MMI COMPANIES INC, 424A, 1996-08-23

MMI COMPANIES INC
424A, 1996-08-23
SURETY INSURANCE

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST 13, 1996

PROSPECTUS

LOGO
2,507,733 SHARES

MMI COMPANIES, INC.

COMMON STOCK

--------

Of the 2,507,733 shares of Common Stock offered hereby, 1,250,000 are being
sold by MMI Companies, Inc. ("MMI" or the "Company") and 1,257,733 are being
sold by the Selling Stockholders named under "Principal and Selling
Stockholders." The Company will not receive any of the proceeds from the sale
of shares of Common Stock by the Selling Stockholders.

The Common Stock of the Company is traded on the New York Stock Exchange
under the symbol "MMI." The reported last sale price of the Common Stock on the
New York Stock Exchange on August 12, 1996, was $33 1/8 per share. See "Price
Range of Common Stock."

PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER ALL OF THE FACTORS
SET FORTH IN "RISK FACTORS" COMMENCING ON PAGE 8 OF THIS
PROSPECTUS.

--------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share $ $ $ $
- --------------------------------------------------------------------------------------------
Total(3) $ $ $ $
- --------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses estimated at $300,000, payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
376,160 additional shares of Common Stock on the same terms as set forth
above solely to cover over-allotments, if any. See "Underwriting." If such
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively.

--------

The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
, 1996 at the offices of Smith Barney Inc., 333 West 34th Street, New
York, New York 10001.

--------

SMITH BARNEY INC.

CONNING & COMPANY

J.P. MORGAN & CO.

, 1996
<PAGE>

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

FOR NORTH CAROLINA PURCHASERS: THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA,
NOR HAS THE COMMISSIONER OF INSURANCE RULED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS.

AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-3 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "1933 Act" or the "Act"), with respect
to the shares of Common Stock offered hereby ("Offering"). This Prospectus,
which forms part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the exhibits and
financial statements thereto, to which reference is hereby made. Statements
contained in this Prospectus as to the contents of any contract, agreement or
other document are summaries which are not necessarily complete, and in each
instance reference is made to the copy of such contract, agreement or other
document filed as an exhibit to the Registration Statement, each such
statement herein being qualified in all respects by such reference.

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act" or the "Exchange Act"), and
in accordance therewith, files annual and quarterly reports, proxy statements
and other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements, other information and the
Registration Statement, including all exhibits thereto, may be inspected
without charge and copied at the public reference facilities of the Commission
at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at its regional offices at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and at Seven World
Trade Center, 13th Floor, New York, New York 10048. Any interested party may
obtain copies of all or any portion of the Registration Statement and its
exhibits at prescribed rates from the Public Reference Section of the
Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549. In addition, reports, proxy statements,
other information and this Registration Statement may be inspected at the
offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005.

The Commission maintains a World Wide Web site on the Internet at
http://www.sec.gov. that contains reports, proxy and information statements
and other information regarding registrants, such as the Company, that file
electronically with the Commission.

2
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus and incorporated by reference. All financial data for the
Company are presented on the basis of generally accepted accounting principles
("GAAP") unless otherwise stated. See "Glossary of Healthcare and Insurance
Terms" for the definition of certain healthcare and insurance terms used in
this Prospectus. Unless the context otherwise indicates, all references to the
"Company" refer to MMI Companies, Inc. and its subsidiaries. Unless otherwise
indicated, the information in this Prospectus assumes no exercise of the
Underwriters' option to purchase from the Company up to 376,160 additional
shares of Common Stock solely to cover over-allotments, if any.

THE COMPANY

The Company offers a comprehensive set of specialized insurance products and
consulting services that are designed to assist healthcare providers manage the
business, clinical, insurable and financial risks associated with the delivery
of healthcare. The Company was formed in 1983 to write medical malpractice
insurance for hospitals and physicians in the United States and has since
established its strategic vision to be The Healthcare Risk Management SourceSM.
Since the initial public offering of its Common Stock in June 1993, the Company
has, through acquisitions and internal growth, substantially increased its
insurance assets and capital as well as the breadth of its products and
services and its capacity to deliver them. The Company has acquired insurance,
strategic management consulting and employee relations consulting businesses
and successfully integrated them into its operations. It has also developed
additional products and services to assist healthcare providers manage their
business operations.

The Company's net premiums earned have increased from $101 million in 1992 to
$155 million in 1995, representing a compound annual growth rate of 15%.
Consulting and fee income increased from $6 million to $22 million over the
same period, representing a compound annual growth rate of 56%.

MMI believes its combination of insurance and consulting product and service
offerings and national distribution differentiates it in the marketplace and
provides a competitive advantage over monoline professional liability insurers
and professional service firms serving the healthcare industry. Because of the
close relationship between clinical and insurable risks, the Company integrates
its professional liability insurance with its risk management services and does
not offer such insurance or certain of its risk management programs on a stand
alone basis. Accordingly, insurance clients are required to purchase a specific
set of risk modification services consisting of consulting, education and
information services in order to have access to the Company's professional
liability coverage.

The Company's business is organized into three operating groups:

. The Insurance Group generates medical malpractice and life and health
insurance premiums by underwriting primarily professional and general
liability insurance and reinsurance for healthcare providers, including
hospitals, healthcare systems and physician groups.

. The Strategic Management Consulting Group generates fee income by
providing healthcare clients with consulting services, including strategy
development, healthcare system integration and development, managed care
strategy design and implementation, hospital/physician alignment
strategies and business process reengineering.

. The Healthcare Services Group generates fee income by providing clinical
risk modification services, employee relations and human resource
consulting services, education programs, information services, managed
care and third party administrative services, physician credentials
verification and patient billing and coding services.

3
<PAGE>

The Company believes that a close working relationship with its healthcare
industry clients is essential. Consequently, it markets its products and
services directly and through insurance brokers where such a close client
relationship can be created and maintained. The Company utilizes a team
approach in delivering its services, combining the expertise of its sales, risk
management, claims and underwriting specialists. The Company's Board of
Directors is composed primarily of healthcare executives and physicians, which
contributes to the Company's understanding of the business needs of its
clients. In addition, the Company works closely with its clients in developing
its products and services through formal and ad hoc advisory committees.

Business Environment

The healthcare industry, particularly healthcare providers, constitutes the
Company's target market. This market has undergone substantial structural
change over the past decade and continues to evolve. Historically, healthcare
delivery was generally provided on a fee-for-service basis by hospitals and
physicians. The Company believes that under managed care, healthcare delivery
is evolving toward a more complex structure involving numerous healthcare
provider types and payment mechanisms. Healthcare providers are forming
integrated delivery networks by combining through mergers and acquisitions and
through contractual arrangements. These networks include healthcare systems,
physician organizations, physician management companies, physician hospital
organizations, individual hospitals and physicians and other specialized
healthcare provider entities.

Under managed care contracts and health plans, these integrated networks
provide care for covered groups represented by large purchasers. These
contracts can include fixed price per person, or capitation arrangements, and
other criteria with respect to the type and quality of healthcare services
provided. In addition, healthcare is provided in numerous settings, including
hospitals, clinics, outpatient facilities, physician offices, rehabilitation
and long-term care facilities and the home.

The Company believes that the evolving and consolidating healthcare
environment presents providers and networks with a related set of risks:

. Business Risk--arises as providers develop and implement organizational
and operating strategies to respond to their changing business
environment.

. Clinical Risk--relates to assuring a consistent quality of care to
patients in an increasing variety of delivery settings.

. Insurable Risk--relates to costs associated with medical malpractice and
other liability exposures.

. Financial Risk--increases for providers as managed care transforms the
operating environment from fee-for-service to capitated arrangements.

The Company believes that healthcare providers benefit from addressing these
risks jointly rather than individually to achieve delivery of quality
healthcare at appropriate cost. For example, expenditures related to clinical
care may reduce potential liability and clinical risk but increase financial
risk. Similarly, reduced use of clinical resources may improve financial
performance but may simultaneously increase liability exposure.

MMI's Integrated Response

The Company's client base has evolved as the structure of the healthcare
industry has changed. Initially, the Company insured hospitals and physician
groups and physicians affiliated with insured hospitals. The Company's client
base has expanded to include healthcare systems, integrated delivery systems,
various types of physician organizations and health plans in addition to its
historical clients. The Company believes that as healthcare integration
continues, its prospective clients will continue to become more sophisticated
in their approach to managing risk, which should result in increased demand for
its services. The Company has

4
<PAGE>

developed a comprehensive set of products and services designed to assist
healthcare providers address the risks of healthcare delivery in an evolving
environment. These services have been developed both internally and through
acquisition.

Consolidation of the Medical Malpractice Industry

The medical malpractice insurance market includes several large multi-line
carriers, as well as numerous single-state, monoline insurance companies. The
Company believes that the evolving healthcare industry is contributing to
consolidation in the medical malpractice insurance market. As healthcare
providers increase in size and complexity, they demand more sophisticated
products and services and seek insurers with greater financial capacity. The
Company believes that current market conditions favor larger, strongly
capitalized companies with multiple state licenses, broad distribution systems
and a full complement of insurance and risk management products and services.

Acquisition Opportunities

The Company believes the breadth of its product and service offerings,
national distribution and its ranking as the tenth largest writer of medical
malpractice insurance in the United States helps to position the Company as an
acquiror. Over the past five years the Company has obtained several blocks of
insurance business from healthcare-sponsored single-state insurance entities in
Connecticut, North Carolina and Georgia. With the acquisition of Health
Providers Insurance Company ("HPIC") in 1995, the Company added a block of
medical malpractice assumed reinsurance business and substantially increased
its asset base and statutory surplus. The Company's strategy is to utilize its
competitive position within the consolidating medical malpractice industry to
continue this trend of growth through acquisitions and the assumption of books
of business.

As part of its strategy of assisting healthcare clients to address their
business and clinical risks, during the past three years the Company acquired a
healthcare strategy consulting firm, McManis Associates, Inc. ("McManis
Associates"), and a healthcare employee relations consulting firm, Management
Science Associates, Inc. ("MSA"). The Company intends to consider acquiring
complementary consulting and fee businesses that serve the healthcare industry.

5
<PAGE>

THE OFFERING

<TABLE>
<S> <C>
Common Stock being offered by:
The Company...................... 1,250,000 shares (1)
The Selling Stockholders......... 1,257,733 shares
Common Stock to be outstanding
after the Offering................ 11,114,714 shares (1)(2)
Use of proceeds.................... The net proceeds from the sale of Common
Stock by the Company in this Offering will
be available for general corporate purpos-
es, including contributions to the capital
and surplus of the Company's insurance sub-
sidiaries to support increased premium
writings and to fund future acquisitions.
See "Use of Proceeds."
New York Stock Exchange symbol..... MMI
Dividend policy.................... The Board of Directors has a policy of de-
claring quarterly cash dividends on the
Common Stock. The Board of Directors de-
clared a quarterly cash dividend of $.06
per share on August 8, 1996. The record
date for such dividend is September 30,
1996. The declaration and payment of divi-
dends is subject to the discretion of the
Board of Directors and certain other re-
strictions. See "Dividend Policy."
</TABLE>

- --------
(1) Excludes up to 376,160 shares of Common Stock which may be sold by the
Company upon exercise of the Underwriters' over-allotment option. See
"Underwriting."
(2) Based on 9,864,714 shares of Common Stock outstanding as of June 30, 1996.
Does not include 974,554 shares of Common Stock issuable upon exercise of
options held by current and former employees and directors.

RISK FACTORS

See "Risk Factors" for a discussion of certain factors that should be
carefully considered in evaluating an investment in the Common Stock.

6
<PAGE>

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ ------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PREMIUMS AND INCOME DATA
(1):
Gross premiums written
(2).................... $130,905 $136,774 $161,421 $184,791 $210,752 $118,769 $131,408
Net premiums written
(2).................... 103,111 102,350 120,237 139,800 161,188 91,821 100,225
Net premiums earned (2). 100,556 100,894 116,295 132,389 155,191 69,572 81,824
Consulting and fee
income................. 4,768 5,924 6,962 18,602 22,336 11,651 15,628
Net investment income... 25,232 28,603 29,836 29,067 39,850 17,818 21,653
Net realized gains
(losses) on
investments............ 3,126 6,653 1,771 (2,853) 1,367 344 1,002
Total revenues.......... 144,895 142,074 154,864 177,205 218,744 99,385 120,107
Income from continuing
operations (3) (4)..... 12,982 6,683 14,181 15,051 22,695 10,048 13,759
Per share (fully
diluted).............. 1.90 1.01 1.90 1.72 2.34 1.09 1.34
Operating income (3) (4)
(5).................... 10,256 2,292 13,030 16,905 21,806 9,824 13,108
Per share (fully
diluted).............. 1.50 .35 1.74 1.93 2.25 1.07 1.28
Cash dividends declared
per common share....... .09 .11 .12 .16 .20 .10 .12
Weighted average number
of common and common
equivalent shares
(fully diluted)........ 6,850 6,613 7,483 8,763 9,683 9,200 10,276
SELECTED STATUTORY DATA
(3) (6):
Statutory net income.... $ 10,548 $ 11,490 $ 9,494 $ 12,077 $ 17,479 $ 8,655 $ 11,988
Statutory surplus....... 73,785 75,867 100,377 106,508 152,075 139,944 157,560
Ratio of net premiums
written to statutory
surplus................ 1.4x 1.7x 1.2x 1.3x 1.1x -- --
GAAP RATIOS (3) (7):
Loss ratio.............. 88.6% 88.4% 88.3% 85.7% 84.8% 86.0% 83.1%
Expense ratio........... 22.5 28.9 19.7 18.7 19.5 19.6 21.1
-------- -------- -------- -------- -------- -------- --------
Combined ratio.......... 111.1% 117.3% 108.0% 104.4% 104.3% 105.6% 104.2%
======== ======== ======== ======== ======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------
ACTUAL AS ADJUSTED(8)
---------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Investments........................................... $ 711,672 $ 750,708
Total assets.......................................... 1,004,199 1,043,235
Loss and loss adjustment expense reserves............. 626,340 626,340
Long-term notes payable............................... 58,000 58,000
Stockholders' equity.................................. 187,946 226,982
Book value per common share........................... 19.05 20.42
</TABLE>
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(1) Includes results of purchased businesses from their respective acquisition
dates, including McManis Associates, acquired December 30, 1993; HPIC,
acquired May 9, 1995; and MSA, acquired April 1, 1996. See Note 2 to the
Consolidated Financial Statements.
(2) Excludes non-recurring premiums of $11,213,000 in 1991 relating to a
transaction with an affiliate.
(3) For 1991 and 1992, income from continuing operations, operating income,
selected statutory data and GAAP ratios have been significantly affected by
the affiliate transaction referred to in Note 2 above and by certain events
relating to a special assessment by the State of Florida, option
termination expense, provision for reinsurance and interest on a tax
refund.
(4) The Company adopted new standards on accounting for investments in 1994 and
income taxes in 1992. See Note 1 to the Consolidated Financial Statements.
(5) Operating income represents income from continuing operations before after-
tax realized investment gains (losses) of $2,726,000 in 1991, $4,391,000 in
1992, $1,151,000 in 1993, $(1,854,000) in 1994, $889,000 in 1995, and
$224,000 and $651,000 for the six-month periods ended June 30, 1995 and
1996, respectively.
(6) Selected statutory data are derived from the combined financial statements
of American Continental Insurance Company ("ACIC") and another direct
insurance subsidiary that was merged into ACIC in 1992, and, for the six
months ended June 30, 1995 and 1996 and the year ended December 31, 1995,
also include data derived from the financial statements of HPIC. Such
financial statements have been filed with insurance regulatory authorities
and were prepared in accordance with statutory accounting practices,
adjusted to eliminate the effect of loss reserve discounting. Statutory
accounting practices differ in many respects from those governing
preparation of financial statements under GAAP. Accordingly, statutory net
income and statutory surplus differ from amounts reported in the GAAP basis
financial statements for comparable items.
(7) GAAP ratios have been derived from the financial statements of ACIC, and
include the results of operations of HPIC from the date of its acquisition,
as prepared on a GAAP basis for inclusion in the Consolidated Financial
Statements. Transactions and events described in Note 3 above resulted in
an increase in the GAAP combined ratio of 3.8 percentage points and 6.2
percentage points in 1991 and 1992, respectively.
(8) Adjusted to reflect the sale of shares of Common Stock offered by the
Company hereby at an assumed offering price of $33 1/8 per share.

7
<PAGE>

RISK FACTORS

Prospective investors should carefully consider the following matters,
together with the other information contained in this Prospectus, in
evaluating the Company and its business before purchasing the shares of Common
Stock offered hereby.

INDUSTRY FACTORS AND COMPETITION

Many factors influence the financial results of the medical malpractice
insurance business, several of which are beyond the control of the Company.
The supply of medical malpractice insurance, or the industry's underwriting
capacity, is determined principally by the industry's level of capitalization,
historical underwriting results, returns on investment and perceived premium
rate adequacy. The Company competes with numerous insurance companies and
consulting businesses, many of which have greater financial resources than
does the Company. These factors, together with competitive pricing, could
result in fluctuations in the Company's underwriting results and net income.

CHANGES IN HEALTHCARE INDUSTRY

The Company obtains substantially all of its insurance premium income from
healthcare systems, physician groups and physicians affiliated with insured
healthcare systems. For at least the past decade, the healthcare industry has
been consolidating. Because larger healthcare systems generally retain more
risk by accepting higher deductibles and self-insured retentions, the Company
believes this consolidation has reduced primary medical malpractice insurance
premiums paid by healthcare systems and may continue to do so. In addition,
federal and state governments may enact legislation and promulgate regulations
designed to reform the healthcare system. No assurance can be given that
future legislative or regulatory changes will not adversely affect the
Company.

CIVIL JUSTICE REFORM

Federal and state civil justice reform legislation has been proposed and may
be passed in some form. It may be designed to result in fewer lawsuits filed,
reduced cost to defendants and insurers and increased predictability of
litigation outcomes. Although such reform could result in reduced revenues to
the Company, the Company does not believe it will have a materially adverse
effect on its business.

UNDERWRITING LOSSES AND RESERVES

The reserves for losses and loss adjustment expenses established by the
Company are estimates of amounts needed to pay reported and unreported claims
and related loss adjustment expenses. The estimates are based on assumptions
related to the ultimate cost of settling such claims. If the Company's
reserves are inadequate, the Company will be required to increase its reserves
and thus reduce its net income in the period in which the deficiency is
identified. Unanticipated underwriting losses or materially underestimated
reserves could have a material adverse effect on the Company. See "Business--
Reserves and Losses."

REINSURANCE

In order to reduce risk and to increase its underwriting capacity, the
Company obtains reinsurance from unaffiliated reinsurers, although it
generally retains a portion of each risk reinsured. The Company is subject to
a credit risk with respect to its reinsurers because reinsurance does not
relieve the Company of liability to its insureds for the risks ceded to
reinsurers. Although the Company believes that its reinsurance is maintained
with financially stable reinsurers and that any reinsurance security
maintained is adequate to protect its interests, a reinsurer's insolvency or
inability to make payments under the terms of a reinsurance treaty could have
a material adverse effect on the Company. In previous years, a portion of the
Company's reinsurance was placed with reinsurers that were subsequently placed
in liquidation. The Company establishes reserves for the potential
uncollectibility of reinsurance.

8
<PAGE>

HOLDING COMPANY STRUCTURE AND RESTRICTIONS ON INSURANCE SUBSIDIARIES

As a holding company, the Company depends on dividends and other permitted
payments from its subsidiaries to meet its cash needs, including servicing its
debt and paying stockholder dividends. The Missouri and Illinois insurance
laws and regulations impose restrictions on the amount of dividends that may
be paid to stockholders by insurance companies domiciled in the respective
states without prior approval of the Director of Insurance in such states.
American Continental Insurance Company ("ACIC"), a subsidiary of the Company,
may not, without the prior approval of the Missouri Director of Insurance, pay
a dividend that, together with any other dividends paid within the twelve-
month period ending on the date when the dividend will be paid, exceeds the
lesser of ACIC's net investment income for the prior calendar year or 10% of
its statutory surplus as of December 31 of the prior calendar year. HPIC may
not, without the prior approval of the Illinois Director of Insurance, pay a
dividend that, together with any other dividends paid within the twelve-month
period ending on the date when the dividend will be paid, exceeds the greater
of 10% of its statutory surplus as of December 31 of the prior calendar year
or net income for the prior calendar year.

The Company's bank credit agreement restricts dividends in an amount not to
exceed for each fiscal year 20% of the Company's consolidated net earnings
after taxes of the previous fiscal year, but the Company may in one fiscal
year during the term of the bank credit agreement pay an amount of dividends
up to the amount paid in the prior fiscal year without regard to the amount of
its consolidated net earnings after taxes in such prior fiscal year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Business--Regulation."

REGULATION

The Company's insurance subsidiaries are subject to supervision and
regulation of their businesses and financial condition by the states in which
they transact business. The primary purpose of such supervision and regulation
is the protection of the interests of policyholders as opposed to the
interests of the holders of shares of Common Stock. Such supervision and
regulation generally derives from state statutes which delegate broad
regulatory, supervisory and administrative authority to state insurance
departments. Recently, the insurance regulatory framework has come under
increased scrutiny by various regulatory agencies, including the National
Association of Insurance Commissioners ("NAIC"), state legislatures, and the
United States Congress. Under the insolvency or guarantee laws of most of the
states in which the Company operates, insurers doing business in those states
are regularly assessed for policyholder losses of insolvent insurance
companies. In addition, from time to time, states may make special assessments
in response to extraordinary circumstances. See "Business--Regulation" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

In addition to state-imposed insurance laws and regulations, the Company is
subject to statutory accounting practices and the reporting format of the
NAIC. The NAIC and many states have adopted risk-based capital formulas to
establish minimum capital and surplus requirements for insurance companies and
a model act for regulation of such companies. The risk-based capital formula
measures a company's asset risk, insurance risk, interest rate risk and
business risk. As of December 31, 1995, the surplus of each of the Company's
insurance subsidiaries exceeds the minimum requirements under the NAIC
formula.

RISKS RELATED TO POSSIBLE ACQUISITIONS

The Company may expand its operations through the acquisition of additional
businesses. There can be no assurance that the Company will be able to
identify, acquire or profitably manage additional businesses or successfully
integrate any acquired businesses into the Company without substantial
expenses, delays or other operational or financial problems. Further,
acquisitions may involve a number of special risks, including diversion of
management's attention, failure to retain key acquired personnel,
unanticipated events or circumstances, legal liabilities and amortization of
acquired intangible assets, some or all of which could have a material adverse
effect on the Company's business, operating results and financial condition.

9
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of shares of Common Stock
being offered by the Company are estimated to be $39,036,000 ($50,873,000 if
the Underwriters' over-allotment option is exercised in full), assuming an
offering price of $33 1/8 per share. The net proceeds from the sale of Common
Stock by the Company in this Offering will be available for general corporate
purposes, including contributions to the capital and surplus of the Company's
insurance subsidiaries to support increased premium writings and to fund
future acquisitions. The Company from time to time reviews possible
acquisitions of complementary businesses and assets. There are currently no
binding commitments or agreements with respect to any material acquisitions.
Pending such uses, the net proceeds to the Company will be invested by the
Company in accordance with its current investment policy. See "Business--
Investments." The Company will not receive any of the proceeds from the sale
of the shares of Common Stock being offered by the Selling Stockholders.

PRICE RANGE OF COMMON STOCK

The Common Stock is traded on the New York Stock Exchange (the "NYSE") under
the symbol "MMI."

The following table sets forth the high and low closing sales price per
share of the Common Stock on the NYSE and the cash dividends declared per
share for the periods indicated.

<TABLE>
<CAPTION>
CASH
DIVIDENDS
CALENDAR PERIOD HIGH LOW DECLARED
--------------- ------- ------- ---------
<S> <C> <C> <C>
1994:
First quarter................................. $15 3/4 $13 3/8 $.04
Second quarter ............................... 13 3/4 12 1/8 .04
Third quarter................................. 15 7/8 13 1/8 .04
Fourth quarter................................ 15 7/8 14 1/8 .04
----
$.16
====
1995:
First quarter................................. $17 1/4 $14 7/8 $.05
Second quarter................................ 20 17 .05
Third quarter................................. 25 1/4 18 7/8 .05
Fourth quarter................................ 25 1/2 22 1/8 .05
----
$.20
====
1996:
First quarter................................. $30 1/4 $22 $.06
Second quarter................................ 31 1/4 26 3/4 .06
Third quarter (through August 12)............. 33 1/8 30 1/2 .06
</TABLE>

On August 12, 1996, the reported last sale price of the Common Stock on the
NYSE was $33 1/8 per share. On June 30, 1996, the Company had 363 holders of
record of Common Stock.

10
<PAGE>

DIVIDEND POLICY

The policy of the Board of Directors is to pay regular quarterly cash
dividends. The declaration and payment of dividends is subject to the
discretion of the Board of Directors and will depend upon general business
conditions, legal and contractual restrictions on the payment of dividends and
other factors that the Board of Directors deems relevant.

As an insurance holding company, MMI depends in large part on dividends and
other payments from its subsidiaries for the payment of cash dividends to
stockholders. In the case of the Company's insurance subsidiaries, such
payments are restricted by insurance laws, and insurance regulators have
authority in certain circumstances to prohibit payments of dividends and other
amounts by the Company's insurance subsidiaries that would otherwise be
permitted without regulatory approval. The Company's bank credit agreement
also restricts the payment of dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company as of June 30, 1996, and as adjusted to give effect to the sale of the
Common Stock offered hereby at an assumed offering price of $33 1/8 per share.
This table should be read in conjunction with the Consolidated Financial
Statements and the notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term notes payable............................. $ 58,000 $ 58,000
Stockholders' equity
Preferred Stock, par value $20.00 per share:
Authorized: 5,000,000 shares; none outstanding.. -- --
Common Stock, par value $.10 per share:
Authorized: 30,000,000 shares
Issued and outstanding: 9,864,714 shares;
11,114,714 shares as adjusted (1).............. 986 1,111
Additional paid-in capital........................ 85,995 124,906
Retained earnings................................. 96,941 96,941
Unrealized gains on investments, net of taxes..... 4,024 4,024
-------- --------
Total stockholders' equity...................... 187,946 226,982
-------- --------
Total capitalization.......................... $245,946 $284,982
======== ========
</TABLE>
- --------
(1) Does not include 974,554 shares of Common Stock issuable upon exercise of
options held by current and former employees and directors.

11
<PAGE>

SELECTED CONSOLIDATED FINANCIAL INFORMATION

The Consolidated Financial Statements for each of the years in the five-year
period ended December 31, 1995 have been audited by Ernst & Young LLP,
independent auditors. The premium and income data (other than gross and net
premiums written) and balance sheet data presented below as of December 31,
1994 and 1995 and for each of the years in the three years ended December 31,
1995 are derived from the Consolidated Financial Statements that are included
in this Prospectus. The data presented below as of June 30, 1995 and 1996 and
for each of the six-month periods ended June 30, 1995 and 1996 are unaudited
and are derived from the unaudited Consolidated Financial Statements included
in this Prospectus. The unaudited consolidated financial statements include
all adjustments that the Company considers necessary for a fair presentation
of the information set forth herein. The operating results for interim periods
are not necessarily indicative of the results that may be expected for the
full year. The selected consolidated financial information should be read in
conjunction with the Company's Consolidated Financial Statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ -------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
PREMIUMS AND INCOME DATA
(1):
Gross premiums written
(2).................... $130,905 $136,774 $161,421 $184,791 $210,752 $118,769 $ 131,408
Net premiums written
(2).................... 103,111 102,350 120,237 139,800 161,188 91,821 100,225
Net premiums earned (2). 100,556 100,894 116,295 132,389 155,191 69,572 81,824
Consulting and fee
income................. 4,768 5,924 6,962 18,602 22,336 11,651 15,628
Net investment income... 25,232 28,603 29,836 29,067 39,850 17,818 21,653
Net realized gains
(losses) on
investments............ 3,126 6,653 1,771 (2,853) 1,367 344 1,002
Total revenues.......... 144,895 142,074 154,864 177,205 218,744 99,385 120,107
Losses and loss
adjustment expenses.... 96,671 87,405 101,471 112,711 130,088 58,905 67,725
Provision for
reinsurance (3)........ 400 8,556 -- -- -- -- --
Insurance and
administrative expense
(3).................... 30,682 37,286 36,699 47,286 61,055 28,408 35,786
Interest expense........ 2,151 2,152 1,489 1,619 2,767 1,098 1,602
Total losses and
expenses............... 129,904 135,399 139,659 161,616 193,910 88,411 105,113
Income from continuing
operations before
income taxes........... 14,991 6,675 15,205 15,589 24,834 10,974 14,994
Income taxes (credit)... 2,009 (8) 1,024 538 2,139 926 1,235
Income from continuing
operations (3) (4)..... 12,982 6,683 14,181 15,051 22,695 10,048 13,759
Per share (fully
diluted).............. 1.90 1.01 1.90 1.72 2.34 1.09 1.34
Operating income (3) (4)
(5).................... 10,256 2,292 13,030 16,905 21,806 9,824 13,108
Per share (fully
diluted).............. 1.50 .35 1.74 1.93 2.25 1.07 1.28
Cash dividends declared
per common share....... .09 .11 .12 .16 .20 .10 .12
SELECTED STATUTORY DATA
(3) (6):
Statutory net income.... $ 10,548 $ 11,490 $ 9,494 $ 12,077 $ 17,479 $ 8,655 $ 11,988
Statutory surplus....... 73,785 75,867 100,377 106,508 152,075 139,944 157,560
Ratio of net premiums
written to statutory
surplus................ 1.4x 1.7x 1.2x 1.3x 1.1x -- --
GAAP RATIOS (3) (7):
Loss ratio.............. 88.6% 88.4% 88.3% 85.7% 84.8% 86.0% 83.1%
Expense ratio........... 22.5 28.9 19.7 18.7 19.5 19.6 21.1
-------- -------- -------- -------- -------- -------- ---------
Combined ratio.......... 111.1% 117.3% 108.0% 104.4% 104.3% 105.6% 104.2%
======== ======== ======== ======== ======== ======== =========
BALANCE SHEET DATA (AT
END OF PERIOD) (4):
Investments............. $381,146 $413,522 $472,040 $497,679 $743,622 $697,691 $ 711,672
Total assets............ 529,461 558,998 643,773 693,804 982,678 950,976 1,004,199
Loss and loss adjustment
expense reserves....... 366,291 384,621 419,679 448,672 638,815 624,182 626,340
Long-term notes payable. 29,000 23,000 16,000 28,000 49,000 43,000 58,000
Net unrealized gains
(losses) on
investments............ -- -- -- (7,237) 18,490 7,742 4,024
Stockholders' equity.... 72,481 76,966 116,503 123,059 186,463 162,788 187,946
Book value per common
share.................. 11.28 11.96 13.56 14.28 19.27 16.97 19.05
Long-term notes payable
as a percentage of
total capitalization... 28.6% 23.0% 12.1% 18.5% 20.8% 20.9% 23.6%
</TABLE>

Footnotes appear on the following page.

12
<PAGE>

- --------

(1) Includes results of purchased businesses from their respective acquisition
dates, including McManis Associates, acquired December 30, 1993; HPIC,
acquired May 9, 1995; and MSA, acquired April 1, 1996. See Note 2 to the
Consolidated Financial Statements.
(2) Excludes non-recurring premiums of $11,213,000 in 1991 relating to a
transaction with an affiliate.
(3) For 1991 and 1992, income from continuing operations, operating income,
selected statutory data and GAAP ratios have been significantly affected
by the affiliate transaction referred to in Note 2 above and by certain
events relating to a special assessment by the State of Florida, option
termination expense, provision for reinsurance and interest on a tax
refund.
(4) The Company adopted new standards on accounting for investments in 1994
and income taxes in 1992. See Note 1 to the Consolidated Financial
Statements.
(5) Operating income represents income from continuing operations before
after-tax realized investment gains (losses) of $2,726,000 in 1991,
$4,391,000 in 1992, $1,151,000 in 1993, $(1,854,000) in 1994, $889,000 in
1995, and $224,000 and $651,000 for the six-month periods ended June 30,
1995 and 1996, respectively.
(6) Selected statutory data are derived from the combined financial statements
of ACIC and another direct insurance subsidiary that was merged into ACIC
in 1992, and, for the six months ended June 30, 1995 and 1996 and the year
ended December 31, 1995, also include data derived from the financial
statements of HPIC. Such financial statements have been filed with
insurance regulatory authorities and were prepared in accordance with
statutory accounting practices, adjusted to eliminate the effect of loss
reserve discounting. Statutory accounting practices differ in many
respects from those governing preparation of financial statements under
GAAP. Accordingly, statutory net income and statutory surplus differ from
amounts reported in the GAAP basis financial statements for comparable
items.
(7) GAAP ratios have been derived from the financial statements of ACIC, and
include the results of operations of HPIC from the date of its
acquisition, as prepared on a GAAP basis for inclusion in the Consolidated
Financial Statements. Transactions and events described in Note 3 above
resulted in an increase in the GAAP combined ratio of 3.8 percentage
points and 6.2 percentage points in 1991 and 1992, respectively.

13
<PAGE>

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

The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Company's
financial statements and notes thereto included elsewhere in this Prospectus.

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995.

Revenues. Gross premiums written increased by 10.6% to $131,408,000 for the
six months ended June 30, 1996 from $118,769,000 for the 1995 period. Net
premiums written increased by 9.2% to $100,225,000 from $91,821,000, and net
premiums earned increased by 17.6% to $81,824,000 from $69,572,000.

Medical malpractice premiums earned increased by 18.2% to $77,870,000 for
the six months ended June 30, 1996 from $65,900,000 for the 1995 period. A
substantial percentage of the Company's business renews during the first
quarter. The Company's quarterly written and earned premiums can vary
significantly from quarter to quarter due to one-time premiums, such as prior
acts coverage for new insureds. Of the increase in premiums earned in the
first six months of 1996, approximately ten percentage points of the 18%
growth resulted from increases in such one-time premiums. Healthcare system
premium rates were generally unchanged, and pricing for physician groups
increased modestly. Pricing of healthcare system insurance is strongly
influenced by the loss experience of the insured. Life and health premiums
earned increased by 7.7% to $3,954,000 for the six months ended June 30, 1996
from $3,672,000 in 1995.

Consulting and fee income increased by 34.1% to $15,628,000 for the six
months ended June 30, 1996 from $11,651,000 for the 1995 period. The growth in
consulting and fee income is attributable to growth in fees generated by the
Healthcare Services Group and the inclusion of the results of MSA from the
date of its acquisition, April 1, 1996. Consulting and fee income as a
percentage of net premiums earned and consulting and fee income was 16.0% for
the six months ended June 30, 1996 compared to 14.3% in 1995.

Net investment income increased by 21.5% to $21,653,000 for the six months
ended June 30, 1996 from $17,818,000 for the 1995 period. Net investment
income attributable to HPIC was $3,536,000 for the six months ended June 30,
1996 compared to $1,037,000 for the 1995 period. Net investment income,
excluding the growth attributable to HPIC, increased by 8.0% for the six month
period, and is due to growth in invested assets. The Company had net realized
gains on investments of $1,002,000 for the six months ended June 30, 1996
compared to gains of $344,000 for the 1995 period.

Losses and expenses. Losses and loss adjustment expenses ("LAE") increased
by 15.0% to $67,725,000 for the six months ended June 30, 1996 from
$58,905,000 for the 1995 period. Medical malpractice liability losses and LAE
increased by 14.7% to $65,439,000 for the six months ended June 30, 1996 from
$57,029,000 for the 1995 period due to an increase in premiums earned
partially offset by a decrease in the property and casualty loss ratio. The
property and casualty loss ratio decreased to 83.1% from 86.0% for the
respective six month periods. Life and health benefit costs increased by
$410,000 or 21.9% to $2,286,000 for the six months ended June 30, 1996 from
$1,876,000 for the 1995 period. Underwriting results for the Company's life
and health segment are variable due to the relatively small volume of business
written.

Insurance and administrative expenses increased by 26.0% to $35,786,000 for
the six months ended June 30, 1996 from $28,408,000 for the 1995 period. The
increase in administrative expense is attributable to increased premiums and
consulting and fee income, increased commission expense due to a greater
percentage of business acquired through brokers and the inclusion of the
results of acquired businesses, including HPIC from its acquisition in May
1995 and MSA from its acquisition in April 1996.

14
<PAGE>

Interest expense increased by 45.9% to $1,602,000 for the six months ended
June 30, 1996 from $1,098,000 for the 1995 period and is due principally to an
increase in outstanding debt.

Income taxes. Income taxes were $1,235,000 for the six months ended June 30,
1996 compared to $926,000 for the 1995 period.

Net income. Net income increased by 36.9% to $13,759,000 for the six months
ended June 30, 1996 from $10,048,000 for the 1995 period. Operating income,
which excludes net realized gains on investments, net of taxes, increased by
33.4% to $13,108,000 for the six months ended June 30, 1996 from $9,824,000
for the 1995 period.

Net income per share. Fully diluted net income per common and common
equivalent share increased to $1.34 for the six months ended June 30, 1996
from $1.09 for the 1995 period. Included in these amounts are $.06 in 1996 and
$.02 in 1995 related to net realized gains on investments. Fully diluted
earnings per common and common equivalent share before realized gains
(losses), net of taxes, increased to $1.28 for the six months ended June 30,
1996 from $1.07 for the 1995 period. Fully diluted weighted average shares and
equivalents outstanding increased due to the issuance of capital stock in
connection with the acquisition of HPIC in May 1995.

1995 COMPARED TO 1994.

Revenues. Gross premiums written increased by 14.0% to $210,752,000 in 1995
from $184,791,000 in 1994. Net premiums written increased by 15.3% to
$161,188,000 from $139,800,000 and net premiums earned increased by 17.2% to
$155,191,000 from $132,389,000. Gross premiums written, net premiums written
and net premiums earned attributable to HPIC in 1995 were $3,863,000,
$1,978,000, and $4,424,000, respectively.

Medical malpractice premiums earned increased by 19.1% to $147,635,000 in
1995 from $123,982,000 in 1994. Gross and net premiums increased principally
due to strong renewals for healthcare systems, the addition of new group
practice insureds and the acquisition of HPIC. Reflected in 1995 premiums
earned are approximately $3,000,000 more in one-time non-recurring premiums,
such as prior acts coverage, than was included in 1994. Healthcare system
premium rates were generally unchanged, and modest rate increases were
obtained for physician business. Life and health premiums earned decreased by
10.1% to $7,556,000 from $8,407,000 in 1994 due to a decrease in group
accident and health and medical expense stop-loss business.

Consulting and fee income increased by 20.1% to $22,336,000 in 1995 from
$18,602,000 in 1994. The growth in consulting and fee income is attributable
primarily to increases in risk management fee income and also to an increase
in McManis Associates consulting revenues. Consulting and fee income as a
percentage of net premiums earned and consulting and fee income increased to
12.6% in 1995 from 12.3% in 1994.

Net investment income increased by 37.1% to $39,850,000 in 1995 from
$29,067,000 in 1994. Net investment income attributable to HPIC in 1995 was
$4,793,000. Investment income increased principally due to an increase in
invested assets related to growth in the Company's historical business and the
acquisition of HPIC. The Company had net realized gains on investments of
$1,367,000 in 1995 compared to losses of $2,853,000 in 1994.

Losses and expenses. Losses and LAE increased by 15.4% to $130,088,000 in
1995 from $112,711,000 in 1994. Medical malpractice liability losses and LAE
increased by 17.9% to $125,944,000 in 1995 from $106,861,000 in 1994 due
principally to an increase in premiums earned. The property and casualty loss
ratio decreased to 84.8% from 85.7% in 1994. Life and health benefit costs
decreased 29.2% to $4,144,000 in 1995 from $5,850,000 in 1994 due to a
decrease in premiums earned and a decrease in the ratio of life and health
benefit costs to premiums earned.

Insurance and administrative expenses increased by 29.1% to $61,055,000 in
1995 from $47,286,000 in 1994. The increase in administrative expense is
attributable to increased revenues, increased commission expense due to a
greater percentage of business acquired through brokers and the acquisition of
HPIC.

15
<PAGE>

Interest expense increased by 70.9% to $2,767,000 in 1995 from $1,619,000 in
1994 and is due to an increase in debt outstanding and to an increase in
average short-term interest rates.

Income taxes. Income taxes were $2,139,000 in 1995 compared to $538,000 in
1994. The increase was attributable to greater pretax income.

Net income. Net income increased by 50.8% to $22,695,000 in 1995 from
$15,051,000 in 1994 due to the aforementioned reasons. Operating income, which
excludes net realized gains (losses) on investments, net of taxes, increased
by 29.0% to $21,806,000 in 1995 from $16,905,000 in 1994.

Net income per share. Fully diluted net income per common and common
equivalent share increased to $2.34 in 1995 from $1.72 in 1994. Included in
these amounts are gains of $.09 in 1995 and losses of $.21 in 1994 related to
net realized gains (losses) on investments. Fully diluted net income per
common and common equivalent share before realized gains (losses), net of
taxes, increased to $2.25 from $1.93. Fully diluted weighted average shares
and equivalents outstanding increased due to the issuance of capital stock in
connection with the acquisition of HPIC in May 1995.

1994 COMPARED WITH 1993.

Revenues. Gross premiums written increased by 14.5% to $184,791,000 in 1994
from $161,421,000 in 1993; net premiums written increased by 16.3% to
$139,800,000 from $120,237,000 and net premiums earned increased by 13.8% to
$132,389,000 from $116,295,000.

Medical malpractice premiums earned increased by 15.1% to $123,982,000 in
1994 from $107,704,000 in 1993. Medical malpractice premiums increased
principally due to a high renewal rate and the addition of new healthcare
system and clinic accounts. Life and health premiums earned decreased by
$184,000, or 2.1%, to $8,407,000 from $8,591,000.

Consulting and fee income increased by 167.2% to $18,602,000 in 1994 from
$6,962,000 in 1993 due principally to consulting revenues generated by McManis
Associates, which was purchased on December 30, 1993. Other consulting and fee
income, principally risk management fees from insureds, continued to increase
at a rate exceeding the rate of premium growth. Consulting and fee income as a
percentage of net premiums earned and consulting and fee income increased to
12.3% from 5.6% in 1993.

Net investment income decreased by 2.6% to $29,067,000 in 1994 from
$29,836,000 in 1993. Yield on market value of invested assets decreased to
5.9% in 1994 from 6.5% in 1993. The decrease in investment income and lower
yield is due to an increase in the percentage of tax-advantaged securities in
the investment portfolio and reinvestment of redeemed securities at lower
yields.

Net realized losses on investments were $2,853,000 in 1994 compared to gains
of $1,771,000 in 1993. During the second quarter of 1994, the Company adjusted
the mix among taxable and tax-advantaged securities in its investment
portfolio from approximately 40% tax-advantaged to approximately 60% tax-
advantaged. The Company sold taxable securities with an aggregate market value
of approximately $80,000,000 and reinvested the proceeds and available cash in
tax-advantaged securities of comparable credit quality and duration. The
Company undertook the change in investment mix to improve the after-tax total
return portion of the investment portfolio and to take advantage of an
expiring tax carryback.

Losses and expenses. Losses and LAE increased by 11.1% to $112,711,000 in
1994 from $101,471,000 in 1993 principally because of the increase in premiums
earned. The property and casualty loss ratio decreased to 85.7% in 1994 from
88.3% in 1993. Life and health benefit costs decreased by $307,000, or 5.0%,
to $5,850,000 in 1994 from $6,157,000 in 1993.

Insurance and administrative expenses increased 28.8% to $47,286,000 in 1994
from $36,699,000 in 1993. A substantial majority of the increase in insurance
and administrative expenses is attributable to the addition of

16
<PAGE>

McManis Associates. Included in insurance and administrative expenses in 1994
is amortization of goodwill of approximately $880,000 related to the McManis
Associates acquisition. Excluding the addition of McManis Associates,
insurance and administrative expenses increased at a rate lower than premium
growth.

Interest expense was $1,619,000 in 1994 compared to $1,489,000 in 1993 due
principally to an increase in short-term interest rates.

Income taxes. The Company recorded income taxes of $538,000 in 1994 compared
to $1,024,000 in 1993. The decrease in income taxes resulted primarily from
the tax effect of the net realized losses on investments incurred during the
second quarter of 1994 as well as an increase in tax-advantaged investment
income in 1994.

Net income. Net income increased by 6.1% in 1994 to $15,051,000 from
$14,181,000 in 1993. Operating income, which excludes realized gains (losses)
on investments, net of tax, increased by 29.7% to $16,905,000 from
$13,030,000.

Net income per share. Fully diluted net income per common and common
equivalent share decreased by 9.5% to $1.72 in 1994 from $1.90 in 1993.
Included in these amounts are losses of $.21 in 1994 and gains of $.16 in 1993
related to net realized gains (losses) on investments. Fully diluted net
income per common and common equivalent share before realized gains (losses),
net of taxes, increased by 10.9% to $1.93 from $1.74. Weighted average shares
outstanding increased due to the Company's public offering of Common Stock and
the acquisition of McManis Associates, both of which occurred in 1993.

LIQUIDITY AND CAPITAL RESOURCES

As a holding company, the Company's assets consist primarily of the stock of
its subsidiaries. The Company's principal sources of operating funds are
management fees and dividends from its subsidiaries. In 1995, the Company
received dividends from its subsidiaries of $6,000,000 compared to $5,000,000
in 1994 and 1993. For the six months ended June 30, 1996 the Company received
dividends of $5,500,000, compared to $2,500,000 for the 1995 period. The
Company received management fees from its subsidiaries of $19,100,000 in 1995,
$16,750,000 in 1994, and $12,200,000 in 1993. For the six months ended June
30, 1996, the Company received management fees of $10,100,000 compared to
$8,050,000 for the 1995 period. The Company's principal uses of funds are
operating expenses, acquisitions, debt service and dividends to stockholders.

On a consolidated basis, the Company's principal sources of operating funds
are premiums, investment income, fees and recoveries from reinsurers. Funds
are used to pay claims, operating expenses, reinsurance premiums, acquisition-
related expenditures, debt service requirements, taxes and dividends to
stockholders.

Cash flow. On a consolidated basis, the Company has had positive cash flow
from operations in each of the last three years. Positive cash flow has
resulted from growth in premiums and timing differences between the collection
of premiums and payment of claims. Because of uncertainty related to the
timing of payment of claims, cash from operations for a casualty insurance
company can vary substantially from year to year and quarter to quarter. Cash
provided by operating activities was $50,299,000 in 1995, $42,977,000 in 1994,
and $41,151,000 in 1993. For the six months ended June 30, 1996, cash used by
operating activities was $7,233,000 compared to cash provided by operating
activities of $25,794,000 for the 1995 period. Cash from operations decreased
principally due to increased paid losses during the first six months of 1996.

Investing activities, substantially in fixed income securities, have been
the principal use of cash flow from operations. Cash used by investing
activities was $69,738,000 in 1995, $41,685,000 in 1994, and $61,796,000 in
1993. For the six months ended June 30, 1996 cash provided by investing
activity was $492,000 compared to cash used by investing activity of
$39,463,000 for the 1995 period. During the first six months of 1996, the
decrease in cash provided by operating activities reduced cash available for
investing activities. The greater use of cash in 1995 compared to 1994 relates
to the acquisition of HPIC. Investment of proceeds from the Company's public
offering and the acquisition of McManis Associates were two other principal
uses of cash in investing

17
<PAGE>

activities in 1993. Reallocations of the Company's investment portfolio have
resulted in significant purchases and sales of fixed income securities. The
Company has no material commitments for capital expenditures.

Financing activities provided $19,380,000 in cash in 1995, resulted in a
$1,508,000 use in 1994, and provided $20,106,000 in 1993. Cash provided by
financing activities was $9,975,000 for the six months ended June 30, 1996
compared to $14,351,000 for the 1995 period. In January 1996, the Company
obtained an increase in its available credit line to $85,000,000 and increased
its borrowings to $58,000,000 as of June 30, 1996 in connection with the
acquisition of MSA. In May 1995, in connection with the acquisition of HPIC,
the Company obtained an increase in its available credit line to $56,000,000
and borrowed an additional $15,000,000. The Company borrowed an additional
$5,000,000 in July 1995. Long-term and short-term notes payable totaled
$49,750,000 as of December 31, 1995, compared to $30,000,000 as of December
31, 1994.

Invested assets. The Company invests in investment grade fixed income
securities and preferred stocks. The estimated fair value of preferred stocks
was less than 2.0% of the fair value of total invested assets as of June 30,
1996. The estimated fair value of the Company's short-term, fixed maturity and
preferred stock investments was $711,672,000 as of June 30, 1996, compared to
$743,622,000 as of December 31, 1995 and $497,679,000 as of December 31, 1994.
The June 30, 1996 amount includes net unrealized gains of $6,191,000, which
represents the amount by which the estimated fair value of the fixed income
portfolio exceeds amortized cost. Unrealized gains were $28,447,000 as of
December 31, 1995 compared to unrealized losses of $11,133,000 as of December
31, 1994. The decrease in unrealized gains during the first six months of 1996
was due to an increase in the general level of interest rates.

The Company maintains a portion of its investment portfolio in high quality,
short-term securities to meet its short-term operating liquidity requirements,
including the payment of claims and expenses. Short-term investments totaled
$30,769,000 or 4.3% of invested assets as of June 30, 1996, compared to
$33,550,000 or 4.5% of invested assets as of December 31, 1995 and $33,839,000
or 6.8% of invested assets as of December 31, 1994. The Company believes that
all of its invested assets are readily marketable.

Debt. Long-term and short-term debt totaled $58,000,000 as of June 30, 1996,
compared to $49,750,000 as of December 31, 1995 and $30,000,000 as of December
31, 1994. In January 1996, the Company obtained an increase in its available
credit line to $85,000,000. The credit agreement, which is secured by the
capital stock of ACIC and HPIC, limits the Company's ability to enter new
lines of business, incur or assume debt, pay dividends in excess of 20% of the
prior year's net income and make acquisitions. The credit agreement contains
financial covenants with respect to minimum net worth, minimum statutory
surplus, a ratio of debt to capital, a debt service coverage ratio, certain
leverage ratios for ACIC, A.M. Best rating and risk-based capital levels. The
loan bears interest at a fixed rate equal to the London Interbank Offered Rate
("LIBOR") for periods of up to one year plus a margin ranging from 5/8% to
7/8%. The Company has entered into interest rate swap agreements that result
in a fixed interest rate of 5.4% through 1997 on the LIBOR component for
$44,500,000 of the $58,000,000 in outstanding principal. As of June 30, 1996,
the unused commitment under the credit facility was $27,000,000.

Stockholders' equity. The Company's stockholders' equity was $187,946,000 as
of June 30, 1996, compared to $186,463,000 as of December 31, 1995 and
$123,059,000 as of December 31, 1994. Changes in stockholders' equity are
primarily attributable to net income of the Company, dividends to
stockholders, changes in unrealized gains or losses on fixed income securities
and issuances of Common Stock. Cash dividends to stockholders totaled
$1,957,000 in 1995, $1,376,000 in 1994, and $946,000 in 1993. Dividends to
stockholders were $1,179,000 for the six months ended June 30, 1996. In 1994,
the Company adopted Financial Accounting Standard No. 115--Accounting for
Certain Investment in Debt and Equity Securities, which requires invested
assets classified as available-for-sale to be carried at estimated fair value,
with changes in temporary unrealized gains and losses reported directly in
stockholders' equity. As of June 30, 1996, estimated unrealized gains on
investments were $6,191,000 net of deferred tax liability of $2,167,000,
thereby increasing stockholders' equity by $4,024,000. As of December 31, 1995
the Company had an unrealized gain, net of taxes, of $18,490,000 and as of
December 31, 1994, the Company had an unrealized loss, net of taxes, of
$7,237,000.

18
<PAGE>

Risk-based capital. NAIC risk-based capital solvency standards for property
and casualty insurers became effective as of December 31, 1994 in addition to
risk-based capital standards for life and health insurance companies, which
became effective in 1993. Under risk-based capital, several solvency
thresholds are calculated based on the underwriting, credit, and asset risks
of a company. As of December 31, 1995 the statutory capital and surplus of
each of the Company's insurance subsidiaries exceeds its risk-based capital
requirements.

ACQUISITION OF HPIC AND MSA

On May 9, 1995 the Company acquired all of the outstanding capital stock of
HPIC, an Illinois-domiciled insurance company that writes medical malpractice
insurance for healthcare organizations and assumes reinsurance from healthcare
sponsored insurance companies. Total consideration was $30,672,000, consisting
of $15,320,000 in cash and $15,352,000 in convertible preferred stock, which
was subsequently converted into 949,760 shares of Common Stock. The
transaction was accounted for as a purchase.

Effective April 1, 1996 the Company purchased substantially all of the net
assets of MSA. MSA provides employee relations and human resource consulting
services to healthcare organizations and had revenues of approximately $6.6
million in 1995. The purchase price for MSA was $8.3 million in cash which was
funded principally by an increase in borrowings under the Company's credit
agreement.

EFFECT OF INFLATION

The primary effect of inflation on the Company is implicitly considered in
pricing and estimating reserves for unpaid losses and loss adjustment
expenses, particularly for claims where there is a long period between
reporting and settlement. 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.

19
<PAGE>

BUSINESS

OVERVIEW

The Company offers a comprehensive set of specialized insurance products and
consulting services that are designed to assist healthcare providers manage
the business, clinical, insurable and financial risks associated with the
delivery of healthcare. The Company was formed in 1983 to write medical
malpractice insurance for hospitals and physicians in the United States and
has since established its strategic vision to be The Healthcare Risk
Management SourceSM. Since the initial public offering of its Common Stock in
June 1993, the Company has, through acquisitions and internal growth,
substantially increased its insurance assets and capital as well as the
breadth of its products and services and its capacity to deliver them. The
Company has acquired insurance, strategic management consulting and employee
relations consulting businesses and successfully integrated them into its
operations. It has also developed additional products and services to assist
healthcare providers manage their business operations.

The Company's net premiums earned have increased from $101 million in 1992
to $155 million in 1995, representing a compound annual growth rate of 15%.
Consulting and fee income increased from $6 million to $22 million over the
same period, representing a compound annual growth rate of 56%.

MMI believes its combination of insurance and consulting product and service
offerings and national distribution differentiates it in the marketplace and
provides a competitive advantage over monoline professional liability insurers
and professional service firms serving the healthcare industry. Because of the
close relationship between clinical and insurable risks, the Company
integrates its professional liability insurance with its risk management
services and does not offer such insurance or certain of its risk management
programs on a stand alone basis. Accordingly, insurance clients are required
to purchase a specific set of risk modification services consisting of
consulting, education and information services in order to have access to the
Company's professional liability coverage.

The Company's business is organized into three operating groups:

The Company believes that a close working relationship with its healthcare
industry clients is essential. Consequently, it markets its products and
services directly and through insurance brokers where such a close client
relationship can be created and maintained. The Company utilizes a team
approach in delivering its services, combining the expertise of its sales,
risk management, claims and underwriting specialists. The Company's Board of
Directors is composed primarily of healthcare executives and physicians, which
contributes to the Company's understanding of the business needs of its
clients. In addition, the Company works closely with its clients in developing
its products and services through formal and ad hoc advisory committees.

Business Environment

20
<PAGE>

healthcare delivery was generally provided on a fee-for-service basis by
hospitals and physicians. The Company believes that under managed care,
healthcare delivery is evolving toward a more complex structure involving
numerous healthcare provider types and payment mechanisms. Healthcare
providers are forming integrated delivery networks by combining through
mergers and acquisitions and through contractual arrangements. These networks
include healthcare systems, physician organizations, physician management
companies, physician hospital organizations, individual hospitals and
physicians and other specialized healthcare provider entities.

The Company believes that the evolving and consolidating healthcare
environment presents providers and networks with a related set of risks:

. Business Risk--arises as providers develop and implement organizational
and operating strategies to respond to their changing business
environment.

. Clinical Risk--relates to assuring a consistent quality of care to
patients in an increasing variety of delivery settings.

. Insurable Risk--relates to costs associated with medical malpractice and
other liability exposures.

. Financial Risk--increases for providers as managed care transforms the
operating environment from fee-for-service to capitated arrangements.

MMI's Integrated Response

Consolidation of the Medical Malpractice Industry

Acquisition Opportunities

21
<PAGE>

as an acquiror. Over the past five years the Company has obtained several
blocks of insurance business from healthcare-sponsored single-state insurance
entities in Connecticut, North Carolina and Georgia. With the acquisition of
HPIC in 1995, the Company added a block of medical malpractice assumed
reinsurance business and substantially increased its asset base and statutory
surplus. The Company's strategy is to utilize its competitive position within
the consolidating medical malpractice industry to continue this trend of
growth through acquisitions and the assumption of books of business.

As part of its strategy of assisting healthcare clients to address their
business and clinical risks, during the past three years the Company acquired
a healthcare strategy consulting firm, McManis Associates, and a healthcare
employee relations consulting firm, MSA. The Company intends to consider
acquiring complementary consulting and fee businesses that serve the
healthcare industry.

BUSINESS GROUP DATA

The Company classifies its operations into insurance and consulting and fee
groups. The Insurance Group is comprised principally of medical malpractice
liability insurance, including professional and general liability insurance
and reinsurance for hospitals, healthcare systems and healthcare providers and
life and health insurance, including group life, disability and health stop-
loss insurance and reinsurance. The consulting and fee group includes the
Strategic Management Consulting Group and the Healthcare Services Group.
Investment income and certain expenses are allocated based on estimates.
Corporate and eliminations represents certain corporate income and expenses
that have not been allocated to specific business groups. The following table
sets forth the revenues and income (loss) before taxes for the Company's
business groups over the past three years:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Insurance Group:
Premiums earned........................... $116,295 $132,389 $155,191
Net investment income..................... 28,236 28,928 39,417
-------- -------- --------
144,531 161,317 194,608
Strategic Management Consulting and
Healthcare Services Groups:
Consulting and fee income................. 6,962 18,602 22,336
Net realized investment gains (losses)...... 1,771 (2,853) 1,367
Corporate and eliminations.................. 1,600 139 433
-------- -------- --------
Total................................... $154,864 $177,205 $218,744
======== ======== ========
Income (loss) before taxes:
Insurance Group............................. $ 16,830 $ 21,670 $ 30,158
Strategic Management Consulting and
Healthcare Services Groups................. 385 2,615 2,873
Net realized investment gains (losses)...... 1,771 (2,853) 1,367
Corporate and eliminations.................. (3,781) (5,843) (9,564)
-------- -------- --------
Total................................... $ 15,205 $ 15,589 $ 24,834
======== ======== ========
</TABLE>

PRODUCTS AND SERVICES

INSURANCE GROUP

Insurance products include professional liability insurance for healthcare
organizations and systems, physicians and allied healthcare professionals,
assumed reinsurance, and life and health insurance, written by the Company's
insurance subsidiaries: ACIC, HPIC and American Continental Life Insurance
Company

22
<PAGE>

("ACLIC"). Both ACIC and HPIC are rated "A" (Excellent) by A.M. Best Company
("A.M. Best"). ACLIC is rated "B++" (Very Good) by A.M. Best.

Healthcare Organizations and Systems. The Company writes primary, umbrella
and excess liability insurance for healthcare organizations and systems. The
Company has capacity to write policy limits to $51,000,000 and obtains
reinsurance for losses in excess of $3,000,000 subject to an annual aggregate
reinsurance deductible of $8,000,000. The Company's liability insurance is
written primarily on a claims-made basis. The Company has the capacity to
write this coverage on a surplus lines basis in most jurisdictions through
HPIC in situations where filed rates and forms are not immediately available
for complex risk exposures. The Company also writes liability insurance for
directors and officers of healthcare systems.

Physicians and Allied Healthcare Professionals. The Company underwrites
physician groups and physicians that are employed by or affiliated with
insured hospitals or clinics, and locum tenens organizations. The Company
writes both primary and excess policies primarily on a claims-made basis and
has capacity to write policy limits of up to $5,000,000 per occurrence with a
$7,000,000 aggregate policy limit. The Company cedes to reinsurers 100% of
losses in excess of $500,000 per claim. The Company's maximum exposure on any
single occurrence involving more than one insured is $750,000. The Company is
also the insurer for several liability insurance programs sponsored by
associations of healthcare professionals.

Assumed Reinsurance. The Company provides excess of loss reinsurance for
healthcare-sponsored medical malpractice insurance companies, principally
single-state organizations. The Company had assumed reinsurance gross earned
premiums of $17,247,000 in 1995.

Life and Health Insurance. The Company provides group life, stop-loss, and
disability products for healthcare institutions and their employees. The
Company's life and health insurance products further the Company's strategy of
offering a broad range of products to its existing and potential clients. The
Company also provides HMO reinsurance and healthcare provider excess
insurance.

CONSULTING AND FEE GROUP

The Strategic Management Consulting Group and Healthcare Services Group
comprise the Company's consulting and fee group.

Strategic Management Consulting Group

The Company acquired McManis Associates on December 30, 1993. McManis
Associates is a Washington D.C.-based management and research consulting firm
founded in 1964 that specializes in providing services to healthcare industry
clients. McManis Associates provides a wide variety of consulting services,
including strategy development, healthcare system integration and development,
managed care strategy design and implementation, hospital/physician alignment
strategies and business process reengineering. These services are designed to
assist clients in implementing organizational change. Since the acquisition,
McManis Associates has increased its capacity to provide consulting services
by locating senior consultants in certain of the Company's other offices
throughout the United States.

Healthcare Services Group

The Healthcare Services Group provides fee-based services designed to help
its customers increase revenues, reduce cost and improve the quality of
healthcare provided. Since its inception in 1983, the Company has required
that its insurance clients purchase a combination of its risk modification
programs, educational programs and information services as a condition to
obtaining its insurance coverage. The Company subsequently broadened its
strategy and now offers certain of these services to both insured and non-
insured clients and has developed additional clinical and operations support
service offerings for all of its healthcare clients.

Risk Modification Services to Insured Clients. The clinical risk
modification process is designed to help clients change practices in the
healthcare setting that may increase risk exposure. This process begins with a

23
<PAGE>

review of each prospective insured prior to underwriting in order to assess
risk exposures and to evaluate its receptivity to the Company's risk
management philosophy. Once insured, the client is provided several services
by the Company to manage its risk exposures.

The Company's risk modification approach originated with its risk
modification programs for the clinical setting. The Company has introduced
specialized clinical risk modification programs in four relatively high-risk
areas: obstetrics, anesthesia, emergency medicine and surgery. These programs,
which are updated regularly, seek to improve the quality of patient care,
thereby reducing loss exposures and incurred losses in these areas. The
Company requires that healthcare systems continually review clinical practices
and submit indicator statistics monthly. These statistics measure the
insureds' degree of compliance with the guidelines which have been developed
by national work groups of physicians and other medical professionals working
under the sponsorship of the Company. These data comprise a comparative
database of practice and outcome indicators that has been maintained since
1985. Insured institutions must also establish procedures for internal
clinical and risk management review of cases and furnish reports and make
available patient records, case review summaries and other material requested
to support the evaluation of their risk management activity.

The introduction of these programs into the insured's operation is
accomplished through a combination of consultation, education and information
services.

Consultation. The Company's risk management consultants regularly conduct
on-site visits to insured institutions, which include interviews with key
executive, administrative and clinical staff; review of hospital policies,
physician profiles and patient records; and inspection of treatment areas.
The consultants' periodic observations and recommendations are reported to
the insured and are included in the risk management plan developed for the
insured. The Company's risk consultants are supported by a nationwide
network of outside clinical and legal experts who are called upon as needed
to assist with on-site reviews and risk intervention. The consultants are
available to insureds to discuss risk management issues that arise from
time to time.

Education Programs. The Company includes education programs as a key
element of its approach to risk modification. The Company provides insureds
with educational opportunities including national seminars and focused
training workshops. National seminars are offered to multi-disciplinary
audiences and are designed to address a specific area of risk exposure of
national concern. Focused training workshops, with limited enrollment,
provide in-depth training for risk managers, healthcare executives and
others within the healthcare setting on specialized areas of risk. Some
examples of workshop topics include behavioral health, laboratory services,
radiological services, home healthcare and group practice. In addition, the
Company has developed and offers The Healthcare Risk Management Certificate
Program, a ten course professional development and continuing education
program. The Company's education programs have been approved by several
states and professional organizations for professional certification or
continuing education credit.

Information Services. Insureds receive the Company's proprietary
software, RISKKEY(R), which facilitates collection, analysis and reporting
of incident, claim and clinical data and contains a policy module that
enables insureds to monitor their insurance coverages. In addition, the
Company has developed an on-line communications function with its insureds
that allows for direct interaction among all clients and from each client
to the Company's staff.

Clinical and Operations Support Services. The Healthcare Services Group
offers services to insured and non-insured clients on a fee basis. These
services include clinical risk modification program assessment and
development; third party claims administration and audit and design of self-
administered claims management systems; and customized education and training.

The Company offers managed care support services that include: physician
credentials verification services; managed care contract management, patient
billing and coding services; quality management services; health claims
administration; and accreditation preparation services.

24
<PAGE>

The Company provides employee relations and human resource consulting
services to healthcare organizations. The Company believes that human resource
and compensation issues will take on increased importance as healthcare
organizations continue to consolidate and evolve.

MARKETING AND UNDERWRITING

The Company believes that a close working relationship with its healthcare
industry clients is essential and consequently markets its products and
services directly and through insurance brokers where such a close client
relationship can be created and maintained. The Company markets its products
nationally and has significant operations in Deerfield, Illinois; Washington,
D.C.; Atlanta, Georgia; San Francisco and San Diego, California; and Kansas
City, Missouri. The Company also has several small offices in locations where
specialized services are provided to clients. ACIC is licensed in 50 states
and the District of Columbia. In 1995, the five largest states in terms of
direct written premium by ACIC were Florida, Illinois, California, Texas and
North Carolina, which together accounted for approximately 52% of ACIC's
direct written premium. HPIC has authority to write insurance on a surplus
lines basis in 29 states.

The Company has a select risk underwriting philosophy and its account
management team approach supports the underwriting process. Clinical risk
management consultants prepare reports regarding potential new business and
provide site visit reports, risk assessments, and recommendations and monthly
statistical reports regarding risk management programs for renewal business.
The Company's risk management consultants develop a base-line risk index which
measures the degree to which clients have processes in place to assess and
manage risk. Claims managers evaluate a minimum of five years of loss history
and reserve data, and underwriters require detailed historical exposure data
and three years of financial information. The Company's underwriters perform a
complete underwriting evaluation for every new and renewal applicant and
determine premiums and coverage provisions when an insurance quotation is
issued. Pricing of healthcare system insurance is strongly influenced by the
loss experience of the insured, which provides incentive for the client to
adopt and adhere to sound risk management policies.

For physicians affiliated with insured healthcare systems, the underwriting
process involves an evaluation of the prospective insured and an underwriting
recommendation by a committee of insured physicians, in addition to an
evaluation of a physician's loss history and exposure data. Although
physicians are underwritten individually by the Company, for all physician
group business pricing is influenced by the experience of the insured
physician group. The Company believes that this approach to pricing and the
review by group members improves the physician underwriting process.

CLAIMS MANAGEMENT

The Company's approach to claims management utilizes highly experienced
multi-disciplinary teams and early clinical evaluation. The Company believes
that this approach allows it to assess claims more accurately and manage them
to resolution more efficiently. Clinical resource work groups are a key
component of claims management for the Company. Each work group meets three
times a year and includes several prominent physicians affiliated with insured
healthcare institutions and the Company's Medical Director and legal, claims
and underwriting personnel. The work groups review and evaluate clinical,
standard of care, causation and risk management issues relating to new claims.

The Company emphasizes early evaluation and aggressive management of claims.
Claims professionals are required to complete a full evaluation and reserving
of claims within nine months of the filing of a claim. The claims department
conducts major case reviews semiannually for all cases reserved at or above
$100,000 and for all obstetric claims. The major case review process ensures
ongoing senior management involvement for all large exposure claims. The
Company works closely with its defense counsel to develop case strategies and
participate in litigation of claims. Claims professionals attend case
conferences and trials and maintain an expert witness data bank. When
necessary, medical consultants are retained to assist in defense of claims.

25
<PAGE>

The Company seeks a cooperative working relationship with client risk
managers. Claims professionals are assigned responsibility for claim activity
on an account basis, working closely with underwriters and risk management
consultants also assigned to these accounts. Claims professionals routinely
conduct phone consultations with client risk managers regarding specific cases
and perform claim audits annually. This working relationship and open
communication is critical for the Company in identifying incidents that may
result in claims and assists the Company in evaluating and responding to
claims expeditiously.

RESERVES AND LOSSES

The Company establishes balance sheet reserves based on its estimates of the
future amounts necessary to pay claims and expenses associated with
investigation and settlement of claims. These estimates include two
components: case reserves and non-case reserves. Case reserves are estimates
of future losses and LAE for reported claims and are established by the claims
department. Non-case reserves, which include a provision for losses that have
occurred but have not been reported to the Company as well as development on
reported claims, are the difference between (i) the sum of case reserves and
paid losses and (ii) actuarially estimated ultimate incurred losses. Ultimate
incurred losses are an actuarially determined estimate of total losses and LAE
necessary for the ultimate settlement of all reported claims and incurred but
not reported claims including amounts already paid.

The following table shows the Company's property and casualty loss and LAE
reserves as of December 31, 1993, 1994 and 1995, separated into their case and
non-case components. The table is presented net of reinsurance receivables.

LOSS AND LAE RESERVES
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Case........................................... $193,039 $207,501 $297,904
Non-case....................................... 144,774 154,232 240,803
-------- -------- --------
Total...................................... $337,813 $361,733 $538,707
======== ======== ========
</TABLE>

The Company employs several actuarial methodologies in setting its reserves,
including the Bornheutter-Ferguson method, traditional development approaches,
frequency and severity methods and simulation models. The Company places
heavier emphasis on the Bornheutter-Ferguson method and development approaches
in estimating reserves. The Company estimates reserves separately for each of
its several classes of business, including hospital malpractice, physician
malpractice, umbrella and other classes, and it evaluates insurance written on
a claims-made basis separately from insurance written on an occurrence basis.
The actuarial analysis results in estimates of ultimate incurred losses, which
are then disaggregated into paid losses, case reserves and non-case
components. In deriving loss development factors to apply to known losses, the
Company uses its own historic loss development patterns.

The process of estimating reserves is inherently uncertain and involves an
evaluation of many variables including social and economic conditions. A
significant period of time may elapse between the report of a claim to the
Company and the ultimate settlement of the claim. The inherent uncertainty of
establishing reserves is relatively greater for companies writing long-tail
casualty insurance, including medical malpractice insurance, due primarily to
the longer-term nature of the resolution of claims. There can be no assurance
that the ultimate liability of the Company will not exceed the amounts
reserved.

26
<PAGE>

The following table presents the development of balance sheet reserve
liability for property and casualty reserves net of reinsurance for the
calendar years 1986 through 1995. The amounts shown for each year on the top
line of the table represent the Company's estimate of its liability for future
payments of losses and LAE as of the balance sheet date as originally
reported. The liability for unpaid losses and LAE as originally reported is
presented net of reinsurance receivables relating to unpaid losses. The upper
portion of the table represents a re-estimate of the original balance sheet
liability at the end of each succeeding period, followed by a line indicating
the change from the original estimate to the most current re-estimate. The
lower portion of the table represents the cumulative amount of the original
liability that has been paid in the succeeding years.

ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE DEVELOPMENT
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid
losses and LAE, net.... $ 74,116 $115,315 $162,812 $208,752 $244,876 $288,297 $314,401 $337,813 $361,733 $538,707
Liability re-estimated
as of:
One year later......... 73,288 117,015 162,938 208,674 247,086 302,168 317,727 340,198 359,967
Two years later........ 79,127 118,368 164,333 209,397 255,183 301,032 316,445 336,180
Three years later...... 82,349 120,724 162,832 212,058 248,985 287,985 305,428
Four years later....... 87,288 120,480 166,651 207,542 235,641 278,989
Five years later....... 91,503 122,992 163,278 202,287 227,666
Six years later........ 95,124 123,039 159,063 199,548
Seven years later...... 96,626 122,829 157,348
Eight years later...... 95,563 124,619
Nine years later....... 96,898
-------- -------- -------- -------- -------- -------- -------- -------- --------
Cumulative redundancy
(deficiency)........... $(22,782) $ (9,304) $ 5,464 $ 9,204 $ 17,210 $ 9,308 $ 8,973 $ 1,633 $ 1,766
======== ======== ======== ======== ======== ======== ======== ======== ========
Cumulative liability
paid as of:
One year later......... $ 10,922 $ 18,209 $ 28,150 $ 47,812 $ 39,248 $ 72,518 $ 68,070 $ 77,646 $ 69,088
Two years later........ 26,538 39,502 67,111 78,606 97,689 125,036 125,009 135,881
Three years later...... 35,242 61,709 82,354 119,211 126,723 157,181 166,623
Four years later....... 51,500 71,051 106,322 140,118 151,038 186,705
Five years later....... 58,050 89,864 121,615 153,606 166,893
Six years later........ 72,877 101,741 127,870 161,440
Seven years later...... 82,076 106,218 134,099
Eight years later...... 86,852 110,338
Nine years later....... 86,865
</TABLE>

In evaluating the information in the table above, it should be noted that
each column includes the effects of changes in amounts for prior periods. The
table does not present accident year or policy year development data.
Conditions and trends that have affected the development of liabilities in the
past may not necessarily occur in the future. Accordingly, it may not be
appropriate to extrapolate future redundancies or deficiencies based on this
table. In 1995, reserve redundancy of $1,766,000 represents a 0.5% decrease in
the Company's estimate of the December 31, 1994 reserve.

27
<PAGE>

The following table presents a reconciliation of beginning and ending
property and casualty loss and LAE reserve balances for the years indicated.

RECONCILIATION OF LIABILITY FOR LOSS AND LAE
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Liability for losses and LAE at beginning of year
(net of reinsurance receivables: 1993--$62,263;
1994--$71,851; 1995--$78,057)................... $314,401 $337,813 $361,733
Liability for losses and LAE from HPIC at date of
acquisition (net of reinsurance receivables:
$9,944)......................................... -- -- 124,651
Add: Provision for losses and LAE for claims
occurring in:
The current year from continuing operations.... 92,027 104,366 127,710
The current year from discontinued operations.. 4,866 759 --
Prior years from continuing operations......... 3,287 2,495 (1,766)
Prior years from discontinued operations....... 39 (110) --
-------- -------- --------
Total incurred losses and LAE................ 100,219 107,510 125,944
Less: Losses and LAE payments for claims
occurring in:
The current year from continuing operations.... 8,717 5,944 4,533
The current year from discontinued operations.. 20 -- --
Prior years from continuing operations......... 62,082 74,453 67,681
Prior years from discontinued operations....... 5,988 3,193 1,407
-------- -------- --------
Total paid losses and LAE.................... 76,807 83,590 73,621
-------- -------- --------
Liability for losses and LAE at end of year (net
of reinsurance receivables: 1993--$71,851;
1994--$78,057; 1995--$88,707)................... $337,813 $361,733 $538,707
======== ======== ========
</TABLE>

The following table presents a reconciliation of reserves of the Company's
property and casualty operations in accordance with statutory accounting
practices ("SAP") with reserves reflected in the Consolidated Financial
Statements prepared in accordance with GAAP as of December 31, 1995.

RECONCILIATION OF SAP RESERVES WITH GAAP RESERVES
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
Liability for losses and LAE on a SAP basis............ $449,589
Add:
Statutory loss reserve discount...................... 50,182
Retroactive reinsurance reserve assumed.............. 19,109
Other................................................ 19,827
--------
Liability for losses and LAE on a GAAP basis (net of
reinsurance receivables of $88,707)................... $538,707
========
</TABLE>

For SAP reporting, ACIC discounts reserves at a 5.0% interest rate, as
expressly approved by insurance regulatory authorities. Retroactive
reinsurance reserve assumed is reported as an aggregate write-in liability for
SAP. For GAAP reporting, ACIC does not discount its reserves.

28
<PAGE>

INVESTMENTS

The Company invests principally in investment grade fixed income securities
and preferred stocks. The Investment Committee of the Company's Board of
Directors meets quarterly with management to set investment policy and review
performance of internal and external investment managers. The Company's Board
of Directors approves investment policy which currently authorizes a maximum
average effective duration of six years and limits fixed income purchases to
securities rated Baa/BBB or better by Moody's Investors Services, Inc.
("Moody's"), Standard & Poor's Corporation ("S&P"), Duff & Phelps Inc. ("D&P")
or Fitch Investors Service Inc ("Fitch"). The Company's investment managers
select specific bond issues within these guidelines. The investment policy
limits holdings in private placements, common stocks, preferred stocks and
international stocks and bonds, cumulatively, to 5% of invested assets.

In general, the investment policy of the Company is to maximize after-tax
total return, subject to constraints on investment quality, maturity and
liquidity. The Company's investment policy establishes a range for the
appropriate allocation among asset classes. The precise allocation varies
depending on an evaluation of the economic environment and on the Company's
tax position. Currently, the portfolio is being managed with emphasis on
corporate and municipal bonds. As of June 30, 1996, the securities in the
Company's fixed income portfolio had an average rating of Aa3 as rated by
Moody's. S&P, D&P or Fitch ratings are used for securities not rated by
Moody's.

All fixed maturity securities are classified as available-for-sale and
carried at estimated fair value. For these securities, temporary unrealized
gains and losses, net of tax, are reported directly through stockholders'
equity, and have no effect on net income. As of June 30, 1996, the estimated
fair value of fixed maturity securities exceeded aggregate amortized cost by
$6,191,000, and stockholders' equity was increased by that amount, offset in
part by a $2,167,000 deferred tax liability. See Note 1 to the Consolidated
Financial Statements. The following table summarizes the investment results of
the Company for the years indicated.

INVESTMENT RESULTS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------- JUNE 30,
1993 1994 1995 1996 (1)
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Average invested assets (2)........... $442,781 $490,426 $611,994 $710,329
Net investment income................. 29,836 29,067 39,850 21,653
Net realized investment gains
(losses)............................. 1,771 (2,853) 1,367 1,002
Taxable-equivalent yield on invested
assets (excluding net realized
investment gains and losses)......... 8.1% 7.7% 8.2% 7.9%
</TABLE>
- --------
(1) Yield is annualized.
(2) Amounts are based on amortized cost.

The following table summarizes the Company's fixed maturity portfolio by
sector as of June 30, 1996.

FIXED MATURITY PORTFOLIO BY SECTOR
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------
PERCENT
AMORTIZED FAIR OF FAIR
COST VALUE VALUE
--------- -------- -------
<S> <C> <C> <C>
U.S. Government and government agencies.............. $ 54,497 $ 54,447 8.1%
States and political subdivisions.................... 430,635 434,416 65.0
Corporate securities................................. 95,424 97,644 14.6
Mortgage-backed securities........................... 81,811 82,076 12.3
-------- -------- -----
Total............................................ $662,367 $668,583 100.0%
======== ======== =====
</TABLE>

29
<PAGE>

The following table summarizes the Company's fixed maturity portfolio by
rating as of June 30, 1996. The table is based on ratings by Moody's. S&P, D&P
or Fitch ratings are used for securities not rated by Moody's.

FIXED MATURITY PORTFOLIO BY RATING
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------
PERCENT
AMORTIZED FAIR OF FAIR
COST VALUE VALUE
--------- -------- -------
<S> <C> <C> <C>
U.S. Government obligations and agencies (1)......... $ 84,987 $ 84,750 12.7%
Aaa/AAA.............................................. 189,042 189,809 28.4
Aa/AA................................................ 108,857 110,112 16.5
A/a.................................................. 193,160 195,736 29.2
Baa/BBB.............................................. 82,108 84,590 12.7
Below investment grade............................... 4,213 3,586 0.5
-------- -------- -----
Total............................................ $662,367 $668,583 100.0%
======== ======== =====
</TABLE>
- --------
(1)Includes $30,491,000 of U.S. government-sponsored entity mortgage-backed
securities.

The following table summarizes the Company's fixed maturity portfolio by
stated maturity as of June 30, 1996.

FIXED MATURITY PORTFOLIO BY STATED MATURITY
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------
PERCENT
AMORTIZED FAIR OF FAIR
COST VALUE VALUE
--------- -------- -------
<S> <C> <C> <C>
1 year or less....................................... $ 8,573 $ 8,611 1.3%
Over 1 year through 5 years.......................... 116,402 117,635 17.6
Over 5 years through 10 years........................ 189,968 193,164 28.9
Over 10 years through 20 years....................... 163,721 165,968 24.8
Over 20 years........................................ 101,892 101,129 15.1
Mortgage-backed securities........................... 81,811 82,076 12.3
-------- -------- -----
Total............................................ $662,367 $668,583 100.0%
======== ======== =====
</TABLE>

CEDED REINSURANCE

Insurance companies purchase reinsurance to limit risk on individual
exposures, protect against catastrophic losses and increase their capacity to
write insurance. Reinsurance involves an insurance company transferring, or
ceding, all or a portion of its exposure on insurance to a reinsurer. The
reinsurer assumes the exposure in return for a portion of the premium received
by the insurance company. Reinsurance does not discharge the insurer from its
obligation to its insureds. If the reinsurer fails to meet its obligations,
the ceding insurer remains liable to pay the insured.

The Company cedes a material amount of its business to reinsurers to spread
risk and limit loss per exposure. Management seeks to mitigate exposure to
adverse reinsurance pricing conditions and to limit its credit risk by
maintaining a diversity of reinsurers. Furthermore, the Company diversifies
its reinsurance exposure geographically with North American, United Kingdom
and continental European companies. In 1995, no single reinsurer accounted for
more than 12% of the Company's ceded premiums.

30
<PAGE>

For its hospital medical malpractice insurance business, the Company has
reinsurance capacity to write policy limits to $51,000,000. The Company has
reinsurance for all losses in excess of $3,000,000 per occurrence subject to
an $8,000,000 aggregate annual deductible. The Company provides for its
estimated liability relating to this deductible in loss reserves. For its
physician business, the Company has reinsurance capacity to write policy
limits up to $5,000,000 per claim with a $7,000,000 annual aggregate limit.
The Company has reinsurance for losses in excess of $500,000 per claim and
$750,000 for occurrences involving more than one claim. For its group life
insurance business, the Company has reinsurance for losses in excess of
$50,000 per life and for excess medical expense business, the Company cedes
70% of the premiums and losses for policy limits of $1,000,000 per occurrence
and $2,000,000 in the aggregate.

The Company's Vetting Committee evaluates the credit risk associated with
every reinsurer and reports its findings to the Audit Committee of the Board
of Directors. The Board of Directors has substantially increased the Company's
creditworthiness standards for reinsurers over the past several years. For new
reinsurers, the standards require minimum capital and surplus of $100,000,000
or one of the following ratings: at least A- or better from A.M. Best, Claims
Paying Ability rating from S&P of at least A or a S&P Insurance Solvency
International rating of at least A. In 1995, the Company ceded to reinsurers
approximately $49,564,000 or 24% of gross premiums written. In 1994 and 1993
the Company ceded premiums of $44,991,000 and $41,184,000 and respectively,
which constituted 24% and 26% of gross premiums written in each year.

The following table sets forth the principal reinsurers of the Company and
reinsurance receivables with respect to paid and unpaid losses and LAE as of
December 31, 1995.

REINSURANCE RECEIVABLES
(IN THOUSANDS)

<TABLE>
<CAPTION>
REINSURANCE SOURCE OF
REINSURER RECEIVABLE RATING RATING
--------- ----------- ------ ---------
<S> <C> <C> <C>
Lloyd's Underwriters....................... $ 17,411 -- --
Hannover Reinsurance Company............... 12,317 A+ A.M. Best
Transatlantic Reinsurance Company.......... 7,267 A+ A.M. Best
CNA International Reinsurance Company
Limited................................... 6,618 A- A.M. Best
Unionamerica Insurance Company Limited..... 6,448 A- A.M. Best
Insurance Company of Hannover.............. 3,255 A- A.M. Best
TIG Reinsurance Company.................... 2,790 A A.M. Best
Phoenix Home Life Mutual Insurance Company. 2,701 A A.M. Best
Axa Reassurance SA......................... 2,585 AA S&P (1)
Zurich Reinsurance Centre, Inc............. 2,534 A A.M. Best
Other...................................... 41,628 -- --
--------
Total.................................. $105,554
========
</TABLE>
- --------
(1) S&P rating refers to Claims Paying Ability rating.

COMPETITION

The Company competes with monoline medical malpractice insurance companies,
large multi-line property and casualty companies and providers of risk
management and consulting services. The insurance business is highly
competitive. Many of the Company's competitors have substantially greater
financial resources than the Company, and there are many companies that
provide risk management and other services that the Company provides. Among
other things, competition may take the form of lower prices, broader coverage,
greater product flexibility or higher quality service. However, the Company
believes that its particular combination of insurance, risk management
services involving clinical risk management, strategic management consulting
services, direct access and long-term relationships with its clients provide
it with a competitive advantage in its chosen markets.

31
<PAGE>

REGULATION

The Company's insurance subsidiaries, ACIC, HPIC and ACLIC (collectively,
the "Insurance Subsidiaries") are subject to the insurance laws and
regulations in each state in which they are licensed to do business. ACIC is
licensed in 50 states and the District of Columbia, HPIC is licensed in 2
states and has authority to write on a surplus lines basis in 29 states. ACLIC
is licensed in 45 states and the District of Columbia. ACIC and ACLIC are
subject to supervisory regulation by Missouri, the state of their
incorporation, and HPIC is subject to supervisory regulation in Illinois, its
state of incorporation. Each of the states in which the Insurance Subsidiaries
are licensed has the duty and obligation to impose premium taxes and other
fees and to regulate rates, financial data and major business transactions.
Also, the Insurance Subsidiaries must pass certain solvency tests and meet
minimum capital and surplus requirements in each jurisdiction where they are
licensed. Statutory financial statements must be filed on a quarterly basis
and insurance reserves must be certified by an actuary on an annual basis. The
Insurance Subsidiaries are regulated with regard to the amount of insurance
they may write based upon the amount of their respective surpluses.

As part of a holding company system, the Insurance Subsidiaries are subject
to the reporting requirements of their respective states, which require them
to file an annual Holding Company System Registration Statement (Form B). Form
B is required by Missouri, Illinois and several other jurisdictions where the
Insurance Subsidiaries are licensed. Form B must include relevant information
concerning the history, capital structure and significant transactions of each
of the Insurance Subsidiaries, their parent and affiliates. Pertinent
biographical information regarding each director and officer must also be
provided. Transfers of assets and significant transactions between the
Company's subsidiaries within the holding company system also require
regulatory approval.

Every insurance company is subject to a periodic examination under the
authority of the insurance commissioner of its state of domicile. Any other
state interested in participating in a periodic examination may do so. The
most recent periodic examination reports for ACIC and ACLIC, based on December
31, 1994 financial statements, were issued on November 29, 1995 for ACIC and
September 18, 1995 for ACLIC. An examination of HPIC, based on December 31,
1994 financial statements, is presently in progress. The most recent periodic
examination report for HPIC, based on December 31, 1991 financial statements,
was issued on October 22, 1992. Various states also conduct "market conduct
examinations" which are periodic, unscheduled examinations designed to monitor
the compliance with state laws and regulations concerning the filing of rates
and forms.

ACIC principally writes medical malpractice insurance and additional
requirements are placed upon ACIC to report detailed information with regard
to the settlements or judgments against its insureds. In addition to the
reporting to the states of medical malpractice settlements and judgments,
payments must also be reported to the National Practitioners Data Bank.
Penalties attach if reports to the states and to the data bank are not made.
The Insurance Subsidiaries are required to participate in the guaranty funds
of states in which they are licensed to do business. Assessments are made by
the states to pay amounts to policyholders who were insured by companies which
have become insolvent and are placed into liquidation either voluntarily or
involuntarily by the insurance commissioner. These assessments vary from state
to state and are dependent upon the amount of the insolvencies in each state
during a given year.

The Missouri and Illinois insurance laws and regulations impose restrictions
on the amount of dividends that may be paid to stockholders by insurance
companies domiciled in the respective states without prior approval of the
Director of Insurance of such states. ACIC may not, without the prior approval
of the Missouri Director of Insurance, pay a dividend that, together with any
other dividends paid within the twelve-month period ending on the date when
the dividend will be paid, exceeds the lesser of ACIC's net investment income
for the prior calendar year or 10% of its statutory capital and surplus as of
December 31 of the prior calendar year. In 1996, dividend payments by ACIC
without prior regulatory approval may not exceed $17,175,000. HPIC may not,
without the prior approval of the Illinois Director of Insurance, pay a
dividend that, together with any other dividends paid within the twelve-month
period ending on the date when the dividend will be paid, exceeds the

32
<PAGE>

greater of 10% of its statutory capital and surplus as of December 31 of the
prior calendar year or net income for the prior calendar year. In 1996,
dividend payments by HPIC without prior regulatory approval may not exceed
$6,973,000. As of June 30, 1996, in 1996 ACIC paid stockholder dividends of
$3,000,000 and HPIC paid stockholder dividends of $2,500,000.

The Missouri and Illinois insurance laws and regulations impose a risk-based
minimum surplus requirement for life and health insurance companies that
attempts to measure statutory capital and surplus needs based on the risks in
a company's mix of products and investment portfolio. As of December 31, 1995
ACIC's, HPIC's and ACLIC's surplus all exceeded their respective risk-based
capital requirement under the standards.

EMPLOYEES

As of June 30, 1996, the Company employed approximately 650 persons. None of
its employees are represented by a labor union, and the Company believes that
its employee relations are excellent.

PROPERTIES

The Company leases and has firm commitments for approximately 246,565 square
feet of office space throughout the United States and England. The Company's
primary leasehold obligation relates to its corporate office located in
Deerfield, Illinois. The Deerfield, Illinois office space consists of 112,000
square feet. The lease is for a term of fifteen years beginning July 1, 1991,
and may be terminated by the Company in the tenth and eleventh years of the
lease under certain circumstances. In 2001, the Company has the option to rent
an additional 42,000 square feet. The Company's principal regional and
subsidiary offices are in Atlanta, Georgia; San Francisco and San Diego,
California; Washington, D.C.; and Kansas City, Missouri.

33
<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table provides information regarding the directors and
executive officers of the Company. Biographical information for each of the
individuals named is presented below.

<TABLE>
<CAPTION>
END OF TERM
NAME AGE POSITION AS DIRECTOR
---- --- -------- -----------
<C> <C> <S> <C>
B. Frederick Becker........ 50 Chairman and Chief Executive 1999
Officer
Paul M. Orzech............. 54 Executive Vice President and
Chief Financial Officer
Anna Marie Hajek........... 48 Executive Vice President
Stephan A. Schleisman...... 51 Executive Vice President
Wayne A. Sinclair.......... 50 Senior Vice President, Secretary
and General Counsel
Richard R. Barr............ 57 Director 1998
James A. Block, M.D........ 55 Director 1997
George B. Caldwell......... 66 Director 1998
F. Laird Facey, M.D........ 65 Director 1998
William M. Kelley.......... 61 Director 1997
Andrew David Kennedy, Esq.. 53 Director 1999
Timothy R. McCormick....... 50 Director 1998
Gerald L. McManis.......... 60 Director 1997
Scott S. Parker............ 61 Director 1998
Edward C. Peddie........... 55 Director 1999
Anthony J. Perry........... 76 Director 1997
Joseph D. Sargent.......... 66 Director 1997
Marshall Whisnant.......... 67 Director 1999
</TABLE>

B. Frederick Becker is Chairman and Chief Executive Officer. Mr. Becker
joined the Company as its President in 1985. Prior to joining the Company, he
had more than 15 years experience as a senior executive in the insurance
industry. He began his career as a practicing lawyer.

Paul M. Orzech is Executive Vice President and Chief Financial Officer of
the Company. Before joining the Company in 1993, Mr. Orzech served as Vice
President--Finance for Security Life of Denver Insurance Company from 1990.
Prior to that Mr. Orzech was a partner with the accounting firm of Ernst &
Young LLP for over ten years and was Partner in Charge of its Midwest Region
Insurance Practice from 1986 to 1990.

Anna Marie Hajek is an Executive Vice President of the Company, the
President of the MMI Healthcare Services Group and President of MMI Risk
Management Resources, Inc. Prior to joining the Company in 1985, Ms. Hajek's
experience included clinical practice, education administration and health
professions program development in major medical centers, community hospitals
and government healthcare facilities.

Stephan A. Schleisman is Executive Vice President of the Company, President
of the MMI Insurance Group, ACLIC and MMI Agency, Inc. and Vice Chairman of
ACIC. Prior to joining the Company in 1995, he served as President of American
International Underwriters-North America, a subsidiary of American
International Group.

Wayne A. Sinclair is Senior Vice President, Secretary and General Counsel of
the Company. Prior to joining the Company in 1987, Mr. Sinclair was a partner
in the West Virginia law firm of Steptoe and Johnson, where he specialized in
insurance company defense litigation and represented the American Insurance
Association in legislative matters.

Richard R. Barr retired in 1995 as President of Presbyterian Healthcare
Services in Albuquerque, New Mexico. Mr. Barr has been a director of the
Company since 1986.

<PAGE>

James A. Block, M.D. has been President and Chief Executive Officer of The
Johns Hopkins Health System and The Johns Hopkins Hospital since 1992. Prior
to that he was President and Chief Executive Officer of University Hospitals
of Cleveland, Ohio from 1986 to 1992. Since 1992, Dr. Block has been a
director of Mercantile Bankshares Corp. He has been a director of the Company
since 1994.

George B. Caldwell is President Emeritus of Lutheran General Health System
in Park Ridge, Illinois and is Chairman of the Collier Company in Park Ridge,
Illinois. Mr. Caldwell has been a director of the Company since 1983.

F. Laird Facey, M.D. is a general surgeon affiliated with Daniel Freeman
Hospitals, Inc. in Inglewood, California. Dr. Facey has been a director of the
Company since 1983.

William M. Kelley is Chairman of Hill-Rom in Batesville, Indiana. He served
as President of Hill-Rom from 1992 to 1995 and Senior Vice President from 1980
to 1992. Mr. Kelley has been a director of the Company since 1993.

Andrew David Kennedy, Esq., is a partner with Beachcroft Stanleys, London
solicitors. Mr. Kennedy has been a director of Healthcare Risk Solutions
Limited, a subsidiary of the Company, since its formation in 1993.

Timothy R. McCormick has been President of the Park Ridge Health System in
Rochester, New York since 1979. Mr. McCormick has been a director of the
Company since 1986.

Gerald L. McManis is President of McManis Associates, Inc., a subsidiary of
the Company. He joined the Company in 1993 when the Company acquired McManis
Associates. Prior to the acquisition, Mr. McManis was President of McManis
Associates, which he co-founded in 1964. Mr. McManis has been a director of
the Company since 1994 and is a director of Magellan Health Services, Inc.

Scott S. Parker is President and Chief Executive Officer of Intermountain
Health Care, Inc. in Salt Lake City, Utah. Mr. Parker is a director of First
Security Corporation and has been a director of the Company since 1986.

Edward C. Peddie is President of AvMed-Santa Fe in Gainesville, Florida. Mr.
Peddie has been a director of the Company since 1990.

Anthony J. Perry is the retired President of the Decatur Memorial
Foundation. Mr. Perry has been a director of the Company since 1983.

Joseph D. Sargent is the Chairman and Chief Financial Officer of Connecticut
Surety Company. Mr. Sargent was previously the Vice Chairman of Conning &
Company in Hartford, Connecticut. Mr. Sargent is also a director of Trenwick
Group, Inc., Executive Risk Inc., Policy Management Systems Corp., Mutual Risk
Management Ltd. and E. W. Blanch Holdings, Inc. Mr. Sargent has been a
director of the Company since 1985. Two limited partnerships affiliated with
Conning & Company own, in the aggregate, 385,000 shares of Common Stock, or
3.9% of the outstanding shares. In connection with the purchase by such
limited partnerships of such Common Stock, the Company agreed to use its best
efforts to cause the nomination of, and to support for election by the
Company's Board of Directors, one qualified individual designated by such
limited partnerships. These limited partnerships designated Mr. Sargent. See
"Underwriting."

Marshall Whisnant retired as President of Methodist Medical Center in Oak
Ridge, Tennessee in 1995 where he served in such capacity since 1967. Mr.
Whisnant has been a director of the Company since 1984.

35
<PAGE>

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information regarding the beneficial
ownership of shares of Common Stock as of June 30, 1996, by (i) each person or
entity known by the Company to beneficially own more than 5% of the
outstanding shares of Common Stock, (ii) all directors and executive officers
as a group and (iii) each of the other Selling Stockholders.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) SHARES TO BE OFFERING(1)
NAME AND ADDRESS OF ----------------------- SOLD IN THE -----------------------
BENEFICIAL OWNER NUMBER PERCENT OFFERING NUMBER PERCENT
- ------------------- ------ ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
5% Stockholders and
Directors and Executive
Officers as a Group
J.P. Morgan & Co.
Incorporated(2)........ 1,029,820 10.4% -- 1,029,820 9.3%
60 Wall Street
New York, New York
10260
American Hospital
Association Services,
Inc.................... 949,760 9.6 949,760 -- --
One North Franklin
Avenue
Chicago, Illinois 60606
Lutheran General Health
Care System(3)......... 595,431 6.0 300,000 295,431 2.7
1775 Dempster Street
Park Ridge, Illinois
60068
Putnam Investment
Management, Inc........ 502,100 5.1 -- 502,100 4.5
One Post Office Square
Boston, MA 02109
All Directors and
Executive Officers as a
Group(4)(5) (18
persons)............... 966,063 9.3 -- 966,063 8.3
Other Selling
Stockholders
David A. Brooks......... 2,072 * 2,072 -- --
Daniel O. Cermak and
Martha L. Cermak, as
joint tenants.......... 1,165 * 1,165 -- --
Wayne Field and Maria
Field, as joint
tenants................ 2,770 * 2,770 -- --
James E. Sandum......... 801 * 801 -- --
Smith Barney Inc.,
Custodian for the IRA
of
Lowell J. Noteboom..... 1,165 * 1,165 -- --
</TABLE>
- --------
*Represents less than 1% of the Common Stock.
(1) Includes shares of Common Stock and options, exercisable within sixty
days, to purchase shares of Common Stock. Except as noted, each of the
persons identified above holds exclusive voting and investment power over
the shares of Common Stock beneficially owned.
(2) As reported in a Schedule 13F filed with the Securities and Exchange
Commission as of March 31, 1996. These shares are owned of record by two
wholly owned subsidiaries of J.P. Morgan & Co. Incorporated, Morgan
Guaranty Trust Company of New York and J.P. Morgan Investment Management
Inc., which hold 689,800 and 340,020 shares, respectively. All such shares
are held by these subsidiaries on behalf of their respective clients.
(3) As reported in a Schedule 13D filed with the Securities and Exchange
Commission dated February 10, 1994. Lutheran General Health Care System
has sole power to vote these shares and sole power to direct the
disposition of these shares.
(4) Includes 498,250 options granted under the 1993 Employee Stock Plan and
1993 Director's Stock Option Plan.
(5) Does not include 103,710 shares of Common Stock held in trust for
employees under the Company's Amended and Restated Savings and Profit
Sharing Plan (401(k)) as of June 30, 1996 over which a director and
certain executive officers have voting and dispositive power solely in
their capacities as trustees or shares of Common Stock held by employees
in the Company's Employee Stock Investment Plan.

36
<PAGE>

UNDERWRITING

Under the terms and subject to the conditions contained in the Underwriting
Agreement, dated the date hereof, each of the underwriters named below (the
"Underwriters"), for whom Smith Barney Inc., Conning & Company and J.P. Morgan
Securities Inc. are acting as representatives, has severally agreed to
purchase, and the Company and the Selling Stockholders have agreed to sell to
such Underwriter, the number of shares of Common Stock set forth opposite the
name of such Underwriter below.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Smith Barney Inc................................................
Conning & Company...............................................
J.P. Morgan Securities Inc......................................
---------
Total....................................................... 2,507,733
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all shares of Common Stock
offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.

The Underwriters initially propose to offer part of the shares of Common
Stock offered hereby directly to the public at the public offering price set
forth on the cover page hereof and part to certain dealers at a price that
represents a concession not in excess of $ per share below the public
offering price. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After the
initial public offering of the shares of Common Stock offered hereby, the
public offering price and such concessions may be changed by the Underwriters.

The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of
376,160 additional shares of Common Stock at the public offering price set
forth on the cover page hereof less underwriting discounts and commissions.
The Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, incurred in connection with the sale of the shares
offered hereby. To the extent such option is exercised, each Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional shares as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of shares
of Common Stock in such table.

The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Act.

With certain exceptions, the Company, a Selling Stockholder and the
executive officers and directors of the Company have agreed that, for a period
of 90 days after the date of this Prospectus, they will not, without the prior
written consent of Smith Barney Inc., sell, offer to sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into, exercisable or exchangeable for any shares of Common Stock.

Smith Barney Inc. was a co-managing underwriter of the initial public
offering of the Company's Common Stock in June, 1993.

Conning & Company was an underwriter of the initial public offering of the
Company's Common Stock in June, 1993. Conning & Company also provides
investment management services for ACIC, and the Company recorded expenses of
$221,000 for these services in 1995. See "Management."

37
<PAGE>

J.P. Morgan Securities Inc. is an indirect, wholly owned subsidiary of J.P.
Morgan & Co. Incorporated. As of March 31, 1996, two wholly owned subsidiaries
of J.P. Morgan & Co. Incorporated, Morgan Guaranty Trust Company of New York
and J.P. Morgan Investment Management Inc., held 689,800 and 340,020 shares of
Common Stock, respectively, an aggregate of 10.4% of the outstanding shares.
All such shares are held by these subsidiaries on behalf of their respective
clients.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Wildman, Harrold, Allen & Dixon, Chicago, Illinois.
Certain legal matters in connection with this Offering will be passed upon for
the Underwriters by Willkie Farr & Gallagher, New York, New York.

EXPERTS

The Consolidated Financial Statements (including schedules incorporated by
reference) of MMI Companies, Inc. and subsidiaries at December 31, 1995 and
1994, and for each of the three years in the period ended December 31, 1995,
appearing in this Prospectus and Registration Statement and the Consolidated
Financial Statements of Health Providers Insurance Company and subsidiary at
December 31, 1994 and 1993, and for the years then ended, incorporated by
reference in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
(which, as relates to HPIC, contains an explanatory paragraph with respect to
the reserve for losses and loss adjustment expenses mentioned in Note 1 to
HPIC's Consolidated Financial Statements) appearing elsewhere herein and in
the Registration Statement or incorporated by reference. Such Consolidated
Financial Statements are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.

38
<PAGE>

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents have been filed by the Company with the Commission
and are incorporated herein by reference: (i) the Company's Annual Report on
Form 10-K for the year ended December 31, 1995; (ii) the Company's Quarterly
Reports on Form 10-Q for the quarters ended March 31 and June 30, 1996; (iii)
the Company's Current Report on Form 8-K dated May 9, 1995 and amended June
23, 1995 and (iv) the description of Common Stock contained in the Company's
Registration Statement on Form 8-A filed April 28, 1993, pursuant to Section
12 of the Exchange Act and all amendments thereto on all reports filed for the
purpose of updating such description. All documents filed by the Company with
the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange
Act, subsequent to the date of this Prospectus and prior to the termination of
the Offering, shall be deemed to be incorporated by reference into this
Prospectus. Any statement contained herein or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or
is deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any statement or document so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.

The Company will provide without charge to each person (including any
beneficial owner) to whom this Prospectus is delivered, upon written or oral
request, a copy of any and all of the documents described above which have
been or may be incorporated by reference in this Prospectus other than
exhibits to such documents which are not specifically incorporated by
reference in such documents. Requests should be directed to MMI Companies,
Inc., 540 Lake Cook Road, Deerfield, Illinois 60015, Attention: Investor
Relations, telephone (847) 374-2254.

39
<PAGE>

GLOSSARY OF HEALTHCARE AND INSURANCE TERMS

Accident year basis.............. The matching of losses occurring within a
given period of time, regardless of when
the losses are reported, with premiums
earned during that same period of time. An
accident year cannot be finalized until all
losses for that accident year are settled.

Calendar year basis.............. The matching of all losses incurred, as
reported in a respective income statement
including estimated losses incurred but not
yet reported, within a given period of
time, with premium earned during that same
period of time. Once calculated for a given
time period, calendar year experience never
changes.

Capitation....................... A healthcare provider reimbursement
arrangement whereby a provider's payment
for services is set at a fixed amount per
covered life over a given time period.

Cede............................. To transfer the risk and related premium in
connection with a reinsurance transaction.

Claims-made 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 policy is to be
distinguished from an "occurrence policy".

Combined ratio................... A common index used to determine the
underwriting performance of an insurer
calculated as the arithmetic sum of the
loss ratio and the expense ratio.

Discounting...................... The practice of incorporating the time
value of money in calculating loss reserves
for long tail lines of business utilizing
an imputed rate of return and an estimated
payout pattern.

Effective duration............... A measure of the price sensitivity of a
fixed income security to changes in yield.

Excess insurance................. Insurance which covers the insured only for
losses in excess of a stated amount or a
specific primary policy.

Expense ratio.................... Underwriting expenses, other than loss
adjustment expenses, incurred during a
specific period of time expressed as a
percentage of net premiums written for SAP
and earned for GAAP during the same period.

Financial Accounting Standards... Financial accounting standards promulgated
by the Financial Accounting Standards
Board.

Generally Accepted Accounting
Principles....................... Recording transactions and preparing
financial statements in accordance with
rules and procedures prescribed by the
Financial Accounting Standards Board
(FASB).

Gross premiums written........... The gross consideration prior to ceded
premiums received by an insurer or a
reinsurer in consideration of accepting a
risk under a policy or policies of
insurance or reinsurance.

40
<PAGE>

Healthcare system................ A single corporate entity that owns or
controls one or more patient care
facilities, such as hospitals, outpatient
care facilities and other alternate site
care facilities.

Integrated delivery network...... A healthcare provider organizational
structure that includes all or most types
of healthcare delivery settings. The
principal elements of a healthcare delivery
network include the following: hospitals,
clinics, outpatient facilities, primary
care physicians, specialist physicians, and
ancillary care such as home healthcare,
rehabilitative services and long-term care.

Locum tenens organization........ An organization that contracts with
employed physicians to fulfill the
obligations of staff physicians on a
temporary leave of absence, typically
vacation.

Loss Adjustment Expenses (LAE)... Expenses incurred in the settlement of
claims, including outside adjustment
expenses, legal fees and internal
administration costs associated with the
claims adjustment process, but not general
overhead expenses.

Loss Adjustment Expense (LAE)
Reserves......................... Liabilities established for LAE.

Loss ratio....................... Losses and LAE expressed as a percentage of
net premiums earned.

Loss reserves.................... A balance sheet liability for unpaid losses
which represents estimates of amounts
needed to pay losses and LAE both on claims
which have been reported but have not yet
been resolved and on claims which have
occurred but have not yet been reported.

Net premium earned............... The portion of net premiums written
applicable to the expired period of
policies and, accordingly, recognized as
revenue during a given period.

Net premiums written............. Gross premiums written less premiums ceded.

Occurrence basis................. A liability insurance policy written on a
basis that generally insures claims that
arise from incidents that occurred during
the policy period irrespective of when the
claims are reported.

Physician / hospital
organization..................... A healthcare provider organizational
structure whereby ownership and management
is shared jointly among physicians or
physician organizations and the hospital
facility or system.

Premiums ceded................... The consideration paid to reinsurers in
connection with reinsurance transactions.

Primary insurance................ Insurance which covers an insured from the
first dollar of loss, generally after a
deductible or self-insured retention, as
distinguished from umbrella or excess
insurance.

Reinsurance...................... A transaction in which the reinsurer
agrees, in return for a payment of premium,
to assume an agreed portion of the
reinsured's risk resulting from a policy or
policies of insurance or reinsurance.

Reinsurance intermediary......... One who negotiates contracts of reinsurance
between a ceding company and reinsurer,
receiving a commission from the ceding
company for placement and other services
rendered.

41
<PAGE>

Reinsurance receivable........... Amounts due to a ceding company from a
reinsurer at a point in time, which include
contractual obligations for paid and unpaid
losses and LAE.

Retroactive reinsurance.......... Reinsurance in which a reinsurer agrees to
reimburse a ceding company for liabilities
incurred as a result of past insurable
events covered under contracts subject to
the reinsurance.

Self-insured retention (SIR)..... A loss exposure not covered by insurance.
An SIR is similar to a deductible.

Soft insurance market............ An insurance market which is characterized
by excessive capital and competition
resulting in increased availability of
coverage and decreased prices.

Statutory Accounting Practices
(SAP)............................ The accounting rules and procedures
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................ As determined under Statutory Accounting
Practices, the excess of total assets over
total liabilities.

Surplus lines.................... Specialized types of insurance coverage
written where coverage is not available
from an admitted, or licensed insurance
carrier.

Tail............................. The amount of time that elapses between the
expiration of the applicable insurance
policy and the assertion of the loss event
and the payment in respect thereof.

Ultimate losses.................. The absolute amount paid or payable for the
settlement of a claim for which the insurer
is liable including defense costs.

Umbrella insurance............... A form of excess liability insurance which
typically covers all forms of liability to
which the insured may be subject in excess
of the limits of primary policies or other
excess policies, or specified amounts not
covered by other insurance.

Unearned premiums................ The portion of premium which represents the
consideration for the assumption of risk in
the future. Such premiums are not yet
earned since the risk has not yet been
assumed.

Underwriting profit.............. The amount of net premiums earned less all
associated losses and expenses.
Underwriting profit is calculated without
regard to investment income.

42
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MMI Companies, Inc.
Report of Independent Auditors.......................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994............ F-3
Consolidated Statements of Income for the years ended December 31, 1995,
1994 and 1993.......................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1994 and 1993....................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1994 and 1993.................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Consolidated Balance Sheets as of June 30, 1996 (unaudited) and December
31, 1995............................................................... F-19
Unaudited Consolidated Statements of Income for the six months ended
June 30, 1996 and 1995................................................. F-20
Consolidated Statements of Stockholders' Equity for the six months ended
June 30, 1996 (unaudited) and the year ended December 31, 1995......... F-21
Unaudited Consolidated Statements of Cash Flows for the six months ended
June 30, 1996 and 1995................................................. F-22
Notes to Unaudited Consolidated Financial Statements.................... F-23
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors
MMI Companies, Inc.

We have audited the accompanying consolidated balance sheets of MMI
Companies, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995. 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 Consolidated Financial Statements referred to above
present fairly, in all material respects, the consolidated financial position
of MMI Companies, Inc. and subsidiaries at December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.

As discussed in Note 1 to the Consolidated Financial Statements, in 1994,
the Company adopted a new standard on accounting for investments.

Ernst & Young LLP

Chicago, Illinois
February 28, 1996

F-2
<PAGE>

MMI COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
ASSETS -------- --------
<S> <C> <C>
INVESTMENTS (Note 4)
Short-term investments....................................... $ 33,550 $ 33,839
Fixed maturities--at fair value (amortized cost: 1995:
$681,643; 1994: $474,973)................................... 710,072 463,840
-------- --------
743,622 497,679
OTHER ASSETS
Cash......................................................... 439 498
Premiums receivable.......................................... 36,316 24,786
Reinsurance receivables (Note 3)............................. 105,554 92,258
Prepaid reinsurance premiums (Note 3)........................ 9,925 8,916
Accrued investment income.................................... 11,628 7,784
Cost in excess of net assets of purchased subsidiaries, less
accumulated amortization (Notes 1 and 2).................... 8,965 9,986
Furniture and equipment--at cost, less accumulated
depreciation (Note 1)....................................... 6,610 4,972
Deferred income taxes (Note 5)............................... 41,203 33,391
Other........................................................ 18,416 13,534
-------- --------
$982,678 $693,804
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
LIABILITIES
Policy liabilities:
Loss and loss adjustment expense reserves (Note 7):
Medical malpractice liability............................ $623,220 $433,334
Life and health.......................................... 11,401 8,882
Other.................................................... 4,194 6,456
-------- --------
638,815 448,672
Unearned premium reserves.................................. 52,951 43,096
Future life policy benefits................................ 8,982 10,405
-------- --------
700,748 502,173
Accrued expenses and other liabilities....................... 21,015 16,599
Amounts due to reinsurers (Note 3)........................... 24,702 21,973
Notes payable to stockholders (Note 6)....................... 750 2,000
Long-term notes payable (Notes 6 and 14)..................... 49,000 28,000
-------- --------
796,215 570,745
Contingencies (Notes 3 and 10)
STOCKHOLDERS' EQUITY (Notes 8 and 9)
Common Stock, par value $ .10 per share:
Authorized shares: 1995--30,000; 1994--20,000
Issued and outstanding shares: 1995--9,675; 1994--8,677.... 967 868
Additional paid-in capital................................... 82,645 66,381
Retained earnings............................................ 84,361 63,787
Treasury stock, at cost: 1994--62 shares..................... -- (740)
Unrealized gains (losses) on investments, net of taxes 1995--
$9,957;
1994--$(3,896).............................................. 18,490 (7,237)
-------- --------
186,463 123,059
-------- --------
$982,678 $693,804
======== ========
</TABLE>

See notes to Consolidated Financial Statements.

F-3
<PAGE>

MMI COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Insurance premiums earned (Note 3):
Medical malpractice liability................... $147,635 $123,982 $107,704
Life and health................................. 7,556 8,407 8,591
-------- -------- --------
155,191 132,389 116,295
Consulting and fee income......................... 22,336 18,602 6,962
Net investment income (Note 4).................... 39,850 29,067 29,836
Net realized gains (losses) on investments (Note
4)............................................... 1,367 (2,853) 1,771
-------- -------- --------
Total revenues................................ 218,744 177,205 154,864
LOSSES AND EXPENSES
Losses and loss adjustment expenses (Notes 3 and
7):
Medical malpractice liability................... 125,944 106,861 95,314
Life and health................................. 4,144 5,850 6,157
-------- -------- --------
130,088 112,711 101,471
Insurance and administrative expenses (Note 3).... 61,055 47,286 36,699
Interest expense.................................. 2,767 1,619 1,489
-------- -------- --------
Total losses and expenses..................... 193,910 161,616 139,659
-------- -------- --------
Income before income taxes.................... 24,834 15,589 15,205
Income taxes (Note 5)............................. 2,139 538 1,024
-------- -------- --------
Net income.................................... $ 22,695 $ 15,051 $ 14,181
======== ======== ========
Earnings per common and common equivalent share
(Note 1):
Primary......................................... $ 2.42 $ 1.73 $ 1.90
Fully diluted................................... 2.34 1.72 1.90
Weighted average number of common and common
equivalent shares:
Primary......................................... 9,243 8,681 7,476
Fully diluted................................... 9,683 8,763 7,483
</TABLE>

See notes to Consolidated Financial Statements.

F-4
<PAGE>

MMI COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK UNREALIZED
----------------- --------------- ADDITIONAL GAINS (LOSSES) TOTAL
NUMBER PAR NUMBER PAR PAID-IN RETAINED TREASURY ON INVESTMENTS, STOCKHOLDERS'
OF SHARES VALUE OF SHARES VALUE CAPITAL EARNINGS STOCK NET OF TAXES EQUITY
--------- ------- --------- ----- ---------- -------- -------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1993................... -- $ -- 6,437 $644 $39,445 $36,877 $ -- $ -- $ 76,966
Year ended December 31,
1993:
Net income............. 14,181 14,181
Issuance of Common
Stock in connection
with public offering
net of expenses of
$3,319................ 1,925 192 22,476 22,668
Issuance of Common
Stock in connection
with acquisition of
subsidiary............ 269 27 3,973 4,000
Issuance of Common
Stock in connection
with employee defined
contribution plan..... 25 3 371 374
Purchase of 62 shares
of Common Stock for
treasury.............. (740) (740)
Common cash dividends
($.12 per share)...... (946) (946)
---- ------- ----- ---- ------- ------- ----- ------- --------
Balance at December 31,
1993................... -- -- 8,656 866 66,265 50,112 (740) -- 116,503
Year ended December 31,
1994:
Net income............. 15,051 15,051
Issuance of Common
Stock in connection
with exercise of
employee stock
options............... 21 2 116 118
Cumulative effect of
accounting change, net
of taxes of $6,928.... 12,867 12,867
Change in unrealized
gains (losses), net of
taxes of $10,824...... (20,104) (20,104)
Common cash dividends
($.16 per share)...... (1,376) (1,376)
---- ------- ----- ---- ------- ------- ----- ------- --------
Balance at December 31,
1994................... -- -- 8,677 868 66,381 63,787 (740) (7,237) 123,059
Year ended December 31,
1995:
Net income............. 22,695 22,695
Issuance of Preferred
Stock in connection
with acquisition of
subsidiary............ 903 18,061 (2,709) 15,352
Conversion of Preferred
to Common Stock....... (903) (18,061) 941 94 17,967 --
Issuance of Common
Stock in connection
with employee benefit
plans and exercise of
employee stock
options............... 110 10 1,577 1,587
Change in unrealized
gains, net of taxes of
$13,853............... 25,727 25,727
Retirement of Treasury
Stock................. (62) (6) (734) 740 --
Common cash dividends
($.20 per share)...... (1,827) (1,827)
Preferred stock
dividend ($.18 per
share)................ 9 1 163 (164) --
Preferred cash
dividends ($.14 per
share)................ (130) (130)
---- ------- ----- ---- ------- ------- ----- ------- --------
Balance at December 31,
1995................... -- $ -- 9,675 $967 $82,645 $84,361 $ -- $18,490 $186,463
==== ======= ===== ==== ======= ======= ===== ======= ========
</TABLE>

See notes to Consolidated Financial Statements.

F-5
<PAGE>

MMI COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.......................................................... $ 22,695 $ 15,051 $ 14,181
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in policy liabilities.................................... 39,493 38,760 37,943
Change in reinsurance balances.................................... (1,305) (4,166) (2,179)
Increase in premiums receivable................................... (4,981) (13,329) (2,162)
Deferred income taxes (credit).................................... (4,878) (3,723) 1,553
Decrease (increase) in accrued investment income and other assets. (4,300) 4,932 (4,009)
Increase (decrease) in accrued expenses and other liabilities..... 2,454 390 (1,905)
Net realized (gains) losses on investments........................ (1,367) 2,853 (1,771)
Depreciation and amortization on investments and goodwill......... 2,488 2,209 (500)
-------- -------- --------
Net cash provided by operating activities....................... 50,299 42,977 41,151
INVESTING ACTIVITIES
Net sale (purchase) of short-term investments....................... 41,741 (5,157) (81)
Purchases of fixed maturities....................................... (548,145) (256,582) (219,688)
Sales of fixed maturities........................................... 245,348 145,451 116,146
Maturities of fixed maturities...................................... 210,798 77,488 48,893
Furniture and equipment additions................................... (4,108) (2,885) (2,066)
Acquisition of subsidiary........................................... (15,372) -- (5,000)
-------- -------- --------
Net cash used by investing activities........................... (69,738) (41,685) (61,796)
FINANCING ACTIVITIES
Issuance of Common Stock............................................ 1,587 118 24,542
Payments on notes payable........................................... (1,250) (28,250) (6,250)
Proceeds from notes payable......................................... 21,000 28,000 5,000
Dividends........................................................... (1,957) (1,376) (946)
Costs incurred in connection with stock offering.................... -- -- (1,500)
Purchase of Common Stock............................................ -- -- (740)
-------- -------- --------
Net cash provided (used) by financing activities................ 19,380 (1,508) 20,106
-------- -------- --------
Decrease in cash................................................ (59) (216) (539)
Cash at beginning of year............................................. 498 714 1,253
-------- -------- --------
Cash at end of year............................................. $ 439 $ 498 $ 714
======== ======== ========
</TABLE>

See notes to Consolidated Financial Statements.

F-6
<PAGE>

MMI COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995

1. ACCOUNTING POLICIES

Nature of Operations

MMI Companies, Inc. (MMI) is a specialty company that offers insurance
products and risk management and consulting services to the healthcare
industry. MMI writes its medical malpractice liability insurance through its
principal subsidiary, American Continental Insurance Company (ACIC). MMI
provides its products and services in all 50 states and through a branch
office in the United Kingdom. Information on MMI's operations by segment is
included in Note 12.

Principles of Consolidation

The accompanying Consolidated Financial Statements have been prepared in
conformity with generally accepted accounting principles (GAAP) and include
the accounts and operations, after intercompany eliminations, of MMI and its
subsidiaries.

Use of Estimates

The preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that can affect the amounts
reported in the Consolidated Financial Statements and accompanying notes.
Actual results could differ from these estimates.

Investments

In 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" and as of January 1, 1994, MMI
adopted the standard. MMI elected to classify 100% of its fixed maturity
investments as "available for sale," requiring that these investments be
carried at fair value, with unrealized gains and losses, less related deferred
income taxes, excluded from earnings and reported as a separate component of
stockholders' equity. At January 1, 1994, the cumulative effect of
implementing SFAS No. 115 resulted in an increase in fixed maturity
investments of $19,795,000 and an increase in stockholders' equity, less
deferred income taxes, of $12,867,000.

Realized gains and losses on sales of investments are recognized on the
specific identification basis. Realized losses also include losses for fair
value declines that are considered to be other than temporary.

Fair Value Information

The fair values of investments are reported in Note 4. The fair values of
other financial instruments, principally accrued investment income, premiums
receivable, accrued expenses and other liabilities, amounts due to reinsurers
and notes payable approximate their December 31, 1995 and 1994 carrying
values.

Premium Revenues

Premiums are earned pro rata over the terms of the policies, which are
generally one year for medical malpractice and monthly for life and health.
Unearned premiums are calculated using the monthly pro rata basis.

Deferred Policy Acquisition Costs

Commissions and other costs that vary with, and are primarily related to,
the production of new and renewal business have been deferred and are
amortized over the period of the related insurance policies. Such unamortized
amounts included in other assets amounted to $5,700,000 and $4,700,000 at
December 31, 1995 and 1994, respectively. Amortization of such costs are
included in insurance and administrative expenses and amounted to $11,400,000
in 1995, $7,500,000 in 1994, and $4,500,000 in 1993.

F-7
<PAGE>

MMI COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Unpaid Losses and Loss Adjustment Expenses

The liabilities for unpaid losses and loss adjustment expenses represent the
estimated liability for claims reported to MMI plus claims incurred but not
yet reported and the related estimated adjustment expenses. The liabilities
for losses and related loss adjustment expenses are determined using case-
basis evaluations and statistical analyses. Although considerable variability
is inherent in such estimates, particularly considering the nature of medical
malpractice liability business, management believes that the liabilities for
unpaid losses and loss adjustment expenses are reasonable. The estimates are
continually reviewed and adjusted as necessary; such adjustments are included
in current operations.

Future Policy Benefits

The liability for future policy benefits principally represents reserves
related to disability policies.

Reinsurance

Reinsurance premiums, commissions, expense reimbursements and liabilities
related to reinsured business are accounted for on bases consistent with those
used in accounting for the original policies issued and with the terms of the
reinsurance contracts. Premiums ceded to other companies have been reported as
a reduction of premium revenues. Expense allowances received in connection
with reinsurance ceded have been accounted for as a reduction of the related
deferred policy acquisition costs and are deferred and amortized accordingly.
Reinsurance receivables and prepaid reinsurance premiums are reported as
assets in the accompanying balance sheets.

Furniture and Equipment

The costs of furniture and equipment are depreciated over their estimated
useful lives of five years using an accelerated method. As of December 31,
1995 and 1994, accumulated amortization amounted to $6,500,000 and $4,700,000
respectively.

Goodwill

Costs in excess of net assets of purchased subsidiaries are being amortized
on a straight-line basis over periods ranging from ten to twenty years. As of
December 31, 1995 and 1994, accumulated amortization amounted to $4,800,000
and $3,700,000, respectively.

Income Taxes

MMI and its subsidiaries file a consolidated federal income tax return.
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using tax rates and laws that will be in effect when the differences
are expected to reverse.

Stock Based Compensation

MMI grants stock options for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant. MMI
accounts for stock option grants in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and accordingly, recognizes no
compensation expense for the stock option grants.

F-8
<PAGE>

MMI COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Earnings Per Share

Earnings per share are computed based on the weighted average number of
outstanding shares of common stock and equivalents, including incremental
shares from dilutive stock options since the date of grant using the treasury
stock method.

As described in Note 2, MMI issued Preferred Stock in May 1995 that was
converted into Common Stock in September 1995. For primary earnings per share,
earnings are net of Preferred Stock dividends of $294,000 in 1995. For fully
diluted earnings per share, weighted average common and common equivalent
shares in 1995 are computed assuming the Preferred Stock was converted as of
the May 1995 Preferred Stock issue date. If primary earnings per share also
had been computed without deducting dividends and assuming a May 1995
Preferred Stock conversion date, primary earnings per share would have
amounted to $2.38 in 1995.

Cash Flows

In the consolidated statements of cash flows, cash includes principally
demand deposit accounts. Also, sales and purchases of short-term investments
presented on a net cash basis include investments with original maturities of
three months or less.

2. BUSINESS COMBINATIONS

On May 9, 1995, MMI acquired all of the outstanding capital stock of Health
Providers Insurance Company (HPIC) from American Hospital Association
Services, Inc. HPIC is an Illinois-domiciled insurance company that writes
medical malpractice insurance for healthcare organizations and assumes
reinsurance from healthcare-sponsored insurance companies. The results of
HPIC's operations are included in MMI's financial statements from the date of
acquisition. Total consideration was $30,672,000, with $15,320,000 in cash and
the balance in the form of Series A Convertible Preferred Stock that was
converted into 941,000 shares of Common Stock on September 5, 1995. In
connection with the acquisition, MMI increased its credit facility to
$56,000,000 and funded the cash portion of the purchase price with additional
debt. The acquisition was accounted for as a purchase.

Assets acquired and liabilities assumed were as follows (in thousands):

<TABLE>
<S> <C>
Invested assets................................................ $ 138,612
Other assets................................................... 31,654
Liabilities, principally policy liabilities.................... (139,594)
---------
$ 30,672
=========
</TABLE>

The following table summarizes unaudited pro forma results of operations as
if the acquisition had occurred as of the beginning of the respective years
(in thousands, except per share data):

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1995 1994
-------- --------
<S> <C> <C>
Total revenues......................................... $224,513 $199,582
Net income............................................. 22,838 19,067
Earnings per common and common equivalent share:
Primary.............................................. $ 2.40 $ 2.09
Fully diluted........................................ 2.28 1.96
</TABLE>

F-9
<PAGE>

MMI COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

On December 30, 1993, MMI purchased McManis Associates, Inc. (McManis), a
Washington, D.C.-based consulting firm, for a total cost, including expenses,
of $9,140,000. MMI's cost was comprised of 269,000 shares of MMI Common Stock,
valued at $4,000,000, and cash. Assets acquired, liabilities assumed, and the
excess of cost over net assets purchased were as follows (in thousands):

<TABLE>
<S> <C>
Excess of cost over net assets purchased.......................... $8,820
Cash.............................................................. 140
Other assets, principally receivables............................. 2,658
Other liabilities................................................. (2,478)
------
$9,140
======
</TABLE>

The operations of McManis are included in MMI's consolidated statements of
income beginning in 1994.

3. REINSURANCE

MMI's insurance subsidiaries are involved in the cession of reinsurance to
other domestic and foreign companies, which permits the recovery of a portion
of the direct losses. MMI's insurance subsidiaries would remain liable to the
extent that these reinsurance companies are unable to meet their obligations
under these arrangements.

Insurance premiums earned are comprised of the following (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Direct...................................... $186,792 $156,739 $144,484
Assumed..................................... 17,247 18,069 12,376
Ceded....................................... (48,848) (42,419) (40,565)
-------- -------- --------
$155,191 $132,389 $116,295
======== ======== ========
</TABLE>

MMI's reinsurance receivables from foreign reinsurers amounted to
$71,900,000 and $62,400,000 at December 31, 1995 and 1994 respectively, of
which $46,300,000 and $39,500,000 related to United Kingdom-based reinsurers.

In 1995, 1994 and 1993 respectively, MMI's losses and loss adjustment
expenses were net of reinsurance ceded of $28,800,000, $19,100,000 and
$23,500,000.

F-10
<PAGE>

MMI COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

4. INVESTMENTS

The amortized cost and fair value of investments, which are available for
sale, are as follows (in thousands):

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
December 31, 1995:
Fixed maturities:
U.S. Government and agencies....... $ 75,646 $ 2,338 $ (17) $ 77,967
State and political subdivisions... 394,746 16,517 (644) 410,619
Corporate securities............... 128,576 7,853 (1,076) 135,353
Mortgage-backed securities......... 82,675 3,466 (8) 86,133
-------- ------- -------- --------
681,643 30,174 (1,745) 710,072
Short-term investments............... 33,532 18 -- 33,550
-------- ------- -------- --------
$715,175 $30,192 $ (1,745) $743,622
======== ======= ======== ========
December 31, 1994:
Fixed maturities:
U.S. Government and agencies....... $ 19,463 $ 114 $ (552) $ 19,025
State and political subdivisions... 322,471 1,404 (9,678) 314,197
Corporate securities............... 121,822 893 (3,104) 119,611
Mortgage-backed securities......... 11,217 177 (387) 11,007
-------- ------- -------- --------
474,973 2,588 (13,721) 463,840
Short-term investments............... 33,839 -- -- 33,839
-------- ------- -------- --------
$508,812 $ 2,588 $(13,721) $497,679
======== ======= ======== ========
</TABLE>

Fair values for fixed maturities are principally based on quoted market
prices. Short-term investments are comprised principally of corporate and
municipal securities.

The amortized cost and fair value of fixed maturities at December 31, 1995,
by contractual maturity, are as follows (in thousands):

<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- --------
<S> <C> <C>
Due in 1996........................................... $ 25,068 $ 25,202
Due in 1997 through 2000.............................. 133,914 137,676
Due in 2001 through 2005.............................. 188,389 198,027
Due in 2006 and thereafter............................ 251,597 263,034
-------- --------
598,968 623,939
Mortgage-backed securities............................ 82,675 86,133
-------- --------
$681,643 $710,072
======== ========
</TABLE>

The expected maturities may differ from contractual maturities in the
foregoing table because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties, or MMI may have the
right to put obligations back to the issuer prior to stated maturity.

F-11
<PAGE>

MMI COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The changes in unrealized gains and losses, which are reflected in
stockholders' equity beginning in 1994, and net realized gains and losses all
relate to fixed maturity investments and were as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
------- -------- -------
<S> <C> <C> <C>
Change in unrealized gains (losses)............ $39,580 $(30,928) $ 9,321
Net realized gains (losses).................... 1,367 (2,853) 1,771
------- -------- -------
$40,947 $(33,781) $11,092
======= ======== =======
</TABLE>

In 1995, 1994, and 1993, respectively, gross gains of $3,357,000, $661,000,
and $2,857,000 and gross losses of $1,990,000, $3,514,000, and $1,086,000 were
realized on sales of fixed maturities.

Major categories of net investment income are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Fixed maturities................................. $38,276 $29,265 $29,106
Short-term investments, cash and other........... 4,610 1,981 2,781
------- ------- -------
Total investment income...................... 42,886 31,246 31,887
Expenses......................................... 3,036 2,179 2,051
------- ------- -------
Net investment income........................ $39,850 $29,067 $29,836
======= ======= =======
</TABLE>

At December 31, 1995, investments with a fair value of $11,250,000 were on
deposit to meet statutory requirements. None of MMI's investments were non-
income producing in 1995.

5. INCOME TAXES

Deferred income taxes reflect the net tax effect of temporary differences
between the amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of MMI's
deferred tax assets and liabilities as of December 31, 1995 and 1994, are as
follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1994
------- -------
<S> <C> <C>
Deferred tax assets:
Tax-basis loss reserve adjustment..................... $50,697 $27,268
Tax-basis unearned premium reserve adjustment......... 3,012 2,309
Unrealized investment losses.......................... -- 3,896
Accrued compensation.................................. 710 1,326
Alternative minimum tax credit carryforward........... 1,692 1,737
Other................................................. 706 635
------- -------
Total deferred tax assets........................... 56,817 37,171
------- -------
Deferred tax liabilities:
Unrealized investment gains........................... (9,957) --
Deferred policy acquisition costs..................... (1,893) (1,558)
Discount amortization on fixed maturities............. (297) (344)
Receivables........................................... (2,223) (749)
Other................................................. (1,244) (1,129)
------- -------
Total deferred tax liabilities...................... (15,614) (3,780)
------- -------
Net deferred tax asset.............................. $41,203 $33,391
======= =======
</TABLE>

F-12
<PAGE>

MMI COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

MMI expects adequate future taxable income to realize the deferred tax asset
and does not expect to realize investment losses without a tax benefit.
Accordingly, no valuation reserve is considered necessary.

Significant components of the provision for income taxes (credit) are as
follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Current............................................ $7,017 $4,261 $ (529)
Deferred........................................... (4,878) (3,723) 1,553
------ ------ ------
Net provision.......................................$2,139 $ 538 $1,024
====== ====== ======
</TABLE>

A reconciliation of income tax computed at the U.S. federal statutory tax
rates of 35% to income tax expense in the accompanying financial statements is
as follows (dollars in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. Statutory rate........... $8,692 35% $5,456 35% $5,322 35%
Non taxable investment income........ (6,187) (25) (4,730) (31) (3,779) (24)
State income taxes................... 545 2 241 2 153 1
Cumulative effect of 1% rate
increase............................ -- -- -- -- (718) (5)
Other................................ (911) (3) (429) (3) 46 --
------ --- ------ --- ------ ---
Net provision........................ $2,139 9% $ 538 3% $1,024 7%
====== === ====== === ====== ===
</TABLE>

MMI's net payments (refunds) of income taxes were $8,000,000, ($2,400,000),
and $1,100,000 during 1995, 1994 and 1993, respectively.

6. NOTES PAYABLE

The $49,000,000 note payable at December 31, 1995, which was under a
$56,000,000 line of credit agreement, was repaid on January 18, 1996, with the
finalization of a new credit agreement consisting of a $50,000,000 term loan
and a $35,000,000 line of credit for MMI. See terms and restrictions for the
new credit agreement in Note 14.

At December 31, 1995 and 1994, notes payable due to hospital stockholders
amounted to $750,000 and $2,000,000, respectively, of which $750,000 in 1995
and $1,000,000 in 1994 was short term. The interest rates on these borrowings
averaged 6.9% and 6.0% at December 31, 1995 and 1994, respectively.

Total interest paid in 1995, 1994 and 1993 was $2,818,000, $1,440,000, and
$1,681,000, respectively.

F-13
<PAGE>

MMI COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

7. LIABILITY FOR LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

The following table presents a reconciliation of beginning and ending
property/casualty loss and loss adjustment expense (LAE) reserve balances for
the years indicated (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Liability for losses and LAE at beginning of year
(net of reinsurance receivables: 1995--$78,057;
1994--$71,851; 1993--$62,263)................... $361,733 $337,813 $314,401
Liability for losses and LAE for HPIC at date of
acquisition (net of reinsurance receivables:
$9,944)......................................... 124,651 -- --
Add: Provision for losses and LAE for claims
occurring in:
The current year from continuing operations.... 127,710 104,366 92,027
The current year from discontinued operations.. -- 759 4,866
Prior years from continuing operations......... (1,766) 2,495 3,287
Prior years from discontinued operations....... -- (110) 39
-------- -------- --------
Total incurred losses and LAE.................. 125,944 107,510 100,219
Less: Losses and LAE payments for claims
occurring in:
The current year from continuing operations.... 4,533 5,944 8,717
The current year from discontinued operations.. -- -- 20
Prior years from continuing operations......... 67,681 74,453 62,082
Prior years from discontinued operations....... 1,407 3,193 5,988
-------- -------- --------
Total paid losses and LAE...................... 73,621 83,590 76,807
-------- -------- --------
Liability for losses and LAE at end of year (net
of reinsurance receivables: 1995--$88,707;
1994--$78,057; 1993--$71,851)................... $538,707 $361,733 $337,813
======== ======== ========
</TABLE>

The portion of the losses and LAE in the foregoing schedule for the years
ended December 31, 1995, 1994 and 1993 that relate to prior years' from
continuing operations each represent approximately 1% of the respective prior
years' liabilities for losses and LAE. MMI's loss and LAE reserves and related
provision for prior years' losses attributable to health business are
immaterial.

8. STOCKHOLDERS' EQUITY

The statutory accounting practices prescribed or permitted by regulatory
authorities for MMI's insurance subsidiaries differ in some respects from
GAAP. The statutory-basis capital and surplus of MMI's direct insurance
subsidiaries, ACIC and HPIC, as reported to regulatory authorities were
$171,800,000, and $33,800,000 at December 31, 1995 and $150,900,000 at
December 31, 1994 for ACIC. The aforementioned capital and surplus amounts for
ACIC include the capital and surplus of ACLIC, a life insurance company owned
by ACIC, in the amount of $14,800,000, at December 31, 1995 and $14,300,000 at
December 31, 1994. Statutory net income of the insurance subsidiaries amounted
to $20,000,000 in 1995, $15,200,000 in 1994, and $12,700,000 in 1993 for ACIC;
$5,200,000 in 1995 for HPIC; and $500,000 in 1995, $200,000 in 1994, and
$600,000 in 1993 for ACLIC.

F-14
<PAGE>

MMI COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

ACIC's discounting of loss and LAE reserves for statutory reporting purposes
is permitted by regulatory authorities. Reconciliations of statutory-basis
capital and surplus and net income for ACIC, ACLIC and HPIC for 1995 (See Note
2) to MMI's GAAP-basis amounts included in the accompanying financial
statements are as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
-------- --------
<S> <C> <C>
Statutory-basis capital and surplus of ACIC and, in
1995, HPIC............................................ $205,596 $150,927
Additions (deductions):
Statutory-basis loss reserve discount................ (50,182) (43,575)
GAAP-basis deferred income taxes..................... 39,779 31,086
Other, including non-insurance company amounts....... (8,730) (15,379)
-------- --------
GAAP-basis consolidated stockholders' equity of MMI.... $186,463 $123,059
======== ========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Statutory-basis combined net income of ACIC,
ACLIC and, in 1995, HPIC....................... $25,763 $15,398 $13,268
Additions (deductions):
Statutory-basis loss reserve discount......... (6,607) (3,122) (3,198)
GAAP-basis deferred income taxes.............. 6,938 2,150 (866)
Other, including non-insurance company
amounts...................................... (3,399) 625 4,977
------- ------- -------
GAAP-basis consolidated net income of MMI....... $22,695 $15,051 $14,181
======= ======= =======
</TABLE>

The maximum amount of dividends that can be paid from ACIC to MMI without
regulatory approval is the lesser of net investment income or 10% of ACIC's
statutory-basis capital and surplus, each as of the preceding December 31. For
HPIC, the maximum amount of dividends that can be paid to MMI without
regulatory approval is the greater of net income or 10% of capital and
surplus, each as of the preceding December 31. Accordingly, the maximum total
dividend amount is $24,000,000 in 1996.

ACIC and HPIC's combined GAAP-basis net assets amounted to $220,000,000 at
December 31, 1995. The excess of these combined basis net assets over ACIC and
HPIC's maximum dividend amount represents restricted consolidated net assets.

MMI has authorized and unissued 5,000,000 shares of $20 par value Preferred
Stock.

9. STOCK OPTION PLANS

In February 1993, MMI adopted a new employee plan that authorizes the
issuance, subject to directors' approval, of stock options and restricted
stock, and a stock option plan for non-employee directors (the "1993 plans").
The directors plan provides for the issuance of 1,375 options each year for
each director and 4,125 options to a new director joining MMI's Board, with
exercise prices equal to market value at the issue date.

Of the 962,737 stock options that were outstanding as of December 31, 1995,
29,825 relate to a 1986 plan with exercise prices of $5.70 and $5.91 expiring
in 1996 and 1997 and 932,912 relate to the 1993 plans with exercise prices of
$13.13 to $24.63, expiring in 2003 through 2005.

F-15
<PAGE>

MMI COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Information with respect to these options for the two years ended December
31, 1995 is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1994
----------------------- -----------------------
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of year....... 875,775 $ 5.70-$15.00 708,600 $ 5.70-$15.00
Granted................ 146,750 $15.50-$24.63 188,750 $13.13-$13.63
Exercised.............. (59,788) $ 5.70-$15.50 (20,575) $ 5.70-$ 5.91
Canceled............... -- -- (1,000) $13.63
------- -------
Options outstanding at
end of year............. 962,737 $ 5.70-$24.63 875,775 $ 5.70-$15.00
======= =======
Options exercisable at
end of year............. 801,237 $ 5.70-$24.63 744,525 $ 5.70-$15.00
======= =======
Shares available for
grant at end of year.... 418,525 565,275
======= =======
</TABLE>

10. COMMITMENTS AND CONTINGENCIES

MMI is engaged in various legal actions incident to the nature of its
business. Management is of the opinion that none of the litigation will have a
material effect on MMI's financial position or results of operations.

MMI leases its office space and certain equipment under noncancelable
leases. Rental expense for 1995, 1994 and 1993 was $5,200,000, $4,500,000 and
$3,100,000, respectively. As of December 31, 1995, aggregate minimum rental
commitments under noncancelable leases amounted to $4,700,000 in 1996,
$5,000,000 in 1997, $4,700,000 in 1998, $4,700,000 in 1999, $4,300,000 in 2000
and $7,700,000 thereafter.

11. EMPLOYEE BENEFIT PLANS

MMI has a defined-contribution pension plan that covers substantially all
employees who have attained age 21 and completed three months of service. MMI
contributes 4% (3% in 1993) of salary for all employees who have completed
1,000 hours of service in the plan year and who are employed at December 31.
In addition, MMI contributes the greater of 75% of the first $2,000 of
employee contributions or 50% of employee contributions up to 4% of salary (3%
in 1994 and 1993). Additional MMI contributions are made at the discretion of
MMI's Board of Directors. MMI's contributions charged to operations were
$1,600,000 in 1995, $1,000,000 in 1994, and $750,000 in 1993.

MMI provides no post retirement benefits to its employees.

F-16
<PAGE>

MMI COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

12. INDUSTRY SEGMENTS

MMI's operations are classified and summarized into medical malpractice
liability, life and health and consulting and fees. The medical malpractice
liability segment principally includes professional and general liability
insurance and reinsurance for hospitals, healthcare systems and healthcare
providers. The life and health segment includes group life, disability and
health stop-loss insurance and reinsurance. The consulting and fees segment
includes strategic healthcare consulting and healthcare-related risk
management consulting and fee-based services. Investment income and expense
allocations are based on estimates and certain assets have been allocated to
segments by formulas. Depreciation expense and capital expenditures are not
material. Corporate and eliminations represents certain corporate income and
expenses that have not been allocated to specific industry segments.
Information by segment is as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Medical malpractice liability................ $185,748 $151,647 $134,688
Life and health.............................. 8,860 9,670 9,843
Consulting and fees.......................... 22,336 18,602 6,962
Net realized investment gains (losses)....... 1,367 (2,853) 1,771
Corporate and eliminations................... 433 139 1,600
-------- -------- --------
Total...................................... $218,744 $177,205 $154,864
======== ======== ========
Pre-tax income (loss):
Medical malpractice liability................ $ 29,004 $ 20,864 $ 16,003
Life and health.............................. 1,154 806 827
Consulting and fees.......................... 2,873 2,615 385
Net realized investment gains (losses)....... 1,367 (2,853) 1,771
Corporate and eliminations................... (9,564) (5,843) (3,781)
-------- -------- --------
Total...................................... $ 24,834 $ 15,589 $ 15,205
======== ======== ========
<CAPTION>
DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Identifiable assets at end of year:
Medical malpractice liability................ $924,965 $633,383 $579,398
Life and health.............................. 36,163 33,861 35,079
Consulting and fees.......................... 10,354 12,734 14,073
Corporate, discontinued and eliminations..... 11,196 13,826 15,223
-------- -------- --------
Total...................................... $982,678 $693,804 $643,773
======== ======== ========
</TABLE>

F-17
<PAGE>

MMI COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)

13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

(In thousands, except per share data):

<TABLE>
<CAPTION>
THREE MONTHS ENDED,
--------------------------------
3/31/95 6/30/95 9/30/95 12/31/95
------- ------- ------- --------
<S> <C> <C> <C> <C>
Revenues............................... $46,579 $52,806 $60,098 $59,261
Net income............................. 4,410 5,638 5,906 6,741
Earnings per common and common
equivalent share:
Primary.............................. $ .50 $ .62 $ .62 $ .67
Fully diluted........................ .50 .60 .59 .67
<CAPTION>
THREE MONTHS ENDED,
--------------------------------
3/31/94 6/30/94 9/30/94 12/31/94
------- ------- ------- --------
<S> <C> <C> <C> <C>
Revenues............................... $40,674 $42,368 $42,534 $51,629
Net income............................. 3,650 2,597 4,211 4,593
Earnings per common and common
equivalent share:
Primary.............................. $ .42 $ .30 $ .49 $ .53
Fully diluted........................ .42 .30 .48 .52
</TABLE>

14. SUBSEQUENT EVENT

In January 1996, MMI amended its bank credit agreement to provide MMI with a
$50,000,000 term loan and a $35,000,000 line of credit, of which $49,000,000
of the term loan was drawn to retire debt outstanding at December 31, 1995.
The $35,000,000 line of credit remained unused and available for general
corporate purposes.

The loan bears interest at a rate equal to the London Interbank Offered Rate
for periods of up to one year plus a margin ranging from 5/8% to 7/8%. MMI
also has the option of selecting an interest rate related to the bank's prime
rate. As of February 1996, the LIBOR component on $44,500,000 of MMI's
borrowings was fixed at 5.374% through December 1997.

The bank credit agreement subjects MMI and its subsidiaries to certain
covenants and restrictions, including limitations on dividends (limited to 20%
of prior year's net income), purchases of capital stock, additional borrowing,
encumbrance or sale of assets and types of investment purchases. Covenants
also include maintenance of various financial ratios and amounts, including
maintaining $135,000,000 of statutory-basis capital and surplus for ACIC.

The line of credit is secured by the stock of ACIC and HPIC, which own the
majority of MMI's consolidated assets. Annual fees related to the agreement
range from 1/5% to 3/8% of the unused commitment. Reduction of the credit
commitment is scheduled as follows (in thousands):

Principal payments are not required based on the current level of borrowings
until 2001. The credit agreement expires on April 1, 2001.

F-18
<PAGE>

MMI COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
ASSETS ----------- ------------
(UNAUDITED)
<S> <C> <C>
INVESTMENTS
Short-term investments................................. $ 30,769 $ 33,550
Fixed maturities....................................... 668,583 710,072
Other.................................................. 12,320 --
---------- --------
711,672 743,622
OTHER ASSETS
Cash................................................... 3,673 439
Premiums receivable.................................... 52,947 36,316
Reinsurance receivables................................ 109,558 105,554
Prepaid reinsurance premiums........................... 15,061 9,925
Accrued investment income.............................. 11,167 11,628
Cost in excess of net assets of purchased subsidiaries,
less accumulated amortization......................... 15,942 8,965
Furniture and equipment--at cost, less accumulated
depreciation.......................................... 8,317 6,610
Deferred income taxes.................................. 48,890 41,203
Other.................................................. 26,972 18,416
---------- --------
$1,004,199 $982,678
========== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
LIABILITIES
Policy liabilities:
Loss and loss adjustment expense reserves:
Medical malpractice liability...................... $ 614,239 $623,220
Life and health.................................... 8,255 11,401
Other.............................................. 3,846 4,194
---------- --------
626,340 638,815
Unearned premium reserves............................ 76,692 52,951
Future life policy benefits.......................... 8,635 8,982
---------- --------
711,667 700,748
Accrued expenses and other liabilities................. 18,430 21,015
Amounts due to reinsurers.............................. 28,156 24,702
Notes payable to stockholders.......................... -- 750
Long-term notes payable................................ 58,000 49,000
---------- --------
816,253 796,215
STOCKHOLDERS' EQUITY
Common Stock, par value $.10 per share:
Authorized shares: 1996 and 1995--30,000
Issued and outstanding shares: 1996--9,865; 1995--
9,675............................................... 986 967
Additional paid-in capital............................. 85,995 82,645
Retained earnings...................................... 96,941 84,361
Unrealized gains on investments, net of taxes:
1996--$2,167; 1995--$9,957........................... 4,024 18,490
---------- --------
187,946 186,463
---------- --------
$1,004,199 $982,678
========== ========
</TABLE>

See notes to Consolidated Financial Statements.

F-19
<PAGE>

MMI COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED

<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-----------------
1996 1995
-------- --------
<S> <C> <C>
REVENUES
Insurance premiums earned:
Medical malpractice liability............................. $ 77,870 $ 65,900
Life and health........................................... 3,954 3,672
-------- --------
81,824 69,572
Consulting and fee income................................... 15,628 11,651
Net investment income....................................... 21,653 17,818
Net realized gains on investments........................... 1,002 344
-------- --------
Total revenues.......................................... 120,107 99,385
LOSSES AND EXPENSES
Losses and loss adjustment expenses:
Medical malpractice liability............................. 65,439 57,029
Life and health........................................... 2,286 1,876
-------- --------
67,725 58,905
Insurance and administrative expenses....................... 35,786 28,408
Interest expense............................................ 1,602 1,098
-------- --------
Total losses and expenses............................... 105,113 88,411
-------- --------
Income before income taxes.............................. 14,994 10,974
Income taxes................................................ 1,235 926
-------- --------
Net income.............................................. $ 13,759 $ 10,048
======== ========
Earnings per common and common equivalent share:
Primary................................................... $ 1.35 $ 1.12
Fully diluted............................................. 1.34 1.09
Weighted average number of common and common equivalent
shares:
Primary................................................... 10,207 8,838
Fully diluted............................................. 10,276 9,200
</TABLE>

See notes to Consolidated Financial Statements.

F-20
<PAGE>

MMI COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK UNREALIZED
------------------ --------------- ADDITIONAL GAINS (LOSSES) TOTAL
NUMBER PAR NUMBER PAR PAID-IN RETAINED TREASURY ON INVESTMENTS, STOCKHOLDERS'
OF SHARES VALUE OF SHARES VALUE CAPITAL EARNINGS STOCK NET OF TAXES EQUITY
--------- -------- --------- ----- ---------- -------- -------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... -- $ -- 8,677 $868 $66,381 $63,787 $(740) $ (7,237) $123,059
Year ended December 31,
1995:
Net income............. 22,695 22,695
Issuance of Preferred
Stock in connection
with acquisition of
subsidiary............ 903 18,061 (2,709) 15,352
Conversion of Preferred
to Common Stock....... (903) (18,061) 941 94 17,967 --
Issuance of Common
Stock in connection
with employee benefit
plans and exercise of
employee stock
options............... 110 10 1,577 1,587
Change in unrealized
gains, net of taxes of
$13,853............... 25,727 25,727
Retirement of Treasury
Stock................. (62) (6) (734) 740 --
Common cash dividends
($.20 per share)...... (1,827) (1,827)
Preferred stock
dividend ($.18 per
share)................ 9 1 163 (164) --
Preferred cash dividend
($.14 per share)...... (130) (130)
---- -------- ----- ---- ------- ------- ----- -------- --------
Balance at December 31,
1995................... -- -- 9,675 967 82,645 84,361 -- 18,490 186,463
Six months ended June
30, 1996 (unaudited):
Net income............. 13,759 13,759
Issuance of Common
Stock in connection
with acquisition of
subsidiary............ 28 3 462 465
Issuance of Common
Stock in connection
with employee benefit
plans and exercise of
employee stock
options............... 162 16 2,888 2,904
Change in unrealized
gains, net of taxes of
$7,790................ (14,466) (14,466)
Common cash dividends
($.12 per share)...... (1,179) (1,179)
---- -------- ----- ---- ------- ------- ----- -------- --------
Balance at June 30, 1996
(unaudited)............ -- $ -- 9,865 $986 $85,995 $96,941 $ -- $ 4,024 $187,946
==== ======== ===== ==== ======= ======= ===== ======== ========
</TABLE>

See notes to Consolidated Financial Statements.

F-21
<PAGE>

MMI COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED

<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................. $ 13,759 $ 10,048
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Increase in policy liabilities....................... 10,919 46,090
Change in reinsurance balances....................... (5,686) (6,801)
Increase in premiums receivable...................... (16,631) (17,077)
Deferred income taxes................................ (42) (1,949)
Increase in accrued investment income and other
assets.............................................. (6,112) (4,111)
Decrease in accrued expenses and other liabilities... (3,987) (1,288)
Net realized gains on investments.................... (1,002) (344)
Depreciation and amortization on investments and
goodwill............................................ 1,549 1,226
--------- ---------
Net cash provided (used) by operating activities... (7,233) 25,794
INVESTING ACTIVITIES
Net sale of short-term investments..................... 5,181 4,256
Purchases of available-for-sale investments............ (162,268) (283,537)
Sales of available-for-sale investments................ 134,530 125,264
Maturities of available-for-sale investments........... 33,819 131,839
Furniture and equipment additions...................... (2,812) (1,913)
Acquisition of subsidiary.............................. (7,958) (15,372)
--------- ---------
Net cash provided (used) by investing activities... 492 (39,463)
FINANCING ACTIVITIES
Issuance of Common Stock............................... 2,904 344
Payments on notes payable.............................. (750) --
Proceeds from notes payable............................ 9,000 15,000
Dividends.............................................. (1,179) (993)
--------- ---------
Net cash provided by financing activities.......... 9,975 14,351
--------- ---------
Increase in cash................................... 3,234 682
Cash at beginning of period.............................. 439 498
--------- ---------
Cash at end of period.............................. $ 3,673 $ 1,180
========= =========
</TABLE>

See notes to Consolidated Financial Statements.

F-22
<PAGE>

MMI COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the six month
period ended June 30, 1996 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1996. For further
information, refer to the Consolidated Financial Statements and notes thereto
included elsewhere in this Prospectus.

2. ACQUISITION OF MANAGEMENT SCIENCE ASSOCIATES, INC.

Effective April 1, 1996 the Company purchased substantially all of the net
assets of Management Science Associates, Inc. (MSA). MSA provides employee
relations and human resource consulting services to healthcare organizations
and had revenues of approximately $6.6 million in 1995. The purchase price for
MSA, including expenses, was $8,353,000 in cash which was funded principally
by an increase in borrowings under the Company's credit agreement.

Assets acquired, liabilities assumed, and the excess of cost over net assets
purchased were as follows (in thousands):

<TABLE>
<S> <C>
Excess of cost over net assets purchased.......................... $6,403
Cash.............................................................. 395
Other assets, principally receivables............................. 2,133
Other liabilities................................................. (578)
------
$8,353
======
</TABLE>

The operations of MSA are included in MMI's Consolidated Financial Statements
since the date of acquisition.

F-23
<PAGE>

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

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR BY ANY OF THE UN-
DERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM
IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PRO-
SPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO ITS DATE.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................................................... 2
Prospectus Summary......................................................... 3
Risk Factors............................................................... 8
Use of Proceeds............................................................ 10
Price Range of Common Stock................................................ 10
Dividend Policy............................................................ 11
Capitalization............................................................. 11
Selected Consolidated Financial Information................................ 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................................................. 14
Business................................................................... 20
Management................................................................. 34
Principal and Selling Stockholders......................................... 36
Underwriting............................................................... 37
Legal Matters.............................................................. 38
Experts. . ................................................................ 38
Incorporation of Certain Documents
by Reference.............................................................. 39
Glossary of Healthcare and Insurance Terms................................. 40
Index to Consolidated Financial Statements................................. F-1
</TABLE>

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2,507,733 SHARES

LOGO

MMI COMPANIES, INC.

COMMON STOCK

--------

PROSPECTUS

, 1996

--------

SMITH BARNEY INC.

CONNING & COMPANY

J.P. MORGAN & CO.

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