ISMIE HOLDINGS INC, S-4, 1999-05-14

ISMIE HOLDINGS INC
S-4, 1999-05-14

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1999
REGISTRATION NO. 333-

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

ISMIE HOLDINGS INC.
(Exact Name of registrant as specified in its charter)

DELAWARE 6719 36-4293113
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification Number)
organization)

20 North Michigan Avenue
Suite 700
Chicago, Illinois 60602
(312) 782-2749
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)

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

Alexander R. Lerner
President and Chief Executive Officer
20 North Michigan Avenue
Suite 700
Chicago, Illinois 60602
(312) 782-2749
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

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

copies to:
John S. Chapman, Esq.
Richard A. Hemmings, Esq.
Lord, Bissell & Brook
115 South LaSalle Street
Chicago, Illinois 60603
(312) 443-0700

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement is declared effective.

If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box: / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED OFFERING PRICE PER UNIT(1) AGGREGATE OFFERING PRICE REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $0.01 10,100,000 $23.13 $233,677,000 $ 64,962
per share
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 of the Securities Act of 1933, as amended.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

ILLINOIS STATE MEDICAL INTER-INSURANCE EXCHANGE
20 NORTH MICHIGAN AVENUE
SUITE 700
CHICAGO, ILLINOIS 60602

NOTICE OF SPECIAL MEETING

A special meeting of the members of Illinois State Medical
Inter-Insurance Exchange, an Illinois reciprocal insurance exchange (the
"Exchange"), will take place at ____________, Chicago, Illinois at _______ p.m.,
Central time, on ________, 1999, for the following purpose:

To consider and vote upon a proposal to approve a Plan and Agreement of
Merger, dated as of May 5, 1999, pursuant to which the Exchange will
merge with and into ISMIE Indemnity Company, an Illinois stock insurance
company and the surviving corporation in the merger.

The purpose of the merger is to effect the conversion of the Exchange
from an Illinois reciprocal insurance exchange to an Illinois stock insurance
company.

Pursuant to the Exchange's Rules and Regulations, no other business may
be transacted at the special meeting.

Persons who were members of the Exchange at the close of business on May 5,
1999 are entitled to notice of, and eligible to vote at, the special
meeting. Each member is requested to complete, date and sign the enclosed
proxy card and Taxpayer Identification Card and return them promptly in the
enclosed pre-paid envelope whether or not you intend to attend the special
meeting. Your proxy may be revoked in the manner described in the
accompanying Proxy Statement/Prospectus at any time before it has been voted
at the special meeting.

Approval of the Agreement and Plan of Merger requires the affirmative
vote of two-thirds of the eligible members voting in person or by proxy at
the special meeting. Your vote is important!

By Order of the Board of Governors of
Illinois State Medical Inter-Insurance Exchange

[LOGO]

Irwin A. Smith, M.D.
Secretary

Chicago, Illinois
_________ , 1999

PLEASE PROMPTLY EXECUTE THE ENCLOSED PROXY CARD AND TAXPAYER
IDENTIFICATION CARD AND RETURN THEM TO THE EXCHANGE IN THE ENCLOSED
POSTAGE-PAID ENVELOPE AS SOON AS POSSIBLE WHETHER OR NOT YOU INTEND TO BE
PRESENT AT THE SPECIAL MEETING.

<PAGE>

SUBJECT TO COMPLETION
DATED __________, 1999

[ISMIE LOGO]

CONVERSION PROPOSED -- YOUR VOTE IS VERY IMPORTANT

The Illinois State Medical Inter-Insurance Exchange is converting from a
reciprocal insurance exchange to a stock insurance company. The Conversion
will be accomplished by a merger of the Exchange with and into ISMIE
Indemnity Company, a newly formed stock insurance company. Before we can
complete the Conversion, the merger must be approved by the Eligible Members
of the Exchange. We are sending you this Proxy Statement/Prospectus to ask
you to approve the Conversion by voting in favor of the merger.

In the Conversion, your membership interest in the Exchange will be
converted into the right to receive shares of stock of ISMIE Holdings Inc., a
newly formed company that will be the publicly held holding company for ISMIE
Indemnity. Your current insurance policy and coverage will not be affected
by the Conversion or your vote on the Conversion. The box below describes
how the shares of stock of ISMIE Holdings Inc. will be allocated among
Eligible Members:

- -------------------------------------------------------------------------------
ALLOCATION OF COMMON STOCK TO ELIGIBLE MEMBERS
IN THE CONVERSION

- - 9,000,000 shares of common stock will be allocated pro rata among Eligible
Members based on the ratio of each Eligible Member's Earned Premiums to
the total Earned Premiums of all Eligible Members from July 1, 1995 through
May 5, 1999.

- - 1,000,000 shares of common stock will be allocated evenly among Eligible
Members.

THE ENCLOSED GREEN RECORD CARD CONTAINS YOUR NAME AND SHOWS THE
ESTIMATED NUMBER OF SHARES OF COMMON STOCK YOU WILL RECEIVE IF THE CONVERSION
IS APPROVED AND CONSUMMATED.
- -------------------------------------------------------------------------------

ISMIE Holdings intends to list ISMIE Holdings common stock on the Nasdaq
National Market under the symbol "ISME."

YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the
special meeting in person, we urge you to review carefully the enclosed
materials, then please sign, date and mail the enclosed proxy card promptly
in the postage-paid envelope that has been provided to you for your
convenience.

<PAGE>

The date, time and place of the special meeting is:

___________, 1999
_______ p.m. Central Time
__________Chicago, Illinois

We believe that the Conversion will enhance our ability to achieve our
strategic goals by providing us greater operating flexibility, access to the
capital markets and opportunities to utilize our stock for acquisitions, and
a form of organization which offers a higher degree of regulatory certainty
than that afforded to a reciprocal insurance exchange. We therefore urge you
to approve the Conversion by voting FOR the merger.

THE BOARD OF GOVERNORS HAS DETERMINED THAT THE CONVERSION IS IN THE BEST
INTERESTS OF THE EXCHANGE AND ITS MEMBERS AND HAS APPROVED THE MERGER
AGREEMENT ON BEHALF OF THE EXCHANGE. THE BOARD OF GOVERNORS RECOMMENDS THAT
YOU VOTE FOR APPROVAL OF THE MERGER AGREEMENT.

If you have any questions or need help in completing the proxy card or
the taxpayer identification card, please call our conversion information
center at 1-888-__________ (toll free).

/s/ Harold L. Jensen

Harold L. Jensen
Chairman of the Board

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

THIS PROXY STATEMENT/PROSPECTUS PROVIDES YOU DETAILED INFORMATION ABOUT
THE CONVERSION AND THE SPECIAL MEETING. WE URGE YOU TO READ THIS ENTIRE
DOCUMENT CAREFULLY, INCLUDING IN PARTICULAR THE "RISK FACTORS" SECTION
BEGINNING ON PAGE __.

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

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.

THIS PROXY STATEMENT/PROSPECTUS IS DATED __________, 1999
AND WAS FIRST MAILED TO MEMBERS ON OR ABOUT _______, 1999

<PAGE>

If you date and mail your proxy card without indicating how you wish to
vote, your vote will be counted as a vote FOR the Conversion.

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

Illinois Insurance laws and regulations provide that no person may
acquire control of ISMIE Holdings, and thus indirect control of its insurance
subsidiary, ISMIE Indemnity Company, unless such person has obtained the
prior approval of the Illinois Director of Insurance. Under Illinois law,
any purchaser of 10% or more of the voting stock of an insurance holding
company is presumed to have acquired control of affiliated or subsidiary
insurers and must obtain the approval of the Illinois Director of Insurance
before completing the purchase.

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

WHERE YOU CAN FIND MORE INFORMATION

ISMIE Holdings Inc. (the "Company") has filed with the Securities and
Exchange Commission a Registration Statement on Form S-4 (Registration
No. 333-________) under the Securities Act of 1933, as amended, with respect to
the shares of Common Stock to be issued pursuant to the Plan and Agreement of
Merger. As permitted by the rules and regulations of the Securities and
Exchange Commission, this Proxy Statement/Prospectus, which constitutes a
part of the Registration Statement, incorporates important business and
financial information about the Exchange that is not included in or delivered
with this Proxy Statement/Prospectus.

ANY DOCUMENTS FILED BY THE EXCHANGE WITH THE COMMISSION AND INCORPORATED
BY REFERENCE (EXCLUDING EXHIBITS, UNLESS SPECIFICALLY INCORPORATED IN THIS
PROXY STATEMENT/PROSPECTUS) ARE AVAILABLE WITHOUT CHARGE UPON WRITTEN REQUEST
TO RONI PRESSLER, ASSISTANT VICE PRESIDENT OF CLAIMS, ILLINOIS STATE MEDICAL
INTER-INSURANCE EXCHANGE, 20 NORTH MICHIGAN AVENUE, SUITE 700, CHICAGO,
ILLINOIS 60602. TELEPHONE REQUESTS MAY BE DIRECTED TO RONI PRESSLER,
ASSISTANT VICE PRESIDENT OF CLAIMS AT (800) 632-7478. IN ORDER TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY ________, 1999.

For further information about us and the Common Stock offered hereby,
please refer to the Registration Statement, including the exhibits thereto.
The Registration Statement can be inspected and copied at the Securities and
Exchange Commission's Public Reference Room, Judiciary Plaza, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and at the public reference
facilities maintained by the Commission at its regional offices located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of
these materials can be obtained from the Commission at prescribed rates from
the Public Reference Room of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Additionally, material filed by the Company can be
inspected at the offices of the New York Stock Exchange at 20 Broad Street,
New York, New

i
<PAGE>

York 10005. In addition, the Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission, including the Company. Statements contained in this Proxy
Statement/Prospectus relating to the contents of any contract or other
document referred to herein are not necessarily complete, and, in each
instance, reference is made to the copy of that contract or other document
filed as an exhibit to the Registration Statement and each statement is
qualified in its entirety by that reference.

No person is authorized to give any information or to make any
representation with respect to the matters described in this Proxy
Statement/Prospectus other than those contained herein and, if given or made,
the information or representation should not be relied upon as having been
authorized by the Company or any other person. This Proxy
Statement/Prospectus does not constitute an offer to sell, or a solicitation
of an offer to purchase, the securities offered by this Proxy
Statement/Prospectus, or make a solicitation of a proxy, in any jurisdiction
in which, or to or from any person to or from whom, it is unlawful to make
such an offer or solicitation. Neither the delivery of this Proxy
Statement/Prospectus nor any distribution of securities hereunder shall under
any circumstances be deemed to imply that there has been no change in the
assets, properties or affairs of the Company since the date hereof or that
the information set forth herein is correct as of any time subsequent to the
date hereof.

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

As a result of the issuance of Common Stock pursuant to the Conversion,
the Company will be subject to the information requirements of the Securities
Exchange Act of 1934, as amended. The Company will fulfill these
requirements by filing periodic reports and other information with the
Securities and Exchange Commission. The Company intends to furnish its
stockholders with annual reports containing audited financial statements
reported upon by our independent auditors and quarterly reports containing
unaudited financial information for each of the first three quarters of each
fiscal year.

<PAGE>
<TABLE>
TABLE OF CONTENTS
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE CONVERSION. . . . . . . . . . . . . . . . . . . . . . . .1

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Overview of the Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
The Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Actions to Be Taken by Eligible Members. . . . . . . . . . . . . . . . . . . . . . .8
The Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Conversion to Stock Insurance Company. . . . . . . . . . . . . . . . . . . . . . . 10
Certain Federal Income Tax Considerations. . . . . . . . . . . . . . . . . . . . . 10
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Possible Initial Public Offering . . . . . . . . . . . . . . . . . . . . . . . . . 11
Summary Financial and Operating Data . . . . . . . . . . . . . . . . . . . . . . . 11

RISK FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
We Earn Almost All of Our Revenues from Medical Malpractice Insurance Policies
Issued in Illinois. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
We Must Develop New Products and Enter New Markets in Order to Keep Up with
Changes in the Medical Malpractice Insurance Industry . . . . . . . . . . . . 14
The Success of our Business is Tied to Many Factors Which Affect Our Industry
and Are Beyond Our Control. . . . . . . . . . . . . . . . . . . . . . . . . . 15
The Advent of "Managed Care" and Proposed Healthcare Reforms Could Lessen the
Demand for our Products and Reduce our Revenues . . . . . . . . . . . . . . . 15
The Market in Which We Operate is Highly Competitive . . . . . . . . . . . . . . . 16
A Decrease in Our Ratings Could Hurt our Business; Other Companies Have Higher
Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
The Conversion May Not Go Forward Even If Two-Thirds of the Eligible Members
Voting In Person or By Proxy Vote in Favor of the Conversion. . . . . . . . . 17
We Must Retain Key Executives and Personnel. . . . . . . . . . . . . . . . . . . . 17
If We Do Not Correctly Estimate Loss and LAE Reserves Our Results of Operations
and Financial Condition Could Be Adversely Affected . . . . . . . . . . . . . 17
Fluctuations in Interest Rates Could Have Adverse Effects on the Market Value of
Our Investment Portfolio and Our Financial Condition. . . . . . . . . . . . . 18
If Our Computer Systems or Those of Our Vendors and Suppliers Do Not Work
Properly after December 31, 1999, Our Operations Will Be Disrupted. . . . . . 18
Our Ability to Remain Competitive Partly Depends on an Effective Reinsurance
Program; We Have Recently Made Changes to Our Reinsurance Strategy. . . . . . 19
Regulation of Insurance Companies is Primarily Concerned with Protecting the
Interests of Policyholders, Not Stockholders. . . . . . . . . . . . . . . . . 20
Our Financial Success Depends Primarily on the Ability of ISMIE Indemnity to Pay
Dividends to Us . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Antitakeover Provisions Could Affect the Price of Our Common Stock . . . . . . . . 20
Sales of Substantial Amounts of Common Stock Following the Conversion Could
Lower the Market Price of the Common Stock. . . . . . . . . . . . . . . . . . 21

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<S> <C>
An Active or Orderly Trading Market for the Common Stock May Not Develop;
Our Stock Price May Be Volatile . . . . . . . . . . . . . . . . . . . . . . . 21

INFORMATION CONCERNING THE SPECIAL MEETING. . . . . . . . . . . . . . . . . . . . . . . 22
Time, Date and Place . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Record Date, Quorum and Vote Required. . . . . . . . . . . . . . . . . . . . . . . 22
Recommendation of the Board of Governors . . . . . . . . . . . . . . . . . . . . . 22
Interests of the Board of Governors in the Conversion. . . . . . . . . . . . . . . 23
Proxies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Proxy Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Questions Regarding the Conversion . . . . . . . . . . . . . . . . . . . . . . . . 23

THE CONVERSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Overview of the Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Background of the Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
History; Structure of the Conversion . . . . . . . . . . . . . . . . . . . . . . . 27
Determination of Eligible Members. . . . . . . . . . . . . . . . . . . . . . . . . 28
Conversion of Membership Interests . . . . . . . . . . . . . . . . . . . . . . . . 29
Consideration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Opinion of the Financial Advisor . . . . . . . . . . . . . . . . . . . . . . . . . 30
Recommendation of the Board of Governors . . . . . . . . . . . . . . . . . . . . . 33
Description of the Merger Agreement. . . . . . . . . . . . . . . . . . . . . . . . 37
Conditions to Effectiveness of the Merger. . . . . . . . . . . . . . . . . . . . . 38
Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Additional Aspects of the Merger Agreement and the Conversion. . . . . . . . . . . 39

COMPARISON OF CERTAIN RIGHTS OF MEMBERS
BEFORE AND AFTER THE CONVERSION. . . . . . . . . . . . . . . . . . . . . . . . . . 40

MARKET FOR COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE CONVERSION . . . . . . . . . . . . . . . 55
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Eligible Members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
The Exchange and ISMIE Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . 57
Consequence of a Taxable Exchange . . . . . . . . . . . . . . . . . . . . . . . . 57
Issuance of Rules Dealing with Inversions. . . . . . . . . . . . . . . . . . . . . 57
Possible Policyholder Dividend Treatment . . . . . . . . . . . . . . . . . . . . . 58
Taxpayer Identification Number . . . . . . . . . . . . . . . . . . . . . . . . . . 58

SELECTED FINANCIAL AND OPERATING DATA . . . . . . . . . . . . . . . . . . . . . . . . . 59

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<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . 62
Liquidity and Capital Resources. . . . . . . . . . . . . . . . . . . . . . . . . . 64
Effect of Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Year 2000 Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Recent Accounting Pronouncement Not Yet Adopted. . . . . . . . . . . . . . . . . . 67

BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Business Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Marketing and Policyholder Services. . . . . . . . . . . . . . . . . . . . . . . . 74
Premium Rates and Discount Programs. . . . . . . . . . . . . . . . . . . . . . . . 76
Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Risk Management Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Loss Reserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Reinsurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Investment Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Market Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Relationship with the Medical Society. . . . . . . . . . . . . . . . . . . . . . . 91
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Ratings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Directors and Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . 96
Committees of the ISMIE Holdings Board . . . . . . . . . . . . . . . . . . . . . . 98
Director Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Employment Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100
Compensation Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101
Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . .102

OWNERSHIP OF COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103

DESCRIPTION OF CAPITAL STOCK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .104
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .104
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105
Preferred Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105
Certain Statutory, Charter and Bylaw Provisions
Which Could Have an Anti-Takeover Effect . . . . . . . . . . . . . . . . . . .106

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Transfer Agent and Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . .108

LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .108

EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .108

GLOSSARY OF SELECTED INSURANCE TERMS. . . . . . . . . . . . . . . . . . . . . . . . . .109

INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-1
</TABLE>
ANNEX I PLAN AND AGREEMENT OF MERGER
ANNEX II OPINION OF THE FINANCIAL ADVISOR

vi
<PAGE>

QUESTIONS AND ANSWERS ABOUT THE CONVERSION

Q: WHAT IS "CONVERSION"?

A: Conversion is a change in the legal form of organization. ISMIE is
currently organized as a reciprocal insurance company with no
stockholders. Through the Conversion, ISMIE will become a stock
insurance company and its stock will be owned by the eligible members of
ISMIE. The Conversion will be accomplished through the merger of ISMIE
into ISMIE Indemnity Company, a newly formed stock insurance company.

Q. WHY IS ISMIE UNDERTAKING THE CONVERSION?

A. We believe that the growth in managed healthcare and the emergence of
multi-state integrated healthcare providers will lead to major changes
in the medical malpractice industry. We have adopted a business
strategy that we believe will allow us to compete effectively in this
changing market. The Conversion is part of our strategy. We believe
that the Conversion will enhance our ability to achieve our strategic
goals by providing us greater operating flexibility, access to the
capital markets and opportunities to use our stock for acquisitions, and
a higher degree of regulatory certainty as a stock company than we have
as an insurance exchange.

Q. WHO ARE THE ELIGIBLE MEMBERS?

A. Every person who was a member of ISMIE at the close of business on May
5, 1999 is an eligible member. Only eligible members are entitled to
vote on the Conversion. In the Conversion, all of the common stock of
ISMIE Holdings Inc., a newly formed company that will be the publicly
held holding company for ISMIE Indemnity, will be issued to eligible
members of ISMIE.

Q. HOW MUCH STOCK WILL ELIGIBLE MEMBERS RECEIVE?

A. A total of 10 million shares of ISMIE Holdings Inc. will be issued to
eligible members in the Conversion as follows:

- 9 million shares of stock will be allocated pro rata among
eligible members based on the ratio of each eligible member's
earned premiums (net of discounts, surcharges and premiums paid
for reporting endorsements) to the total earned premiums of all
eligible members from July 1, 1995 through May 5, 1999, and

- 1 million shares of stock will be allocated evenly among all
eligible members.

1
<PAGE>

Q. WILL THE CONVERSION AFFECT MY INSURANCE POLICY OR COVERAGE?

A. No. Your current insurance policy will not be affected by the Conversion.

Q. WHAT DO I NEED TO DO NOW?

A. Please carefully review all of the materials we have sent to you. After
doing so, please mail your completed, signed and dated BLUE proxy card
and YELLOW Taxpayer Identification Card in the enclosed return envelope
as soon as possible so that your vote may be counted at the ________,
1999 ISMIE special meeting. If you have any questions or need help in
completing the proxy card or the Taxpayer Identification Card, please
call our conversion information center at 1-888-__________.

Q. CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?

A. Yes. You can change your vote at any time before your proxy card is
voted at the special meeting. You can do this in one of three ways.
First, you can send a written notice stating that you would like to
revoke your proxy. Second, you can complete and submit a new proxy card.
Third, you can attend the special meeting and vote in person. Your
attendance alone will not, however, revoke your proxy.

Q. WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF THE CONVERSION TO ELIGIBLE
MEMBERS?

A. The exchange of membership interests in ISMIE for shares of common stock
of ISMIE Holdings Inc. in connection with the Conversion is intended to
be tax-free to eligible members for federal income tax purposes. Your
tax basis in the common stock of ISMIE Holdings Inc. that you will
receive in the Conversion will be zero for federal income tax purposes.

Q. WHEN DO YOU EXPECT THE CONVERSION TO BE COMPLETED?

A. We hope to complete the Conversion in the third quarter of 1999. We are
working toward completing the Conversion as quickly as possible.

Q. WHERE CAN I FIND MORE INFORMATION ABOUT THE CONVERSION?

A. This Proxy Statement/Prospectus describes the Conversion process in
detail.

<PAGE>

SUMMARY

SEE "GLOSSARY OF SELECTED INSURANCE TERMS" FOR DEFINITIONS OF TERMS USED IN
THIS PROXY STATEMENT/PROSPECTUS. WE URGE YOU TO READ THIS PROXY
STATEMENT/PROSPECTUS, INCLUDING THE ANNEXES, IN ITS ENTIRETY. FOR PURPOSES OF
THIS PROXY STATEMENT/PROSPECTUS, THE TERMS "ISMIE," THE "EXCHANGE," THE
"COMPANY," "WE," "OUR" AND "US" REFER, PRIOR TO THE EFFECTIVE DATE, TO THE
ILLINOIS STATE MEDICAL INTER-INSURANCE EXCHANGE, AN ILLINOIS RECIPROCAL
INSURANCE EXCHANGE, AND ITS SUBSIDIARIES, COLLECTIVELY, AND ON AND AFTER THE
EFFECTIVE DATE, TO ISMIE HOLDINGS INC. AND ITS SUBSIDIARIES; THE TERM "ISMIE
HOLDINGS" REFERS TO ISMIE HOLDINGS INC., EXCLUDING ITS SUBSIDIARIES; THE TERM
"ISMIE INDEMNITY" REFERS TO ISMIE INDEMNITY COMPANY; THE TERM "ELIGIBLE MEMBER"
MEANS A PERSON WHO WAS A MEMBER OF THE EXCHANGE AT THE CLOSE OF BUSINESS ON MAY
5, 1999 (THE "ADOPTION DATE").

HISTORICAL FINANCIAL DATA PRESENTED IN THIS PROXY STATEMENT/PROSPECTUS
INCLUDE THE EXCHANGE AND THE CORPORATIONS THAT HAVE ACTED AS ITS
ATTORNEY-IN-FACT UNDER THE ILLINOIS INSURANCE CODE. FINANCIAL DATA AND
RATIOS SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS HAVE BEEN PRESENTED IN
ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP"), UNLESS
OTHERWISE INDICATED.

THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS.

OVERVIEW OF THE CONVERSION

At the Special Meeting, each Eligible Member of the Exchange will be asked
to consider and vote upon a proposal to approve the conversion of the Exchange
from an Illinois reciprocal insurance exchange to an Illinois stock insurance
company. The conversion will be accomplished through a Plan and Agreement of
Merger dated as of May 5, 1999 (the "Merger Agreement"), in which the Exchange
will merge with and into ISMIE Indemnity, a newly formed Illinois stock
insurance company and the surviving corporation of the merger (the
"Conversion"). Following the Conversion, ISMIE Indemnity will be a wholly owned
subsidiary of ISMIE Holdings Inc., a newly formed company that will be the
publicly held holding company for ISMIE Indemnity. As part of the Conversion,
the Common Stock, par value $0.01 per share, of ISMIE Holdings Inc. (the "Common
Stock") will be issued to Eligible Members of the Exchange. The following box
describes how the Common Stock issuable in the Conversion will be allocated
among Eligible Members:

<PAGE>

-----------------------------------------------------------------------------
ALLOCATION OF COMMON STOCK TO ELIGIBLE MEMBERS
IN THE CONVERSION

- 9,000,000 shares of Common Stock will be allocated pro rata among
Eligible Members based on the ratio of each Eligible Member's Earned
Premiums to the total Earned Premiums of all Eligible Members from
July 1, 1995 through May 5, 1999.

- 1,000,000 shares of Common Stock will be allocated evenly among
Eligible Members.

Upon completion of the Conversion, all Membership Interests in the Exchange
will be extinguished. Eligible Members may have certain dissenters' rights
by law.
-----------------------------------------------------------------------------

THE COMPANY

Founded by the Illinois State Medical Society (the "Medical Society") in
1976, ISMIE is the largest provider of medical malpractice insurance in Illinois
and one of the ten largest providers of medical malpractice insurance in the
United States based on direct premiums written. We currently insure
approximately 8,700 Illinois physicians who practice alone or in medical groups,
clinics or other healthcare organizations. In addition, we offer protection to
approximately 775 corporate and partnership entities as well as a variety of
other healthcare providers.

For the year ended December 31, 1998, our total revenue was $182.4 million
and our net income was $12.7 million. As of December 31, 1998, we had $1.21
billion of total assets, no debt outstanding and $242.7 million of total equity.
In 1998, A.M. Best Company ("A.M. Best") upgraded its insurer financial strength
rating of the Exchange to "B++ (Very Good)."

Medical malpractice insurance, or medical professional liability insurance,
insures the physician or other healthcare provider against liabilities arising
from the rendering of, or failure to render, professional medical services.
Under the typical medical malpractice insurance policy, the insurer also defends
the insured against potentially covered claims. Based on data compiled by A.M.
Best, total medical malpractice premiums in the United States in 1997 exceeded
$5.7 billion. In Illinois, the fourth largest market for medical malpractice
insurance based on premiums written, approximately $393.0 million of medical
malpractice premiums were written in 1997 by licensed insurance companies. Our
share of the medical malpractice premiums written in Illinois in 1997 by
licensed insurance companies was approximately 50%. For the same period, our
share of the national market was approximately 3.4%.

We believe that our leading market share for medical malpractice insurance
in Illinois is due in large part to the loyalty of our insured physicians. Over
the last five years, on average, we have had a policyholder retention rate in
excess of 90%. We attribute this loyalty to:

<PAGE>

- the high quality, personalized "Physician-First Service" we provide;

- our traditional focus on the physician marketplace;

- our commitment to protecting the reputation of our insureds and our
aggressive defense of claims;

- our financial stability;

- our ability to customize product features and programs to fit the
needs of different customers; and

- our close relationship with the medical community, including our
longstanding relationship with the Illinois State Medical Society.

We believe that the growth in managed healthcare and the emergence of
multi-state integrated healthcare providers and delivery systems will lead to
major changes in the medical malpractice insurance industry. We have adopted a
strategy which we believe will enable us to compete effectively, enhance
profitability and create long-term growth, while maintaining competitive rates
and market presence. The Company's strategy is to:

- maintain the Company's strong relationship with its policyholders and
continue to provide superior service;

- expand geographically by increasing the number of states in which the
Company writes policies;

- enhance product offerings to include hospital coverage, our "Physician
Business Practice Liability (E&O/D&O)" insurance, workers compensation
insurance and employment practices liability insurance;

- respond to market changes, including strengthening our relationships
with independent brokers and agents in order to expand our Clinic
Option program, while continuing to expand our direct relationships
with individual policyholders;

- maintain underwriting discipline in order to emphasize profitability
rather than premium volume;

- maintain operating expenses below the industry average;

- continue to improve our financial ratings; and

- pursue acquisition and consolidation opportunities relating to the
Company's core insurance business.

<PAGE>

As part of this strategy, we have undertaken the Conversion. We believe
that the Conversion will enhance our ability to achieve our strategic goals by
providing us (i) greater operating flexibility, (ii) access to the capital
markets and opportunities to use our stock for acquisitions, and (iii) a form of
organization which offers a higher degree of regulatory certainty than that
afforded to a reciprocal insurance exchange. See "The Conversion" and
"Business -- Business Strategy".

HISTORY AND STRUCTURE. ISMIE is an Illinois reciprocal insurance exchange
organized in 1976 by the Medical Society to provide medical malpractice
insurance to its physician and other healthcare provider members. The business
of ISMIE is managed by its Board of Governors and by its attorney-in-fact,
Illinois State Medical Insurance Services, Inc. (the "Attorney-in-Fact" or
"ISMIS"), which is a wholly owned subsidiary of ISMIE. Prior to July 1998,
ISMIE's attorney-in-fact was a wholly owned subsidiary of the Medical Society.
In July 1998, the function of attorney-in-fact for ISMIE was transferred from a
wholly owned subsidiary of the Medical Society to ISMIS, a new corporation of
the same name formed as a wholly owned subsidiary of the Exchange. Immediately
preceding the Conversion, the Exchange plans to contribute the stock of ISMIS to
ISMIE Holdings. After the Conversion, ISMIS will continue to perform service
functions for ISMIE as a wholly owned subsidiary of ISMIE Holdings.

ISMIE Holdings is a newly formed Delaware corporation which was formed to
be the publicly held holding company for ISMIE Indemnity. ISMIE Holdings has no
historical operations and was organized in April, 1999. ISMIE Indemnity, a
wholly owned subsidiary of ISMIE Holdings, is an Illinois stock insurance
corporation licensed to write property and casualty insurance in the State of
Illinois. It will have conducted no business prior to the merger in which ISMIE
will be merged into and become part of ISMIE Indemnity. Our principal executive
and business offices are located at 20 North Michigan Avenue, Suite 700,
Chicago, Illinois 60602-4890, and our telephone number is (312) 782-2749.

<PAGE>

The following diagram summarizes the Company's structure immediately after
the Conversion:

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

Stockholders*

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

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

ISMIE Holding Inc.
(Delaware)

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

ISMIE Indemnity Company
(Illinois)

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

* Approximately 1% of the shares of Common Stock issued in the Conversion will
be issued to ISMIE Indemnity so that the merger will have the tax consequences
set forth in "Certain Federal Income Tax Consequences of the Conversion -- The
Exchange and ISMIE Indemnity."

THE SPECIAL MEETING

TIME, DATE AND PLACE. The Special Meeting will be held at _______ p.m.,
Central time, on _____________, 1999 at __________________, Chicago,
Illinois.

RECORD DATE. The Board of Governors has set the close of business on May
5, 1999 as the record date for determining the members entitled to vote at the
Special Meeting.

QUORUM. The presence, either in person or by proxy, of one-hundred Eligible
Members entitled to vote at the Special Meeting is necessary to constitute a
quorum.

VOTE REQUIRED. The affirmative vote of two-thirds of all Eligible Members
present in person or by proxy at the Special Meeting is required to approve the
Merger Agreement on behalf of the Exchange. Each Eligible Member is entitled to
one vote at the Special Meeting.

<PAGE>

ACTIONS TO BE TAKEN BY ELIGIBLE MEMBERS

This Proxy Statement/Prospectus is part of a package designed to enable you
to understand and evaluate our plan to convert from a reciprocal insurance
exchange to a stock insurance company through a merger with ISMIE Indemnity. In
addition to the Proxy Statement/Prospectus, this package contains:

- a blue PROXY CARD which you may use to vote for or against approval of
the Merger Agreement.

- a yellow TAXPAYER IDENTIFICATION CARD which shows your social security
number (or identification number), if known to ISMIE, and which is
required by the Internal Revenue Service.

- a green RECORD CARD showing the estimated whole number of shares of
Common Stock that you are entitled to receive pursuant to the Merger
Agreement.

PLEASE CAREFULLY REVIEW ALL OF THE MATERIALS WE HAVE SENT TO YOU. AFTER DOING
SO, PLEASE:

- Complete, date and sign the enclosed blue PROXY CARD.

- Fill out and sign the enclosed yellow TAXPAYER IDENTIFICATION CARD by
including your taxpayer identification number (for most individuals,
your taxpayer identification number is your social security number).

- Return the completed blue PROXY CARD and yellow TAXPAYER
IDENTIFICATION CARD in the enclosed postage-paid envelope. THE PROXY
CARD MUST BE RECEIVED BY THE ATTORNEY-IN-FACT NO LATER THAN ______
P.M., CENTRAL TIME, ON ____________, 1999 (TEN DAYS PRIOR TO THE DATE
OF THE SPECIAL MEETING). YOU HAVE THE RIGHT TO APPEAR AT THE SPECIAL
MEETING AND VOTE IN PERSON.

IF YOU HAVE ANY QUESTIONS OR NEED HELP IN COMPLETING THE PROXY CARD OR THE
TAXPAYER IDENTIFICATION CARD, PLEASE CALL OUR CONVERSION INFORMATION CENTER AT
1-888-__________ (TOLL FREE).

THE CONVERSION

BACKGROUND OF AND REASONS FOR THE CONVERSION. Your Board of Governors has
determined that the Conversion of the Exchange into a stock insurance company
which is a wholly owned subsidiary of a publicly held holding company will
enhance our ability to achieve our strategic goals. We believe that the
Conversion will provide us greater operating flexibility, access to the capital
markets and opportunities to use our stock for acquisitions, as well as a form
of organization that offers a higher degree of regulatory certainty than that
afforded to a reciprocal insurance exchange. See "The Conversion -- Background
of the Conversion."

<PAGE>

OPINION OF FINANCIAL ADVISOR. On July 29, 1998, we retained Salomon Smith
Barney Inc. (the "Financial Advisor") to assist us in investigating the possible
conversion of the Exchange from an Illinois reciprocal insurance exchange to a
stockholder-owned company, or some other transaction involving the issuance of
debt and/or equity securities, in order to secure and strengthen our position
and growth in the future.

On May 5, 1999, the Financial Advisor delivered to us an opinion (which was
subsequently confirmed in writing by delivery of a written opinion dated May 5,
1999) with respect to the Conversion. The Financial Advisor's written opinion,
which is subject to certain limitations and assumptions, is set forth fully as
Annex II to this Proxy Statement/Prospectus, and you should read it in its
entirety. Any description of or reference to the Financial Advisor's opinion is
subject, and qualified in its entirety by reference, to the full text of the
opinion. See "The Conversion -- Opinion of Financial Advisor" and Annex II.

RECOMMENDATIONS OF THE EXCHANGE'S BOARD OF GOVERNORS. Your Board of
Governors has determined that the Conversion is in the best interests of the
Exchange and its members and has approved the Merger Agreement on behalf of the
Exchange. Your Board of Governors recommends that you vote for approval of the
Conversion. The ISMIE Holdings Board and the ISMIE Indemnity Board, based upon
the approval of the Board of Governors, have each approved the Conversion. In
making these determinations, the Board of Governors, among other things, had
access to the analysis and advice referred to in "The Conversion -- Background
of and Reasons for the Conversion" and relied on the advice of the Financial
Advisor regarding the fairness, from a financial point of view, of the aggregate
consideration to be paid in the Conversion to Eligible Members as a group.

EFFECTIVE TIME. The Conversion will become effective at the time (the
"Effective Time") that the Illinois Director of Insurance issues a certificate
of merger as provided for in Section 163 of the Insurance Code of the State of
Illinois (the "Illinois Insurance Code") relating to the merger of the Exchange
with and into ISMIE Indemnity. If the merger of the Exchange with and into
ISMIE Indemnity has not been consummated by December 31, 1999, the Merger
Agreement shall, unless extended in accordance with its terms, automatically
terminate.

DISSENTERS' RIGHTS. The merger of the Exchange with and into ISMIE
Indemnity is subject to the provisions of the Illinois Insurance Code relating
to rights of dissenting policyholders. No shares of Common Stock issuable in
the Conversion will be delivered to Eligible Members until the thirty-day period
for filing a dissenters' rights petition, if any, has expired and certain other
conditions have been satisfied. See "The Conversion -- Dissenters' Rights."

ACCOUNTING TREATMENT. The Conversion involves a reorganization of entities
under common control, and the assets and liabilities transferred to effect the
Conversion will be accounted for at historical cost in a manner similar to that
in pooling of interests accounting. See "The Conversion -- Additional Aspects of
the Merger Agreement and the Conversion -- Accounting Treatment."

<PAGE>

REGULATORY APPROVALS. Except for the approval of the Merger Agreement by
the Illinois Director of Insurance, and compliance with federal and state
securities laws, the Company is not aware of any material federal or state
regulatory requirements that must be complied with or approval that must be
obtained in connection with the Conversion. See "Risk Factors -- Regulation of
Insurance Companies is Primarily Concerned with Protecting the Interests of
Policyholders, Not Stockholders."

INTERESTS OF CERTAIN PERSONS IN THE CONVERSION. Except for the Common Stock
allocated to members of the Board of Governors in their capacity as members of
ISMIE, no compensation or other benefits will be paid to the Board of Governors
or officers of ISMIE in connection with the Conversion. See "Information
Concerning the Special Meeting -- Interests of the Board of Governors in the
Conversion." For information regarding management incentives following the
Conversion, see "Management -- Compensation Plans."

CONVERSION TO STOCK INSURANCE COMPANY

In the Conversion, ISMIE will convert from an Illinois reciprocal
insurance exchange to an Illinois stock insurance company. An Illinois
reciprocal insurance exchange is an organization or group of subscribers,
including individuals, partnerships and corporations, who may insure each
other by "exchanging" insurance contracts through their commonly appointed
attorney-in-fact. All insurance contracts so exchanged are executed by their
designated attorney-in-fact on behalf of the subscribers through a power of
attorney. A stock insurance company is an insurance company organized as a
corporation that has capital stock divided into shares and is owned by its
stockholders. The capital stock of ISMIE Indemnity will be held by ISMIE
Holdings. Immediately following the Conversion, all of the Common Stock of
ISMIE Holdings will be owned by Eligible Members except for approximately 1%
of the Common Stock that will be owned by ISMIE Indemnity. Your current
insurance policy and coverage will not be affected by the Conversion. See
"Comparison of Certain Rights of Members Before and After the Conversion."

CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

You should carefully review the more detailed discussion under "Certain
Federal Income Tax Consequences of the Conversion" and are urged to consult
your personal tax advisors with respect to the federal income tax impact of
the receipt of Common Stock upon consummation of the Conversion.

RISK FACTORS

You should carefully consider the matters set forth herein under "Risk
Factors" commencing on page ___, as well as the other information contained in
this Proxy Statement/Prospectus.

<PAGE>

POSSIBLE INITIAL PUBLIC OFFERING

We have considered, and may continue to consider, an initial public
offering of the Common Stock concurrent with or following completion of the
Conversion. As of the date hereof, we have made no determination as to whether
we will proceed with an initial public offering in the future. Whether or not we
undertake an initial public offering could have certain effects on you. See
"Market for Common Stock."

SUMMARY FINANCIAL AND OPERATING DATA

The following table sets forth selected financial data for ISMIE and the
Attorney-in-Fact. The selected income statement data (other than direct and
assumed premiums written) set forth below for each of the three years in the
three-year period ended December 31, 1998 and the selected balance sheet data as
of December 31, 1998 and 1997 are derived from the consolidated financial
statements audited by Ernst & Young LLP, independent auditors, included
elsewhere herein and should be read in conjunction with, and are qualified by
reference to those statements and the notes related to those statements. The
selected income statement data (other than direct and assumed premiums written)
for the years ended December 31, 1995 and 1994 and the selected balance sheet
data as of December 31, 1996, 1995 and 1994 are derived from audited financial
statements of ISMIE and the Attorney-in-Fact which management believes
incorporate all of the adjustments necessary for the fair presentation of the
financial condition and results of operations for such periods. All summary
income statement and balance sheet data are presented in accordance with GAAP.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

<PAGE>

As of or for the Year Ended December 31,

1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Income Statement Data: (in thousands, except per share, ratios and percentage data)
<S> <C> <C> <C> <C> <C>
Premiums written

Direct and assumed premiums written $179,668 $196,152 $207,578 $197,241 $203,756
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net premiums written 134,215 104,953 85,532 96,809 140,504

Direct and assumed premiums earned 177,451 188,866 207,857 221,491 200,285

Reinsurance premiums ceded (45,453) (91,199) (122,040) (100,432) (63,252)
-------- -------- -------- -------- --------
Net premiums earned 131,998 97,667 85,817 121,059 137,033

Net investment income 45,361 46,663 46,436 50,927 49,140

Other income 5,095 0 0 0 0

Realized investment gains (losses) (104) (401) 2,406 322 12,141
-------- -------- -------- -------- --------
Total revenues 182,350 143,929 134,659 172,308 198,314
-------- -------- -------- -------- --------
Losses and loss adjustment expenses 153,660 117,816 105,403 177,273 210,046

Other operating expenses 16,222 10,878 6,296 8,793 11,870
-------- -------- -------- -------- --------
Total expenses 169,882 128,694 111,699 186,066 221,916
-------- -------- -------- -------- --------
Income (loss) before income taxes 12,468 15,235 22,960 (13,758) (23,602)

Income taxes (benefit) (257) (3,206) 19,541 6,007 (8,564)
-------- -------- -------- -------- --------
Net income (loss) $12,725 $18,441 $3,419 ($19,765) ($15,038)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Balance Sheet Data:

Total investments and invested cash $887,661 $787,333 $780,209 $861,428 $780,362

Total assets 1,211,428 1,246,506 1,287,514 1,362,798 1,263,586

Members' Equity (1) 242,690 220,169 193,336 200,969 175,200

Additional Data:

Pro forma earnings (loss) per share (2) $1.27 $1.84 $0.34 ($1.98) ($1.50)

Pro forma book value per share 24.27 22.02 19.33 20.10 17.52

Pro forma book value per share, net of FAS 115 (1) 22.77 21.50 19.65 19.31 21.29

Retention rate (3) 86.0% 90.1% 90.8% 92.4% 93.4%

Investment yield (4) 5.60% 6.07% 5.77% 6.10% 6.00%

Direct ratios (GAAP) (5):

Loss & LAE 94.5% 95.1% 77.4% 128.6% 142.0%

Expense 10.1% 8.8% 7.4% 6.4% 6.2%

Combined 104.6% 103.9% 84.8% 135.0% 148.2%

Net ratios (GAAP) (6):

Loss & LAE 116.4% 120.6% 122.8% 146.4% 153.3%

Expense 12.3% 11.1% 7.3% 7.3% 8.7%

Combined 128.7% 131.8% 130.2% 153.7% 161.9%

Statutory combined ratio 128.5% 131.0% 130.2% 155.5% 161.9%

Statutory surplus $187,224 $172,713 $158,622 $134,432 $135,339
</TABLE>

<PAGE>

(1) The Company has designated its entire fixed maturity and equity security
investment portfolio as "available for sale". Under FAS 115, the Company's
members' equity reflects unrealized market appreciation or depreciation on
these investments, net of deferred taxes thereon. For purposes of this
calculation, the unrealized market appreciation or depreciation, net of
deferred taxes, has been removed from members' equity.

(2) Gives effect in all periods to the issuance of approximately 10,000,000
shares of Common Stock to Eligible Members. The 100,000 shares of Common
Stock to be issued to ISMIE Indemnity are not considered outstanding for
purposes of determining the per share amounts.

(3) Represents the percentage of policyholders insured by the Company at the
beginning of the year that continued to be insured by the Company at the
end of the year.

(4) Represents the yield as determined for statutory reporting purposes which,
for any period, equals annualized investment income, excluding realized
capital gains or losses and net of expenses, divided by the average of
beginning and ending cash and investments at statement value plus accrued
investment income.

(5) Direct ratios represent the ratios of losses and expenses, before deducting
reinsurance recoverables, to direct and assumed premiums earned, before
reinsurance premiums ceded.

(6) Net ratios represent the ratios of losses and expenses, after deducting
reinsurance recoverables, to net premiums earned, after reinsurance
premiums ceded.

13
<PAGE>

RISK FACTORS

IN CONSIDERING THE MATTERS INCLUDED IN THIS PROXY STATEMENT/PROSPECTUS,
YOU SHOULD CAREFULLY CONSIDER, AMONG OTHER THINGS, THE SIGNIFICANT FACTORS
DESCRIBED BELOW AND UNDER "COMPARISON OF CERTAIN RIGHTS OF MEMBERS BEFORE AND
AFTER THE CONVERSION" THAT MAY ADVERSELY AFFECT YOU IF THE CONVERSION IS
APPROVED OR THAT MAY GENERALLY ADVERSELY AFFECT THE VALUE OF AN INVESTMENT IN
COMMON STOCK.

SOME OF THE STATEMENTS IN THIS PROXY STATEMENT/PROSPECTUS THAT ARE NOT
HISTORICAL FACT CONSTITUTE FORWARD-LOOKING STATEMENTS WHICH INVOLVE KNOWN AND
UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE OUR ACTUAL
RESULTS TO BE MATERIALLY DIFFERENT FROM HISTORICAL RESULTS OR FROM ANY
RESULTS EXPRESSED OR IMPLIED BY THE FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS MAY BE IDENTIFIED BY THE USE OF WORDS SUCH AS "BELIEVES,"
"EXPECTS," "MAY," "WILL," "SHOULD," "SEEKS," "PRO FORMA," OR "ANTICIPATES,"
AND SIMILAR EXPRESSIONS. THESE RISKS, UNCERTAINTIES AND OTHER FACTORS
INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING RISKS:

WE EARN ALMOST ALL OF OUR REVENUES FROM MEDICAL MALPRACTICE INSURANCE
POLICIES ISSUED IN ILLINOIS

Over 95% of ISMIE's premiums written are generated from medical
malpractice insurance policies issued to physicians, medical groups and
allied health professionals. As a result, negative developments in the
economic, competitive or regulatory conditions affecting the medical
malpractice insurance industry, particularly as those developments might
affect medical malpractice insurance for physicians, could have a material
adverse effect on our results of operations.

Over 95% of our direct premiums written are generated in Illinois. The
revenues and profitability of the Company are therefore subject to prevailing
regulatory, economic and other conditions in Illinois. Management believes
that medical malpractice jury awards in Illinois, particularly in the
counties of Cook, Madison and St. Clair, are significantly higher than those
in a number of other states. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations."

WE MUST DEVELOP NEW PRODUCTS AND ENTER NEW MARKETS IN ORDER TO KEEP UP WITH
CHANGES IN THE MEDICAL MALPRACTICE INSURANCE INDUSTRY

Our strategy is to expand and diversify our products and operations to
meet the insurance needs of large healthcare organizations, while maintaining
our traditional personalized service for physicians and medical groups, both
large and small. We have recently introduced Physician Business Practice
Liability (E&O/D&O) insurance for healthcare organizations. In addition, we
have an arrangement with NAS Insurance Services to provide employment
practices liability insurance for physicians, physician organizations and
hospitals. ISMIE has also entered into a reinsurance arrangement in the
hospital workers compensation liability market. There is no assurance,
however, that our diversification efforts will be successful.

Another aspect of our strategy is to expand our market by offering a
variety of healthcare related liability insurance products to clinics, large
medical groups and other healthcare systems

<PAGE>

outside Illinois. After the Conversion, we will continue to be licensed to
write property and casualty insurance only in Illinois. Until we become
licensed in other states, we plan to market certain of our policies through
licensed "fronting" insurers under arrangements whereby we would reinsure all
or substantially all of the policy risks under the policies. There is no
assurance that these arrangements can be successfully implemented. Also, the
regulatory, litigation and political environment of each state varies. We
will need to adapt our operations to take into account these differences and
there is no assurance that this adjustment will be successful. As we expand
and diversify our products and markets into areas where we are inexperienced,
we will be required to retain qualified personnel with the requisite
experience in those areas. Competition for such personnel may be intense,
and there can be no assurance that we will be able to attract and retain
qualified personnel. In addition, we will have to develop distribution
channels for our new products and in our new markets, which may increase our
dependence on insurance brokers and other intermediaries. There can be no
assurance that we will be able to develop such distribution channels or
maintain satisfactory relationships with insurance brokers and other
intermediaries.

THE SUCCESS OF OUR BUSINESS IS TIED TO MANY FACTORS WHICH AFFECT OUR INDUSTRY
AND ARE BEYOND OUR CONTROL

The financial results for medical malpractice insurers are influenced by
a number of factors, many of which are beyond our control. These factors
include, among other things, changes in frequency and severity of claims,
changes in tort laws (tort reform), judicial decisions and changes in general
economic conditions.

The availability of medical malpractice insurance and the industry's
underwriting capacity are determined principally by the industry's level of
capitalization, historical underwriting results, returns on investment and
perceived premium rate adequacy. Historically, the financial performance of
medical malpractice insurers has tended to fluctuate in cyclical patterns
characterized by periods of greater competition in pricing and underwriting
terms and conditions (called a "soft insurance market") followed by periods
of capital shortage and lesser competition. In a soft insurance market,
competitive conditions result in premium rates and underwriting terms and
conditions which may be below profitable levels. For a number of years, the
medical malpractice insurance industry in Illinois has faced a soft insurance
market. There can be no assurance as to whether or when industry conditions
will improve or the extent to which any improvement in industry conditions
may improve our results of operations.

THE ADVENT OF "MANAGED CARE" AND PROPOSED HEALTHCARE REFORMS COULD LESSEN THE
DEMAND FOR OUR PRODUCTS AND REDUCE OUR REVENUES

In recent years, a number of factors related to the emergence of
"managed care" have negatively affected or threatened to affect the medical
practice and economic independence of physicians. Physicians have found it
more difficult to conduct a traditional fee for service practice, and many
have been driven to join or contractually affiliate with organizations,
healthcare delivery systems or practice management organizations. This
consolidation could result in the elimination or significant decrease of
physician input in the medical professional liability insurance purchasing
decision. In addition, this consolidation could reduce primary medical
malpractice insurance premiums paid by healthcare systems. Larger healthcare
systems

<PAGE>

generally retain more risk by accepting higher deductibles and self-insured
retentions or by forming their own captive insurance companies.

Significant attention has recently been focused on reforming the
healthcare system at both the federal and state levels. A broad range of
healthcare reform measures has been suggested, and public discussion of these
measures will likely continue in the future. Proposals have included, among
other things, spending limits, price controls, limits on increases in
insurance premiums, limits on the liability of doctors and hospitals for tort
claims and changes in the healthcare insurance system. We cannot predict
which, if any, reform proposals will be adopted, when they may be adopted or
what impact they may have on us. While some of these proposals could be
beneficial to us, the adoption of others could have a material adverse effect
on the Company's financial condition or results of operations.

THE MARKET IN WHICH WE OPERATE IS HIGHLY COMPETITIVE

We compete with numerous insurance companies in the Illinois market. Our
principal competitors for physicians and medical groups consist of a number
of commercial companies and, increasingly, programs of self-insurance offered
by hospitals that have acquired physician practices. Each competes for the
medical malpractice insurance business of larger medical groups, hospitals
and other healthcare providers. Several of these competitors have greater
financial resources and higher ratings than ISMIE. In addition to pricing,
competitive factors include financial stability, ratings, breadth and
flexibility of coverage, the quality and level of services provided and
policyholder loyalty. The competitive environment could also result in lower
premium rates and fees, reduced profitability and loss of market share. As we
expand into new product lines and new geographic markets, we will need to
compete with established companies in these markets, many of which will have
existing relationships with the doctors and medical groups that we will be
seeking to insure. See "Business -- Competition."

A DECREASE IN OUR RATINGS COULD HURT OUR BUSINESS; OTHER COMPANIES HAVE
HIGHER RATINGS

Ratings have become an increasingly important factor in establishing the
competitive position of insurance companies. ISMIE is rated "B++ (Very Good)"
by A.M. Best and "BBB (Good)" by Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. ("Standard & Poor's"). Ratings
assigned by A. M. Best to solvent insurance companies currently range from
"A++ (Superior)" to "D (Poor)," and ratings assigned by Standard & Poor's to
solvent insurance companies currently range from "AAA (Extremely Strong)" to
"CC (Extremely Weak)." A.M. Best's and Standard & Poor's ratings reflect
their opinion of an insurance company's financial strength, operating
performance and ability to meet its obligations to policyholders, and are not
evaluations directed to purchasers of an insurance company's securities.
Other insurance companies with which we compete currently have higher
insurance ratings. Our ability to maintain or improve our rating by A.M.
Best or Standard & Poor's may depend on our ability to implement successfully
our business strategy. See "Business -- Ratings." If ISMIE's ratings are
materially reduced from their current level, the Company's business could be
adversely affected.

<PAGE>

THE CONVERSION MAY NOT GO FORWARD EVEN IF TWO-THIRDS OF THE ELIGIBLE MEMBERS
VOTING IN PERSON OR BY PROXY VOTE IN FAVOR OF THE CONVERSION

The Common Stock issuable in the Conversion will be delivered on the
thirty-first day after the Effective Date, or as soon as reasonably
practicable thereafter, unless such a petition has been filed with the
Illinois Director of Insurance in accordance with Section 168 of the Illinois
Insurance Code. If such a petition has been filed, the Common Stock shall be
delivered only upon the issuance of an order of the Illinois Director of
Insurance in accordance with Section 168 of the Illinois Insurance Code.
There can be no assurance if or when the Common Stock would be delivered to
Eligible Members if such a petition is filed. See "Dissenters' Rights."

WE MUST RETAIN KEY EXECUTIVES AND PERSONNEL

The operations of the Company are significantly dependent on existing
management. The loss of one or more of our existing executive officers could
have a material adverse effect on the Company's business and results of
operations. In addition, we believe that our future success will depend in
part on our ability to attract and retain additional highly skilled
professional, managerial, sales and marketing personnel. Competition for
qualified personnel is intense. The Company has entered into employment
agreements with its executive officers. However, there can be no assurance
that the Company will be successful in attracting and retaining the personnel
that we require for our business and planned growth.

IF WE DO NOT CORRECTLY ESTIMATE LOSS AND LAE RESERVES OUR RESULTS OF
OPERATIONS AND FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED

The reserves established for losses and loss adjustment expenses ("LAE")
are estimates of amounts needed to pay reported and unreported claims and
related LAE. The estimates are based on assumptions related to the ultimate
cost of settling the claims based on facts and interpretation of
circumstances then known, predictions of future events, estimates of future
trends in claims frequency and severity and judicial theories of liability,
legislative activity and other factors. However, establishment of appropriate
reserves is an inherently uncertain process involving estimates of future
losses and we cannot assure that currently established reserves will prove
adequate in light of subsequent actual experience. The inherent uncertainty
is greater for certain types of insurance, such as medical malpractice, where
a longer period may elapse before a definite determination of ultimate
liability is made, and where the judicial, political and regulatory climates
are changing. Medical malpractice claims and expenses may be paid over a

<PAGE>

period of ten or more years, which is longer than most property and casualty
claims. Trends in losses on "long-tail" lines of business such as medical
malpractice may be slow to appear and, accordingly, our reaction in terms of
modifying underwriting practices and changing premium rates may lag behind
underlying loss trends. In addition, emerging changes in the practice of
medicine, such as the emergence of new, larger medical groups that do not
have an established claims history and additional claims resulting from
restrictions on treatment by organizations, may require us to adjust our
underwriting and reserving practices.

If our reserves should prove inadequate, we would be required to
increase reserves, which could have a material adverse effect on our
financial condition or results of operations. To the extent that reserves
prove to be inadequate in the future, we would have to increase these
reserves and incur a charge to earnings in the period that these reserves are
increased, which could have a material adverse effect on our financial
condition or results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- General -- Loss and LAE
Reserves" and "-- Results of Operations" and "Business -- Loss Reserves."

FLUCTUATIONS IN INTEREST RATES COULD HAVE ADVERSE EFFECTS ON THE MARKET VALUE
OF OUR INVESTMENT PORTFOLIO AND OUR FINANCIAL CONDITION

Our investment portfolio consists substantially of fixed maturity
securities. The fair value of these assets fluctuates depending on general
economic and market conditions. The market value of our fixed maturity
securities generally increases when interest rates fall and generally
decreases when interest rates rise. Because we classify our entire
investment portfolio as available for sale, changes in the market or fair
value of our securities are reflected in our financial statements. If
interest rates rise, this will cause our GAAP equity and total comprehensive
income to be adversely affected.

IF OUR COMPUTER SYSTEMS OR THOSE OF OUR VENDORS AND SUPPLIERS DO NOT WORK
PROPERLY AFTER DECEMBER 31, 1999, OUR OPERATIONS WILL BE DISRUPTED

The "Year 2000" issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may interpret a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, an
inability to process transactions, send invoices or engage in similar normal
business activities. We are highly dependent upon our computer processing
systems. Our principal computer applications cover three broad areas of its
operations: (i) policy processing; (ii) claims processing; and (iii) our
financial and accounting systems. We have substantially completed our
assessment of all internal information technology systems that we believe
could be significantly affected by the Year 2000 issue. As a result of our
assessment, we have identified certain systems that will need to be
reprogrammed or replaced in order to bring them into year 2000 compliance.
We expect to complete software reprogramming and replacement by June 30, 1999.

There can be no assurance that the foregoing compliance schedule will be
met or that any software or systems of our vendors and suppliers, on which
our business is dependent, will be

<PAGE>

corrected in a timely manner. We are not aware of any vendor or supplier
with a Year 2000 compliance problem that would materially impact the
Company's business operations. However, we have no means of ensuring that
those vendors or suppliers will be Year 2000 compliant. The inability of
vendors or suppliers to complete their Year 2000 resolution process in a
timely fashion could disrupt our business operations and materially and
adversely impact our results of operations, liquidity or capital resources.

Our failure to complete our Year 2000 compliance project successfully
could result in the disruption of our normal operations and in the inability
or unwillingness of our policyholders to utilize our services. In a worst
case scenario, any such failure or disruption could have a material adverse
effect on our business, financial condition and results of operations and
could result in litigation against the Company based upon any such disruption
or failure. In addition, disruptions in the economy generally resulting from
Year 2000 issues could also materially adversely affect the Company. The
amount of potential liability and lost revenue cannot be reasonably estimated
at this time. The Company may also be adversely affected if Year 2000 issues
result in additional claims being made against our insureds.

We plan to evaluate the status of our Year 2000 efforts, including the
preparation of any contingency plans, in June 1999. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Year 2000 Issues."

OUR ABILITY TO REMAIN COMPETITIVE PARTLY DEPENDS ON AN EFFECTIVE REINSURANCE
PROGRAM; WE HAVE RECENTLY MADE CHANGES TO OUR REINSURANCE STRATEGY

The amount and cost of reinsurance available to companies specializing
in medical professional liability insurance are subject, in large part, to
prevailing market conditions beyond our control. Our ability to provide
professional liability insurance at competitive premium rates and coverage
limits on a continuing basis will depend in part upon our ability to secure
adequate reinsurance in amounts and at rates that are commercially
reasonable. Although we anticipate that we will continue to be able to obtain
reinsurance, we cannot assure that this will be the case.

Further, the Company is subject to credit risk with respect to its
reinsurers because reinsurance does not relieve us of liability to our
insureds for the risks ceded to reinsurers. Although we place our reinsurance
with reinsurers we believe to be financially stable, a significant
reinsurer's inability to make payment under the terms of a reinsurance treaty
could have a material adverse effect on the Company.

Finally, due to the favorable trends in claims reported since mid-1995,
we have recently modified our reinsurance strategy to increase the Company's
retention and decrease premiums and risk ceded to reinsurers. Though we
believe these changes to be prudent, we cannot assure that they will not have
a material adverse effect on the Company. See "Business -- Reinsurance."

<PAGE>

REGULATION OF INSURANCE COMPANIES IS PRIMARILY CONCERNED WITH PROTECTING THE
INTERESTS OF POLICYHOLDERS, NOT STOCKHOLDERS

Insurance companies are subject to supervision and regulation by the
state insurance authority in each state in which they transact business.
ISMIE is domiciled and licensed only in the State of Illinois. Supervision
and regulation relate to numerous aspects of an insurance company's business
and financial condition, including limitations on lines of business,
underwriting limitations, the setting of premium rates, the establishment of
standards of solvency, statutory surplus requirements, the licensing of
insurers and agents, concentration of investments, levels of reserves, the
payment of dividends, transactions with affiliates, changes of control and
the approval of policy forms. Regulation is concerned primarily with the
protection of policyholders' interests rather than stockholders' interests.
See "Business -- Regulation."

State regulatory oversight and various proposals at the federal level
may in the future adversely affect the Company's results of operations. In
recent years, the state insurance regulatory framework has come under
increased federal scrutiny, and certain state legislatures have considered or
enacted laws that alter and, in many cases, increase state authority to
regulate insurance companies and insurance holding company systems. Further,
the National Association of Insurance Commissioners (the "NAIC") and state
insurance regulators are reexamining existing laws and regulations, which in
many states has resulted in the adoption of laws that specifically focus on
insurance company investments, issues relating to the solvency of insurance
companies, risk-based capital guidelines, interpretations of existing laws,
the development of new laws and the definition of extraordinary dividends.
See "Business -- Regulation -- Regulation of Dividends from Insurance
Subsidiaries," "-- Risk-Based Capital" and "-- Regulation of Investments."

OUR FINANCIAL SUCCESS DEPENDS PRIMARILY ON THE ABILITY OF ISMIE INDEMNITY TO
PAY DIVIDENDS TO US

Following the Effective Date, ISMIE Holdings will be an insurance
holding company which will hold all of the outstanding capital stock of ISMIE
Indemnity. As an insurance holding company, ISMIE Holdings' ability to meet
its obligations and to pay dividends, if any, depend upon the receipt of
sufficient funds from its subsidiaries. The payment of dividends to ISMIE
Holdings by ISMIE Indemnity is subject to general limitations imposed by
applicable insurance laws. See "Management's Discussion and Analysis of
Financial Data and Results of Operations" and "Business -- Regulation --
Regulation of Dividends from ISMIE Indemnity."

ANTITAKEOVER PROVISIONS COULD AFFECT THE PRICE OF OUR COMMON STOCK

ISMIE Holdings' certificate of incorporation (the "Certificate of
Incorporation") and bylaws (the "Bylaws") include provisions that may be
considered to have anti-takeover effects and may delay, defer or prevent a
takeover attempt that you may consider to be in your best interests. These
provisions include a board of directors consisting of three classes;
authorization to issue up to 5,000,000 shares of preferred stock, par value
$.01 per share (the "Preferred Stock"), in one or more series with such
rights, obligations, powers and preferences as the ISMIE Holdings Board may
provide; a limitation which permits a special meeting of stockholders to be
called only by the President or Secretary at the request of a majority of the
ISMIE Holdings

<PAGE>

Board, or by the Chairman; a prohibition against stockholders acting by
written consent; provisions which provide that directors may be removed only
for cause and only by the affirmative vote of holders of two-thirds of the
outstanding shares of voting securities; provisions that the ISMIE Holdings
Board may increase the size of the board and may fill vacancies and newly
created directorships; and certain advance notice procedures for nominating
candidates for election to the ISMIE Holdings Board and for proposing
business before a meeting of stockholders. In addition, Illinois law
prohibits a person from acquiring more than 10% of the Common Stock of ISMIE
Holdings without the prior approval of the Illinois Director of Insurance.
In the future, we may also be subject to insurance holding company laws in
other states that contain similar regulatory approval requirements. See
"Management" and "Description of Capital Stock -- Certain Statutory, Charter
and Bylaw Provisions Which Could Have an Anti-Takeover Effect."

SALES OF SUBSTANTIAL AMOUNTS OF COMMON STOCK FOLLOWING THE CONVERSION COULD
LOWER THE MARKET PRICE OF THE COMMON STOCK

Shares of Common Stock issued to Eligible Members pursuant to the
Conversion, will be eligible for immediate sale in the public market. We
cannot predict the effect, if any, that future sales of shares, or the
availability of shares for future sale, will have on the market price of the
Common Stock prevailing from time to time. Sales of substantial amounts of
Common Stock in the public market following effectiveness of the Conversion,
or the perception that sales could occur, could adversely affect the market
price of the Common Stock and impair our future ability to raise capital
through an offering of our equity securities.

AN ACTIVE OR ORDERLY TRADING MARKET FOR THE COMMON STOCK MAY NOT DEVELOP; OUR
STOCK PRICE MAY BE VOLATILE

Prior to the Conversion, there has been no public market for the Common
Stock and there can be no assurance that an active or orderly trading market
will develop or be sustained. Application will be made to have the Common
Stock approved for listing, subject to official notice of issuance, on the
Nasdaq National Market. However, there can be no assurance as to the price
at which the Common Stock will trade on the Nasdaq National Market.

The trading price of the Common Stock may be subject to wide
fluctuations and the bid and ask price of the Common Stock might vary
significantly. Additionally, factors such as variations in our financial
results or other developments affecting us could cause the market price of
the Common Stock to fluctuate significantly. See "Market for Common Stock."

We have considered, and may consider in the future, an initial public
offering of our Common Stock. However, there is no assurance that an initial
public offering will occur. If an initial public offering does occur, sales
of substantial amounts of Common Stock in the public market or the perception
that sales might occur could adversely affect the market price of the Common
Stock. If an initial public offering does not occur, it is less likely that
an active or orderly trading market will develop for the Common Stock. If an
active market does not develop, you may not be able to sell your shares
promptly or at the desired price.

<PAGE>

INFORMATION CONCERNING THE SPECIAL MEETING

This Proxy Statement/Prospectus is furnished to you in connection with
the solicitation by the Board of Governors of proxies in the accompanying
form to be used at the Special Meeting and any adjournment or postponement
thereof.

TIME, DATE AND PLACE

The Special Meeting will be held at _______ p.m., Central time, on
__________, 1999 at __________________, Chicago, Illinois. At the Special
Meeting, including any adjournment or postponement, all Eligible Members will
consider and vote upon a proposal to approve the Merger Agreement.

RECORD DATE, QUORUM AND VOTE REQUIRED

All persons who were members of record of the Exchange on the Adoption
Date (also referred to herein as "Eligible Members") are entitled to notice
of, and to vote at, the Special Meeting. The presence, either in person or
by proxy, of one hundred Eligible Members at the Special Meeting is necessary
to constitute a quorum. The affirmative vote of two-thirds of Eligible
Members voting in person or by proxy at the Special Meeting is required to
approve the Merger Agreement on behalf of ISMIE. The ISMIE Holdings Board
and the ISMIE Indemnity Board, based upon the approval of the Board of
Governors, each approved the Merger Agreement on May 5, 1999.

There are approximately 9,434 Eligible Members of the Exchange. You are
entitled to one vote at the Special Meeting regardless of the size of the
policy which you own or hold.

RECOMMENDATION OF THE BOARD OF GOVERNORS

The Board of Governors has determined that the Conversion is in the best
interests of the Exchange and its members and has approved the Merger
Agreement on behalf of the Exchange. The Board of Governors recommends that
you vote for approval of the Conversion. In making this determination, the
Board of Governors, among other things, had access to the analysis and advice
referred to in "The Conversion -- Background of the Conversion" and relied on
the fairness opinion of the Financial Advisor with respect to the Conversion.
The Board of Governors also considered, among other things, the proposed
terms and conditions of the merger, its fiduciary responsibilities, possible
alternatives to the Conversion and information with respect to the financial
condition, assets, liabilities, businesses, results of operations and
prospects of the Company on a historical, prospective and current value basis.

The Board of Governors believes that the Conversion is in the best
interests of the Exchange and its members. ACCORDINGLY, THE BOARD OF
GOVERNORS RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE CONVERSION.

<PAGE>

INTERESTS OF THE BOARD OF GOVERNORS IN THE CONVERSION

Pursuant to ISMIE's Rules and Regulations, members of the Board of
Governors must be physician members of the Exchange in order to serve on the
Board of Governors. Accordingly, each present member of the Board of
Governors is an Eligible Member of ISMIE who will be entitled to vote upon
the Merger Agreement and to receive Common Stock pursuant to the Conversion.
The estimated number of shares of Common Stock to be allocated to members of
the Board of Governors is set forth under "Ownership of Common Stock." Common
Stock will be allocated to members of the Board of Governors on the same
basis as all other Eligible Members and no additional shares of Common Stock
will be allocated in the Conversion to members of the Board of Governors or
to management. Management and members of the Board of Governors will be
eligible to participate in the Company's equity incentive plan. See
"Management -- Compensation Plans."

PROXIES

Each Eligible Member will be entitled to one vote at the Special Meeting
in connection with the approval of the Merger Agreement as well as any other
matter which may properly come before the Special Meeting. Eligible Members
may vote in person or by proxy. Duly executed proxies, will, unless revoked,
be voted in accordance with the instructions indicated on those proxies. If
no contrary instructions are indicated, each duly executed proxy will be
voted in favor of approval of the Merger Agreement. An Eligible Member who
has given a proxy may revoke it at any time prior to its exercise at the
Special Meeting by delivering to the Attorney-in-Fact an instrument of
revocation or a duly executed proxy bearing a later date (provided such later
dated proxy is delivered to the Attorney-in-Fact at least ten days prior to
the Special Meeting) or by attending the Special Meeting and voting in person.

PROXY SOLICITATION

The Exchange will bear the cost of soliciting proxies from its Eligible
Members. In addition to solicitation by mail, proxies may be solicited by the
directors, officers and certain employees of the Exchange, who will not be
specifically compensated for those services, by personal interview, telephone
or other telecommunication. In addition, the Exchange has retained
_______________ to assist in soliciting proxies for the Special Meeting at a
fee of approximately $_________ plus out-of-pocket expenses.

QUESTIONS REGARDING THE CONVERSION

If you have questions regarding the Conversion or need help with any of
the accompanying materials you may call the Exchange's conversion information
center at 1-888-_________ (toll-free).

Persons wishing to comment to the Department of Insurance of the State of
Illinois (the "Illinois Insurance Department") regarding the merger of the
Exchange with and into ISMIE Indemnity may write to: Department of Insurance,
320 West Washington Street, Fourth Floor, Springfield, Illinois 62767-0001
or may send comments to the Illinois Insurance Department via facsimile at
(217) 782-5020.

<PAGE>

THE CONVERSION

INTRODUCTION

This general information section describes certain aspects of the Merger
Agreement and the proposed Conversion. A copy of the Merger Agreement is
included in this Proxy Statement/Prospectus as Annex I. This Proxy
Statement/Prospectus contains information about us and our business,
including financial statements, certain considerations relevant to the
ownership of Common Stock and additional information about the Conversion and
other matters. You are urged to read this Proxy Statement/Prospectus in its
entirety.

OVERVIEW OF THE CONVERSION

The Board of Governors approved the Conversion on May 5, 1999. The
principal purpose of the Conversion is to enable the Company to obtain
increased financial and structural flexibility and provide greater access to
capital resources than are currently available to the Exchange as a
reciprocal insurance exchange and thus to help position it for long-term
growth. If the Merger Agreement is approved by Eligible Members, the
Exchange will merge with and into ISMIE Indemnity. As a result of the merger,
ISMIE Indemnity will be the surviving corporation, membership rights in the
Exchange will end and Eligible Members will be entitled to receive shares of
Common Stock in ISMIE Holdings. See "Comparison of Certain Rights of Members
Before and After the Conversion." Your current insurance policy and coverage
will not be affected by the Conversion or your vote on the Conversion. After
the Conversion, ISMIE Indemnity will remain a wholly owned subsidiary of
ISMIE Holdings, and ISMIE Indemnity will have access to capital markets
through ISMIE Holdings.

If the conditions to the merger of the Exchange with and into ISMIE
Indemnity are fulfilled, the Effective Date of the Merger Agreement is
expected to occur during the third quarter of 1999. No shares of Common
Stock issuable in the Conversion will be delivered to Eligible Members until
the thirty day period for filing a dissenters' rights petition, if any, has
expired and certain other conditions have been satisfied. For further
details about these conditions, see "-- Conditions to Effectiveness of the
Merger."

BACKGROUND OF THE CONVERSION

As a result of intense competition throughout the 1980's and 1990's,
premium rate increases in the medical malpractice industry generally have not
kept pace with increases in the severity of claims. Financially strong
companies with comparatively better financial strength ratings are
benefitting from a highly competitive market. We believe that these market
conditions have created a competitive environment that favors larger,
well-capitalized companies with multi-state operations and broad distribution
systems that offer a variety of products. In light of this competitive
environment, in the summer of 1998, ISMIE engaged Salomon Smith Barney to
serve as its Financial Advisor to investigate the possible conversion of
ISMIE from a reciprocal insurance exchange to a stockholder-owned company or
some other transaction involving the issuance of debt or equity securities in
order to secure and strengthen our market position and prospects for growth
in the future.

<PAGE>

At a meeting of the Board of Governors on June 26, 1998, the Financial
Advisor reviewed in detail with the Board of Governors several capital
raising alternatives for the Exchange. The purpose of the Financial Advisor's
review was to analyze the financial position and operations of the Exchange
and alternative sources for raising capital for a reciprocal insurance
exchange, including the feasibility of a public securities offering by the
Exchange in the event it were restructured and reorganized as a stock
corporation. The Financial Advisor discussed the following matters with the
Board of Governors: (i) trends in the insurance industry, including
acquisitions of malpractice insurance companies and the strategic environment
for medical malpractice insurers; (ii) projections of operating income for
the Exchange; (iii) capital raising alternatives available to reciprocal
insurance companies, including financial reinsurance, the sale of surplus
note securities, the long-term utilization of a downstream holding company
and the conversion to a corporate structure; and (iv) constraints inherent in
a single state, single line of business insurance company.

The Financial Advisor emphasized the need for financial flexibility to
effect strategic initiatives identified by management, even though additional
capital is not an immediate need of the Exchange. The Financial Advisor also
presented an analysis of the feasibility of a public stock offering if the
Exchange converted to a corporate form. The Financial Advisor concluded that
it would be feasible for the Exchange to change its corporate structure in
order to gain access to the public markets and to proceed as a publicly held
company. The Financial Advisor also expressed its view that a holding company
structure (under which the Exchange would become a wholly owned subsidiary of
a publicly held holding company) would better serve the Company going
forward.

Based on the Board of Governors' conclusion that it is in the best
interests of the Exchange and its members that the Exchange be reorganized as
a stock corporation, the Board of Governors instructed management, in
conjunction with the Exchange's professional advisors, to develop and prepare
a plan of conversion pursuant to which the Exchange would become a stock
corporation, and to present the plan to the Board of Governors for its
consideration at a future meeting.

On July 29, 1998, a representative of the Exchange, together with legal
counsel, met informally with the staff of the Illinois Insurance Department
to discuss in general terms the Exchange's reasons for the proposed
Conversion and possible terms, including share allocation. Management of the
Exchange and its legal counsel then prepared a plan and agreement of merger
incorporating the essential provisions of the Conversion, including the
method of allocating Common Stock to be issued in the Conversion, which was
presented to the Board of Governors at its meeting on September 2, 1998. At
that meeting, which was also attended by the Financial Advisor and legal
counsel for the Exchange and the Financial Advisor, the Board of Governors
discussed in detail the proposed terms of the Conversion and approved in
principle the plan and agreement of merger as presented.

Following the September 2, 1998 meeting of the Board of Governors,
management of the Exchange and legal counsel reviewed and revised the
proposed plan and agreement of merger. The Board of Governors next met on
October 9, 1998, and further discussed the terms of the proposed Conversion
and timing of implementation of the Conversion. No action regarding the
proposed Conversion was taken at that meeting. Thereafter management of the
Exchange and its

<PAGE>

advisors continued to work on the terms of the Merger Agreement, including
the method of allocating Common Stock to be issued in the Conversion. On
January 29, 1999, a representative of the Exchange, together with legal
counsel, met again with the staff of the Illinois Insurance Department to
discuss the terms of the proposed merger of the Exchange with and into ISMIE
Indemnity.

At a regular meeting of the Board of Governors held on February 5, 1999,
the Board of Governors met with management, the Financial Advisor and legal
counsel to consider the Conversion and discuss the proposed Merger Agreement.
No action regarding the proposed Conversion was taken at that meeting.

On May 5, 1999, another regular meeting of the Board of Governors was
held. All but one of the twenty one members of the Board of Governors were
present at the meeting. At this meeting, the Board of Governors again met
with management, the Financial Advisor and legal counsel to consider the
Conversion and the proposed Merger Agreement. The Financial Advisor advised
the Board of Governors that, based upon the current structure of the
Conversion, the Financial Advisor was of the opinion that the exchange of the
aggregate Membership Interests for shares of Common Stock pursuant to the
Merger Agreement, was fair, from a financial point of view, to Eligible
Members as a group. See " -- Opinion of Financial Advisor." After discussion
and consideration of various factors relating to the proposed Conversion, the
members of the Board of Governors present at the meeting unanimously
determined the Conversion to be in the best interests of the Exchange and its
members and approved the Merger Agreement on behalf of ISMIE. See
"Recommendations of the Board of Governors." The Board of Governors then
directed that the Merger Agreement be submitted to a vote of the Members at a
special meeting of members called for that purpose. The Board set May 5,
1999 as the record date for determining members eligible to vote at the
special meeting and to participate in the Conversion. The Financial Advisor
subsequently delivered to the Board of Governors its written opinion, dated
May 5, 1999, a copy of which is attached hereto as Annex II.

<PAGE>

HISTORY; STRUCTURE OF THE CONVERSION

ISMIE is an Illinois reciprocal insurance exchange organized in 1976 by
the Medical Society to provide medical malpractice insurance to its physician
and other healthcare provider members. The business of ISMIE is managed by
its Board of Governors and by its attorney-in-fact, the Illinois State
Medical Insurance Services, Inc. (the "Attorney-in-Fact" or "ISMIS"), which
is a wholly owned subsidiary of ISMIE. Prior to July 1998, ISMIE's
attorney-in-fact was a wholly owned subsidiary of the Medical Society. In
July 1998, the function of attorney-in-fact for ISMIE was transferred from a
wholly owned subsidiary of the Medical Society to ISMIS, a new corporation of
the same name formed as a wholly owned subsidiary of the Exchange.
Immediately preceding the Conversion, the Exchange plans to contribute the
stock of ISMIS to ISMIE Holdings. After the Conversion, ISMIS will continue
to perform service functions for ISMIE as a wholly owned subsidiary of ISMIE
Holdings.

ISMIE Holdings is a newly formed Delaware corporation which was formed
to be the publicly held holding company for ISMIE Indemnity. ISMIE Holdings
has no historical operations and was organized in April, 1999. ISMIE
Indemnity, a wholly owned subsidiary of ISMIE Holdings, is an Illinois stock
insurance corporation licensed to write property and casualty insurance in
the State of Illinois. It will have conducted no business prior to the
merger in which ISMIE will be merged into and become part of ISMIE Indemnity.

The following diagram summarizes the Company's structure immediately
after the Conversion:

<PAGE>

STOCKHOLDERS*

ISMIE HOLDINGS INC.
(DELAWARE)

ISMIE INDEMNITY COMPANY
(ILLINOIS)

* Approximately 1% of the shares of Common Stock to be issued in the
Conversion will be issued to ISMIE Indemnity so that the Conversion will have
the tax consequences set forth in "Certain Federal Income Tax Consequences of
the Conversion -- The Exchange and ISMIE Indemnity."

DETERMINATION OF ELIGIBLE MEMBERS

Your right to vote on the proposal to approve the Merger Agreement is
based on whether you were a member on May 5, 1999, the date the Board of
Governors adopted the Merger Agreement (the "Adoption Date"). The Board of
Governors set the Adoption Date as the record date for determining members
eligible to vote at the Special Meeting. Members entitled to vote at the
Special Meeting and to receive consideration in the Conversion are referred
to herein as "Eligible Members."

DETERMINATION OF MEMBERSHIP. An Exchange member is a person or
organization who is a "named insured" or "additional named insured" under a
Policy. A "Policy" is an insurance policy issued by the Exchange but does
not include (i) any agreement pursuant to which the Company has ceded or
assumed reinsurance or (ii) a reporting endorsement. "Named insured" or
"additional named insured" means any person who is specifically identified by
name in the declarations page of a Policy as a "named insured" or as an
"additional named insured" on any endorsement attached thereto other than a
reporting endorsement. The identity of the "named insured" or "additional
named insured" in a Policy will be determined by the Company without giving
effect to any interest of any other person in such Policy and such
determination shall be binding. A "named insured" or "additional named
insured" ceases to be a Member when the Policy terminates.

<PAGE>

Whether or not you are an Eligible Member for purposes of voting or for
purposes of receiving consideration is determined solely from the Exchange's
books and records.

CONVERSION OF MEMBERSHIP INTERESTS

Members have certain rights which for purposes of the Conversion are
called "Membership Interests." Membership Interests consist of the rights
arising under the Exchange's Subscription Agreements and Rules and
Regulations, the Illinois Insurance Code and otherwise, including, without
limitation, the right to vote for the election of members of the Board of
Governors and on other matters, any right and title to assets, and to
participate in any distribution of surplus upon liquidation, but not
including claim obligations of the Exchange arising under Policies. Upon
completion of the Conversion, all Membership Interests in ISMIE will be
canceled and extinguished, and the Membership Interests of Eligible Members
will be converted into the right to receive consideration to be distributed
in the Conversion, as described in "-- Consideration" below. See "Comparison
of Certain Rights of Members Before and After the Conversion."

CONSIDERATION

If the Conversion becomes effective, Eligible Members will receive
consideration in the form of Common Stock.

ALLOCATION OF SHARES. The amount of consideration received by Eligible
Members pursuant to the Merger Agreement will be based on the following
allocation of Common Stock.

(i) Each Eligible Member will be allocated a number of shares of
Common Stock equal to the product of x and y, where "x" equals 9,000,000
shares of Common Stock and "y" equals the ratio of the Earned Premiums of
that Eligible Member to the total Earned Premiums of all Eligible Members
during the period beginning on July 1, 1995 and ending on and including the
Adoption Date, plus

(ii) Each Eligible Member will also be allocated a number of
shares of Common Stock equal to 1,000,000 shares of Common Stock divided by
the total number of Eligible Members.

As used herein, the term "Earned Premiums" means earned premiums (exclusive
of any premium surcharges) in respect of a Policy covering an Eligible Member at
any time during the period beginning on July 1, 1995 and ending on and including
Adoption Date. The term Earned Premiums refers to the gross premiums paid to
the Exchange as earned over the period of coverage provided under a Policy and
is, therefore, net of return premiums due to cancellations or applications not
accepted. Earned Premiums are not reduced by reinsurance premiums ceded or
certain other reductions made in calculating "net premiums earned" as presented
in the financial statements contained herein. The total amount of Earned
Premiums of all Eligible Members for the period July 1, 1995 through the
Adoption Date is approximately $582.1 million, or $64.68 of Earned Premiums for
each of the 9,000,000 shares of Common Stock to be allocated based on Earned
Premiums.

<PAGE>

There are approximately 9,434 Eligible Members who will participate in
the allocation of the 1,000,000 shares of Common Stock distributed to those
members. Based upon the foregoing allocation formula, if you were a member on
the Adoption Date and joined the Exchange prior to July 1, 1995 and paid
average annual premiums since that date of $16,026, you would be allocated
approximately 1,060 shares of Common Stock. Of that Common Stock, 954 would
be allocable based on your Earned Premiums and 106 would be allocable because
you are an Eligible Member. See "-- Recommendation of the Board of Governors
- --Determining the Allocation Among Eligible Members."

For more information about the allocation of the Common Stock among
Eligible Members, see Section 2.3 of the Merger Agreement, a copy of which is
included in this Proxy Statement/Prospectus as Annex I.

For more information about the number of shares of Common Stock that
will be allocated to you, see the green RECORD CARD distributed with this
Proxy Statement/Prospectus and "-- Estimated Allocation of Shares."

FRACTIONAL SHARES. No fractional shares of Common Stock shall be issued
to any Eligible Member in the Conversion. Fractional shares will be rounded
up or down to the nearest integral number of shares (with one-half being
rounded upward). Rounding may cause the aggregate number of shares of Common
Stock issued to Eligible Members in the Conversion to be, in the aggregate,
slightly less or more than 10,000,000.

ESTIMATED ALLOCATION OF SHARES. Your green RECORD CARD indicates the
estimated whole number of shares of Common Stock that you would be entitled
to receive pursuant to the Merger Agreement.

ISSUANCE OF SHARES. Eligible Members will be sent stock certificates
for their shares of Common Stock no earlier than 30 days after the Effective
Date. See "-- Dissenters' Rights."

OPINION OF THE FINANCIAL ADVISOR

The Exchange retained the Financial Advisor to assist the Exchange in
evaluating the possible conversion of the Exchange from an Illinois
reciprocal insurance exchange to a stockholder-owned company in order to
secure and strengthen the Exchange's market position and growth in the
future. See "--Background of the Conversion." In connection with the
engagement, the Exchange instructed the Financial Advisor to evaluate the
fairness, from a financial point of view, to the Eligible Members, as a
group, of the exchange of the aggregate Membership Interests for shares of
Common Stock of ISMIE Holdings, pursuant to the Merger Agreement. The Company
imposed no limitations on the Financial Advisor with respect to the
investigation to be made, or the procedures to be followed, by it in
rendering its opinion. The Exchange selected the Financial Advisor because of
its reputation and expertise as a nationally recognized investment banking
firm. The Financial Advisor, as part of its investment banking services, is
regularly engaged in the valuation of businesses and securities in connection
with stock repurchases, mergers, acquisitions, underwritings, sales and
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.

<PAGE>

The Financial Advisor has delivered its written opinion, dated May 5,
1999, to the Board of Governors stating that, on and as of the date of such
opinion, and based upon the procedures and subject to the assumptions and
qualifications described in its opinion, the exchange of the aggregate
Membership Interests for shares of Common Stock of ISMIE Holdings pursuant to
the Merger Agreement is fair, from a financial point of view, to the Eligible
Members as a group.

THE FULL TEXT OF THE FINANCIAL ADVISOR'S OPINION, DATED MAY 5, 1999,
WHICH SETS FORTH THE MATTERS REVIEWED, ASSUMPTIONS MADE, FACTORS CONSIDERED,
RELIANCE UPON OTHERS AND LIMITATIONS AS TO THE REVIEW UNDERTAKEN BY IT, IS
ATTACHED HERETO AS ANNEX II AND IS INCORPORATED BY REFERENCE HEREIN. YOU ARE
URGED TO READ CAREFULLY THE OPINION OF THE FINANCIAL ADVISOR IN ITS ENTIRETY.
ANY DESCRIPTION OF OR REFERENCE TO THE FINANCIAL ADVISOR'S OPINION IS SUBJECT
TO, AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE
OPINION. THE PREPARATION OF A FAIRNESS OPINION IS A COMPLEX PROCESS AND IS
NOT NECESSARILY SUBJECT TO PARTIAL ANALYSIS OR SUMMARY DESCRIPTION. THE
FINANCIAL ADVISOR'S OPINION IS DIRECTED TO THE BOARD OF GOVERNORS AND DOES
NOT CONSTITUTE A RECOMMENDATION TO YOU AS TO WHETHER YOU SHOULD VOTE TO
APPROVE THE CONVERSION.

The Financial Advisor was not requested to opine as to, and its opinion
does not address, the underlying business decision of the Board of Governors
to proceed with or effect the Conversion. In addition, the Financial
Advisor's opinion expressly excludes any opinion as to: (1) which of the
Company's policyholders are to be included among the Eligible Members; (2)
the fairness of the proposed consideration to be paid to any Eligible Member
or to any class of Eligible Members in connection with the Conversion,
including any provisions of the Merger Agreement relating to which members
receive Common Stock of ISMIE Holdings, the allocation of such Common Stock
among Eligible Members and other provisions of the Merger Agreement which
distinguish among Eligible Members; and (3) the fair market value of any
shares of Common Stock of ISMIE Holdings to be issued pursuant to the Merger
Agreement, the price at which the Common Stock of ISMIE Holdings could be
sold in an initial public offering, (the "Initial Public Offering," and such
price is referred to as the "IPO Price"), or the price at which the Common
Stock of ISMIE Holdings issued in connection with the Merger Agreement or
pursuant to an Initial Public Offering would trade. The Financial Advisor
noted that the IPO Price, if an Initial Public Offering were consummated,
would be a function of market conditions and the recent performance of and
outlook for the Company at that time. Further, the Financial Advisor noted
its belief that trading in the Common Stock of ISMIE Holdings for a period
following the completion of a distribution of the Common Stock of ISMIE
Holdings, including an Initial Public Offering, would be characterized by a
redistribution of the Common Stock of ISMIE Holdings among Eligible Members
that were issued shares of Common Stock and other investors. The Financial
Advisor also noted that it is possible that during these periods of
redistribution the Common Stock of ISMIE Holdings may trade below the prices
at which it would trade on a fully distributed basis.

In arriving at its opinion, the Financial Advisor reviewed, analyzed and
relied upon material bearing upon the financial and operating condition and
prospects of the Company and material prepared in connection with the Merger
Agreement and the Conversion, and considered such financial and other factors
as it deemed appropriate under the circumstances, including, among other
things, the following: (1) the statutory annual statements provided by the
Company for the years 1993 through 1998; (2) certain GAAP financial data
provided by the Company, including the audited income statements for each
year of the five year period ending December 31, 1998 and the audited balance
sheets for each year of the five year period ending December

<PAGE>

31, 1998; (3) certain consolidated financial projections for ISMIE Holdings
and its subsidiaries after the Conversion provided to the Financial Advisor
by the Company; (4) the draft Registration Statement on Form S-4 of ISMIE
Holdings, dated April 28,1999; (5) a copy of the Plan and Agreement of Merger
dated May 5, 1999; (6) certain financial data of the Company which the
Financial Advisor compared with publicly available financial information and
market data of other companies which it believed to be comparable; and (7)
the financial terms of the transactions contemplated by the Merger Agreement
which it compared with the financial terms of other transactions it deemed to
be relevant. The Financial Advisor also conducted discussions with
management and advisors of the Company relating to the business of the
Company and certain financial and other aspects of the Merger Agreement and
the Conversion and such other matters it believed to be relevant to its
inquiry. In addition, the Financial Advisor took into account its assessment
of general economic, market and financial conditions, its experience in
securities valuation and its knowledge of the insurance industry generally.

In preparing its opinion, the Financial Advisor assumed, at the
Company's instruction, that: (1) the Conversion will meet all applicable
legal and regulatory requirements and that all necessary action will have
been taken to comply with all applicable laws and requirements, including the
receipt of all required approvals by policyholders, regulators and otherwise;
and (2) the terms of an Initial Public Offering (which have not yet been
determined) would not affect the legal or tax treatment of the Merger
Agreement or the Conversion. The Financial Advisor also assumed that, as of
the date of its opinion, the Conversion will be completed on the basis
described in the Merger Agreement. The Financial Advisor has been advised as
to certain legal and tax matters by counsel to the Company and, with respect
to such matters, it relied upon such counsel.

The Financial Advisor has assumed that the Company will receive, prior
to the Effective Date, a private letter ruling from the Internal Revenue
Service or an opinion from its tax counsel as to certain matters as described
in Section 7.1(d) of the Merger Agreement. For purposes of its opinion, the
Financial Advisor has assumed that, if an opinion from tax counsel is
delivered, then such opinion of tax counsel is correct and will be confirmed
as of the Effective Date with no changes or exceptions whatsoever.

In preparing its opinion, the Financial Advisor considered a number of
factors including, but not limited to, the following (in no particular
order): (1) the fact that the Company has advised the Financial Advisor that
growth is extremely important to remain an effective and competitive insurer
in the future; (2) the fact that the Company has advised the Financial
Advisor that it is of significant strategic importance that the Company have
broader access to external capital to finance this growth; (3) the Company's
financial strength ratings and the considerations on which such ratings are
based; (4) in its present form as a reciprocal insurance exchange, the
Company has limited access to the capital markets for new capital; (5)
following the Conversion, the Exchange will have a capital structure
potentially enabling it to access the capital markets for new capital; and
(6) the non-transferability of Membership Interests.

In conducting its review and arriving at its opinion, the Financial
Advisor relied upon and assumed the accuracy and completeness of the
financial and other information that was provided to it or was publicly
available and has not attempted to independently verify that information.

<PAGE>

With respect to financial forecasts, the Financial Advisor has assumed that
such forecasts have been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the Company, and it expressed
no opinion with respect to the forecasts or the assumptions on which they are
based. In addition, the Financial Advisor did not make or obtain any
evaluations or appraisals of the properties, assets, liabilities, reserves or
surplus of the Company. The Financial Advisor's opinion as expressed therein
is limited to the fairness, from a financial point of view, to the Eligible
Members, as a group, of the exchange of the aggregate membership interests
for shares of Common Stock of ISMIE Holdings, pursuant to the Merger
Agreement, and does not address the Company's underlying business decision to
participate in the Merger Agreement and Conversion, and does not constitute a
recommendation to any Eligible Member as to how such Eligible Member should
vote with respect to the Merger Agreement. The Financial Advisor's opinion is
necessarily based upon conditions as they exist and can be evaluated on the
date of its opinion and the information made available to it through the date
of its opinion.

The Exchange retained the Financial Advisor pursuant to an engagement
letter dated July 29, 1998. The Exchange will pay the Financial Advisor an
aggregate fee of up to $500,000 pursuant to the engagement letter. The
Exchange also agreed to reimburse the Financial Advisor for all reasonable
out-of-pocket expenses, including fees and expenses of counsel, in connection
with the rendering of services contemplated in the engagement letter. These
fees and expenses were payable whether or not the Financial Advisor gave the
Exchange a favorable fairness opinion. The Company has agreed to indemnify
the Financial Advisor and its affiliated entities, directors, officers,
employees, legal counsel, agents and controlling persons against certain
costs, expenses and liabilities to which they may become subject arising out
of or in connection with their engagement. The Exchange also has agreed to
retain the Financial Advisor to act as lead underwriter in connection with an
Initial Public Offering, and the Financial Advisor will receive fees in
connection with that transaction when and if completed.

RECOMMENDATION OF THE BOARD OF GOVERNORS

The Board of Governors believes that the terms of the Conversion are in
the best interests of the Exchange and its members and recommends that you
vote FOR the approval of the Merger Agreement at the Special Meeting.

The terms of the Merger Agreement were approved by the Board of
Governors at a meeting held on May 5,1999. At that meeting and at previous
meetings of the Board of Governors held on September 2, 1998 and February 5,
1999, members of the Exchange's senior management, together with its legal
and financial advisors, reviewed with the Board of Governors the background
of the proposed Conversion, the potential benefits of the Conversion and the
terms of the proposed Merger Agreement. On May 5, 1999, the Financial
Advisor provided its opinion as to the fairness, from a financial point of
view, to Eligible Members as a group, of the exchange of Membership Interests
for shares of Common Stock to be allocated in the Conversion. A summary of
the opinion and the procedures followed in preparing the opinion are set
forth in "-- Opinion of Financial Advisor."

DETERMINATION THAT THE CONVERSION IS IN THE BEST INTERESTS OF THE
EXCHANGE AND ITS MEMBERS. In reaching its determination at the May 5, 1999
meeting that the Conversion is in the

<PAGE>

best interests of the Exchange and its members, the Board of Governors
consulted with the Exchange's management and its legal and financial
advisors, and considered the following factors:

1. The competitive forces affecting the medical malpractice market
in Illinois, which in the view of the Board of Governors require the
Exchange to grow and diversify its business in order to remain an effective
and competitive insurer in the future. The Board of Governors has
concluded that growth and diversification can best be accomplished in a
corporate form.

2. The strategic importance of the Exchange having broader access
to external capital to achieve this growth, and the Board of Governors'
belief that in its present form as a reciprocal insurance exchange, the
Exchange has limited access to the capital markets for new capital.

3. Negative comments from A.M. Best and Standard & Poor's relating
to the Exchange's narrow product line and geographic concentration.

4. The intense competition in the medical malpractice industry.

5. The business, operations, earnings, assets, liabilities and
financial condition of the Exchange, on both an historical and prospective
basis, and the benefits to the Exchange that the Board of Governors
believes could be realized by pursuing its business strategy of growth and
diversification of which the Conversion and related transactions are a
principal part.

6. The conversion of other professional liability insurance
companies, including Southern California Physicians Insurance Exchange and
the pending conversion of the Medical Inter-Insurance Exchange of New
Jersey, to publicly held companies, and the greater access to capital
resources and increased financial and structural flexibility that such a
structure affords.

7. The opinion of the Financial Advisor (subject to the limitations
contained therein) that the exchange of the aggregate Membership Interests
for shares of Common Stock pursuant to the Merger Agreement is fair, from a
financial point of view, to Eligible Members as a group.

8. That the merger of the Exchange with and into ISMIE Indemnity
will be a tax-free reorganization and that Eligible Members, the Exchange,
ISMIE Holdings and ISMIE Indemnity will not recognize gain or loss for
federal income tax purposes in the merger.

9. That Membership Interests in ISMIE are not transferable, and that
the Common Stock, in contrast, will be freely tradable and will be listed
on the Nasdaq Stock Market.

10. That as a result of the Conversion, Eligible Members will become
stockholders of ISMIE Holdings, a Delaware corporation. Delaware corporate
law is widely regarded as the most extensive and well defined body of
corporate law in the United States, and a

<PAGE>

substantial body of case law and public policies have developed with
respect to Delaware corporations.

DETERMINING THE ALLOCATION AMONG ELIGIBLE MEMBERS. In determining which
members would be eligible to participate in the Conversion and receive Shares
of Common Stock, and the apportionment of consideration among Eligible
Members, the Board of Governors further considered the terms of other
insurance company conversion transactions (such as the conversion of the
Southern California Physicians Insurance Exchange and the pending conversion
of the Medical Inter-Insurance Exchange of New Jersey), the provisions of
applicable Illinois statutes, the nature and value of the Membership
Interests being exchanged, the financial results for recent years, and
certain analyses prepared by management. These factors are described in more
detail below. The Board of Governors did not find it practicable to, and did
not, quantify or otherwise assign relative weights to the individual factors
considered in reaching its determinations.

With respect to the allocation of Common Stock among Eligible Members,
there is no Illinois statutory provision for the guidance of the Board of
Governors. The Board of Governors was of the view that two components of
value should be given consideration when allocating the Common Stock to be
issued in the Conversion: (1) the relative contribution of members to the
surplus of the Exchange, and (2) the intangible Membership Interest itself,
E.G., the right to vote on significant transactions and for election of the
governing board, irrespective of the contribution to the assets and surplus
of the Exchange.

The Board of Governors considered the Earned Premiums from the
respective Eligible Members to be the predominant factor in determining
contribution to surplus. Earned Premiums may contribute to the surplus of the
Exchange in two ways. First, pending the payment of expenses and claims,
premiums are invested and generate investment income to increase the
Exchange's earnings. Second, to the extent the losses and expenses are
ultimately less than the aggregate premiums, some underwriting profit is
realized to further increase earnings and surplus. The Board of Governors did
not believe that an analysis of contributions to surplus on an individual
policy basis would be meaningful because the Exchange offers the same
coverage forms to all of its members and attempts to establish rates that are
neither excessive nor inadequate among any class of insureds. The Board of
Governors intends that all classes of Exchange insureds contribute to surplus
in proportion to the premiums they pay. The Board of Governors concluded
that the respective Earned Premiums themselves were the predominant indicator
of contribution to the Exchange. This approach has been used by other
property and casualty companies in allocating interests in connection with
conversion to stock companies including the Southern California Physicians
Insurance Exchange and the Medical Inter-Insurance Exchange of New Jersey.

The Board of Governors therefore concluded that the allocation formula
should be based principally on the respective Earned Premiums paid by an
Eligible Member in proportion to the Earned Premiums paid by all Eligible
Members during a specified period. Consistent with this approach, the Board
of Governors further concluded that premiums should be "net" of any discounts
and should not include any surcharges or any premiums paid for reporting
endorsements.

<PAGE>

The Exchange considered various measurement periods for determining the
amount of premiums to be included in the allocation formula, including
measurement periods used by other companies in similar conversions, including
the conversion of the Southern California Physicians Insurance Exchange and
the pending conversion of the Medical Inter-Insurance Exchange of New Jersey.
The Exchange concluded that periods of three to five years were the most
common measurement periods in similar conversions and in the demutualization
laws of other states that address allocation procedures. The Exchange
selected a measurement period for Earned Premiums beginning on July 1, 1995
and continuing through the Adoption date, a measurement period of
approximately 3 3/4 years. The Exchange also determined that a period of
approximately 3 3/4 years provided an appropriate weighing of the interests
of both long-time and newer members.

The Board of Governors also considered the "intangible" Membership
Interest itself and what value should be attributed to this interest
independent of premiums paid by Eligible Members. The intangible value,
independent of premiums, was deemed to be the right to vote and any right to
share in the assets of the Exchange in the event of the Exchange's
liquidation. The Rules and Regulations of the Exchange give one vote to each
member regardless of longevity with or premiums paid to the Exchange. See
"Comparison of Certain Rights of Members Before and After the Conversion --
Description of Certain Rights of Members of the Exchange -- Distributions."
Since the Conversion could not be effected under Illinois law and under the
Rules and Regulations of the Exchange without the vote of Eligible Members,
the Exchange concluded that there is value to the intangible Membership
Interests that should be recognized in the formula.

In considering a value for the Membership Interest, the Board of
Governors concluded that no value should be attributable to the Membership
Interest for those members who joined after the Board of Governors approved
the Conversion, as this could encourage healthcare providers to seek a
windfall by joining the Exchange primarily for the purpose of obtaining stock
ownership attributable to the Membership Interest. The Exchange therefore
adopted the date of adoption of the Merger Agreement as the record date for
receiving any stock distribution attributable to the Membership Interest
itself.

The Board of Governors considered what portion of the stock distribution
should be attributable to the "intangible" Membership Interests. The Exchange
reviewed other transactions and considered the measurement periods used for
the Earned Premium component of the distribution and the absence of any
independent value attributed to the Membership Interest in such transactions.
Because, as discussed above, the Board of Governors concluded that there is
value to the intangible Membership Interests, the Board of Governors
determined that it would be appropriate to allocate some value represented by
the Common Stock to be issued in the Conversion to the Membership Interests.
The Exchange analyzed various allocations based upon the Membership Interests
and considered the effect that those allocations would have on the
distribution of consideration to Eligible Members. The Board of Governors
concluded that the allocation formula should provide those persons who were
members of the Exchange at the time the Conversion was approved by the Board
of Governors with a meaningful ownership interest in ISMIE. Accordingly, the
Board of Governors determined that an allocation of 10% of the Common Stock
to be issued in the Conversion was an appropriate measure of value to be
attributed to the "intangible" Membership Interests.

<PAGE>

Based on all of the factors described above, the Board of Governors
believes that the Conversion is in the best interests of the Exchange and its
members. Accordingly, the Board of Governors has approved the Merger
Agreement and recommends that Eligible Members vote in favor of the proposal
to approve the Merger Agreement.

DESCRIPTION OF THE MERGER AGREEMENT

The following is a summary of certain provisions of the Merger
Agreement, a copy of which is attached hereto as Annex I and incorporated by
reference herein. The summary is qualified in its entirety by reference to
the full text of the Merger Agreement. You should read the Merger Agreement.
Approval of the Merger Agreement by the Eligible Members is a condition to
the consummation of the Conversion.

The Merger Agreement was approved by the respective Boards of the
Exchange, ISMIE Holdings and ISMIE Indemnity on May 5, 1999 and provides
that, following the satisfaction or waiver of certain conditions, in
accordance with and subject to the provisions of the Merger Agreement and the
Illinois Insurance Code, the Exchange will be merged with and into ISMIE
Indemnity. See "-- Conditions to Effectiveness of the Merger." At and after
the Effective Date, the separate existence of the Exchange will cease, and
ISMIE Indemnity will continue as the surviving corporation. The Merger
Agreement further provides that the merger of the Exchange with and into
ISMIE Indemnity will have the effect set forth in the Illinois Insurance Code.

The Merger Agreement provides that at the Effective Date, by virtue of
the merger and without any further action on the part of the Exchange, ISMIE
Indemnity, ISMIE Holdings or any other Person, and subject to applicable
dissenters' rights discussed below, (i) the Membership Interests of all
members will end, (ii) each Eligible Member will be allocated and will
receive Common Stock in accordance with the provisions of Section 2.3
thereof. (see "--Consideration -- Allocation of Shares") and (iii) ISMIE
Indemnity will receive 100,000 shares of Common Stock or such other number as
provided in Section 2.3 of the Merger Agreement.

The Merger Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties to it; provided, however,
that after approval of the Merger Agreement by Eligible Members at the
Special Meeting, no amendment may be made without the further approval of
Eligible Members which under applicable law requires their further approval.

The Merger Agreement may be terminated and the merger of the Exchange
with and into ISMIE Indemnity may be abandoned, at any time prior to the
Effective Date, whether prior to or after approval of the Merger Agreement by
Eligible Members at the Special Meeting: (i) by mutual written consent of the
parties thereto, (ii) if any party breaches in any material respect any of
its covenants or agreements contained in the Merger Agreement; or (iii) if:
(a) the merger has not been consummated prior to December 31, 1999; or (b)
any court of competent jurisdiction or any other governmental body shall have
taken any action restraining, enjoining or otherwise prohibiting the merger
and such order, decree, ruling or other action, shall have become final and
non-appealable.

<PAGE>

CONDITIONS TO EFFECTIVENESS OF THE MERGER

In order for the merger of the Exchange with and into ISMIE Indemnity to
become effective, and for the Conversion to occur, the Merger Agreement must
be approved by two-thirds of the Eligible Members voting at the Special
Meeting and by the Illinois Director of Insurance and the required opinion of
tax counsel must be received.

APPROVAL BY ELIGIBLE MEMBERS. One of the conditions for the merger to
become effective is that the Merger Agreement must be approved by a vote of
Eligible Members at the Special Meeting. The affirmative vote of two-thirds
of Eligible Members present at the meeting, either in person or by proxy, is
required to approve the Merger Agreement on behalf of the Exchange. The
presence, either in person or by proxy, of one hundred of Eligible Members is
necessary to constitute a quorum. For more information about the requirements
to be entitled to vote at the Special Meeting, see "-- Determination of
Eligible Members." For more information about the Special Meeting, see
"Information Concerning the Special Meeting -- Time, Date and Place" and "--
Record Date, Quorum and Vote Required."

APPROVAL BY THE ILLINOIS DIRECTOR OF INSURANCE. Pursuant to the
Illinois Insurance Code, the Merger Agreement must be approved by the
Illinois Director of Insurance after approval by Eligible Members at the
Special Meeting. Approval by the Illinois Director of Insurance is a
condition to the effectiveness of the merger. See "-- Dissenters' Rights."
In addition to approval of the merger, the transfer of control of ISMIE
Holdings from the Exchange to Eligible Members as shareholders will be
subject to the review and approval of the Illinois Director of Insurance.

TAX OPINION. Under the Merger Agreement, an opinion of tax counsel
regarding certain federal income tax consequences of the merger is required
to be received in order for the merger to become effective. As more fully
discussed in "Certain Federal Income Tax Consequences of the Conversion," an
opinion of tax counsel has been received regarding these matters (although
the opinion of tax counsel covering certain of these matters must be
reconfirmed on or before the Effective Date).

EFFECTIVE DATE. The Effective Time occurs when the Illinois Director of
Insurance issues a certificate of merger as provided in the Illinois
Insurance Code. The Effective Date will be the day on which the Effective
Time occurs. If the merger has not been completed by December 31, 1999, the
Merger Agreement will, unless extended in accordance with its terms,
automatically terminate.

ISSUANCE AND DELIVERY OF COMMON STOCK TO ELIGIBLE MEMBERS. The Common
Stock allocated to Eligible Members and ISMIE Indemnity will be deemed to
have been issued at the Effective Time. The Common Stock will be delivered
to the recipients thereof on the thirty-first day after the Effective Date,
or as soon as reasonably practicable thereafter, unless a petition has been
filed with the Illinois Director of Insurance in accordance with Section 168
of the Illinois Insurance Code. If such a petition has been filed, the
Common Stock will be delivered only upon the issuance of an order of the
Illinois Director of Insurance in accordance with Section 168 of the Illinois
Insurance Code. See "-- Dissenters' Rights."

<PAGE>

DISSENTERS' RIGHTS

Under Section 168 of the Illinois Insurance Code, if five percent or
more of all Eligible Members who do not vote in favor of the Merger Agreement
at the Special Meeting file a petition with the Illinois Director of
Insurance within thirty days after the Effective Date for a hearing upon the
Merger Agreement, the Illinois Director of Insurance is required to order a
hearing and provide at least fifteen days notice thereof. Any petitioning
Eligible Member may appear before the Illinois Director of Insurance at the
hearing. If the Illinois Director of Insurance finds that the interests of
the members of the Exchange are not properly protected, or if he finds that
any reasonable objection exists to the Merger Agreement, he will enter an
order revoking the approval already given. The merger of the Exchange with
and into ISMIE Indemnity would then become null and void, the Conversion
would not occur, and no Eligible Member would receive Common Stock as
proposed or have any further rights under the Merger Agreement. The Illinois
Director of Insurance also has the power to revoke any approval of the merger
of the Exchange with and into ISMIE Indemnity if any officer, director or
employee of any party to the Merger Agreement fails or refuses without
reasonable cause to attend and testify at the hearing, or to produce any
books or papers called for by the Illinois Director of Insurance.

ADDITIONAL ASPECTS OF THE MERGER AGREEMENT AND THE CONVERSION

ACCOUNTING TREATMENT. The Conversion and related transactions involve a
reorganization of entities under common control, and the assets and
liabilities transferred to effect the Conversion and related transactions
will be accounted for at historical cost in a manner similar to that in
pooling of interests accounting.

EXPENSES OF THE CONVERSION. All reasonable costs related to the
Conversion will be borne by the Exchange.

REGULATORY APPROVALS. Except for approval by the Illinois Director of
Insurance, and compliance with federal and state securities laws, we are not
aware of any material federal or state regulatory requirement necessary to be
complied with or approval that must be obtained in connection with the
Conversion. See "Risk Factors -- Regulation of Insurance Companies is
Primarily Concerned with Protecting the Interests of Policyholders, Not
Stockholders ."

INSURANCE COVERAGE. The Conversion will not affect any member's policy
coverage. By virtue of the Conversion, each member will become a
policyholder of ISMIE Indemnity and ISMIE Indemnity will assume all policy
and other obligations of the Exchange.

ISSUANCE OF SHARES TO ISMIE INDEMNITY. The Merger Agreement provides
that ISMIE Holdings will issue to ISMIE Indemnity 100,000 shares of Common
Stock in consideration of the cancellation of the outstanding shares of
Common Stock of ISMIE Holdings currently held by the Exchange. The Board of
Governors and the ISMIE Holdings Board may adjust the number of shares of
Common Stock issuable to ISMIE Indemnity in the merger of the Exchange with
and into ISMIE Indemnity in order to ensure that the Common Stock issued to
ISMIE Indemnity has a fair market value equivalent to the fair market value
of the Common Stock currently held by the Exchange which is to be canceled in
the merger.

<PAGE>

The shares of Common Stock will be issued to ISMIE Indemnity so that the
merger of the Exchange with and into ISMIE Indemnity will have the tax
consequences set forth in "Certain Federal Income Tax Consequences of the
Conversion -- The Exchange and ISMIE Indemnity." Pursuant to the Delaware
General Corporation Law (the "DGCL"), ISMIE Indemnity will not be entitled to
vote the shares of Common Stock issued to it in the Conversion, but those
shares will be entitled to receive dividends. Under GAAP those shares will be
treated as issued but not outstanding. See "Capitalization."

COMPARISON OF CERTAIN RIGHTS OF MEMBERS
BEFORE AND AFTER THE CONVERSION

You have certain rights as a member of the Exchange which are described
herein as "Membership Interests." Membership Interests consist of the rights
arising under the Exchange's Subscription Agreements and the Rules and
Regulations of the Exchange, the Illinois Insurance Code and otherwise,
including, without limitation, the right to vote for the election of the
Board of Governors and on other matters; rights in the assets of the
Exchange; and the right to participate in any distribution of surplus upon
liquidation, but not including claim obligations of the Company under
policies. Upon completion of the Conversion and expiration or termination of
dissenters' rights (see "--Dissenters' Rights"), your Membership Interests
will be canceled and extinguished and converted into the right to receive
Common Stock, and you will become a stockholder of ISMIE Holdings.

The following is a comparison of certain rights of Eligible Members of
the Exchange and holders of ISMIE Holdings Common Stock. This comparison is
not intended to be complete and is qualified in its entirety by reference to
the Exchange's Rules and Regulations and ISMIE Holdings' Certificate of
Incorporation and Bylaws, copies of which are available for inspection at the
executive offices of the Exchange and will be sent to you upon request.

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<PAGE>

DESCRIPTION OF CERTAIN RIGHTS OF MEMBERS OF THE EXCHANGE

GENERAL. Membership in the Exchange is limited to and composed of those
persons who are "named insureds" or "additional named insureds" in the
Exchange. "Named insured" or "additional named insured" means any person who
is specifically identified by name in the declarations page of a Policy as a
"named insured" or as an "additional named insured" on any endorsement
attached thereto other than a reporting endorsement. Each "named insured" or
"additional named insured" under a policy of insurance issued by the Exchange
becomes a member when the policy is issued and the period of coverage
commences under the policy.

Membership Interests in the Exchange have no preemptive or conversion
rights, redemption rights, or sinking fund provisions.

DESCRIPTION OF CERTAIN RIGHTS OF HOLDERS OF ISMIE HOLDING STOCK AFTER THE
CONVERSION

GENERAL. The authorized capital stock of ISMIE Holdings consists of (i)
40,000,000 shares of Common Stock, par value $0.01 per share, and (ii)
5,000,000 shares of Preferred Stock, par value $0.01 per share. Immediately
after the consummation of the Conversion, it is expected that there will be
approximately 10,100,000 shares of Common Stock outstanding and no shares of
Preferred Stock outstanding.

Shares of Common Stock have no preemptive rights, conversion rights, or
redemption rights. No shares of Preferred stock will be issued or outstanding
immediately following the Conversion. When and if issued, the Preferred
Stock will have such rights, powers and preferences as may be established by
the ISMIE Holdings Board. See "Description of Capital Stock -- Preferred
Stock."

41
<PAGE>

DESCRIPTION OF CERTAIN RIGHTS OF MEMBERS OF THE EXCHANGE

LIQUIDITY/MARKETABILITY. A Membership Interest is not transferable and
ceases when the coverage period or certificate period of the member under the
policy issued by the Exchange terminates.

DISTRIBUTIONS. The Board of Governors may declare dividends to
qualifying members of the Exchange. The qualifications of members to receive
dividends declared may be determined by the Board of Governors, except that a
dividend may only be paid to a member who has been insured during four (4)
continuous policy periods.

If the Exchange is liquidated, any assets remaining after payment of all
liabilities would be distributed to members in accordance with the provisions
of Article 13 of the Illinois Insurance Code.

INCOME TAXATION. The Exchange, as a reciprocal insurance exchange, is
taxable under the Internal Revenue Code as a "mutual insurance company." A
holder of a Membership Interest is not taxed with respect to the Exchange's
income, but may realize taxable income to the extent that the Exchange makes
actual distributions (in the form of premium credits or other dividends) to
the holder out of current or accumulated earnings and profits of the
Exchange. As a "mutual insurance company" for federal income tax purposes,
the Exchange will receive a deduction in the amount of such distributions
when accrued.

DESCRIPTION OF CERTAIN RIGHTS OF HOLDERS OF ISMIE HOLDINGS STOCK
AFTER THE CONVERSION

LIQUIDITY/MARKETABILITY. ISMIE Holdings intends to apply for listing of
the shares of Common Stock on the Nasdaq National Market. As a result, ISMIE
Holdings anticipates that there will be a public market for the shares of
Common Stock, although there can be no assurance as to the price at which the
Common Stock will trade. See "Risk Factors -- Sales of Substantial Amounts of
Common Stock Following the Conversion Could Lower the Market Price of the
Common Stock."

DISTRIBUTIONS. Subject to the rights of holders of Preferred Stock, if
any, holders of Common Stock will be entitled to participate equally in
dividends if, as and when declared by the ISMIE Holdings Board, and in the
distribution of assets in the event of dissolution. See "Dividend Policy."

The Company has not made any determination as to whether it will pay
dividends on the Common Stock in the foreseeable future. There can be no
assurance that dividends will be paid or, if paid initially, that they would
continue to be paid in the future. See "Dividend Policy."

INCOME TAXATION. ISMIE Holdings is a taxable entity. A holder of Common
Stock or Preferred Stock will not be taxed with respect to ISMIE Holdings'
income, but will realize taxable income to the extent that ISMIE Holdings
pays dividends to the holder out of current or accumulated earnings and
profits. As a stock corporation, ISMIE Holdings will not receive a deduction
for such dividends. Accordingly, to the extent distributed, earnings and
profits of ISMIE Holdings generally will be subject to two levels of federal
income tax.

42
<PAGE>

DESCRIPTION OF CERTAIN RIGHTS OF MEMBERS OF THE EXCHANGE

ASSESSMENTS. Members may not be assessed on policies issued or renewed
by the Exchange.

MEETINGS AND ACTIONS. Action required to be taken by the members may be
taken at a duly called annual or special meeting of members of the Exchange.
Annual meetings are held during, and at the same place as, the annual meeting
of the Illinois State Medical Society. Special meetings of the members may
be called only by (i) the Chairman of the Board of Governors or (ii)
one-third of the total number of Governors and twenty (20) members of the
Exchange.

The business transacted at any special meeting of the members is
confined to matters specified in the notice of meeting.

The Rules and Regulations of the Exchange provide for an advance notice
procedure with respect to the nomination by members of candidates for
election as members of the Board of Governors. Nominations by members
require a nominee to be nominated by an ISMIE policyholder and seconded by
two other members of the Exchange.

The Rules and Regulations of the Exchange may be amended by the Board of
Governors at any regular or special meeting by a vote of two-thirds of the
total Governors holding office or at a meeting of members of the Exchange
upon the affirmative vote of two-thirds of the members represented at the
meeting either in person or by proxy.

DOMICILIARY STATE, Illinois

DESCRIPTION OF CERTAIN RIGHTS OF HOLDERS OF ISMIE HOLDINGS STOCK AFTER THE
CONVERSION

ASSESSMENTS. Shares of Common Stock and Preferred Stock will not be
subject to calls or assessments by ISMIE Holdings.

MEETINGS AND ACTIONS. Any action required or permitted to be taken by
the stockholders of ISMIE Holdings must be taken by vote of the stockholders
at a duly called annual or special meeting of stockholders and not by written
consent. Special meetings of stockholders may be called only by (i) the
President or Secretary at the request of a majority of the ISMIE Holdings
Board or (ii) the Chairman of the ISMIE Holdings Board.

The business transacted at any special meeting of stockholders is
confined to matters specified in the notice of meeting.

The Certificate of Incorporation establishes an advance notice procedure
with regard to the nomination by stockholders of candidates for election as
directors and with regard to proposals of business to be brought before an
annual meeting of stockholders of ISMIE Holdings. Notice as to any
stockholder nomination or other proper proposal must be received by ISMIE
Holdings not less than 60 days nor more than 90 days prior to the anniversary
date of the immediately preceding annual meeting. In the event that the date
of the annual meeting is more than 30 days before or more than 60 days after
the anniversary date, however, the Certificate of Incorporation provides
additional time for notice. In addition, the notice must contain certain
specified information concerning the person to be nominated or the matters to
be brought before the meeting as well as the name and address of the
stockholder and the class and number of shares beneficially owned by the
stockholder submitting the proposal.

STATE OF INCORPORAITON. Delaware

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<PAGE>

DESCRIPTION OF CERTAIN RIGHTS OF MEMBERS OF THE EXCHANGE

VOTING. Each member entitled to vote is entitled to one vote at all
meetings of members on all matters submitted to the members for action. The
Rules and Regulations of the Exchange generally require the affirmative vote
of a majority of members voting to approve matters submitted to the members.
There is no cumulative voting, and, therefore, a majority of the members
voting at the meeting will be entitled to elect all of the members of the
Board of Governors to be elected at the meeting.

DESCRIPTION OF CERTAIN RIGHTS OF HOLDERS OF ISMIE HOLDINGS STOCK AFTER THE
CONVERSION

VOTING. Holders of Common Stock are entitled to one vote per share on
all matters with respect to which the holders of Common Stock are entitled to
vote (including the election of directors) and, except as otherwise required
by law or by the terms of any series of Preferred Stock then outstanding, the
holders of Common Stock will exclusively possess all voting power. Under the
DGCL, in the absence of specific requirements in a corporation's certificate
of incorporation or bylaws, all matters submitted to stockholders for
approval must be approved at a meeting at which a quorum is present by the
affirmative vote of the holders of a majority of the outstanding shares
present in person or by proxy and entitled to vote, except for election of
directors, which requires a plurality vote, and certain matters governed by
Section 203 of the DGCL, which requires the approval of the Board of
Directors and of two-thirds (66-2/3%) vote of disinterested stockholders to
approve certain types of business combinations. See "Description of Capital
Stock -- Certain Statutory, Charter and Bylaw Provisions Which Could Have an
Anti-Takeover Effect." Pursuant to the Certificate of Incorporation,
directors may be removed only for cause and only by the affirmative vote of
two-thirds (66-2/3% of the outstanding voting securities. In the election of
members of the Board of Directors, there is no cumulative voting, and
therefore, except as otherwise required by the terms of any series of
Preferred Stock then outstanding, the holders of a majority of the shares of
Common Stock entitled to vote and voting at the meeting will be entitled to
elect all of the members of the Board of Directors to be elected at the
meeting if they choose to do so.

44
<PAGE>

DESCRIPTION OF CERTAIN RIGHTS OF MEMBERS OF THE EXCHANGE

QUORUM. One hundred (100) members represented in person or by proxy
constitutes a quorum for the transaction of business at any meeting of the
members.

PREFERRED STOCK. Not applicable.

LIMITED LIABILITY. The liability of a member generally is limited to the
premiums accrued under the current policies of insurance issued by the
Exchange to the member. Members of the Exchange are not subject to assessment.

DESCRIPTION OF CERTAIN RIGHTS OF HOLDERS OF ISMIE HOLDINGS STOCK AFTER THE
CONVERSION

QUORUM. The holders of a majority of the stock issued and outstanding
and entitled to vote, represented in person or by proxy, will constitute a
quorum for the transaction of business at all meetings of stockholders.

PREFERRED STOCK. The ISMIE Holdings Board is authorized, subject to any
limitations prescribed by law, without further action by stockholders, to
issue up to 5,000,000 shares of Preferred Stock, from time to time, in one or
more series and, with respect to each series, to determine its terms,
including the number of shares, dividend rates, redemption rights, conversion
rights, voting rights and rights on liquidation. Because the ISMIE Holdings
Board has the power to establish the preferences, powers and rights of each
series, it may afford the holders of any particular series of Preferred Stock
preferences, powers and rights (including dividend rights, voting powers and
liquidation preferences) senior to the rights of the holders of Common Stock.
No shares of Preferred Stock will be outstanding immediately following the
Conversion, and the Company has no immediate plans to issue any series of
Preferred Stock. The issuance of a series of Preferred Stock could,
depending on the terms of the series, have the effect of discouraging,
delaying or preventing a third party from acquiring or proposing to acquire
a majority of the outstanding voting stock of ISMIE Holdings. See
"Description of Capital Stock -- Preferred Stock."

Limited Liability. The liability of holders of Common Stock is generally
limited to the price paid for the Common Stock by the holder.

45
<PAGE>

DESCRIPTION OF CERTAIN RIGHTS OF MEMBERS OF THE EXCHANGE

MANAGEMENT. The Exchange is a reciprocal insurance exchange and
management responsibility is divided between the Board of Governors and its
Attorney-in-Fact, Illinois State Medical Insurance Services, Inc. The
Attorney-in-Fact is designated as the attorney-in-fact for each subscriber
under an Applicant Subscriber's Representation, Authorization and Release,
Application for Membership - Power of Attorney (the "Subscriber Agreement")
which each subscriber signs when making application for insurance. The Power
of Attorney Agreement between the Attorney-in-Fact and the Exchange (the
"Management Agreement"), describes the allocation of powers and duties
between the Attorney-in-Fact and the Board of Governors.

Under the Subscriber Agreement and the Management Agreement, the
Attorney-in-Fact is subject to the control and supervision of the Board of
Governors, is authorized to operate the business of the Exchange, accepts or
rejects, underwrites and issues policies for the Exchange, collects and
accounts for all premiums paid, handles and disposes of claims, and performs
all related functions.

DESCRIPTION OF CERTAIN RIGHTS OF HOLDERS OF ISMIE HOLDINGS STOCK AFTER THE
CONVERSION

MANAGEMENT. The ISMIE Holdings Board has the power and duty to manage
the business and affairs of ISMIE Holdings and, indirectly, all its
subsidiaries. The ISMIE Holdings Board may designate committees, each
committee to consist of one or more directors, and has established an audit
committee, a compensation committee, an executive committee, a stock option
committee, a nominating committee and an investor relations committee.
Directors are elected by the stockholders of ISMIE Holdings. See "-- Voting"
and "-- Election of Directors."

The officers of the Company serve at the discretion of the ISMIE
Holdings Board.

46
<PAGE>

DESCRIPTION OF CERTAIN RIGHTS OF MEMBERS OF THE EXCHANGE

BOARD OF GOVERNORS. The Rules and Regulations of the Exchange provide
that the Board of Governors shall consist of twenty-one members, each of whom
must be a physician member. The Board of Governors is divided into three
classes who serve for staggered terms. Each class is composed of seven
governors, who serve for a term of three years, with one class being elected
at each annual meeting.

ELECTION OF GOVERNORS. The Exchange's Rules and Regulations provide that
nominations for election of members of the Board of Governors must be made by
members who comply with certain notice procedures. A Nominating Committee
composed of at least three but no more than five members of the Board of
Governors reviews the nominees and presents its recommendations to the
Executive Committee of the Board of Governors which ultimately approves a
slate of recommended nominees for consideration by the members. The Rules
and Regulations also provide that members who comply with certain procedures
may run without being recommended by the Nominating Committee. See "--
Meetings and Actions."

DESCRIPTION OF CERTAIN RIGHTS OF HOLDERS OF ISMIE HOLDINGS STOCK AFTER THE
CONVERSION

BOARD OF DIRECTORS. The ISMIE Holdings Board consists of not less than
three and more than fifteen directors, the exact number to be fixed from
time to time by the affirmative vote of a majority of the ISMIE Holdings
Board.

Immediately following the consummation of the Conversion, the ISMIE
Holdings Board will consist of ten members. The Board of Directors is divided
into three classes who serve staggered terms (not including directors who may
be selected from time to time by holders of Preferred Stock). Each class
consists, as nearly as possible, of one-third of the total number of
directors, who serve for a term of three years, with one class being elected
at each annual meeting. See "Management -- Directors and Executive Officers."

In the future, the Board's ability to determine the number of directors
could delay any stockholder from obtaining majority representation on the
ISMIE Holdings Board and filling the new vacancies with its own nominees
until the next stockholder election.

ELECTION OF DIRECTORS. The Certificate of Incorporation provides that
nominations for election of directors may be made only by or at the direction
of the ISMIE Holdings Board or by any stockholder of ISMIE Holdings entitled
to vote on the election of directors who complies with certain notice
procedures and who was a stockholder of record at the time of giving notice.
See "-- Meetings and Actions." Directors are elected at the annual meeting of
stockholders except when filling vacancies or newly-created vacancies. See
"-- Vacancies." A plurality of votes present in person or by proxy and
entitled to vote on the election of directors is required for election.

47
<PAGE>

DESCRIPTION OF CERTAIN RIGHTS OF MEMBERS OF THE EXCHANGE

REMOVAL OF GOVERNORS. The Exchange's Rules and Regulations do not
contain any provisions relating to the removal of a member of the Board of
Governors.

VACANCIES. Vacancies in the Board of Governors are filled by a vote of
the majority of the remaining Governors (1) for the remaining term if the
remaining term is less than 18 months, or (2) only until the next annual
meeting of members if the remaining term is more than 18 months.

DESCRIPTION OF CERTAIN RIGHTS OF HOLDERS OF ISMIE HOLDINGS STOCK AFTER THE
CONVERSION

REMOVAL OF DIRECTORS. The Certificate of Incorporation provides that
directors can be removed from office only for cause and only with the vote of
two-thirds of the voting power of the then outstanding shares of voting stock
of ISMIE Holdings, voting together as a single class.

VACANCIES. The Certificate of Incorporation provides that vacancies on
the ISMIE Holdings Board and any newly-created directorships resulting from
an increase in the authorized number of directors may be filled for the
remainder of a term only by an affirmative vote of a majority of the
remaining directors (even though less than a quorum). The provisions of the
Certificate of Incorporation governing removal of directors and the filling
of vacancies would preclude a third party from removing incumbent directors
and simultaneously gaining control of the ISMIE Holdings Board by filling
vacancies created by the removal with its own nominees unless, among other
things, the third party controls at least two-thirds of the combined voting
power of ISMIE Holdings' voting stock.

48
<PAGE>

DESCRIPTION OF CERTAIN RIGHTS OF MEMBERS OF THE EXCHANGE

INDEMNIFICATION. The Exchange's Rules and Regulations provide that the
Exchange shall indemnify the members of the Board of Governors, the officers
of the Exchange, the employees of the Exchange and any person serving as a
director, trustee, officer, or employee of another enterprise at the request
of the Exchange, from and against expenses (including attorneys' fees),
judgments, decrees, fines, penalties, and amounts paid in settlement actually
and reasonably incurred in connection with any actions, suits or proceedings
relating to claims or liabilities asserted against the management or
operations of the Exchange, including any derivative actions brought in the
name of or on behalf of the Exchange. However, indemnification may be made
only if such person acted in good faith and in a manner reasonably believed
to be in, or not opposed to, the best interests of the Exchange and, with
respect to any criminal proceeding, had no reasonable cause to believe the
conduct was unlawful. In a derivative action, no indemnification will be
made if such person shall have been finally adjudged to be liable for
negligence or misconduct unless the court in which such action was brought
shall determine that such person is fairly and reasonably entitled to
indemnity for such expenses.

AMENDMENTS TO GOVERNING DOCUMENTS. Members of the Exchange may adopt,
alter, amend or repeal provisions of the Exchange's Rules and Regulations by
the vote of two-thirds of the members voting at an annual or special meeting
or by the vote of two-thirds of the number of Governors holding office at any
regular or special meeting thereof.

DESCRIPTION OF CERTAIN RIGHTS OF HOLDERS OF ISMIE HOLDINGS STOCK AFTER THE
CONVERSION

INDEMNIFICATION. The Certificate of Incorporation provides that ISMIE
Holdings shall indemnify its directors, officers and any person serving at
the request of the corporation as a director, officer employee or agent of
another corporation, and may indemnify its employees and agents, who are
parties or threatened to be made parties to any action, suit or proceeding by
reason of such person's capacity as a director, officer, employee or agent of
ISMIE Holdings, from and against expenses (including attorneys' fees),
judgments, fines and settlements arising from such action, suit or proceeding
to the fullest extent authorized by the DGCL. Section 145(a) of the DGCL
provides that a corporation may indemnify a director, officer, employee or
agent if such person acted in good faith and in a manner reasonably believed
to be in, or not opposed to, the best interests of the corporation and, with
respect to any criminal proceeding, had no reasonable cause to believe the
conduct was unlawful. As permitted by the DGCL, the Certificate of
Incorporation eliminates in certain circumstances the monetary liability of
the directors of ISMIE Holdings for a breach of their fiduciary duties as
directors.

AMENDMENTS TO GOVERNING DOCUMENTS. Stockholders of ISMIE Holdings are
entitled to adopt, alter, amend, rescind or repeal provisions of the ISMIE
Holdings Bylaws by the affirmative vote of a majority of the stockholders
present in person or by proxy at a duly called meeting of stockholders at
which a quorum is present. The ISMIE Holdings Board is also entitled to
alter, amend, change or repeal provisions of the ISMIE Holdings Bylaws by
majority vote. Generally, under Section 242 of the DGCL, an amendment to

49
<PAGE>

DESCRIPTION OF CERTAIN RIGHTS OF MEMBERS OF THE EXCHANGE

FINANCIAL REPORTING. The Exchange is not required to provide the members
with any annual or quarterly income and expense statements or balance sheets.
The Exchange is required to file annual and quarterly financial statements
prepared in accordance with statutory accounting practices ("SAP") with the
Illinois Insurance Department, which are open to public inspection. The
Exchange provides to members an annual report of its financial condition and
results of operations, prepared in accordance with GAAP and audited by
independent auditors.

BUSINESS COMBINATIONS. The Rules and Regulations of the Exchange do not
contain any provisions relating to business combinations. The Illinois
Insurance Code generally requires a vote of two-thirds of the members voting
in person or by proxy to approve a merger, consolidation or plan of exchange.

DESCRIPTION OF CERTAIN RIGHTS OF HOLDERS OF ISMIE HOLDINGS STOCK AFTER THE
CONVERSION

the Certificate of Incorporation requires adoption by the ISMIE Holdings
Board of a resolution setting forth the proposed amendment and the approval
of the resolution by a majority vote of the Common Stock issued, outstanding
and entitled to vote.

FINANCIAL REPORTING. ISMIE Holdings will be subject to the reporting
requirements of the Exchange Act, and will file annual and quarterly reports
with the Securities and Exchange Commission and with the Nasdaq National
Market. ISMIE Holdings will also provide to the holders of Common Stock
annual and quarterly reports of its financial condition and results of
operations, prepared in accordance with GAAP and, with respect to the annual
reports, audited by independent auditors. Following the Conversion, ISMIE
Indemnity will file annual and quarterly financial statements under SAP with
the Illinois Insurance Department.

BUSINESS COMBINATIONS. The DGCL generally requires that a majority of
the stockholders approve a merger, consolidation or the sale, lease or
exchange of all or substantially all of a corporation's property and assets.
The DGCL contains additional restrictions where such action or transaction is
with, or proposed by or on behalf of, an "interested stockholder" (defined
generally as a person owning 15% or more of ISMIE Holdings' outstanding
voting stock). See "-- Anti-takeover Provisions" and "Description of Capital
Stock -- Certain Statutory, Charter and Bylaw Provisions Which Could Have an
Anti-Takeover Effect."

50
<PAGE>

DESCRIPTION OF CERTAIN RIGHTS OF MEMBERS OF THE EXCHANGE

ANTI-TAKEOVER PROVISIONS. As a reciprocal insurance exchange, the
Exchange has no capital stock or other transferable ownership interests and
therefore is not subject to being acquired by a hostile bidder. The Board of
Governors is divided into three classes of directors, serving staggered
three-year terms. As a result, one third of the Board of Governors is elected
each year. This classified board provision could delay a majority of members
who do not favor the policies of the Board of Governors from removing a
majority of the Board of Governors for two years.

DESCRIPTION OF CERTAIN RIGHTS OF HOLDERS OF ISMIE HOLDINGS STOCK AFTER THE
CONVERSION

ANTI-TAKEOVER PROVISIONS. ISMIE Holdings is a Delaware corporation and
is subject to the provisions of Section 203 of the DGCL. In general, Section
203 prevents an "interested stockholder" (defined generally as a person
owning 15% or more of ISMIE Holdings' outstanding voting stock) from engaging
in a "business combination" (as defined in Section 203) with ISMIE Holdings
for three years following the time that person became an interested
stockholder unless: (i) before that person became an interested stockholder,
the ISMIE Holdings Board approved the transaction in which the interested
stockholder became an interested stockholder or approved the business
combination; (ii) upon completion of the transaction that resulted in the
interested stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of ISMIE Holdings
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of ISMIE Holdings and by employee stock plans
that do not provide employees with the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer); or (iii) at or following the time on which that person
became an interested stockholder, the business combination is approved by the
ISMIE Holdings Board and authorized at a meeting of stockholders by the
affirmative vote of the holders of at least two-thirds of the outstanding
voting stock of ISMIE Holdings not owned by the interested stockholder.

Under Section 203, these restrictions also do not apply to certain
business combinations proposed by an interested stockholder following the
announcement or notification of one of certain extraordinary transactions
involving ISMIE Holdings and a person who was not an interested stockholder
during the privious three years or who became an

51
<PAGE>

DESCRIPTION OF CERTAIN RIGHTS OF MEMBERS OF THE EXCHANGE

DESCRIPTION OF CERTAIN RIGHTS OF HOLDERS OF ISMIE HOLDINGS STOCK AFTER THE
CONVERSION

interested stockholder with the approval of a majority of ISMIE Holdings'
directors or during a time when the restrictions in Section 203 did not
apply, if that extraordinary transaction is approved or not opposed by a
majority of the directors (but not less than one) who were directors before
any person became an interested stockholder in the previous three years or
who were recommended for election or elected to succeed such directors by a
majority of such directors then in office.

The ISMIE Holdings Board of Directors is divided into three classes of
directors, serving staggered three-year terms. The classified board
provisions could have the effect of discouraging a third party from making a
tender offer or otherwise attempting to gain control of ISMIE Holdings. The
Certificate of Incorporation of ISMIE Holdings and ISMIE Holdings' Bylaws
also contain certain provisions that may delay, defer or prevent a change of
control of ISMIE Holdings and make removal of management more difficult.
These provisions are intended to (i) enhance the likelihood of continuity and
stability in the composition of the ISMIE Holdings Board and in the policies
formulated by the ISMIE Holdings Board, (ii) discourage certain types of
transactions which may involve an actual or threatened change of control of
ISMIE Holdings, (iii) reduce the vulnerability of ISMIE Holdings to an
unsolicited proposal for a takeover of the Company that does not contemplate
the acquisition of all its outstanding shares or an unsolicited proposal for
the restructuring or sale of all or part of ISMIE Holdings, and (iv)
discourage certain tactics that may be used in proxy fights.

52
<PAGE>

DESCRIPTION OF CERTAIN RIGHTS OF MEMBERS OF THE EXCHANGE

DESCRIPTION OF CERTAIN RIGHTS OF HOLDERS OF ISMIE HOLDINGS STOCK AFTER THE
CONVERSION

Moreover, the issuance of shares of Preferred Stock by ISMIE Holdings
(or the issuance of rights to purchase such shares) could be used to
discourage an unsolicited acquisition proposal. For instance, the issuance
of a series of Preferred Stock might (i) impede a business combination by
including class voting rights that would enable the holders to block such a
transaction or (ii) facilitate a business combination by including voting
rights that would provide a required percentage vote of the stockholders.
Also, under certain circumstances, the issuance of Preferred Stock could
adversely affect the voting power of the holders of Common Stock.

The provisions described in "-- Meetings and Actions," "-- Board of
Directors," "Election of Directors," "-- Removal of Directors,"
"-- Vacancies," and "-- Amendments to Governing Documents," together with
the ability of the ISMIE Holdings Board to authorize the issuance of
Preferred Stock without further stockholder action, could delay or frustrate
the removal of incumbent directors or the assumption of control of ISMIE
Holdings by the holder of a large block of Common Stock. These provisions
could also discourage or make more difficult a merger, tender offer or proxy
contest even if a majority of the stockholders might consider such event to
be in their best interest. See "Description of Capital Stock -- Certain
Statutory, Charter and Bylaw Provisions Which Could Have an Anti-Takeover
Effect."

MARKET FOR COMMON STOCK

The Exchange, as a reciprocal insurance exchange, has not issued any
capital stock. ISMIE Holdings has been organized for the purpose of becoming
the parent company of ISMIE Indemnity upon consummation of the Conversion.
Prior to the Conversion, there has not been any market for the Common Stock.
Application will be made to have the Common Stock approved for listing,
subject to official notice of issuance, on the Nasdaq National Market under
the symbol "ISME." There can be no assurance that an active or orderly market
for the Common Stock will develop after listing or, if developed, will
continue. Regardless of whether a public

53
<PAGE>

market for the Common Stock develops, if a substantial number of shares of
Common Stock are sold by Eligible Members or any other stockholders, the
market price of the Common Stock may be adversely affected.

Although we have considered, and may consider in the future, an initial
public offering of the Common Stock, there is no assurance that an initial
public offering will occur. If an initial public offering does not occur, it
is less likely that an active or orderly trading market will develop for the
Common Stock. The absence of an active and orderly trading market could
adversely effect the market price of the Common Stock subsequent to the
Conversion. See "Risk Factors -- Sales of Substantial Amounts of Common
Stock Following the Conversion Could Lower the Market Price of the Common
Stock" and "Risk Factors -- An Active or Orderly Trading Market for the
Common Stock May Not Develop; Our Stock Price May Be Volatile."

DIVIDEND POLICY

The declaration and payment of dividends to holders of Common Stock will
be at the discretion of the ISMIE Holdings Board and will be dependent upon
our financial condition, results of operations, cash requirements, future
prospects, regulatory restrictions on the payment of dividends to ISMIE
Holdings by ISMIE Indemnity and other factors considered relevant by the
ISMIE Holdings Board. We have not made any determination whether we will pay
dividends on the Common Stock in the foreseeable future. There can be no
assurance that dividends will be paid or, if paid initially, that they would
continue to be paid in the future. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources." See "Comparison of Certain Rights of Members Before and After
the Conversion -- Distributions."

Following the Effective Date, ISMIE Holdings will be an insurance
holding company whose assets will consist primarily of the outstanding shares
of the Common Stock of ISMIE Indemnity. ISMIE Holdings' ability to pay
dividends to its stockholders and meet its other obligations, including
operating expenses and any debt service, will depend primarily upon the
receipt of sufficient funds from ISMIE Indemnity. The payment of dividends
by ISMIE Indemnity to ISMIE Holdings will be restricted by applicable
insurance law. See "Risk Factors --Regulation of Insurance Companies is
Primarily Concerned with Protecting the Interests of Policyholders, Not
Stockholders," "Business -- Regulation --Regulation of Dividends from
Insurance Subsidiaries" and "Description of Capital Stock."

CAPITALIZATION

The information set forth in the table presented below is derived from
the consolidated financial statements and the related notes thereto included
elsewhere in this Proxy Statement/Prospectus. The table presents the
capitalization at December 31, 1998 of: (i) the Exchange and the
Attorney-in-Fact; and (ii) ISMIE Holdings, adjusted to reflect, on a pro
forma basis, the Conversion and the issuance of 10,000,000 shares of Common
Stock in connection with the Conversion to Eligible Members and 100,000
shares of Common Stock to ISMIE Indemnity. See "The Conversion." The table
should be read in conjunction with the historical consolidated financial
statements and related notes appearing elsewhere in this Proxy
Statement/Prospectus.

54
<PAGE>
<TABLE>
<CAPTION>

At December 31, 1998
--------------------

Actual As Adjusted
-------- -------------
(Dollars in Thousands)
<S> <C> <C>
Total debt . . . . . . . . . . . . . . . . . . $ - $ -

Equity:

Preferred stock, $0.01 par value, 5,000,000
shares authorized; no shares issued and
outstanding . . . . . . . . . . . . . . . . . - -

Common stock, $0.01 par value,
40,000,000 shares authorized; 0 shares issued
and outstanding; 10,100,000 issued and
10,000,000 outstanding, as adjusted (1) . . . - 100

Additional paid-in capital . . . . . . . . . . - 227,607

Policyholders' surplus/retained earnings . . . 227,707 -

Accumulated other comprehensive income . . . . 14,983 14,983
-------- --------

Total Equity . . . . . . . . . . . . . . . $242,690 $242,690
-------- --------

Total capitalization . . . . . . . . . . . . . $242,690 $242,690
-------- --------
-------- --------
</TABLE>
(1) The 100,000 shares issued to ISMIE Indemnity in the Conversion are treated
as issued but not outstanding under GAAP. See "The Conversion -- Additional
Aspects of the Merger Agreement and the Conversion -- Issuance of Shares
to ISMIE Indemnity."

CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE CONVERSION

The following discussion is a summary of the material federal income tax
consequences which are expected to result from the Conversion and the related
transactions, and is based on the opinion of Lord, Bissell & Brook, tax
counsel to the Company ("Tax Counsel"). This summary is based on the current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
existing Treasury Regulations thereunder and administrative rulings and court
decisions, all of which are subject to changes that can be retroactively
applied. The following discussion is limited to those persons who are
citizens or residents of the U.S., corporations or partnerships organized in
or under the laws of the U.S., and an estate or trust, the income of which is
subject to federal income taxation regardless of its source.

Tax Counsel's opinion is based on current law, certain assumptions set
forth in the opinion, certain representations from the Exchange, ISMIE Holdings
and ISMIE Indemnity and

55
<PAGE>

certain other information, data, documentation and materials Tax Counsel
deems necessary. An opinion of counsel (although the opinion would represent
the best interpretation of applicable law by counsel) is not binding on the
Internal Revenue Service, and, therefore, we cannot assure you that this
opinion would not be challenged by the Internal Revenue Service or would be
sustained by a court if so challenged.

It is impractical to comment on all aspects of federal, state, local and
foreign laws that may affect the tax consequences of the Conversion as they
relate to the particular circumstances of each Eligible Member. This
discussion does not address any aspect of foreign, state or local law or
federal estate or gift tax considerations. In addition, the following
discussion does not address how the federal income tax rules affect all of
the possible types of Eligible Members, some of whom (E.G., tax-exempt
entities) may be subject to special rules not discussed herein.

THE DISCUSSION SET FORTH BELOW ADDRESSES ONLY THE SIGNIFICANT FEDERAL
INCOME TAX CONSEQUENCES OF GENERAL APPLICATION WHICH ARE EXPECTED TO RESULT
FROM THE CONVERSION. ELIGIBLE MEMBERS SHOULD CONSULT THEIR TAX ADVISORS TO
DETERMINE THE TAX CONSEQUENCES OF THE CONVERSION, AND HOLDING AND DISPOSITION
OF COMMON STOCK TO BE RECEIVED IN CONNECTION WITH THE CONVERSION, INCLUDING
THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND
OTHER TAX LAWS WITH RESPECT TO THEIR OWN PARTICULAR CIRCUMSTANCES.

GENERAL

Assuming that the Conversion and the related transactions will take
place as described elsewhere in this Proxy Statement/Prospectus and that
certain factual matters represented by the Exchange are true and correct, it
is the opinion of Tax Counsel that (i) the Conversion will constitute a
reorganization within the meaning of Section 368(a) of the Code, (ii)
Eligible Members will recognize no gain or loss for federal income tax
purposes by reason of the exchange of their Membership Interests for the
Common Stock, and (iii) no gain or loss will be recognized by the Exchange,
ISMIE Holdings or ISMIE Indemnity, as further discussed below.

ELIGIBLE MEMBERS

Eligible Members will not recognize gain or loss for federal income tax
purposes upon their exchange of Membership Interests for Common Stock
pursuant to the Conversion. The tax basis in their Common Stock will be equal
to their tax basis in their exchanged Membership Interests, which is deemed
to be zero for federal income tax purposes. The holding period for the Common
Stock received by an Eligible Member generally will include the holding
period for the exchanged Membership Interest.

Upon a subsequent sale or other taxable disposition of Common Stock
issued in the Conversion, Eligible Members will recognize gain in an amount
equal to the amount of cash and fair market value of any property received
upon such sale or other taxable disposition minus their tax basis in that
Common Stock. Since their tax basis in the Common Stock would be zero (as
discussed above), the entire amount of cash and fair market value of any
property received would be the amount of gain subject to tax. This gain will
generally be long-term capital gain if the holding period of the Common Stock
(which includes the holding period of the exchanged Membership Interest) is
more than one year.

56
<PAGE>

Policies issued by the Exchange before the Conversion will not be deemed
reissued or newly issued in exchange for existing policies as a result of the
Conversion. Accordingly, the federal income tax rules that currently apply to
each policy will generally continue to apply after the Conversion.

THE EXCHANGE AND ISMIE INDEMNITY

Subject to the discussion below under "-- Issuance of Rules Dealing with
Inversions," no gain or loss will be recognized by the Exchange and ISMIE
Indemnity as a result of the Conversion. ISMIE Indemnity's tax basis in the
assets of the Exchange acquired pursuant to the Conversion will be equal to
the tax basis of those assets in the hands of the Exchange immediately prior
to the merger of the Exchange with and into ISMIE Indemnity.

CONSEQUENCE OF A TAXABLE EXCHANGE

If the Conversion were not to qualify as a tax-free reorganization under
Section 368(a) of the Code, Eligible Members would recognize gain equal to
the fair market value of the Common Stock received in the Conversion minus
their tax basis in their exchanged Membership Interests (which, as discussed
above, would be zero). The gain would generally be capital gain, and would
be long-term capital gain if Eligible Member has held the Membership Interest
for more than one year. The tax basis of the Common Stock received pursuant
to the Merger Agreement would generally be equal to the fair market value of
that stock at the Effective Time, and the holding period of the exchanged
Membership Interest would not be included in the holding period of the Common
Stock received.

In addition, if the Conversion were not to qualify as a tax-free
reorganization, the Exchange would recognize, in a taxable transaction, gain
equal to the excess of the fair market value of the total Common Stock that
Eligible Members are entitled to receive pursuant to the Conversion over the
Exchange's aggregate tax basis in its assets transferred to ISMIE Indemnity
in the Conversion.

ISSUANCE OF RULES DEALING WITH INVERSIONS

There is a pending project at the Internal Revenue Service dealing with
the tax consequences of a transaction involving an "inversion" of members of
an affiliated group (I.E., the positions of the members are inverted or
otherwise reversed). The Service has announced in Notice 94-93 that any
Treasury Regulations addressing inversion transactions will apply to certain
transactions occurring on or after September 22, 1994. Notice 94-93 provides
that future Treasury Regulations may require, where appropriate, "recognition
of income or gain at the time of an inversion transaction" or "reductions to
the basis (or increases in gain on the sale or other disposition) of the
stock of one or more corporations that are involved in inversion
transactions." While the potential scope of any future Treasury Regulations
or other Service positions applicable to inversion transactions is unclear,
Tax Counsel does not believe that income or gain recognition should be
required in connection with the Conversion and the related transactions.

57
<PAGE>

POSSIBLE POLICYHOLDER DIVIDEND TREATMENT

You should be aware that a federal court of appeals recently affirmed a
federal district court decision which rejected a claim by a life insurance
company that its distribution to its policyholders of stock and cash pursuant
to its plan of demutualization should be treated as a policyholder dividend
distribution, rather than as part of an exchange. UNUM CORP. V. UNITED
STATES, 929 F. Supp. 15 (D. Me. 1996), AFF'D, 130 F.3d 501 (1st Cir. 1997),
CERT. DENIED, 119 S. Ct. 42 (1998). If the distribution were treated for
federal income tax purposes as a dividend distribution, the company would be
entitled to a policyholder dividend deduction equal to the amount of cash and
the fair market value of any stock distributed, and each policyholder
receiving stock or cash would likely be treated for federal income tax
purposes as if the policyholder had received a policyholder dividend equal to
the amount of cash or the fair market value of the stock received. Consistent
with the holding in UNUM CORP., the Exchange plans to treat the Common Stock
distributed in the Conversion as issued in exchange for the Membership
Interests pursuant to a tax-free reorganization and not as a policyholder
dividend.

In the event that any portion of the consideration received by an
Eligible Member pursuant to the Conversion were treated as a policyholder
dividend (an event which Tax Counsel believes is highly unlikely), the normal
tax consequences of the receipt of a policyholder dividend would apply
(rather than the rules generally summarized above). The tax basis of the
Common Stock received pursuant to the Merger Agreement would generally be
equal to the fair market value of that stock at the Effective Time, and the
holding period of the exchanged Membership Interest would not be included in
the holding period of the Common Stock received.

TAXPAYER IDENTIFICATION NUMBER

It is important that you complete, sign and return the Taxpayer
Identification Card accompanying your Proxy Card. (For most individuals, your
taxpayer identification number is your Social Security number.) ANY ELIGIBLE
MEMBER WHO FAILS TO COMPLETE, SIGN AND RETURN THIS CARD MAY BE SUBJECT TO A
$50 PENALTY AND THE EXCHANGE (OR ISMIE INDEMNITY) MAY BE REQUIRED TO WITHHOLD
FOR FEDERAL INCOME TAXES 31% OF ANY CASH PAYMENT, INCLUDING ANY FUTURE
DIVIDENDS ON COMMON STOCK, YOU WOULD OTHERWISE RECEIVE. This 31% withholding
is not an additional tax and any amount withheld may be claimed on the your
federal income tax return as a credit against the your federal income tax
liability.

<PAGE>

SELECTED FINANCIAL AND OPERATING DATA

The following table sets forth selected financial data for ISMIE and the
Attorney-in-Fact. The selected income statement data (other than direct and
assumed premiums written) set forth below for each of the three years in the
three-year period ended December 31, 1998 and the selected balance sheet data as
of December 31, 1998 and 1997 are derived from the consolidated financial
statements audited by Ernst & Young LLP, independent auditors, included
elsewhere herein and should be read in conjunction with, and are qualified by
reference to such statements and the related notes thereto. The selected income
statement data (other than direct and assumed premiums written) for the years
ended December 31, 1995 and 1994 and the selected balance sheet data as of
December 31, 1996, 1995 and 1994 are derived from audited financial statements
of ISMIE and the Attorney-in-Fact which management believes incorporate all of
the adjustments necessary for the fair presentation of the financial condition
and results of operations for such periods. All selected income statement and
balance sheet data are presented in accordance with GAAP. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

<PAGE>

As of or for the Year Ended December 31,

1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except per share, ratios and percentage data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:

Premiums written

Direct and assumed premiums written $179,668 $196,152 $207,578 $197,241 $203,756
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------

Net premiums written 134,215 104,953 85,532 96,809 140,504

Direct and assumed premiums earned 177,451 188,866 207,857 221,491 200,285

Reinsurance premiums ceded (45,453) (91,199) (122,040) (100,432) (63,252)
---------- ---------- ---------- ---------- ----------

Net premiums earned 131,998 97,667 85,817 121,059 137,033

Net investment income 45,361 46,663 46,436 50,927 49,140

Other income 5,095 0 0 0 0

Realized investment gains (losses) (104) (401) 2,406 322 12,141
---------- ---------- ---------- ---------- ----------

Total revenues 182,350 143,929 134,659 172,308 198,314
---------- ---------- ---------- ---------- ----------

Losses and loss adjustment expenses 153,660 117,816 105,403 177,273 210,046

Other operating expenses 16,222 10,878 6,296 8,793 11,870
---------- ---------- ---------- ---------- ----------

Total expenses 169,882 128,694 111,699 186,066 221,916
---------- ---------- ---------- ---------- ----------

Income (loss) before income taxes 12,468 15,235 22,960 (13,758) (23,602)

Income taxes (benefit) (257) (3,206) 19,541 6,007 (8,564)
---------- ---------- ---------- ---------- ----------

Net income (loss) $12,725 $18,441 $3,419 ($19,765) ($15,038)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Balance Sheet Data:

Total investments and invested cash $887,661 $787,333 $780,209 $861,428 $780,362

Total assets 1,211,428 1,246,506 1,287,514 1,362,798 1,263,586

Members' Equity(1) 242,690 220,169 193,336 200,969 175,200

Additional Data:

Pro forma earnings (loss) per share(2) $1.27 $1.84 $0.34 ($1.98) ($1.50)

Pro forma book value per share 24.27 22.02 19.33 20.10 17.52

Pro forma book value per share, net of FAS 115(1) 22.77 21.50 19.65 19.31 21.29

Retention rate(3) 86.0% 90.1% 90.8% 92.4% 93.4%

Investment yield(4) 5.60% 6.07% 5.77% 6.10% 6.00%

Direct ratios (GAAP)(5):

Loss & LAE 94.5% 95.1% 77.4% 128.6% 142.0%

Expense 10.1% 8.8% 7.4% 6.4% 6.2%

Combined 104.6% 103.9% 84.8% 135.0% 148.2%

Net ratios (GAAP)(6):

Loss & LAE 116.4% 120.6% 122.8% 146.4% 153.3%

Expense 12.3% 11.1% 7.3% 7.3% 8.7%

Combined 128.7% 131.8% 130.2% 153.7% 161.9%

Statutory combined ratio 128.5% 131.0% 130.2% 155.5% 161.9%

Statutory surplus $187,224 $172,713 $158,622 $134,432 $135,339

</TABLE>

<PAGE>

(1) The Company has designated its entire fixed maturity and equity security
investment portfolio as "available for sale". Under FAS 115, the Company's
equity reflects unrealized market appreciation or depreciation on these
investments, net of deferred taxes thereon. For purposes of this
calculation, the unrealized market appreciation or depreciation, net of
deferred taxes, has been removed from members' equity.

(2) Gives effect in all periods to the issuance of approximately 10,000,000
shares of Common Stock to Eligible Members. The 100,000 shares of Common
Stock issued to ISMIE Indemnity are not considered outstanding for purposes
of determining the per share amounts.

(3) Represents the percentage of policyholders insured by the Company at the
beginning of the year that continued to be insured by the Company at the
end of the year.

(5) Direct ratios represent the ratios of losses and expenses, before deducting
reinsurance recoverables, to direct and assumed premiums earned, before
reinsurance premiums ceded.

(6) Net ratios represent the ratios of losses and expenses, after deducting
reinsurance recoverables, to net premiums earned, after reinsurance
premiums ceded.

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the
consolidated financial statements and the related notes thereto appearing
elsewhere in this Proxy Statement/Prospectus.

GENERAL

The financial results for medical malpractice insurers are influenced by
a number of factors, many of which are beyond ISMIE's control. These factors
include, among other things, changes in frequency and severity of claims,
changes in tort laws (tort reform), judicial decisions and changes in general
economic conditions. The availability of medical malpractice insurance, or
the industry's underwriting capability, is determined primarily by historical
underwriting results, investment returns, available capital and the
perception of adequate pricing.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

PREMIUMS. Direct premiums written decreased $16.5 million to $179.7
million for the year ended December 31, 1998 from $196.2 million for the same
period in 1997. This decrease was due primarily to premium discounts
associated with the conversion of group practices to the Clinic Option
program. Net premiums earned increased $34.3 million to $132.0 million for
the year ended December 31, 1998 from $97.7 million for the same period in
1997. This increase was due to a strategic reduction in ceded premiums
associated with the Company's quota share reinsurance program.

NET INVESTMENT INCOME. Net investment income decreased $1.3 million to
$45.4 million for the year ended December 31, 1998 from $46.7 million for the
same period in 1997. The overall pretax investment yield was 5.60% for the
year ended December 31, 1998, a decrease from the yield of 6.07% for the same
period in 1997.

LOSSES AND LAE. Losses and loss adjustment expenses ("LAE"), net of
reinsurance, increased $35.9 million to $153.7 million for the year ended
December 31, 1998 from $117.8 million for the same period in 1997. The
increase was due primarily to a strategic reduction in losses ceded under the
quota share reinsurance program in the current year. The net loss ratio
decreased to 116.4% for the year ended December 31, 1998 from 120.6% for the
same period in 1997. The reduction in the net loss ratio was attributable
primarily to a decrease in reported claims between these periods. Because of
the reinsurance in place during this period, management believes it is also
meaningful to examine the losses in its book of business, relative to the
industry, by analyzing the direct loss ratio. The direct loss ratio for the
years ended December 31, 1998 and 1997 was 94.5% and 95.1%, respectively.
This decrease is attributable primarily to a general decrease in frequency of
claims.

<PAGE>

OTHER OPERATING EXPENSES. Other operating expenses increased $5.3
million to $16.2 million for the year ended December 31, 1998 from $10.9
million for the same period in 1997. This was due primarily to a $0.5
million increase in commissions paid to brokers, and a $4.0 million decrease
in the commission ceding allowance associated with the quota share
reinsurance program. These factors resulted in a 1.2 percentage point
increase in the net expense ratio to 12.3% for the year ended December 31,
1998 from 11.1% for the same period in 1997. Management also believes a
meaningful way to compare its operating expenses is by looking at its direct
expense ratio, before reinsurance transactions. On this basis, direct
expenses were 10.1% for the year ended December 31, 1998, up 1.3 percentage
points from the 8.8% for the year ended December 31, 1997.

FEDERAL INCOME TAXES. The Company's income tax benefit decreased
approximately $2.9 million to $0.3 million for the year ended December 31,
1998 compared to $3.2 million for the same period in 1997. The difference
between the effective tax rate and the statutory rate relates principally to
changes in the valuation allowance established for deferred tax assets. The
valuation allowance represents that portion of the deferred tax assets for
which it is more likely than not that a tax benefit will not be realized.
For more information, refer to Note 4 in the Consolidated Financial
Statements attached hereto at page F-__.

NET INCOME. Net income decreased $5.7 million to $12.7 million for the
year ended December 31, 1998 from $18.4 million for the same period in 1997.
The decrease in net income primarily reflects an increase in net premiums
earned (at a combined ratio greater than 100%), a slight increase in the net
expense ratio and an increase in the Company's effective tax rate.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

PREMIUMS. Direct premiums written decreased $11.4 million to $196.2
million for the year ended December 31, 1997 from $207.6 million for 1996.
Direct premiums written decreased 5.5% due to a 2.0% decrease in insured
physicians and because of premium discounts related to the conversion of
group practices to the Clinic Option program. Net premiums earned increased
$11.9 million to $97.7 million for the year ended December 31, 1997 from
$85.8 million for 1996. This increase was due entirely to a strategic
reduction in ceded premiums associated with the Company's quota share
reinsurance program.

NET INVESTMENT INCOME. Net investment income increased $0.3 million to
$46.7 million for the year ended December 31, 1997 from $46.4 million for
1996. A decrease of approximately 4% in average invested assets between
periods was offset by an increase in the overall pre-tax yield on investments
to 6.07% for the year ended December 31, 1997 from 5.77% for 1996. The
increase in yield was due to a change in the portfolio composition that added
relatively more investment grade corporate bonds in lieu of lower yielding
U.S. treasury securities.

LOSSES AND LAE. Losses and LAE, net of reinsurance, increased $12.4
million to $117.8 million for the year ended December 31, 1997 from $105.4
million for 1996. The increase was due primarily to an increase in severity
of claims that was offset by a 4.5% decrease in reported

<PAGE>

claims. The net loss and LAE ratio decreased 2.2 percentage points to 120.6%
for the year ended December 31, 1997 from 122.8% for 1996. The direct loss
and LAE ratio for the year ended December 31, 1997 and 1996 was 95.1% and
77.5% respectively. The direct loss and LAE ratio in 1996 was 17.6
percentage points lower due to a one-time favorable effect of a reduction in
claims reported during 1996 after a "frontloading" of claims experienced
during 1995 immediately prior to the passage of tort reform legislation in
Illinois.

OTHER OPERATING EXPENSES. Other operating expenses increased $4.6
million to $10.9 million for the year ended December 31, 1997 from $6.3
million for 1996. This was due primarily to a $0.9 million increase in
commissions paid to brokers and a $3.3 million decrease in the commission
ceding allowance associated with the quota share reinsurance program. These
factors resulted in a 3.8 percentage points increase in the net expense ratio
to 11.1% for the year ended December 31, 1997 from 7.3% for 1996. The direct
expense ratio increased 1.4 percentage points to 8.8% for the year ended
December 31, 1997 from 7.4% for 1996.

FEDERAL INCOME TAXES. The income tax benefit was $3.2 million for the
year ended December 31, 1997 compared to income tax expense of $19.5 million
for 1996. For both years, the difference between the effective tax rate and
the statutory rate relates principally to changes in the valuation allowance
established for deferred tax assets. The determination of the valuation
allowance is subject to many factors, including estimates of future taxable
income for the Company. For more information, refer to Note 4 in the
Consolidated Financial Statements attached hereto at page F-___.

NET INCOME. Net income increased $15.0 million to $18.4 million for the
year ended December 31, 1997 from $3.4 million for 1996. The increase in
1997 was attributable largely to a decrease in the Company's effective income
tax rate. Items offsetting this increase were a realized investment loss of
$0.4 million for the year ended December 31, 1997 as compared to a gain of
$2.4 million for 1996 and a $4.6 million increase in other operating
expenses.

LIQUIDITY AND CAPITAL RESOURCES

The primary sources for ISMIE's liquidity are insurance premiums, net
investment income, recoveries from reinsurers and proceeds from the maturity
or sale of invested assets. Funds are used to pay claims, LAE, operating
expenses, reinsurance premiums and taxes, and to purchase additional invested
assets.

ISMIE's cash flow during the last three years has fluctuated due to
reinsurance payments. The largest cash outflow came from premiums paid for
the purpose of quota share reinsurance. Also, ISMIE made a scheduled premium
payment in 1997 applicable to the 1994/1995 treaty year. Adjusting for these
reinsurance payments, ISMIE would have shown net cash provided by operating
activities of $14.5 million, $15.1 million and $28.4 million for the years
1997, 1996 and 1995, respectively.

In addition, effective July 1, 1998 ISMIE discontinued a reinsurance
program with Cologne Re (Dublin) which provided quota share and stop loss
protection. This program began

<PAGE>

July 1, 1995. ISMIE's improved surplus position, along with recent favorable
trends in claims frequency, also enabled it to commute the first two years of
this reinsurance program, thereby recovering cash, along with the
corresponding loss reserves, of $81.1 million in 1997 and $79.1 million in
1998.

ISMIE invests primarily in government-backed securities, and securities
that are A-rated or higher based on Standard & Poor's and Moody's rating
systems. The average overall effective maturity of ISMIE's portfolio has
consistently been slightly under five years, which approximates the
anticipated turnover rate of its loss reserves. To further enhance
liquidity, ISMIE has maintained about 25% of its invested assets in U.S.
treasury notes and short-term investments. See "Business--Investment
Portfolio."

As a holding company, ISMIE Holdings' assets will consist primarily of
the stock of ISMIE. The principal source of funds for ISMIE Holdings will be
dividends from ISMIE Indemnity and proceeds, if any, from the issuance of
debt and equity securities. ISMIE is and ISMIE Holdings will be restricted
by Illinois law in the amount of dividends it can pay in relation to earnings
or surplus, without consent of the Illinois Insurance Department. ISMIE may
pay dividends in any year, without regulatory approval, to the extent of the
greater of (i) 10% of its statutory capital and surplus at the end of the
preceding year or (ii) its net income for the preceding year. If ISMIE had
been a stock insurance company on December 31, 1998, the amount of dividends
it would have been permitted to pay during 1999 without approval from the
Illinois Insurance Department would have been approximately $18 million.

Based on historical trends, market conditions and its business plan, the
Company believes that its sources of funds will be sufficient to meet its
liquidity needs in the foreseeable future. However, because economic, market
and regulatory conditions may change, there can be no assurance that ISMIE's
sources of funds will be sufficient to meet these liquidity needs. Also, the
short-term and long-term liquidity needs of ISMIE may vary because of the
uncertainties regarding the timing of claims settlement.

EFFECT OF INFLATION

The primary effect of inflation on the Company relates to pricing and
estimating reserves for unpaid losses and LAE for claims in which there is a
long period between reporting and settlement, such as medical malpractice
claims. The actual effect of inflation on the Company's results cannot be
accurately known until claims are ultimately settled. Based on actual results
to date, the Company believes that loss and LAE reserve levels and the
Company's rate making process adequately incorporate the effects of inflation.

YEAR 2000 ISSUES

The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may interpret a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations

<PAGE>

causing disruptions of operations, including, among other things, an
inability to process transactions, send invoices or engage in similar normal
business activities.

The Company is highly dependent upon its computer processing systems.
The Company's principal computer applications cover three broad areas of its
operations: (i) policy processing; (ii) claims processing; and (iii)
financial and accounting systems. The Company's plan to resolve the Year
2000 issue involves four phases: assessment, remediation, testing and
implementation.

The Company has substantially completed its assessment of all internal
information technology systems that it believes could be significantly
affected by the Year 2000 issue. In February 1998, the Company completed the
installation of new systems to handle its policy processing requirements.
The Company believes that these systems are Year 2000 compliant because these
systems are currently processing new business and policy renewals with an
effective date in 1999 and expiration date in the year 2000. The Company's
claims processing system was installed in 1989 and was designed with a four
digit year code field. Testing of the claims processing system is ongoing to
verify the system's overall Year 2000 compliance. The Company's financial
and accounting systems were purchased from third party vendors. The Company
is in the process of upgrading certain of these systems. The Company plans
to obtain certification from these vendors that the financial and accounting
systems are Year 2000 compliant.

The Company expects to complete software reprogramming and replacement
by June 30, 1999. Once software is reprogrammed or replaced for a system,
the Company begins testing and implementation. Completion of the testing
phase for all significant systems is expected by the end of August, with all
remediated systems fully tested and implemented by September 30, 1999. The
Company expects that all phases of its Year 2000 efforts will be completed by
October 31, 1999.

The Company is gathering information about the Year 2000 compliance
status of its significant vendors and suppliers. This process will include
the Company's request for certification from its vendors, service providers,
brokers and other business partners to determine whether they may experience
Year 2000 problems that could affect the Company. Based on its assessment to
date, the Company is not aware of any vendor or supplier with a Year 2000
compliance problem that would materially impact the Company's results of
operations, liquidity, or capital resources. However, the Company has no
means of ensuring that such vendors or suppliers will be Year 2000 compliant.
The inability of vendors or suppliers to complete their Year 2000 resolution
process in a timely fashion could materially and adversely impact the
Company's operations, liquidity or capital resources.

The Company will utilize internal and external resources to reprogram or
replace, test, and implement the software modifications for Year 2000
compliance. The Company has incurred costs to date (not including
expenditures associated with the installation of new or upgraded systems as
part of the Company's ongoing efforts to maintain and upgrade its information
technology) of approximately $70,000 and costs are estimated to be less than
$175,000 through the end of the project, which is targeted for October 1999.
These costs have

<PAGE>

been considered in preparing the Company's capital and operating budgets.
There can be no assurance, however, that efforts will be completed within
these estimated costs and time periods. See "Risk Factors -- If Our Computer
Systems or Those of Our Vendors and Suppliers Do Not Work Properly after
December 31, 1999, Our Operations Will Be Disrupted."

The Company may also be adversely affected if Year 2000 issues result
in additional claims being made against our insureds. While the Company
believes that its risk of loss from Year 2000 issues is not extensive because
of the relatively small number of exposures that would likely be impacted by
the Year 2000, there is no certainty as to the degree of liability which
might be established against us because of such claims.

RECENT ACCOUNTING PRONOUNCEMENT NOT YET ADOPTED

In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
which is effective for fiscal years beginning after June 15, 1999. Adoption
of this statement is not expected to have a significant impact on the
Company's financial position or results of operations because ISMIE does not
engage in any significant derivative or hedging activities.

<PAGE>

BUSINESS

OVERVIEW

Founded by the Medical Society in 1976, ISMIE is the largest provider of
medical malpractice insurance in Illinois and is one of the ten largest
providers of medical malpractice insurance in the United States based on
direct premiums written. We currently insure approximately 8,700 Illinois
physicians who practice alone or in medical groups, clinics or other
healthcare organizations. In addition, we offer protection to approximately
775 corporate and partnership entities as well as a variety of other
healthcare providers.

For the year ended December 31, 1998 our total revenue was $182.4
million and our net income was $12.7 million. As of December 31, 1998, ISMIE
had $1.21 billion of total assets, no debt outstanding and $242.7 million of
total equity. In 1998, A.M. Best upgraded its insurer financial strength
rating of the Exchange to "B++ (Very Good)."

Medical malpractice insurance, or medical professional liability
insurance, insures the physician or other healthcare provider against
liabilities arising from the rendering of, or failure to render, professional
medical services. Under the typical medical malpractice insurance policy, the
insurer also defends the insured against potentially covered claims. Based on
data compiled by A.M. Best, total medical malpractice premiums in the United
States in 1997 exceeded $5.7 billion. In Illinois, the fourth largest market
for medical malpractice insurance based on premiums written, approximately
$393.0 million of medical malpractice premiums were written in 1997 by
licensed insurance companies. Our share of the medical malpractice premiums
written in Illinois in 1997 by licensed insurance companies was approximately
50%. For the last five years, on average, we have had a policyholder
retention rate in excess of 90%.

HISTORY

ISMIE was organized by the Medical Society as an Illinois reciprocal
insurance exchange to provide physicians with an alternative to commercial
medical professional liability insurance and was approved to begin issuing
policies in 1976. An Illinois reciprocal insurance exchange is an
organization or group of subscribers, including individuals, partnerships and
corporations, who may insure each other by "exchanging" insurance contracts
through their commonly appointed attorney-in-fact. All insurance contracts
so exchanged are executed by their designated attorney-in-fact on behalf of
the subscribers through a power of attorney. Each subscriber or member of
the Exchange has granted this power of attorney to the Attorney-in-Fact. The
Attorney-in-Fact, under the direction of the Board of Governors, manages the
Exchange, including the underwriting and issuance of insurance policies, the
collection and investment of premiums, and the service and administration of
the policyholders and their claims. The Attorney-in-Fact is a corporation
that is wholly owned by the Exchange and was formed for the sole purpose of
acting as the attorney-in-fact of the Exchange, which it does pursuant to an
agreement with the Exchange that requires the Exchange to reimburse the costs
of the Attorney-in-Fact.

<PAGE>

Since its organization in 1976 by the Medical Society, the Exchange and
the Medical Society have enjoyed a mutually beneficial relationship which has
cultivated the loyalty of Illinois physicians to the Exchange. We believe
that our leading market share for medical malpractice insurance in Illinois
is due in large part to the loyalty of our insured physicians. Over the past
five years, on average, we have had a policyholder retention rate in excess
of 90%. We attribute this loyalty to:

- the high quality, personalized "Physician-First Service" we provide;

- our traditional focus on the physician marketplace;

- our commitment to protecting the reputation of our insureds and our
aggressive defense of claims;

- our financial stability;

- our ability to customize product features and programs to fit the
needs of different customers; and

- our close relationship with the medical community, including our
longstanding relationship with the Medical Society.

BUSINESS STRATEGY

We believe that the growth in managed healthcare and the emergence of
multi-state integrated healthcare providers and delivery systems will lead to
major changes in the medical malpractice insurance industry. We have adopted
a strategy which we believe will enable us to compete effectively, enhance
profitability and create long-term growth, while maintaining consistent
coverage and market presence. The Company's strategy is to:

- maintain the Company's strong relationship with its policyholders and
continue to provide superior service;

- expand geographically by increasing the number of states in which the
Company writes policies;

- enhance product offerings to include hospital coverage, our "Physician
Business Practice Liability (E&O/D&O)" insurance, workers compensation
insurance and employment practices liability insurance;

<PAGE>

- maintain underwriting discipline in order to emphasize profitability
rather than premium volume;

- maintain operating expense below the industry average;

- continue to improve our financial ratings; and

- pursue acquisition and consolidation opportunities relating to the
Company's core insurance business.

As part of this strategy, we have undertaken the Conversion. We believe
that the Conversion will enhance our ability to achieve our strategic goals
by providing us (i) greater operating flexibility, (ii) access to the capital
markets and opportunities to use our stock for acquisitions and (iii) a form
of organization that offers a higher degree of regulatory certainty than that
afforded to a reciprocal insurance exchange. To implement our strategy, we
have taken the following steps:

MAINTAIN RELATIONSHIPS. To help assure a continued close relationship
with our policyholders and with the Medical Society, we intend to continue to
provide the superior service which we believe has fostered those
relationships. See "--Relationship with the Medical Society" and "Management
- -- Certain Relationships and Related Transactions."

GEOGRAPHIC EXPANSION. To initiate our geographic expansion beyond
Illinois, ISMIE entered into a fronting relationship to write business in
other states. "Fronting" is a reinsurance arrangement where one insurance
company issues policies to specified insureds and then reinsures all or
substantially all of the risks on the insurance to another insurance company
for a fee or a portion of the profits on the business. This is a first step
toward our goal of expanding into the neighboring states of Wisconsin, Iowa,
Missouri, Kentucky, Indiana and Michigan. Eventually, we intend to become a
fully admitted carrier in these and possibly other states.

ENHANCED PRODUCT OFFERINGS. We are in the process of expanding our
product offerings to include employment practices liability, hospital
affiliated staff medical malpractice liability and workers compensation
insurance. We intend to market these products aggressively.

In 1998, we began a one year pilot program in conjunction with the
Illinois Provider Trust (the "IPT"), an organization managed by a subsidiary
of the Illinois Hospital and Healthsystems Association ("IHHA") which
provides hospital malpractice coverage for its members. Under this program,
we offer a combined hospital and affiliated professional staff medical
malpractice liability insurance program at three Illinois hospitals. We
believe that such programs represent an increasing share of the market for
malpractice insurance and provide us with a significant area for future
growth. See "Business -- Products -- IPT Pilot Program."

Additionally, we recently began a relationship with the IHHA whereby the
Illinois Compensation Trust (the "ICT"), another organization managed by a
subsidiary of the IHHA, acts as the managing general agent to administer a
workers compensation product marketed to

<PAGE>

physicians and physician organizations. ISMIE acts as both a direct insurer
and a reinsurer in this program. See "Business -- Reinsurance -- Assumed
Reinsurance."

STRENGTHENING BROKER RELATIONSHIPS AND EXPANSION OF OUR CLINIC OPTION
PROGRAM. We believe that the growth in managed healthcare and the emergence
of multi-state integrated healthcare providers and delivery systems will lead
to major changes in the medical malpractice insurance industry. Practice
management organizations, hospitals, administrators of large group practices
and organizations increasingly influence the purchasing decision for the
medical malpractice insurance coverages of their affiliated physicians. As
the consolidation of healthcare providers continues, the number of physicians
insured through these organizations will increase and we believe that these
organizations increasingly will seek well-capitalized medical malpractice
insurers that can provide a full range of products and a high level of
service.

An important part of expanding business through programs such as the
Clinic Option program is strengthening our relationships with independent
brokers and agents. Historically, because of its relationship with the
Medical Society, ISMIE has not relied on brokers to sell policies.
Increasingly, however, we believe that insurance sold to physicians insured
through larger organizations will be sold through brokers. As part of our
effort to foster relationships with independent brokers and agents, we are
now beginning to align our broker commissions with market levels. In
response to these challenges, ISMIE has designed and begun to market its
Clinic Option program, which provides discount opportunities and risk
management programs to physicians groups.

MAINTAINING UNDERWRITING DISCIPLINE. Our experience with, commitment to
and focus on medical professional liability insurance for over 20 years has
allowed us to develop a strong knowledge of the market and to build an
extensive data base of medical malpractice claims experience. We take
advantage of this specialized expertise in medical professional liability
insurance to set premiums that we believe are appropriate for exposures being
insured. We have also adopted more prospective underwriting guidelines that
apply to insureds with evolving adverse loss experience. This enables us to
provide lower premiums or pricing for those insureds who have the best loss
experience, and minimize the propensity for adverse selection within the
insured base. As the Company expands its business, it intends to maintain
underwriting discipline and emphasize profitability over premium growth.

CONTROL OF OPERATING EXPENSES. ISMIE's net expense ratio, defined as
other operating expenses as a percent of net premiums earned, has ranged from
7% to 12% over the last five years, remaining consistently below the industry
average for medical malpractice insurers, which management estimates ranged
from 15% -18% for the same period. Although increased use of brokers in
writing group business has led to an increase in operating expenses, we will
continue to utilize the rigorous controls which have proved successful to
date. We believe we will be able to enhance operating efficiencies if we
achieve our business strategy through the Conversion.

IMPROVE STRONG FINANCIAL RATINGS. Our traditional goal has been to
continually improve our strong financial ratings through steady performance.
We believe that the Conversion will

<PAGE>

help ISMIE to improve its financial ratings due to increased corporate
flexibility and the greater access to capital it affords.

PURSUE STRATEGIC ACQUISITION OPPORTUNITIES. We believe that the
Conversion will better position the Company to make strategic acquisitions by
providing greater access to capital as a source of financing and creating an
attractive stock acquisition currency. We believe that consolidation will
continue in the medical professional liability insurance industry and that
opportunities to make strategic acquisitions may arise, which could provide
an effective way to expand the Company's business, product offerings and
geographic scope.

PRODUCTS

ISMIE underwrites professional and related liability policy coverages
for physicians, physician medical groups and clinics, associated healthcare
professionals and other providers in the healthcare industry. Our principal
products are discussed below.

PHYSICIAN AND MEDICAL GROUP LIABILITY. ISMIE offers coverage for both
physicians who are sole practitioners and those who are part of a medical
group or clinic. The policy issued to physicians and medical groups or
clinics includes: (1) coverage for professional liability which arises out of
medical practice; (2) a limited defendant reimbursement benefit which is
payable for attendance at certain depositions and trial; and (3) a limited
legal expense reimbursement benefit for proceedings brought by a governmental
disciplinary board. Professional liability insurance provides protection
against the liability of physicians and their employees arising from an error
in the diagnosis or treatment of a patient's condition.

Professional liability coverages are issued primarily on a "claims made"
basis. Coverage is provided for claims reported to us during the policy
period arising from incidents that occurred on or after the retroactive date
contained in the policy. We also offer "tail coverage" for claims reported
after the expiration of the policy for occurrences during the coverage
period. The price of the tail coverage is based on the length of time the
insured has been covered under the Company's claims made form. We provide
tail coverage without additional charge for insured physicians who die or
become totally disabled during the coverage period of the policy and those
who retire from the practice of medicine after having been insured by ISMIE
for at least sixty consecutive months and who are also at least 55 years old.
As of July 1, 1999, free retirement tail coverage will be granted at any
age, as long as the insured physician has been insured with ISMIE for 10
years.

For individual physicians, we offer limits of insurance up to $2.0
million per person, with an aggregate policy limit of up to a $4.0 million
per person for all claims reported for each calendar year or other 12-month
policy period. The most common limit is $1.0 million per claim or occurrence,
subject to a $3.0 million aggregate policy limit. The defense reimbursement
benefit for governmental disciplinary proceedings is $25,000.

The market for medical malpractice insurance has been steadily changing
over the past five years. Many sole practitioners are joining groups, and
groups are forming larger groups in

<PAGE>

order to better meet the increased demands for medical resources. ISMIE has
responded to these market changes by designing an insurance product called
the Clinic Option program, which provides various discount opportunities and
effective risk management programs to groups of physicians. Under the
Clinic Option program, practice groups are underwritten on a group basis
instead of on a per physician basis. This allows for experience rating. The
Clinic Option program provides economies of scale for both the physicians and
for ISMIE by permitting underwriting and pricing considerations to be made on
a collective basis. Through the Clinic Option program, ISMIE is able to offer
competitive pricing while striving to maintain underwriting discipline.
Additionally, development of the Clinic Option program has allowed us to
maintain our relationship with physicians regardless of changes in the way
they organize their practice.

The Clinic Option limits are $1.0 million or $2.0 million per person
with a shared annual aggregate limit based on the number of physicians in the
group. The shared annual aggregate limit under the Clinic Option program is
generally less than the accumulated aggregate limit would be for a group of
doctors insured individually.

To date, substantially all premiums of the Company have been generated
by our physician and medical group liability product.

OTHER COVERAGES. Other coverages, some of which offer the opportunity
for significant growth, include the following:

- IPT PILOT PROGRAM. We recently began a one year pilot program in
conjunction with the Illinois Provider Trust, an organization composed
of 38 Illinois hospitals which is managed by a subsidiary of the IHHA,
to offer a combined hospital and affiliated professional staff medical
malpractice liability insurance program at one Illinois hospital. Due
to the success of this venture, we expanded this pilot program to
other hospitals within Illinois.

- ICT PROGRAM. Earlier this year, we entered into a reinsurance treaty
with the Illinois Compensation Trust, another organization managed by
a subsidiary of the IHHA, under which the Illinois Compensation Trust
would act as the managing general agent to market a workers
compensation product to physicians and physician organizations. ISMIE
would act as both a direct insurer and a reinsurer under this proposed
program. See "Business -- Reinsurance -- Assumed Reinsurance."

- HEALTHCARE PROVIDER LIABILITY. We offer our professional liability
insurance to a variety of specialty provider organizations, including
outpatient surgery centers, hemodialysis laboratories and associated
healthcare professionals. These policies include the standard
professional liability coverage provided to physicians and medical
groups. The policies generally are issued on a claims made basis with
the limits of liability up to those offered to larger medical groups.
The limits of coverage under our healthcare provider policies are
between $1.0 million and $2.0 million each person, subject to $3.0
million to $4.0 million aggregate policy limits.

<PAGE>

- PHYSICIAN BUSINESS PRACTICE LIABILITY (E&O/D&O). In 1995, we
introduced a policy that provides coverage for liability arising out
of the conduct of an insured's business operations and for liability
of directors and officers of an organization. The Physician Business
Practice Liability (E&O/D&O) product was designed to address the need
for coverage in activities such as utilization review, credentialing,
peer review, quality assurance and other aspects of delivering health
care services in a managed care environment. In addition, the product
includes coverage for the liability of directors and officers. These
policies are generally issued on a claims made basis. The limits of
coverage under these policies issued by ISMIE are between $1.0 million
and $2.0 million.

- EMPLOYMENT PRACTICES LIABILITY INSURANCE. Together with NAS Insurance
Services, an underwriting manager for Lloyds of London in the United
States, we provide employment practices liability insurance to
physicians and physician organizations and hospitals. Employment
practices liability insures the employer for suits brought by
employees for wrongful termination, harassment, and discrimination
claims. The limits of coverage range from $100,000 to $1.0 million
per occurrence.

- JOINT HOSPITAL RISK MANAGEMENT PROGRAMS. In 1990, we entered into a
joint program with a Chicago hospital on a pilot basis. In this
program, ISMIE insureds who were members of the medical staff were
eligible for premium discounts. These premium discounts were
predicated on mandatory participation in risk management, as well as
participation in a joint defense program.

Based upon the success of this pilot program, other hospital medical
staffs have requested participation in a joint program with ISMIE. In
1995, joint programs were begun with two other Chicago-area hospitals.
In 1996, we added two downstate hospitals and a physician-hospital
organization. There are now 10 such programs in operation, affecting
over 600 physician policyholders.

Each of these joint programs has varying discount levels, depending on
whether they require risk management participation of members and
their participation in a joint defense program. Although not all
programs have agreed to joint defense, all of the joint programs have
mandatory risk management participation as an element of the program.

MARKETING AND POLICYHOLDER SERVICES

We employ various strategies for marketing our products and providing
policyholder services. We market our products to physicians, physician
groups, group managers and other key decision-makers within a group
principally through recommendations from our large existing policyholder
base, advertisements in medical journals and other publications, seminars on
healthcare and risk management topics for physicians, and direct mail
solicitation.

<PAGE>

As part of our marketing and service efforts, we also maintain the ISMIE
network of physician policyholders at most hospitals in Illinois (the "ISMIE
Network"). The ISMIE Network was first developed in the mid-1980's to
promote personal physician representation of ISMIE at the hospital level and
to foster advocacy and communication between ISMIE and its policyholders.
Currently, the ISMIE Network has approximately 180 physician representatives.
These ISMIE representatives are physicians at each hospital who have
volunteered to be a local informational liaison between their colleagues and
ISMIE. They maintain an awareness of new and existing ISMIE products and
programs and assist in keeping their local physician colleagues up-to-date
regarding them. In addition, they are asked to report back to ISMIE any
questions or concerns that policyholders have. ISMIE uses this information
to identify and address policyholder concerns.

In addition to these direct marketing channels, we sell our products
through independent brokers and agents who currently produce approximately
32% of the Company's direct premiums written. Larger physician groups and
clinics frequently prefer brokers over direct solicitation when they purchase
professional liability insurance, and we believe that our broker
relationships are important to our ability to grow in that market segment.

The following pie chart summarizes our physician and medical group
professional liability direct premiums written for the year ended December
31, 1998:

[PIE CHART SHOWING THE FOLLOWING INFORMATION:

Sole practioners: 48%
Groups greater than 10: 17%
Groups with less than 10: 35%]

We regularly provide account information to all insureds and maintain
relationships with all policyholders insured by ISMIE. Each insured has a
designated client service representative

75
<PAGE>

who can answer most inquiries and, in other instances, can provide the
insured with immediate access to the person with expertise in a particular
department. For larger physician group and clinics, we have a service team
composed of underwriting, risk management and claims management
representatives, each of whom may be contacted directly by the policyholder
for prompt response.

In addition, through a formal outreach program, we present seminars and
communication forums at the local level. Through this program, our
representatives present workshops and exhibits during various specialty and
other healthcare related organization meetings. This provides an effective
communication vehicle for information about our products and services.

PREMIUM RATES AND DISCOUNT PROGRAMS

Through our own actuarial staff and independent actuaries, we establish
rates and rating classifications for our insured physicians and clinics.
Rates are based on loss and LAE experience that ISMIE has developed since
1976. Based on our large policyholder base and the length of time we have
been in business, we believe we have established the largest database of
experience of any professional liability insurer in Illinois. ISMIE has
various rating classifications based on medical specialty, practice location,
years in practice and limits of coverage. We also offer various discount
programs, including discounts for part-time practice, newly practicing
physicians, loss free physicians based on number of years without losses, and
group practice. Approximately 70% of all of our active policyholders
currently qualify for the loss free discount. Additional discounts are
available to qualifying groups based on favorable loss experience through the
Clinic Option program. Risk management discounts are awarded to qualified
insureds who attend risk management programs. Surcharges and debit charges
may also be given to certain insureds based on unfavorable loss experience.

Rates are set annually and filed with the Illinois Insurance Department.
We implemented general rate increases of 12% in 1998, 9% in 1995, 15% in 1994
and 5% in 1993. Where warranted by favorable loss experience, changes were
made to discount programs to offset a portion of the rate increase. These
rate actions did not have a material effect on policyholder retention.

ISMIE has not paid dividends to its policyholders since 1991. We believe
that policyholders prefer receiving premium credits through discounts rather
than receiving dividends. We also believe that discounts are a better way to
provide rewards for favorable loss experience of an insured.

UNDERWRITING

Our underwriting division is responsible for the evaluation of
applicants for professional liability and other coverages, the issuance of
policies and the establishment and implementation of underwriting standards
for all of our coverages. In addition, the division provides extensive
support for our marketing activities, including sales presentations to both
existing and

76
<PAGE>

prospective policyholders, outreach activities and policyholder services.
See "--Marketing and Policyholder Services."

Our underwriting division consists of thirty professional and support
staff. All of the professional staff is involved in underwriting
professional liability coverage for physicians and their employees. However,
a select number specialize in underwriting employment practices liability
insurance and the Physician Business Practice Liability (E&O/D&O) product.

We follow strict procedures with respect to the issuance of all
professional liability policies. Each applicant or member of an applicant
medical group is required to provide proof of medical licensing and complete
a detailed application that provides a personal and professional history, the
type and nature of the applicant's professional practice, certain information
relating to specific practice procedures, hospital and professional
affiliations and a complete history of any prior claims and incidents.

We perform a continuous process of re-underwriting our insureds.
Information concerning physicians with large losses, a high frequency of
claims or unusual practice characteristics is developed through online claims
and risk management reports. Beginning in 1999, we plan to send current
practice questionnaires to approximately one-third of our insureds each year.
Each insured should receive a current practice questionnaire approximately
every three years. These questionnaires will request information similar to
that submitted in connection with the original application for insurance, and
are designed to detect any changes in the specialty or practice
characteristics of the physician that may require a higher or lower premium
rate or possible removal from the program.

The underwriting division is assisted by the Physician Review and
Evaluation Panel ("PREP") which is composed of nine practicing physicians
who are insured by ISMIE. Members of PREP are not employees of the Company,
but receive compensation for their services on the panel. PREP provides
medical expertise to the underwriting process. The panel meets monthly and
reviews underwriting profiles which include information regarding practice
patterns and relationships, overall loss experience, details of significant
claims, loss ratios and frequency ratios. A review by PREP may result in
mandatory risk management, continuing medical education, coverage
restrictions, surcharges or non-renewal. Physicians have the right to seek
reconsideration of certain actions of PREP. We have found that physician
input in the underwriting process is often helpful in fairly judging exposure
to malpractice risk and improving the practice characteristics of the
insured.

RISK MANAGEMENT SERVICES

The risk management department provides a variety of educational
activities for all policyholders in an effort to minimize and prevent losses
and supplement our marketing efforts. Activities are directed in three
general areas: those that are of general interest to all policyholders, those
issues that are specialty-specific, and activities designed as remedial
education for identified policyholders.

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<PAGE>

Among the general interest activities are:

- risk management seminars for both physicians and their office staffs
that are conducted throughout Illinois;

- self-study programs designed to educate physicians in risk management
principles;

- audio and videotapes on risk management topics and litigation support;

- and written pamphlets and brochures that address general and specific
risk management topics.

Specialty-specific activities are identified and designed by designated
subcommittees composed of physicians in the designated specialty areas. By
reviewing specialty-specific claims, these subcommittees develop educational
materials, including seminars, pamphlets and advisories to help each
policyholder evaluate and implement risk management activities that are
designed to address their specific practice needs.

We also make available educational activities to policyholders who
require assistance in specifically identified areas. Among these activities
are on-site office assessments, with specific recommended improvement
strategies; small group workshops designed to address general, as well as
specific problem areas; and access to other general interest materials that
are designated to be helpful to the individual policyholder. Many of our
educational programs have been approved for continuing medical education
(CME) credit, which is required for renewal of medical licenses in Illinois.

CLAIMS

Our claims department is responsible for selecting and assigning defense
counsel, establishing injury estimates which are used in developing reserves
for loss and LAE, directing the defense of each claim while weighing
objective and subjective issues to establish settlement values, and
negotiating settlements while directing the claim in preparation for trial.
Under most of our policies, except Physician Business Practice Liability
(E&O/D&O) policies, we are obligated to defend our insureds. In almost all
cases, the person bringing the claim against the physician is already
represented by legal counsel when the claim is reported to us.

Our claims department consists of approximately 50 technical and
management personnel, plus support staff. These personnel are responsible
for all aspects of claims handling and coverage analysis from initial
reporting through appeals of verdicts. We have an experienced claims staff
which is able to handle all claims without using independent adjusters.
Experience shows that the longer a claim goes unsettled, the more likely a
loss will be paid. Therefore, ISMIE puts a priority on resolving claims as
early as possible.

One distinct feature of our claims department is our "Physician-First
Service" program through which we strive to develop a high degree of
involvement and interaction with our

78
<PAGE>

policyholders. We encourage insured physicians to remain actively involved
in their claims throughout the legal discovery process in addition to the
trial. We believe that a physician's close involvement not only benefits the
physician during the claims process but also leads to a more efficient and
successful disposition of the claim. To further encourage this involvement,
we provide a "defendant reimbursement" stipend for each day of attendance at
depositions or other discovery and at trial.

Medical malpractice claims often involve highly complex medical and
legal issues which take a significant amount of time to resolve and often
carry severe damages. The sensitive nature of these claims requires an
open-minded professional approach to claims disposition. We believe that
ISMIE has developed a reputation for aggressively defending our insureds
against non-meritorious claims. Over the past five years, ISMIE has taken
more than 10% of claims to verdict and has won 80% of these claims. During
this period, nearly 80% of all the claims against ISMIE insureds have been
resolved with no payment made. Each claim, when received, is viewed as
neutral. The claims department works to develop facts to move the claim into
a "defend" or "settle" category as soon as possible. Our desire is to settle
cases that should be settled as early in the claims process as possible. A
system of ascending authority levels ensures that the more serious claims
receive multiple reviews. We also maintain a special unit of claims
personnel to work with insured physicians to help resolve patient conflicts
early to avoid litigation where possible.

A special committee of physicians (the "Physician Review Committee" or
"PRC"), encompassing a large variety of specialties and composed of nine
voting members and approximately twenty consulting members, makes each
decision to defend or settle a claim. Each member of the PRC must have
previously been through the professional liability litigation process. The
PRC is appointed by the ISMIE Board of directors based upon recommendations
submitted by the claims department. A significant number of the PRC members
have developed several years of experience reviewing claims. All claims
involving settlement and all claims taken to verdict are reviewed by the PRC.
As soon as sufficient information is developed to establish a "defend" or
"settle" posture, the claim handler submits the case to the PRC with detailed
information about the claim which specifically includes the claim handler's
recommendation, the defense attorney's recommendation and the insured
physician's recommendation. If the insured disagrees with the PRC's
decision, the insured physician may meet with the PRC to discuss the case and
the PRC's decision. This doctor to doctor interaction has helped us develop
a strong loyalty among our policyholders.

Litigation defense is provided almost exclusively by private law firms
with lawyers whose primary focus is defending malpractice cases. ISMIE
maintains a database to track and analyze trends in our claims experience and
to assess the rates, cost and other performance data of our defense counsel.
Our ongoing, high volume relationships allow us to work more closely and
efficiently with defense counsel and insureds to provide the best defense
possible while maintaining consistency in results at a reasonable cost.

The ongoing satisfaction of our insureds is monitored through a series
of claims monitoring surveys. These surveys allow us to promptly address
developing problems on

79
<PAGE>

specific cases and also to ensure that our policies and procedures continue
to address our customer's concerns. To ensure that we maintain our strong
market presence and customer satisfaction, every claim that is filed receives
three monitoring surveys during the pendency of the claim. These surveys are
generally conducted 45 days after the claim is filed, after the decision to
"defend" or "settle" has been reached, and after a claim is closed.

LOSS RESERVES

Medical malpractice loss and LAE reserves are established based on well
known facts and interpretation of circumstances, including ISMIE's experience
with similar cases and historical trends involving claim payment patterns,
loss payments, pending levels of unpaid claims, as well as court decisions
and economic conditions. For claims-made policies, reserves apply only to
claims that have been reported during the period that coverage has been
granted. For "tail coverage," which is available under an extended reporting
endorsement feature of the policy, an estimate of possible future claims
needs to be made as well. While historical experience is helpful in
determining loss trends, each case is unique and the outcomes can vary
substantially from any pattern derived. Therefore, ISMIE attempts to record
reserves based on its best estimate of future losses and expenses from
claims. Nevertheless, there is no assurance that the reserves recorded will
ultimately be adequate to cover the losses from claims.

Uncertainty is further enhanced by the fact that medical malpractice
claims can typically take several years to close. In fact, more than 45% of
ISMIE's direct loss reserves as of December 31, 1998 were related to losses
incurred in 1995 or earlier. The majority of unfavorable loss development
prior to 1995 related to underestimated exposure under occurrence policies,
which were written until 1986. As of December 31, 1998, there remained $46
million, about 5% of total reserves, in estimated unpaid losses and LAE
applicable to occurrence policies written prior to 1986. Experience shows
that financial results are improved by the early resolution of claims that
ISMIE believes will ultimately be lost at trial. Therefore, ISMIE puts a
priority on resolving probable liability claims as early as possible.

The setting of loss reserves is a projection of ultimate losses,
developed through an actuarial study of ISMIE's claims history and an
assessment of economic trends. Also considered are the injury estimates
established by the claims analysts and the liability assessment of the PRC.
Actuaries rely heavily on historical trends, but also consider any changes in
economic and legal conditions. As additional information becomes available,
estimates reflected in earlier reserve projections may be revised. Any
increase needed to previously set reserves could have an adverse effect on
ISMIE's results for the period in which the adjustments are made.

The uncertainties associated with estimating ultimate losses are
augmented by outside factors, such as judicial precedents, social temperament
and economic conditions. The inherent uncertainty of estimating reserves is
relatively greater for companies like ours writing long-tail casualty
insurance, such as medical malpractice, due primarily to the greater length
of time before ultimate claims resolution.

80
<PAGE>

ISMIE uses both its internal actuarial staff and independent actuaries
in establishing its reserves. ISMIE's independent actuaries review reserves
for losses and LAE at the end of each policy year and prepare a report that
includes a recommended level for reserves. ISMIE considers their
recommendations, along with other factors, when determining reserve levels.
Between reserve studies, ISMIE continues to monitor trends in frequency and
severity, settlements, judicial and legislative decisions, etc. in order to
refine estimates and keep them current.

Our loss reserve experience is shown in the following table, which sets
forth a reconciliation of beginning and ending reserves for unpaid losses and
LAE for the years indicated:
<TABLE>
<CAPTION>

Year Ended December 31
----------------------

(in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Reserves for losses and LAE at beginning of year $946,082 $980,217 $1,021,647

Less reinsurance recoverables 331,857 395,104 362,978
-------- -------- ----------

Net reserves for losses and LAE at beginning of year 614,225 585,113 658,669
-------- -------- ----------

Provision for losses and LAE for claims, net of
reinsurance, occurring in:

Current year 163,962 121,912 99,373

Prior years 10,302 4,096 6,030
-------- -------- ----------

Total incurred losses and LAE 153,660 117,816 105,403
-------- -------- ----------

Effect of commutation 79,130 81,080 0

Less loss and LAE payments for claims, net of
reinsurance, occurring in:

Current year 4,379 6,436 3,449

Prior years 169,120 163,348 175,510
-------- -------- ----------

Total payments 173,499 169,784 178,959
-------- -------- ----------

Net reserves for losses and LAE at end of year 673,516 614,225 585,113

Add reinsurance recoverables 221,759 331,857 395,104
-------- -------- ----------

Reserves for losses and LAE at end of year $895,275 $946,082 $980,217
-------- -------- ----------
-------- -------- ----------
</TABLE>

81
<PAGE>

The following tables reflect the development of loss and LAE reserves, on a
net basis and then on a gross basis, for the periods indicated at the end of
that year and each subsequent year. The first line shows the reserves as
originally reported at the end of the stated year. Each calendar year end
reserve includes the estimated unpaid liabilities for that report or accident
year and for all prior report or accident years. The section under the
caption "liability reestimated as of" shows the original recorded reserve as
adjusted as of the end of each subsequent year to reflect the cumulative
amounts paid and all other facts and circumstances discovered during each
year. The line "cumulative redundancy (deficiency)" reflects the difference
between the latest reestimated reserve amount and the reserve amount as
originally established. The section under the caption "cumulative amount of
liability paid through" shows the cumulative amounts paid related to the
reserves as of the end of each subsequent year. In evaluating the
information in the tables below, you should note that each amount includes
the effects of all changes in amounts of prior periods. The tables presents
development data by calendar year and does not relate the data to the year in
which the claim was reported or the accident actually occurred. Conditions
and trends that have affected the development of these reserves in the past
will not necessarily recur in the future.

ISMIE RESERVE REDUNDANCY (DEFICIENCY) -- NET BASIS
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands)

Loss & LAE 496,674 583,442 643,309 644,913 643,285 622,108 648,158 658,669 585,113 614,225 673,516
Reserves

Liability
Reestimated as
of:

1 Years Later 511,249 582,554 628,553 647,011 654,407 631,924 631,502 666,835 581,015 603,923

2 Years Later 513,671 595,474 649,320 669,605 656,932 622,002 635,237 675,466 568,237

3 Years Later 548,577 619,696 669,300 668,413 644,392 616,055 649,167 668,652

4 Years Later 583,511 654,292 661,326 668,057 634,752 630,760 628,315

5 Years Later 606,915 650,864 657,991 652,131 646,342 621,108

6 Years Later 599,366 659,804 638,725 667,934 635,901

7 Years Later 604,378 642,734 648,967 665,281

8 Years Later 588,554 655,741 648,506

9 Years Later 602,245 655,000

10 Years Later 601,090

Cumulative
Redundancy
(Deficiency) (104,416) (71,558) (5,197) (20,368) 7,384 1,000 19,843 (9,983) 16,876 10,302
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>

Cumulative Amount
of Liability Paid
Through:

1 Years Later 87,923 105,137 158,356 182,397 215,785 178,197 157,706 177,647 82,266 89,989

2 Years Later 179,720 247,834 311,117 366,149 362,097 306,971 305,116 281,713 187,373

3 Years Later 301,243 372,263 455,001 479,100 446,811 411,334 400,236 403,451

4 Years Later 387,839 496,965 533,566 542,517 513,741 478,766 467,690

5 Years Later 481,754 556,359 565,489 578,261 551,223 527,175

6 Years Later 517,881 582,684 584,351 601,749 571,624

7 Years Later 536,849 597,253 595,936 616,044

8 Years Later 549,884 607,304 608,311

9 Years Later 558,609 618,387

10 Years Later 567,117

Net Reserves -
December 31, 614,225 673,516

Reinsurance
Recoverables 331,857 221,759
------- -------

Gross Reserves 946,082 895,275
</TABLE>

ISMIE RESERVE REDUNDANCY (DEFICIENCY) - DIRECT BASIS
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
Loss & LAE 621,979 779,907 798,029 809,477 883,428 895,401 942,680 1,021,647 980,216 946,082 895,275
Reserves

Liability
Reestimated as
of:

1 Years Later 687,594 740,996 920,247 874,846 921,458 901,168 921,056 988,686 942,868 920,082

2 Years Later 670,255 884,888 995,332 928,603 922,253 889,572 917,112 955,765 928,940

3 Years Later 832,919 963,057 1,046,736 927,095 906,562 874,327 862,439 927,020

4 Years Later 919,492 1,029,169 1,040,873 922,085 888,383 826,722 833,221

5 Years Later 973,990 1,028,149 1,034,152 896,722 851,312 810,232

6 Years Later 968,461 1,029,244 1,006,606 872,998 841,288

7 Years Later 965,633 1,004,791 981,457 873,238

8 Years Later 941,648 984,897 987,319

9 Years Later 924,447 991,535

10 Years 929,668
Later
</TABLE>

83
<PAGE>
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cumulative
Redundancy
(Deficiency) (307,689) (211,628) (189,290) (63,761) 42,140 85,169 109,459 94,627 51,276 26,000

Cumulative
Amount of
Liability Paid
Through:

1 Years Later 104,407 136,269 322,908 226,377 268,996 222,547 197,010 200,949 192,288 214,041

2 Years Later 226,791 443,517 519,649 460,672 459,126 389,062 366,765 373,981 386,142

3 Years Later 512,699 611,926 710,312 610,706 580,201 513,446 484,033 525,216

4 Years Later 643,275 776,665 818,862 704,188 665,697 596,114 580,016

5 Years Later 769,847 859,669 873,334 755,841 709,270 659,555

6 Years Later 824,992 896,773 903,293 777,372 740,442

7 Years Later 849,479 919,602 908,241 797,770

8 Years Later 869,249 919,374 925,986

9 Years Later 865,970 935,084

10 Years 878,603
Later

Gross Reserves -
December 31 946,082 895,275

Reinsurance
Recoverables 331,857 221,759
------- -------

Net Reserves 614,225 673,516
</TABLE>

While we believe our reserves for losses and LAE are adequate, there can
be no assurance that our ultimate losses and LAE will not deviate, perhaps
substantially, from the estimates reflected in our financial statements. If
our reserves should prove inadequate, we will be required to increase
reserves, which could have a material adverse effect on our financial
condition or results of operation.

REINSURANCE

REINSURANCE CEDED. ISMIE follows customary industry practice by
reinsuring a portion of its risks. We cede to reinsurers a portion of our
risk and pay a premium to reinsurers based upon direct premiums received on
all policies subject to reinsurance. Insurance is ceded principally to
reduce net liability on individual risks and to provide protection against
large losses. Although reinsurance does not legally discharge the ceding
insurer from its primary liability for the full amount of policies reinsured,
it does make the reinsurer liable to the insurer to the extent of the
reinsurance ceded. We determine how much reinsurance to purchase based upon
the evaluation of the risks we have insured, consultations with our
reinsurance brokers and market conditions, including the availability and
pricing of reinsurance. During the ten years between 1989 and 1998,

84
<PAGE>

excess reinsurance has reduced ISMIE's average loss by 31%, from $360,000 per
claim average on a gross basis to $247,000 per claim average on a net of
reinsurance basis.

ISMIE's reinsurance strategy is to obtain reinsurance which is designed
to protect ISMIE against unexpected increases in severity and frequency in
any given year. From 1995 to 1997, ISMIE steadily increased its retention
under its excess of loss reinsurance program from a retention level of
$500,000 per medical incident to $1,000,000 per medical incident. With
increased retentions, the Exchange bears more of the potential losses and
cedes only losses excess of specified retention levels to reinsurers. In
1998, ISMIE ceded $45.5 million of its earned premiums to reinsurers.

ISMIE places its reinsurance arrangements exclusively through AON Re
Inc. ISMIE has two layers of excess reinsurance: a per incident treaty (ISMIE
often has more than one insured named in a lawsuit or claim arising from the
same incident, and therefore multiple policies and limits may be involved),
and a per claim treaty applicable to insureds with $2 million/$4 million
limits. The per incident treaty is applicable to all medical malpractice
policies and applies to the first $1.0 million in limits per insured per
incident. ISMIE retains the first $1.0 million per incident and the per
incident treaty covers losses up to $5.0 million per incident. The per claim
treaty covers $1.0 million excess of $1.0 million per insured per claim for
insurance with $2.0 million/$4.0 million policy limits.

For the three-year period from July 1, 1995 to July 1, 1998, ISMIE
purchased reinsurance from Cologne Re (Dublin), which provided a combination
of quota share and stop loss protection. This reinsurance provided ISMIE
additional protection against higher than expected claims frequency and
severity. During the period that this treaty was in effect, ISMIE was able
to greatly improve its surplus position on a statutory basis, from $110.1
million to $178.4 million. ISMIE has discontinued this reinsurance program
effective July 1, 1998. ISMIE's improved surplus position, along with recent
favorable trends in claims frequency, has also enabled it to commute the
first two years of this reinsurance program, thereby taking back cash, along
with the corresponding loss reserves, of $81.1 million in 1997 and $79.1
million in 1998.

ISMIE also has a treaty which is applicable to $5.0 million per claim
limits issued to entities under our Clinic Option program and our corporate
policy. This treaty cedes 100% of $3.0 million excess of $2.0 million per
claim to reinsurers.

In addition, ISMIE has a quota share treaty applicable to all Physician
Business Practice Liability (E&O/D&O) policies. ISMIE retains 10% of all
losses on these policies and 90% is ceded to reinsurers.

We place reinsurance under reinsurance treaties and agreements with a
number of individual companies and with syndicates at Lloyd's to avoid
concentrations of credit risk. The following table identifies the most
significant reinsurers, their percentage participation in the aggregate
reinsured risk based upon premiums paid and their rating as of December 31,
1998. No other reinsurer's percentage participation in 1998 exceeded 3% of
total reinsurance premiums.

85
<PAGE>
<TABLE>
<CAPTION>

PREMIUMS CEDED PERCENTAGE OF TOTAL
FOR YEAR ENDED REINSURANCE
REINSURER DECEMBER 31,1998 RATING(1) PREMIUMS
--------- ---------------- --------- -------------------
<S> <C> <C> <C>
(IN THOUSANDS)

Cologne Re (Dublin) $15,986 AAA 35.2%

Transatlantic Reinsurance Co. $6,052 A ++ 13.3%

Lloyd's Syndicates $4,376 A 9.6%

Union America Insurance Co. $4,252 A - 9.4%

CNA Reinsurance Co. (U.K.) $3,385 A 7.4%

NAC Reinsurance Corp. $2,697 A + 5.9%

Everest Reinsurance Re $1,930 A 4.2%

Kemper Reinsurance Co. $1,908 A 4.2%

Chartwell Reinsurance Co. $1,526 A 3.4%

Other reinsurers (2) $3,341 7.4%
------- ------
Total $45,453 100.00%
------- ------
------- ------
</TABLE>

(1) All ratings are assigned by A.M. Best, except for Cologne Re
(Dublin) which is rated by Standard & Poor's. Our minimum requirement for
ratings of our reinsurers is "B+" or better from A.M. Best or "A" or better
from Standard & Poor's.

(2) Each of the "other reinsurers" percentage of total reinsurance
premiums did not exceed 3% of total reinsurance premiums in 1998.

We analyze the credit quality of our reinsurers and rely on our brokers
and intermediaries to assist in such analysis. To date we have not
experienced any material difficulties in collecting reinsurance recoverables.
No assurance can be given, however, regarding the future ability of any of
the Company's reinsurers to meet their obligations. The largest percentage
of reinsurance ceded to any one company is ceded to Cologne Reinsurance Co.
(Dublin) which is a non-admitted carrier in the U.S. Recoverables from this
reinsurer are secured by an irrevocable and unconditional letter of credit
issued by Citibank N.A. and a trust account at AmalgaTrust (Chicago). ISMIE
is the sole beneficiary of both the letter of credit and trust account.

REINSURANCE ASSUMED. Earlier this year, we entered into a reinsurance
treaty with the Illinois Compensation Trust to reinsure the Trust's workers'
compensation risks. The Trust is organized under the Illinois Religious and
Charitable Organization Risk Pooling Act and insures the workers'
compensation risks of various Illinois hospitals. The risk assumed by ISMIE
is the layer of $375,000 excess of $25,000 per claim. The Trust retains the
first $25,000 of loss. The estimated aggregate amount of losses assumed
under this treaty are approximately $2.6 million.

<PAGE>

INVESTMENT PORTFOLIO

Return on invested assets is an important component of our operating
results. Investments are made on behalf of ISMIE by investment managers, in
accordance with the prescribed investment objectives and guidelines. ISMIE's
guidelines emphasize high-quality, fixed-maturity investments. ISMIE has
used Scudder Insurance Assets Management (SIAM) since 1985 to manage its
portfolio, which has primarily been fixed-income securities. ISMIE also uses
an investment advisor, Gofen & Glossberg, to review the performance of its
portfolio relative to the market and economic conditions.

ISMIE recently hired two equity investment managers, Dearborn Partners
and Trees Front Associates, to institute an equity securities portfolio. The
first investments under this program were made in July, 1998. The portfolio
is currently being restricted to no more than 5% of ISMIE's total invested
assets and is intended to provide more diversification to its overall
portfolio.

The following table sets forth the composition of ISMIE's investment
portfolio at the dates indicated. All of the fixed maturity securities are
held as available-for-sale.

December 31, 1998 December 31, 1997
------------------------ --------------------------
Cost or Cost or
Amortized Amortized
Cost Fair Value Cost Fair Value
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
(in thousands)

Fixed maturity securities:
U.S. government obligations $97,062 $102,698 $137,586 $139,015

Corporate securities 345,733 356,579 261,739 264,863

Mortgage-backed and other asset-backed 344,033 348,239 322,819 326,151
securities

States, territories and
possessions, and public utilities 12,307 12,675 6,694 6,787
--------- ---------- --------- ----------

Total fixed maturity securities: 799,135 820,191 728,838 736,816

Equity securities 15,975 17,969 0 0
--------- ---------- --------- ----------

Total $815,110 $838,160 $728,838 $736,816
--------- ---------- --------- ----------
--------- ---------- --------- ----------

</TABLE>

The mortgage-backed and other asset-backed portfolio represents approximately
43% of the total fixed maturity portfolio, and consists primarily of
"standard" and "more complex" securities. Standard, mortgage-backed
securities are issued on and collateralized by an underlying pool of
single-family home mortgages. Asset-backed securities are collateralized by
an underlying pool of receivables or other assets. Such pools are commonly
home equity loans, credit card and auto loans, and manufactured housing
loans. Principal and interest payments from the underlying pool are
distributed pro rata to the security holders. More complex mortgage-backed
and other asset-backed securities prioritize the distribution of interest and
principal payments to different classes of securities which are backed by the
same underlying collateral mortgages. The Company's investment portfolio
does not include any "interest only" or "principal only" mortgage securities.
Regardless of the structure, mortgage-backed and other asset-backed
securities involve the same risks associated with all fixed income
investments: interest rate risk,

<PAGE>

reinvestment rate risk, and default or credit risk. In addition,
mortgage-backed and other asset-backed securities possess prepayment risk,
which is the risk that a security's originally scheduled interest and
principal payments will differ considerably due to changes in the level of
interest rates. In a standard pass-through mortgage-backed and other
asset-backed security, the inherent risks are identical across all security
holders, but as mortgage-backed and other asset-backed security structures
become more complex the risk is spread unevenly across the different
securities issued on the same underlying pool of mortgages. This results in
securities having dramatically different credit and/or prepayment
characteristics even though the securities are issued from the same
underlying collateral. We take advantage of this "structural" risk by
purchasing those mortgage-backed and other asset backed securities which, due
to this uneven spread of risk, possess enhanced credit and/or stable
prepayment characteristics.

Our investment portfolio of fixed maturity securities consists primarily of
intermediate-term, investment-grade securities. Our investment policy
provides that fixed maturity securities investments are limited to purchases
of investment-grade securities or unrated securities which, in the opinion of
a national investment advisor, should qualify for such rating. The table
below contains additional information concerning the investment ratings of
our fixed maturity investments at December 31, 1998:

As of December 31, 1998 Amortized Percentage
Cost Fair Value of Fair Value
(in thousands) --------- ---------- -------------
<S> <C> <C> <C>
TYPE/RATING OF INVESTMENT

AAA (including U.S. government
obligations $441,095 $450,937 55.0%

AA 21,282 22,100 2.7

A 282,993 292,649 35.7

BBB 53,765 54,505 6.6
-------- -------- ------
$799,135 $820,191 100.0%
-------- -------- ------
-------- -------- ------

</TABLE>

The following table sets forth certain information concerning the
maturities of fixed maturity securities in our investment portfolio as of
December 31, 1998:

As of December 31, 1998 Amortized Percentage
Cost Fair Value of Fair Value
(in thousands) --------- ---------- -------------
<S> <C> <C> <C>

Years to maturity:

After one through five $223,416 $227,693 27.8%

After five through ten 217,662 229,839 28.0

After ten 14,024 14,420 1.8

<PAGE>

As of December 31, 1998 Amortized Percentage
Cost Fair Value of Fair Value
(in thousands) --------- ---------- -------------
<S> <C> <C> <C>

Mortgage-backed securities and
other asset-backed securities 344,033 348,239 42.4
-------- -------- ------
Totals $779,135 $820,191 100.0%
-------- -------- ------
-------- -------- ------

</TABLE>

MARKET RISK

The Company is subject to various market risk exposures, including
interest rate risk and equity price risk.

The value of the Company's fixed-maturity portfolio is subject to
interest rate risk. As market interest rates decrease, the value of the
portfolio goes up with the opposite holding true in rising interest rate
environments. A common measure of the interest sensitivity of fixed-maturity
assets is modified duration, a calculation that takes maturity, coupon rate,
yield and call terms to calculate an average age of the expected cash flows.
The longer the duration, the more sensitive the asset is to market interest
rate fluctuations.

The value of the Company's common stock equity investments is dependent
upon general conditions in the securities markets and the business and
financial performance of the individual companies in the portfolio. Values
are typically based on future economic prospects as perceived by investors in
the equity markets.

The first column of the following table shows the estimated fair values
of certain of the Company's financial instruments as of December 31, 1998.
The second column shows the effect on current estimated fair values assuming
a 100 basis point increase in market interest rates and a 10% decline in
equity price (sensitivity analysis).

Estimated Fair Value
Estimated Fair Value At Adjusted Market
at Current Market Rates/Prices as
Rates/Prices Indicated Below
------------ ---------------
<S> <C> <C>
Interest rate risk(1)
Fixed-maturity securities
Available-for-sale $820,191 $790,644

Equity price risk (2)
Common stocks $17,969 $16,172

</TABLE>

<PAGE>

(1) Adjusted interest rates assume a 100 basis point increase in
market rates at December 31, 1998

(2) Adjusted equity prices assume a 10 percent decline in values at
December 31, 1998

For all its financial assets and liabilities, the Company seeks to maintain
reasonable average durations, consistent with the maximization of income without
sacrificing investment quality and providing for liquidity and diversification.

The estimated fair values at the adjusted market rates (assuming a
100-basis point increase in market interest rates) are calculated using
discounted cash flow analysis and duration modeling where appropriate. The
estimated values do not consider the effect that changing interest rates
could have on prepayment activity.

This sensitivity analysis provides only a limited, point-in-time view of
the market risk sensitivity of certain of the Company's financial
instruments. The actual impact of market interest rate and price changes on
the financial instruments may differ significantly from those shown in the
sensitivity analysis. The sensitivity analysis is further limited as it does
not consider any actions the Company could take in response to actual and/or
anticipated changes in interest rates and equity prices.

COMPETITION

The physician professional liability insurance market in Illinois is
highly competitive. We believe that the principal competitive factors
include pricing, financial stability, ratings, breadth and flexibility of
coverage and the quality and level of service provided. ISMIE competes with
numerous insurance companies in the Illinois market. Our principal
competitors for physicians and medical groups consist of several commercial
insurance companies and, increasingly, self-insurance programs by hospitals
for acquired physician practices. Each of these competitors is actively
engaged in soliciting insureds in Illinois, ISMIE's primary area of
operations, and each has offered assessments or premiums at very competitive
rates during the past few years. The number of licensed insurance carriers in
the medical professional liability insurance market in Illinois has
dramatically increased from six in 1992 to approximately thirty-two today.
At the same time, a number of health care professionals have left the
insurance market because many become a part of self-insurance programs
instituted by hospitals that have acquired physician practices. Despite
substantial increases in competition over the past five years and the
increase in the use of self-insurance, ISMIE has experienced a reduction of
only 12.5% of persons or entities covered under existing policies since 1993.
We attribute this favorable experience to our superior customer service and
the close relationships we have with our insured policyholders.

We expect to encounter similar competition from local physician-owned
insurance companies, commercial companies and self-insurance programs in
other states as we carry out our expansion plans. The Company plans to
compete in other states principally through offering superior policyholder
service. All markets in which we now write insurance and which we would
expect to enter have competitors with substantially greater financial and
operating resources and higher ratings than the Company. See "Risk Factors
- -- The Market in Which We Operate is Highly Competitive."

<PAGE>

RELATIONSHIP WITH THE MEDICAL SOCIETY

The Exchange was organized in 1976 by the Illinois State Medical
Society, and has received the active support of the Medical Society in
building its physician and medical group policyholder base. We have certain
officers and directors in common with the Medical Society. We also have a
shared services agreement with the Medical Society whereby certain office,
administrative, employee, lobbying and other services are shared. See
"Management--Certain Relationships and Related Transactions--Services and
Office Space." This close relationship with the Medical Society has been
critical to the success of the Exchange. As a reciprocal insurance exchange,
the Exchange has been wholly owned and governed by its members. The Exchange
has relied on its relationship with the Medical Society in marketing its
policies. In 1998, this relationship was modified to eliminate the
requirement that policyholders be members of the Medical Society and to
transfer the function of the attorney-in-fact from the Medical Society to the
Exchange. Following the Conversion, we will endeavor to continue our shared
services agreement and, through personalized service, to maintain our close
relationship with the Medical Society.

REGULATION

GENERAL. Insurance companies are regulated by government agencies in
states in which they transact insurance. The extent of regulation varies by
state, but regulation usually includes: (i) establishing standards of
solvency which must be met and maintained by insurers; (ii) regulating
premium rates and policy forms; (iii) setting minimum capital and surplus
requirements; (iv) requiring the licensing of companies and agents; (v)
approving accounting methods and methods of setting statutory loss and
expense reserves; (vi) setting requirements for and limiting the types and
amounts of investments; (vii) establishing requirements for the filing of
annual statements and other financial reports; (viii) conducting periodic
statutory examinations of the affairs of insurance companies; (ix) approving
proposed changes of control; and (x) limiting the amounts of dividends that
may be paid without prior regulatory approval. State insurance departments
also conduct periodic examinations of the affairs of insurance companies.
This regulation and supervision are primarily for the benefit and protection
of policyholders and not for the benefit of investors.

We have written all of our insurance in Illinois and ISMIE Indemnity
will be domiciled there. Accordingly, Illinois laws and regulations have the
most significant impact on the Company and its operations.

HOLDING COMPANY REGULATION. The Illinois Insurance Holding Company
System Act (the "Holding Company Act") requires us to file information
periodically with the Illinois Insurance Department, including information
relating to our capital structure, ownership, financial condition and general
business operations, and information relating to transactions and agreements
between ISMIE Indemnity and its affiliates. Certain transactions between an
insurance company and its affiliates, including certain sales, loans,
guarantees, transfer of assets or liabilities, investments, reinsurance
agreements, and management agreements and cost sharing arrangements, also are
subject to prior notice to the Illinois Insurance Department, and may not be
entered into if disapproved by the Illinois Insurance Department.

<PAGE>

The Holding Company Act also provides that the acquisition or change of
"control" of an Illinois insurance company or of any person or entity that
controls such an insurance company cannot be consummated without the prior
approval of the Illinois Director of Insurance. In general, a presumption of
"control" arises from the ownership of voting securities and securities that
are convertible into voting securities, which in the aggregate constitute 10%
or more of the voting securities of an Illinois insurance company or of a
person or entity that controls an Illinois insurance company, such as ISMIE
Holdings. A person or entity seeking to acquire direct or indirect
"control," of the Company is generally required to file with the Illinois
Director of Insurance an application for change of control containing certain
information required by statute and published regulations and provide a copy
of the application to us. The Holding Company Act and other provisions of the
Illinois Insurance Code also effectively restrict us from consummating
certain reorganizations or business combinations without prior regulatory
approval.

We will also be subject to insurance holding company laws in other
states that contain similar provisions and restrictions if we become licensed
in those states.

REGULATION OF DIVIDENDS FROM INSURANCE SUBSIDIARIES. The Holding
Company Act will limit the ability of ISMIE Indemnity to pay dividends to the
Company. Without prior notice to and approval of the Illinois Director of
Insurance, ISMIE Indemnity may not declare or pay an extraordinary dividend,
which is defined as any dividend or distribution of cash or other property
whose fair market value together with other dividends or distributions made
within the preceding 12 months exceeds the greater of such subsidiary's
statutory net income for the preceding calendar year or 10% of its
policyholder surplus as of the preceding December 31. Regulations further
require that an insurer's policyholder surplus following a dividend or other
distribution be reasonable in relation to its outstanding liabilities and
adequate to its financial needs. The Illinois Insurance Code permits the
payment of dividends only out of statutory earned (unassigned) surplus. In
addition, an insurance company is required to give the Illinois Insurance
Department notice of all dividends after declaration, but prior to payment.

RISK-BASED CAPITAL. The NAIC has developed, and states including
Illinois have adopted, a methodology for assessing the adequacy of statutory
surplus of property and casualty insurers which includes a risk-based capital
("RBC") formula that attempts to measure statutory capital and surplus needs
based on the risks in a company's mix of products and investment portfolio.
The formula is designed to allow state insurance regulators to identify
potentially under-capitalized companies. Under the formula, a company
determines its RBC by taking into account certain risks related to the
insurer's assets (including risks related to its investment portfolio and
ceded reinsurance) and the insurer's liabilities (including underwriting
risks related to the nature and experience of its insurance business). The
RBC rules provide for different levels of regulatory attention depending on
the ratio of a company's total adjusted capital to its "authorized control
level" of RBC. At December 31, 1998, ISMIE's statutory surplus was $187.2
million, substantially exceeding the threshold authorizing regulatory
control, which would be $53.3 million.

NAIC-IRIS RATIOS. The NAIC Insurance Regulatory Information System
("IRIS") was developed by a committee of state insurance regulators and is
intended primarily to assist state insurance departments in executing their
statutory mandates to oversee the financial condition of

<PAGE>

insurance companies operating in their respective states. IRIS identifies 12
ratios for the property and casualty insurance industry and specifies a range
of "usual values" for each ratio. Departure from the "usual value" range on
four or more ratios may lead to increased regulatory oversight from
individual state departments of insurance. ISMIE has continually been
successful in satisfying the regulators in terms of these ratios.

REGULATION OF INVESTMENTS. Illinois insurance companies are subject to
state laws and regulations that require diversification of their investment
portfolios and limit the amount of investments in certain investment
categories such as below investment grade fixed income securities, real
estate and equity investments. Failure to comply with these laws and
regulations would cause investments exceeding regulatory limitations to be
treated as nonadmitted assets for purposes of measuring statutory surplus
and, in some instances, would require divestiture of such non-qualifying
investments over specified time periods unless otherwise permitted by the
state insurance authority under certain conditions.

PRIOR APPROVAL OF POLICY FORMS. Pursuant to the Illinois Insurance
Code, we must submit policies and endorsements to the Illinois Director of
Insurance for prior approval. The possibility exists that we may be unable
to implement desired endorsements or forms if they are not approved by the
Illinois Director of Insurance. See "Risk Factors -- Regulation of Insurance
Companies is Primarily Concerned with Protecting the Interests of
Policyholders, Not Stockholders ." If ISMIE Indemnity or any future
subsidiary of the Company were to become licensed in other states, then
policy forms and endorsements under those other states also would be subject
to regulatory review and approval in those states. Also, many other states
(but not Illinois) also require notice to state insurance departments of, and
in some cases prior approval of, insurance rates before those rates can be
implemented.

INSURANCE GUARANTY ASSOCIATIONS. All states, including Illinois,
require admitted property and casualty insurers to become members of guaranty
funds or associations which generally protect policyholders of member
insurers in the event of the insolvency of such insurers. Guaranty funds or
associations pay certain claims made against insolvent insurers, and guaranty
funds assess their members in order to fund the payment of those claims and
related guaranty fund expenses. Maximum assessments permitted by law in any
one year vary by state, and Illinois permits a maximum assessment of 1.0% of
annual premiums written by a member in that state during the preceding year.
In 1998, ISMIE was assessed $93,000.

MEDICAL MALPRACTICE TORT REFORM. In cooperation with the Medical
Society, we have consistently advocated proposals for medical malpractice
tort reform and other legislation which we believe would benefit our
policyholders. It is our intent to continue to work with the Medical Society
on these efforts.

From the time of its creation, the Exchange has worked closely with the
Medical Society to secure tort reform for the benefit of physicians, patients
and its operational results. In 1976 the initial efforts led successfully to
legislation reducing the time period within which individuals could file
claims. A similar reduction in the time period for filing claims for minors
was achieved in 1987.

<PAGE>

Over the course of several years beginning in 1977, the Exchange was
successful in promoting legislation to provide confidentiality to peer review
activities including those of the Exchange and its agents. We believe that
the confidential nature of peer review reduces negligent incidents in medical
practice by promoting the frank evaluation of medical care and practice
patterns.

In 1985, broad malpractice reform legislation was successfully initiated
by the Exchange and the Medical Society and withstood legal attack in the
Illinois Supreme Court. This legislation required the filing of Affidavits
of Merit with each malpractice case and prohibited the award of punitive
damages in medical malpractice cases. The legislation made several other
substantive changes in the way in which malpractice cases were filed, all of
which contributed to providing stability in the Illinois marketplace and in
the frequency of claims. Legislation providing certain additional reforms,
which we advocated, was adopted in 1995 but was struck down by the Illinois
Supreme Court in 1997.

The Exchange has continued its legislative efforts with the Medical
Society and we believe we are recognized as a leading force in efforts at
malpractice and tort reform.

MEDICAL MALPRACTICE REPORTS. We are required to report detailed
information with regard to settlements or judgments against our Illinois
physician insureds to the Illinois Department of Professional Regulation,
which has responsibility for investigations and initiation of proceedings
relating to professional medical conduct in Illinois. In addition, all
payments must also be reported to the National Practitioners' Data Bank and
such reports are accessible by state licensing and disciplinary authorities,
hospital and other peer review committees and other providers of medical
care.

RATINGS

In 1998, A.M. Best, which rates insurance companies based on factors of
concern to policyholders, increased the Company's rating to "B++ (Very
Good)," from "B+ (Very Good)" citing improved profitability, adequate loss
reserves and our strong position in the Illinois medical professional
liability market. The improved rating also acknowledges the actions taken by
our management to position the Company to compete in the changing market.
The Company's ability to maintain or improve its ratings may depend on its
ability to implement successfully its business strategy. This rating is the
fifth highest of 13 ratings that A.M. Best assigns to solvent insurance
companies, which currently range from "A++ (Superior)" to "D (Poor)."
Publications of A.M. Best indicate that the B++ rating is assigned to those
companies that in A.M. Best's opinion "have a good ability to meet their
ongoing obligations to policyholders." In evaluating a company's financial
and operating performance, A.M. Best reviews the company's profitability,
leverage and liquidity, as well as its book of business, the adequacy and
soundness of its reinsurance, the quality and estimated market value of its
assets, the adequacy of its loss reserves, the adequacy of its surplus, its
capital structure, the experience and competence of its management and its
market presence. A.M. Best's ratings reflect its opinion of an insurance
company's financial strength, operating performance and ability to meet its
obligations to policyholders and are not evaluations directed to purchasers
of an insurance company's securities.

<PAGE>

Standard & Poor's assigns ratings to insurance companies with respect to
their ability to pay under their insurance policies. Ratings assigned by
Standard & Poor's to solvent insurance companies currently range from "AAA
(Extremely Strong)" to "CC (Extremely Weak)." ISMIE received its first
official rating of "BBB (Good)" from Standard & Poor's in 1996. This rating
is within the "secure" range of Standard & Poor's rating hierarchy. Prior to
that, Standard & Poor's had given a rating of "BBq", based solely on
quantitative analysis of publicly available financial data.

EMPLOYEES

As of December 31, 1998, the Company had approximately 183 full time
equivalent employees. None of the employees is covered by a collective
bargaining agreement. We believe that our employee relations are good.

PROPERTIES

The Company's headquarters are located in Chicago, Illinois where the
Company occupies approximately 75,000 square feet under a lease expiring in
2011. The Company also has office space in Springfield, Illinois in a
building owned by the Company. The Springfield office building contains
approximately 40,000 square feet, of which we lease and occupy approximately
10,000 square feet. The Company is both a general partner and a limited
partner in a limited partnership which owns the building containing our
Chicago headquarters. The Chicago building is currently encumbered by a
mortgage loan. The Company believes that its office space is adequate for
its present needs and that it will be able to secure additional office space
in the future if necessary.

LITIGATION

The Company is from time to time named as a defendant in various
lawsuits incidental to its insurance business. The most common litigation
includes claims where lawsuit verdicts exceed the available coverage. The
Company vigorously defends these actions, unless a reasonable settlement
appears appropriate. We believe that adverse results, if any, in the actions
currently pending should not have a material adverse effect on the Company's
financial condition. Other than claims against our insureds, we are not
currently involved in any litigation.

<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth information concerning the individuals
who serve as directors and executive officers of ISMIE Holdings.

NAME POSITION
---- --------
<S> <C>
Harold L. Jensen, M.D. Chairman of the Board

Walter Whisler, M.D. Vice Chairman of the Board

Alexander R. Lerner President, Chief Executive Officer and Director

Donald A. Udstuen Chief Operating Officer and Director

Jeffrey M. Holden Chief Administrative Officer

Eugene J. Gross Chief Financial Officer and Assistant Treasurer

Saul J. Morse General Counsel and Assistant Secretary

Irwin A. Smith, M.D. Secretary and Director

Peter A. Brusca, M.D. Treasurer and Director

Richard A. Geline, M.D. Director

Henri S. Havdala, M.D. Director

Robert M. Reardon, M.D. Director

Jane Jackman, M.D. Director

</TABLE>

The Company's Board of Directors currently consists of ten persons,
divided into three classes of directors and elected for staggered terms as
follows: Class I, composed of three persons and elected for a term expiring
at the 2000 annual meeting of stockholders; Class II, composed of four
persons and elected for a term expiring at the 2001 annual meeting of
stockholders; and Class III, composed of three persons and elected for a term
expiring at the 2002 annual meeting of stockholders. Class I directors are
Mr. Udstuen and Drs. Reardon and Jackman. Class II directors are Drs. Jensen,
Geline, Havdala and Smith. Class III directors are Mr. Lerner and Drs. Brusca
and Whisler. Following the expiration of the initial term as described
above, directors will serve for three-year terms.

DIRECTORS AND EXECUTIVE OFFICERS. Set forth below is the description of
the business positions for the directors and executive officers of ISMIE
Holdings held during at least the past five years. Each of the directors has
been a director of ISMIE Holdings since it was organized in April 1999.

Harold L. Jensen, M.D., 72, is the Chairman of the Board of the Company.
Dr. Jensen has been a member of the Board of Governors of ISMIE since 1987
and Chairman since 1991.

<PAGE>

Dr. Jensen also has served as Vice-President of Medical Affairs at Ingalls
Memorial Hospital in Harvey since 1988. He has been an internist in Harvey,
Illinois, for more than 33 years. Dr. Jensen is a member of the Medical
Society and the American Medical Association.

Walter W. Whisler, M.D., 65, is Vice Chairman of the Board of the
Company. He has been a member of the Board of Governors of ISMIE since 1977
and Vice Chairman since 1992. He also served as Vice Chairman from
1982-1990. He has been a Board certified neurosurgeon in Chicago, Illinois
for over 30 years. He also serves as Professor and Chairman of the
Department of Neurosurgery at Rush Medical College & Rush-Presbyterian St.
Luke's Medical Center. Dr. Whisler is a member of the Medical Society and
the American Medical Association.

Alexander R. Lerner, 52, is President and Chief Executive Officer and a
director of the Company. Mr. Lerner has served as Chief Executive Officer of
ISMIE since 1985 and Chief Executive Officer of the Attorney-in-Fact since
its formation in July, 1998. Mr. Lerner also has served as the Chief
Executive Officer of the Medical Society since 1981. Mr. Lerner also serves
as chairman of the Illinois Sports Facilities Authority and is a member of
the American Association of Medical Society Executives.

Donald A. Udstuen, 55, is Chief Operating Officer of the Company. Mr.
Udstuen has served as Chief Operating Officer of ISMIE since 1991 and
Secretary/Treasurer and Chief Operating Officer of the Attorney-in-Fact since
its formation in July, 1998. Mr. Udstuen also has served as the Associate
Executive Vice President of the Medical Society since 1987, and previously
served as its chief financial officer and governmental affairs director and
its chief lobbyist.

Jeffrey M. Holden, 46, is Chief Administrative Officer of the Company.
Mr. Holden has served as Chief Administrative Officer of ISMIE since July,
1998, and Chief Administrative Officer of the Attorney-in-Fact since its
formation in July, 1998. Mr. Holden has also served as Chief Operating
Officer of the Medical Society since January, 1992, and previously served,
at various times, as the Assistant Executive Vice President, Vice President
of Governmental Affairs, and Chief Lobbyist of the Medical Society.

Eugene J. Gross, 47, is Chief Financial Officer and Assistant Treasurer
of the Company. Mr. Gross has served as Chief Financial Officer of ISMIE
since 1991, and Chief Financial Officer of the Attorney-in-Fact since its
formation in July, 1998. Mr. Gross also has served as Chief Financial
Officer of the Medical Society since 1991. Prior to joining ISMIE, Mr.
Gross held senior management positions with Allstate Insurance Company and
Metropolitan Life.

Saul J. Morse, Esq., 51, is General Counsel and Assistant Secretary for
the Company. Mr. Morse has served as General Counsel of ISMIE since 1992.
Mr. Morse has served as General Counsel of the Attorney-in-Fact since its
formation in July, 1998. He also has served as Vice President and General
Counsel of the Medical Society since 1992. Prior to joining ISMIE, Mr.
Morse was managing partner of the law firm of Morse, Giganti & Appleton, in
Springfield, Illinois. Mr. Morse is a Clinical Assistant Professor in the
Department of Medical Humanities at Southern Illinois University School of
Medicine. Mr. Morse is a member of the Sangamon County Bar Association,
Illinois State Bar Association and the American Bar Association, the Defense
Research Institute, and the American Health Lawyers Association.

<PAGE>

Irwin A. Smith, M.D., 82, is Secretary and a director of the Company.
He has served on the Board of Governors of the Exchange since 1977. Now
retired, has been a Board certified family physician in Northbrook, Illinois,
for more than 50 years.

Peter A. Brusca, M.D., 58, is a director of the Company. He has served
on the Board of Governors of the Exchange since 1990. He has been a Board
certified otolaryngologist in Carol Stream, Illinois, for over 20 years.
Dr. Brusca is a member of the Medical Society and the American Medical
Association, and is a fellow of the American College of Surgeons, the
American Academy of Otolaryngology, the American Academy of Facial, Plastic &
Reconstructive Surgery, and the American Academy of Cosmetic Surgery. He has
also served as a member of the Health Advisory Committee for United States
Representative Dennis Hastert.

Richard A. Geline, M.D., 61, is a director of the Company. He has
served on the Board of Governors of the Exchange since 1989. He has been a
Board certified orthopaedic Surgeon in Skokie, Illinois, for over 28 years.
Dr. Geline is the immediate past president of the Medical Society and a
member of the American Medical Association. He is also a member of the
American Academy of Orthopaedic Surgeons.

Henri S. Havdala, M.D., 67, is a director of the Company. He has served
on the Board of Governors of the Exchange since 1977. He has been a Board
certified anesthesiologist in Lincolnwood, Illinois, for over 35 years. Dr.
Havdala is a member of the Medical Society, the American Medical Association
and the American Society of Anesthesiologists.

Jane Jackman, M.D., 54, is a director of the Company. She has served on
the Board of Governors of the Exchange since 1993. She has been a Board
certified family physician in Springfield, Illinois, for over 25 years.
She is a past president of the Medical Society, a member of the American
Medical Association and the American Academy of Family Physicians. Dr.
Jackman is also a Clinical Associate Professor, Department of Family
practice, at the Southern Illinois University School of Medicine.

Robert M. Reardon, M.D., 69, is a director of the Company. He has
served on the Board of Governors of the Exchange since 1988. Now retired he
has been a Board certified ophthalmologist in Bloomington, Illinois, for over
35 years. Dr. Reardon is a past president of the Medical Society, a member of
the American Medical Association and the American Academy of Ophthalmology.
He is also a member of the Board, and serves as Vice President, of Illinois
Wesleyan University.

COMMITTEES OF THE ISMIE HOLDINGS BOARD

The ISMIE Holdings Board will have the following standing committees
immediately following the Conversion:

EXECUTIVE COMMITTEE. The Executive Committee will have the authority to
exercise all powers of the ISMIE Holdings Board between meetings of the ISMIE
Holdings Board, except in cases where action of the entire ISMIE Holdings
Board is required by the Certificate of Incorporation, the Bylaws or
applicable law.

<PAGE>

AUDIT COMMITTEE. The Audit Committee will make recommendations
concerning the engagement of independent public accountants, review the scope
of audit engagement, review the services and reports of the accountants,
review any major accounting changes, consider the range of audit and
non-audit fees and review the adequacy of the Company's internal accounting
controls. The members of the Audit Committee will be independent directors.

COMPENSATION COMMITTEE. The Compensation Committee will establish
compensation levels for the executive officers of the Company, review
significant employee benefit programs and establish, as it deems appropriate,
and administer executive compensation programs, including bonus plans, stock
option and other equity-based programs, deferred compensation plans and any
other such cash or stock incentive programs. The Chief Executive Officer of
the Company will establish remuneration levels for other employees of the
Company.

STOCK OPTION COMMITTEE. The Stock Option Committee will administer the
Company's employee stock option plans.

NOMINATING COMMITTEE. The Nominating Committee will recommend to the
Board of Directors candidates for director and membership on committees of
the Board of Directors of the Company and its subsidiaries.

INVESTMENT COMMITTEE. The Investment Committee will oversee the
investment activities and portfolio management of the Company and its
subsidiaries.

INVESTOR RELATIONS COMMITTEE. The Investor Relations Committee will
review and make recommendations to management regarding policies and
procedures to be adopted by the Company regarding communications with
stockholders, analysts and others.

The ISMIE Holdings Board may from time to time establish other
committees to facilitate the management of ISMIE Holdings.

DIRECTOR COMPENSATION

The Chairman of the Board will receive an annual retainer of $60,000
plus reimbursement of certain automobile and other expenses. Each
non-employee director will be paid $1,200 per day for attendance at meetings
of the Board and committees thereof, meetings of a board of a subsidiary on
which the director serves, and each seminar or other meeting attended on
special assignment on behalf of the Company. All non-employee directors will
be reimbursed for reasonable travel and other expenses incurred to attend
meetings of the ISMIE Holdings Board and committees thereof.

EXECUTIVE COMPENSATION

ISMIE Holdings was organized as a Delaware corporation in April, 1999,
and consequently did not pay any cash compensation to its executive officers
for the year ended December 31, 1998. The following Summary Compensation
Table, therefore, sets forth information concerning the compensation paid or
accrued by the Exchange and the Attorney-in-Fact for (i) the Company's
President and Chief Executive Officer and (ii) and each of the other

<PAGE>

four most highly compensated executive officers of the Exchange for services
rendered during the year ended December 31, 1998:

<TABLE>
<CAPTION>
Annual Compensation
-------------------

Other Annual All Other
Name and Principal Position Year Salary($) Bonus($) Compensation(2) Compensation($)(3)
- ---------------------------- ---- --------- -------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
Alexander R. Lerner, President 1998 $588,812 $342,337(1) $305,813 $43,504
and Chief Executive Officer

Donald A. Udstuen, Chief Operating 1998 $361,427 $24,188 $43,730
Officer

Jeffrey M. Holden, Chief 1998 $247,708 $16,334 $23,635
Administrative Officer

Eugene J. Gross, Chief Financial 1998 $192,970 $10,000 $59,370 $15,985
Officer and Assistant Treasurer

Saul J. Morse, General Counsel and 1998 $270,251 $1,426 $16,086
Assistant Secretary

</TABLE>

(1) Includes $214,356 paid to Mr. Lerner to permit him to make an installment
of principal and interest on a loan from the Exchange. Mr. Lerner will
continue to receive the $214,356 bonus through the year 2000, after which
Mr. Lerner's compensation will be reduced by that amount.

(2) Represents amounts reimbursed for payment of taxes. For Mr. Lerner, the
amount includes $168,765 paid to reimburse taxes with respect to the bonus
of $214,356 paid to him. Mr. Lerner will continue to receive reimbursement
for taxes on this bonus through the year 2000, after which Mr. Lerner's
compensation will be reduced by the amount of the reimbursement. For Mr.
Gross, the amount includes $18,718 for automobile and related expenses, and
$10,162 for club dues.

(3) Represents contributions by the Exchange and the Attorney-in-Fact to a
401(k) Plan in the amount $9,856, $15,312, $8,863, $14,766 and $14,960 for
the accounts of Messrs. Lerner, Udstuen, Holden, Gross and Morse,
respectively; and insurance premiums of $33,648, $28,418, $14,772, $1,219
and $1,126, for Messrs. Lerner, Udstuen, Holden, Gross and Morse,
respectively.

EMPLOYMENT AGREEMENTS

The Exchange and the Attorney-in-Fact have entered into employment
agreements (the "Employment Agreements") with each of the named executives which
will be assumed by the Company after the Conversion. These agreements are
intended to secure for the Company the continued services of those executive
officers and to provide them appropriate incentives for their

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<PAGE>

maximum efforts. The compensation levels under the Employment Agreements have
been established by the Boards of the Exchange and the Attorney-in-Fact based
on the executive officer's value to the enterprise and competitive
considerations, including the fact that until now the companies have been
unable to offer any equity incentives to them for their efforts. The Boards
of the Exchange and the Attorney-in-Fact have been assisted by independent
compensation consultants in determining appropriate levels of compensation
and benefits for the executives.

The current terms of the Employment Agreements for Messrs. Lerner,
Udstuen, Holden, Morse and Gross are effective through December 31, 2004,
March 15, 2001, March 18, 2001, April 30, 2002 and June 30, 2001,
respectively. In the case of Mr. Lerner, unless otherwise determined by the
Boards, his employment will be extended by one year during each year of the
initial seven year term so that, after each extension, a seven year term
remains. Thereafter, the term will be extended on a year to year basis
unless the Exchange and the Attorney-in-Fact give notice to Mr. Lerner by
September 1 that it will not renew the Employment Agreement for another year.
The Employment Agreements provide for a current base compensation payable by
the Exchange and the Attorney-in-Fact to Messrs. Lerner, Udstuen, Holden,
Morse and Gross of $440,099, $173,744, $151,628, $221,352 and $198,759,
respectively, with annual increases of not less than 8%, 7%, 7%, 4% and 4%,
respectively. Mr. Lerner's annual compensation for each of 1998, 1999 and
2000 includes a bonus amount of $214,356 (plus additional amounts to cover
taxes thereon) which Mr. Lerner intends to use to repay a loan from the
Exchange. Mr. Lerner's annual compensation will be reduced by the amount of
this annual bonus and tax reimbursement beginning January 1, 2001.

The Employment Agreements require the executives to devote at least a
majority of their time to the Exchange and the Attorney-in-Fact. Each of the
named executives is also employed by the Medical Society and spends the
balance of his working hours on the affairs of the Medical Society. Mr.
Lerner's Employment Agreement provides that if his employment with the
Medical Society or the Attorney-in-Fact terminates for any reason, he will
increase the time he devotes to the Exchange by the additional time that
becomes available due to such termination, and the Exchange will increase his
compensation by the amount of compensation that he had earned from the
Medical Society or the Attorney-in-Fact pursuant to his Employment Agreement
with the Medical Society or the Attorney-in-Fact, as the case may be. In no
event will such increase exceed the amount of compensation that Mr. Lerner is
then receiving from the Exchange.

Upon termination of any of the Employment Agreements by the Exchange and
the Attorney-in-Fact without cause, or by any of the executive officers for
good reason (as such terms are defined in their respective Employment
Agreements), that executive officer will be entitled to receive the aggregate
value of his compensation and benefits for the remaining term of his
Employment Agreement (with a minimum of two years).

COMPENSATION PLANS

DEFERRED COMPENSATION AGREEMENTS. The Exchange has entered into certain
deferred compensation agreements (the "Deferred Compensation Agreements")
with certain executive officers and other key employees, including the named
executive officers, which will be assumed by the Company following the
Conversion. The Deferred Compensation Agreements provide for a deferment of
a portion of the employer's compensation and for distributions to be made in
the

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event of death, severance of affiliation with the Exchange, disability as
defined therein, and such other time as the Exchange or the Trustee under the
trust maintained in connection therewith may determine. The right of a
participant to receive distributions under the Deferred Compensation
Agreements may be forfeited for certain acts contrary to the interests of the
Exchange or for insubordination.

401(k) PLAN. The Company participates in a 401(k) Plan which offers
eligible employees the opportunity to contribute to the 401(k) Plan on a
regular basis through payroll deductions. Also, the Company may make
discretionary contributions to the 401(k) Plan to be allocated among the
employees' accounts on the basis of their relative levels of compensation.
The 401(k) Plan's benefits are based on amounts contributed and individual
account investment performance. All full-time employees of the Exchange who
have completed one year of service and are over the age of 21 years are
eligible to participate in the 401(k) Plan.

1999 LONG-TERM EQUITY INCENTIVE PLAN. Certain directors, officers and
key employees of the Company are eligible to participate in the Company's
1999 Long-Term Equity Incentive Plan adopted by the Company in May, 1999 (the
"Long-Term Plan"). Except as otherwise indicated in the Long-Term Plan, the
Plan is administered by the Stock Option Committee of the Board of Directors.
Under the Long-Term Plan, participants may be granted nonqualified stock
options, incentive stock options, stock appreciation rights, restricted
stock, phantom stock and other stock-based awards. The number of shares of
Common Stock which may be issued or sold or for which options or stock
appreciation rights may be granted under the Long-Term Plan is one million
shares, subject to certain adjustments. Under the Long-Term Plan,
nonqualified stock options may be granted to participants to purchase shares
of Common Stock of the Company at an option price of not less than 85% of the
fair market value of a share of Common Stock at the time the option is
granted, subject to adjustment as provided in the Plan. Options granted
under the Long-Term Plan terminate no later than ten years from the date of
grant.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CERTAIN DIRECTORS AS POLICYHOLDERS. Certain of the members of the ISMIE
Holdings Board of Directors are also policyholders of the Exchange and
eligible to receive Common Stock in the Conversion. These directors may
experience claims requiring coverage under their respective insurance
policies.

SERVICES AND OFFICE SPACE. The Exchange, the Attorney-in-Fact and the
Medical Society share various support services pursuant to a Shared Services
Agreement (the "Shared Services Agreement"). The Shared Services Agreement
will be assumed by the Company following the Conversion. Currently, services
covered by the Agreement are office space, administrative, human resources,
public relations, membership services, communications, mail and other
miscellaneous services. The Shared Services Agreement has a term of five
years and thereafter is automatically renewed on an annual basis. Any party
may terminate the Shared Services Agreement upon six month's prior notice.
All such services are provided at rates established from time to time by
negotiation among the parties. If actual usage of the services varies from
expected usage, adjustments to the rates may be negotiated by the parties.

102
<PAGE>

LOANS TO EXECUTIVE OFFICERS. Messrs. Lerner, Udstuen and Holden are
indebted to the Exchange and the Attorney-in-Fact pursuant to loans which will
be assumed by the Company following the Conversion. The loans are secured by
mortgages on the executives' homes. The principal balance remaining on the
loans at January 31, 1999 was $272,573, $102,672, and $466,751 for Messrs.
Lerner, Udstuen and Holden, respectively. The loans are evidenced by notes
which bear interest at 6% and mature in 2021, in the case of Messrs. Lerner and
Udstuen, and in 2020 in the case of Mr. Holden (a portion of Mr. Holden's loan
matures in 2024).

OWNERSHIP OF COMMON STOCK

The following table sets forth certain information regarding beneficial
ownership of Common Stock as of the Effective Date by (i) each director and
executive officer named in the Summary Compensation Table and (ii) all
directors and executive officers of ISMIE Holdings as a group. No person will
own more than 5% of the outstanding shares of Common Stock. The number of
shares of Common Stock beneficially owned by each physician director
represents the number of shares the director and certain persons and entities
affiliated with the director are expected to receive as Eligible Members
under the terms of the Conversion. Except as noted below, each holder listed
will have sole investment and voting power with respect to the shares
beneficially owned by the holder. The address for all stockholders listed in
the table is c/o ISMIE Holdings Inc., 20 North Michigan Avenue, Suite 700,
Chicago, Illinois 60602-4890.

103

<PAGE>

NUMBER OF SHARES
EXPECTED TO BE PERCENT
NAME BENEFICIALLY OWNED OF TOTAL
---- ------------------ --------
<S> <C> <C>

Harold L. Jensen, M.D. . . . . . . . . *

Walter Whisler, M.D. . . . . . . . . . *

Alexander R. Lerner . . . . . . . . . . -0- -0-

Donald A. Udstuen . . . . . . . . . . . -0- -0-

Jeffrey M. Holden . . . . . . . . . . . -0- -0-

Eugene J. Gross . . . . . . . . . . . . -0- -0-

Saul J. Morse . . . . . . . . . . . . . -0- *

Irwin A. Smith, M.D. . . . . . . . . . *

Peter A. Brusca, M.D. . . . . . . . . . *

Richard A. Geline, M.D. . . . . . . . . *

Henri S. Havdala, M.D. . . . . . . . . *

Robert M. Reardon, M.D. . . . . . . . . *

Jane Jackman, M.D. . . . . . . . . . . *

All directors and executive officers
as a group (13 persons) . . . . . . . . *

</TABLE>

- ---------
* Less than one percent

DESCRIPTION OF CAPITAL STOCK

GENERAL

Upon completion of the Conversion, the authorized capital stock of ISMIE
Holdings will consist of 40,000,000 shares of Common Stock, $0.01 par value
per share, and 5,000,000 shares of Preferred Stock, par value $0.01 per
share, the rights, preferences and powers of which may be designated by the
ISMIE Holdings Board. At present, there are no shares of Preferred Stock
issued or outstanding.

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<PAGE>

The following description of the capital stock of ISMIE Holdings does
not purport to be complete or to give full effect to Delaware statutory or
common law and is, in all respects, qualified by reference to the applicable
provisions of the DGCL, and the Certificate of Incorporation and the Bylaws
of ISMIE Holdings.

COMMON STOCK

Holders of shares of Common Stock are entitled to one vote per share on
matters to be voted upon by the stockholders and, subject to the prior rights
of the holders of Preferred Stock, to receive dividends ratably when and as
declared by the ISMIE Holdings Board with funds legally available therefor.
Such holders are also entitled to share ratably in the assets of the Company
legally available for distribution to the stockholders in the event of
liquidation or dissolution, after payment of all debts and other liabilities.
Holders of the Common Stock are not entitled to preemptive rights and will
have no subscription, redemption or conversion privileges. The Common Stock
does not have cumulative voting rights, which means the holder or holders of
more than one-half of the shares of Common Stock voting for the election of
directors can elect all of the directors then being elected. All of the
shares of Common Stock to be issued in the Conversion when issued will be
fully paid and nonassessable. The rights, preferences and powers of holders
of Common Stock are subject to the rights of the holders of shares of any
series of Preferred Stock which the Company may issue in the future.
Pursuant to Section 160 of the DGCL, ISMIE Indemnity will not be entitled to
vote the shares of Common Stock issued to it in the Conversion. See "The
Conversion -- Additional Aspects of the Conversion and the Merger Agreement
- -- Issuance of Shares to ISMIE Indemnity."

PREFERRED STOCK

The ISMIE Holdings Board will have the authority, without further
stockholder approval, to issue up to 5,000,000 shares of Preferred Stock in
one or more series and to determine the dividend rights, any conversion
rights or rights of exchange, voting powers, rights and terms of redemption
(including sinking fund provisions), liquidation preferences and any other
rights, preferences, powers and restrictions. The number of shares
constituting a series of Preferred Stock and the designation thereof shall be
stated in a resolution or resolutions providing for the issuance of such
series of Preferred Stock all in accordance with the laws of the State of
Delaware.

The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company, making removal of
the present management of the Company more difficult, restricting the payment
of dividends and other distributions to the holders of Common Stock, diluting
the voting power of the Common Stock to the extent that the Preferred Stock
has voting rights or diluting the equity interests of the Common Stock to the
extent that the Preferred Stock is convertible into Common Stock. In
addition, issuance of Preferred Stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
make it more difficult for a third party to acquire a majority of the
outstanding shares of voting stock. Accordingly, the issuance of Preferred
Stock may be used as an "anti-takeover" device without further action on the
part of the stockholders of ISMIE Holdings.

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<PAGE>

CERTAIN STATUTORY, CHARTER AND BYLAW PROVISIONS WHICH COULD HAVE AN
ANTI-TAKEOVER EFFECT

The following is a description of certain provisions of the DGCL,
Illinois law and the Certificate of Incorporation and Bylaws of ISMIE
Holdings which could have an anti-takeover effect. This summary does not
purport to be complete and is qualified in its entirety by reference to the
DGCL, the Certificate of Incorporation and the Bylaws.

ISMIE Holdings is subject to the provisions of Section 203 of the DGCL.
Section 203 of the DGCL prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the time that the person became an "interested
stockholder," unless the business combination is approved in a prescribed
manner. A "business combination" includes certain mergers, asset sales and
other transactions resulting in a financial benefit to the "interested
stockholder." Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within the past
three years did own, 15% of the corporation's voting stock.

Illinois Insurance laws and regulations provide that no person may
acquire control of ISMIE Holdings, and thus indirect control of its insurance
subsidiary, ISMIE Indemnity Company, unless such person has obtained the
prior approval of the Illinois Director of Insurance. Under Illinois law,
any purchaser of 10% or more of the voting stock of an insurance holding
company is presumed to have acquired control of affiliated or subsidiary
insurers and is required to obtain the approval of the Illinois Director of
Insurance before consummating such purchase.

Certain provisions of the Certificate of Incorporation and Bylaws could
have anti-takeover effects. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of the policies
formulated by the ISMIE Holdings Board. In addition, these provisions also
are intended to ensure that the ISMIE Holdings Board will have sufficient
time to act in what the Board of Directors believes to be in the best
interests of the Company and its stockholders. These provisions also are
designed to reduce the vulnerability of ISMIE Holdings to an unsolicited
proposal for a takeover that does not contemplate the acquisition of all of
its outstanding shares or an unsolicited proposal for the restructuring or
sale of all or part of the Company. The provisions are also intended to
discourage certain tactics that may be used in proxy fights. However, these
provisions could delay or frustrate the removal of incumbent directors or the
assumption of control of ISMIE Holdings by the holder of a large block of
Common Stock, and could also discourage or make more difficult a merger,
tender offer or proxy contest, even if such event would be favorable to the
interest of stockholders.

CLASSIFIED BOARD OF DIRECTORS. The Certificate of Incorporation
provides for the ISMIE Holdings Board to be divided into three classes of
directors, with each class as nearly equal in number as possible, serving
staggered three-year terms (other than directors which may be elected by
holders of Preferred Stock). As a result, approximately one-third of the
ISMIE Holdings Board will be elected each year. The classified board
provision will help to assure the continuity and stability of the ISMIE
Holdings Board and the business strategies and policies of ISMIE Holdings as
determined by the ISMIE Holdings Board. The classified board provision could
have the effect of discouraging a third party from making an unsolicited
tender offer or otherwise attempting to obtain control of ISMIE Holdings
without the approval of the ISMIE Holdings Board. In addition,

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the classified board provision could delay stockholders who oppose the
policies of the ISMIE Holdings Board from electing a majority of the ISMIE
Holdings Board for two years.

NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS. The
Certificate of Incorporation provides that stockholder action can be taken
only at an annual or special meeting of stockholders and prohibits
stockholder action by written consent in lieu of a meeting. The Certificate
of Incorporation also provides that special meetings of stockholders may be
called only by the President or Secretary at the request of a majority of the
ISMIE Holdings Board, or by the Chairman. Stockholders are not permitted to
call a special meeting of stockholders or to require that the ISMIE Holdings
Board call a special meeting.

ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINEES. The Certificate of Incorporation establishes an advance notice
procedure for stockholders to make nominations of candidates for election as
directors or to bring other business before an annual meeting of stockholders
of ISMIE Holdings (the "Stockholder Notice Procedure"). The Stockholder
Notice Procedure provides that only persons who are nominated by, or at the
direction of, the ISMIE Holdings Board, or by a stockholder who is entitled
to vote at the meeting and who has given timely written notice to the
Secretary of ISMIE Holdings prior to the meeting at which directors are to be
elected, will be eligible for election as directors. The Stockholder Notice
Procedure also provides that at an annual meeting only such business may be
conducted as has been brought before the meeting by, or at the direction of,
the ISMIE Holdings Board or by a stockholder who is entitled to vote at the
meeting and who has given timely written notice to the Secretary of the
stockholder's intention to bring such business before the meeting. Under the
Stockholder Notice Procedure, if a stockholder desires to submit a proposal
or nominate persons for election as directors at an annual meeting, the
stockholder must submit written notice to ISMIE Holdings not less than 60
days nor more than 90 days prior to the first anniversary of the previous
year's annual meeting. In addition, under the Stockholder Notice Procedure, a
stockholder's notice to ISMIE Holdings proposing to nominate a person for
election as a director or relating to the conduct of business other than the
nomination of directors must contain certain specified information. If the
chairman of a meeting determines that business was not properly brought
before the meeting, in accordance with the Stockholder Notice Procedure, such
business shall not be discussed or transacted.

NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES. The Certificate of
Incorporation provides that the ISMIE Holdings Board will consist of not less
than three and not more than fifteen members (other than directors elected by
holders of Preferred Stock), the exact number to be fixed from time to time
by resolution adopted by the directors of ISMIE Holdings. The ISMIE Holdings
Board currently consists of ten directors. Further, subject to the rights of
the holders of any series of Preferred Stock then outstanding, the
Certificate of Incorporation authorizes the ISMIE Holdings Board to fill
newly created directorships. If a number of vacancies existed in the ISMIE
Holdings Board, this provision could delay the ability of a stockholder from
obtaining majority representation on the ISMIE Holdings Board by permitting
the ISMIE Holdings Board to enlarge the ISMIE Holdings Board in certain
circumstances and fill the new directorships with its own nominees. A
director so elected by the ISMIE Holdings Board holds office until the next
election of the class for which such director has been chosen and until his
successor is elected and qualified. Subject to the rights of the holders of
any series of Preferred Stock then outstanding, the Certificate of
Incorporation also provides that directors may be removed only for cause and
only

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by the affirmative vote of holders of two-thirds of the outstanding shares of
voting securities. The effect of these provisions is to preclude a
stockholder from removing incumbent directors without cause and
simultaneously gaining control of the ISMIE Holdings Board by filling the
vacancies created by such removal with its own nominees.

EXCULPATION; INDEMNIFICATION. The Company has included in its
Certificate of Incorporation provisions to (i) eliminate the personal
liability of its directors for monetary damages resulting from breaches of
their fiduciary duty to the extent permitted by the DGCL and (ii) indemnify
its directors and officers to the fullest extent permitted by Section 145 of
the DGCL, including circumstances in which indemnification is otherwise
discretionary. We believe that these provisions are necessary to attract and
retain qualified persons as directors and officers.

BYLAWS. The Certificate of Incorporation provides that the directors
shall have concurrent power with the stockholders to make, alter, amend,
change, add or repeal the Bylaws.

TRANSFER AGENT AND REGISTRAR

______________ has been appointed as the transfer agent and registrar
for the Common Stock.

LEGAL MATTERS

The validity of the Common Stock to be issued in the Conversion will be
passed upon for the Company by Lord, Bissell & Brook, counsel for the Company.

EXPERTS

The consolidated financial statements of the Illinois State Medical
Inter-Insurance Exchange and Illinois State Medical Insurance Services, Inc.
at December 31, 1998 and 1997, and for each of the three years in the period
ended December 31, 1998 appearing in this Proxy Statement/Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon, appearing elsewhere herein,
and are included in reliance upon such report given the authority of such
firm as experts in accounting and auditing.

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GLOSSARY OF SELECTED INSURANCE TERMS

<TABLE>

<S> <C>
Cede To transfer risk and related premium in
connection with a reinsurance transaction.

Claims made and reported basis A liability insurance policy written on a
basis that generally insures only claims that
are reported to the insurer during the policy
period, or reported during any extended
reporting period provided in the policy or
any endorsement thereto, but only if the
claims arise from incidents that occurred
after a retroactive date stated in the
policy. A claims made and reported policy is
to be distinguished from an "occurrence
policy" which generally insures claims that
arise from incidents that occurred during the
policy period irrespective of when the claims
are reported.

Combined ratio The sum of the loss ratio and the expense
ratio expressed as a percentage. Generally, a
combined ratio below 100% indicates an
underwriting profit and a combined ratio
above 100% indicates an underwriting loss.

Direct premiums written Total premiums written by an insurer other
than premiums for reinsurance assumed by an
insurer.

Excess insurance Insurance which covers the insured only for
losses in excess of a stated amount or a
specific primary policy.

Excess of loss reinsurance A generic term describing reinsurance that
indemnifies the reinsured against all or a
specified portion of losses on underlying
insurance policies in excess of a specified
dollar amount, called a "layer" or
"retention."

Expense ratio Policy acquisition costs and other
underwriting expenses, divided by net
premiums earned under GAAP accounting or by
net premiums written under statutory
accounting, expressed as a percentage.

Frequency Refers to the rate of occurrence. The number
of times a claim or a loss by a specific
peril occurs to a given body of exposures or
insureds during a particular time period.

GAAP Generally accepted accounting principles in
use throughout the United States in the
preparation of financial statements,
including the financial statements presented
in this Proxy Statement/Prospectus.

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Incurred but not reported The estimated liabilities for future payments
("IBNR") reserves of losses and LAE that have occurred, but
have not yet been reported to the insurer.

Loss Adjustment Expenses Expenses incurred in the settlement of
("LAE") claims, including outside adjustment
expenses, legal fees and internal
administration costs associated with the
claims adjustment process, but not including
general overhead expenses.

Loss Adjustment Expense Liabilities established for LAE. LAE includes
("LAE") reserves an estimated provision for IBNR.

Loss ratio The ratio of net incurred losses and LAE to
net premiums earned. Net incurred losses
include an estimated provision for IBNR.

Net premiums written Gross premiums written less premiums ceded.

Premiums ceded The consideration paid to reinsurers in
connection with reinsurance transactions.

Premiums earned The portion of premiums written applicable
the expired period of policies and,
accordingly, recognized as revenue during a
given period.

Quota share basis Reinsurance wherein the insurer cedes an
agreed fixed percentage of liabilities,
premiums and losses for each policy covered
on a pro rata basis.

Redundancy (deficiency) Estimates in reserves change as more
information becomes known about the frequency
and severity of claims for each year. A
redundancy (deficiency) exists when the
original liability estimate is greater (less)
than the reestimated liability. The
cumulative redundancy (deficiency) is the
aggregate net change in estimates over time
subsequent to establishing the original
liability estimate.

Reinsurance A procedure whereby an original insurer cedes
a portion of the premium to a reinsurer as
payment for the reinsurer's assumption of a
portion of the risk; referred to as
reinsurance ceded by the original insurer and
as reinsurance assumed by the reinsurer.

Reserves Liabilities established by insurers to
reflect the estimated cost of claims and the
related LAE expenses that the insurer will
ultimately be required to pay in respect of
insurance it has written.

110

<PAGE>

Retention The amount or portion of risk that an insurer
retains for its own account. Losses in excess
of the retention level are paid by the
reinsurer. In quota share treaties, the
retention may be a percentage of the original
policy's limit. In excess of loss
reinsurance, the retention is a dollar
amount of loss, a loss ratio or a percentage
of loss.

Risk-Based Capital Requirements Regulatory and rating agency targeted surplus
("RBC") based on the relationship of statutory
surplus, with certain adjustments, to the sum
of slated percentages of each element of a
specified list of company risk exposures.

Severity The average claim cost, statistically
determined by dividing dollars of losses by
the number of claims.

Statutory Accounting Practices The accounting rules and procedures
("SAP") promulgated or permitted by the National
Association of Insurance Commissioners
("NAIC") for financial reporting by insurers
licensed in one or more states of the United
States.

Statutory surplus Total assets less total liabilities as
determined in accordance with SAP.

Underwriting The process whereby an insurer, directly or
through its agent, reviews applications
submitted for insurance coverage and
determines whether it will accept all or part
of the coverage being requested, and the
applicable premium.

</TABLE>

111

<PAGE>

Balance Sheet

ISMIE Holdings Inc.

APRIL 14, 1999

WITH REPORT OF INDEPENDENT AUDITORS

F-1

<PAGE>

ISMIE Holdings Inc.

April 14, 1999

CONTENTS

<TABLE>
<S> <C>
Report of Independent Auditors................................. F-3

Balance Sheet.................................................. F-4

Note to Balance Sheet.......................................... F-5
</TABLE>

F-2
<PAGE>

Report of Independent Auditors

Board of Directors
ISMIE Holdings Inc.

We have audited the accompanying balance sheet of ISMIE Holdings Inc. as of
April 14, 1999. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance
sheet based on our audit.

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

In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of ISMIE Holdings Inc. as of April
14, 1999, in conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP

Chicago, Illinois
April 14, 1999
F-3
<PAGE>

ISMIE Holdings Inc.

Balance Sheet

April 14, 1999

<TABLE>
<S> <C>
ASSETS
Investment in subsidiary $1,000
------
Total assets $1,000
------
------
STOCKHOLDER'S EQUITY
Preferred stock, $.01 par value, 5,000,000
shares authorized; no shares issued
and outstanding $ --
Common stock, $.01 par value, 40,000,00
shares authorized; 100,000 shares
issued and outstanding 1,000
------
Total stockholder's equity $1,000
------
------
</TABLE>
SEE ACCOMPANYING NOTE.

F-4

<PAGE>

ISMIE Holdings Inc.

Note to Balance Sheet

April 14, 1999

1. ORGANIZATION

ISMIE Holdings Inc. (ISMIE Holdings) is a Delaware corporation that is a
wholly owned subsidiary of Illinois State Medical Inter-Insurance Exchange
(Exchange). ISMIE Holdings has no historic operations and was organized in
April 1999 as part of the Exchange's plan to reorganize its corporate
structure.

In April 1999, ISMIE Holdings acquired the outstanding stock of ISMIE
Indemnity Company, a newly organized Illinois stock insurer.

F-5
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

ILLINOIS STATE MEDICAL INTER-INSURANCE
EXCHANGE AND SUBSIDIARY

<TABLE>
<S> <C>
Report of Independent Auditors..............................................F-7

Audited Financial Statements

Consolidated Balance Sheets as of December 31, 1998 and 1997................F-8
Consolidated Statements of Income for the years ended
December 31, 1998, 1997, and 1996........................................F-9
Consolidated Statements of Changes in Members' Equity for the years
ended December 31, 1998, 1997, 1996, and 1995............................F-10
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996........................................F-11
Notes to Consolidated Financial Statements..................................F-12
</TABLE>

F-6
<PAGE>

Report of Independent Auditors

Board of Governors
Illinois State Medical Inter-Insurance Exchange

We have audited the accompanying consolidated balance sheets of the Illinois
State Medical Inter-Insurance Exchange and subsidiary as of December 31, 1998
and 1997, and the related consolidated statements of income, changes in
members' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Illinois
State Medical Inter-Insurance Exchange and subsidiary at December 31, 1998
and 1997, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP

Chicago, Illinois
March 1, 1999,
except as to Note 11, as to which the date is
May 5, 1999

F-7

<PAGE>

Illinois State Medical Inter-Insurance
Exchange and Subsidiary

Consolidated Balance Sheets
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------------------------
<S> <C> <C>
ASSETS
Investments (NOTE 3):
Fixed maturities - At fair value (amortized cost: 1998 - $799,135;
1997 - $728,838; 1996 - $751,971) $ 820,191 $ 736,816
Equity securities - At fair value (cost - $15,975) 17,969 -
Other invested assets 10,581 11,422
------------------------------------
848,741 748,238

Cash and cash equivalents 38,920 39,095
Premiums receivable 9,134 12,015
Accrued investment income 10,957 9,721
Income taxes recoverable 3,373 12,605
Reinsurance receivables (NOTE 7) 232,613 335,426
Funds held by reinsurers 9,290 25,797
Deferred income taxes (NOTE 4) 32,682 37,200
Other assets (NOTE 5) 25,718 26,409
------------------------------------
$1,211,428 $1,246,506
====================================

LIABILITIES AND MEMBERS' EQUITY
Liabilities:
Losses and loss adjustment expenses (NOTES 6 AND 7) $ 895,275 $ 946,082
Unearned premiums 24,343 22,126
Funds held for or payable to reinsurers 15,461 25,617
Accrued expenses and other liabilities (NOTE 5) 24,626 23,415
Income taxes payable 888 455
Advanced premiums billed but not collected 8,145 8,642
------------------------------------
968,738 1,026,337

Commitments and contingencies (NOTES 7 AND 10)

Members' equity:
Unassigned members' equity 227,707 214,982
Accumulated other comprehensive income 14,983 5,187
------------------------------------
242,690 220,169
------------------------------------
$1,211,428 $1,246,506
====================================
</TABLE>

SEE ACCOMPANYING NOTES.

F-8

<PAGE>

Illinois State Medical Inter-Insurance
Exchange and Subsidiary

Consolidated Statements of Income
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------------------------
<S> <C> <C> <C>
INCOME
Premiums earned $131,998 $ 97,667 $ 85,817
Net investment income 45,361 46,663 46,436
Other income 5,095 - -
Net realized gains (losses) on investments
(NOTE 3) (104) (401) 2,406
-------------------------------------------------
182,350 143,929 134,659

LOSSES AND EXPENSES
Losses and loss adjustment expenses 153,660 117,816 105,403
Other underwriting expenses 16,222 10,878 6,296
-------------------------------------------------
169,882 128,694 111,699
-------------------------------------------------
Income before income taxes 12,468 15,235 22,960

Income taxes (credit) (NOTE 4):
Current 500 3,900 -
Deferred (757) (7,106) 19,541
-------------------------------------------------
(257) (3,206) 19,541
-------------------------------------------------
Net income $ 12,725 $ 18,441 $ 3,419
=================================================

Earnings per share (pro forma) - Unaudited
(NOTE 11) $ 1.27 $ 1.84 $ .34
=================================================
</TABLE>

SEE ACCOMPANYING NOTES.

F-9

<PAGE>

Illinois State Medical Inter-Insurance
Exchange and Subsidiary

Consolidated Statements of Changes in Members' Equity
(IN THOUSANDS)

ACCUMULATED
UNASSIGNED OTHER
MEMBERS' COMPREHENSIVE
EQUITY INCOME (LOSS) TOTAL
---------------------------------------------------------
<S> <C> <C> <C>
BALANCES AT DECEMBER 31, 1995 $193,122 $ 7,847 $200,969
1996 activity:
Net income 3,419 - 3,419
Other comprehensive income:
Change in unrealized loss on
investments, net of tax - (11,052) (11,052)
-------------------
Comprehensive loss - - (7,633)
---------------------------------------------------------
BALANCES AT DECEMBER 31, 1996 196,541 (3,205) 193,336
1997 activity:
Net income 18,441 - 18,441
Other comprehensive income:
Change in unrealized gain on
investments, net of tax - 8,392 8,392
-------------------
Comprehensive income - - 26,833
---------------------------------------------------------
BALANCES AT DECEMBER 31, 1997 214,982 5,187 220,169
1998 activity:
Net income 12,725 - 12,725
Other comprehensive income:
Change in unrealized gain on
investments, net of tax - 9,796 9,796
-------------------
Comprehensive income - - 22,521
---------------------------------------------------------
BALANCES AT DECEMBER 31, 1998 $227,707 $14,983 $242,690
=========================================================
</TABLE>

SEE ACCOMPANYING NOTES.

F-10

<PAGE>

Illinois State Medical Inter-Insurance
Exchange and Subsidiary

Consolidated Statements of Cash Flows
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 12,725 $ 18,441 $ 3,419
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income tax (757) (7,106) 19,541
Amortization of net premium on investments 1,381 1,724 2,185
Net realized (gains) losses on investments 104 401 (2,406)
Decrease in book value of other invested assets 166 166 176
(Increase) decrease in receivables and other 121,656 43,470 (20,444)
assets
Decrease in unpaid losses and loss adjustment
expenses (50,807) (34,135) (41,430)
Decrease in unearned premiums, funds held for or
payable to reinsurers, advanced premiums billed
but not collected, and accrued expenses and
other liabilities (7,223) (29,986) (27,792)
Decrease in income taxes recoverable, net of
amounts payable 9,665 3,538 2,776
-------------------------------------------------
Net cash provided by (used in) operating activities 86,910 (3,487) (63,975)

INVESTING ACTIVITIES
Purchase of investments (302,135) (128,722) (120,049)
Proceeds from sale or maturity of investments 215,052 150,397 183,932
-------------------------------------------------
Net cash provided by (used in) investing activities (87,083) 21,675 63,883

FINANCING ACTIVITIES - OTHER (2) (8) (284)
-------------------------------------------------
Increase (decrease) in cash and cash equivalents (175) 18,180 (376)
Cash and cash equivalents, at beginning of year 39,095 20,915 21,291
-------------------------------------------------
Cash and cash equivalents, at end of year $ 38,920 $ 39,095 $20,915
=================================================
</TABLE>

SEE ACCOMPANYING NOTES.

F-11

<PAGE>

Illinois State Medical Inter-Insurance
Exchange and Subsidiary

Notes to Consolidated Financial Statements

1. ORGANIZATION AND OPERATIONS

The Illinois State Medical Inter-Insurance Exchange (Exchange) provides
comprehensive professional liability insurance to Illinois physicians. The
Exchange is an inter-insurance exchange, or reciprocal, formed under the
Illinois Insurance Code. An inter-insurance exchange is an organization under
which policyholders "exchange" insurance contracts and thereby insure each
other and become members of the Exchange. The Exchange is managed under
contract by Illinois State Medical Insurance Services, Inc. (Services), which
was formed on July 1, 1998, as a wholly owned subsidiary of the Exchange,
subject to the general supervision of the Exchange's Board of Governors; the
Exchange has no employees of its own. Prior to July 1, 1998, the Exchange was
managed by an affiliated entity, Illinois Medical Physician Insurance
Services, Inc. (IMPIS), which is a wholly owned subsidiary of the Illinois
State Medical Society (Society). The Exchange and Services were organized
solely for the purpose of providing insurance for Illinois physicians.
Services and IMPIS are compensated by the Exchange on a cost-reimbursement
basis.

Since July 1, 1986, all insurance policies issued by the Exchange are on a
"claims made" basis and provide coverage for the policyholder for claims
first made against the policyholder and reported to the Exchange during the
policy period for claims which occurred on or after the retroactive date
stated in the policy. Prior to July 1986, all insurance policies issued by
the Exchange were on an "occurrence" basis and provided coverage for the
policyholder for claims incurred during the policy period regardless of when
the claims were reported to the Exchange. The Exchange also provides, upon
payment of an additional premium, a reporting endorsement that extends the
period in which claims otherwise covered by the "claims made" policy may be
reported to the Exchange. In the event of death or permanent disability of a
policyholder, the reporting endorsement is issued without additional premium.
Upon retirement of a policyholder, as defined in the policy, the policyholder
may be eligible for a credit toward the additional premium for the reporting
endorsement calculated at one-ninetieth of the additional premium for each
consecutive month that the policyholder was insured by the Exchange. In no
event will the credit exceed 100% of the additional premium.

F-12

<PAGE>

Illinois State Medical Inter-Insurance
Exchange and Subsidiary

Notes to Consolidated Financial Statements (continued)

2. ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying consolidated financial statements include the financial
statements of the Exchange, Services (since date of inception) and IMPIS
(prior to July 1, 1998), collectively, the "Company." These financial
statements have been prepared in conformity with generally accepted
accounting principles. All transactions between the Exchange, Services, and
IMPIS have been eliminated in the preparation of the consolidated financial
statements.

USE OF ESTIMATES

The preparation of the consolidated financial statements of the Company
requires management to make estimates and assumptions that affect amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates and assumptions, and such differences may
be material to the financial statements.

INVESTMENTS

The Company has designated its entire fixed-maturities and equity securities
portfolio as available-for-sale. These available-for-sale investments are
carried at fair value. Changes in fair value for these investments, after
adjustment for deferred income taxes, are reported as other comprehensive
income directly in members' equity.

Fair values for fixed maturities and equity securities are based on quoted
market prices, or, if they are not actively traded, on estimated values
obtained from independent pricing services. Realized gains or losses are
determined on the basis of specific identification and are included in the
determination of net income or loss. The discount or premium on investments
is amortized using the interest method.

LOSSES AND LOSS ADJUSTMENT EXPENSES

The liability for losses and loss adjustment expenses represents an estimate
of the ultimate net cost of all such amounts that are unpaid at the balance
sheet dates. The Company does not discount the liability for losses and loss
adjustment expenses. The liability is based on loss and loss adjustment
expense factors determined by independent consulting actuaries using
statistical analyses and projections and the historical loss experience of
the Company, and gives effect to estimates of trends in claim severity and

F-13

<PAGE>

2. ACCOUNTING POLICIES (CONTINUED)

frequency. These estimates are continually reviewed and, as adjustments
become necessary, such adjustments are included in current operations.
Although management believes that the estimate of the liability for losses
and loss adjustment expenses is reasonable in the circumstances, it is
possible that the actual incurred losses and loss adjustment expenses will
not conform to the assumptions inherent in the determination of the
liability. Accordingly, the ultimate settlement of losses and the related
loss adjustment expenses may vary significantly from the estimated amounts
included in the financial statements.

PREMIUMS

Premiums are earned ratably over the policy period to which they apply. Net
premiums written totaled $134,215,000, $104,953,000, and $85,532,000 in 1998,
1997, and 1996, respectively.

REINSURANCE

Reinsurance premiums, losses, and loss adjustment expenses are accounted for
on a basis consistent with the accounting for the original policies issued
and the terms of the reinsurance contracts. Premiums ceded to other companies
have been reported as a reduction of premium revenue. Reinsurance receivables
are reported as assets in the accompanying consolidated balance sheets.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash balances and investments with initial
maturities of three months or less.

FINANCIAL INSTRUMENTS

The fair values of investments are reported in Note 3. The fair values of
other financial instruments approximate their carrying values at December 31,
1998 and 1997.

SEGMENT INFORMATION

In 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which became effective on December 31, 1998. The Company
operates in only one reportable industry

F-14

<PAGE>

2. ACCOUNTING POLICIES (CONTINUED)

segment and therefore Statement No. 131 did not require disclosure of any
significant information beyond that previously provided in the Company's
consolidated financial statements.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The Company plans to adopt Statement No. 133 effective January
1, 2000. Statement No. 133 provides a comprehensive and consistent standard
for the recognition and measurement of derivatives and hedging activities.
The Company does not anticipate that the adoption of this Statement will have
a significant effect on its results of operations or financial position.

3. INVESTMENTS

The cost or amortized cost, gross unrealized gains and losses, and fair value
of investments in fixed maturities and equity securities are summarized as
follows:

<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1998
Fixed maturity securities:
U.S. government obligations $ 97,062 $ 5,636 $ - $102,698
Corporate securities 345,733 10,965 (119) 356,579
Mortgage-backed and other
asset-backed securities 344,033 4,403 (197) 348,239
States, territories, and
possessions 6,691 319 - 7,010
Public utilities 5,616 49 - 5,665
----------------------------------------------------------------
Total fixed maturities 799,135 21,372 (316) 820,191
Total equity securities 15,975 2,440 (446) 17,969
----------------------------------------------------------------
$815,110 $23,812 $ (762) $838,160
================================================================

AT DECEMBER 31, 1997
Fixed maturity securities:
U.S. government obligations $137,586 $ 1,624 $ (195) $139,015
Corporate securities 261,739 3,781 (657) 264,863
Mortgage-backed and other
asset-backed securities 322,819 4,259 (927) 326,151
States, territories, and possessions 6,694 93 - 6,787
----------------------------------------------------------------
Total fixed maturities $728,838 $ 9,757 $(1,779) $736,816
================================================================
</TABLE>

F-15

<PAGE>

3. INVESTMENTS (CONTINUED)

The amortized cost and fair value of fixed maturities, by contractual
maturity, are summarized as follows at December 31, 1998 (in thousands):

<TABLE>
<CAPTION>
AMORTIZED FAIR
MATURITY COST VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due after one year through five years $223,416 $227,693
Due after five years through ten years 217,662 229,839
Due after ten years 14,024 14,420
------------------------------------
455,102 471,952
Mortgage-backed and other asset-backed securities 344,033 348,239
------------------------------------
$799,135 $820,191
====================================
</TABLE>

The expected maturities in the foregoing table will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.

The components of the equity securities are as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31
1998
-------------------
<S> <C>
Equity securities:
Common stock:
Banks, trust, and insurance companies $ 2,501
Industrial, miscellaneous, and all other 15,468
-------------------
Total equity securities $17,969
===================
</TABLE>

Proceeds from the sales of fixed maturities were $135,390,000, $105,489,000,
and $123,388,000 for the years ended December 31, 1998, 1997, and 1996,
respectively. Proceeds from the sales of equity securities were $1,810,000
for the year ended December 31, 1998.

F-16

<PAGE>

3. INVESTMENTS (CONTINUED)

Major categories of net investment income are summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities $47,171 $47,373 $48,373
Equity securities 50 - -
Cash and cash equivalents 1,390 2,060 1,738
Other 601 621 602
------------------------------------------------------
Total investment income 49,212 50,054 50,713
Investment expenses 3,851 3,391 4,277
------------------------------------------------------
Net investment income $45,361 $46,663 $46,436
======================================================
</TABLE>

Realized gains and losses on investments are summarized as follows (in
thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Gross realized gains $ 853 $ 545 $1,852
Gross realized losses 478 537 576
------------------------------------------------------
Net realized gains on fixed maturities 375 8 1,276

Equity securities:
Gross realized gains 81 - -
Gross realized losses 157 - -
------------------------------------------------------
Net realized losses on equity securities (76) - -

Other invested assets:
Gross realized gains - - 1,269
Gross realized losses 403 409 139
------------------------------------------------------
Net realized gains (losses) on other invested
assets (403) (409) 1,130
------------------------------------------------------
Net realized gains (losses) on investments $(104) $(401) $2,406
======================================================
</TABLE>

The change in the Company's unrealized appreciation (depreciation) on
investments was $15,071,000, $12,909,000, and $(17,003,000), for the years
ended December 31, 1998, 1997, and 1996, respectively.

F-17

<PAGE>

3. INVESTMENTS (CONTINUED)

At December 31, 1998 and 1997, fixed maturities with an aggregate amortized
cost of $3,134,000 and $3,027,000, respectively, were held on deposit to
meet statutory and reinsurance escrow requirements.

4. INCOME TAXES

Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates.

Significant components of deferred tax assets and liabilities are as follows
(in thousands):

<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------------------------
<S> <C> <C>
Deferred tax assets:
Tax-basis loss reserve discounting adjustment $42,486 $47,408
Alternative minimum tax credit carryforward 4,674 4,046
Tax-basis unearned premium reserve adjustment 793 1,233
Net operating loss carryforward - -
Net unrealized depreciation on bonds - -
Tax-basis fixed asset adjustment 1,396 1,367
Other 1,765 1,176
------------------------------------
Total deferred tax assets 51,114 55,230
Valuation allowance for deferred tax assets (9,857) (14,758)
------------------------------------
Deferred tax assets net of valuation allowance 41,257 40,472

Deferred tax liabilities:
Discount amortization on bonds and other (508) (480)
Net unrealized appreciation on securities (8,067) (2,792)
------------------------------------
Total deferred tax liabilities (8,575) (3,272)
------------------------------------
Net deferred tax asset $32,682 $37,200
====================================
</TABLE>

F-18

<PAGE>

4. INCOME TAXES (CONTINUED)

The nature of the deferred tax assets and liabilities are such that the
reversal pattern for these temporary differences should result in realization
of a portion of the deferred tax asset. The Company establishes a "valuation
allowance" for any portion of the deferred tax asset where management
believes that it is more likely than not that the asset will not be realized.
The valuation allowance decreased by $4,901,000 and $8,597,000 and increased
by $8,914,000 in the years ended December 31, 1998, 1997, and 1996,
respectively.

A reconciliation of income tax computed at the United States federal
statutory tax rate of 35% to income tax expense is as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
Federal income tax at 35% $4,364 $ 5,332 $ 8,036
Prior-period tax return adjustments (170) 68 1,740
Change in valuation allowance (4,901) (8,597) 8,914
Other 450 (9) 851
------------------------------------------------------
Total income taxes (credit) $ (257) $(3,206) $19,541
======================================================
</TABLE>

At December 31, 1998, the Company has alternative minimum tax credits of
approximately $4,674,000 that have no expiration date. The Company received
refunds of income taxes of $11,665,000, $3,737,000, and $3,842,000 in 1998,
1997, and 1996, respectively, and made tax payments of $2,500,000 in 1998.

5. ANNUITIES PURCHASED TO FUND CERTAIN OBLIGATIONS

The Company currently purchases annuities without recourse on a competitive
basis to fund settlements of indemnity losses. The nature and terms of the
annuities vary according to settlements. The current value of annuities
purchased in prior years from other insurance companies, but with recourse to
the Company, and reflected as an other asset and an other liability in the
consolidated balance sheets, totaled $17,356,000 and $17,222,000, as of
December 31, 1998 and 1997, respectively. The Company becomes liable only in
the event that an insurance company cannot meet its obligations under
existing agreements and state guaranty funds are not available.

F-19

<PAGE>

6. LOSSES AND LOSS ADJUSTMENT EXPENSES

The following table provides a reconciliation of the beginning and ending loss
and loss adjustment expenses (LAE) reserve balances, net of reinsurance
receivables (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------------------------
<S> <C> <C> <C>
Liability for losses and LAE, net of reinsurance
receivables, at beginning of year $614,225 $585,113 $658,669

Add: Provision for losses and LAE for claims, net
of reinsurance, occurring during:
Current year 163,962 121,912 99,373
Prior years (10,302) (4,096) 6,030
-------------------------------------------------
Incurred losses and LAE during the current year, net
of reinsurance 153,660 117,816 105,403

Effect of commutation 79,130 81,080 -

Deduct: Loss and LAE payments for claims, net of
reinsurance, occurring during:
Current year 4,379 6,436 3,449
Prior years 169,120 163,348 175,510
-------------------------------------------------
Claim payments during the current year, net of
reinsurance 173,499 169,784 178,959
-------------------------------------------------
Liability for losses and LAE, net of reinsurance
receivables, at end of year 673,516 614,225 585,113
Reinsurance receivable on losses and LAE, at
end of year 221,759 331,857 395,104
-------------------------------------------------
Liability for losses and LAE, gross of reinsurance
receivables, at end of year $895,275 $946,082 $980,217
=================================================
</TABLE>

The incurred development related to prior years for 1998 and 1997 was
principally a result of the Company's methodology of reallocating reserves
for death, permanent disability or retirement (DDR) policies from prior years
to the current year upon issuance of a DDR policy. This reallocation has no
effect on the Company's total incurred losses. For 1996, the incurred
development related to prior years was a result of higher than expected
losses and related expenses in 1996.

F-20

<PAGE>

6. LOSSES AND LOSS ADJUSTMENT EXPENSES (CONTINUED)

During 1998 and 1997, the Exchange recognized gains related to the commutation
of ceded reinsurance agreements. Favorable net loss reserve development related
to these gains was substantially offset by the strengthening of gross loss
reserves.

7. REINSURANCE

Certain premiums and losses and loss adjustment expenses are ceded to other
insurance companies under various reinsurance agreements. These reinsurance
agreements provide the Company with increased capacity to write additional risks
and maintain its exposure to loss within its capital resources.

The Company's ceded reinsurance arrangements reduced certain items in the
accompanying consolidated statement of income as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
Premiums earned $45,453 $91,199 $122,040
Losses and loss adjustment expenses 13,951 61,820 55,577
</TABLE>

Amounts reported as reinsurance receivables, the majority of which are due from
United Kingdom-based reinsurers, represent estimates of the ultimate losses
which will exceed the Company's retention levels. The Company would remain
liable to the extent that the reinsuring companies were unable to meet their
obligations. Premiums ceded to reinsurers represent the estimated ultimate
reinsurance premiums based on estimated losses to be reinsured.

8. STATUTORY ACCOUNTING PRACTICES

The statutory accounting practices prescribed or permitted by regulatory
authorities for the Exchange differ in some respects from generally accepted
accounting principles. Members' equity and net income, as reported to the
domicillary state insurance department in accordance with statutory accounting
practices, are summarized as follows:

<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory surplus at year-end $187,224 $172,712 $158,621
Statutory net income for the year 11,968 11,335 22,960
</TABLE>

F-21

<PAGE>

9. COMPREHENSIVE INCOME

As of January 1, 1998, the Company adopted Statement No. 130, "Reporting
Comprehensive Income." Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption
of this Statement had no impact on the Company's net income or members'
equity. Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported
separately in members' equity, to be included in other comprehensive income.
Prior year financial statements have been reclassified to conform to the
requirements of Statement 130.

The components of other comprehensive income, and the related tax effects,
are as follows (in thousands):

AMOUNT AMOUNT
BEFORE INCOME NET OF
TAXES TAXES TAXES
------------------------------------------------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Unrealized holding gains arising during
the year $ 15,370 $ 5,380 $ 9,990
Reclassification adjustment (299) (105) (194)
------------------------------------------------------
Total other comprehensive income $ 15,071 $ 5,275 $ 9,796
======================================================

YEAR ENDED DECEMBER 31, 1997
Unrealized holding gains arising during
the year $12,918 $ 4,521 $8,397
Reclassification adjustment (8) (3) (5)
------------------------------------------------------
Total other comprehensive income $ 12,910 $ 4,518 $ 8,392
======================================================

YEAR ENDED DECEMBER 31, 1996
Unrealized holding losses arising during
the year $(15,728) $(5,505) $(10,223)
Reclassification adjustment (1,276) (447) (829)
------------------------------------------------------
Total other comprehensive income $(17,004) $(5,952) $(11,052)
======================================================
</TABLE>

F-22

<PAGE>

10. COMMITMENTS AND CONTINGENCIES

The Company has entered into certain lease and related agreements for office
space. The principal lease agreement is through November 2011, and contains
certain escalation clauses. At December 31, 1998, future minimum annual
payments under these agreements are $1,675,000.

Rent expense for 1998, 1997, and 1996 amounted to $1,704,000, $1,700,000, and
$1,667,000, respectively. The Company received rental income of $377,000,
$371,000, and $381,000 in 1998, 1997, and 1996, respectively, from the
Society for office space made available for their use.

The Company has been named as defendant in various legal actions in which
plaintiffs are seeking material amounts. Management intends to defend these
actions vigorously and believes that the actions should not have a material
adverse effect on the Company's financial position.

11. CONVERSION

On May 5, 1999, the Board of Governors of the Exchange adopted a Plan and
Agreement of Merger (the Merger Agreement) whereby the Exchange will
reorganize from a reciprocal insurer to a stock insurance company and become
a wholly owned subsidiary of ISMIE Holdings Inc. (the Conversion). Pursuant
to the Conversion, the Exchange will merge with and into ISMIE Indemnity
Company (ISMIE Indemnity), a newly organized Illinois stock insurer and a
wholly owned subsidiary of ISMIE Holdings Inc. that will be the surviving
corporation of the Conversion. The assets and liabilities of the Exchange
that will be merged into ISMIE Indemnity will be accounted for at a
historical cost in a manner similar to that in a pooling of interests. ISMIE
Indemnity is licensed to write property and casualty insurance lines in the
state of Illinois, but has not conducted business prior to the Conversion.

The principal purpose of the Conversion is to enhance the Exchange's ability
to achieve its strategic goals by providing greater operating flexibility and
access to the capital markets. The Conversion will also provide Members of
the Exchange with shares of Common Stock in exchange for their membership
interests in the Exchange.

A special meeting of the Exchange Members will be held to approve the Merger
Agreement.

F-23

<PAGE>

11. CONVERSION (CONTINUED)

Unaudited pro forma net income per share included in the consolidated
statements of income gives effect in all periods to the Conversion and the
issuance of 10,000,000 shares of Common Stock (less fractional shares, which
will be paid in cash) to Eligible Members of the Exchange.

F-24
<PAGE>

ANNEX I

PLAN AND AGREEMENT OF MERGER

THIS PLAN AND AGREEMENT OF MERGER (the "Plan"), dated as of May 5, 1999,
is among ISMIE HOLDINGS INC., a Delaware corporation ("Holdings"), ISMIE
INDEMNITY COMPANY, an Illinois corporation and a wholly owned subsidiary of
Holdings ("New Insurer"), and ILLINOIS STATE MEDICAL INTER-INSURANCE
EXCHANGE, an Illinois reciprocal insurance exchange (the "Company").

RECITALS

WHEREAS, the Company is an Illinois reciprocal insurance exchange
organized pursuant to the provisions of Article IV of the Insurance Code of
the State of Illinois (the "Illinois Insurance Code");

WHEREAS, New Insurer is an Illinois stock insurance company organized to
transact insurance under the Illinois Insurance Code;

WHEREAS, Holdings is a corporation incorporated in the State of Delaware
and a wholly owned subsidiary of the Company;

WHEREAS, Article X of the Illinois Insurance Code authorizes the merger
of the Company with and into the New Insurer;

WHEREAS, the Board of Governors of the Company (the "Board of
Governors") and the respective Boards of Directors of New Insurer and
Holdings have each proposed and duly approved the merger of the Company with
and into New Insurer (the "Merger") upon the terms and subject to the
conditions set forth in this Plan and in accordance with the Illinois
Insurance Code;

WHEREAS, in the Merger, the Membership Interests (as hereinafter
defined) of the Company shall be cancelled and extinguished in exchange for
the consideration described herein;

WHEREAS, the Company intends to prepare and mail to all Eligible Members
of the Company a proxy statement with respect to a special meeting (the
"Special Meeting") of Members of the Company at which Eligible Members will
be asked to approve this Plan;

I-1
<PAGE>

NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, Holdings, New Insurer
and the Company hereby agree as follows:

ARTICLE I

THE MERGER

1.1 THE MERGER. Subject to the conditions of Article VII of this
Agreement being satisfied or duly waived, and in accordance with and subject
to the provisions of this Plan and the Illinois Insurance Code, at the
Effective Time (as defined in Section 1.2) the Company shall be merged with
and into New Insurer in the Merger. At and after the Effective Time, the
separate existence of the Company shall cease, and New Insurer shall continue
as the surviving corporation, sometimes hereinafter referred to as the
"Surviving Corporation," under the corporate name it possesses immediately
prior to the Effective Time. The Company and New Insurer are sometimes
hereinafter referred to as the "Constituent Entities."

1.2 EFFECTIVE TIME OF THE MERGER. The Merger shall be effected and
become effective at the time (herein called the "Effective Time") the
Illinois Director of Insurance issues a certificate of merger as provided for
in Section 163 of the Illinois Insurance Code. The day on which the Effective
Time occurs is hereinafter called the "Effective Date."

1.3 EFFECT OF THE MERGER. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of the Illinois
Insurance Code, including, without limitation, Section 166 of the Illinois
Insurance Code. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time the Surviving Corporation shall have all of
the rights, privileges, immunities and powers and shall be subject to all of
the duties and liabilities granted or imposed by the Illinois Insurance Code.
The Surviving Corporation shall thereupon and thereafter possess all the
rights, privileges, immunities, powers and franchises of a public as well as
of a private nature, of each of the Constituent Entities; and all property,
real, personal and mixed, and all debts due on whatever account, including
subscriptions to shares, assessments payable from members or policyholders,
and all other choses in action and all and every other interest of, or
belonging to or due to, each of the Constituent Entities shall be deemed to
be transferred to and vested in the Surviving Corporation without further act
or deed; and the title to any real estate, or any interest therein, under the
laws of the State of Illinois vested in any of such companies shall not
revert or be in any way impaired by reason of such Merger. The Surviving
Corporation shall thenceforth be responsible and liable for all the
liabilities and obligations of the Constituent Entities; any

I-2

<PAGE>

claim existing or action or proceeding pending by or against any of the
Constituent Entities may be prosecuted to judgment as if such merger or
consolidation had not taken place, or the Surviving Corporation may be
substituted in its place; neither the rights of creditors nor any liens upon
the property of any of the Constituent Entities shall be impaired by such
Merger, but such liens shall be limited to the property upon which they were
liens immediately prior to the time of such Merger, unless otherwise provided
herein.

1.4 SUBSEQUENT ACTIONS. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any deed, bill of
sale, assignment, assurance or any other action or thing is necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of the Company acquired or to be acquired by the
Surviving Corporation as a result of, or in connection with, the Merger or
otherwise to carry out this Plan, the officers and directors of the Surviving
Corporation shall be authorized to execute and deliver, in the name and on
behalf of the Company, all such deeds, bill of sale, assignments and
assurances and to take and do, in the name and on behalf of such corporation
or otherwise, all such other actions and things as may be necessary or
desirable to vest, perfect or confirm any and all right, title and interest
in, to and under such rights, properties or assets in the Surviving
Corporation or otherwise to carry out this Plan.

1.5 GOVERNING DOCUMENTS. The Articles of Incorporation and Bylaws of
New Insurer shall be the Articles of Incorporation and Bylaws of the
Surviving Corporation, as in effect immediately prior to the Effective Time,
until thereafter amended as provided therein and under the Illinois Insurance
Code.

1.6 DIRECTORS AND OFFICERS. The members of the Board of Directors of
New Insurer immediately prior to the Effective Time shall be the initial
directors of the Surviving Corporation, and the officers of New Insurer
immediately prior to the Effective Time shall be the initial officers of the
Surviving Corporation, in each case until their successors are duly elected
and qualified.

ARTICLE II

CONVERSION OF MEMBERSHIP INTERESTS,
ALLOCATION AND PAYMENT OF MERGER CONSIDERATION

2.1 CERTAIN DEFINITIONS. As used in this Article II and elsewhere in
this Plan, the terms listed below shall have the following meanings:

I-3

<PAGE>

"Adoption Date" means May 5, 1999, the date that the Board of Governors
adopted this Plan.

"Attorney-in-Fact" means Illinois State Medical Insurance Services,
Inc., an Illinois corporation, a wholly owned subsidiary of the Company and
the Company's attorney-in-fact.

"Director" means the Director of Insurance of the Illinois Department,
or such governmental officer, body or authority as may succeed such Director
as the primary regulator of the Company's insurance business under applicable
law.

"Earned Premiums" means earned premiums (exclusive of any premium
surcharges) in respect of a Policy at any time during the period beginning on
July 1, 1995 and ending on and including the Adoption Date.

"Eligible Member" means a Person who is a Member of the Company on the
Adoption Date.

"Holdings Common Stock" means the common stock, par value $.01 per
share, of Holdings.

"Illinois Department" means the Department of Insurance of the State of
Illinois.

"Member" means a Person who is a Named Insured or Additional Named
Insured under a Policy. A Named Insured or Additional Named Insured ceases
to be a Member when the period of time (without regard to any extended
reporting period) which commences with the Policy effective date specified on
the declarations page expires or terminates, either upon cancellation,
non-renewal of the Policy, or otherwise.

"Named Insured" or "Additional Named Insured" means any Person who is
specifically identified by name in the declarations page of a Policy as a
"named insured" or as an "additional named insured" on any endorsement
attached thereto other than a reporting endorsement. The Named Insured or
Additional Named Insured in any Policy as of any date shall be determined on
the basis of the Company's records as of such date, and the Company shall not
be required to examine or consider any other facts or circumstances. The
identity of the Named Insured or Additional Named Insured in a Policy shall
be determined by the Company without giving effect to any interest of any
other Person in such Policy and such determination shall be binding.

"Membership Interests" means rights of Members of the Company arising
under the APPLICANT SUBSCRIBER'S REPRESENTATION, AUTHORIZATION AND RELEASE,
APPLICATION FOR MEMBERSHIP--POWER OF ATTORNEY between Members and the Company
(the "Subscription

I-4

<PAGE>

Agreements"), the Company's Rules and Regulations, the Illinois Insurance
Code or otherwise, including, without limitation, the right to vote for
members of the Board of Governors and on other matters and the right they may
have in any assets of the Company and to participate in any distribution of
surplus on liquidation of the Company (but not including claim obligations of
the Company arising under Policies).

"Merger Shares" means the shares of Holdings Common Stock to be
delivered by virtue of the Merger (i) to Eligible Members and (ii) to New
Insurer as consideration for the cancellation of the shares of Holdings
Common Stock held by the Company, which cancellation shall occur by virtue of
the Merger.

"Person" means an individual, corporation, joint venture, limited
liability company, partnership, association, trust, trustee, unincorporated
entity, organization or government or any department or agency thereof.

"Policy" means an insurance policy issued by the Company but does not
include (i) any agreement pursuant to which the Company has ceded or assumed
reinsurance or (ii) a reporting endorsement.

2.2 CANCELLATION AND CONVERSION OF INTERESTS. At the Effective Time,
by virtue of the Merger and without any action on the part of the Company,
New Insurer, Holdings, the Surviving Corporation or any other Person, and
subject to Section 2.6 hereof regarding dissenter's rights:

(a) All Membership Interests in existence immediately prior to the
Effective Time shall be cancelled and extinguished.

(b) Membership Interests of Eligible Members shall be converted into
the right to receive the number of Merger Shares as provided in Section
2.3(a) and Section 2.4 below.

(c) The Holdings Common Stock held by the Company immediately prior
to the Effective Time shall be cancelled and converted into the right to
receive the number of Merger Shares as provided in Section 2.3(b) below.

(d) Each share of common stock of New Insurer issued and outstanding
immediately prior to the Effective Time shall be converted into one validly
issued, fully paid and nonassessable share of common stock of the Surviving
Corporation.

I-5

<PAGE>

2.3 ALLOCATION OF MERGER SHARES. The Merger Shares issuable in the
Merger shall be allocated among the Eligible Members and New Insurer as
follows:

(a) The number of Merger Shares allocable to each Eligible Member
shall be determined as follows:

(i) Each Eligible Member shall be allocated a number of shares
of Holdings Common Stock equal to the product of x and y, where "x"
equals 9,000,000 shares of Holdings Common Stock and "y" equals the
ratio of the Earned Premiums of such Eligible Member to the total
Earned Premiums of all Eligible Members during the period beginning on
July 1, 1995 and ending on and including the Adoption Date, plus

(ii) Each Eligible Member shall be allocated a number of shares
of Holdings Common Stock equal to 1,000,000 shares of Holdings Common
Stock divided by the total number of Eligible Members.

(b) The number of Merger Shares allocable to New Insurer shall be (i)
100,000 or (ii) such other number as the Board of Directors of Holdings and
the Board of Governors of the Company determine is appropriate in order to
insure that the Merger Shares issued to New Insurer pursuant to the Merger
have a fair market value equivalent to the fair market value of the shares
of Holdings Common Stock held by the Company which are to be cancelled in
the Merger pursuant to Section 2.5 hereof.

2.4 FRACTIONAL SHARES. No fractional shares of Holdings Common Stock
shall be issued upon consummation of the Plan. The number of shares of
Holdings Common Stock calculated in accordance with Section 2.3 in respect of
each Eligible Member and New Insurer shall be the sum of the number of shares
of Holdings Common Stock after rounding such number to the nearest integral
number of shares (with one-half being rounded upward). Because of such
rounding, the aggregate number of shares of Holdings Common Stock issued to
Eligible Members in the Merger may be slightly more or less than 10,000,000.

2.5 ISSUANCE, DELIVERY, VOTING AND DIVIDENDS. Subject to Section 2.6
hereof, the Merger Shares allocated to the Eligible Members and New Insurer
shall be deemed to have been issued at the Effective Time. The Merger Shares
shall be delivered to the recipients thereof on the thirty-first day after
the Effective Date, or as soon as reasonably practicable thereafter, unless
the petition specified in Section 2.6 hereof has been filed with the Director
prior thereto. If such a petition has been filed, the Merger Shares shall be
delivered only upon the conclusion of the Director's review of dissenting
policyholder rights or the issuance of an order permitting or confirming the
effectiveness of the Merger in accordance with

I-6

<PAGE>

Section 168 of the Illinois Insurance Code. No recipient shall have the
right to vote the Merger Shares, and no dividends or other distributions with
respect to the Merger Shares shall be paid to any recipient, until the Merger
Shares are delivered as provided herein. Following delivery of the Merger
Shares, (i) each recipient other than New Insurer shall have the right to
vote its Merger Shares at any meeting the record date of which is after the
date of such delivery, and (ii) there shall be paid, without interest, to
each recipient in whose name the certificates representing the Merger Shares
are registered, all dividends and other distributions payable in respect of
such Merger Shares on a date subsequent to, and in respect of a record date
after, the Effective Time and prior to such delivery. Such recipient shall
also be entitled to receive, on the payment date therefor, any dividend or
distribution the record date for which occurs prior to such delivery and the
payment date for which occurs following such delivery.

2.6 DISSENTING MEMBERS' RIGHTS. If five percent or more of all
Eligible Members who do not vote in favor of the Plan at the Special Meeting
at which this Plan was adopted by the Eligible Members, at any time within
thirty days after the Effective Date, shall file a petition with the Director
for a hearing upon the Plan, the Director shall then order a hearing upon
said petition, fix the time and place of such hearing, and give written
notice to the Constituent Entities (as defined in Section 1.1), at least
fifteen days before the date of such hearing, all as provided in Section 168
of the Illinois Insurance Code. Any Eligible Member so petitioning may appear
before the Director at such hearing, either in person or by an attorney, and
be heard with reference to the Plan. If, upon such hearing being had, the
Director finds that the interests of the Members of the Company are not
properly protected, or if he finds that any reasonable objection exists to
this Plan, he shall enter an order revoking the approval already given, and
the Merger, and this Plan, shall, thereupon, become null and void. In the
event of the entry of such an order by the Director, no party hereto nor any
Eligible Member shall have any further rights under this Agreement. The
Director shall also have the power to revoke any approval of the Merger if
any officer, director or employee of any Constituent Entity shall, after
reasonable notice, fail or refuse without reasonable cause to attend and
testify at such hearing, or to produce any books or papers called for by the
Director.

2.7 NO FURTHER INTEREST IN THE COMPANY. Subject to Section 2.6 hereof,
as of the Effective Time, each Member of the Company shall cease to be a
Member, and shall have no further Membership Interest or any other interest
in the Company or any interest in the Surviving Corporation, except for any
interest that a Member may have as a holder of Holdings Common Stock or
rights as a policyholder under any Policy issued by the Company.

I-7

<PAGE>

ARTICLE III

APPROVAL BY THE DIRECTOR

3.1 DIRECTOR'S APPROVAL. This Plan is subject to the approval of the
Director pursuant to Article X of the Illinois Insurance Code. The change of
control of Holdings and New Insurer contemplated by the Plan is subject to
the standards established under Article VIII 1/2 of the Illinois Insurance
Code.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES BY THE COMPANY

The Company represents and warrants to Holdings that, as of the date of
this Plan and as of the Effective Time:

4.1 ORGANIZATION AND QUALIFICATION. The Company is a reciprocal
insurance exchange duly organized, validly existing and in good standing
under the laws of the State of Illinois. The Company has all requisite power
and authority required for it to hold, lease, convey or dispose of assets
held for subscribers and carry on its business as presently conducted. The
Company is duly qualified or licensed to do business, and is in good
standing, in each jurisdiction where the nature of business or the character
of its properties makes necessary such qualifications or licensing, except
where the failure to so qualify would not materially adversely affect the
condition (financial or otherwise), results of operations, business,
properties or prospects of the Company taken as a whole.

4.2 AUTHORITY RELATIVE TO THIS PLAN; RECOMMENDATION TO ELIGIBLE
MEMBERS. The Company has full right, power, and authority to execute, deliver
and perform the terms of this Plan. Subject only to favorable action by the
Company's Eligible Members at the Special Meeting referred to in Section 6.2,
the execution, delivery and performance of this Plan by the Company have been
duly and validly authorized and approved by all required action on the part
of the Company. The Company's Board of Governors has approved the execution,
delivery and performance of this Plan and recommends the approval of this
Plan by the Eligible Members. Subject only to approval of the Company's
Eligible Members and the Director as described above, this Plan constitutes
the valid and binding agreement of the Company and is enforceable in
accordance with its terms.

4.3 COMPLIANCE. Neither the execution and delivery of this Plan by the
Company nor the consummation of the transactions contemplated hereby nor
compliance by the Company with any of the provisions hereof will (i) violate,
conflict with, or result in a breach of any provision of, or constitute a
default (or an event which, with notice or lapse of time

I-8

<PAGE>

or both, would constitute a default) under, or result in the termination of,
or accelerate the performance required by, or result in a right of
termination or acceleration under, or result in the creation of any lien,
security interest, charge or encumbrance upon any of the properties or assets
of the Company under any of the terms, conditions or provisions of (a) the
Power of Attorney Agreement between the Company and the Attorney-in-Fact, or
the Company's Rules and Regulations or (b) any material note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other instrument or
obligation to which the Company or any direct or indirect subsidiary of the
Company is a party, or to which any of them, or any of their respective
properties or assets, may be subject, or (ii) subject to compliance with the
statutes and regulations referred to in the next paragraph, violate any
judgment, ruling, order, writ, injunction, decree, statute, rule or
regulation applicable to the Company or any direct or indirect subsidiary of
the Company or any of their respective properties or assets, except, in the
case of each of clauses (i) and (ii) above, for such violations, conflicts,
breaches, defaults, terminations, accelerations or creations of liens,
security interests, charges or encumbrances, which, in the aggregate, would
not have a material adverse effect on the transactions contemplated hereby or
on the condition (financial or other), business or operations of the Company
and its subsidiaries taken as a whole.

Other than in connection with or in compliance with the provisions of
the Illinois Insurance Code, the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the Securities Act of 1933, as amended (the "Securities
Act"), and the "takeover" or "blue sky" laws of the various states, no notice
to, filing with, or authorization, consent or approval of, any domestic or
foreign public body or authority is necessary for the consummation by the
Company of the transactions contemplated by this Plan, except where the
failure to give such notice, make such filings, or obtain such
authorizations, consents or approvals would, individually or in the
aggregate, not have a material adverse effect on the transactions
contemplated hereby or on the condition (financial or other), business or
operations of the Company taken as a whole.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF HOLDINGS AND NEW INSURER

Each of Holdings and New Insurer, jointly and severally, represents and
warrants to the Company as follows:

5.1 ORGANIZATION AND QUALIFICATION. Holdings is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware. New Insurer is a stock insurance corporation duly organized,
validly existing and in good standing under the laws of the State of
Illinois. At the Effective time, each of Holdings and New Insurer will be
duly qualified or licensed to do business, and will be in good standing, in
each jurisdiction

I-9

<PAGE>

where the nature of their respective businesses or the character of their
respective properties makes necessary such qualifications or licensing,
except where the failure to so qualify would not materially adversely affect
the condition (financial or otherwise), results of operations, business,
properties or prospects of Holdings and New Insurer, taken as a whole. At
the Effective Time, New Insurer will hold a certificate of authority from the
Director to transact Class 2 and Class 3 insurance in the State of Illinois,
and such certificate of authority will be in full force and effect at the
Effective Time.

5.2 CAPITALIZATION. As of the date of this Plan, Holdings has an
authorized capital stock of 40,000,000 shares of Holdings Common Stock, par
value $.01 per share, of which 1,000 shares are duly and validly issued and
outstanding, fully paid and nonassessable, all of which are held by the
Company, and 5,000,000 shares of Preferred Stock, par value $.01 per share,
none of which is issued and outstanding. As of the date of this Plan, New
Insurer has an authorized capital stock of 500,000 shares of common stock,
par value $100 per share, of which 10 shares are duly and validly issued and
outstanding, fully paid, nonassessable, all of which are held by Holdings.
At the Effective Time, 25,000 shares of New Insurer will be duly and validly
issued and outstanding, fully paid and nonassessable, all of which will be
held by Holdings.

5.3 AUTHORITY RELATIVE TO THIS PLAN. Each of Holdings and New Insurer
has full corporate power and authority to execute and deliver this Plan and
to perform its respective obligations hereunder. All corporate action
required on the part of Holdings and New Insurer in order to authorize such
execution, delivery and performance has been taken. This Plan constitutes the
valid and binding obligation of each of Holdings and New Insurer, enforceable
against each in accordance with its terms.

5.4 COMPLIANCE. Neither the execution and delivery of this Plan by
Holdings and New Insurer nor the consummation of the transactions
contemplated hereby nor compliance by Holdings and New Insurer with any of
the provisions hereof will (i) violate, conflict with, or result in a breach
of any provision of, or constitute a default (or an event which, with notice
or lapse of time or both, would constitute a default) under, or result in the
termination of, or accelerate the performance required by, or result in a
right of termination or acceleration under, or result in the creation of any
lien, security interest, charge or encumbrance upon any of the properties or
assets of Holdings or New Insurer or any other direct or indirect subsidiary
under any of the terms, conditions or provisions of (a) the respective
charters or bylaws of Holdings or New Insurer or (b) any material note, bond,
mortgage, indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which Holdings or New Insurer is a party, or to
which either of them, or any of their respective properties or assets, may be
subject, or (ii) subject to compliance with the statutes and regulations
referred to in the next paragraph, violate any judgment, ruling, order, writ,
injunction, decree, statute, rule or regulation applicable to Holdings or New
Insurer or any

I-10

<PAGE>

of their respective properties or assets, except, in the case of each of
clauses (i) and (ii) above, for such violations, conflicts, breaches,
defaults, terminations, accelerations or creations of liens, security
interests, charges or encumbrances, which, in the aggregate, would not have a
material adverse effect on the transactions contemplated hereby or on the
condition (financial or other), business or operations of Holdings and its
subsidiaries taken as a whole.

Other than in connection with or in compliance with the provisions of
the Illinois Insurance Code, the Exchange Act, the Securities Act, and the
"takeover" or "blue sky" laws of the various states, no notice to, filing
with, or authorization, consent or approval of, any domestic or foreign
public body or authority is necessary for the consummation by Holdings or New
Insurer of the transactions contemplated by this Plan, except where the
failure to give such notice, make such filings, or obtain such
authorizations, consents or approvals would, individually or in the
aggregate, not have a material adverse effect on the transactions
contemplated hereby or on the condition (financial or other), business or
operations of Holdings and New Insurer taken as a whole.

ARTICLE VI

ADDITIONAL AGREEMENTS

6.1 COOPERATION. Subject to the terms and conditions herein provided,
each of the parties hereto agrees to use all reasonable efforts to take, or
cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective as promptly
as practicable the transactions contemplated by this Plan and to cooperate
with each other in connection with the foregoing, including using its best
efforts to:

(a) prepare and file with the Illinois Department as soon as is
reasonably practicable all necessary requests for approval, applications
and other necessary registrations and filings, including, but not limited
to, all filings and other submissions of information to governmental
authorities with respect to the transactions contemplated by this Plan, and
use its best efforts to obtain such permits and approvals as promptly as
possible;

(b) prepare and file with the SEC as soon as is reasonably
practicable a Registration Statement, including a proxy
statement/prospectus (the "Registration Statement"), with respect to the
transactions contemplated by this Plan, and use its best efforts to have
such Registration Statement declared effective by the SEC under the
Securities Act as promptly as possible;

I-11

<PAGE>

(c) mail to Eligible Members, as soon as is reasonably practicable
after receiving any required regulatory approvals (other than approval of
this Agreement under Article X of the Illinois Insurance Code), a proxy
statement, together with a form of proxy, with respect to the meeting of
the Company's Eligible Members at which the Eligible Members of the Company
will vote upon this Plan and the Merger (the "Proxy Statement"). The term
"Proxy Statement" shall mean such proxy or information statement at the
time it initially is mailed to the Company's Eligible Members and all
amendments or supplements thereto, if any, similarly filed and mailed. The
information provided and to be provided by the Company, Holdings and New
Insurer, respectively, for use in the Proxy Statement shall not, on the
date the Proxy Statement is first mailed to the Company's Eligible Members
and on the date of the meeting of the Company's Eligible Members referred
to in Section 6.2, contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make such information not
misleading, and each of the Company, Holdings and New Insurer agrees to
correct any information provided by it for use in the Proxy Statement that
shall have become false or misleading;

(d) take all such actions as may be required under state blue sky or
securities laws in connection with the transactions contemplated by this
Plan;

(e) arrange for the listing of the Holdings Common Stock on a
national securities exchange or the Nasdaq Stock Market;

(f) obtain all necessary waivers, consents and approvals from other
parties to material loan agreements, leases and other contracts;

(g) obtain all necessary consents, approvals and authorizations as
are required to be obtained under any Federal, state or foreign law or
regulations;

(h) defend all lawsuits or other legal proceedings, formal or
informal, challenging this Plan or the consummation of the transactions
contemplated hereby; and

(i) lift, rescind or mitigate the effect of any injunction or
restraining order or other order adversely affecting the ability of the
parties to consummate the transactions contemplated hereby.

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<PAGE>

6.2 SPECIAL MEETING OF ELIGIBLE MEMBERS OF THE COMPANY.

(a) The Company shall take all action necessary, in accordance with
the Illinois Insurance Code, the Subscription Agreements and the Company's
Rules and Regulations, to convene the Special Meeting of the Eligible
Members as promptly as practicable to consider and vote upon this Plan and
the Merger.

(b) The record date for the Special Meeting shall be the Adoption
Date.

(c) Each Eligible Member shall be entitled to vote in person or by
proxy in a manner to be prescribed by the Director and the Company's Rules
and Regulations; provided, however, that any vote cast shall be by ballot
and not viva voce.

(d) The Proxy Statement shall contain the recommendation of the Board
of Governors that the Eligible Members of the Company vote to approve the
Merger and this Plan.

(e) The Company shall use its best efforts to solicit from Eligible
Members proxies or otherwise secure the vote or consent of the Eligible
Members in favor of approval of the Merger and the Plan.

(f) The Company shall mail notice of the Special Meeting to all
Eligible Members. Such notice shall set forth the reasons for the Special
Meeting and the time and place of the Special Meeting, and shall enclose a
proxy for each Eligible Member. Such notice and proxy shall be mailed by
first class mail to the address of each Eligible Member, as such address
appears on the records of the Company, at least 20 days prior to the
Special Meeting, and such notice and proxy shall be in a form satisfactory
to the Director. Notice of the Special Meeting shall be accompanied by
information relevant to the Special Meeting.

(g) The affirmative vote of the Eligible Members required for
approval of this Plan and the Merger shall be two-thirds of the votes cast
by Eligible Members.

6.3 OFFICERS' AND DIRECTORS' INSURANCE; INDEMNIFICATION. It is
understood and agreed that the Company shall indemnify and hold harmless and,
after the Effective Time, the Surviving Corporation shall indemnify and hold
harmless, each present and former member of the Board of Governors and
officer of the Company, and each director and officer of the Attorney-in-Fact
(the term "officer" including for this purpose the chief executive officer,
the chief operating officer, the chief administrative officer, the chief
financial officer and the chief legal officer)(the "Indemnified Parties") to
the fullest extent permitted by applicable

I-13

<PAGE>

law against any losses, claims, damages, liabilities, costs, expenses,
judgments and amounts paid in settlement in connection with any claim,
action, suit, proceeding or investigation arising out of or pertaining to any
action or omission which arises out of or relates to the transactions
contemplated by this Plan, and the Company and the Surviving Corporation, as
the case may be, will advance expenses to each such person upon receipt of an
undertaking to: (i) repay such amount if it shall be determined ultimately
that such person is not entitled to indemnification under the applicable law;
and (ii) reasonably cooperate with the Company (or, after the Effective Time,
the Surviving Corporation) concerning the action, suit, proceeding or
investigation. In the event any such claim, action, suit, proceeding or
investigation is brought against any Indemnified Party (whether arising
before or after the Effective Time), (a) the Indemnified Parties may retain
counsel satisfactory to them and the Company (or them and the Surviving
Corporation after the Effective Time), (b) the Company (or after the
Effective Time, the Surviving Corporation) shall pay all reasonable fees and
expenses of such counsel for the Indemnified Parties promptly as statements
therefor are received, and (c) the Company (or after the Effective Time, the
Surviving Corporation) will use its best efforts to assist in the vigorous
defense of any such matter, provided, that neither the Company nor the
Surviving Corporation shall be liable for any such settlement effected
without their written consent, which consent, however, shall not be
unreasonably withheld. Any Indemnified Party wishing to claim indemnification
under this Section 6.3, upon learning of any such claim, action, suit,
proceeding or investigation, shall notify the Company or the Surviving
Corporation thereof and shall deliver to the Company or the Surviving
Corporation an undertaking to repay any amounts advanced pursuant hereto when
and if a court of competent jurisdiction shall ultimately determine, after
exhaustion of all avenues of appeal, that such Indemnified Party was not
entitled to indemnification under this Section. In addition, upon the
occurrence of the Effective Time, New Insurer shall be deemed expressly to
have assumed any obligations of the Company to its directors and officers for
indemnification, whether under the Company's Rules and Regulations or the
Subscription Agreements, or otherwise, for acts or occurrences prior to the
Effective Time. This Section 6.3 shall survive the consummation of the Merger.

6.4 CONTINUITY OF OBLIGATIONS REGARDING POLICYHOLDERS. It is
understood and agreed that after the Effective Time: (i) the Surviving
Corporation shall be a corporation of the State of Illinois authorized to
transact insurance under the Illinois Insurance Code, (ii) the policyholders
of the Company immediately prior to the Effective Time shall become
policyholders of the Surviving Corporation; (iii) the Surviving Corporation
shall be available to such policyholders to obtain policy changes and
endorsements, to receive payment of premiums and refund unearned premiums, to
serve notice of claim, proof of loss, summons, process and other papers, and
for purposes of suit; and (iv) the Surviving Corporation shall timely file
with the Director the financial statements and tax returns required by the
Illinois Insurance Code, and shall timely pay all taxes found to be due
relating to the business of the

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<PAGE>

Company in the State of Illinois during the calendar year of the Merger, in
accordance with the Illinois Insurance Code.

ARTICLE VII

CONDITIONS PRECEDENT

7.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Time of the following conditions:

(a) the Registration Statement shall have become effective under the
Securities Act and no stop order with respect to the Registration Statement
shall have been issued;

(b) all consents, authorizations, orders or approvals of the Illinois
Department and any other governmental commission, board or other regulatory
body that the parties mutually agree are essential to effect the Merger and
for New Insurer to conduct the business of New Insurer and the Company in
substantially the same matter as now conducted shall have been received;

(c) this Plan and the Merger shall have been approved and adopted by
the requisite vote or consent of the Eligible Members of the Company
required by the Illinois Insurance Code, by the requisite vote or consent
of the shareholders of New Insurer required by the Illinois Insurance Code,
and by the requisite vote or consent of the stockholder of Holdings;

(d) the Company shall have received an opinion from a law firm of
recognized standing, to the effect that for Federal income tax purposes,
the Eligible Members generally will recognize no gain or loss on the
exchange of their Membership Interests for shares of Holdings Common Stock
pursuant to the Merger;

(e) no preliminary or permanent injunction or other order, decree or
ruling issued by a court of competent jurisdiction or by a governmental,
regulatory or administrative agency or commission nor any statute, rule,
regulation or executive order promulgated or enacted by any governmental
authority shall be in effect, which would prevent the consummation of the
Merger or make the consummation of the Merger illegal; and

(f) prior to the Effective Time, the Company and Holdings shall have
received from an investment banking firm of recognized standing an opinion
that the

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<PAGE>

exchange of the aggregate Membership Interests for the Merger Shares in
the aggregate is fair, from a financial point of view, to the Eligible
Members as a group.

ARTICLE VIII

TERMINATION

8.1 TERMINATION. This Plan may be terminated, and the Merger
contemplated herein may be abandoned, at any time prior to the Effective
Time, whether prior to or after approval of the Merger by the Eligible
Members:

(a) by mutual written consent of the Board of Directors of Holdings,
the Board of Directors of New Insurer and the Board of Governors of the
Company; or

(b) by the Company, if New Insurer or Holdings breaches in any
material respect any of its covenants or agreements contained in this Plan;
or

(c) by Holdings, if the Company breaches in any material respect any
of its covenants or agreements contained in this Plan; or

(d) by either Holdings or the Company:

(i) if the Merger has not been consummated prior to December 31,
1999; or

(ii) if any court of competent jurisdiction or other governmental
body shall have issued an order, decree or ruling, or taken any other
action restraining, enjoining or otherwise prohibiting the Merger and
such order, decree, ruling or other action shall have become final and
non-appealable.

8.2 EFFECT OF TERMINATION. In the event of the termination of this
Plan as provided in Section 7.1, this Plan shall forthwith become void, and
there shall be no liability on the part of the Company, Holdings or New
Insurer, except as described in Section 6.3 and as set forth in the last
sentence of this Section 8.2. Nothing contained in this Section 8.2 shall
relieve the Company, Holdings or New Insurer from liability for any breach of
this Plan.

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<PAGE>

ARTICLE IX

GENERAL PROVISIONS

9.1 AMENDMENT. This Plan may be amended by an instrument in writing
signed on behalf of each of the parties hereto; provided, however, that after
approval of the Merger by the Eligible Members, no amendment may be made
which under applicable law requires further approval of Eligible Members
without such further approval of Eligible Members.

9.2 EXTENSION; WAIVER. At any time prior to the Effective Time any
party hereto may (i) extend the time for the performance of any of the
obligations or other acts of any other party hereto; (ii) waive any
inaccuracies in the representations and warranties contained in this Plan and
(iii) waive compliance with any of the agreements of the other parties or
conditions to its own obligations contained in this Plan. Any agreement on
the part of a party hereto to any such extension or waiver shall be valid
only if set forth in an instrument in writing signed on behalf of such party
by a duly authorized officer.

9.3 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. The respective
representations and warranties of the Company, New Insurer and Holdings
contained herein shall expire with, and be terminated and extinguished upon,
consummation of the Merger, and thereafter none of the Company, New Insurer
and Holdings or any officer, director or principal thereof shall be under any
liability whatsoever with respect to any such representation or warranty.
This Section 9.3 shall have no effect upon any other obligation of the
parties hereto, whether to be performed before or after the consummation of
the Merger.

9.4 ENTIRE PLAN. This Plan contains the entire agreement among the
Company, New Insurer and Holdings with respect to the subject matter hereof
and supersedes all prior arrangements and understandings, both written and
oral, among such parties with respect thereto.

9.5 COUNTERPARTS. This Plan may be executed in one or more
counterparts, all of which shall be considered one and same agreement and
shall become binding when one or more counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.

9.6 SEVERABILITY. It is the desire and intent of the parties that the
provisions of this Plan be enforced to the fullest extent permissible under
the law and public policies applied in each jurisdiction in which enforcement
is sought. Accordingly, in the event that any provision of this Plan would be
held in any jurisdiction to be invalid, prohibited or unenforceable for any
reason,

I-17

<PAGE>

such provision, as to such jurisdiction, shall be ineffective, without
invalidating the remaining provisions of this Plan or affecting the validity
or enforceability of such provision in any other jurisdiction.
Notwithstanding the foregoing, if such provision could be more narrowly drawn
so as not to be invalid, prohibited or unenforceable in such jurisdiction, it
shall, as to such jurisdiction, be so narrowly drawn, without invalidating
the remaining provisions of this Plan or affecting the validity or
enforceability of such provision in any other jurisdiction.

9.7 NOTICES. Any notice given by any party under this Plan (each, a
"notice") shall be in writing and shall be deemed duly given (i) when
personally delivered, or (ii) when five days have elapsed after its
transmittal by registered or certified mail, postage prepaid, return receipt
requested, addressed to the party to whom directed at that party's address as
it appears below or another address of which that party has given notice as
provided herein, or (iii) when transmitted by telex or telecopy (or
equivalent service), the sender's receiving apparatus having printed the
answerback (if any) of the addressee on a copy of the telex or telecopy
message. Notices of address change shall be effective only upon receipt
notwithstanding the previous sentence.

If to the Company, to:

Illinois State Medical Inter-Insurance Exchange
20 North Michigan Avenue, Suite 700
Chicago, Illinois 60602-4890
Attention: Chairman, Board of Governors

If to Holdings to:

ISMIE Holdings Inc.
20 North Michigan Avenue, Suite 700
Chicago, Illinois 60602-4890
Attention: Chairman, Board of Directors

If to New Insurer, to:

ISMIE Indemnity Company
20 North Michigan Avenue, Suite 700
Chicago, Illinois 60602-4890
Attention: Chairman, Board of Directors

I-18

<PAGE>

9.8 SECTION HEADINGS. The section headings contained in this Plan are
inserted for reference purposes only and shall not affect the meaning or
interpretation of this Plan.

9.9 BENEFITS AND ASSIGNMENT. This Plan is not intended to convey upon
any person other than the parties any rights or remedies hereunder. This Plan
shall not be assigned by operation of law or otherwise.

9.10 APPLICABLE LAW. This Plan and the legal relations between the
parties hereto shall be governed by and construed in accordance with the laws
of the State of Illinois applicable to contracts made and to be performed
therein.

[SIGNATURE PAGE FOLLOWS]

I-19

<PAGE>

IN WITNESS WHEREOF, each of the parties has caused this Plan to be
executed as of the date first above written, which is sometimes referred to
herein as "the date of this Plan."

ILLINOIS STATE MEDICAL INTER-INSURANCE EXCHANGE

By:
--------------------------------------------
Chairman

By:
--------------------------------------------
Secretary

ISMIE INDEMNITY COMPANY

By:
--------------------------------------------
Chairman

By:
--------------------------------------------
Secretary

ISMIE HOLDINGS INC.

By:
--------------------------------------------
Chairman

By:
--------------------------------------------
Secretary

I-20

<PAGE>
ANNEX II

[SALOMON SMITH BARNEY INC. LETTERHEAD]

May 5, 1999

The Board of Governors
Illinois State Medical Inter-Insurance Exchange
20 North Michigan Avenue, Suite 700
Chicago, IL 60602

Members of the Board of Directors:

You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the Eligible Members of Illinois State
Medical Inter-Insurance Exchange ("ISMIE" or the "Company"), as a group, of
the exchange of the aggregate Membership Interests for shares of Common Stock
of ISMIE Holdings Inc. (the "Holding Company"), pursuant to the Plan and
Agreement of Merger among the Company, the Holding Company and ISMIE
Indemnity Company, an Illinois stock insurance company, dated May 5, 1999
(the "Plan"). Capitalized terms not otherwise defined herein are used as
defined in the Plan.

The Plan provides for a merger and related transactions pursuant to
Article X of the Illinois Insurance Code (the "Conversion") and further
provides, among other things, that: (1) the Company will merge with and into
ISMIE Indemnity Company, the surviving corporation of the Merger; (2)
following such merger, ISMIE Indemnity Company will be a wholly owned
subsidiary of the Holding Company; (3) the Membership Interests in ISMIE will
be extinguished; (4) Eligible Members will receive shares of Common Stock of
the Holding Company as compensation for relinquishing their Membership
Interests in ISMIE; and (5) at the discretion of the board of directors of
the Holding Company, shares of Common Stock of the Holding Company may be
offered to the public in an Initial Public Offering.

As you are aware, Salomon Smith Barney Inc. has acted as financial
advisor to the Company in connection with the Conversion and has received a
fee in connection with those services. In addition, the Company has agreed
to retain Salomon Smith Barney Inc. as lead underwriter in connection with a
possible initial public offering (the "IPO"). Salomon Smith Barney Inc. and
its affiliates (including Citigroup Inc. and The Robinson-Humphrey Company,
LLC) may have other business relationships with the Company. The Company has
agreed to indemnify us for certain liabilities arising out of the rendering
of this opinion.

Pursuant to the Illinois Insurance Code, the Plan must be approved by
(a) the Illinois Director of Insurance (the "Director") and (b) not less than
two-thirds of the

II-1
<PAGE>

The Board of Governors
Illinois State Medical Inter-Insurance Exchange
May 5, 1999
Page 2

Eligible Members present in person or by proxy at the Special Meeting of the
policyholders. If approved by Eligible Members and the Director, and if the
other conditions set forth in the Plan or required by law are satisfied, the
Merger contemplated by the Plan will become effective on the Effective Date.

We do not express any opinion as to: (1) which of the Company's
policyholders are to be included among the Eligible Members; (2) the fairness
of the proposed consideration to be paid to any particular Eligible Member or
to any class of Eligible Members in connection with the Conversion, including
any provisions of the Plan relating to which Eligible Members receive Common
Stock of the Holding Company, the allocation of such Common Stock among
Eligible Members and other provisions of the Plan which distinguish among
Eligible Members; and (3) the fair market value of any shares of Common Stock
of the Holding Company to be issued pursuant to the Plan, the price at which
the Common Stock could be sold in an Initial Public Offering (the "IPO
Price"), or the price at which the Common Stock of the Holding Company issued
in connection with the Plan or pursuant to an Initial Public Offering will
trade. We note that the IPO Price would be a function of market conditions
and the recent performance of and outlook for the Company at that time. We
believe that trading in the Common Stock of the Holding Company for a period
following the completion of a distribution of the Common Stock of the Holding
Company, including an Initial Public Offering, would be characterized by a
redistribution of the Common Stock of the Holding Company among Eligible
Members that were issued shares of Common Stock and other investors. It is
possible that during these periods of redistribution, the Common Stock of the
Holding Company may trade at prices below the prices at which it would trade
on a fully distributed basis.

In arriving at our opinion, we have reviewed, analyzed and relied upon
material bearing upon the financial and operating condition and prospects of
the Company and material prepared in connection with the Plan and the
Conversion, and we have considered such financial and other factors as we
have deemed appropriate under the circumstances, including, among other
things, the following: (1) the statutory annual statements provided by the
Company for the years 1993 through 1998; (2) certain GAAP financial data
provided by the Company, including the audited income statements for each
year of the five year period ending December 31, 1998 and the audited balance
sheets for each year of the five year period ending December 31, 1998 (3)
certain consolidated financial projections for the Holding Company and its
subsidiaries after the Conversion provided to us by the Company; (4) the
draft Registration Statement on Form S-4 of the Company dated April 28, 1999;
(5) a copy of the Plan dated May 5, 1999; (6) certain financial data of the
Company which we compared with publicly available financial information and
market data of other companies which we believed to be comparable; and (7)
the financial terms of the transactions contemplated by the Plan and the
exhibits thereto which we compared with the financial terms of other
transactions we deemed to be relevant. We have also conducted discussions
with the management and advisors of the Company relating to the business of
the Company and certain financial and other aspects of the Plan and the
Conversion and such other matters we believe

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<PAGE>

The Board of Governors
Illinois State Medical Inter-Insurance Exchange
May 5, 1999
Page 3

relevant to our inquiry. We have also taken into account our assessment of
general economic, market and financial conditions, our experience in
securities valuation and our knowledge of the insurance industry generally.

Furthermore, you have directed us to assume and we have assumed that:
(1) the Conversion will meet all applicable legal and regulatory requirements
and that all necessary action will have been taken to comply with all
applicable laws and requirements, including the receipt of all required
approvals by policyholders, regulators and otherwise; and (2) the terms of an
Initial Public Offering (which have not yet been determined), would not
affect the legal or tax treatment of the Plan or the Conversion. We have also
assumed that, as of the date hereof, the Conversion will be completed on the
basis described in the Plan. We have been advised as to certain legal and tax
matters by counsel to the Company and, with respect to such matters, we have
relied upon such counsel.

We have assumed that the Company will receive, prior to the Effective
Date, a private letter ruling from the Internal Revenue Service or an opinion
from its tax counsel as to certain tax matters as described in Section 7.1(d)
of the Plan. For purposes of our opinion, we have assumed that, if an opinion
from tax counsel is delivered, then such opinion of tax counsel is correct
and will be confirmed as of the Effective Date with no changes or exceptions
whatsoever.

In preparing our opinion, we have taken into account a number of factors
including, but not limited to, the following (in no particular order): (1)
the fact that the Company has advised us that growth is extremely important
to remain an effective and competitive insurer in the future; (2) the fact
that the Company has advised us that it is of significant strategic
importance that it have broader access to external capital to finance this
growth; (3) the Company's financial strength ratings and the considerations
on which such ratings are based; (4) in its present form as a reciprocal
insurer, the Company has limited access to the capital markets for new
capital; (5) following the Conversion, the Company will have a capital
structure potentially enabling it to access the capital markets for new
capital; and (6) the illiquidity of Membership Interests.

In conducting our review and arriving at our opinion, we have relied
upon and assumed the accuracy and completeness of the financial and other
information provided to us or publicly available and have not attempted to
independently verify the same. With respect to the financial projections, we
have assumed that such projections have been reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
Company, and we express no opinion with respect to such projections or the
assumptions on which they are based. We have not made or obtained any
evaluations or appraisals of the properties, assets, liabilities, reserves or
surplus of the Company. Our opinion as expressed herein is limited to the
fairness, from a financial point of view, to the Eligible Members of the
exchange of the aggregate membership interests for shares of Common Stock of
the Holding Company pursuant to the Plan, and does not address the Company's
underlying business decision to participate in the Plan and Conversion,

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<PAGE>

The Board of Governors
Illinois State Medical Inter-Insurance Exchange
May 5, 1999
Page 4

and does not constitute a recommendation to any Eligible Member as to how
such Eligible Member should vote with respect to the Plan. Our opinion is
necessarily based upon conditions as they exist and can be evaluated on the
date hereof and the information made available to us through the date hereof.

It is understood that this letter is for the information of the Board of
Governors of the Company and is not to be quoted or referred to, in whole or
in part, in any document or used for any other purpose without the prior
written consent of Salomon Smith Barney Inc., except that it may be referred
to in, and attached as an exhibit to, the Proxy Statement/Prospectus to be
sent to Eligible Members, and copies of it may be provided to the Director.

Based upon and subject to the foregoing, it is our opinion as investment
bankers that, as of the date hereof, the exchange of the aggregate Membership
Interests for shares of Common Stock of the Holding Company pursuant to the
Plan is fair, from a financial point of view, to the Eligible Members of the
Company, as a group.

Very truly yours,

/s/ Salomon Smith Barney Inc.

Salomon Smith Barney Inc.

II-4
<PAGE>

PART II
INFORMATION NOT REQUIRED
IN PROSPECTUS

ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS. Under Delaware law, a
corporation may indemnify any person who was or is a party or is threatened
to be made a party to an action (other than an action by or in the right of
the corporation) by reason of his service as a director or officer of the
corporation, or his service, at the corporation's request, as a director,
officer, employee or agent of another corporation or other enterprise,
against expenses (including attorneys' fees) that are actually and reasonably
incurred by him ("Expenses"), and judgments, fines and amounts paid in
settlement that are actually and reasonably incurred by him, in connection
with the defense or settlement of such action, provided that he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was unlawful.
Although Delaware law permits a corporation to indemnify any person referred
to above against Expenses in connection with the defense or settlement of an
action by or in the right of the corporation, provided that he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests, if such person has been judged liable to the
corporation, indemnification is only permitted to the extent that the Court
of Chancery (or the court in which the action was brought) determines that,
despite the adjudication of liability, such person should be indemnified for
such Expenses. The Delaware General Corporation Law also provides for
mandatory indemnification of any director, officer, employee or agent against
Expenses to the extent such person has been successful in any proceeding
covered by the statute. In addition, the Delaware General Corporation Law
provides the general authorization of advancement of a director's or
officer's litigation expenses in lieu of requiring the authorization of such
advancement by the board of directors in specific cases, and that
indemnification and advancement of expenses provided by the statute shall not
be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement or otherwise.

Article Ninth of the Certificate of Incorporation of ISMIE Holdings Inc.
(the "Registrant") provides for the broad indemnification of the directors
and officers of the Registrant and for advancement of litigation expenses to
the fullest extent permitted by current Delaware law.

Article Seventh of the Certificate of Incorporation of the Registrant
eliminates the personal liability of a director to the Registrant or its
stockholders under certain circumstances, for monetary damages for breach of
fiduciary duty as a director.

112

<PAGE>

ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

A. EXHIBITS

EXHIBIT
NUMBER DOCUMENT DESCRIPTION
<S> <C>
2 Plan and Agreement of Merger by and among ISMIE Holdings Inc.,
ISMIE Indemnity Company, and Illinois State Medical Inter-
Insurance Exchange, dated May 5, 1999 (attached as Appendix I
to the Proxy Statement/Prospectus included as a part of this
Registration Statement).

3.1 Certificate of Incorporation.

3.2 Bylaws.

5 Opinion of Lord, Bissell & Brook.*

8 Opinion of Lord, Bissell & Brook regarding tax matters.*

10.1 1999 Long-Term Equity Incentive Plan.*

10.2 Excess of Loss Reinsurance Agreement, effective July 1, 1997 among
Illinois State Medical Inter-Insurance Exchange and the reinsurers
listed therein.*

10.3 First Excess Cession Reinsurance Agreement, effective July 1, 1997
among Illinois State Medical Inter-Insurance Exchange and the
reinsurers listed therein.*

10.4 Second Excess Cession Reinsurance Agreement, effective July 1,
1997 among Illinois State Medical Inter-Insurance Exchange and the
reinsurers listed therein.*

10.5 Physician's Business Practice Liability Quota Share Reinsurance
Agreement, effective July 1, 1997 among Illinois State Medical
Inter-Insurance Exchange and the reinsurers listed therein.*

10.6 Aggregate Stop Loss Reinsurance Contract, effective July 1, 1997
between Illinois State Medical Inter-Insurance Exchange and
Cologne Reinsurance Company (Dublin) Ltd.

10.7 Shared Services Agreement among the Illinois State Medical Inter-
Insurance Exchange, Illinois State Medical Services, Inc. and
Illinois State Medical Society.*

10.8 Lease dated October 14, 1996, by and between U.S. Equities Realty,
Inc., as agent for the Beneficiary of LaSalle National Bank, as
Trustee under Trust No. 106020 and Illinois State Medical Inter-
Insurance Exchange, as amended.*

10.9 Amended and Restated Employment Agreement dated January 20, 1999,
between Illinois State Medical Inter-Insurance Exchange and
Alexander R. Lerner.*

113

<PAGE>

EXHIBIT
NUMBER DOCUMENT DESCRIPTION
<S> <C>
10.10 Amended and Restated Employment Agreement dated January 20, 1999,
between Illinois State Medical Inter-Insurance Exchange and Donald
Udstuen.*

10.11 Amended and Restated Employment Agreement dated January 20, 1999,
between Illinois State Medical Inter-Insurance Exchange and
Jeffrey M. Holden*.

10.12 Employment Agreement dated April 21, 1999, between Illinois State
Medical Inter-Insurance Exchange and Saul Morse.*

10.13 Amended and Restated Employment Agreement dated January 20, 1999,
between Illinois State Medical Inter-Insurance Exchange and Eugene
J. Gross.*

11 Statement regarding computation of per share earnings, reference
is made to page F-24.

21 Subsidiaries of the registrant.

23.1 Consent of Ernst & Young LLP.

23.2 Consent of Lord, Bissell & Brook (to be included in Exhibit 5).

23.3 Consent of Salomon Smith Barney Inc. (included in Annex II to the
Proxy Statement/Prospectus included as a part of this Registration
Statement).

24 Power of Attorney (included in signature page).

27 Financial Data Schedule.

99.1 Form of Proxy Card.*

99.2 Form of Taxpayer Identification Card.*

99.3 Form of Record Card.*

</TABLE>

- ----------------
* To be filed by amendment

B. FINANCIAL STATEMENT SCHEDULES Schedules I, II, III, IV and VI have
been omitted as all required data is included in the Financial Statements and
corresponding footnotes. All other schedules for which provision is made in
the applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or are not
applicable and therefore have been omitted.

ITEM 22. UNDERTAKINGS.

(a) (1) The undersigned Registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder through
use of a prospectus which is a part of this Registration Statement, by any
person or party who is deemed to be an underwriter

114

<PAGE>

within the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.

(2) The Registrant undertakes that every prospectus (i) that is filed
pursuant to the paragraph immediately preceding, or (ii) that purports to
meet the requirements of section 10(a)(3) of the Securities Act and is used
in connection with an offering of securities subject to Rule 415 (Section
230.415 of this chapter), will be filed as a part of an amendment to the
Registration Statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under then
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

(c) The undersigned Registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Chicago,
State of Illinois, on May 14, 1999.

ISMIE HOLDINGS INC.

By: /s/ Alexander R. Lerner
-----------------------------------------
Alexander R. Lerner
President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

115

<PAGE>

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Alexander R. Lerner as his or her
attorney-in-fact, with full power of substitution and resubstitution, for him
or her in any and all capacities, to sign any or all amendments or
post-effective amendments to this Registration Statement or any Registration
Statement for the same offering that is effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, as amended, and to file the
same with exhibits thereto and other documents in connection therewith or in
connection with the registration of Common Stock under the Securities
Exchange Act of 1934, as amended, with the Securities and Exchange
Commission, granting unto each of such attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing requisite
and necessary in connection with such matters and hereby ratifying and
confirming all that each such attorney-in-fact, or his agent or substitutes,
may do or cause to be done by virtue hereof.

116

<PAGE>

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

Name Title Date
- ---- ----- ----
<S> <C> <C>

/s/ Harold L. Jensen, M.D.
- ---------------------------
Harold L. Jensen, M.D. Chairman of the Board May 14, 1999

/s/ Walter Whisler, M.D.
- ---------------------------
Walter Whisler, M.D. Vice Chairman of the Board May 14, 1999

/s/ Alexander R. Lerner
- ---------------------------
Alexander R. Lerner President, Chief Executive Officer May 14, 1999
and Director (principal executive
officer)

/s/ Donald A. Udstuen
- ---------------------------
Donald A. Udstuen Chief Operating Officer and May 14, 1999
Director

/s/ Eugene J. Gross
- ---------------------------
Eugene J. Gross Chief Financial Officer and May 14, 1999
Assistant Treasurer (principal
financial and accounting officer)

/s/ Irwin A. Smith, M.D.
- ---------------------------
Irwin A. Smith, M.D. Secretary and Director May 14, 1999

/s/ Peter A. Brusca, M.D.
- ---------------------------
Peter A. Brusca, M.D. Treasurer and Director May 14, 1999

/s/ Richard A. Geline, M.D.
- ---------------------------
Richard A. Geline, M.D. Director May 14, 1999

/s/ Henri S. Havdala, M.D.
- ---------------------------
Henri S. Havdala, M.D. Director May 14, 1999

/s/ Robert M. Reardon, M.D.
- ---------------------------
Robert M. Reardon, M.D. Director May 14, 1999

/s/ Jane Jackman, M.D.
- ---------------------------
Jane Jackman, M.D. Director May 14, 1999

</TABLE>

117

<PAGE>
EXHIBIT 3.1

CERTIFICATE OF INCORPORATION

ISMIE HOLDINGS INC.

FIRST. The name of the corporation is: ISMIE Holdings Inc. (the
"Corporation").

SECOND. The address of the Corporation's registered office in the
State of Delaware is 1209 Orange Street, in the City of Wilmington, County of
Newcastle (the "Registered Office"). The name of its registered agent at
such address is The Corporation Trust Company.

THIRD. The purpose of the Corporation is to engage in any lawful act
or activity for which a corporation may be organized under the General
Corporation Law of the State of Delaware as set forth in Title 8 of the
Delaware Code (the "GCL").

FOURTH. The total number of shares of all classes of capital stock
which the Corporation shall have authority to issue is 45,000,000 shares,
divided into two classes as follows:

5,000,000 shares of Preferred Stock of the par value of $0.01 per
share ("Preferred Stock"); and

40,000,000 shares of Common Stock of the par value of $0.01 per
share ("Common Stock").

The designations, powers, preferences and rights, and the
qualifications, limitations or restrictions of the above classes of stock are
as follows:

DIVISION I

Preferred Stock

1. SERIES. The board of directors is expressly authorized at any
time, and from time to time, to issue shares of Preferred Stock in one or
more series, and for such consideration as the board of directors may
determine, with such voting powers, full or limited, or without voting
powers, and with such designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions thereof, as shall be stated in the resolution or resolutions
providing for the issue thereof, and as are not stated in this Certificate of
Incorporation, or any amendment thereto. All shares of any one series shall
be of equal rank and identical in all respects.

<PAGE>

2. DIVIDENDS. No dividend shall be paid or declared on any particular
series of Preferred Stock unless dividends shall be paid or declared PRO RATA
on all shares of Preferred Stock at the time outstanding of each other series
which ranks equally as to dividends with such particular series.

3. VOTING POWER. Unless and except to the extent otherwise required
by law or provided in the resolution or resolutions of the board of directors
creating any series of Preferred Stock pursuant to this Division I, the
holders of the Preferred Stock shall have no voting power with respect to any
matter whatsoever. Subject to the protective conditions or restrictions of
any outstanding series of Preferred Stock, any amendment to this Certificate
of Incorporation shall increase or decrease the authorized capital stock of
any class or classes may be adopted by the affirmative vote of the holders of
a majority of the outstanding shares of the voting stock of the Corporation.

4. REDEMPTION. Shares of Preferred Stock redeemed, converted,
exchanged, purchased, retired or surrendered to the Corporation, or which
have been issued and reacquired in any manner, shall, upon compliance with
any applicable provisions of the GCL, have the status of authorized and
unissued shares of Preferred Stock and may be reissued by the board of
directors as part of the series of which they were originally a part or may
be reclassified into and reissued as part of a new series or as a part of any
other series, all subject to the protective conditions or restrictions of any
outstanding series of Preferred Stock.

DIVISION II

Common Stock

1. DIVIDENDS. Subject to the preferential dividend rights, if any,
applicable to shares of the Preferred Stock and subject to applicable
requirements, if any, with respect to the setting aside of sums for purchase,
retirement or sinking funds for the Preferred Stock, the holders of the
Common Stock shall be entitled to receive, to the extent permitted by law,
such dividends as may be declared from time to time by the board of directors.

2. LIQUIDATION. In the event of the voluntary or involuntary
liquidation, dissolution, distribution of assets or winding up of the
Corporation, after distribution in full of the preferential amounts, if any,
to be distributed to the holders of shares of the Preferred Stock, holders of
the Common Stock shall be entitled to receive all the remaining assets of the
Corporation of whatever kind available for distribution to stockholders,
ratably in proportion to the number of shares of Common Stock held by them
respectively.

3. VOTING RIGHTS. Except as may be otherwise required by law or this
Certificate of Incorporation, each holder of the Common Stock shall have one
vote in respect of each share of stock held by him or her of record on the
books of the Corporation on all matters voted upon by the stockholders.

<PAGE>

FIFTH. (1) Nominations of persons for election to the board of
directors of the Corporation and the proposal of business to be considered by
the stockholders may be made at any annual meeting of stockholders (a) by or
at the direction of the board of directors or (b) by any stockholder of
record of the Corporation who is entitled to vote at the meeting and who
complies with the notice procedures set forth in this Article FIFTH.

(2) For nominations or other business to be properly brought by a
stockholder at an annual meeting of stockholders pursuant to clause (b) of
paragraph (1) of this Article Fifth, the stockholder must have given timely
advance notice thereof in writing to the Secretary of the Corporation and
must be a stockholder of record at the time of the delivery of such notice.
To be timely, a stockholder's notice shall be delivered to the Secretary at
the principal executive offices of the Corporation not less than sixty (60)
days nor more than ninety (90) days prior to the first anniversary of the
preceding year's annual meeting; provided, further, in the event that the
date of the annual meeting is advanced by more than thirty (30) days or
delayed by more than sixty (60) days from such anniversary date, notice by
the stockholder to be timely must be so delivered not earlier than the 90th
day prior to such annual meeting and not later than the close of business on
the later of the 60th day prior to such annual meeting or the 10th day
following the day on which public announcement of the date of such meeting is
first made.

(3) Such stockholder's notice shall set forth (a) as to each person
whom the stockholder proposes to nominate for election or reelection as a
director (i) the name, age, business address and residence address of each
such person, (ii) the principal occupation or employment of such person,
(iii) the class and number of shares of the Corporation which are
beneficially owned by each such person and (iv) such other information
relating to such person as would be required to be disclosed by the federal
securities laws and the rules and regulations promulgated thereunder in
respect of an individual nominated as a director of the Corporation and for
whom proxies are solicited by the board of directors of the Corporation
(including, without limitation, such person's written consent to being named
in the proxy statement as a nominee and to serving as a director if elected);
(b) as to any other business that the stockholder proposes to bring before
the meeting, a brief description of the business desired to be brought before
the meeting and the reasons for conducting such business at the meeting; and
(c) as to the stockholder giving the notice and the beneficial owner, if any,
on whose behalf the nomination or proposal is made (i) the name and address
of such stockholder, as they appear on the Corporation's books, and of such
beneficial owner, (ii) the class and number of shares of the Corporation
which are owned beneficially and of record by such stockholder and such
beneficial owner and (iii) a description of all arrangements or
understandings between such stockholder or beneficial owner and any other
person or persons (including their names) in connection with such nomination
or business and any material interest of such stockholder or beneficial owner
in such nomination or business.

(4) Only those persons who are nominated in accordance with the
procedures set forth in this Article FIFTH shall be eligible to serve as
directors and only such business shall be conducted at a meeting of
stockholders as shall have been brought before the meeting in accordance with
the procedures set forth in this Article FIFTH. The presiding officer of the
meeting shall have the power and duty to determine whether a nomination or
any business proposed to be brought before the meeting was made in accordance
with the procedures set forth

<PAGE>

in this Article FIFTH and, if any proposed nomination or business is not in
compliance with this Article FIFTH, to declare that such defective proposed
business or nomination shall be disregarded.

(5) For the purposes of this Article FIFTH, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or a comparable national news service or in a document
publicly filed by the Corporation with the Securities and Exchange Commission
pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act.

SIXTH. The name and mailing address of the incorporator are as
follows: Saul Morse, Twenty North Michigan Avenue, Suite 700, Chicago,
Illinois

SEVENTH. The following provisions are inserted for the management of
the business and the conduct of the affairs of the Corporation, and for
further definition, limitation and regulation of the powers of the
Corporation and of its directors and stockholders:

(1) The business and affairs of the Corporation shall be managed by or
under the direction of the board of directors.

(2) The directors shall have concurrent power with the stockholders to
make, alter, amend, change, add to or repeal the bylaws of the Corporation.

(3) The number of directors of the Corporation shall be not less than
three and not more than fifteen, the exact number of directors to be
determined from time to time solely by resolution adopted by a majority of
the board of directors.

(4) The directors of the Corporation, other than directors elected by
one or more series of Preferred Stock, shall be divided into three classes,
designated Class I, Class II and Class III. Each class shall consist, as
nearly as may be possible, of one-third of the total number of directors
(other than directors elected by the holders of one or more series of
Preferred Stock) constituting the entire Board of Directors. Each director
(other than directors elected by the holders of one or more series of
Preferred Stock) shall serve for a term ending on the date of the third
annual meeting of stockholders next following the annual meeting at which
such director was elected, provided that directors initially designated as
Class I directors shall serve for a term ending on the date of the 2000
annual meeting, directors initially designated as Class II directors shall
serve for a term ending on the date of the 2001 annual meeting and directors
initially designated as Class III directors shall serve for a term ending on
the date of the 2002 annual meeting. Notwithstanding the foregoing, each
director shall hold office until such director's successor shall have been
duly elected and qualified or until such director's earlier death,
resignation, disqualification or removal. If the authorized number of
directors (other than directors elected by the holders of one or more series
of Preferred Stock and other than directors to be elected at an annual
meeting of stockholders) is changed, any increase or decrease shall be
apportioned among the classes so as to maintain the number of directors in
each class as nearly equal as possible, but in no event will a decrease in
the number of directors shorten the term of any incumbent director.
Vacancies on the Board of Directors resulting from death, resignation,

<PAGE>

removal or otherwise and newly created directorships resulting from any
increase in the number of directors may be filled (other than directors
elected by the holders of one or more series of Preferred Stock) solely by a
majority of the directors then in office (although less than a quorum) or by
a sole remaining director, and each director so elected shall hold office for
a term that shall coincide with the remaining term of the class to which such
director shall have been elected. Whenever the holders of one or more series
of Preferred Stock shall have the right, voting separately as a series, to
elect directors, the nomination, election, term of office, filling of
vacancies, removal and other features of such directorships shall not be
governed by this Article SEVENTH unless otherwise provided for in the
certificate of designation for such series.

(5) No director (other than directors elected by the holders of one or
more series of Preferred Stock) may be removed from office by the
stockholders except for cause and, in addition to any other vote required by
law, upon the affirmative vote of the holders of not less than 66 2/3% of the
outstanding shares of the voting stock of the Corporation.

(6) Any action required or permitted to be taken at any annual or
special meeting of stockholders may be taken only upon the vote of
stockholders at an annual or special meeting duly noticed and called in
accordance with the GCL, and may not be taken by written consent of
stockholders without a meeting.

(7) Special meetings of stockholders may be called at any time by the
Chairman of the Board and shall be called by the President or the Secretary
of the Corporation at the request in writing of a majority of the members of
the whole Board of Directors. Except as otherwise prescribed by the GCL, a
special meeting of the stockholders may not be called by any other person.
Notwithstanding the foregoing, whenever holders of one or more series of
Preferred Stock shall have the right, voting separately as a series, to elect
directors, such holders may call special meetings of such holders pursuant to
the certificate of designation for such series.

(8) No director shall be personally liable to the Corporation or any of
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) pursuant to Section 174 of the GCL or (iv) for any
transaction from which the director derived an improper personal benefit. If
the GCL is amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of a
director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the GCL as so amended. Any repeal or modification of
this Article SEVENTH by the stockholders of the Corporation shall not
adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification with respect to acts or
omissions occurring prior to such repeal or modification.

(9) In addition to the powers and authority herein or by statute
expressly conferred upon them, the directors are hereby empowered to exercise
all such powers and do all such acts and things as may be exercised or done
by the Corporation, subject, nevertheless, to the provisions of the GCL, this
Certificate of Incorporation and any bylaws adopted by the stockholders;
provided,

<PAGE>

however, that no bylaws adopted by the stockholders shall invalidate any
prior act of the directors which would have been valid if such bylaws had not
been adopted.

EIGHTH. Meetings of stockholders may be held within or without the
State of Delaware, as the bylaws may provide. The books of the Corporation
may be kept (subject to any provision contained in the GCL) outside of the
State of Delaware at such place or places as may be designated from time to
time by the board of directors or in the bylaws of the Corporation.

NINTH. (1) The Corporation shall indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the Corporation)
by reason of the fact that he or she is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by him or her in connection with such action, suit or
proceeding to the fullest extent authorized by the GCL, in each case as the
same exists or may hereafter be amended.

(2) The Corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a judgment in
its favor by reason of the fact that he or she is or was a director or
officer of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against, expenses
(including attorneys' fees) and amounts paid in settlement actually and
reasonably incurred by him or her in connection with the defense or
settlement of such action or suit to the fullest extent authorized by the
GCL, in each case as the same exists or may hereafter be amended.

(3) To the extent that any person referred to in paragraphs (1) and (2)
of this Article NINTH has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to therein or in defense
of any claim, issue or matter therein, he or she shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him
or her in connection therewith.

(4) Any indemnification under paragraphs (1) and (2) of this Article
NINTH (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of
the director or officer is proper in the circumstances because he or she has
met the applicable standard of conduct for indemnification set forth in
subsection (a) or (b) of Section 145 of the GCL as the same may exist or may
hereafter be amended. Such determination shall be made (a) by the board of
directors by a majority vote of a quorum (as defined in the bylaws of the
Corporation) consisting of directors who were not parties to such action,
suit or proceeding, or (b) if such a quorum is not obtainable, or, even if
obtainable a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion or (c) by the stockholders.

<PAGE>

(5) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of the director or officer to repay such amount
if it shall ultimately be determined that he or she is not entitled to be
indemnified by the Corporation as provided in this Article NINTH.

(6) The Corporation may, to the extent authorized from time to time by
the board of directors, grant rights to indemnification and to the
advancement of expenses, to any employee or agent of the Corporation or its
subsidiaries, or to any employee or agent of any entity providing contractual
services for the Corporation or its subsidiaries, to the fullest extent of
the provisions of this Article NINTH with respect to the indemnification and
advancement of expenses of directors and officers of the Corporation.

(7) The indemnification and advancement of expenses provided by or
granted pursuant to the other subsections of this Article NINTH shall not be
deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under any statute, by-law,
agreement, vote of stockholders or disinterested directors or otherwise, both
as to action in his or her official capacity and as to action in another
capacity while holding such office.

(8) The Corporation shall have power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent
of the Corporation, or is or was serving at the request of the Corporation as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against any liability asserted
against him or her and incurred by him or her in any such capacity, or
arising out of his or her status as such, whether or not the Corporation
would have the power to indemnify him or her against such liability under the
provisions of this Article.

(9) For the purposes of this Article NINTH, references to the
"Corporation" shall include in addition to the resulting Corporation, any
constituent corporation (including any constituent of a constituent) absorbed
in a consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers, and
employees or agents, so that any person who is or was a director, officer,
employee or agent of such constituent corporation, or is or was serving at
the request of such constituent corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under the provisions of this
Article NINTH with respect to the resulting or surviving corporation as he or
she would have with respect to such constituent corporation if its separate
existence had continued.

(10) For purposes of this Article NINTH, references to "other
enterprises" shall include employee benefit plans; references to "fines"
shall include any excise taxes assessed on a person with respect to any
employee benefit plan; and references to "serving at the request of the
Corporation" shall include any service as a director, officer, employee or
agent of the Corporation which imposes duties on, or involves services by,
such director, officer, employee or

<PAGE>

agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he or she
reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" as referred to
in this paragraph.

(11) The indemnification and advancement of expenses provided by, or
granted pursuant to this Article NINTH shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person. Any repeal or
modification of this Article NINTH shall not adversely affect any right to
indemnification or advancement of expenses of any present or former director,
officer, employee or agent of the Corporation existing at the time of such
repeal or modification.

(12) If this Article NINTH or any portion hereof is invalidated by any
court of competent jurisdiction, then the Corporation shall nevertheless
provide such indemnification and advancement of expenses as would otherwise
be permitted under any portion of this Article NINTH that shall not have been
invalidated.

TENTH. Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a
summary way of this Corporation or of any creditor or stockholder thereof, or
on the application of any receiver or receivers appointed for this
Corporation under the provisions of Section 291 of the GCL or on the
application of trustees in dissolution or of any receiver or receivers
appointed for this Corporation under the provisions of Section 279 of the
GCL, order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority
in number representing three-fourths in value of the creditors or class of
creditors, and/or the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and
to any reorganization of this Corporation as a consequence of such compromise
or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said
application has been made, be binding on all the creditors or class of
creditors, and/or on all the stockholders or class of stockholders, of this
Corporation, as the case may be, and also on this Corporation.

ELEVENTH. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.

<PAGE>

I, the undersigned, being the sole incorporator hereinbefore named, for
the purpose of forming a Corporation pursuant to the GCL, do make this
certificate, hereby declaring and certifying that the facts herein stated are
true and accordingly have hereunto set my hand this 1st day of April, 1999.

/s/ Saul Morse
------------------------------
Incorporator

<PAGE>

EXHIBIT 3.2

BYLAWS

ISMIE HOLDINGS INC.

ARTICLE I

OFFICES

SECTION 1. The registered office shall be in the City of Wilmington,
County of Newcastle, State of Delaware.

SECTION 2. The corporation may also have offices at such other places
both within and without the State of Delaware as the board of directors may
from time to time determine or the business of the corporation may require.

ARTICLE II

MEETINGS OF STOCKHOLDERS

SECTION 1. All meetings of the stockholders for the election of
directors shall be held at such place, either within or without the State of
Delaware, as shall be designated from time to time by the board of directors
and stated in the notice of the meeting. Meetings of stockholders for any
other purpose may be held at such time and place, within or without the State
of Delaware, as shall be stated in the notice of the meeting or in a duly
executed waiver of notice thereof.

SECTION 2. Annual meetings of stockholders shall be held on the third
Wednesday of April, if not a legal holiday, and if a legal holiday, then on
the next secular day following, or on such other date as shall be designated
from time to time by the board of directors and stated in the notice of the
meeting. At the annual meeting, the stockholders shall elect by a plurality
vote by written ballot a board of directors, and transact such other business
as may properly be brought before the meeting.

<PAGE>

SECTION 3. Written notice of the annual meeting stating the place, date
and hour of the meeting shall be given to each stockholder entitled to vote
at such meeting not fewer than ten nor more than sixty days before the date
of the meeting.

SECTION 4. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten days prior to the meeting, either at a place within
the city where the meeting is to be held, which place shall be specified in
the notice of the meeting, or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time
and place of the meeting during the whole time thereof, and may be inspected
by any stockholder who is present.

SECTION 5. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may be called at any time by the chairman of the board and
shall be called by the president or the secretary of the corporation at the
request in writing of a majority of the members of the whole board of
directors. Such request shall state the purpose or purposes of the proposed
meeting. The business transacted at any special meeting of stockholders
shall be limited to the purpose or purposes for which the meeting is called
which are stated in the corporation's notice of the meeting pursuant to
Article II, Section 6 of these bylaws.

SECTION 6. Written notice of a special meeting stating the place, date
and hour of the meeting and the purpose or purposes for which the meeting is
called, shall be given not fewer than ten nor more than sixty days before the
date of the meeting, to each stockholder entitled to vote at such meeting.

SECTION 7. The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business, except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present
or represented at any meeting of the stockholders, the stockholders entitled
to vote thereat, present in person or represented by proxy, shall have power
to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented.
At such adjourned meeting at which a quorum shall be present or represented,
any business may be transacted at the meeting as originally noticed. If the
adjournment is for more than thirty days, or if after

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<PAGE>

the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.

SECTION 8. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power, present in person or
represented by proxy, shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the General
Corporation Law of the State of Delaware or of the certificate of
incorporation, a different vote is required in which case such express
provision shall govern and control the decision of such question.

SECTION 9. At each meeting of the stockholders, each stockholder having
the right to vote may vote in person or may authorize another person or
persons to act for him by proxy appointed by an instrument in writing
subscribed by such stockholder and bearing a date not more than three years
prior to said meeting, unless said instrument provides for a longer period.
All proxies must be filed with the secretary of the corporation at the
beginning of each meeting in order to be counted in any vote at the meeting.
Each stockholder shall have one vote for each share of common stock having
voting power, registered in his name on the books of the corporation on the
record date set by the board of directors as provided in Section 10 of this
Article II.

SECTION 10. In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the board of directors may fix, in
advance, a record date, which shall not be more than sixty nor fewer than ten
days before the date of such meeting, nor more than sixty days prior to any
other action. A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of
the meeting; provided, however, that the board of directors may fix a new
record date for the adjourned meeting.

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<PAGE>

ARTICLE III

DIRECTORS

SECTION 1. The number of directors (other than directors elected by the
holders of one or more series of Preferred Stock) which shall constitute the
whole board shall be fixed from time to time by resolution adopted by the
affirmative vote of a majority of the entire board of directors, except that
the number of directors shall not be less than three nor more than fifteen.
Such directors shall be elected at the annual meeting of the stockholders,
except as provided in Section 2 of this Article, and shall hold office until
their successors are elected and qualified or until their earlier resignation
or removal. Directors need not be stockholders.

SECTION 2. Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled (other than
directors elected by the holders of one or more series of Preferred Stock) by
a majority of the directors then in office, though less than a quorum, or by
a sole remaining director, and the directors so chosen shall hold office
until the next annual election and until their successors are duly elected
and shall qualify, unless sooner displaced. If there are no directors in
office, then an election of directors may be held in the manner provided by
statute.

SECTION 3. The business of the corporation shall be managed by its
board of directors which may exercise all such powers of the corporation and
do all such lawful acts and things as are not by statute or by the
certificate of incorporation or by these bylaws directed or required to be
exercised or done by the stockholders.

MEETINGS OF THE BOARD OF DIRECTORS

SECTION 4. The board of directors of the corporation may hold meetings,
both regular and special, either within or without the State of Delaware.

SECTION 5. The first meeting of each newly elected board of directors
shall be held immediately following the adjournment of the annual meeting of
the stockholders at the same place as such annual meeting, and no notice of
such meeting shall be necessary to the newly elected directors in order
legally to constitute the meeting, provided a quorum shall be present. In
the event such meeting is not held at such time and place, the meeting may be
held at such time and place as shall be specified in a notice given as
hereinafter

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<PAGE>

provided for special meetings of the board of directors, or as shall be
specified in a written waiver signed by all of the directors.

SECTION 6. Regular meetings of the board of directors may be held
without notice at such time and at such place as shall from time to time be
determined by the board.

SECTION 7. Special meetings of the board may be called by the chairman
of the board or the president on at least two (2) days' notice to each
director, either personally or by mail or telegram. Special meetings shall
be called by the chairman of the board, the president or the secretary in
like manner and on like notice at the written request of two (2) or more
directors stating the purpose or purposes for which such meeting is
requested. A meeting of the board of directors or any committee thereof by
conference telephone or similar communication equipment by means of which all
of the members of the board or committee participating may hear one another
shall not require notice if a quorum of the board or committee are
participating.

SECTION 8. At all meetings of the board, a majority of the then duly
elected directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which
there is a quorum shall be the act of the board of directors, except as may
be otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum shall not be present at any meeting of the board
of directors, the directors present at such meeting may adjourn the meeting
from time to time, without notice other than announcement at the meeting,
until a quorum shall be present.

SECTION 9. Any action required or permitted to be taken at any meeting
of the board of directors or of any committee thereof may be taken without a
meeting, if all members of the board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committee.

COMMITTEES OF DIRECTORS

SECTION 10. The board of directors may, by resolution passed by a
majority of the whole board, designate one or more committees, each committee
to consist of one or more of the directors of the corporation. The board may
designate one or more directors as alternate members of any committee, who
may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified
from voting, whether or not he or they constitute a quorum, may

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<PAGE>

unanimously appoint another member of the board of directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the board of
directors, shall have and may exercise all the powers and authority of the
board of directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to
all papers which may require it; but no such committee shall have the power
or authority in reference to amending the certificate of incorporation,
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a dissolution or amending
the bylaws of the corporation; and, unless the resolution or the certificate
of incorporation expressly so provide, no such committee shall have the power
or authority to declare a dividend or to authorize the issuance of stock.
Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the board of directors.

SECTION 11. Each committee shall keep regular minutes of its meetings
and shall file such minutes and all written consents executed by its members
with the secretary of the corporation.

COMPENSATION OF DIRECTORS

SECTION 12. In the discretion of the board of directors, the directors
may be paid their expenses, if any, of attendance at each meeting of the
board of directors and may be paid a fixed sum for attendance at each meeting
of the board of directors or a stated salary as director. No such payment
shall preclude any director from serving the corporation in any other
capacity and receiving compensation therefor. Members of special or standing
committees may be allowed similar compensation for attending committee
meetings.

ARTICLE IV

NOTICES

SECTION 1. Whenever, under the provisions of the statutes or of the
certificate of incorporation or of these bylaws, notice is required to be
given to any director or stockholder, it shall not be construed to mean
personal notice, but such notice may be given in writing, by mail, addressed
to such director or stockholder, at his or her address as it appears on the
records of the corporation, with postage thereon prepaid, and such

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<PAGE>

notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. Notice to directors may also be given
by telegram or facsimile.

SECTION 2. Whenever any notice is required to be given under the
provisions of the statutes or of the certificate of incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled
to said notice, whether before or after the time stated therein, shall be
deemed equivalent thereto.

ARTICLE V

OFFICERS

SECTION 1. The initial officers of the corporation shall be elected by
the board of directors and shall be a chairman of the board, a vice chairman
of the board, a president, a chief operating officer, a chief administrative
officer, a treasurer and a secretary. The board of directors may also elect
one or more vice presidents, assistant vice-presidents, assistant secretaries
and assistant treasurers. Any number of offices may be held by the same
person, unless the certificate of incorporation or these bylaws otherwise
provide. The chairman and vice chairman of the board of directors shall be
chosen from the members of the board of directors. The board of directors
may also designate persons as officers of divisions of the corporation, but
such persons shall not be officers of the corporation.

SECTION 2. The board of directors may appoint such other officers and
agents as it shall deem necessary, who shall hold their offices for such
terms and shall exercise such powers and perform such duties as shall be
provided for in these bylaws and as determined from time to time by the board.

SECTION 3. The salaries of all officers of the corporation shall be
fixed or approved from time to time by or under the direction of the board of
directors.

SECTION 4. The officers of the corporation shall hold office until the
next annual meeting of the board of directors, until their successors are
elected and qualified or until their earlier resignation or removal. Any
officer elected or appointed by the board of directors may be removed at any
time by the affirmative vote of a majority of the board of directors. Any
vacancy occurring in any office of the corporation shall be filled by the
board of directors.

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<PAGE>

THE CHAIRMAN OF THE BOARD

SECTION 5. The chairman of the board of directors shall preside at all
meetings of the stockholders and of the board of directors of the corporation
and shall perform such other duties as may from time to time be prescribed by
the board of directors or these bylaws.

THE VICE CHAIRMAN OF THE BOARD

SECTION 6. In the absence or disability of the chairman of the board,
the vice chairman of the board shall preside at meetings of the stockholders
and of the board of directors of the corporation and shall perform the duties
and exercise the powers of the chairman of the board. The vice chairman of
the board shall perform such duties and have such powers as the chairman of
the board or the board of directors may from time to time prescribe.

THE PRESIDENT

SECTION 7. The president shall be the chief executive officer of the
corporation. He or she shall, under the general direction and supervision of
the board of directors, perform such duties as are customarily incident to
the office of president and shall have general and active supervision over
the business affairs of the corporation and its employees. He or she shall
execute bonds, mortgages and other contracts requiring a seal, under the seal
of the corporation, except where required or permitted by law to be otherwise
signed and executed and except where the signing and executing thereof shall
be expressly delegated by the board of directors to some other officer or
agent of the corporation. He or she shall perform such other duties as may
from time to time be prescribed by the board of directors or these bylaws.
In the absence or disability of the chairman of the board and the vice
chairman of the board, he or she shall perform the duties and exercise the
powers of the chairman of the board.

CHIEF OPERATING OFFICER

SECTION 8. The chief operating officer of the corporation shall be in
general and active charge of the day-to-day operations and business of the
corporation. The chief operating officer shall report to the president and
chief executive officer, unless otherwise expressly provided by the board of
directors. In the absence or disability of the president, the chief
operating officer shall perform the duties and exercise the powers of the
president, unless otherwise provided by the board.

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<PAGE>

CHIEF ADMINISTRATIVE OFFICER

SECTION 9. The chief administrative officer shall be in general and
active charge of the administrative functions of the corporation. The chief
administrative officer shall report to the president and chief executive
officer, unless otherwise expressly provided by the board of directors.

THE VICE-PRESIDENTS

SECTION 10. The vice-presidents, if any are designated by the board of
directors, shall perform such duties and have such powers as the president,
subject to the general direction and supervision of the board of directors,
may from time to time prescribe. A vice-president may execute contracts on
behalf of the corporation pertaining to the normal course of his or her
duties.

THE SECRETARY AND ASSISTANT SECRETARY

SECTION 11. The secretary shall attend all meetings of the board of
directors and all meetings of the stockholders and record all the proceedings
of the meetings of the corporation and of the board of directors in a book to
be kept for that purpose and shall perform like duties for the standing
committees when required. He or she shall give, or cause to be given, notice
of all meetings of the stockholders and special meetings of the board of
directors, and shall perform such other duties as may be prescribed by the
board of directors or the president, under whose supervision he or she shall
be. He or she shall have custody of the corporate seal of the corporation
and he or she, or an assistant secretary, shall have authority to affix the
same to any instrument requiring it and when so affixed, it may be attested
by his or her signature or by the signature of such assistant secretary.

The board of directors may give general authority to any other officer
to affix the seal of the corporation and to attest the affixing by his or her
signature.

SECTION 12. The assistant secretary, or if there be more than one, the
assistant secretaries in the order determined by the board of directors (or
if there be no such determination, then in the order of their election),
shall, in the absence of the secretary or in the event of his or her
inability or refusal to act, perform the duties and exercise the powers of
the secretary and shall perform such other duties and have such other powers
as the president, subject to the general direction and supervision of the
board of directors, may from time to time prescribe.

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<PAGE>

THE TREASURER AND ASSISTANT TREASURERS

SECTION 13. The treasurer shall have the custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all
moneys and other valuable effects in the name and to the credit of the
corporation in such depositories as may be designated by the board of
directors. He or she shall disburse the funds of the corporation as may be
ordered by the president or board of directors, taking proper vouchers for
such disbursements, and shall render to the president and the board of
directors, at its regular meetings, or when the president or board of
directors so requires, an account of all of his or her transactions as
treasurer and of the financial condition of the corporation. If required by
the board of directors, he or she shall give the corporation a bond (which
shall be renewed every six years), in such sum and with such surety or
sureties as shall be satisfactory to the board of directors, for the faithful
performance of the duties of his or her office and for the restoration to the
corporation, in case of his or her death, resignation, retirement or removal
from office, of all books, papers, vouchers, money and other property of
whatever kind in his or her possession or under his or her control belonging
to the corporation.

SECTION 14. The assistant treasurer, or if there shall be more than
one, the assistant treasurers in the order determined by the board of
directors (or if there be no such determination, then in the order of their
election), shall, in the absence of the treasurer or in the event of his or
her inability or refusal to act, perform the duties and exercise the powers
of the treasurer and shall perform such other duties and have such other
powers as the president, subject to the general direction and supervision of
the board of directors, may from time to time prescribe.

ARTICLE VI

CERTIFICATES OF STOCK

SECTION 1. Every holder of stock in the corporation shall be entitled
to have a certificate, signed by or in the name of the corporation by (a) the
chairman of the board, the president or a vice-president and (b) the
treasurer or an assistant treasurer, the secretary or an assistant secretary
of the corporation certifying the number of shares owned in the corporation.
If the corporation shall be authorized to issue more than one class of stock
or more than one series of any class, the designations, preferences and
relative, participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions
of such preferences and/or rights

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shall be set forth in full or summarized on the face or back of the
certificate which the corporation shall issue to represent such class or
series of stock; provided that, except as otherwise provided in Section 202
of the General Corporation Law of Delaware, in lieu of the foregoing
requirements, there may be set forth on the face or back of the certificate
which the corporation shall issue to represent such class or series of stock,
a statement that the corporation will furnish without charge to each
stockholder who so requests, the designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.

SECTION 2. Where a certificate is countersigned (a) by a transfer agent
other than the corporation or its employee or (b) by a registrar other than
the corporation or its employee, any other signatures on the certificate may
be facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the corporation with the same
effect as if he or she were such officer, transfer agent or registrar at the
date of issue.

SECTION 3. Subject to the foregoing, certificates for stock of the
corporation shall be in such form as the board of directors may from time to
time prescribe.

LOST CERTIFICATES

SECTION 4. The board of directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the board of
directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to advertise the same in such
manner as it shall require and/or to give the corporation a bond in such sum
as it may direct as indemnity against any claim that may be made against the
corporation or its transfer agent or registrar with respect to the
certificate alleged to have been lost, stolen or destroyed.

TRANSFERS OF STOCK

SECTION 5. Upon surrender to the corporation or the transfer agent of
the corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, it shall
be the duty of the corporation to

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issue a new certificate to the person entitled thereto, cancel the old
certificate and record the transaction upon its books.

REGISTERED STOCKHOLDERS

SECTION 6. The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends and to vote as such owner and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and
shall not be bound to recognize any equitable or other claim to or interest
in such share or shares on the part of any other person, whether or not it
shall have express or other notice thereof, except as otherwise provided by
the laws of Delaware.

ARTICLE VII

CONFLICTS OF INTEREST

SECTION 1. No contract or transaction between the corporation and one
or more of its directors or officers, or between the corporation and any
other corporation, partnership, association, or other organization in which
one or more of its directors or officers are directors or officers, or have a
financial interest, shall be void or voidable solely for this reason, or
solely because the director or officer is present at or participates in the
meeting of the board or committee thereof which authorizes the contract or
transaction, or solely because his, her or their votes are counted for such
purpose, if:

(1) The material facts as to the relationship or interest and as to
the contract or transaction are disclosed or are known to the board of
directors or the committee, and the board or committee in good faith
authorizes the contract or transaction by the affirmative vote of a
majority of the disinterested directors, even though the disinterested
directors be less than a quorum; or

(2) The material facts as to the relationship or interest and as to
the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction
is specifically approved in good faith by vote of the stockholders; or

(3) The contract or transaction is fair as to the corporation as of
the time it is authorized, approved or ratified, by the board of
directors, a committee thereof or the stockholders.

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SECTION 2. Common or interested directors may be counted in determining
the presence of a quorum at a meeting of the board of directors or of a
committee which authorizes the contract or transaction.

ARTICLE VIII

GENERAL PROVISIONS

DIVIDENDS

SECTION 1. Dividends upon the capital stock of the corporation, subject
to the provisions of the certificate of incorporation, if any, may be
declared by the board of directors at any regular or special meeting,
pursuant to law. Dividends may be paid in cash, in property or in shares of
the capital stock, subject to the provisions of the certificate of
incorporation.

SECTION 2. Before payment of any dividend, there may be set aside out
of any funds of the corporation available for dividends such sum or sums as
the directors from time to time, in their absolute discretion, think proper
as a reserve or reserves to meet contingencies, or for equalizing dividends,
or for repairing or maintaining any property of the corporation, or for such
other purpose as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.

CHECKS

SECTION 3. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons
as the board of directors may from time to time designate.

FISCAL YEAR

SECTION 4. The fiscal year of the corporation shall be determined by
resolution of the board of directors.

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SEAL

SECTION 5. The corporate seal shall have inscribed thereon the name of
the corporation and the words "Corporate Seal, Delaware." The seal may be
used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise.

ARTICLE IX

AMENDMENTS

SECTION 1. These bylaws may be altered, amended or repealed or new
bylaws may be adopted by the stockholders or by the board of directors, at
any regular meeting of the stockholders or of the board of directors or at
any special meeting of the stockholders or of the board of directors if
notice of such alteration, amendment, repeal or adoption of new bylaws be
contained in the notice of such special meeting.

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EXHIBIT 10.6

AGGREGATE STOP LOSS REINSURANCE CONTRACT

BETWEEN

ILLINOIS STATE MEDICAL INTER-INSURANCE EXCHANGE
CHICAGO, ILLINOIS
(HEREINAFTER REFERRED TO AS THE "COMPANY")

COLOGNE REINSURANCE COMPANY (DUBLIN) LTD.
Dublin, Ireland
(hereinafter referred to as the "Reinsurer")

ARTICLE I- CLASS OF BUSINESS REINSURED

A. By this Contract the Company obligates itself to cede to the Reinsurer and
the Reinsurer obligates itself to accept reinsurance of the Company's Net
Liability under policies, contracts and binders of insurance (hereinafter
called "policies") in force at the inception of this Contract, or issued or
renewed during the term of this Contract and classified by the Company as
Medical Malpractice business. The Company shall be the sole judge of what
constitutes Medical Malpractice business.

B. "Net Liability" as used herein is defined as the Company's gross liability
for loss and loss adjustment expense remaining after cessions to excess
reinsurers whether or not such reinsurance is collectible, or the first
$1,000,000 of the Company's gross liability with loss adjustment expense
limited proportionately to the first $1,000,000 of the Company's gross
liability in respect of each Loss Event (except for Loss Events involving
any Extended Reporting Endorsements issued prior to July 1, 1995)
regardless of the number of policies or individual claims involved in such
Loss Event, whichever is the lesser.

C. The liability of the Reinsurer with respect to each cession hereunder shall
commence obligatorily and simultaneously with that of the Company, subject
to the terms, conditions and limitations hereinafter set forth.

ARTICLE II- TERM

A. This Contract shall cover Loss Events during the 12-month term beginning
July 1, 1997 where date of loss of such Loss Event is on or after July 1,
1997.

In the event this Contract is not renewed, the Contract shall expire on a
cut-off basis, and the Reinsurer shall not be liable for any Loss Event
occurring on or after the expiration date, except for any Loss Events
involving in force extended reporting endorsements. Any extended reporting
endorsements (except for those issued prior to July 1, 1995) in

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force at the expiration date of this Contract shall run off until their
natural expiration dates not exceeding eight years from the expiration date
of this Contract.

Notwithstanding the foregoing, the parties to this Agreement recognize that
a Loss Event may involve policies covered by this Contract, as well as
policies not covered hereunder but only by reason of having been written by
the Company after the nonrenewal of this Agreement. In such a case, the
Reinsurer'slimit of liability for the Loss Event will be limited to those
policies covered by this Contract.

B. By mutual agreement of the Company and the Reinsurer, the Reinsurer shall
have no liability on or after a date mutually agreed, and the Reinsurer
shall return to the Company the plan assets and liabilities calculated in
accordance with the provisions of Article XII, Return of Plan Assets and
Liabilities, and in so doing the Reinsurer shall be deemed to have returned
the ceded outstanding case loss and outstanding loss adjustment expense
reserves as of the effective date. Upon such return, the Reinsurer shall
have no further liability to make payments of any kind or amount or for any
reason to the Company under the Contract.

C. The Reinsurer may terminate this Contract by not less than 90 days prior
notice by certified mail for non-payment of premium when due. Non-payment
status shall be entered whenever balances owing to the Reinsurer by the
Company are not received in accordance with the provisions of Article XI,
Reports and Remittances. In such case, the Contract shall be deemed to have
been terminated by the Company at that time when such premium was due to
have been paid by the Company to the Reinsurer, and in such instance the
Company shall be deemed to have elected, pursuant to paragraph (B) of this
Article, that the Reinsurer shall have no liability after the effective
date of termination.

ARTICLE III - TERRITORY

This Contract shall only apply to policies issued to insureds domiciled in the
State of Illinois; but this limitation shall not apply to losses if the
Company's policies provide coverage outside the aforesaid territorial limit, and
coverage under this Contract shall follow that of the Company's policies with
respect to territory.

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ARTICLE IV - EXCLUSIONS

This Contract does not apply to and specifically excludes the following:

A. Interests which at time of loss or damage are on shore, in respect of any
loss or damage that is occasioned by war, invasion, hostilities, acts of
foreign enemies, civil war, rebellion, insurrection, military or usurped
power, or martial law or confiscation by order of any government or public
authority. This War Exclusion Clause shall not, however, apply to interests
which at time of loss or damage are within the territorial limits of the
United States of America (comprising the fifty states of the Union, the
District of Columbia, and including bridges between the United States of
America and Mexico provided they are under United States ownership),
Canada, St. Pierre and Miquelon, provided such interests are insured under
policies containing a standard war or hostilities or warlike operations
exclusion clause.

B. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause -
Liability -Reinsurance" attached to and forming part of this Contract.

C. All liability of the Company arising by contract, operation of law, or
otherwise from its participation or membership, whether voluntary or
involuntary, in any insolvency fund. "Insolvency fund" includes any
guarantee fund, insolvency fund, plan, pool, association, fund or other
arrangement, howsoever denominated, established or governed, which provides
for any assessment of or payment or assumption by the Company of part or
all of any claim, debt, charge, fee or other obligation of an insurer or
its successors or assignees, which has been declared by any competent
authority to be insolvent or which is otherwise deemed unable to meet any
claim, debt, charge, fee or other obligation in whole or in part.

D. Liability as a member, subscriber or reinsurer of any Pool, Syndicate,
Association or Plan, including assigned risk plans, however styled.

E. Liability assumed by the Company under any form of treaty reinsurance;
however, local agency reinsurance accepted in the normal course of business
and/or policies written by another carrier at the Company's request and
reinsured 100% by the Company shall not be excluded hereunder.

F. Pollution liability, however styled. This exclusion does not apply,
however, in any jurisdiction where it is illegal to exclude pollution or
where there has been a final court ruling that the Company's pollution
exclusion is not valid or enforceable.

G. Financial Guarantee and Insolvency coverage of any kind or description.

H. Claims arising from any Loss Event where the first claim of the Loss Event
is first notified to the Company prior to the inception of this Contract,
or on or after the nonrenewal of this Contract, except for Loss Events
involving inforce extended reporting endorsements.

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I. Policies excluded from this Contract at the Company's discretion.

ARTICLE V - RETENTION AND LIMIT

A. 1. As respects business subject to this Contract, the Company shall
retain and be liable for 40% of its Net Liability, as defined in
Article I, Class of Business Reinsured, and the Company shall cede to
the Reinsurer and the Reinsurer shall accept 60% of the Company's said
Net Liability, subject to a Reinsurer'saggregate limit equal to 110%
of 60% of the Company's first net earned premium. For purposes of this
Contract, the phrase "first net earned premium" shall mean the
Company's gross earned premium less premiums paid for inuring excess
of loss facultative reinsurance, if any, or excess of loss treaty
reinsurance as agreed by the Reinsurer hereunder, if any.

2. Notwithstanding the provisions of paragraph (A)(1) above, the Company
shall be subject to an inner aggregate deductible of its Net Liability
equal to 50% of the Company's first net earned premium, which amount
shall be retained net by the Company for its own account in addition
to its retention specified in paragraph (A)(1) above.

3. In addition to coverage provided under paragraph (A)( 1) above, the
Reinsurer shall accept 100% of the Company's Net Liability, net of
loss amounts specified in paragraphs (A)(1) and (A)(2) above, that
exceeds 110% of the Company's second net earned premium until the
amount of Net Liability, net of loss amounts specified in paragraphs
(A)( 1) and (A)(2) above, equals 130% of the Company's second net
earned premium.

For the purposes of this Contract, the phrase "second net earned
premium" shall mean the Company's first net earned premium net of
reinsurance provided hereunder.

B. "Loss Event" as used herein is defined as follows:

1. "Loss Event" shall mean any one casualty, accident or loss or series
of casualties, accidents or losses arising out of or caused by one
error or omission to act or series of errors or omissions to act.

2. If the Company's losses arising out of or caused by a single Loss
Event covered hereunder are sustained under more than one policy
issued to the same insured, the Company shall combine, for purposes of
calculating its Net Liability hereunder, all loss(es) arising from
such policies in force at the inception of this Contract, or issued or
renewed during the Contract term.

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<PAGE>

3. The date of the Loss Event, regardless of the number of covered
policies or claimants or claims or losses involved, shall be deemed in
all cases to be the date upon which the first claim under any policy
or any extended reporting period endorsement issued to any involved
insured is first notified to the Company.

ARTICLE VI - LOSS IN EXCESS OF POLICY LIMITS/EXTRA CONTRACTUAL OBLIGATIONS

A. With respect to policies covered under this Contract, in the event the
Company pays or is held liable to pay an amount of loss in excess of its
policy limit, but otherwise within the terms of its policy (hereinafter
called "loss in excess of policy limits") or any punitive, exemplary,
compensatory or consequential damages, other than loss in excess of policy
limits (hereinafter called "extra contractual obligations") because of
alleged or actual bad faith or negligence on its part in rejecting a
settlement within policy limits, or in discharging its duty to defend or
prepare the defense in the trial of an action against its policyholder, or
in discharging its duty to prepare or prosecute an appeal consequent upon
such an action or in otherwise handling a claim under a policy subject to
this Contract, the loss in excess of policy limits and/or the extra
contractual obligations shall be covered hereunder; however, the
Reinsurer'slimit of liability for such loss in excess of policy limits
and/or extra contractual obligations shall not exceed $500,000 any one
individual claim and/or $1,000,000 in the aggregate for the Contract term.
Any loss in excess of policy limits and/or extra contractual obligations
amount in excess of the aforementioned shall be paid by the Company but
shall be used to erode the inner aggregate deductible described in
paragraph (A)(2) of Article V, Retention and Limit, and the aggregate stop
loss attachment point described in paragraph (A)(3) of Article V, Retention
and Limit.

B. Extra contractual obligations shall be deemed to have occurred on the same
date as the loss covered or alleged to be covered under the policy.

C. Notwithstanding anything stated herein, this Contract shall not apply to
any loss in excess of policy limits and/or any extra contractual
obligations incurred by the Company as a result of any fraudulent and/or
criminal act by any officer or director of the Company acting individually
or collectively or in collusion with any individual or corporation or any
other organization or party involved in the presentation, defense or
settlement of any claim covered hereunder.

D. Recoveries from any form of insurance and/or reinsurance that protects the
Company against claims the subject matter of this Article shall inure to
the benefit of this Contract whether or not such recoveries from such
insurance and/or reinsurance are collectible.

ARTICLE VII- LOSSES AND LOSS ADJUSTMENT EXPENSE

A. Losses and loss adjustment expense shall be reported by the Company in
summary form as hereinafter provided. When so requested, the Company shall
afford the Reinsurer the

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<PAGE>

opportunity to participate, at its own expense, in the defense of any claim
or suit or proceeding involving this reinsurance.

B. All loss settlements made by the Company, whether under strict policy
conditions or by way of compromise, shall be binding upon the Reinsurer,
and the Reinsurer agrees to pay or allow, as the case may be, its
proportion of each such settlement in accordance with Article XI, Reports
and Remittances.

C. In the event of a claim under a Loss Event covered by this Contract, the
Reinsurer shall be liable for its proportionate share of loss adjustment
expense incurred by the Company in connection therewith and remaining after
cessions to excess reinsurers, whether or not reinsurance is collectible,
and limited proportionately to the first $1,000,000 of the Company's gross
liability in respect of such Loss Event. Loss adjustment expense shall
include litigation expenses, interest on judgments, and expense incurred as
a result of a declaratory judgment action, but not include office expenses
or salaries of the Company's regular employees. The Reinsurer shall be
credited with its proportionate share of any recoveries of such expense.

ARTICLE VIII - SALVAGE AND SUBROGATION

The Reinsurer shall be credited with its proportionate share of salvage and/or
subrogation (i.e., reimbursement obtained or recovery made by the Company, less
the actual cost of obtaining such reimbursement or making such recovery) on
account of claims and settlements involving reinsurance hereunder. The Company
hereby agrees to enforce its rights to salvage and/or subrogation relating to
any loss, a part of which loss was sustained by the Reinsurer and to prosecute
all claims arising out of such rights.

ARTICLE IX - ORIGINAL CONDITIONS

A. All reinsurance under this Contract shall be subject to the same rates,
terms, conditions, waivers, modifications, interpretations and alterations
as the respective policies of the Company. The Reinsurer shall be credited
with its applicable amount of premiums received by the Company, prior to
disbursement of any dividends, but after deduction of premiums, if any,
ceded by the Company for all other reinsurances.

B. Nothing herein shall in any manner create any obligations or establish any
rights against the Reinsurer in favor of any third party or any persons not
parties to this Contract.

ARTICLE X - REINSURER'S PREMIUM AND CEDING COMMISSION

A. For the term of this Contract, there shall be a deposit premium hereon of
$36,100,000, less a 5% ceding commission allowance, payable within 45 days
of inception of this

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<PAGE>

Contract. Within 12 months of Contract expiration, the Company shall adjust
the deposit premium against a rate of 21.5% of its first net earned
premium, subject to a minimum premium of $28,880,000, less a 5% ceding
commission allowance. The Company shall allow the Reinsurer return
commission on return premium at the same rate.

B. The deposit premium set forth in paragraph (A) above shall include the
Reinsurer's margin of $2,500,000, which shall be subject to adjustment
within 12 months of Contract expiration at 6.925% of the cumulative premium
described in paragraph (A) above, and further subject to a minimum amount
equal to $2,250,000.

C. The ceding commission allowed the Company includes provision for all
dividends, commissions and taxes, and all board, exchange and bureau
assessments, and all other expenses of whatever nature.

ARTICLE XI - REPORTS AND REMITTANCES

A. Within 12 months from Contract expiration, the Company shall furnish the
Reinsurer with a report of reinsurance premium due it for that period. Such
report shall show and properly segregate the Company's premium to which the
reinsurance rate applies as well as contain such other information as may
be required by the Reinsurer for completion of its NAIC interim and/or
annual statements. The premium due the Reinsurer shall be balanced against
the minimum and deposit premiums set forth in paragraph (A) of Article X,
the Reinsurer's Premium and Ceding Commission, and any balance shown to be
due the Reinsurer shall be remitted with said annual report. Any premium
amount shown to be due the Company shall be withdrawn from the Trust
Account.

B. Within 60 days after the end of each month, the Company shall provide the
Reinsurer with a loss bordereau including ceded paid and outstanding losses
and loss adjustment expense for the month. Any amount shown to be due
Company shall be withdrawn from the Trust account. In the event the Trust
account balance is zero and the Reinsurer has not reached its limit of
liability as outlined in Article V, the Retention and Limit, the Reinsurer
shall remit said amount due directly to the Company within 30 days of
receipt of bordereau.

C. 1. After each quarter the Reinsurer shall calculate and report to the
Company the following as promptly as possible:

a. Cumulative premium received by the Reinsurer from the effective
date of this Contract through the end of calendar quarter under
consideration;

b. Ceding commission allowed on (a) above at 5%;

c. Reinsurer's margin as calculated in paragraph (B) of Article X,
Reinsurer's Premium and Ceding Commission;

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<PAGE>

d. Cumulative case losses and loss adjustment expense incurred
hereunder (excluding incurred but not reported losses) from the
effective date of this Contract through the end of the calendar
quarter under consideration;

e. The balance of (a) less (b) less (c) less the paid portion of(d)
above;

f. Cumulative investment income on the amount, if any, of the
positive balance in (e) above.

"Investment income" as used herein shall be an amount equal to
the return derived from the investments made within a Trust
Account to be established by the Reinsurer in accordance with
Article XXII, Trust Agreement.

2. The Reinsurer shall provide quarterly investment performance reports
within 30 days of the end of each quarter.

ARTICLE XII- RETURN OF PLAN ASSETS AND LIABILITIES

If paragraph (B) of Article II, Term, is invoked, the Reinsurer shall return to
the Company the plan assets and liabilities as hereinafter provided. Within 45
days after the effective date of termination, the Reinsurer shall report to the
Company:

A. Cumulative premium received by the Reinsurer during the term of this
Contract;

B. Ceding commission allowed on (A) above at 5%;

C. Reinsurer's margin during the term of this Contract as calculated in
paragraph (B) of Article X, Reinsurer's Premium-and Ceding Commission;

D. Cumulative case losses paid and loss adjustment expense paid by the
Reinsurer during the term of this Contract;

E. 95% of the cumulative investment income calculated in accordance with the
provisions of paragraph (C) of Article XI, Reports and Remittances;

F. The positive balance, if any, of (A) less (B) less (C) less (D) plus (E)
above.

The Company shall verify the calculation and upon such verification the
Reinsurer shall pay the Company within 15 days either the amount set forth in
(F) above with its report or the agreed amount.

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<PAGE>

ARTICLE XIII - OFFSET

The Company and the Reinsurer shall have the right to offset any balance or
amounts due from one party to the other under the terms of this Contract. The
party asserting the right of offset may exercise such right any time whether the
balances due are on account of premiums or losses or otherwise. This right of
offset shall not be affected by the insolvency of either the Company or the
Reinsurer.

ARTICLE XIV - INSPECTION OF RECORDS

Provided the inspecting party has given prior notice, the Company and the
Reinsurer shall have the right at all times to inspect, through their authorized
representatives, all books, records, and papers of the other party in connection
with any reinsurance hereunder, or claims in connection herewith. The cost of
such inspection shall be borne by the inspecting party.

ARTICLE XV - DELAYS, ERRORS OR OMISSIONS

Inadvertent delays, errors or omissions made in connection with this Contract or
any transaction hereunder shall not relieve either party from any liability that
would have attached had such delay, error or omission not occurred, provided
always that such error or omission shall be rectified as soon as possible after
discovery.

ARTICLE XVI- TAXES AND FEDERAL EXCISE TAX

The Company shall pay all taxes on premiums reported to the Reinsurer under this
Contract including Federal Excise Tax to the U.S. Government on premiums subject
to such tax. In the event of return premiums or other amounts becoming due the
Company under this Contract the Company or its agent shall take steps to recover
any such tax as may be recoverable under the law.

ARTICLE XVII- RESERVES FUNDING

A. Recoverables under this Contract for losses and/or loss adjustment expense
(including incurred but not reported loss reserves) reserves in excess of
those amounts secured by the Trust Account shall be secured by a Letter of
Credit, or other instrument acceptable to the Company and its regulatory
authority, provided by the Reinsurer. The Reinsurer shall bear the expenses
associated with such Letter(s) of Credit. The Company shall pay to the
Reinsurer the expenses associated with such Letter(s) of Credit up to one-
quarter of one percent of the amount being funded. Any remaining expense
shall be paid by the Reinsurer.

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B. With regard to funding in whole or in part by Letters of Credit, each
Letter of Credit shall be in a form acceptable to insurance regulatory
authorities involved, shall be issued for a term of at least one year and
shall include an "evergreen clause," which automatically extends the term
for at least one additional year at each expiration date unless written
notice of non-renewal is given to the Company not less than 30 days prior
to said expiration date. Notwithstanding anything to the contrary in this
Contract, the Trust Account set forth in Article XXII, Trust Agreement, and
said Letters of Credit may be drawn upon by the Company or its successors
in interest at any time, without diminution because of the insolvency of
the Company or the Reinsurer, but only for one or more of the following
purposes:

1. To reimburse itself for the Reinsurer's share of returned premiums for
cancellations.

2. To reimburse itself for the Reinsurer's share of losses and/or loss
adjustment expense paid under the terms of policies reinsured
hereunder, unless paid in cash by the Reinsurer;

3. To reimburse itself for the Reinsurer's share of any other amounts due
hereunder, unless paid in cash by the Reinsurer;

4. To fund a cash account in an amount equal to the Reinsurer's share of
any outstanding loss and loss adjustment expense reserves (including
incurred but not reported loss reserves) and unearned premium reserves
funded by means of a Letter of Credit that is under non-renewal
notice, if said Letter of Credit has not been renewed or replaced by
the Reinsurer 10 days prior to its expiration date;

5. To refund to the Reinsurer any sum in excess of the actual amount
required to fund the Reinsurer's share of the Company's outstanding
loss and loss adjustment expense reserves (including incurred but not
reported loss reserves)and unearned premium reserves, if so requested
by the Reinsurer.

In the event the amount drawn by the Company on any Letter of Credit is in
excess of the actual amount required for (B)(I) or (B)(3), or in the case
of (B)(2), the actual amount determined to be due, the Company shall
promptly return to the Reinsurer the excess amount so drawn.

ARTICLE XVIII- INSOLVENCY

A. In the event of the Company's insolvency, the reinsurance afforded by this
Contract shall be payable by the Reinsurer on the basis of the Company s
liability under the policies reinsured without diminution because of the
Company's insolvency or because its liquidator, receiver, conservator or
statutory successor has failed to pay all or a portion of any claims,
subject however to the right of the Reinsurer to offset against such
funds due

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<PAGE>

hereunder, any sums that may be payable to it by said insolvent Company in
accordance with Article XIII, Offset. The reinsurance shall be payable by
the Reinsurer directly to the Company, its liquidator, receiver,
conservator or statutory successor except (a) where this Contract
specifically provides another payee of such reinsurance in the event of the
Company's insolvency or (b) where the Reinsurer, with the consent of the
direct insured or insureds, has assumed such policy obligations of the
Company as direct obligations of itself to the payees under such policies
in substitution for the Company's obligation to such payees.

B. The Company's liquidator, receiver, conservator or statutory successor
shall give written notice of the pendency of a claim against the Company
under the policies reinsured within a reasonable time after such claim is
filed in the insolvency proceeding. During the pendency of such claim, the
Reinsurer may investigate said claim and interpose in the proceeding where
the claim is to be adjudicated, at its own expense, any defense that it may
deem available to the Company, its liquidator, receiver, conservator or
statutory successor. The expense thus incurred by the Reinsurer shall be
chargeable against the Company, subject to court approval, as part of the
expense of conservation or liquidation to the extent that such
proportionate share of the benefit shall accrue to the Company solely as a
result of the defense undertaken by the Reinsurer.

C. In the event of insolvency of the Company, the Reinsurer under this
Contract shall have all rights, as more fully set forth in Section 173 of
Illinois Insurance Code, as amended.

ARTICLE XIX - ARBITRATION

A. As a condition precedent to any right of action hereunder, any dispute
arising out of the interpretation, performance or breach of this Contract
including the formation or validity thereof, shall be submitted for
decision to a panel of three arbitrators. Notice requesting arbitration
shall be in writing and sent certified or registered mail, return receipt
requested.

B. One arbitrator shall be chosen by each party and the two arbitrators shall
before instituting the hearing choose an impartial third arbitrator who
shall preside at the hearing. If either party fails to appoint its
arbitrator within 30 days after being requested to do so by the other
party, the latter after 10 days notice by certified or registered mail of
its intention to do so, may appoint the second arbitrator.

C. If the two arbitrators are unable to agree upon the third arbitrator within
30 days of their appointment, the third arbitrator shall be selected from a
list of six individuals (three named by each arbitrator) by a judge of the
federal district court having jurisdiction over the geographical area in
which the arbitration is to take place, or if the federal court declines to
act, the state court having general jurisdiction in such area.

D. All arbitrators shall be disinterested, active or former executive officers
of insurance or reinsurance companies or Underwriters at Lloyd's, London.

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E. Within 30 days after notice of appointment of all arbitrators, the panel
shall meet and determine timely periods for briefs, discovery procedures
and schedules for hearings.

F. The panel shall be relieved of all judicial formality and shall not be
bound by the strict rules of procedure and evidence. Unless the panel
agrees otherwise, arbitration shall take place in Chicago, Illinois but the
venue may be changed when deemed by the panel to be in the best interest of
the arbitration proceeding. Insofar as the arbitration panel looks to
substantive law, it shall consider the law of the state of Illinois. The
decision of any two arbitrators when rendered in writing shall be final and
binding. The panel is empowered to grant interim relief as it may deem
appropriate.

G. The panel shall make its decision considering the custom and practice of
the applicable insurance and reinsurance business as promptly as possible
following the termination of the hearings. Judgment upon the award may be
entered in any court having jurisdiction thereof

H. Each party shall bear the expense of its own arbitrator and shall jointly
and equally bear with the other party the cost of the third arbitrator. The
remaining costs of the arbitration shall be allocated by the panel. The
panel may, at its discretion, award such further costs and expenses as it
considers appropriate, including but not limited to attorneys fees, to the
extent permitted by law.

ARTICLE XX - CURRENCY SETTLEMENTS

All payments hereunder whether in respect of premiums or losses shall be made in
U.S. dollars. All currencies other than U.S. dollars shall be converted to U.S.
dollars at the rate of exchange used by the Company in its own accounts.

ARTICLE XXI - SERVICE OF SUIT

This Article is not intended to conflict with or override the parties'
obligation to arbitrate their disputes in accordance with Article XIX,
Arbitration.

A. In the event the Reinsurer fails to pay any amount claimed to be due
hereunder, the Reinsurer, at the request of the Company, shall submit to
the jurisdiction of any court of competent jurisdiction within the United
States. Nothing in this Article constitutes or should be understood to
constitute a waiver of the Reinsurer's rights to commence an action in any
court of competent jurisdiction in the United States, to remove an action
to a United States District Court, or to seek a transfer of a case to
another Court as permitted by the laws of the United States or of any state
in the United States.

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B. Further, pursuant to any statute of any state, territory or district of the
United States which makes provision therefor, the Reinsurer hereby
designates the Superintendent, Commissioner or Director of Insurance or
other officer specified for that purpose in the statute, or his successor
or successors in office, as its true and lawful attorney upon whom may be
served any lawful process in any action, suit or proceeding instituted by
or on behalf of the Company or any beneficiary hereunder arising out of
this Contract.

ARTICLE XXII - TRUST AGREEMENT

A. The Reinsurer shall create and establish a Trust Agreement for the sole
benefit of the Company under which the Trustee shall be a mutually agreed
financial institution sited in the State of Illinois and a member of the
Federal Reserve Banking System of the United States of America. All costs
associated with the Trust Agreement shall be borne by the Company.

B. The Trust shall hold assets as security for the performance by the
Reinsurer of its obligations under this Contract and shall be funded with
net premiums paid less the Reinsurer'smargin as calculated in paragraph
(B) of Article X, Reinsurer's Premium and Ceding Commission, cash and/or
assets transferred to the Reinsurer under this Contract and 100% of all
investment income derived by investing in financial assets of the type(s)
permitted under the Trust Agreement. Assets deposited in the Trust by the
Reinsurer, and all investments and reinvestments thereof, shall be valued
according to their current fair market value and shall consist only of cash
(United States legal tender), U.S. Treasury Bonds, U.S. Treasury Bills,
obligations of U.S. government agencies which have been approved by the
Company, and bonds, bills, notes, commercial paper, or preferred shares
issued by a solvent corporation organized under the laws of any state in
the United States as may have a quality rating of "A" or better, A1/P1, by
Standard & Poor's and/or Moody's; provided however, that such investments
are issued by an institution that is not the parent, subsidiary, or
affiliate of the Company or the Reinsurer.

C. The Reinsurer shall, prior to depositing assets with the Trustee and as
required thereafter, execute assignments, endorsements, or appropriate
stock or bond powers with respect to all assets in the Trust, so that the
Company or the Trustee, upon direction by the Company, may, whenever
necessary, negotiate such assets without consent or signature from the
Reinsurer or any other person or entity.

D. Upon paragraph (B) of Article II, Term, being invoked and payment by the
Reinsurer of all amounts owed to the Company and/or transfer to the Company
of Trusteed assets less 5% of the accumulated investment income (as
provided for in Article XII, Return of Plan Assets and Liabilities), the
remainder in the Trust being the 5% of the accumulated investment income
shall be released to the Reinsurer. Following such payment, the Company
shall immediately surrender and return to the Reinsurer any and all
Letter(s) of Credit as may have been provided to the Company by the
Reinsurer.

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ARTICLE XXIII - INTERMEDIARY

Aon Re Inc. Chicago, Illinois is recognized as the intermediary negotiating this
Contract for all business hereunder. All communications shall be transmitted to
the Reinsurer or the Company through Aon Re Inc., 123 N Wacker Drive, Chicago,
Illinois 60606. Payments between the Company and the Reinsurer shall be made
directly via wire transfer and/or Trust Account transaction.

IN WITNESS WHEREOF, the parties hereto have caused this Contract to be executed
in duplicate this 29th day of August, 1997

ILLINOIS STATE MEDICAL INTER-INSURANCE EXCHANGE

/s/
-----------------------------------------------

Attest:

/s/
- -------------------------------

this 4th day of September, 1997

COLOGNE REINSURANCE COMPANY (DUBLIN) LTD.

/s/
-----------------------------------------------

Attest:

/s/
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<PAGE>
EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

ISMIE Indemnity Company, an Illinois insurance company

Illinois State Medical Insurance Services, Inc., an Illinois corporation

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated March 1, 1999, except Note 11, as to which the
date is May 5, 1999, and April 14, 1999, included in the Proxy Statement of
Illinois State Medical Inter-Insurance Exchange that is made a part of the
Registration Statement (Form S-4 No. 333-_____ ) and Prospectus of ISMIE
Holdings Inc. for the registration of 10,100,000 shares of its common stock.

Ernst & Young LLP

Chicago, Illinois
May 14, 1999

<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM S-4
ISMIE HOLDINGS INC. ILLINOIS STATE MEDICAL INTER-INSURANCE EXCHANGE AND
SUBSIDIARY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 820,191
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 17,969
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 848,741
<CASH> 38,920
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 1,211,428
<POLICY-LOSSES> 895,275
<UNEARNED-PREMIUMS> 24,343
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 242,690
<TOTAL-LIABILITY-AND-EQUITY> 1,211,428
131,998
<INVESTMENT-INCOME> 45,361
<INVESTMENT-GAINS> (104)
<OTHER-INCOME> 5,095
<BENEFITS> 153,660
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 16,222
<INCOME-PRETAX> 12,468
<INCOME-TAX> (257)
<INCOME-CONTINUING> 12,725
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,725
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.27
<RESERVE-OPEN> 614,225 <F1>
<PROVISION-CURRENT> 163,962 <F1>
<PROVISION-PRIOR> (10,302) <F1>
<PAYMENTS-CURRENT> 4,379 <F1>
<PAYMENTS-PRIOR> 89,990 <F1>
<RESERVE-CLOSE> 673,516 <F1>
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> Amounts are net of reinsurance
recovered/recoverable.
</FN>

</TABLE>