</TABLE>
 
<TABLE>
<CAPTION>
                                              1ST             2ND             3RD             4TH
                                          -----------     -----------     -----------     -----------
<S>                                       <C>             <C>             <C>             <C>
1994
Revenues................................  $58,426,647     $56,678,300     $58,015,367     $57,080,897
Benefits and expenses...................   57,022,839      54,849,263      55,911,317      55,544,803
Net income..............................    1,010,742       1,111,313       1,468,890       1,222,816
Earnings per share......................          .24             .26             .35             .29
                                           ==========      ==========      ==========      ==========
</TABLE>
 
                                       34
<PAGE>   36
 
                                                                      SCHEDULE I
 
               CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
 
      SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES
 
                               DECEMBER 31, 1995
================================================================================
<TABLE>
<CAPTION>
                  COLUMN A                        COLUMN B        COLUMN C        COLUMN D
----------------------------------------------------------------------------------------------
                                                                                  AMOUNT ON
                                                                                   BALANCE
             TYPE OF INVESTMENT                     COST            VALUE           SHEET
---------------------------------------------------------------------------------------------
<S>                                              <C>             <C>             <C>
FIXED MATURITIES -- HELD TO MATURITY
U.S. Treasury securities.....................    $ 7,583,168     $ 7,638,045     $ 7,583,168
Mortgage-backed securities...................      4,412,560       4,440,621       4,412,560
FIXED MATURITIES -- AVAILABLE FOR SALE
U.S. Treasury securities.....................     10,412,584      10,869,086      10,869,086
Obligations of states, municipalities and
  political subdivisions.....................      4,170,456       4,216,569       4,216,569
Corporate bonds..............................     25,999,185      26,555,156      26,555,156
Convertible bonds............................        379,189         342,525         342,525
Foreign bonds................................        502,781         443,500         443,500
Mortgage-backed securities...................     27,192,604      27,404,491      27,404,491
                                                 -----------     -----------     -----------
  Total fixed maturities.....................     80,652,527     $81,909,993      81,827,055
                                                 -----------     ===========     -----------
Policy loans.................................        106,441                         106,441
Short-term investments.......................      9,377,285                       9,377,285
                                                 -----------                     -----------
  Total investments..........................    $90,136,253                     $91,310,781
                                                  ==========                      ==========
</TABLE>
 
                 See accompanying independent auditors' report.
 
                                       35
<PAGE>   37
 
                                                                     SCHEDULE II
 
               CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
 
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 
                 CENTRAL RESERVE LIFE CORPORATION (PARENT ONLY)
 
                                 BALANCE SHEETS
================================================================================
 
<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                               ---------------------------
                                                                  1995            1994
                                                               -----------     -----------
<S>                                                            <C>             <C>
ASSETS
Investments in subsidiaries*...............................    $31,430,682     $22,375,551
Property and equipment.....................................      9,943,485      10,385,537
Cash.......................................................        305,011         261,544
Other......................................................        238,108         217,684
                                                               -----------     -----------
                                                               $41,917,286     $33,240,316
                                                                ==========      ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
  Accounts payable.........................................    $    17,239     $    23,830
  Mortgage note payable....................................      8,599,067       8,685,754
                                                               -----------     -----------
       TOTAL LIABILITIES...................................      8,616,306       8,709,584
                                                               -----------     -----------
Shareholders' equity:
  Common stock.............................................      2,018,750       2,018,650
  Paid-in capital..........................................      3,476,940       3,475,690
  Net unrealized holding gain (loss).......................        775,188      (5,427,055)
  Retained earnings........................................     27,030,102      24,463,447
                                                               -----------     -----------
                                                                33,300,980      24,530,732
                                                               -----------     -----------
                                                               $41,917,286     $33,240,316
                                                                ==========      ==========
 
---------------

<FN> 
*Eliminated in consolidation.
</TABLE>
 
                 See accompanying independent auditors' report.
 
                                       36
<PAGE>   38
 
                                                                     SCHEDULE II
 
               CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
 
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 
                 CENTRAL RESERVE LIFE CORPORATION (PARENT ONLY)
 
                              STATEMENTS OF INCOME
================================================================================
 
<TABLE>
<CAPTION>
                                                         YEARS ENDED DECEMBER 31,
                                                 ----------------------------------------
                                                    1995           1994           1993
                                                 ----------     ----------     ----------
<S>                                              <C>            <C>            <C>
Revenues:
  Dividend from subsidiaries*................    $1,900,000     $1,500,000     $1,331,250
  Inter-company fees*........................     1,170,000      1,434,000      1,170,000
  Other investment income....................        25,000         28,718             --
                                                 ----------     ----------     ----------
                                                  3,095,000      2,962,718      2,501,250
                                                 ----------     ----------     ----------
Operating expenses...........................     1,443,282      1,290,738      1,433,853
Federal income tax expense...................            --          8,790             --
                                                 ----------     ----------     ----------
Income before equity in earnings of
  subsidiaries...............................     1,651,718      1,663,190      1,067,397
Equity in earnings of subsidiaries
  (net of dividends).........................     2,852,889      3,150,571      1,322,952
                                                 ----------     ----------     ----------
               Net income....................    $4,504,607     $4,813,761     $2,390,349
                                                  =========      =========      =========
 
---------------

<FN> 
*Eliminated in consolidation.
</TABLE>
 
                 See accompanying independent auditors' report.
 
                                       37
<PAGE>   39
 
                                                                     SCHEDULE II
 
               CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
 
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 
                 CENTRAL RESERVE LIFE CORPORATION (PARENT ONLY)
 
                            STATEMENTS OF CASH FLOWS
================================================================================
 
<TABLE>
<CAPTION>
                                                          YEARS ENDED DECEMBER 31,
                                                 -------------------------------------------
                                                    1995            1994            1993
                                                 -----------     -----------     -----------
<S>                                              <C>             <C>             <C>
Cash Flows From Operating Activities:
Net income before equity in subsidiaries*....    $ 1,651,718     $ 1,663,190     $ 1,067,397
  Change in accounts payable.................         (6,591)          1,538           3,184
  Depreciation...............................        444,053         438,141         432,228
  Change in other assets.....................        (20,424)         14,076          14,075
                                                 -----------     -----------     -----------
Net cash provided by operating activities....      2,068,756       2,116,945       1,516,884
                                                 -----------     -----------     -----------
Cash Flows From Investing Activities:
  Purchase of property and equipment.........         (2,000)       (177,400)             --
                                                 -----------     -----------     -----------
Net cash used in investing activities........         (2,000)       (177,400)             --
                                                 -----------     -----------     -----------
Cash Flows From Financing Activities:
  Dividends Paid.............................     (1,937,952)     (1,772,615)     (1,609,043)
  Issuance of common stock...................          1,350          59,745          60,589
  Decrease in mortgage payable...............        (86,687)        (78,860)        (71,741)
                                                 -----------     -----------     -----------
Net cash used in financing activities........     (2,023,289)     (1,791,730)     (1,620,195)
                                                 -----------     -----------     -----------
Net increase (decrease) in cash..............         43,467         147,815        (103,311)
Cash at beginning of year....................        261,544         113,729         217,040
                                                 -----------     -----------     -----------
Cash at end of year..........................    $   305,011     $   261,544     $   113,729
                                                  ==========      ==========      ==========
 
---------------

<FN> 
*Eliminated in consolidation.
</TABLE>
 
                 See accompanying independent auditors' report.
 
                                       38
<PAGE>   40
 
                                                                    SCHEDULE III
 
               CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
 
                      SUPPLEMENTARY INSURANCE INFORMATION
 
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
================================================================================
<TABLE>
<CAPTION>
           COLUMN A                  COLUMN B         COLUMN C         COLUMN D         COLUMN E         COLUMN F         COLUMN G
------------------------------------------------------------------------------------------------------------------------------------
                                                       FUTURE           OTHER                                             BENEFITS
                                     DEFERRED          POLICY           POLICY                                             CLAIMS
                                      POLICY         BENEFITS,          CLAIMS                             NET            LOSSES &
                                   ACQUISITION         LOSSES         & BENEFITS        PREMIUM         INVESTMENT       SETTLEMENT
            SEGMENT                    COST          AND CLAIMS        PAYABLE          REVENUE           INCOME          EXPENSES
<S>                                <C>              <C>              <C>              <C>              <C>              <C>
------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1995:
  Group life and health........      $     --       $ 6,632,320      $35,095,967      $232,637,514      $4,619,871      $158,960,388
  Life insurance and
    Annuities..................       209,760        23,228,579           29,500           531,015       1,639,123         6,512,215
  Corporate and other..........            --           331,156               --                --         195,044                --
                                   ----------       -----------      -----------      ------------     -----------      ------------
        Total..................      $209,760       $30,192,055      $35,125,467      $233,168,529      $6,454,038      $165,472,603
                                   ==========       ===========      ===========      ============     ===========      ============
Year ended December 31, 1994:
  Group life...................      $     --       $   116,112      $   236,500      $  4,828,115      $   13,576       $ 1,457,160
  Group accident and health....            --         6,511,021       34,837,000       217,731,794       4,925,857       151,715,281
  Annuities....................            --        18,883,495               --                --       1,143,151         1,101,771
  Other........................       149,926         1,986,257          146,492         1,119,162         433,343           983,348
                                   ----------       -----------      -----------      ------------     -----------      ------------
        Total..................      $149,926       $27,496,885      $35,219,992      $223,679,071      $6,515,927      $155,257,560
                                   ==========       ===========      ===========      ============     ===========      ============
Year ended December 31, 1993:
  Group life...................      $     --       $   310,886      $   217,000      $  4,988,762      $   78,172       $ 1,434,052
  Group accident and health....            --         5,937,733       31,750,000       202,850,443       4,322,475       143,272,984
  Annuities....................            --        15,954,470               --                --         676,606           624,688
  Other........................        89,810         1,941,915           36,500           891,635         289,931           686,014
                                   ----------       -----------      -----------      ------------     -----------      ------------
        Total..................      $ 89,810       $24,145,004      $32,003,500      $208,730,840      $5,367,184      $146,017,738
                                   ==========       ===========      ===========      ============     ===========      ============
 
<CAPTION>
           COLUMN A                COLUMN H         COLUMN I
--------------------------------------------------------------
                                  AMORTIZA-
                                   TION OF
                                   DEFERRED
                                 ACQUISITION       OPERATING
            SEGMENT                 COSTS           EXPENSES
<S>                                <C>            <C>
-------------------------------------------------------------
Year ended December 31, 1995:
  Group life and health........    $     --       $67,333,980
  Life insurance and
    Annuities..................      59,834           542,956
  Corporate and other..........          --           452,496
                                 ----------       -----------
        Total..................    $ 59,834       $68,329,432
                                 ==========       ===========
Year ended December 31, 1994:
  Group life...................    $     --       $ 2,183,583
  Group accident and health....          --        64,449,683
  Annuities....................          --           798,322
  Other........................      60,116           578,958
                                 ----------       -----------
        Total..................    $ 60,116       $68,010,546
                                 ==========       ===========
Year ended December 31, 1993:
  Group life...................    $     --       $ 2,072,187
  Group accident and health....          --        61,556,278
  Annuities....................          --         1,291,282
  Other........................      16,849           752,554
                                 ----------       -----------
        Total..................    $ 16,849       $65,672,301
                                 ==========       ===========
</TABLE>
 
                 See accompanying independent auditors' report.
 
                                       39
<PAGE>   41
 
                                                                     SCHEDULE IV
 
               CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
 
                                  REINSURANCE
 
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
================================================================================================================
           COLUMN A                  COLUMN B         COLUMN C        COLUMN D        COLUMN E       COLUMN F
<S>                               <C>                <C>             <C>            <C>              <C>
----------------------------------------------------------------------------------------------------------------
                                                                                                     PERCENTAGE
                                                      CEDED TO        ASSUMED                        OF AMOUNT
                                      GROSS             OTHER        FROM OTHER         NET           ASSUMED
                                      AMOUNT          COMPANIES      COMPANIES         AMOUNT         TO NET
----------------------------------------------------------------------------------------------------------------
<S>                               <C>                <C>             <C>            <C>              <C>
Year ended December 31, 1995:
  Life insurance in force.....    $1,175,823,000     $50,751,000             --     $1,125,072,000           --
                                  ==============     ===========     ==========     ==============   ==========
  Premiums:                                                                                                    
    Life insurance............    $    5,815,836     $    78,003             --     $    5,767,543           --
    Accident and health                                                                                        
      insurance...............       228,453,564       1,553,883             --        227,400,986           --
                                  --------------     -----------     ----------     --------------     --------
                                  $  234,269,400     $ 1,631,886             --     $  233,168,529           --
                                  ==============     ===========     ==========     ==============   ==========
Year ended December 31, 1994:                                                                                  
  Life insurance in force.....    $1,012,860,000     $41,424,000             --     $  971,436,000           --
                                  ==============     ===========     ==========     ==============   ==========
  Premiums:                                                                                                    
    Life insurance............    $    5,283,232     $    65,498             --     $    5,217,734           --
    Accident and health                                                                                        
      insurance...............       220,147,427       1,686,090             --        218,461,337           --
                                  --------------     -----------     ----------     --------------     --------
                                  $  225,430,659     $ 1,751,588             --     $  223,679,071           --
                                  ==============     ===========     ==========     ==============   ==========
Year ended December 31, 1993:                                                                                  
  Life insurance in force.....    $1,016,513,000     $13,608,000             --     $1,002,905,000           --
                                  ==============     ===========     ==========     ==============   ==========
  Premiums:                                                                                                    
    Life insurance............    $    5,391,994     $    72,239             --     $    5,319,755           --
    Accident and health                                                                                        
      insurance...............       204,338,846         882,491             --        203,411,085           --
                                  --------------     -----------     ----------     --------------     --------
                                  $  209,730,840     $   954,730             --     $  208,730,840           --
                                  ==============     ===========     ==========     ==============   ==========
</TABLE>
 
                 See accompanying independent auditors' report.
 
                                       40
<PAGE>   42
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The information required by this Item 10 is incorporated herein by
reference to the Company's Proxy Statement to Shareholders in connection with
its annual meeting of Shareholders to be held on May 16, 1996, as well as Part I
of this Annual Report on Form 10-K.
 
ITEM 11. EXECUTIVE COMPENSATION
 
     The information required by this Item 11 is incorporated herein by
reference to the Company's Proxy Statement to Shareholders in connection with
its annual meeting of Shareholders to be held on May 16, 1996.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information required by this Item 12 is incorporated herein by
reference to the Company's Proxy Statement to Shareholders in connection with
its annual meeting of Shareholders to be held on May 16, 1996.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information required by this Item 13 is incorporated herein by
reference to the Company's Proxy Statement to Shareholders in connection with
its annual meeting of Shareholders to be held on May 16, 1996.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND
         REPORTS ON FORM 8-K.
 
     (a) Filed documents. The following documents are filed as part of this
report:
 
     1. Financial Statements.
 
        Central Reserve Life Corporation and Subsidiaries: Audit Report.
 
        Consolidated Balance Sheets -- December 31, 1995 and 1994.
 
        Consolidated Statements of Income -- Years ended December 31, 1995, 1994
           and 1993.
 
        Consolidated Statements of Shareholders' Equity -- Years ended December
           31, 1995, 1994 and 1993.
 
        Consolidated Statements of Cash Flows -- Years ended December 31, 1995,
           1994 and 1993.
 
        Notes to Consolidated Financial Statements.
 
     2. Financial Statement Schedules.
 
        Central Reserve Life Corporation and Subsidiaries:
 
        I.   Summary of Investments -- Other than Investments in Related
           Parties.
 
        II.  Condensed Financial Information of Registrant.
 
        III. Supplementary Insurance Information.
 
        IV.  Reinsurance.
 
     Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is given in the
consolidated financial statements or notes thereto.
 
                                       41
<PAGE>   43
 
3. EXHIBITS:
 
         * 3(a) -- Amended Articles of Incorporation
 
         * 3(b) -- Code of Regulations
 
        **10(a) -- Employment Contract
 
         *10(b) -- Incentive Stock Option Plan
 
         *10(c) -- Agreement of Lease
 
         *10(d) -- Mortgage Note
 
         *10(e) -- Mortgage
 
        **16   -- Letter regarding change in certifying accountant.
 
         *22   -- Subsidiaries
 
          27   -- Financial Data Schedule
 
     (b) Reports on Form 8-K. No reports on Form 8-K were filed during the
         quarter ended December 31, 1995.
 
     (c) Financial statements are on pages 16 to 20.
---------------
 *Incorporated by reference from Registrant's Report on Form 10-K filed on March
  12, 1992, file number
  0-8483 and made a part hereof by such reference.
**Incorporated by reference from Registrant's Report on Form 10-K filed on March
  25, 1993, file number
  0-8483 and made a part hereof by such reference.
 
                                       42
<PAGE>   44
 
                                   SIGNATURES
 
     PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
 
<TABLE>
<S>                                          <C>
                                             CENTRAL RESERVE LIFE CORPORATION
                                                         By:   /s/ FRED LICK, JR.
                                                             --------------------
                                                         Fred Lick, Jr., President
</TABLE>
 
     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE COMPANY
AND IN THE CAPACITIES AND ON THE DATES INDICATED.
 
<TABLE>
<CAPTION>
             DATE                                         SIGNATURE AND CAPACITY
             ----                                         ----------------------
<S>                                          <C>
       February 29, 1996                     By:   /s/ FRED LICK, JR.
                                                ----------------------------------------------
                                                   Fred Lick, Jr., Chairman of the Board of
                                                   Directors President, and Principal Executive Officer

       February 29, 1996                     By:   /s/ FRANK W. GRIMONE
                                                ----------------------------------------------
                                                  Frank W. Grimone, Executive Vice President,
                                                  Treasurer, and Principal Financial         
                                                  and Accounting Officer                     

       February 28, 1996                     By:   /s/ ROBERT E. BRUCE
                                                ----------------------------------------------
                                                  Robert E. Bruce, Director

       February 28, 1996                     By:   /s/ WILLIAM E. GERSTENSLAGER
                                                ----------------------------------------------
                                                  William E. Gerstenslager, Director

       February 28, 1996                     By:   /s/ E. LAWRENCE HENDERSHOT
                                                ----------------------------------------------
                                                  E. Lawrence Hendershot, Director

       February 29, 1996                     By:   /s/ JOHN L. MCKEAN
                                                ----------------------------------------------
                                                  John L. McKean, Director

       February 29, 1996                     By:   /s/ JOHN F. NOVATNEY, JR.
                                                ----------------------------------------------
                                                  John F. Novatney, Jr., Director

       February 28, 1996                     By:   /s/ DAVID L. ROSSIO
                                                ----------------------------------------------
                                                   David L. Rossio, Director

       February 29, 1996                     By:   /s/ THOMAS D. SCHULTE
                                                ----------------------------------------------
                                                  Thomas D. Schulte, Director

       February 28, 1996                     By:   /s/ ROBERT K. SMITH
                                                ----------------------------------------------
                                                   Robert K. Smith, Director
</TABLE>
 
                                       43
<PAGE>   45
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
                                                                                SEQUENTIALLY
                                                                                  NUMBERED
    EXHIBIT                                                                         PAGES
---------------                                                                ---------------
<C>             <S>                                                            <C>
        3(a)    Amended Articles of Incorporation..............................      *
        3(b)    Code of Regulations............................................      *
       10(a)    Employment Contract............................................     **
       10(b)    Incentive Stock Option Plan....................................      *
       10(c)    Agreement of Lease.............................................      *
       10(d)    Mortgage Note..................................................      *
       10(e)    Mortgage.......................................................      *
       16       Letter regarding change in certifying accountant...............     **
       22       Subsidiaries...................................................      *
       27       Financial Data Schedule........................................
 
---------------

<FN> 
 *Incorporated by reference from Registrant's Report on Form 10-K filed on March
  12, 1992, file number 0-8483 and made a part hereof by such reference.
**Incorporated by reference from Registrant's Report on Form 10-K filed on March
  25, 1993, file number 0-8483 and made a part hereof by such reference.
</TABLE>
 
                                       44