SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

[X]  Annual Report  Pursuant to Section 13 or 15(d) of the  Securities  Exchange
     Act of 1934. For the fiscal year ended: December 31, 1996

                                       or

[ ]  Transition  Report  Pursuant  to Section  13 or 15(d) of the  Securities
     Exchange Act of 1934. For the transition period from _______ to _______

                         Commission file number: 1-11920

                               MMI COMPANIES, INC.
             (Exact name of registrant as specified in its charter)

           Delaware                                    36-3263253
 (State or other jurisdiction of                     (IRS Employer
  incorporation or organization)                  Identification No.)

               540 Lake Cook Road, Deerfield, Illinois 60015-5290
                    (Address of principal executive offices)

                                 (847) 940-7550
              (Registrant's telephone number, including area code)

           Securities registered pursuant to Section 12(b) of the Act:


Common Stock, $0.10 par value                 New York Stock Exchange
   (Title of each class)            (Name of each exchange on which registered)


     Indicate  by check mark  whether the  Registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

     The aggregate  market value of the voting stock held by  non-affiliates  of
the Registrant was $277,003,000 as of March 6, 1997. The aggregate number of the
Registrant's  $0.10 par value Common Stock shares  outstanding  on March 6, 1997
was 11,740,206.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the  Registrant's  Annual Report to  Stockholders  for the year
ended  December  31, 1996 are  incorporated  by  reference  into Part II of this
report. Portions of the Registrant's Proxy Statement for the 1997 annual meeting
of stockholders to be held on April 17, 1997 are  incorporated by reference into
Part III of this report.

                      Exhibit index is located on page 17.

                                  Page 1 of 18.
<PAGE>
                                     PART I


ITEM 1.  BUSINESS
-----------------

OVERVIEW

     MMI Companies,  Inc.  ("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  Source . 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,  employee
relations  consulting,  and professional  liability claims management businesses
and  successfully  integrated  them  into  its  operations.  It  also  developed
additional  services  to  assist  healthcare  providers  manage  their  business
operations.

     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 in order to have access to the Company's  professional
liability coverage.

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

     o    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.

     o    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.

     o    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.

     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, 

                                     - 2 -
<PAGE>
physician  hospital  organizations  and 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:

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

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

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

     o    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.

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 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.

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:  American Continental Insurance Company ("ACIC"), Health
Providers  Insurance  Company  ("HPIC") and American  Continental Life Insurance
Company  ("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.

                                     - 3 -
<PAGE>
     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 $19,510,000 in 1996.

     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
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

                                     - 4 -
<PAGE>
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.

     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  markets  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
Independence,  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 1996,  the five largest states in terms
of direct  written  premium by ACIC were Florida,  Illinois,  California,  North
Carolina and 

                                     - 5 -
<PAGE>
Georgia, which together accounted for approximately 49% of ACIC's direct written
premium.  HPIC is licensed in two states and 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 baseline  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.

     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 

                                     - 6 -
<PAGE>
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 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.

     The  following  table  presents the  development  of balance  sheet reserve
liability for property and casualty reserves net of reinsurance for the calendar
years 1987 through 1996.  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.

                                     - 7 -
<PAGE>
<TABLE>
<CAPTION>
     ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE DEVELOPMENT
                                 (IN THOUSANDS)


                                                                        DECEMBER 31,
                              -----------------------------------------------------------------------------------------
                                  1987     1988     1989     1990     1991     1992    1993      1994     1995     1996
                              -----------------------------------------------------------------------------------------

Liability for unpaid
<S>                           <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>     
 losses and LAE, net          $115,315 $162,812 $208,752 $244,876 $288,297 $314,401 $337,813 $361,733 $538,707 $536,635
Liability re-estimated as of:
  One year later               117,015  162,938  208,674  247,086  302,168  317,727  340,198  359,967  533,599
  Two years later              118,368  164,333  209,397  255,183  301,032  316,445  336,180  357,448
  Three years later            120,724  162,832  212,058  248,985  287,985  305,428  324,901
  Four years later             120,480  166,651  207,542  235,641  278,989  288,703
  Five years later             122,992  163,278  202,287  227,666  265,482
  Six years later              123,039  159,063  199,548  218,087
  Seven years later            122,829  157,348  194,651
  Eight years later            124,619  154,283
  Nine years later             122,915


Cumulative redundancy
  (deficiency)                 $(7,600)  $8,529  $14,101  $26,789  $22,815  $25,698  $12,912  $ 4,285  $ 5,108
                              ========= ======= ======== ======== ======== ======== ======== ======== ======== 

Cumulative liability paid as of:
  One year later               $18,209  $28,150  $47,812  $39,248  $72,518  $68,070  $77,646  $69,088 $118,959
  Two years later               39,502   67,111   78,606   97,689  125,036  125,009  135,881  161,601
  Three years later             61,709   82,354  119,211  126,723  157,181  166,623  202,374
  Four years later              71,051  106,322  140,118  151,038  186,705  194,089
  Five years later              89,864  121,615  153,606  166,893  206,336
  Six years later              101,741  127,870  161,440  180,278
  Seven years later            106,218  134,099  169,791
  Eight years later            110,338  140,720
  Nine years later             115,768
</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 1996,
reserve  redundancy  of  $5,108,000  represents  less than a 1%  decrease in the
Company's estimate of the December 31, 1995 reserve.

     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 generally accepted accounting  principles
("GAAP") as of December 31, 1996.


<TABLE>
<CAPTION>
                RECONCILIATION OF SAP RESERVES WITH GAAP RESERVES
                                 (IN THOUSANDS)

                                                                                    DECEMBER 31, 1996
                                                                                    -----------------
<S>                                                                                      <C>     
Liability for losses and LAE on a SAP basis......................................        $451,312
Add:
  Statutory loss reserve discount................................................          52,176
  Retroactive reinsurance reserve assumed .......................................          14,166
  Other  ........................................................................          18,981
                                                                                         --------
Liability for losses and LAE on a GAAP basis (net of
  reinsurance receivables of $87,159)............................................        $536,635
                                                                                         ========
</TABLE>

                                     - 8 -
<PAGE>
     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.

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 and  preferred
stock  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 December 31, 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  and  preferred  stock  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.

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.

     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

                                     - 9 -
<PAGE>
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  Standard  &  Poor's  of at  least  A or a S&P  Insurance  Solvency
International rating of at least A.

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.

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
46  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  was issued on  February  28,  1997.  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.

                                     - 10 -
<PAGE>
     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 1997, dividend payments by ACIC
without  prior  regulatory  approval may not exceed  $19,150,000.  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 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 1997,  dividend  payments by HPIC
without prior regulatory approval may not exceed $5,153,000.

     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, 1996
ACIC's,  HPIC's and ACLIC's  surplus all exceeded  their  respective  risk-based
capital requirement under the standards.

EMPLOYEES

     As of December 31, 1996, the Company  employed  approximately  725 persons.
None of its employees are represented by a labor union, and the Company believes
that its employee relations are excellent.

ITEM 2.  PROPERTIES
-------------------

     The  Company  leases  approximately  255,000  square  feet of office  space
throughout  the United  States  ("U.S.") and the United  Kingdom  ("U.K.").  The
Company's major leasehold  obligation relates to its corporate office located in
Deerfield,  Illinois.  The Deerfield,  Illinois office space consists of 120,000
square feet.  The lease is for a term of fifteen years  beginning  July 1, 1991.
The  Company  has the right to  terminate  this lease in the tenth and  eleventh
years of the lease under  certain  circumstances.  Terms of the lease include an
expansion  option in July 1997 for 20,000 square feet. In 2001,  the Company has
the option of renting an additional 52,000 square feet. The Company's  principal
regional and subsidiary offices are in Atlanta,  Georgia;  San Francisco and San
Diego, California; Independence, Missouri; and Washington, D.C.

ITEM 3.  LEGAL PROCEEDINGS
--------------------------

     In 1992, the Company sold Ludgate Insurance Company Limited  ("Ludgate") at
a loss,  which was  reported in  discontinued  operations.  The Company has been
involved in two lawsuits connected with the sale. A U.K. action related to sales
contract  warranties and a U.S. suit concerned the  commutation of a reinsurance
transaction with Ludgate.  Also at issue was a stop-loss  reinsurance  agreement
provided  by the  Company to Ludgate in  connection  with the sale.  In February
1997, a U.K. court rendered a judgment against the Company. The U.S. lawsuit and
the stop-loss agreement remained unresolved.

     In February  1997,  the Company  settled  both  lawsuits  and  commuted the
stop-loss  reinsurance  agreement.  The  settlement  of  all  these  matters  is
reflected in the accompanying  1996  consolidated  statement of income as a loss
from   discontinued   operations.   The  pre-tax  loss  is  $7,800,000   with  a
corresponding tax benefit of $2,700,000, resulting in a charge of $5,100,000.

     In addition to the litigation  described  above,  the Company is subject to
other  litigation  and  arbitration  in the normal course of its  business.  The
Company does not believe that any pending  litigation or arbitration will have a
material  adverse effect on its  consolidated  financial  position or results of
operations.

                                     - 11 -
<PAGE>

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------

     There were no matters  submitted to a vote of security  holders  during the
fourth quarter of 1996.

                                     PART II

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

     The Company's  Common Stock is traded on the New York Stock  Exchange under
the symbol "MMI." There were 407 holders of record as of December 31, 1996.  The
following table sets forth the quarterly high and low closing prices during 1996
and 1995.

                                      High            Low
                                    --------       --------
         1996
           First quarter            $ 30 1/4       $ 22
           Second quarter             31 1/4         26 3/4
           Third quarter              33 1/4         30 1/8
           Fourth quarter             32 1/4         28 1/2

         1995
           First quarter            $ 17 1/4$        14 7/8
           Second quarter             20             17
           Third quarter              25 1/4         18 7/8
           Fourth quarter             25 1/2         22 1/8

     On March 6,  1997 the  closing  price of the  Company's  Common  Stock  was
$24.50.

     In 1996,  the  Company  declared  quarterly  dividends  of $.06 per  share,
compared to quarterly  dividends of $.05 per share in 1995. See Notes 6 and 8 to
the Consolidated  Financial  Statements for a description of restrictions on the
ability of the registrant's  subsidiaries to transfer funds to the registrant in
the form of dividends.

ITEM 6.  SELECTED FINANCIAL DATA
--------------------------------

     Selected Consolidated Financial Data on page 13 of the MMI Companies,  Inc.
1996 Annual Report to Stockholders is incorporated herein by reference.

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

     Management's  Discussion and Analysis of Financial Condition and Results of
Operations on pages 14 through 21 of the MMI Companies,  Inc. 1996 Annual Report
to Stockholders is incorporated herein by reference.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------

     The  Consolidated  Financial  Statements  and Notes  thereto  and Report of
Independent  Auditors  on pages 22 through 39 of the MMI  Companies,  Inc.  1996
Annual Report to Stockholders is incorporated herein by reference.

                                     - 12 -
<PAGE>

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

     None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------

     The "Election of Directors"  and "Executive  Officers"  sections on pages 1
through 3 and page 4 of the Registrant's  Proxy Statement relating to the annual
meeting of  stockholders  to be held on April 17, 1997,  are included  herein by
reference.


ITEM 11.  EXECUTIVE COMPENSATION
--------------------------------

     The  "Executive  Compensation"  section  on  pages  7  through  11  of  the
Registrant's  Proxy Statement  relating to the annual meeting of stockholders to
be held on April 17, 1997, is included herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------

     The  "Security  Ownership  of Certain  Beneficial  Owners  and  Management"
section on pages 4 through 5 of the Registrant's Proxy Statement relating to the
annual meeting of  stockholders to be held on April 17, 1997, is included herein
by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------

     The "Certain  Relationships and  Transactions" and "Compensation  Committee
Interlocks and Insider  Participation  in  Compensation  Decisions"  sections on
pages  6 and 11 of the  Registrant's  Proxy  Statement  relating  to the  annual
meeting of  stockholders  to be held on April 17, 1997,  are included  herein by
reference.


                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
--------------------------------------------------------------------------

a.   Filed documents

     1.   Financial statements.

              Consolidated Balance Sheets
              Consolidated Statements of Income
              Consolidated Statements of Stockholders' Equity
              Consolidated Statements of Cash Flows
              Notes to Consolidated Financial Statements
              Report of Independent Auditors

     2.   Financial  statement  schedules.   An  index  to  financial  statement
          schedules is on page 15.

     3.   Exhibits. An index to exhibits to this report is on page 16.

                                     - 13 -
<PAGE>
b.   Reports on Form 8-K.  There  were no  reports on Form 8-K filed  during the
     fourth quarter of 1996.


                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                       Registrant:  MMI Companies, Inc.


Date:    March 17, 1997                By:/s/ B. Frederick Becker
         --------------                   -----------------------
                                          B. Frederick Becker
                                          Chairman and Chief Executive Officer
 

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.



Date:    March 17, 1997                By:/s/ B. Frederick Becker
         --------------                   -----------------------
                                          B. Frederick Becker
                                          Chairman,  Chief Executive
                                          Officer and Director


Date:    March 17, 1997                By:/s/ Paul M. Orzech
         --------------                   ------------------
                                          Paul M. Orzech
                                          Executive Vice President and
                                          Chief Financial Officer


Date:    March 17, 1997                By:/s/ Joseph R. Herman
         --------------                   --------------------
                                          Joseph R. Herman
                                          Vice President and Controller


Date:    March 17, 1997                By:/s/ Richard R. Barr
         --------------                   -------------------------
                                          Richard R. Barr
                                          Director


Date:    March 17, 1997                By:/s/ James A. Block, M.D.
         --------------                   ------------------------
                                          James A. Block, M.D.
                                          Director


Date:    March 17, 1997                By:/s/ George B. Caldwell
         --------------                   ----------------------
                                          George B. Caldwell
                                          Director

                                     - 14 -
<PAGE>


Date:    March 17, 1997                By:/s/ K. James Ehlen, M.D.
         --------------                   ------------------------
                                          K. James Ehlen, M.D.
                                          Director




Date:    March 17, 1997                By:/s/ F. Laird Facey, M.D              .
         --------------                   -----------------------
                                          F. Laird Facey, M.D.
                                          Director


Date:    March 17, 1997                By:/s/ William M. Kelley
         --------------                   ---------------------
                                          William M. Kelley
                                          Director


Date:    March 17, 1997                By:/s/ Andrew D. Kennedy
         --------------                   ---------------------
                                          Andrew D. Kennedy
                                          Director


Date:    March 17, 1997                By:/s/ Timothy R. McCormick
         --------------                   ------------------------
                                          Timothy R. McCormick
                                          Director


Date:    March 17, 1997                By:/s/ Gerald L. McManis
         --------------                   ---------------------
                                          Gerald L. McManis
                                          Director


Date:    March 17, 1997                By:/s/ Scott S. Parker
         --------------                   -------------------
                                          Scott S. Parker
                                          Director


Date:    March 17, 1997                By:/s/ Edward C. Peddie
         --------------                   --------------------
                                          Edward C. Peddie
                                          Director


Date:    March 17, 1997                By:/s/ Anthony J. Perry
         --------------                   --------------------
                                          Anthony J. Perry
                                          Director


Date:    March 17, 1997                By:/s/ Joseph D. Sargent
         --------------                   ---------------------
                                          Joseph D. Sargent
                                          Director


Date:    March 17, 1997                By:/s/ Marshall Whisnant
         --------------                   ---------------------
                                          Marshall Whisnant
                                          Director

                                     - 15 -
<PAGE>

                     INDEX TO FINANCIAL STATEMENT SCHEDULES


                                                                          Page

II.    Condensed Financial Information of Registrant
         Condensed Balance Sheets....................................      S-1
         Condensed Statements of Income..............................      S-2
         Condensed Statements of Cash Flows..........................      S-3
III.   Supplementary Insurance Information...........................      S-4
IV.    Reinsurance...................................................      S-5
V.     Valuation and Qualifying Accounts.............................      S-6
VI.    Supplementary Property/Casualty Insurance Information.........      S-7




Schedule I has been omitted because the required  information is included in the
Consolidated Financial Statements or Notes thereto.

                                     - 16 -
<PAGE>
                                  EXHIBIT INDEX

3.1     Certificate Of Incorporation Of The Registrant.*****
3.2     Bylaws of the Registrant.***
4.1     Specimen stock certificate representing Common Stock.*
10.1    Amended and Restated Credit Agreement dated as of January 18, 1996 among
        the Registrant,  Various Lenders and Bank of America  National Trust and
        Savings Association, as Agent for the Lenders.****
10.2    Waiver of Right to Elect  Director  dated October 21, 1996,  between the
        Registrant and each of Conning  Insurance  Capital Limited  Partnership,
        Conning Insurance Capital International  Partnership,  Conning Insurance
        Capital   Limited   Partnership   II  and  Conning   Insurance   Capital
        International Partnership II.
10.3    Agreement  for the Sale and  Purchase  of  Shares in  Ludgate  Insurance
        Company  Limited  dated June 30, 1992,  between the  Registrant  and Ken
        Randall Associates Limited.*
10.4    Lease dated July 1, 1991,  between the Registrant and MATAS  Corporation
        for the Registrant's  principal executive offices and First Amendment to
        Lease dated August 1, 1992.*
10.5    Second  Amendment  to  Lease,  effective  January  1, 1995  between  the
        Registrant and MATAS Corporation.***

10.6    Third  Amendment  to  Lease,  effective  February  1, 1996  between  the
        Registrant and MATAS Corporation.****

10.7    Fourth and Fifth  Amendments to Lease,  effective  July 1996 between the
        Registrant and MATAS Corporation.
10.8    Incentive Stock Option Plan, effective February 28, 1986.* #
10.9    Amended and Restated Return on Equity Incentive Plan,  effective January
        1, 1990. #
10.10   1993 Employee Stock Plan, effective January 15, 1993.* #
10.11   Employment  Agreement,  dated as of September 17, 1988 and amended as of
        December  1,  1992,  between  the  Registrant  and its  Chief  Executive
        Officer, Mr. B. Frederick Becker.* #
10.12   Second  Amendment to  Employment  Agreement,  dated as of April 19, 1995
        between the Registrant and its Chief Executive Officer, Mr. B. Frederick
        Becker.**** #
10.13   Employment  Agreement dated as of October 9, 1995 between the Registrant
        and Mr. Steve A. Schleisman. **** #
10.14   Employment  Agreements dated as of April 17, 1996 between the Registrant
        and Ms. Anna Marie Hajek,  Mr. Gerald L. McManis and Mr. Paul M. Orzech.
        ***** #
10.15   Description  of Employment  Arrangement  between the  Registrant and Mr.
        Steve A. Schleisman.
10.16   1993  Non-Employee  Directors'  Formula  Stock  Option  Plan,  effective
        January 15, 1993.* #
10.17   Certificates of Insurance for Directors' Life Insurance Program.* #
10.18   Amended Board of Directors Retirement Plan, effective January 1, 1993. #
10.19   Amended 1996 Non-Employee  Director Stock and Deferred Cash Compensation
        Plan. #
10.20   Merger  Agreement  and Plan of  Reorganization  dated as of December 30,
        1993 among the Registrant, McManis Associates, Inc. and the stockholders
        of McManis Associates, Inc.**
10.21   Transfer and  Forbearance  Agreement dated as of December 30, 1993 among
        the Registrant and Gerald L. McManis.**
10.22   Stock Purchase  Agreement  dated February 2, 1995 between the Registrant
        and American Hospital Association Services, Inc.***
11.1    Statement re computation of per share earnings.
13.1    MMI Companies Inc. 1996 Annual Report to Stockholders
21.1    Subsidiaries of the registrant.
23.1    Consent of Ernst & Young LLP.
27.1    Financial data schedule.


*       Incorporated herein by reference to Registration  Statement No. 33-59464
        on Form S-1.
**      Incorporated  herein by reference to Report on Form 10-K dated  December
        31, 1993, Commission File No. 1-11920.

                                     - 17 -
<PAGE>
***     Incorporated  herein by reference to Report on Form 10-K dated  December
        31, 1994, Commission File No. 1-11920.
****    Incorporated  herein by reference to Report on Form 10-K dated  December
        31, 1995, Commission File No. 1-11920.
*****   Incorporated  herein by  reference to Report on Form 10-Q dated June 30,
        1996, Commission File No. 1-11920. # Compensatory plans or arrangements.

                                     - 18 -
<PAGE>
<TABLE>
<CAPTION>

                                                MMI COMPANIES, INC.
                                                 (PARENT COMPANY)

                            SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

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

                                                                              December 31,
                                                                   ---------------------------------
                                                                          1996                1995
                                                                   -------------       -------------
ASSETS
 INVESTMENTS
<S>                                                                <C>                 <C>         
  Investment in subsidiaries ..............................        $    254,992        $    226,834
  Short term investments ..................................              15,460                 597
  Fixed maturities ........................................              24,822                  --
                                                                   -------------       -------------
                                                                        295,274             227,431

OTHER ASSETS
 Cash (overdraft) .........................................                (299)               (836)
 Furniture and equipment - at cost, less accumulated
   depreciation: 1996 - $5,719; 1995 - $4,222 .............               3,964               3,287               
 Due from affiliates ......................................              17,805               6,516
 Deferred income taxes ....................................               5,924                (380)
 Other ....................................................               2,148               4,049
                                                                   -------------       -------------
                                                                   $    324,816          $  240,067
                                                                   =============       =============

LIABILITIES AND STOCKHOLDERS' EQUITY
 LIABILITIES ..............................................
  Accrued expenses and other liabilities ..................        $     13,612          $    2,609
  Due to affiliates .......................................               1,238               1,245
  Notes payable to stockholders ...........................                  --                 750
  Long-term notes payable .................................              58,000              49,000
                                                                   -------------       -------------
                                                                         72,850              53,604

STOCKHOLDERS' EQUITY
 Common Stock, par value $.10 per share:
   Authorized shares: 1996 and 1995 - 30,000
   Issued and outstanding shares: 1996 - 11,625; 1995 - 9,675             1,162                 967
 Additional paid-in capital ...............................             135,183              82,645
 Retained earnings ........................................             102,830              84,361
 Unrealized gains on investments, net of taxes:
   1996 - $6,887; 1995 - $9,957 ...........................              12,791              18,490
                                                                   -------------       -------------
                                                                        251,966             186,463
                                                                   -------------       -------------
                                                                   $    324,816        $    240,067
                                                                   =============       =============
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>

                                                        S-1
<PAGE>
<TABLE>
<CAPTION>
                               MMI COMPANIES, INC.
                                (PARENT COMPANY)

     SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

                         CONDENSED STATEMENTS OF INCOME
                                 (IN THOUSANDS)

                                                                               Year Ended December 31,
                                                                     -------------------------------------------- 
                                                                          1996            1995            1994
                                                                     ------------    ------------    ------------ 
REVENUES
<S>                                                                  <C>             <C>             <C>        
     Management fees from subsidiaries..........................     $    24,550     $    19,100     $    16,750
     Dividends received from subsidiaries.......................          11,000           6,000           5,000
     Net investmentincome.......................................             752             375              95
     Net realized gains on investments..........................              22               -               -
                                                                     ------------    ------------    ------------ 
                                                                          36,324          25,475          21,845
EXPENSES
     Administrative and other...................................          23,193          19,558          16,574
     Interest expense...........................................           3,397           2,767           1,619
                                                                     ------------    ------------    ------------ 
                                                                          26,590          22,325          18,193
                                                                     ------------    ------------    ------------ 

     Income from continuing operations before income 
          taxes and equity in undistributed net income of                                                 
          subsidiaries.............. ...........................           9,734           3,150           3,652
     Income taxes (credit)......................................            (396)           (932)           (344)
                                                                     ------------    ------------    ------------ 
         Income from continuing operations before equity in
             undistributed net income of subsidiaries...........          10,130           4,082           3,996
     Loss from discontinued operations..........................          (5,100)              -               -
                                                                     ------------    ------------    ------------ 
         Income before equity in undistributed net income
             of subsidiaries....................................           5,030           4,082           3,996
     Equity in undistributed net income of subsidiaries.........          15,985          18,613          11,055
                                                                     ------------    ------------    ------------ 

         Net income.............................................     $    21,015     $    22,695     $    15,051
                                                                     ============    ============    ============ 
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>

                                       S-2
<PAGE>
<TABLE>
<CAPTION>
                               MMI COMPANIES, INC.
                                (PARENT COMPANY)

     SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

                       CONDENSED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

                                                                               Year Ended December 31,
                                                                     -------------------------------------------- 
                                                                          1996            1995            1994
                                                                     ------------    ------------    ------------ 

<S>                                                                  <C>             <C>             <C>        
Net cash provided by operating activities.......................     $     3,955     $     1,961     $     4,107

Investing activities:
     Net sale (purchase) of short-term investments..............         (14,769)            121            (719)
     Purchases of fixed maturities..............................         (38,833)              -               -
     Sales of fixed maturities..................................           8,706               -               -
     Maturities of fixed maturities.............................           5,430               -               -
     Capital contribution to subsidiaries.......................         (10,003)         (5,000)           (500)
     Furniture and equipment additions..........................          (2,174)         (1,770)         (1,522)
     Acquisition of subsidiaries................................          (8,921)        (15,372)              -
                                                                     ------------    ------------    ------------ 
                                                                                                               -

        Net cash used by investing activities...................         (60,564)        (22,021)         (2,741)

Financing activities:
     Issuance of Common Stock...................................          54,308           1,587             118
     Costs incurred in connection with stock offering...........          (2,866)              -               -
     Payments on notes payable..................................            (750)         (1,250)        (28,250)
     Proceeds from notes payable including
          short-term borrowings... .............................           9,000          21,000          28,000
     Dividends..................................................          (2,546)         (1,957)         (1,376)
                                                                     ------------    ------------    ------------ 

        Net cash provided (used) by financing activities........          57,146          19,380          (1,508)
                                                                     ------------    ------------    ------------ 

        Increase (decrease) in cash.............................             537            (680)           (142)
Cash (deficit) at beginning of year.............................            (836)           (156)            (14)
                                                                     ------------    ------------    ------------ 
        Cash (deficit) at end of year...........................     $      (299)    $      (836)    $      (156)
                                                                     ============    ============    ============ 

<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>

                                       S-3
<PAGE>
<TABLE>
<CAPTION>
                      MMI COMPANIES, INC. AND SUBSIDIARIES

               SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
                                 (IN THOUSANDS)

                                               December 31,
                      ------------------------------------------------------------ 
                                         Loss and
                         Deferred            Loss
                           Policy      Adjustment        Unearned          Future
                      Acquisition         Expense         Premium          Policy
Segment                     Costs        Reserves        Reserves        Benefits
--------------        ------------    ------------    ------------    ------------ 

1996

<S>                   <C>             <C>             <C>             <C>        
Insurance...........  $     7,117     $   628,452     $    55,679     $     8,578
Consulting and fees.           --              --              --              --
Corporate and
   eliminations.....           --           3,121              --              --
                      ------------    ------------    ------------    ------------ 
                      $     7,117     $   631,573     $    55,679     $     8,578
                      ============    ============    ============    ============ 

1995

Insurance...........  $     5,660     $   634,621     $    52,951     $     8,982
Consulting and fees.           --              --              --              --
Corporate and
   eliminations.....           --           4,194              --              --
                      ------------    ------------    ------------    ------------ 
                      $     5,660     $   638,815     $    52,951     $     8,982
                      ============    ============    ============    ============ 
<FN>
See Note 12 to the  consolidated  financial  statements  for a discussion of the
reclassification of segment information.
</FN>
</TABLE>

<TABLE>
<CAPTION>
                      MMI COMPANIES, INC. AND SUBSIDIARIES

         SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION (CONTINUED)
                                 (IN THOUSANDS)


                                                        Year Ended December 31,
                      --------------------------------------------------------------------------------------------
                                                        Benefits,    Amortization
                                                          Claims,     of Deferred
                                              Net      Losses and          Policy           Other             Net
                          Premium      Investment      Settlement     Acquisition       Operating        Premiums
Segment                  Revenues          Income        Expenses           Costs        Expenses         Written
--------------        ------------    ------------    ------------    ------------    ------------    ------------  

1996

<S>                      <C>              <C>            <C>             <C>             <C>             <C>     
Insurance...........  $   164,409     $    43,428     $   135,786     $    14,024     $    23,776     $   167,392
Consulting and fees.           --              --              --              --          29,966              --
Corporate and
   eliminations.....           --             846              --              --           9,260              --
                      ------------    ------------    ------------    ------------    ------------    ------------  
                      $   164,409     $    44,274     $   135,786     $    14,024     $    63,002     $   167,392
                      ============    ============    ============    ============    ============    ============  
 
1995

Insurance...........  $   155,191     $    39,417     $   130,088     $    11,353     $    23,009     $   161,188
Consulting and fees.           --              --              --              --          19,463              --
Corporate and
   eliminations.....           --             433              --              --           7,230              --
                      ------------    ------------    ------------    ------------    ------------    ------------  
                      $   155,191     $    39,850     $   130,088     $    11,353     $    49,702     $   161,188
                      ============    ============    ============    ============    ============    ============  

1994

Insurance...........  $   132,389     $   $28,928     $   112,711     $     7,507     $    19,429     $   139,800
Consulting and fees.           --              --              --              --          15,987              --
Corporate and
   eliminations.....           --             139              --              --           4,363              --
                      ------------    ------------    ------------    ------------    ------------    ------------  
                      $   132,389     $    29,067     $   112,711     $     7,507     $    39,779     $   139,800
                      ============    ============    ============    ============    ============    ============  
<FN>
See Note 12 to the  consolidated  financial  statements  for a discussion of the
reclassification of segment information.
</FN>
</TABLE>

                                                                S-4
<PAGE>
<TABLE>
<CAPTION>
                      MMI COMPANIES, INC. AND SUBSIDIARIES

                            SCHEDULE IV - REINSURANCE
                             (DOLLARS IN THOUSANDS)

                                                                                                      Percentage
                                                              Ceded to       Assumed                   of Amount
                                                   Gross         Other    from Other           Net    Assumed to
                                                  Amount     Companies     Companies        Amount           Net 
                                             ------------  ------------  ------------  ------------  ------------  

Year Ended December 31, 1996:
<S>                                          <C>           <C>           <C>           <C>                <C>       
  Life insurance in force at end of year...  $ 1,265,506   $   300,385   $         -   $   965,121             -%
                                             ============  ============  ============  ============ 
Premiums:
  Life insurance...........................  $     4,779   $     1,210   $         -   $     3,569             -%
  Accident and health insurance............       16,222        14,383         2,279         4,118         55.34
  Medical malpractice .....................      171,058        31,567        17,231       156,722         10.99
                                             ------------  ------------  ------------  ------------  
    Total premiums.........................  $   192,059   $    47,160   $    19,510   $   164,409
                                             ============  ============  ============  ============


Year Ended December 31, 1995:
  Life insurance in force at end of year...  $ 1,397,274   $   344,807   $         -   $ 1,052,467             -%
                                             ============  ============  ============  ============ 

Premiums:
  Life insurance...........................  $     4,430   $     1,043   $         -   $     3,387             -%
  Accident and health insurance............       12,602        12,721         4,288         4,169        102.85
  Medical malpractice .....................      169,760        35,084        12,959       147,635          8.78
                                             ------------  ------------  ------------  ------------
    Total premiums.........................  $   186,792   $    48,848   $    17,247   $   155,191
                                             ============  ============  ============  ============

Year Ended December 31, 1994:
  Life insurance in force at end of year...  $ 1,064,590   $   223,032   $         -   $   841,558             -%
                                             ============  ============  ============  ============

Premiums:
  Life insurance...........................  $     3,794   $       830   $        52   $     3,016          1.72
  Accident and health insurance............       14,437        14,558         5,512         5,391        102.24
  Medical malpractice .....................      138,508        27,031        12,505       123,982         10.09
                                             ------------  ------------  ------------  ------------
    Total premiums.........................  $   156,739   $    42,419   $    18,069   $   132,389
                                             ============  ============  ============  ============
</TABLE>

                                                           S-5
<PAGE>
<TABLE>
<CAPTION>
                      MMI COMPANIES, INC. AND SUBSIDIARIES

                 SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)


                                                       Balance At
                                                        Beginning                                      Balance at
Description                                               of Year       Additions      Deductions     End of Year
                                                     -------------   -------------   -------------   -------------   

Year Ended December 31, 1996:
<S>                                                  <C>             <C>             <C>             <C>         
  Accumulated amortization of goodwill ..........    $      4,800    $      1,787    $         --    $      6,587
  Accumulated depreciation of furniture and      
     equipment ..................................           6,500           3,149             161           9,488


Year Ended December 31, 1995:
  Accumulated amortization of goodwill ..........    $      3,686    $      1,114    $         --    $      4,800
  Accumulated depreciation of furniture and
     equipment ..................................           4,749           2,502             751           6,500
  Accumulated allowance for uncollectible
     reinsurance (1) ............................          11,160              --          11,160              --


Year Ended December 31, 1994:
  Accumulated amortization of goodwill ..........    $      2,572    $      1,114    $         --    $      3,686
  Accumulated depreciation of furniture and
     equipment ..................................           3,090           2,454             795           4,749
  Accumulated allowance for uncollectible
     reinsurance ................................          11,160              --              --          11,160
<FN>
(1) Represents the write-off of reinsurance receivables that were fully reserved
prior to 1993.
</FN>
</TABLE>

                                                           S-6
<PAGE>
<TABLE>
<CAPTION>
                      MMI COMPANIES, INC. AND SUBSIDIARIES

       SCHEDULE VI-- SUPPLEMENTARY PROPERTY/CASUALTY INSURANCE INFORMATION
                                 (IN THOUSANDS)

                                                 December 31,
                          --------------------------------------------------------------
                                                               Discount
                                               Loss and   Deducted from
                               Deferred            Loss   Loss and Loss
   Affiliation                   Policy      Adjustment      Adjustment        Unearned
       with                 Acquisition         Expense         Expense         Premium
    Registrant                    Costs        Reserves        Reserves        Reserves
----------------------    --------------  --------------  --------------  --------------

1996:
   Consolidated
<S>                       <C>             <C>             <C>             <C>          
    subsidiaries......    $      7,117    $     623,794   $          --   $      55,677
1995:
   Consolidated
    subsidiaries......           5,660          627,414              --          52,949
</TABLE>

<TABLE>
<CAPTION>
                      MMI COMPANIES, INC. AND SUBSIDIARIES

 SCHEDULE VI-- SUPPLEMENTARY PROPERTY/CASUALTY INSURANCE INFORMATION (CONTINUED)
                                 (IN THOUSANDS)

                                                                Year ended December 31,
                        ------------------------------------------------------------------------------------------------ 
                                                           Losses and Loss                                
                                                             Adjustment        
                                                              Expenses         Amortization          Paid
                                                      Incurred Related to       of Deferred    Losses and
   Affiliation                                Net   --------------------------       Policy          Loss           Net  
       with                Premiums    Investment       Current         Prior   Acquisition    Adjustment      Premiums
    Registrant               Earned        Income          Year         Years         Costs      Expenses       Written
-----------------       ------------  ------------  ------------  ------------  ------------  ------------  ------------  
1996:
   Consolidated
<S>                     <C>           <C>           <C>           <C>           <C>           <C>           <C>        
    subsidiaries...     $   156,722   $    42,048   $   135,895   $    (5,108)  $    14,024   $   129,751   $   159,714
1995:
   Consolidated
    subsidiaries...         147,635        38,113       127,710        (1,766)       11,353        72,214       153,634

1994:
   Consolidated
    subsidiaries...         123,982        27,665       104,366         2,495         7,507        80,397       131,399

</TABLE>

                                       S-7
<PAGE>
EXHIBIT 10.2


                                     WAIVER
                                     ------

         THIS WAIVER is made as of the 21st day of October,  1996,  by and among
MMI Companies, Inc., a Delaware corporation (the ACompany@), and each of Conning
Insurance Capital Limited Partnership,  Conning Insurance Capital  International
Partnership,  Conning  Insurance  Capital  Limited  Partnership  II and  Conning
Insurance  Capital  International  Partnership  II  (collectively  the  AConning
Investors@).


                               W I T N E S S E T H
                               - - - - - - - - - - 

         WHEREAS,  the Company  and the  Conning  Investors  have  entered  into
separate Unit Purchase  Agreements  dated January 25, 1989 and February 23, 1989
(the APurchase Agreements@); and

         WHEREAS,  Section 6.8 of each of the Purchase  Agreements  requires the
Company to use its best  efforts to elect a director  designated  by the Conning
Investors as long as the Conning  Investors own a specified  number of Shares of
the Company; and

         Whereas,  the Company=s  shares are now publicly traded and the Conning
Investors no longer need the protection afforded by Section 6.8;

         NOW, THEREFORE, the parties hereby agrees as follows:

         1.   Waiver.   Section 6.8 of the Purchase Agreements is hereby 
              ------
irrevocably waived by the Conning Investors.

         2.   Counterparts.   This document may be executed in any number of 
              -------------
counterparts, each of which shall be an original but all of which together shall
constitute one instrument.

         IN WITNESS  WHEREOF,  the parties have  executed  this Waiver as of the
date first above written.


         MMI COMPANIES, INC.                        CONNING INSURANCE
                                                CAPITAL LIMITED PARTNERSHIP

By:  _______________________________            By:     CONNING & COMPANY, its 
     Name:  B. Frederick Becker                             General Partner
     Title:    Chairman/CEO
                                                By:  ___________________________
                                                     Name:
                                                     Title:
<PAGE>







                                                CONNING INSURANCE CAPITAL
                                                INTERNATIONAL PARTNERSHIP

                                                By:    CONNING & COMPANY, its
                                                           General Partner

                                                By:  ___________________________
                                                     Name:
                                                     Title:




                                                CONNING INSURANCE CAPITAL
                                                LIMITED PARTNERSHIP II

                                                By:    CONNING & COMPANY, its
                                                           General Partner

                                                By:  ___________________________
                                                     Name:
                                                     Title:



                                                CONNING INSURANCE CAPITAL
                                                INTERNATIONAL PARTNERSHIP II

                                                By:    CONNING & COMPANY, its
                                                           General Partner

                                                By:  ___________________________
                                                     Name:
                                                     Title:
<PAGE>
EXHIBIT 10.7

                            FOURTH AMENDMENT TO LEASE
                                       FOR
                              CORPORATE 500 CENTRE

     This Fourth  Amendment  to Lease is made and entered into as of the ___ day
of July, 1996 between American  National Bank and Trust Company of Chicago,  not
individually,  but solely,  as Trustee under a certain Trust Agreement dated the
20th day of July,  1985, and known as Trust number 65110 (the  "Landlord"),  and
MMI Companies,  Inc. (the  "Tenant").  This agreement  amends that certain Lease
dated the 7th day of December, 1990 between Landlord and Tenant (the "Lease") as
previously  amended by First  Amendment to Lease,  dated  August,  1992,  Second
Amendment to Lease,  dated  October,  1994 and Third  Amendment to Lease,  dated
January,  1996.  Landlord and Tenant are desirous of further  amending the Lease
for and in  consideration  of the premises and the  agreements  hereinafter  set
forth.  Capitalized  terms  used  herein  shall  have the same  meaning as those
ascribed to them in the Lease unless otherwise defined herein.

     1. LEASE OF  PREMISES.  The  definition  of Premises in  Paragraph 1 of the
Lease is hereby amended to include an additional  1,648 rentable  square feet on
the first  floor of the  Building  (the  "Additional  Space"),  to the  existing
110,479  rentable  square  feet in the  Premises  as shown on Exhibit A attached
hereto and made a part hereof. The total amount of the Premises shall be 112,127
rentable  square feet,  which number shall be substituted  for 110,479  rentable
square feet in Section 1 of the Lease. 


     2. TERM.  The Term of the  Additional  Space shall  commence on December 1,
1996 and the Termination Date shall be June 30, 2006. Tenant may take possession
of the Additional Space on or before December 1, 1996.


     3. REVISED BASE RENT. The amount of Base Rent shown on Exhibit A-I attached
to the Lease is amended and replaced with a new Exhibit A-I attached  hereto and
made a part of the Lease.

     4. TENANTS  PROPORTIONATE  SHARE.  Commencing  December 1, 1996,  "Tenant's
Proportionate  Share" shall be amended by deleting 62.20% and  substituting  for
the deleted figure "63.13%."

     5. CONSTRUCTION.  Landlord shall construct the Additional Space pursuant to
Tenant's drawings and specifications, which drawings and specifications shall be
identified  in a separate  Work Letter to be  provided  by Tenant.  All costs in
connection with  construction or reconstruction of the Additional Space shall be
the responsibility of the Tenant.

     6.  EXCULPATORY  CLAUSE.  This  Amendment  to Lease is executed by American
National Bank and Trust  Company of Chicago,  not  personally  but as Trustee as
aforesaid,  in the exercise of the power and authority conferred upon and vested
in it as such Trustee, and under the express direction of the beneficiaries of a
certain Trust Agreement dated

<PAGE>


July 30,  1985 and known as Trust  Number  65110 at said  Bank.  Nothing in this
Lease contained shall be construed as creating any liability  whatsoever against
said  Trustee  personally  or said  beneficiaries,  and in  particular,  without
limiting the generality of the foregoing,  there shall be no personal  liability
to perform any covenant,  either express or implied,  herein contained, to keep,
preserve  or  sequester  any  property  of said  Trust,  and that  all  personal
liability of said Trustee (and said  beneficiaries,  to the extent  permitted by
law), of every sort, if any, is hereby expressly wavered by Tenant, and by every
person now or hereafter  claiming any right or security  hereunder,  and that so
far as the  parties  hereto  are  concerned  the  owner of any  indebtedness  or
liability  accruing hereunder shall look solely to the Trust Estate from time to
time subject to the provisions of said Trust Agreement for the payment  thereof.
The  Trustee  has no agents or  employees  and merely  holds  naked title to the
property herein  described and has no knowledge  respecting  rentals,  leases or
other factual matters with respect to the Premises,  except as represented to it
by the beneficiary or beneficiaries of the Trust.

     7. Except as modified by the terms of this Amendment,  all of the terms and
provisions of the said Lease shall be and remain in full force and effect.


LANDLORD                                      TENANT

AMERICAN NATIONAL BANK AND                    MMI COMPANIES, INC.
TRUST COMPANY OF CHICAGO
not individually, but solely
and only as Trustee aforesaid.

BY:  /s/                                      By:  /s/ Wayne A. Sinclair
     ----------------------------                  ----------------------------

Its: Asst VP                                  Its:  General Counsel
     ----------------------------                  ----------------------------
<PAGE>
                            FIFTH AMENDMENT TO LEASE
                                       FOR
                              CORPORATE 500 CENTRE

     This Fifth Amendment to Lease is made and entered into as of the ___ day of
July,  1996 between  American  National Bank and Trust  Company of Chicago,  not
individually,  but solely,  as Trustee under a certain Trust Agreement dated the
30th day of July,  1985, and known as Trust number 65110 (the  "Landlord"),  and
MMI Companies,  Inc. (the  "Tenant").  This agreement  amends that certain Lease
dated the 7th day of December, 1990 between Landlord and Tenant (the "Lease") as
previously  amended by First  Amendment to Lease,  dated  August,  1992,  Second
Amendment  to Lease,  dated  October,  1994,  Third  Amendment  to Lease,  dated
January,  1996, and Fourth Amendment to Lease,  dated July,  1996.  Landlord and
Tenant are desirous of further  amending the Lease for and in  consideration  of
the premises and the agreement  hereinafter  set forth.  Capitalized  terms used
herein shall have the same meaning as those ascribed to them in the Lease unless
otherwise defined herein.

     1. LEASE OF  PREMISES.  The  definition  of Premises in  Paragraph 1 of the
Lease is hereby amended to include an additional  2,671 rentable  square feet on
the first  floor of the  Building  (the  "Additional  Space"),  to the  existing
112,127  rentable  square  feet in the  Premises  as shown on Exhibit A attached
hereto and made a part hereof. The total amount of the Premises shall be 114,798
rentable  square feet,  which number shall be substituted  for 112,127  rentable
square feet in Section 1 of the Lease.

     2. TERM. The term on the  Additional  Space shall commence on March 1, 1997
and the Termination  Date shall be June 30, 2006.  Tenant may take possession of
the Additional Space on or before March 1, 1997.

     3. REVISED BASE RENT. The amount of Base Rent shown on Exhibit A-I attached
to the Lease is amended and replaced with a new Exhibit A-I attached  hereto and
made a part of the Lease.

     4.  TENANTS  PROPORTIONATE  SHARE.   Commending  March  1,  1997  "Tenant's
Proportionate  Share" shall be amended by deleting  "63.13% and substituting for
the deleted figure "64.63%."

     5.  CONSTRUCTION  Landlord shall construct the Additional Space pursuant to
Tenant's drawings and specifications, which drawings and specifications shall be
identified  in a separate  Work Letter to be  provided  by Tenant.  All costs in
connection with  construction or reconstruction of the Additional Space shall be
the responsibility of the Tenant.

     6.  EXCULPATORY  CLAUSE.  This  Amendment  to Lease is executed by American
National Bank and Trust  Company of Chicago,  not  personally  but as Trustee as
aforesaid,  in the exercise of the power and authority conferred upon and vested
in it as such Trustee, and under the express direction of the beneficiaries of a
certain Trust  Agreement  dated July 30, 1985 and known as Trust Number 65110 at
said Bank. Nothing in this Lease contained

<PAGE>
shall be  construed as creating any  liability  whatsoever  against said Trustee
personally  or said  beneficiaries,  and in  particular,  without  limiting  the
generality of the foregoing, there shall be no personal liability to perform any
covenant,  either express or implied,  herein  contained,  to keep,  preserve or
sequester  any property of said Trust,  and that all personal  liability of said
Trustee (and said beneficiaries, to the extent permitted by law), of every sort,
if any,  is  hereby  expressly  waived by  Tenant,  and by every  person  now or
hereafter  claiming  any  right or  security  hereunder;  and that so far as the
parties hereto are concerned the owner of any indebtedness or liability accruing
hereunder shall look solely to the Trust Estate from time to time subject to the
provisions of said Trust Agreement for the payment  thereof.  The Trustee has no
agents  or  employees  and  merely  holds  naked  title to the  property  herein
described  and has no  knowledge  respecting  rentals,  leases or other  factual
matters  with  respect  to the  Premises,  except  as  represented  to it by the
beneficiary or beneficiaries of the Trust.

     7. Except as modified by the terms of this Amendment,  all of the terms and
provisions of the said Lease shall be and remain in full force and effect.


LANDLORD                                      TENANT

AMERICAN NATIONAL BANK AND                    MMI COMPANIES, INC.
TRUST COMPANY OF CHICAGO
not individually, but solely
and only as Trustee aforesaid.

BY:  /s/                                      By:  /s/ Wayne A. Sinclair
     ----------------------------                  ----------------------------

Its: Asst VP                                  Its:  General Counsel
     ----------------------------                  ----------------------------
<PAGE>
EXHIBIT 10.9

                               MMI COMPANIES, INC.

                         RETURN ON EQUITY INCENTIVE PLAN


                               TABLE OF CONTENTS
                               -----------------
SECTION                                                                   PAGE
-------                                                                   ----
  1         Introduction                                                   
               Purpose and Summary                                         1
               Effective Date, Plan Year                                   1
               Committee                                                   1
               Employers                                                   1
               Unfunded Nature of Plan                                     1

  2         Eligibility                                                    
               Participation                                               2
               Notice of Participation                                     2

  3         Annual Awards
               Determining Annual Award                                    2
               Return on Equity Factor                                     2-3
               Committee Involvement                                       4

  4         Plan Accounts and Adjustments
               Participant Accounts                                        4
               Account Adjustments                                         4-5

  5         Vesting
               Vesting Schedule                                            5
               Retirement or Death of Participant                          5
               Disability                                                  5
               Special Circumstances                                       6

  6         Distribution of Benefits
               Time of Payment                                             6
               Form of Payment                                             6
               Designation of Beneficiary                                  6

  7         Administration
               General Rights, Powers, and Duties of Committee             7
               Information to be Furnished to Committee                    8

<PAGE>

               Responsibility                                              8
               Interested Committee Member                                 8
               Committee Expenses                                          8
               Committee's Decision Final                                  8
               Role of Independent Auditors                                9

  8         General Provisions
               Action By Employer                                          10
               Controlling Law                                             10
               Employment Rights                                           10
               Litigation by Participants                                  10
               Interests Not Transferable                                  10

  9         Amendment and Termination                                      11


                                   SECTION 1
                                   ---------

                                  Introduction
                                  ------------

     1.1.  Purpose  and  Summary.  The MMI  Companies,  Inc.  Return  on  Equity
           ----------------------
Incentive Plan (the "Plan") is maintained by MMI Companies, Inc. (the "Company")
to assist in attracting and retaining  management  personnel for the Company and
certain of its subsidiaries and affiliates and to encourage executives to strive
for outstanding results in the operation of the Company and its subsidiaries and
affiliates  from year to year.  The Plan is  intended  to provide  an  incentive
comparable to equity  participation in the performance of the Company and is not
intended  as an element  of the  Company's  c  ompensation  package.  The amount
awarded  to each  participant  under the Plan for any Plan year  depends  on the
extent to which the  amount  earned on the book  value of the  Company's  common
stock exceeds a certain threshold.

     1.2.  Effective  Date, Plan Year. The Plan has been  established  effective
           ---------------------------
January 1, 1990. The "Plan year" is the Company's fiscal year.

     1.3. Committee.  The Plan is administered by the Compensation  Committee of
          ----------
the  Company's  Board of Directors  (the  "Committee").  The general  rights and
duties of the Committee under the Plan are described in Section 7.

     1.4. Employers. The Company and each subsidiary or affiliate of the Company
          ----------
which  adopts the Plan with the  Company's  consent is  referred to herein as an
"employer" and

                                       2
<PAGE>
 may be referred to collectively as the "employers".

     1.5.  Unfunded Nature of Plan. The Plan is an unfunded program for a select
           ------------------------
group of management  employees,  with incentive award payments provided from the
general  assets of the employers.  Participants  shall have only those rights to
incentive award payments as are set forth in the Plan and shall be considered as
unsecured creditors of the employers with respect to any such rights.


                                   SECTION 2
                                   ---------

                                  Eligibility
                                  -----------

     2.1.  Participation.  Participants  in the Plan shall be those employees of
           --------------
the employers who are designated as participants by the Committee. The Committee
may add or remove employees from  participation at any time for any reason (e.g.
termination or retirement). An employee who is remo ved from participation shall
continue to be treated as a participant for all purposes of the Plan except that
such an employee  will not receive any awards under  Section 3 for any Plan year
ending after the date the employee is removed as a  participant.  Each Plan year
the Committee  shall classify each  participant as either a Class I, Class II or
Class III participant.

     2.2.  Notice  of  Participation.   The  Committee  will  ensure  that  each
           --------------------------
participant receives notice of eligibility for participation in the Plan.


                                   SECTION 3
                                   ---------

                                 Annual Awards
                                 -------------

     3.1. Determining Annual Award. Each participant in the Plan on the last day
of a Plan year  shall be  entitled  to an award for that Plan  year.  The annual
award  for a Plan  year  shall  be the  amount  determined  by  multiplying  the
participant's  base salary for the Plan year by the return on e quity factor (as
defined in subsection 3.2) that is applicable based on the  participant's  class
of participation and the Company's return on equity for the Plan year.

                                       3
<PAGE>

     3.2.  Return on Equity  Factor.  The return on equity factor ("ROE Factor")
           ------------------------
for each class of participants shall be the percentage for the class (determined
from the table below) that  corresponds  to the  Company's  return on equity per
share (ROE" as defined below) for the Plan year.



If the Return on
Equity Per Share Is:            Then The ROE Factor shall Be:
--------------------            -----------------------------


               Class I           Class II             Class III
             Participants      Participants         Participants
             ------------      ------------         ------------

Below 14%         0%                0%                   0%
14%               3%              2.5%                   2%
15%               9%              7.5%                   6%
16%              18%               15%                  12%
17%              30%               25%                  20%
18%              42%               35%                  28%
19%              51%               42%                  34%
20%              57%               46%                  38%
21 % or more     60%               50%                  40%

The ROE Factor for any ROE between 14 percent and 21 percent that is not a whole
number shall be the sum of (i) the ROE Factor on the table that  corresponds  to
the next lower ROE on the table that is a whole number,  and (ii) the product of
the  fractional  portion of the ROE  (expressed as a decimal a nd rounded to the
nearest one-tenth) multiplied by the margin between the ROE Factors on the table
that  correspond to the next lower and next higher ROE figures on the table that
are whole numbers.* The Company's ROE for a Plan year means the ratio (expressed
as a percentage)  of the Company's full y diluted  Operating  Earnings Per Share
for the Plan year  divided by the  beginning  of year Book Value Per Share.  For
purposes of this calculation,  Operating Earnings Per Share shall mean per share
income  from  continuing  operations  less the net of tax per  share  impact  of
realized  investment gains an d losses.  Operating Earnings Per Share also shall
exclude the net of tax effect of earnings adjustments

                                       4
<PAGE>

for  material  amounts  resulting  from  nonrecurring
transactions or agreements  entered into in prior years or for adjustments  that
arise  from  outside  factors,  e.g.,  accounting,  legislative  or regul  atory
changes.  Book Value Per Share shall mean  beginning  of the year fully  diluted
book value per share.

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

*For example, if the ROE is 14.53 percent,  the ROE Factor will be 6 percent for
Class I: (3 + [.5 x (9 - 3) ] ); the ROE Factor  will be 5% for Class II; 4 (2.5
+ [.5 x (7.5 - 2.5) ] ); the ROE Factor for Class III will be 4% (2 + [.5 x (6 -
2 ]).

                                       5
<PAGE>

     3.3 Committee Involvement.  The Committee shall approve the construction of
         ----------------------
"Operating  Earnings  Per  Share"  and the  exclusion,  if  appropriate,  of the
after-tax  earnings impact of any material events in order to have such earnings
per share  amounts in concert  with the  intent of the  Operating  Earn ings Per
Share definition.  The decision of the Committee shall be final.  Further, it is
the intent of the  Committee to neither  enhance nor penalize the  Company's ROE
calculation as a result of an increase or decrease in the per share market value
of the Company's common stock.

                                   SECTION 4
                                   ---------

                         Plan Accounts and Adjustments
                         -----------------------------

     4.1. Participant Accounts. A bookkeeping reserve account will be maintained
          ---------------------
by the Committee for each  participant in the Plan. A separate  subaccount shall
be maintained  under a participant's  account for each Plan year the participant
receives an award under the Plan. The annual award  determined for a participant
in  accordance  with  the  provisions  of  Section  3 shall be  credited  to the
subaccount  created under the participant's  account for the Plan year and added
to the amounts credited to the participant's subaccount for prior Plan years and
thereafter shall be adjusted as provid ed in subsection 4.2 below.

     4.2.  Account  Adjustments.  The  annual  award for any Plan year  shall be
           ---------------------
credited to a participant's  account as soon as practicable  after the amount of
the award has been determined. Thereafter, each subaccount under a participant's
account shall be adjusted as follows:


     (a)  As of each  January 1 and July 1,  interest  shall be credited to each
          subaccount  based on the  subaccount  balance at the  beginning of the
          period.  The interest to be credited  shall be at an annual rate equal
          to the prime  interest rate as reported by the Wall Street  Journal on
          the  date  such  int  erest is to be  credited  (or the  next  closest
          business day if such date is a Saturday or Sunday).

     (b)  As soon as  practicable  after  the end of each Plan year but prior to
          the April 1  immediately  followed  the end of such year,  the Company
          will  review the ROE  determinations  for each of the three Plan years
          preceding the Plan year just  completed.  If the ROE for any such Plan
          year is reduced be cause of a determination by the Company's  auditors
          and  consulting  actuaries  that the  Company's  loss reserves for the
          fiscal  year  ending  with  the  Plan  year as  brought  forward  were
          deficient,  the Committee will charge each subaccount created for that
          Plan year with the  difference  between the award that was  originally
          credited to the subaccount and the award that would have been credited
          had the redetermined ROE been used.

                                       6
<PAGE>

     (c)  As soon as  practicable  following a  distribution  under Section 6, a
          participant's  subaccount  shall be  charged  with the  amount  of the
          distribution  after adjusting the subaccount under  subparagraphs  (a)
          and (b) above.


                                   SECTION 5
                                   ---------

                                    Vesting
                                    -------

     5.1. Vesting Schedule.  A participant shall become vested (i.e., shall have
          ----------------
a nonforfeitable  right subject to the adjustment  provisions of subsection 4.2)
in a portion of each of his subaccounts in accordance with the following vesting
schedule,  based  upon the  number of months  after the end of the Plan year for
which the subaccount was established.


Months Following Plan Year                   Vesting %
--------------------------                   ---------
          16                                   33 1/3%
          28                                       50%
          40                                      100%




That  portion  of any  subaccount  that is not vested  under  this  Section 5 at
termination of employment shall be forfeited by the participant.

     5.2. Retirement or Death of Participant.  Notwithstanding subsection 5.1, a
          -----------------------------------
participant's entire account balance shall be 100 percent vested in the event of
the participant's  retirement or death while employed by an employer;  provided,
that such account shall  continue to be adjusted as p rovided in subsection  4.2
until completely distributed.

     5.3.  Disability.  Notwithstanding  subsection 5.1, a participant's  entire
           -----------
account balance shall be 100 percent vested in the event the participant becomes
disabled;  provided, that such account shall continue to be adjusted as provided
in  subsection  4.2  until  completely  distributed.  A par  ticipant  shall  be
considered disabled if it is certified to the Company by a physician  acceptable
to  the  Company  that  the  participant's  disability  is  such  that  it  will
substantially  impair the  participant's  ability to perform his duties for more
than 180 days.

                                       7
<PAGE>
     5.4. Special  Circumstances.  The entire balance in  participant's  account
          -----------------------
shall become 100 percent vested and  nonforfeitable  in the event of a change in
control  of the  Company.  A change  in  control  of the  Company  shall  mean a
reconstitution of more than 50 percent of the Board of Director s of the Company
within  any  consecutive  12-month  period  or an  accumulation  of more than 50
percent of the Company's  outstanding  stock by any  individual,  by any entity,
controlled  group of entities,  or group of  individuals  or entities  acting in
concert for the purpose of controlling the Company.

                                   SECTION 6
                                   ---------

                            Distribution of Benefits
                            ------------------------

     6.1.  Time of Payment.  Each of a  participant's  subaccount  balances  (as
           ----------------
adjusted from time to time under  subsection  4.2) shall be distributed in three
installments.  One-third of each  subaccount  balance  shall be paid in the 16th
month  following the end of the Plan year for which the subac count was created,
one-half  of the  remaining  account  balance  shall be paid in the  28th  month
following the end of such Plan year and any remaining  balance in the subaccount
shall  be paid in the  40th  month  following  the end of such  Plan  year.  The
Committee will combine all  subaccount  payments under the Plan into one payment
to a participant.  Notwithstanding the foregoing, a participant's entire account
shall be distributed in one lump sum payment as soon as practicable  following a
change in control of the Company (as defined in subsection 5.4 above).


     6.2.  Form  of  Payment.   Amounts   distributable  to  a  participant  (or
           ------------------
beneficiary)  will be payable in a lump sum directly from the general  assets of
the employers.

     6.3  Designation of  Beneficiary.  Each  participant  form time to time may
          ----------------------------
designate any person or persons to whom the  participant's  account will be paid
in the event the participant dies before receiving all of his account balance. A
beneficiary  designation  will be effective  only when filed in writing with the
Committee while the  participant is alive and will cancel all beneficiary  forms
previously  filed  with the  Committee.  If a  deceased  participant  failed  to
designate a beneficiary,  or if the beneficiary  dies before full payment of the
participant's  account,  the  particip  ant's  account  shall be  payable to the
participant's spouse or, if there is none, to the participant's estate.

                                       8
<PAGE>

                                   SECTION 7
                                   ---------

                                 Administration
                                 --------------

     7.1. General Rights,  Powers, and Duties of Committee.  The Committee shall
be  the  Plan  administrator  and  shall  be  responsible  for  the  management,
operation, and administration of the Plan. In addition to any powers, rights and
duties set forth  elsewhere in the Plan, it shall have the fo llowing powers and
duties:

     (a)  To adopt such rules and regulations  consistent with the provisions of
          the Plan as it deems necessary, in its sole discretion, for the proper
          and efficient administration of the Plan;

     (b)  To administer the Plan in accordance  with its terms and any rules and
          regulations it may establish;

     (c)  To  maintain  records,  concerning  the Plan,  sufficient  to  prepare
          reports, returns and other information required by the Plan or by law;

     (d)  To  construe  and  interpret  the Plan and to  resolve  all  questions
          arising under the Plan;

     (e)  To direct the  employers to pay benefits  under the Plan,  and to give
          such other  directions  and  instructions  as may be necessary for the
          proper administration of the Plan;

     (f)  To employ or retain agents;  attorneys,  accountants or other persons,
          who may also be employed by or represent the employers; and

     (g)  To be responsible for the preparation, filing and disclosure on behalf
          of the Plan of such  documents  and  reports  as are  required  by any
          applicable Federal or State law.

                                       9
<PAGE>
     7.2. Information to be Furnished to Committee.  The employers shall furnish
          -----------------------------------------
the Committee such data and  information  as it may require.  The records of the
employers shall be  determinative  of each  participant's  period of employment,
termination   of  employment  and  the  reason   therefor,   leave  of  absence,
reemployment  and personal  data.  Participants  and their  beneficiaries  shall
furnish to the Committee such evidence,  data or  information,  and execute such
documents as the Committee requests.


     7.3.  Responsibility.  No  member of the  Committee  shall be liable to any
           ---------------
person for any action taken or omitted in connection with the  administration of
this Plan unless attributable to such member's fraud or willful misconduct.  The
Company  agrees to defend,  indemnify  and hold each Commi ttee member  harmless
form any and all  damages,  losses  or costs  (including  reasonable  attorney's
fees),   which  occur  by  reason  of,  arise  out  of,  or  are  incidental  to
implementation or administration of the Plan unless attributable to the member's
fraud or willful misconduct.

     7.4.  Interested  Committee  Member. If a member of the Committee is also a
           ------------------------------
participant  in the Plan,  the member may not decide or determine  any matter or
question concerning such member's account under the Plan unless such decision or
determination  could be made under the Plan by such indi  vidual if not a member
of the Committee.


     7.5.  Committee  Expenses.  All  costs,  charges  and  expenses  reasonably
           --------------------
incurred by the Committee  will be paid by the employers in such  proportions as
the Company may direct.

     7.6.  Committee's  Decision Final. Any  interpretation of the provisions of
           ----------------------------
the Plan and any decisions on any matter within the  discretion of the Committee
made by the  Committee  in  good  faith  shall  be  binding  on all  persons.  A
misstatement  or other mistake of fact shall be corrected  when it becomes known
and the Committee  shall make such adjustment on account thereof as it considers
equitable and practicable.

                                       10
<PAGE>

     7.7 Role of Independent Auditors The determination of the Company's ROE for
         ----------------------------
a Plan  year  shall be  reviewed  by the  Company's  independent  auditors.  The
auditor's role in reviewing the ROE calculation  will be at the direction of the
Committee;  however,  it is contemplated  that thei r role is for the purpose of
expressing  comfort  to the  Committee  as well  as  reporting  and  documenting
findings by performing the following:

     (a)  Review the  calculation of original ROE including  Operating  Earnings
          per Share and Book Value per Share;

     (b)  Review the  calculation  of per share net of tax  realized  investment
          gains and losses;

     (c)  Review the calculation of common shares outstanding as of year end and
          of the  weighted  average  number of common  share  and  common  stock
          equivalents as of each year;

     (d)  Review loss reserve adjustments by accident year as of each succeeding
          year end;

     (e)  Review the effect of net of tax loss reserve adjustments on subsequent
          years per share operating earnings, as recalculated;

     (f)  Review the calculation of any other adjustments  deemed appropriate by
          the Committee; and

     (g)  Review the derivation of all amounts used in the calculation.


                                       11
<PAGE>

                                   SECTION 8
                                   ---------

                               General Provisions
                               ------------------

     8.1. Action by Employer. Any action required or permitted to be taken by an
          -------------------
employer  under the Plan shall be by resolution  of its Board of  Directors,  by
resolution of a duly  authorized  committee of its Board of  Directors,  or by a
person or persons  authorized  by  resolution  of its Board of Directors or such
committee.

     8.2. Controlling Law. Except to the extent superseded by laws of the United
          ----------------
States, the laws of Illinois shall be controlling in all matters relating to the
Plan.

     8.3.  Employment  Rights.  The  Plan  does not  constitute  a  contract  of
           -------------------
employment,  and  participation in the Plan will not give any employee the right
to be  retained  in the  employ  of an  employer,  nor any right or claim to any
benefit under the Plan unless such right or claim has specifically accrued under
the terms of the Plan.

     8.4.  Litigation  by  participants.  If a legal  action  begun  against  an
           -----------------------------
employer or the Committee or any member  thereof,  by or on behalf of any person
results adversely to that person,  the cost to the employers or the Committee or
any member thereof of defending the action will be charged t o the sums, if any,
which were involved in the action or were payable to the person concerned.

     8.5  Interests  Not  Transferable.  The  interests  of persons  entitled to
          -----------------------------
benefits under the Plan are not subject to their debts or other obligations and,
except as may be  required by the tax  withholding  provisions  of the  Internal
Revenue  Code  or  any  state's  income  tax  act,  may  not be  voluntarily  or
involuntarily sold, transferred, alienated, assigned or encumbered.

                                       12
<PAGE>

                                   SECTION 9
                                   ---------

                           Amendment and Termination
                           -------------------------

     While the Company expects and intends to continue the Plan, it reserves the
right to amend the Plan from time to time or to  terminate  the Plan,  provided,
however,  that each  participant  will be  entitled to the awards  credited  his
account prior to such amendment or termination  which are veste d at the time of
the amendment or termination or vested  thereafter in accordance  with the terms
of the Plan as in effect immediately report to such amendment or termination.

                                       13
<PAGE>
EXHIBIT 10.15

Description  of employment  arrangement  between the Registrant and Mr. Steve A.
Schleisman.

The  Registrant's  offer of  employment  to Mr.  Schleisman,  which he accepted,
included a salary of $250,000;  a grant of 50,000 stock  options  vesting over a
four year  period,  funding of an annuity or life  insurance  program  that will
provide the sum of $1,000,000 to Mr.  Schleisman at age 65, or his spouse as his
survivor,  and  participation in incentive and benefit plans comparable to other
executive officers.
<PAGE>
EXHIBIT 10.18


            MMI COMPANIES, INC. BOARD OF DIRECTORS' RETIREMENT PLAN

                                    PREAMBLE

       The principal objective of this Board of Directors' Retirement Plan
(the  "Plan") is to ensure  the  payment of a  competitive  level of  retirement
income in order to attract, retain and motivate Directors.  The Plan is designed
to provide a benefit which,  when added to other retirement  income of the Board
member, will meet the objective  described above.  Eligibility for participation
in the Plan shall be limited to non-employee Directors ("Director"),  serving on
or after the date of the Plan.  This Plan will  become  effective  on January 1,
1993, and will be effective as to each  participant on the date he or she is, or
was, designated as such hereunder.

SECTION I
DEFINITIONS
1.1 "Committee"  means the Personnel and Compensation  Committee of the Board of
Directors  of the  Company,  which  has been  given  authority  by the  Board of
Directors to administer the Plan.

1.2 "Company" means MMI Companies, Inc.

1.3 "Participant" means a non-employee Director of the Company. A Director shall
become a  Participant  in the Plan as of the  date he or she is  elected  to the
Board.

1.4 "Plan" means the Company's Board of Directors Retirement Plan.

1.5 "Retirement"  means the termination of a Participant's  tenure as a Director
provided  that he or she has served at least one full three (3) year term in the
class to which he or she was elected as a non-employee Director.

1.6  "Retirement  Benefit  Date" means the first day of the month  following the
Director's  Retirement or the first day of the month  following  the  Director's
attaining age 59 and 1/2, whichever is later.

                                   SECTION II

                            ELIGIBILITY FOR BENEFITS
<PAGE>
            MMI COMPANIES, INC. BOARD OF DIRECTORS' RETIREMENT PLAN

2.1 Each  Participant is eligible to receive a benefit under this Plan beginning
on the Retirement Benefit Date.

2.2 If any Participant entitled to a benefit under this Plan is removed from the
Board,  or enters into  competition  with the Company,  or  interferes  with the
relations  between the Company and any customer,  the rights of such Participant
to a benefit under this Plan,  including  the rights of a Surviving  Spouse to a
benefit,  will be forfeited,  unless the Committee determines that such activity
is not detrimental to the best interests of the Company.

2.3 No benefits are payable under this Plan if a  Participant  ceases his or her
tenure as a Director for any reason prior to his or her  completing a full three
(3) year  term as a  non-employee  director  in the class to which he or she was
elected.

                                  SECTION III

                     AMOUNT AND FORM OF RETIREMENT BENEFIT

Amount of Benefit
-----------------

3.1  The annual retirement  benefit payable at the Retirement Benefit Date
under the Plan will equal the annual  retainer  fee in effect at the time of the
retirement. The number of annual benefit payments will be equal to the number of
years of Board service  provided that the maximum number of years of service for
purposes of this calculation shall be ten (10).

Form of Benefit
---------------

3.2  The benefits determined under this Plan will be payable in any of the
following  as is elected by the  Participant:  (1) annual lump sum, (2) straight
life annuity,  (3) 50% joint  survivorship  annuity,  (4) 75% joint survivorship
annuity, or (5) 100% joint survivorship annuity.  Payments under (1) annual lump
sum are terminated  following the number of benefit years, as defined under 3.1,
or upon death, whichever comes earlier.

                                   SECTION IV

                         PAYMENT OF RETIREMENT BENEFITS

<PAGE>
            MMI COMPANIES, INC. BOARD OF DIRECTORS' RETIREMENT PLAN

4.1  Benefits  payable in  accordance  with  Section  III will  commence  on the
Participant's  Retirement  Benefit Date in accordance with the provisions of the
election.



                                   SECTION V

                                 MISCELLANEOUS


5.1 The Committee may, in its sole discretion,  terminate, suspend or amend this
Plan at any time, or from time to time,  in whole or in part,  with the approval
of the full Board of Directors.  However, no amendment or suspension of the Plan
will affect a retired  Participant's right or the right of a Surviving Spouse to
continue to receive a benefit in  accordance  with this Plan as in effect on the
date such Participant commenced to receive a benefit under this Plan.

5.2 Nothing  contained  herein will confer upon any  Participant the right to be
retained as a Director of the Company,  nor will it interfere  with the right of
the Company or its  shareholders  to remove or otherwise deal with  Participants
without regard to the existence of this Plan.

5.3 The Plan is unfunded, and the Company will make Plan benefit payments solely
on a current reimbursement basis.

5.4 To the maximum extent  permitted by law, no benefit under this Plan shall be
assignable or subject to any manner to  alienation,  sale,  transfer,  claims of
creditors, pledge, attachment or encumbrances of any kind.

5.5  The  Committee  may  adopt  rules  and  regulations  to  assist  it in  the
administration of the Plan.

5.6 Each  Participant  shall receive a copy of the Plan. The Committee will make
available for inspection by any  Participant a copy of the rules and regulations
used by the Committee in administering the Plan.

<PAGE>
            MMI COMPANIES, INC. BOARD OF DIRECTORS' RETIREMENT PLAN


5.7 This Plan is established  under and will be construed  according to the laws
of the State of Illinois.

5.8 Any decisions made by the full Board of Directors, with respect to the Plan,
in whole or in part, are binding.

<PAGE>
EXHIBIT 10.19


              MMI COMPANIES, INC. 1996 NON-EMPLOYEE DIRECTOR STOCK
                       AND DEFERRED CASH COMPENSATION PLAN


I.       PURPOSE
 
         The purpose of the  Non-Employee  Board of Director  Stock and Deferred
         Cash  Compensation  Plan  ("Plan")  is to  provide  an  alternative  to
         Participants  to receive  restricted  stock as a part of the reasonable
         compensation for services  rendered by them,  comparable to the general
         prevailing practices of similar size public companies.

II.      DEFINITIONS

         As used herein, the following definitions shall apply:

         (a)      "Board" means the Board of Directors of the Company.
         (b)      "Cash  Account"  means the  Account  established  by the
                  Company for Participants who elect to defer cash compensation.
         (c)      "Committee" means the Personnel and Compensation Committee 
                  appointed by the Board.
         (d)      "Company" means MMI Companies, Inc.
         (e)      "Fair Market Value" of a share of Stock means the lower of the
                  New York Stock Exchange closing price on the first or last day
                  of the Offering Period. In the event the Stock is not traded 
                  on the date as of which the Fair Market Value is to be 
                  determined, Fair Market Value shall be determined as of the 
                  next preceding date on which the Stock is traded.
         (f)      "Offering Period" means quarterly periods of each year 
                  commencing January 1, 1997 in which retainers and meeting fees
                  are paid.
         (g)      "Participant" means a non-employee director of the Company who
                  elects to participate in the Plan by filing the appropriate
                  election.  
         (h)      "Stock" means the Common Stock of the Company.  
         (i)      "Stock Plan Account" means the account established by the 
                  Company for each Participant pursuant to the Plan who elects 
                  to receive Stock in lieu of cash compensation.

III.     PAYMENT OPTIONS

         Prior  to the  beginning  of the  fiscal  year in which  retainers  and
         meeting fees are earned,  each  Participant  may  irrevocably  elect to
         receive payment for such fiscal year in the following forms:

         o         Cash

         o         Shares of Stock as described in Section B.

         o         Deferral  of  payment  as   non-qualified   deferred
                   compensation as described in Section E.

         o         A combination of the above.

         The payment  election  shall be made in writing to the Secretary of the
         Company  in the form  provided  by the  Company.  In the  absence of an
         election,  all  retainers  and  meeting  fees  shall  be paid in  cash.
         Notwithstanding  the  foregoing,  elections may be made with respect to
         cash  deferrals  in the 1996 fiscal  year prior to the time  applicable
         retainers  and  meeting  fees are  earned.  The  Company  may appoint a
         custodian for purposes of implementing the provisions of this Plan.

         A.       Cash
<PAGE>

                  Retainer paid  semi-annually in advance;  meeting fees paid on
                  meeting date.

         B.       Stock

                  The number of shares of Stock granted to a  Participant  shall
                  be  calculated  as of the end of each  Offering  Period  using
                  eighty-five   percent  (85%)  of  Fair  Market  Value  of  the
                  Company's Stock for the Offering Period.  Shares granted under
                  the Plan are fully vested but are  non-transferable  until the
                  director  departs from the Board or six months  following  the
                  date of grant, whichever is later.

                  Shares issued under the Plan to  Participants  will be held by
                  the Company in the Stock Plan  Account  which shall only be in
                  the name of the  Participant.  The  Participant  may  elect to
                  receive a stock  certificate for the number of shares acquired
                  upon a  written  request  made to the  Company  or  custodian,
                  however,  such shares shall be subject to the  transferability
                  restrictions set forth in this Plan.  Dividends will accrue on
                  Stock  held in the Plan  Account  for  Stock  owned  and Stock
                  equivalents shall be credited to the Stock Plan Account in the
                  amount of such dividends.

         C.       A  Participant's  right to  receive  Stock in lieu of cash, if
                  an election is made, shall not be transferable by the 
                  Participant  other  than by  will,  the  laws of  descent  and
                  distribution  or pursuant to a  qualified  domestic  relations
                  order.

         D.       The maximum  number of shares which can be granted under the 
                  Stock  payment  option of this Plan  shall be Fifty Thousand 
                  (50,000) shares. The number of shares subject to this Plan 
                  shall be adjusted in the event of a stock dividend, stock 
                  plit, recapitalization, merger, consolidation, reorganization
                  or similar change.

         E.       Deferred Compensation

                  Through a properly executed election, the receipt of retainers
                  and/or  meeting  fees may be deferred.  Deferred  compensation
                  under  this  Plan  shall  be an  unsecured  obligation  of the
                  Company,  and not  evidenced by a note.  All deferred  amounts
                  shall be held as general assets of the Company.

                  For Participants who elect to defer cash  compensation,  there
                  shall be  established  and  maintained  by the  Company a Cash
                  Account  in the name of each  Participant  electing  to defer,
                  which shall be 100% vested. Credited to the Cash Account shall
                  be amounts equal to the amounts of  compensation  deferred and
                  interest  equal to that which  would have been  earned had the
                  deferred  compensation account balance been invested at a rate
                  equal to the "prime rate" in effect on January 1 and July 1 of
                  each year at the First  National Bank of Chicago or such other
                  bank  as may  be  designated  the  Company's  principal  bank.
                  Interest shall be calculated and credited semi-annually.

                  The minimum  deferral  period shall be one year.  The deferral
                  may be made to any  date  (over  one  year)  or to the date of
                  departure from the Board. Payment may be elected as a lump sum
                  or in annual installments up to 5 years. In the event of death
                  or disability, any deferred account balance shall be paid in a
                  lump sum.

         F.       Combination

                  Directors can elect to split their  compensation,  i.e. entire
                  retainer or meeting fees, among the above options as set forth
                  in the election form.

         G.       It is the  intention  of the  Company  that annual payment
                  elections under this Plan comply in all respects with Rule 
                  16b-3 under Section 16(b) of the Securities  Exchange Act or
                  its   successor   and   that   all   Participants   remain
                  Disinterested Persons.  Accordingly,  if any Plan provision is
                  later found to cause such an annual election to fail to comply
                  with  Rule  16b-3 or if any Plan  provision  would  disqualify
                  Participants  from  remaining   Disinterested   Persons,  that
                  provision shall be deemed null and void, and in all events the
                  Plan  shall  be   construed   in  favor  of  its  meeting  the
                  requirements of Rule 16b-3.
<PAGE>


IV.      ELIGIBILITY

         Only  non-employee  directors  of the  Company  shall  be  eligible  to
         participate in this Plan.

V.       AMENDMENTS

         This Plan and any  provision of this Plan may be amended or repealed by
         the Board except that any  amendment  which shall  require  stockholder
         approval in order to comply with SEC Rule 16b-3 or its successor  shall
         be submitted  to the  stockholders  for their  approval  and,  provided
         further,  any such action shall not adversely affect any  Participant's
         rights under this Plan relating to elections made prior to such action.
         Any  issue  of  interpretation  under  this  Plan  may be  made  by the
         Committee.

VI.      EFFECTIVE DATE

         As  required  by  SEC  Rule  16b-3,  this  Plan  must  be  approved  by
         stockholders.
<PAGE>
<TABLE>
<CAPTION>
                                        MMI COMPANIES, INC AND SUBSIDIARIES
                            EXHIBIT 11 - STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)


                                                                     Year Ended December 31,
                                                         --------------------------------------------
                                                            1996             1995             1994
                                                         ----------       ----------       ----------

PRIMARY

<S>                                                      <C>               <C>              <C>  
Weighted average shares outstanding.................        10,284            8,951            8,595

Net effect of dilutive stock options
     based on the treasury stock method
     using average market price....................            430              292               86
                                                         ----------       ----------       ----------

Weighted average number of common
     and common equivalent shares..................         10,714            9,243            8,681
                                                         ==========       ==========       ==========

Earnings per common and
     common equivalent share (Note 1):
          Income from continuing operations.             $    2.44        $    2.42        $    1.73
          Loss from discontinued operations..........         (.48)              --               --
                                                         ----------       ----------       ----------
          Net income                                     $    1.96        $    2.42        $    1.73
                                                         ==========       ==========       ==========

FULLY DILUTED

Weighted average shares outstanding..................       10,284            8,951            8,595

Net effect of dilutive stock options
     based on the treasury stock method using
     ending market price, if higher than average.....          486              425              168
                                                         ----------       ----------       ----------
Net effect of assuming Preferred Stock was
     converted as of the May 1995 Preferred
     Stock issue date................................           --              307               --
                                                         ----------       ----------       ----------


Weighted average number of common
     and common equivalent shares ...................       10,770            9,683            8,763
                                                         ==========       ==========       ==========

Earnings per common and 
     common equivalent share:
          Income from continuing operations..........    $    2.42        $    2.34        $    1.72
          Loss from discontinued operations..........         (.47)              --               --
                                                         ----------       ----------       ----------
          Net income                                     $    1.95        $    2.34        $    1.72
                                                         ==========       ==========       ==========
<FN>
Note 1 - For primary, earnings reflect net income less, in 1995, Preferred Stock
dividends of $294,000.
</FN>
</TABLE>
<PAGE>
EXHIBIT 21.1


SUBSIDIARIES OF THE REGISTRANT
------------------------------

Company                                                   Domicile
-------                                                   --------
MMI Companies, Inc.                                       Delaware
     AmCon Re, Inc.                                       Cayman Islands, B.W.I.
     American Continental Insurance Company               Missouri
          American Continental Life Insurance Company     Missouri
     Health Providers Insurance Company                   Illinois
     Healthcare Credentials Management Services, Inc.     Delaware
     Healthcare Risk Underwriters Ltd.                    United Kingdom
     Management Science Associates, Inc.                  Delaware
     McManis Associates, Inc.                             Delaware
     MMI Agency, Inc.                                     Illinois
     MMI Risk Management Resources, Inc.                  Illinois
          Healthcare Risk Resources, International Ltd.   United Kingdom
     MMedica Insurance Limited                            Ireland
     Professional Risk Management, Inc.                   Delaware


MMedica Insurance Limited is 80% owned.  All other subsidiaries are 100% owned.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 13.1

SELECTED CONSOLIDATED FINANCIAL DATA
    The  following  selected  financial  data are  derived  from  the  Company's
consolidated  financial statements.  The data should be read in conjunction with
the  consolidated  financial  statements,  related  notes  and  other  financial
information included elsewhere in this report.

                                                              YEAR ENDED DECEMBER 31,
                                               (In thousands, except per share amounts and ratios)

                                      1996        1995        1994        1993        1992        1991
                                                                                                                       
                                                                                        (2)    (1)(2)(4)
PREMIUMS AND INCOME DATA:
<S>                               <C>          <C>         <C>         <C>         <C>         <C>      
Gross premiums written...........  $214,326    $210,752    $184,791    $ 161,421   $ 136,774   $ 130,905
Net premiums written.............   167,392     161,188     139,800      120,237     102,350     103,111
Net premiums earned..............   164,409     155,191     132,389      116,295     100,894     100,556
Consulting and fee income........    34,535      22,336      18,602        6,962       5,924       4,768
Net investment income............    44,274      39,850      29,067       29,836      28,603      25,232
Total revenues...................   243,178     218,744     177,205      154,864     142,074     144,895
Income from continuing operations    26,115      22,695      15,051       14,181       6,683      12,982
   Per share (7).................      2.42        2.34        1.72         1.90        1.01        1.90

Operating income (3).............  $ 26,141    $ 21,806    $ 16,905    $  13,030   $   2,292   $  10,256
   Per share (7).................      2.43        2.25        1.93         1.74         .35        1.50
Cash dividends per common share..       .24         .20         .16          .12         .11         .09

Weighted average number of common
   and common equivalent shares (7)  10,770       9,683       8,763        7,483       6,613       6,850

BALANCE SHEET DATA (AT END OF YEAR):
Investments......................  $788,451    $743,622    $497,679    $ 472,040    $413,522   $ 381,146
Total assets..................... 1,058,018     982,678     693,804      643,773     558,998     529,461
Loss and loss adjustment expense
       reserves..................   631,573     638,815     448,672      419,679     384,621     366,291
Long-term notes payable..........    58,000      49,000      28,000       16,000      23,000      29,000
Net unrealized gains (losses)
   on investments (4)............    12,791      18,490      (7,237)          --          --          --
Stockholders' equity (4).........   251,966     186,463     123,059      116,503      76,966      72,481
Book value per share (4).........     21.67       19.27       14.28        13.56       11.96       11.28

GAAP RATIOS (5):
Loss ratio.......................      82.9%       84.8%       85.7%        88.3%       88.4%       88.6%
Expense ratio....................      21.3        19.5        18.7         19.7        28.9        22.5

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

Combined ratio...................     104.2%      104.3%      104.4%       108.0%      117.3%      111.1%

=========================================================================================================
<FN>
(1)  1991 premium amounts exclude non-recurring premiums of $11,213,000 relating
     to a transaction with an affiliate.
(2)  For 1992 and 1991 income from continuing  operations,  operating income and
     GAAP  (generally   accepted   accounting   principles)   ratios  have  been
     significantly  affected by the aforementioned  affiliate transaction 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.
(3)  Operating  income  represents  income  from  continuing  operations  before
     after-tax realized investment gains (losses) of $(26,000) in 1996, $889,000
     in 1995,  $(1,854,000) in 1994, $1,151,000 in 1993, $4,391,000 in 1992, and
     $2,726,000 in 1991.
(4)  The Company adopted new standards on accounting for investments in 1994 and
     income taxes in 1992.
(5)  GAAP ratios have been derived  from the  financial  statements  of American
     Continental  Insurance Company and Health Providers  Insurance Company from
     the  date of its  acquisition  in  1995 as  prepared  on a GAAP  basis  for
     inclusion in the Company's consolidated financial statements.  Transactions
     and events described in Note 2 resulted in an increase in the GAAP combined
     ratio of 6.2 percentage  points and 3.8 percentage points in 1992 and 1991,
     respectively.
(6)  The Company  entered into business  combinations  as described in Note 2 to
     the Consolidated Financial Statements and acquired McManis Associates, Inc.
     in December 1993.
(7)  Per share data and weighted average shares are presented on a fully diluted
     basis.
(8)  Income from continuing  operations  excludes  amounts  relating to segments
     that were discontinued in 1992.  Losses from  discontinued  operations were
     $5,100,000 in 1996, $7,024,000 in 1992, and $1,875,000 in 1991. See Note 14
     to the Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATION


    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 report.

Results of Operations

1996 compared to 1995

    Revenues.  Gross premiums written  increased by 1.7% to $214,326,000 in 1996
from   $210,752,000  in  1995.  Net  premiums  written   increased  by  3.8%  to
$167,392,000  from  $161,188,000,  and net premiums earned  increased by 5.9% to
$164,409,000 from $155,191,000.

    Medical  malpractice  premiums  earned  increased by 6.2% to $156,722,000 in
1996 from  $147,635,000  in 1995.  In the  aggregate  for the 1996 policy  year,
medical  malpractice  pricing  for  healthcare  institutions  on a per  unit  of
exposure  basis was  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 earned  premiums  increased by
1.7% to $7,687,000 in 1996 from $7,556,000 in 1995.

    Consulting  and fee income  increased by 54.6% to  $34,535,000  in 1996 from
$22,336,000 in 1995. 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 Management  Science  Associates,  Inc. (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 17.4% in 1996  compared  to
12.6% in 1995.

    Net  investment  income  increased  by 11.1%  to  $44,274,000  in 1996  from
$39,850,000  in 1995.  Investment  income  growth is due to  growth in  invested
assets.  The Company had net realized  losses on  investments of $40,000 in 1996
compared to gains of $1,367,000 in 1995.

    Losses and expenses.  Losses and loss adjustment expenses (LAE) increased by
4.4% to $135,786,000  in 1996 from  $130,088,000  in 1995.  Medical  malpractice
liability  losses  and  LAE  increased  by  3.8% to  $130,787,000  in 1996  from
$125,944,000  in 1995.  The property and casualty  combined ratio was relatively
unchanged at 104.2% in 1996  compared to 104.3% in 1995.  The  components of the
combined ratio, the loss ratio and the expense ratio, declined by 1.9 percentage
points and increased by 1.8 percentage points, respectively, in 1996 compared to
1995. Life and health benefit costs increased by $855,000 or 20.6% to $4,999,000
in 1996 from $4,144,000 in 1995. Underwriting results for the Company's life and
health  insurance  business are variable due to the  relatively  small volume of
business written.

    Insurance and  administrative  expenses increased by 26.2% to $77,026,000 in
1996 from  $61,055,000  in 1995.  The  increase  in  administrative  expense  is
attributable to internal growth in the Company's consulting and fee segment, the
inclusion of MSA from the date of its  acquisition in April 1996 and an increase
in the  insurance  segment  expense  ratio  including an increase in  commission
expense.

    Interest expense increased by 22.8% to $3,397,000 in 1996 from $2,767,000 in
1995 due to an 
<PAGE>
increase in outstanding debt.

    Income  taxes.  Income taxes were $854,000 in 1996 compared to $2,139,000 in
1995  due to a  higher  percentage  of  investment  income  from  tax-advantaged
securities comprising the Company's pre-tax income in 1996 compared to 1995.

     Loss from  discontinued  operations.  In 1992,  MMI sold Ludgate  Insurance
Company  Limited  (Ludgate)  at a  loss,  which  was  reported  in  discontinued
operations.  The Company has been  involved in two lawsuits  connected  with the
sale.  A U.K.  action  related  to sales  contract  warranties  and a U.S.  suit
concerned the  commutation of a reinsurance  transaction  with Ludgate.  Also at
issue was a  stop-loss  reinsurance  agreement  provided  by MMI to  Ludgate  in
connection  with the sale. In February  1997, a U.K.  court  rendered a judgment
against MMI. The U.S. lawsuit and the stop-loss agreement remained unresolved.

    In February  1997,  MMI settled both  lawsuits  and  commuted the  stop-loss
reinsurance  agreement.  The settlement of all these matters is reflected in the
accompanying 1996  consolidated  statement of income as a loss from discontinued
operations.  The pre-tax loss is $7,800,000 with a corresponding  tax benefit of
$2,700,000, resulting in a charge of $5,100,000.

    Net  income.  Net  income  decreased  by 7.4% to  $21,015,000  in 1996  from
$22,695,000 in 1995 as a result of the discontinued  operations  charge in 1996.
Operating income from continuing  operations,  which excludes net realized gains
(losses) on investments, net of taxes, increased by 19.9% to $26,141,000 in 1996
from $21,806,000 in 1995.

    Net  income  per  share.  Fully  diluted  net  income  per common and common
equivalent share decreased to $1.95 in 1996 from $2.34 in 1995.  Included in the
1996 amount is a loss of $0.47 from discontinued operations as well as a loss of
$.01 in 1996  versus a gain of $.09 in 1995  related to net  realized  gains and
losses on  investments.  Fully diluted  income per common and common  equivalent
share  before  realized  gains  (losses),   net  of  taxes  and  the  loss  from
discontinued  operations  increased  to $2.43 in 1996 from $2.25 in 1995.  Fully
diluted weighted average shares and equivalents outstanding increased due to the
Company's stock offering in September and October 1996.

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 Health  Providers  Insurance  Company  (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.


<PAGE>
    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.

    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  out-standing  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.

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 1996,  the  Company
received  dividends from its subsidiaries of $11,000,000


<PAGE>

compared to $6,000,000  in 1995 and  $5,000,000  in 1994.  The Company  received
management  fees from its  subsidiaries  of $24,550,000 in 1996,  $19,100,000 in
1995 and  $16,750,000  in  1994.  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  $10,012,000  in  1996,   $50,299,000  in  1995  and
$42,977,000 in 1994. 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 $66,518,000 in 1996, $69,738,000 in 1995 and $41,685,000 in 1994.
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 $57,146,000 in cash in 1996 and $19,380,000 in
1995 and  resulted in a  $1,508,000  use in 1994.  Cash  provided  by  financing
activities includes  $51,442,000,  net of expenses,  from the issuance of Common
Stock in 1996 of which  $46,325,000  related to the Company's  stock offering in
September and October 1996. 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 December 31, 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 notes payable totaled $58,000,000 as of December 31, 1996, compared to
$49,000,000 as of December 31, 1995.

    Invested  assets.  The Company  invests in  investment  grade  fixed  income
securities and preferred  stocks.  The estimated fair value of preferred  stocks
was less than 3% of the fair value of total  invested  assets as of December 31,
1996. The estimated fair value of the Company's  short-term,  fixed maturity and
preferred stock  investments was $788,451,000 as of December 31, 1996,  compared
to $743,622,000 as of December 31, 1995. The December 31, 1996,  amount includes
net unrealized  gains of  $19,678,000,  which  represent the amount by which the
estimated  fair  value  of the  investment  portfolio  exceeds  amortized  cost.
Unrealized  gains were  $28,447,000  as of December  31,  1995.  The decrease in
unrealized  gains  during 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
$42,777,000  or 5.4% of invested  assets as of December  31,  1996,  compared to
$33,550,000  or 4.5% of invested  assets as of December  31,  1995.  The Company
believes that all of its invested assets are readily marketable.
<PAGE>
    Debt.  Long-term debt totaled  $58,000,000 as of December 31, 1996, compared
to $49,750,000 of long- and short-term  debt as of December 31, 1995. 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
American Continental  Insurance Company (ACIC) and HPIC, restricts the Company's
ability to enter new lines of  business  without the  permission  of the lender,
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 December 31, 1996, the unused commitment under the
credit facility was $27,000,000.

    Stockholders' equity.  The Company's stockholders' equity
was  $251,966,000  as of  December  31,  1996,  compared to  $186,463,000  as of
December 31, 1995. Changes in stockholders' equity are primarily attributable to
net income of the Company,  dividends  to  stockholders,  changes in  unrealized
gains or losses on  investments  and issuances of Common Stock.  Included in the
increase in stockholders' equity is $46,325,000 from proceeds,  net of expenses,
from the Company's  offering of Common Stock in September and October 1996. Cash
dividends to  stockholders  totaled  $2,546,000 in 1996,  $1,957,000 in 1995 and
$1,376,000 in 1994. In 1994, the Company adopted Financial  Accounting  Standard
No. 115 -  Accounting  for Certain  Investments  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 December 31, 1996,  estimated
unrealized  gains on investments  were $19,678,000 net of deferred tax liability
of $6,887,000,  thereby increasing  stockholders'  equity by $12,791,000.  As of
December  31,  1995,  the  Company  had an  unrealized  gain,  net of taxes,  of
$18,490,000.

    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,  1996,  the  statutory  capital  and surplus of each of the
Company's insurance  subsidiaries  exceeds its risk-based capital  requirements.
Acquisition of MSA and HPIC

    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
$6,600,000 in 1995. The purchase price for MSA was $8,300,000 in cash, which was
funded  principally  by an increase in  borrowings  under the  Company's  credit
agreement.

    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


<PAGE>
preferred stock, which was subsequently  converted into 949,760 shares of Common
Stock. These two transactions were accounted for as purchases.

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.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
MMI COMPANIES INC. AND SUBSIDIARIES
IN THOUSANDS, EXCEPT PER SHARE DATA

                                                DECEMBER 31,                           1996        1995
                                                                                ------------  ----------
ASSETS
     
   INVESTMENTS (Note 4)

<S>                                                                             <C>           <C>                          
     Short-term investments ....................................................$     42,777  $  33,550                    
     Fixed maturities-- at fair value (amortized cost: 1996-- $707,948;
          1995-- $681,643)... ..................................................     727,080    710,072
     Preferred stocks ..........................................................      18,594         --
--------------------------------------------------------------------------------------------------------
                                                                                     788,451    743,622

   OTHER ASSETS
     Cash ......................................................................       1,079        439 
     Premiums and fees receivable ..............................................      58,611     41,544
     Reinsurance receivables (Note 3) ..........................................     101,175    105,554
     Prepaid reinsurance premiums (Note 3) .....................................       9,711      9,925                    
     Accrued investment income .................................................      11,116     11,628                    
     Cost in excess of net assets of purchased subsidiaries,
       less accumulated amortization (Notes 1 and 2)............................      16,244      8,965                    
     Furniture and equipment-- at cost,
       less accumulated depreciation (Note 1) ..................................       9,076      6,610                    
     Deferred income taxes (Note 5) ............................................      46,459     41,203                    
     Other .....................................................................      16,096     13,188
--------------------------------------------------------------------------------------------------------
                                                                                $  1,058,018   $982,678


LIABILITIES AND STOCKHOLDERS' EQUITY

   LIABILITIES

     Policy Liabilities:
       Loss and loss adjustment expense reserves (Note 7):
         Medical malpractice liability .........................................$    620,673   $623,220
         Life and health .......................................................       7,779     11,401
         Other .................................................................       3,121      4,194
--------------------------------------------------------------------------------------------------------
                                                                                     631,573    638,815


         Unearned premium reserves .............................................      55,679     52,951
         Future life policy benefits ...........................................       8,578      8,982
--------------------------------------------------------------------------------------------------------
                                                                                     695,830    700,748


     Accrued expenses and other liabilities ....................................      28,051     21,015
     Amounts due to reinsurers (Note 3) ........................................      24,171     24,702
     Notes payable to stockholders (Note 6) ....................................          --        750
     Long-term notes payable (Note 6) ..........................................      58,000     49,000
--------------------------------------------------------------------------------------------------------
                                                                                     806,052    796,215


   Contingencies (Notes 3 and 10)

   STOCKHOLDERS' EQUITY (Notes 8 and 9) 
     Common Stock, par value $.10 per share:
       Authorized shares:
         1996 and 1995 -- 30,000
       Issued and outstanding shares:
         1996-- 11,625; 1995-- 9,675............................................       1,162        967
     Additional paid-in capital ................................................     135,183     82,645
     Retained earnings .........................................................     102,830     84,361
     Unrealized gains on investments, net of taxes:
         1996-- $6,887; 1995-- $9,957 ..........................................      12,791     18,490
--------------------------------------------------------------------------------------------------------
                                                                                     251,966    186,463
--------------------------------------------------------------------------------------------------------
                                                                                $  1,058,018   $982,678
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
MMI COMPANIES, INC. AND SUBSIDIARIES
IN THOUSANDS, EXCEPT PER SHARE DATA


                                     YEAR ENDED DECEMBER 31,       1996       1995        1994

REVENUES
Insurance premiums earned (Note 3):
<S>                                                           <C>          <C>        <C>      
   Medical malpractice                                        $  156,722   $147,635   $ 123,982
   Life and health                                                 7,687      7,556       8,407
------------------------------------------------------------------------------------------------

                                                                 164,409    155,191     132,389

Consulting and fee income                                         34,535     22,336      18,602
Net investment income (Note 4)                                    44,274     39,850      29,067
Net realized gains (losses) on investments (Note 4)                  (40)     1,367      (2,853)
------------------------------------------------------------------------------------------------

                                              TOTAL REVENUES     243,178    218,744     177,205
LOSSES AND EXPENSES

Losses and loss adjustment expenses (Notes 3 and 7):
   Medical malpractice                                           130,787    125,944     106,861
   Life and health                                                 4,999      4,144       5,850
------------------------------------------------------------------------------------------------

                                                                 135,786    130,088     112,711


Insurance and administrative expenses (Note 3)                    77,026     61,055      47,286
Interest expense                                                   3,397      2,767       1,619
------------------------------------------------------------------------------------------------

                                   TOTAL LOSSES AND EXPENSES     216,209    193,910     161,616

                           INCOME FROM CONTINUING OPERATIONS
                                         BEFORE INCOME TAXES      26,969     24,834      15,589
Income taxes (Note 5)                                                854      2,139         538
------------------------------------------------------------------------------------------------

                           INCOME FROM CONTINUING OPERATIONS      26,115     22,695      15,051
Loss from discontinued operations (Note 14)                       (5,100)        --          --
------------------------------------------------------------------------------------------------

                                                  NET INCOME  $   21,015   $ 22,695   $  15,051
================================================================================================

Earnings per common and common equivalent share (Note 1):
Primary
   Income from continuing operations                          $     2.44   $   2.42   $    1.73
   Loss from discontinued operations                                (.48)        --          --
------------------------------------------------------------------------------------------------

     NET INCOME                                               $     1.96   $   2.42   $    1.73
================================================================================================

Fully diluted
   Income from continuing operations                          $     2.42   $   2.34   $    1.72
   Loss from discontinued operations                                (.47)        --          --
------------------------------------------------------------------------------------------------

     NET INCOME                                               $     1.95   $   2.34   $    1.72
================================================================================================

Weighted average number of common and common equivalent shares:
   Primary                                                        10,714      9,243       8,681
   Fully diluted                                                  10,770      9,683       8,763
================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
MMI COMPANIES, INC AND SUBSIDIARIES
IN THOUSANDS, EXCEPT PER SHARE DATA

                                                                                                      UNREALIZED
                               PREFERRED STOCK     COMMON STOCK  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, 1994          --   $  --    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 $10,824                                                                             (20,104)         (20,104)
   Common dividends ($.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 (losses),
     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


Year ended December 31, 1996:
   Net income                                                                  21,015                                      21,015  
   Issuance of Common Stock in
     connection with public offering
     net of expenses of $2,866                    1,626     163       46,162                                               46,325
   Issuance of Common Stock in
     connection with acquisition of subsidiaries     65       7        1,284                                                1,291
   Issuance of Common Stock
     in connection with employee
     benefit plans and exercise of
     employee stock options                         259      25        5,092                                                5,117
   Change in unrealized gains,
     net of taxes of $3,070                                                                               (5,699)          (5,699)
   Common cash dividends ($.24 per share)                                      (2,546)                                     (2,546)
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996        --   $  --   11,625  $1,162   $135,183   $102,830        --        $  12,791         $251,966
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
MMI COMPANIES, INC. AND SUBSIDIARIES
IN THOUSANDS

                                                   YEAR ENDED DECEMBER 31,         1996       1995       1994

OPERATING ACTIVITIES
<S>                                                                              <C>       <C>        <C>     
   Net income.............................................................       $21,015   $ 22,695   $ 15,051
   Adjustments to reconcile net income to net cash
     provided by operating activities:
       Increase (decrease) in policy liabilities..........................        (4,918)    39,493     38,760
       Change in reinsurance balances.....................................         4,062     (1,305)    (4,166)
       Increase in premiums and fees receivable...........................       (14,980)    (6,440)   (13,422)
       Increase in deferred tax asset.....................................        (2,020)    (4,878)    (3,723)
       Decrease (increase) in accrued investment income and other assets .        (2,203)    (2,841)     5,025
       Increase in accrued expenses and other liabilities.................         5,483      2,454        390
       Net realized (gains) losses on investments.........................            40     (1,367)     2,853
       Depreciation and amortization on investments and goodwill..........         3,533      2,488      2,209
---------------------------------------------------------------------------------------------------------------

                                                         NET CASH PROVIDED
                                                   BY OPERATING ACTIVITIES        10,012     50,299     42,977
INVESTING ACTIVITIES
   Net sale (purchase) of short-term investments..........................        (8,931)    41,741     (5,157)
   Purchases of other investments, principally fixed maturities...........      (417,828)  (548,145)  (256,582)
   Sales of other investments, principally fixed maturities...............       303,520    245,348    145,451
   Maturities of fixed maturities.........................................        71,044    210,798     77,488
   Acquisition of subsidiaries (Note 2)...................................        (8,921)   (15,372)        --
   Furniture and equipment additions......................................        (5,402)    (4,108)    (2,885)
---------------------------------------------------------------------------------------------------------------

                                                             NET CASH USED
                                                   BY INVESTING ACTIVITIES       (66,518)   (69,738)   (41,685)

FINANCING ACTIVITIES
   Issuance of Common Stock...............................................        54,308      1,587        118
   Costs incurred in connection with stock offering.......................        (2,866)        --         --
   Payments on notes payable..............................................          (750)    (1,250)   (28,250)
   Proceeds from notes payable including short-term borrowings............         9,000     21,000     28,000
   Dividends..............................................................        (2,546)    (1,957)    (1,376)
---------------------------------------------------------------------------------------------------------------

                                                  NET CASH PROVIDED (USED)
                                                   BY FINANCING ACTIVITIES        57,146     19,380     (1,508)
---------------------------------------------------------------------------------------------------------------

                                               INCREASE (DECREASE) IN CASH           640        (59)      (216)
Cash at beginning of year.................................................           439        498        714
---------------------------------------------------------------------------------------------------------------

                                                       CASH AT END OF YEAR       $ 1,079   $    439   $    498
===============================================================================================================
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MMI Companies, Inc. and Subsidiaries
December 31, 1996

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 in Europe.  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.  Certain  reclassifications  have been  made to the  prior  years'
financial statements in order to conform to the current year presentation.

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. Such
estimates and assumptions could change in the future as more information becomes
known, which could impact the amounts reported and disclosed herein.

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
classifies  100% of its  fixed  maturity  and  preferred  stock  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 and fees
receivable,  accrued expenses and other  liabilities,  amounts due to reinsurers
and notes payable approximate their December 31, 1996 and 1995 carrying values.
<PAGE>
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 $7,100,000  and $5,700,000 at December 31, 1996 and
1995,  respectively.  Amortization  of such costs are included in insurance  and
administrative expenses and amounted to $14,000,000 in 1996, $11,400,000 in 1995
and $7,500,000 in 1994.

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, 1996 and
1995,   accumulated   amortization   amounted  to  $9,500,000  and   $6,500,000,
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, 1996 and 1995, accumulated  amortization amounted to $6,600,000 and
$4,800,000, 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.
<PAGE>
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

Effective  April 1, 1996, MMI 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):

Cost in excess of net assets purchased             $  7,155
Cash                                                    395
Other assets, principally receivables                 1,758
Other liabilities                                      (955)
------------------------------------------------------------
                                                   $  8,353
============================================================

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.  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.

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

    Invested assets                              $  138,612
    Other assets                                     31,654
    Liabilities, principally
      policy liabilities                           (139,594)
------------------------------------------------------------
                                                 $   30,672
============================================================

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

                                     Year ended December 31,
------------------------------------------------------------
                                     1995            1994
------------------------------------------------------------
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

These  acquisitions  were accounted for as purchases,  and the operations of the
acquirees  are included in MMI's  consolidated  financial  statements  since the
dates of acquisition.
<PAGE>
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):

                                   Year Ended December 31,
------------------------------------------------------------
                    1996              1995             1994
------------------------------------------------------------
Direct          $192,059          $186,792         $156,739
Assumed           19,510            17,247           18,069
Ceded            (47,160)          (48,848)         (42,419)
------------------------------------------------------------
                $164,409          $155,191         $132,389

MMI's reinsurance  receivables from foreign  reinsurers  amounted to $68,500,000
and $71,900,000 at December 31, 1996 and 1995 respectively, of which $40,600,000
and $46,300,000 related to United Kingdom-based reinsurers.

In 1996, 1995 and 1994 respectively,  MMI's losses and loss adjustment  expenses
were net of reinsurance ceded of $30,800,000, $28,800,000 and $19,100,000.

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
--------------------------------------------------------------------------------------------------------------
December 31, 1996:
Fixed maturities:
<S>                                                  <C>              <C>             <C>            <C>    
    U.S. Government and agencies                      $76,429            $891            $(30)        $77,290
    State and political subdivisions                  438,139          13,228            (684)        450,683
    Corporate securities                               77,236           3,802              (2)         81,036
    Mortgage-backed securities                        116,144           2,167            (240)        118,071
--------------------------------------------------------------------------------------------------------------
                                                      707,948          20,088            (956)        727,080
Short-term investments                                 42,746              31              --          42,777
Preferred stocks                                       18,079             585             (70)         18,594
--------------------------------------------------------------------------------------------------------------
                                                     $768,773         $20,704         $(1,026)       $788,451
==============================================================================================================
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
==============================================================================================================
</TABLE>
Fair  values of  investments  are  principally  based on quoted  market  prices.
Short-term  investments  are  comprised  principally  of corporate and municipal
securities.
<PAGE>
The amortized  cost and fair value of fixed  maturities at December 31, 1996, by
contractual maturity, are as follows (in thousands):
 
                                Amortized          Fair
                                     Cost         Value
--------------------------------------------------------
Due in 1997                       $22,683       $22,800
Due in 1998
  through 2001                    125,524       128,089
Due in 2002
  through 2006                    152,601       158,616
Due in 2007
  and thereafter                  290,996       299,504
--------------------------------------------------------
                                  591,804       609,009
Mortgage-backed
  securities                      116,144       118,071
--------------------------------------------------------
                                 $707,948      $727,080
========================================================

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.

The changes in unrealized gains and losses, which are reflected in stockholders'
equity, were as follows (in thousands):
<TABLE>
<CAPTION>
                                                       `                   Year Ended December 31,
--------------------------------------------------------------------------------------------------------------
                                                                   1996               1995               1994
--------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                <C>               <C>      
Fixed maturities and short-term investments                     $(9,284)           $39,580           $(30,928)
Preferred stocks                                                    515                 --                 --
--------------------------------------------------------------------------------------------------------------
                                                                $(8,769)           $39,580           $(30,928)
==============================================================================================================
</TABLE>

Net realized gains  (losses) on  investments  are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
                                                       `                   Year Ended December 31,
--------------------------------------------------------------------------------------------------------------
                                                                   1996               1995               1994
--------------------------------------------------------------------------------------------------------------
Fixed maturities:
<S>                                                             <C>                 <C>              <C> 
    Gross gains                                                 $ 3,347             $3,357               $661
    Gross losses                                                 (3,567)            (1,990)            (3,514)
--------------------------------------------------------------------------------------------------------------
                                                                   (220)             1,367             (2,853)
--------------------------------------------------------------------------------------------------------------
Preferred stocks:
    Gross gains                                                     206                 --                 --
    Gross losses                                                    (26)                --                 --
--------------------------------------------------------------------------------------------------------------
                                                                    180                 --                 --
--------------------------------------------------------------------------------------------------------------
                                                                  $ (40)           $ 1,367           $ (2,853)
==============================================================================================================
</TABLE>

Major categories of net investment income are as follows (in thousands):
<TABLE>
<CAPTION>
                                                       `                   Year Ended December 31,
--------------------------------------------------------------------------------------------------------------
                                                                   1996               1995               1994
--------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                <C>                <C>    
Fixed maturities                                                $43,492            $38,276            $29,265
Short-term investments and cash                                   3,001              4,610              1,981
Preferred stocks                                                    785                 --                 --
--------------------------------------------------------------------------------------------------------------
Total investment income                                          47,278             42,886             31,246
Expenses                                                          3,004              3,036              2,179
--------------------------------------------------------------------------------------------------------------
Net investment income                                           $44,274            $39,850            $29,067
==============================================================================================================
</TABLE>

At December  31,  1996,  investments  with a fair value of  $13,050,000  were on
deposit to meet statutory requirements.
<PAGE>

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, 1996 and 1995 are as
follows (in thousands):
<TABLE>
<CAPTION>
                                                                             December 31,
                                                                      1996                    1995
---------------------------------------------------------------------------------------------------
Deferred tax assets:
<S>                                                                <C>                     <C>                      
    Tax-basis loss reserve adjustment                              $42,696                 $50,697                  
    Tax-basis unearned premium reserve adjustment                    3,261                   3,012   
    Accrued expenses                                                 4,238                     710
    Alternative minimum tax credit carryforward                      5,584                   1,692 
    Other                                                            4,317                     706 
---------------------------------------------------------------------------------------------------
Total deferred tax assets                                           60,096                  56,817 
---------------------------------------------------------------------------------------------------

Deferred tax liabilities:
    Unrealized investment gains                                     (6,887)                 (9,957)
    Deferred policy acquisition costs                               (2,453)                 (1,893)          
    Receivables                                                     (2,115)                 (2,223)
    Other                                                           (2,182)                 (1,541)
---------------------------------------------------------------------------------------------------
Total deferred tax liabilities                                     (13,637)                (15,614)
---------------------------------------------------------------------------------------------------
Net deferred tax asset                                             $46,459                 $41,203
===================================================================================================
</TABLE>

MMI expects  adequate  future  taxable income to realize the deferred tax asset.
Accordingly, no valuation reserve is considered necessary.

Significant  components  of the  provision  for income  taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
                                                       `                   Year Ended December 31,
--------------------------------------------------------------------------------------------------------------
                                                                   1996               1995               1994
--------------------------------------------------------------------------------------------------------------
<S>                                                                <C>              <C>                <C>      
Current                                                            $431             $7,017             $4,261
Deferred (credit)                                                   423             (4,878)            (3,723)
--------------------------------------------------------------------------------------------------------------
Net provision                                                      $854             $2,139               $538
==============================================================================================================
</TABLE>

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

                                                                Year Ended December 31,
------------------------------------------------------------------------------------------------------
                                                 1996                   1995                   1994
------------------------------------------------------------------------------------------------------
                                          Amount      %          Amount      %          Amount      %
------------------------------------------------------------------------------------------------------
<S>                                       <C>        <C>         <C>        <C>         <C>        <C>
Tax at U.S. Statutory rate                $9,439     35%         $8,692     35%         $5,456     35%
Non taxable investment income             (7,896)   (29)         (6,187)   (25)         (4,730)   (31)
Other                                       (689)    (3)           (366)    (1)           (188)    (1)
------------------------------------------------------------------------------------------------------
Net provision                               $854      3%         $2,139      9%           $538      3%
======================================================================================================
</TABLE>

MMI's net payments  (refunds) of income taxes were $(500,000),  $8,000,000,  and
$(2,400,000) during 1996, 1995 and 1994, respectively.

6.  NOTES PAYABLE

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.  At
December 31, 1996, a total of  $58,000,000  was  outstanding  with the remaining
$27,000,000  from the line of credit unused and available for general  corporate
purposes.

The loan bears  interest at a rate equal to the London  Interbank  Offered  Rate
(5.6% at December 31, 1996) 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 December  31,  1996,  the LIBOR  component  on
$44,500,000 of MMI's borrowings was fixed at 5.4% 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  borrowings,
encumbrances  or sales 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 capital  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):

1997                              $ 5,000
1998                                7,000
1999                               10,000
2000                               13,000
2001                               50,000

Principal  payments are not required  based on the current  level of  borrowings
until 2000. The credit agreement expires on April 1, 2001.

At December  31,  1995,  short term notes  payable due to hospital  stockholders
amounted to $750,000.  The interest  rate on these  borrowings  averaged 6.9% at
December 31, 1995. The notes were retired in 1996.

Total  interest  paid in 1996,  1995 and 1994  was  $3,406,000,  $2,818,000  and
$1,440,000, respectively.
<PAGE>
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,
-----------------------------------------------------------------------------------------------------------------
                                                                              1996           1995           1994
-----------------------------------------------------------------------------------------------------------------
Liability for losses and LAE at beginning of year
    (net of reinsurance receivables: 1996 -- $88,707;
<S> <C>    <C>       <C>    <C>                                           <C>           <C>            <C>      
    1995-- $78,057;  1994-- $71,851)                                      $538,707      $ 361,733      $ 337,813
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                     135,895        127,710        104,366
           The current year from discontinued operations                        --             --            759
           Prior years from continuing operations                           (5,108)        (1,766)         2,495
           Prior years from discontinued operations                             --             --           (110)
-----------------------------------------------------------------------------------------------------------------
           Total incurred losses and LAE                                   130,787        125,944        107,510

Less:  Losses and LAE payments for claims occurring in:
           The current year from continuing operations                      13,900          4,533          5,944
           The current year from discontinued operations                        --             --             --
           Prior years from continuing operations                          115,851         67,681         74,453
           Prior years from discontinued operations                          3,108          1,407          3,193
-----------------------------------------------------------------------------------------------------------------
           Total paid losses and LAE                                       132,859         73,621         83,590
-----------------------------------------------------------------------------------------------------------------

Liability for losses and LAE at end of year (net of reinsurance
    receivables: 1996 -- $87,159; 1995-- $88,707;  1994-- $78,057)       $ 536,635      $ 538,707       $361,733
=================================================================================================================
<FN>
The portion of the provision  for losses and LAE in the  foregoing  schedule for
the years ended  December  31,  1996,  1995 and 1994 that relate to prior years'
from continuing  operations each represent less than 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.
</FN>
</TABLE>
<PAGE>
8. STOCKHOLDERS' EQUITY

The  statutory  accounting  practices  prescribed  or  permitted  by  regulatory
authorities for MMI's insurance  subsidiaries differ in some respects from GAAP.
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  to  MMI's  GAAP-basis  amounts  included  in the
accompanying financial statements are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                         December 31,
-----------------------------------------------------------------------------------------------------------
                                                                                    1996              1995
-----------------------------------------------------------------------------------------------------------
<S>                                                                             <C>               <C>     
Statutory-basis capital and surplus                                             $225,945          $205,596
Additions (deductions):
    Statutory-basis loss reserve discount                                        (52,176)          (50,182)
    GAAP-basis deferred income taxes                                              38,122            41,034
    Other, including non-insurance company amounts                                40,075            (9,985)
-----------------------------------------------------------------------------------------------------------
GAAP-basis consolidated stockholders' equity of MMI                             $251,966          $186,463
===========================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
-----------------------------------------------------------------------------------------------------------
                                                                        1996          1995            1994
-----------------------------------------------------------------------------------------------------------
<S>                                                                  <C>           <C>             <C>    
Statutory-basis combined net income                                  $32,685       $25,763         $15,398
Additions (deductions):
   Statutory-basis loss reserve discount                              (1,994)       (6,607)         (3,122)   
   GAAP-basis deferred income taxes                                   (5,986)        6,938           2,150
   Other, including non-insurance company amounts                     (3,690)       (3,399)            625
-----------------------------------------------------------------------------------------------------------
GAAP-basis consolidated net income of MMI                            $21,015       $22,695         $15,051
===========================================================================================================
</TABLE>

The foregoing statutory-basis capital and surplus amounts relate to MMI's direct
insurance subsidiaries,  ACIC and HPIC. The capital and surplus amounts for ACIC
include  the capital and surplus of ACLIC,  a life  insurance  company  owned by
ACIC,  in the amount of  $15,200,000  at December  31, 1996 and  $14,800,000  at
December 31, 1995.  Statutory net income of ACLIC  amounted to $400,000 in 1996,
$500,000 in 1995 and $200,000 in 1994.

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 1997. ACIC and HPIC's combined  GAAP-basis net assets amounted to
$235,000,000  at December 31, 1996. The excess of these combined 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.
<PAGE>

9.  STOCK OPTION PLANS

MMI has an  employee  stock  plan  that  authorizes  the  issuance,  subject  to
directors'  approval,  of nonqualified stock options and restricted stock, and a
nonqualified  stock option plan for non-employee  directors.  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
fair value at the grant date.  All options have 10-year terms and generally vest
and become fully exercisable six months after the date of grant.

A summary of the Company's stock option activity and related information for the
years ended December 31 is as follows:
<TABLE>
<CAPTION>

                                        1996                        1995                        1994
------------------------------------------------------------------------------------------------------------------
                                         Weighted Average            Weighted Average            Weighted Average
                                 Options   Exercise Price    Options   Exercise Price    Options   Exercise Price
------------------------------------------------------------------------------------------------------------------
Oustanding at
<S>                              <C>              <C>        <C>              <C>        <C>              <C>    
    beginning of year            962,737          $ 14.27    875,775          $ 12.89    708,600          $ 12.60
Granted
    (at fair value)              223,875            26.48    146,750            20.32    188,750            13.20
Exercised                       (204,978)           12.85    (59,788)            8.93    (20,575)            5.73
Cancelled                        (35,250)           23.09         --               --     (1,000)           13.63
------------------------------------------------------------------------------------------------------------------
                                 946,384          $ 17.14    962,737          $ 14.27    875,775          $ 12.89
==================================================================================================================

Options exercisable
    at year-end                  837,634          $ 16.45    801,237          $ 13.44    744,525          $ 12.82
                                 =======                     =======                     =======
Options available for
   grant at end of year          229,900                     418,525                     565,275
                                 =======                     =======                     =======  
</TABLE>

Other information  regarding options  outstanding and exercisable as of December
31, 1996, is as follows:
<TABLE>
<CAPTION>
                                            Options Outstanding                  Options Exercisable
-------------------------------------------------------------------------------------------------------
                                                Weighted
                                                Average       Weighted                        Weighted
                               Number           Remaining     Average       Number            Average
        Range of               Outstanding      Contractual   Exercise      Exercisable       Exercise
Exercise Prices                at 12/31/96      Life          Price         at 12/31/96       Price
-------------------------------------------------------------------------------------------------------
<C>                                 <C>            <C>         <C>            <C>             <C>   
$5.91                                 5,450        0.2 years   $ 5.91           5,450         $ 5.91
$13.13 to $18.63                    671,059        6.9          13.69         631,309          13.72
$24.00 to $32.00                    269,875        9.2          25.95         200,875          25.31
-------------------------------------------------------------------------------------------------------
                                    946,384        7.5         $17.14         837,634         $16.45
=======================================================================================================
</TABLE>

Pro forma  information  regarding  net  income and net income per share has been
determined  as if MMI had  accounted  for its 1996 and 1995 stock option  grants
under the plans  using the fair value  method of SFAS No. 123,  "Accounting  for
Stock-Based  Compensation."  For these  purposes,  the fair  value for the stock
option  grants  was  estimated  at the date of the grant  using a  Black-Scholes
option pricing model with the following  weighted-average  assumptions  for 1996
and 1995:  a  risk-free  interest  rate of 6%, a  volatility  factor of 23%,  an
expected life of the option of five years and a 1% annual dividend yield.

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

For purposes of pro forma  disclosures,  the estimated fair value of the options
is amortized to expense over the options' six-month vesting
period.  MMI's pro forma information is as follows:

                                             1996              1995
--------------------------------------------------------------------
Pro forma net income
   (in thousands)                         $20,053           $22,363
Pro forma net income
   per common and
       common equivalent share:
         Primary                          $  1.87           $  2.39
         Fully diluted                       1.86              2.31

The pro forma  disclosures  above only  include  the  effect of options  granted
subsequent to January 1, 1995. Accordingly, the effects of applying the SFAS No.
123 pro forma  disclosures  to future  periods may not be  indicative  of future
effects.
<PAGE>
10.  COMMITMENTS AND CONTINGENCIES

In addition to the  litigation  disclosed  in Note 14, MMI is engaged in various
other legal actions incident to the nature of its business. Management is of the
opinion that none of the other  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  1996,  1995  and  1994  was  $6,000,000,   $5,200,000  and
$4,500,000,  respectively.  As of December 31, 1996,  aggregate  minimum  rental
commitments  under   noncancelable   leases  amounted  to  $5,000,000  in  1997,
$5,000,000 in 1998,  $4,800,000 in 1999,  $4,200,000 in 2000, $3,900,000 in 2001
and $5,300,000 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% 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).  Additional MMI
contributions  are made at the  discretion  of MMI's Board of  Directors.  MMI's
contributions  charged to operations were $2,200,000 in 1996, $1,600,000 in 1995
and $1,000,000 in 1994.

MMI provides no post retirement benefits to its employees.

12.  INDUSTRY SEGMENTS

MMI's operations are classified and summarized into insurance and consulting and
fees. Prior to 1996, the insurance segment consisted of the medical  malpractice
liability segment and the life and health segment.  These segments were combined
in 1996 and  segment  results for 1994 and 1995 were  combined  to reflect  this
change.  The insurance  segment  principally  includes  professional and general
liability  insurance  and  reinsurance  for  hospitals,  healthcare  systems and
healthcare providers,  group life, disability and health stop-loss insurance and
reinsurance.  The  consulting  and fee  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,
-----------------------------------------------------------------------------------------------------------
                                                                  1996              1995              1994
-----------------------------------------------------------------------------------------------------------
Revenues:
<S>                                                           <C>               <C>               <C>     
     Insurance                                                $207,837          $194,608          $161,317
     Consulting and fees                                        34,535            22,336            18,602
     Net realized investment gains (losses)                        (40)            1,367            (2,853)
     Corporate and eliminations                                    846               433               139
-----------------------------------------------------------------------------------------------------------
     Total                                                    $243,178          $218,744          $177,205
===========================================================================================================

Pre-tax income:
     Insurance                                                $ 34,251          $ 30,158          $ 21,670
     Consulting and fees                                         4,569             2,873             2,615
     Net realized investment gains (losses)                        (40)            1,367            (2,853)
     Corporate and eliminations                                (11,811)           (9,564)           (5,843)
-----------------------------------------------------------------------------------------------------------
     Total                                                    $ 26,969          $ 24,834          $ 15,589
===========================================================================================================

</TABLE>

<TABLE>
<CAPTION>

                                                                           Year Ended December 31,
-----------------------------------------------------------------------------------------------------------
                                                                  1996              1995              1994
-----------------------------------------------------------------------------------------------------------
Identifiable assets at end of year:
<S>                                                         <C>                 <C>               <C>     
     Insurance                                              $  972,833          $961,128          $667,244
     Consulting and fees                                        16,549            10,354            12,734
     Corporate, discontinued and eliminations                   68,636            11,196            13,826
-----------------------------------------------------------------------------------------------------------
     Total                                                  $1,058,018          $982,678          $693,804
===========================================================================================================
</TABLE>
<PAGE>


13.  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
         (In thousands, except per share data):
<TABLE>
<CAPTION>

                                                                          Three Months Ended,
--------------------------------------------------------------------------------------------------------------
                                                       3/31/96        6/30/96         9/30/96        12/31/96
--------------------------------------------------------------------------------------------------------------
<S>                                                    <C>            <C>             <C>             <C>    
Revenues                                               $61,211        $58,896         $60,324         $62,747

Income from continuing operations                      $ 7,411        $ 6,348         $ 6,176         $ 6,180
Loss from discontinued operations                           --             --              --          (5,100)
--------------------------------------------------------------------------------------------------------------
     Net income                                        $ 7,411        $ 6,348         $ 6,176         $ 1,080
==============================================================================================================

Earnings per common and common equivalent share:
     Primary
        Income from continuing operations              $   .73        $   .62         $   .59         $   .52
        Loss from discontinued operations                   --             --              --            (.43)
--------------------------------------------------------------------------------------------------------------
        Net income                                     $   .73        $   .62         $   .59         $   .09
==============================================================================================================
     Fully diluted
        Income from continuing operations              $   .72        $   .62         $   .59         $   .52
        Loss from discontinued operations                   --             --              --            (.43)
--------------------------------------------------------------------------------------------------------------
        Net income                                     $   .72        $   .62         $   .59         $   .09
==============================================================================================================
</TABLE>
<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

Net income per common and common equivalent share:
     Primary                                           $   .50        $   .62         $   .62         $   .67
     Fully diluted                                         .50            .60             .59             .67
</TABLE>

14.  DISCONTINUED OPERATIONS

In 1992, MMI sold Ludgate Insurance Company Limited ("Ludgate") at a loss, which
was reported in  discontinued  operations.  The Company has been involved in two
lawsuits  connected  with the sale.  A U.K.  action  related  to sales  contract
warranties  and  a  U.S.  suit  concerned  the   commutation  of  a  reinsurance
transaction with Ludgate.  Also at issue was a stop-loss  reinsurance  agreement
provided by MMI to Ludgate in connection with the sale. In February 1997, a U.K.
court  rendered a judgment  against  MMI.  The U.S.  lawsuit  and the  stop-loss
agreement remained unresolved.

In  February  1997,  MMI  settled  both  lawsuits  and  commuted  the  stop-loss
reinsurance  agreement.  The settlement of all these matters is reflected in the
accompanying 1996  consolidated  statement of income as a loss from discontinued
operations.  The pre-tax loss is $7,800,000 with a corresponding  tax benefit of
$2,700,000, resulting in a charge of $5,100,000.
<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, 1996 and 1995,  and the
related consolidated statements of income,  stockholders' equity, and cash flows
for each of the  three  years in the  period  ended  December  31,  1996.  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, 1996 and 1995,  and the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended December 31, 1996, 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 27, 1997
<PAGE>
                                                                   Exhibit 23.1
                                                                   ------------




               CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


We consent to the  incorporation  by reference in this Annual Report (Form 10-K)
of MMI Companies,  Inc. of our report dated  February 27, 1997,  included in the
1996 Annual Report to Stockholders of MMI Companies, Inc.

Our audits also included the  financial  statement  schedules of MMI  Companies,
Inc.  listed  in Item  14(a).  These  schedules  are the  responsibility  of the
Company's  management.  Our responsibility is to express an opinion based on our
audits. In our opinion, with respect to which the date is February 27, 1997, the
financial  statement schedules referred to above, when considered in relation to
the basic financial  statements taken as a whole, present fairly in all material
respects  the  information  set forth  therein.  As  discussed  in Note 1 to the
consolidated  financial statements,  in 1994, the Company adopted a new standard
on accounting for investments.

We also consent to the incorporation by reference in the Registration  Statement
pertaining to the MMI Companies,  Inc.  Savings and Profit Sharing Plan (401(k))
(Form S-8 No.  33-72786),  in the Registration  Statement  pertaining to the MMI
Companies,  Inc.  Incentive Stock Option Plan (1986),  1993 Employee Stock Plan,
and 1993  Non-employee  Director's  Formula  Stock  Option  Plan  (Form  S-8 No.
33-81228),  and in the  Registration  Statement  pertaining to the 1995 Employee
Stock Investment Plan (Form S-8 No. 33-87356),  and in the related Prospectuses,
of our  report  dated  February  27,  1997,  with  respect  to the  consolidated
financial statements  incorporated herein by reference,  and our report included
in the preceding  paragraph  with respect to the financial  statement  schedules
included in this Annual Report (Form 10-K) of MMI Companies, Inc.


                                                           ERNST & YOUNG LLP



Chicago, Illinois
March 17, 1997
<PAGE>