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                                 UNITED STATES
                       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, 1999                COMM. FILE NO. 0-8483

                               CERES GROUP, INC.
             (Exact Name of Registrant as Specified in its Charter)

                                    DELAWARE
                          ---------------------------
                        (State or Other Jurisdiction of
                         Incorporation or Organization)
                                   34-1017531
                       ---------------------------------
                     I.R.S. Employer Identification Number

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          17800 ROYALTON ROAD, CLEVELAND, OHIO                                    44136
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        (Address of Principal Executive Offices)                                (Zip Code)
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                                 (440) 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 STOCK, PAR VALUE $0.001 PER SHARE
                ------------------------------------------------
                                (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.  [X]

     State the aggregate market value of the voting stock held by non-affiliates
of the Registrant. (The Registrant considers affiliates to be directors,
executive officers, and those persons subject to the Voting and Stockholders'
Agreements.)

     $27,098,548 computed based on the closing price of the common stock on
March 24, 2000.

     The number of shares of common stock, par value $0.001 per share,
outstanding as of March 17, 2000: 13,707,573
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                      DOCUMENTS INCORPORATED BY REFERENCE:

 Portions of the Registrant's Definitive Proxy Statement for the Annual Meeting
of Stockholders to be held June 27, 2000 are incorporated by reference into Part
                             III of this Form 10-K.
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                               CERES GROUP, INC.
                                    INDEX TO
                           ANNUAL REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 1999

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PART I
Item 1   Business....................................................      1
Item 2   Properties..................................................     18
Item 3   Legal Proceedings...........................................     18
Item 4   Submission of Matters to a Vote of Security Holders.........     18
         Our Executive Officers......................................     18

PART II
Item 5   Market for Registrant's Common Equity and Related
         Shareholder Matters.........................................     20
Item 6   Selected Financial Data.....................................     21
Item 7   Management's Discussion and Analysis of Financial Condition
         and Results of Operations...................................     21
Item 7A  Quantitative and Qualitative Disclosures about Market
         Risk........................................................     31
Item 8   Financial Statements and Supplemental Data..................     32
         Schedule II -- Condensed Financial Information of
         Registrant..................................................     65
         Schedule III -- Supplementary Insurance Information.........     68
         Schedule IV -- Reinsurance..................................     69
Item 9   Changes in and Disagreement with Accountants on Accounting
         and Financial Disclosure....................................     70

PART III
Item 10  Directors and Executive Officers of the Registrant..........     70
Item 11  Executive Compensation......................................     70
Item 12  Security Ownership of Certain Beneficial Owners and
         Management..................................................     70
Item 13  Certain Relationships and Related Transactions..............     70

PART IV
Item 14  Exhibits, Financial Statements, Financial Statement
         Schedules, and Reports on Form 8-K..........................     70
Signatures...........................................................     75
Index to Exhibits....................................................     76
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                                     PART I

ITEM 1.   BUSINESS

OVERVIEW

     Ceres Group, Inc. markets and delivers a broad range of health and life
insurance, medical cost management services and specialty products to
individuals, small businesses and the senior market. We use a wide variety of
distribution channels, including more than 60,000 independent licensed agents
and a number of e-commerce platforms. To maintain affordable premiums for our
more than 525,000 insureds across the nation and to enhance our profitability,
we apply medical cost management programs to each of our health product lines.
We also focus on administrative consolidation and efficiency improvements to
retain customers and enhance our financial results. A large part of our growth
during the past two years has been a result of strategic acquisitions of
companies and blocks of business in our selected markets. These acquisitions
have allowed us to penetrate our markets more quickly, and we believe will allow
us to gain administrative efficiencies through economies of scale.

HISTORY

     We began in 1964 as Citation Life Insurance Company and have changed our
name twice: to Central Reserve Life Corporation in 1976, then to Ceres Group,
Inc. in 1998, to more clearly reflect that we are the parent company of multiple
insurance companies. Through acquisitions, our insurance subsidiaries now
include Central Reserve Life Insurance Company, United Benefit Life Insurance
Company, Provident American Life and Health Insurance Company and Continental
General Insurance Company.

     In 1996 and 1997, Central Reserve experienced substantial financial losses
in connection with newly-issued group health insurance policies, due to greater
utilization than anticipated, new state mandates and overall reductions in
profitability arising out of industry-wide pricing competition. In late 1997, a
group of investors, including Peter W. Nauert, who later became our Chairman of
the Board, President and Chief Executive Officer, arranged and entered into a
number of financial restructuring transactions that enabled us return to
profitability and established a platform for growth through acquisitions and
increased sales.

     Total premiums, before reinsurance, for the year ended December 31, 1999
were $605.6 million, an increase of 128.6%, compared to $264.9 million for 1998.
Assets at December 31, 1999 were $717.9 million, an increase of 298.4%, compared
to $180.2 million at December 31, 1998. Pre-tax profits totaled $18.0 million
for the year ended December 31, 1999 compared to a pre-tax loss of $2.8 million
for 1998.

BUSINESS STRATEGY

     We have developed our business plan around a strategy of growth and
consolidation. We expect to grow through increased retail sales, expanded
distribution systems including e-commerce and strategic acquisitions that fit
into our target markets. As we grow, we are focused on lowering medical claims
costs, reducing underwriting risks, consolidating administrative operations and
increasing our fee-based revenue.

     There are a number of factors affecting the health insurance industry that
we believe will benefit us through the next several years. We have positioned
our company to take advantage of these trends.

     - Industry consolidation -- Traditional indemnity health insurers and
       managed care companies face many challenges, including increasing
       healthcare costs, changing government regulation and rising prescription
       drug costs, thereby creating acquisition opportunities for us. As smaller
       companies find that they can no longer compete and as other companies
       divest themselves of certain types of business, we expect there will be
       more acquisition targets for us and increased opportunities for retail
       sales.

     - Growing affluent senior population -- The 55 and older segment is the
       fastest growing age group in our nation. By the year 2025, this segment
       is projected to increase 75% to 103 million people. Government proposals
       for tax credits for long-term care and other incentives to promote
       personal responsibility for senior healthcare costs also should benefit
       this market. We established our senior life and health

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       division to meet the needs of this growing market. In 1999, we introduced
       the "Senior Power Portfolio" to provide comprehensive coverage and a wide
       range of products and benefits.

     - Expansion of e-commerce -- We have increased our distribution channels to
       include the Internet. In addition to alliances with two major e-commerce
       companies, we are developing a program to empower our agents with
       Internet technology to increase their sales efficiency. QQLink.com, our
       business-to-business (B2B) agent-linked e-commerce exchange, which we
       expect will become operational during the summer of 2000, will provide
       discounted prices on insurance and other products and services and a
       strong agent connection to enhance online service and marketing.

     - Consumer movement away from HMOs -- Consumers have demanded and received
       more freedom of choice from health maintenance organizations (HMOs) in
       the providers they use and the treatment they receive. With the resulting
       increased costs, HMOs have lost the prime advantage with which they
       entered the market: the concept of saving money by limiting care. Our
       approach is more consumer-friendly. We manage the cost of healthcare. We
       do not manage medicine. This approach means we do not interfere with
       medical decisions of our insureds' physicians. Instead, we negotiate fees
       with medical providers and direct our insureds to specialized medical
       providers with the experience and proven track records to offer more
       positive outcomes at lower costs.

We have established a number of initiatives to achieve our strategic goals.
These programs have been the basis for our financial turnaround and our return
to profitability as we have grown.

  Implement Medical Cost Management Techniques

     We seek to reduce medical costs and lower loss ratios by using enhanced
utilization management and other cost control measures. Our medical cost
management initiatives are centralized into Ceres Health Care, Inc., a
wholly-owned subsidiary of Ceres, which was established in January 1999 to
provide our insurance subsidiaries and acquired businesses with cost management
programs. By directly controlling medical cost management, we believe we have an
enhanced ability to achieve greater efficiency, increased cost savings, and to
adjust programs to meet product and profitability requirements.

     Our cost management programs include:

     - pre-certification of medical care and other screening techniques to move
       high-cost and high-risk insureds into case management;

     - specialized case management for critical conditions, such as neonatal
       care, cancer and cardiovascular surgery;

     - improved preferred provider organization (PPO) network contracting;

     - use of a three-tiered pharmacy benefit program;

     - limitation of medical charges by reasonable and customary standards;

     - use of medically appropriate protocols;

     - enhanced communication to insureds on how to reduce their out-of-pocket
       expenses and lower total healthcare costs;

     - use of ancillary facility discount programs; and

     - product design geared to encourage use of PPOs.

     We have entered into contracts with 76 PPO networks in 49 states and the
District of Columbia. In certain areas, we also utilize secondary networks to
increase the total discounts available. We believe that co-payments and
out-of-network obligations of our PPO products enhance our ability to control
costs by encouraging insureds to take more responsibility for their healthcare
decisions.

     In addition to the PPO networks, we utilize a "Centers of Excellence"
network which provides insureds access to transplant and other necessary
high-risk procedures at approximately 52 renowned medical
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institutions. These select facilities have the staff, the experience, and the
volume of patients to produce higher recovery rates while offering discounted
costs. The purpose of the program is to provide quality care and improved
treatment outcomes in a more cost-effective manner.

     Our medical cost containment programs are designed to reduce the cost of
healthcare in order to keep our premiums at affordable levels and out-of-pocket
expenses as low as possible. As a result of these programs, as well as premium
adjustments, our medical loss ratio for the year ended December 31, 1999,
declined to 70.1% from 75.8% for 1998.

  Improve the Underwriting Process

     We have improved underwriting at all levels of our business through more
rigorous risk evaluation and controls, along with improved product design.
Effective, consistent and accurate underwriting is an important element of our
profitability and depends on our ability to adequately predict claims liability
when determining the prices of our products. We have recently implemented an
individual debit system of underwriting for both group and individual major
medical insurance, enabling us to better reflect individual health risk. Under
the debit system, for a group health insurance policy, we underwrite the entire
group and base our debit rating on individual health risk. We intend to apply
the same method of underwriting to each insurance company and its related
operations that we may acquire, to the extent permitted by applicable laws and
regulations.

     When we acquire a company or block of insurance business, we address new
business rates and renewal rates. Our profitability depends on our ability to
adequately increase rates for both new and renewal business. We have implemented
internal procedures that permit us to apply to regulatory authorities for
corrective rate actions on a timely basis for our existing businesses and new
acquisitions with respect to both new business and renewals.

     In an acquisition, we first examine the acquired company's or block's new
business rates and the current market rates to analyze whether these rates
sufficiently cover benefits, expenses, and commissions. For renewal business, we
analyze the acquired company's or block's loss ratios and compare them to our
target loss ratios. When this analysis is complete, we immediately implement any
necessary corrective action including rate increases. Some components of rating
include implementing new programs such as non-commissionable premium for
underwriting rate-ups and renewal increases, increasing administration fees,
increasing life volumes, implementing medical cost management fees,
cross-selling other supplemental products and introducing our PPO products and
drug benefits. Premium billings also include fees paid to Ceres Health Care to
provide care coordination services for the benefit of our insureds.

     We have ratings manuals and audit procedures for use by each of our
insurance subsidiaries and third party administrators to ensure that policies
are underwritten in a uniform manner. Each insurance subsidiary and third party
administrator uses our standard health history questionnaire, allowing us to
obtain pertinent information on medical conditions of prospective insureds, most
of the time without obtaining medical records from the attending physician and
thereby reducing expenses. Each health history questionnaire is verified through
a recorded phone call with each individual and each member of groups of one to
nine individuals and with approximately every third member for groups of ten or
more. In addition, we have implemented internal procedures that permit us to
apply to regulatory authorities for corrective rate actions on a timely basis.

     We emphasize the sale of individual and association sponsored products, as
opposed to employer small group products, because of greater flexibility in both
the underwriting and design of these products. In 1999, the percentage of total
medical premiums, which includes comprehensive major medical plans, was 61.5%
for individual and association sponsored products and 38.5% for small group
products compared to 36.6% for individual and association sponsored products and
63.4% for small group products in 1998.

  Reduce Administrative Costs

     We are committed to reducing administrative costs through increases in
efficiency, streamlined procedures and consolidation of operations and services.
Our areas of focus include reductions in facility

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management costs, printing and supply costs, travel expenses and the
consolidation of corporate activities such as accounting, marketing and
distribution.

     In addition, where cost-effective, we outsource certain functions to
independent third parties, including claims processing, underwriting and
administrative services. All information and telephone systems at our Cleveland
headquarters, as well as all claims processing for our Ohio insureds of Central
Reserve, are outsourced to Antares Management Solutions, a subsidiary of Medical
Mutual of Ohio. The claims processing, underwriting services and other
administrative services for Provident American Life and Health and the claims
processing and other administrative services for United Benefit Life are
outsourced to HealthPlan Services Corporation, in Tampa, Florida. We believe
this outsourcing offers us the following advantages:

     - predictable operational, administrative and systems costs;

     - variable expense based upon volume of business;

     - the benefits of the vendor's expertise in specialized areas;

     - enabling our capital to be used for other parts of our growth strategy;

     - efficiency and economies of scale; and

     - system consolidation and integration.

     All of our claims processing facilities, including the claims that are
outsourced, must apply the same claims management standards. We and our vendors
work actively to meet our goals of:

     - processing claims within five to ten days of receipt;

     - minimizing claims inventory through consistent turnaround time and
       control of backlogs;

     - processing claims with an accuracy rate of not less than 99.5%; and

     - answering customer service calls in less than two minutes and with an
       abandon, or hang-up, rate less than 5%.

     In 1999, our selling, general and administrative expenses, which include
administrative expenses relating to issuing and servicing our insurance
business, to premium ratio, after deferred acquisition costs and value of
business acquired, was 19.2% compared to 20.8% in 1998. We accomplished this
improvement at the same time that we consolidated Provident American Life and
Health, Continental General and United Benefit Life into our operations.

  Implement Ancillary Profit Enhancement Techniques

     In addition to premium rate adjustments, claims cost management programs
and increases in administrative efficiency, we also develop and implement a
number of profit enhancement techniques.

     Some of these programs also increase our fee-based revenue. Fee-based
revenue is derived from:

     - administrative fees for direct billing and claim payment fees on certain
       products;

     - reinsurance management fees;

     - care coordination fees; and

     - management fees for associations that endorse our products.

     Our fee-based revenue increased to $15.8 million in 1999 from $7.7 million
in 1998, an increase of 105.2%.

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  Expand Marketing and Distribution Systems

     We have expanded our marketing reach through acquisitions, agent
recruitment and development of new distribution channels. In 1999, we added
approximately 22,000 independent licensed sales agents through acquisitions. As
we acquire companies or blocks of insurance business, we seek to retain the
existing agency force. This strategy is intended to increase our new sales going
forward and improve our ability to retain the business we have acquired. We
communicate with these agents to illustrate the benefits and rewards of our
products and programs. We also emphasize our cross-selling opportunities and
encourage agents to be licensed by our other insurance subsidiaries in order to
expand the portfolio of products they will be able to offer.

     Our nationwide recruiting efforts have also been an important source for
increasing business. In 1999, we added 14,600 new agents through our recruiting
programs.

     In addition to traditional independent agent distribution channels, we have
added:

     - e-commerce, by partnering with HealthAxis.com and ChannelPoint, two major
       Internet companies, and by developing QQLink.com, our B2B agent-linked
       exchange which we expect will become operational during the summer of
       2000;

     - inter-company marketing alliances with carriers of non-competing products
       including over 15,000 agents of approximately 20 unaffiliated insurance
       companies;

     - affinity group marketing to associations, employer groups and other
       organizations; and

     - a career agent distribution system through our subsidiary, HealthMark
       Sales, LLC, which will enable agents to sell only our products and which
       we expect will begin operations late in 2000.

  Selectively Acquire Complementary Insurance Businesses

     We seek to acquire complementary insurance businesses to which we can apply
our cost containment programs, marketing support systems, underwriting
processes, product design expertise, administrative efficiency improvements and
profit enhancement techniques. To execute our acquisition strategy, we engage in
discussions with health and life insurance companies and other complementary
businesses.

     We believe that we are well positioned to continue to selectively acquire
insurance companies and related operations and apply our strategic initiatives
to improve operations and profitability. The challenges faced by traditional
indemnity health insurers and managed care companies, including increasing
healthcare costs, changing government regulations and a highly competitive
marketplace, create acquisition opportunities for us. We believe that because of
these challenges smaller managed care companies and smaller indemnity health
insurance companies will continue to seek operating partners and that multi-line
insurance companies with blocks of individual and small group health insurance
or senior products will continue to seek to divest these operations. We believe
that these market conditions will continue to result in acquisition
opportunities for us.

     We expect to be an active acquirer of other health and life insurance
companies and blocks of insurance business to increase our size, efficiency and
markets. As we acquire businesses, we expect to implement our business strategy
with each acquired business. We plan to concentrate primarily on acquisitions
which can be consolidated into our current niche markets, including individual,
association and small group medical coverage, and senior life and health
insurance.

PENDING ACQUISITION

     Pyramid Life Insurance Company. On October 7, 1999, we signed a definitive
stock purchase agreement to purchase The Pyramid Life Insurance Company from
United Insurance Company of America, a subsidiary of Unitrin, Inc. of Chicago,
Illinois. The acquisition is expected to be completed in the second quarter of
2000. Upon completion of the acquisition, Pyramid will be a wholly-owned
subsidiary.

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     In addition to the acquisition of Pyramid, we expect that Continental
General will sell specialty senior medical insurance products through the
independent agent distribution system of selected Unitrin insurance
subsidiaries.

     Pyramid, based in Mission, Kansas, provides health and life insurance
primarily for the senior market, including Medicare supplement, long-term care,
home health care, and senior life products. At December 31, 1999, Pyramid had
assets of approximately $120.0 million, statutory surplus of approximately $43.0
million and statutory revenue of $72.0 million. Pyramid markets its senior
insurance products through 2,500 independent and career agents in 40 states with
primary sales concentration in Texas, Tennessee, Indiana, Arkansas, and
Virginia.

     We expect to finance the $67.5 million purchase price as follows:

     - up to $15.0 million from financing provided by The Chase Manhattan Bank
       and associated banks;

     - $25.0 million from special dividends to be paid by Pyramid in connection
       with the acquisition;

     - $7.5 million from the sale of our convertible preferred stock to the
       seller; and

     - $20.0 million from the proceeds of a private placement offering of our
       common stock at $6.00 per share.

     We have not yet completed the above financing and we cannot guarantee that
the acquisition of Pyramid will be completed.

     The acquisition of Pyramid is subject to regulatory approval from the State
of Kansas and other customary terms and conditions. Pyramid will be our fourth
acquisition since July 1998.

COMPLETED ACQUISITIONS

     Acquisition of United Benefit Life Insurance Company. On August 1, 1998,
Central Reserve entered into an agreement with United Benefit Life, a health and
accident and life insurer, to reinsure 100% of the major medical policies of
United Benefit Life in effect prior to August 1, 1998, covering approximately
100,000 members with estimated annual premiums of $100.0 million. The agreement
also provided that Central Reserve would reinsure 100% of all major medical
policies written by United Benefit Life from and after August 1, 1998. Central
Reserve also began administering all of United Benefit Life's major medical
policies as of August 1, 1998. In addition, Central Reserve entered into an
agreement with Insurance Advisors of America, Inc., an affiliate of United
Benefit Life, to market the policies to be issued by United Benefit Life which
Central Reserve has reinsured. At the same time, Central Reserve ceded 80% of
the business in force on August 1, 1998 to Reassurance Company of Hannover,
thereby retaining a net risk of 20%. Additionally, Central Reserve ceded to
Hannover 50% of the policies to be written by United Benefit Life from and after
August 1, 1998 and reinsured by Central Reserve.

     On July 31, 1998, United Benefit Life held approximately $13.5 million in
liability reserves. Hannover paid to Central Reserve an initial ceding allowance
of $20.0 million for its 80% portion of the reinsurance. Reserves for estimated
claims of $36.5 million were assumed by Central Reserve, for which United
Benefit Life transferred assets of $33.5 million, including a $20.0 million
ceding allowance paid to United Benefit Life by Central Reserve. Therefore,
liability reserves assumed by Central Reserve exceeded by $3.0 million the
assets transferred to Central Reserve by United Benefit Life. This $3.0 million
reserve shortfall was reflected in a note receivable payable to Central Reserve
by United Benefit Life. Insurance Advisors joined in United Benefit Life's $3.0
million obligation. In addition, Central Reserve entered into an agency
agreement with respect to the marketing of United Benefit Life's policies with
Insurance Advisors in exchange for a $7.0 million note receivable. The
agreements between the parties provided for a "true up" for any difference
between the indicated reserve of $36.5 million and the actual liabilities as of
August 1, 1998, and required United Benefit Life and Insurance Advisors to be
jointly liable. The obligations of United Benefit Life and Insurance Advisors to
Central Reserve were secured by a pledge from United Benefit Managed Care
Corporation, the parent company of United Benefit Life, of 100% of the stock of
United Benefit Life and the

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pledge by Insurance Advisors of all of the commissions due Insurance Advisors or
to become due from United Benefit Life.

     On March 18, 1999, Central Reserve announced the execution of an agreement
with United Benefit Managed Care Corporation to purchase all of the outstanding
shares of United Benefit Life. On June 14, 1999, Central Reserve terminated this
agreement due to the increasing amount of the reserve shortfall at United
Benefit Life. Pursuant to the "true up" provision in the agreements between
United Benefit Life, Insurance Advisors and Central Reserve, the reserve
shortfall, calculated at December 31, 1999, totaled $19.4 million. The reserve
shortfall was due in part to a fraud committed in connection with claims
administration at the United Benefit Life facility. On July 21, 1999, Central
Reserve foreclosed on the stock of United Benefit Life and the renewal
commissions due Insurance Advisors from United Benefit Life in order to satisfy,
in part, the reserve shortfall.

     As of December 31, 1999, Central Reserve had recovered approximately $17.8
million of the $19.4 million reserve shortfall, consisting of $4.6 million from
United Benefit Life, $5.3 million from withheld commissions from Insurance
Advisors, and $7.9 million from funds received from Hannover. As a result, the
remaining reserve shortfall to be recovered at December 31, 1999 totaled
approximately $1.6 million. An expense of $0.7 million was recorded in 1998, and
the balance of $0.9 million was recorded in 1999.

     Acquisition of Provident American Life and Health Insurance Company. On
December 31, 1998, Central Reserve acquired Provident American Life and Health
from Provident American Corporation for $5.5 million in cash, an amount equal to
Provident American Life and Health's statutory capital and surplus at the date
of acquisition. Provident American Life and Health is a life and accident and
health insurer. Provident American Life and Health, a marketer of managed care
health insurance products to individuals and small businesses, had approximately
$48.9 million in direct premiums (before reinsurance) and fees in 1998 and $5.4
million in statutory capital and surplus at December 31, 1998. Funds for the
acquisition were provided from Central Reserve's working capital.

     Prior to our acquisition of Provident American Life and Health, all of the
insurance business of Provident American Life and Health in force at December
31, 1998 was ceded to Provident Indemnity Life Insurance Company. In addition,
Hannover reinsured all the individual and small group health insurance in force
at December 31, 1998, of Provident American Life and Health and Provident
Indemnity for a ceding allowance of approximately $10.0 million. On January 1,
1999, Hannover ceded 10% of this reinsurance to Central Reserve and Central
Reserve paid a $1.0 million ceding commission.

     Effective January 1, 1999, Provident American Life and Health entered into
a reinsurance agreement with Provident Indemnity, whereby Provident American
Life and Health reinsured 100% of Provident Indemnity's business written after
December 31, 1998. In a separate reinsurance agreement, Provident American Life
and Health ceded to Hannover 50% of its direct business written after December
31, 1998 and 50% of the business reinsured from Provident Indemnity.

     Acquisition of Continental General Corporation. Effective February 1, 1999,
we acquired Continental General Corporation and its wholly-owned subsidiary,
Continental General Insurance Company, for $84.5 million in cash. Continental
General provides health and life insurance products for the senior market,
including long-term care insurance, Medicare supplement and senior life and
annuity products, as well as major medical plans. Continental General had
approximately $190.7 million in premiums in 1998 and at December 31, 1998 had
approximately $500.0 million in assets and $37.0 million in statutory capital
and surplus. The administrative functions of Continental General are based in
Omaha, Nebraska.

     Funds for the acquisition of Continental General were provided as follows:

     - $40.0 million by a syndicate of banks arranged by Chase Securities Inc.;

     - $15.0 million from the private placement of 2,000,000 newly-issued shares
       of our common stock;

     - $22.5 million from a special dividend from Continental General to the
       seller; and

     - the balance from cash available at Ceres.

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     Concurrently with the closing, Continental General entered into a
reinsurance agreement with Hannover, under which Hannover reinsured 50% of all
insurance business in force at Continental General on February 1, 1999 for a
ceding allowance of $13.0 million.

NEW BUSINESS AGREEMENT

     Central Benefits Mutual Insurance Company Block of Business. On December
17, 1999, we announced an agreement with Central Benefits to offer group medical
coverage on a case-by-case basis to certain Central Benefits customers, as a
result of Central Benefits' decision to withdraw from the group health business.

     Based in Columbus, Ohio, Central Benefits made a decision to reallocate its
resources to expand its third party administrator services and concentrate on
its group life insurance and Medicare supplement business segments.

     Coverage to the groups we selected is being offered through our
subsidiaries, Central Reserve and Continental General. In addition to the block
of existing business, we are also licensing approximately 100 Central Benefits
independent agents who were not previously licensed with us. We expect that
these new agents will sell additional Ceres products.

     Because we are selecting coverage on a case-by-case basis, we are able to
keep underwriting risk to a minimum. With the added assistance of the agent
sales force in making this transition, we expect to be able to successfully
acquire approximately $15.0 to $20.0 million in annualized premium revenue
through this program in 2000.

     We expect to use this type of arrangement as a blueprint for other
agreements with companies that are seeking to exit healthcare markets, including
individual, small business and specialty product lines. By using this blueprint,
we can limit our risk while benefiting from potential new business and
distribution channels.

PENDING NEW BUSINESS AGREEMENT

     American Chambers Life Insurance Company Reinsurance Agreement. On March
10, 2000, we announced that Continental General acquired through reinsurance a
block of individual and small group health insurance from American Chambers,
based in Naperville, Illinois, written by American Chambers on or after January
1, 2000. The reinsurance effective date is March 1, 2000.

     We estimate that sales through the American Chambers agents will produce
approximately $30.0 million in new annualized premium in 2000. American Chambers
agents will have access to selected products through our insurance subsidiaries
and QQLink.com in certain states. American Chambers is represented by more than
15,000 independent agents in 38 states and is endorsed by 3,500 Chambers of
Commerce across the nation.

     American Chambers will continue to provide all administrative services for
the block of business covered by the reinsurance agreement. There will be no
change to the benefits or insurance contracts of the existing customers. Under
the administrative agreement, claims processing, customer service and all
underwriting activities will be continued by American Chambers.

INDUSTRY OVERVIEW

     National health expenditures in the United States have grown from $41.0
billion, or $202 per capita, in 1965 to $1.1 trillion, or $4,094 per capita, in
1998, according to the most recent statistics compiled by the Health Care
Financing Administration (HCFA). National health expenditures represented 13.5%
of the United States Gross Domestic Product (GDP) in 1998 compared to 5.7% in
1965. Several factors have contributed to the dramatic increase in healthcare
expenditures, including increased costs and utilization of high-technology
diagnostic testing and treatments, the rising cost of malpractice insurance,
higher operating costs for hospitals and physicians, changes in federal and
state healthcare regulations, and the aging of the population. National health
expenditures are projected to total $2.2 trillion and reach 16.2% of GDP by
2008. Private health insurance paid for one-third, or $375 billion, of total
healthcare spending in 1998. Employees

                                        8
<PAGE>   11

covered by managed care accounted for 86% of all insured workers in 1998.
Employees are moving away from HMOs to less restrictive plans such as
point-of-purchase plans and PPOs.

     Due to the escalating cost of healthcare services, customers (individuals,
groups, and employers) began to demand lower cost alternatives to traditional
indemnity insurance plans. Managed healthcare plans were developed to attempt to
provide quality healthcare services in an affordable manner. Typically, PPO
plans develop networks of healthcare providers to deliver healthcare at
favorable rates that incorporate healthcare utilization management and other
cost control measures. Managed healthcare plans also feature a variety of
methods of healthcare utilization management to control the type, quality, and
setting of services obtained. PPO members generally are charged periodic prepaid
premiums and co-payments or deductibles. These plans allow out-of-network usage,
typically at substantially higher out-of-pocket costs to members. By referring
patients to healthcare providers, utilization management programs are designed
to provide economic incentives to encourage providers to deliver medically
necessary and cost-effective care.

     Traditional indemnity insurance usually allows insureds substantial freedom
of choice in selecting healthcare providers but without financial incentives or
cost-control measures typical of managed care plans. Healthcare providers are
reimbursed on a retrospective basis and there are few, if any, incentives or
measures to control healthcare costs. Indemnity insurance plans typically impose
an annual deductible on the insureds.

     Senior Market Growth. The senior market, Americans age 55 and over, is one
of the fastest growing age segments in the country. According to HCFA, the
number of Medicare enrollees (age 65 and older) nearly doubled between 1967 and
1998, growing to 38.8 million from 19.5 million. By 2007, the Medicare
population is expected to total more than 44 million. As of January 1998,
Medicare managed care enrollment totaled more than 6 million, a 156% increase
since 1992, according to HCFA.

CUSTOMER BASE

     We had over 208,000 major medical group certificates and individual
policies in force as of December 31, 1999, representing more than 525,000
insureds. The following table reflects the breakdown by product of the group
certificates and individual policies for the year ended December 31, 1999:

<TABLE>
<CAPTION>
                                                         INDEMNITY      PPO
                                                         ---------    --------
<S>                                                      <C>          <C>
Major Medical..........................................    46,180      162,301
Senior and Supplemental Products.......................   102,138           --
                                                          -------     --------
     Total Health......................................   148,318      162,301
Life and Annuity Products..............................    47,277           --
                                                          -------     --------
     Total.............................................   195,595      162,301
                                                          =======     ========
</TABLE>

                                        9
<PAGE>   12

     The geographic distribution of direct and assumed premiums, before
reinsurance ceded, and annuity considerations received by Central Reserve and
United Benefit Life during 1998 and a full year for all of our subsidiaries in
1999, with the exception of 11 months for Continental General, is as follows (in
thousands):

<TABLE>
<CAPTION>
                      1999                                                1998
                      ----                                                ----
                                       PERCENT OF                                          PERCENT OF
          STATE              AMOUNT      TOTAL                STATE              AMOUNT      TOTAL
          -----             --------   ----------             -----             --------   ----------
<S>                         <C>        <C>          <C>                         <C>        <C>
Ohio......................  $ 94,193      14.2%     Ohio......................  $ 82,027      26.3%
Florida...................    75,892      11.4      Indiana...................    37,034      11.9
Indiana...................    46,176       6.9      North Carolina............    20,600       6.6
Georgia...................    41,081       6.2      Arizona...................    16,067       5.1
North Carolina............    37,281       5.6      Tennessee.................    15,367       4.9
Texas.....................    31,882       4.8      Florida...................    14,976       4.8
Kansas....................    25,121       3.8      South Carolina............    14,009       4.5
South Carolina............    24,967       3.8      Michigan..................    13,810       4.4
Tennessee.................    24,567       3.7      Kansas....................    13,079       4.2
Missouri..................    22,450       3.4      Missouri..................    13,017       4.2
Other.....................   241,516      36.2      Other.....................    72,268      23.1
                            --------     -----                                  --------     -----
          Total...........  $665,126     100.0%     Total.....................  $312,254     100.0%
                            ========     =====                                  ========     =====
</TABLE>

     As shown by the table, although the acquisitions of Provident American Life
and Health and Continental General significantly reduced the geographic
concentration, the State of Ohio accounted for $94.2 million, or 14.2%, and the
State of Florida accounted for $75.9 million, or 11.4%, of our total direct and
assumed premiums, before reinsurance ceded, and annuity considerations for 1999.
The State of Ohio accounted for approximately $82.0 million, or 26.3%, and the
State of Indiana accounted for approximately $37.0 million, or 11.9%, of our
total direct and assumed premiums (before reinsurance ceded) and annuity
considerations in 1998.

PRODUCTS AND SERVICES

     We primarily market health and life insurance products tailored to meet the
varied benefit needs of our markets, including individuals, employer groups,
associations and seniors.

     Major Medical. Our major medical products are offered through PPO networks
and as traditional indemnity health plans. We provide a broad range of products
from basic to comprehensive coverage. We emphasize our PPO products and
encourage our insureds to convert from traditional indemnity health because our
PPO products provide for healthcare delivery at lower costs than traditional
indemnity health insurance due to network provider arrangements that provide
favorable rates and use utilization management and other cost control measures.

     Our traditional indemnity health insurance products, which provide coverage
for services from any qualified medical provider, also offer access to our
negotiated network savings. Although our indemnity insureds do not have to use
network providers, we have established programs using our networks which reduce
claims cost and out-of-pocket costs for our insureds.

     Specialty Medical Coverage. We also provide specialty products which serve
specific niche markets:

     - BasicMed which provides a limited health insurance benefit to primarily
       cover specified healthcare expenses while hospitalized or in need of
       surgery; and

     - short-term medical coverage, which provides for major medical benefits
       for a limited amount of time for people who, for example, are between
       jobs or are recent graduates.

                                       10
<PAGE>   13

     Employer Group Products. We offer employer groups of two to 100 employees a
partially self-funded major medical plan. This alternate funding mechanism
allows the employer to limit expense and risk by self-funding part of the
coverage. The savings generated can be used to provide other employee benefits,
including coverage for vision, dental, critical illness, supplemental life
insurance, and a prescription drug discount card.

     Senior Health and Life. Our senior market products include a wide range of
comprehensive and supplemental coverage. In 1999, we released our new "Senior
Power Portfolio," featuring 12 newly-approved health, life and annuity products
for Americans age 55 and over, including long-term care, home health care,
extended convalescent care, acute recovery care, Medicare supplement, Medicare
Select, life insurance, wealth accumulation annuities and senior cancer
coverage.

     Supplemental Products and Services. We augment our core business of health
and life insurance products for individuals, employer groups, group associations
and seniors with a select group of complementary, supplemental products and
services. These products provide increased protection for our insureds,
additional commission income for our agents and higher profit margins for us. We
provide compensation and support programs to encourage our agents to use these
products for cross-sell, up-sell and next-sell purposes. Supplemental products
include:

     - critical illness coverage which provides a one-time cash payment when an
       insured is diagnosed with a specified critical illness or when undergoing
       a specified surgery;

     - first diagnosis cancer coverage which provides a one-time cash payment
       when an insured is diagnosed with cancer;

     - accidental injury coverage which provides replacement income when an
       insured becomes disabled due to a covered off-the-job accident;

     - accidental death benefit which provides for payments directly to the
       insured's beneficiary in the event of an accidental death; and

     - dental coverage.

     Life and Annuity. We also market group life insurance and annuities. We
offer term life as an ancillary product to our major medical members. We also
offer a single premium deferred annuity with guaranteed interest rate and a
principal amount of $5,000 to $250,000, and a single premium bonus annuity with
first year interest bonus, guaranteed interest rate and withdrawal options.

     Pharmaceutical Benefits Program. In July 1999, we implemented a program to
reduce costs in our prescription drug programs. The two major benefits of the
program are:

     - a three-tiered incentive system to encourage our insureds to elect
       certain tiers of prescription drugs to reduce their co-payment, and

     - a tandem program where all maintenance prescription drugs are offered
       almost exclusively by mail-order.

     Non-insurance Products and Services. In addition to our health and life
insurance lines, we provide a number of products and services, which offer our
customers added benefits.

     - Section 125 Premium Only Plan -- This product provides a vehicle to pay
       for health insurance on a pre-tax basis, saving money for both employers
       and employees. The savings that are generated are available to use for
       the purchase of supplemental insurance products.

     - Ceres Savers Plan -- This discount buying organization offers significant
       discounts for its members when they purchase travel, vision, dental and
       other services.

     - Personal Healthcare Management Services -- This program provides valuable
       services, such as a toll-free medical and benefits phone line, early high
       risk pregnancy screening, non-network negotiation services and early
       warning case management programs, which are designed to lower
       out-of-pocket medical expenses for our insureds.

                                       11
<PAGE>   14

MARKETING AND SALES

     Our national distribution channels are critical for our continued growth.
We market our products through approximately 60,000 independent licensed agents
in 49 states, the District of Columbia and the U.S. Virgin Islands.

     We compensate the agents in our distribution network for business produced
by them on a commission basis at rates which we believe to be competitive with
those of other life and health insurance companies. Through training,
communication and incentive programs, we encourage our agents to cross-sell our
select group of complementary, supplemental and non-insurance products. In
addition, we have implemented compensation structures which are designed to
reward agents for multi-product sales. In our existing and newly acquired
companies, we believe that these products and programs combine to enhance the
value and productivity of our agents.

     Ten Distribution Channels. We utilize a variety of distribution systems in
marketing our products, including independent agents, marketing alliances,
e-commerce and affinity groups. We segment our ten distribution channels based
on organization of the agents and specific markets or products:

     1. GROUP/INDIVIDUAL MEDICAL. With approximately 30,000 independent agents
        nationwide, this distribution system concentrates on small business
        owners, individuals, associations and self-employed persons. The product
        portfolio creates cross-selling and package-selling opportunities and
        includes individual medical plans, small employer group medical, medical
        savings account plans, basic medical coverage, short-term major medical,
        dental and supplemental products.

     2. SENIOR LIFE/HEALTH. Approximately 20,000 independent agents in this
        division target the 58 million Americans age 55 and over with a
        comprehensive product line including Medicare supplement, long term
        care, home health care, convalescent and acute recovery care, and senior
        life and annuities.

     3. AMERICAN CHAMBERS. Through our recent agreement with American Chambers,
        approximately 15,000 agents in 38 states market individual and small
        employer medical plans, directly and through endorsements of over 3,500
        local Chambers of Commerce. Products include individual medical, small
        employer partially and fully self-funded plans, worksite supplemental
        products, and Section 125 Premium Only plans.

     4. EMPLOYEE BENEFITS. Our "Partnership" product is an innovative approach
        for small employers to economically provide benefits to their employees.
        Agents who specialize in this market offer our partially self-funded
        employer group plan, which can provide premium savings over traditional
        health insurance products. These savings can be used to pay for other
        employee benefits which we offer, including critical illness,
        supplemental life, vision, dental, and a prescription drug discount
        card.

     5. WORKSITE MARKETING. We offer Section 125 Premium Only Plans with both
        major medical and supplemental insurance coverages. Section 125 plans
        provide tax savings for employers and their employees through the
        purchase of health insurance on a pre-tax basis. The more insurance
        purchased by employees on this pre-tax basis, the more tax benefits for
        the employer, as total net payroll amount is reduced.

     6. E-COMMERCE -- HEALTHAXIS.COM. The individual major medical plan of our
        subsidiary, Provident American Life and Health, is available on the
        HealthAxis.com website, along with products of other insurance
        companies. During 2000, we expect to add a long-term care product and a
        Medicare supplement to this program. We expect that all marketing
        through HealthAxis.com will be through our Provident American Life and
        Health subsidiary.

     7. E-COMMERCE -- CHANNELPOINT INSURANCE EXCHANGE. This Internet-based
        program allows insurance brokers to compare rates and benefits of
        products offered by participating insurance carriers. In an agreement
        reached in 1999, our "Partnership" partially self-funded employer group
        plan will be added to the ChannelPoint listing mid-year of 2000.

                                       12
<PAGE>   15

     8. E-COMMERCE -- QQLINK.COM. We expect QQLink, our B2B agent-linked
        e-commerce exchange, to become operational during the summer of 2000.
        QQLink.com will be dedicated to empowering our agents with Internet
        technology by combining our traditional agent distribution system with
        direct online sales. Consumers will have access to significant discounts
        on our insurance products and will be able to review and receive premium
        quotes and apply for insurance online, with or without the assistance of
        an agent. We believe that agents will be able to substantially increase
        the client base they serve through greater efficiency and through leads
        generated through QQLink's advertising and database management programs.
        Initial products available on QQLink.com will be several major medical
        plans, a short-term major medical plan, individual and group dental and
        critical illness coverage with term life insurance.

     9. INTER-COMPANY MARKETING. We pursue alliances to market our health and
        life insurance products through the distribution systems of carriers who
        handle non-competing products. Specific marketing ventures through this
        division include:

          - Continental General's marketing agreements with approximately 20
            unaffiliated insurance companies. Our products are incorporated into
            the product portfolios of more than 15,000 agents through these
            alliances.

          - HealthPlan Services Corporation (HPS). In late 1999, we completed a
            marketing alliance with HPS to provide selected Continental General
            medical products through HPS' endorsement relationships with
            companies such as Metropolitan Life Insurance Company, John Hancock
            Mutual Life Insurance Company and Mutual of Omaha Insurance Company.
            In addition, distribution of these products will include HPS'
            tele-sales associates to HPS' brokerage agents.

          - USI Brokerage, Inc. In a marketing agreement announced in November
            1999, our health and dental insurance products are being added to
            USI's nationwide integrated financial services distribution system.
            With approximately 14,000 agents nationwide, USI agents provide a
            full range of health insurance, life insurance and property and
            casualty insurance coverage in a "one-stop shopping" concept for
            small businesses.

     10. AFFINITY GROUPS. We actively pursue endorsement of our products by
         affinity groups throughout the nation. National associations, employer
         groups and other organizations are targets for this division. Marketing
         through affinity groups can reduce sales expenses, increase name
         recognition and streamline service operations.

     In 1999, we began development of a career agent distribution system which
targets the individual major medical and small group health insurance market.
Our subsidiary, HealthMark Sales, LLC, is expected to begin operations in
mid-2000. With a strong lead generation program and agent training, we expect
this organization to be positioned to attract and motivate sales people who are
new to the insurance industry as well as seasoned insurance agents.

     Marketing Support. Our marketing systems concentrate on broad product
portfolios and sales support to agents. Our strategy is to provide the tools and
resources needed by the sales force, so that the agents can devote their time to
selling.

     Our support programs include:

     - ongoing product development through the introduction of supplementary
       products, featuring low premiums and higher profit margins;

     - enhanced, quality sales materials;

     - cross-selling opportunities;

     - special incentives awards to new agents;

     - website development;

     - user-friendly proposal software;
                                       13
<PAGE>   16

     - training seminars to introduce new products and sales materials for our
       agents;

     - increased agent communication;

     - improved service for our insureds; and

     - pro-active insured retention programs.

INVESTMENTS

     We attempt to minimize our business risk through conservative investment
policies. Our investment objectives are to maximize yields, preserve principal,
and maintain liquidity. Investments for insurance companies 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 we may be precluded from
making certain otherwise attractive investments. As of December 31, 1999, 100%
of our fixed maturity securities were of investment grade quality. We do not
invest in "junk" bonds or derivatives such as futures, forwards, swaps, and
option contracts and other financial instruments with similar characteristics,
and substantially all of our investments are in fixed maturities. We do invest
in mortgage-backed securities, some of which are collateralized mortgage
obligations (CMOs), principally issued by U.S. government agencies. These
investments, besides having a credit risk, also have the risk of prepayment
during a decline in interest rates and the risk of extension during a rise in
interest rates. We constantly monitor these securities. At December 31, 1999,
our investments in mortgage-backed securities totaled $58.9 million, or 19.6%.
At December 31, 1999, approximately 97.1% of our invested assets were fixed
maturity securities including mortgage-backed securities.

     The amortized cost and estimated fair value of securities
available-for-sale as of December 31, 1999, are as follows:

<TABLE>
<CAPTION>
                                                                   GROSS UNREALIZED
                                                   AMORTIZED    ----------------------    ESTIMATED
                                                     COST        GAINS        LOSSES      FAIR VALUE
                                                   ---------    --------    ----------    ----------
                                                                (DOLLARS IN THOUSANDS)
<S>                                                <C>          <C>         <C>           <C>
AVAILABLE-FOR-SALE:
  U.S. Treasury securities.......................  $  16,140     $   41      $   (282)     $ 15,899
  U.S. Agencies..................................      6,670         --          (160)        6,510
  State and political subdivisions...............      4,225         --          (145)        4,080
  Corporate bonds................................    232,229        692       (17,353)      215,568
  Mortgage-backed securities.....................     60,355        138        (1,564)       58,929
                                                   ---------     ------      --------      --------
          Total available-for-sale...............  $ 319,619     $  871      $(19,504)     $300,986
                                                   ---------     ------      --------      --------
Surplus notes....................................      4,964         79            --         5,043
                                                   ---------     ------      --------      --------
          Total..................................  $ 324,583     $  950      $(19,504)     $306,029
                                                   =========     ======      ========      ========
</TABLE>

RESERVES

     The majority of Central Reserve's, Provident American Life and Health's and
United Benefit Life's reserves and liabilities for claims are for the health
insurance business. The majority of Continental General's reserves and
liabilities for claims are for the life and annuity business. For our individual
and group accident and health business, we establish an active life reserve plus
a liability for due and unpaid claims, claims in course of settlement and
incurred but not reported 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.

     Liabilities for future policy reserves 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 our

                                       14
<PAGE>   17

experience and actuarial judgment with an allowance for possible unfavorable
deviation from the expected experience. The various actuarial factors are
determined from mortality tables and interest rates in effect when the policy is
issued.

     Liabilities for interest sensitive contracts such as deferred annuities and
Universal Life-type contracts are based on the retrospective deposit method.
This is the full account value before any surrender charges are applied.

REINSURANCE

     We reinsure portions of the health, accident, and life insurance policies
we write and portions of policies we reinsure from other companies. Reinsurance
provides a greater diversification of risk and minimizes our exposure on major
risks. Reinsurance involves one or more insurance companies participating in the
liabilities or risks of another insurance company in exchange for a portion of
the premiums. Although the effect of reinsurance is to lessen our risks, it may
lower net income. We have entered into a variety of reinsurance arrangements
under which we:

     - cede business to other insurance companies to mitigate risk, and

     - accept risk on a "quota share" basis from other insurance companies.

     When we cede business to others, reinsurance does not discharge us from our
primary liability to our policyholders and ceded insurers. However, the
insurance company that assumes the coverage assumes the related liability and
agrees to become the ultimate source of payment. Under quota share reinsurance,
the reinsurer assumes an agreed percentage of certain risks insured by the
ceding insurer and shares premium revenue and losses proportionately.

     We have reinsurance on group accident and health claims. All individual
claims in excess of $500,000 are 100% reinsured. The maximum amount of exposure
that Central Reserve retains on any life is $50,000 on ordinary life and group
life. No retention is maintained over age 70. The maximum amount of exposure
that Continental General retains on life is $125,000.

     Substantially all of our reinsurance recoverable is due from a single
reinsurer, Hannover. At December 31, 1999, Hannover maintained an "A" rating
from A.M. Best Company Inc.

     For more information on specific reinsurance agreements, see the sections
called "Pending New Business Agreement" and "Completed Acquisitions."

COMPETITION

     The insurance business is highly competitive. We compete with large
national, regional and specialty health insurers and managed care companies,
many of which have substantially greater financial resources, broader product
lines, or greater experience than we do. In addition to claims paying ratings,
we compete on the basis of price, reputation, diversity of product offerings and
flexibility of coverage, ability to attract and retain agents and the quality
and level of services provided to agents and insureds. We face competition from
a trend among healthcare providers and insurance companies to combine and form
networks in order to contract directly with employer groups and other
prospective customers to provide healthcare services. In addition, because our
products are marketed through independent agents, most of whom represent more
than one company, we experience competition with other companies for the
marketing focus of each agent.

     Further, our ratings assigned by A.M. Best Company Inc. and other
nationally recognized rating agencies are important in evaluating our
competitive position. Best ratings are based on an analysis of the financial
condition of the companies rated. Best ratings are primarily based upon factors
of concern to policyholders and insurance agents. In 1997, Central Reserve's
Best rating was a B (adequate -- under review) rating. In 1999, Central
Reserve's rating was upgraded to a B+ (very good) rating, reflecting
strengthened capital, positive operating initiatives and a focused,
market-driven business strategy. In 1999, Continental General's A-(excellent
-- under review) rating was reconfirmed. Provident American Life and
Health's and United Benefit Life's ratings for 1999 are NR-3 (rating procedure
inapplicable). This rating is defined by Best to
                                       15
<PAGE>   18

mean that normal rating procedures do not apply due to unique or unusual
business features. Provident American Life and Health and United Benefit Life
fall into this category because they both retain only a small portion of their
gross premiums. Recently, Duff & Phelps Credit Rating Co. lowered the claims
paying ability of Central Reserve and Continental General one level to BBB+ from
A-.

GOVERNMENT REGULATION

     Insurance Regulation. We are subject to regulation and supervision by state
insurance regulatory agencies. This regulation is primarily intended to protect
policyholders rather than investors. 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, approval of rate increases, 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.
We are required to file detailed annual statements with the respective state
regulatory bodies and are subject to periodic examination by the regulators.

     The National Association of Insurance Commissioners (NAIC) has adopted
Risk-Based Capital (RBC) requirements for life and health insurers to evaluate
the adequacy of statutory capital and surplus in relation to investment and
insurance risks associated with:

     - asset quality;

     - mortality and morbidity;

     - asset and liability matching; and

     - other business factors.

     The RBC formula is used by state insurance regulators to monitor trends in
statutory capital and surplus for the purpose of initiating regulatory action.
We calculated the risk-based capital for our insurance subsidiaries as of
December 31, 1999, using the applicable RBC formula. These calculations at each
subsidiary produced risk-based capital levels, which substantially exceed the
levels at which the RBC formulas require intervention by regulatory authorities.

     Prior to our foreclosure on the stock in July 1999, United Benefit Life was
under supervision by the State of Texas and State of Indiana Departments of
Insurance. Both states have now abated their supervision. Certain other states
have continued to restrict new writings by United Benefit Life but none of these
states were sources of significant new business volume.

     Dividends paid by our insurance subsidiaries to Ceres are limited by state
insurance regulations. The insurance regulator in the insurer's state of
domicile may disapprove any dividend which, together with other dividends paid
by an insurance company in the prior 12 months, exceeds the regulatory maximum
as computed for the insurance company based on its statutory surplus and net
income. In 2000, Central Reserve and United Benefit Life cannot pay any
dividends without the prior approval of the Ohio Insurance Commissioner as a
result of their respective statutory deficit at December 31, 1999. In addition,
in 2000, Provident American Life and Health cannot pay any dividends without the
prior approval of the Pennsylvania Insurance Commissioner as a result of its
statutory deficit at December 31, 1999. Continental General can pay
approximately $3.4 million in dividends in 2000, without the prior approval of
the Nebraska Insurance Commissioner. However, by agreement with the State of
Nebraska Department of Insurance on February 17, 1999, we agreed that
Continental General would not pay dividends to Ceres for 18 months without
approval.

     The most recent completed regulatory examination for Central Reserve was
performed as of December 31, 1995, and for Provident American Life and Health
and Continental General, the examinations were performed as of December 31,
1997, and for United Benefit Life, the examination was performed as of June 30,
1997. We strive to maintain compliance in all material respects with the various
federal and state regulations applicable to our current operations.

                                       16
<PAGE>   19

     Many states have also enacted insurance holding company laws, which require
registration and periodic reporting by insurance companies controlled by other
corporations. Such laws vary from state to state but typically require periodic
disclosure concerning the corporation which controls the controlled insurer and
prior notice to, or approval by, the applicable regulator of intercorporate
transfers of assets and other transactions, including payments of dividends in
excess of specified amounts by the controlled insurer, within the holding
company system. Such laws often also require the prior approval for the
acquisition of a significant direct or indirect ownership interest (for example,
10% or more) in an insurance company. Our insurance subsidiaries are subject to
these laws and we believe they are in compliance in all material respects with
all-applicable insurance holding company laws and regulations.

     Healthcare Regulation. Government regulation of the healthcare industry
also affects the manner in which we conduct our business. During 1996, Congress
passed and the President signed into law the Health Insurance Portability and
Accountability Act of 1996 (HIPAA), and additional federal mandates concerning
mental health parity and maternity stays. Among other things, HIPAA:

     - addresses group and individual market reforms increasing the
       transferability of health insurance;

     - permits medical savings accounts on a trial basis; and

     - increases the deductibility of health insurance for self-employed
       persons.

In addition, many states, including states in which we do business, have
enacted, or are considering, various healthcare reform statutes. These reforms
relate to, among other things, managed care practices, such as requirements with
respect to maternity stays, waiting period restrictions on pre-existing
conditions, credit for certain prior coverage, and limitations on rate increases
and guaranteed renewability for small group employer plans and policies for
individuals.

     In addition, some jurisdictions have enacted small group insurance and
rating reforms, which generally limit the ability of insurers and health plans
to use risk selection as a method of controlling costs for small group
businesses. These laws may generally limit or eliminate use of pre-existing
condition exclusions, experience rating, and industry class rating and limit the
amount of rate increases from year to year. Our operations also may be subject
to PPO or managed care laws and regulations in certain states. PPO and managed
care regulations generally contain requirements pertaining to provider networks,
provider contracting, and reporting requirements that vary from state to state.

     Congress and various states are considering some form of the "Patients'
Bill of Rights." This legislation, if enacted, is designed to provide consumers
more freedom of choice in the selection of doctors, facilities, and treatments.
Although the bill was originally conceived to regulate HMOs, it will affect all
facets of the nation's healthcare delivery system, including medical providers,
PPOs, EPOs, community-based healthcare organizations, and indemnity insurance
plans. The pending federal legislation will provide for expansion of access to
care, establishment of quality assurance programs and quality analysis of
providers, collection of standardized data on provider performance and patient
outcomes, and establishment of a federal Health Care Quality Advisory Board.
These changes are expected to result in higher total medical costs, which could
encourage more partnerships and associations between medical providers and
insurers to control costs, more community-based health organizations,
establishment and adherence to medical practice guidelines and greater use of
higher deductibles to lower insurance costs and reduce administrative expenses
of smaller claims.

     Recently, the Clinton Administration proposed expanding the federal
Medicare program to include coverage for drug purchases. The sale of Medicare
supplement policies by Continental General is not driven by the drug coverage
afforded by such policies. Most of the Medicare Supplement policies sold by
Continental General do not include prescription drug coverage. The impact of
this proposed Medicare change is not known at present since details of the
proposed changes are not yet finalized.

     Increasingly, states are considering various healthcare reform measures and
are adopting laws or regulations, which may limit our operations and our ability
to control which providers are part of our networks and may hinder our ability
to effectively manage utilization and costs. We are unable to predict what
reforms, if any, may be enacted or how these reforms would affect our business.

                                       17
<PAGE>   20

EMPLOYEES

     We had approximately 900 employees at December 31, 1999. We consider our
employee relations to be good. Our approximately 60,000 agents are independent
contractors and not employees.

ITEM 2.   PROPERTIES

     We own our headquarters building in Cleveland, Ohio, which consists of
121,625 square feet. Our headquarters are also occupied by Central Reserve. At
December 31, 1999, the outstanding principal balance of the mortgage note on the
building was approximately $8.2 million. Continental General owns and occupies a
building in Omaha, Nebraska, which consists of approximately 61,400 square feet.
United Benefit Life owns two buildings in Fort Worth, Texas, which consist of
approximately 210,000 square feet. The buildings owned by United Benefit Life
are for sale, and we do not expect any material gain or loss upon completion of
the sale.

ITEM 3.   LEGAL PROCEEDINGS

     Other than ordinary routine litigation incidental to the business, neither
Ceres nor any of our 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

     None.

OUR EXECUTIVE OFFICERS

     Pursuant to Instruction 3 to Item 401(b) of Regulation S-K, our current
executive officers are as follows:

<TABLE>
<CAPTION>
               NAME                  AGE            PRINCIPAL POSITION             OFFICER SINCE
               ----                  ---            ------------------             -------------
<S>                                  <C>    <C>                                    <C>
Peter W. Nauert....................  56     Chairman of the Board, President           1998
                                            and Chief Executive Officer
Bruce Henry........................  41     Chief Sales Officer                        1999
Billy B. Hill, Jr..................  48     General Counsel                            1998
Glen A. Laffoon....................  60     Executive Vice President of Ceres          1974
                                            and President and Chief Executive
                                            Officer of Central Reserve
Charles E. Miller, Jr..............  49     Executive Vice President, Chief            1998
                                            Financial Officer and Treasurer
Anthony J. Pino....................  52     Executive Vice President                   1999
</TABLE>

     MR. NAUERT has been the President, Chief Executive Officer and a director
of Ceres since July 3, 1998 and Chairman of the Board since June 10, 1999. Mr.
Nauert is also the principal investor in Strategic Acquisition Partners, LLC.
Mr. Nauert served as Chief Executive Officer of Pioneer Financial Services, Inc.
from 1982 to 1997, and as Chairman from 1988 to 1997. Mr. Nauert had been
employed in an executive capacity by one or more of the insurance subsidiaries
of Pioneer Financial Services from 1968 to 1997.

     MR. HENRY has been the Chief Sales Officer of Ceres since joining Ceres in
July 1998. From 1996 to 1998, Mr. Henry was National Sales Director for Design
Benefit Plans, a marketing subsidiary of Pioneer Financial Services. Prior to
1996, Mr. Henry was a top producing regional sales manager for a subsidiary of
Pioneer Financial Services.

     MR. HILL has served as a consultant to Ceres, with the title of General
Counsel, since July 3, 1998. He is a principal in the law firm of Hill & Reagan,
Dallas, Texas. Mr. Hill is an investor in Strategic Acquisition Partners. Mr.
Hill also served as General Counsel of Pioneer Financial Services from January
1996 to August 1997.

                                       18
<PAGE>   21

     MR. LAFFOON has served as an officer of Ceres since 1991 and of Central
Reserve since 1974 and has held various positions in both companies. Since July
1998, he has served as Executive Vice President of Ceres and since December
1998, he has also served as Assistant Secretary. Since June 1998, Mr. Laffoon
has served as President and Chief Executive Officer of Central Reserve.

     MR. MILLER has served as Executive Vice President and Chief Financial
Officer of Ceres since October 1998 and as Treasurer since June 30, 1999. From
1996 to 1998, he was a principal and President of Wellington Partners, Inc., an
insurance acquisition company. Mr. Miller was also a consultant to Insurance
Partners, L.P. and Insurance Partners Offshore (Bermuda), L.P. Before 1996, Mr.
Miller was Executive Vice President, Chief Financial Officer and a director of
Harcourt General Insurance Companies.

     MR. PINO has served as Executive Vice President of Ceres since February
2000 and was Senior Vice President of Ceres from August 1999 to February 2000.
From June to August 1999, he was a consultant to Ceres. From 1996 to 1999, Mr.
Pino was President of National Health Services, Inc., a managed care subsidiary
of United Payors & United Providers, an intermediary between health care payors
and health care providers. From 1991 to 1996, Mr. Pino was Executive Vice
President of Pioneer Financial Services, Inc. and President of National Group
Life Insurance Company, a subsidiary of Pioneer.

                                       19
<PAGE>   22

                                    PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

     (a) Our common stock is traded on the Nasdaq National Market tier of The
Nasdaq Stock Market(SM) under the symbol CERG since December 1998 and under the
symbol CRLC prior to that. The following table shows the representative high and
low closing prices of our common stock for the quarters listed. These prices
were taken from the Nasdaq monthly statistical reports.

<TABLE>
<CAPTION>
                                                    HIGH      LOW     DIVIDENDS
                                                   ------    -----    ---------
<S>                                                <C>       <C>      <C>
1999
     First Quarter.............................    $11.50    $8.25       -0-
     Second Quarter............................     11.00     8.50       -0-
     Third Quarter.............................     10.38     6.25       -0-
     Fourth Quarter............................      8.31     5.94       -0-

1998
     First Quarter.............................    $ 8.50    $4.81       -0-
     Second Quarter............................     8.125     6.38       -0-
     Third Quarter.............................      9.00     5.81       -0-
     Fourth Quarter............................     11.38     6.75       -0-
</TABLE>

     (b) As of March 17, 2000, there were 1,551 record holders of our common
stock.

     (c) We have not paid any cash dividends in the past two years as indicated
in the table above.

     Dividends paid by our insurance subsidiaries to Ceres are limited by state
insurance regulations. The insurance regulator in the insurer's state of
domicile may disapprove any dividend which, together with other dividends paid
by an insurance company in the prior 12 months, exceeds the regulatory maximum
as computed for the insurance company based on its statutory surplus and net
income. In 2000, Central Reserve and United Benefit Life cannot pay any
dividends without the prior approval of the Ohio Insurance Commissioner as a
result of their respective statutory deficit at December 31, 1999. In addition,
in 2000, Provident American Life and Health cannot pay any dividends without the
prior approval of the Pennsylvania Insurance Commissioner as a result of its
statutory deficit at December 31, 1999. Continental General can pay
approximately $3.4 million in dividends in 2000, without the prior approval of
the Nebraska Insurance Commissioner. However, by agreement with the State of
Nebraska Department of Insurance on February 17, 1999, we agreed that
Continental General would not pay dividends to Ceres for 18 months without
approval. In addition, our Credit Agreement with The Chase Manhattan Bank, dated
February 17, 1999, contains financial and other covenants with respect to Ceres
that, among other matters, prohibits the payment of cash dividends on our common
stock, except upon compliance with certain conditions.

     (d) On November 8, 1999, we issued 16,667 shares of common stock to Billy
B. Hill, Jr., our General Counsel, pursuant to his retainer agreement. These
shares were exempt from registration in accordance with Section 4(2) of the
Securities Act of 1933, as amended, and exemptions available under applicable
state securities laws.

     On August 17, 1999, we issued 52,227 shares of common stock to Val Rajic,
our former Executive Vice President, upon the cashless exercise of his warrants
to purchase 100,000 shares of common stock at $6.00 per share and warrants to
purchase 50,000 shares of common stock at $5.50 per share. The issuance of the
warrants and the common stock upon exercise of the warrants was exempt from
registration in accordance with Section 4(2) of the Securities Act and
exemptions available under applicable state securities laws.

                                       20
<PAGE>   23

ITEM 6.   SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                      1999(1)       1998        1997        1996        1995
                                      --------    --------    --------    --------    --------
                                          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<S>                                   <C>         <C>         <C>         <C>         <C>
FOR THE YEAR:
Premiums (net of reinsurance).......  $327,746    $154,188    $249,707    $258,175    $233,169
Net investment income...............    21,362       7,454       6,528       6,701       6,454
Net realized gains..................       107         211         146           9         149
Other income........................    17,410       7,694       9,152          --          37
Amortization of deferred reinsurance
  gain..............................     5,468         600          --          --          --
                                      --------    --------    --------    --------    --------
Total revenues......................  $372,093    $170,147    $265,533    $264,885    $239,809
                                      ========    ========    ========    ========    ========
Income (loss) before federal income
  taxes.............................  $ 18,006    $ (2,769)   $(21,089)   $(12,134)   $  5,947
Federal income tax expense
  (benefit).........................     6,302       1,067        (133)     (2,846)      1,443
                                      --------    --------    --------    --------    --------
Net income (loss)...................  $ 11,704    $ (3,836)   $(20,956)   $ (9,288)   $  4,504
                                      ========    ========    ========    ========    ========
Basic earnings (loss) per
  share(2)..........................  $   0.88    $  (0.49)   $  (5.01)   $  (2.29)   $   1.12
Diluted earnings (loss) per
  share(2)..........................      0.77       (0.49)(3)    (5.01)(3)    (2.29)(3)     1.07
Cash dividends per share............        --          --          --        0.52        0.48
AT YEAR END:
Investments.........................  $309,952    $ 89,826    $ 79,957    $ 79,613    $ 81,933
Reinsurance receivable..............   263,289      41,417      26,216         312         210
Total assets........................   717,868     180,233     135,804     119,389     117,329
Long-term debt......................    48,157       8,284       8,399       8,504       8,599
Note payable........................        --          --      20,000          --          --
Future policy benefits and claims
  payable...........................   538,732      97,113      81,090      76,651      65,317
Retained earnings (accumulated
  deficit)..........................     2,549      (9,155)     (5,319)     15,637      27,030
Shareholders' equity................    44,661      35,836(4)    1,512      21,468      33,301
Equity per share:
  After accumulated other
     comprehensive income (loss)....      3.26        3.12(4)     0.36        5.18        8.25
  Before accumulated other
     comprehensive income (loss)....      4.59        3.02(4)     0.21        5.24        8.06
</TABLE>

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

(1) In February 1999, we acquired Continental General Corporation for $84.5
    million, funded in part by $40 million of long term debt and $15.0 million
    in private placement of 2,000,000 shares of our common stock at $7.50 per
    share. Operations of Continental General from the effective date of
    acquisition are included in our results.

(2) Earnings per share amounts for 1997 have been restated to comply with
    Statement of Financial Accounting Standard No. 128 "Earnings Per Share."

(3) The exercise of options and warrants is not assumed when a loss from
    operations is reported and the result would be antidilutive.

(4) In July 1998, we issued and sold 7,300,000 shares of common stock at $5.50
    per share for an aggregate purchase price of approximately $40.2 million.

                                       21
<PAGE>   24

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS

     This discussion should be read in conjunction with the consolidated
financial statements, notes and tables included elsewhere in this report.
Management's discussion and analysis may contain forward-looking statements that
are provided to assist in the understanding of anticipated future financial
performance. However, such performance involves risks and uncertainties which
may cause actual results to differ materially from those expressed in the
forward-looking statements. See "Forward-Looking Statements."

OVERVIEW

     We provide a broad spectrum of health and life insurance, medical cost
management and specialty products and services to more than 525,000 insureds. We
actively distribute our products on a national basis through approximately
60,000 independent licensed agents and through various e-commerce platforms to
individuals, small businesses and the senior market. For our subsidiaries and
the blocks of business we acquire, we focus on reducing medical costs and
underwriting risks and increasing fee-based revenue. As a result, our medical
loss ratio for the year ended December 31, 1999 declined to 70.1% from 75.8% for
1998.

     In 1996 and 1997, Central Reserve, our then-principal subsidiary,
experienced substantial losses incurred in connection with newly-issued group
health insurance policies, greater than anticipated utilization, new state and
federal mandates and reductions in profitability arising out of industry-wide
pricing competition. In June 1997, in order to address the continued decline in
Central Reserve's surplus, we borrowed $5.2 million from Huntington National
Bank, $5.0 million of which was contributed to the surplus of Central Reserve.

     In December 1997, Central Reserve entered into a reinsurance treaty with
Hannover in which Central Reserve transferred to Hannover $24.5 million of
reserve liability. In return for Hannover's reinsurance of this liability,
Central Reserve transferred $14.5 million in assets to Hannover. The reinsurance
treaty, which is on a 50/50 quota-share basis, provided Central Reserve with a
$10.0 million initial ceding allowance, which increased Central Reserve's
statutory surplus. The treaty provides for repayment of the initial ceding
allowance plus interest out of statutory profits, if any, of the reinsured
business. The combination of a $14.0 million surplus note which was invested in
Central Reserve in connection with a $20.0 million bridge loan arranged by
Strategic Acquisition Partners, LLC and the $10.0 million ceding allowance
provided an additional $24.0 million to the statutory capital and surplus of
Central Reserve, increasing statutory levels in excess of regulatory risk-based
capital requirements and alleviating the regulatory concerns that were created
in 1996 and continued in 1997.

     Since January 1, 1998, we

     - began executing a new business plan designed to expand our distribution
       systems, lower medical claim costs, reduce underwriting risks,
       consolidate administrative functions, increase fee-based revenue and
       acquire complementary businesses;

     - underwent a change in control;

     - completed a private placement of our common stock in July 1998 in which
       we issued and sold 7,300,000 shares of common stock at $5.50 per share
       and warrants to purchase an additional 3,650,000 shares of common stock
       at an exercise price of $5.50 per share for an aggregate purchase price
       of approximately $40.2 million;

     - entered into an agreement with United Benefit Life as of August 1, 1998
       to reinsure 100% of the major medical policies of United Benefit Life,
       covering approximately 100,000 members with estimated annual premiums of
       $100.0 million;

     - acquired Provident American Life and Health from Provident American
       Corporation on December 31, 1998 for $5.5 million in cash;

     - acquired Continental General Corporation and Continental General
       Insurance Company from The Western and Southern Life Insurance Company of
       Cincinnati, Ohio, on February 17, 1999 for $84.5 million in cash;

                                       22
<PAGE>   25

     - completed a private placement of common stock in February 1999 to provide
       funds for the Continental General acquisition, in which 2,000,000 shares
       of common stock were issued and sold at $7.50 per share;

     - entered into a $40.0 million credit facility to finance the Continental
       General acquisition; and

     - acquired United Benefit Life in July 1999 through foreclosure.

     Year-to-year financial results must be viewed in light of the change in
control, reinsurance, acquisitions and changes to our equity and debt. The
acquisitions of Provident American Life and Health and Continental General had
no impact on our results of operations in 1998. Results for United Benefit Life
are included from August 1998 to July 20, 1999 under a reinsurance agreement and
thereafter as an acquired entity. The financial information for the year ended
December 31, 1999 includes the operations of Continental General since February
1, 1999 and for Provident American Life and Health for the entire period.

RECENT EVENTS

     On October 7, 1999, we announced a definitive agreement to purchase The
Pyramid Life Insurance Company from United Insurance Company of America, a
subsidiary of Unitrin, Inc. of Chicago, Illinois. In addition, we expect that
Continental General will sell specialty senior medical insurance products
through the independent agent distribution systems of selected Unitrin insurance
subsidiaries. Pyramid, based in Mission, Kansas, provides health and life
insurance primarily for the senior market, including Medicare supplement,
long-term care, home health care, and senior life products. Pyramid, on a
statutory basis, had assets of approximately $120.0 million, capital and surplus
of approximately $43.0 million at December 31, 1999, and 1999 revenue of $72.0
million. Pyramid markets senior insurance products through 2,500 independent
agents in 40 states.

     The acquisition, subject to regulatory approvals and other customary terms
and conditions, is expected to be completed in the second quarter of 2000. At
completion, Pyramid will be a wholly-owned subsidiary. The $67.5 million
purchase price is expected to be financed through private equity offerings, an
increase in our existing line of credit and a special dividend from Pyramid. We
have not yet completed the private equity offerings or the amendment to our
existing line of credit, and we cannot guarantee that the acquisition of Pyramid
will be completed.

RESULTS OF OPERATIONS

  1999 Compared to 1998

     For the year ended December 31, 1999, total net premiums were $327.7
million, an increase of 112.6%, from $154.2 million for 1998. Medical premiums
for 1999 were $251.9 million compared to $143.1 million for 1998, an increase of
76.1%. The increase in medical premiums was the result of $49.4 million
attributable to Provident American Life and Health and Continental General,
$22.6 million reinsurance assumed, and $36.8 million from rate increases and new
business, net of lapses, at Central Reserve. Specialty and other premiums were
$75.9 million for 1999 compared to $11.1 million for 1998, an increase of
582.0%. The increase in specialty and other premiums was primarily the result of
$63.3 million attributable to Continental General and Provident American Life
and Health.

     Net investment income increased to $21.4 million for 1999 from $7.5 million
for 1998, an increase of 186.6%. Continental General accounted for $14.4 million
of the increase. Central Reserve's net investment income decreased approximately
$1.8 million during the year from 1998. The decrease was directly related to the
decrease in invested assets from $84.7 million at December 31, 1998, to $67.2
million at December 31, 1999. The decrease in invested assets was primarily a
result of acquiring Provident American Life and Health, and payment of claims
under the United Benefit Life reinsurance agreement.

     Fee and other income increased to $17.4 million for 1999 compared to $7.7
million for 1998, an increase of 126.3%. This increase was primarily attributed
to $4.0 million in administrative fees for business reinsured

                                       23
<PAGE>   26

through Provident American Life and Health and United Benefit Life. The balance
represents association fees and a partial recovery of $1.6 million from the
fraud committed in connection with claims administration at United Benefit Life.
The amortization of deferred reinsurance gain of $5.5 million for 1999
represents the recognition of the ceding commission allowances received on our
reinsurance agreements. The unamortized amount of $20.9 million at December 31,
1999 is accounted for as a deferred reinsurance gain on the consolidated balance
sheet.

     Total benefits, claims and settlement expenses increased to $233.1 million
for 1999 compared to $116.1 million for 1998, an increase of 100.8%. Provident
American Life and Health and Continental General accounted for $78.7 million of
the total increase of $117.0 million. The remaining $38.3 million is primarily
attributable to Central Reserve's portion of the increase in benefits at United
Benefit Life, reflecting 12 months of operational activity in 1999 compared to
five months in 1998. Medical benefits, claims, losses and settlement expenses
were $176.5 million for 1999 compared to $108.4 million for 1998, an increase of
62.8%. The medical loss ratio was 70.1% for the year ended December 31, 1999
compared to 75.8% for 1998. Cost reduction and benefit program modifications
implemented beginning in 1998, such as rate increases, improved underwriting,
enhanced claim procedures, and medical cost management techniques, in addition
to reduced loss ratios on increased new sales, led to the reduction in the
medical loss ratio. Specialty and other benefits, claims, losses and settlement
expenses were $56.6 million for 1999 compared to $7.6 million for 1998, an
increase of 642.4%. The specialty benefit ratio was 74.6% for 1999 compared to
68.5% for 1998. The increase is primarily attributable to the inclusion of
Continental General's Medicare supplement business and interest sensitive life
and annuity benefits and reserves, which traditionally support a higher benefit
ratio, in addition to adverse claims of Continental General's long-term care
business.

     Selling, general and administrative expenses increased to $137.9 million in
1999 compared to $54.4 million in 1998, an increase of 153.7%. Of this amount,
agent commissions in 1999 were $85.1 million compared to $36.9 million in 1998.
Included in the 1999 commissions is $44.3 million for Provident American Life
and Health and Continental General. The remaining increase represents the
increase in commissions for Central Reserve due to higher commission rates that
were paid on the increase in new business sold in 1999. Other expenses,
consisting of employee salaries and benefits, taxes, licenses and fees, and
administrative expenses, increased to $99.8 million for 1999 compared to $44.6
in 1998. Continental General accounted for $32.8 million of the $55.2 million
increase. We also incurred costs of $9.7 million for the operations of Provident
American Life and Health in 1999. Central Reserve accounted for approximately
$8.3 million of the increase consisting of $6.0 million for increased costs of
administration, information systems services, and medical cost management and
$2.3 million for personnel and premium tax costs related to the increase in
sales. The balance of $4.4 million represents the increased expenses in 1999
over 1998 for Ceres, including $2.7 million for employee contracts, severance
and other expenses, $1.3 million for bonuses and professional fees, and a one
time charge of $0.4 million for professional services in connection with the
postponement of a secondary public offering of our common stock.

     As a percentage of revenues, selling, general and administrative expenses
increased to 37.1% in 1999 compared to 31.9% in 1998, primarily as a result of
higher commission payments as a result of increased new business, hiring
additional employees, consulting support, acquisitions, product development to
help support our increased growth, and actions necessary to complete Year 2000
compliance conversions.

     The net amortization and change in deferral of acquisition costs and value
of business acquired resulted in a net deferral of $21.9 million for 1999
compared to a net amortization of $0.6 million for 1998. Continental General and
Provident American Life and Health account for $13.5 million of the deferral.
The deferral of first year excess expenses associated with the significant
increase in sales of new products written by Central Reserve and United Benefit
Life accounted for the remaining balance.

     Amortization of goodwill of $1.0 million relates to the February 1999
acquisition of Continental General and the December 1998 acquisition of
Provident American Life and Health. The goodwill asset of $22.8 million as of
December 31, 1999 consists of a balance of $20.8 for Continental General being
amortized over 25 years, and $2.0 for Provident American Life and Health being
amortized over 15 years.

                                       24
<PAGE>   27

     Interest expense and financing costs increased to $3.9 million in 1999
compared to $1.8 million in 1998 as a result of the interest expense on the
$40.0 million loan under our credit facility, which began to accrue on February
17, 1999, the closing date of the purchase of Continental General.

     A provision for federal income taxes of $6.3 million, or 35% of income
before federal taxes of $18.0 million, was established for the year ended
December 31, 1999.

     Net income for the year ended December 31, 1999 was $11.7 million, or $0.88
basic earnings per share and $0.77 diluted earnings per share, compared to a net
loss of $3.8 million, or $0.49 loss per share on both a basic and diluted basis,
for 1998.

  1998 compared to 1997

     Total net premiums in 1998 decreased 38.3% to $154.2 million from $249.7
million in 1997 primarily as a result of the 50% reinsurance treaty with
Hannover. Medical premiums for 1998 were $143.1 million compared to $235.1
million in 1997, a decrease of 39.2%. The decrease in net medical premiums was
primarily the result of the reinsurance agreement with Hannover. Specialty and
other premiums were $11.1 million for 1998 compared to $14.6 million in 1997, a
decrease of 23.7%. The decrease in specialty and other premiums was the result
of reinsurance with Hannover.

     Premiums assumed represents Central Reserve's 100% portion of a block of
group health business under a reinsurance agreement entered into in August 1998
with United Benefit Life for major medical policies in effect prior to August 1,
1998. The reinsurance ceded to Hannover for United Benefit Life represents 80%
of the above-mentioned block (Central Reserve's final retention is 20%) plus 50%
of Central Reserve's group health business in force at December 31, 1997. The
agreement also provides that Central Reserve will reinsure 100% of all major
medical policies written by United Benefit Life from and after August 1, 1998.
Central Reserve ceded 50% of the policies that it assumed and were written by
United Benefit Life from and after August 1, 1998 to Hannover.

     Net investment income increased to $7.5 million, or 14.2%, in 1998 from
$6.5 million in 1997. The primary reason for the increase was the interest
earned on funds received in July 1998 from the equity transaction.

     Fee and other income for 1998 was $7.7 million, compared to $9.2 million
for 1997, a decrease of 15.9%. Fee and other income in 1998 consisted of fees
for Central Reserve servicing the United Benefit Life premiums assumed and
administrative and association fees. The decrease was the result of the cession
to Hannover. The amortization of deferred reinsurance gain represented Central
Reserve's portion of the $20.0 million ceding commission paid by Hannover for
the United Benefit Life block of group health policies in August 1998.

     Total benefits, claims, losses and settlement expenses were $116.1 million
for 1998 compared to $210.8 million for 1997, a decrease of 44.9%. The decrease
in 1998 was due to Central Reserve's reinsurance agreements. Medical benefits,
claims, losses and settlement expenses were $108.4 million for 1998 compared to
$198.7 million for 1997, a decrease of 45.4%. The medical loss ratio was 75.8%
for 1998 compared to 84.5% for 1997. The lower loss ratio of 75.8% for 1998 is a
combination of reinsurance ceded, rate renewal actions and medical cost
management programs and benefits changes. Specialty and other benefits, claims,
losses and settlement expenses were $7.6 million for 1998 compared to $12.1
million for 1997, a decrease of 36.9% resulting from the amount of business
ceded.

     Selling, general and administrative expenses were lower in 1998 compared to
1997 because of the reinsurance allowances, as indicated in Note J to the
consolidated financial statements. Before reinsurance expenses and allowances,
commissions were $36.9 million, up 3.7% from $35.5 million in 1997, primarily
due to an increase in new business and commission rates. Salaries and benefits
in 1998 were $15.7 million, a decrease of 13.2%, from $18.1 million in 1997 due
to the reduction in staff during the first half of the year and the
discontinuance of Central Reserve's contribution to the pension plan. Other
operating expenses increased to $22.5 million, up 52.1% from $14.8 million in
1997. The major reason for the increase was the cost of outsourcing our computer
operations for approximately $5.0 million, including Year 2000 compliance costs,
a
                                       25
<PAGE>   28

provision of approximately $1.5 million taken in connection with a United
Benefit Life note receivable, and a $1.5 million expense related to a fraud
committed in connection with claims administration at the United Benefit Life
facility.

     The $0.6 million net amortization and change in deferral of acquisition
costs and value of business acquired in 1998 was primarily the amortization of
Central Reserve's portion of the ceding commission paid for the United Benefit
Life block of group health policies.

     Interest expense and financing costs increased to $1.8 million, or 70.8%,
from $1.1 million in 1997. The increase was due primarily to the increase in
interest from the $20 million bridge loan incurred in December 1997. The bridge
loan was paid in full in July 1998 from the $40.2 million equity transaction.

     The net loss for 1998 was $3.8 million, or $0.49 per share, compared to a
net loss of $21.0 million, or $5.01 per share, for 1997. Although benefits,
claims, losses, and settlement expenses were reduced as a result of the
reinsurance agreements, Central Reserve implemented certain policy benefit and
managed care changes along with premium rate increases, which also contributed
to the reduced loss ratio.

     Although we reported a loss for 1998, a provision for federal income taxes
of $1.1 million was required principally due to the tax treatment related to the
reinsurance transactions effective in 1998. For further information concerning
the provision for income taxes, as well as information regarding differences
between effective tax rates and statutory tax rates, see Note H of the Notes to
Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

     Liquidity is our ability to generate adequate amounts of cash to meet our
financial commitments. The major needs for cash are to enable our insurance
subsidiaries to pay claims and expenses as they come due. The primary sources of
cash are premiums, investment income and reimbursements from reinsurers.
Payments consist of current claim payments to insureds, managed care expenses,
and operating expenses such as salaries, employee benefits, commissions, taxes
and interests on debts.

     Assets of $310.0 million, or 43.2% of the total assets, are in investments
at December 31, 1999. Fixed maturities are our primary investment and were
$301.0 million, or 97.1% of total investments, at December 31, 1999. Other
investments consist of surplus notes, policy loans and mortgage loans. We are
carrying all of our fixed maturities at estimated fair value (available for
sale) at December 31, 1999.

     We hold few high-yield type securities, with nearly 100% of our bonds being
investment grade quality. In addition to the fixed maturities, we also had $42.9
million in cash and cash equivalents, and a $10.0 million line of credit with a
major bank at December 31, 1999. There was no amount outstanding on the line of
credit at December 31, 1999.

     The total reinsurable receivable was $263.3 million at December 31, 1999.
Of this amount, $253.1 million represents reserves held by our reinsurers under
our various reinsurance treaties in place. Most all of these reserves are held
by Hannover, supported by investment grade securities.

     Assets increased 298.3% to $717.9 million at December 31, 1999 from $180.2
million at December 31, 1998. The increase was primarily due to the acquisition
of Continental General, which had assets of $504.4 million at December 31, 1999,
with the remaining increase attributable to the acquisition of Provident
American Life and Health and United Benefit Life. These increases were, in part,
offset by a related increase in liabilities of $528.8 million during the period
to $673.2 million. Continental General's liabilities were $447.1 million and
Provident American Life and Health's and United Benefit Life's were $27.4
million at December 31, 1999.

     The total policy liabilities and accruals (reserves) were 80.0% of the
total liabilities at December 31, 1999, compared to 67.3% at December 31, 1998.
Continental General accounted for 75.7% of the reserves at December 31, 1999.
Continental General's reserves were 80.9% of its total liabilities at December
31, 1999, accounting for the increase. This is a result of Continental General's
life insurance and annuity reserves comprising a significant portion of its
total liabilities.

                                       26
<PAGE>   29

     To provide funds for the acquisition of Continental General, we incurred
debt of $40.0 million under a credit agreement. Under the terms of the credit
agreement, dated as of February 17, 1999, among Ceres, various lending
institutions and The Chase Manhattan Bank, as Administrative Agent, the first
principal payment of $3.0 million was paid February 17, 2000. Quarterly payments
are due thereafter starting with $1.0 million through February 17, 2001; $1.5
million thereafter through February 17, 2002; and $2.25 million thereafter to
February 17, 2005. Interest on the outstanding balance will be determined based
on whether we select a "Base Rate Loan" or a "Eurodollar Loan." Under the Base
Rate Loan, the interest rate will be 2.5% per annum plus the higher of (a) the
rate which is 1/2 of 1% in excess of a federal funds rate and (b) Chase's prime
rate as in effect from time to time. Under the Eurodollar Loan, the interest
rate will be 3.5% per annum plus a Eurodollar rate, which is the arithmetic
average of the offered quotation to first-class banks in the interbank
Eurodollar market by Chase, adjusted for certain reserve requirements. At
December 31, 1999, the interest rate was 9.41%. The credit agreement also
provides for a $10.0 million line of credit, which bears interest at the same
rate as the $40.0 million loan. A commitment fee of 3/4 of 1% per annum on the
average daily unutilized line of credit is charged to Ceres under the credit
agreement.

     The credit agreement contains financial and other covenants that, among
other matters: (1) prohibit the payment of cash dividends on our shares of
common stock, except upon compliance with certain conditions; (2) restrict the
creation of liens and sales of assets; and (3) require that we at a minimum
maintain (a) a leverage ratio (consolidated debt to consolidated total capital)
of 0.50 to 1.00 through December 31, 1999, 0.45 to 1.00 thereafter through
December 31, 2000, 0.40 to 1.00 thereafter through December 31, 2001, and 0.35
to 1.00 thereafter, (b) an interest coverage ratio (consolidated EBITDA to
consolidated interest expense) of 2.0 to 1 through December 31, 1999, 2.5 to 1
through December 31, 2000, and 3.0 to 1 thereafter, (c) a risk-based capital
ratio for any regulated insurance company subsidiary of the Company of not less
than 125.0%, and (d) consolidated net worth of $35.0 million through December
31,1999, $40.0 million thereafter through December 31, 2000, $50.0 million
thereafter through December 31, 2001, $60.0 million thereafter through December
31, 2002, and $70.0 million thereafter. In addition, we pledged the common stock
of Continental General, Central Reserve, Provident American Life and Health and
other insignificant subsidiaries as security for the credit agreement. At
December 31, 1999, we were in compliance with the covenants contained in the
credit agreement.

     We believe that cash flow from operating activities will be sufficient to
meet our currently anticipated operating and capital expenditure requirements.
We are seeking to raise $27.5 million in private equity to finance the
acquisition of Pyramid and will also borrow $15.0 million in additional funds
from Chase and the other lending banks through an increase in our line of
credit. We have not yet completed the private equity offerings or the amendment
to our existing line of credit. If we are unable to do so, we may not be able to
complete the acquisition of Pyramid. If additional funds are required for
long-term growth, we believe that these funds could be obtained through equity
or debt offerings as market conditions permit or dictate. We may not be able to
obtain any additional financing on terms that are favorable to us.

NET OPERATING LOSS CARRYFORWARD

     At December 31, 1999, we had a tax net operating loss (NOL) carryforward of
approximately $16.9 million for federal income tax purposes which expires
through 2012. Future changes in ownership, as defined in Section 382 and 383 of
the Internal Revenue Code, could limit the amount of NOL carryforwards used in
any one year. We determine a valuation allowance based on an analysis of amounts
recoverable in the statutory carryback period and available tax planning
strategies. In assessing the valuation allowance of $14.7 million and $9.0
million established at December 31, 1999 and 1998, respectively, estimates were
made as to the potential financial impact on us of recent NOLs and our financial
condition in 1997. We believe that we will generate sufficient future taxable
income to realize the $1.8 million net deferred tax asset prior to the
expiration of any NOLs.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

     We have three segments: medical which includes comprehensive major medical
plans, specialty and other which includes Medicare supplement, long-term care,
dental, life insurance and annuities, and corporate and
                                       27
<PAGE>   30

other which consists of primarily interest income and interest expense. The
following tables present the revenues, expenses and profit (loss), before
federal income taxes, on a GAAP basis for the last three years attributable to
our industry segments for Central Reserve through 1998 and for all of our
subsidiaries in 1999, with the exception of 11 months for Continental General.
We do not separately allocate investment assets or other identifiable assets by
industry segment, nor are income tax (benefit) expenses allocated by industry
segment.

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                     --------------------------------
                                                       1999        1998        1997
                                                     --------    --------    --------
                                                          (DOLLARS IN THOUSANDS)
<S>                                                  <C>         <C>         <C>
Medical
  Revenues
       Net premiums................................  $251,876    $143,064    $235,129
       Investment income, realized gains...........     6,985       5,682       4,860
       Fee and other income........................    21,307       8,294       9,152
                                                     --------    --------    --------
                                                      280,168     157,040     249,141
                                                     --------    --------    --------
  Expenses
       Benefits and claims.........................   176,531     108,439     198,704
       Other operating expenses....................    93,963      49,143      69,210
                                                     --------    --------    --------
                                                      270,494     157,582     267,914
                                                     --------    --------    --------
  Segment profit (loss) before federal income
     taxes.........................................  $  9,674    $   (542)   $(18,773)
                                                     ========    ========    ========
Specialty and other
  Revenues
       Net premiums................................  $ 75,870    $ 11,124    $ 14,578
       Investment income, realized gains...........    14,233       1,498       1,621
       Fee and other income........................     1,364          --          --
                                                     --------    --------    --------
                                                       91,467      12,622      16,199
                                                     --------    --------    --------
  Expenses
       Benefits and claims.........................    56,572       7,620      12,072
       Other operating expenses....................    18,164       3,986       4,931
                                                     --------    --------    --------
                                                       74,736      11,606      17,003
                                                     --------    --------    --------
  Segment profit (loss) before federal income
     taxes.........................................  $ 16,731    $  1,016    $   (804)
                                                     ========    ========    ========
Corporate and other
  Revenues
       Investment income...........................  $    251    $    485    $    193
       Fee and other income........................       207          --          --
                                                     --------    --------    --------
                                                          458         485         193
                                                     --------    --------    --------
  Expenses
       Interest and financing expenses.............     3,902       1,842       1,078
       Other operating expenses....................     4,955       1,886         627
                                                     --------    --------    --------
                                                        8,857       3,728       1,705
                                                     --------    --------    --------
  Segment profit (loss) before federal income
     taxes.........................................  $ (8,399)   $ (3,243)   $ (1,512)
                                                     ========    ========    ========
Income (loss) before federal income taxes..........  $ 18,006    $ (2,769)   $(21,089)
                                                     ========    ========    ========
</TABLE>

                                       28
<PAGE>   31

MARKET RISK AND MANAGEMENT POLICIES

     The following is a description of certain risks facing life and accident
and health insurers and how we mitigate 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. We attempt to mitigate this
risk by offering a wide range of products and by operating in many states, thus
reducing our exposure to any single product of non-Federal jurisdiction, and
also by employing underwriting practices which identify and minimize the adverse
impact of this risk.

     Inadequate Pricing Risk is the risk that the premium charged for insurance
and insurance related products is insufficient to cover the costs associated
with the distribution of such products which include: benefits, claims and
losses, settlement expenses, acquisition expenses and other corporate expenses.
We utilize a variety of actuarial and/or qualitative methods to set such pricing
levels.

     Credit Risk is the risk that issuers of securities owned by us will default
or that other parties, including reinsurers that have obligations to us, will
not pay or perform. We attempt 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 if we attempt to mitigate this risk by charging fees for
non-conformance with certain policy provisions and/or by attempting to match the
maturity schedule of 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.

     We also have long-term debt that bears interest at variable rates;
therefore our results of operations would be affected by interest rate changes.
We do not expect a significant rate change in the near future that would have a
material effect on our near-term results of operations.

IMPACT OF INFLATION

     Inflation rates impact our 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, especially
prescription drug costs. New, more expensive and wider use of pharmaceuticals is
inflating health care costs. The Office of Personnel Management reported the
costs of prescription drugs increased by 22% in 1998. While to a certain extent
these increased costs are offset by interest rates (investment income), the rate
of income from investments has not increased proportionately. We will continue
to establish premium rates in accordance with trends in hospital and medical
costs along with concentrating on various cost containment programs. However,
there can be no assurance that these efforts by us will fully offset the impact
of inflation or that premiums will equal or exceed increasing healthcare costs.

FORWARD-LOOKING STATEMENTS

     This report contains both historical and forward-looking statements.
Forward-looking statements are statements other than historical information or
statements of current condition. The forward-looking statements relate to our
plans and objectives for future operations. In addition to statements, which are
forward-looking by reason of context, the words "believe," "expect,"
"anticipate," "intend," "designed," "goal," "objective," "optimistic," "will"
and other similar expressions identify forward-looking statements. In light of
the risks and uncertainties inherent in all future projections, the inclusion of
forward-looking

                                       29
<PAGE>   32

statements should not be regarded as a representation by Ceres or any other
person that our objectives or plans will be achieved.

     Many factors could cause our actual results to differ materially and
adversely from those in the forward-looking statements, including the following:

     - the failure to successfully integrate the businesses of Continental
       General, Provident American Life and Health and United Benefit Life into
       Ceres, including the failure to achieve cost savings;

     - the failure to complete the acquisition of Pyramid or if the acquisition
       is completed, the failure to successfully integrate the operations of
       Pyramid into those of Ceres, including the failure to achieve cost
       savings;

     - any further shortfall in the assets or reserves of United Benefit Life,
       or the commissions due to Insurance Advisors, which were foreclosed upon
       on July 21, 1999;

     - rising healthcare costs, especially the rising costs of prescription drug
       costs that are rising faster than other medical costs;

     - business conditions and competition in the healthcare industry;

     - developments in healthcare reform and other regulatory issues;

     - changes in laws and regulations affecting our business;

     - adverse changes in interest rates;

     - unforeseen losses with respect to loss and settlement expense reserves
       for unreported and reported claims;

     - our ability to develop, distribute and administer competitive products
       and services in a timely, cost-effective manner;

     - our visibility in the marketplace and our financial and claims paying
       ratings;

     - the costs of defending litigation and the risk of unanticipated material
       adverse outcomes in such litigation;

     - the performance of others on whom we rely for reinsurance, particularly
       Hannover upon whom we rely for most of our reinsurance;

     - the risk that issuers of securities owned by Ceres will default or that
       other parties will not pay or perform;

     - changes in accounting and reporting practices;

     - the effect of any future acquisitions;

     - the failure to comply with financial and other covenants in our loan
       agreements; and

     - our ability to obtain additional debt or equity financing on terms
       favorable to us to facilitate long-term growth.

     The foregoing review of important factors should not be construed as
exhaustive and should be read in conjunction with other cautionary statements
that are included in this report, including the risks detailed under "Market
Risk and Management Policies." We undertake no obligation to update
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In June 1998, Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities as amended by Statement

                                       30
<PAGE>   33

No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133, which is required to be adopted
for all fiscal quarters of all fiscal years beginning June 15, 2000. We expect
to adopt the new statement effective January 1, 2001. This statement will
require us to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged asset, liability, or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. We anticipate that the adoption of this
statement will not have a significant effect on our results of operations or
financial position.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     See "Market Risk and Management Policies" section under Item
7. -- Management's Discussion and Analysis of Financial Condition and Results of
Operation.

                                       31
<PAGE>   34

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

                       CERES GROUP, INC. AND SUBSIDIARIES
                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
                         FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>
                                                                PAGE
                                                                ----
<S>                                                             <C>
Independent Auditors' Reports...............................     33

CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1999 and
  1998......................................................     35
Consolidated Statements of Operations for the years ended
  December 31, 1999, 1998 and 1997..........................     36
Consolidated Statements of Shareholders' Equity for the
  years ended December 31, 1999, 1998 and 1997..............     37
Consolidated Statements of Cash Flows for the years ended
  December 31, 1999, 1998 and 1997..........................     38
Notes to Consolidated Financial Statements for the years
  ended December 31, 1999, 1998, and 1997...................     39

FINANCIAL STATEMENT SCHEDULES
Schedule  II -- Condensed Financial Information of
  Registrant -- Ceres Group, Inc. (Parent Only).............     64
Schedule III -- Supplementary Insurance Information.........     67
Schedule IV -- Reinsurance..................................     68
</TABLE>

                                       32
<PAGE>   35

                         REPORT OF INDEPENDENT AUDITORS

Shareholders and Board of Directors
Ceres Group, Inc.

     We have audited the accompanying consolidated balance sheets of Ceres
Group, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years then ended. We have also audited the information presented in the
supplemental schedules for the years ended December 31, 1999 and 1998. These
consolidated financial statements and supplemental schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and supplemental schedules
based on our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Ceres Group,
Inc. and subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States. Also in our
opinion, the related supplemental schedules for the years ended December 31,
1999 and 1998, 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.

                                                               Ernst & Young LLP

Cleveland, Ohio
March 27, 2000

                                       33
<PAGE>   36

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Ceres Group, Inc (formerly Central Reserve Life Corporation):

     We have audited the accompanying consolidated statements of operations,
retained earnings, and cash flows of Central Reserve Life Corporation and
subsidiaries for the year ended December 31, 1997. In connection with our audit
of the consolidated financial statements, we also have audited the financial
statement schedules as of and for the year ended December 31, 1997 as listed in
the accompanying index. These consolidated financial statements and 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 audit.

     We conducted our audit 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 audit provides a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Central Reserve Life Corporation and subsidiaries for the year ended
December 31, 1997, in conformity with generally accepted accounting principles.
Also in our opinion, the related 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.

     The accompanying consolidated financial statements and financial statement
schedules have been prepared assuming that the Company will continue as a going
concern. As discussed in Note C to the consolidated financial statements, the
Company has suffered substantial losses from operations in 1997 that resulted in
a significantly reduced net capital position. The Company has entered into an
Amended and Restated Stock Purchase Agreement to issue and sell 7,300,000 Common
Shares and warrants to purchase an additional 3,650,000 Common Shares at an
exercise price of $5.50 per share for an aggregate purchase price of
$40,150,000. The closing of the Amended and Restated Stock Purchase Agreement is
subject to shareholder approval and regulatory approvals. In December 1997, the
Company obtained an interim loan of $20 million and that loan is due June 30,
1998. Should the Amended and Restated Stock Purchase Agreement not be completed
before June 30, 1998, and due to regulatory limitations on the Company's ability
to receive dividends from its insurance subsidiary, the Company, absent some
alternative capital resource, will not have the ability to repay the interim
loan. These matters raise substantial doubt about the ability of the Company to
continue as a going concern. Management's plans in regard to these matters are
also described in Note C to the consolidated financial statements. The
accompanying consolidated financial statements and financial statement schedules
do not include any adjustments that might result from the outcome of this
uncertainty.

Columbus, Ohio                                                          KPMG LLP
February 20, 1998, except for Notes B and C,
     as to which the date is March 30, 1998.

                                       34
<PAGE>   37

                       CERES GROUP, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 1999 AND 1998
                             (DOLLARS IN THOUSANDS)

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

<TABLE>
<CAPTION>
                                                                1999        1998
                                                              --------    --------
<S>                                                           <C>         <C>
ASSETS
Investments
  Fixed maturities--Note E
     Available-for-sale, at fair value......................  $300,986    $ 80,832
     Held-to-maturity, at amortized cost....................        --       8,900
                                                              --------    --------
          Total fixed maturities............................   300,986      89,732
  Surplus notes.............................................     5,043          --
  Policy and mortgage loans.................................     3,923          94
                                                              --------    --------
          Total investments.................................   309,952      89,826
Cash and cash equivalents--Note E...........................    42,921      19,376
Accrued investment income...................................     5,234       1,343
Premiums receivable.........................................     4,905       2,204
Note receivable--Note J.....................................        --       7,368
Reinsurance receivable--Note J..............................   263,289      41,417
Property held for sale--Note F..............................     2,177          --
Property and equipment, net--Note G.........................    15,091      10,062
Deferred federal income taxes--Note H.......................     1,792       1,409
Deferred acquisition costs..................................    26,650       3,810
Value of business acquired..................................    16,731          --
Goodwill....................................................    22,857          --
Other assets................................................     6,269       3,418
                                                              --------    --------
          Total assets......................................  $717,868    $180,233
                                                              ========    ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accrual
  Future policy benefits, losses and claims.................  $357,149    $ 20,694
  Unearned premiums.........................................    32,045       2,024
  Other policy claims and benefits payable--Note I..........   149,538      74,395
                                                              --------    --------
                                                               538,732      97,113
Deferred reinsurance gain--Note J...........................    20,932      13,400
Other policyholders' funds..................................    22,365       8,846
Federal income taxes payable--Note H........................     1,449       1,106
Long-term debt--Note L......................................    48,157       8,284
Other liabilities...........................................    41,572      15,648
                                                              --------    --------
          Total liabilities.................................   673,207     144,397
Shareholders' equity
  Non-voting preferred shares, $.001 par value, 2,000,000
     shares authorized, none issued--Note N.................        --          --
  Common shares, $.001 par value, authorized 30,000,000
     shares, issued and outstanding 13,706,726 in 1999 and
     11,495,172 in 1998.....................................        14          12
  Additional paid-in capital................................    60,290      43,883
  Retained earnings (deficit)...............................     2,549      (9,155)
  Accumulated other comprehensive (loss) income.............   (18,192)      1,096
                                                              --------    --------
          Total shareholders' equity........................    44,661      35,836
                                                              --------    --------
          Total liabilities and shareholders' equity........  $717,868    $180,233
                                                              ========    ========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       35
<PAGE>   38

                       CERES GROUP, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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

<TABLE>
<CAPTION>
                                                              1999        1998        1997
                                                            --------    --------    --------
<S>                                                         <C>         <C>         <C>
REVENUES
Premiums, net--Note J
  Medical.................................................  $251,876    $143,064    $235,129
  Specialty and other.....................................    75,870      11,124      14,578
                                                            --------    --------    --------
          Total premiums, net.............................   327,746     154,188     249,707
Net investment income--Note E.............................    21,362       7,454       6,528
Net realized gains--Note E................................       107         211         146
Fee and other income......................................    17,410       7,694       9,152
Amortization of deferred reinsurance gain--Note J.........     5,468         600          --
                                                            --------    --------    --------
                                                             372,093     170,147     265,533
                                                            --------    --------    --------
BENEFITS, LOSSES AND EXPENSES
Benefits, claims, losses and settlement expenses--Note J
  Medical.................................................   176,531     108,439     198,704
  Specialty and other.....................................    56,572       7,620      12,072
                                                            --------    --------    --------
          Total benefits, claims, losses and settlement
            expenses......................................   233,103     116,059     210,776
Selling, general and administrative expenses--Note J......   137,932      54,368      74,764
Net amortization and change in deferral of acquisition
  costs and value of business acquired--Note A............   (21,892)        647           4
Amortization of goodwill..................................     1,042          --          --
Interest expense and financing costs......................     3,902       1,842       1,078
                                                            --------    --------    --------
                                                             354,087     172,916     286,622
                                                            --------    --------    --------
Income (loss) before federal income taxes.................    18,006      (2,769)    (21,089)
Federal income tax expense (benefit)--Note H..............     6,302       1,067        (133)
                                                            --------    --------    --------
NET INCOME (LOSS).........................................  $ 11,704    $ (3,836)   $(20,956)
                                                            ========    ========    ========
EARNINGS (LOSS) PER COMMON SHARE
  Basic...................................................  $   0.88    $  (0.49)   $  (5.01)
  Diluted.................................................      0.77       (0.49)      (5.01)
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       36
<PAGE>   39

                       CERES GROUP, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                             (DOLLARS IN THOUSANDS)

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

<TABLE>
<CAPTION>
                                                                                         ACCUMULATED
                                                                           RETAINED         OTHER
                                         COMMON STOCK       ADDITIONAL     EARNINGS     COMPREHENSIVE       TOTAL
                                      -------------------    PAID-IN     (ACCUMULATED      (LOSS)       SHAREHOLDERS'
                                        SHARES     AMOUNT    CAPITAL       DEFICIT)        INCOME          EQUITY
                                      ----------   ------   ----------   ------------   -------------   -------------
<S>                                   <C>          <C>      <C>          <C>            <C>             <C>
BALANCE, DECEMBER 31, 1996..........   4,145,172   $2,073    $ 4,006       $15,637        $   (248)       $ 21,468
                                                                                          --------        --------
Comprehensive loss
  Net loss..........................                                       (20,956)             --         (20,956)
  Other comprehensive income, net:
    Unrealized gain on securities,
      net of tax of $315............                                                           956             956
    Reclassification adjustment for
      gains included in
      operations....................                                                           (97)            (97)
                                                                                          --------        --------
        Other comprehensive
          income....................                                                           859             859
                                                                                                          --------
  Comprehensive loss................                                                                       (20,097)
Exercise of stock options--Note M...      50,000      25         116            --              --             141
                                      ----------   ------    -------       -------        --------        --------
BALANCE, DECEMBER 31, 1997..........   4,195,172   2,098       4,122        (5,319)            611           1,512
                                                                                          --------        --------
Comprehensive loss
  Net loss..........................                                        (3,836)             --          (3,836)
  Other comprehensive income, net:
    Unrealized gain on securities,
      net of tax of $565............                                                           614             614
    Reclassification adjustment for
      gains included in
      operations....................                                                          (129)           (129)
                                                                                          --------        --------
        Other comprehensive
          income....................                                                           485             485
                                                                                                          --------
  Comprehensive loss................                                                                        (3,351)
Issuance of common shares--Note B...   7,300,000   3,650      34,025            --              --          37,675
Change to $.001 par value...........          --   (5,736)     5,736            --              --              --
                                      ----------   ------    -------       -------        --------        --------
BALANCE, DECEMBER 31, 1998..........  11,495,172      12      43,883        (9,155)          1,096          35,836
                                                                                          --------        --------
Comprehensive loss
  Net income........................                                        11,704              --          11,704
  Other comprehensive income, net:
    Unrealized loss on securities,
      net of tax of $0..............                                                       (19,701)        (19,701)
    Other...........................                                                           362             362
    Reclassification adjustment for
      losses included in
      operations....................                                                            51              51
                                                                                          --------        --------
        Other comprehensive loss....                                                       (19,288)        (19,288)
                                                                                                          --------
  Comprehensive loss................                                                                        (7,584)
Issuance of common shares
  Private placement -- Note D.......   2,000,000       2      14,998            --              --          15,000
  Employee benefit plans -- Notes M
    and Q...........................     211,554      --       1,409            --              --           1,409
                                      ----------   ------    -------       -------        --------        --------
BALANCE, DECEMBER 31, 1999..........  13,706,726   $  14     $60,290       $ 2,549        $(18,192)       $ 44,661
                                      ==========   ======    =======       =======        ========        ========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       37
<PAGE>   40

                       CERES GROUP, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                             (DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                1999        1998        1997
                                                              ---------    -------    --------
<S>                                                           <C>          <C>        <C>
OPERATING ACTIVITIES
  Net income (loss).........................................  $  11,704    $(3,836)   $(20,956)
  Adjustments to reconcile net income (loss) to cash
    provided by (used in) operating activities:
      Depreciation and amortization.........................      2,395        513         841
      Net realized gains....................................       (107)      (211)       (147)
      Deferred federal income tax expense (benefit).........      5,587       (382)       (723)
      Changes in assets and liabilities:
         Premiums receivable................................         85       (105)        951
         Reinsurance receivable.............................   (221,744)   (15,201)     (1,354)
         Value of business acquired.........................       (902)        --          --
         Goodwill...........................................     (1,584)        --          --
         Federal income taxes payable/recoverable...........     (6,256)       720       2,246
         Accrued investment income..........................        250       (219)       (135)
         Other assets.......................................       (215)    (1,191)     (1,100)
         Future policy benefits, claims and funds payable...    248,382     21,939       8,612
         Unearned premium...................................     17,525         --          --
         Other liabilities..................................      8,454      8,797         982
         Deferred policy acquisition costs..................    (22,283)     3,484          --
         Deferred reinsurance gain..........................     (5,468)    (3,400)         --
                                                              ---------    -------    --------
Net cash provided by (used in) operating activities.........     35,823     10,908     (10,783)
                                                              ---------    -------    --------
INVESTING ACTIVITIES
  Net (purchases) disposals of furniture and equipment......       (739)       302        (763)
  Purchase of fixed maturities available-for-sale...........    (30,323)   (33,100)    (22,113)
  Acquisition of Continental General Corporation, net of
    $24,712 cash acquired...................................    (59,788)        --          --
  Increase in surplus notes.................................     (5,042)        --          --
  Increase in mortgage and policy loans, net................        (20)        (2)        (16)
  Proceeds from sales of fixed maturities
    available-for-sale......................................     29,811      7,837       3,529
  Proceeds from calls and maturities of fixed maturities
    available-for-sale......................................     12,991     13,318      19,722
  Proceeds from sales (purchase) of fixed maturities
    held-to-maturity........................................      3,923         --          (6)
  Proceeds from calls and maturities of fixed maturities
    held-to-maturity........................................         --      3,023          13
                                                              ---------    -------    --------
Net cash (used in) provided by investing activities.........    (49,187)    (8,622)        366
                                                              ---------    -------    --------
FINANCING ACTIVITIES
  Increase in annuity account balances......................     18,446        482       1,269
  Decrease in annuity account balances......................    (37,819)    (5,118)     (4,387)
  Increase in note receivable...............................         --     (7,368)         --
  Principal payments on mortgage note payable...............       (127)      (115)       (105)
  Proceeds from notes payable...............................         --         --      25,200
  Repayment of notes payable................................         --    (20,000)     (5,200)
  Increase in long-term debt borrowings.....................     40,000         --          --
  Proceeds from issuance of common shares...................      1,409     37,675         142
  Proceeds from private placement...........................     15,000         --          --
  Reinsurance ceding allowance, net.........................         --         --     (14,550)
                                                              ---------    -------    --------
Net cash provided by financing activities...................     36,909      5,556       2,369
                                                              ---------    -------    --------
NET INCREASE (DECREASE) IN CASH.............................     23,545      7,842      (8,048)
Cash and cash equivalents at beginning of year..............     19,376     11,534      19,582
                                                              ---------    -------    --------
CASH AND CASH EQUIVALENTS AT END OF YEAR....................  $  42,921    $19,376    $ 11,534
                                                              =========    =======    ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest......................  $   2,940    $ 1,662    $  1,012
Cash paid during the year for income taxes..................      2,078        650         590
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       38
<PAGE>   41

                       CERES GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1999, 1998 AND 1997

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

A. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF BUSINESS

     Ceres Group, Inc. and its subsidiaries ("Ceres" or the "Company"), known as
Central Reserve Life Corporation prior to December 8, 1998, operated in 1998 and
prior periods primarily through its wholly-owned subsidiary, Central Reserve
Life Insurance Company ("Central"). As of December 31, 1999, the Company's
consolidated statements also include the accounts of Provident American Life &
Health Insurance Company ("Provident") acquired on December 31, 1998,
Continental General Corporation ("Continental General") and its wholly-owned
subsidiary Continental General Insurance Company ("Continental") acquired on
February 17, 1999 and United Benefit Life Insurance Company ("United Benefit")
under a reinsurance arrangement effective August 1, 1998 and acquired on July
21, 1999. These acquisitions are discussed further in Notes D and J.

     The Company provides through its wholly-owned subsidiaries a broad spectrum
of health insurance, medical cost management, and specialty products and
services distributed through 60,000 independent licensed agents. While the
Company through its subsidiaries is licensed in 49 states, the District of
Columbia and the U.S. Virgin Islands, approximately 67% of premium volume is
generated from eleven states: Ohio, Florida, Indiana, Georgia, North Carolina,
Texas, Kansas, South Carolina, Tennessee, Missouri, and Illinois.

SIGNIFICANT ACCOUNTING POLICIES

     The accompanying consolidated financial statements include the accounts of
Ceres and its wholly-owned subsidiaries. The consolidated statement of
operations for the year ended December 31, 1999 reflects the results of
operations for Continental General for the period subsequent to its acquisition
on February 17, 1999 and United Benefit's for the period subsequent to its
acquisition (through foreclosure) on August 1, 1999. All intercompany
transactions have been eliminated in consolidation.

     The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP"), which differ from accounting
practices prescribed or permitted by the various state departments of insurance
in which the insurance subsidiaries are domiciled (see Note O). A summary of
significant accounting policies is as follows:

  CASH AND CASH EQUIVALENTS

     Cash and cash equivalents include cash and all liquid securities with
maturities of 90 days or less when purchased.

  INVESTMENTS

     Investments in bonds and mandatory redeemable preferred stocks are
designated at purchase as held-to-maturity or available-for-sale.
Held-to-maturity investments are securities which management has the positive
intent and ability to hold until maturity, and are reported at amortized cost.
Available-for-sale investments are reported at fair value, with unrealized
holding gains and losses reported in accumulated other comprehensive income, net
of deferred federal income taxes. All investments as of December 31, 1999 are
designated as available-for-sale.

     Investments in surplus notes, mortgage loans, and policy loans are reported
at cost which approximates fair value.

                                       39
<PAGE>   42
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 1999, 1998 AND 1997

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

     Premiums and discounts arising from the purchase of mortgage-backed
securities are amortized using the interest method over the estimated remaining
term of the securities, adjusted for anticipated prepayments. Premiums and
discounts on other debt instruments are amortized using the interest method over
the remaining term of the security.

     Realized gains and losses on the sale of investments are determined using
the specific-identification method, and are credited or charged to income.

     The estimated fair value of investments is based upon quoted market prices,
where available, or on values obtained from independent pricing services.

  DEFERRED ACQUISITION COSTS

     The costs of acquiring traditional life, interest-sensitive products and
accident and health contracts, certain expenses of the policy issues and
underwriting department, and certain agency expenses, all of which vary with and
are primarily related to the production of new business have been deferred.
Deferred acquisition costs of traditional life and accident and health contracts
are amortized over the premium paying period of the related policies using the
same assumptions. For interest-sensitive life and annuity products, deferred
acquisition costs are amortized over the estimated duration of the policies in
relation to the present value of estimated gross profits from surrender charges
and investments, mortality, and expense margins.

     Unamortized deferred policy acquisition costs are summarized as follows:

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                            -------------------------
                                                             1999       1998     1997
                                                            -------    ------    ----
                                                             (DOLLARS IN THOUSANDS)
<S>                                                         <C>        <C>       <C>
Balance at beginning of year..............................  $ 3,810    $  326    $322
Current year's costs deferred.............................   27,379     4,131       8
                                                            -------    ------    ----
                                                             31,189     4,457     330
Less: Amortization for the year...........................    4,539       647       4
                                                            -------    ------    ----
Balance at end of the year................................  $26,650    $3,810    $326
                                                            =======    ======    ====
</TABLE>

  VALUE OF BUSINESS ACQUIRED

     A portion of the purchase price paid by the Company for Continental General
was allocated to the value of business acquired based on the
actuarially-determined present value of the expected pre-tax future profits from
the business assuming a discount rate of 15%. Interest is accrued on the balance
annually at a rate consistent with the rate credited on the acquired policies on
the acquisition date, which ranges from 4.75% to 8.75%. Recoverability of the
value of business acquired is evaluated periodically by comparing the current
estimate of the present value of expected pre-tax future profits to the
unamoritized asset balance. If such current estimate is less than the existing
asset balance, the difference would be charged to expense.

     For accident and health and ordinary life business, the value of business
acquired is amortized over the estimated life of the in force business using
assumptions consistent with those in computing reserves. Interest of 6% is
credited to the unamortized balance. For interest sensitive products such as
universal life and deferred annuities, the value of business acquired is
amortized over the expected profit stream of the in force business. The expected
profit stream is based upon actuarial assumptions as to mortality, lapses and
expenses. Earned interest was assumed to be 6% which was the market rate at the
time of acquisition.

     The balance of the value of business acquired was $16.7 million at December
31, 1999. During the year, $2.5 million was established as an additional expense
reserve, increasing the value of business acquired. The

                                       40
<PAGE>   43
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 1999, 1998 AND 1997

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

increased expense reserve is primarily a result of the higher commission rates
paid in the initial policy years of the Medicare supplement business acquired.
Under the current assumptions, amortizations for the next five years is expected
to be as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                   AMORTIZATION
                                                   ------------
<S>                                                <C>
2000.............................................    $(1,684)
2001.............................................       (492)
2002.............................................        647
2003.............................................      1,552
2004.............................................      1,924
</TABLE>

  GOODWILL

     Goodwill represents the excess of cost over the fair value of net assets
acquired. Goodwill is being amortized on a straight-line basis over periods of
25 years or less. On a periodic basis, management reviews goodwill to determine
if events or changes in circumstances indicate the carrying value of such assets
is not recoverable, in which case an impairment charge would be recorded in
current operations. Management believes that no impairment of goodwill exists at
December 31, 1999.

  PROPERTY AND EQUIPMENT AND PROPERTY HELD FOR SALE

     Property and equipment are carried at cost less allowances for depreciation
and amortization. Office buildings are depreciated on the straight-line method
over 31.5 years, except for certain components, which are depreciated over 15
years. Depreciation for other property and equipment is computed on the
straight-line basis over the estimated useful lives of the equipment,
principally five and seven years. Property held for sale is stated at estimated
fair value less cost to sell. No depreciation or amortization is provided for
property held for sale.

     Management periodically reviews the carrying value of property and
equipment for impairment. Any impaired property and equipment is valued using an
undiscounted cash flow methodology.

  FUTURE POLICY BENEFITS, LOSSES AND CLAIMS

     Liabilities for future policy reserves for accident and health and ordinary
life business are based on the net level premium basis and estimates of future
claims, investment yield, lapses using the Company's experience and actuarial
judgment with an allowance for possible future adverse deviations from expected
experience. Interest rates used range from 4.5% to 6.0%. Liabilities for
interest sensitive products such as deferred annuities and universal life are
based on the retrospective deposit method. This is the policyholder fund balance
before adjusting for any surrender charges. Guaranteed minimum rates for
universal life contracts are 4.0% to 4.5%. At December 31, 1999, credited rates
ranged from 5.5% to 7.0%. Guaranteed base minimum rates for deferred annuities
range from 3.0% to 5.75% depending on the duration of the contract. Current
rates credited range from 5.0% to 8.6%.

  OTHER POLICY CLAIMS AND BENEFITS PAYABLE

     Liabilities for unpaid life and accident and health claims, which include a
provision for estimated costs to investigate and settle claims, are estimated
based upon past experience for pending, incurred but not reported, and reopened
claims. Accident and health claims incurred but not reported are computed using
actuarially-determined factors based on a combination of claim completion and
projected claim cost methods, utilizing

                                       41
<PAGE>   44
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 1999, 1998 AND 1997

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

durational experience, seasonal cycle, changes in health care practice, changes
in inflation rates, and the claims backlog.

     Claim liabilities with long pay-out periods, such as long term care and
disability income claims, are discounted at interest rates ranging from 3.0% to
6.0%. Although considerable variability is inherent in such computations,
management believes that the liabilities for unpaid life and accident and health
claims are adequate. The estimates are continually reviewed and adjusted as
necessary as experience develops or new information becomes known with such
adjustments included in current operations.

  DEFERRED REINSURANCE GAIN

     Deferred reinsurance gain consists of initial ceding allowances received
from reinsurers, less amounts amortized into income over the estimated remaining
life of the underlying policies reinsured.

  OTHER POLICYHOLDERS' FUNDS

     Other policyholders' funds consist of supplementary contracts without life
contingencies, premiums, and annuity considerations received in advance and
remittance and items not allocated.

  INSURANCE RELATED ASSESSMENTS

     In December 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-3, Accounting by Insurance and Other Enterprises
for Insurance-Related Assessments, which provides guidance for determining when
an insurance or other enterprise should recognize a liability for guaranty-fund
and other insurance-related assessments and guidance for measuring the
liability. The adoption of this statement effective January 1, 1999 resulted in
a $0.2 million charge to general operating expenses.

  COMPREHENSIVE INCOME

     Comprehensive income in 1999, 1998 and 1997 includes a change in unrealized
gains or losses on available-for-sale securities, in addition to reported net
income.

  PREMIUM REVENUE

     Life premiums are recognized as revenue when they become due. Accident and
health premiums are recognized as revenue over the terms of the policies.
Amounts received from interest sensitive contracts, principally Universal Life
and annuity products, are not reflected in premium revenue; rather, such amounts
are accounted for as deposits and are included in future policy benefits, losses
and claims.

  FEE AND OTHER INCOME

     Fee and other income consists of association, collection, management, and
administrative fees, and are recognized when earned.

                                       42
<PAGE>   45
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 1999, 1998 AND 1997

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

  FEDERAL INCOME TAXES

     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. 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.

  STOCK-BASED COMPENSATION

     The intrinsic value method of accounting is used for stock-based
compensation plans. In accordance with the intrinsic value method, compensation
cost is measured as the excess, if any, of the quoted market price of the equity
instrument awarded at the measurement date over the amount an employee must pay
to acquire the equity instrument. Stock-based compensation costs are recognized
over the period in which employees render services associated with the awards.

  EARNINGS PER SHARE

     Basic earnings per share are computed by dividing the income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflect the potential dilution that
could occur if common stock equivalents were exercised and shared in the
earnings of the Company. Only those potential common shares, which are dilutive,
are included in the computation of diluted earnings per share.

  USE OF ESTIMATES

     The consolidated financial statements reflect estimates and judgments made
by management that affect the amounts reported herein and the disclosure of
contingent assets and liabilities. Actual results could differ significantly
from those estimates.

  RECLASSIFICATION

     Certain amounts presented in the prior years' financial statements have
been reclassified to conform to the current year's method of presentation.

  NEW ACCOUNTING PRONOUNCEMENTS

     In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities as amended by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133, which is required to be adopted for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Company expects
to adopt the new statement effective January 1, 2001. This Statement will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If a derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of the derivative will either be offset against the
change in fair value of the hedged asset, liability, or firm commitment through
earnings, or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings. The Company anticipates that
the adoption of this Statement will not have a significant effect on its results
of operations or financial position.

                                       43
<PAGE>   46
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 1999, 1998 AND 1997

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

B. EQUITY TRANSACTIONS

     In November 1997, the Company entered into a Stock Purchase Agreement
("Original Stock Purchase Agreement") with Strategic Acquisition Partners, LLC
("Strategic"), wherein the Company agreed to issue and sell 5,000,000 common
shares and warrants to purchase an additional 2,500,000 common shares at an
exercise price of $6.50 per share, for an aggregate purchase price of $27.5
million. On March 30, 1998, the Company entered into an amended and restated
Stock Purchase Agreement ("New Stock Purchase Agreement") with Strategic and two
additional investors: Insurance Partners, L.P. and Insurance Partners Offshore
(Bermuda), L.P. (collectively, "Insurance Partners"). The New Stock Purchase
Agreement was subsequently approved by shareholders, and accordingly, in July
1998 the Company issued and sold 7,300,000 common shares at $5.50 per share and
warrants to purchase an additional 3,650,000 common shares at an exercise price
of $5.50 per share, which expire July 2, 2005, and received proceeds of $37.7
million, which are net of transaction expenses.

     In connection with the Original Stock Purchase Agreement, Strategic
arranged an interim loan (the "Bridge Loan") of $20.0 million to the Company.
The bridge loan was due June 30, 1998, and bore interest at the prime rate of a
major commercial bank. As consideration for the arrangement, the Company issued
Strategic and Richard M. Osborn warrants to purchase 800,000 common shares at
$6.00 per share on December 1997, which expire December 17, 2002, and additional
warrants to purchase 200,000 common shares at $6.00 per share on July 3, 1998,
which expire on December 17, 2002. Proceeds from the Bridge Loan were used as
follows: (a) $5.2 million was used to repay outstanding bank debt, (b) $14.0
million was used by the Company to invest in the statutory surplus of Central,
and was evidenced by a surplus note in favor of the Company from Central, and
(c) $0.8 million was used to establish an interest reserve at the Company and to
pay transaction expenses. The Bridge Loan was repaid in full by the Company in
July 1998 from the proceeds received in accordance with the New Stock Purchase
Agreement.

C. 1997 OPERATING RESULTS

     In 1997, the Company incurred a net loss of approximately $21.0 million,
which resulted in a significantly reduced net capital position. In addition, at
December 31, 1997, it was not clear if shareholder approval would be granted for
the Original Stock Purchase Agreement or New Stock Purchase Agreement described
in Note B. If shareholder approval had not been granted, the Company would have
been required to immediately obtain an alternate source of funding in order to
repay the Bridge Loan and fund its operations. There was no assurance that such
funding could have been obtained at all or on terms favorable to the Company.
The failure to obtain such funding could have resulted in Strategic exercising
its rights as a secured creditor, and foreclosing upon all the common shares of
Central, which were pledged as collateral under the terms of the Bridge Loan.
Such action would have made it impossible for the Company to continue operations
and/or forced the Company to seek protection under federal bankruptcy law. These
matters raised significant doubt at December 31, 1997 about the Company's
ability to continue as a going concern.

     As discussed in Note B, the New Stock Purchase Agreement was approved by
shareholders, resulting in the Company's receipt of net proceeds of $37.7
million, enabling the Company to satisfy the Bridge Loan obligation and fund
operations. In addition, as reported in the accompanying consolidated financial
statements, the Company reported profitable operations in the third and fourth
quarters of 1998 and in all four quarters of 1999. Accordingly, the matters,
which raised substantial doubt about the Company's ability to continue as a
going concern at December 31, 1997, have been alleviated.

                                       44
<PAGE>   47
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 1999, 1998 AND 1997

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

D. BUSINESS COMBINATIONS

  CONTINENTAL GENERAL CORPORATION

     Effective February 1, 1999, the Company acquired 100% of the outstanding
common stock of Continental General from The Western & Southern Life Insurance
Company. Continental General is a holding company that primarily conducts
business through its wholly-owned subsidiary, Continental, a life and accident
and health insurer domiciled in Nebraska, which is licensed in 49 states, the
District of Columbia, and the U.S. Virgin Islands. Continental offers Medicare
supplement and individual major medical products, distributed through
independent agents. Continental also offers long-term care, ordinary life,
universal life, and annuity policies. Total consideration paid by the Company
for the common stock was $84.5 million, and was financed through reinsurance,
debt, cash and an equity offering as described further below. This transaction
was accounted for in accordance with the purchase method, and accordingly, the
purchase price was allocated to assets and liabilities acquired based upon
estimates of their fair value.

     The acquisition was partially funded by a reinsurance treaty with
Reassurance Company of Hannover ("Hannover"), whereby Continental ceded 50% of
its in force life, accident and health, and annuity policies to Hannover, and
retained the remaining risk. The treaty provides an initial ceding allowance of
$13.0 million, which was accounted for as a deferred reinsurance gain.

     Other fundings were provided by a $40.0 million credit facility with a
syndicate of major commercial banks led by The Chase Manhattan Bank. The Company
has pledged the common stock of Continental General and Central as security for
the loan. See Note L, Long-Term Debt footnote for further discussion of the
credit facility. In addition, effective February 17, 1999, the Company entered
into a series of stock subscription agreements with a group of investors,
principally Peter W. Nauert, and Insurance Partners wherein the Company issued
2,000,000 common shares at $7.50 per share for $15.0 million.

     The following unaudited proforma information presents the consolidated
results of operations of the Company assuming the acquisition of Continental was
completed at the beginning of January 1, 1998 and 1999:

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                                ------------------------
                                                                   1999          1998
                                                                ----------    ----------
                                                                 (DOLLARS IN THOUSANDS)
<S>                                                             <C>           <C>
Revenues....................................................     $382,393      $310,710
Income (loss) before federal income taxes...................       17,120       (14,323)
Federal income tax expense..................................        5,992         2,924
Earnings (loss).............................................       11,128       (11,399)
Per common share
  Basic.....................................................         0.82         (1.16)
  Diluted...................................................         0.72         (1.16)
</TABLE>

     The proforma results of operations are not indicative of the actual results
of operations that would have occurred had the acquisition been made on the
dates indicated, or the results that may be obtained.

  PROVIDENT AMERICAN LIFE & HEALTH INSURANCE COMPANY

     On December 31, 1998, Central acquired 100% of the outstanding common stock
of Provident from Provident American Corporation ("Provident American") for $5.5
million. Provident is a life and accident and health insurer, domiciled in
Pennsylvania, licensed in 40 states and the District of Columbia, that markets
managed care health insurance products to individuals and small businesses, and
critical illness coverage.

                                       45
<PAGE>   48
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 1999, 1998 AND 1997

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

Funds for the acquisition were provided from Central's working capital. This
transaction was accounted for in the accompanying consolidated financial
statements in accordance with the purchase method and accordingly, the purchase
price was allocated to assets and liabilities acquired based upon estimates of
their fair values. There was no impact on the accompanying consolidated
statement of operations for 1998 as a result of this transaction.

     The fair value of assets acquired totaled $6.5 million, consisting
principally of bonds and cash, and liabilities of $1.0 million, which relate
principally to premiums taxes payable.

     Immediately prior to the completion of this transaction, Provident ceded
100% of its insurance in force to Provident Indemnity Life Insurance Company
("Provident Indemnity"), a subsidiary of Provident American.

     Effective January 1, 1999, Hannover assumed from Provident Indemnity 100%
of its accident and health block of business. As of January 1, 1999, Central
entered into a separate reinsurance agreement with Hannover, wherein Central
assumed from Hannover 10% of the block acquired by Hannover from Provident
Indemnity.

E. CASH AND INVESTMENTS

     The amortized cost and estimated fair value of securities
available-for-sale as of December 31, 1999, are as follows:

<TABLE>
<CAPTION>
                                                          GROSS UNREALIZED
                                            AMORTIZED    ------------------    ESTIMATED
                                              COST       GAINS      LOSSES     FAIR VALUE
                                            ---------    ------    --------    ----------
                                                       (DOLLARS IN THOUSANDS)
<S>                                         <C>          <C>       <C>         <C>
AVAILABLE-FOR-SALE
  U.S. Treasury securities................  $ 16,140     $   41    $   (282)    $ 15,899
  U.S. Agencies...........................     6,670         --        (160)       6,510
  State and political subdivisions........     4,225         --        (145)       4,080
  Corporate bonds.........................   232,229        692     (17,353)     215,568
  Mortgage-backed securities..............    60,355        138      (1,564)      58,929
                                            --------     ------    --------     --------
          Total available-for-sale........   319,619        871     (19,504)     300,986
  Surplus notes...........................     4,964         79          --        5,043
                                            --------     ------    --------     --------
          Total...........................  $324,583     $  950    $(19,504)    $306,029
                                            ========     ======    ========     ========
</TABLE>

     Except for bonds and notes of the U.S. Government or of a U.S. Government
agency or authority, the only investment the Company has that exceeds 10% of
total shareholders' equity is a bond of Petroliam Nasional Berhad with an
estimated fair value of $4.8 million at December 31, 1999.

     In June 1999, the Company sold approximately $4.0 million of securities
from its held-to-maturity portfolio to meet a significant and unanticipated
increase in claim payments. The securities sold represent 44% of the
held-to-maturity portfolio and generated a realized gain of $2,000. Due to the
sale and the recent acquisition of Continental, management changed the intent to
hold the remaining held-to maturity portfolio, of approximately $5.0 million,
and transferred, as of June 30, 1999, the balance to available-for-sale and
recorded an unrealized loss of $9,000.

                                       46
<PAGE>   49
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 1999, 1998 AND 1997

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

     The amortized cost and estimated fair value of securities held-to-maturity
and available-for-sale as of December 31, 1998, are as follows:

<TABLE>
<CAPTION>
                                                          GROSS UNREALIZED
                                            AMORTIZED    ------------------    ESTIMATED
                                              COST       GAINS      LOSSES     FAIR VALUE
                                            ---------    ------    --------    ----------
                                                       (DOLLARS IN THOUSANDS)
<S>                                         <C>          <C>       <C>         <C>
HELD-TO-MATURITY
  U.S. Treasury securities................  $  4,534     $   47    $     --     $  4,581
  Mortgage-backed securities..............     4,366         71          --        4,437
                                            --------     ------    --------     --------
          Total held-to-maturity..........  $  8,900     $  118    $     --     $  9,018
                                            ========     ======    ========     ========
AVAILABLE-FOR-SALE
  U.S. Treasury securities................  $ 11,137     $  243    $     --     $ 11,380
  U.S. Agencies...........................     3,720        147          --        3,867
  Municipals..............................       600         14          --          614
  Corporate bonds.........................    50,189      1,039        (104)      51,124
  Mortgage-backed securities..............    13,526        323          (2)      13,847
                                            --------     ------    --------     --------
          Total available-for-sale........  $ 79,172     $1,766    $   (106)    $ 80,832
                                            ========     ======    ========     ========
</TABLE>

     The amortized cost and estimated fair value of fixed maturities at December
31, 1999 by contractual maturity, are as follows:

<TABLE>
<CAPTION>
                                                              AMORTIZED    ESTIMATED
                                                                COST       FAIR VALUE
                                                              ---------    ----------
                                                              (DOLLARS IN THOUSANDS)
<S>                                                           <C>          <C>
AVAILABLE-FOR-SALE
  Due in one year or less...................................  $  9,260      $  9,073
  Due after one year through five years.....................    80,412        78,036
  Due after five years through ten years....................   139,135       128,019
  Due after ten years.......................................    30,457        26,929
                                                              --------      --------
                                                               259,264       242,057
  Mortgage-backed securities................................    60,355        58,929
                                                              --------      --------
  Total available-for-sale..................................  $319,619      $300,986
                                                              ========      ========
</TABLE>

     Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
penalties.

     Proceeds, gross realized gains and gross realized losses from the sales
(excluding calls, maturities and pay downs) of fixed maturities
available-for-sale during each year were as follows:

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                          ---------------------------
                                                           1999       1998      1997
                                                          -------    ------    ------
                                                            (DOLLARS IN THOUSANDS)
<S>                                                       <C>        <C>       <C>
Proceeds................................................  $29,811    $7,926    $3,529
Gross realized gains....................................       27       165        56
Gross realized losses...................................       74        29         2
</TABLE>

                                       47
<PAGE>   50
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 1999, 1998 AND 1997

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

     The following is a summary of net investment income by category of
investments:

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                          ---------------------------
                                                           1999       1998      1997
                                                          -------    ------    ------
                                                            (DOLLARS IN THOUSANDS)
<S>                                                       <C>        <C>       <C>
Fixed maturities........................................  $19,359    $5,433    $5,572
Policy loans............................................      244         5         5
Cash equivalents........................................    1,637     1,182       758
Other...................................................    1,345     1,033       193
Investment expenses.....................................   (1,223)     (199)       --
                                                          -------    ------    ------
                                                          $21,362    $7,454    $6,528
                                                          =======    ======    ======
</TABLE>

     At December 31, 1999, the Company's insurance subsidiaries had certificates
of deposit and fixed maturity securities with a carrying value of $21.6 million
on deposit with various state insurance departments to satisfy regulatory
requirements.

     At December 31, 1999, $4.8 million of cash is held for self-funded accident
and health accounts, which is restricted to use. Central is entitled to
investment income from these funds. A corresponding liability is included in the
accompanying consolidated financial statements.

     At December 31, 1999, the Company held no unrated or less-than-investment
grade bonds. The Company performs periodic evaluations of the relative credit
standings of the issuers of the bonds held in the Company's portfolio. These
evaluations are considered by the Company in its overall investment strategy.

F. PROPERTY HELD FOR SALE

     During the fourth quarter of 1999, management committed to a plan to
consolidate the operations of United Benefit into the home office and to sell
United Benefit's home office property. The Company has recorded the property at
its estimated fair value less the estimated incremental direct costs to transact
a sale. This resulted in a charge to operations of approximately $0.2 million.

G. PROPERTY AND EQUIPMENT

     Property and equipment are stated at cost and are summarized by category as
follows:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                1999         1998
                                                              ---------    ---------
                                                              (DOLLARS IN THOUSANDS)
<S>                                                           <C>          <C>
Home office building........................................   $17,374      $11,060
Land........................................................     1,610        1,610
Other property and equipment................................     8,205        5,674
                                                               -------      -------
                                                                27,189       18,344
Less: Accumulated depreciation..............................    12,098        8,282
                                                               -------      -------
          Total.............................................   $15,091      $10,062
                                                               =======      =======
</TABLE>

     Other property and equipment consists principally of furniture, fixtures,
and data processing equipment. Depreciation expense for the years ended December
31, 1999, 1998 and 1997 was $1.5 million, $0.9 million, and $1.1 million,
respectively.
                                       48
<PAGE>   51
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 1999, 1998 AND 1997

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

H. FEDERAL INCOME TAXES

     The Company files a consolidated federal income tax return with its
subsidiaries, except for Continental, which is required to file a separate
return through fiscal year 2003. 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.

     Federal income tax expense (benefit) is composed of the following:

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                            -------------------------
                                                             1999      1998     1997
                                                            ------    ------    -----
                                                             (DOLLARS IN THOUSANDS)
<S>                                                         <C>       <C>       <C>
Current...................................................  $  715    $1,449    $ 590
Deferred..................................................   5,587      (382)    (723)
                                                            ------    ------    -----
          Total...........................................  $6,302    $1,067    $(133)
                                                            ======    ======    =====
</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 summarized as follows:

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                          ---------------------------
                                                           1999      1998      1997
                                                          ------    ------    -------
                                                            (DOLLARS IN THOUSANDS)
<S>                                                       <C>       <C>       <C>
Expected tax benefit at 35%.............................  $6,302    $ (969)   $(7,381)
Special life insurance deduction........................      --      (367)        --
Tax exempt interest.....................................    (135)      (12)       (13)
Valuation allowance for deferred tax assets.............    (158)    2,327      6,368
Tax rate differential...................................      --        28        211
Accrual adjustment......................................      --        --       (104)
IRS audit adjustment....................................      --        --        590
Alternative minimum tax.................................     332        --         --
Other...................................................     (39)       60        196
                                                          ------    ------    -------
                                                          $6,302    $1,067    $  (133)
                                                          ======    ======    =======
</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 were
approximately $2.4 million of which $0.2 million was paid in 1994 and $0.6
million paid in 1997. The balance of approximately $1.6 million relates to
whether or not the Company's subsidiary, Central, qualified as a life company
for tax purposes. The Company vigorously protested the proposed deficiency.
Based on discussions with counsel, management believed existing law supported
the Company's position. On October 12, 1999, the United States Tax Court ruled
that Central did qualify as a life company for tax reporting purposes. A final
computation of amounts due for 1991 and 1992 was filed in February 2000. The
Company had established a liability for the amounts due, which had no material
impact on the accompanying financial statements. The IRS has until May 31, 2000
to appeal the decision to the United States Tax Court.

                                       49
<PAGE>   52
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 1999, 1998 AND 1997

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

     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1999 and 1998 are presented below:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              -----------------------
                                                                 1999         1998
                                                              ----------    ---------
                                                              (DOLLARS IN THOUSANDS)
<S>                                                           <C>           <C>
Deferred tax assets
  Reinsurance transactions..................................   $11,222       $8,785
  Deferred acquisition costs................................     2,834           72
  Severance pay.............................................       417          231
  Alternative minimum tax...................................       332           --
  Reserves..................................................     4,812          706
  Net operating loss carryforward...........................     5,923          841
  Advance premium...........................................       673          294
  Other.....................................................       178          203
                                                               -------       ------
                                                                26,391       11,132
Less: Valuation allowance...................................    14,719        8,988
                                                               -------       ------
Deferred assets, net of valuation allowance.................    11,672        2,144
                                                               -------       ------
Deferred tax liabilities
  Value of business acquired................................     9,548           --
  Net unrealized holding gain...............................        --          565
  Bond discount accretion...................................       186          102
  Difference in book and tax depreciation...................       146           68
                                                               -------       ------
                                                                 9,880          735
                                                               -------       ------
Net deferred tax assets.....................................   $ 1,792       $1,409
                                                               =======       ======
</TABLE>

     At December 31, 1999, the Company has a tax net operating loss ("NOL")
carryforward of approximately $16.9 million for federal income tax purposes,
which expires through 2012. Future changes in ownership, as defined by Sections
382 and 383 of the Internal Revenue Code, could limit the amount of NOL
carryforwards used in any one year.

     The Company determines a valuation allowance based on an analysis of
amounts recoverable in the statutory carryback period and available tax planning
strategies. In assessing the valuation allowance established at December 31,
1999 and 1998, estimates were made as to the potential financial impact on the
Company of recent NOLs and the Company's financial condition described in Notes
B and C. Management believes that the Company will generate sufficient future
taxable income to realize the $1.8 million net deferred tax asset prior to the
expiration of any NOLs.

     In accordance with federal tax law, 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 policyholders, 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." At
December 31, 1999, the accumulated untaxed policyholders' surplus for the
Company, all of which relates to Central, is $2.9 million.

                                       50
<PAGE>   53
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 1999, 1998 AND 1997

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

I. 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"),
net of reinsurance recoverables, as follows:

<TABLE>
<CAPTION>
                                                                        DECEMBER 31,
                                                               ------------------------------
                                                                 1999       1998       1997
                                                               --------    -------    -------
                                                                   (DOLLARS IN THOUSANDS)
    <S>                                                        <C>         <C>        <C>
    Balance at beginning of year.............................  $ 74,395    $56,187    $42,909
    Reserve on blocks of business reinsured..................    16,620     23,500         --
    Reserve on blocks of business acquired...................    53,560         --         --
                                                               --------    -------    -------
      Net balances at beginning of year......................   144,575     79,687     42,909
                                                               --------    -------    -------
    Incurred claims and CAE, net of reinsurance, for
      Current year...........................................   226,202    116,357    206,636
      Prior years............................................    (1,487)    (1,697)     8,275
                                                               --------    -------    -------
         Total incurred......................................   224,715    114,660    214,911
                                                               --------    -------    -------
    Paid claims and CAE, net of reinsurance, for
      Current year...........................................   176,387     89,953    144,056
      Prior years............................................    57,875     29,999     57,577
                                                               --------    -------    -------
         Total paid..........................................   234,262    119,952    201,633
                                                               --------    -------    -------
      Net balance at end of year.............................   135,028     74,395     56,187
    Plus reinsurance recoveries..............................    14,510         --         --
                                                               --------    -------    -------
    Balance at end of year...................................  $149,538    $74,395    $56,187
                                                               ========    =======    =======
</TABLE>

     The foregoing indicates that a $1.5 million redundancy in the 1998 reserves
emerged in 1999, a $1.7 million redundancy in the 1997 reserves emerged in 1998,
and a $8.3 million deficiency emerged in 1997. The deficiency in the 1996
reserves resulted from substantial losses developing on insurance plans issued
in 1995, and higher utilization than anticipated.

J. REINSURANCE ARRANGEMENTS

  UNITED BENEFIT LIFE INSURANCE COMPANY

     Effective August 1, 1998, Central entered into a reinsurance treaty with
United Benefit, a life and accident and health insurer in Texas. Under the terms
of the treaty, Central agreed to assume 100% of United Benefit's block of
business, until such time as profits earned by Central on the assumed block
reach a contractual threshold, which approximates $20.0 million of pretax
income. Upon achieving this threshold, the quota share percentage is reduced
from 100% to 80%, until a second threshold, which approximates $16.0 million in
pretax income, is achieved. Upon achieving the second threshold, the quota share
percentage is further reduced from 80% to 50%. Central paid to United Benefit a
$20.0 million ceding allowance in connection with this transaction. In addition,
Central entered into an agency arrangement with respect to the marketing of
United Benefit policies with Insurance Advisors of America, Inc. ("IAA"), a
subsidiary of United Benefit Managed Care Corporation and an affiliate of United
Benefit, in exchange for a $7.0 million note receivable. Central recorded a full
valuation allowance against such note receivable at December 31, 1998.

     Reserve liabilities assumed by Central under the United Benefit agreement
on August 1, 1998 exceeded the cash transferred to Central by United Benefit as
reimbursement for this assumption by $3.0 million which was reflected in a note
receivable. Subsequent to August 1, 1998, the balance of the note receivable was
increased as a result of adverse developments in the assumed policy liabilities,
net of amounts ceded to

                                       51
<PAGE>   54
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 1999, 1998 AND 1997

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

Hannover, and net of an allowance for uncollectability. The note receivable was
secured by the outstanding common stock and assets of United Benefit. The assets
included real estate, bonds and reinsurance receivables from an unrelated party,
and by commissions due to IAA.

     In connection with the United Benefit reinsurance treaty, Central ceded 80%
of the business in force on August 1, 1998 to Hannover, thereby retaining a net
risk of 20%. Additionally, Central ceded 50% of the policies to be written by
United Benefit from and after August 1, 1998 and reinsured by Central to
Hannover. This treaty provided Central an initial ceding allowance of $20.0
million, which is being accounted for as a deferred reinsurance gain in the
accompanying consolidated financial statements, and will be amortized into
income over the duration of the underlying block of business.

     On March 18, 1999, Central announced the execution of an agreement with
United Benefit Managed Care Corporation, to purchase all of the outstanding
shares of its subsidiary, United Benefit. On June 14, 1999, Central terminated
this agreement due to a reserve shortfall at United Benefit in excess of amounts
projected. Pursuant to the "true up" provision in the agreements between United
Benefit, IAA and Central, the reserve shortfall calculated at December 31, 1999,
totaled $19.4 million. On July 21, 1999, following receipt of approval from the
Department of Insurance of the State of Indiana, Central foreclosed on the stock
of United Benefit and the renewal commissions due IAA in partial payment of the
$19.4 million reserve shortfall.

     As of December 31, 1999, Central had recovered approximately $17.8 million
of the $19.4 million reserve shortfall through real and personal property of
United Benefit totaling $4.6 million, commissions due IAA of $5.3 million, and
$7.9 million from the Hannover reinsurance agreement. As a result, the remaining
reserve shortfall was $1.6 million. An expense of $0.7 million was recorded in
1998, and the balance of $0.9 million was recorded in 1999.

  PROVIDENT AMERICAN LIFE & HEALTH INSURANCE COMPANY

     Prior to our acquisition of Provident, all of the insurance business of
Provident in force at December 31, 1998 was ceded to Provident Indemnity. In
addition, Hannover reinsured all the individual and small group health insurance
in force at December 31, 1998, of Provident and Provident Indemnity for a ceding
allowance of approximately $10.0 million. On January 1, 1999, Hannover ceded 10%
of this reinsurance to Central and Central paid a $1.0 million ceding
commission.

     Effective January 1, 1999, Provident entered into a reinsurance agreement
with Provident Indemnity, whereby Provident reinsured 100% of Provident
Indemnity's business written after December 31, 1998. In a separate reinsurance
agreement, Provident ceded to Hannover 50% of its direct business written after
December 31, 1998 and 50% of the business reinsured from Provident Indemnity.

  CONTINENTAL GENERAL LIFE INSURANCE COMPANY

     In February 1999, Continental entered into a reinsurance agreement with
Hannover, under which Hannover reinsured 50% of all insurance business in force
at Continental on February 1, 1999 for a ceding allowance of $13.0 million. The
ceding allowance is being accounted for as a deferred reinsurance gain in the
accompanying consolidated financial statements and will be amortized into income
over the duration of the underlying block of business. Various assets, primarily
comprised of fixed income securities with a market value of $188.4 million, were
transferred from Continental to Hannover for the policy liabilities assumed by
Hannover.

                                       52
<PAGE>   55
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 1999, 1998 AND 1997

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

  CENTRAL RESERVE LIFE INSURANCE COMPANY

     In December 1997, Central entered into a retroactive reinsurance treaty
(the "1997 Treaty") with Hannover. The quota share treaty was effective January
1, 1997, and covered certain group accident and health policies in force and
written during 1997. Under the provisions of the 1997 Treaty, Central cedes 50%
of the premiums of the eligible policies, and in return receives reimbursement
for 50% of the claims paid, plus a commission and expense allowance. In
connection with the 1997 Treaty, Central transferred $24.5 million of reserves
to Hannover, and received an initial ceding allowance of $10.0 million,
resulting in a net cash transfer of $14.5 million to Hannover. The initial
ceding allowance is reported as a deferred reinsurance gain, in the accompanying
consolidated financial statements, and is amortized into income over the
duration of the underlying block of business.

     In December 1999, Central entered into a reinsurance transaction with
Hannover for certain health insurance policies issued during the period from
July 1, 1998 through June 30, 1999. As part of the coinsurance funds withheld
transaction, Hannover will pay Central on a quarterly basis, an experience
refund, the amount of which shall be based upon the earnings derived from the
business reinsured. Concurrent with this transaction, Hannover will reinsure to
Continental on a stop loss basis 100% of any losses incurred under the business
reinsured in excess of a pre-determined aggregate annualized loss ratio. In
exchange for coverage under the stop loss reinsurance, Hannover will pay
Continental a stop loss premium on the business reinsured.

     In the ordinary course of business, the Company maintains other reinsurance
arrangements with other insurers. These arrangements are designed to limit the
maximum amount of exposure that the Company retains on a given policy. For
ordinary and group life claims, Continental's maximum retention is $125,000 and
Central's maximum retention is $50,000, with no retention maintained over age
70. For accident and health claims, maximum retention on individual claims is
$500,000.

                                       53
<PAGE>   56
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 1999, 1998 AND 1997

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

     The following table summarizes the net impact of reinsurance arrangements
on premiums and benefits, claims, losses and settlement expenses, commissions,
and other operating expenses:

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                     --------------------------------
                                                       1999        1998        1997
                                                     --------    --------    --------
                                                          (DOLLARS IN THOUSANDS)
<S>                                                  <C>         <C>         <C>
Premiums
  Direct...........................................  $605,554    $264,868    $253,009
  Assumed..........................................    81,493      33,556          --
  Ceded............................................  (359,301)   (144,236)     (3,302)
                                                     --------    --------    --------
  Net Premiums.....................................  $327,746    $154,188    $249,707
                                                     ========    ========    ========
Benefits, claims, losses, and settlement
  expenses.........................................  $501,216    $217,747    $211,194
Reinsurance recoverable............................  (268,113)   (101,688)       (418)
                                                     --------    --------    --------
                                                     $233,103    $116,059    $210,776
                                                     ========    ========    ========
Selling, general, and administrative expenses
  Commissions......................................  $ 85,104    $ 36,853    $ 35,525
  Salaries and benefits............................    25,678      15,718      18,113
  Taxes, licenses, and fees........................    13,024       6,448       6,367
  Other operating expenses.........................    46,579      14,328      12,321
  Administrative and IS services...................    14,513       8,122       2,438
  Reinsurance expenses.............................    44,096      13,774          --
  Reinsurance allowances...........................   (91,062)    (40,875)         --
                                                     --------    --------    --------
                                                     $137,932    $ 54,368    $ 74,764
                                                     ========    ========    ========
</TABLE>

     The insurance companies remain obligated for amounts ceded in the event
that the reinsurers do not meet their obligations.

K. COMMITMENTS AND CONTINGENCIES

     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.

L. LONG-TERM DEBT

     The Company executed a mortgage note payable in December 1990 for $9.0
million bearing interest at 9 1/2% per annum for 10 years. The Company received
$8.5 million of the funds in December 1990 and the remaining $0.5 million 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 $75,700 for 10 years. After five years, the Company
has the right to prepay the loan with a 3% prepayment fee. Principal payments
due in the next two years, assuming no prepayments, are $0.1 million in 2000 and
$8.0 million on January 1, 2001.

     On February 17, 1999, the Company entered into a $40.0 million credit
facility with a syndicate of major commercial banks and the Chase Manhattan
Bank, as the administrative agent. In accordance with the terms of the loan, the
first principal payment of $3.0 million is due February 17, 2000. Quarterly
principal payments are due thereafter as follows: $1.0 million through February
17, 2001; $1.5 million thereafter through

                                       54
<PAGE>   57
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 1999, 1998 AND 1997

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

February 17, 2002; and $2.25 million every three months thereafter to February
17, 2005. Interest on the outstanding balance will be determined based on
whether we select a "Base Rate Loan" or a "Eurodollar Loan". Under the Base Rate
Loan, the interest rate will be 2.5% per annum plus the higher of (a) the rate
which is 1/2 of 1% in excess of a federal funds rate and (b) Chase's prime rate
as in effect from time to time. Under the Eurodollar Loan, the interest rate
will be 3.5% per annum plus a Eurodollar rate, which is the arithmetic average
of the offered quotation to first-class banks in the interbank Eurodollar market
by Chase, adjusted for certain reserve requirements. At December 31, 1999, the
interest rate was 9.41%. The credit agreement also provides for a $10.0 million
line of credit, which bears interest at the same rate as the $40.0 million loan.
A commitment fee of 3/4 of 1% per annum on the average daily unutilized line of
credit is charged to the Company under the credit agreement. At December 31,
1999, there was no amount outstanding under the line of credit.

     The credit agreement contains financial and other covenants with respect to
the Company that, among other matters: (1) prohibit the payment of cash
dividends on Ceres' shares of common stock, except upon compliance with certain
conditions; (2) restrict the creation of liens and sales of assets; and (3)
require that the Company maintain (a) a leverage ratio (consolidated debt to
consolidated total capital) of 0.50 to 1.00 through December 31, 1999, 0.45 to
1.00 thereafter through December 31, 2000, 0.40 to 1.00 thereafter through
December 31, 2001, and 0.35 to 1.00 thereafter, (b) an interest coverage ratio
(consolidated earnings before interest, income taxes, depreciation, and
amortization to consolidated interest expense) of 2.0 to 1 through December 31,
1999, 2.5 to 1 through December 31, 2000, and 3.0 to 1 thereafter, (c) a minimum
risk-based capital ratio for any regulated insurance company subsidiary of Ceres
not less that 125%, and (d) a minimum consolidated net worth of $35.0 million
through December 31, 1999, $40.0 million thereafter through December 31, 2000,
$50.0 million thereafter through December 31, 2001, $60.0 million thereafter
through December 31, 2002, and $70.0 million thereafter. In addition, the common
stock of Continental General, Central and other insignificant subsidiaries are
pledged as security for the credit agreement. At December 31, 1999, the Company
is in compliance with the covenants contained in the credit agreement.

M. STOCK-BASED COMPENSATION

     On March 5, 1983, the Company adopted an Incentive Stock Option Plan (the
"1983 Plan"). The 1983 Plan, which expired in May 1993, provided that key
full-time employees of the Company and its subsidiaries were eligible for
participation. The 65,845 options outstanding at December 31, 1997 expired in
1998 and no options are outstanding under the plan.

     In 1999, 373 employees each received 1,000 common stock options under the
1998 Employee Stock Option Plan. Each grant vests after three years and expires
after ten years from the date of the grant. The vesting accelerates in the event
of a change in control of the Company.

     In 1998, pursuant to various individual employment agreements with certain
key officers, and pursuant to the 1998 Key Employee Share Incentive Plan, the
Company granted common stock options to certain key employees. Such grants
generally vest over three years, and expire ten years from the date of the
grant. In the event of a change in control, all options granted immediately vest
and become exercisable in full. Also, pursuant to an employment contract, the
Company provided an award of common shares to Peter Nauert. The number of shares
awarded is contingent upon the weighted average fair value of the common shares
over specified periods, but is based on a fixed dollar amount per year.
Management currently estimates that 305,225 shares will be issued pursuant to
the employment contract, based upon the fair value of the Company's shares at
December 31, 1999. In 1999, the Company granted additional common stock options
to certain employees under the 1998 Key Employee Share Incentive Plan.

                                       55
<PAGE>   58
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 1999, 1998 AND 1997

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

     A summary of the Company's 1998 Employee Stock Option Plan activity is
presented below:

<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31,
                               --------------------------------------------------------------
                                           1999                             1998
                               -----------------------------    -----------------------------
                                            WEIGHTED AVERAGE                 WEIGHTED AVERAGE
                                SHARES       EXERCISE PRICE      SHARES       EXERCISE PRICE
                               ---------    ----------------    ---------    ----------------
<S>                            <C>          <C>                 <C>          <C>
Outstanding beginning of
  year.......................  1,065,000         $7.70                 --         $  --
Options granted, with
  exercise prices:
  Greater than fair value at
     grant date..............         --            --            700,000          8.36
  Equal to fair value at
     grant date..............    648,000          8.11            315,000          6.59
  Less than fair value at
     grant date..............         --            --             50,000          5.50
Forfeited....................   (107,000)         8.60                 --            --
                               ---------                        ---------
Outstanding at end of year...  1,606,000          7.81          1,065,000          7.70
                               =========                        =========
Exercisable at end of year...    340,000          7.82            240,000          7.54
                               =========                        =========
</TABLE>

     Exercise prices for options outstanding at December 31, 1999 ranged from
$5.50 to $10.50, of which 33% were at $8.25, 16% at $6.50 and 14% at $6.625, and
the balance evenly distributed throughout the range. While some options have no
expiration date, management estimates the remaining average contractual life of
options awarded is 5 years.

     The Company also has outstanding at December 31, 1999; 3,600,000 warrants
at $5.50, expiring in 2005; 130,000 warrants at $6.00, expiring in 2003; and
770,000 warrants at $6.00, expiring in 2002.

     The Company recognized $1.5 million and $0.9 million in 1999 and 1998,
respectively, in stock-based compensation expense. As required by FASB Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, the Company has estimated the pro forma impact on net income and
earnings per share of stock-based compensation under the fair value method,
using the Black-Scholes option valuation model.

     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

     Significant underlying assumptions made are summarized as follows:

<TABLE>
<S>                                                             <C>
Risk-free rate of return....................................       6.34%
Dividend yield..............................................          0%
Volatility factor...........................................      0.287
Expected life of award......................................    5 years
</TABLE>

                                       56
<PAGE>   59
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 1999, 1998 AND 1997

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

     Based on the methodology and assumptions delineated above, the weighted
average fair value of options granted in 1999, at grant date, was $2.10 per
share. The pro forma impact would be to decrease net income by $0.9 million and
decrease net income per share by $0.07 for basic and $0.06 for fully diluted for
the year ended December 31, 1999.

N. PREFERRED SHARES

     The Company has authorized 2,000,000, $.001 par value Non-Voting Preferred
Shares. 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, including but
not limited to the dividend rate, liquidation preference, redemption rights and
price, sinking fund requirements, conversion rights and restrictions on the
issuance of such shares. Holders of Non-Voting Preferred Shares shall have no
voting rights except as required by law.

O. STATUTORY FINANCIAL INFORMATION

     The Company's insurance subsidiaries, Central, Provident, Continental and
United Benefit, are required to file Annual Statements with state insurance
regulatory authorities to whose jurisdiction those entities are subject. These
Annual Statements are prepared on an accounting basis prescribed or permitted by
the domiciliary state insurance department, which differs from GAAP. Prescribed
accounting practices include a variety of publications of the National
Association of Insurance Commissioners ("NAIC"), as well as state laws,
regulations and general and administrative rules. Permitted statutory accounting
practices encompass all accounting practices not prescribed.

     The following table represents a full year of the statutory capital and
surplus and the statutory net gain (loss) as reported in the Annual Statement
filed with the regulatory authorities for all the Company's insurance
subsidiaries.

<TABLE>
<CAPTION>
                                 STATUTORY CAPITAL AND
                                        SURPLUS               STATUTORY NET GAIN (LOSS)
                                      DECEMBER 31,             YEAR ENDED DECEMBER 31,
                                 ----------------------    -------------------------------
                                   1999         1998        1999        1998        1997
                                 ---------    ---------    -------    --------    --------
                                                  (DOLLARS IN THOUSANDS)
<S>                              <C>          <C>          <C>        <C>         <C>
Central........................   $23,109      $30,418     $(1,994)   $(21,163)   $(21,616)
Provident......................     3,356        5,393        (983)         --          --
Continental....................    33,535           --      14,996          --          --
United Benefit.................     3,854           --         421          --          --
                                  -------      -------     -------    --------    --------
          Total................   $63,854      $35,811     $12,440    $(21,163)   $(21,616)
                                  =======      =======     =======    ========    ========
</TABLE>

     The Company's insurance subsidiaries are subject to certain Risk-Based
Capital ("RBC") requirements as specified by the NAIC. The RBC model serves as a
benchmark for the regulation of life and accident and health insurance companies
by state insurance regulators. At December 31, 1999, the statutory capital and
surplus of Central, Provident, Continental, and United Benefit each exceed the
minimum RBC requirements to which the entity is subject.

     The amount of dividends, which the Company's subsidiaries can pay, is
subject to certain regulatory restrictions. In 2000, Central, Provident and
United Benefit cannot pay any dividends without the prior approval of the
respective Commissioner of Insurance of the State of domicile as a result of
specific regulatory requirements. Continental can pay approximately $3.4 million
in dividends, in 2000, without the prior approval

                                       57
<PAGE>   60
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 1999, 1998 AND 1997

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

of the Nebraska Insurance Commissioner. However, by agreement with the State of
Nebraska Department of Insurance on February 17, 1999, the Company has agreed
that Continental would not pay dividends to the Company prior to August 17,
2000, without the approval of the Nebraska Department of Insurance.

P. COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE

     The following table sets forth the computation of basic and diluted net
income (loss) per common share:

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                ---------------------------------------
                                                   1999           1998          1997
                                                -----------    ----------    ----------
                                                        (DOLLARS IN THOUSANDS)
<S>                                             <C>            <C>           <C>
Basic
  Average common shares outstanding...........   13,328,339     7,845,172     4,182,672
                                                ===========    ==========    ==========
  Net income (loss)...........................  $    11,704    $   (3,836)   $  (20,956)
                                                ===========    ==========    ==========
  Net income (loss) per common share..........  $      0.88    $    (0.49)   $    (5.01)
                                                ===========    ==========    ==========
Diluted
  Average common shares outstanding...........   13,328,339     7,845,172     4,182,672
  Warrants/stock options - treasury stock
     method...................................    1,905,560            --            --
                                                -----------    ----------    ----------
  Weighted average shares.....................   15,233,899     7,845,172     4,182,672
                                                ===========    ==========    ==========
  Net income (loss)...........................  $    11,704    $   (3,836)   $  (20,956)
                                                ===========    ==========    ==========
  Net income (loss) per common share..........  $      0.77    $    (0.49)   $    (5.01)
                                                ===========    ==========    ==========
</TABLE>

     Net income (loss) per common share has been computed in accordance with
FASB's Statement of Financial Accounting Standards No. 128, Earnings Per Share.
In computing diluted earnings per share, only potential common shares that are
dilutive, those that reduce earnings per share, are included. The exercise of
options and warrants is not assumed if the result would be antidilutive, such as
when a loss from operations is reported.

Q. EMPLOYEE BENEFIT PLAN

     Effective January 1, 1998, the Company's noncontributory pension plan was
converted into a defined contribution 401(k) savings plan (the "Plan").
Employees become eligible to participate in the Plan after six months of
service. Based on the provisions of the Plan, participants may contribute up to
10% of their pretax annual compensation. The Plan provides for a 100% employer
matching contribution only for that portion of participant contributions made to
a fund, which holds principally the Company's common shares, up to $1,000
annually. The employer matching contribution vests over a five-year graded
vesting schedule with 100% vesting after five years.

     In 1999 and 1998, total matching contributions expensed by the Company were
approximately $133,000 and $52,000, respectively.

     Prior to January 1, 1998, the Plan operated as a noncontributory pension
plan, covering substantially all employees of Central who had completed six
months of service. Vesting in accordance with the Plan began after two years of
service, with full vesting after seven years. Total contributions made under the
Plan were $1.3 million in 1997.

     Continental employees are eligible to participate in the Continental
Retirement Savings Plan ("Continental Plan") after completing one full year of
service and 1,000 hours of service within any one calendar year. Participants of
the Continental Plan may contribute up to 10% of their pre-tax annual
compensation. The

                                       58
<PAGE>   61
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 1999, 1998 AND 1997

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

Continental Plan provides for employer matching equal to 50% of the employee's
contribution of up to the first 2% of an employee's annual compensation.
Continental employees are immediately 100% vested under the Continental Plan.

R. OPERATING SEGMENTS

     In conjunction with the Company's continued growth and refinement of
defined organization structure, the Company expanded its operating segments to
the following three distinct operating segments based upon product types:
medical, specialty and other, and corporate and other. Products included in the
medical segment include comprehensive major medical plans. Significant products
in the specialty and other segment include Medicare supplement, long-term care,
dental, life insurance, and annuities.

     The corporate segment encompasses all other activities of the Company,
including interest income and expense of the parent company. Revenues from each
segment are primarily generated from premiums charged

                                       59
<PAGE>   62
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 1999, 1998 AND 1997

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

to external policyholders and interest earned on cash and investments and are
summarized in the following tables:

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                     --------------------------------
                                                       1999        1998        1997
                                                     --------    --------    --------
                                                          (DOLLARS IN THOUSANDS)
<S>                                                  <C>         <C>         <C>
Medical
  Revenues
     Net premiums..................................  $251,876    $143,064    $235,129
     Investment income, realized gains.............     6,985       5,682       4,860
     Fee and other income..........................    21,307       8,294       9,152
                                                     --------    --------    --------
                                                      280,168     157,040     249,141
                                                     --------    --------    --------
  Expenses
     Benefits and claims...........................   176,531     108,439     198,704
     Other operating expenses......................    93,963      49,143      69,210
                                                     --------    --------    --------
                                                      270,494     157,582     267,914
                                                     --------    --------    --------
  Segment profit (loss) before federal income
     taxes.........................................  $  9,674    $   (542)   $(18,773)
                                                     ========    ========    ========
Specialty and other
  Revenues
     Net premiums..................................  $ 75,870    $ 11,124    $ 14,578
     Investment income, realized gains.............    14,233       1,498       1,621
     Fee and other income..........................     1,364          --          --
                                                     --------    --------    --------
                                                       91,467      12,622      16,199
                                                     --------    --------    --------
  Expenses
     Benefits and claims...........................    56,572       7,620      12,072
     Other operating expenses......................    18,164       3,986       4,931
                                                     --------    --------    --------
                                                       74,736      11,606      17,003
                                                     --------    --------    --------
  Segment profit (loss) before federal income
     taxes.........................................  $ 16,731    $  1,016    $   (804)
                                                     ========    ========    ========
Corporate and other
  Revenues
     Investment income.............................  $    251    $    485    $    193
     Fee and other income..........................       207          --          --
                                                     --------    --------    --------
                                                          458         485         193
                                                     --------    --------    --------
  Expenses
     Interest and financing expenses...............     3,902       1,842       1,078
     Other operating expenses......................     4,955       1,886         627
                                                     --------    --------    --------
                                                        8,857       3,728       1,705
                                                     --------    --------    --------
  Segment profit (loss) before federal income
     taxes.........................................  $ (8,399)   $ (3,243)   $ (1,512)
                                                     ========    ========    ========
Income (loss) before federal income taxes..........  $ 18,006    $ (2,769)   $(21,089)
                                                     ========    ========    ========
</TABLE>

     The Company does not separately allocate investment or other identifiable
assets by industry segment, nor are income tax (benefits) expenses allocated by
industry segment. The Company also expanded the detail of its disclosures for
1999, 1998, and 1997, which included certain reclassifications.

S. FAIR VALUES OF FINANCIAL INSTRUMENTS

     Fair values of financial instruments are based upon quoted market prices,
where available, or on values obtained from independent pricing services. In
cases where quoted market prices are not available, fair value is

                                       60
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            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 1999, 1998 AND 1997

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

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 in 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.

     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.

     CASH, CASH EQUIVALENTS, PREMIUMS RECEIVABLE, NOTE RECEIVABLE, REINSURANCE
RECEIVABLE, SURPLUS NOTES, MORTGAGE LOANS AND POLICY LOANS--The carrying amounts
reported in the consolidated balance sheets for these instruments approximate
their fair value.

     ANNUITY CONTRACTS--The fair value for the annuity reserves included in the
liability for future policy benefit, losses, and claims 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, NOTE PAYABLE AND REINSURANCE PAYABLE--The carrying
amount reported in the consolidated balance sheets for the mortgage note payable
and note payable approximates their fair value.

                                       61
<PAGE>   64
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 1999, 1998 AND 1997

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

     Carrying amounts and estimated fair values of financial instruments at
December 31, 1999 and 1998, are summarized as follows:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                 ------------------------------------------------
                                                          1999                      1998
                                                 ----------------------    ----------------------
                                                 CARRYING    ESTIMATED     CARRYING    ESTIMATED
                                                  AMOUNT     FAIR VALUE     AMOUNT     FAIR VALUE
                                                 --------    ----------    --------    ----------
                                                              (DOLLARS IN THOUSANDS)
<S>                                              <C>         <C>           <C>         <C>
ASSETS
Investments
  Fixed maturities available for sale..........  $300,986     $300,986     $80,832      $80,832
  Fixed maturities held to maturity............        --           --       8,900        9,018
  Surplus Notes................................     5,043        5,043          --           --
  Policy loans.................................     3,828        3,828          94           94
  Mortgage Loans...............................        95           95          --           --
Cash and cash equivalents......................    42,921       42,921      19,376       19,376
Premiums receivable............................     4,905        4,905       2,204        2,204
Note receivable................................        --           --       7,368        7,368
Reinsurance receivable.........................   263,289      263,289      41,417       41,417
LIABILITIES
Annuity reserve................................   218,074      209,586      18,224       18,083
Other policyholders' funds.....................    22,365       22,365       8,846        8,846
Mortgage note payable..........................     8,157        8,157       8,283        8,283
Long-term debt.................................    40,000       40,000          --           --
</TABLE>

T. CONCENTRATIONS OF CREDIT RISK

     Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of fixed maturity investments,
cash, cash equivalents, and reinsurance receivable.

     The Company maintains cash and short-term investments with various
financial institutions, and the Company performs periodic evaluations of the
relative credit standings of those financial institutions.

     Substantially all of the Company's reinsurance recoverable is due from a
single reinsurer, Hannover. At December 31, 1999, Hannover maintained an "A"
rating from the A.M. Best Company. The Company performs periodic evaluation of
this reinsurer's credit standing.

                                       62
<PAGE>   65
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 1999, 1998 AND 1997

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

U. QUARTERLY RESULTS OF OPERATIONS - (UNAUDITED)

     The following is a summary of quarterly results of operations for the years
ended December 31, 1999 and 1998:

<TABLE>
<CAPTION>
                                                       FIRST       SECOND        THIRD        FOURTH
                                                     ---------    ---------    ---------    ----------
                                                     (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                  <C>          <C>          <C>          <C>
1999
  Revenues.........................................   $78,434      $93,555      $97,424      $102,680
  Benefits and claims..............................    50,210       60,387       60,108        62,398
  Selling, general and administrative and other
     expenses......................................    24,803       28,530       33,193        34,458
  Net income.......................................     2,224        3,014        2,680         3,786(d)
  Basic earnings per share.........................      0.17         0.23         0.20          0.28
  Diluted earnings per share.......................      0.15         0.19         0.17          0.26
1998
  Revenues.........................................    38,105       40,257       45,412        46,373
  Benefits and claims..............................    30,643(a)    31,289(a)    30,082        24,045
  Selling, general and administrative and other
     expenses......................................     9,820(a)    12,022(a)    14,927        20,088(b)
  Net (loss) income................................    (2,358)      (3,055)         403         1,174
  Basic (loss) earnings per share (c)..............     (0.56)       (0.73)        0.04          0.10
  Diluted (loss) earnings per share (c)............     (0.56)       (0.73)        0.03          0.09
</TABLE>

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

(a) In 1998, the Company reclassified certain items from commissions and general
    expenses to benefits and claims related to the first and second quarters.
    There was no effect on earnings (loss) or the per share amounts resulting
    from these reclassifications.

(b) Includes $3.7 million related to policy administration fees expensed to
    Hannover in 1998.

(c) The sum of basic and diluted income (loss) per share by quarter does not
    agree with the amounts reported on the statement of operations due to the
    issuance of 7,300,000 Company Common Shares in July 1998.

(d) The increase in the fourth quarter net income is primarily a result of a
    decrease in claim reserves held for the health business of Continental and a
    leveling of the increased reserves held for adverse deviations in the
    long-term care business of Continental.

V. SUBSEQUENT EVENTS

 PYRAMID LIFE INSURANCE COMPANY ACQUISITION

     On October 7, 1999, the Company announced the signing of a definitive
agreement to purchase The Pyramid Life Insurance Company from United Insurance
Company of America, a subsidiary of Unitrin, Inc. of Chicago, Illinois. The
parties also reached an agreement in principle for the Company's subsidiaries to
sell specialty medical insurance products through the agent distribution systems
of selected Unitrin insurance subsidiaries over a three-year term. Pyramid,
based in Mission, Kansas, provides health and life insurance primarily for the
senior market, including Medicare supplement, long term care, home health care,
and senior life products. At December 31, 1999, Pyramid, on a statutory basis,
had assets of $120.0 million, capital and surplus of approximately $43.0
million, and 1999 revenue of $72.0 million. Pyramid markets senior insurance
products through approximately 2,500 independent agents in 40 states.

     The acquisition, subject to regulatory approvals and other customary terms
and conditions, is expected to be completed in the second quarter of 2000. At
completion, Pyramid will be a wholly-owned subsidiary of Continental General.
The $67.5 million purchase price is expected to be financed as follows: (a) up
to

                                       63
<PAGE>   66
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 1999, 1998 AND 1997

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

$15 million from financing provided by The Chase Manhattan Bank and associated
banks, (b) $25.0 million from special dividends to be paid by Pyramid in
conjunction with the purchase, (c) $7.5 million from the sale of our convertible
preferred stock to the seller, and (d) $20.0 million from the proceeds of a
private placement offering of our common stock at $6.00 per share.

                                       64
<PAGE>   67

                                                                     SCHEDULE II

                       CERES GROUP, INC. AND SUBSIDIARIES
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                        CERES GROUP, INC. (PARENT ONLY)
                                 BALANCE SHEETS
                           DECEMBER 31, 1999 AND 1998
                             (DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                1999       1998
                                                              --------    -------
<S>                                                           <C>         <C>
ASSETS
Investments in subsidiaries*................................  $ 87,187    $25,344
Cash and cash equivalents...................................     1,674     11,175
Property and equipment, net.................................     8,887      9,076
Other assets................................................     4,416        734
                                                              --------    -------
                                                              $102,164    $46,329
                                                              ========    =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
  Long-term debt............................................  $ 48,157    $ 8,284
  Other liabilities.........................................     9,346      2,209
                                                              --------    -------
                                                                57,503     10,493
                                                              --------    -------
Shareholders' equity
  Common stock..............................................        14         12
  Additional Paid-in capital................................    60,290     43,883
  Retained earnings (deficit)...............................     2,549     (9,155)
  Accumulated other comprehensive (loss) income.............   (18,192)     1,096
                                                              --------    -------
                                                                44,661     35,836
                                                              --------    -------
                                                              $102,164    $46,329
                                                              ========    =======
</TABLE>

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

* Eliminated in consolidation.

                 See accompanying independent auditors' report.
                                       65
<PAGE>   68

                                                                     SCHEDULE II

                       CERES GROUP, INC. AND SUBSIDIARIES
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                        CERES GROUP, INC. (PARENT ONLY)
                            STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                             (DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                               1999       1998        1997
                                                              -------    -------    --------
<S>                                                           <C>        <C>        <C>
REVENUES
Rental income*..............................................  $ 1,410    $   930    $  1,310
Net investment income.......................................       72        293          --
                                                              -------    -------    --------
                                                                1,482      1,223       1,310
EXPENSES
Selling, general and administrative expenses................   10,103      3,712       1,690
                                                              -------    -------    --------
Loss before income tax expense (benefit) in earning (losses)
  of subsidiaries...........................................   (8,621)    (2,489)       (380)
Income tax expense (benefit)................................    1,469      1,067        (132)
                                                              -------    -------    --------
Loss before equity in earnings of subsidiaries..............  (10,090)    (3,556)       (248)
Equity in net income (loss) of subsidiaries.................   21,794       (280)    (20,708)
                                                              -------    -------    --------
NET INCOME (LOSS)...........................................  $11,704    $(3,836)   $(20,956)
                                                              =======    =======    ========
</TABLE>

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

* Eliminated in consolidation.

                 See accompanying independent auditors' report.
                                       66
<PAGE>   69

                                                                     SCHEDULE II

                       CERES GROUP, INC. AND SUBSIDIARIES
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                        CERES GROUP, INC. (PARENT ONLY)
                            STATEMENT OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                             (DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                               1999       1998        1997
                                                              -------    -------    --------
<S>                                                           <C>        <C>        <C>
OPERATING ACTIVITIES
Net income (loss)...........................................  $11,704    $(3,836)   $(20,956)
  Change in other liabilities...............................    7,137      3,208          10
  Depreciation..............................................      380        449         449
  Change in other assets....................................   (3,682)      (107)       (300)
  Dividends income received from subsidiaries...............      450         --          --
                                                              -------    -------    --------
Net cash provided by (used in) operating activities.........   15,989       (286)    (20,797)
                                                              -------    -------    --------
INVESTING ACTIVITIES
  Surplus note receivable*..................................       --     14,000     (14,000)
  Contribution to subsidiary surplus*.......................       --    (21,200)     (5,000)
  Investments in subsidiaries...............................  (21,793)       280      20,709
  Acquisition of Continental General Corporation, net of
     $24,712 cash acquired..................................  (59,788)        --          --
  Purchase of property and equipment........................     (191)        --        (267)
                                                              -------    -------    --------
Net cash (used in) provided by investing activities.........  (81,772)    (6,920)      1,442
                                                              -------    -------    --------
FINANCING ACTIVITIES
  Proceeds from notes payable...............................       --         --      25,200
  Repayment of notes payable................................       --    (20,000)     (5,200)
  Increase in long-term borrowings..........................   40,000         --          --
  Principal payment on mortgage payable.....................     (127)      (115)       (105)
  Proceeds from private placement...........................   15,000         --          --
  Issuance of common shares.................................    1,409     37,675         142
                                                              -------    -------    --------
Net cash provided by financing activities...................   56,282     17,560      20,037
                                                              -------    -------    --------
Net (decrease) increase in cash.............................   (9,501)    10,354         682
Cash and cash equivalents at beginning of year..............   11,175        821         139
                                                              -------    -------    --------
CASH AND CASH EQUIVALENTS AT END OF YEAR....................  $ 1,674    $11,175    $    821
                                                              =======    =======    ========
</TABLE>

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

* Eliminated in consolidation.

                 See accompanying independent auditors' report.
                                       67
<PAGE>   70

                                                                    SCHEDULE III

                       CERES GROUP, INC. AND SUBSIDIARIES
                       SUPPLEMENTAL INSURANCE INFORMATION
                             (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>

                                                              FUTURE POLICY              OTHER POLICY
                                                 DEFERRED       BENEFITS,                 CLAIMS AND                  NET
                                                ACQUISITION    LOSSES AND     UNEARNED     BENEFITS     PREMIUM    INVESTMENT
                                                   COSTS         CLAIMS       PREMIUMS     PAYABLE      REVENUE      INCOME
<S>                                             <C>           <C>             <C>        <C>            <C>        <C>
--------------------------------------------------------------------------------
Year ended December 31, 1999
  Medical.....................................    $18,758       $  6,839      $ 8,613      $120,081     $251,876    $  7,027
  Specialty and other.........................      7,892        350,310       23,432        29,457      75,870       14,084
  Corporate and other.........................         --             --           --            --          --          251
                                                  -------       --------      -------      --------     --------    --------
        Total.................................    $26,650       $357,149      $32,045      $149,538     $327,746    $ 21,362
                                                  =======       ========      =======      ========     ========    ========
Year ended December 31, 1998
  Medical.....................................    $ 3,400       $    395      $ 2,024      $ 73,872     $143,064    $  5,647
  Specialty and other.........................        278         20,299           --           523      11,124        1,322
  Corporate and other.........................        132             --           --            --          --          485
                                                  -------       --------      -------      --------     --------    --------
        Total.................................    $ 3,810       $ 20,694      $ 2,024      $ 74,395     $154,188    $  7,454
                                                  =======       ========      =======      ========     ========    ========
Year ended December 31, 1997
  Medical.....................................    $    --       $     68      $   720      $ 55,546     $235,129    $  4,875
  Specialty and other.........................        326         23,761           --           641      14,578        1,460
  Corporate and other.........................         --            354           --            --          --          193
                                                  -------       --------      -------      --------     --------    --------
        Total.................................    $   326       $ 24,183      $   720      $ 56,187     $249,707    $  6,528
                                                  =======       ========      =======      ========     ========    ========

<CAPTION>
                                                                   NET
                                                               AMORTIZATION
                                                                AND CHANGE
                                                               IN DEFERRAL
                                                 BENEFITS,    OF ACQUISITION
                                                  CLAIMS,       COSTS AND
                                                LOSSES AND       VALUE OF        OTHER
                                                SETTLEMENT       BUSINESS      OPERATING
                                                 EXPENSES        ACQUIRED      EXPENSES
<S>                                             <C>           <C>              <C>
----------------------------------------------
Year ended December 31, 1999
  Medical.....................................   $176,531        $(13,210)     $107,174
  Specialty and other.........................     56,572          (8,682)       26,845
  Corporate and other.........................         --              --         8,857
                                                 --------        --------      --------
        Total.................................   $233,103        $(21,892)     $142,876
                                                 ========        ========      ========
Year ended December 31, 1998
  Medical.....................................   $108,439        $    600      $ 49,814
  Specialty and other.........................      7,620              47         2,668
  Corporate and other.........................         --              --         3,728
                                                 --------        --------      --------
        Total.................................   $116,059        $    647      $ 56,210
                                                 ========        ========      ========
Year ended December 31, 1997
  Medical.....................................   $198,704        $     --      $ 69,210
  Specialty and other.........................     12,072              --         4,931
  Corporate and other.........................         --               4         1,701
                                                 --------        --------      --------
        Total.................................   $210,776        $      4      $ 75,842
                                                 ========        ========      ========
</TABLE>

                 See accompanying independent auditors' report.

                                       68
<PAGE>   71

                                                                     SCHEDULE IV

                       CERES GROUP, INC. AND SUBSIDIARIES
                                  REINSURANCE
                             (DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                             ASSUMED                   PERCENTAGE OF
                                               CEDED TO       FROM                        AMOUNT
                                  GROSS         OTHER         OTHER         NET         ASSUMED TO
                                  AMOUNT      COMPANIES     COMPANIES      AMOUNT           NET
----------------------------------------------------------------------------------------------------
<S>                             <C>           <C>           <C>          <C>           <C>
YEAR ENDED DECEMBER 31, 1999
Life insurance in force.......  $3,863,690    $1,165,579    $129,428     $2,827,539         4.6%
                                ==========    ==========    ========     ==========
Premiums
  Life insurance..............  $   17,735    $    5,757    $  1,958     $   13,936        14.1%
  Accident and health
     insurance................     587,819       353,544      79,535        313,810        25.3%
                                ----------    ----------    --------     ----------
                                $  605,554    $  359,301    $ 81,493     $  327,746        24.9%
                                ==========    ==========    ========     ==========
YEAR ENDED DECEMBER 31, 1998
Life insurance in force.......  $1,239,853    $   88,477    $     --     $1,151,376
                                ==========    ==========    ========     ==========
Premiums
  Life insurance..............  $    6,817    $      201    $     --     $    6,616
  Accident and health
     insurance................     251,454       149,805      45,923        147,572        29.8%
                                ----------    ----------    --------     ----------
                                $  258,271    $  150,006    $ 45,923     $  154,188        28.6%
                                ==========    ==========    ========     ==========
YEAR ENDED DECEMBER 31, 1997
Life insurance in force.......  $1,192,280    $   95,249    $     --     $1,097,031
                                ==========    ==========    ========     ==========
Premiums
  Life insurance..............  $    7,004    $      166    $     --     $    6,838
  Accident and health
     insurance................     246,005         3,136          --        242,869
                                ----------    ----------    --------     ----------
                                $  253,009    $    3,302    $     --     $  249,707
                                ==========    ==========    ========     ==========
</TABLE>

                 See accompanying independent auditors' report.

                                       69
<PAGE>   72

ITEM 9.   CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
          ACCOUNTING AND FINANCIAL DISCLOSURE

     As reported on Form 8-K/A dated August 27, 1998, we appointed Ernst & Young
LLP as our independent auditors for the fiscal year ending December 31, 1998 to
replace the firm of KPMG LLP which was dismissed as our auditors effective
August 27, 1998. There were no disagreements with KPMG LLP on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures which, if not resolved to the satisfaction of KPMG LLP
would have caused KPMG LLP to make reference to the matter in their report.

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this Item 10 is incorporated herein by
reference to our Proxy Statement in connection with our annual meeting of
stockholders to be held on June 27, 2000. We expect to file the Proxy Statement
by April 28, 2000.

ITEM 11.   EXECUTIVE COMPENSATION

     The information required by this Item 11 is incorporated herein by
reference to our Proxy Statement in connection with our annual meeting of
stockholders to be held on June 27, 2000.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this Item 12 is incorporated herein by
reference to our Proxy Statement in connection with our annual meeting of
stockholders to be held on June 27, 2000.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this Item 13 is incorporated herein by
reference to our Proxy Statement in connection with our annual meeting of
stockholders to be held on June 27, 2000.

                                    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.

        Ceres Group, Inc. and Subsidiaries: Audit Report.

        Consolidated Balance Sheets -- December 31, 1999 and 1998.

        Consolidated Statements of Operations -- Years ended December 31, 1999,
        1998, and 1997.

        Consolidated Statements of Shareholders' Equity -- Years ended December
        31, 1999, 1998, and 1997.

        Consolidated Statements of Cash Flows -- Years ended December 31, 1999,
        1998, and 1997.

        Notes to Consolidated Financial Statements.

                                       70
<PAGE>   73

     2. Financial Statement Schedules.

        Ceres Group, Inc.:

        II. Condensed Financial Information of Registrant -- Ceres Group, Inc.
        (parent only).

        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.

     (b) Reports on Form 8-K: None

     (c) Exhibits

<TABLE>
<CAPTION>
                                                          INCORPORATED BY
                                                           REFERENCE TO
                                                          REGISTRATION OR    FORM OR                  EXHIBIT
                          EXHIBITS                          FILE NUMBER      REPORT        DATE       NUMBER
                          --------                        ---------------    -------    ----------    -------
<C>   <S>                                                 <C>                <C>        <C>           <C>
 (2)  Plan of acquisition, reorganization,
      Arrangement, liquidation, or succession
      (1) Stock Purchase Agreement, dated as of               0-8483            8-K     Dec. 1997        2.1
          November 26, 1997, by and Between Strategic
          Partners and Central Reserve
      (2) Amendment No. 1 to Stock Purchase Agreement,        0-8483            8-K     Dec. 1997        2.1
          dated as of December 16, 1997, by and
          between Strategic Partners and Central
          Reserve
      (3) Amended and Restated Stock Purchase                 0-8483           10-K     Mar. 1998        2.2
          Agreement, dated March 30, 1998, by and
          among Strategic Partners, Insurance
          Partners, L.P., Insurance Partners Offshore
          (Bermuda), L.P. and Central Reserve
      (4) Merger Agreement and Plan of Reorganization         0-8483            8-K     Dec. 1998        2.1
          dated December 8, 1998 between Central
          Reserve Life Corporation and Ceres Group,
          Inc.
      (5) Stock Purchase Agreement dated as of                0-8483            8-K     Feb. 1999        2.2
          November 4, 1998 between The Western and
          Southern Life Insurance Company and Ceres
          Group, Inc.
 (3)  Articles of Incorporation and By-laws
      (1) Certificate of Incorporation of Ceres Group,        0-8483            8-K     Dec. 1998        3.1
          Inc. as filed with Secretary of Delaware on
          October 22, 1998
      (2) Bylaws of Ceres Group, Inc.                         0-8483            8-K     Dec. 1998        3.2
</TABLE>

                                       71
<PAGE>   74

<TABLE>
<CAPTION>
                                                          INCORPORATED BY
                                                           REFERENCE TO
                                                          REGISTRATION OR    FORM OR                  EXHIBIT
                          EXHIBITS                          FILE NUMBER      REPORT        DATE       NUMBER
                          --------                        ---------------    -------    ----------    -------
<C>   <S>                                                 <C>                <C>        <C>           <C>
 (4)  Instruments defining the rights of Security
      holders, including indentures
      (1) Voting Agreement, dated as of July                  0-8483            8-K     Feb. 1999        4.1
          1, 1998, by and among Ceres Group, Inc. (as
          successor-in-interest to Central Reserve Life
          Corporation) and the security holders listed on
          the Signature pages thereof.
      (2) Stockholders Agreement, dated as                    0-8483            8-K     Feb. 1999        4.2
          of July 1, 1998, by and among Ceres Group,
          Inc. (as successor-in-interest to Central
          Reserve Life Corporation) and the security
          holders listed on the Signature pages thereof.
      (3) Registration Rights Agreement, dated as of          0-8483            8-K     Feb. 1999        4.3
          July 1, 1998, between Ceres Group, Inc. (as
          successor-in-interest to Central Reserve
          Life Corporation) and the persons and
          entities set forth on the signature pages
          attached thereto.
      (4) Amendment No. 1 to Registration Rights              0-8483            8-K     Feb. 1999        4.4
          Agreement, dated as of February 17, 1999,
          between Ceres Group, Inc. (as
          successor-in-interest to Central Reserve
          Life Corporation) and the persons and
          entities set forth on the signature pages
          attached thereto.
(10)  Material Contracts
      (1) Agreement of Lease                                  0-8483           10-K     Mar. 1992       10(c)
      (2) Mortgage Note                                       0-8483           10-K     Mar. 1992       10(d)
      (3) Mortgage                                            0-8483           10-K     Mar. 1992       10(e)
      (4) Credit Agreement, dated as of December 16,          0-8483            8-K     Dec. 1997       10.1
          1997, by and between Central Reserve and
          Strategic Partners.
      (5) Pledge Agreement, dated as of December 16,          0-8483            8-K     Dec. 1997       10.2
          1997, by and between Central Reserve and
          Strategic Partners.
      (6) Promissory Note, dated as of December 16,           0-8483            8-K     Dec. 1997       10.3
          1997, by Central Reserve in favor of
          Strategic Partners.
      (7) Warrants to purchase Common Shares, dated           0-8483            8-K     Dec. 1997       10.4
          December 16, 1997, by Central Reserve in
          favor of Peter W. Nauert
</TABLE>

                                       72
<PAGE>   75

<TABLE>
<CAPTION>
                                                          INCORPORATED BY
                                                           REFERENCE TO
                                                          REGISTRATION OR    FORM OR                  EXHIBIT
                          EXHIBITS                          FILE NUMBER      REPORT        DATE       NUMBER
                          --------                        ---------------    -------    ----------    -------
<C>   <S>                                                 <C>                <C>        <C>           <C>
       (8) Warrant to purchase Common Shares, dated           0-8483            8-K     Dec. 1997       10.5
           December 16, 1997, by Central Reserve in
           favor of the Turkey Vulture Fund XIII, Ltd.
       (9) The Central Reserve Life Insurance Company         0-8483            8-K     Dec. 1997       10.9
           Severance Benefit Plan.
      (10) Reinsurance Agreement between Central              0-8483           10-K     Mar. 1998      10.10
           Reserve Life Insurance Company and
           Reassurance Company of Hannover.
      (11) Amendment No. 1 to Credit Agreement, Dated         0-8483           10-K     Mar. 1998      10.11
           as of March 25, 1998 by and Between Central
           Reserve and Strategic Partners.
      (12) Administrative Services                            0-8483         10-K/A     Mar. 1998      10.12
           Agreement, Dated March 25, 1998 by and
           between Mutual Management Company, Inc. and
           Central Reserve Life Insurance Company.
      (13) Amendment No. 1 to Warrant to Purchase             0-8483           10-K     Mar. 1998      10.13
           Common Shares, dated March 30, 1998 by
           Central Reserve in favor of Peter Nauert
      (14) Amendment No. 1 to Warrant to Purchase             0-8483           10-K     Mar. 1998      10.14
           Common Shares, dated March 30, 1998 by
           Central Reserve in favor of Turkey Vulture
           Fund XIII, Ltd.
      (15) Employment agreement dated June 30, 1998,          0-8483           10-Q     Sept. 1998     10.17
           by and between Peter Nauert and Central
           Reserve Life Corporation
      (16) Employment agreement dated June 1, 1998, by        0-8483           10-Q     Sept. 1998     10.19
           and between Glen Laffoon and Central
           Reserve Life Insurance Company
      (17) Employment agreement dated October 1, 1998,        0-8483           10-K     Mar. 1999      10.20
           by and between Charles Miller and Central
           Reserve Life Corporation
      (18) Reinsurance Agreement dated February 1,            0-8483           10-K     Mar. 1999      10.21
           1999, between Continental General Life
           Insurance Company and Reassurance Company
           of Hannover.
</TABLE>

                                       73
<PAGE>   76

<TABLE>
<CAPTION>
                                                          INCORPORATED BY
                                                           REFERENCE TO
                                                          REGISTRATION OR    FORM OR                  EXHIBIT
                          EXHIBITS                          FILE NUMBER      REPORT        DATE       NUMBER
                          --------                        ---------------    -------    ----------    -------
<C>   <S>                                                 <C>                <C>        <C>           <C>
      (19) Credit Agreement, dated February 17, 1999,         0-8483            8-K     Feb. 1999      10.22
           among Ceres Group, Inc., the lending
           institutions and The Chase Manhattan Bank,
           as Administrative Agent
      (20) First Amendment to Employment Agreement            0-8483              *                    10.23
           between Peter W. Nauert and Ceres Group,
           Inc., dated March 18, 1999
      (21) Second Amendment to Employment Agreement           0-8483              *                    10.24
           between Peter W. Nauert and Ceres Group,
           Inc., dated June 15, 1999
      (22) Third Amendment to Employment Agreement            0-8483              *                    10.25
           between Peter W. Nauert and Ceres Group,
           Inc., dated December 19, 1999
(16)  Letter regarding change in certifying accountant        0-8483            8-K     Aug. 1998       16.1
(21)  Subsidiaries of the Registrants                         0-8483              *                     21.1
(23)  Consents of Experts and counsel
      (1) Consent of Ernst & Young LLP                        0-8483              *                     23.1
      (2) Consent of KPMG LLP                                 0-8483              *                     23.2
(27)  Financial Data Schedule                                 0-8483              *                     27.1
</TABLE>

* Filed herewith.

                                       74
<PAGE>   77

                                   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>
                                            CERES GROUP, INC.

Date: March 30, 2000                                         By:   /s/ PETER W. NAUERT
                                               -----------------------------------------------------
                                                             Peter W. Nauert, Chairman
</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>

March 30, 2000                                                By: /s/ PETER W. NAUERT
                                              -------------------------------------------------------
                                                       Peter W. Nauert, Chairman, President
                                                            and Chief Executive Officer
                                                           (principal executive officer)

March 30, 2000                                            By: /s/ CHARLES E. MILLER, JR.
                                              -------------------------------------------------------
                                                 Charles E. Miller, Jr., Executive Vice President,
                                                       Chief Financial Officer and Treasurer
                                                   (principal financial and accounting officer)

March 30, 2000                                                By: /s/ ANDREW A. BOEMI
                                              -------------------------------------------------------
                                                             Andrew A. Boemi, Director

March 30, 2000                                              By: /s/ MICHAEL A. CAVATAIO
                                              -------------------------------------------------------
                                                           Michael A. Cavataio, Director

March 30, 2000                                               By: /s/ BRADLEY E. COOPER
                                              -------------------------------------------------------
                                                            Bradley E. Cooper, Director

March 30, 2000                                               By: /s/ SUSAN S. FLEMING
                                              -------------------------------------------------------
                                                            Susan S. Fleming, Director

March 30, 2000                                                By: /s/ RODNEY L. HALE
                                              -------------------------------------------------------
                                                             Rodney L. Hale, Director

March 30, 2000                                                By: /s/ ROBERT A. SPASS
                                              -------------------------------------------------------
                                                             Robert A. Spass, Director

March 30, 2000                                                 By: /s/ MARK H. TABAK
                                              -------------------------------------------------------
                                                              Mark H. Tabak, Director
</TABLE>

                                       75
<PAGE>   78

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
                                                INCORPORATED BY
                                                 REFERENCE TO
                                                REGISTRATION OR    FORM OR                  EXHIBIT
                     EXHIBITS                     FILE NUMBER      REPORT        DATE       NUMBER
                     --------                   ---------------    -------    ----------    -------
<C>   <S>                                       <C>                <C>        <C>           <C>
 (2)  Plan of acquisition, reorganization,
      arrangement, liquidation, or
      succession
      (1) Stock Purchase Agreement, dated as        0-8483            8-K     Dec. 1997        2.1
          of November 26, 1997, by and
          between Strategic Partners and
          Central Reserve.
      (2) Amendment No. 1 to Stock Purchase         0-8483            8-K     Dec. 1997        2.1
          Agreement, dated as of December
          16, 1997, by and between Strategic
          Partners and Central Reserve.
      (3) Amended and Restated Stock                0-8483           10-K     Mar. 1998        2.2
          Purchase Agreement, dated March
          30, 1998, by and among Strategic
          Partners, Insurance Partners,
          L.P., Insurance Partners Offshore
          (Bermuda), L.P. and Central
          Reserve.
      (4) Merger Agreement and Plan of              0-8483            8-K     Dec. 1998        2.1
          Reorganization dated December 8,
          1998 between Central Reserve Life
          Corporation and Ceres Group, Inc.
      (5) Stock Purchase Agreement dated as         0-8483            8-K     Feb. 1999        2.2
          of November 4, 1998 between The
          Western and Southern Life
          Insurance Company and Ceres Group,
          Inc.
 (3)  Articles of Incorporation and By-laws
      (1) Certificate of Incorporation of           0-8483            8-K     Dec. 1998        3.1
          Ceres Group, Inc. as filed with
          Secretary of Delaware on October 22,
          1998.
      (2) Bylaws of Ceres Group, Inc.               0-8483            8-K     Dec. 1998        3.2
 (4)  Instruments defining the rights of
      security holders, including indentures
      (1) Voting Agreement, dated as of July        0-8483            8-K     Feb. 1999        4.1
          1, 1998, by and among Ceres Group,
          Inc. (as successor-in-interest to
          Central Reserve Life Corporation)
          and the security holders listed on
          the signature pages thereof.
      (2) Stockholders Agreement, dated as          0-8483            8-K     Feb. 1999        4.2
          of July 1, 1998 by and among
          Ceres Group, Inc. (as
          successor-in-interest to Central
          Reserve Life Corporation) and the
          security holders listed on the
          signature pages thereof.
</TABLE>

                                       76
<PAGE>   79

<TABLE>
<CAPTION>
                                                INCORPORATED BY
                                                 REFERENCE TO
                                                REGISTRATION OR    FORM OR                  EXHIBIT
                     EXHIBITS                     FILE NUMBER      REPORT        DATE       NUMBER
                     --------                   ---------------    -------    ----------    -------
<C>   <S>                                       <C>                <C>        <C>           <C>
      (3) Registration Rights Agreement,            0-8483            8-K     Feb. 1999        4.3
          dated as of July 1, 1998 between Ceres
          Group, Inc. (as
          successor-in-interest to Central
          Reserve Life Corporation) and the
          persons and entities set forth on
          the signature pages attached
          thereto.
      (4) Amendment No. 1 to Registration           0-8483            8-K     Feb. 1999        4.4
          Rights Agreement, dated as of
          February 17, 1999, between Ceres
          Group, Inc. (as
          successor-in-interest to Central
          Reserve Life Corporation) and the
          persons and entities set forth on
          the signature pages attached
          thereto.
(10)  Material Contracts
      (1) Agreement of Lease                        0-8483           10-K     Mar. 1992       10(c)
      (2) Mortgage Note                             0-8483           10-K     Mar. 1992       10(d)
      (3) Mortgage                                  0-8483           10-K     Mar. 1992       10(e)
      (4) Credit Agreement, dated as of             0-8483            8-K     Dec. 1997       10.1
          December 16, 1997, by and between
          Central Reserve and Strategic
          Partners.
      (5) Pledge Agreement, dated as of             0-8483            8-K     Dec. 1997       10.2
          December 16, 1997, by and between
          Central Reserve and Strategic
          Partners.
      (6) Promissory Note, dated as of              0-8483            8-K     Dec. 1997       10.3
          December 16, 1997, by Central
          Reserve in favor of Strategic
          Partners.
      (7) Warrant to purchase Common Shares,        0-8483            8-K     Dec. 1997       10.4
          dated December 16, 1997, by
          Central Reserve in favor of Peter
          W. Nauert.
      (8) Warrant to purchase Common Shares,        0-8483            8-K     Dec. 1997       10.5
          dated December 16, 1997, by
          Central Reserve in favor of the
          Turkey Vulture Fund XIII, Ltd.
      (9) The Central Reserve Life Insurance        0-8483            8-K     Dec. 1997       10.9
          Company Severance Benefit Plan.
     (10) Reinsurance Agreement between             0-8483           10-K     Mar. 1998      10.10
          Central Reserve Life Insurance
          Company and Reassurance Company
          of Hannover.
     (11) Amendment No. 1 to Credit                 0-8483           10-K     Mar. 1998      10.11
          Agreement, dated as of March 25,
          1998 by and between Central
          Reserve and Strategic Partners.
</TABLE>

                                       77
<PAGE>   80

<TABLE>
<CAPTION>
                                                INCORPORATED BY
                                                 REFERENCE TO
                                                REGISTRATION OR    FORM OR                  EXHIBIT
                     EXHIBITS                     FILE NUMBER      REPORT        DATE       NUMBER
                     --------                   ---------------    -------    ----------    -------
<C>   <S>                                       <C>                <C>        <C>           <C>
      (12) Administrative Services                  0-8483         10-K/A     Mar. 1998      10.12
      Agreement, dated March 25, 1998 by and
      between Mutual Management Company,
      Inc. and Central Reserve Life
      Insurance Company.
      (13) Amendment No. 1 to Warrant to            0-8483           10-K     Mar. 1998      10.13
           purchase Common Shares, dated
           March 30, 1998 by Central Reserve
           in favor of Peter Nauert.
      (14) Amendment No. 1 to Warrant to            0-8483           10-K     Mar. 1998      10.14
           purchase Common Shares, dated
           March 30, 1998 by Central Reserve
           in favor of the Turkey Vulture
           Fund XIII, Ltd.
      (15) Employment agreement dated June          0-8483           10-Q     Sept. 1998     10.17
           30, 1998, by and between Peter
           Nauert and Central Reserve Life
           Corporation.
      (16) Employment agreement dated June          0-8483           10-Q     Sept. 1998     10.19
           1, 1998, by and between Glen
           Laffoon and Central Reserve Life
           Insurance Company.
      (17) Employment agreement dated                    *                                   10.20
           October 1, 1998, by and between
           Charles Miller and Central
           Reserve Life Corporation.
      (18) Reinsurance Agreement dated                   *                                   10.21
           February 1, 1999, between
           Continental General Life
           Insurance Company and Reassurance
           Company of Hannover.
      (19) Credit Agreement dated February          0-8483            8-K     Feb. 1999      10.22
            17, 1999, among Ceres Group,
      Inc., the lending institutions and The
      Chase Manhattan Bank, as
      Administrative Agent.
      (20) First Amendment to Employment            0-8483              *                    10.23
           Agreement between Peter W. Nauert
           and Ceres Group, Inc. dated March
           18, 1999.
      (21) Second Amendment to Employment           0-8483              *                    10.24
           Agreement between Peter W. Nauert
           and Ceres Group, Inc. dated June
           15, 1999.
      (22) Third Amendment to Employment            0-8483         *                        10.25
           Agreement between Peter W. Nauert
           and Ceres Group, Inc., dated
           December 19, 1999
</TABLE>

                                       78
<PAGE>   81

<TABLE>
<CAPTION>
                                                INCORPORATED BY
                                                 REFERENCE TO
                                                REGISTRATION OR    FORM OR                  EXHIBIT
                     EXHIBITS                     FILE NUMBER      REPORT        DATE       NUMBER
                     --------                   ---------------    -------    ----------    -------
<C>   <S>                                       <C>                <C>        <C>           <C>
(16)  Letter re: change in certifying
      accountant
      (1) Letter regarding change in                0-8483            8-K     Aug. 1998       16.1
      certifying accountant.
(21)  Subsidiaries of the registrant
      (1) Subsidiaries                                   *                                      21
(23)  Consents of expert and counsel
      (1) Consent of Ernst & Young LLP                   *                                    23.1
      (2) Consent of KPMG LLP                            *                                    23.2
(27)  Financial Data Schedule
      (1) Financial Data Schedule                        *                                    27.1
</TABLE>

* Filed herewith.

                                       79