UNITED STATES
                       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, 1997.

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

Indicate by a 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. [ ]

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant was $460,667,000 as of December 31, 1997. The aggregate number of the
Registrant's  $0.10 par value Common Stock  shares  outstanding  on December 31,
1997 was 18,857,000.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the  Registrant's  Annual Report to Stockholders  for the year ended
December 31, 1997 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 16, 1998 are  incorporated  by reference  into
Part III of this report.

                      Exhibit index is located on page 24.
                                  Page 1 of 25


<PAGE>
                                     PART I


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

GENERAL

Introduction

    MMI Companies, Inc. (together with its subsidiaries, the "Company") provides
insurance  products and related  specialized  services in two principal markets:
the  United  States  healthcare   industry  and   international   insurance  and
reinsurance markets.

    Domestically,  the Company offers specialized medical malpractice  insurance
products  and  consulting  services  that  are  designed  to  assist  healthcare
providers  manage  the cost and  quality of care.  The  Company  integrates  its
professional  liability  insurance with certain of its fee-based risk management
services  and does  not  offer  such  insurance  or that set of risk  management
services 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.  In  addition,  the  Company  offers  a  variety  of  other
consulting and fee-based services to healthcare  providers,  including strategic
and  management  consulting,  employee  relations  consulting,  risk  management
services,  professional  liability  claims  management,  healthcare  credentials
verification services and billing, compliance and reimbursement services.

    Internationally,  the Company operates as a specialty  casualty and property
reinsurer and insurer  operating in the  London-based  reinsurance and insurance
market  (the  "London   Market"),   primarily   through  its  recently  acquired
subsidiary,   Unionamerica   Insurance   Company  Limited   (together  with  its
affiliates,  "Unionamerica").  Unionamerica's  core businesses are  professional
liability   reinsurance,   including  malpractice   reinsurance  for  healthcare
providers,  as well as lawyers  and other  professionals,  and  reinsurance  and
insurance  for a variety of  property  and  casualty  risks.  Of  Unionamerica's
insurance gross premiums  written,  approximately  74% are generated in the U.S.
The percentage of business from non-U.S.  sources has grown in recent years. The
Company  intends to  continue  to operate  Unionamerica  as a distinct  business
entity under its current management.

History

    The Company was formed in 1983 to write  medical  malpractice  insurance and
provide risk  management  services for  hospitals  and  physicians in the United
States.  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,  the breadth of its products and services and
its  capacity to deliver  them.  The Company has acquired  insurance,  strategic
management consulting,  employee relations consulting,  credentials verification
services  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.  In
December  1997,  the  Company  acquired   Unionamerica  in  a  stock  for  stock
transaction.

    Unionamerica  was founded in 1971.  In 1993,  an  investor  group along with
senior management  acquired  Unionamerica from The Continental  Corporation.  In
December 1995,  Unionamerica  completed an initial  public  offering of American
Depository Shares ("ADSs"). In 1996 Unionamerica acquired interests in a Lloyd's
dedicated  corporate capital vehicle and a Dutch auto insurance program,  and in
1997 Unionamerica acquired an interest in a Lloyd's managing agency.

Strategic Rationale for Unionamerica Acquisition

    The insurance market is undergoing consolidation and insureds and reinsureds
are demanding more sophisticated products and services and seeking insurers with
greater  financial  capacity.  These market  conditions  favor larger,  strongly
capitalized companies with multiple licenses, strong distribution capacity and a
full complement of insurance and value-added services.

                                     - 2 -
<PAGE>
    By  acquiring  Unionamerica,  the Company has  substantially  increased  its
medical  malpractice  insurance and  reinsurance  premiums in the U.S.,  and has
increased the diversity of insurance  risks in its book of business.  Also,  the
acquisition  offers  operations and distribution  capabilities  that support the
Company's strategy to expand its international business.

BUSINESS SEGMENTS

    The Company's business is organized into three business  segments:  domestic
insurance, international insurance, and consulting and fee services.

    The  following  tables set forth the  Company's  revenues and income  before
income taxes by segment over the past three years:

<TABLE>
<CAPTION>
                          REVENUES BY BUSINESS SEGMENT
                                 (IN THOUSANDS)

                                                                    Year ended December 31,
                                                       ---------------------------------------------------
                                                              1997             1996              1995
                                                            --------         --------          --------
<S>                                                        <C>              <C>               <C>      
Domestic insurance segment:
   Net premiums earned...............................      $ 159,579        $ 164,409         $ 155,191
   Net investment income.............................         47,171           44,274            39,850
   Realized gains (losses) on investments............          2,418             (40)             1,367
                                                            --------         --------          --------
                                                             209,168          208,643           196,408
International insurance segment:
   Net premiums earned...............................        118,658          116,982           117,712
   Net investment income.............................         28,319           29,407            23,086
   Realized gains (losses) on investments............           (236)            (850)              325
                                                            --------         --------            ------
                                                             146,741          145,539           141,123

Consulting and fee segment...........................         51,626           34,535            22,336
                                                            --------        ---------          --------
      Total revenues.................................      $ 407,535        $ 388,717         $ 359,867
                                                           =========        =========         =========
</TABLE>
<TABLE>
<CAPTION>

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EXTRAORDINARY LOSSES BY BUSINESS SEGMENT
                                 (IN THOUSANDS)

                                                                    Year ended December 31,
                                                       ---------------------------------------------------
                                                            1997              1996              1995
                                                          --------          --------          --------

<S>                                                       <C>               <C>               <C>     
Domestic insurance segment...........................     $ 23,530          $ 24,080          $ 23,036
International insurance segment (1)..................       16,216            28,480            17,379
Consulting and fee segment...........................        4,570             2,889             1,798
                                                          --------          --------          --------
      Income from continuing operations before
           income taxes and extraordinary losses.....     $ 44,316          $ 55,449          $ 42,213
                                                          ========          ========          ========
<FN>
(1) 1997 includes expenses of $9,745,000 related to the acquisition of Unionamerica.
</FN>
</TABLE>

DOMESTIC INSURANCE SEGMENT

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. Due to changes in the financing of
healthcare  under managed care, the healthcare  delivery system has evolved to a
complex  structure  involving  numerous  healthcare  provider  types and payment
mechanisms.  Healthcare  providers  are  forming  integrated  delivery  networks
through mergers and  acquisitions and contractual  arrangements.  These networks
include  healthcare  systems,  physician  organizations,   physician  management
companies,   physician  hospital  organizations  and  individual  hospitals  and
physicians and other  specialized  healthcare  provider  entities.  In 

                                     - 3 -
<PAGE>
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  healthcare  business  environment  requires
providers and networks to address related business, quality and insurance risks,
and the Company has  developed a  comprehensive  set of  insurance  products and
consulting  and  fee-based  services  designed  to assist  healthcare  providers
address  these issues.  These  products and services  have been  developed  both
internally and through acquisition.

Products

    The Company's  insurance products include  professional  liability insurance
for  hospitals  and  healthcare   systems,   physicians  and  allied  healthcare
professionals,  as well as assumed  reinsurance,  and life and health insurance,
written  principally by American  Continental  Insurance Company  ("ACIC"),  the
Company's  primary domestic  insurance  subsidiary.  According to A.M. Best, the
Company was the eighth  largest writer of medical  malpractice  insurance in the
United States in 1996, based on direct premiums written.

    Hospitals and Healthcare Systems.  The Company writes primary,  umbrella and
excess liability insurance for hospitals and healthcare 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.  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.

    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.   Although   physicians  are
underwritten  individually  by the  Company,  pricing  for all  physician  group
business 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.

    Other.    The   Company    provides   excess   of   loss   reinsurance   for
healthcare-sponsored   medical  malpractice  insurance  companies,   principally
single-state organizations. The Company also provides group life, stop-loss, and
disability  products for  healthcare  institutions  and their  employees and HMO
reinsurance and healthcare provider excess insurance.

Underwriting

    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,  as well as
monthly  statistical  reports  regarding  risk  management  programs for renewal
business.  The Company's risk management  consultants  conduct a pre-acquisition
process to  determine  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.

    For physicians affiliated with insured hospitals and healthcare systems, the
underwriting  process  involves an evaluation of the  prospective  insured and a
recommendation   by  a  committee  of  insured   physicians   for   underwriting
consideration,  in addition to an evaluation  of a physician's  loss history and
exposure data.

                                     - 4 -
<PAGE>
Claims

    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,  risk 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  semi-annually  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 to identify  incidents that may result
in claims  and  assists  the  Company in  evaluating  and  responding  to claims
expeditiously.

Distribution

    The Company believes that a close working  relationship  with its healthcare
industry clients is essential and consequently markets its products and services
directly and through  insurance  brokers where such a close client  relationship
can be created and maintained.  The Company markets  nationally and has regional
insurance offices in Deerfield,  Illinois;  Atlanta, Georgia; and San Francisco,
California.  The  Company  also has several  small  offices in  locations  where
specialized services are provided to clients. The Company has insurance licenses
in 50 states and the District of Columbia.  In 1997,  the five largest states in
terms  of  medical  malpractice  direct  written  premium  by the  Company  were
Illinois, Florida, California, Texas and Tennessee, which together accounted for
approximately 47% of the Company's medical malpractice direct written premium.

CONSULTING AND FEE SEGMENT

    The  Company's  consulting  and fee segment  consists of its  clinical  risk
management  services,  which are  closely  linked  with its  domestic  insurance
operations,  as well as management  consulting,  employee relations  consulting,
professional   liability   claims    administration,    healthcare   credentials
verification businesses and billing, compliance and reimbursement services.

Healthcare Risk Services Group

    The Company's  Healthcare  Risk 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  certain of its risk  modification
programs,  educational  programs  and  information  services as a  condition  to
obtaining its insurance coverage.

    The clinical risk  modification  process is designed to help clients  change
practices in the  healthcare  setting that may increase  professional  liability
risk exposure.  This process includes 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  specific  services  by the  Company to help manage its risk
exposures.

                                     - 5 -
<PAGE>
    The  Company's  specialized  clinical  risk  modification  programs  seek to
contribute  to the  quality of patient  care by  improving  clinical  practices,
thereby  reducing loss  exposures and incurred  losses,  and improving  clinical
outcomes.  The Company  requires  that  healthcare  systems  continually  review
clinical  practices  and submit  clinical  indicator  data  monthly.  These data
measure the insureds'  degree of compliance with the guidelines  which have been
developed by national work groups of physicians and other medical  professionals
working under the sponsorship of the Company.  These data comprise a comparative
database of practice and outcome indicators that has been maintained since 1985.
Insured  institutions  must also establish  procedures for internal clinical and
risk  management  review of cases,  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  provides  consulting  services,  which  include
clinical, operational and administration process assessments, clinical care path
development,  risk and quality management programming,  risk management staffing
and assistance with peer review processes.

    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  topic
workshops. National seminars are offered to multi-disciplinary audiences and are
designed to address specific areas of risk exposure of national concern. Focused
topic workshops,  with limited  enrollment,  provide in-depth  training for risk
managers,  healthcare  executives  and others within the  healthcare  setting on
specialized areas of risk. 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,
which  facilitates  collection,  analysis and  reporting of incident,  claim and
clinical data. In addition,  the Company has developed an on-line communications
resource for its insureds that allows for direct  interaction  among all clients
and from each client to the Company's staff.

Professional Liability Claims Administration

    The  Company  provides  claims  administration  services  designed to assist
healthcare  organizations manage self-insured  retentions.  The Company believes
that in the future,  consolidating  healthcare organizations will have increased
financial capacity and will seek to retain liability exposures through increased
deductibles and  self-insured  retentions.  This trend represents an opportunity
for the Company to provide a highly specialized service to healthcare  providers
on an outsourced basis.

Healthcare Credentials Management Services

    Healthcare   providers  and  managed  care   organizations   face  increased
regulatory  requirements to periodically  review and evaluate the credentials of
physicians and other healthcare  professionals.  The Company provides outsourced
information technology-based services to these organizations that enable them to
assemble  credentials  information in a timely and cost-efficient  manner rather
than through labor intensive internal processes.

Strategy Consulting Services

    The  Company  provides a wide  variety of  management  consulting  services,
including strategy  development,  healthcare system integration and development,
medical  group   practice   development,   managed  care  strategy   design  and
implementation,  hospital/physician  alignment  strategies and business  process
reengineering.  These  services  are  designed to assist  healthcare  clients in
implementing organizational change.

                                     - 6 -
<PAGE>
Employee Relations Consulting

    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.  Principal  services provided
include labor relations consulting,  compensation  consulting,  employee opinion
surveys and human resource search services.

Billing, Compliance and Reimbursement Services

    The Company provides services that help hospitals, physicians and integrated
healthcare  organizations  capture and report accurate and timely information on
patient care.  These services are designed to assure  healthcare  providers that
billing and reimbursement is appropriate for service rendered.

INTERNATIONAL INSURANCE SEGMENT

    Internationally,  the Company operates as a specialty  casualty and property
reinsurer and insurer  operating in the  London-based  reinsurance and insurance
market  (the  "London   Market"),   primarily   through  its  recently  acquired
subsidiary,   Unionamerica   Insurance   Company  Limited   (together  with  its
affiliates,  "Unionamerica").  Unionamerica's  core businesses are  professional
liability   reinsurance,   including  malpractice   reinsurance  for  healthcare
providers,  as well as lawyers  and other  professionals,  and  reinsurance  and
insurance for a variety of property and casualty risks.

Products

    The Company writes casualty and property  reinsurance on both a treaty basis
(in  which the  reinsurer  typically  agrees to  reinsure  all,  or a  specified
portion,  of the  risks  arising  under a  number  of  similar  policies)  and a
facultative  basis (in which the reinsurer agrees to reinsure all, or a portion,
of the  insurance  provided  under a single  policy).  The  Company  also writes
insurance, particularly for U.S. insureds, on an excess and surplus lines basis.

    The  Company  writes  its  core  casualty   contracts   predominantly  on  a
claims-made  basis,  under which it is liable only for those  claims made during
the contract period (generally  subject to a limited discovery  period),  rather
than on an occurrence basis, in which the insurer is liable for losses occurring
during or attributable  to the contract  period,  no matter when reported.  This
approach  benefits  the  Company  by  permitting  a  faster  and  more  accurate
evaluation of its probable  ultimate losses under a contract,  which the Company
can utilize in negotiating  the terms and pricing of similar new business and of
renewal policies.

    Casualty

    The core casualty  lines written by the Company are  professional  indemnity
and single industry and/or single state third-party risks coverages. The Company
writes these lines both on a treaty and a facultative  reinsurance basis as well
as on a primary insurance basis. The Company's focus on these lines is a natural
outgrowth  of  its  underwriting   philosophy,   in  that  these  coverages  are
predominantly  written on a claims-made basis for accounts with  clearly-defined
exposure  parameters,  which  generally  permit more  accurate  pricing  than do
accounts  which consist of casualty  exposures  arising in a number of different
geographic  locations or across a range of  industries.  Casualty gross premiums
written totaled $106.7 million, or 70% of international premiums in 1997.

    The  Company's  core  casualty  treaty book is the largest  component of its
total  international  book of business.  The significance of the casualty treaty
book has increased since the late 1970's, following the widespread establishment
and growth of mutual and captive  insurers  which  provide  insurance for single
state groups of doctors,  lawyers and other  professionals in a single industry.
Such mutual and captive buyers of reinsurance  have been attracted to the London
Market because its underwriters have provided a flexible  underwriting  approach
where there is homogeneity of risk.
     
                                     - 7 -
<PAGE>
    The largest component of the Company's casualty treaty reinsurance  business
is  its  professional   indemnity  line,  which  includes   primarily,   medical
malpractice  and  hospital  indemnity   reinsurance   business.   The  Company's
experience and reputation in the U.S. in the general area of medical malpractice
has enabled it to develop successfully similar lines of U.S. business for, among
others, lawyers, architects, engineers, accountants and insurance agents as well
as a few

specialized sources for D&O business. The insured risks under these treaties are
typically  associations of small professional  partnerships,  many of which have
memberships  that are limited to a specific state or other defined  geographical
areas in the United States.

    In addition to its professional indemnity business, the Company writes other
types of casualty business on a treaty basis. As with its professional indemnity
business,  the Company  focuses on specific  industries  and,  where  practical,
specific  states  or other  defined  geographic  areas in the U.S.  The  largest
component of this line is the Company's excess of loss reinsurance of commercial
trucking risks for certain  well-established primary insurers that specialize in
this business. The Company also reinsures general liability business written for
ski resorts and a variety of other specialty industries.

    In 1997, the main component of the Company's casualty direct and facultative
business was U.S.  primary  casualty  business  underwritten  on a surplus lines
basis through carefully selected managing general agents. Such business consists
of insurance for small commercial risks,  such as restaurants,  other commercial
properties and small  contractors,  as well as a number of individual  programs.
Before  entering into an agreement with a managing  general  agent,  the Company
carefully evaluates the ability and financial strength of the agent involved and
monitors each of these arrangements closely in order to ensure that the pricing,
terms and quality of the coverage written are consistent with its  expectations.
In  addition,  the  Company  provides  motor  liability  insurance  in  Holland,
underwritten  on  a  segmented  basis  and  which  has  been  produced   through
telemarketing by a Dutch associate, Polis Direct BV.

    The Company writes a book of medical  expense  business  obtained  through a
limited number of carefully selected brokers.  This business has been maintained
at the same level for the last three years as competition has limited  favorable
opportunities.  As a book of business,  it includes quota share,  excess of loss
and stop loss reinsurance provided to insurers who have written health insurance
coverages  as well as direct  medical  reimbursement  insurance  provided to the
employees  of  certain  specific  employers.  This  book  is  written  on both a
reinsurance and primary insurance basis.

    Property

    The Company's  property  reinsurance  and insurance  business  totaled $38.5
million,  or 25% of international gross premiums written in 1997. The volume and
type of property  business  written  varies from year to year  depending  on the
state of the market in the United States, London and elsewhere.

    The Company's  property treaty book consists of catastrophe and general risk
coverages.  These  coverages are  primarily  written on an excess of loss basis,
although some  proportional  treaties are also written where historical  results
and the quality of information  provided by the reinsured justify doing so. This
book  covers  both  U.S.  and  international  business.  This book  consists  of
approximately half each of U.S. exposures and international exposures, which are
predominately in the U.K. and Northern Europe and Japan (excluding  earthquake).
In its  underwriting,  the Company  seeks to limit its  maximum  exposure to any
catastrophe  in  defined  geographic  areas of the United  States  and  specific
catastrophe regions elsewhere.

    The total  amount of U.S.  catastrophe  coverage  written by the Company has
been  constrained by  management's  unwillingness  to increase  aggregate  gross
exposure and thereby either become too reliant on purchasing reinsurance,  which
is still relatively  expensive for a London Market reinsurer buying  reinsurance
protection,  or to risk too  high a  proportion  of the  Company's  capital.  As
regards international property treaty,  specific major zones each with their own
maximum aggregate exposure are: UK and Europe windstorm area; Japanese windstorm
area; Italy;  Africa;  Australia and the Far East (excluding Japan).  Apart from
certain   "frequency  of  loss"   reinsurance,   the  reinsurance   program  for
catastrophes only applies to the U.S.

                                     - 8 -
<PAGE>
    Property direct and facultative  business  comprises  individual  non-marine
property and automobile  physical damage risks,  mainly written on an excess and
surplus lines basis through selected managing general agents.  The vast majority
of this business originates from North America.

    Lloyds

    The Company's  majority  investment in Jago Capital Limited  ("JCL"),  which
provided 4.1% of capacity for Lloyd's  Non-Marine  Syndicate 205, produced gross
premiums  written of $6.8 million in 1997.  JCL's share of Syndicate  205's 1998
capacity has been increased to approximately 16%.

Distribution

    The Company  generally writes its business in the London Market.  Treaty and
facultative  reinsurance  business originating in the United States is typically
placed  for  an  insured  or   reinsured   by  one  or  more  U.S.   reinsurance
intermediaries  or  brokers  and then  through  a London  Market  broker  to the
Company.  Direct  insurance  business is also generally  placed by London Market
brokers,  who in turn have received the business  directly  from a U.S.  broker.
Non-United  States  business is also generally  placed by local country  brokers
through London Market brokers to the Company.  Recently,  a small  percentage of
European business has been placed with the Company directly by European brokers.
In addition, the Company now provides motor liability insurance in Holland which
has been produced through telemarketing by a Dutch associate, Polis Direct BV.

    The Company  devotes  considerable  effort to maintaining  and enhancing its
relationships  with key London Market and United States brokers,  and management
considers  relationships  with such  brokers  to be strong.  Relationships  with
United States brokers are important  because  certain U.S.  brokers  control the
placement of material  amounts of business in the London Market in the Company's
specialty  casualty lines.  Further,  U.S. brokers frequently work with multiple
London Market brokers and can influence the ultimate  placement of business.  As
regards U.S.  excess of loss  business  placed by London Market  brokers,  total
commissions received by the U.S. and London brokers together are generally about
15%.  Total  commissions  for direct and  facultative  business are up to 25% of
gross premiums and those for primary business are up to 30% of gross premiums.

Underwriting

    The  Company  believes  that  its core  professional  indemnity  and  single
industry and/or single state risks businesses  require a high level of technical
underwriting skills and judgment in order to price risks appropriately.  Members
of the  Company's  underwriting  team have an average of 14 years  experience as
underwriters  with the Company.  Before  joining the Company,  most of them were
London Market brokers, an experience that has given them an understanding of the
business  acquisition  process  from  both the  broker's  and the  underwriter's
perspective.

    A key element of the  Company's  strategy  is its  ability,  primarily  as a
result of the length of service and reputation of its  underwriting  team in the
London  Market,  to be one of a limited  number of  reinsurers  involved  in the
negotiation  of the terms and  pricing of nearly all of the  specialty  casualty
business  in  which it  participates  (thereby  functioning,  in  London  Market
terminology,  as a "lead"). Such involvement allows the Company to gain the most
advantage from its underwriting expertise. As a result, the Company is presented
with  opportunities  to  participate  in a high  percentage  of the  reinsurance
programs in its  specialized  lines of business  which are brought to the London
Market.  In addition,  the Company also has the  opportunity  to subscribe for a
larger percentage of each of such risks than reinsurers without such expertise.

    The Company's underwriting philosophy stresses the underwriting of exposures
within  clearly  defined  parameters  which  permit the  thorough  analysis  and
appropriate  pricing of each  individual  account.  One way in which the Company
limits the  parameters of the casualty  risks it  underwrites  in any individual
account  is by  focusing  on the  underwriting  of risks  arising  in a  defined
geographic  area,  such  as a  single  state.  Although  many of its  risks  are
underwritten  on this basis,  the Company  also seeks to spread its risk through
diversifying  its  portfolio by  underwriting  individual  accounts in different
geographic areas.

                                     - 9 -
<PAGE>
    The Company generally seeks to write the lower or middle layers of excess of
loss reinsurance coverage, which have historically demonstrated more predictable
loss experience and therefore permit more accurate  pricing.  Higher layers have
historically been less predictable  because the frequency of claims is lower and
because it takes longer  before  reinsurers  writing such layers become aware of
losses. In addition,  management believes that these lower or middle layers tend
to receive a greater portion of the premium in relation to the risk assumed.  In
its direct casualty  insurance  business,  the Company generally  emphasizes the
writing of coverage above a significant self-retention by the insured party. The
Company also generally seeks to write business in an amount not exceeding two or
three  times  the  attachment  point,  since  management  believes  that  larger
multiples are less predictable and in many cases do not provide sufficient extra
premium for the greater exposure.  To increase further its ability to assess its
risk,  the  Company  focuses  on  casualty  coverages  which can be written on a
claims-made basis rather than on a loss occurrence basis.


Claims

    In accordance with standard London Market contract conditions,  the majority
of claims are made on the Company  through the London  Market broker that placed
the business. The London Market broker acts as custodian of the claims files and
notifies the Company,  and other  participants,  of claims that have been filed,
either by way of  electronic  loss  advice or by direct  visit to the  Company's
claims  department.  In the London Market,  it is standard practice for the lead
underwriter  on a  particular  risk to  advise  the  other  underwriters  on the
handling of the claim,  including whether to pursue  settlement  negotiations or
litigation.  However,  each following reinsurer retains the right to reject such
advice and pursue alternative approaches.

RATINGS

    The  Company's  ratings as of  December  31,  1997 by various  agencies  are
summarized below:

    Capital Securities rating:
        Moody's Investors Service.......................    a3
        Standard & Poor's...............................    BBB+

    A.M. Best rating:
        ACIC............................................    A
        Unionamerica....................................    A-

    S&P Claims paying ability (Unionamerica).               A

RESERVES

    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  loss  adjustment  expenses  (LAE)  for  reported  claims.  Non-case
reserves,  which  include a provision for losses that have occurred but have not
been reported to the Company as well as development on reported claims,  are the
difference  between  (i) the sum of case  reserves  and  paid  losses  and  (ii)
actuarially estimated ultimate incurred losses.  Ultimate incurred losses are an
actuarially  determined  estimate  of total  losses  and LAE  necessary  for the
ultimate  settlement of all reported claims and incurred but not reported claims
including amounts already paid.

    The 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.

                                     - 10 -
<PAGE>
    The  following  table  presents the  development  of balance  sheet  reserve
liability for property and casualty reserves net of reinsurance for the calendar
years 1988 through 1997.  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.


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

                                                                       December 31,
                        -------------------------------------------------------------------------------------------------------
                        1988       1989       1990       1991       1992       1993       1994       1995       1996       1997
                        ----       ----       ----       ----       ----       ----       ----       ----       ----       ----
Liability for unpaid
<S>                   <C>        <C>        <C>        <C>        <C>      <C>          <C>      <C>        <C>        <C>    
  losses and LAE, gross                                                    1,008,114    993,957  1,182,431  1,141,697  1,115,342
Deduct reinsurance
  receivables                                                                310,190    292,751    263,934    241,270    263,401
                                                                             -------   --------   --------   --------   --------

Liability for unpaid 
  losses and LAE, net 444,918    511,451    547,993    616,003    644,881    697,924    701,206    918,497    900,427    851,941

Liability        
re-estimated     
  as of:         
One year later        453,489    528,216    541,904    616,880    645,937    695,113    699,294    908,855    886,742           
Two years later       444,664    524,397    552,882    606,952    641,382    694,590    693,639    897,436
Three years later     444,232    511,236    538,867    591,608    634,813    680,453    658,184
Four years later      431,272    499,258    524,345    593,996    614,590    645,797
Five years later      420,073    494,777    524,664    576,630    586,693
Six years later       419,318    501,074    515,775    562,064
Seven years later     428,468    497,157    502,340
Eight years later     427,747    487,165
Nine years later      426,434
                      -------    -------    -------    -------    -------    -------   --------   --------   --------           

Cumulative redundancy
  (deficiency), net    18,484     24,286     45,653     53,939     58,188     52,127     43,022     21,061     13,685         

Cumulative net
liability
paid as of:
One year later         66,567    106,555    103,849    145,215    123,719    176,319    162,844    204,693    228,561
Two years later       150,239    167,806    201,336    235,776    251,331    309,933    320,828    385,497
Three years later     189,183    257,924    264,043    323,344    349,441    427,157    356,676
Four years later      255,108    305,337    331,625    394,961    416,852    428,801
Five years later      291,783    352,998    381,599    445,555    412,083
Six years later       326,195    386,223    418,146    424,741
Seven years later     353,831    413,270    394,665
Eight years later     377,273    390,466
Nine years later      360,398



</TABLE>

                                     - 11 -
<PAGE>

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

                                                   December 31,
                                -------------------------------------------------
                                1993       1994       1995       1996       1997
                                ----       ----       ----       ----       ----


Liability for unpaid 
<S>                         <C>          <C>      <C>        <C>        <C>      
losses and LAE, gross       1,008,114    993,957  1,182,431  1,141,697  1,115,342

Liability
re-estimated as of:
   One year later             994,427  1,030,558  1,163,423  1,130,976          
   Two years later          1,034,565  1,015,670  1,148,545
   Three years later        1,019,160    972,955
   Four years later           979,057


Cumulative       
redundancy, gross              29,057     21,002     33,886     10,721          

Cumulative gross
liability paid
   as of:
   One year later             212,816    210,685    256,518    268,771
   Two years later            390,049    411,583    463,042
   Three years later          549,149    458,046
   Four years later           556,409

</TABLE>

    In evaluating the  information in the tables above,  it should be noted that
each column  includes the effects of changes in amounts for prior  periods.  The
tables do 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 these tables. In 1997,
net  reserve  redundancy  of  $13,685,000  represents  a  1.5%  decrease  in the
Company's  estimate  of  the  December  31,  1996  reserve.  See  Note  7 to the
Consolidated  Financial  Statements for  additional  information on incurred and
paid losses and LAE.

                                     - 12 -
<PAGE>
    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, 1997.

                RECONCILIATION OF SAP RESERVES WITH GAAP RESERVES
                                 (IN THOUSANDS)
                                                               DECEMBER 31, 1997
                                                               -----------------

    Liability for losses and LAE on a SAP basis................      $ 494,513
    Add:  
     Unionamerica..............................................        329,160
     Other.....................................................         28,268
                                                                     ---------

    Liability for losses and LAE on a GAAP basis (net of
     reinsurance receivables of $ 263,401 )....................      $ 851,941
                                                                     =========

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.

    Domestic Insurance Operations

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

    The Company's  Vetting  Committee  evaluates the credit risk associated with
every  reinsurer and reports its findings to the Audit Committee of the Board of
Directors.  The Board of Directors  has  substantially  increased  the Company's
creditworthiness  standards for reinsurers over the past several years.  For new
reinsurers, the standards require minimum capital and surplus of $125,000,000 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.

    International Insurance Operations

    In 1997 and 1998 to date,  the Company  has limited its maximum  exposure to
any one  casualty  loss  (after  the  benefit  of any  automatic  or  individual
facultative reinsurance but before the benefit of treaty reinsurance) in respect
of any single  casualty  reinsurance or insurance  cedant by line of business to
$2,000,000.  In addition,  the Company purchases treaty  reinsurance in order to
reduce its exposure both to individual  insured  losses and to 

                                     - 13 -
<PAGE>
multiple insured losses arising out of one loss event.  The reinsurance  program
currently  purchased  provides a maximum of $9,625,000  of coverage  exceeding a
$375,000  retention  by the Company for each  insured  loss or loss event.  This
program is purchased in several  layers,  with such layers having varied maximum
recoverable provisions.

    In its property  business,  the Company seeks to limit its maximum  exposure
before  reinsurance  both on any one risk and in any one geographic  region.  In
1996, the maximum gross exposure (except for trucking  terminal  automobile fire
theft and collision ("FTC") business) on any one direct or facultative  property
risk is limited to $500,000. In the case of trucking terminal FTC business,  the
maximum gross exposure for any one terminal is $1,000,000.

    The Company purchases catastrophe reinsurance protecting its U.S. direct and
facultative  property binding authority account.  For 1997 and 1998, the Company
purchased two layers of coverage,  collectively totaling a maximum of $3,000,000
of protection in excess of a $1,000,000 retention by the Company on an each loss
basis, with each layer having one  reinstatement.  Within this band of coverage,
the Company retains net an amount of $150,000 in co-reinsurance.

    In addition,  the Company also purchases catastrophe  reinsurance protecting
its entire U.S.  property account  (including  property treaty as well as direct
and  facultative  business).  For 1997, the Company  purchased such  catastrophe
coverage in several  layers,  collectively  totaling a maximum of  $8,300,000 of
protection in excess of a retention of $1,500,000 on an each loss basis.  Within
this  band of  coverage  the  Company  retains  net an  amount  of  $340,000  in
co-reinsurance.   Each  such   layer   purchased   permits  a  maximum   of  one
reinstatement.  Furthermore,  the Company  protects itself against  frequency of
catastrophe  loss by buying  additional  coverage  against the possibility of it
experiencing a number of losses  retained under its $1,500,000  retention  under
the Company's principal  catastrophe  reinsurance coverage described above. This
"frequency of loss" coverage provides the Company with: (a) $500,000 of coverage
above a $500,000 retention on each loss, but only after an aggregate of $750,000
in losses to the layer between  $500,000 and  $1,000,000  have been borne by the
Company;  and (b)  $1,000,000 of coverage  above a $1,000,000  retention on each
loss,  but only after an aggregate of  $1,500,000 in losses to the layer between
$1,000,000 and $2,000,000 have been borne by the Company. The only change to the
above for 1998 relates to the "frequency of loss" coverage. The aggregate amount
to be borne by the Company  under (a) has been amended from $750,000 to $625,000
in losses to the layer between  $500,000 and $1,000,000.  Likewise under (b) the
aggregate  amount to be borne by the Company has been amended from $1,500,000 to
$1,000,000 in losses to the layer between $1,000,000 and $2,000,000. Each of the
"frequency of loss" protections has one reinstatement.

    The Company  estimates  that its maximum gross exposure in respect of all of
its property  coverages  with respect to a  catastrophe  in any one of four U.S.
geographic  regions   (Northeast,   Southeast,   West  Coast  and  Mid-West)  is
approximately  $22,000,000 before  reinsurance,  reinstatement  premiums and tax
benefits,  which management  believes the Company would not experience except in
connection with a catastrophe  producing total insured losses in excess of those
produced  by  Hurricane  Andrew  (which  produced  the largest  insured  loss in
history).  Therefore, the Company estimates that its maximum net exposure to any
such catastrophe  would be significantly  less than $22,000,000,  since it would
have  $10,800,000 in catastrophe  reinsurance  recoverables,  in addition to any
reinstatement  premiums.  The  Company  would also  receive  tax  benefits to it
arising from the loss. The Company's estimate of its maximum gross exposure to a
catastrophe in respect of all its U.S. property  coverages was derived by adding
together  three  components:  (a) the total  limits  exposed in its  catastrophe
treaty business,  subject to an adjustment to take account of nationwide  treaty
accounts;  (b) for property  non-catastrophe  treaty  business,  a  conservative
proportion,  based on the Company's experience, of the total limits exposed; and
(c) for direct and  facultative  business,  an amount  representing  the largest
exposure  by  geographic  region,  taking  into  account  likely  loss  based on
prevailing  type of  property  construction  and spread of risk.  International,
non-U.S.  property  risk is  managed  by using  carefully  controlled  aggregate
exposure limits for each  designated  geographical  zone. The maximum  aggregate
exposure is monitored  carefully to ensure that, despite its minimal reinsurance
protection, it will not yield a catastrophe loss of more than $10,500,000. The
Company would however receive the tax benefits arising from such a loss.

                                     - 14 -
<PAGE>
    The following  table sets forth ceded  premiums for the year ended  December
31, 1997 to principal  reinsurers  and  retrocessionaires  participating  in the
Company's reinsurance and retrocession program:

<TABLE>
<CAPTION>

                                 CEDED PREMIUMS
                                 (IN THOUSANDS)

                                              Ceded
Reinsurer or retrocessionaire                Premiums       Rating    Source of Rating
-----------------------------                ---------      ------    ----------------
<S>                                            <C>                                     
Hannover Reinsurance Company                 $ 10,301         A+      A.M. Best Company
Lloyd's Underwriters                           10,110         A              "
Sun Life Assurance Company of Canada            4,830         A++            "
CNA Reinsurance Company Limited                 3,461         A              "
American Reinsurance Company                    2,437         A+             "
Other                                          43,345
                                             ---------
Total                                        $ 74,484
                                             =========

</TABLE>

    The  following  table  sets forth the  Company's  principal  reinsurers  and
retrocessionaires  and reinsurance  receivables  with respect to paid and unpaid
losses and LAE as of December 31, 1997.

<TABLE>
<CAPTION>
                             REINSURANCE RECEIVABLES
                                 (IN THOUSANDS)

                                                              Reinsurance
Reinsurer or retrocessionaire                                 Receivables        Rating        Source of Rating
-----------------------------                                ------------        ------        ----------------
<S>                                                          <C>         
Lloyd's Underwriters                                         $     51,082         A            A.M. Best Company 
Hannover Reinsurance Company                                       29,630         A+                   "
CIGNA Reinsurance Company                                          21,439         B+                   "
National Reinsurance Company                                       18,920         A+                   "
Munich Reinsurance Company                                         16,597         A++                  "
Other                                                             162,409         
                                                             ------------
Total                                                        $    300,077
                                                             ============
</TABLE>

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.  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.  As of December 31, 1997, the securities in the Company's fixed income
portfolio had an average  rating of Aa as rated 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")  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.

    The  Company's  investment  policy  emphasizes  quality and  liquidity.  The
Company's  current  investment  objective  is to  maximize  current  yield while
preserving principal and maintaining liquidity. At December 31, 1997, 

                                     - 15 -
<PAGE>
70% of the  Company's  $1.14  billion fixed  maturity  investment  portfolio was
invested  in  bonds  rated  "A" or  higher  by  S&P  or  Moody's  or  issued  by
governmental  bodies or  agencies,  and 68% was  invested in bonds rated "AA" or
higher or issued by such bodies or agencies.  The Company's  policy continues to
be to attempt to match the  durations  and  currency mix of its  investments  as
closely  as  possible  with  those  of  its  obligations.  See  Note  4  to  the
Consolidated Financial Statements.

COMPETITION

    The Company competes with monoline medical malpractice  insurance companies,
specialty  reinsurers,  large  multi-line  property  and  casualty  insurers and
reinsurers  and  providers  of risk  management  and  consulting  services.  The
insurance and reinsurance  businesses are highly  competitive and in a prolonged
soft market due in part to the level of capital available in the industry.  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 and reinsurance,  risk management  services involving clinical risk
management,  consulting  services,  direct  access to the  client  organization,
experienced staff and long-term relationships with its clients provide it with a
competitive advantage in its chosen markets.

REGULATION

Domestic Insurance Operations

    The  Company's  domestic  insurance  subsidiaries  (ACIC,  Health  Providers
Insurance Company and American Continental Life Insurance Company, collectively,
the "Domestic  Insurance  Subsidiaries")  are subject to the insurance  laws and
regulations  in each state in which they are licensed to do business,  and their
states of domicile  which include  Missouri and Illinois.  Each of the states in
which the Company's  Domestic  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 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 Domestic  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 Domestic 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. 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.

    The  Domestic  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.

                                     - 16 -
<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. Collectively in 1997, dividend payments by
the Domestic  Insurance  Subsidiaries  to the Company  without prior  regulatory
approval may not exceed $31,000,000.

    The Missouri and Illinois insurance laws and regulations impose a risk-based
minimum  surplus  requirement  for insurance  companies that attempts to measure
statutory capital and surplus needs based on the risks in a company's  insurance
business and investment portfolio.  As of December 31, 1997, the surplus of each
of the Domestic  Insurance  Subsidiaries  exceeded their  respective  risk-based
capital requirement under the standards.

    The  National  Association  of  Insurance  Commissioners  ("NAIC")  annually
calculates a number of financial  ratios to assist  regulators in monitoring the
financial  condition of insurance  companies.  In 1997, the ratios for ACIC, the
Company's principal domestic insurance subsidiary fell within the "normal" range
for ten of the eleven ratios.  ACIC's result for the change in surplus test fell
outside the normal range due to the  elimination of loss reserve  discounting in
1997.

International Insurance Operations

    Authorization  To Transact  Business.  Except as  permitted  under  European
Community  law,  no person  may carry on an  insurance  business  in the  United
Kingdom  (U.K.) unless  authorized  to do so under the  Insurance  Companies Act
1982, as amended from time to time (the "1982 Act").  Authorization  is obtained
from HM Treasury Insurance Directorate ("HMTID"). The HMTID, in deciding whether
to grant  authorization,  has broad discretion to act in the public interest and
is required to determine  whether the applicant is a fit and proper entity to be
engaged in  insurance  business  and,  in  particular,  whether  it has,  or has
available to it,  adequate  knowledge  and expertise and whether the criteria of
sound and prudent management will be fulfilled with respect to the applicant. In
connection with a company's authorization,  the HMTID may impose such conditions
as it sees fit  relating  to the  operation  of the  Company  and the writing of
insurance business. These are specific to each insurance company and are set out
in a "Notice of Requirements." In addition,  companies  incorporated in the U.K.
must comply with certain  provisions  of the  Companies Act 1985 as amended from
time to time (the  "Companies  Act")  requiring  them to file and provide  their
shareholders  with audited  financial  statements  and related  reports by their
directors.

    Excess and Surplus Lines Insurance in the United States (U.S.). Unionamerica
is an approved or eligible  excess and surplus  lines  insurer in 47 states,  as
well as in the District of  Colombia,  the  Commonwealth  of Puerto Rico and the
U.S.  Virgin  Islands.  In order to maintain such  approvals  and  eligibilities
Unionamerica  has established a U.S. trust fund for the benefit of U.S.  surplus
lines policyholders.

    Reinsurance  Business in the United States.  To date,  Unionamerica has been
granted  trusteed  or  accredited  reinsurer  status in 46 U.S.  States  and the
District of Colombia. Accreditation makes it more convenient for U.S. reinsureds
to do business with Unionamerica,  since it allows reinsureds to take credit for
the  reinsurance in their statutory  financial  statements  without  withholding
funds or requiring  Unionamerica to provide  letters of credit.  The Company has
obtained  such  status  in most of the  states  in which  its  significant  U.S.
reinsureds  are  organized  and is continuing to seek such a status in all other
U.S.  jurisdictions in which the law would permit accreditation of Unionamerica.
Management believes that accreditation  provides a marketing advantage with U.S.
clients  by  emphasizing  Unionamerica's  commitment  to the U.S.  market and by
enhancing Unionamerica's  reputation for financial stability. As of December 31,
1997,  Unionamerica's U.S. Reinsurance Trust for the benefit of its U.S. cedants
is funded with  trusteed  assets plus  accrued  interest of $251.9  million.  In
addition,  as of December 31, 1997, the Unionamerica  provided letters of credit
totaling $80.6 million to U.S. cedants on business not currently  covered by the
Trust.

                                     - 17 -
<PAGE>
United Kingdom Tax Treatment

    Unionamerica  is resident in the United  Kingdom for the  purposes of United
Kingdom  taxation  and is  subject  to  United  Kingdom  corporation  tax on its
profits.  Advance corporation tax ("ACT") is payable in respect of dividends and
other  distributions made by Unionamerica.  ACT which is paid by Unionamerica on
dividends and other  distributions may, in certain  circumstances and subject to
certain  limits and  restrictions,  be offset  against its  liability for United
Kingdom corporation tax.  See Note 5 to Consolidated Financial Statements.

EMPLOYEES

    As of December 31, 1997,  the Company  employed  approximately  800 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  244,000  square  feet of office  space
throughout   the  United  States   ("U.S.")  and  three  suites  in  the  London
Underwriting  Centre  in  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 135,000 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.  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
--------------------------

    The Company is subject to 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 operation.

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

    The Company held a Special  Meeting of  Stockholders  on December 5, 1997 to
approve a) the issuance of up to 7,685,336  shares of Common Stock in connection
with the  acquisition  of  Unionamerica  Holdings  plc and b) the adoption of an
amendment to the Company's 1993 Employee  Stock Plan to increase,  in connection
with the acquisition, the number of shares of Common Stock reserved for issuance
under the plan by 570,845 shares.  At the meeting,  8,613,080 votes were cast in
favor of the proposal,  19,760 votes were cast against the  proposal,  and there
were 7,717 abstentions.

                                     - 18 -
<PAGE>
                                     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 521 holders of record as of December 31, 1997. The
following  table  sets forth the  quarterly  high and low daily  closing  prices
during 1997 and 1996.

                                                          High        Low
                                                          ----        ---
1997
----
     First Quarter                                     $  32 1/8    $ 22 3/4
     Second Quarter                                       27 1/2      21
     Third Quarter                                        27 11/16    24 5/8
     Fourth Quarter                                       26 15/16    23 3/4

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

     On December 31, 1997 the closing  price of the  Company's  Common Stock was
$25 1/8 per share.

     In 1997,  the  Company  declared  quarterly  dividends  of $0.07 per share,
compared to quarterly dividends of $0.06 per share in 1996. 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.
1997 Annual Report to Stockholders  is  incorporated  herein by reference and is
filed in electronic format as Exhibit 13.1.

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 19 of the MMI Companies,  Inc. 1997 Annual Report
to Stockholders  is incorporated  herein by reference and is filed in electronic
format as Exhibit 13.2.


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

     The  Consolidated  Financial  Statements  and Notes  thereto  and Report of
Independent  Auditors  on pages 20 through 38 of the MMI  Companies,  Inc.  1997
Annual Report to Stockholders  is incorporated  herein by reference and is filed
in electronic format as Exhibit 13.3.

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

     None.

                                     - 19 -
<PAGE>
                                    PART III

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

    The  "Election of  Directors",  "Executive  Officers" and  "Compliance  with
Section  16(a) of the  Exchange  Act"  sections on pages 1 through 3 and pages 4
through 5 and page 7 of the Registrant's  Proxy Statement relating to the annual
meeting of shareholders to be held on April 16, 1998, are included by reference.

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

    The  "Executive   Compensation"  section  on  pages  7  through  15  of  the
Registrant's  Proxy Statement  relating to the annual meeting of stockholders to
be held on April 16, 1998, 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 5 through 6 of the Registrant's Proxy Statement relating to the
annual meeting of  stockholders to be held on April 16, 1998, is included herein
by reference.

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

    The  "Certain  Relationships  and Related  Transactions"  and  "Compensation
Committee  Interlocks  and  Insider  Participation  in  Compensation  Decisions"
sections  on  pages 6 and 7 and 12 and 13 of the  Registrant's  Proxy  Statement
relating to the annual meeting of stockholders to be held on April 16, 1998, 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 23.

         3. Exhibits. An index to exhibits to this report is on page 24.

     b. Reports on Form 8-K.

On December 23, 1997, the Company filed a Current Report on Form 8-K relating to
the completion of private placement of $125 million in Capital Securities.


                                     - 20 -
<PAGE>

                                   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 18, 1998                 /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 18, 1998                 /s/ B. Frederick Becker
                                        ------------------------
                                        B. Frederick Becker
                                        Chairman and Chief Executive Officer
                                        Officer and Director


Date:    March 18, 1998                 /s/ Paul M. Orzech
                                        -------------------
                                        Paul M. Orzech
                                        Executive Vice President and
                                        Chief Financial Officer


Date:    March 18, 1998                 /s/ Joseph R. Herman
                                        ---------------------
                                        Joseph R. Herman
                                        Senior Vice President and Controller


Date:    March 18, 1998                 /s/ Richard R. Barr
                                        --------------------
                                        Richard R. Barr
                                        Director


Date:    March 18, 1998                 /s/ George B. Caldwell
                                        -----------------------
                                        George B. Caldwell
                                        Director


Date:    March 18, 1998                 /s/ K. James Ehlen, M.D.
                                        -------------------------
                                        K. James Ehlen, M.D.
                                        Chairman and Chief Executive Officer



Date:    March 18, 1998                 /s/ F. Laird Facey, M.D.
                                        -------------------------
                                        F. Laird Facey, M.D.
                                        Director

                                     - 21 -
<PAGE>

Date:    March 18, 1998                 /s/ Alan C. Guy
                                        ----------------
                                        Alan C. Guy
                                        Director


Date:    March 18, 1998                 /s/ William M. Kelley
                                        ----------------------
                                        William M. Kelley
                                        Director


Date:    March 18, 1998                 /s/ Andrew D. Kennedy
                                        ----------------------
                                        Andrew D. Kennedy
                                        Director

Date:    March 18, 1998                 /s/ Timothy R. McCormick
                                        -------------------------
                                        Timothy R. McCormick
                                        Director

Date:    March 18, 1998                 /s/ Gerald L. McManis
                                        ----------------------
                                        Gerald L. McManis
                                        Director

Date:    March 18, 1998                 /s/ Scott S. Parker
                                        --------------------
                                        Scott S. Parker
                                        Director

Date:    March 18, 1998                 /s/ Edward C. Peddie
                                        ---------------------
                                        Edward C. Peddie
                                        Director

Date:    March 18, 1998                 /s/ Joseph D. Sargent
                                        ----------------------
                                        Joseph D. Sargent
                                        Director

Date:    March 18, 1998                 /s/ Ian G. Sinclair
                                        --------------------
                                        Ian G. Sinclair
                                        Director

Date:    March 18, 1998                 /s/ Robert A. Spass
                                        --------------------
                                        Robert A. Spass
                                        Director



                                     - 22 -
<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.


                                     - 23 -
<PAGE>
                                  EXHIBIT INDEX

3.1     Certificate Of Incorporation of The Registrant. (6)
3.2     Bylaws of the Registrant. (3)
4.1     Specimen stock certificate representing Common Stock. (7)
4.2     Rights Agreement dated as of June 14, 1997 by and between the Registrant
        and Chase Mellon Shareholder Services LLC, as Rights Agent. (7)
4.3     Deposit  Agreement,  dated as of  December 1, 1995,  among the  Company,
        Morgan  Guaranty  Trust  Company  of New York,  as  Depositary,  and the
        holders  from  time to  time of the  American  Depositary  Receipts,  as
        supplemented  by a Supplemental  Agreement dated as of February 14, 1996
        to the Deposit agreement dated as of December 1, 1995. (9)
4.4     Form of  American  Depositary  Receipt  evidencing  American  Depositary
        Shares. (8)
10.1    Credit  Agreement  dated as of February  20, 1998 among the  Registrant,
        Various  Lenders  and  Bank  of  America   National  Trust  and  Savings
        Association, as Agent for the Lenders.
10.2    Indenture  dated  December  23,  1997  relating  to Junior  Subordinated
        Debentures. (11)
10.3    Amended and Restated  Declaration  of Trust of MMI Capital Trust I dated
        December 23, 1997. (11)
10.4    Form of Exchange  Guarantee  of the Company  dated  December  23,  1997,
        relating to the  Exchange  Capital  Securities.  (11) 10.5  Registration
        Rights Agreement dated December 23, 1997. (11)
10.6    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 (5) 
10.7    Lease dated July 1, 1991,  between the Registrant and MATAS  Corporation
        for the  Registrant's  principal  executive  offices  and First  through
        Seventh Amendments to Lease, various dates (1)(3)(4)(5)(7)
10.8    Amended and Restated Return on Equity Incentive Plan,  effective January
        1, 1990. (5) #
10.9    Amended 1993 Employee Stock Plan, effective January 15, 1993.(10) #
10.10   Retirement Equity Plan.(7) #
10.11   1993  Non-Employee  Directors'  Formula  Stock  Option  Plan,  effective
        January 15, 1993. #
10.12   Certificates of Insurance for Directors' Life Insurance Program.(1) #
10.13   Amended Board of Directors Retirement Plan, effective January 1, 1993. #
10.14   Amended 1996 Non-Employee  Director Stock and Deferred Cash Compensation
        Plan. (5) #
10.15   Unionamerica Holdings plc Loan Stock Plans. (8) #
10.16   Unionamerica  Holdings Limited Unapproved Executive Share Option Scheme.
        (8) #
10.17   The Rules of the  Unionamerica  Holdings plc 1996 Executive Share Option
        Scheme. (12) #
10.18   Employment  Agreement,  dated as of May 1, 1997,  between the Registrant
        and its Chief Executive Officer, Mr. B. Frederick Becker. #
10.19   Agreement  dated as of January 7, 1998  between the  Registrant  and Mr.
        Steve A. Schleisman.
10.20   Agreements  dated as of April 17, 1996  between the  Registrant  and Ms.
        Anna Marie Hajek, Mr. Gerald L. McManis and Mr. Paul M. Orzech.(6) #
10.21   Service Agreement dated September 10, 1993,  between Ian G. Sinclair and
        UA Management Company. (8) #
10.22   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.(2)
10.23   Transfer and  Forbearance  Agreement dated as of December 30, 1993 among
        the Registrant and Gerald L. McManis. (2)
10.24   Acquisition  Agreement dated June 25, 1997 by and between the Registrant
        and Unionamerica Holdings plc (7)

10.25   Share Purchase Agreement,  as amended,  dated as of June 30, 1993, among
        Unionamerica  Acquisition Company Ltd.,  Unionamerica  Holdings Ltd. and
        The Continental Corporation. (8)

10.26   Tax  Indemnification  Agreement,  dated as of September 10, 1993, by and
        among The Continental  Corporation and Unionamerica  Acquisition Company
        Ltd. (8)

12.1    Statement re computation of ratio of earnings to fixed charges

13.1    MMI  Companies  Inc.  1997  Annual  Report to  Stockholders  -  Selected
        Consolidated Financial Data

13.2    MMI Companies  Inc. 1997 Annual Report to  Stockholders  -  Management's
        Discussion and Analysis of Results of Operations and Financial Condition

                                     - 24 -
<PAGE>

13.3    MMI Companies  Inc. 1997 Annual Report to  Stockholders  -  Consolidated
        Financial Statements and Notes

21.1    Subsidiaries of the registrant.

23.1    Consent of Ernst & Young LLP.

23.2    Consents of KPMG and KPMG Audit Plc.

27.1    Financial data schedule.

99.1    Opinions of KPMG and KPMG Audit Plc.

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

(1)     Incorporated herein by reference to Registration  Statement No. 33-59464
        on Form S-1 dated June 24, 1993.

(2)     Incorporated  herein by reference to Report on Form 10-K dated  December
        31, 1993, Commission File No. 1-11920.

(3)     Incorporated  herein by reference to Report on Form 10-K dated  December
        31, 1994, Commission File No. 1-11920.

(4)     Incorporated  herein by reference to Report on Form 10-K dated  December
        31, 1995, Commission File No. 1-11920.

(5)     Incorporated  herein by reference to Report on Form 10-K dated  December
        31, 1996, Commission File No. 1-11920.

(6)     Incorporated  herein by  reference to Report on Form 10-Q dated June 30,
        1996, Commission File No. 1-11920.

(7)     Incorporated herein by reference to Registration Statement No. 333-32027
        on Form S-4, dated November 4, 1997.

(8)     Incorporated by reference to Registration Statement No. 33-99186 on Form
        F-1 dated November 9, 1995.

(9)     Incorporated  by reference to  Registration  Statement No.  333-05858 on
        Form S-8.

(10)    Incorporated  by reference to  Registration  Statement No.  333-46889 on
        Form S-8, dated February 25, 1998.

(11)    Incorporated herein by reference to Registration Statement No. 333-44565
        on Form S-4, dated January 20, 1998

(12)    Incorporated  herein by  reference to Report on Form 10-Q dated June 30,
        1996, Commission File No. 1-14112.

# Compensatory plans or arrangements.

                                     - 25 -
<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,
                                                                             ---------------------------
                                                                                   1997           1996
                                                                             -------------  ------------
ASSETS
  INVESTMENTS
<S>                                                                          <C>            <C>        
    Investment in subsidiaries.........................................      $    403,200   $   358,192
    Short-term investments.............................................               835        15,460
    Fixed maturities...................................................            31,855        24,822
    Preferred stocks...................................................             2,000            --
                                                                             -------------  ------------
                                                                                  437,890       398,474

  OTHER ASSETS
    Cash...............................................................               161           128
    Furniture and equipment - at cost, less accumulated
        depreciation:  1997 - $4,298; 1996 - $5,719....................             5,501         3,964
    Due from affiliates................................................            78,164        17,805
    Deferred income taxes..............................................             8,888         5,924
    Other..............................................................             4,888         2,148
                                                                             -------------  ------------
                                                                             $    535,492   $   428,443
                                                                             =============  ============

LIABILITIES AND STOCKHOLDERS' EQUITY
  LIABILITIES
    Accrued expenses and other liabilities.............................      $     15,484   $    14,039

    Due to affiliates..................................................             2,282         1,238
    Company-obligated, mandatorily redeemable preferred
       securities of subsidiary trust holding solely junior
       subordinated debentures of the Company..........................           118,724            --
    Long-term notes payable............................................                --        58,000
                                                                             -------------  ------------
                                                                                  136,490        73,277
 


  STOCKHOLDERS' EQUITY
    Common Stock, par value $.10 per share:
        Authorized shares:  1997 and 1996 - 30,000
        Issued and outstanding shares:  1997 - 18,857; 1996 - 18,681....            1,886         1,868
    Additional paid-in capital..........................................          217,855       215,091

    Retained earnings...................................................          154,929       124,751
    Unrealized gains on investments, net of taxes:
        1997 - $12,812; 1996 - $7,217...................................           24,332        13,456
                                                                             -------------  ------------

                                                                                  399,002       355,166
                                                                             -------------  ------------
                                                                              $   535,492   $   428,443
                                                                             =============  ============
<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,
                                                                         -------------------------------------
                                                                              1997         1996          1995
                                                                         ----------   ----------    ----------
REVENUES
<S>                                                                      <C>          <C>           <C>       
     Management fees from subsidiaries ...............................   $   28,450   $   24,550    $   19,100
     Dividends received from subsidiaries ............................       29,750       11,000         6,000
     Net investment income ...........................................        1,578          752           375
     Net realized gains on investments ...............................           16           22            --
                                                                         ----------   ----------    ----------
                                                                             59,794       36,324        25,475

EXPENSES
     Administrative and other ........................................       24,394       23,193        19,558
     Interest expense ................................................        3,712        3,397         2,767
                                                                         ----------   ----------    ----------
                                                                             28,106       26,590        22,325
                                                                         ----------   ----------    ----------


         Income from continuing operations before income taxes,
              extraordinary loss and equity in undistributed net
              income of subsidiaries .................................       31,688        9,734         3,150
     Income taxes (credit) ...........................................          381         (396)         (932)
                                                                         ----------   ----------    ----------
                                                                                                                            
         Income from continuing operations before
              extraordinary loss and equity in
              undistributed net income of subsidiaries ...............       31,307       10,130         4,082
     Extraordinary loss, net of taxes ................................          141           --            --
                                                                         ----------   ----------    ----------

          Income from continuing operations before
              equity in undistributed net income
              of subsidiaries ........................................       31,166       10,130         4,082
     Loss from discontinued operations ...............................           --       (5,100)           --
                                                                         ----------   ----------    ----------

         Income before equity in undistributed net income
             of subsidiaries .........................................       31,166        5,030         4,082
     Equity in undistributed net income of subsidiaries ..............        3,194       35,090        25,312
                                                                         ----------   ----------    ----------

         Net income ..................................................   $   34,360   $   40,120    $   29,394
                                                                         ==========   ==========    ==========

<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,
                                                                         --------------------------------------
                                                                              1997          1996          1995
                                                                         ----------    ----------    ----------



<S>                                                                      <C>           <C>           <C>       
Net cash provided (used) by operating activities .....................   $  (17,619)   $    3,558    $  (46,306)

Investing activities:
     Net sale (purchase) of short-term investments ...................       14,649       (14,769)          121
     Purchases of fixed maturities ...................................      (43,108)      (38,833)           --
     Sales of fixed maturities .......................................       33,133         8,706            --
     Maturities of fixed maturities ..................................        1,588         5,430            --
     Capital contribution to subsidiaries ............................      (20,000)      (10,003)       (5,000)
     Furniture and equipment additions ...............................       (3,200)       (2,174)       (1,770)
     Acquisition of subsidiaries .....................................      (21,006)      (11,074)      (25,097)
                                                                         ----------    ----------    ----------
        Net cash used by investing activities ........................      (37,944)      (62,717)      (31,746)

Financing activities:
     Issuance of Common Stock ........................................        1,899        56,725        66,626
     Issuance of Capital Securities ..................................      124,551            --            --
     Common Stock repurchased ........................................       (2,840)           --            --
     Costs incurred in connection with securites offering ............       (5,832)       (3,119)       (6,176)
     Payments on notes payable .......................................      (58,000)         (750)       (1,250)
     Proceeds from notes payable including short-term borrowings .....           --         9,000        21,000
     Dividends .......................................................       (4,182)       (2,864)       (2,061)
                                                                         ----------    ----------    ----------

        Net cash provided by financing activities ....................       55,596        58,992        78,139
                                                                         ----------    ----------    ----------

        Increase (decrease) in cash ..................................           33          (167)           87
Cash at beginning of year ............................................          128           295           208
                                                                         ----------    ----------    ----------
        Cash at end of year ..........................................   $      161    $      128    $      295
                                                                         ==========    ==========    ==========

<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
                                       ------------   ------------   ------------   ------------

1997

<S>                                    <C>            <C>            <C>            <C>         
Domestic insurance                     $      7,462   $    625,114   $     67,147   $      8,723
International insurance                      19,077        500,032         67,041           --
Consulting and fees                            --             --             --             --
                                       ------------   ------------   ------------   ------------
                                       $     26,539   $  1,125,146   $    134,188   $      8,723
                                       ============   ============   ============   ============


1996

Domestic insurance                     $      7,117   $    631,573   $     55,679   $      8,578
International insurance                      16,006        518,345         50,796           --
Consulting and fees                            --             --             --             --
                                       ------------   ------------   ------------   ------------
                                       $     23,123   $  1,149,918   $    106,475   $      8,578
                                       ============   ============   ============   ============


1995

Domestic insurance                     $      5,660   $    638,815   $     52,951   $      8,982
International insurance                      11,233        561,055         43,330           --
Consulting and fees                            --             --             --             --
                                       ------------   ------------   ------------   ------------
                                       $     16,893   $  1,199,870   $     96,281   $      8,982
                                       ============   ============   ============   ============
<FN>
See Note 13 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
                                                      (IN THOUSANDS)
                                                       [CONTINUED]

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


1997

<S>                                    <C>            <C>            <C>            <C>            <C>            <C>         
Domestic insurance                     $    159,579   $     47,171   $    132,948   $     15,805   $     36,885   $    168,607
International insurance                     118,658         28,319         66,813         33,244         30,469        129,082
Consulting and fees                            --             --             --             --           47,055           --
                                       ------------   ------------   ------------   ------------   ------------   ------------
                                       $    278,237   $     75,490   $    199,761   $     49,049   $    114,409   $    297,689
                                       ============   ============   ============   ============   ============   ============


1996

Domestic insurance                     $    164,409   $     44,274   $    135,786   $     14,024   $     34,753   $    167,392
International insurance                     116,982         29,407         72,990         27,811         16,258        122,725
Consulting and fees                            --             --             --             --           31,646           --
                                       ------------   ------------   ------------   ------------   ------------   ------------
                                       $    281,391   $     73,681   $    208,776   $     41,835   $     82,657   $    290,117
                                       ============   ============   ============   ============   ============   ============


1995

Domestic insurance                     $    155,191   $     39,850   $    130,088   $     11,353   $     31,932   $    161,188
International insurance                     117,712         23,086         76,220         28,050         19,474        137,207
Consulting and fees                            --             --             --             --           20,537           --
                                       ------------   ------------   ------------   ------------   ------------   ------------
                                       $    272,903   $     62,936   $    206,308   $     39,403   $     71,943   $    298,395
                                       ============   ============   ============   ============   ============   ============


<FN>
See Note 13 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, 1997:
<S>                                                        <C>          <C>          <C>          <C>                <C>  
Life insurance inforce at end of year...................   $  992,060   $  302,889   $       -    $  689,171            -%
                                                           ==========   ==========   ==========   ==========  
Premiums:
  Medical malpractice ..................................   $  173,025   $   32,946   $   14,018   $  154,097         9.10%
  International ........................................       43,583       19,586       94,661      118,658        79.78%
  Other ................................................       17,854       14,185        1,813        5,482        33.07%
                                                           ----------   ----------   ----------   ----------  
       Total premiums ..................................   $  234,462   $   66,717   $  110,492   $  278,237
                                                           ==========   ==========   ==========   ==========  

Year Ended December 31, 1996:
Life insurance inforce at end of year...................   $1,265,506   $  300,385   $       -    $  965,121            -%
                                                           ==========   ==========   ==========   ==========  
Premiums:
  Medical malpractice ..................................   $  171,058   $   29,504   $   15,168   $  156,722         9.68%
  International ........................................       49,915       21,040       88,107      116,982        75.32%
  Other ................................................       21,001       15,481        2,167        7,687        28.19%
                                                           ----------   ----------   ----------   ----------  
       Total premiums ..................................   $  241,974   $   66,025   $  105,442   $  281,391
                                                           ==========   ==========   ==========   ==========  


Year Ended December 31, 1995:
Life insurance inforce at end of year...................   $1,397,274   $  344,807   $       -    $1,052,467            -%
                                                           ==========   ==========   ==========   ==========  
Premiums:
  Medical malpractice ..................................   $  169,760   $   33,115   $   10,990   $  147,635         7.44%
  International ........................................       41,822       21,358       97,248      117,712        82.62%
  Other ................................................       17,032       13,653        4,177        7,556        55.28%
                                                           ----------   ----------   ----------   ----------  
       Total premiums ..................................   $  228,614   $   68,126   $  112,415   $  272,903
                                                           ==========   ==========   ==========   ==========  

</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, 1997:
<S>                                                            <C>          <C>          <C>          <C>       
  Accumulated amortization of goodwill .....................   $    5,788   $    3,314   $     --     $    9,102
  Accumulated depreciation of furniture and
       equipment ...........................................       11,626        4,647        5,574       10,699



Year Ended December 31, 1996:
  Accumulated amortization of goodwill .....................   $    3,777   $    2,011   $     --     $    5,788
  Accumulated depreciation of furniture and
       equipment ...........................................        7,733        4,143          250       11,626



Year Ended December 31, 1995:
  Accumulated amortization of goodwill .....................   $    3,096   $      681   $     --     $    3,777
  Accumulated depreciation of furniture and
       equipment ...........................................        5,294        3,242          803        7,733
   Accumulated allowance for uncollectible
        reinsurance (1) ....................................       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    Adjustments         
       with                             Acquisition        Expense       Expenses        Premium  
    Registrant                                Costs       Reserves       Reserves       Reserves
------------------                     ------------   ------------   ------------   ------------

1997:
   Consolidated
<S>                                    <C>            <C>            <C>            <C>          
    subsidiaries...                    $     26,539   $  1,113,095   $         --   $    134,188 

1996:                                                                           
   Consolidated                                                                 
    subsidiaries...                    $     23,123   $  1,139,018   $         --   $    106,475

1995:                                                                           
   Consolidated                                                                 
    subsidiaries...                    $     16,893   $  1,007,204   $         --   $     96,281 
                        
</TABLE>
                        



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

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

                                                     Year Ended December 31,
                      ------------------------------------------------------------------------------------------------
                                   
                                   
                                                      Loss and Loss                                 
                                                      Adjustment Expenses     Amortization          Paid
                                                      Incurred Related to      of Deferred    Losses and 
  Affiliation                                Net  --------------------------        Policy          Loss           Net
       with                Premium    Investment       Current         Prior   Acquisition    Adjustment      Premiums
    Registrant              Earned        Income          Year          Year         Costs      Expenses       Written
-------------------   ------------  ------------  ------------  ------------  ------------  ------------  ------------

1997:              
   Consolidated    
<S>                   <C>           <C>           <C>              <C>        <C>           <C>           <C>         
    subsidiaries...   $   272,755   $    74,019   $   209,367      ($13,685)  $    49,049   $   243,869   $    292,205

1996:                                                                                                    
   Consolidated                                                                                          
    subsidiaries...   $   273,704   $    72,301   $   213,419       ($9,642)  $    41,835   $   218,739   $    282,443

1995:                                                                                                    
   Consolidated                                                                                          
    subsidiaries...   $   265,347   $    61,632   $   204,076       ($1,912)  $    39,403   $   169,223   $    290,839
                   
                                                                                            
</TABLE>

                                      S-7
<PAGE>
<TABLE>
<CAPTION>
                                           MMI COMPANIES, INC. AND SUBSIDIARIES
                                      EXHIBIT 12 - RATIO OF EARNINGS TO FIXED CHARGES
                                               (IN THOUSANDS EXCEPT RATIOS)


                                                                                            Year ended December 31,
                                                               --------------------------------------------------------------   
                                                                    1997         1996         1995         1994         1993
                                                               ----------   ----------   ----------   ----------   ----------   

Income from continuing operations
<S>                                                            <C>          <C>          <C>          <C>          <C>       
     before income taxes and extraordinary losses              $   44,316   $   55,449   $   42,213   $    5,330   $   43,797

Add fixed charges:
     Interest expense                                               6,489        6,083       10,889       10,084        4,150
     Amortization of issuance costs                                  --             70         --            123           38
     Portion of rents representative of
        interest factor                                             2,150        1,850        1,625        1,345          982
                                                               ----------   ----------   ----------   ----------   ----------   
                                                                    8,639        8,003       12,514       11,552        5,170
                                                               ----------   ----------   ----------   ----------   ----------   

Income as adjusted                                             $   52,955   $   63,452   $   54,727   $   16,882   $   48,967
                                                               ==========   ==========   ==========   ==========   ==========   

Fixed charges                                                  $    8,639   $    8,003   $   12,514   $   11,552   $    5,170
                                                               ==========   ==========   ==========   ==========   ==========   

Ratio of earnings to fixed charges                                    6.1          7.9          4.4          1.5          9.5


</TABLE>
<PAGE>
EXHIBIT 10.1
================================================================================


                                U.S. $100,000,000



                                CREDIT AGREEMENT,



                         dated as of February 20, 1998,



                                      among



                              MMI COMPANIES, INC.,

                                as the Borrower,



                    CERTAIN COMMERCIAL LENDING INSTITUTIONS,

                                 as the Lenders,



                                       and



             BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION,

                          as the Agent for the Lenders


                                   Arranged by


                         BANCAMERICA ROBERTSON STEPHENS




================================================================================
<PAGE>
                                TABLE OF CONTENTS
                                -----------------

                                                                            Page
                                                                            ----


                                    ARTICLE I

               DEFINITIONS AND ACCOUNTING TERMS.............................   1
1.1  Defined Terms..........................................................   1
1.2  Use of Defined Terms...................................................  19
1.3  Cross-References.......................................................  19
1.4  Accounting and Financial Determinations................................  19

                                   ARTICLE II

               COMMITMENTS and BORROWING PROCEDURES.........................  19
2.1  Commitments............................................................  19
     2.1.1  Commitment of Each Lender.......................................  19
     2.1.2  Lenders Not Permitted or Required To Make Loans.................  19
2.2  Reduction of Commitment Amount.........................................  20
     2.2.1  Optional........................................................  20
2.3  Borrowing Procedure....................................................  20
2.4  Continuation and Conversion Elections..................................  20
2.5  Funding................................................................  21
2.6  Loan Accounts..........................................................  21

                                   ARTICLE III

               REPAYMENTS, PREPAYMENTS, INTEREST AND FEES...................  22
3.1  Repayments and Prepayments.............................................  22
3.2  Interest Provisions....................................................  23
     3.2.1  Rates ..........................................................  23
     3.2.2  Post-Maturity Rates.............................................  23
     3.2.3  Payment Dates...................................................  23
3.3  Fees...................................................................  24
     3.3.1  Facility Fees...................................................  24
     3.3.2  Other Fees......................................................  25

                                   ARTICLE IV

               CERTAIN OFFSHORE RATE AND OTHER PROVISIONS...................  25
4.1  Fixed Rate Lending Unlawful............................................  25
4.2  Deposits Unavailable...................................................  26
4.3  Increased Eurodollar Loan Costs, etc...................................  26
4.4  Funding Losses.........................................................  26
4.5  Increased Capital Costs................................................  27
4.6  Taxes..................................................................  27

                                     - i -
<PAGE>

4.7  Payments, Computations, etc............................................  29
4.8  Sharing of Payments....................................................  29
4.9  Setoff.................................................................  30
4.10 Use of Proceeds........................................................  30

                                    ARTICLE V

               CONDITIONS TO BORROWING .....................................  31
5.1  Initial Borrowing......................................................  31
     5.1.1  Resolutions, etc................................................  31
     5.1.2  Organic Documents...............................................  31
     5.1.3  Opinion of Counsel..............................................  31
     5.1.4  Closing Fees, Expenses, etc.....................................  31
     5.1.5  Other Documents.................................................  32
5.2  All Borrowings.........................................................  32
     5.2.1  Compliance with Warranties, No Default, etc.....................  32
     5.2.2  Borrowing Request...............................................  33
     5.2.3  Satisfactory Legal Form.........................................  33

                                   ARTICLE VI

               REPRESENTATIONS AND WARRANTIES...............................  33
6.1  Organization, etc......................................................  33
6.2  Due Authorization, Non-Contravention, etc..............................  34
6.3  Government Approval, Regulation, etc...................................  34
6.4  Validity, etc..........................................................  34
6.5  Financial Statements...................................................  34
     6.5.1  GAAP Financial Statements.......................................  34
     6.5.2  Statutory Financial Statements..................................  35
6.6  No Material Adverse Change.............................................  36
6.7  Litigation, Labor Controversies, etc...................................  36
6.8  Subsidiaries...........................................................  37
6.9  Ownership of Properties................................................  37
6.10 Taxes..................................................................  37
6.11 ERISA Compliance.......................................................  37
6.12 Insurance Licenses.....................................................  38
6.13 Environmental Warranty.................................................  38
6.14 Regulations G, U and X.................................................  38
6.15 Accuracy of Information................................................  39

                                   ARTICLE VII

               COVENANTS....................................................  39
7.1  Affirmative Covenants..................................................  39
     7.1.1  Financial Information, Reports, Notices, etc. ..................  39
     7.1.2  Compliance with Laws, etc.......................................  43
     7.1.3  Maintenance of Properties.......................................  43
     7.1.4  Insurance.......................................................  43

                                     - ii -
<PAGE>

     7.1.5  Books and Records...............................................  44
     7.1.6  Environmental Covenant..........................................  44
7.2  Negative Covenants.....................................................  44
     7.2.1  Business Activities.............................................  44
     7.2.2  Liens ..........................................................  44
     7.2.3  Financial Condition.............................................  45
     7.2.4  Investments.....................................................  46
     7.2.5  Restricted Payments, etc........................................  46
     7.2.6  Consolidation, Merger, etc......................................  47
     7.2.7  Transactions with Affiliates....................................  47
     7.2.8  Negative Pledges, Restrictive Agreements, etc. .................  47

                                  ARTICLE VIII

               EVENTS OF DEFAULT............................................  48
8.1  Listing of Events of Default...........................................  48
     8.1.1  Non-Payment of Obligations......................................  48
     8.1.2  Breach of Warranty..............................................  48
     8.1.3  Non-Performance of Certain Covenants and Obligations............  48
     8.1.4  Non-Performance of Other Covenants and Obligations..............  48
     8.1.5  Default on Other Indebtedness...................................  49
     8.1.6  Judgments.......................................................  49
     8.1.7  Pension Plans...................................................  49
     8.1.8  Control of the Borrower.........................................  50
     8.1.9  Bankruptcy, Insolvency, etc.....................................  50
8.2  Action if Bankruptcy...................................................  50
8.3  Action if Other Event of Default.......................................  51

                                   ARTICLE IX

               THE AGENT....................................................  51
9.1  Appointment and Authorization..........................................  51
9.2  Delegation of Duties...................................................  51
9.3  Liability of Agent.....................................................  51
9.4  Reliance by Agent......................................................  52
9.5  Notice of Default......................................................  53
9.6  Credit Decision........................................................  53
9.7  Indemnification........................................................  54
9.8  Agent in Individual Capacity...........................................  54
9.9  Successor Agent........................................................  54
9.10 Withholding Tax........................................................  55

                                    ARTICLE X

               MISCELLANEOUS PROVISIONS.....................................  56
10.1 Waivers, Amendments, etc...............................................  56

                                    - iii -
<PAGE>

10.2  Notices...............................................................  57
10.3  Payment of Costs and Expenses.........................................  58
10.4  Indemnification.......................................................  58
10.5  Survival..............................................................  59
10.6  Severability..........................................................  59
10.7  Headings..............................................................  59
10.8  Execution in Counterparts, Effectiveness, etc.........................  59
10.9  Governing Law; Entire Agreement.......................................  60
10.10 Successors and Assigns................................................  60
10.11 Sale and Transfer of Loans; Participations in Loans...................  60
      10.11.1  Assignments..................................................  60
      10.11.2  Participations...............................................  61
      10.11.3  Limitation of Rights of any Assignee
               Lender or Participant........................................  62
      10.11.4  Tax Matters..................................................  62
      10.11.5  Information..................................................  63
      10.11.6  Federal Reserve Bank.........................................  63
10.12 Confidentiality.......................................................  63
10.13 Other Transactions....................................................  63
10.14 Forum Selection and Consent to Jurisdiction...........................  64
10.15 Waiver of Jury Trial..................................................  64


SCHEDULE I  -     Disclosure Schedule
SCHEDULE II -     Business Activities of the Borrower and its
                           Subsidiaries

EXHIBIT A   -     Form of Borrowing Request
EXHIBIT B   -     Form of Continuation/Conversion Notice
EXHIBIT C   -     Form of Lender Assignment Agreement
EXHIBIT D   -     Form of Note
EXHIBIT E   -     Form of Opinion of Wayne A. Sinclair, General
                           Counsel to the Borrower
EXHIBIT F   -     Form of Officer's Certificate of the Borrower


                                     - iv -
<PAGE>


                                CREDIT AGREEMENT


         THIS  CREDIT  AGREEMENT,  dated as of  February  20,  1998,  among  MMI
COMPANIES, INC., a Delaware corporation (the "Borrower"),  the various financial
                                              --------
institutions parties hereto (collectively,  the "Lenders"),  and BANK OF AMERICA
                                                 -------
NATIONAL TRUST AND SAVINGS ASSOCIATION ("BofA"), as agent (in such capacity, the
"Agent") for the Lenders.
 -----

                              W I T N E S S E T H:

         WHEREAS,  the Borrower is engaged  through its various  subsidiaries in
the business of insurance and providing risk  management  services and products;
and

         WHEREAS,  the Lenders  have agreed to make  available to the Borrower a
revolving  credit  facility  upon the  terms  and  conditions  set forth in this
Agreement; and

          NOW,  THEREFORE,  in  consideration  of the mutual  agreements  herein
contained, the parties hereto agree as follows:


                                    ARTICLE I

                        DEFINITIONS AND ACCOUNTING TERMS

          SECTION  I.1  Defined  Terms  The  following  terms  (whether  or  not
                        --------------
underscored)  when used in this Agreement,  including its preamble and recitals,
shall, except where the context otherwise requires,  have the following meanings
(such  meanings  to be equally  applicable  to the  singular  and  plural  forms
thereof):

          "ACIC"  means  American  Continental  Insurance  Company,  a  Missouri
           ---- 
insurance company.

          "ACLIC" means American  Continental Life Insurance Company, a Missouri
           -----
insurance company.


          "Affiliate" means, as to any Person, any other Person which,  directly
           ---------
or  indirectly,  is in control of, is controlled  by or is under common  control
with,  such Person.  A Person shall be deemed to be controlled by another Person
if the controlling Person possesses, directly or indirectly, the power to direct
or cause the  direction of the  management  and policies of such Person  whether
through the ownership of voting securities, by contract or otherwise.


<PAGE>
         "Agent" means BofA in its capacity as agent for the Lenders  hereunder,
          -----
and any successor agent arising under Section 9.9.
                                      -----------

         "Agent-Related  Persons"  means BofA and any  successor  agent  arising
      
under Section 9.9, together with their respective Affiliates (including,  in the
      -----------
case of BofA, the Arranger), and the officers, directors,  employees, agents and
attorneys-in-fact of such Persons and Affiliates.

         "Agreement"  means, on any date, this Credit Agreement as originally in
          ---------
effect  on the  Effective  Date and as  thereafter  from  time to time  amended,
supplemented,  amended and restated, or otherwise modified and in effect on such
date.

         "Alternate  Reference Rate" means, for any day, the higher of: (a) .50%
          -------------------------
per annum above the latest  Federal Funds Rate;  and (b) the rate of interest in
effect  for  such day as  publicly  announced  from  time to time by BofA in San
Francisco,  California, as its "reference rate." (The "reference rate" is a rate
set by BofA  based upon  various  factors  including  BofA's  costs and  desired
return,  general  economic  conditions  and  other  factors,  and is  used  as a
reference point for pricing some loans,  which may be priced at, above, or below
such announced rate.)

         "Annual  Statement"  means  the  annual  financial   statement  of  any
          -----------------
insurance  company  as  required  to be  filed  with the  applicable  Department
together with all exhibits or schedules filed therewith,  prepared in conformity
with SAP. With respect to the Annual  Statements  for U.S.  domiciled  Insurance
Subsidiaries,  references to amounts on particular exhibits,  schedules,  lines,
pages and columns of such Annual  Statement are based on the format  promulgated
by  the  NAIC  for  1996  life  insurance  company  annual  statements  or  1996
property-casualty insurance company annual statements,  whichever is applicable.
If the  format of any  Annual  Statement  is  changed  in  future  years so that
different  information is contained in such items or they no longer exist, it is
understood that the reference is to information consistent with that reported in
the referenced item in the 1996 Annual Statement of the insurance company.

         "Applicable  Margin" means a percentage  determined on the basis of the
          ------------------
higher of the S&P Rating and the Moody's Rating, as follows:

                                     - 2 -
<PAGE>

||
|------------------------------------------------------------------------------|
|              If the higher of the              |                             |
|               S&P Rating and the               |     Then the Applicable     |
|                Moody's Rating is:              |       Margin shall be:      |
|------------------------|-----------------------|                             |
|     S&P Rating         |    Moody's Rating     |                             |
|------------------------|-----------------------|-----------------------------|
| A or higher            | A2 or higher          |          .13%               |
|------------------------|-----------------------|-----------------------------|
| A-                     | A3                    |          .165%              |
|------------------------|-----------------------|-----------------------------|
| BBB+                   | Baa1                  |          .20%               |
|------------------------|-----------------------|-----------------------------|
| BBB                    | Baa2                  |          .235%              |
|------------------------|-----------------------|-----------------------------|
| BBB- or lower          | Baa3 or lower         |          .27%               |
|------------------------|-----------------------|-----------------------------|
||

         Any change in the  Applicable  Margin as a result of a change in either
the S&P Rating and/or the Moody's Rating shall be effective for purposes of this
definition as of the day immediately following such change;  provided,  further,
                                                             --------   -------
that for  purposes of  determining  the higher of the S&P Rating and the Moody's
Rating,  the A, A-, BBB+, BBB and BBB- rating levels of S&P shall  correspond to
and be deemed the  equivalent of the A2, A3, Baa1,  Baa2 or Baa3 rating  levels,
respectively,  of  Moody's.  If only one of a Moody's  Rating  and an S&P Rating
exists  at any time,  then the  Applicable  Margin  during  such  time  shall be
determined  as set forth above  based on such  existing  rating.  If at any time
there exists neither a Moody's Rating nor an S&P Rating,  the Applicable  Margin
during such time shall be .27%.

         "1996 Annual Statements" is defined in Section 6.5.2(b).
          ----------------------                ----------------

          "Arranger"   means   BancAmerica   Robertson   Stephens,   a  Delaware
           --------
Corporation.

         "Assignee Lender" is defined in Section 10.11.1.
          ---------------                ---------------

         "Assignment" is defined in Section 10.11.1.
          ----------                ---------------

         "Attorney  Costs" means and includes all fees and  disbursements of any
          ---------------
law firm or  other  external  counsel,  the  allocated  cost of  internal  legal
services (without duplication) and all disbursements of internal counsel.


                                     - 3 -
<PAGE>
         "Authorized  Officer"  means,  relative to the  Borrower,  those of its
          -------------------
officers whose  signatures and incumbency shall have been certified to the Agent
and the Lenders pursuant to Section 5.1.1.
                            -------------

         "BofA" means Bank of America National Trust and Savings Association,  a
          ----
national banking association.

         "Borrower" is defined in the preamble.
          --------                    --------

         "Borrowing"  means  the  Loans of the  same  type  and,  in the case of
          ---------
Eurodollar  Loans,  having the same  Interest  Period made by all Lenders on the
same Business Day and pursuant to the same Borrowing  Request in accordance with
Section 2.3.
-----------

         "Borrowing  Request" means a loan request and certificate duly executed
          ------------------
by an Authorized Officer of the Borrower, substantially in the form of Exhibit A
                                                                       ---------
hereto.

         "Business Day" means
          ------------

                  (a) any day which is neither a Saturday  or Sunday nor a legal
         holiday  on which  banks are  authorized  or  required  to be closed in
         Chicago, Illinois; and

                  (b) relative to the making, continuing,  prepaying or repaying
         of any  Eurodollar  Loans,  any day on which  dealings  in Dollars  are
         carried on in the interbank eurodollar market in London.

         "Capital" means Net Worth plus Debt.
          -------

         "Capital Securities" means the Capital Securities issued by the Capital
          ------------------
Trust containing substantially the terms described in the Capital Trust Offering
Memorandum.

         "Capital  Trust"  means  the MMI  Capital  Trust I, a  special  purpose
          --------------
Delaware business trust established by the Borrower, of which the Borrower holds
all the common securities,  which has issued the Capital  Securities,  and which
has loaned to the  Borrower  (such loan being  evidenced  by the  Capital  Trust
Debentures) the net proceeds of the issuance and sale of the Capital Securities.

         "Capital Trust  Debentures"  means the Junior  Subordinated  Deferrable
          -------------------------
Interest  Debentures  issued by the  Borrower  to the Capital  Trust  containing
substantially the terms described in the Capital Trust Offering Memorandum.

                                     - 4 -
<PAGE>
         "Capital Trust Offering Memorandum" means the Offering Memorandum dated
          ---------------------------------
December 18, 1997 for $125,000,000 of Capital  Securities  issued by the Capital
Trust.

         "Change in Control" means the acquisition by any Person, or two or more
          -----------------
Persons acting in concert,  of beneficial  ownership (within the meaning of Rule
13d-3 of the Securities and Exchange  Commission  under the Securities  Exchange
Act of 1934) of 35% or more of the  outstanding  shares of  voting  stock of the
Borrower.

         "Code" means the Internal Revenue Code of 1986, as amended, reformed or
          ----
otherwise modified from time to time.

         "Commitment" means, relative to any Lender, such Lender's obligation to
          ----------
make Loans  pursuant to Section  2.1.1 in an amount not to exceed the amount set
                        --------------
forth opposite such Lender's name on the signature pages hereto.

         "Commitment  Amount" means, on any date,  $100,000,000,  as such amount
          ------------------
may be reduced from time to time pursuant to Section 2.2.
                                             -----------

         "Commitment Termination Date" means the earliest of
          ---------------------------

                  (a) February 20, 2003;

                  (b) the date on which the  Commitment  Amount is terminated in
         full or reduced to zero pursuant to Section 2.2; and
                                             -----------

                  (c) the date on which any Commitment Termination Event occurs.

Upon the occurrence of any event described in clause (b) or (c), the Commitments
                                              ----------    ---
shall terminate automatically and without further action.

         "Commitment Termination Event" means
          ----------------------------

                  (a) the  occurrence  of any Default  described  in clauses (a)
                                                                     -----------
         through  (d) of Section  8.1.9  with  respect  to the  Borrower  or any
                  ---    --------------
         Significant Subsidiary; or

                  (b) the  occurrence  and  continuance  of any  other  Event of
Default and either


                           (i) the  declaration  of  the  Loans  to  be  due and
payable  pursuant to Section 8.3, or    
                     -----------

                                     - 5 -
<PAGE>
                           (ii) in the absence of such  declaration,  the giving
of notice by the Agent,  acting at the direction of the Required Lenders, to the
Borrower that the Commitments have been terminated.

         "Contingent Liability" means any agreement,  undertaking or arrangement
          --------------------
by which any Person guarantees, endorses or otherwise becomes or is contingently
liable  upon (by direct or  indirect  agreement,  contingent  or  otherwise,  to
provide  funds for  payment,  to supply  funds to, or  otherwise to invest in, a
debtor,  or  otherwise  to assure a  creditor  against  loss) the  indebtedness,
obligation  or  any  other   liability  of  any  other  Person  (other  than  by
endorsements  of  instruments  in the course of  collection),  or guarantees the
payment of dividends or other distributions upon the shares of any other Person.
The amount of any  Person's  obligation  under any  Contingent  Liability  shall
(subject to any limitation  set forth  therein) be deemed to be the  outstanding
principal  amount  (or  maximum  principal  amount,  if  larger)  of  the  debt,
obligation or other liability guaranteed thereby.

         "Continuation/Conversion  Notice"  means a notice  of  continuation  or
          -------------------------------
conversion  and  certificate  duly  executed  by an  Authorized  Officer  of the
Borrower, substantially in the form of Exhibit B hereto.
                                       ---------

         "Controlled   Group"  means  all  members  of  a  controlled  group  of
          ------------------
corporations  and all  members  of a  controlled  group of trades or  businesses
(whether or not  incorporated)  under common  control  which,  together with the
Borrower, are treated as a single employer under Section 414(b) or 414(c) of the
Code or Section 4001 of ERISA.

         "Debt"  means the  consolidated  Indebtedness  of the  Borrower and its
          ----
Subsidiaries; provided, however, that for the purpose of determining the Debt to
Capital Ratio in Section 7.2.3(a), (i) any contingent obligation with respect to
                 ----------------
undrawn  letters  of credit  shall not  constitute  Debt,  and (ii) the  Capital
Securities, the Capital Trust Debentures and the related agreements shall not be
considered Debt of the Capital Trust or the Borrower.


                                     - 6 -
<PAGE>
         "Debt to Capital Ratio" means the ratio of
          ---------------------

                  (a) Debt

to

                  (b)  Capital.

         "Default"  means any Event of Default or any  condition,  occurrence or
          -------
event which, after notice or lapse of time or both, would constitute an Event of
Default.

         "Department" is defined in Section 6.5.2.
          ----------                -------------

         "Disclosure  Schedule" means the Disclosure Schedule attached hereto as
          --------------------
Schedule I, as it may be amended,  supplemented or otherwise  modified from time
----------
to time by the Borrower  with the written  consent of the Agent and the Required
Lenders,  provided,  however,  that no such consent  shall be required to amend,
          --------   -------
supplement or modify the Disclosure Schedule to report any of the following:

                  (a)  a stock dividend as permitted under Section 7.2.5;
                                                           -------------

                  (b) a stock  acquisition as permitted under Sections 7.2.4 and
                                                              --------------
         7.2.6; or
         -----

                  (c) the  addition of a  Subsidiary  acquired in a  transaction
         permitted under Sections 7.2.4 and 7.2.6.
                         --------------     -----

         "Dollar" and the sign "$" mean lawful money of the United States.
          ------                -

         "Domestic  Office"  means,  relative to any Lender,  the office of such
          ----------------
Lender designated as such below its signature hereto or designated in the Lender
Assignment  Agreement  or such  other  office of a Lender (or any  successor  or
assign of such Lender)  within the United States as may be designated  from time
to time by notice  from such  Lender,  as the case may be, to each other  Person
party hereto.

         "Effective Date" means the date this Credit Agreement becomes effective
          --------------
pursuant to Section 10.8.
            ------------


         "Environmental Laws" means all federal,  state or local laws, statutes,
          ------------------
common law duties, rules,  regulations,  ordinances and codes, together with all
administrative orders, directed duties, requests,  licenses,  authorizations and
permits of, and agreements

- 7 -
<PAGE>

with,  any  Governmental  Authorities,  in each case relating to  environmental,
health, safety and land use matters.

         "ERISA" means the Employee  Retirement Income Security Act of 1974, and
          -----
regulations promulgated thereunder.

         "ERISA   Affiliate"  means  any  trade  or  business  (whether  or  not
          -----------------
incorporated)  under  common  control  with the  Borrower  within the meaning of
Section  414(b) or (c) of the Code (and Sections  414(m) and (o) of the Code for
purposes of provisions relating to Section 412 of the Code).

         "ERISA  Event" means (a) a  Reportable  Event with respect to a Pension
          ------------
Plan;  (b) a withdrawal  by the Borrower or any ERISA  Affiliate  from a Pension
Plan  subject  to  Section  4063 of ERISA  during a plan  year in which it was a
substantial  employer (as defined in Section 4001(a)(2) of ERISA) or a cessation
of operations  which is treated as such a withdrawal  under  Section  4062(e) of
ERISA;  (c) a  complete  or  partial  withdrawal  by the  Borrower  or any ERISA
Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is
in  reorganization;  (d) the  filing of a notice of  intent  to  terminate,  the
treatment of a Plan  amendment as a  termination  under Section 4041 or 4041A of
ERISA,  or the  commencement  of  proceedings by the PBGC to terminate a Pension
Plan or Multiemployer  Plan; (e) an event or condition which might reasonably be
expected to constitute  grounds under Section 4042 of ERISA for the  termination
of,  or the  appointment  of a  trustee  to  administer,  any  Pension  Plan  or
Multiemployer  Plan; or (f) the  imposition  of any liability  under Title IV of
ERISA,  other than PBGC  premiums due but not  delinquent  under Section 4007 of
ERISA, upon the Borrower or any ERISA Affiliate.

          "Eurodollar  Reserve  Percentage"  has the  meaning  specified  in the
           -------------------------------
definition of "Offshore Rate."

         "Eurodollar Loan" means a Loan bearing interest, at all times during an
          ---------------
Interest Period applicable to such Loan, at a fixed rate of interest  determined
by reference to the Offshore Rate.

         "Eurodollar  Office" means,  relative to any Lender, the office of such
          ------------------  
Lender designated as such below its signature hereto or designated in the Lender
Assignment Agreement or such other office of a Lender as designated from time to
time by notice from such Lender to the  Borrower  and the Agent,  whether or not
outside the United States, which shall be making or maintaining Eurodollar Loans
of such Lender hereunder.

                                     - 8 -
<PAGE>
         "Event of Default" is defined in Section 8.1.
          ----------------                -----------

         "Federal  Funds  Rate"  means,  for any day,  the rate set forth in the
          --------------------
weekly   statistical   release   designated  as  H.15(519),   or  any  successor
publication,  published by the Federal  Reserve Bank of New York  (including any
such successor,  "H.15(519)") on the preceding Business Day opposite the caption
"Federal  Funds  (Effective)";  or, if for any  relevant day such rate is not so
published on any such preceding  Business Day, the rate for such day will be the
arithmetic mean as determined by the Agent of the rates for the last transaction
in overnight  Federal funds  arranged prior to 9:00 a.m. (New York City time) on
that day by each of three leading  brokers of Federal funds  transactions in New
York City selected by the Agent.

         "Fiscal Quarter" means any quarter of a Fiscal Year.
          --------------

         "Fiscal Year" means any period of twelve  consecutive  calendar  months
          -----------
ending on December 31;  references to a Fiscal Year with a number  corresponding
to any  calendar  year (e.g.  the "1996  Fiscal  Year") refer to the Fiscal Year
                        ---
ending on the December 31 occurring during such calendar year.

          "F.R.S.  Board" means the Board of  Governors  of the Federal  Reserve
           -------------
System or any successor thereto.

         "GAAP" means  generally  accepted  accounting  principles in the United
          ----
States of America as from time to time in effect.

         "Governmental  Authority" means any nation or government,  any state or
          -----------------------
other  political  subdivision  thereof,  and any  entity  exercising  executive,
legislative,  judicial,  regulatory or administrative functions of or pertaining
to government.

          "HPIC"  means  Health  Providers   Insurance   Company,   an  Illinois
           ----
corporation.


          "Impermissible  Qualification"  means,  relative  to  the  opinion or'
           ----------------------------
certification of any independent public accountant as to any financial statement
of the Borrower, any qualification or exception to such opinion or certification

                  (a)  which is of a "going concern" or similar nature;

                  (b) which  relates  to the  limited  scope of  examination  of
         matters   relevant   to  such   financial   statement   (other  than  a
         qualification  to the  effect  that such  accountant  has 

                                     - 9 -
<PAGE>

          relied on the opinion or certificate of a foreign accountant); or

                  (c) which  relates to the treatment or  classification  of any
         item in such  financial  statement  and which,  as a  condition  to its
         removal,  would  require an adjustment to such item the effect of which
         would  be to  cause  the  Borrower  to be in  default  of  any  of  its
         obligations under Section 7.2.3.
                           -------------

         "Indebtedness"  of any  Person  means,  without  duplication,  (a)  all
          ------------
indebtedness  for borrowed  money;  (b) all  obligations  issued,  undertaken or
assumed as the deferred purchase price of property or services (other than trade
payables entered into in the ordinary course of business on ordinary terms); (c)
all non-contingent  reimbursement or payment  obligations with respect to Surety
Instruments;  (d) all  obligations  evidenced  by notes,  bonds,  debentures  or
similar instruments,  including  obligations so evidenced incurred in connection
with the  acquisition of property,  assets or businesses;  (e) all  indebtedness
created  or  arising  under  any  conditional  sale  or  other  title  retention
agreement,  or incurred as  financing,  in either case with  respect to property
acquired  by the Person  (even  though the rights and  remedies of the seller or
bank under such agreement in the event of default are limited to repossession or
sale of such property);  (f) all obligations with respect to capital leases; (g)
all net  obligations  with  respect  to  Swap  Contracts;  (h) all  indebtedness
referred to in clauses (a) through (g) above secured by (or for which the holder
of such  Indebtedness  has an existing  right,  contingent or  otherwise,  to be
secured  by) any Lien upon or in  property  (including  accounts  and  contracts
rights) owned by such Person,  even though such Person has not assumed or become
liable for the payment of such Indebtedness;  and (i) all Contingent Liabilities
in respect of  indebtedness or obligations of others of the kinds referred to in
clauses (a) through (e) above;

provided,  however,  that payables arising in the ordinary course of business of
the Borrower to any of its  Subsidiaries and of any such Subsidiary to any other
Subsidiary   of  the   Borrower  or  to  the   Borrower   shall  not  be  deemed
"Indebtedness".

For all purposes of this Agreement, the Indebtedness of any Person shall include
the  Indebtedness  of any partnership or joint venture in which such Person is a
general partner or a joint venturer.

         "Indemnified Liabilities" is defined in Section 10.4.
          -----------------------                ------------

                                     - 10 -
<PAGE>
         "Indemnified Parties" is defined in Section 10.4.
          -------------------                ------------

         "Insurance  Code"  means (i) with  respect  to  Insurance  Subsidiaries
          ---------------
domiciled in the State of Missouri or the State of Illinois,  the Insurance Code
of the  State of  Missouri  or the State of  Illinois,  as  applicable,  and any
successor statutes of similar import,  together with the regulations thereunder,
as amended or  otherwise  modified and in effect from time to time and (ii) with
respect to any  Insurance  Subsidiary  not domiciled in the State of Missouri or
the State of Illinois (including any non-U.S. domiciled Insurance Subsidiaries),
the applicable regulatory requirements of the applicable Department,  as amended
or otherwise modified and in effect from time to time. References to sections of
the Insurance Code shall be construed also to refer to successor sections.

         "Insurance Subsidiary" means each of ACIC, HPIC, ACLIC and Unionamerica
          --------------------
and any other Subsidiary of the Borrower  designated as an Insurance  Subsidiary
in Item 2 ("Insurance and Significant Subsidiaries") of the Disclosure Schedule,
   ------
as such  Schedule may from time to time be amended,  modified,  supplemented  or
restated.

         "Interest  Period" means,  relative to any Eurodollar Loans, the period
          ----------------
beginning on (and  including) the date on which such  Eurodollar Loan is made or
continued  as, or converted  into, a Eurodollar  Loan pursuant to Section 2.3 or
                                                                  -----------
2.4 and shall end on (but exclude) the day which numerically corresponds to such
---
date one, two, three or six months or one year thereafter (or, if such month has
no numerically  corresponding  day, on the last Business Day of such month),  in
either  case as the  Borrower  may select in its  relevant  notice  pursuant  to
Section 2.3 or 2.4; provided, however, that
-----------    ---  --------  -------

                  (a) if any  Lender  shall  determine  in good faith that it is
         unable to fund a Eurodollar  Loan in the  interbank  eurodollar  market
         with respect to a six month or one year Interest Period for any reason,
         the  Borrower  shall not be permitted to select such a six month or one
         year Interest Period;

                  (b) the Borrower  shall not be  permitted  to select  Interest
         Periods  to be in effect at any one time which  have  expiration  dates
         occurring on more than five different dates;

                  (c) if such Interest Period would otherwise end on a day which
         is not a  Business  Day,  such  Interest  Period  shall end on the next

                                     - 11 -
<PAGE>
         following  Business Day (unless such next following Business Day is the
         first  Business Day of a calendar  month,  in which case such  Interest
         Period shall end on the Business Day next  preceding  such  numerically
         corresponding day); and

                  (d) no  Interest  Period  may end  later  than the  Commitment
Termination Date.

         "Invested  Assets" means,  as of any date, (i) with respect to any U.S.
          ----------------
domiciled Insurance Subsidiary,  the amount reported on line 9, page 2, column 4
of the Annual Statement of property-casualty Insurance Subsidiaries and line 11,
page 2, column 4 of the Annual  Statement of life Insurance  Subsidiaries or any
amount  determined in a consistent  manner in  accordance  with SAP for any date
other than one as of which an Annual Statement is prepared and (ii) with respect
to any U.K. domiciled  Insurance  Subsidiary,  the amount reported in the Annual
Return to HM Treasury Insurance  Directorate for such Insurance  Subsidiary that
is comparable  to the amount  reported as "Invested  Assets" for U.S.  domiciled
Insurance  Subsidiaries.  Notwithstanding  the  foregoing,  if the format of the
Annual  Statement is changed in future years so that  different  information  is
contained in such line or such line no longer exists,  it is understood that the
foregoing reference is to information  consistent with that reported in the 1996
Annual Statement of the relevant Insurance Subsidiary.

         "Investment" means, relative to any Person,
          ----------

                  (a) any  loan or  advance  made by such  Person  to any  other
         Person (excluding commission, travel and similar advances to directors,
         officers,  employees and independent  contractors  made in the ordinary
         course of business);

                  (b) any Contingent Liability of such Person; and

                  (c) any  ownership or similar  interest held by such Person in
any other Person;

provided,  however,  that (i) trade accounts receivables arising in the ordinary
--------
course of business,  (ii) receivables arising in the ordinary course of business
of  the  Borrower  to  its  Subsidiaries  and of  any  Subsidiary  to any  other
Subsidiary or the Borrower (not including  Indebtedness or equity  investments),
(iii)  quarterly  tax payments due from or advanced by the  Subsidiaries  to the
Borrower under the terms of the tax allocation agreement,  (iv) payments made by
ACIC  to MMI  Agency,  Inc.,  to  temporarily  cover  expenses  incurred  before
commissions  are  earned,  (v)  management  fees  due  from or  advanced  by the
Subsidiaries to the

                                     - 12 -
<PAGE>
Borrower,  (vi) the Borrower's  ownership  interest in any of its  Subsidiaries,
(vii)  Indebtedness of the Borrower to any of its  Subsidiaries and Indebtedness
of any Subsidiary of the Borrower to the Borrower or any other Subsidiary of the
Borrower;  and (viii) any  guarantee  of the  Borrower  relating  to the Capital
Securities shall not be deemed "Investments". The amount of any Investment shall
be the  original  principal  or  capital  amount  thereof  less all  returns  of
principal or equity  thereon (and without  adjustment by reason of the financial
condition of such other  Person) and shall,  if made by the transfer or exchange
of  property  other  than  cash,  be deemed  to have  been  made in an  original
principal or capital amount equal to the fair market value of such property.

         "Investment Grade Securities" means
          ---------------------------

                    (a)  non-equity   securities,   convertible  securities  and
non-perpetual  preferred  securities  rated BBB- or better by S&P, Duff & Phelps
Credit Rating Co. or Fitch Investors Service Inc. or Baa3 or better by Moody's;

                    (b) U.S. Government Securities;

                    (c)  commercial  paper  rated A-2 or better by S&P or P-2 or
better by Moody's;

                    (d) demand  deposit  accounts or money market  accounts that
are maintained in the ordinary  course of business with banks or other financial
institutions that are members of the Federal Deposit Insurance  Corporation (and
any successors thereto);

                    (e)  certificates of deposit issued by (i) commercial  banks
having  capital  and  surplus  in  excess  of  $50,000,000  or (ii)  any bank or
financial  institution;  provided  that the  amount of any such  certificate  of
deposit shall not exceed the then insured  amount per deposit  available to such
bank or financial  institution by the Federal Deposit Insurance Corporation (and
any successors thereto); and

                    (f) eurodollar  deposits  having a maturity of not more than
30 days.

         "IRS"  means  the  Internal  Revenue  Service,   and  any  Governmental
          ---
Authority succeeding to any of its principal functions under the Code.

                                     - 13 -
<PAGE>
         "Lender  Assignment  Agreement"  means a  Lender  Assignment  Agreement
          -----------------------------
substantially in the form of Exhibit C hereto.
                             ---------

         "Lenders" is defined in the preamble.
          -------                    --------

         "Lending Office" means, as to any Lender, the office or offices of such
          --------------
Lender specified as its Domestic Office" or "Offshore  Office",  as the case may
be, or such other  office or offices as such Lender may from time to time notify
the Borrower and the Agent.

         "Licenses" is defined in Section 6.12.
          --------                ------------

         "Lien" means any security interest,  mortgage,  pledge,  hypothecation,
          ----
assignment,  deposit  arrangement,  encumbrance,  lien (statutory or otherwise),
charge  against  or  interest  in  property  to  secure  payment  of a  debt  or
performance of an obligation or other priority or preferential  arrangement with
respect to property of any kind or nature whatsoever.

         "Loan" is defined in Section 2.1.1.
          ----                -------------

         "Loan  Document"  means  this  Agreement,   any  Notes  and  all  other
          --------------
agreements,  certificates  or documents  delivered to the Agent or any Lender in
connection herewith.

         "Material Adverse Effect" means any change, event, action, condition or
          -----------------------
effect  which  individually  or in the  aggregate  (i) impairs  the  validity or
enforceability  of this  Agreement or any Loan  Document,  (ii)  materially  and
adversely affects the consolidated business, operations,  financial prospects or
condition of the Borrower or any of its Subsidiaries or (iii) materially impairs
the ability of the Borrower to perform its obligations  under this Agreement and
the Loan Documents.

         "Moody's" means Moody's Investors Services, Inc.
          -------  

         "Moody's  Rating" means the actual rating level  assigned by Moody's to
          ---------------
the most senior  debt of the  Borrower  without  credit  enhancement;  provided,
                                                                       --------
however,  that if no senior debt of the Borrower  without credit  enhancement is
-------
rated by Moody's (or if the senior debt so rated has been defeased), the Moody's
Rating  shall mean the actual  rating  level  assigned by Moody's to the Capital
Securities.

         "Multiemployer  Plan" means a "multiemployer  plan", within the meaning
          -------------------
of Section  4001(a)(3)  of ERISA,  to which the Borrower or any ERISA  Affiliate
makes, is making, or is obligated to make

                                     - 14 -
<PAGE>
contributions  or, during the preceding three calendar years,  has made, or been
obligated to make, contributions.

          "NAIC" means the National Association of Insurance  Commissioners,  or
           ----
any successor thereto.

         "Net Worth" means the consolidated net worth,  calculated in accordance
          ---------
with  GAAP,  of the  Borrower  and  its  Subsidiaries  but  excluding  aggregate
unrealized  gains or  losses  net of tax as  prescribed  by FAS  115;  provided,
                                                                       --------
however,  that for the  purpose  of  determining  the Debt to  Capital  Ratio in
-------
Section  7.2.3(a),  the net  proceeds  of the  issuance  and sale of the Capital
-----------------
Securities  shall  not be  included  in the  calculation  of  Net  Worth  of the
Borrower.

         "Note" means a promissory  note  executed by the Borrower in favor of a
          ----
Lender pursuant to Section 2.6, substantially in the form of Exhibit D hereto.
                   -----------                               ---------

         "Obligations"  means all  obligations  (monetary or  otherwise)  of the
          -----------
Borrower  arising under or in connection with this Agreement and each other Loan
Document.

         "Offshore Rate (Reserve Adjusted)" means, for any Interest Period, with
          --------------------------------
respect to Eurodollar  Loans,  the rate of interest per annum (rounded upward to
the next 1/16th of 1%) determined by the Agent as follows:

         Offshore Rate =           IBOR
                        ---------------------------------------
                          1.00 - Eurodollar Reserve Percentage

         Where,


                           "Eurodollar Reserve Percentage" means for any day for
                            -----------------------------
                  any Interest Period the maximum reserve percentage  (expressed
                  as a  decimal,  rounded  upward  to the next  1/16th of 1%) in
                  effect on such day (whether or not  applicable  to any Lender)
                  under regulations issued from time to time by the F.R.S. Board
                  for determining the maximum reserve requirement (including any
                  emergency, supplemental or other marginal reserve requirement)
                  with respect to Eurocurrency funding (currently referred to as
                  "Eurocurrency liabilities"); and

                           "IBOR"   means  the  rate  of   interest   per  annum
                            ----
                  determined  by the Agent to be the rate of  interest  at which
                  dollar  deposits in the  approximate  amount of the Eurodollar
                  Loan for such Interest Period would be


                                     - 15 -
<PAGE>
                  offered by BofA's Grand Cayman  Branch,  Grand Cayman B.W.I.
                  (or such other office as may be designated  for such purpose
                  by  the  Agent),  to  major  banks  in the  offshore  dollar
                  interbank  market at their  request at  approximately  10:00
                  a.m.   (Chicago   time)  two  Business  Days  prior  to  the
                  commencement of such Interest Period.

                           The Offshore Rate shall be adjusted  automatically as
                  to all Eurodollar  Loans then  outstanding as of the effective
                  date of any change in the Eurodollar Reserve Percentage.

         "Organic  Document" means,  relative to the Borrower or any Subsidiary,
          -----------------
its certificate of  incorporation,  its by-laws and all shareholder  agreements,
voting  trusts and  similar  arrangements  applicable  to any of its  authorized
shares of capital stock.

         "Other Taxes" means any present or future stamp or documentary taxes or
          -----------
any other excise or property  taxes,  charges or similar levies which arise from
any payment made hereunder or from the execution,  delivery or registration  of,
or otherwise with respect to, this Agreement or any other Loan Documents.

         "Participant" is defined in Section 10.11.2.
          -----------                ---------------

         "Participation" is defined in Section 10.11.2.
          -------------                ---------------

         "PBGC"  means  the  Pension  Benefit  Guaranty   Corporation,   or  any
          ----
Governmental Authority succeeding to any of its principal functions under ERISA.

         "Pension  Plan"  means a pension  plan (as  defined in Section  3(2) of
          -------------
ERISA) subject to Title IV of ERISA which the Borrower sponsors,  maintains,  or
to which it makes, is making, or is obligated to make  contributions,  or in the
case of a multiple  employer plan (as described in Section 4064(a) of ERISA) has
made  contributions  at any time during the immediately  preceding five (5) plan
years.

         "Percentage"  means,  relative to any Lender,  the percentage set forth
          ----------
opposite its signature hereto or set forth in the Lender  Assignment  Agreement,
as  such  percentage  may be  adjusted  from  time to time  pursuant  to  Lender
Assignment  Agreement(s)  executed by such Lender and its Assignee Lender(s) and
delivered pursuant to Section 10.11.
                      -------------

         "Person"  means any natural  person,  corporation,  partnership,  firm,
          ------
association, trust, government, governmental agency or any

                                     - 16 -
<PAGE>
other entity, whether acting in an individual, fiduciary or other capacity.

         "Plan"  means an employee  benefit  plan (as defined in Section 3(3) of
          ----
ERISA) which the Borrower  sponsors or maintains or to which the Borrower makes,
is making, or is obligated to make contributions and includes any Pension Plan.

         "Quarterly  Payment  Date"  means  the  last day of each  March,  June,
          ------------------------
September,  and  December  or, if any such day is not a Business  Day,  the next
succeeding Business Day.

         "Quarterly Statements" is defined in Section 6.5.2(b).
          --------------------                ----------------

         "Rating" means the Moody's Rating or the S&P Rating.
          ------

         "Reference  Rate Loan" means a Loan bearing  interest at a  fluctuating
          --------------------
rate determined by reference to the Alternate Reference Rate.

         "Reportable  Event"  means,  any of the  events  set  forth in  Section
          -----------------
4043(b) of ERISA or the  regulations  thereunder,  other than any such event for
which the 30-day notice  requirement  under ERISA has been waived in regulations
issued by the PBGC.

         "Required  Lenders" means,  at any time,  Lenders then holding at least
          -----------------
61% of the then  aggregate  unpaid  principal  amount  of the  Loans,  or, if no
amounts are outstanding,  Lenders having at least 61% of the aggregate amount of
the Commitments.

         "S&P"  means  Standard & Poor's  Ratings  Services,  a division  of the
          ---
McGraw-Hill Companies, Inc.

         "S&P Rating" means the actual rating level  assigned by S&P to the most
          ----------
senior debt of the Borrower without credit enhancement;  provided, however, that
                                                         --------  -------
if no senior debt of the Borrower without credit enhancement is rated by S&P (or
if the senior debt so rated has been  defeased),  the S&P rating  shall mean the
actual rating level assigned by S&P to the Capital Securities.

         "SAP"  means, as to any U.S. or non-U.S.  domiciled  insurance company,
          ---
the statutory  accounting  practices  prescribed or permitted by the  applicable
Department.

         "Significant  Subsidiary"  means (i) each  Subsidiary  of the  Borrower
          -----------------------
designated as a Significant  Subsidiary  in Item 2 ("Insurance  and  Significant
                                            ------
Subsidiaries")  of the  Disclosure


                                     - 17 -
<PAGE>
Schedule,  as  such  Schedule  may  from  time to  time  be  amended,  modified,
supplemented  or restated,  and (ii) at any time, any Subsidiary of the Borrower
having a net worth or revenues for the most recent Fiscal Quarter at least equal
to 5% of Net Worth or 5% of the  consolidated  revenues of the  Borrower and its
Subsidiaries for the most recent Fiscal Quarter, respectively.

         "Statutory Financial Statements" is defined in Section 6.5.2(a).
          ------------------------------                ----------------

         "Statutory  Liabilities"  means as of any date, (i) with respect to any
          ----------------------
U.S. domiciled Insurance Subsidiary,  the total amount shown on line 21, page 3,
column 1 of the Annual Statement of property-casualty Insurance Subsidiaries and
line  28,  page  3,  column  1  of  the  Annual   Statement  of  life  Insurance
Subsidiaries,  or an amount determined in a consistent manner for any date other
than one as of which an Annual  Statement  is prepared  and (ii) with respect to
any U.K.  domiciled  Insurance  Subsidiary,  the minimum margin  required by the
applicable Governmental Authority.  Notwithstanding the foregoing, if the format
of the Annual Statement is changed in future years so that different information
is contained in such line or such line no longer exists,  it is understood  that
the foregoing  reference is to information  consistent with that reported in the
referenced line in the 1996 Annual Statement of such Insurance Subsidiary.

         "Subsidiary"  means,  with  respect  to any  Person,  any  corporation,
          ----------
association,  partnership,  limited  liability  partnerships,  limited liability
company,  joint venture or other  business  entity of which more than 50% of the
outstanding  capital stock having  ordinary  voting power to elect a majority of
the board of directors of such corporation  (irrespective of whether at the time
capital stock of any other class or classes of such  corporation  shall or might
have voting power upon the occurrence of any contingency),  membership interests
or other equity interests (in the case of Persons other than  corporations),  is
at the time directly or indirectly owned by such Person,  by such Person and one
or more other  Subsidiaries of such Person, or by one or more other Subsidiaries
of such Person.

         "Surety Instruments" means all letters of credit (including standby and
          ------------------
commercial), banker's acceptances, bank guaranties, shipside bonds, surety bonds
and similar instruments.

         "Surplus" means, with respect to ACIC or HPIC as of any date, the total
          -------
amount  shown on line 25,  page 3, column 1 of the Annual  Statement  of ACIC or
HPIC,  as  applicable,  on  an  undiscounted  basis  or an  undiscounted  amount
determined in a 

                                     - 18 -
<PAGE>
consistent manner in accordance with SAP for any date other than one as of which
an Annual Statement is prepared. Notwithstanding the foregoing, if the format of
the Annual Statement is changed in future years so that different information is
contained in such line or such line no longer exists,  it is understood that the
foregoing  reference  is to  information  consistent  with that  reported in the
referenced line in the 1996 Annual Statement of ACIC or HPIC, as applicable.

         "Swap Contract" means any agreement  (including  any  master  agreement
          -------------
and' any agreement,   whether  or  not  in  writing,   relating  to  any  single
transaction) that is an interest rate swap agreement,  basis swap,  forward rate
agreement,  commodity  swap,  commodity  option,  equity or equity index swap or
option, bond option,  interest rate option,  forward foreign exchange agreement,
rate cap, collar or floor  agreement,  currency swap  agreement,  cross-currency
rate swap agreement,  swaption,  currency option or any other, similar agreement
(including any option to enter into any of the foregoing).

         "Taxes"  means any and all present or future  taxes,  levies,  imposts,
          -----
deductions,  charges or withholdings,  and all liabilities with respect thereto,
excluding,  in the case of each  Lender  and the Agent,  such  taxes  (including
income taxes or franchise  taxes) as are imposed on or measured by each Lender's
net income by the jurisdiction (or any political  subdivision thereof) under the
laws of which such  Lender or the  Agent,  as the case may be, is  organized  or
maintains a lending office.

         "Type" means relative to any Loan, the portion  thereof,  if any, being
          ----
maintained as a Reference Rate Loan or a Eurodollar Loan.

         "U.K." means the United Kingdom.
          ----

         "Unfunded  Pension  Liability"  means the  excess  of a Plan's  benefit
          ----------------------------
liabilities  under Section  4001(a)(16) of ERISA, over the current value of that
Plan's assets,  determined in accordance with the  assumptions  used for funding
the Pension  Plan  pursuant to Section 412 of the Code for the  applicable  plan
year.

         "Unionamerica"  means Unionamerica Insurance Company, Limited, a United
          ------------
Kingdom insurance company.

         "United States" or "U.S." means the United States of America, its fifty
          -------------      ----
States and the District of Columbia.

                                     - 19 -
<PAGE>
         "United States  Person" means any citizen,  national or resident of the
          ---------------------
United States,  any corporation or other entity created or organized in or under
the laws of the United States or any political subdivision thereof or any estate
or trust,  in each case that is not  subject  to  withholding  of United  States
federal  income taxes or other taxes on payment of  interest,  principal or fees
hereunder.

         "U.S.  Government  Securities"  means  obligations of the United States
          ----------------------------
Government,  any  agency  thereof  or  any  United  States  Government-sponsored
entities.

         SECTION  I.2 Use of  Defined  Terms.  Unless  otherwise  defined or the
                      ----------------------  
context  otherwise  requires,  terms for which  meanings  are  provided  in this
Agreement  shall have such meanings when used in the Disclosure  Schedule and in
each Borrowing Request,  Continuation/Conversion  Notice, Loan Document,  notice
and other  communication  delivered  from time to time in  connection  with this
Agreement or any other Loan Document.

         SECTION I.3 Cross-References. Unless otherwise specified, references in
                     ----------------
this  Agreement  and in each other Loan  Document  to any Article or Section are
references  to such  Article  or Section  of this  Agreement  or such other Loan
Document, as the case may be, and, unless otherwise specified, references in any
Article,  Section or definition  to any clause are  references to such clause of
such Article, Section or definition.

         SECTION I.4 Accounting and Financial  Determinations.  Unless otherwise
                     ----------------------------------------
specified,  all accounting terms used herein or in any other Loan Document shall
be interpreted,  all accounting  determinations  and  computations  hereunder or
thereunder  (including  under  Section  7.2.3) shall be made,  and all financial
                               --------------
statements required to be delivered hereunder or thereunder shall be prepared in
accordance with GAAP.



                                   ARTICLE II

                      COMMITMENTS and BORROWING PROCEDURES

         SECTION II.1 Commitments. On the terms and subject to the conditions of
                      -----------
this Agreement (including Article V), each Lender severally agrees to make Loans
                          ---------
pursuant to the Commitments described in this Section 2.1.
                                              -----------

         SECTION  II.1.1  Commitment  of Each  Lender.  From time to time on any
                          ---------------------------
Business Day occurring  prior to the Commitment  Termination  

                                     - 20 -
<PAGE>
Date, each Lender will make Loans (relative to such Lender,  its "Loans") to the
                                                                  -----
Borrower  equal to such  Lender's  Percentage  of the  aggregate  amount  of the
Borrowing  of  Loans  requested  by the  Borrower  to be made on such  day.  The
Commitment of each Lender  described in this Section 2.1.1 is herein referred to
                                             -------------
as its  "Commitment."  On the terms and subject to the  conditions  hereof,  the
         ----------
Borrower may from time to time borrow, prepay and reborrow Loans.

         SECTION  II.1.2  Lenders Not  Permitted  or Required To Make Loans.  No
                          -------------------------------------------------
Lender shall be  permitted or required to make any Loan if, after giving  effect
thereto, the aggregate outstanding principal amount of all Loans

                  (a)      of all Lenders would exceed the Commitment Amount, 
         or

                  (b) of such Lender would exceed such  Lender's  Percentage  of
         the Commitment Amount.

         SECTION II.2 Reduction of Commitment  Amount.  The Commitment Amount is
                      -------------------------------  
subject to reduction from time to time pursuant to this Section 2.2.
                                                        -----------

         SECTION  II.2.1  Optional.  The Borrower  may, from time to time on any
                          --------
Business Day subject to the  conditions  set forth in Section  3.1,  voluntarily
                                                      ------------
reduce the Commitment Amount; provided,  however, that all such reductions shall
                              --------   -------
require  at  least  three  Business  Days'  prior  notice  to the  Agent  and be
permanent,  and any partial  reduction  of the  Commitment  Amount shall be in a
minimum amount of $1,000,000 and in an integral multiple of $500,000.

         SECTION II.3  Borrowing  Procedure.  By delivering a written  Borrowing
                       --------------------
Request to the Agent on or before 11:00 a.m.,  Chicago  time, on a Business Day,
the  Borrower  may from time to time  irrevocably  request,  (i) with respect to
Reference  Rate Loans,  on not less than one nor more than three  Business Days'
notice and (ii) with  respect to  Eurodollar  Loans,  on not less than three nor
more than five  Business  Days'  notice,  that a Borrowing  be made in a minimum
amount of $1,000,000 and an integral  multiple of $500,000,  or, if less, in the
unused amount of the Commitments.  On the terms and subject to the conditions of
this Agreement, each Borrowing shall be comprised of the type of Loans, shall be
made on the Business Day and, with respect to Eurodollar Loans, shall be for the
Interest Period,  specified in such Borrowing  Request.  On or before 12:00 noon
(Chicago  time) on such  Business Day each Lender  shall  deposit with the Agent
same day funds in an 

                                     - 21 -
<PAGE>
amount  equal to such  Lender's  Percentage  of the  requested  Borrowing.  Such
deposit  will be made to an account  which the Agent shall  specify from time to
time by  notice to the  Lenders.  To the  extent  funds  are  received  from the
Lenders,  the Agent  shall make such funds  available  to the  Borrower  by wire
transfer to the  accounts  the Borrower  shall have  specified in its  Borrowing
Request.  No Lender's obligation to make any Loan shall be affected by any other
Lender's failure to make any Loan.

         SECTION II.4  Continuation  and Conversion  Elections.  By delivering a
                       ---------------------------------------
Continuation/Conversion  Notice to the Agent, the Borrower may from time to time
irrevocably  elect that all, or any portion in an  aggregate  minimum  amount of
$1,000,000 and an integral multiple of $500,000, of any Loans be, in the case of
Reference  Rate  Loans,  converted  into  Eurodollar  Loans  or,  in the case of
Eurodollar  Loans,  be  converted  into  Reference  Rate Loans or  continued  as
Eurodollar  Loans;   provided,   however,  that  (i)  each  such  conversion  or
                     --------    -------
continuation  shall be pro rata among the  applicable  outstanding  Loans of all
Lenders,  and (ii) no portion of the outstanding  principal  amount of any Loans
may be continued as, or be converted into, Eurodollar Loans when any Default has
occurred  and is  continuing.  Such  Continuation/  Conversion  Notice  shall be
delivered  on or before  11:00 a.m.,  Chicago  time,  on a Business Day (i) with
respect to Loans being  converted into or continued as Reference Rate Loans,  on
not less  than one nor more  than  three  Business  Days'  notice  and (ii) with
respect to Loans being  converted into or continued as Eurodollar  Loans, on not
less than three nor more than five  Business  Days'  notice  (in the  absence of
delivery of a Continuation/Conversion Notice with respect to any Eurodollar Loan
at least two  Business  Days  before the last day of the then  current  Interest
Period with  respect  thereto,  such  Eurodollar  Loan shall,  on such last day,
automatically convert to a Reference Rate Loan).

         SECTION  II.5  Funding.  Each Lender may, if it so elects,  fulfill its
                        -------
obligation to make,  continue or convert  Eurodollar  Loans hereunder by causing
one of its foreign branches or Affiliates (or an international  banking facility
created by such  Lender) to make or maintain  such  Eurodollar  Loan;  provided,
                                                                       --------
however, that such Eurodollar Loan shall nonetheless be deemed to have been made
-------
and to be held by such Lender,  and the obligation of the Borrower to repay such
Eurodollar  Loan shall  nevertheless  be to such  Lender for the account of such
foreign branch,  Affiliate or international banking facility.  In addition,  the
Borrower hereby consents and agrees that, for purposes of any  determination  to
be made for purposes of Sections 4.1, 4.2, 4.3 or 4.4, it shall be  conclusively
                        ------------  ---  ---    ---
assumed  that each Lender  elected 

                                     - 22 -
<PAGE>
to fund all  Eurodollar  Loans by purchasing  Dollar  deposits in its Eurodollar
Office's interbank eurodollar market.

         SECTION II.6 Loan Accounts.  (a) The Loans made by each Lender shall be
                      -------------  
evidenced by one or more loan  accounts or records  maintained by such Lender in
the ordinary course of business.  The loan accounts or records maintained by the
Agent and each Lender shall be conclusive absent manifest error of the amount of
the Loans made by the Lenders to the  Borrower  and the  interest  and  payments
thereon.  Any failure so to record or any error in doing so shall not,  however,
limit or otherwise  affect the  obligation of the Borrower  hereunder to pay any
amount owing with respect to the Loans.

         (b) Upon the  request of any Lender made  through the Agent,  the Loans
made by such  Lender  may be  evidenced  by one or more  Notes,  instead of loan
accounts. Each such Lender shall endorse on the schedules annexed to its Note(s)
the date,  amount  and  maturity  of each Loan made by it and the amount of each
payment of principal made by the Borrower with respect thereto. Each such Lender
is  irrevocably  authorized  by the  Borrower  to endorse  its  Note(s) and each
Lender's record shall be conclusive  absent manifest error;  provided,  however,
                                                             --------   -------
that the failure of a Lender to make, or an error in making,  a notation thereon
with respect to any Loan shall not limit or otherwise  affect the obligations of
the Borrower hereunder or under any such Note to such Lender.


                                   ARTICLE III

                   REPAYMENTS, PREPAYMENTS, INTEREST AND FEES

         SECTION III.1 Repayments and  Prepayments.  The Borrower shall repay in
                       ---------------------------
full the unpaid  principal  amount of each Loan upon the Commitment  Termination
Date therefor. Prior thereto, the Borrower

                  (a)  may,  from  time  to  time on any  Business  Day,  make a
         voluntary prepayment, in whole or in part, of the outstanding principal
         amount of any Loans; provided, however, that
                              --------  -------

                           (1) any such prepayment  shall be made pro rata among
                  Loans of the same type and,  if  applicable,  having  the same
                  Interest Period of all Lenders;

                           (2) all such voluntary  prepayments  shall require at
                  least three but no more than five Business 


                                     - 23 -
<PAGE>
                  Days' prior written notice to the Agent and shall specify type
                  of Loan being prepaid; and

                           (3) all such voluntary  partial  prepayments shall be
                  in an aggregate  minimum  amount of $1,000,000 and an integral
                  multiple of $500,000;

         provided  further,  that  any  prepayment  of Loans  may be  reborrowed
         --------  -------
         subject to the terms of this Agreement; and

                  (b) shall,  on each date when any reduction in the  Commitment
         Amount shall become effective,  including pursuant to Section 2.2, make
                                                               -----------
         a mandatory prepayment of all Loans equal to the excess, if any, of the
         aggregate,   outstanding   principal  amount  of  all  Loans  over  the
         Commitment Amount as so reduced;

                  (c) shall, immediately upon any acceleration of the Commitment
         Termination  Date of any Loans  pursuant to Section 8.2 or Section 8.3,
                                                     -----------    -----------
         repay all Loans, unless, pursuant to Section 8.3, only a portion of all
                                              -----------
         Loans is so accelerated.

Each  prepayment  of any Loans made  pursuant to this  Section  shall be without
premium or  penalty,  except as may be required  by Section  4.4.  No  voluntary
                                                    ------------
prepayment  of principal of any Loans shall cause a reduction in the  Commitment
Amount.

         SECTION  III.2  Interest   Provisions.   Interest  on  the  outstanding
                         ---------------------
principal  amount of Loans shall accrue and be payable in  accordance  with this
Section 3.2.

         SECTION III.2.1 Rates. Pursuant to an appropriately delivered Borrowing
                         -----
Request or  Continuation/Conversion  Notice,  the  Borrower may elect that Loans
comprising a Borrowing accrue interest at a rate per annum:

                  (a)  on  that  portion  maintained  from  time  to  time  as a
         Reference Rate Loan, equal to the Alternate Reference Rate from time to
         time in effect; and

                  (b) on that portion  maintained as a Eurodollar  Loan,  during
         each  Interest  Period  applicable  thereto,  equal  to the  sum of the
         Offshore Rate for such Interest Period plus the Applicable Margin.

         SECTION  III.2.2  Post-Maturity  Rates.  After  the date any  principal
                           --------------------               
amount of any Loan is due and  payable  (whether on the  Commitment  Termination
Date, upon acceleration or otherwise), or 




                                    - 24 - 1
<PAGE>
after any other  monetary  Obligation of the Borrower  shall have become due and
payable,  the  Borrower  shall  pay,  but only to the extent  permitted  by law,
interest (after as well as before  judgment) on such amounts at a rate per annum
equal to the Alternate Reference Rate plus a margin of 2%.

         SECTION III.2.3 Payment Dates.  Interest  accrued on each Loan shall be
                         -------------
payable, without duplication:

                  (a) on the Commitment Termination Date therefor;

                  (b) with respect to Reference  Rate Loans,  on each  Quarterly
         Payment  Date  occurring  after  the  date  of  the  initial  Borrowing
         hereunder;

                  (c) with  respect to  Eurodollar  Loans,  the last day of each
         applicable  Interest  Period (and, if such Interest Period shall exceed
         three months,  at three month intervals) and on the date of any payment
         or  prepayment,  in whole or in part, of principal  outstanding on such
         Loan; and

                  (d) on that  portion of any Loans the  Commitment  Termination
         Date of which is  accelerated  pursuant to Section 8.2 or Section  8.3,
                                                    -----------    ------------
         immediately upon such acceleration.

Interest  accrued  on Loans or other  monetary  Obligations  arising  under this
Agreement  or any other  Loan  Document  after  the date such  amount is due and
payable  (whether on the  Commitment  Termination  Date,  upon  acceleration  or
otherwise) shall be payable upon demand.

         SECTION  III.3 Fees.  The Borrower  agrees to pay the fees set forth in
this Section 3.3. All such fees shall be non-refundable.
     -----------

         SECTION III.3.1  Facility Fees. The Borrower shall pay to the Agent for
                          -------------
the  account of each  Lender a facility  fee (the  "Facility  Fee") on the daily
                                                    -------------
amount of such Lender's  Commitment  (whether or not used),  computed on a daily
basis,  which Facility Fee shall be determined on the basis of the higher of the
S&P Rating and the Moody's Rating as follows:


                                     - 25 -
<PAGE>

|------------------------------------------------------------------------------|
|              If the higher of the              |   Then the Facility Fee     |
|               S&P Rating and the               |   for such day shall be     |
|                Moody's Rating is:              |  calculated on the basis    |
|------------------------|-----------------------|  of a percentage rate per   |
|     S&P Rating         |    Moody's Rating     |       annum equal to:       |
|------------------------|-----------------------|-----------------------------|
| A or higher            | A2 or higher          |          .07%               |
|------------------------|-----------------------|-----------------------------|
| A-                     | A3                    |          .08%               |
|------------------------|-----------------------|-----------------------------|
| BBB+                   | Baa1                  |          .095%              |
|------------------------|-----------------------|-----------------------------|
| BBB                    | Baa2                  |          .11%               |
|------------------------|-----------------------|-----------------------------|
| BBB- or lower          | Baa3 or lower         |          .125%              |
|------------------------|-----------------------|-----------------------------|

         Any change in the  percentage  rate per annum on the basis of which the
Facility  Fee is  calculated,  resulting  from a change in either the S&P Rating
and/or the Moody's  Rating,  shall be effective for purposes of calculating  the
Facility Fee as of the day immediately following such change; provided, further,
                                                              --------  -------
that for  purposes of  determining  the higher of the S&P Rating and the Moody's
Rating,  the A, A-, BBB+, BBB and BBB- rating levels of S&P shall  correspond to
and be deemed the  equivalent of the A2, A3, Baa1,  Baa2 and Baa3 rating levels,
respectively,  of  Moody's.  If only one of a Moody's  Rating  and an S&P Rating
exists at any time, then the percentage rate per annum on the basis of which the
Facility Fee is  calculated  during such time shall be  determined  as set forth
above  based on such  existing  rating.  If at any time there  exists  neither a
Moody's Rating nor an S&P Rating,  the percentage rate per annum on the basis of
which the Facility Fee is calculated during such time shall be .125%.

         Such Facility Fee shall accrue from the Closing Date to the  Commitment
Termination  Date and shall be due and payable on each  Quarterly  Payment  Date
occurring  after  the  date of the  initial  Borrowing  hereunder,  through  the
Commitment Termination Date, with the final payment to be made on the Commitment
Termination Date; provided that, in connection with any reduction or termination
                  --------
of  Commitments  under Section 2.2, the accrued  Facility Fee calculated for the
                       -----------
period  ending on such date shall also be paid on the date of such  reduction or
termination,  with the following quarterly payment being calculated on the basis
of the period from such reduction or termination date to such 

                                     - 26 -
<PAGE>
quarterly  payment date.  The Facility Fees  provided in this  subsection  shall
accrue at all times after the  above-mentioned  commencement date,  including at
any time during which one or more conditions in Article V are not met.
                                                ---------

         SECTION  III.3.2 Other Fees. The Borrower shall pay an arrangement  fee
                          ----------
to the Arranger for the Arranger's  own account,  and shall pay an agency fee to
the Agent for the Agent's own  account,  as  referenced  in the term sheet dated
January 16, 1998 or as shall be agreed to, in writing, by the Borrower from time
to time.


                                   ARTICLE IV

                   CERTAIN OFFSHORE RATE AND OTHER PROVISIONS

         SECTION IV.1 Fixed Rate Lending Unlawful. If any Lender shall determine
                      ---------------------------
in good faith (which  determination  shall,  upon notice thereof to the Borrower
and  the  Lenders,   be  conclusive  and  binding  on  the  Borrower)  that  the
introduction  of or any change in or in the  interpretation  of any law makes it
unlawful, or any central bank or other Governmental Authority asserts that it is
unlawful,  for such  Lender to make,  continue  or  maintain  any Loan as, or to
convert any Loan into,  a Eurodollar  Loan,  the  obligations  of all Lenders to
make,   continue,   maintain  or  convert  any  such  Loans  shall,   upon  such
determination,  forthwith be suspended  until such Lender shall notify the Agent
that  the  circumstances  causing  such  suspension  no  longer  exist,  and all
Eurodollar  Loans shall  automatically  convert into Reference Rate Loans at the
end of the then current  Interest  Periods with  respect  thereto or sooner,  if
required by such law or assertion.

         SECTION IV.2 Deposits  Unavailable.  If the Agent shall have determined
                      ---------------------  
in good faith that by reason of circumstances  affecting BofA's relevant market,
adequate  means do not exist  for  ascertaining  the  interest  rate  applicable
hereunder to Eurodollar Loans,  then, upon notice from the Agent to the Borrower
and the Lenders,  the  obligations  of all Lenders under Section 2.3 and Section
                                                         -----------     -------
2.4 to make or continue  any Loans as, or to convert any Loans into,  Eurodollar
---
Loans shall forthwith be suspended until the Agent shall notify the Borrower and
the Lenders that the circumstances causing such suspension no longer exist.

         SECTION IV.3 Increased  Eurodollar Loan Costs, etc. The Borrower agrees
                      -------------------------------------  
to reimburse  each Lender for any increase in the cost to such Lender of, or any
reduction  in the amount of any sum  receivable  by such  Lender in respect  of,
making,  continuing or 

                                     - 27 -
<PAGE>
maintaining  (or of its obligation to make,  continue or maintain) any Loans as,
or of converting  (or of its  obligation to convert) any Loans into,  Eurodollar
Loans; it being  understood that the Borrower shall not be required to reimburse
any Lender for any costs of  maintaining  reserves  that have been  incorporated
into the calculation of the Offshore Rate. Such Lender shall promptly notify the
Agent and the  Borrower in writing of the  occurrence  of any such  event,  such
notice to state, in reasonable  detail,  the reasons therefor and the additional
amount  required  fully to  compensate  such Lender for such  increased  cost or
reduced   amount;   provided,   that  such  Lender  shall  not  be  entitled  to
                    --------
reimbursement  for any period more than thirty days prior to such notice  (other
than a notice of a change in law or regulation  having a retroactive  impact, in
which case such  Lender  shall be entitled  to  reimbursement  only if notice is
given  within  thirty  days  after  the  adoption  of such  law or  regulation);
provided,  further,  that if such  Lender  shall make a claim for any  increased
--------   -------      
costs under this  Section 4.3 and  thereafter  such costs  shall  decrease,  the
                  -----------
Borrower  shall be entitled to the benefit of any such  decrease in costs.  Such
additional  amounts  shall be payable by the  Borrower  directly  to such Lender
within five days of its receipt of such notice,  and such notice  shall,  in the
absence of manifest error, be conclusive and binding on the Borrower.

         SECTION  IV.4 Funding  Losses.  In the event any Lender shall incur any
                       ---------------
loss or  expense  (including  any loss or  expense  incurred  by  reason  of the
liquidation or  reemployment  of deposits or other funds acquired by such Lender
to make,  continue or maintain any portion of the  principal  amount of any Loan
as, or to convert  any  portion  of the  principal  amount of any Loan  into,  a
Eurodollar Loan) as a result of

                  (a) any conversion or repayment or prepayment of the principal
         amount of any Eurodollar  Loans on a date other than the scheduled last
         day of the Interest  Period  applicable  thereto,  whether  pursuant to
         Section 3.1 or otherwise;
         -----------

                  (b) any Loans not being made as Eurodollar Loans in accordance
         with the Borrowing Request therefor; or

                  (c) any Loans  not being  continued  as,  or  converted  into,
         Eurodollar Loans in accordance with the Continuation/ Conversion Notice
         therefor,

then, upon the written notice of such Lender to the Borrower (with a copy to the
Agent),  the  Borrower  shall,  within  five days of its  receipt  thereof,  pay
directly to such Lender such amount



                                     - 29 -
<PAGE>
as will (in the reasonable  determination of such Lender)  reimburse such Lender
for such loss or expense.  Such written notice (which shall include calculations
in reasonable detail) shall, in the absence of manifest error, be conclusive and
binding on the Borrower.

         SECTION  IV.5  Increased  Capital  Costs.  If  any  change  in,  or the
                        -------------------------
introduction,  adoption,  effectiveness,  interpretation,   reinterpretation  or
phase-in of, any law or regulation  (other than any law or regulation  presently
in effect  which  provides for a phase-in of  increased  capital  requirements),
directive,  guideline,  decision or request  (whether or not having the force of
law) of any court,  central  bank,  regulator  or other  Governmental  Authority
affects  the amount of capital  required or  expected  to be  maintained  by any
Lender or any Person controlling such Lender, and such Lender determines (in its
sole and absolute discretion) that the rate of return on its or such controlling
Person's  capital as a consequence  of its  Commitment or the Loans made by such
Lender is reduced to a level  below that which such  Lender or such  controlling
Person could have  achieved  but for the  occurrence  of any such  circumstance,
then,  in any such case  upon  notice  from  time to time by such  Lender to the
Borrower,  the Borrower shall immediately pay directly to such Lender additional
amounts sufficient to compensate such Lender or such controlling Person for such
reduction  in  rate  of  return.  A  statement  of such  Lender  as to any  such
additional  amount or amounts  (including  calculations  thereof  in  reasonable
detail) shall,  in the absence of manifest  error,  be conclusive and binding on
the Borrower;  it being  understood  that the Borrower  shall not be required to
reimburse  any Lender for any costs  reimbursed  by the  Borrower to such Lender
pursuant to Section 4.3. In  determining  such  amount,  such Lender may use any
            -----------
method  of  averaging  and  attribution  that  it  (in  its  sole  and  absolute
discretion) shall deem applicable.

         SECTION  IV.6 Taxes.  (a) Any and all  payments by the Borrower to each
                       -----
Lender or the Agent under this  Agreement and any other Loan  Document  shall be
made free and clear of, and without  deduction or withholding  for any Taxes. In
addition, the Borrower shall pay all Other Taxes.

         (b) The Borrower  agrees to indemnify and hold harmless each Lender and
the Agent for the full  amount of Taxes or Other Taxes  (including  any Taxes or
Other Taxes imposed by any  jurisdiction  on amounts payable under this Section)
paid  by the  Lender  or the  Agent  and  any  liability  (including  penalties,
interest,  additions  to tax and  expenses)  arising  therefrom  or with respect
thereto,  whether or not such Taxes or Other  Taxes  were  correctly  or legally
asserted.  Payment under this indemnification shall be



                                     - 29 -
<PAGE>
made within 30 days after the date the Lender or the Agent makes written  demand
therefor.  Upon  receipt  of notice  by any  Lender or the Agent of any Taxes or
Other Taxes for which indemnification would be available under this Section 4.6,
                                                                            --- 
such Lender or the Agent shall notify the Borrower so that the Borrower may have
the opportunity to cooperate with such Lender or the Agent to contest such Taxes
or Other Taxes.

         (c) If the Lender  shall be required  by law to deduct or withhold  any
Taxes or Other  Taxes  from or in respect of any sum  payable  hereunder  to any
Lender or the Agent, then:

                  (i) the sum payable  shall be  increased  as necessary so that
         after  making  all  required  deductions  and  withholdings  (including
         deductions and withholdings applicable to additional sums payable under
         this Section) such Lender or the Agent, as the case may be, receives an
         amount equal to the sum it would have  received had no such  deductions
         or withholdings been made;

                  (ii) the Borrower shall make such deductions and withholdings;

                  (iii) the  Borrower  shall  pay the full  amount  deducted  or
         withheld  to the  relevant  taxing  authority  or  other  authority  in
         accordance with applicable law; and

                  (iv) the  Borrower  shall also pay to each Lender or the Agent
         for the  account of such  Lender,  at the time  interest  is paid,  all
         additional  amounts which the respective  Lender specifies as necessary
         to preserve the after-tax  yield the Lender would have received if such
         Taxes or Other Taxes had not been imposed.

         (d) Within 30 days after the date of any  payment  by the  Borrower  of
Taxes or Other  Taxes,  the Borrower  shall  furnish the Agent the original or a
certified copy of a receipt  evidencing  payment  thereof,  or other evidence of
payment satisfactory to the Agent.

         (e) If the Borrower is required to pay additional amounts to any Lender
or the Agent pursuant to subsection (c) of this Section,  then such Lender shall
use reasonable  efforts  (consistent with legal and regulatory  restrictions) to
change  the  jurisdiction  of its  Lending  Office so as to  eliminate  any such
additional  payment by the Lender which may thereafter accrue, if such change in
the judgment of such Lender is not otherwise disadvantageous to such Lender.


                                     - 30 -
<PAGE>
         SECTION IV.7 Payments,  Computations,  etc. Unless otherwise  expressly
                      -----------------------------
provided  herein or  therein,  all  payments  by the  Borrower  pursuant to this
Agreement or any other Loan Document  shall be made by the Borrower to the Agent
for the pro rata account of the Lenders  entitled to receive such  payment.  All
such payments  required to be made to the Agent shall be made,  without  setoff,
deduction or counterclaim,  not later than 11:00 a.m., Chicago time, on the date
due, in same day or immediately  available  funds,  to such account as the Agent
shall  specify from time to time by notice to the  Borrower.  Funds  received on
said  Business Day but after such time shall be deemed to have been  received by
the Agent on the next succeeding Business Day. The Agent shall promptly remit in
same day funds to each Lender its share,  if any, of such  payments  received by
the Agent  for the  account  of such  Lender.  All  interest  and fees  shall be
computed on the basis of the actual number of days  (including the first day but
excluding the last day)  occurring  during the period for which such interest or
fee is payable  over a year  comprised  of 360 days.  Whenever any payment to be
made shall  otherwise be due on a day which is not a Business  Day, such payment
shall (except as otherwise  required by clause (c) of the definition of the term
                                        ----------
"Interest  Period"  with  respect  to  Eurodollar  Loans)  be made  on the  next
 ----------------
succeeding  Business  Day and  such  extension  of time  shall  be  included  in
computing interest and fees, if any, in connection with such payment.

         SECTION  IV.8  Sharing  of  Payments.  If any Lender  shall  obtain any
                        ---------------------
payment or other recovery  (whether  voluntary,  involuntary,  by application of
setoff or otherwise) on account of any Loan (other than pursuant to the terms of
Sections  4.3, 4.4 4.5 and 4.6) in excess of its pro rata share of payments then
-------------  --- ---     ---                   --- ----
or therewith obtained by all Lenders,  such Lender shall purchase from the other
Lenders such participations in Loans made by them as shall be necessary to cause
such  purchasing  Lender to share the excess payment or other  recovery  ratably
with each of them; provided,  however,  that if all or any portion of the excess
                   --------   -------
payment or other recovery is thereafter  recovered from such purchasing  Lender,
the purchase  shall be rescinded and each Lender which has sold a  participation
to the purchasing Lender shall repay to the purchasing Lender the purchase price
to the ratable  extent of such  recovery  together  with an amount equal to such
selling Lender's ratable share (according to the proportion of

                  (a) the amount of such selling Lender's required  repayment to
         the purchasing Lender

to
--

                                     - 31 -
<PAGE>
                  (b) the total amount so recovered from the purchasing Lender)

of any  interest  or other  amount paid or payable by the  purchasing  Lender in
respect of the total amount so recovered. The Borrower agrees that any Lender so
purchasing a participation  from another Lender pursuant to this Section may, to
the  fullest  extent  permitted  by law,  exercise  all its  rights  of  payment
(including  pursuant to Section 4.9) with respect to such participation as fully
                        -----------
as if such Lender were the direct creditor of the Borrower in the amount of such
participation.  If under any applicable bankruptcy,  insolvency or other similar
law,  any  Lender  receives  a secured  claim in lieu of a setoff to which  this
Section  applies,  such Lender shall,  to the extent  practicable,  exercise its
rights in respect of such secured claim in a manner  consistent  with the rights
of the  Lenders  entitled  under this  Section to share in the  benefits  of any
recovery on such secured claim.

         SECTION IV.9 Setoff.  Each Lender  shall,  upon the  occurrence  of any
                      ------
Default  described  in clauses (a) through (d) of Section  8.1.9 with respect to
                       -----------         ---    --------------
the Borrower or any  Subsidiary  or, with the consent of the  Required  Lenders,
upon the occurrence of any other Event of Default, have the right to appropriate
and apply to the  payment of the  Obligations  owing to it  (whether or not then
due), and (as security for such  Obligations) the Borrower hereby grants to each
Lender  a  continuing  security  interest  in,  any and all  balances,  credits,
deposits,  accounts or moneys of the Borrower then or thereafter maintained with
such Lender;  provided,  however,  that any such  appropriation  and application
              --------   -------
shall be subject to the  provisions of Section 4.8. Each Lender agrees  promptly
                                       -----------
to notify the Borrower and the Agent after any such setoff and application  made
by such Lender;  provided,  however,  that the failure to give such notice shall
                 --------   -------
not affect the  validity  of such  setoff  and  application.  The rights of each
Lender  under  this  Section  are in  addition  to  other  rights  and  remedies
(including  other rights of setoff under applicable law or otherwise) which such
Lender may have.

         SECTION IV.10 Use of Proceeds. The Borrower shall apply the proceeds of
                       ---------------
each Borrowing for general  corporate  purposes and working capital  purposes of
the Borrower and its  Subsidiaries;  after applying the proceeds of any proposed
Borrowing,  not more  than 25% of the  value (as  determined  by any  reasonable
method) of the  consolidated  total  assets of the  Borrower is  represented  by
"margin stock", as defined in F.R.S. Board Regulation U.

                                     - 32 -
<PAGE>

                                    ARTICLE V

                             CONDITIONS TO BORROWING

         SECTION V.1 Initial  Borrowing.  The effectiveness of the amendment and
                     ------------------
restatement  hereof  and the  obligations  of the  Lenders  to fund the  initial
Borrowing  shall be subject to the prior or concurrent  satisfaction  of each of
the conditions precedent set forth in this Section 5.1.
                                           -----------

         SECTION V.1.1 Resolutions,  etc. The Agent shall have received from the
                       -----------
Borrower a certificate substantially in the form of Exhibit F, dated the date of
                                                    ---------
the initial Borrowing, of its Secretary or Assistant Secretary as to

                  (a)  resolutions  of its Board of Directors  or its  Executive
         Committee  then in full force and  effect  authorizing  the  execution,
         delivery and performance of this Agreement and each other Loan Document
         to be executed by it; and

                  (b) the  incumbency  and  signatures  of those of its officers
         authorized  to act with respect to this  Agreement  and each other Loan
         Document executed by it,

upon which  certificate,  Agent and each Lender may  conclusively  rely until it
shall  have  received  a  further  certificate  of the  Secretary  or  Assistant
Secretary of the Borrower canceling or amending such prior certificate.

         SECTION  V.1.2  Organic  Documents.  The Agent shall have  received the
                         ------------------
articles or  certificate of  incorporation  and the bylaws of the Borrower as in
effect on the Effective Date,  certified by the Secretary or Assistant Secretary
of the Borrower as of the Closing Date.

         SECTION  V.1.3  Opinion of Counsel.  The Agent  shall have  received an
                         ------------------
opinion,  dated the date of the initial Borrowing and addressed to the Agent and
all  Lenders,  from  Wayne  A.  Sinclair,  General  Counsel  for  the  Borrower,
substantially in the form of Exhibit E hereto.
                             ---------

         SECTION  V.1.4  Closing  Fees,  Expenses,  etc.  The Agent  shall  have
                         ------------------------------
received for its own account, or for the account of each Lender, as the case may
be, all fees,  costs and expenses  due and payable  pursuant to Sections 3.3 and
                                                                ------------
10.3, if then invoiced.
----

                                     - 33 -
<PAGE>
         SECTION V.1.5 Other Documents. The Agent shall have received such other
                       --------------- 
approvals,  opinions,  documents or materials as the Agent, counsel to the Agent
or any Lender may reasonably request.

         SECTION V.2 All  Borrowings.  The obligation of each Lender to fund any
                     ---------------
Loan on the occasion of any Borrowing (including the initial Borrowing) shall be
subject to the  satisfaction  of each of the  conditions  precedent set forth in
this Section 5.2.
     -----------

         SECTION V.2.1 Compliance with Warranties,  No Default, etc. Both before
                       --------------------------------------------
and after  giving  effect to any  Borrowing  (but,  if any Default of the nature
referred  to in Section  8.1.5  shall have  occurred  with  respect to any other
                --------------
Indebtedness,  without giving effect to the application, directly or indirectly,
of the proceeds thereof) the following statements shall be true and correct.

                  (a) the  representations  and warranties set forth in, Article
                                                                         -------
         VI (excluding,  however, those contained in Section 6.7), shall be true
         --                                          -----------
         and  correct  with the same  effect as if then made  (unless  stated to
         relate solely to an earlier  date,  in which case such  representations
         and warranties shall be true and correct as of such earlier date);

                  (b) except as  disclosed  by the Borrower to the Agent and the
         Lenders pursuant to Section 6.7,
                             -----------

                           (1) no labor controversy,  litigation, arbitration or
                  governmental  investigation  or proceeding  (other than such a
                  controversy,   litigation,   arbitration,   investigation   or
                  proceeding in the ordinary course of business of the Insurance
                  Subsidiaries)  shall be pending  or, to the  knowledge  of the
                  Borrower,  threatened  against  the  Borrower  or  any  of its
                  Subsidiaries which might materially adversely affect (it being
                  agreed that for the purpose of this Section 5.2.1(b), any such
                                                      ----------------
                  labor  controversy,  litigation,  arbitration or  governmental
                  investigation or proceeding  having an effect equal to or less
                  than  10% of Net  Worth  shall  not be  deemed  material)  the
                  Borrower's   consolidated   business,    operations,   assets,
                  revenues,  properties or prospects or which purports to affect
                  the legality,  validity or enforceability of this Agreement or
                  any other Loan Document; and

                                     - 34 -
<PAGE>
                           (2) no  development  shall have occurred in any labor
                  controversy,    litigation,    arbitration   or   governmental
                  investigation or proceeding  disclosed pursuant to Section 6.7
                                                                     -----------
                  which  might  materially  adversely  affect  the  consolidated
                  businesses,   operations,   assets,  revenues,  properties  or
                  prospects of the Borrower and its Subsidiaries; and

                  (c) no Default shall have then occurred and be continuing, and
         the  Borrower  shall  not  be in  material  violation  of  any  law  or
         governmental regulation or court order or decree.

         SECTION  V.2.2  Borrowing  Request.  The Agent  shall  have  received a
                         ------------------
Borrowing  Request  for such  Borrowing.  Each of the  delivery  of a  Borrowing
Request and the  acceptance  by the Borrower of the  proceeds of such  Borrowing
shall constitute a representation  and warranty by the Borrower that on the date
of such  Borrowing  (both  immediately  before and after  giving  effect to such
Borrowing and the  application of the proceeds  thereof) the statements  made in
Section 5.2.1 are true and correct.
-------------

         SECTION  V.2.3  Satisfactory  Legal  Form.  All  documents  executed or
                         -------------------------
submitted  pursuant  hereto  by or on  behalf  of  the  Borrower  or  any of its
Subsidiaries  shall be  satisfactory  in form and substance to the Agent and its
counsel;  the  Agent  and its  counsel  shall  have  received  all  information,
approvals,  opinions,  documents or  instruments as the Agent or its counsel may
reasonably request.


                                   ARTICLE VI

                         REPRESENTATIONS AND WARRANTIES

         In order to  induce  the  Lenders  and the  Agent  to enter  into  this
Agreement and to make Loans hereunder, the Borrower represents and warrants unto
the Agent and each Lender as set forth in this Article VI.
                                               ----------

         SECTION  VI.1   Organization,   etc.  The  Borrower  and  each  of  its
                         --------------------
Subsidiaries  is a  corporation  validly  organized  and  existing  and in  good
standing  under  the  laws of the  jurisdiction  of its  incorporation,  is duly
qualified to do business  and is in good  standing as a foreign  corporation  in
each jurisdiction  where the nature of its business requires such  qualification
except where the failure to qualify  would not have a Material  Adverse  Effect,
and has full power and authority and holds all requisite


                                     - 35 -
<PAGE>
governmental licenses, permits and other approvals to enter into and perform its
Obligations  under this  Agreement and each other Loan Document to which it is a
party and to own and hold under lease its  property  and to conduct its business
substantially as currently conducted by it (except where the failure to hold any
government  license,  permit or approval required for the Borrower or any of its
Subsidiaries  to own or hold under lease its property or to conduct its business
substantially  as currently  conducted  by it would not have a Material  Adverse
Effect).

         SECTION VI.2 Due Authorization,  Non-Contravention, etc. The execution,
                      -------------------------------------------  
delivery and  performance  by the Borrower of this Agreement and each other Loan
Document  executed or to be executed by it, are within the Borrower's  corporate
powers, have been duly authorized by all necessary corporate action, and do not

                  (a) contravene the Borrower's Organic Documents;

                  (b)   contravene   any   contractual   restriction,   law   or
         governmental  regulation  or  court  decree  or  order  binding  on  or
         affecting the Borrower; or

                  (c) result in, or require the creation or  imposition  of, any
         Lien on any of the Borrower's properties.

         SECTION VI.3 Government  Approval,  Regulation,  etc. No authorization,
                      ----------------------------------------
consent or approval  or other  action by, and no notice to or filing  with,  any
Governmental  Authority or  regulatory  body or other Person is required for the
due execution,  delivery or performance by the Borrower of this Agreement or any
other Loan  Document.  Neither the  Borrower nor any of its  Subsidiaries  is an
"investment  company" within the meaning of the Investment  Company Act of 1940,
as amended,  or a "holding  company",  or a  "subsidiary  company" of a "holding
company",  or an "affiliate" of a "holding company" or of a "subsidiary company"
of a "holding company", within the meaning of the Public Utility Holding Company
Act of 1935, as amended.

         SECTION VI.4 Validity, etc. This Agreement constitutes,  and each other
                      --------------
Loan Document  executed by the Borrower  will, on the due execution and delivery
thereof,  constitute,  the legal, valid and binding  obligations of the Borrower
enforceable in accordance with their respective terms.

         SECTION VI.5 Financial Statements.
                      --------------------

         SECTION VI.5.1 GAAP Financial Statements.  The audited consolidated and
                        -------------------------
unaudited consolidating balance sheets as at 

                                     - 36 -
<PAGE>
December  31, 1996 and the  unaudited  consolidated  and  consolidating  balance
sheets as at September 30, 1997 of the Borrower and each of its Subsidiaries and
the related statements of earnings and cash flow of the Borrower and each of its
Subsidiaries,  copies of which have been furnished to the Agent and each Lender,
have been prepared in accordance  with GAAP  consistently  applied,  and present
fairly the consolidated  financial condition of the corporations covered thereby
as at the dates thereof and the results of their operations for the periods then
ended.

         SECTION VI.5.2 Statutory Financial Statements.
                        ------------------------------

                  (a)  The  Annual  Statements  of  each  Insurance   Subsidiary
         including,   without  limitation,   the  provisions  made  therein  for
         investments and the valuation  thereof,  reserves,  policy and contract
         claims  and  Statutory  Liabilities,  as  filed  with  the  appropriate
         Governmental Authority of its state of domicile or, with respect to any
         non-U.S.  domiciled  Insurance  Subsidiary with the applicable non-U.S.
         Governmental  Authority (the "Department") and delivered to each Lender
                                       ----------
         prior to the  execution and delivery of this  Agreement,  as of and for
         the  1996  Fiscal  Year,  and as of and for the  Fiscal  Quarter  ended
         September   30,   1997   (collectively,    the   "Statutory   Financial
                                                           ---------------------
         Statements"),  have been prepared in  accordance  with SAP applied on a
         ----------
         consistent  basis  (except  as  noted  therein).  Each  such  Statutory
         Financial  Statement was in compliance  with applicable law when filed.
         The  Statutory  Financial   Statements  fairly  present  the  financial
         position,  the results of operations,  changes in equity and changes in
         financial  position  of the  Insurance  Subsidiaries  as of and for the
         respective dates and periods  indicated  therein in accordance with SAP
         applied on a consistent basis, except as set forth in the notes thereto
         or in Item 6.5.2(a) ("Unreported Changes in Financial Position") of the
               -------------
         Disclosure Schedule. Except for liabilities and obligations, including,
         without limitation,  reserves, policy and contract claims and Statutory
         Liabilities  (all of which have been computed in accordance  with SAP),
         disclosed or provided for in the Statutory  Financial  Statements,  the
         Insurance Subsidiaries did not have, as of the respective dates of each
         of such financial  statements,  any liabilities or obligations (whether
         absolute or  contingent  and  whether  due or to become due) which,  in
         conformity  with SAP,  applied on a consistent  basis,  would have been
         required to be or should be disclosed or provided for in such financial
         statements.  All books of account of the Insurance  Subsidiaries  fully
         and fairly disclose, in all 

                                     - 37 -
<PAGE>
         material  respects,  all  of  the  transactions,   properties,  assets,
         investments,  liabilities and obligations of the Insurance Subsidiaries
         and  all of  such  books  of  account  are in the  possession  of  such
         Insurance  Subsidiaries  and are  true,  correct  and  complete  in all
         material respects.

                  (b) The investments  reflected in the Annual  Statements filed
         with the Department by the Insurance  Subsidiaries  with respect to the
         1996 Fiscal Year (the "1996 Annual  Statements")  and the September 30,
                                -----------------------
         1997 Quarterly Statement of the Insurance  Subsidiaries (the "Quarterly
                                                                       ---------
         Statement")  comply  in  all  material  respects  with  all  applicable
         ---------
         requirements  of the applicable  Department  relating to investments in
         respect of which it may invest its funds.

                  (c) The provisions  made in the 1996 Annual  Statements and in
         the Quarterly  Statement for reserves,  policy and contract  claims and
         Statutory  Liabilities are in compliance in all material  respects with
         the requirements of the applicable  Department,  and have been computed
         in accordance with SAP.

                  (d) Cash and Invested Assets (i) for U.S. domiciled  Insurance
         Subsidiaries,  as  reflected  in line 9,  page 2,  column 4 of the 1996
         Annual Statements of property-casualty  Insurance Subsidiaries and line
         11,  page 2,  column  4 of the  Annual  Statements  of  life  Insurance
         Subsidiaries  and in the  Quarterly  Statement  and (ii)  for  non-U.S.
         domiciled Insurance Subsidiaries,  as reflected in the Annual Return to
         HM Treasury Insurance Directorate of such Insurance  Subsidiaries,  are
         valued  at  cost,  amortized  cost or  market  value,  as noted on such
         Statutory Financial Statements and as required by applicable law.

                  (e) Except as set forth in Item  6.5.2(e)  ("Unreported  Stock
                                             --------------
         Dividends  and Stock  Acquisitions")  of the  Disclosure  Schedule,  no
         dividends or other distributions have been declared,  paid or made upon
         any  shares  of  capital  stock  of  any  Insurance  Subsidiary  or the
         Borrower,  nor have any shares of such  capital  stock  been  redeemed,
         retired,  purchased or otherwise  acquired  since  September  30, 1997,
         other  than as  reflected  in the  consolidated  balance  sheet of such
         Insurance Subsidiary or the Borrower.

         SECTION  VI.6  No  Material  Adverse  Change.  Since  the  date  of the
                        -----------------------------
financial  statements  described  in  Section  6.5,  there has been no  material
                                      ------------
adverse  change  in  the  financial  condition,  

                                     - 38 -
<PAGE>
operations,  assets,  business,  properties or prospects of the Borrower and its
Subsidiaries on a consolidated basis.

         SECTION VI.7 Litigation, Labor Controversies,  etc. There is no pending
                      --------------------------------------
or, to the knowledge of the Borrower, threatened litigation, action, proceeding,
or labor controversy  affecting the Borrower or any of its Subsidiaries,  or any
of their  respective  properties,  businesses,  assets  or  revenues,  which may
materially  adversely  affect  (it being  agreed  that for the  purpose  of this
Section 6.7, any such litigation, action, proceeding or labor controversy having
-----------
an effect  equal to or less than 10% of Net Worth shall not be deemed  material)
the financial condition,  operations,  assets, business, properties or prospects
of the  Borrower or any  Subsidiary  or which  purports to affect the  legality,
validity  or  enforceability  of this  Agreement,  the Notes or any  other  Loan
Document,  except as  disclosed  in Item 6.7  ("Litigation")  of the  Disclosure
                                    --------
Schedule.

         SECTION VI.8  Subsidiaries.  The Borrower has no  Subsidiaries,  except
                       ------------
those Subsidiaries

                  (a) which are identified in Item 6.8 ("Existing Subsidiaries")
                                              --------
         of the Disclosure Schedule; or 

                  (b) which are  permitted to have been  acquired in  accordance
         with Sections 7.2.4 and 7.2.6.
              --------------     -----

         SECTION  VI.9  Ownership  of  Properties.  The Borrower and each of its
                        -------------------------
Subsidiaries owns good and marketable title to all of its properties and assets,
real and personal,  tangible and intangible, of any nature whatsoever (including
patents, trademarks, trade names, service marks and copyrights),  free and clear
of all Liens,  charges or claims (including  infringement claims with respect to
patents,  trademarks,  copyrights and the like) except as permitted  pursuant to
Section 7.2.2.
-------------

         SECTION  VI.10 Taxes.  The Borrower  and each of its  Subsidiaries  has
                        -----
filed all tax returns  and reports  required by law to have been filed by it and
has paid all taxes and  governmental  charges thereby shown to be owing,  except
(i) any such taxes or charges which are being diligently contested in good faith
by appropriate  proceedings  and for which adequate  reserves in accordance with
GAAP  shall  have been set aside on its books or (ii) any such  taxes or charges
where the failure to pay such taxes or charges would not have a Material Adverse
Effect.

         SECTION VI.11 ERISA  Compliance.  (a) Each Plan is in compliance in all
                       ----------------- 
material  respects with the applicable

                                     - 39 -
<PAGE>
provisions of ERISA, the Code and other federal or state law. Each Plan which is
intended to qualify  under  Section  401(a) of the Code has received a favorable
determination  letter from the IRS and to the best  knowledge  of the  Borrower,
nothing  has  occurred  which would  cause the loss of such  qualification.  The
Borrower and each ERISA  Affiliate  has made all required  contributions  to any
Plan subject to Section 412 of the Code, and no application for a funding waiver
or an extension of any  amortization  period pursuant to Section 412 of the Code
has been made with respect to any Plan.

         (b)  There  are no  pending  or,  to the best  knowledge  of  Borrower,
threatened claims, actions or lawsuits, or action by any Governmental Authority,
with respect to any Plan which has resulted or could  reasonably  be expected to
result in a Material Adverse Effect. There has been no prohibited transaction or
violation of the fiduciary  responsibility  rules with respect to any Plan which
has  resulted or could  reasonably  be expected to result in a Material  Adverse
Effect.

         (c) (i) No ERISA Event has occurred or is reasonably expected to occur;
(ii) no Pension  Plan has any  Unfunded  Pension  Liability;  (iii)  neither the
Borrower nor any ERISA Affiliate has incurred,  or reasonably  expects to incur,
any  liability  under Title IV of ERISA with  respect to any Pension Plan (other
than premiums due and not delinquent under Section 4007 of ERISA);  (iv) neither
the Borrower nor any ERISA  Affiliate  has incurred,  or  reasonably  expects to
incur, any liability (and no event has occurred which, with the giving of notice
under Section 4219 of ERISA,  would result in such liability) under Section 4201
or 4243 of ERISA with  respect to a  Multiemployer  Plan;  and (v)  neither  the
Borrower  nor any ERISA  Affiliate  has engaged in a  transaction  that could be
subject to Section 4069 or 4212(c) of ERISA.

         SECTION  VI.12  Insurance  Licenses.  Except  as set forth in Item 6.12
                         -------------------                           ---------
("Suspension or Revocation of Insurance  Licenses") of the Disclosure  Schedule,
no license (including, without limitation, licenses or certificates of authority
from  applicable  insurance  departments),  permits  or  authorizations  of  the
Borrower  or any of its  Subsidiaries  to  transact  insurance  and  reinsurance
business  (collectively,  the  "Licenses")  is the subject of a  proceeding  for
suspension  or revocation or any similar  proceedings,  there is no  sustainable
basis for such a suspension or revocation,  and no such suspension or revocation
is  threatened  by any state  insurance  department  or any  other  Governmental
Authority.

                                     - 40 -
<PAGE>
         SECTION VI.13 Environmental Warranty. All facilities and property owned
                       ----------------------
or leased by the Borrower or any of its Subsidiaries  have been, and continue to
be, owned or leased by the Borrower and its Subsidiaries in material  compliance
with  all  Environmental  Laws and the  Borrower  and its  Subsidiaries  have no
material  liability  with  respect to  Environmental  Laws;  provided  that with
                                                             --------
respect to any  facilities  or  property  leased by the  Borrower  or any of its
Subsidiaries,  this Section shall not be deemed  breached unless the Borrower or
any of its Subsidiaries shall have a material liability with respect thereto.

         SECTION  VI.14  Regulations  G, U and X. The Borrower is not engaged in
                         -----------------------
the  business  of  extending  credit for the purpose of  purchasing  or carrying
margin  stock,  and no  proceeds  of any Loans will be used for a purpose  which
violates,  or would be inconsistent  with,  F.R.S.  Board  Regulation G, U or X.
Terms for which  meanings are provided in F.R.S.  Board  Regulation G, U or X or
any regulations  substituted  therefor, as from time to time in effect, are used
in this Section with such meanings.

         SECTION VI.15  Accuracy of  Information.  To the best of the Borrower's
                        ------------------------
knowledge, all factual information heretofore or contemporaneously  furnished by
or on behalf of the  Borrower in writing to the Agent or any Lender for purposes
of or in connection with this Agreement or any transaction  contemplated  hereby
is, and all other such factual  information  hereafter furnished by or on behalf
of the  Borrower to the Agent or any Lender will be, true and  accurate in every
material  respect on the date as of which such information is dated or certified
and as of the date of execution and delivery of this  Agreement by the Agent and
such Lender,  and such  information is not, or shall not be, as the case may be,
incomplete  by  omitting  to state  any  material  fact  necessary  to make such
information not misleading.


                                   ARTICLE VII

                                    COVENANTS

         SECTION VII.1 Affirmative Covenants. The Borrower agrees with the Agent
                       ---------------------
and each Lender that,  until all Commitments have terminated and all Obligations
have been paid and performed in full, the Borrower will perform the  obligations
set forth in this  Section  7.1,  except  as  otherwise  agreed by the  Required
                   ------------
Lenders and the Agent in accordance with Section 10.1.
                                         ------------

         SECTION  VII.1.1  Financial  Information,  Reports,  Notices,  etc. The
                           ------------------------------------------------
Borrower will  furnish, 

                                     - 41 -
<PAGE>
or will cause to be furnished,  to the Agent,  and the Agent will  distribute to
each Lender, copies of the following financial statements,  reports, notices and
information:

                  (a) as soon as available and in any event within 45 days after
         the end of each of the first three Fiscal  Quarters of each Fiscal Year
         of the Borrower,  consolidated and consolidating  balance sheets of the
         Borrower and its  Subsidiaries as of the end of such Fiscal Quarter and
         consolidated and consolidating  statements of earnings and cash flow of
         the Borrower and its  Subsidiaries  for such Fiscal Quarter and for the
         period  commencing  at the end of the  previous  Fiscal Year and ending
         with  the end of  such  Fiscal  Quarter,  certified  by the  Authorized
         Officer of the Borrower, all prepared in accordance with GAAP;

                  (b) as soon as  available  and in any  event  within  100 days
         after the end of each Fiscal Year of the Borrower, a copy of the annual
         audit   report  for  such  Fiscal  Year  for  the   Borrower   and  its
         Subsidiaries,  including  therein  consolidated  balance  sheets of the
         Borrower  and its  Subsidiaries  as of the end of such  Fiscal Year and
         audited consolidated and unaudited consolidating statements of earnings
         and cash flow of the  Borrower  and its  Subsidiaries  for such  Fiscal
         Year,  all  prepared  in  accordance  with  GAAP and in the case of the
         annual  audit  report,   the   consolidated   balance  sheets  and  the
         consolidated  statements  of earnings and cash flow of the Borrower and
         its Subsidiaries,  certified (without any Impermissible  Qualification)
         in a manner acceptable to the Agent and the Required Lenders by Ernst &
         Young LLP or other  independent  public  accountants  acceptable to the
         Agent and the Required Lenders;

                  (c) as soon as possible, but in any event within 60 days after
         the end of each U.S. domiciled  Insurance  Subsidiary's Fiscal Year and
         within  six  months  after  the end of each  U.K.  domiciled  Insurance
         Subsidiary's Fiscal Year, as applicable, a copy of the Annual Statement
         of  each  Insurance   Subsidiary  for  such  Fiscal  Year  prepared  in
         accordance with SAP and accompanied by the  certification  of the chief
         financial  Authorized  Officer  or  chief  executive  officer  of  such
         Insurance  Subsidiary  that such  financial  statement  is complete and
         correct  and  presents  fairly  in  accordance  with SAP the  financial
         position of such Insurance Subsidiary for the period then ended;

                  (d) as soon as possible, but in any event within 45 days after


                                     - 42 -
<PAGE>
         the end of each of the first three Fiscal Quarters of each Fiscal Year,
         a copy of the quarterly statement of each Insurance Subsidiary for such
         Fiscal Quarter,  all prepared in accordance with SAP and accompanied by
         the  certification  of the chief  financial  officer or chief executive
         officer of such Insurance Subsidiary that all such financial statements
         are complete and correct and present fairly in accordance  with SAP the
         financial  position of such  Insurance  Subsidiary for the periods then
         ended;

                  (e) within 90 days after the close of each Fiscal Year, a copy
         of each Insurance Subsidiary's "Statement of Actuarial Opinion" if such
         a statement is required to be provided to the Department (or equivalent
         information for each U.S.  domiciled  Insurance  Subsidiary  should the
         Department  no longer  require such a statement)  as to the adequacy of
         loss reserves of such Insurance  Subsidiary,  which opinion shall be in
         the format prescribed by the Insurance Code;

                  (f) the following  certificates and other information  related
         to the Borrower and each of its Subsidiaries:

                           (1) not  later  than 30  days  after  the end of each
                  Fiscal Year, a copy of the Borrower's operating budget for the
                  next succeeding Fiscal Year.

                           (2) not later than 30 days after received,  a copy of
                  any   financial   examination   reports   or  market   conduct
                  examination  reports by a Governmental  Authority with respect
                  to the  Borrower  or any of its  Subsidiaries  relating to the
                  insurance  business of the Borrower or such Subsidiary  (when,
                  and  if,  prepared);  provided,  that  the  Borrower  or  such
                                        --------
                  Subsidiary  shall  not  have to  deliver  any  interim  report
                  hereunder so long as a final report is issued and delivered to
                  the Agent within 90 days of such interim report;

                           (3) within 13 Business Days of such notice, notice of
                  actual  suspension,  termination or revocation of any material
                  License  of the  Borrower  or any of its  Subsidiaries  by any
                  Governmental  Authority  or of  receipt  of  notice  from  any
                  Governmental  Authority  notifying  the Borrower or any of its
                  Subsidiaries  of a hearing  (which is not withdrawn  within 10
                  days)   relating  to  such  a   suspension,   termination   or
                  revocation,  including any request by a Governmental Authority
                  which commits the Borrower or any of its Subsidiaries to take,
                  or  refrain  from  taking,   any

                                     - 43 -
<PAGE>
                  action or which otherwise materially and adversely affects the
                  authority  of the  Borrower  or any  of  its  Subsidiaries  to
                  conduct its business;

                           (4) within three Business Days of such notice, notice
                  of  any  material  pending  or  threatened   investigation  or
                  regulatory    proceeding    (other   than   routine   periodic
                  investigations  or  reviews)  by  any  Governmental  Authority
                  concerning  the  business,  practices  or  operations  of  the
                  Borrower or any of its  Subsidiaries,  including  any agent or
                  managing general agent thereof; and

                           (5) promptly,  notice of any actual material  changes
                  in the Insurance  Code  governing  the  investment or dividend
                  practices of any Insurance Subsidiary;

                  (g) as soon as available and in any event within 45 days after
         the end of each of the first three Fiscal  Quarters of each Fiscal Year
         and  within 100 days of the end of each  Fiscal  Year,  a  certificate,
         executed by the chief  financial  Authorized  Officer of the  Borrower,
         showing (in reasonable  detail and with  appropriate  calculations  and
         computations in all respects satisfactory to the Agent and the Required
         Lenders)  compliance with the financial  covenants set forth in Section
                                                                         -------
         7.2.3;
         -----

                  (h) as soon as  possible  and in any event  within  three days
         after the discovery of the  occurrence of each Default,  a statement of
         the chief financial  Authorized  Officer of the Borrower  setting forth
         details of such Default and the action which the Borrower has taken and
         proposes to take with respect thereto;

                  (i)  within  30 days  after  the end of each  Fiscal  Quarter,
         notice of the  occurrence  of any  material  adverse  development  with
         respect to any litigation,  action,  proceeding,  or labor  controversy
         described  in  Section  6.7  (other  than  any  litigation,  action  or
                        ------------
         proceeding  in the  ordinary  course of the  business of the  Insurance
         Subsidiaries)  during such Fiscal Quarter; or as soon as possible after
         the commencement of any material labor controversy,  litigation, action
         or proceeding  of the type  described in Section 6.7 during such Fiscal
                                                  -----------
         Quarter,  notice thereof, and, upon the request of the Agent, copies of
         all documentation relating to any of the foregoing;

                                     - 44 -
<PAGE>
                  (j) as soon as  possible  and in any event  within  three days
         after the entry of any judgment with respect to any litigation, action,
         proceeding  or labor  controversy  described  in  Section  6.7,  notice
                                                           ------------
         thereof and copies of all documentation relating thereto;

                  (k) promptly  after the sending or filing  thereof,  copies of
         all reports  which the Borrower  sends to any of its security  holders,
         and all  significant  reports  and  registration  statements  which the
         Borrower  or any of its  Subsidiaries  files  with the  Securities  and
         Exchange Commission or any national securities exchange;

                  (l)  promptly  after the  occurrence  of any of the  following
         events  affecting the Borrower or any ERISA  Affiliate (but in no event
         more than 10 days after such  event),  any notice with  respect to such
         event  that is  filed  with a  Governmental  Authority  and any  notice
         delivered  by a  Governmental  Authority  to the  Borrower or any ERISA
         Affiliate with respect to such event:

                           (i) an ERISA Event;

                           (ii) a  material  increase  in the  Unfunded  Pension
                  Liability of any Pension Plan;

                           (iii)  the  adoption  of,  or  the   commencement  of
                  contributions  to, any Plan subject to Section 412 of the Code
                  by the Borrower or any ERISA Affiliate; or

                           (iv) the adoption of any  amendment to a Plan subject
                  to Section  412 of the Code,  if such  amendment  results in a
                  material   increase  in   contributions  or  Unfunded  Pension
                  Liability; and

                  (m)  such  other  information   respecting  the  condition  or
         operations,  financial  or  otherwise,  of the  Borrower  or any of its
         Subsidiaries  as any  Lender  through  the  Agent may from time to time
         reasonably request.

         SECTION VII.1.2  Compliance with Laws, etc. The Borrower will, and will
                          --------------------------    
cause each of its  Subsidiaries  to,  comply in all material  respects  with all
applicable  laws,  rules,  regulations  and orders,  such  compliance to include
(without limitation):

                  (a) the establishment of all insurance reserves required to be
         established  under SAP and applicable laws


                                     - 45 -
<PAGE>
         restricting the investments of the Borrower or any of its Subsidiaries;
         and

                  (b)  the  maintenance   and   preservation  of  its  corporate
         existence  and  qualification  as a foreign  corporation  except  where
         failure to maintain such existence and  qualification  would not have a
         Material Adverse Effect on the business and operations of the Borrower;
         and

                  (c) the payment,  before the same becomes  delinquent,  of all
         taxes, assessments and governmental charges imposed upon it or upon its
         property except to the extent being diligently  contested in good faith
         by  appropriate   proceedings  and  for  which  adequate   reserves  in
         accordance with GAAP shall have been set aside on its books.

         SECTION VII.1.3 Maintenance of Properties.  The Borrower will, and will
                         -------------------------
cause each of its  Subsidiaries  to,  maintain,  preserve,  protect and keep its
properties in good repair,  working order and condition,  ordinary wear and tear
excepted,  and make necessary and proper repairs,  renewals and  replacements so
that its business carried on in connection  therewith may be properly  conducted
at all times unless the  Borrower  determines  in good faith that the  continued
maintenance of any of its properties is no longer economically desirable.

         SECTION  VII.1.4  Insurance.  The Borrower will, and will cause each of
                           ---------
its  Subsidiaries  to,  maintain  or cause  to be  maintained  with  responsible
insurance  companies  insurance  with  respect to its  properties  and  business
(including  added  expense  coverage  insurance)  against  such  casualties  and
contingencies  and of such types and in such amounts as is customary in the case
of similar  businesses  and will,  upon  request  of the Agent,  furnish to each
Lender and the Agent at  reasonable  intervals a  certificate  of an  Authorized
Officer of the  Borrower  setting  forth the nature and extent of all  insurance
maintained by the Borrower and its Subsidiaries in accordance with this Section.

         SECTION  VII.1.5 Books and Records.  The Borrower  will, and will cause
                          -----------------
each of its Subsidiaries to, keep books and records which accurately reflect all
of its business affairs and transactions and permit the Agent and each Lender or
any of their respective  representatives,  at reasonable times and intervals, to
visit all of its offices, to discuss its financial matters with its officers and
independent   public   accountant  (and  the  Borrower  hereby  authorizes  such
independent  public accountant to discuss the Borrower's  financial matters with
each  Lender or its  representatives  whether or not any  representative  of the
Borrower

                                     - 46 -
<PAGE>
is  present;  provided,  however  that the  Borrower  does not hereby  waive any
              ---------  -------
applicable  privilege  of said  accountant  and no  discussion  may be  required
hereunder  with said  accountant  if the effect  thereof  would be to waive said
privilege)  and to examine  (and,  at the  reasonable  expense of the  Borrower,
photocopy  extracts  from)  any of its  books or other  corporate  records.  The
Borrower shall pay any reasonable  fees of such  independent  public  accountant
incurred in connection  with the Agent's or any Lender's  exercise of its rights
pursuant to this Section.

         SECTION  VII.1.6  Environmental  Covenant.  The Borrower will, and will
                           -----------------------
cause each of its  Subsidiaries to, conduct its operations and keep and maintain
its properties in compliance with all Environmental Laws.

         SECTION VII.2 Negative  Covenants.  The Borrower  agrees with the Agent
                       -------------------
and each Lender that,  until all Commitments have terminated and all Obligations
have been paid and performed in full, the Borrower will perform the  obligations
set forth in this  Section  7.2,  except  as  otherwise  agreed by the  Required
                   ------------
Lenders and the Agent in accordance with Section 10.1.
                                         ------------

         SECTION VII.2.1  Business  Activities.  The Borrower will not, and will
                          --------------------
not permit any of its Subsidiaries  to, engage in any type of business  activity
except  the  businesses  that  the  Borrower  and  any of its  Subsidiaries  are
presently engaged in which are listed on Schedule II, and such activities as may
                                         -----------
be incidental or related thereto.

         SECTION  VII.2.2 Liens.  The Borrower will not, and will not permit any
                          -----
of its Subsidiaries to, create,  incur,  assume or suffer to exist any Lien upon
any of its  property,  revenues  or  assets,  whether  now  owned  or  hereafter
acquired, except:

                  (a)  Liens  securing  payment  of  the  Obligations,   granted
         pursuant to any Loan Document;

                  (b) Liens for taxes, assessments or other governmental charges
         or levies not at the time  delinquent  or  thereafter  payable  without
         penalty or being  diligently  contested  in good  faith by  appropriate
         proceedings  and for which  adequate  reserves in accordance  with GAAP
         shall have been set aside on its books;

                  (c) Liens of carriers,  warehousemen,  mechanics,  materialmen
         and landlords  incurred in the ordinary course of business for sums not
         overdue or being  diligently  contested  in good  faith by  appropriate
         proceedings  and for which


                                     - 47 -
<PAGE>
         adequate  reserves in accordance with GAAP shall have been set aside on
         its books;

                  (d) Liens  incurred  in the  ordinary  course of  business  in
         connection with workmen's compensation, unemployment insurance or other
         forms of governmental  insurance or benefits,  or to secure performance
         of tenders, statutory obligations, leases and contracts (other than for
         borrowed  money) entered into in the ordinary  course of business or to
         secure obligations on surety or appeal bonds;

                  (e) judgment  Liens in  existence  less than 15 days after the
         entry thereof or with respect to which  execution has been stayed or is
         not otherwise permitted under the law of the applicable jurisdiction or
         the  payment  of which  is  covered  in full  (subject  to a  customary
         deductible)  by  insurance   maintained  with   responsible   insurance
         companies;

                  (f) Liens granted to secure payment of  Indebtedness  which is
         incurred by the Borrower or any of its  Subsidiaries to a vendor of any
         assets to finance  its  acquisition  of such assets and  covering  only
         those assets acquired with the proceeds of such Indebtedness;  provided
         that the  aggregate  amount  of all such  Liens  shall not  exceed  $10
         million; and

                  (g) Liens listed in Item 7.2.2(g) ("Other Permitted Liens") of
         the Disclosure Schedule.

         SECTION VII.2.3 Financial Condition. The Borrower will not permit:
                         -------------------

                  (a) its Debt to Capital Ratio to be greater than .35:1.

                  (b) the sum of (i) ACIC's  Surplus,  (ii)  HPIC's  Surplus and
         (iii)  Unionamerica's  net  worth  as  reflected  in  its  most  recent
         quarterly report to the Department of Trade and Industry at any time to
         be less than $245,000,000.

                  (c) (i)  The  adjusted  surplus  of any  Insurance  Subsidiary
         calculated as of the end of any Fiscal Year (as  determined  under NAIC
         risk based capital  guidelines) to be less than 100% (or in the case of
         ACIC 150%) of the  Company  Action  Level (as  defined  under NAIC risk
         based  capital   guidelines),   or  (ii)  the  margin  of  solvency  of
         Unionamerica  to be less than the minimum  required  by any  applicable
         Governmental Authority regulating United Kingdom insurance companies.

                                     - 48 -
<PAGE>
         SECTION VII.2.4 Investments. The Borrower will not, and will not permit
                         -----------
its Subsidiaries to make, incur, assume or suffer to exist any Investment in any
other Person unless it meets the following requirements:

                  (a) all Investments by the Insurance  Subsidiaries  will be in
         compliance with the Insurance Code; and

                  (b) at least  eighty-five  percent (85%) of the Investments of
         the Borrower and its Subsidiaries  (excluding  Investments  incurred in
         order to consummate  acquisitions  otherwise  permitted pursuant to the
         first proviso of Section 7.2.6),  will be invested in Investment  Grade
         ----- -------    -------------
         Securities.

         SECTION VII.2.5 Restricted Payments, etc. On and at all times after the
                         ------------------------
Effective Date:

                  (a) the Borrower will not declare, pay or make any dividend or
         distribution  (in cash,  property or  obligations) on any shares of any
         class of capital stock (now or hereafter  outstanding)  of the Borrower
         or on any warrants,  options or other rights with respect to any shares
         of any class of capital  stock (now or  hereafter  outstanding)  of the
         Borrower (other than dividends or  distributions  payable in its common
         stock  or  warrants  to  purchase  its  common  stock  or  splitups  or
         reclassifications  of its stock into  additional or other shares of its
         common stock) or apply, or permit any of its Subsidiaries to apply, any
         of its funds, property or assets to the purchase,  redemption,  sinking
         fund or other retirement of, or agree or permit any of its Subsidiaries
         to purchase or redeem, any shares of any class of capital stock (now or
         hereafter  outstanding) of the Borrower, or warrants,  options or other
         rights with respect to any shares of any class of capital stock (now or
         hereafter  outstanding)  of the  Borrower;  except that,  so long as no
         Default has  occurred  and is  continuing  or would occur after  giving
         effect  thereto,  (i) the  Borrower  may  purchase its common stock for
         contribution  to its employee  profit sharing  program and its employee
         stock investment  program,  (ii) the Borrower may declare  dividends on
         its common stock and/or  preferred  stock or  repurchase  shares of its
         capital  stock in an amount  not to exceed  in the  aggregate  for each
         Fiscal  Year 50% of the  average  of the  Borrower's  consolidated  net
         earnings  after taxes for the three most recent Fiscal Years and may in
         one  Fiscal  Year  during the term of this  Agreement  pay an amount of
         dividends up to the amount paid in the prior Fiscal Year

                                     - 49 -
<PAGE>
         without  regard to the amount of the  average of its  consolidated  net
         earnings  after  taxes in such prior three  Fiscal  Years and (iii) the
         Borrower may repurchase,  pursuant to agreements presently existing and
         previously  disclosed to the Lenders,  shares of its capital  stock (A)
         owned by members of the senior management of the Borrower, at such time
         as the  employment  of such  members  of the senior  management  may be
         terminated  or (B) owned by directors  of the  Borrower and  previously
         issued as  compensation to said  directors,  upon  termination of their
         services as directors.

                  (b) the Borrower will not, and will not permit any  Subsidiary
         to, make any deposit for any of the foregoing purposes.

         SECTION VII.2.6 Consolidation,  Merger, etc. The Borrower will not, and
                         ---------------------------
will not permit any of its Subsidiaries  to, liquidate or dissolve,  consolidate
with,  or merge into or with,  any other  corporation,  or purchase or otherwise
acquire all or substantially all of the assets of any Person (or of any division
thereof);  provided,  however,  that the Borrower and its Subsidiaries  shall be
           --------   -------
permitted  to acquire  assets or stock of other  Persons the cash portion of the
purchase  price of which  shall not  exceed  35% of the sum of (i) the  combined
Surplus of the Insurance Subsidiaries (excluding  Unionamerica) (as reflected on
their most recent Annual Statements without duplication) plus (ii) the net worth
of  Unionamerica  as  reported  in  its  most  recent  quarterly  report  to the
Department  of Trade and Industry in the  aggregate for all such assets or stock
acquired after the date hereof, less the cash portion of the aggregate amount of
any  acquisitions  made  pursuant  to the  proviso of Section  7.2.4;  provided,
                                                      --------------   --------
however, that Subsidiaries other than Significant Subsidiaries may be liquidated
-------
or dissolved in the Borrower's discretion.

         SECTION VII.2.7  Transactions  with Affiliates.  The Borrower will not,
                          -----------------------------
and will not permit any of its  Subsidiaries to, enter into any transaction with
any Affiliate of the  Borrower,  except upon fair and  reasonable  terms no less
favorable  to the  Borrower  or  such  Subsidiary  than  the  Borrower  or  such
Subsidiary would obtain in a comparable  arm's-length  transaction with a Person
not an Affiliate of the Borrower or such Subsidiary.

         SECTION VII.2.8  Negative  Pledges,  Restrictive  Agreements,  etc. The
                          --------------------------------------------------
Borrower will not, and will not permit any of its Significant  Subsidiaries  to,
enter into any agreement  (excluding  this Agreement or any other Loan Document)
prohibiting

                                     - 50 -
<PAGE>
                  (a)  the  creation  or   assumption   of  any  Lien  upon  its
         properties,   revenues  or  assets,  whether  now  owned  or  hereafter
         acquired,  or the ability of the Borrower to amend or otherwise  modify
         this Agreement or any other Loan Document; or

                  (b) the  ability  of any  Significant  Subsidiary  to make any
         payments,  directly or indirectly, to the Borrower by way of dividends,
         advances, repayments of loans or advances, reimbursements of management
         and other intercompany charges,  expenses and accruals or other returns
         on investments,  or any other agreement or arrangement  which restricts
         the ability of any such  Significant  Subsidiary  to make any  payment,
         directly or indirectly, to the Borrower.


                                  ARTICLE VIII

                                EVENTS OF DEFAULT

         SECTION  VIII.1  Listing of Events of  Default.  Each of the  following
                          -----------------------------
events or occurrences  described in this Section 8.1 shall  constitute an "Event
                                         -----------                       -----
of Default".
----------

         SECTION VIII.1.1 Non-Payment of Obligations. The Borrower shall default
                          --------------------------
in the payment or  prepayment  when due of any  principal  of or interest on any
Loan, or the Borrower shall default (and such default shall continue  unremedied
for a period of five days) in the payment when due of any  commitment  fee or of
any other Obligation.

         SECTION VIII.1.2 Breach of Warranty.  Any representation or warranty of
                          ------------------
the Borrower  made or deemed to be made  hereunder or in any other Loan Document
or any other writing or certificate furnished by or on behalf of the Borrower to
the Agent or any Lender for the purposes of or in connection with this Agreement
or any such other Loan Document  (including any certificates  delivered pursuant
to Article V) is or shall be incorrect when made in any material respect.
   ---------

         SECTION VIII.1.3  Non-Performance of Certain Covenants and Obligations.
                           ----------------------------------------------------
The Borrower shall default in the due  performance  and observance of any of its
obligations  under Section 7.2 (excluding,  however,  those under Sections 7.2.4
                   -----------                                    --------------
and 7.2.8).
    -----

         SECTION  VIII.1.4  Non-Performance  of Other Covenants and Obligations.
                            ---------------------------------------------------
The Borrower  shall default in the due  performance  and observance of any other
agreement contained herein or in any

                                     - 51 -
<PAGE>
other Loan Document,  and such default shall continue unremedied for a period of
30 days after notice  thereof shall have been given to the Borrower by the Agent
or any Lender.

         SECTION VIII.1.5 Default on Other  Indebtedness.  A default shall occur
                          ------------------------------
in the payment when due (subject to any  applicable  grace  period),  whether by
acceleration  or  otherwise,   of  any  Indebtedness  (other  than  Indebtedness
described in Section 8.1.1) of the Borrower or any of its Subsidiaries  having a
             -------------
principal amount,  individually or in the aggregate, in excess of $5,000,000, or
a default shall occur in the  performance  or  observance  of any  obligation or
condition with respect to such  Indebtedness if the effect of such default is to
accelerate the maturity of any such  Indebtedness or such default shall continue
unremedied for any applicable  period of time sufficient to permit the holder or
holders of such Indebtedness, or any trustee or agent for such holders, to cause
such Indebtedness to become due and payable prior to its expressed maturity.

         SECTION  VIII.1.6  Judgments.  Any judgment or order for the payment of
                            ---------
money in excess of  $5,000,000  shall be entered  against the Borrower or any of
its Subsidiaries and either

                  (a) enforcement  proceedings  shall have been commenced by any
         creditor upon such judgment or order; or

                  (b) there  shall be any period of 60  consecutive  days during
         which (i) a stay of enforcement of such judgment or order, by reason of
         a  pending  appeal  or  otherwise,  shall  not be in  effect  or is not
         otherwise permitted by the law of the applicable jurisdiction,  or (ii)
         such judgment has not been paid; or

                  (c) a judgment  Lien shall be entered and remain in  existence
         for 15 days or more in respect of such judgment.

         SECTION  VIII.1.7  Pension  Plans.  (i) An ERISA Event shall occur with
                            --------------
respect to a Pension  Plan or  Multiemployer  Plan which has  resulted  or could
reasonably be expected to result in liability of the Borrower  under Title IV of
ERISA to the Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount
in excess of $1,500,000; (ii) the aggregate amount of Unfunded Pension Liability
among all Pension Plans at any time exceeds $1,500,000; or (iii) the Borrower or
any ERISA  Affiliate  shall fail to pay when due,  after the  expiration  of any
applicable grace period, any installment  payment with respect to its withdrawal
liability under Section 4201 of ERISA under a


                                     - 52 -
<PAGE>
Multiemployer Plan in an aggregate amount in excess of $5,000,000.

         SECTION VIII.1.8  Control of the Borrower.  Any Change in Control shall
                           -----------------------
occur.

         SECTION VIII.1.9  Bankruptcy,  Insolvency,  etc. The Borrower or any of
                           -----------------------------
its Significant Subsidiaries shall

                  (a) become  insolvent  or  generally  fail to pay, or admit in
         writing its inability or unwillingness  generally to pay, debts as they
         become due;

                  (b) apply for, consent to, or acquiesce in, the appointment of
         a trustee,  receiver,  sequestrator or other custodian for the Borrower
         or any of its Significant  Subsidiaries or any property of any thereof,
         or make a general assignment for the benefit of creditors;

                  (c)  in  the   absence   of  such   application,   consent  or
         acquiescence,  permit or suffer to exist the  appointment of a trustee,
         receiver,  sequestrator  or other  custodian for the Borrower or any of
         its Significant  Subsidiaries or for a substantial part of the property
         of any  thereof,  and such  trustee,  receiver,  sequestrator  or other
         custodian  shall not be  discharged  within 60 days,  provided that the
         Borrower and each Significant  Subsidiary  hereby expressly  authorizes
         the Agent  and each  Lender  to  appear  in any  court  conducting  any
         relevant proceeding during such 60-day period to preserve,  protect and
         defend their rights under the Loan Documents;

                  (d)  permit  or  suffer  to  exist  the  commencement  of  any
         bankruptcy,   reorganization,   debt   arrangement  or  other  case  or
         proceeding  under any bankruptcy or insolvency law, or any dissolution,
         winding up or liquidation proceeding, in respect of the Borrower or any
         of its Significant Subsidiaries, and, if any such case or proceeding is
         not commenced by the Borrower or such Significant Subsidiary, such case
         or proceeding shall be consented to or acquiesced in by the Borrower or
         such  Significant  Subsidiary  or shall result in the entry of an order
         for relief or shall remain for 60 days  undismissed,  provided that the
         Borrower and each Significant  Subsidiary  hereby expressly  authorizes
         the Agent and each  Lender to appear in any court  conducting  any such
         case or proceeding  during such 60-day period to preserve,  protect and
         defend their rights under the Loan Documents; or

                                     - 53 -
<PAGE>
                  (e) take any action authorizing,  or in furtherance of, any of
         the foregoing.

         SECTION VIII.2 Action if Bankruptcy.  If any Event of Default described
                        --------------------
in clauses  (a) through  (d) of Section  8.1.9  shall occur with  respect to the
   ------------          ---    --------------
Borrower or any  Significant  Subsidiary,  the  Commitments  (if not theretofore
terminated) shall automatically  terminate and the outstanding  principal amount
of all outstanding Loans and all other  Obligations  shall  automatically be and
become immediately due and payable, without notice or demand.

         SECTION  VIII.3  Action  if Other  Event of  Default.  If any  Event of
                          -----------------------------------
Default (other than any Event of Default described in clauses (a) through (d) of
                                                      -----------         ---
Section 8.1.9 with respect to the Borrower or any Significant  Subsidiary) shall
-------------
occur for any reason, whether voluntary or involuntary,  and be continuing,  the
Agent,  upon the  direction  of the  Required  Lenders,  shall by  notice to the
Borrower  declare all or any portion of the outstanding  principal amount of the
Loans and other Obligations to be due and payable and/or the Commitments (if not
theretofore  terminated) to be  terminated,  whereupon the full unpaid amount of
such Loans and other  Obligations  which  shall be so  declared  due and payable
shall be and become immediately due and payable,  without further notice, demand
or presentment, and/or, as the case may be, the Commitments shall terminate.


                                   ARTICLE IX

                                    THE AGENT

         SECTION  IX.1  Appointment  and   Authorization.   Each  Lender  hereby
                        --------------------------------
irrevocably  (subject to Section 9.9)  appoints,  designates  and authorizes the
Agent to take such action on its behalf under the  provisions of this  Agreement
and each other Loan Document and to exercise such powers and perform such duties
as are  expressly  delegated  to it by the terms of this  Agreement or any other
Loan Document,  together with such powers as are reasonably  incidental thereto.
Notwithstanding  any  provision  to the  contrary  contained  elsewhere  in this
Agreement or in any other Loan Document,  the Agent shall not have any duties or
responsibilities,  except those expressly set forth herein,  nor shall the Agent
have or be deemed to have any  fiduciary  relationship  with any Lender,  and no
implied  covenants,   functions,   responsibilities,   duties,   obligations  or
liabilities  shall be read into this  Agreement  or any other Loan  Document  or
otherwise exist against the Agent.

                                     - 54 -
<PAGE>
         SECTION  IX.2  Delegation  of Duties.  The Agent may execute any of its
                        ---------------------
duties  under this  Agreement or any other Loan  Document by or through  agents,
employees  or  attorneys-in-fact  and shall be  entitled  to  advice of  counsel
concerning  all  matters  pertaining  to such  duties.  The  Agent  shall not be
responsible  for the  negligence or misconduct of any agent or  attorney-in-fact
that it selects with reasonable care.

         SECTION IX.3  Liability  of Agent.  None of the  Agent-Related  Persons
                       -------------------
shall (i) be liable for any  action  taken or omitted to be taken by any of them
under or in  connection  with this  Agreement or any other Loan  Document or the
transactions contemplated hereby (except for its own gross negligence or willful
misconduct),  or (ii) be responsible in any manner to any of the Lenders for any
recital,  statement,  representation  or  warranty  made by the  Borrower or any
Subsidiary or Affiliate of the Borrower,  or any officer  thereof,  contained in
this Agreement or in any other Loan  Document,  or in any  certificate,  report,
statement or other  document  referred to or provided for in, or received by the
Agent under or in connection with, this Agreement or any other Loan Document, or
the validity, effectiveness,  genuineness, enforceability or sufficiency of this
Agreement or any other Loan Document,  or for any failure of the Borrower or any
other  party to any Loan  Document  to  perform  its  obligations  hereunder  or
thereunder.  No Agent-Related Person shall be under any obligation to any Lender
to ascertain or to inquire as to the  observance  or  performance  of any of the
agreements  contained  in, or  conditions  of, this  Agreement or any other Loan
Document, or to inspect the properties,  books or records of the Borrower or any
of the Borrower's Subsidiaries or Affiliates.

         SECTION  IX.4  Reliance by Agent.  The Agent shall be entitled to rely,
                        -----------------
and shall be fully protected in relying, upon any writing,  resolution,  notice,
consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone
message,  statement  or other  document  or  conversation  believed  by it to be
genuine and correct and to have been signed,  sent or made by the proper  Person
or Persons,  and upon advice and statements of legal counsel  (including counsel
to the  Borrower),  independent  accountants  and other experts  selected by the
Agent.  The Agent  shall be fully  justified  in failing or refusing to take any
action  under this  Agreement or any other Loan  Document  unless it shall first
receive  such  advice  or  concurrence  of  the  Required  Lenders  as it  deems
appropriate  and,  if it so  requests,  it  shall  first be  indemnified  to its
satisfaction  by the Lenders against any and all liability and expense which may
be incurred by it by reason of taking or continuing to take any such action. The
Agent shall in all cases be fully  protected in acting,  or in

                                     - 55 -
<PAGE>
refraining  from  acting,  under this  Agreement  or any other Loan  Document in
accordance  with a request or consent of the  Required  Lenders and such request
and any action  taken or failure to act pursuant  thereto  shall be binding upon
all of the Lenders.

         (b)  For  purposes  of  determining   compliance  with  the  conditions
specified in Section  5.1,  each Lender that has  executed  and  delivered  this
             ------------
Agreement  shall be deemed to have  consented to,  approved or accepted or to be
satisfied  with,  each document or other matter either sent by the Agent to such
Lender for consent, approval, acceptance or satisfaction, or required thereunder
to be consented to or approved by or acceptable or satisfactory to the Lender.

         SECTION  IX.5 Notice of Default.  The Agent shall not be deemed to have
                       -----------------
knowledge or notice of the occurrence of any Default or Event of Default, except
with respect to defaults in the payment of principal, interest and fees required
to be paid to the Agent for the account of the  Lenders,  unless the Agent shall
have  received  written  notice from a Lender or the Borrower  referring to this
Agreement,  describing  such  Default or Event of Default and stating  that such
notice is a "notice  of  default".  The Agent  will  notify  the  Lenders of its
receipt of any such  notice.  The Agent shall take such  action with  respect to
such Default or Event of Default as may be requested by the Required  Lenders in
accordance with Article VIII; provided, however, that unless and until the Agent
                ------------  --------  -------
has received  any such  request,  the Agent may (but shall not be obligated  to)
take such  action,  or refrain  from taking such  action,  with  respect to such
Default or Event of Default as it shall deem  advisable or in the best  interest
of the Lenders.

         SECTION IX.6 Credit Decision. Each Lender acknowledges that none of the
                      ---------------
Agent-Related Persons has made any representation or warranty to it, and that no
act by the Agent hereinafter  taken,  including any review of the affairs of the
Borrower and its Subsidiaries,  shall be deemed to constitute any representation
or warranty by any Agent-Related Person to any Lender. Each Lender represents to
the Agent that it has, independently and without reliance upon any Agent-Related
Person and based on such documents and information as it has deemed appropriate,
made  its own  appraisal  of and  investigation  into the  business,  prospects,
operations,  property, financial and other condition and creditworthiness of the
Borrower and its Subsidiaries,  and all applicable bank regulatory laws relating
to the transactions contemplated hereby, and made its own decision to enter into
this Agreement and to extend credit to the Borrower hereunder.  Each Lender also
represents  that  it  will,


                                     - 56 -
<PAGE>
independently  and without reliance upon any  Agent-Related  Person and based on
such  documents  and  information  as it shall  deem  appropriate  at the  time,
continue to make its own credit analysis,  appraisals and decisions in taking or
not taking action under this Agreement and the other Loan Documents, and to make
such  investigations  as it deems necessary to inform itself as to the business,
prospects,   operations,   property,   financial   and   other   condition   and
creditworthiness  of  the  Borrower.  Except  for  notices,  reports  and  other
documents expressly herein required to be furnished to the Lenders by the Agent,
the Agent shall not have any duty or  responsibility  to provide any Lender with
any credit or other information concerning the business, prospects,  operations,
property,  financial  and other  condition or  creditworthiness  of the Borrower
which may come into the possession of any of the Agent-Related Persons.

         SECTION  IX.7   Indemnification.   Whether  or  not  the   transactions
                         ---------------
contemplated hereby are consummated, the Lenders shall indemnify upon demand the
Agent-Related  Persons  (to the  extent  not  reimbursed  by or on behalf of the
Borrower  and without  limiting  the  obligation  of the Borrower to do so), pro
                                                                             ---
rata, from and against any and all Indemnified Liabilities;  provided,  however,
----                                                         --------   -------
that no Lender shall be liable for the payment to the  Agent-Related  Persons of
any portion of such Indemnified  Liabilities resulting solely from such Person's
gross  negligence or willful  misconduct.  Without  limitation of the foregoing,
each Lender shall  reimburse  the Agent upon demand for its ratable share of any
costs or out-of-pocket expenses (including Attorney Costs) incurred by the Agent
in  connection  with  the  preparation,   execution,  delivery,  administration,
modification,  amendment or enforcement  (whether  through  negotiations,  legal
proceedings  or  otherwise)  of,  or  legal  advice  in  respect  of  rights  or
responsibilities under, this Agreement, any other Loan Document, or any document
contemplated  by or  referred  to herein,  to the  extent  that the Agent is not
reimbursed for such expenses by or on behalf of the Borrower. The undertaking in
this Section  shall  survive the payment of all  Obligations  hereunder  and the
resignation or replacement of the Agent.

         SECTION IX.8 Agent in Individual Capacity.  BofA and its Affiliates may
                      ----------------------------
make loans to, issue letters of credit for the account of, accept deposits from,
acquire equity interests in and generally engage in any kind of banking,  trust,
financial  advisory,  underwriting  or other  business with the Borrower and its
Subsidiaries  and  Affiliates  as though BofA were not the Agent  hereunder  and
without  notice to or consent of the  Lenders.  The  Lenders  acknowledge  that,
pursuant to such  activities,  BofA or its  Affiliates  may receive  information
regarding  the Borrower or

                                     - 57 -
<PAGE>
its Affiliates  (including  information  that may be subject to  confidentiality
obligations in favor of the Borrower or such  Subsidiary) and  acknowledge  that
the Agent shall be under no obligation to provide such information to them. With
respect to its Loans,  BofA  shall  have the same  rights and powers  under this
Agreement  as any other  Lender and may  exercise the same as though it were not
the Agent,  and the terms "Lender" and "Lenders"  include BofA in its individual
capacity.

         SECTION IX.9 Successor  Agent. The Agent may, and at the request of the
                      ----------------
Required Lenders shall,  resign as Agent upon 30 days' notice to the Lenders and
Borrower. If the Agent resigns under this Agreement,  the Required Lenders shall
appoint  from  among  the  Lenders a  successor  agent  for the  Lenders.  If no
successor  agent is appointed  prior to the effective date of the resignation of
the Agent,  the Agent may  appoint,  after  consulting  with the Lenders and the
Borrower,  a successor agent from among the Lenders.  Upon the acceptance of its
appointment as successor agent hereunder,  such successor agent shall succeed to
all the rights,  powers and duties of the  retiring  Agent and the term  "Agent"
shall mean such successor agent and the retiring Agent's appointment, powers and
duties as Agent shall be  terminated.  After any  retiring  Agent's  resignation
hereunder as Agent, the provisions of this Article IX and Sections 10.4 and 10.5
                                           ----------     -------------     ----
shall inure to its benefit as to any actions  taken or omitted to be taken by it
while it was Agent under this  Agreement.  If no  successor  agent has  accepted
appointment as Agent by the date which is 30 days  following a retiring  Agent's
notice of  resignation,  the retiring  Agent's  resignation  shall  nevertheless
thereupon  become  effective  and the Lenders shall perform all of the duties of
the Agent hereunder  until such time, if any, as the Required  Lenders appoint a
successor agent as provided for above.

         SECTION  IX.10  Withholding  Tax.  (a)  If  any  Lender  is a  "foreign
                         ----------------
corporation,  partnership  or trust"  within  the  meaning  of the Code and such
Lender claims  exemption  from, or a reduction  of, U.S.  withholding  tax under
Sections  1441 or 1442 of the Code,  such Lender agrees with and in favor of the
Agent, to deliver to the Agent:

                  (i) if such Lender  claims an exemption  from,  or a reduction
         of,  withholding  tax  under  a  United  States  tax  treaty,  properly
         completed  IRS Forms 1001 and W-8 before the payment of any interest in
         the first  calendar year and before the payment of any interest in each
         third succeeding  calendar year during which interest may be paid under
         this Agreement;

                                     - 58 -
<PAGE>
                  (ii) if such  Lender  claims  that  interest  paid  under this
         Agreement is exempt from United  States  withholding  tax because it is
         effectively  connected  with a United  States trade or business of such
         Lender,  two properly  completed  and executed  copies of IRS Form 4224
         before the payment of any interest is due in the first  taxable year of
         such Lender and in each  succeeding  taxable year of such Lender during
         which interest may be paid under this Agreement, and IRS Form W-9; and

                  (iii) such other  form or forms as may be  required  under the
         Code or other laws of the United  States as a  condition  to  exemption
         from, or reduction of, United States withholding tax.

Such Lender agrees to promptly  notify the Agent of any change in  circumstances
which would modify or render invalid any claimed exemption or reduction.

         (b) If any Lender claims  exemption from, or reduction of,  withholding
tax under a United  States tax treaty by providing IRS Form 1001 and such Lender
sells, assigns, grants a participation in, or otherwise transfers all or part of
the Obligations of the Borrower to such Lender, such Lender agrees to notify the
Agent of the percentage  amount in which it is no longer the beneficial owner of
Obligations  of the  Borrower to such Lender.  To the extent of such  percentage
amount, the Agent will treat such Lender's IRS Form 1001 as no longer valid.

         (c) If any Lender claiming exemption from United States withholding tax
by filing IRS Form 4224 with the Agent sells,  assigns,  grants a  participation
in, or otherwise  transfers  all or part of the  Obligations  of the Borrower to
such Lender,  such Lender agrees to undertake sole  responsibility for complying
with the withholding tax  requirements  imposed by Sections 1441 and 1442 of the
Code.

         (d) If  any  Lender  is  entitled  to a  reduction  in  the  applicable
withholding tax, the Agent may withhold from any interest payment to such Lender
an amount equivalent to the applicable withholding tax after taking into account
such reduction.  If the forms or other documentation  required by subsection (a)
of this Section are not delivered to the Agent, then the Agent may withhold from
any  interest  payment  to  such  Lender  not  providing  such  forms  or  other
documentation an amount equivalent to the applicable withholding tax.

                                     - 59 -
<PAGE>
         (d) If the IRS or any other Governmental Authority of the United States
or other  jurisdiction  asserts a claim that the Agent did not properly withhold
tax  from  amounts  paid  to or for  the  account  of any  Lender  (because  the
appropriate form was not delivered,  was not properly executed,  or because such
Lender failed to notify the Agent of a change in  circumstances  which  rendered
the exemption  from, or reduction of,  withholding tax  ineffective,  or for any
other reason) such Lender shall  indemnify the Agent fully for all amounts paid,
directly or indirectly,  by the Agent as tax or otherwise,  including  penalties
and interest, and including any taxes imposed by any jurisdiction on the amounts
payable to the Agent under this  Section,  together  with all costs and expenses
(including  Attorney Costs). The obligation of the Lenders under this subsection
shall survive the payment of all  Obligations and the resignation or replacement
of the Agent.


                                    ARTICLE X

                            MISCELLANEOUS PROVISIONS

         SECTION X.1 Waivers,  Amendments, etc. The provisions of this Agreement
                     -------------------------
and of each other Loan  Document  may from time to time be amended,  modified or
waived, if such amendment, modification or waiver is in writing and consented to
by the  Borrower  and the  Required  Lenders;  provided,  however,  that no such
                                               --------   -------
amendment, modification or waiver which would:

                  a. modify any requirement hereunder that any particular action
         be  taken  by all the  Lenders  or by the  Required  Lenders  shall  be
         effective unless consented to by each Lender;

                  b.  modify  this  Section  10.1,   change  the  definition  of
                                    -------------
         "Required Lenders", increase the Commitment Amount or the Percentage of
          ----------------
         any  Lender,  reduce  any fees  described  in Article  III (other  than
                                                       ------------
         Section  3.3.2),  change the  schedule of  repayments  provided  for in
         --------------
         Section  3.1,  release any  collateral  security,  except as  otherwise
         ------------
         specifically  provided in any Loan  Document  or extend the  Commitment
         Termination Date shall be made without the consent of each Lender;

                  c.  extend  the due date for,  or reduce  the  amount  of, any
         scheduled  repayment or  prepayment  of principal of or interest on any
         Loan (or  reduce the  principal  amount of or rate of  interest  on any
         Loan) shall be made without the consent of any Lender affected thereby;
         or

                                     - 60 -
<PAGE>
                  d. affect  adversely the  interests,  rights or obligations of
         the Agent qua the Agent shall be made without consent of the Agent.

No  failure or delay on the part of the Agent or any  Lender in  exercising  any
power or right under this  Agreement or any other Loan Document shall operate as
a waiver thereof,  nor shall any single or partial exercise of any such power or
right  preclude  any other or further  exercise  thereof or the  exercise of any
other power or right.  No notice to or demand on the  Borrower in any case shall
entitle it to any notice or demand in similar or other circumstances.  No waiver
or approval by the Agent or any Lender  under this  Agreement  or any other Loan
Document shall, except as may be otherwise stated in such waiver or approval, be
applicable to subsequent  transactions.  No waiver or approval  hereunder  shall
require any similar or  dissimilar  waiver or approval  thereafter to be granted
hereunder.

         SECTION X.2 Notices. All notices and other  communications  provided to
                     -------
any party hereto under this  Agreement  or any other Loan  Document  shall be in
writing or by Telex or by facsimile and  addressed,  delivered or transmitted to
such  party at its  address,  Telex or  facsimile  number  set  forth  below its
signature  hereto or set forth in the  Lender  Assignment  Agreement  or at such
other address, Telex or facsimile number as may be designated by such party in a
notice to the other parties.  Any notice, if mailed and properly  addressed with
postage prepaid or if properly  addressed and sent by pre-paid  courier service,
shall be deemed given when  received or if refused,  when delivery is attempted;
any notice,  if  transmitted  by Telex or facsimile,  shall be deemed given when
transmitted (answerback confirmed in the case of Telexes).

         SECTION X.3 Payment of Costs and Expenses.  The Borrower  agrees to pay
                     -----------------------------
on demand all direct out-of-pocket  expenses of the Agent (including  reasonable
Attorney Costs incurred by the Agent) in connection with

                  a. the  negotiation,  preparation,  execution  and delivery of
         this Agreement and of each other Loan Document, including schedules and
         exhibits, and any amendments,  waivers, consents,  supplements or other
         modifications  to this Agreement or any other Loan Document as may from
         time to time  hereafter  be required,  whether or not the  transactions
         contemplated hereby are consummated, and

                                     - 61 -
<PAGE>
                  b. the  preparation  and review of the form of any document or
         instrument relevant to this Agreement or any other Loan Document.

The  Borrower  further  agrees to pay,  and to save the  Agent  and the  Lenders
harmless from all  liability  for, any stamp or other taxes which may be payable
in connection with the execution or delivery of this  Agreement,  the borrowings
hereunder or any other Loan Documents. The Borrower also agrees to reimburse the
Agent and each  Lender  upon demand for all  reasonable  out-of-pocket  expenses
(including  Attorney  Costs)  incurred by the Agent or such Lender in connection
with (x) the  negotiation of any  restructuring  or  "work-out",  whether or not
consummated, of any Obligations and (y) the enforcement of any Obligations.

         SECTION X.4  Indemnification.  In  consideration  of the  execution and
                      ---------------
delivery of this Agreement by each Lender and the extension of the  Commitments,
the Borrower hereby indemnifies,  exonerates and holds the Agent and each Lender
and  each  of  their  respective  officers,  directors,   employees  and  agents
(collectively, the "Indemnified Parties") free and harmless from and against any
                    -------------------
and all  actions,  causes of  action,  suits,  losses,  costs,  liabilities  and
damages, and expenses incurred in connection therewith  (irrespective of whether
any such  Indemnified  Party is a party to the action for which  indemnification
hereunder is sought),  including Attorney Costs (collectively,  the "Indemnified
                                                                     -----------
Liabilities"),  incurred by the  Indemnified  Parties or any of them as a result
-----------
of, or arising out of, or relating to

                  a. any  transaction  financed or to be financed in whole or in
         part, directly or indirectly, with the proceeds of any Loan; or

                  b. the entering into and performance of this Agreement and any
         other Loan Document by any of the Indemnified Parties;

except  for any  such  Indemnified  Liabilities  arising  for the  account  of a
particular Indemnified Party by reason of the relevant Indemnified Party's gross
negligence  or  wilful  misconduct.  If and to the  extent  that  the  foregoing
undertaking may be unenforceable  for any reason,  the Borrower hereby agrees to
make the maximum  contribution  to the payment and  satisfaction  of each of the
Indemnified Liabilities which is permissible under applicable law.

                                     - 62 -
<PAGE>
         SECTION X.5 Survival.  The  obligations  of the Borrower under Sections
                     --------                                           --------
4.3,  4.4, 4.5, 4.6,  10.3 and 10.4,  and the  obligations  of the Lenders under
---   ---  ---  ---   ----     ----
Section 9.7, shall in each case survive any termination of this  Agreement,  the
-----------
payment in full of all Obligations and the termination of all  Commitments.  The
representations  and  warranties  made by the Borrower in this  Agreement and in
each other Loan  Document  shall  survive  the  execution  and  delivery of this
Agreement and each such other Loan Document.

         SECTION X.6 Severability.  Any provision of this Agreement or any other
                     ------------
Loan Document which is prohibited or unenforceable in any jurisdiction shall, as
to such  provision and such  jurisdiction,  be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions of
this Agreement or such Loan Document or affecting the validity or enforceability
of such provision in any other jurisdiction.

         SECTION X.7  Headings.  The various  headings of this  Agreement and of
                      --------        
each other Loan Document are inserted for convenience  only and shall not affect
the meaning or  interpretation  of this Agreement or such other Loan Document or
any provisions hereof or thereof.

         SECTION  X.8  Execution  in  Counterparts,   Effectiveness,  etc.  This
                       ---------------------------------------------------
Agreement may be executed by the parties hereto in several counterparts, each of
which  shall be executed  by the  Borrower  and the Agent and be deemed to be an
original  and all of  which  shall  constitute  together  but  one and the  same
agreement.  This  Agreement  shall become  effective  when  counterparts  hereof
executed  on  behalf  of  the  Borrower  and  each  Lender  (or  notice  thereof
satisfactory to the Agent) shall have been received by the Agent, the conditions
in Section 5.1 have been satisfied or waived by each Lender,  and notice thereof
   -----------
shall have been given by the Agent to the Borrower and each Lender.

         SECTION X.9 Governing Law;  Entire  Agreement.  THIS AGREEMENT AND EACH
                     ---------------------------------
OTHER  LOAN  DOCUMENT  SHALL  EACH BE DEEMED  TO BE A  CONTRACT  MADE  UNDER AND
GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS.  This  Agreement and the
other Loan  Documents  constitute  the entire  understanding  among the  parties
hereto  with  respect  to the  subject  matter  hereof and  supersede  any prior
agreements, written or oral, with respect thereto.

         SECTION X.10  Successors and Assigns.  This Areement  shall be binding
                       ----------------------
upon and shall inure to the benefit of the 


                                     - 63 -
<PAGE>
parties hereto and their respective successors and assigns;  provided,  however,
that:

                  a. the  Borrower  may not  assign or  transfer  its  rights or
         obligations  hereunder  without the prior written  consent of the Agent
         and all Lenders; and

                  b. the rights of sale,  assignment and transfer of the Lenders
         are subject to Section 10.11.
                        -------------

         SECTION X.11 Sale and Transfer of Loans;  Participations in Loans. Each
                      ----------------------------------------------------
Lender may assign, or sell participations in, its Loans and Commitment to one or
more other Persons in accordance with this Section 10.11.
                                           -------------
                                          

         SECTION X.11.1 Assignments.
                        -----------

                  (a) Each Lender  shall have the right,  subject to the further
         provisions of this Section  10.11.1,  to sell or assign all or any part
                            ----------------
         of its Commitments,  Loans and other rights and obligations  under this
         Agreement and the other Loan Documents (such transfer, an "Assignment")
                                                                    ----------
         to any commercial lender,  other financial  institution or other entity
         (an "Assignee  Lender").  Upon such  Assignment  becoming  effective as
              ----------------
         provided in Section 10.11.1(b),  the assigning Lender shall be relieved
                     ------------------
         from the portion of the Commitments, obligations to indemnify the Agent
         and other obligations hereunder to the extent assumed and undertaken by
         the Assignee Lender,  and to such extent the Assignee Lender shall have
         the rights and obligations of a "Lender" hereunder. Notwithstanding the
         foregoing,  unless otherwise consented to by the Borrower and the Agent
         or unless its  Assignment  is to a Lender or an  Affiliate of a Lender,
         (i)  each  Assignment  shall  be of a  constant,  and  not  a  varying,
         percentage of the Commitment  Amount, and (ii) each Assignment shall be
         in the  initial  principal  amount of not less than  $5,000,000  in the
         aggregate  for  all  Loans  and  Commitments  assigned  or an  integral
         multiple of $5,000,000 if above such amount.  Each Assignment  shall be
         documented by a Lender Assignment Agreement;

                  (b) An Assignment shall become effective hereunder when all of
         the following shall have occurred: (i) the Agent and the Borrower shall
         have  been  given at least  five  days'  prior  written  notice  of the
         Assignment,  together with payment instructions,  addresses and related
         information with respect to such Assignee Lender,  and shall have given
         prior written  consent to such  Assignment  (which consent shall not 


                                     - 64 -
<PAGE>
         be  unreasonably  withheld)  unless  the  Assignee  Lender is already a
         Lender or an Affiliate under this  Agreement,  (ii) the Assignee Lender
         shall  have  paid a  processing  fee of $3,000 to the Agent for its own
         account,  (iii) the  assigning  Lender  shall  have  submitted  in form
         satisfactory to the Agent, the relevant Lender Assignment  Agreement in
         which  the  Assignee  Lender  shall  have  agreed  in  writing  to have
         irrevocably  assumed  and  undertaken  the  transferred  portion of the
         assigning Lender's obligations  hereunder (including without limitation
         the obligations to indemnify the Agent hereunder),  to the Agent with a
         copy for the Borrower, and shall have provided to the Agent information
         which the Agent shall have reasonably  requested to make payment to the
         Assignee Lender, and (iv) the assigning Lender and the Agent shall have
         agreed upon a date upon which the  Assignment  shall become  effective.
         Upon  the  Assignment  becoming  effective,  (x)  if  requested  by the
         assigning  Lender,  the Agent and the Borrower  shall make  appropriate
         arrangements  so that new Notes are issued to the assigning  Lender and
         the  Assignee  Lender and (y) the Agent shall  forward all  payments of
         interest,  principal,  fees and other amounts that would have been made
         to  the  assigning  Lender,  in  proportion  to the  percentage  of the
         assigning Lender's rights transferred, to the Assignee Lender.

         SECTION  X.11.2  Participations.  Each  Lender  shall  have the  right,
                          --------------
subject to the further  provisions of this Section  10.11.2,  to grant or sell a
                                           ----------------
participation   in  all  or  any  part  of  its   Loans   and   Commitments   (a
"Participation") to any commercial lender, other financial  institution or other
 -------------
entity (a  "Participant")  without the  consent of the Lender,  the Agent or any
            -----------
other party hereto.  The Borrower agrees that if amounts  outstanding under this
Agreement  are due and unpaid,  or shall have been declared or shall have become
due and payable upon the  occurrence  of an Event of Default,  each  Participant
shall be deemed to have the right of setoff in respect of its  Participation  in
amounts  owing under this  Agreement  to the same extent as if the amount of its
Participation  were  owing  directly  to it as a Lender  under  this  Agreement;
provided,  that such right of setoff shall be subject to the  obligation of such
Participant to share with the Lenders,  and the Lenders agree to share with such
Participant,  as provided in Section  4.9.  The  Borrower  also agrees that each
                             ------------
Participant  shall be entitled to the benefits of Sections 4.3, 4.5 and 4.6 with
                                                  ------------  ---     ---
respect to its Participation, provided, that no Participant shall be entitled to
receive any greater amount pursuant to such Sections than the transferor  Lender
would  have  been   entitled  to  receive  in  respect  of  the  amount  of  the
Participation  transferred


                                     - 65 -
<PAGE>
by such transferor Lender to such Participant had no such transfer occurred.

         SECTION  X.11.3   Limitation  of  Rights  of  any  Assignee  Lender  or
                           -----------------------------------------------------
Participant.  Notwithstanding anything in the foregoing to the contrary,  except
-----------
in the  instance  of an  Assignment  that has become  effective  as  provided in
Section 10.11.1(b),  (i) no Assignee Lender or Participant shall have any direct
------------------
rights  hereunder,  (ii) the Borrower,  the Agent and the Lenders other than the
assigning  or selling  Lender  shall deal solely with the  assigning  or selling
Lender and shall not be  obligated  to extend any rights or make any payment to,
or seek any consent of, the Assignee Lender or Participant,  (iii) no Assignment
or  Participation  shall  relieve  the  assigning  or  selling  Lender  from its
Commitment to make Loans hereunder or any of its other obligations hereunder and
such Lender shall remain solely  responsible  for the performance  thereof,  and
(iv) no Assignee Lender or Participant, other than an Affiliate of the assigning
or selling  Lender,  shall be entitled to require such Lender to take or omit to
take any action hereunder,  except that such Lender may agree with such Assignee
Lender or Participant that such Lender will not, without such Assignee  Lender's
or  Participant's  consent,  take any  action  which  would,  in the case of any
principal,  interest or fee in which the Assignee  Lender or Participant  has an
ownership or beneficial interest:  (w) extend the final maturity of any Loans or
extend the  termination of any  Commitment,  (x) reduce the interest rate on the
Loans or the rate of fees paid on the  Commitment,  or (y) forgive any principal
of, or interest on, the Loans or any fees.

         SECTION X.11.4 Tax Matters.  No Lender shall be permitted to enter into
                        -----------
any Assignment or  Participation  with any Assignee Lender or Participant who is
not a United States Person unless such Assignee Lender or Participant represents
and  warrants  to  such  Lender  that,  as at the  date of  such  Assignment  or
Participation,  it is entitled to receive interest payments without  withholding
or deduction of any taxes and such Assignee  Lender or Participant  executes and
delivers to such Lender and the Agent,  on or before the date of  execution  and
delivery of documentation of such  Participation or Assignment,  a United States
Internal  Revenue  Service Form 1001 or 4224, or any successor to either of such
forms, as appropriate,  properly  completed and claiming complete exemption from
withholding and deduction of all federal income taxes.

         SECTION  X.11.5  Information.  Each Lender may furnish any  information
                          -----------
concerning  the Borrower in the  possession  of such


                                     - 66 -
<PAGE>
Lender from time to time to  Assignee  Lenders and  Participants  and  potential
Assignee Lenders and Participants.

         SECTION X.11.6 Federal Reserve Bank.  Nothing herein stated shall limit
                        --------------------
the right of any Lender to assign any interest herein to a Federal Reserve Bank.

         SECTION X.12  Confidentiality.  The Lenders  shall hold all  non-public
                       ---------------
information  (which  has  been  identified  as  such by the  Borrower)  obtained
pursuant  to the  requirements  of this  Agreement  confidential  and  shall not
disclose it to any third person,  except that the Lenders may make disclosure to
any  of  their  examiners,  Affiliates,  outside  auditors,  counsel  and  other
professional  advisors  in  connection  with  this  Agreement  or as  reasonably
required  by any bona fide  transferee,  participant  or  assignee  or  proposed
                 ---- ----
transferee,  participant  or  assignee  or  as  required  or  requested  by  any
governmental  agency or  representative  thereof or pursuant  to legal  process;
provided, however, that
--------  -------

                  a. unless  specifically  prohibited by applicable law or court
         order,  each  Lender  shall  notify the  Borrower of any request by any
         governmental  agency or  representative  thereof  (other  than any such
         request in connection with an examination of the financial condition of
         such Lender by such  governmental  agency) for  disclosure  of any such
         non-public information prior to disclosure of such information;

                  b.  prior  to any such  disclosure  pursuant  to this  Section
                                                                         -------
         10.12,  each  Lender  shall  require  any such  bona  fide  transferee,
         -----                                           ----  ----
         participant or assignee or proposed transferee, participant or assignee
         receiving a disclosure of non-public information to agree in writing

                           (i) to be bound by this Section 10.12; and
                                                   -------------

                           (ii) to  require  such  Person to  require  any other
                  Person  to  whom  such  Person   discloses   such   non-public
                  information to be similarly bound by this Section 10.12; and
                                                            -------------

                  c.  except  as may be  required  by an  order  of a  court  of
         competent  jurisdiction and to the extent set forth therein,  no Lender
         shall be obligated or required to return any materials furnished by the
         Borrower or any Subsidiary.

         SECTION  X.13  Other  Transactions.   Nothing  contained  herein  shall
                        -------------------
preclude  the Agent or any other  Lender from  engaging

                                     - 67 -
<PAGE>
in any transaction,  in addition to those  contemplated by this Agreement or any
other Loan  Document,  with the Borrower or any of its  Affiliates  in which the
Borrower or such Affiliate is not restricted hereby from engaging with any other
Person.

         SECTION  X.14  Forum  Selection  and  Consent  to   Jurisdiction.   ANY
                        -------------------------------------------------
LITIGATION  BASED HEREON,  OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS
AGREEMENT  OR ANY OTHER  LOAN  DOCUMENT,  OR ANY  COURSE OF  CONDUCT,  COURSE OF
DEALING,  STATEMENTS  (WHETHER  VERBAL OR WRITTEN) OR ACTIONS OF THE AGENT,  THE
LENDERS OR THE  BORROWER  SHALL BE BROUGHT  AND  MAINTAINED  EXCLUSIVELY  IN THE
COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES  DISTRICT  COURT FOR THE
NORTHERN  DISTRICT  OF  ILLINOIS;  PROVIDED,  HOWEVER,  THAT  ANY  SUIT  SEEKING
ENFORCEMENT  AGAINST ANY  COLLATERAL  OR OTHER  PROPERTY MAY BE BROUGHT,  AT THE
AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER
PROPERTY MAY BE FOUND. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY  SUBMITS TO
THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS AND OF THE UNITED STATES
DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS FOR THE PURPOSE OF ANY SUCH
LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT
RENDERED  THEREBY IN  CONNECTION  WITH SUCH  LITIGATION.  THE  BORROWER  FURTHER
IRREVOCABLY  CONSENTS  TO THE  SERVICE OF PROCESS BY  REGISTERED  MAIL,  POSTAGE
PREPAID, TO MMI COMPANIES, INC., 540 LAKE COOK ROAD, DEERFIELD,  ILLINOIS 60015,
ATTENTION: WAYNE A. SINCLAIR, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE
OF ILLINOIS.  THE BORROWER  HEREBY  EXPRESSLY  AND  IRREVOCABLY  WAIVES,  TO THE
FULLEST  EXTENT  PERMITTED BY LAW, ANY OBJECTION  WHICH IT MAY HAVE OR HEREAFTER
MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT
REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH  LITIGATION HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM. TO THE EXTENT THAT THE BORROWER HAS OR HEREAFTER MAY ACQUIRE
ANY IMMUNITY FROM  JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS  (WHETHER
THROUGH SERVICE OR NOTICE,  ATTACHMENT  PRIOR TO JUDGMENT,  ATTACHMENT IN AID OF
EXECUTION OR  OTHERWISE)  WITH RESPECT TO ITSELF OR ITS  PROPERTY,  THE BORROWER
HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS.

         SECTION  X.15  Waiver of Jury  Trial.  THE AGENT,  THE  LENDERS AND THE
                        ---------------------
BORROWER HEREBY KNOWINGLY,  VOLUNTARILY AND INTENTIONALLY  WAIVE ANY RIGHTS THEY
MAY  HAVE TO A TRIAL BY JURY IN  RESPECT  OF ANY  LITIGATION  BASED  HEREON,  OR
ARISING OUT OF, UNDER,  OR IN CONNECTION  WITH, THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENT,  OR ANY COURSE OF  CONDUCT,  COURSE OF  DEALING,  STATEMENTS

                                     - 68 -
<PAGE>
(WHETHER  VERBAL OR  WRITTEN)  OR  ACTIONS  OF THE  AGENT,  THE  LENDERS  OR THE
BORROWER.  THE BORROWER  ACKNOWLEDGES  AND AGREES THAT IT HAS RECEIVED  FULL AND
SUFFICIENT  CONSIDERATION  FOR THIS PROVISION (AND EACH OTHER  PROVISION OF EACH
OTHER  LOAN  DOCUMENT  TO WHICH IT IS A PARTY)  AND  THAT  THIS  PROVISION  IS A
MATERIAL  INDUCEMENT FOR THE AGENT AND THE LENDERS  ENTERING INTO THIS AGREEMENT
AND EACH SUCH OTHER LOAN DOCUMENT.  IN WITNESS WHEREOF,  the parties hereto have
caused this Agreement to be executed by their respective officers thereunto duly
authorized as of the day and year first above written.

                                     - 69 -
<PAGE>
         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their  respective  officers  thereunto duly authorized as of the day
and year first above written.

                                    MMI COMPANIES, INC.


                                    By /S/ Philip J. Fiskow
                                      ----------------------------------
                                      Title: Treasurer
                                             ---------------------------

                                    Address:
                                      540 Lake Cook Road
                                      Deerfield, IL 60015

                                    Attention: Paul Orzech


                                    BANK OF AMERICA NATIONAL TRUST
                                       AND SAVINGS ASSOCIATION, as
                                       Agent


                                    By /S/ Gary Peet
                                      ----------------------------------
                                      Title: Senior Vice President
                                             ---------------------------

                                      Address:
                                        231 South LaSalle Street
                                        Chicago, IL 60697

                                    Facsimile: (312) 987-0889
                                    Attention: Gary Peet

Commitment     Percentage           BANK OF AMERICA NATIONAL TRUST
----------     ----------            ANDASSOCIATION, as a
$25,000,000       25.0%              Lender


                                    By /S/ Gary Peet
                                      ----------------------------------
                                      Title: Senior Vice President
                                             ---------------------------

                                    Domestic and Eurodollar Office:
                                      231 South LaSalle Street
                                      Chicago, IL 60697

                                    Facsimile: (312) 987-0889
                                    Attention: Gary Peet


                                     - S-1 -
<PAGE>            
Commitment     Percentage           LASALLE NATIONAL BANK
----------     ----------            

$25,000,000       25.0%
                                    By /S/ George L. Kumis
                                      ----------------------------------
                                      Title: Senior Vice President
                                             ---------------------------


                                    Domestic and Eurodollar Office:
                                      135 South LaSalle Street
                                      Chicago, IL 60603

                                    Facsimile: (312) 904-6189
                                    Attention: George L. Kumis


Commitment     Percentage           FLEET NATIONAL BANK
----------     ----------            
$25,000,000       25.0%
                                    By /S/ Leonard Lapolice
                                      ----------------------------------
                                      Title: A.V.P.
                                             ---------------------------

                                    Domestic and Eurodollar Office:
                                      CT MO 0250
                                      777 Main Street
                                      Hartford, CT 06115-2000

                                    Facsimile: (806) 986-1264
                                    Attention: Mildred Chavarria-Jones


Commitment     Percentage           FIRST UNION NATIONAL BANK
----------     ----------            
$25,000,000       25.0%
                                    By /S/ Jane W. Workman
                                      ----------------------------------
                                      Title: Senior Vice President
                                             ---------------------------

                                    Domestic and Eurodollar Office:
                                      301 S. College St., DC 5
                                      Charlotte, NC  28288-0735

                                    Facsimile: (704) 383-7611
                                   Attention: Robert C. Mayer, Jr.


                                     - S-2 -
<PAGE>
EXHIBIT 10.11
                               MMI COMPANIES, INC.
                          1993 NON-EMPLOYEE DIRECTORS'
                            FORMULA STOCK OPTION PLAN

          1. The  Purpose of the Plan.  The purpose of the MMI  Companies,  Inc.
             ------------------------
1993  Non-Employee  Directors'  Formula  Stock  Option  Plan (the  "Plan") is to
promote  the  interests  of MMI  Companies,  Inc.  (the  "Corporation")  and its
subsidiaries  by providing an incentive for  non-employee  directors to join and
remain on the Board of Directors of the Corporation.

          2. Eligibility for Participation.  Awards under the Plan shall be made
             -----------------------------
to each non-employee  director of the Corporation in the form of a non-qualified
stock option to acquire shares of the Corporation's common stock. A non-employee
director is a director who is not an officer or employee of the  Corporation  or
any of its subsidiaries.

          3. Shares Available.  Subject to adjustments as provided in Section 7,
             ----------------
the Corporation  shall reserve for issuance under the Plan 187,500 shares of the
Corporation's common stock. Such shares may be authorized but unissued shares or
treasury shares.  If any option granted  hereunder shall expire or terminate for
any reason  without  having been  exercised in full,  the shares subject to such
option shall again be available for issuance under the Plan.

         4. Awards Under the Plan.
            ---------------------

                  A. Initial One-Time Grant. If the Corporation sells any of its
                     ----------------------
securities  to  the  public  for  its  own  account  pursuant  to  an  effective
registration  statement  under the Securities  Act of 1933, as amended,  and the
rules and regulations  thereunder (the "initial public  offering"),  then, as of
the date that such registration statement is declared effective by the SEC, each
non-employee  director shall be granted a non-qualified option to purchase 4,125
shares  of  the  Corporation's  common  stock  at  the  offering  price  of  the
Corporation's common stock in the initial public offering. Thereafter, as of the
date that any new  non-employee  director is elected or  appointed to the Board,
such  nonemployee  director shall be granted a non-qualified  option to purchase
4,125 shares of the Corporation's common stock at an exercise price equal to the
fair  market  value  of the  Corporation's  common  stock  on the  date  of such
appointment or election.

                  B. Annual Grant.  From and after the initial public  offering,
                     ------------
each non-employee  director who is serving on the Board of Directors on December
31 of any year shall be granted a  nonqualified  option to purchase 1,375 shares
of the  Corporation's  common stock. The grant date of such options shall be the
date of the  annual  meeting  of  shareholders  for the next  year.  The  option
exercise price shall equal the fair market value per share of the  Corporation's
common  stock on the  date  immediately  prior to the  grant  date.  Although  a
non-employee  director  must be serving as a director  on December 31 of a given
year to be eligible to receive an option with  respect to such year,  a director
need not be serving as a director on the grant date to be granted such option.

                  C. Annual Performance Option Grant. Each non-employee director
                     -------------------------------
who is serving  on the Board of  Directors  on January 1 of any year  commencing
January 1, 1998 shall be granted a nonqualified  Performance  Option to purchase
2,500 shares of the Corporation's  common stock.  Notwithstanding the foregoing,
(1) if the minimum Earnings Per Share goal incorporated into the Chief Executive
Officer's objective for that year is not achieved, or (2) if the director is not
also serving as a director on December 31 of the target  performance  year,  the
Performance  Options  for that year will be  forfeited.  The grant  date of such
Performance  Options  shall be as of January 1 of the target  performance  year,
except  that for 1998 the grant  date shall be March 2,  1998.  The  Performance
Option  exercise  price  shall  equal  the fair  market  value  per share of the
Corporation's common stock on the grant date.

          5. Option Terms.  Options  granted under the Plan shall be exercisable
             ------------
for a term of 10 years from the date of grant,  except as set forth  below,  and
shall be evidenced by stock option  agreements.  As used herein, the fair market
value of the  Corporation's  common  stock  means  either (i) if, on the date an
option is granted the common stock is traded on a national securities  exchange,
then on the  basis of the  closing  sale  price  on the


<PAGE>
exchange on which the Corporation's common stock may then be traded or, if there
is no such sale on such date,  then on the last previous day on which a sale was
reported; or (ii) if, on the date an option is granted, the Corporation's common

                                     - 2 -
<PAGE>
stock is not  listed on any  securities  exchange,  but is  publicly  traded and
reported on NASDAQ, then on the basis of the average between the closing bid and
asked  quotations  as reported by NASDAQ.  Options  shall not be  contingent  on
continued board service and shall remain  exercisable  following  resignation or
removal from the Board.  Upon the death of a non-employee  director,  his or her
options may be exercised by the executor, administrator, personal representative
or  distribute  of the  deceased  non-employee  director  through a period to be
determined by the Board of Directors of the  Corporation,  but not to exceed the
date on  which  such  options  expire  or six  months  after  the  death of such
non-employee  director,  whichever is earlier.  No option granted under the Plan
shall be assignable or transferable,  other than by will, by the laws of descent
and  distribution or by a qualified  domestic  relations order as defined by the
Internal Revenue Code of 1986, as amended, or Title I of the Employee Retirement
Income Security Act, or the rules thereunder.

         Notwithstanding  the  foregoing,  from  and  after  March  1,  1997,  a
Non-Employee  Director may  transfer all or a portion of the options  granted to
such Non-Employee Director (including options outstanding on the date hereof) to
(i) the spouse,  descendants  (including adopted descendants and grandchildren),
or the  spouses  of  children  or  grandchildren  of the  Non-Employee  Director
("Immediate  Family Members"),  (ii) a trust or trusts for the exclusive benefit
of such Immediate  Family Members,  or (iii) a partnership or limited  liability
company in which such Immediate Family Members are the only partners or members,
provided that (x) there may be no  consideration  for any such transfer  (except
issuance  of a  partnership  or limited  liability  company  interest in case of
transfer to a family limited partnership or limited liability company),  (y) the
stock  option  agreement  pursuant to which such  options  are  granted  must be
approved by the Committee, and must expressly provide, or be amended to provide,
for transferability in a manner consistent with this Section, and (z) subsequent
transfers of transferred  options shall be prohibited except by will or the laws
of descent and distribution. Following transfer, any such options shall continue
to be subject to the same terms and  conditions as were  applicable  immediately
prior to transfer.  The Committee may, in its  discretion,  permit  transfers to
other persons or entities on substantially the same terms.


          6. Adjustments Upon Changes in Capitalization. The number of shares of
             ------------------------------------------
the  Corporation's  common  stock with respect to which stock  options  shall be
granted  under  the Plan and the  prices  at which  such  stock  options  may be
exercised  shall be  appropriately  adjusted for any increase or decrease in the
number of outstanding  shares of common stock  resulting from the subdivision or
combination of shares of common stock, other capital adjustments, or the payment
of a stock dividend.  Adjustments  under this section shall be made by the Board
of Directors and shall be final, binding and conclusive.

          7.  Effective  Date.  The Plan shall  become  effective on January 15,
              ---------------
1993, subject to the approval thereof by the affirmative votes of the holders of
a majority of the shares of common stock of the Corporation  present,  in person
or by proxy, and entitled to vote at the 1993 annual meeting of the shareholders
of the Corporation, or any adjournment of such meeting.

         8. Amendment.  The Plan may be amended only by an effective  resolution
            ---------
of the Board of Directors of the  Corporation.  In addition,  any amendment that
would materially  increase the benefits accruing to participants under the Plan,
materially  increase the number of securities which may be issued under the Plan
or materially modify the requirements as to eligibility for participation in the
Plan shall be subject to the approval of the holders of a majority of the shares
of common stock of the Corporation  present, in person or by proxy, at an annual
or special meeting of the shareholders.  The provisions of the Plan shall not be
amended  more than once every six months,  other than to comport with changes in
the Internal  Revenue Code, the Employee  Retirement  Security Act, or the rules
thereunder.

         9. Term of the Plan.  The Plan shall  terminate 10 years after the date
            ----------------
on which it becomes  effective  and no award shall  thereafter be made under the
Plan.  Notwithstanding  the foregoing,  all options issued and outstanding under
the Plan prior to such date shall  remain in effect until such options have been
exercised or terminated in accordance with their terms.


As amended through February 26, 1998

                                     - 3 -
<PAGE>
EXHIBIT 10.13

             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  or
appointed to the Board.

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

1.5 "Plan Termination Date" shall mean February 26, 1998.

1.6 "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  if such
director's  Retirement has occurred prior to the Plan  Termination  Date, or has
served  at least  one (1) full year  prior to the Plan  Termination  Date if the
Participant is a director on such date.

1.7  "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.  Notwithstanding the foregoing, in
the case of Participants  who are serving on the Company's Board of Directors on
the Plan Termination Date, the Retirement Benefit Date shall be the first day of
the month following a Participant's Retirement.


                                   SECTION II


<PAGE>
                            ELIGIBILITY FOR BENEFITS

2.1 Each  Participant is eligible to receive a benefit under this Plan beginning
on his or her 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 if such director's Retirement has occurred prior to the Plan Termination
Date,  or at least one (1) full year of  service  prior to the Plan  Termination
Date if Retirement  of a director  serving on the Plan  Termination  Date occurs
thereafter.

                                   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).  Notwithstanding  the foregoing,
all non-employee directors serving on the Board on the Plan Termination Date who
complete  at least one full  year of  service  prior to such  date will  receive
$15,000 per full year or partial year (for the then-current term year) served on
the Board of Directors to the Plan  Termination  Date, but no more than ten (10)
years of service.

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

3.2(a)  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.

                                     - 2 -
<PAGE>
3.2(b) Notwithstanding the foregoing,  the only benefits payable under this Plan
to directors serving on the Plan Termination Date shall be payable either:

     (i)  in the form of a  lump-sum  payment of cash upon  Retirement  from the
          Board  (which may also be deferred  over any period of time  beginning
          with the Retirement Benefit Date but not to exceed ten years); or

     (ii) Directors may  irrevocably  elect, at only one time, to exchange their
          entire  current cash benefit  payable under this  Retirement  Plan for
          unregistered  MMI stock at 85% of fair market value  (closing price on
          the most  recent  trading  day  prior  to  receipt  of the  director's
          election),  such stock to be held for the director until Retirement in
          a Stock Plan  Account on the books of the Company and which shall only
          be in the name of the Director. Dividends will accrue on stock held in
          such Stock Plan Account and stock equivalents shall be credited to the
          Stock Plan Account in the amount of such dividends.  At Retirement,  a
          stock certificate shall be issued to the director in the amount of the
          whole number of shares appearing in the Stock Plan Account and a check
          shall be issued in lieu of fractional shares,  however, a director may
          elect  to  defer  receipt  of such  shares  over  any  period  of time
          beginning  with  Retirement  Benefit Date but not to exceed ten years,
          provided however,  that the director elects such deferral at least six
          months prior to Retirement. Stock in the Stock Plan Account may not be
          sold or  transferred  prior to Retirement but shares may be issued and
          exchanged  for  shares  related  to an offer  of  purchase  or  merger
          extended to other shareholders.  Such stock may, in the Company's sole
          discretion,  be held for an  additional  six (6) months  following the
          contemplated issue date to comply with the federal securities laws.

A director's  election to receive cash or unregistered  stock may be made at any
time before benefits are paid under this Retirement Plan. The annuity options of
Section 3.2(a) are eliminated for all directors  whose  Retirement  occurs after
the Plan Termination Date.



                                   SECTION IV

                         PAYMENT OF RETIREMENT BENEFITS

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.

                                     - 3 -
<PAGE>
                                    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.

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.



Effective  January 1, 1993  
Amended  December  8, 1993  
Amended  April 17,  1996
Amended February 26, 1998


                                     - 4 -
<PAGE>
EXHIBIT 10.18

                              EMPLOYMENT AGREEMENT
                              --------------------


         THIS  AGREEMENT is made as of May 1, 1997 by and between MMI COMPANIES,
INC. (the  "Company"),  with offices at Deerfield,  Illinois,  and B.  FREDERICK
BECKER of Lake Forest, Illinois (the "Employee").

                  WHEREAS,  the Company  wishes to assure itself of the services
         of the Employee upon the terms and conditions herein set forth.
                  NOW,  THEREFORE,  in  consideration of the mutual promises and
         agreement set forth herein, the parties agree as follows:

         1.       Employment
                  ----------

                  Subject to the terms and conditions  hereinafter provided, the
Company  hereby employs and engages the services of the Employee to serve in the
capacity of Chairman and Chief Executive Officer of the Company,  and such other
offices and positions as the Board may from time to time  designate,  during the
term of  employment  set  forth  in  Paragraph  2 of this  Agreement  and at the
compensation and benefits  hereinafter  stated. The Employee hereby accepts such
employment and agrees to render to the Company services consistent with those of
Chairman and Chief Executive Officer,  and such other  commensurate  offices and
positions as designated,  faithfully,  diligently and to the best of his ability
and to discharge the responsibilities thereof.

         2.       Term of Employment
                  ------------------

         The expression  "Term of Employment," as used in this Agreement,  shall
mean the period  beginning on May 1, 1997 and ending on the date the  Employee's
employment   relationship  with  the  Company  is  terminated  pursuant  to  the
provisions of Paragraph 6 hereof.

         3.       Salary
                  ------

         (a) The Company  shall pay or cause to be paid to the  Employee  during
the  Term of  Employment  a salary  of not less  than  five  hundred  thirty-one
thousand  and  three  hundred   Dollars   ($531,300)   per  annum,   payable  in
approximately  equal  monthly  installments  during  such term or in such  other
installments as the Company and Employee may agree to adopt from time to time.

         (b) The amount of salary payable hereunder shall be subject to periodic
review  by the  Company.  Such  review  shall  occur  not less  frequently  than
annually, with the first annual review to occur in April of 1998. The Employee's
annual  salary  may not be  reduced,  and in the event the salary  hereunder  is
increased,  such annual salary shall  thereafter be the minimum  salary  payable
under this Agreement.


<PAGE>
         4.       Annual Bonus
                  ------------

                  The Company shall have adopted a formal annual bonus plan that
will provide for the payment of an annual cash bonus to the Employee  during the
Term of Employment  based upon the achievement of a limited number of financial,
operational  and  managerial  goals  mutually  agreed  to  by  the  Compensation
Committee  of the Company and the  Employee.  Such  objectives  will be weighted
according  to their  importance.  Objectives  and  weightings  may be revised by
mutual consent of the Employee and the Compensation  Committee during the fiscal
year if warranted by changes in economic conditions,  accounting  regulations or
other unforeseen circumstances.

         Upon successful achievement of the agreed upon goals, such annual bonus
will equal up to 60% of the Employee's annual salary ("Maximum Bonus").

         The level of the Employee's  performance for  determining  actual bonus
payments  will be measured  by the  Compensation  Committee  based on a thorough
review of the  Employee's  performance  vis-a-vis  the  established  objectives,
taking into consideration  extraordinary  events that may have either positively
or negatively impacted on the ability to achieve such objectives.

         The Maximum  Bonus  level  shall be subject to  periodic  review by the
Company  to  ensure  that the  bonus  opportunity  remains  consistent  with the
practices of companies of comparable size and business focus.  Such review shall
occur at least every three years.

         5.       Other Benefits
                  --------------

         (a) During the Term of  Employment,  the Employee  shall be entitled to
participate and be included in any retirement plan adopted by the Company and in
any group life insurance,  hospitalization,  disability,  or similar programs of
the Company now  existing  and/or as  established  and offered from time to time
during the Term of  Employment,  to the  extent  that he is  eligible  under the
general  provisions  thereof or at such earlier  time as the Company  shall have
consented thereto.  These benefits shall include all employee benefits generally
provided to senior executives of the Company, including, but not limited to, the
Company's  Return on Equity Plan,  the  Retirement  Equity Plan (to be effective
July 1, 1997) and the Nonqualified Stock Option Plan. The Employee shall also be
entitled to full reimbursement for his health club membership, without regard to
any annual  limitation  that  applies  generally  to Company  officers  or other
employees.

         (b) The  Company  shall  provide to the  Employee  an annual  allowance
("Perquisite  Allowance")  of  thirty  five  thousand  dollars  ($35,000)  to be
allocated  by the Employee at his  discretion  among the  following  perquisites
based on the actual cost of providing each perquisite: an automobile and related
operating  costs,  including  insurance,  gas, oil, and repairs and maintenance;
country and luncheon  club  memberships,  including  initiation  fees and annual
dues; life and disability insurance above the level provided by Company programs
offered to key employees;  reimbursement of family medical  expenses,  including
vision and dental,  not covered by Company  programs  offered to key  employees;
financial  counseling  and tax  preparation  assistance;

- 2 -
<PAGE>
and spouse  travel in addition to such travel  required in the normal  course of
conducting the Company's business.

         The Perquisite  Allowance must be used for the purposes described above
and will be made  available  only upon the  Company's  receipt  of  satisfactory
evidence that the funds are being used in  accordance  with such  purposes.  Any
portion of the Perquisite Allowance that is unused during a fiscal year shall be
forfeited.

         At the  Employee's  election,  initiation  fees  associated  with  club
memberships  may be financed by a loan from the Company to the  Employee or by a
loan from a financial  institution  arranged and  guaranteed by the Company.  In
such cases,  the  Perquisite  Allowance  will be charged  annually  for interest
payments  due on the  loan as well as  payments  of  principal  (whether  or not
required by the lender)  sufficient  to amortize  the loan balance in ten years.
Charges to the  Perquisite  Allowance for loan principal in excess of reductions
in such  principal  required  by the  lender  will be applied to prepay the loan
balance.

         In the case of the Employee's  death (as defined in Paragraph  6(a)) or
permanent  disability (as defined in Paragraph 6(b)) or involuntary  termination
for any reason  except for Cause (as Cause is defined in  Paragraph  6(c)),  the
Company will be  responsible  for the payment of any remaining  loan balance and
accrued interest thereon  associated with club memberships  obtained through the
Perquisite  Allowance.  Upon the  Employee's  termination  for any other  reason
(including  for  Cause),  the  Employee  will be  required  to repay  fully  any
outstanding  loan  balance  and  accrued  interest  thereon  within  90  days of
termination.

         The  Employee  will be  personally  responsible  for any tax  liability
resulting  from any  actual or imputed  income  associated  with the  Perquisite
Allowance.

         (c) Reasonable authorized,  ordinary and necessary expenses,  meals and
other travel and  entertainment  expenses incurred by the Employee in connection
with his duties hereunder shall be reimbursed upon  presentation of receipts and
vouchers in the form required by the Company and in accordance with the policies
of the  Company,  as those  requirements  and  policies may from time to time be
amended or changed.  The Employee  shall not be reimbursed  under this Paragraph
5(c) for any costs  associated  with any vehicle owned or leased to the Employee
or that is regularly available for his use (but may elect to be reimbursed under
Paragraph 5(b)).

         (d) For each  calendar  year or part thereof that this  Agreement is in
effect,  the  Employee  shall be  entitled  to vacation  and  holidays  (without
deduction of salary or other  compensation)  for such period as is in conformity
with  the  Company's  policy  regarding   vacations  and  holidays  for  officer
employees,  such  vacations to be taken at such time or times during the year as
may be mutually agreed upon between the Company and the Employee.

         (e) For each  calendar  year or part thereof that this  Agreement is in
effect,  the  Employee  agrees to obtain a  comprehensive  "executive"  physical
examination (which shall include not only an in depth physical examination,  but
also  appropriate  nutrition,   weight,   exercise,  and  other  health  related
counseling)  at the  Greenbriar  Clinic (or an equivalent  clinic).  The Company

                                     - 3 -
<PAGE>
agrees to pay all of the Employee's  costs  (including  all reasonable  medical,
transportation and lodging costs) associated with Employee obtaining this annual
comprehensive physical examination.

         6.       Termination
                  -----------

         (a) The  Employee  may  terminate  his  employment  for any reason upon
ninety  (90) days'  prior  written  notice to the  Company.  In the event of the
Employee's  death,  the  Employee's  employment  shall  terminate and any unpaid
salary,  accrued incentive  compensation,  and stock options will be paid to his
estate on the last day of the month during which the Employee's death occurs. In
addition,  in the  event  of the  Employee's  death  during  the  term  of  this
agreement,  the Employee  shall be entitled to a benefit under Section 6(e). The
Company will continue for 18 months payment of health  insurance  premiums under
the Company's then existing plan for benefits provided to the Employee's covered
dependents as of his date of death.

         (b) In the event of the Employee's  permanent disability (as defined in
this Paragraph 6(b)),  the Employee's  employment may terminate six months after
the last day of the month  during  which such  disability  occurs.  The Employee
shall at the Company's  request,  submit to a physical  examination  in order to
confirm such disability and its continuance  (subject to reasonable  limitations
as to the frequency of required  examinations).  The Employee shall be deemed to
be  permanently  disabled if it shall have been  certified to the Company,  by a
physician acceptable to the Company, that the Employee's disability is such that
it will  substantially  impair the  Employee's  ability to perform his essential
duties  hereunder  for more  than 180  days.  In  addition,  in the event of the
Employees' permanent disability during the term of this Agreement,  the Employee
shall be entitled to a benefit under Section 6(e).

         (c) The Company may terminate the  Employee's  employment  for Cause as
set forth in this  Paragraph  6(c).  Cause shall be defined to include,  without
limitation:

                  (i) The  commission  of fraud,  embezzlement,  dishonesty,  or
         crimes of a similar nature, and

                  (ii) The Employee's  substantial default in the performance of
         his material obligations  hereunder for a period of ten (10) days after
         the Employee is advised in writing of such  default and the  Employee's
         failure  to cure  such  default  within  the ten (10) day  period,  the
         Employee's refusal to follow the reasonable directions or orders of the
         Board of  Directors  of the  Company,  drunkenness  which  affects  the
         Employee's  job  performance,  use  of  illegal  drugs,  misconduct  or
         malfeasance of office, or acts of a similar character.

         Subject to the ten (10) day cure period in (ii) above,  the Company may
immediately  terminate  the Employee for  committing or attempting to commit the
acts enumerated in Paragraph  6(c)(i) hereof.  The Company may not terminate the
Employee for committing or attempting to commit the acts enumerated in Paragraph
6(c)(ii) hereof unless it sends to the Employee  written notice of its intent to
so discharge the Employee, along with the reasons therefor.

                                     - 4 -
<PAGE>
         (d) Except as provided in Paragraph 6(c) hereof,  this Agreement  shall
renew  automatically for successive one year terms,  unless the Company notifies
the  Employee  in  writing at least 90 days prior to the date that it intends to
terminate  the  Employee's  employment   relationship  with  the  Company.  Once
notified,  pursuant to this  Paragraph,  that the Company intends to discontinue
its  employment  relationship  with the  Employee  on the date set  forth in the
written notice  required by this  Paragraph,  the Employee shall be permitted to
take such reasonable time away from his duties  hereunder as may be necessary to
secure other employment.

         (e) Except as a result of the Employee's termination following a Change
of Control (as defined in Paragraph 7) or the Employee's  termination  for Cause
(as defined in Paragraph  6(c)), if the Company  terminates the Employee (either
through  dismissal during the term or through written  notification not to renew
this  Agreement)  or if the Employee  dies or becomes  permanently  disabled (as
defined in Paragraph 6(b)) during the term of this Agreement,  the Employee will
be entitled to severance  pay in an amount  equal to one and one-half  times the
Employee's  then current annual salary.  Such amount will be paid in cash within
60 days of  termination.  The Employee  will continue to receive life and health
benefits  at then  existing  levels of  premiums  and  benefits  for himself and
covered dependents for 18 months.

         (f) At the Employee's  option,  following his termination of employment
(other  than for  Cause),  the  Company  shall  furnish  an office and access to
administrative  assistance  for a period  not to exceed  one year at a  mutually
acceptable location.

         (g)  The  Employee's  termination  of  employment  shall  result  in  a
"qualifying  event" for purposes of determining  his  eligibility for continuing
health  coverage  under  the  Consolidated  Omnibus  Budget  Reconciliation  Act
("COBRA"), and any period during which continued health benefits are provided by
the Company pursuant to this Paragraph 6 (i.e, Paragraph 6(a) and (e)) shall run
concurrently with the Employee's applicable COBRA eligibility period.

         7.       Change of Control
                  -----------------

         (a) In the  event  of a  Change  of  Control  of the  Company  and  the
occurrence  of any one or more of the four events  described in  Paragraph  7(b)
below within twelve (12) months  following such Change of Control,  the Employee
shall be  entitled  to a  payment  equal to two times  his then  current  annual
salary,  plus an amount equal to two times his then current  Maximum  Bonus.  In
addition,  unvested shares of Restricted  Stock and cash payments related to the
associated  tax  liability  on such  Restricted  Stock  will vest and be paid in
accordance  with the  provisions of said  Restricted  Stock Plan and  Restricted
Stock Agreement.

         (b)  Occurrences  resulting in payments to the Employee under Paragraph
7(a) shall be:

                  (i) Involuntary termination of employment,  except upon death,
         permanent disability or Cause (as defined in Paragraph 6(c)); and

                  (ii)  Voluntary  termination  of  employment  within  60  days
         following any one of the following:

                                     - 5 -
<PAGE>
                  o        A   significant    reduction   in   the    Employee's
                           responsibilities, or title;

                  o        A reduction in the Employee's salary,  Maximum Bonus,
                           Perquisite   Allowance  or  other  benefits   (unless
                           benefits   that  are   generally   available  to  all
                           employees  and/or  senior  executives  are  similarly
                           changed for all other of such employees and/or senior
                           executives);

                  o        Relocation  of  the  Company's   principal  place  of
                           business  in  excess  of 75 miles  from its  existing
                           location.

         (c) For purposes of this  Agreement,  Change of Control will be defined
as:

                  (i) The purchase or other acquisition by any person, entity or
         group of persons,  within the meaning of Sections 13(d) or 14(d) of the
         Securities  Exchange Act of 1934 ("Act"),  or any comparable  successor
         provisions,  of beneficial  ownership (within the meaning of Rule 13d-3
         promulgated  under  the  Act)  of 50  percent  or more  of  either  the
         outstanding  shares of common stock or the combined voting power of the
         Company's  then  outstanding   voting   securities   entitled  to  vote
         generally; or,

                  (ii) The approval by the stockholders of the Company of:

                  o        a reorganization,  merger, or consolidation,  in each
                           case,   with  respect  to  which   persons  who  were
                           stockholders of the Company immediately prior to such
                           reorganization,   merger  or  consolidation  do  not,
                           immediately  thereafter,  own more than 50 percent of
                           the combined  voting power entitled to vote generally
                           in the  election  of  directors  of the  reorganized,
                           merged or  consolidated  Company's  then  outstanding
                           securities;

                  o        a liquidation or dissolution of the Company; or

                  o        of  the  sale  of  all  or  substantially  all of the
                           Company's assets.

         8.       Confidential Information
                  ------------------------

         (a) The Company and the  Employee  acknowledge  that the  Employee,  in
performing the terms and conditions of the Employee's employment,  will directly
or indirectly gain access to confidential business information about the Company
and its  operations,  including,  but not  limited  to, its modes and methods of
conducting its business and producing and marketing its products,  its employee,
customer,  vendor and referral sources lists, its trade secrets, its copyrighted
and non-copyrighted or non-protected  computer software programs, its techniques
of operation, its financial structure, and its weaknesses, if any ("Confidential
Information").

         (b)  The  Company  and  the  Employee   agree  that  all   Confidential
Information  shall be deemed to be highly  confidential,  shall  constitute  the
Company's  trade secrets and shall remain the

                                     - 6 -
<PAGE>
sole property of the Company. The Employee agrees not to in any way communicate,
reveal or  divulge  any  Confidential  Information  to any  person or entity not
employed by the Company,  unless the Executive  Committee of the Company's Board
of Directors has given its advance, written approval to such communication.

         (c) Upon termination of employment with the Company for any reason,  or
at any other time the Company  demands,  the Employee shall deliver  promptly to
the Company all  Company  property  then in his  possession,  including  without
limitation  all  memoranda,   notes,  records,   reports,   manuals,   drawings,
blueprints,  employee  lists,  customer  lists,  referral  source lists,  vendor
service lists,  software,  programs,  and any other documents and copies thereof
and all material relating to Confidential Information belonging to the Company.

         (d) The Employee acknowledges and agrees that the Company has a duty to
its shareholders to protect its assets, and in fulfilling this duty, the Company
reserves  the right to  question  its  employees,  generally  and  specifically,
regarding Confidential Information.

         (e) The Employee  agrees that the terms of this Section 8 shall survive
termination of the  Employee's  employment.  The Employee  agrees to execute and
abide by the Company's Confidentiality Agreement and such additional obligations
of  confidentiality as are set forth in the Company's policies and procedures or
promulgated from time to time.

         9.       Notices
                  -------

         All  notices  under this  Agreement  shall be in  writing  and shall be
deemed  effective  when  delivered  in person  (in the  Company's  case,  to its
Secretary)  or 72  hours  after  deposit  in the  U.S.  Mail,  postage  prepaid,
addressed  to the  Employee  at his  address  as last  recorded  in the  Company
personnel  records;  and if to the  Company  at 540 Lake Cook  Road,  Deerfield,
Illinois; or such other address as either may give by notice.

         10.      Assignment and Successors
                  -------------------------

         The rights and  obligations of the Company under this  Agreement  shall
inure to the benefit of and shall be binding upon the successors of the Company.
This  Agreement  may be  assigned  by the Company  only to an  affiliate  of the
Company,  provided  that no such  assignment  shall  relieve  the Company of its
obligation to provide  compensation  and benefits to the Employee as outlined in
this Agreement.

         11.      Binding Arbitration - Attorney's Fees
                  -------------------------------------

                  The Company and the  Employee  agree that any and all disputes
which  may arise  between  the  parties  hereto  regarding  all  aspects  of the
Employee's future employment and association with the Company, the terms of this
Agreement  and/or  the  Employee's  rights  hereunder  shall be  subject  to and
determined by  arbitration in the City of Chicago,  Illinois in accordance  with
the  employment  arbitration  rules  of  the  American  Arbitration  Association
("AAA"). In that regard, the Company and the Employee acknowledge and agree that


                                     - 7 -
<PAGE>
(i)  arbitration  is final and binding on both  parties on all claims  which are
raised  or could be raised  concerning  all  aspects  of the  Employee's  future
employment and association  with the Company or this Agreement,  including,  but
not limited to, claims of employment  discrimination,  wrongful  discharge,  and
breach of contract; (ii) both parties waive their rights to seek any remedies in
court,  including the right to a jury trial;  (iii)  reasonable  pre-arbitration
discovery is available to both parties, but may be more limited and focused than
that in court proceedings; (iv) the arbitrator's award is required to be written
and include findings of ultimate fact and reasoning;  and (v) a party's right to
appeal or to seek  modification of the arbitrator's  rulings is strictly limited
by law and will be as limited as possible to permit enforcement under applicable
state or federal law. The  arbitrator  is to apply  Illinois law as to liability
and damages except where a claim arises under the laws of the United States,  in
which case United  States'  substantive  law as to liability  and damages  shall
apply.

                  The arbitrator  shall be empowered to award  attorney's  fees,
out-of-pocket costs or disbursements,  and any and all charges which may be made
for the cost of the arbitration and the fees of the arbitrator to be paid by the
losing party or to be borne equally by the parties in his or her discretion. The
provisions of this  Agreement  will survive any  termination  of the  Employee's
employment or other association with the Company, and the existence of any claim
or cause of action by the Employee  against the Company,  whether  predicated on
this Agreement or otherwise, will not constitute a defense to the enforcement of
the covenants and agreements of this Agreement in AAA proceedings.

         12.      Amendment
                  ---------

         This  Agreement may be amended only by a written  instrument  signed by
both the  Employee  and the  Company.  Nothing  in this  Agreement,  express  or
implied,  is  intended  to confer  upon any third  person any rights or remedies
under or by reason of this  Agreement.  No  amendment  or  modification  of this
Agreement requires the consent of any individual,  partnership,  corporation, or
other entity not a party to this Agreement

         13.      Construction
                  ------------

         This  Agreement  shall be  construed  under  the  laws of the  State of
Illinois.  Paragraph  headings  are  for  convenience  only  and  shall  not  be
considered a part of the terms and provisions of the Agreement

         14.      Severability
                  ------------

                  The  provisions of this  Agreement  are severable  and, in the
event that any provision hereof shall be found by any court to be unenforceable,
in whole or in part, the remainder of this Agreement  shall  nonetheless  remain
enforceable and binding upon the Company and the Employee.

                                     - 8 -
<PAGE>

         15.      Waiver of Breach
                  ----------------

                  No  waiver  of any  breach  of any term or  provision  of this
Agreement  shall be  construed to be, nor shall be, a waiver of any other breach
of this  Agreement.  No waiver shall be binding  unless in writing and signed by
the party waiving the breach.

         16.      Entire Agreement
                  ----------------

                  This Agreement shall constitute the entire  agreement  between
the  Company  and the  Employee  and  supersede  all prior  and  contemporaneous
agreements, representations and understandings of the parties.

         IN WITNESS WHEREOF, MMI Companies, Inc. has caused this Agreement to be
executed by its duly authorized officers, and Employee has hereunto set his hand
and seal. this day of , 1997.


                                        MMI COMPANIES, INC.



                                        BY:___________________________________
                                            Joseph D. Sargent, Chairman of the
                                            Personnel and Compensation
                                            Committee



                                           ___________________________________
                                            B. Frederick Becker






                                     - 9 -
<PAGE>
EXHIBIT 10.19

January 7, 1998

Via Hand Delivery


Mr. Stephan A. Schleisman
871 Woodstream Court
Lake Forest, IL  60045

Dear Steve:

This letter confirms our discussion of the terms of a mutual agreement regarding
your resignation from MMI Companies,  Inc. (the "Company"). In order for you and
the Company to complete this  agreement as a full and binding  resolution of all
matters relating to your employment with and separation from the Company,  it is
understood that you and the Company agree as follows:

1.       Resignation.  You agree to resign and the Company agrees to accept your
         ------------
         resignation effective January 7, 1998 (the "Separation Date").

2.       Separation  Payment.  In  consideration of the terms and conditions set
         -------------------
         out in the  paragraphs  that  follow,  the Company  will make a special
         separation payment and provide benefits as follows:

                  a. The  Company  will make a  special  separation  payment  of
                  $255,000.00  (less  deductions for social security  insurance,
                  federal,   state   and   other   taxes   and   other   payroll
                  withholdings),  a sum  equal  to 12  months  of  your  regular
                  annualized base salary.  This separation  payment will be made
                  to you  semi-monthly  in equal  installments  with  the  first
                  payment  to be made  on the  first  normal  payday  after  the
                  expiration of the seven day revocation  period described below
                  in  Paragraph  6. The  period  of time  during  which  you are
                  receiving separation pay is referred to as the "Pay Period."

                  b.  Through  the end of the Pay  Period  or until  you  secure
                  employment  elsewhere,  whichever  occurs first,  you shall be
                  entitled  to  participate  at  the  Company's  expense  in the
                  medical,  dental and vision group insurance plans in which you
                  presently  participate,  provided  such  medical,  dental  and
                  vision  benefits   continue  to  be  available  for  similarly
                  situated  employees within the Company.  Your COBRA rights, to
                  medical benefits will commence on the Separation Date and will
                  run for  eighteen  months from  February 1, 1998.  The Company
                  will cover your COBRA payments,  if any, from February 1, 1998
                  through January 31, 1999.

<PAGE>
                  c. The Company will  provide  outplacement  assistance,  for a
                  period of 12 months or until you secure employment,  whichever
                  occurs  first,   with  Drake,   Beam,  Morin,  at  a  location
                  acceptable to the Company.

                  d.  Payments  under this  Paragraph 2 shall not be included as
                  compensation  for  purposes of the Company  Savings and Profit
                  Sharing  Plan  (401(k))(the  "Plan").  You will be entitled to
                  receive the Company match for your 1997  contributions  to the
                  Plan.

                  e. All unvested stock options previously granted will lapse on
                  the Separation Date.  Vested but unexercised stock options are
                  subject to the terms of your option agreement.

                  f.  The   Company   will   provide   you  with  a  payment  of
                  $1,000,000.00  upon  attainment of age 65 or death,  whichever
                  occurs first,  subject to all applicable  taxes as required by
                  law.

                  g. The Company will forgive all relocation  expenses  incurred
                  and reimbursed up through the Separation Date.

                  h.  Your  contributions  to the  Retirement  Equity  Plan  and
                  applicable  match  will  paid to you in the  April  15,  1998,
                  payroll, subject to all applicable taxes as required by law.

                  i. Your  eligibility  to  participate in the Plan and the ESIP
                  will terminate as of your resignation date.

         You  understand  and agree that the total of the  payments and benefits
         described in Paragraphs 2(a) through 2(h) are in  consideration  of the
         terms you agree to in this  agreement and exceed in amount any payments
         or benefits  the Company  would have  otherwise  owed you, but for this
         agreement. You further acknowledge and understand that you are entitled
         to no payments or benefits other than those enumerated in the Paragraph
         2.

3.       Release.
         --------

                  a. You (as defined  below in Paragraph  3(b)) waive your right
                  to assert and release and discharge  the Company,  and each of
                  the Company's successors,  assigns,  divisions,  subsidiaries,
                  current or prior  parents,  affiliates,  directors,  officers,
                  agents, employees, representatives, and attorneys (and agents,
                  directors, officers, employees, representatives, and attorneys
                  of any divisions,  current or prior parents,  subsidiaries and
                  affiliates),  from any and all  claims of any  sort,  known or
                  unknown,  which  you now have or have ever had that in any way
                  relate to your employment relationship with the Company or the
                  termination of your employment (the  "Release").  This Release
                  specifically


<PAGE>
                  includes,  but is not  limited  to, any  claims  under the Age
                  Discrimination  in Employment  Act ("ADEA"),  Title VII of the
                  Civil  Rights  Act of 1964,  the  Employee  Retirement  Income
                  Security Act ("ERISA"),  the Americans With  Disabilities  Act
                  ("ADA"),  the  Civil  Rights  Act  of  1991,  the  Fair  Labor
                  Standards  Act, the Family and Medical Leave Act, the Illinois
                  Human Rights  Employment  Act,  each as amended,  or under any
                  other  federal,  state or local  statute,  law,  regulation or
                  ordinance banning any type of employment  discrimination or in
                  any way  regulating  employment  relationships  as well as any
                  claim of unlawful retaliation,  wrongful discharge,  breach of
                  contract  (express or implied),  breach of good faith and fair
                  dealing,  emotional distress,  injury to personal  reputation,
                  any equitable or any other type of claim whatsoever in any way
                  related to your  employment or termination of employment.  You
                  also waive and agree not to accept any award of money from any
                  lawsuit or administrative proceeding which might be brought on
                  your behalf by someone else.

                  b. For  purposes  of this  Release  "You" shall  include  your
                  spouse, issue, agents,  representatives,  guardians,  assigns,
                  dependents, heirs, executors, administrators, and attorneys.

                  c. You represent that you have not filed, and promise never to
                  file,  any  lawsuit,   petition,   charge  of  discrimination,
                  grievance  or action of any nature  against  the  Company,  or
                  anyone  else  released  above,  asserting  any claims that are
                  released in Paragraph 3(a).

4.       Confidential  Information.  You agree that the success of the Company's
         -------------------------
         business depends in large part on the  development,  use and protection
         of certain  Confidential  Information and  acknowledge  that during the
         course  of  your   employment,   you  have  become   aware  of  certain
         Confidential  Information,   such  as  business  methods,   techniques,
         research  data,  marketing  and  sales  information,   customer  lists,
         know-how of the Company and its parent and affiliates,  their manner of
         operation, plans or other data, which constitute valuable trade secrets
         of the Company. You agree to hold such information in strict confidence
         and not to publish or disseminate any  Confidential  Information to any
         third party.  Confidential Information shall mean any information which
         is not  disclosed to the general  public and which  relates to: (i) the
         business of the Company,  its parent or affiliates,  (ii) any client of
         the Company,  its parent or affiliates  or (iii) any product,  service,
         methodology,   tool,  or  software  of  the  Company,   its  parent  or
         affiliates. Confidential Information does not include information that:
         (i) is or  becomes  published  or  otherwise  available  to the  public
         through  no act or no fault of your own;  or (ii) has  previously  been
         disclosed to you by a source  other than the  Company,  as evidenced by
         your written  records;  or (iii)  hereafter  comes into your possession
         from a third party with the legal right to use and  disclose  the same.
         You agree not to make any use whatsoever,  either now or in the future,
         of the Confidential  Information,  for your own personal use or the use
         of any business or venture with 


<PAGE>

         which you are or may become  associated,  whether  through  employment,
         investment, contractual relationship, or otherwise.

5.       Consultation  with Legal Counsel.  You acknowledge that the Company has
         --------------------------------
         advised you in writing to consult  with  counsel and has granted you at
         least 21 days to consider this agreement, including the Release, before
         signing it.

6.       Revocation Period.  Following your execution of this Release,  you will
         -----------------
         have seven days during which to revoke your  agreement to this Release.
         If you choose  not to so revoke  your  agreement,  this  Release  shall
         become  effective and  enforceable  and the payment  described above in
         Paragraph 2 will then be made to you.

7.       Non-Solicitation.  You  acknowledge  that  the  Company  has  a  highly
         ----------------
         qualified  and loyal work force and a  consequent  valuable  and strong
         interest in maintaining that work force and agree that, for a period of
         two years after the Separation Date, you will not contact any employees
         of the Company, directly,  indirectly or through a third party, for the
         purpose of  soliciting  or inducing  them in any fashion to quit at any
         time their employment with the Company for any purpose.

8.       Cooperation.  You agree that,  at the request of the Company,  you will
         -----------
         cooperate  with the Company and its  subsidiaries  and  affiliates  and
         their   officers,   directors  and  counsel  in  connection   with  any
         investigation,  claim or litigation relating to any matter in which you
         were involved  during your  employment with the Company or of which you
         have knowledge.  The Company agrees to reimburse you for all reasonable
         expenses  incurred by you in  providing  such  assistance  and to pay a
         reasonable  per  diem  rate  for  any  services  requested  of  you  in
         connection therewith.

9.       Breach.  In the event you breach  Paragraphs  4, 7 or 8, you agree that
         ------
         effective  with  such  breach  the  Company's  obligation  to make  any
         payments  to you or to  provide  you  with  any  benefits  pursuant  to
         Paragraph 2 shall cease immediately, without prejudice to the Company's
         right to seek any other remedy, including injunctive relief.

10.      Recovery of Expenses  and Fees.  If you should  assert any claims which
         ------------------------------
         you have  released  under this  agreement,  you agree that the  Company
         (and/or any other party released) shall be entitled to recover from you
         all costs, expenses and attorneys' fees it or they may reasonably incur
         in defending against those claims.

11.      Final  Settlement of Claims and  Employment.  You  understand and agree
         -------------------------------------------
         that any  claims or  disputes  in any way  related  to your  employment
         relationship  and  separation  from the Company are fully  compromised,
         settled and released on the effective date of this agreement.

12.      No Admission of Fault.  You  acknowledge and understand that nothing in
         ---------------------
         this agreement is an admission of fault or wrongdoing by the Company.

<PAGE>
13.      Voluntary Nature of Agreement.  Both parties acknowledge that they have
         -----------------------------
         read this agreement before executing it,  understand its terms and have
         voluntarily  chosen to enter  into this  agreement.  The  parties  also
         acknowledge that no promise or  representation  has been made by you to
         the  Company  or by the  Company  to you other  than as set out in this
         agreement.

14.      Resignation. You agree that you are resigning from the Company and that
         -----------
         if asked about your separation from the Company, you and any authorized
         Company  representative  will respond that you resigned for reasons and
         on terms mutually acceptable to you and the Company. You agree that you
         will not apply for employment  with the Company,  its  subsidiaries  or
         affiliates  in  the  future  and  that  if you  do,  the  Company,  its
         subsidiaries or affiliates will have no obligation to consider you.

15.      Confidentiality.  You agree not to disclose the terms and provisions of
         ---------------
         this agreement to anyone other than your immediate family,  attorney or
         tax  advisor.  You  further  agree that  because of the  difficulty  of
         enforcing  this  provision,  and harm to the  Company,  the  Company is
         entitled to injunctive relief against any breach.

16.      Severability.   This   Agreement  is  expressly  made  subject  to  the
         ------------
         provisions  of  applicable  federal laws and the  internal  laws of the
         State of  Illinois  without  regard to its choice of law rules.  If any
         provision  of this  Agreement  is  invalidated  or  held  unenforceable
         because  of any  conflict  with any such law (or any other  law  deemed
         applicable),  the remaining provisions hereof shall not be affected but
         shall  continue  to be valid  and  enforceable  to the  fullest  extent
         permitted by law.

17.      Company  Property.  You  represent  that you have  returned all Company
         -----------------
         files, documents, proprietary information, and Company owned equipment,
         including but not limited to pagers,  telephones,  facsimile  equipment
         and computers.

18.      Securities Issues. You agree that you will comply with the restrictions
         -----------------
         outlined in the attached memorandum  regarding the purchase and sale of
         the Company's  stock and the exercise of stock options by "insiders" or
         "affiliates",  including  specifically,  the pooling  accounting  rules
         applicable because of the Unionamerica acquisition.

The Company  acknowledges  its agreement to the terms and  conditions  contained
above by having a duly authorized officer sign below.

If you agree to these terms and  conditions,  sign and date this agreement below
and postmark an executed copy to the attention of Merrilee  Hepler no later than
January 28, 1998.  We again bring to your  attention the fact that this document
is a legal document and, therefore, you may desire to consult with an attorney.

Very truly yours,

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

<PAGE>

B. Frederick Becker
Chairman & CEO

Acknowledged and agreed to this
______ day of _________, 1998


-------------------------------
Stephan A. Schleisman

Notary Attestation:

Signed and sworn to before me
this ___ day of ___, 1998

<PAGE>
EXHIBIT 13.1

    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.

<TABLE>
<CAPTION>

                                                                            Year Ended December 31
                                                  ----------------------------------------------------------------------------
                                                         1997           1996           1995           1994           1993
                                                         ----           ----           ----           ----           ----

PREMIUMS AND INCOME DATA (1):
<S>                                                  <C>            <C>            <C>            <C>             <C>        
Gross premiums written                               $   372,173    $   357,718    $   366,802    $   323,071     $   305,274
Net premiums earned                                      278,237        281,391        272,903        267,976         241,988
Consulting and fee income                                 51,626         34,535         22,336         18,602           6,962
Net investment income                                     75,490         73,681         62,936         51,150          53,207
Net realized gains/(losses) on investments                 2,182           (890)         1,692        (35,261)          7,144
Total revenues                                           407,535        388,717        359,867        302,467         309,301
Income from continuing operations (2)                     35,067         45,220         34,131          6,798          32,937
    Per share (5)                                           1.81           2.50           2.54           0.54            2.92

Operating income (3)(6)                              $    33,657    $    45,816    $    33,024    $    30,365     $    28,186
    Per share (5)                                           1.74           2.53           2.46           2.40            2.50
Cash dividends per common share                             0.22           0.17           0.15           0.11            0.09

Weighted average number of common
    and common equivalent shares (5)                      19,396         18,087         13,446         12,634          11,265

BALANCE SHEET DATA (AT END OF YEAR) (1):
Investments                                          $ 1,230,800    $ 1,212,556    $ 1,166,825    $   849,049     $   853,148
Total assets                                           1,884,067      1,804,421      1,741,758      1,401,315       1,432,457
Loss and loss adjustment expense reserves              1,125,146      1,149,918      1,199,870      1,002,839       1,018,129
Long-term notes payable                                        -         93,000         89,000         97,000          92,000
Mandatorily redeemable preferred capital securities      118,724              -              -         16,899          15,437
Unrealized gains (losses) on investments (4)              24,332         13,456         22,709         (9,470)              -
Stockholders' equity (4)                                 399,002        355,166        272,266        136,952         137,435
Book value per share (4)                                   21.16          19.01          16.39          11.04           11.09

GAAP RATIOS (7):
Loss ratio                                                 71.8%          74.2%          75.6%          74.8%           79.6%
Expense ratio                                              41.8%          33.0%          33.3%          28.5%           27.7%
                                                  ----------------------------------------------------------------------------
Combined ratio                                            113.6%         107.2%         108.9%         103.3%          107.3%
                                                  ============================================================================


<FN>
(1) The  Company  acquired  Unionamerica  Holdings  plc in  December  1997  in a
    transaction  accounted  for  as  a  pooling  of  interests.   As  such,  the
    consolidated  financial statements include  Unionamerica's balance sheet and
    results of operations for all periods presented.
(2) Income from continuing  operations in 1996 excludes a loss from discontinued
    operations of $5,100,000,  net of tax,  related to a former  affiliate.  See
    Note 15 to the Consolidated Financial Statements.
(3) Operating  income  represents  income  from  continuing   operations  before
    extraordinary  losses  of  $707,000  in 1997  and  $4,737,000  in  1995  and
    after-tax  realized  investments  gains  (losses)  of  $1,410,000  in  1997,
    $(596,000) in 1996, $1,106,000 in 1995, $(23,567,000) in 1994 and $4,751,000
    in 1993.
(4) The Company adopted new standards on accounting for investments in 1994.
(5) The  Company  adopted a new  standard  on  earnings  per share in 1997.  All
    earnings  per  share  amounts  have  been  restated  to  conform  to the new
    requirements.  Per share and  weighted  average  shares are  presented  on a
    diluted basis.
(6) In 1997,  operating  income includes a charge,  net of tax, of $8,937,000 or
    $.46 per share related to the acquisition of Unionamerica.
(7) GAAP ratios have been derived from the results of the Company's domestic and
    international  insurance  segments.  The 1997  expense  ratio  includes  3.5
    percentage  points  related to  expenses  incurred  in  connection  with the
    Unionamerica acquisition.
</FN>
</TABLE>
<PAGE>
EXHIBIT 13.2


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


     The  following  discussion  of the  results  of  operations  and  financial
condition  of the  Company  should  be read in  conjunction  with the  Company's
financial  statements and notes thereto included  elsewhere in this report.  The
Company's financial statements reflect the acquisition of Unionamerica  Holdings
plc (Unionamerica) in December 1997. The acquisition has been accounted for as a
pooling of interests and as such, the financial statements have been restated to
include Unionamerica's results of operations for all periods presented.

RESULTS OF OPERATIONS

     1997 COMPARED WITH 1996

     Revenues.  Gross  premiums  written  increased by 4.1% to $372.2 million in
1997 from $357.7 million in 1996.  Medical  malpractice  gross premiums  written
increased  5.0% to $200.5  million in 1997 from  $191.0  million,  international
gross  premiums  written  increased  6.0% to $152.0  million in 1997 from $143.4
million  in 1996 and  other  gross  premiums  written  decreased  15.5% to $19.7
million in 1997 from $23.3 million in 1996.  Net premiums  written  increased by
2.6% to $297.7 million in 1997 from $290.1 million in 1996.

     Net premiums earned decreased by 1.1% to $278.2 million in 1997 from $281.4
million in 1996.  Medical  malpractice net premiums earned  decreased by 1.7% to
$154.1 million in 1997 from $156.7 million in 1996.  International  net premiums
earned  increased  1.5% to $118.7  million  from  $117.0  million  and other net
premiums earned decreased 28.6% to $5.5 million from $7.7 million.  An extremely
competitive  environment  continues  to exist  in the  medical  malpractice  and
international  insurance marketplaces which exerts a negative influence on price
levels. The small decline from 1996 to 1997 in the Company's net earned premiums
reflects this pricing environment. Other premiums decreased due to the Company's
non-renewal of a large account.

     Consulting and fee income  increased by 49.6% to $51.6 million in 1997 from
$34.5  million  in 1996.  Of the  growth  in  consulting  and fee  income,  28.9
percentage  points of the 49.6% increase is attributable to the inclusion of the
results  of  Equifax  Medical  Credentials  Verification  Services  (EMCVS)  and
Professional Risk Management, Inc. (PRM) from their date of acquisition, January
1, 1997.  The balance of the  increase is due to  internally  generated  growth.
Consulting and fee income as a percentage of net premiums  earned and consulting
and fee income was 15.7% in 1997 compared to 10.9% in 1996.

     Net investment income increased by 2.4% to $75.5 million in 1997 from $73.7
million in 1996.  Investment  income growth is due to a higher  average level of
invested  assets in 1997 versus 1996  combined with a shift in the average asset
allocation  from municipal  securities to higher yielding  preferred  stocks and
taxable  fixed  income  securities.  The  Company  had  net  realized  gains  on
investments of $2.2 million in 1997 compared to losses of $0.9 million in 1996.

     Losses and expenses.  Losses and loss adjustment expenses ("LAE") decreased
by 4.3%  to  $199.8  million  in 1997  from  $208.8  million  in  1996.  Medical
malpractice liability losses and LAE decreased by 1.5% to $128.9 million in 1997
from $130.8  million in 1996.  International  losses and LAE  decreased  8.5% to
$66.8  million  in 1997 from  $73.0  million  principally  due to the  Company's
downward  revision of estimates for prior years surplus lines premium and losses
as well as an increased  percentage  of casualty  business,  which tends to have
lower loss ratios and higher expense ratios than property business. Other losses
and LAE  decreased  18.0% to $4.1 in 1997  from  $5.0  million  in 1996 due to a
decease in other earned premium.

<PAGE>
    Insurance and administrative  expenses increased by 32.6% to $157.0 million
in 1997 from $118.4 million in 1996. Of the increase in administrative  expense,
$15.4 million is attributable to internal growth in the Company's consulting and
fee segment and the  inclusion of acquired  consulting  and fee  businesses  and
$23.6  million  is  attributable  to an 8.8  percentage  point  increase  in the
insurance  segment expense ratio.  The increase in insurance  expenses  includes
$9.7 million of expenses  related to the Company's  acquisition of Unionamerica,
which was  completed  in December  1997 as well as an $8.0  million  increase in
commission expense.

     The combined ratio,  which includes the sum of losses and LAE and insurance
segment expenses, divided by earned premiums,  increased to 113.6% 1997 compared
to 107.2% in 1996.  The effect on the expense  ratio of expenses  related to the
acquisition of  Unionamerica  amounted to an increase of 3.5 percentage  points.
The  loss  ratio  decreased  by 2.4  percentage  points  and the  expense  ratio
increased  by  8.8  percentage  points  in  1997,  as  compared  to  1996.  Also
contributing to the increase in the expense ratio were increased  commissions on
excess  casualty  business  written in the  international  segment which carries
higher acquisition expenses than the other international lines of business.

     Interest  expense  increased  by 6.6% to $6.5  million  in 1997  from  $6.1
million in 1996 due to an increase in outstanding debt relating to the Company's
increased investment in a Lloyd's managing agency in July, 1997.

     Income  taxes.  Income  taxes were $9.2  million in 1997  compared to $10.2
million  in 1996 due to lower  pre-tax  income  in 1997  partially  offset by an
increase in tax on net capital gains in 1997 versus net capital losses in 1996.

     Extraordinary  loss,  net of tax. In  connection  with the repayment of the
bank lines of credit in December, 1997, the Company wrote off deferred financing
costs totaling $707,000, net of tax.

     Loss from  discontinued  operations.  In  February,  1997,  MMI settled two
lawsuits related to its former subsidiary,  Ludgate Insurance  Company,  Limited
(Ludgate) and recorded the settlement in its 1996 financial statements as a loss
from  discontinued  operations.  The  pre-tax  loss  was  $7.8  million,  with a
corresponding  tax  benefit  of $2.7  million,  resulting  in a  charge  of $5.1
million.

     Net income.  Net income  decreased  by 14.2% to $34.4  million in 1997 from
$40.1  million in 1996 as a result of  expenses  related to the  acquisition  of
Unionamerica  and a decline in the rate of growth of  insurance  premium  and an
increase in the combined ratio  partially  offset by the loss from  discontinued
operations in 1996.

     Net income per share.  Diluted net income per common and common  equivalent
share decreased to $1.77 in 1997 from $2.22 in 1996. Included in the 1997 amount
is a  reduction  of $.46 per share for the  expenses,  net of tax,  incurred  in
connection with the Unionamerica acquisition. Also included is a gain of $.07 in
1997 versus a loss of $.03 in 1996 related to net  realized  gains and losses on
investments,  net of tax, as well as an extraordinary loss of $.04 in 1997 and a
loss from  discontinued  operations of $.28 in 1996.  Diluted  weighted  average
shares and equivalents outstanding increased due to the Company's stock offering
in September and October 1996.


     1996 COMPARED WITH 1995

     Revenues.  Gross  premiums  written  decreased by 2.5% to $357.7 million in
1996 from $366.8 million in 1995.  Medical  malpractice  gross premiums  written
increased  0.8%  to  $191.0  million  in  1996  from  $189.4  million  in  1995,
international  gross premiums  written  decreased 8.1% to $143.4 million in 1996
from $156.1 million in 1995 and other gross premiums  written  increased 9.4% to
$23.3 million in 1996 from $21.3 million in 1995. Net premiums written decreased
by 2.8% to $290.1 million in 1996 from $298.4 million in 1995.

                                     - 2 -
<PAGE>
     Net premiums earned increased by 3.1% to $281.4 million in 1996 from $272.9
million in 1995.  Medical  malpractice net premiums earned  increased by 6.2% to
$156.7 million in 1996 from $147.6 million in 1995.  International  net premiums
earned  decreased  0.6% to $117.0  million in 1996 from $117.7 million and other
net  premiums  earned   increased  1.3%  to  $7.7  million  from  $7.6  million.
Competitive   market   conditions  and  softness  in  pricing   throughout  1996
contributed to a decline in the rate of growth in the Company's premium income.

     Consulting and fee income  increased by 54.7% to $34.5 million in 1996 from
$22.3  million  in 1995.  Of the  growth  in  consulting  and fee  income,  26.3
percentage points are attributable to the inclusion of the results of Management
Science Associates, Inc. (MSA) from the date of its acquisition,  April 1, 1996.
The balance of the increase is due to internally  generated  growth.  Consulting
and fee income as a percentage  of net premiums  earned and  consulting  and fee
income was 10.9% in 1996 compared to 7.6% in 1995.

     Net  investment  income  increased  by 17.2% to $73.7  million in 1996 from
$62.9  million in 1995.  Investment  income  growth is due to growth in invested
assets.  In December  1995,  the Company  commuted an  aggregate  excess of loss
reinsurance   policy  and  received  $63.1  million  as  consideration  for  the
assumption of previously ceded liabilities.  The Company had net realized losses
on investments of $.9 million in 1996 compared to gains of $1.7 million in 1995.

     Losses and expenses.  Losses and LAE increased by 1.2% to $208.8 million in
1996 from $206.3 million in 1995. Medical  malpractice  liability losses and LAE
increased by 3.9% to $130.8  million in 1996 from $125.9  million in 1995 due to
the increase in medical  malpractice net earned premiums.  International  losses
and LAE  decreased by 4.2% to $73.0  million from $76.2 million and other losses
and LAE increased by 22.0% to $5.0 million in 1996 from $4.1 million in 1995.

     Insurance and administrative  expenses increased by 17.8% to $118.4 million
in 1996 from $100.5 million in 1995. Of the increase in administrative  expense,
$11.1 million is attributable to internal growth in the Company's consulting and
fee segment and the  inclusion  of the  Company's  acquired  employee  relations
consulting  business  from  the  date of its  acquisition  in  April  1996.  The
remainder of the increase in expenses is due to internal growth and the addition
of expenses  resulting from changes  following  Unionamerica  becoming  publicly
traded in late 1995.

     The combined  ratio  declined to 107.2% in 1996  compared to 108.9% in 1995
due to a 1.4 percentage point improvement in the loss ratio and a 0.3 percentage
point decrease in the expense ratio.

     Interest  expense  decreased  by 44.0% to $6.1  million  in 1996 from $10.9
million  in  1995  due to a  reduction  in the  amount  of debt  outstanding  in
connection  with the  repayment  of debt  with the  proceeds  of  Unionamerica's
initial public offering in December, 1995.

     Income  taxes.  Income taxes were $10.2  million in 1996 compared with $8.1
million in 1995 due to an increase in pre-tax income.

     Extraordinary  loss. In 1995 an extraordinary loss was recognized  totaling
$4.7 million, net of tax, in connection with the write-off of deferred financing
costs and premium on early redemption of subordinated loan notes.

     Loss from  discontinued  operations.  In 1992,  MMI sold Ludgate at a loss,
which was reported in  discontinued  operations.  Subsequently,  the Company was
named in two lawsuits  connected  with the sale. In February  1997,  MMI settled
both lawsuits and commuted the stop-loss  reinsurance  agreement provided by MMI
to Ludgate in connection  with the sale.  The settlement of all these matters is
recorded  in  the  accompanying   1996  statement  of  income  as  a  loss  from
discontinued  operations.  The pre-tax loss is $7.8 million with a corresponding
tax benefit of $2.7 million, resulting in a charge of $5.1 million.

                                     - 3 -
<PAGE>
     Net income.  Net income  increased  by 36.4% to $40.1  million in 1996 from
$29.4 million in 1995 due to the aforementioned reasons.

     Net income per share.  Diluted net income per common and common  equivalent
share increased to $2.22 in 1996 from $2.19 in 1995. Included in the 1996 amount
is a loss of $0.28  from  discontinued  operations  as well as a loss of $.03 in
1996  related  to net  realized  gains and losses on  investments  net of taxes.
Included in the 1995 amount is an  extraordinary  loss of $.35 as well as a gain
of $.08 related to net realized  gains and losses on  investments  net of taxes.
Diluted  weighted average shares and equivalents  outstanding  increased in 1996
due to the Company's stock offering in September and October 1996.

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 1997,  the  Company
received  dividends from its  subsidiaries  of $29.8 million,  compared to $11.0
million in 1996 and $6.0 million in 1995.  Of the 1997  dividend,  $20.0 million
was a special dividend paid by Health Providers Insurance Company to the Company
in December  1997 in  connection  with an  intercompany  assumption  reinsurance
transaction.  The Company  then  contributed  the $20.0 to American  Continental
Insurance Company's statutory surplus. The Company received management fees from
its  subsidiaries  of $28.5  million  in 1997,  $24.6  million in 1996 and $19.1
million in 1995. 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. The level of positive cash flow
has  decreased  over the last two years due to the decline in the rate of growth
in premiums.  Also  contributing  to positive cash flow besides  premiums is the
timing  difference  between the collection of premiums and payment of claims and
expenses.  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 $6.5 million in 1997, $25.0 million in 1996 and $112.1 million in 1995. Cash
provided  in  1995  includes  $63.1  million   received  in  connection  with  a
reinsurance  commutation.  Cash from operations  decreased  principally due to a
decrease in the growth rate of net premiums  written and an acceleration in paid
losses.

     Investing activities,  substantially in fixed income securities,  have been
the  principal  use of  cash  flow  from  operations.  Cash  used  by  investing
activities  was $24.4 million in 1997,  $88.4 million in 1996 and $156.6 million
in 1995. The Company has no material commitments for capital expenditures.

     Financing  activities provided $19.8 million in cash in 1997, $54.0 million
in 1996 and $32.2  million in 1995.  In July 1997,  the  Company  increased  its
borrowings  by $10.0  million to finance an  investment  in  additional  Lloyd's
underwriting  capacity.  In  December  1997,  the  Company  completed  a private
placement of Trust  Preferred  Capital  Securities  and received net proceeds of
$118.7 million.  Concurrent with the receipt of the proceeds, the Company repaid
the full  outstanding  amounts  under  its  credit  agreements  totaling  $103.0
million. The Company had no outstanding bank debt at December 31, 1997.

     Cash provided by financing  activities in 1996 includes $53.6 million,  net
of expenses,  from the issuance of Common Stock,  of which $46.3 million related
to the  Company's  stock  offering in September and October 1996. In April 1996,
the Company  increased its  borrowings  by $8.0 million in  connection

                                     - 4 -
<PAGE>
with the acquisition of its employee relations consulting subsidiary.  Long-term
debt totaled $93.0 million as of December 31, 1996.

     Invested  assets.  The Company  invests in  investment  grade fixed  income
securities and preferred  stocks.  The estimated fair value of preferred  stocks
was less than 3.5% of the fair value of total invested assets as of December 31,
1997. The estimated fair value of the Company's  short-term,  fixed maturity and
preferred  stock  investments  was  $1,230.8  million as of December  31,  1997,
compared  with $1,212.6  million as of December 31, 1996.  The December 31, 1997
amount  includes net  unrealized  gains of $37.1  million,  which  represent the
amount by which the estimated  fair value of the  investment  portfolio  exceeds
amortized cost. Unrealized gains were $20.7 million as of December 31, 1996. The
increase in  unrealized  gains during 1996 was due to an decrease 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 $52.2 million or 4.2% of invested assets as of December 31,
1997,  compared with $59.7 million or 4.9% of invested assets as of December 31,
1996.  The  Company  believes  that  all  of its  invested  assets  are  readily
marketable.

     Trust  Preferred  Capital  Securities.  In December  1997,  MMI completed a
private placement of $125.0 million in 30 year non-callable  Capital  Securities
of MMI Capital Trust I, a subsidiary of MMI. The Capital Securities are rated a3
by Moody's Investor  Service and BBB+ by Standard & Poor's Rating Services.  The
Capital  Securities  will pay cumulative  distributions  at the annual rate of 7
5/8% semiannually in arrears beginning June 15, 1998 and have a maturity date of
December  15,  2027.   Payments  on  the  Capital   Securities   are  fully  and
unconditionally  guaranteed by MMI. Total  proceeds from the private  placement,
net of expenses,  were $118.7  million.  In  connection  with the receipt of the
private placement proceeds,  the Company repaid all of its outstanding bank debt
totaling $103.0 million.

     Line of credit.  In  February  1998,  the  Company  obtained  an  unsecured
revolving  credit line of $100.0 million.  The Company has not borrowed  against
this line of credit.  The credit agreement provides for interest at a fixed rate
equal to the Interbank  Offered Rate for periods of up to one year plus a margin
of 20 to 40 basis  points,  and  contains  financial  covenants  with respect to
minimum net worth and statutory surplus,  maximum debt to total  capitalization,
and minimum  risk-based  capital levels. The credit agreement also restricts the
Company's ability to pay  stockholder's  dividends in a single year in excess of
50% of the average of the prior three years' net income.

     Stockholders' equity. The Company's stockholders' equity was $399.0 million
as of December  31,  1997,  compared to $355.2  million as of December 31, 1996.
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.  Cash  dividends  to  stockholders
totaled $4.2 million in 1997,  $2.9 million in 1996 and $2.1 million in 1995. As
of December 31,  1997,  estimated  unrealized  gains on  investments  were $37.1
million net of deferred  tax  liability  of $12.8  million,  thereby  increasing
stockholders'  equity by $24.3 million.  As of December 31, 1996 the Company had
an unrealized gain, net of taxes, of $13.5 million.

     Risk-based  capital.  The  NAIC has  adopted  risk-based  capital  solvency
standards for domestic property and casualty and life and health insurers. Under
these  standards,  several  solvency  thresholds  are  calculated  based  on the
underwriting, credit, and investment risks of a company. As of December 31, 1997
the statutory  capital and surplus of each of the Company's  domestic  insurance
subsidiaries exceeded its risk-basedcapital requirements.

     Minimum  solvency  margin.  Under the Insurance  Companies Act of 1982, the
Department  of Trade and  Industry  (DTI)  authorizes  companies  in the  United
Kingdom  to  engage in the  insurance  business.  Under the 1982 Act,  companies
authorized  to transact  business  are  required to maintain a minimum  solvency
margin.  As of December 31, 1997,  Unionamerica's  minimum  solvency  margin was
estimated

                                     - 5 -
<PAGE>
at $25.7 million and its net assets were  estimated at $133.7  million.  The DTI
typically expects an insurance company to maintain net assets at least 2.5 times
greater than its solvency margin.

ACQUISITIONS

     On  December  11,  1997,  the  Company  acquired  99%  of  the  issued  and
outstanding  Ordinary Shares of  Unionamerica,  all of which were represented by
Unionamerica  American  Depository Shares (ADSs).  MMI is in process of applying
the  compulsory  acquisition  procedures  set forth in the Companies Act 1985 of
Great  Britain to acquire all of the  remaining  Unionamerica  ADSs.  Founded in
1977,  Unionamerica is a specialty  casualty and property  reinsurer and insurer
operating in the London-based  reinsurance and insurance market.  MMI issued 7.1
million  shares of Common  Stock at the  exchange  ratio of 0.836 MMI shares for
each  Unionamerica  ADS.  The  acquisition  was  accounted  for as a pooling  of
interests,  and, as such, the Company's financial  statements have been restated
for all periods presented as if the acquisition had occurred at the beginning of
the earliest period presented.

     On July 23,  1997,  MMI  acquired a 39%  interest in JMA  Holdings  Limited
(JMAHL),  the parent company of Jago Managing General Agency Limited,  a Lloyd's
managing  agency,  for  consideration  of $9.1 million.  The  consideration  was
comprised of $5.9 million in cash and $3.2 million of short-term notes payable.

     Effective January 1, 1997, the Company  purchased  substantially all of the
net assets of Equifax Medical Credentials  Verification Services (EMCVS), a unit
of  Atlanta-based  Equifax,  Inc., and acquired by merger all of the outstanding
stock of Professional  Risk Management,  Inc. (PRM), a privately held California
third-party administrator that specializes in managing enterprise liability risk
for  organizations  that  self-insure.   The  total  purchase  price  for  these
acquisitions  was $8.3  million in cash and $2.0  million  in MMI Common  Stock.
These  acquisitions  were accounted for as purchases and the operations of EMCVS
and PRM are included in the Company's  consolidated  financial  statements since
their date of acquisition.

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

YEAR 2000

    The Company has  developed a workplan to address year 2000 issues across all
MMI technology  platforms.  A companywide  assessment of year 2000 exposures has
been  completed  and  workplan  priorities  and  schedules  are in place and are
expected  to be  completed  in  mid-1998.  Additionally,  system-wide  year 2000
simulations  are  scheduled   throughout  1999.  The  workplan  includes  system
modification and conversion as well as alignment with vendors and third parties.
The cost to address year 2000 issues is not expected to be material and is being
expensed as incurred.

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.

                                     - 6 -
<PAGE>
EXHIBIT 13.3

<TABLE>
<CAPTION>
                      MMI COMPANIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                 (In thousands, except share and per share data)

                                                                                         December 31,
                                                                            ----------------------------------------
                                                                                  1997                  1996
                                                                                  ----                  ----
ASSETS 
   INVESTMENTS (Note 4 )
     Short-term investments -- at fair value (amortized cost: 1997 -
<S>                                                                         <C>                 <C>
        $52,210;  1996 - $59,664).................................          $           52,219  $             59,695
     Fixed maturities-- at fair value (amortized cost: 1997 -
        $1,101,970; 1996 - $1,111,425) ...........................                   1,135,702             1,130,597
     Preferred Stock. -- at fair value (amortized cost: 1997 -
        $39,476; 1996 - $20,794)..................................
                                                                                        42,879                22,264
                                                                            ------------------   -------------------
                                                                                     1,230,800             1,212,556

   OTHER ASSETS
     Cash ........................................................                       6,698                 4,839
     Premiums and fees receivable ................................                     165,906               158,303
     Reinsurance receivables (Note 3) ............................                     300,077               283,577
     Prepaid reinsurance premiums (Note 3) .......................                      21,514                13,175
     Accrued investment income ...................................                      17,045                16,788
     Cost in excess of net assets of purchased
       subsidiaries, less accumulated amortization (Notes 1 and 2)                      37,257                21,084
     Furniture and equipment - at cost,
       less accumulated depreciation (Note 1) ....................                      14,258                12,027
     Deferred income taxes (Note 5) ..............................                      42,979                45,750
     Other .......................................................
                                                                                        47,533                36,322
                                                                            ------------------   -------------------
                                                                            $        1,884,067   $         1,804,421
                                                                            ==================   ===================

LIABILITIES AND STOCKHOLDERS' EQUITY
   LIABILITIES
     Policy liabilities:
       Loss and loss adjustment expense reserves (Note 7):
         Medical malpractice .....................................          $          613,063  $            620,673
         International ...........................................                     500,032               518,345
         Other ...................................................                      12,051                10,900
                                                                            ------------------   -------------------
                                                                                        
                                                                                     1,125,146             1,149,918
       Unearned premium reserves .................................                     134,188               106,475
       Future life policy benefits ...............................                       8,723                 8,578
                                                                            ------------------   -------------------

                                                                                     1,268,057             1,264,971
       Accrued expenses and other liabilities ....................                      50,071                48,421
       Amounts due to reinsurers (Note 3) ........................                      48,213                42,863
       Long-term notes payable (Note 6) ..........................
                                                                                            --                93,000
       Company-obligated, mandatorily redeemable preferred capital
           securities of subsidiary trust holding solely junior
           subordinated debentures of the Company (Note 6)........                     118,724                    --
                                                                            ------------------   -------------------
                                                                                     1,485,065             1,449,255
Contingencies (Notes 3 and 11)

STOCKHOLDERS' EQUITY (Notes 8 and 10)
   Common stock, par value $.10 per share:
       Authorized shares: 30,000
       Issued and outstanding shares:
       1997 - 18,857; 1996 - 18,681 ................................                     1,886                 1,868
   Additional paid-in capital ....................................                     217,855               215,091
   Retained earnings .............................................                     154,929               124,751
   Unrealized gains on investments, net of taxes:
     1997 - $12,812; 1996 - $7,217 ...............................
                                                                                        24,332                13,456
                                                                            ------------------   -------------------
                                                                                       399,002               355,166
                                                                            ------------------   -------------------
                                                                            $        1,884,067   $         1,804,421
                                                                            ==================   ===================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                      MMI COMPANIES, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                      (In thousands, except per share data)

                                                                              Year Ended December 31,
                                                               ------------------------------------------------------
                                                                     1997              1996               1995
                                                                     ----              ----               ----

REVENUES
Insurance premiums earned (Note 3):
<S>                                                            <C>                <C>                <C>                         
   Medical malpractice ..............................          $        154,097   $        156,722   $       147,635             
   International.....................................                   118,658            116,982           117,712
   Other.............................................                     5,482              7,687             7,556
                                                               -----------------  -----------------  ----------------
                                                                        278,237            281,391           272,903
Consulting and fee income ...........................                    51,626             34,535            22,336
Net investment income (Note 4) ......................                    75,490             73,681            62,936
Net realized gains (losses) on investments (Note 4) .                     2,182               (890)            1,692
                                                               -----------------  -----------------  ----------------
       TOTAL REVENUES ...............................                   407,535            388,717           359,867

LOSSES AND EXPENSES
Losses and loss adjustment expenses (Notes 3 and 7):
   Medical malpractice ..............................                   128,869            130,787           125,944
   International.....................................                    66,813             72,990            76,220
   Other.............................................                     4,079              4,999             4,144
                                                               -----------------  -----------------  ----------------
                                                                        199,761            208,776           206,308
Insurance and administrative expenses (Note 3) ......                   156,969            118,409           100,457
Interest expense ....................................                     6,489              6,083            10,889
                                                               -----------------  -----------------  ----------------
       TOTAL LOSSES AND EXPENSES ....................                   363,219            333,268           317,654
                                                               -----------------  -----------------  ----------------

       INCOME FROM CONTINUING OPERATIONS BEFORE 
       INCOME TAXES AND EXTRAORDINARY LOSS...........                    44,316             55,449            42,213
Income taxes (Note 5) ...............................                     9,249             10,229             8,082
                                                               -----------------  -----------------  ----------------
       INCOME FROM CONTINUING
       OPERATIONS BEFORE EXTRAORDINARY
       LOSS..........................................                    35,067             45,220            34,131
Extraordinary losses, net of tax (Note 6)............                       707                 --             4,737
                                                               -----------------  -----------------  ----------------
       INCOME FROM CONTINUING OPERATIONS                                 34,360             45,220            29,394
Loss from discontinued operations, net of tax........                        --              5,100                --
                                                               -----------------  -----------------  ----------------
       NET INCOME ...................................          $         34,360   $         40,120   $        29,394
                                                               =================  =================  ================




Earnings per common and common equivalent share (Note 9):
Basic
     Income from continuing operations before extraordinary    
     loss............................................          $           1.87   $           2.61   $          2.63 
     Extraordinary losses, net of tax................                     (0.04)                --             (0.37)
     Loss from discontinued operations, net of tax...                        --              (0.30)               --
                                                               -----------------  -----------------  ----------------
     Net income......................................          $           1.83   $           2.31   $          2.26
                                                               =================  =================  ================


Diluted 
     Income from continuing operations before 
     extraordinary loss..............................          $           1.81   $           2.50   $          2.54
     Extraordinary losses, net of tax................                     (0.04)                --             (0.35)
     Loss from discontinued operations, net of tax...                        --              (0.28)               --
                                                               -----------------  -----------------  ----------------
     Net income......................................          $           1.77   $           2.22   $          2.19
                                                               =================  =================  ================



Weighted average number of common and 
     common equivalent shares:
      Basic..........................................                    18,751             17,336            12,895
      Diluted .......................................                    19,396             18,087            13,446
                                                               =================  =================  ================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                                           MMI Companies, Inc. and Subsidiaries
                                                     Consolidated Statements of Stockholders' Equity
                                                            (In thousands, except per share data)

                                                         Preferred Stock         Common Stock     Additional
                                                         ---------------         ------------     
                                                       Number         Par      Number         Par    Paid-In
                                                    of Shares       Value   of Shares       Value    Capital
                                                    ---------       -----   ---------       -----    -------

<S>                                                  <C>        <C>            <C>       <C>       <C>      
Balance at January 1, 1995 .......................         --   $      --      12,409    $  1,247  $  85,589

Year ended December 31, 1995
   Net income
   Issuance of Common Stock of pooled
         entity, net of expenses of $6,178........                              3,200         320     58,522
   Issuance of Preferred Stock in connection
     with acquisition of subsidiary ..............        903      18,061                             (2,709)
   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,,568
   Change in unrealized gains, net of
     taxes of $17,028.............................
   Retirement of Treasury Stock ..................                                (62)         (6)      (734)
   Common cash dividends ($.15 per share) ........
   Common stock dividend ($.18 per share) ........                                  9           1        163
   Preferred cash dividends ($.14 per share)......
                                                     --------    --------    --------    --------   --------

Balance at December 31, 1995 .....................         --          --      16,607       1,666    160,396

Year ended December 31, 1996:
   Net income ....................................
   Issuance of Common Stock, net of
     expenses of $2,866 ..........................                              1,750         170     48,280
   Issuance of Common Stock in connection
     with acquisition of subsidiaries ............                                 65           7      1,284
   Issuance of Common Stock in connection
     with employee benefit plans and exercise
     of employee stock options ...................                                259          25      5,131
   Change in unrealized gains, net of
     taxes of $4,557..............................
   Common cash dividends ($.17 per share) ........
                                                     --------    --------    --------    --------   --------

Balance at December 31, 1996 .....................         --          --      18,681       1,868    215,091
                                                                                                       




Year ended December 31, 1997:
   Net income ....................................
   Issuance of Common Stock in connection
     with acquisition of subsidiary ..............                                 85           9      1,942
   Issuance of Common Stock in connection
     with employee benefit plans and exercise
     of employee stock options ...................                                212          21      3,650
   Common  Stock repurchased......................                               (121)        (12)    (2,828)
   Change in unrealized gains, net of
     taxes of $5,595..............................
   Common cash dividends ($.22 per share) ........
                                                     --------    --------    --------    --------   --------

Balance at December 31, 1997 .....................         --    $     --      18,857    $  1,886   $217,855
                                                     ========    ========    ========    ========   ========
</TABLE>


<TABLE>
<CAPTION>
                                                           MMI Companies, Inc. and Subsidiaries
                                                     Consolidated Statements of Stockholders' Equity
                                                            (In thousands, except per share data)
                                                                         (CONTINUED)

                                                                                 Unrealized
                                                                               Gains (Losses)  
                                                                                    on                Total
                                                      Retained     Treasury      Investments,     Stockholders'
                                                      Earnings        Stock     Net of Taxes         Equity
                                                     ---------    ---------    --------------      ---------
                                                       
                                                                               
<S>                                                  <C>          <C>          <C>                 <C>      
Balance at January 1, 1995 .......................   $  60,326    $    (740)   $  (9,470)          $ 136,952

Year ended December 31, 1995
   Net income ....................................      29,394                                        29,394
    Issuance of Common Stock of pooled
         entity, net of expenses of $6,178........                                                    58,872
   Issuance of Preferred Stock in connection
     with acquisition of subsidiary ..............                                                    15,352
   Conversion of Preferred to Common Stock .......                                                        --
   Issuance of Common Stock in connection
     with employee benefit plans and exercise
     of employee stock options ...................                                                     1,578
   Change in unrealized gains, net of
     taxes of $17,028 ............................                                32,179              32,179
   Retirement of Treasury Stock ..................                      740                               --
   Common cash dividends ($.15 per share) ........      (1,931)                                       (1,931)
   Common stock dividend ($.18 per share) ........        (164)                                           --
   Preferred cash dividends ($.14 per share) .....        (130)                                         (130)
                                                     ---------    ---------    ---------           ---------

Balance at December 31, 1995 .....................      87,495           --       22,709             272,266

Year ended December 31, 1996:
   Net income ....................................      40,120                                        40,120
   Issuance of Common Stock, net of
     expenses of $2,866 ..........................                                                    48,450
   Issuance of Common Stock in connection
     with acquisition of subsidiaries ............                                                     1,291
   Issuance of Common Stock in connection
     with employee benefit plans and exercise
     of employee stock options ...................                                                     5,156
   Change in unrealized gains, net of
     taxes of $4,557 .............................                                (9,253)             (9,253)
   Common cash dividends ($.17 per share) ........      (2,864)                                       (2,864)
                                                     ---------    ---------    ---------           ---------

Balance at December 31, 1996 .....................     124,751           --       13,456             355,166




Year ended December 31, 1997:
   Net income ....................................      34,360                                        34,360
   Issuance of Common Stock in connection
     with acquisition of subsidiary ..............                                                     1,951
   Issuance of Common Stock in connection
     with employee benefit plans and exercise
     of employee stock options ...................                                                     3,671
   Common  Stock repurchased......................                                                    (2,840)
   Change in unrealized gains, net of
     taxes of $5,595 .............................                                10,876              10,876
   Common cash dividends ($.22 per share) ........      (4,182)                                       (4,182)
                                                     ---------    ---------    ---------           ---------

Balance at December 31, 1997 .....................   $ 154,929    $      --    $  24,332           $ 399,002
                                                     =========    =========    =========           =========

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

<PAGE>
<TABLE>
<CAPTION>
                      MMI COMPANIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)


                                                                              Year Ended December 31,
                                                               ------------------------------------------------------
                                                                     1997              1996               1995
                                                                     ----              ----               ----

OPERATING ACTIVITIES
<S>                                                             <C>               <C>                <C>            
Net income ..........................................           $        34,360   $        40,120    $        29,394
Adjustments to reconcile net income to net cash
  provided by operating activities:
     Change in policy liabilities ...................                     2,978           (33,912)            59,583
     Change in reinsurance balances .................                   (19,380)           24,858             41,785
     Increase in premiums and fees receivable........                    (6,600)          (15,162)           (17,781)
     Increase in deferred tax asset .................                    (2,686)           (2,255)            (6,054)
     Change in accrued investment income
      and other assests .............................                    (8,398)              134                555
     Increase in accrued expenses and other
      liabilities ...................................                     1,961             5,279              2,947
     Net realized (gains) losses on investments .....                    (2,182)              890             (1,692)
     Depreciation and amortization                                        6,453             5,042              3,372
                                                                ----------------  ----------------  -----------------
       Net cash provided by operating activities ....                     6,506            24,994            112,109

INVESTING ACTIVITIES
   Net sale (purchase) of short-term investments ....                     8,660            (8,103)            37,033
   Purchase of available for sale investments .......                  (721,863)         (715,649)        (1,024,490)
   Sale of available for sale investments ...........                   644,791           579,531            649,805
   Maturities of available for sale investments                          71,916            73,575            211,543
   Acquisition of subsidiaries ......................                   (21,006)          (11,074)           (25,097)
   Furniture and equipment additions ................                    (6,915)           (6,679)            (5,402)
                                                                ----------------  ----------------  -----------------
       Net cash used by investing activities ........                   (24,417)          (88,399)          (156,608)

FINANCING ACTIVITIES
   Issuance of Common Stock .........................                     1,899            56,725             66,626
   Issuance of Capital Securities....................                   124,551                --                 --
   Common Stock repurchased..........................                    (2,840)               --                 --
   Redemption of preference shares...................                        --                --            (16,899)
   Costs incurred in connection with
     securities offerings ...........................                    (5,832)           (3,119)            (6,176)
   Finance costs of long-term debt...................                      (826)              --                  --
   Payments on notes payable.........................                  (103,000)           (5,750)           (30,250)
   Proceeds from notes payable.......................                    10,000             9,000             21,000
   Dividends ........................................                    (4,182)           (2,864)            (2,061)
                                                                ----------------  ----------------  -----------------
       Net cash provided by financing activities ....                    19,770            53,992             32,240
                                                                ----------------  ----------------  -----------------

       Increase (decrease) in cash ..................                     1,859            (9,413)           (12,259)
Cash at beginning of year............................                     4,839            14,252             26,511
                                                                ----------------  ----------------  -----------------
       Cash at end of year ..........................           $         6,698   $         4,839   $         14,252
                                                                ================  ================  =================
                                                                                                   

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

<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997

1.    ACCOUNTING POLICIES

NATURE OF OPERATIONS

MMI Companies,  Inc. (MMI) is a specialty company that offers insurance products
and  risk  management  and  consulting  services  primarily  to  the  healthcare
industry.  MMI writes its medical  malpractice  liability insurance and property
and casualty  insurance  and  reinsurance  through its  principal  subsidiaries,
American Continental Insurance Company (ACIC) and Unionamerica Insurance Company
Ltd. (Unionamerica). MMI provides its products and services in all 50 states and
in Europe. Information on MMI's operations by segment is included in Note 13.

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 of MMI and its subsidiaries.  All material  intercompany
accounts  and  transactions  have  been  eliminated  in  consolidation.  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

MMI  classifies  all 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.

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,
notes payable and trust preferred capital securities  approximate their December
31, 1997 and 1996 carrying values.

PREMIUM REVENUES

Premiums are earned pro rata over the terms of the policies  which are generally
one year.  Adjustments to estimated  premiums are made in the period in which it
is determined an adjusment is warranted.  Unearned premiums are calculated using
the monthly pro rata basis.

CONSULTING AND FEE INCOME

Consulting  and fee income is  derived  from fixed fee  contracts  and  projects
performed on a per diem basis.  Fixed fee contracts are for a specific period of
time, generally one year, in which MMI provides services that are delivered over
the entire  contract term.  Ratable  recognition  of fixed fee contract  revenue
results in a  matching  with  expenses  incurred  as the  related  expenses  are
principally  employee  compensation  and  benefits.  Revenues  from projects are
recognized as the services are rendered.

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 $26,500,000 and $23,100,000 at December 31, 1997 and
1996,  respectively.  Amortization  of such costs are included in insurance  and
administrative expenses and amounted to $49,000,000 in 1997, $41,800,000 in 1996
and $39,400,000 in 1995.

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,  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 reinsurance, assumed and ceded, 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 assumed from other companies have
been  reported  as an  increase  to premium  revenues.  Premiums  ceded to other
companies  have been  reported  as a  reduction  of  premium  revenues.  Expense
allowances  received and paid in connection with reinsurance  ceded and assumed,
respectively,  have been accounted for as an adjustment 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 three to seven years using an  accelerated  method.  As of December 31,
1997 and 1996, accumulated  amortization amounted to $10,700,000 and $11,600,000
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, 1997 and 1996, accumulated  amortization amounted to $9,100,000 and
$5,800,000, respectively.

INCOME TAXES

MMI and its United States  subsidiaries  file a consolidated  federal income tax
return.  Unionamerica and its subsidiaries  file tax returns with Inland Revenue
in the United Kingdom.  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 are expected to be in
effect when the differences 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
recognizes no compensation expense for the stock option grants. Additional stock
option information is included in Note 10.

EARNINGS PER SHARE

On December 31, 1997, MMI adopted  Statement of Financial  Accounting  Standards
No. 128 (SFAS 128),  "Earnings Per Share." SFAS 128 replaced the  calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Refer to Note 9 for more information.

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.

EFFECT OF NEW PRONOUNCEMENTS

In 1997, the Financial  Accounting  Standards  Board (FASB) issued  Statement of
Financial  Accounting  Standards  No. 130 (SFAS 130),  "Reporting  Comprehensive
Income",  which is effective for years  beginning  after December 15, 1997. SFAS
130 establishes  standards for the reporting and display of comprehensive income
and its components in a full set of general purpose financial  statements.  SFAS
130 will require that  enterprises  (a)  classify  items of other  comprehensive
income by their nature in a financial  statement and (b) display the accumulated
balance of other  comprehensive  income  separately  from retained  earnings and
additional   paid-in  capital  in  the  stockholders'   equity  section  of  the
consolidated  balance  sheets.  SFAS  130 will  not  have  any  impact  on MMI's
consolidated results of operations, financial position or cash flows.

In 1997, the FASB also issued  Statement of Financial  Accounting  Standards No.
131  (SFAS  131),  "Disclosure  about  Segments  of an  Enterprise  and  Related
Information",  which is effective for years  beginning  after December 15, 1997.
SFAS 131  establishes  standards  for the way that public  business  enterprises
report information about operating  segments in annual financial  statements and
requires that those  enterprises  report  selected  information  about operating
segments in interim  financial  reports  issued to  stockholders.  SFAS 131 also
establishes  standards for related  disclosures  about products and services and
major customers. MMI has not completed all of the analyses required to determine
the full impact of SFAS 131.

2.  BUSINESS COMBINATIONS

         On December  11, 1997,  MMI acquired 99% of the issued and  outstanding
capital stock of Unionamerica  Holdings plc  (Unionamerica  Holdings),  which is
represented  by American  Depositary  Shares  (ADSs),  in exchange for 7,100,000
shares of MMI Common  Stock.  MMI  intends to  compulsorily  acquire  all of the
remaining  ADSs  outstanding.   Unionamerica   Holdings'  principal  subsidiary,
Unionamerica,  is a United Kingdom-domiciled  insurance and reinsurance company.
The  acquisition  was accounted for as a pooling of interests and,  accordingly,
the accompanying  consolidated financial statements were restated to include the
consolidated operations of Unionamerica Holdings for all periods presented.

         The  following   table   summarizes  the  restatement  to  reflect  the
acquisition of Unionamerica Holdings (in thousands, except per share):
<TABLE>
<CAPTION>
                                                                            Unionamerica
                                                                    MMI        Holdings           Restated
                                                                    ---        --------           --------
1997:
<S>                                                            <C>              <C>               <C>     
         Revenues                                              $260,794         $146,741          $407,535
         Net income before extraordinary losses                  26,339            8,728            35,067
         Extraordinary losses, net of taxes                         141              566               707
         Net income                                              26,198            8,162            34,360
         Dividends per share                                      $0.28            $0.05             $0.22

1996:
         Revenues                                              $243,178         $145,539          $388,717
         Income from continuing operations                       26,115           19,105            45,220
         Loss from discontinued operations                        5,100                -             5,100
         Net income                                              21,015           19,105            40,120
         Dividends per share                                      $0.24            $0.05             $0.17

1995:
         Revenues                                              $218,744         $141,123          $359,867
         Net income before extraordinary losses                  22,695           11,436            34,131
         Extraordinary losses, net of taxes                           -            4,737             4,737
         Net income                                              22,695            6,699            29,394
         Dividends per share                                      $0.20            $   -             $0.15

</TABLE>

         Effective  January 1, 1997, MMI purchased  substantially all of the net
assets of Equifax Medical Credentials  Verification  Services (EMCVS), a unit of
Atlanta-based  Equifax, Inc. and acquired by merger all of the outstanding stock
of Professional  Risk Management  (PRM), a privately held California third party
administrator  that  specializes  in  managing  enterprise  liability  risk  for
organizations  that  self-insure.  The total purchase price of EMCVS and PRM was
$8,300,000 in cash and $2,000,000 million of MMI Common Stock.

         On July 23, 1997,  the Company  acquired a 39% interest in JMA Holdings
Limited ("JMAHL),  the parent company of Jago Managing General Agency Limited, a
Lloyd's   managing  agency,   for  total   consideration  of  $9,100,000  .  The
consideration  was  comprised of  $5,900,000  cash and  $3,200,000 of short-term
notes payable.

         Effective April 1, 1996, MMI purchased  substantially all of the assets
of Management  Science  Associates,  Inc. (MSA). MSA provides employee relations
and human resource consulting services to healthcare organizations. The purchase
price for MSA,  including  expenses,  was  $8,300,000 in cash,  which was funded
principally by an increase in borrowings under MMI's credit agreement.

         On May 9, 1995,  MMI acquired all of the  outstanding  capital stock of
Health  Providers  Insurance  Company  (HPIC).  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 $30,700,000 with $15,300,000 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.

         The  EMCVS,  PRM,  MSA and  HPIC  acquisitions  were  accounted  for as
purchases,  and the operations of the acquired  businesses are included in MMI's
consolidated  financial  statements  since  the  dates  of  acquisition.  Assets
acquired,  liabilities assumed, and the excess of cost over net assets purchased
were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                                                 -----------------------
                                                          1997             1996              1995
                                                          ----             ----              ----
<S>                                                   <C>               <C>              <C>     
Cost in excess of net assets purchased                $ 18,252          $ 7,155          $      -
Cash                                                       566              395                 -
Invested assets                                              -                -           138,612
Other assets                                             2,570            1,758            31,654
Liabilities                                               (689)            (955)         (139,954)
                                                      -------------------------------------------
                                                      $ 20,699           $8,353           $30,672
                                                      ===========================================

</TABLE>
         The  pro  forma  impact  of the  purchased  businesses  on  results  of
operations was not material.

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
gross 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 composed of the following (in thousands):

                       Year Ended December 31,
                     --------------------------
                     1997       1996       1995
                     ----       ----       ----
Direct          $ 234,462   $ 241,974   $ 228,614
Assumed           110,492     105,442     112,415
Ceded             (66,717)    (66,025)    (68,126)
                  -------    --------    --------
                $ 278,237    $281,391   $ 272,903
                =========    ========   =========


MMI  evaluates  the  financial  condition  of its  reinsurers  and  monitors the
geographic  spread of risk to minimize  the  exposure  to losses from  reinsurer
insolvencies.  The reinsurers with the largest recoverable balance due to MMI as
of December 31, 1997 are identified as follows (in thousands):


                                                              Reinsurance
         Reinsurer                                            Recoverable
         --------------------------------------------         -----------
         Lloyd's Underwriters*                                $ 51,082
         Hannover Reinsurance Company*                          29,630
         CIGNA Reinsurance Company                              21,439
         National Reinsurance Company                           18,920
         Munich Reinsurance Company*                            16,597
         Transatlantic Reinsurance Company                       8,186
         Royal Reinsurance Company*                              8,105
         TIG Reinsurance Company                                 6,585
         CNA Reinsurance Company Limited*                        6,187
         Terra Nova Insurance Ltd.*                              5,883
         All others                                            127,463
                                                              --------
         Total                                                $300,077
                                                              ========

*   Represents a foreign insurer.

In 1997, 1996 and 1995 respectively,  MMI's losses and loss adjustment  expenses
were net of reinsurance ceded of $64,000,000, $33,100,000 and $73,900,000.



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, 1997:
Fixed maturities:
<S>                                           <C>           <C>            <C>            <C>        
   U.S. Government and agencies ...........   $   182,638   $     2,552    $      (112)   $   185,078
   State and political subdivisions .......       437,512        21,534           (232)       458,814
   Foreign governments ....................        28,571         2,509           (427)        30,653
   Corporate securities ...................       261,248         5,254           (573)       265,929
   Mortgage-backed securities .............       192,001         3,500           (273)       195,228
                                              ------------  ------------   ------------   ------------
                                                1,101,970        35,349         (1,617)     1,135,702
Short-term investments ....................        52,210             9           --           52,219
Preferred stocks ..........................        39,476         3,445            (42)        42,879
                                              ------------  ------------   ------------   ------------
                                              $ 1,193,656   $    38,803    $    (1,659)   $ 1,230,800
                                              ============  ============   ============   ============

December 31, 1996:
Fixed maturities:
   U.S. Government and agencies ...........   $   166,528   $     1,034    $      (645)   $   166,917
   State and political subdivisions........       438,139        13,228           (684)       450,683
   Foreign governments ....................        35,958         1,606            (52)        37,512
   Corporate securities ...................       274,168         4,880         (1,379)       277,669
   Mortgage-backed securities .............       196,632         2,380         (1,196)       197,816
                                              ------------  ------------   ------------   ------------
                                                1,111,425        23,128         (3,956)     1,130,597
Short-term investments ....................        59,664            31           --           59,695
Preferred stocks ..........................        20,794         1,540            (70)        22,264
                                              ------------  ------------   ------------   ------------
                                              $ 1,191,883   $    24,699    $    (4,026)   $ 1,212,556
                                              ============  ============   ============   ============
</TABLE>

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

The amortized  cost and fair value of fixed  maturities at December 31, 1997, by
contractual maturity, are as follows (in thousands):

                                 Amortized           Fair
                                    Cost            Value
                              ------------     ------------

Due in 1998                   $    45,945      $    45,224
Due in 1999 through 2002          253,283          257,542
Due in 2003 through 2007          211,086          221,289
Due in 2008 and thereafter        399,655          416,419
                                 --------        ---------
                                  909,969          940,474
Mortgage-backed securities        192,001          195,228
                               ----------        ---------
                              $ 1,101,970      $ 1,135,702
                              ===========      ===========

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 recorded in stockholders'
equity were as follows (in thousands):

                                   Year Ended December 31
                             --------------------------------
                                 1997        1996        1995
                             --------    --------    --------
Fixed maturities and
    short-term investments   $ 14,538    $(14,229)   $ 48,676
Preferred stocks         .      1,933         419         531
                             --------    --------    --------
                             $ 16,471    $(13,810)   $ 49,207
                             ========    ========    ========

Net realized  gains(losses)  on  investments  are comprised of the following (in
thousands):
                          Year Ended December 31
                    --------------------------------
                        1997        1996        1995
                    --------    --------    --------
Fixed maturities
     Gross gains    $  2,771    $  5,590    $ 13,096
     Gross losses     (1,270)     (6,660)    (11,404)
                    --------    --------    --------
                       1,501      (1,070)      1,692
                    --------    --------    --------
Preferred stocks:
     Gross gains         726         206        --
     Gross losses        (45)        (26)       --
                    --------    --------    --------
                         681         180        --
                    --------    --------    --------
                    $  2,182    $   (890)   $  1,692
                    ========    ========    ========


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

                                     Year Ended December 31,
                                  ---------------------------
                                     1997      1996      1995
                                  -------   -------   -------

Fixed maturities                  $72,520   $69,825   $59,834
Short-term investments and cash     4,586     6,594     6,603
Preferred stocks                    2,215       983       196
                                  -------   -------   -------
Total investment income            79,321    77,402    66,633
Expenses                            3,831     3,721     3,697
                                  -------   -------   -------
Net investment income             $75,490   $73,681   $62,936
                                  =======   =======   =======

At December  31,  1997,  investments  with a fair value of  $12,996,000  were on
deposit to meet statutory requirements.

Certain investments of the international segment are held in a trust fund set up
as collateral for holders of United States insurance  policies.  At December 31,
1997 and 1996, the fair value of fixed  maturities in the trust fund amounted to
$6,507,000  and  $6,286,000  respectively.  The required  minimum trust fund was
$5,400,000 for 1997 and 1996.

Fixed  maturities  of the  international  segment  of  $251,900,000  in 1997 and
$203,600,000  in 1996 were held in a trust fund  required by virtue of status as
an accredited reinsurer in a number of United States jurisdictions.


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, 1997 and 1996 are as
follows (in thousands):

                                                               December 31,
                                                         --------------------
                                                             1997        1996
                                                         --------    --------
Deferred tax assets:
    Tax-basis loss reserve adjustment                    $ 39,329    $ 42,696
    Tax-basis unearned premium
       reserve adjustment                                   3,855       3,261
    Accrued expenses                                          914       4,238
    Alternative minimum tax
       credit carryforward                                 12,647       5,584
    Other                                                   4,161       4,317
                                                         --------    --------
    Total deferred tax assets                              60,906      60,096
                                                         --------    --------

Deferred tax liabilities:
    Unrealized investment gains                           (12,814)     (7,215)
    Deferred policy acquisition costs                      (2,563)     (2,453)
    Receivables                                              (561)     (2,115)
    Other                                                  (1,989)     (2,563)
                                                         --------    --------
    Total deferred tax liabilities                        (17,927)    (14,346)
                                                         --------    --------
Net deferred tax asset                                   $ 42,979    $ 45,750
                                                         ========    ========


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):

                                      Year Ended December 31,
                                 -------------------------------
Current:                             1997        1996       1995
                                 --------    --------   --------
Federal                          $  2,720    $    431   $  7,017
Foreign                             8,505       9,338      7,124
                                 --------    --------   --------
Total current                      11,225       9,769     14,141
                                 --------    --------   --------


Deferred (credit):
Federal                              (959)        423     (4,878)
Foreign                            (1,017)         37     (1,181)
                                 --------    --------   --------
Total deferred                     (1,976)        460     (6,059)
                                 --------    --------   --------
Provision for income tax         $  9,249    $ 10,229   $  8,082
                                 ========    ========   ========

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

                                                    Year Ended December 31,
                                                    -----------------------
                                               1997               1996              1995
                                       ------------------   ---------------   ----------------
                                          Amount      %      Amount     %      Amount      %
                                       ---------  -------   --------  -----   --------  ------
<S>                                    <C>           <C>    <C>        <C>    <C>         <C>
Tax at U.S. Statutory rate             $ 15,511      35 %   $19,407    35 %   $15,306     35%
Non-taxable investment income            (8,431)    (19)     (7,896)  (14)     (6,187)   (14)
Acquisition costs                         2,603       6          --    --          --     --
Other                                      (434)     (1)     (1,282)   (3)     (1,037)    (2)
                                       ---------  -------   --------  -----   --------  ------
Net provision                          $  9,249      21 %   $10,229    18 %   $ 8,082     19 %
                                       =========  =======   ========  =====   ========  ======
</TABLE>



Federal income taxes have not been provided on the difference between the amount
for  financial  reporting  and  the  tax  basis  in the  stock  of  the  foreign
subsidiaries  because management intends to 

indefinitely invest that difference in these subsidiaries.  Determination of the
amount of the  unrecognized  deferred  United States income tax liability is not
practicable.

MMI's net payments of income taxes were $9,302,000,  $5,572,000, and $13,467,000
during 1997, 1996 and 1995, respectively.

6. TRUST PREFERRED CAPITAL SECURITIES AND NOTES PAYABLE

In December  1997,  the Company  completed a private  placement of  $125,000,000
30-year,   mandatorily   redeemable   preferred  capital   securities   (Capital
Securities) of MMI Capital Trust I, a subsidiary of MMI. The Capital  Securities
will pay a dividend of 7 5/8%  semiannually  in arrears  beginning June 30, 1998
and  have a  maturity  date  of  December  15,  2027.  Payments  on the  Capital
Securities are fully and unconditionally  guaranteed by MMI. Total proceeds were
$118,700,000  net of expenses.  The effective rate of the Capital  Securities is
8.06%.

With the proceeds from the Capital  Securities,  MMI repaid its  $103,000,000 in
bank debt and has no  long-term  notes  payable  as of  December  31,  1997.  At
December 31, 1996, the Company had $93,000,000 in long-term notes payable.  This
amount was  increased  by  $10,000,000  in July 1997 and was retired in December
1997. In connection with the  extinguishment  of the notes payable in the second
and fourth  quarters of 1997,  costs of $700,000 net of taxes of $400,000,  that
were deferred when paid and amortized  over the terms of the notes were expensed
and are classified as an extraordinary item in the 1997 financial statements.

In February 1998,  MMI obtained an unsecured  bank line of credit.  The interest
rate  called  for by this  agreement  is equal to the  Interbank  Offer Rate for
periods  of up to one year  plus a margin  of 20 to 40  basis  points.  The bank
agreement   subjects  MMI  and  its   subsidiaries  to  certain   covenants  and
restrictions  with respect to minimum net worth and statutory  surplus,  maximum
debt to total  capitalization,  and  minimum  risk  based  capital  levels.  The
agreement  also  restricts  MMI's  ability to pay  stockholders'  dividends  and
repurchase  shares in a single year in excess of 50% of the average of the prior
three years' net income. The credit agreement expires on February 20, 2003.

Total  interest  paid in 1997,  1996 and 1995  was  $6,400,000,  $5,900,000  and
$10,500,000, respectively.

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,
                                                                                                   -----------------------
                                                                                                1997         1996         1995
                                                                                                ------------------------------
Liability for losses and LAE at beginning of year  (net of reinsurance
<S>                                                                                            <C>          <C>          <C>    
   receivables: 1997 --$241,270;  1996 -- $263,934;  1995 -- $297,847)                        $900,427    $ 918,497    $ 701,206
Liability for losses and LAE for HPIC at date of acquisition ($124,651)
    and Accord Re commutation ($61,106)                                                           --           --        185,757

Add provision for losses and LAE for claims occurring in:
       Current year                                                                            209,367      213,419      204,076
       Prior years                                                                             (13,685)      (9,642)      (1,912)
                                                                                             ---------    ---------    ---------
Total incurred losses and LAE                                                                  195,682      203,777      202,164

Less losses and LAE payments for claims occurring in:
       Current year from continuing operations                                                  13,108       17,974        8,625
       Prior years from continuing operations                                                  230,761      200,765      160,598
       Prior years from discontinued operations                                                    299        3,108        1,407
                                                                                             ---------    ---------    ---------
       Total paid losses and LAE                                                               244,168      221,847      170,630
                                                                                             ---------    ---------    ---------

Liability for losses and LAE at end of year  (net of reinsurance
   receivables: 1997 -- $263,401; 1996 -- $241,270;  1995 -- $263,934)                       $ 851,941    $ 900,427    $ 918,497
                                                                                             =========    =========    =========
</TABLE>

The portion of the provision  for losses and LAE in the  foregoing  schedule for
the years ended December 31, 1997, 1996 and 1995 that relate to prior years from
continuing operations each represent less than 2% of the respective prior years'
liabilities  for  losses  and LAE.  MMI's  loss  and LAE  reserves  and  related
provision  for  prior  years'  losses   attributable   to  health  business  are
immaterial.

8.  STOCKHOLDERS' EQUITY

The  statutory  accounting  practices  prescribed  or  permitted  by  regulatory
authorities for MMI's insurance  subsidiaries differ in some respects from GAAP.
Prior to 1997,  ACIC  discounted  loss and LAE reserves for statutory  reporting
purposes  as   permitted   by   regulatory   authorities.   Reconciliations   of
statutory-basis  capital and surplus  and net income of its  domestic  insurance
operations to MMI's GAAP-basis  amounts  included in the accompanying  financial
statements are as follows (in thousands):

                                                             December 31,
                                                       ---------------------
                                                           1997        1996
                                                          ------      ------  
Statutory-basis capital and surplus                    $ 191,548   $ 225,945
Additions (deductions):
      Unionamerica                                       118,562     103,200
      Statutory-basis loss reserve discount                 --       (52,176)
      GAAP-basis deferred income taxes                    33,085      38,122
      Other, including non-insurance company amounts      55,807      40,075
                                                       ---------   ---------
GAAP-basis consolidated stockholders' equity of MMI    $ 399,002   $ 355,166
                                                       =========   =========

<TABLE>
<CAPTION>

                                                            Year Ended December 31,
                                                         ------------------------------
                                                          1997        1996        1995
                                                         ------      ------      ------
<S>                                                    <C>         <C>         <C>     
Statutory-basis combined net income                    $ 27,763    $ 32,685    $ 25,763
Additions (deductions):
      Unionamerica                                        8,162      19,105       6,699
      Statutory-basis loss reserve discount                  --      (1,994)     (6,607)
      GAAP-basis deferred income taxes                     (786)     (5,986)      6,938
      Other, including non-insurance company amounts       (779)     (3,690)     (3,399)
                                                       --------    --------    --------
GAAP-basis consolidated net income of MMI              $ 34,360    $ 40,120    $ 29,394
                                                       ========    ========    ========
</TABLE>


The above  statutory-basis  capital and surplus  amounts  relate to MMI's direct
domestic insurance subsidiaries,  ACIC and HPIC. The capital and surplus amounts
for ACIC include the capital and surplus of American  Continental Life Insurance
Company  (ACLIC),  a life  insurance  company  owned by ACIC,  in the  amount of
$15,500,000 at December 31, 1997 and $15,200,000 at December 31, 1996. Statutory
net income of ACLIC amounted to $300,000 in 1997,  $400,000 in 1996 and $500,000
in 1995.

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
$31,000,000 in 1998.

Under a Notice of  Requirements  from its regulatory  body in the United Kingdom
(U.K.), the Department of Trade and Industry (DTI), Unionamerica may not pay any
dividends unless it has given the DTI 14 days advance notice and the DTI has not
objected.  The DTI has the power to prohibit or require  Unionamerica  to reduce
the amount of a dividend.

ACIC and HPIC's  combined  GAAP-basis  net assets  amounted to  $263,000,000  at
December 31, 1997.  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.

On June 14, 1997,  the Board of Directors  declared a dividend  distribution  to
holders of record on June 30,  1997 of one right  ("Right")  to  purchase  1/100
share of one Series B Junior  Participating  preferred stock on each outstanding
share of MMI Common Stock.

The Rights issued under the Plan become  exercisable only when a person or group
acquires or announces its intention to acquire more than 15% of the Common Stock
of MMI.  Under certain  conditions,  each Right would,  upon  exercise,  entitle
stockholders,  other than the third party  acquirer,  to buy $150 worth of a MMI
Common Stock equivalent at an exercise price of $75.

If MMI is acquired in a merger or other business  combination  transaction  that
has not been  approved by the Board of  Directors,  each Right will  entitle its
holder to acquire  common  stock of the  acquiring  company  with a market value
equal to two times the exercise  price of the Right, a purchase value of $150 of
the common  stock of the  acquiring  company  for $75.  At any time prior to the
distribution  date, the Board of Directors retains the right to amend the Rights
Plan and to redeem the Rights at $.01 per Right.  The Rights  will expire in ten
years. MMI has reserved 300,000 shares of Preferred Stock in connection with the
Rights Plan.

9.  EARNINGS PER SHARE

On December 31, 1997,  MMI adopted SFAS 128 which  replaced the  calculation  of
primary and fully diluted earnings per share with basic and diluted earnings per
share.  Unlike primary earnings per share, basic earnings per share excludes the
effect of stock options. Diluted earnings per share is similar to the previously
reported fully diluted earnings per share. Where  appropriate,  all earnings per
share amounts for all periods have been restated to conform to the  requirements
of SFAS 128.

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 basic  earnings per share,
earnings are net of Preferred  Stock  dividends of $293,000 in 1995. For 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.

The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                        1997          1996          1995
                                                     ----------    ----------   ----------

<S>                                                  <C>           <C>          <C>       
Income from continuing operations                    $   34,360    $   45,220   $   29,394
Preferred stock dividends                                   --            --          (293)
                                                     ----------    ----------   ----------

Income available to common shareholders
for basic earnings per share                             34,360        45,220       29,101

Effect of dilutive securities:
   Preferred stock dividends                                --            --           293
                                                     ----------    ----------   ----------

Numerator for diluted earnings per share-
   income available to common shareholders
   after assumed conversions                         $   34,360    $   45,220   $   29,394
                                                     ==========    ==========   ==========


Weighted average shares for basic
    earnings per share                                   18,751        17,336       12,895
Effect of dilutive securities:
    Employee stock options                                  645           751          551
                                                     ----------    ----------   ----------
Adjusted weighted average shares
   for diluted earnings per share                        19,396        18,087       13,446
                                                     ==========    ==========   ==========

Basic earnings per share                             $     1.83    $     2.61   $     2.26
                                                     ==========    ==========   ==========

Diluted earnings per share                           $     1.77    $     2.50   $     2.19
                                                     ==========    ==========   ==========
</TABLE>

Options to  purchase  143,000,  18,000 and  18,000  shares of Common  Stock were
outstanding during 1997, 1996 and 1995,  respectively,  but were not included in
the  computation  of the dilutive  effect of stock  options.  These options were
excluded from the computation  because the options' exercise prices were greater
than the average  market  price of the common  shares and,  therefore,  would be
antidilutive.

10.   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 of Directors, 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 MMI stock  option  activity,  and related  information  for the
years ended December 31 follows:

<TABLE>
<CAPTION>
                                   1997                              1996                               1995
                      --------------------------------- ---------------------------------- ----------------------------------
                                      Weighted Average                   Weighted Average                   Weighted Average
                          Shares      Exercise Price        Shares       Exercise Price        Shares       Exercise Price
                      --------------- ----------------- ---------------- ----------------- ---------------- -----------------
Oustanding at
 
<S>                         <C>                  <C>           <C>                 <C>            <C>                  <C>   
    beginning of year       1,580,916            $14.98        1,298,185           $11.97         1,215,614            $10.78

Granted
    (at fair value)           130,625             25.30          531,319            21.89           146,750             20.32
Exercised                    (121,079)            10.57         (213,338)           12.56           (59,788)             8.93
Cancelled                     ( 1,100)            24.25          (35,250)           23.09            (4,391)             5.36
                      --------------- ----------------- ---------------- ----------------- ---------------- -----------------
                            1,589,362            $16.15        1,580,916           $14.98         1,298,185            $11.97
                      =============== ================= ================ ================= ================ =================

Options exercisable
    at year-end             1,534,862            $15.76        1,164,722           $13.34         1,136,685            $11.06
Shares available for
   grant at end of      
    year                      650,392                            229,900                            418,525

</TABLE>

Other information  regarding options  outstanding and exercisable as of December
31, 1997 is as follows:
<TABLE>
<CAPTION>

                                     Options Outstanding                             Options Exercisable
                    --------------------------------------------------------    -----------------------------------
                                      Weighted Average
    Range of          Number               Remaining       Weighted Average       Number          Weighted Average
Exercise Prices     Outstanding       Contractual Life        Exercise Price    Exercisable          Exercise Price
---------------     -----------       ----------------        --------------    -----------          --------------
<S>                     <C>                  <C>                 <C>                <C>                  <C>   
$ 5.36                  271,342              2.69                $  5.36            271,342              $ 5.36
$13.13 to $18.63        927,420              5.79                  15.26            927,420               15.26
$22.75 to $32.00        390,600              6.90                  25.79            336,100               25.53
                        -------              ----                  -----            -------               -----
                      1,589,362              5.54                 $16.15          1,534,862              $15.76
                      =========              ====                 ======          =========              ======
</TABLE>

Pro forma  information  regarding  net  income and net income per share has been
determined  as if MMI had accounted for its stock option grants since January 1,
1995 under the plan 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 1997,
1996 and  1995:  risk-free  interest  rate of 6%, a  volatility  factor  of 29%,
expected life of the option of four 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  that 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  selected
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:

                                            1997         1996         1995
                                      ----------   ----------   ----------
Pro forma net income (in thousands)   $   33,216   $   36,361   $   29,063
Pro forma net income per common and
   common equivalent share:
       Basic                          $     1.77   $     2.10   $     2.25
       Diluted                              1.71         2.01         2.16

The pro forma disclosures 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>
11.   COMMITMENTS AND CONTINGENCIES

MMI is engaged in various legal actions  incident to the nature of its business.
Management is of the opinion that the outcome of the litigation  will not 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  1997,  1996  and  1995  was  $8,600,000,   $7,400,000  and
$6,500,000,  respectively.  As of December 31, 1997,  aggregate  minimum  rental
commitments  under   noncancelable   leases  amounted  to  $7,700,000  in  1998,
$6,400,000 in 1999,  $5,500,000 in 2000,  $5,200,000 in 2001, $1,800,000 in 2002
and $4,500,000 thereafter.


<PAGE>
12.   EMPLOYEE BENEFIT PLANS

MMI has a  defined-contribution  pension  plan  that  covers  substantially  all
domestic  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.  Additional
MMI contributions are made at the discretion of MMI's Board of Directors.  MMI's
contributions  charged to operations were $2,700,000 in 1997, $2,200,000 in 1996
and $1,600,000 in 1995.

MMI operates a non-contributory,  defined pension plan (the "Plan"), principally
for its  international  employees.  The Plan  provides  for  monthly  retirement
benefits,  normally  at ages  between 60 to 65, to eligible  employees  based on
employee compensation and length of employment.

The actuarial  assumptions used to develop the components of pension expense for
the years ended December 31, 1997, 1996 and 1995 were:

                                 Rate per annum %
                                 ----------------   
                           1997       1996       1995
                           ----       ----       ----
Discount rate              6.50%      7.75%      7.75%
Return on assets           8.00       8.00       8.00
Salary progression         5.50       5.50       5.50

      The  following  table sets forth the Plan's  estimated  funded  status and
amounts  recognized in the accompanying  consolidated  financial  statements (in
thousands):

                                          1997        1996
                                      --------    --------
Accumulated benefit obligation        $ 11,526    $  9,118
Projected benefit obligation            12,553       9,118
Plan assets at fair value               12,894      10,802
                                      --------    --------
Funded status                              341       1,684
Unrecognized net gain(loss)                886        (665)
Unrecognized prior service cost           (902)       (992)
                                      --------    --------
Prepaid pension amount                $    325    $     27
                                      ========    ========


        Net pension expense included the following components (in thousands):

                                          Year ended December 31,
                                          -----------------------
                                         1997       1996       1995
                                        ------     ------     ------
Service cost                          $   704     $  677    $   487
Interest cost                             656        551        424
Actual return on plan assets           (1,883)    (1,409)      (518)
Net amortization and deferral           1,005        736        (94)
                                      --------    -------    -------
Net pension expense                   $   482     $  555     $  299
                                      ========    =======    =======

The assets of the Plan are principally  invested in equity  securities of United
Kingdom companies.


<PAGE>
13.   INDUSTRY SEGMENTS

In December 1997, MMI acquired  Unionamerica  Holdings in a pooling of interests
and, as a result,  redefined their industry  segments.  All years presented have
been restated to include the revenues, pre-tax income and assets of Unionamerica
Holdings.   MMI's   operations  are  classified  and  summarized  into  domestic
insurance,  international  insurance  and  consulting  and  fees.  The  domestic
insurance  segment  principally  includes  professional  and  general  liability
insurance and  reinsurance  for  hospitals,  healthcare  systems and  healthcare
providers.  The  international  insurance  segment,  principally  located in the
United Kingdom,  includes the international  insurance and reinsurance business.
The consulting and fee segment  includes  clinical risk  management  consulting,
strategic healthcare  consulting,  employee relations  consulting,  professional
liability claims  administration,  healthcare credential  verifications services
and  billing,  compliance  and  reimbursement  services.  Investment  income and
expense  allocations  are  based on  estimates  and  certain  assets  have  been
allocated  to segments  by  formulas.  Information  by segment is as follows (in
thousands):
<TABLE>
<CAPTION>

                                                               Year Ended December 31,
                                                               -----------------------
                                                       1997                1996                  1995
                                                       ----------------------------------------------
Revenues:
<S>                                                 <C>                <C>                  <C>      
      Domestic insurance                            $ 209,168          $ 208,643            $ 196,408
      International insurance                         146,741            145,539              141,123
      Consulting and fees                              51,626             34,535               22,336     
                                                    ----------         ----------           ----------
      Total                                         $ 407,535          $ 388,717            $ 359,867
                                                    ==========         ==========           ==========

Income from continuing operations before
  income taxes and extraordinary losses:
      Domestic insurance                              $23,530           $ 24,080             $ 23,036     
      International insurance (1)                      16,216             28,480               17,379
      Consulting and fees                               4,570              2,889                1,798
                                                    ----------         ----------           ----------
      Total                                          $ 44,316          $  55,449            $  42,213
                                                    ==========         ==========           ==========


                                                                          December 31,
                                                                          ------------
                                                       1997                1996                  1995
                                                       ----------------------------------------------
Identifiable assets at end of year:
      Domestic insurance                          $ 1,074,189         $1,037,791            $ 966,286   
      International insurance                         784,650            750,081              765,118   
      Consulting and fees                              25,228             16,549               10,354
                                                    ----------         ----------           ----------
      Total                                        $1,884,067         $1,804,421           $1,741,758
                                                    ==========         ==========           ==========


<FN>
(1)  1997 reflects $9,745 in expenses related to the acquisition of Unionamerica Holdings.
</FN>
</TABLE>

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

                                                                                             Three Months Ended,
                                                                                             -------------------
                                                                             3/31/97       6/30/97        9/30/97      12/31/97
                                                                             --------------------------------------------------

<S>                                                                      <C>           <C>            <C>           <C>        
Revenues .............................................................   $   102,185   $   103,832    $    94,370   $   107,148

Income before extraordinary losses....................................        10,625        11,082         12,230         1,130
Extraordinary losses, net of taxes ...................................            --          (267)            --          (440)
                                                                         ------------------------------------------------------
    Net income .......................................................   $    10,625   $    10,815    $    12,230   $       690
                                                                         ======================================================



Earnings per common and common equivalent share:
   Basic:
        Income before extraordinary losses ...........................   $       .57   $       .59    $       .65    $      .06
        Extraordinary losses, net of taxes ...........................            --          (.01)            --          (.02)
                                                                         ------------------------------------------------------
        Net income ...................................................   $       .57   $       .58    $       .65    $      .04
                                                                         ======================================================
   Diluted:
        Income before extraordinary losses ...........................   $       .55   $       .57    $       .63    $      .06
        Extraordinary losses, net of taxes ...........................            --          (.01)            --          (.02)
                                                                         ------------------------------------------------------
        Net income ...................................................   $       .55   $       .56    $       .63    $      .04
                                                                         ======================================================


                                                                                             Three Months Ended,
                                                                                             -------------------
                                                                             3/31/96       6/30/96        9/30/96      12/31/96
                                                                             --------------------------------------------------

Revenues .............................................................   $   101,283   $   100,103    $    94,694    $   92,637

Income from continuing operations ....................................        12,221        11,100         10,391        11,508
Loss from discontinued operations ....................................            --            --             --        (5,100)
                                                                         ------------------------------------------------------
      Net income .....................................................   $    12,221   $    11,100    $    10,391    $    6,408
                                                                         ======================================================

Earnings per common and common equivalent share:
   Basic:
      Income from continuing operations ..............................   $       .73   $       .66    $       .61    $      .62
      Loss from discontinued operations ..............................            --            --             --          (.27)
                                                                         ------------------------------------------------------
      Net income ....................................................    $       .73   $       .66    $       .61    $      .35
                                                                         ======================================================

   Diluted:
      Income from continuing operations ..............................   $       .70   $       .63    $       .58    $      .59
      Loss from discontinued operations ..............................            --            --             --          (.26)
                                                                         ------------------------------------------------------
      Net income .....................................................   $       .70   $       .63    $       .58    $      .33
                                                                         ======================================================
</TABLE>


The above  information,  prior to the quarter ended December  31,1997,  has been
restated for the acquisition of Unionamerica  Holdings,  accounted for using the
pooling of interests method, and the required adoption on December 31, 1997 of a
new accounting standard on earnings per share.

15.   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.  Also at issue was a  stop-loss  reinsurance
agreement  provided by MMI to Ludgate in  connection  with the sale. In February
1997, a United Kingdom court rendered a judgment against MMI.

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 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,  1997 and  1996,  and the  related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three  years in the period  ended  December  31,  1997.  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 did not  audit  the  1996  and  1995  financial  statements  of
Unionamerica Holdings plc, a wholly-owned  subsidiary,  which statements reflect
total assets of  $750,081,000  as of December 31,  1996,  and total  revenues of
$145,539,000  and  $141,123,000  for the years ended December 31, 1996 and 1995,
respectively.  Those  statements were audited by other auditors whose report has
been  furnished to us, and our opinion,  insofar as it relates to data  included
for  Unionamerica  Holdings  plc,  is based  solely  on the  report of the other
auditors.

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 and the report of other auditors provide a reasonable
basis for our opinion.

In our  opinion,  based on our  audits  and the  report of other  auditors,  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, 1997 and 1996, and the consolidated  results of
their  operations and their cash flows for each of the three years in the period
ended  December 31, 1997,  in  conformity  with  generally  accepted  accounting
principles.



                                                  Ernst & Young LLP

Chicago, Illinois
February 26, 1998


<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 21.1
------------

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

Company                                                          Domicile
-------                                                          --------

<S>                                                              <C>
MMI Companies, Inc.                                              Delaware
     AmCon Reinsurance, 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 - (80% owned)                     Ireland
     Professional Risk Management, Inc.                          Delaware
     MMI Capital Trust I - (3% (100% of common stock) owned)     Delaware
     Unionamerica Holdings, plc                                  United Kingdom
       Unionamerica Intermediate Company Limited                 United Kingdom
       Unionamerica Acquisition Company Limited                  United Kingdom
         Unionamerica Insurance Company Limited                  United Kingdom
         UA Management Company - (99% owned)                     United Kingdom
         UA Combined Investment Company Limited - (80% owned)    United Kingdom
            Jago Dedicated Limited - (89% owned)                 United Kingdom
              Jago Capital Limited                               United Kingdom

</TABLE>

<PAGE>
EXHIBIT 23.1

                         CONSENT OF 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 26, 1998,  included in the
1997 Annual Report to Shareholders 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. We did not audit the 1996 and 1995 financial  statements of Unionamerica
Holdings plc, a wholly-owned  subsidiary,  which statements reflect total assets
of $750,081,000 as of December 31, 1996, and total revenues of $145,539,000  and
$141,123,000  for the years ended December 31, 1996 and 1995,  respectively.  We
have been  furnished with the report of other auditors with respect to Schedules
II, III, IV, V, and VI of Unionamerica Holdings, plc and our opinion, insofar as
it relates to data  included for  Unionamerica  Holdings plc, is based solely on
the  report of the other  auditors.  In our  opinion,  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.

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.  1993 Employee  Stock Plan,  and 1993  Non-employee  Director's
Formula Stock Option Plan (Form S-8 No. 33-46889) and 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 26, 1998,  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 18, 1998

<PAGE>

Exhibit 23.2




March 18, 1998



The Board of Directors
Unionamerica Holdings plc



We consent to the  incorporation  by  reference in the  registration  statements
(Nos. 33-72786,33-81228 and 33-87356) on Form S-8, of MMI Companies, Inc. of our
report  dated 18 March  1996  with  respect  to the  consolidated  statement  of
operations, shareholders' equity and cash flows of Unionamerica Holdings plc for
the year ended 31 December  1995,  which report  appears in the 31 December 1997
Form 10-K of MMI Companies, Inc.



KPMG
Chartered Accountants
Registered Auditor
London, England


<PAGE>
March 18, 1998



The Board of Directors
Unionamerica Holdings plc



We consent to the  incorporation  by  reference in the  registration  statements
(Nos.  33-72786,  33-81228 and 33-87356) on Form S-8, of MMI Companies,  Inc. of
our report dated 11 March 1997 with respect to the consolidated balance sheet of
Unionamerica  Holdings plc as of 31 December 1996, and the related  consolidated
statement of  operations,  shareholders'  equity and cash flow for the year then
ended,  which report appears in the 31 December 1997 Form 10-K of MMI Companies,
Inc.



KPMG Audit Plc
Chartered Accountants
Registered Auditor
London, England