<PAGE>   1
 
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                                   FORM 10-Q
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
(MARK ONE)
[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
 
                 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
 
                                       OR
 
[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
 
                        COMMISSION FILE NUMBER 333-7944
 
                                CGA GROUP, LTD.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<CAPTION>
                         BERMUDA                                                 98-0173536
<S>                                                       <C>
             (STATE OR OTHER JURISDICTION OF                                  (I.R.S. EMPLOYER
             INCORPORATION OR ORGANIZATION)                                  IDENTIFICATION NO.)
                    CRAIG APPIN HOUSE
                     8 WESLEY STREET
                  HAMILTON HM11 BERMUDA                                        NOT APPLICABLE
        (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                                 (ZIP CODE)
</TABLE>
 
                                 (441) 296-3165
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
                                 NOT APPLICABLE
             (FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR,
                         IF CHANGED SINCE LAST REPORT)
 
     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 AND 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 THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE:
 
                                   28,005,648
                             (AS OF MARCH 31, 1999)
 
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<PAGE>   2
 
                                CGA GROUP, LTD.
 
                            ------------------------
 
                               TABLE OF CONTENTS
 
PART I -- FINANCIAL INFORMATION
 
<TABLE>
<CAPTION>
                                                              PAGE
<S>                                                           <C>
  Item 1. Financial Statements
     Consolidated Balance Sheets -- March 31, 1999 and
      December 31, 1998.....................................     1
     Consolidated Statements of Operations -- Three Months
      Ended March 31, 1999 and
       March 31, 1998.......................................     2
     Consolidated Statements of Mezzanine Equity -- Three
      Months Ended March 31, 1999 and the Year Ended
      December 31, 1998.....................................     3
     Consolidated Statements of Shareholders'
      Equity -- Three Months Ended March 31, 1999 and the
      Year Ended December 31, 1998..........................     4
     Consolidated Statements of Cash Flows -- Three Months
      Ended March 31, 1999 and the Year Ended December 31,
      1998..................................................     5
     Notes to Consolidated Financial Statements.............     6
  Item 2. Management's Discussion and Analysis of Financial
     Condition and
     Results of Operations..................................    16
  Item 3. Quantitative and Qualitative Disclosures About
     Market Risk............................................    20
 
PART II -- OTHER INFORMATION
  Item 2. Changes in Securities and Use of Proceeds.........  II-1
  Item 4. Submission of Matters to a Vote of Security
     Holders................................................  II-1
  Item 6. Exhibits and Reports on Form 8-K..................  II-2
  Signatures................................................  II-3
  Index to Exhibits.........................................  II-4
</TABLE>
<PAGE>   3
 
ITEM 1.  FINANCIAL STATEMENTS.
 
                                CGA GROUP, LTD.
 
                          CONSOLIDATED BALANCE SHEETS
                          (EXPRESSED IN U.S. DOLLARS)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                               MARCH 31,      DECEMBER 31,
                                                                  1999            1998
                                                              ------------    ------------
<S>                                                           <C>             <C>
ASSETS
  Fixed maturities available for sale, (at fair value)
     (Amortized cost: $101,493,092 and $99,560,861).........  $100,716,387    $100,488,537
  Other investments.........................................    30,000,000      30,000,000
  Cash and short-term investments...........................    53,083,244       2,598,140
  Premiums receivable.......................................     3,080,055       3,228,497
  Management fees receivable................................     1,064,638       1,093,411
  Accrued interest receivable...............................     2,850,376       3,679,763
  Deferred acquisition costs................................     3,562,274       3,202,557
  Prepaid reinsurance premiums..............................     1,273,640       1,286,782
  Reinsurance recoverable...................................    67,400,000      67,400,000
  Other assets..............................................     2,618,108       2,926,246
                                                              ------------    ------------
  Total assets..............................................  $265,648,722    $215,903,933
                                                              ============    ============
LIABILITIES
  Unearned premiums.........................................  $    786,685    $    821,124
  Provision for losses and loss adjustment expenses.........    90,500,000      90,200,000
  Reinsurance balances payable..............................       406,483         420,660
  Accrued costs and expenses................................     3,631,747       4,355,767
                                                              ------------    ------------
  Total liabilities.........................................    95,324,915      95,797,551
                                                              ------------    ------------
MEZZANINE EQUITY
  Preferred stock, $.01 par value, 72,000,000 shares
     authorized:
  Series A..................................................    78,199,216      75,291,100
  Series B..................................................            --      37,300,985
  Dividends accrued on Series B.............................            --      14,016,164
  Series C..................................................    49,793,795              --
                                                              ------------    ------------
  Total mezzanine equity....................................   127,993,011     126,608,249
                                                              ------------    ------------
SHAREHOLDERS' EQUITY
  Common stock, $.01 par value, 268,000,000 shares
     authorized, 28,005,648 issued and outstanding..........       280,057          91,000
  Additional paid-in-capital................................    96,166,977      42,486,057
  Accumulated other comprehensive income....................      (776,705)        927,676
  Retained deficit..........................................   (53,339,533)    (50,006,600)
                                                              ------------    ------------
  Total shareholders' equity (deficit)......................    42,330,796      (6,501,867)
                                                              ------------    ------------
  Total liabilities and shareholders' equity................  $265,648,722    $215,903,933
                                                              ============    ============
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
                                        1
<PAGE>   4
 
                                CGA GROUP, LTD.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                          (EXPRESSED IN U.S. DOLLARS)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                               THREE MONTHS      THREE MONTHS
                                                                  ENDED             ENDED
                                                              MARCH 31, 1999    MARCH 31, 1998
                                                              --------------    --------------
<S>                                                           <C>               <C>
REVENUES
  Gross premiums written....................................   $ 3,467,232       $ 1,949,993
  Ceded premiums............................................      (419,625)               --
                                                               -----------       -----------
  Net premiums written......................................     3,047,607         1,949,993
  Change in unearned premiums...............................        34,439          (878,858)
                                                               -----------       -----------
  Net premiums earned.......................................     3,082,046         1,071,135
  Net investment income.....................................     1,671,501         1,888,255
  Net realized gains (losses)...............................       151,566          (242,194)
  Management fees...........................................     1,145,259           189,056
                                                               -----------       -----------
  Total revenues............................................     6,050,372         2,906,252
                                                               -----------       -----------
EXPENSES
  Operating expenses........................................     3,276,277         3,063,863
  Acquisition costs.........................................       148,138            53,245
  Commitment fees...........................................       147,945           147,945
  Excess of loss facility...................................        50,000            50,000
  Losses and loss adjustment expenses.......................       300,000           195,000
                                                               -----------       -----------
  Total expenses............................................     3,922,360         3,510,053
                                                               -----------       -----------
NET INCOME (LOSS)...........................................     2,128,012          (603,801)
Other comprehensive income..................................    (1,704,381)          607,868
                                                               -----------       -----------
COMPREHENSIVE INCOME........................................   $   423,631       $     4,067
                                                               ===========       ===========
Net loss available to common shareholders...................   $(3,531,036)      $(5,683,130)
Basic and diluted loss per common share.....................   $     (0.38)      $     (0.62)
                                                               ===========       ===========
Weighted average shares outstanding.........................     9,310,063         9,100,000
                                                               ===========       ===========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
                                        2
<PAGE>   5
 
                                CGA GROUP, LTD.
 
                  CONSOLIDATED STATEMENTS OF MEZZANINE EQUITY
                          (EXPRESSED IN U.S. DOLLARS)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                               THREE MONTHS
                                                                  ENDED            YEAR ENDED
                                                              MARCH 31, 1999    DECEMBER 31, 1998
                                                              --------------    -----------------
<S>                                                           <C>               <C>
MEZZANINE EQUITY
SERIES A PREFERRED STOCK
Balance -- beginning of period..............................   $     32,119       $     27,965
Pay-in-kind dividends paid..................................          1,104              4,154
                                                               ------------       ------------
Balance -- end of period....................................         33,223             32,119
                                                               ------------       ------------
ADDITIONAL PAID-IN-CAPITAL -- SERIES A PREFERRED
Balance -- beginning of period..............................     75,258,981         65,504,534
Fair value of warrants......................................             --         (1,347,300)
Pay-in-kind dividends paid..................................      2,759,046         10,379,765
Accretion to redemption value...............................        114,283            514,273
Accretion on warrants.......................................         33,683            207,709
                                                               ------------       ------------
Balance -- end of period....................................     78,165,993         75,258,981
                                                               ------------       ------------
TOTAL SERIES A PREFERRED STOCK..............................   $ 78,199,216       $ 75,291,100
                                                               ============       ============
SERIES B PREFERRED STOCK
Balance -- beginning of period..............................   $     16,000       $     16,000
Pay-in-kind dividends paid..................................          6,687
Stock exchanged for common stock............................        (22,687)                --
                                                               ------------       ------------
Balance -- end of period....................................             --             16,000
                                                               ------------       ------------
ADDITIONAL PAID-IN-CAPITAL -- SERIES B PREFERRED
Balance -- beginning of period..............................     37,284,985         37,059,371
Pay-in-kind dividends paid..................................     16,710,271                 --
Accretion to redemption value...............................         50,137            225,614
Unaccreted issuance costs...................................      2,648,879
Stock exchanged for common stock............................    (56,694,272)                --
                                                               ------------       ------------
Balance -- end of period....................................             --         37,284,985
                                                               ------------       ------------
TOTAL SERIES B PREFERRED STOCK..............................   $         --       $ 37,300,985
                                                               ============       ============
PAY-IN-KIND DIVIDENDS ACCRUED -- SERIES B
Balance -- beginning of period..............................   $ 14,016,164       $  4,439,231
Dividends accrued...........................................      2,700,795          9,576,933
Dividends paid..............................................    (16,716,959)                --
                                                               ------------       ------------
Balance -- end of period....................................   $         --       $ 14,016,164
                                                               ============       ============
SERIES C PREFERRED STOCK
Balance -- beginning of period..............................   $         --       $         --
Stock issued (43,997,863 shares)............................        439,979                 --
                                                               ------------       ------------
Balance -- end of period....................................        439,979                 --
                                                               ------------       ------------
ADDITIONAL PAID-IN-CAPITAL -- SERIES C PREFERRED
Balance -- beginning of period..............................             --                 --
Stock issued................................................     50,556,816                 --
Issuance costs..............................................     (1,203,000)                --
                                                               ------------       ------------
Balance -- end of period....................................     49,353,816                 --
                                                               ------------       ------------
TOTAL SERIES C PREFERRED STOCK..............................   $ 49,793,795       $         --
                                                               ============       ============
TOTAL MEZZANINE EQUITY......................................   $127,993,011       $126,608,249
                                                               ============       ============
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
                                        3
<PAGE>   6
 
                                CGA GROUP, LTD.
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                          (EXPRESSED IN U.S. DOLLARS)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                               THREE MONTHS
                                                                  ENDED            YEAR ENDED
                                                              MARCH 31, 1999    DECEMBER 31, 1998
                                                              --------------    -----------------
<S>                                                           <C>               <C>
SHAREHOLDERS' EQUITY
COMMON STOCK
Balance -- beginning of period..............................   $     91,000       $     91,000
Stock issued (18,905,648 shares)............................        189,057                 --
                                                               ------------       ------------
Balance -- end of period....................................        280,057             91,000
                                                               ------------       ------------
ADDITIONAL PAID-IN-CAPITAL -- COMMON STOCK
Balance -- beginning of period..............................     42,486,057         42,086,353
Stock issued................................................     56,527,902                 --
Fair value of warrants......................................             --          1,347,300
Accretion of Series A Preferred Stock to redemption value...       (114,283)          (514,273)
Accretion of Series B Preferred Stock to redemption value...        (50,137)          (225,614)
Accretion on warrants.......................................        (33,683)          (207,709)
Unaccreted issuance costs (Series B)........................     (2,648,879)                --
                                                               ------------       ------------
Balance -- end of period....................................     96,166,977         42,486,057
                                                               ------------       ------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance -- beginning of period..............................        927,676          1,638,092
Increase (decrease) during the period.......................     (1,704,381)          (710,416)
                                                               ------------       ------------
Balance -- end of period....................................       (776,705)           927,676
                                                               ------------       ------------
RETAINED EARNINGS (DEFICIT)
Balance -- beginning of period..............................    (50,006,600)       (12,057,969)
Net income (loss)...........................................      2,128,012        (17,987,779)
Series A pay-in-kind dividends paid.........................     (2,760,150)       (10,383,919)
Series B pay-in-kind dividends accrued......................     (2,700,795)        (9,576,933)
                                                               ------------       ------------
Balance -- end of period....................................    (53,339,533)       (50,006,600)
                                                               ------------       ------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)........................   $ 42,330,796       $ (6,501,867)
                                                               ============       ============
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
                                        4
<PAGE>   7
 
                                CGA GROUP, LTD.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                          (EXPRESSED IN U.S. DOLLARS)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                               THREE MONTHS      THREE MONTHS
                                                                  ENDED             ENDED
                                                              MARCH 31, 1999    MARCH 31, 1998
                                                              --------------    --------------
<S>                                                           <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)...........................................   $  2,128,012      $   (603,801)
Adjustments to reconcile net income (loss) to net cash used
  in
  operating activities:
  Amortization of investments...............................         90,484         1,374,914
  Depreciation expense......................................        128,792            81,415
  Realized (gain) loss on sale of investments...............       (151,566)          242,194
  Realized loss on sale of fixed assets.....................             --            26,282
Changes in assets and liabilities:
  Premiums receivable.......................................        148,442          (578,451)
  Management fees receivable................................         28,773                --
  Accrued interest..........................................        829,387           973,774
  Deferred acquisition costs................................       (359,717)         (382,181)
  Prepaid reinsurance premiums..............................         13,142                --
  Other assets..............................................        229,646           239,276
  Organization costs........................................             --           245,812
  Unearned premiums.........................................        (34,439)          878,859
  Provision for losses and loss adjustment expenses.........        300,000           195,000
  Reinsurance balances payable..............................        (14,177)               --
  Deferred compensation payable.............................             --           224,449
  Accrued costs and expenses................................       (724,020)       (1,638,490)
                                                               ------------      ------------
Net cash provided by operating activities...................      2,612,759         1,279,052
                                                               ------------      ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of fixed maturity investments acquired.................    (22,856,171)      (47,025,095)
Proceeds from sale of fixed maturity investments............     20,985,021        42,738,424
Purchases of fixed assets...................................        (50,300)         (420,771)
Note receivable.............................................             --           250,000
                                                               ------------      ------------
Net cash used in investing activites........................     (1,921,450)       (4,457,442)
                                                               ------------      ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on issuance of Series C Preferred Stock............     50,996,795                --
Issuance costs of Series C Preferred Stock..................     (1,203,000)               --
                                                               ------------      ------------
Net cash provided by financing activities...................     49,793,795                --
                                                               ------------      ------------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM
  INVESTMENTS...............................................     50,485,104        (3,178,390)
CASH AND SHORT-TERM INVESTMENTS -- BEGINNING OF PERIOD......      2,598,140         7,199,106
                                                               ------------      ------------
CASH AND SHORT-TERM INVESTMENTS -- END OF PERIOD............   $ 53,083,244      $  4,020,716
                                                               ============      ============
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
                                        5
<PAGE>   8
 
                                CGA GROUP, LTD.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   FOR THE THREE MONTHS ENDED MARCH 31, 1999
                          (EXPRESSED IN U.S. DOLLARS)
 
1.  GENERAL
 
     The interim consolidated financial statements, which include the accounts
of CGA Group, Ltd. (the "Company") and its subsidiaries, have been prepared on
the basis of accounting principles generally accepted in the United States of
America and, in the opinion of management, reflect all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of results for
such periods. The results of operations and cash flows for any interim period
are not necessarily indicative of results for the full year. These financial
statements should be read in conjunction with the consolidated financial
statements, and related notes thereto, included in the Company's 1998 Annual
Report on Form 10-K.
 
     The Company is a holding company, which was incorporated in Bermuda on June
21, 1996. The Company has two wholly owned subsidiaries. Commercial Guaranty
Assurance, Ltd. ("CGA") was incorporated in Bermuda on October 22, 1996. CGA is
licensed as a class 3 insurer under the Insurance Act 1978 of Bermuda (the
"Act") which authorizes it to carry on insurance business of all classes in or
from within Bermuda subject to its compliance with the solvency margin,
liquidity ratio and other requirements imposed on it by the Act. CGA has a
"Triple-A" "claims paying ability" rating from Duff & Phelps Credit Rating
Company ("DCR") and has also been rated in the highest rating category assigned
by each of the two Canadian rating agencies, Dominion Bond Ratings Service and
Canadian Bond Ratings Service. CGA issues financial guaranty insurance policies,
which are the functional equivalent of direct-pay letters of credit, to insure
payment of interest, principal and other amounts payable in respect of notes,
securities, and other financial obligations. CGA Investment Management, Inc.
("CGAIM") was incorporated in Delaware, U.S.A. in July 1996 by the founders of
the Company and was acquired at nominal cost to the Company on June 9, 1997.
CGAIM did not commence operations until after its acquisition by the Company.
CGAIM is registered as an investment advisor with the United States Securities
and Exchange Commission under the Investment Advisors Act of 1940, as amended.
CGAIM provides investment management and financial advisory services primarily
to specialized investment vehicles and for the U.S. and international structured
finance markets. CGAIM and its employees are based in New York City, New York.
 
     The primary clients of CGA and CGAIM are St. George Holdings, Ltd. ("SG
Holdings") and Cobalt Holdings, Ltd. ("Cobalt") and their respective
subsidiaries. In 1998 they provided approximately 85% of the total premiums
earned by CGA, and 91% of the total investment management fees earned by CGAIM.
These percentages are expected to decrease in the future.
 
     Operations commenced following the completion of the Company's private
placement offering which occurred on June 17, 1997 (the "Recapitalization"). The
initial capitalization of the Company consisted of 12,000 common shares with a
par value of $1.00 per share. All 12,000 shares were redeemed on June 17, 1997
at which time the Company completed its Recapitalization.
 
     As part of the Recapitalization, on June 17, 1997, the Company issued 2.6
million shares of Series A Cumulative Voting Preference Shares (the "Series A
Preferred Stock"), par value $.01 per share, for a price of $25 per share. The
shares of Series A Preferred Stock are entitled to a 13.75% quarterly
compounding dividend paid in additional shares of Series A Preferred Stock. The
holders of Series A Preferred Stock also received warrants, which are
transferable separately from the Series A Preferred Stock, which represent the
right to purchase on or prior to June 17, 2007 a total of 270,000 shares of
Common Stock at an exercise price of $.01 per share. The warrants are valued at
$4.99 per share and are accounted for as additional paid-in-capital to the
Common Stock.
 
     As part of the Recapitalization, on June 17, 1997, the Company issued 1.6
million shares of Series B Cumulative Voting Preference Shares (the "Series B
Preferred Stock"), par value $.01 per share, for a price of $25 per share. The
shares of Series B Preferred Stock are entitled to a 20% quarterly compounding
dividend
 
                                        6
<PAGE>   9
                                CGA GROUP, LTD.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
paid in additional shares of Series B Preferred Stock. The shares of Series B
Preferred Stock were sold to investors as part of Investment Units which also
included commitments to purchase an additional $60 million of Series B Preferred
Stock in the aggregate upon the occurrence of certain funding events, in order
to maintain CGA's "Triple-A" rating from DCR. The Company pays a $600,000 annual
fee to the holders of the Investment Units for their commitments. The Investment
Units also included an aggregate of 7,827,957 shares of Common Stock out of a
total of 9,100,000 million shares of Common Stock issued pursuant to the
Recapitalization, at a price of $5 per share.
 
     The remaining 1,272,043 shares of Common Stock were sold to the sponsoring
investors and certain members of management who also received 847,729 warrants,
which each represent the right to purchase one share of Common Stock on or prior
to June 17, 2007 at an exercise price of $5 per share. The exercise price of
these warrants is subject to reduction based on the sales price of additional
Common Stock or equivalents. An additional 1,494,771 warrants have been
authorized for issuance to certain employees, which each represent the right to
purchase one share of Common Stock on or prior to June 17, 2007 at an exercise
price of $5 per share.
 
     On March 31, 1999, the Company sold 43,997,863 shares of Series C
Convertible Cumulative Voting Preference Shares, par value $.01 per share (the
"Series C Preferred Stock"), to existing shareholders for an aggregate sales
price of $50,996,795. Concurrent with the sale of the Series C Preferred Stock,
the outstanding 1,600,000 shares of Series B Preferred Stock and the 668,678
shares of Series B Preferred Stock declared as pay-in-kind dividends thereon,
totaling 2,268,678 shares valued at $56,716,950, were exchanged for 18,905,648
shares of Common Stock based on an exchange price of $3 per share of Common
Stock.
 
2.  SIGNIFICANT ACCOUNTING POLICIES
 
     The consolidated financial statements have been prepared on the basis of
accounting principles generally accepted in the United States of America
("GAAP") and include the accounts of the Company, CGA, and CGAIM. All
significant intercompany accounts and transactions have been eliminated in
consolidation. The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
 
  a) Premiums
 
     CGA's insurance contracts are classified as long-duration contracts for
accounting purposes, as the contracts are expected to remain in force for an
extended period. The contracts generally are not subject to unilateral changes
in their provisions and require insurance protection for extended periods.
Premium rates generally are level throughout the period of coverage. Premiums
are recognized as written upon inception of multi-year policies. Up-front
premiums are earned pro-rata over the period of risk. Installment premiums are
earned over each installment period.
 
  b) Deferred acquisition costs
 
     Deferred acquisition costs are expenses that vary with and are primarily
related to the production of business. These costs include compensation,
underwriting, certain rating agency fees, legal and other expenses. Deferred
acquisition costs are amortized on a straight-line basis over the estimated term
of the related insured risks. The Company evaluates the recoverability of
deferred acquisition costs whenever changes in circumstances warrant. If it is
determined that an impairment exists, the excess of the unamortized balance over
deferred acquisition costs will be charged to earnings.
 
                                        7
<PAGE>   10
                                CGA GROUP, LTD.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  c) Reinsurance
 
     In the ordinary course of business, CGA cedes exposures pursuant to various
reinsurance contracts designed to limit CGA's losses from certain risks and to
protect CGA's capital and surplus. The reinsurance of risk does not relieve CGA
of its original liability to its policyholders. In the event that a reinsurer
was unable to meet its obligations under the existing reinsurance contracts, CGA
would be liable for such defaulted amounts.
 
     Prepaid reinsurance premiums represent the portion of premiums ceded to
reinsurers applicable to the unexpired terms of the reinsurance contracts in
force.
 
  d) Provision for losses and loss adjustment expenses
 
     A case basis reserve for unpaid losses and loss adjustment expenses may be
recorded at the present value of the estimated loss when, in management's
opinion, the likelihood of a future loss is probable and determinable at the
balance sheet date. A general reserve is calculated by applying a loss factor to
the total net par amount outstanding of CGA's insured obligations over the
expected term of such insured obligations.
 
     Management believes that the current level of the provision is adequate to
cover the ultimate net cost of claims. The provision is necessarily an estimate
and there can be no assurance that the ultimate liability will not differ from
such estimates. The Company will monitor the provision on an ongoing basis and
may periodically adjust the provision based on actual loss experience, the
future mix of business and economic conditions.
 
     The provision for losses is reflected on the balance sheet gross of any
losses recoverable from reinsurers.
 
  e) Investments
 
     In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," investments in debt securities are designated as
available-for-sale and are recorded at fair value, being quoted market value.
Any resulting unrealized gains or losses are reflected as a separate component
of shareholder's equity as accumulated other comprehensive income and as a
separate component of the statement of operations as other comprehensive income.
Short-term investments, which are those investments with a maturity of less than
one year at time of purchase, are carried at cost, which approximates fair
value. Other investments are carried at cost, which approximates fair value.
 
     Bond discounts and premiums are accreted or amortized on the effective
interest method over the term of the related securities. Realized gains or
losses on sale of investments are determined on the basis of specific
identification. Net investment income is recognized when earned and includes
interest and amortization of market premiums and discounts, and is net of
investment management and custody fees.
 
  f) Statement of cash flows
 
     For purposes of the statements of cash flows, short-term deposits are
composed of deposits with original maturities which are less than three months.
 
  g) Loss per common share
 
     In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per share."
This statement requires the Company to report basic earnings per share and
diluted earnings per share. Loss per common share is calculated using the loss
for the period adjusted for preference dividends, accretion of preference stock
to redemption value, and accretion
 
                                        8
<PAGE>   11
                                CGA GROUP, LTD.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
on warrants, divided by the weighted average number of common shares outstanding
and, if dilutive, shares issuable under outstanding warrants. The Company
adopted SFAS 128 in 1998.
 
  h) Comprehensive Income
 
     The FASB issued Statement of Financial Accounting Standard No. 130 ("SFAS
130"), "Reporting Comprehensive Income", effective for fiscal years beginning
after December 15, 1997. This statement requires the Company to report in the
financial statements, in addition to net income, comprehensive income and its
components. Comprehensive income for the Company is comprised solely of changes
in unrealized appreciation or depreciation on marketable investments. The
Company adopted SFAS 130 in 1998.
 
  i) Start-up activities
 
     The Accounting Standards Executive Committee issued Statement of Position
98-5, "Reporting on Costs of Start-Up Activities", effective for fiscal years
beginning after December 15, 1998. This statement requires the Company to
expense organization costs as incurred. On July 1, 1998, the Company expensed
the remaining unamortized organization costs, which is reflected in the
financial statements as a change in accounting principle.
 
3.  OTHER INVESTMENTS
 
     Other investments are comprised of a $25 million note from St. George
Holdings, Ltd., a Cayman Islands company which is the parent company of certain
clients of CGAIM ("SG Holdings"), and a $5 million note from Cobalt Holdings
LLC, a Delaware limited liability corporation ("Cobalt Holdings") which is also
the parent company of certain clients of CGAIM. The notes are carried at their
original cost which approximates fair value. The notes bear interest of 3 month
LIBOR plus 1% per annum payable quarterly. The Cobalt note matures in July, 2013
and may be prepaid without penalty. On April 16, 1999, SG Holdings repaid the
$25 million note in full.
 
4.  DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
 
<TABLE>
<CAPTION>
                                                              MARCH 31     DECEMBER 31,
                                                                1999           1998
                                                             ----------    ------------
<S>                                                          <C>           <C>
Other Assets
  Other prepaid expenses...................................  $  229,831     $  222,752
  Prepaid commitment fees..................................     128,219        276,164
  Fixed assets, net of depreciation........................   1,525,108      1,603,600
  Deposits.................................................     329,200        280,000
  Accounts receivable......................................     328,357        368,730
  Other....................................................      77,393        175,000
                                                             ----------     ----------
Total Other Assets.........................................  $2,618,108     $2,926,246
                                                             ==========     ==========
</TABLE>
 
5.  LOSSES AND LOSS EXPENSES
 
     The provision for losses and loss adjustment expenses ("LAE") is
established in an amount equal to CGA's estimate of unidentified or case basis
reserves and unallocated losses including costs of settlement, on the
obligations it has insured. Case basis reserves are established when specific
insured issues are identified as currently or likely to be in default. Such a
reserve is based on the present value of the expected loss and LAE. The general
provision for losses and LAE is calculated by applying a loss factor, determined
based on an independent rating agency study of bond defaults, to net par amount
outstanding of the insured obligations.
 
                                        9
<PAGE>   12
                                CGA GROUP, LTD.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     In October, 1998 the credit ratings on asset-backed securities originated
and serviced by Commercial Financial Services Inc. ("CFS"), a credit-card debt
collection company, were withdrawn by the three credit rating companies that
rate the most recently issued CFS securities. The withdrawal of the ratings was
in response to allegations of accounting irregularities at CFS. The rating
agencies, investors and insurers have commenced an investigation into the
allegations. Clients of CGAIM own approximately $153.5 million par of the CFS
securities, and CGA has insured the credit facilities used to finance their
purchase. In addition, CGA has exposure of approximately $45.5 million par to
CFS securities through a financial guaranty policy issued to a client of CGA
that purchased the securities for its own account. In summary, CGA has exposure
to a total of $199 million par of CFS issued securities, of which $152 million
par has been reinsured, leaving a net exposure of approximately $47 million par
at March 31, 1999. CGA estimates the loss on its net exposure of the CFS
securities to be $20.8 million, for which a case basis reserve was established
for the year ended December 31, 1998. The provision for losses is reflected on
the balance sheet gross of reinsurance recoverable of $67.4 million.
 
6.  REINSURANCE
 
     In the ordinary course of business, CGA cedes exposures pursuant to various
reinsurance contracts primarily designed to minimize CGA's losses from large
risks and to protect CGA's capital and surplus. The reinsurance of risk does not
relieve CGA of its original liability to its policyholders. In the event that
all or any of the reinsurers are unable to meet their obligations to CGA under
the existing reinsurance agreements, CGA would be liable for such defaulted
amounts. CGA also has a $20 million excess of loss reinsurance facility. As of
March 31, 1999 prepaid reinsurance of approximately $1.3 million was associated
with a single reinsurer.
 
     As stated above, CGA has reinsured a portion of its exposure to
asset-backed securities originated and serviced by CFS. Approximately $152
million par of this total exposure of $199 million is reinsured leaving a net
exposure of approximately $47 million par. CGA has reinsurance recoverable of
$67.4 million relating to the CFS securities as of March 31, 1999.
 
     In October, 1998, CGA provided credit support on approximately $382 million
of securities within two insured portfolios, which was further supported by a
"Triple-A" rated reinsurer, using documentation that would permit the insured to
proceed directly against the reinsurer. The effect of the described credit
support arrangements was to substantially increase the market value of the
subject securities. CGA received a premium of $38.95 million from its clients in
connection with these credit support arrangements, and ceded $38.7 million to
the aforementioned reinsurer. The reinsurer is a shareholder of the Company who
has contracted with two other shareholders of the Company to participate in the
above-described credit arrangements. On April 14, 1999, these credit support
arrangements were cancelled and approximately $29.5 million of premium was
refunded to the clients.
 
                                       10
<PAGE>   13
                                CGA GROUP, LTD.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
7.  MEZZANINE EQUITY
 
<TABLE>
<CAPTION>
                                                               1999           1998
                                                            -----------    -----------
<S>                                                         <C>            <C>
Series A: 3,322,297 and 3,211,890 shares issued and
  outstanding.............................................  $    33,223    $    32,119
Additional paid in capital................................   78,165,993     75,258,981
                                                            -----------    -----------
Total series A preferred stock............................  $78,199,216    $75,291,100
                                                            ===========    ===========
Series B: nil and 1,600,000 shares issued and
  outstanding.............................................  $        --    $    16,000
Additional paid in capital................................           --     37,284,985
                                                            -----------    -----------
Total series B preferred stock............................  $        --    $37,300,985
                                                            ===========    ===========
Series C: 43,997,863 and nil shares issued and
  outstanding.............................................  $   439,979    $        --
Additional paid in capital................................   49,353,816             --
                                                            -----------    -----------
Total series C preferred stock............................  $49,793,795    $        --
                                                            ===========    ===========
</TABLE>
 
     The Company's Series A Preferred Stock is subject to mandatory redemption
including all accrued and unpaid dividends thereon, on June 17, 2007. The Series
A Preferred Stock is also redeemable at the election of the Company at any time.
 
     The dividends on the Series A Preferred Stock are declared quarterly by the
Board of Directors and paid in additional shares of Series A Preferred Stock.
 
     The Series A Preferred Stock and the Series B Preferred Stock were each
recorded at fair value. The difference between fair value and the redemption
value (excluding pay-in-kind dividends) is being accreted over the mandatory
redemption period by a charge to retained deficit.
 
     The Series A Preferred Stock, the Series B Preferred Stock and the Series C
Preferred Stock are voting securities, and are entitled to 7 votes per share, 5
votes per share and 1 vote per share, respectively, on all matters presented to
security holders of the Company for their approval. The Series A Preferred Stock
ranks senior in liquidation preference to all other classes of capital stock of
the Company, followed by the Series C Preferred Stock, the Series B Preferred
Stock and the Common Stock of the Company, respectively.
 
     On March 31, 1999, all issued and outstanding shares of Series B Preferred
Stock were converted into shares of Common Stock, at a conversion ratio of
11.816 shares of Common Stock per share of Series B Preferred Stock. The
conversion ratio was based on an assumed value of $3.00 per share of Common
Stock. As a result of the conversion, 18,905,648 new shares of Common Stock were
issued. No shares of Series B Preferred Stock are currently issued and
outstanding.
 
     The shares of Series C Preferred Stock may be converted into shares of
Common Stock on a one-for-one basis at the holder's option at any time, are
mandatorily convertible into shares of Common Stock upon the occurrence of
certain events at the conversion rate specified in the Company's Bye-laws, and
are subject to redemption by the Company for cash upon the occurrence of certain
events at the redemption rate specified in the Company's Bye-laws.
 
8.  COMMON STOCK
 
     The number of shares of Common Stock outstanding as of March 31, 1999 and
the year ended December 31, 1998 were as follows:
 
<TABLE>
<CAPTION>
                                                                 1999         1998
                                                              ----------    ---------
<S>                                                           <C>           <C>
Issued and outstanding......................................  28,005,653    9,100,000
Weighted average number of shares...........................   9,310,063    9,100,000
</TABLE>
 
                                       11
<PAGE>   14
                                CGA GROUP, LTD.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Common Stock of the Company carries 2 votes per share on all matters
presented to security holders of the Company for their approval.
 
9.  LOSS PER COMMON SHARE
 
     The following table sets forth the computation of basic and diluted loss
per share for the periods ended March 31, 1999 and 1998.
 
<TABLE>
<CAPTION>
                                                     THREE MONTHS          THREE MONTHS
                                                        ENDED                 ENDED
                                                    MARCH 31, 1999        MARCH 31, 1998
                                                  ------------------    ------------------
<S>                                               <C>                   <C>
Basic loss per share ("EPS")
Numerator:
  Net income (loss).............................     $ 2,128,012           $  (603,801)
  Series A -- Pay-in-kind dividends paid........      (2,760,150)           (2,403,154)
  Series A -- Pay-in-kind dividends accrued.....              --              (100,924)
  Series A -- Accretion to redemption value.....        (114,283)             (171,424)
  Series A -- Accretion on warrants.............         (33,683)             (106,661)
  Series B -- Pay-in-kind dividends accrued.....      (2,700,795)           (2,221,962)
  Series B -- Accretion to redemption value.....         (50,137)              (75,204)
                                                     -----------           -----------
Net Loss Available to Common Shareholders.......      (3,531,036)           (5,683,130)
                                                     -----------           -----------
Denominator:
Weighted Average Shares Outstanding.............       9,310,063             9,100,000
Basic EPS.......................................     $     (0.38)          $     (0.62)
                                                     ===========           ===========
Diluted Loss Per Share
Numerator.......................................      (3,531,036)          $(5,683,130)
                                                     -----------           -----------
Denominator.....................................       9,310,063             9,100,000
                                                     -----------           -----------
Diluted EPS.....................................     $     (0.38)          $     (0.62)
                                                     ===========           ===========
</TABLE>
 
     The Company has outstanding warrants which were not included in the
computation of the diluted loss per share, as the effect of these warrants is
antidilutive for the periods presented above.
 
     On June 17, 1997, the Company issued warrants to purchase 270,000 shares of
Common Stock in connection with the issuance of 2.6 million shares of Series A
Preferred Stock. All of the warrants are outstanding as of March 31, 1999. These
warrants are excercisable at any time on or prior to June 17, 2007 at an
exercise price of $.01 per share of Common Stock evidenced thereby.
 
     The Company also issued 847,729 warrants to certain investors and members
of management in connection with the issuance of 1.6 million Investment Units.
Each such warrant represents the right to purchase one share of Common Stock on
or prior to June 17, 2007. The warrants have a new exercise price of $2.12 per
share (originally $5 per share) and were outstanding at March 31, 1999. In
addition, the Company has authorized 1,494,771 warrants for issuance to certain
employees. These warrants each represent the right to purchase one share of
Common Stock on or prior to June 17, 2007 at an exercise price of $5 per share.
The employee warrants will vest ratably over a four-year period and expire if
not exercised within thirty days of the employee's termination of employment. As
of March 31, 1999, there were 1,315,984 warrants outstanding, of which 328,996
warrants were exercisable. As of December 31, 1998 there were 1,348,129 warrants
outstanding of which 337,032 warrants were exercisable.
 
                                       12
<PAGE>   15
                                CGA GROUP, LTD.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
10.  INSURANCE IN FORCE
 
     The following table shows the net par outstanding of insured obligations,
net of reinsurance, at March 31, 1999 and December 31, 1998 by asset type:
 
<TABLE>
<CAPTION>
                                                                 1999          1998
                                                              ----------    ----------
                                                              (IN 000'S)    (IN 000'S)
<S>                                                           <C>           <C>
REIT Debt...................................................  $  376,073    $  381,777
Consumer asset-backed securities............................     454,646       456,521
Corporate asset-backed securities...........................     303,208       270,612
Commercial mortgage-backed securities.......................     215,501       185,754
Sovereign debt..............................................     120,000       120,000
Corporate debt..............................................      75,000        75,000
REIT preferred stock........................................      70,000        70,000
                                                              ----------    ----------
Total.......................................................  $1,614,428    $1,559,664
                                                              ==========    ==========
</TABLE>
 
     The following table presents the credit ratings of the above assets, based
on net par outstanding at March 31, 1999 and December 31, 1998:
 
<TABLE>
<CAPTION>
                                                              1999    1998
                                                              ----    ----
<S>                                                           <C>     <C>
"AAA".......................................................    5%      4%
"AA"........................................................    3%      3%
"A".........................................................   14%     12%
"BBB".......................................................   67%     67%
"BB"........................................................    8%     11%
Not rated...................................................    3%      3%
Total.......................................................  100%    100%
</TABLE>
 
11.  SEGMENT REPORTING
 
     The Company has two reportable segments: CGA and CGAIM (see description of
each segment in Note 1). The Company's management has identified the operating
segments on the basis that they are separate legal entities and that each entity
carries on a different type of business. CGA provides financial guaranty
insurance and CGAIM provides investment management services. The accounting
policies of each of the segments are the same as those described in the summary
of significant accounting policies.
 
                                       13
<PAGE>   16
                                CGA GROUP, LTD.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The table below presents financial information for each of the operating
segments
 
     As of and for the three months ended March 31, 1999
 
<TABLE>
<CAPTION>
                                           CGA           CGAIM        OTHER(A)         TOTAL
                                       ------------    ----------    -----------    ------------
<S>                                    <C>             <C>           <C>            <C>
REVENUES
Net premiums earned..................  $  3,082,046    $       --    $        --    $  3,082,046
Net investment income................     1,651,857        16,972          2,672       1,671,501
Net realized gains...................       151,566            --             --         151,566
Management fees......................            --     1,145,259             --       1,145,259
Intersegment revenue.................            --        59,827             --          59,827
TOTAL REVENUES.......................                                                  6,110,199
 
EXPENSE ITEMS
Operating expenses...................       363,383     2,627,079        345,642       3,336,104
Acquisition costs....................       148,138            --             --         148,138
Commitment fees......................       147,945            --             --         147,945
Excess of loss facility..............        50,000            --             --          50,000
Losses and loss adjustment
  expenses...........................       300,000            --             --         300,000
TOTAL EXPENSES.......................                                                  3,982,187
 
ASSETS
Total assets.........................   244,118,686     3,644,229     31,307,904     279,070,819
</TABLE>
 
---------------
(a) The "other" segment is comprised of CGA Group, Ltd., the holding company,
    which does not meet any of the quantitative thresholds for determining a
    reportable segment.
 
     As of and for the three months ended March 31, 1998
 
<TABLE>
<CAPTION>
                                           CGA           CGAIM          OTHER          TOTAL
                                       ------------    ----------    -----------    ------------
<S>                                    <C>             <C>           <C>            <C>
REVENUES
Net premiums earned..................  $  1,071,135    $       --    $        --    $  1,071,135
Net investment income................     1,840,037         6,103         42,115       1,888,255
Net realized gains...................      (242,194)           --             --        (242,194)
Management fees......................            --       189,056             --         189,056
TOTAL REVENUES.......................                                                  2,906,252
EXPENSE ITEMS
Operating expenses...................       199,568     2,384,063        480,232       3,063,863
Acquisition Costs....................        53,245            --             --          53,245
Commitment Fees......................       147,945            --             --         147,945
Excess of loss facility..............        50,000            --             --          50,000
Losses and loss adjustment
  expenses...........................       195,000            --             --         195,000
TOTAL EXPENSES.......................                                                  3,510,053
ASSETS
Total Assets.........................   134,936,068     2,403,308     11,145,695     148,485,071
</TABLE>
 
                                       14
<PAGE>   17
                                CGA GROUP, LTD.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following are reconciliations of reportable segment revenues, expenses
and assets to the Company's consolidated totals in the financial statements.
Depreciation expense is included in operating expenses.
 
<TABLE>
<CAPTION>
                                                           THREE MONTHS      THREE MONTHS
                                                              ENDED             ENDED
                                                          MARCH 31, 1999    MARCH 31, 1998
                                                          --------------    --------------
<S>                                                       <C>               <C>
REVENUES
Total revenues for reportable segments..................   $  6,110,199      $  2,906,252
Elimination of intersegment revenues....................       (59,827)                --
                                                           ------------      ------------
Total consolidated revenues.............................   $  6,050,372      $  2,906,252
                                                           ============      ============
EXPENSES
Total expenses for reportable segments..................   $  3,982,187      $  3,510,053
Elimination of intersegment operating expenses..........       (59,827)                --
                                                           ------------      ------------
Total consolidated expenses.............................   $  3,922,360      $  3,510,053
                                                           ============      ============
ASSETS
Total assets for reportable segments....................   $279,070,819      $148,485,071
Intercompany loans......................................   (10,500,000)       (6,100,000)
Other intercompany balances.............................    (2,922,097)                --
                                                           ------------      ------------
Total consolidated assets...............................   $265,648,722      $142,385,071
                                                           ============      ============
</TABLE>
 
12.  TAXATION
 
     The Company and CGA, which are domiciled in Bermuda, have received from the
Minister of Finance of Bermuda an assurance under the Exempted Undertakings Tax
Protection Act, 1966, as amended, of Bermuda, that generally protects them from
incurring taxation by Bermuda tax authorities until March 28, 2016. Since the
Company and CGA are not engaged in a trade or business in the U.S. there should
be no U.S. income taxes due, however, CGA does file protective U.S. income tax
returns. CGAIM is subject to U.S. taxation at regular corporate tax rates, but
has tax losses carried forward of approximately $7.65 million and $5.3 million
as at December 31, 1998 and 1997, respectively, for which no benefit has been
recorded in the financial statements. These tax loss carry-forwards expire in
2013 and 2012, respectively.
 
13.  SUBSEQUENT EVENTS
 
     On April 14, 1999, the credit support arrangements referred to in footnote
6 were terminated in their entirety. In connection with such termination, two
subsidiaries of SG Holdings received a refund of premium totaling approximately
$29.5 million. On April 16, 1999 a portion of these funds were used to repay the
$25 million note to CGA referred to in footnote 3. Also on April 16, 1999 the $5
million note payable by Cobalt to CGA was assigned by CGA to the Company. The
effect of these transactions was to increase claims paying resources at CGA by
$30 million.
 
     On April 26, 1999 the Company sold 973,483 shares of Series C Preferred
Stock to employees of the Company and its subsidiaries. The shares were sold for
$1.20 each, for a total of $1.2 million. The shares were 90% financed by the
Company at 7% per annum with equal principal installments due annually over a
three-year period.
 
                                       15
<PAGE>   18
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
 
     The following discussion should be read in conjunction with, and is
qualified in its entirety by, the consolidated financial statements of the
Company and the related notes thereto included elsewhere in this report.
 
GENERAL
 
     CGA Group, Ltd. (the "Company"), a holding company, was incorporated in
Bermuda on June 21, 1996. The Company has two wholly-owned subsidiaries.
Commercial Guaranty Assurance, Ltd. ("CGA"), was incorporated in Bermuda on
October 22, 1996. CGA is licensed as a class 3 insurer under the Insurance Act
1978 of Bermuda (the "Act") which authorizes it to carry on insurance business
of all classes in or from within Bermuda subject to its compliance with the
solvency margin, liquidity ratio and other requirements imposed on it by the
Act. CGA has a "Triple-A" "claims paying ability" rating from Duff & Phelps
Credit Rating Company ("DCR") and has also been rated in the highest rating
category assigned by each of the two Canadian rating agencies, Dominion Bond
Ratings Service and Canadian Bond Ratings Service. CGA issues financial guaranty
insurance policies, which are the functional equivalent of direct-pay letters of
credit, to insure payment of interest, principal and other amounts payable in
respect of notes, securities, and other financial obligations. CGA Investment
Management, Inc. ("CGAIM") was incorporated in Delaware, U.S.A. in July 1996 by
the founders of the Company and was acquired at nominal cost to the Company on
June 9, 1997. CGAIM did not commence operations until after its acquisition by
the Company. CGAIM is registered as an investment advisor with the United States
Securities and Exchange Commission under the Investment Advisors Act of 1940, as
amended. CGAIM provides investment management and financial advisory services
primarily to specialized investment vehicles and for the U.S. and international
structured finance markets. The Company and its subsidiaries were inactive until
June 17, 1997, on which date the Company's private placement offering was
completed and the Company was recapitalized with (i) two classes of preferred
stock totaling $105 million, (ii) common stock totaling $45.5 million and (iii)
commitments to purchase $60 million of additional preferred stock upon the
occurrence of certain events.
 
RESULTS OF OPERATIONS
 
     Total revenues for the quarter ended March 31, 1999 were $6.1 million, of
which $3.1 million was from financial guaranty insurance premiums, $1.1 million
was from investment management and advisory fees, $1.7 million was from
investment income and $0.2 million was from net realized gains on the sale of
investments. Total revenues for the quarter ended March 31, 1998 were $2.9
million, of which $1.1 million was from financial guaranty insurance premiums,
$0.2 million was from investment management and advisory fees, $1.8 million was
from investment income minus $0.2 million from net realized losses on the sale
of investments.
 
     Net premiums earned were derived from $3.5 million of gross premiums
written, of which $0.4 million were ceded under reinsurance agreements.
 
                                       16
<PAGE>   19
 
     The amount of CGA's insured portfolio was $1.6 billion net par as of March
31, 1999. The weighted average term of the insured securities at March 31, 1999
is approximately 11 years. The following table shows the net par insured
obligations at March 31, 1999 and December 31, 1998 by asset type:
 
<TABLE>
<CAPTION>
                                                                 1999          1998
                                                              ----------    ----------
                                                              (IN 000'S)    (IN 000'S)
<S>                                                           <C>           <C>
Real estate investment trust debt...........................  $  376,073    $  381,777
Consumer asset-backed securities............................     454,646       456,521
Corporate asset-backed securities...........................     303,208       270,612
Commercial mortgage-backed securities.......................     215,501       185,754
Sovereign debt..............................................     120,000       120,000
Corporate debt..............................................      75,000        75,000
REIT Preferred stock........................................      70,000        70,000
                                                              ----------    ----------
Total.......................................................  $1,614,428    $1,559,664
                                                              ==========    ==========
</TABLE>
 
     The following table presents the credit ratings of the above assets, based
on net par outstanding at March 31, 1999 and December 31, 1998:
 
<TABLE>
<CAPTION>
                                                              1999    1998
                                                              ----    ----
<S>                                                           <C>     <C>
"AAA".......................................................    5%      4%
"AA"........................................................    3%      3%
"A".........................................................   14%     12%
"BBB".......................................................   67%     67%
"BB"........................................................    8%     11%
Not rated...................................................    3%      3%
                                                              ---     ---
Total.......................................................  100%    100%
                                                              ===     ===
</TABLE>
 
     The portfolio currently includes one problem credit consisting of four
charged-off credit card receivable transactions. These transactions comprise
three percent of CGA's net par insured portfolio as of March 31, 1999. CGA has
established a case basis reserve for this exposure which is more fully described
below.
 
     During the first quarter of 1999 the par value of CGAIM's assets under
management increased from $1.8 billion to $1.9 billion. CGAIM generally earns a
management fee of .25% per annum on the average market value of the assets under
its management.
 
     Net investment income is presented after deducting the cost of external
investment management fees which totaled $20,000 for the quarter ended March 31,
1999 and $100,795 for the quarter ended March 31, 1998. Unrealized losses on the
investment portfolio as of March 31, 1999 were $0.8 million. The average yield
on the investment portfolio was 5.6% as of March 31, 1999.
 
     Operating expenses for the quarter ended March 31, 1999 were $3.3 million
compared to $3.1 million for the quarter ended March 31, 1998. These costs are
primarily personnel, legal, and administrative.
 
     In October, 1998, the credit ratings on asset-backed securities issued by
various trusts established and serviced by Commercial Financial Services Inc.
("CFS"), a credit-card debt collection company, were withdrawn by the three
credit rating companies that rate the securities issued by such trusts (the "CFS
Securities"). The withdrawal of said ratings was in response to allegations of
accounting and other irregularities at CFS. The rating agencies, investors and
insurers, as well as the United States Securities and Exchange Commission have
commenced an investigation into these allegations. Clients of CGA own
approximately $199 million par amount of CFS Securities, which exposure has been
guaranteed by CGA. CGA has reinsured approximately $152 million par amount of
this exposure, leaving CGA with a net exposure of approximately $47 million par
amount as of March 31, 1999. In 1998, CGA recorded a case basis reserve in
respect of the CFS Securities in the amount of $20.8 million. This amount
represents Management's best estimate of potential losses in respect of the CFS
Securities at this time.
 
                                       17
<PAGE>   20
 
SUMMARY OF OPERATING SEGMENTS
 
     The Company has two reportable segments, CGA and CGAIM. CGA issues
financial guaranty insurance policies and CGAIM provides investment management
and advisory services. The tables below present selected financial information
for each of the operating segments:
 
     As of and for the three months ended March 31, 1999:
 
<TABLE>
<CAPTION>
                                   CGA           CGAIM        OTHER(A)         TOTAL
                               ------------    ----------    -----------    ------------
<S>                            <C>             <C>           <C>            <C>
REVENUES
Net premiums earned..........  $  3,082,046    $       --    $        --    $  3,082,046
Net investment income........     1,651,857        16,972          2,672       1,671,501
Net realized gains...........       151,566            --             --         151,566
Management fees..............            --     1,145,259             --       1,145,259
Intersegment revenue.........            --        59,827             --          59,827
TOTAL REVENUES...............                                                  6,110,199
EXPENSE ITEMS
Operating expenses...........       363,383     2,627,079        345,642       3,336,104
Acquisition costs............       148,138            --             --         148,138
Commitment fees..............       147,945            --             --         147,945
Excess of loss facility......        50,000            --             --          50,000
Losses and loss adjustment
  expenses...................       300,000            --             --         300,000
TOTAL EXPENSES...............                                                  3,982,187
ASSETS
Total assets.................   244,118,686     3,644,229     31,307,904     279,070,819
</TABLE>
 
---------------
(a) The "other" segment is comprised of CGA Group, Ltd., the holding company,
    which does not meet any of the quantitative thresholds for determining a
    reportable segment.
 
     As of and for the three months ended March 31, 1998:
 
<TABLE>
<CAPTION>
                                           CGA           CGAIM          OTHER          TOTAL
                                       ------------    ----------    -----------    ------------
<S>                                    <C>             <C>           <C>            <C>
REVENUES
Net premiums earned..................  $  1,071,135    $       --    $        --    $  1,071,135
Net investment income................     1,840,037         6,103         42,115       1,888,255
Net realized gains...................      (242,194)           --             --        (242,194)
Management fees......................            --       189,056             --         189,056
TOTAL REVENUES.......................                                                  2,906,252
EXPENSE ITEMS
Operating expenses...................       199,568     2,384,063        480,232       3,063,863
Acquisition Costs....................        53,245            --             --          53,245
Commitment Fees......................       147,945            --             --         147,945
Excess of loss facility..............        50,000            --             --          50,000
Losses and loss adjustment
  expenses...........................       195,000            --             --         195,000
TOTAL EXPENSES.......................                                                  3,510,053
ASSETS
Total Assets.........................   134,936,068     2,403,308     11,145,695     148,485,071
</TABLE>
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company initially capitalized CGA with $125 million. On March 31, 1999,
the Company contributed an additional $27.2 million to CGA using proceeds from
the sale of Series C Preferred Stock.
 
                                       18
<PAGE>   21
 
Alliance Capital Management Corporation manages CGA's entire investment
portfolio. These funds are invested in foreign corporate and government debt
securities which are rated "Double-A" or higher and are denominated in U.S.
dollars. The portfolio maintains a weighted average duration of two to five
years. CGAIM was initially capitalized with $3 million. It has required funding
from the Company since its commencement of operations totaling $11 million to
cover its operations. It is expected to require additional funding in 1999 and
2000 while it continues to build its assets under management to generate
sufficient fee income to cover its operations. On a consolidated basis, the
Company generated $2.6 million of cash from operating activities during the
quarter ended March 31, 1999, compared to $1.3 million for the quarter ended
March 31, 1998. This doubling of cash flow from operations is the result of the
Company's rapid growth during this period.
 
     The Company used $1.9 million of net cash in investing activities during
the quarter ended March 31, 1999, compared to $4.5 million in the first quarter
of 1998. Cash flows from financing activities in the quarter ended March 31,
1999 result from the net proceeds of the Company's issuance of 43,997,863 shares
of Series C Preferred Stock, which raised net proceeds of $49.8 million.
 
     The Company does not expect to pay cash dividends to its shareholders.
CGA's Board of Directors has passed a resolution that CGA will not declare or
pay cash dividends during the first five years of operations. After such
five-year period, CGA intends to comply with dividend restrictions, if any,
imposed by DCR, subject to covenants contained in the subscription agreements
for the various classes of the Company's stock. In addition, CGA's dividend
payments are subject to certain limitations under Bermudian insurance
regulations that require minimum solvency margins and liquidity ratios.
 
     CGA monitors its exposure on a routine basis and stays in close contact
with DCR to ensure that its "Triple-A" rating is maintained. CGA has a $20
million excess of loss reinsurance facility agreement and can also arrange
reinsurance on an as needed basis to manage its exposure. The Company also has
commitments which expire June 17, 2002, from certain institutional shareholders
to purchase an aggregate of $60 million of Series B Preferred Stock. Should
those commitments be called upon, the proceeds would likely be used to increase
the capital of CGA. The commitments must be funded in the event that DCR
notifies the Company at least 45 days prior to June 17, 2002 that CGA's rating
will otherwise be downgraded below a "Triple-A" rating.
 
SUBSEQUENT EVENTS
 
     On April 14, 1999, the credit support arrangements referred to in footnote
6 were terminated in their entirety. In connection with such termination, two
subsidiaries of SG Holdings received a refund of premium totaling approximately
$29.5 million. On April 16, 1999, a portion of these funds were used to repay
the $25 million note to CGA referred to in footnote 3. Also on April 16, 1999,
the $5 million note payable by Cobalt to CGA was assigned by CGA to the Company.
The effect of these transactions was to increase claims paying resources at CGA
by $30 million.
 
     On April 26, 1999 the Company sold 973,483 shares of Series C Preferred
Stock to employees of the Company and its subsidiaries. The shares were sold for
$1.20 each, for a total of $1.2 million. The shares were 90% financed by the
Company at 7% per annum with equal principal installments due annually over a
three-year period.
 
YEAR 2000
 
     The Company's primary uses of software systems are for corporate and
investment portfolio accounting, as well as investment underwriting and
analysis. The Company's current systems have recently been purchased or leased,
as the Company commenced operations in June 1997, and are believed to be Year
2000 compliant. Therefore, the Company believes that the risk of Year 2000
compliance is not significant as it relates to its computer software systems.
The Company has incurred no material costs to date and expects to incur no
material costs in the future to make its systems Year 2000 compliant.
 
                                       19
<PAGE>   22
 
     The Company is also in the process of reviewing its exposure to Year 2000
issues resulting from its vendors' computer systems. The Company has contacted
vendors regarding the state of their remediation activities for material Year
2000 issues. The Company does not expect that there will be material disruptions
to its business or material costs associated with any Year 2000 disruption by
its vendors. However, the cost and timing of third party Year 2000 compliance is
not within the Company's control and no assurances can be given with respect to
the cost or timing of such efforts or the potential effects of any failure to
comply. The Company will continue to monitor Year 2000 compliance and formal
contingency plans will be formulated if the Company identifies specific areas
where there is a substantial risk of Year 2000 problems occurring. No such areas
are identified as of this date.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
     On June 15, 1998, the FASB issued Statement of Financial Accounting
Standard No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities" effective for fiscal years beginning after June 15,
1999.  SFAS 133 requires all derivatives to be recognized in the statement of
financial position as either assets or liabilities and measured at fair value.
The Company does not believe the application of SFAS 133 will have a material
effect on its consolidated financial statements.
 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
RISK MANAGEMENT
 
     In the ordinary course of business, the Company, through its subsidiaries,
manages a variety of risks. Of these, the primary risk is the credit risk taken
by CGA in respect of obligations insured by it. Other material risks include
those in respect of credit derivatives, liquidity, capital markets, exposure to
reinsurers, operational and legal. These risks are identified, measured and
monitored through a variety of control mechanisms, which are in place at
different levels throughout the organization.
 
CREDIT RISK
 
     The most significant risk to which the Company is exposed is credit risk.
Credit risk occurs at a number of levels, primarily in respect of the securities
and other financial obligations insured by CGA, but also in connection with
counterparties to interest rate and currency swaps, credit derivatives, and
liquidity providers.
 
     The primary credit risk to which CGA is exposed is the risk of default on
the underlying securities or other financial obligations which it has
guaranteed. Under its financial guaranty insurance policy, CGA would generally
be liable to pay interest, principal and other amounts in respect of the insured
obligation as these become due for payment in accordance with the payment terms
of the underlying obligation, without giving effect to any acceleration thereof.
In the event the issuer of a CGA-insured security defaults on its payment
obligations, under its policy CGA would be obligated to make all scheduled
payments when due for payment. Under its insurance policies, CGA would generally
have the right, but not the obligation, to repay the defaulted security on an
accelerated basis. Upon making payment in respect of a defaulted security, CGA
would generally be subrogated to all rights and remedies of the issuer of the
security in respect of any related collateral or other security, to the extent
of the payment made by CGA.
 
CREDIT DERIVATIVES
 
     CGA has exposure to counterparties in respect of certain credit
derivatives. CGA has entered into default swaps in respect of certain sovereign
and corporate exposures. CGA has also guaranteed the payment obligations of
certain subsidiaries of SG Holdings and Cobalt Holdings under default swaps and
total rate of return swaps which have been entered into by such vehicles.
 
                                       20
<PAGE>   23
 
  Default Swaps
 
     Default swaps are credit derivatives which enable the owner of a security
to transfer credit risk to another party. CGA has entered into default swaps
directly with banks and investment banks and has also guaranteed the obligations
of certain subsidiaries of SG Holdings and Cobalt Holdings pursuant to default
swaps.
 
     The party taking the credit exposure in a default swap receives a net
payment that is the economic equivalent of a premium. Unless a credit event
occurs, the swap typically terminates on the maturity date of the reference
security, and there is no termination payment at maturity. Credit events relate
to the reference security and typically include: (i) bankruptcy, (ii) failure to
pay, (iii) repudiation, (iv) restructuring, and (v) cross default or
cross-acceleration. If a credit event occurs, CGA generally would be obligated
to purchase the reference security at par plus accrued interest. In some cases,
CGA would have the additional option of cash settlement, whereby CGA can make a
payment equal to the difference between the market value of the security at the
time, and the par value of the security.
 
     Principal credit risks associated with default swaps include: (i) credit
risk -- a loss may be incurred pursuant to a credit event in respect of the
underlying or reference security; (ii) market value risk -- this risk is limited
to cash settlement or to the value of the reference security following a
physical settlement upon a credit event; (iii) counterparty bankruptcy
risk -- from CGA's perspective, the counterparty's fixed payments would no
longer be received; however, the swap would terminate and CGA would no longer
have the credit exposure to the reference security; (iv) liquidity risk -- if a
credit event occurs, CGA must fund the purchase of the reference security. The
cash amount required may be reduced in the event of a cash settlement, but this
option may not be attractive if the reference security is illiquid or is marked
with an unattractive price; and (v) assignment risk -- if the reference security
carries certain rights, remedies, or obligations (such as voting rights related
to a bank loan), these should be assignable in the event of a physical
settlement. The loan documents for the reference security may not allow this.
The loan documents may also obligate the assignee to fund additional amounts
under the loan, which CGA may not be able to do in the required time period.
 
  Total Rate of Return Swaps
 
     Total rate of return swaps ("TRORs") are credit derivatives that are used
by certain subsidiaries of SG Holdings and Cobalt Holdings to assume credit
exposure without using cash. Effectively, the investment vehicle receives all
the economic benefits of owning the investment without financing it on balance
sheet. At the end of the TROR's term (typically one year), the investment
vehicle must purchase the underlying bond at the amount that had been financed
less any principal payments received ("Notional"). Any market value appreciation
or decline is for the investment vehicle's account.
 
     These swaps are either provided by investment banks selling the bond or
through a swap line provided by certain institutional lenders to St. George and
Cobalt. The TROR counterparty benefits from a CGA surety bond guaranteeing the
investment vehicle's obligations under the contract. The counterparty also
retains an ownership interest in the specific bond that is being financed. In
general, the investment vehicle's investment guidelines require no less than a
"Double A minus" or Aa3 rating from S&P or Moody's for eligible counterparties.
 
     There are three principal risks associated with TRORs: (i) refinancing
risk -- if at the termination date the counterparty does not roll its exposure
to the investment vehicles at the then current Notional or financing rate, then
the bond will need to be refinanced at the then available market value and
financing rates; (ii) market value risk -- many TRORs (but not all) have market
value triggers ranging from 5% to 10% of the Notional. If the market value of
the bond drops below the relevant dollar price, then either (a) cash collateral
will need to be posted (normally enough to bring the collateral package back to
par), or (b) an early termination event can be declared by the counterparty; and
(iii) counterparty bankruptcy risk -- the investment vehicle does not have a
security interest in the underlying bond that is being financed. In the event of
the counterparty's bankruptcy, the investment vehicle would have only an
unsecured claim against the counterparty. Under its surety bond, CGA would
typically guarantee any payment default by St. George, Cobalt or other
investment vehicle under the TROR, and would thus be liable to cover any payment
default by the investment vehicle thereunder.
                                       21
<PAGE>   24
 
LIQUIDITY
 
     The liabilities of certain CGA-insured investment vehicles (e.g., St.
George Investments I, Ltd. ("SGI") and St. George Investments III, Ltd. ("SG3"))
do not provide term funding for the assets owned by these vehicles. This could
result in incremental exposure to CGA in the event of an inability to refinance
an asset at the maturity date of the associated liability, especially when the
asset's market value is lower than its acquisition cost. Such inability to
refinance could result in a claim against CGA in the amount of the market value
loss.
 
     As loans, notes and TRORs (liabilities) if the CGA-guaranteed investment
vehicles mature, the investment vehicle will attempt to refinance the liability
with the existing lender or issue a new CGA-insured liability to refinance the
maturing liability. In vehicles such as SGI and SG3, if the 364-day facility is
not renewed, the facility rolls into a four-year term loan with 25% annual
amortization. Currently, for SGI (since the facility was not rolled and SGI is
now a 4-year term loan with an outstanding principal amount of approximately
$300 million) the assets will be refinanced or liquidated as the term loan
amortizes. CGA remains liable for current interest and principal when due in
accordance with the stated amortization schedule on such term loan.
 
     In the event a CGA-insured liability cannot be issued to refinance a
maturing liability, CGA will (i) direct the investment vehicle to sell the
related asset with or without CGA insurance or (ii) attempt to arrange for the
purchase of the asset by another CGA-insured investment vehicle. Refinance
options for maturing TROR include: (i) refinance or "term out" the full amount
of the maturing TROR with the existing TROR counterparty; (ii) refinance the
maturing TROR with the existing TROR counterparty or new counterparty at the
related security's market value; (iii) sell the asset with or without a CGA
guaranty; and (iv) attempt to arrange for the purchase of the asset by another
CGA-insured investment vehicle. In the case of (ii), (iii) and (iv), CGA would
be liable for any market value shortfall not otherwise covered by the terms of
the refinancing.
 
     The Company had exposure totaling approximately $425 million related to the
timely payment of interest and principal on a loan to SGI. The loan is payable
in four equal annual installments with the first installment due November 11,
1999. In order to meet this obligation, CGAIM, as the advisor to SGI, advised
SGI to sell a portion of the underlying securities to special purpose vehicles
that repackaged the securities as follows. Underlying securities were sold to
two newly organized special purpose vehicles, financed by three classes of
certificates. The two most senior classes of certificates, representing
approximately 84% of the total, were purchased by a third party who is also an
institutional investor in the Company. The Company issued a 5.9% pool policy
related to the underlying pool of securities. This transaction closed in April,
1999. The proceeds from this sale were sufficient to meet SGI's obligations due
in November, 1999.
 
CAPITAL MARKETS
 
  Spread Risk (Credit Spread and Swap Spread Widening/Compression)
 
     The market value of a fixed income asset has two components, duration risk
and credit spread risk. Duration risk is the risk of change in price of a
fixed-rate bond as a result of changes in interest rates. St. George and Cobalt
investment vehicles, which generally borrow at floating, LIBOR based rates, are
required by their investment guidelines to hedge this risk, through interest
rate swaps, to minimize fluctuations in the market value of their portfolios
resulting from movements in the Treasury market. Such interest rate swaps
effectively convert fixed rate assets into synthetic floating rate bonds. Credit
spread risk is the risk resulting from change in price of any non-government
bond as a result of a change in the market's willingness to hold the issuer's
risk. The Company believes that the change in the price of a bond due to credit
spread movements (risk premium) cannot be hedged in today's market for the type
of assets in the St. George and Cobalt investment portfolios. Credit derivative
contracts with market value triggers are also subject to credit spread risk.
 
                                       22
<PAGE>   25
 
     The following held true for spread volatility: (i) the shorter life of the
asset, the lower the credit spread volatility; (ii) higher rated assets have
lower credit spread volatility than lower rated assets; and (ii) assets with
better liquidity (tighter bid/ask spread) have lower credit spread volatility.
 
     The market value volatility of a portfolio of assets and/or derivative
contracts is simply the weighted average of the volatility of the individual
assets. Credit spreads move for the following reasons: (i) underlying changes in
the credit quality of the securities; (ii) supply/demand equation; and (iii)
absences of liquidity, such as occurred in the capital markets in the second
half of 1998.
 
  Interest Rate Movements
 
     The market value of fixed rate bonds fluctuates as underlying interest
rates change (parallel shifts and/or twists). This is commonly measured by the
modified duration of the bond. CGAIM manages the duration risk of the assets in
its clients' portfolios by swapping the fixed rate cash flows into LIBOR
floating rate basis. The interest rate hedge is generally put on simultaneously
with the purchase by the client of the fixed rate bond. CGAIM monitors the
interest rate risks as agreed with each client and set forth in the investment
guidelines for such client. Pursuant to the client's investment guidelines, each
client's investment portfolio must be managed so as to remain within certain
parameters in this market risk category.
 
  Interest Rate Swaps
 
     CGA-insured investment vehicles are required by their respective investment
guidelines to swap all fixed rate investment to LIBOR. This is intended to
ensure that the vehicles lock-in the intended spread on their respective
investments and have sufficient resources to pay interest on their respective
financings. The bankruptcy of a provider of an interest rate swap could leave
CGA exposed to the marked-to market value of the interest rate swap. In general,
the investment guidelines for the various St. George and Cobalt vehicles require
that swap counterparties be rated not less than "Single-A" by one or more
nationally recognized credit agencies. Certain of the St. George and Cobalt
vehicles have higher or additional requirements for swap counterparties.
 
                             ST. GEORGE AND COBALT
 
                    INTEREST RATE SWAP COUNTERPARTY EXPOSURE
 
                              AS OF MARCH 31, 1999
 
<TABLE>
  <S>         <C>            <C>
  ----------------------------------------------
         DEBT RATINGS
  ----------------------------------------------
      S&P        MOODY'S       NOTIONAL ($MM)
  ----------------------------------------------
      AAA          Aaa                9
  ----------------------------------------------
      AAA          Aa1               35
  ----------------------------------------------
      AA+          Aa1               20
  ----------------------------------------------
      AA           Aa2               124
  ----------------------------------------------
      AA-          Aa3               82
  ----------------------------------------------
      A+           Aa2               85
  ----------------------------------------------
      A+           Aa3               124
  ----------------------------------------------
      A+            A1               400
  ----------------------------------------------
                   Aa3                9
  ----------------------------------------------
</TABLE>
 
     Counterparty derivative exposures are a function of the notional amount and
tenor of the derivative contracts outstanding, as well as the yield curve. Since
the future paths of the yield curve are probabilistic, there are a number of
analytical approaches to measure the credit exposures from interest rate swaps.
The Company applies a stressed (3-Sigma) expected mark-to-market approach and
aggregates counterparty risks
 
                                       23
<PAGE>   26
 
across the CGA-guaranteed investment vehicles and swap contracts. The "starting
point" for the 3-Sigma measurement is the current marked-to-market value of each
derivative contract.
 
     Most of the long dated interest rate swaps to which St. George and Cobalt
are party have "true-up" provisions which allow either counterparty to terminate
a swap contract in five years. This provision provides both counterparties with
a credit risk mitigant. At the current time, CGA-guaranteed vehicles have over
$700 million of long dated interest rate swaps with this type of provision.
 
  Spread Deterioration Risk
 
     Certain of the St. George and Cobalt investment vehicles fund their
LIBOR-based portfolios by borrowings under asset backed commercial paper
facilities. This could subject the vehicle to basis risk if LIBOR and asset
backed commercial paper rates diverge These two indices normally trade with a
high degree of correlation; i.e. asset backed commercial paper generally yields
around LIBOR minus 5 basis points. However, in times of market disruption, such
as occurred in September and October of 1998, asset-backed commercial paper
widened to as much as LIBOR plus 20 basis points. To the extent that the
LIBOR-based cash flow generated by such St. George and Cobalt investment
vehicles is insufficient to cover such vehicles' increased funding cost due to
excessive widening of asset-backed commercial paper rates, CGA would generally
be liable for any shortfall pursuant to the insurance issued by it.
 
REINSURANCE
 
     In the ordinary course of its business, CGA cedes exposures under various
reinsurance contracts primarily designed to minimize losses from large risks and
to protect capital and surplus. The reinsurance of risk does not relieve the
ceding insurer of its original liability to policyholders. In the event that any
or all of the reinsurers were unable to meet their obligations to CGA under
these reinsurance arrangements, CGA, would be liable for such defaulted amounts.
CGA's exposure to reinsurers was $595 million as of March 31, 1999. All such
exposure is with counterparties which are institutional shareholders (or
affiliates of institutional shareholders) of the Company.
 
     CGA's exposure relating to its reinsurers is the joint probability of both
an asset and a reinsurer defaulting at the same time. Generally speaking, this
risk is considered to be non-correlated, and is therefore considered to be a low
probability risk. Assuming that there is no correlation between the default of
an asset and a reinsurer, the probability of simultaneous default would be
product of the individual default probabilities. For example, a five year
Baa3-rated asset backed security should have a default probability of
approximately 3.7%, according to Moody's Default Study. Similarly, a Aa3 rated
reinsurer should have a five-year default probability of approximately .60%.
Therefore, the joint probability of simultaneous default would be only .02%. The
risk mitigation gained from the non-correlation of asset and counterparty is
extremely valuable and it is the basis for the capital relief provided by
reinsurance.
 
OPERATIONAL
 
     Operational risk related to the potential for loss caused by a breakdown in
information, communication and settlement systems. The Company and the
Subsidiaries attempt to mitigate operational risk by maintaining a comprehensive
system of internal controls. This includes the establishment of systems and
procedures to monitor transactions and positions, documentation and confirmation
of transactions and ensuring compliance with applicable regulations.
 
LEGAL
 
     Legal risk relates to the uncertainty of the enforceability, through legal
or judicial processes, of the obligations of the Company's and the Subsidiaries'
counterparties, including contractual provisions intended to reduce exposure by
providing for the offsetting or netting of mutual obligations. The Company seeks
to remove or minimize such uncertainties through continuous consultation with
internal and external legal advisors to analyze and understand the nature of
legal risk, to improve documentation and to strengthen transaction structure.
                                       24
<PAGE>   27
 
                          PART II.  OTHER INFORMATION
 
ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.
 
     On March 31, 1999, the Company sold to certain existing shareholders of the
Company an aggregate of 43,997,863 shares of Series C Preferred Stock for net
cash proceeds of $50,996,794.50. The sale was made pursuant to the terms of the
Company's Series C Convertible Cumulative Voting Preferred Stock Subscription
Agreement (the "Series C Preferred Stock Subscription Agreement"). 31,997,863
shares of Series C Preferred Stock were sold at $1.50 per share pursuant to the
basic subscription privilege (and overallotments with respect thereto) and
12,000,000 shares of Series C Preferred Stock were sold at $0.25 per share
pursuant to the additional allotment privilege (and overallotments with respect
thereto). Shares of Series C Preferred Stock may be converted into shares of
common stock, par value $.01 per share, of the Company (the "Common Stock") on a
one-for-one basis at the holder's option at any time, and are mandatorily
convertible into shares of Common Stock on a one-for-one basis upon the
occurrence of certain events. The net proceeds from the transaction will be used
for general corporate purposes and to make capital investments in the Company's
wholly owned subsidiary, Commercial Guaranty Assurance, Ltd.
 
     In connection with the consummation of the transactions contemplated by the
Series C Preferred Stock Subscription Agreement, on March 31, 1999, all issued
and outstanding shares of Series B Preferred Stock were converted into shares of
Common Stock, at a conversion ratio of 11.816 shares of Common Stock per share
of Series B Preferred Stock. The conversion ratio was based on an assumed value
of $3.00 per share of Common Stock. As a result of the conversion, 18,905,648
new shares of Common Stock were issued.
 
     The Company has amended its Bye-laws (including the Appendices thereto) as
of March 31, 1999, to reflect the new capital structure of the Company as a
result of the consummation of the transactions described above.
 
     The Company, the holders of the Common Stock and the holders of the Series
C Preferred Stock have entered into the Shareholders Agreement, dated as of June
12, 1997, as amended and restated as of March 31, 1999 (the "Amended and
Restated Shareholders Agreement"), to reflect the new capital structure of the
Company as a result of the consummation of the transactions described above, and
to add the new holders of Series C Preferred Stock as parties thereto with
respect to the shares of Series C Preferred Stock.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
     On January 27, 1999, the Company held a Special General Meeting for all
shareholders, which was both preceded and followed by meetings of its Board of
Directors. The purpose of the meeting was primarily to approve and authorize the
seeking of additional capital from existing investors and one or more third
party investors. During the Special General Meeting the following resolutions
were approved by the affirmative vote representing 98.8% of the shareholder
votes entitled to be cast at the meeting:
 
     - That the authorized share capital of the Company be increased from
       $412,000 to $3,412,000 by the creation of an additional 300,000,000
       shares of a par value of $.01 per share;
 
     - That the Company create a new series of preference shares being the
       Series C Preferred Stock and offer up to $63 million of such stock to
       existing holders of the Company's Series B Preferred Stock and Common
       Stock (the "Rights Offering");
 
     - That concurrent with the closing of the Rights Offering, all outstanding
       shares of Series B Preferred Stock including accrued dividends thereon,
       shall be converted into shares of Common Stock based on a value of $3 per
       share of Common Stock;
 
     - That the Company amend the terms of the Series B Preferred Stock such
       that the dividend rate applicable to the shares of Series B Preferred
       Stock which may be issued in the future upon exercise of the Unit
       Investors Capital Commitments or otherwise will not be greater than 7%
       per annum, that any such Series B Preferred Stock shall rank junior to
       the Series C Preferred Stock in all respects, and that any such Series B
       Preferred Stock shall not be entitled to voting rights.
 
                                      II-1
<PAGE>   28
 
     - That the number of Directors of the Company be increased from 13 to 15 by
       the creation of two new vacancies to be filled by nominees elected by the
       holders of the newly issued Series C Preferred Stock of the Company.
 
     No votes were cast against, and 543,734 votes were withheld with respect to
the foregoing resolutions at the Special General Meeting.
 
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.
 
    (a) Exhibits
 
     The exhibits listed on the accompanying Index to Exhibits are filed as part
of this Report.
 
    (b) Reports on Form 8-K
 
     The Company filed no Current Reports on Form 8-K during the quarter ended
March 31, 1999. On April 8, 1999, the Company filed a Current Report on Form 8-K
with respect to the completion of the sale of 43,997,863 shares of Series C
Preferred Stock for net cash proceeds of $50,996,794.50.
 
                                      II-2
<PAGE>   29
 
                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
 
                                          CGA GROUP, LTD.
                                          Registrant
 
                                          /s/  JAMES R. REINHART
 
                                          --------------------------------------
                                               JAMES R. REINHART
                                             CHIEF FINANCIAL OFFICER
                                               (PRINCIPAL FINANCIAL OFFICER)
 
Date:  May 14, 1999
 
                                      II-3
<PAGE>   30
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
  EXHIBIT NUMBER                             DESCRIPTION
  --------------                             -----------
<C>                  <S>
        3.1          Memorandum of Association and Certificate of Incorporation
                     of CGA Group, Ltd., incorporated herein by reference to
                     Exhibit 3.1 to the Registration Statement on Form S-1 (No.
                     333-7944) of the Company (the "Registration Statement")
        3.2          Amended and Restated Bye-laws of CGA Group, Ltd.,
                     incorporated herein by reference to Exhibit 4.2 to the
                     Company's Current Report on Form 8-K filed on April 8, 1999
                     (the "April 8, 1999 8-K")
        3.3          Amended and Restated Appendices to Bye-laws of CGA Group,
                     Ltd., incorporated herein by reference to Exhibit 4.3 to the
                     April 8, 1999 8-K
        4.1          CGA Group, Ltd. Shareholders Agreement, dated as of June 12,
                     1997, as amended and restated as of March 31, 1999,
                     incorporated herein by reference to Exhibit 4.4 to the April
                     9, 1999 8-K
       10.1          Series A Subscription Agreement dated as of June 9, 1997, by
                     and among CGA Group, Ltd. and the holders of the Series A
                     Preferred Stock, incorporated herein by reference to Exhibit
                     10.1 to the Registration Statement
       10.2          Common Stock Warrant Acquisition Agreement, dated as of June
                     9, 1997, by and among CGA Group, Ltd. and the holders of the
                     Series A Preferred Stock, incorporated herein by reference
                     to Exhibit 10.2 to the Registration Statement
       10.3          Investment Units Subscription Agreement dated as of June 4,
                     1997, by and among CGA Group, Ltd. and the holders of the
                     Investment Units, incorporated herein by reference to
                     Exhibit 10.3 to the Registration Statement
       10.4          Right of First Refusal Agreement dated as of June 17, 1997,
                     by and between CGA Group, Ltd. and Capital Reinsurance
                     Company, incorporated herein by reference to Exhibit 10.4 to
                     the Registration Statement
       10.5          Discretionary Investment Advisory Agreement, dated as of
                     December 18, 1996 between Alliance Capital Management, L.P.
                     and Commercial Guaranty Assurance, Ltd., incorporated herein
                     by reference to Exhibit 10.5 to the Registration Statement
       10.6          Investment Management Agreement dated as of December 27,
                     1996, between J.P. Morgan Investment Management Inc. and
                     Commercial Guaranty Assurance, Ltd., incorporated herein by
                     reference to Exhibit 10.6 to the Registration Statement
       10.7          Letter Agreement, dated June 17, 1997 between CGA Group,
                     Ltd. and DCR (and Attachments), incorporated herein by
                     reference to Exhibit 10.7 to the Registration Statement
       10.8          Employee Warrant Agreement, incorporated herein by reference
                     to Exhibit 10.8 to the Registration Statement
       10.9          CGA Group, Ltd. Employee Stock Warrant Plan, incorporated by
                     reference to Exhibit 10.9 to the Registration Statement
       10.10         CGA Group, Ltd. Sponsoring Investors and Founders Stock
                     Warrant Plan, incorporated herein by reference to Exhibit
                     10.10 to the Registration Statement
       10.11         Excess of Loss Agreement, dated as of June 12, 1997, by and
                     between CGA Group, Ltd. and KRE Reinsurance Ltd.,
                     incorporated herein by reference to Exhibit 10.11 to the
                     Registration Statement
       10.12         Employment Agreement, as of January 1, 1997, by and between
                     CGA Group, Ltd. and Richard A. Price, incorporated by
                     reference to Exhibit 10.12 to the Registration Statement
</TABLE>
 
                                      II-4
<PAGE>   31
 
<TABLE>
<CAPTION>
  EXHIBIT NUMBER                             DESCRIPTION
  --------------                             -----------
<C>                  <S>
       10.13         Employment Agreement, as of January 1, 1997, by and between
                     CGA Investment Management, Inc. and Jean-Michel Wasterlain,
                     incorporated herein by reference to Exhibit 10.20 to the
                     Registration Statement
       10.14         Employment Agreement, as of June 30, 1997, by and between
                     CGA Investment Management, Inc. and Michael M. Miran,
                     incorporated herein by reference to Exhibit 10.18 to the
                     Registration Statement
       10.15         Employment Agreement, as of January 1, 1997, by and between
                     CGA Investment Management, Inc. and Kem H. Blacker,
                     incorporated herein by reference to Exhibit 10.16 to the
                     Registration Statement
       10.16         Employment Agreement, as of August 1, 1997, by and between
                     CGA Investment Management, Inc. and Landon D. Parsons,
                     incorporated herein by reference to Exhibit 10.16 to the
                     1998 10-K
       10.17         CGA Group, Ltd. Founders' Common Stock Subscription
                     Agreement, dated as of June 12, 1997, among CGA Group, Ltd.,
                     CGA Funding, L.P., and certain Founders of CGA Group, Ltd.,
                     incorporated herein by reference to Exhibit 10.19 to the
                     Registration Statement
       27.1          Financial Data Schedule
</TABLE>
 
                                      II-5