FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549



[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                For the Quarterly Period Ended September 30, 1996
                                               ------------------

                                       OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the transition period from ______________ to ______________

                          Commission File Number 1-8282
                                                 ------

                       Alexander & Alexander Services Inc.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

               Maryland                                   52-0969822
   -------------------------------              -------------------------------
   (State or other jurisdiction of              (I.R.S. Employer Identification
   incorporation or organization)               No.)

       1185 Avenue of the Americas
            New York, New York                               10036
----------------------------------------        -------------------------------
(Address of principal executive offices)                   (Zip Code)

        Registrant's telephone number, including area code (212) 444-4500
                                                           --------------------

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

The number of shares of Common Stock, $1 par value, outstanding as of November
1, 1996 was 42,992,256.

The number of shares of Class A Common Stock, $.00001 par value, outstanding as
of November 1, 1996 was 1,805,616.

The number of shares of Class C Common Stock, $1 par value, outstanding as of
November 1, 1996 was 349,687.

No shares of Class D Common Stock, $1 par value, were outstanding as of November
1, 1996.

<PAGE>

              ALEXANDER & ALEXANDER SERVICES INC. AND SUBSIDIARIES


                                      INDEX
                                      -----

                                                                       Page No.
                                                                       --------

Part I.  Financial Information:

    Item 1.  Financial Statements:

        Unaudited Consolidated Statements of Operations for the
          Three and Nine Months Ended September 30, 1996 and 1995............2

        Condensed Consolidated Balance Sheets, as of
          September 30, 1996(Unaudited) and December 31, 1995................3

        Unaudited Consolidated Statements of Cash Flows for the
          Nine Months Ended September 30, 1996 and 1995......................5

        Unaudited Notes to Financial Statements..............................7

    Item 2.  Management's Discussion and Analysis of
                Financial Condition and Results of Operations...............21

Part II.  Other Information:

    Item 1.  Legal Proceedings..............................................37

    Item 6.  Exhibits.......................................................38


                                       1
<PAGE>

              Alexander & Alexander Services Inc. and Subsidiaries

                          PART I. FINANCIAL INFORMATION
                          -----------------------------

                          Item 1. Financial Statements
                 Unaudited Consolidated Statements of Operations
         For the Three and Nine Months Ended September 30, 1996 and 1995
         ---------------------------------------------------------------
                     (in millions, except per share amounts)

                                      Three Months Ended    Nine Months Ended
                                         September 30,         September 30,
                                        1996       1995       1996       1995
                                      --------   --------   --------   --------
Operating revenues:
  Commissions and fees                $  301.6   $  283.7   $  920.6   $  903.4
  Fiduciary investment income             16.3       16.0       46.8       48.6
                                      --------   --------   --------   --------
     Total                               317.9      299.7      967.4      952.0
                                      --------   --------   --------   --------

Operating expenses:
  Salaries and benefits                  191.6      175.4      566.6      543.9
  Other                                  104.6       96.7      312.5      299.6
                                      --------   --------   --------   --------
     Total                               296.2      272.1      879.1      843.5
                                      --------   --------   --------   --------

Operating income                          21.7       27.6       88.3      108.5
                                      --------   --------   --------   --------

Other income (expenses):
  Investment income                        3.5        4.6       10.6       13.9
  Interest expense                        (3.9)      (4.6)     (11.8)     (14.1)
  Other                                    1.1        1.2        0.6       34.0
                                      --------   --------   --------   --------
     Total                                 0.7        1.2       (0.6)      33.8
                                      --------   --------   --------   --------
Income before income taxes and
  minority interest                       22.4       28.8       87.7      142.3
Income taxes                              (9.0)     (11.0)     (35.0)     (54.7)
                                      --------   --------   --------   --------

Income before minority interest           13.4       17.8       52.7       87.6
Minority interest                         (0.3)      (0.3)      (5.0)      (5.7)
                                      --------   --------   --------   --------

Net income                                13.1       17.5       47.7       81.9
Preferred stock dividends                 (6.7)      (6.4)     (19.9)     (18.9)
                                      --------   --------   --------   --------

Earnings attributable to common
  shareholders                        $    6.4   $   11.1   $   27.8   $   63.0
                                      ========   ========   ========   ========

PER SHARE INFORMATION:
----------------------
Primary earnings per share            $   0.14   $   0.25   $   0.62   $   1.42
                                      ========   ========   ========   ========
Average common and common 
  equivalent shares outstanding           45.3       44.6       45.1       44.5
                                      ========   ========   ========   ========

Fully diluted earnings per share      $   0.14   $   0.25   $   0.62   $   1.33
                                      ========   ========   ========   ========
Average common shares outstanding,
  assuming full dilution                  45.3       44.6       45.1       57.1
                                      ========   ========   ========   ========

Cash dividends per common share       $  0.025   $  0.025   $  0.075   $  0.075
                                      ========   ========   ========   ========

                 See accompanying notes to financial statements.


                                       2
<PAGE>

              Alexander & Alexander Services Inc. and Subsidiaries

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------

                    Item 1. Financial Statements (continued)
                      Condensed Consolidated Balance Sheets
              September 30, 1996 (Unaudited) and December 31, 1995
              ----------------------------------------------------
                                  (in millions)

                                                  September 30,    December 31,
                                                       1996            1995
                                                  -------------    ------------
ASSETS                                                            
------                                                            
Current assets:                                                   
  Cash and cash equivalents:                                      
     Operating                                       $  232.0        $  241.2
     Fiduciary                                          526.2           496.4
  Short-term investments:                                         
     Operating                                           21.1            11.3
     Fiduciary                                          265.0           224.9
  Premiums and fees receivable (less                              
   allowance for doubtful accounts                                
   of $20.6 in 1996 and $20.5 in 1995)                1,200.7         1,292.8
  Deferred income taxes                                  16.8            20.0
  Other current assets                                   74.1            85.4
                                                     --------        --------
        Total current assets                          2,335.9         2,372.0

Property and equipment - net                            120.4           126.4
Intangible assets - net                                 221.2           210.7
Deferred income taxes                                   103.6           102.1
Long-term operating investments                          21.4            30.9
Other                                                   119.5           100.3
                                                     --------        --------
                                                     $2,922.0        $2,942.4
                                                     ========        ========
LIABILITIES AND STOCKHOLDERS' EQUITY                              
------------------------------------                              
Current liabilities:                                              
  Premiums payable to insurance companies            $1,775.9        $1,810.4
  Short-term debt                                        13.8            19.1
  Current portion of long-term debt                       7.7             9.3
  Deferred income taxes                                   8.8             9.4
  Accrued compensation and related benefits              56.1            81.8
  Income taxes payable                                   34.6            24.7
  Other accrued expenses                                130.6           165.8
                                                     --------        --------
       Total current liabilities                      2,027.5         2,120.5
                                                     --------        --------
                                                                  
Long-term liabilities:                                            
  Long-term debt                                        142.4           126.2
  Deferred income taxes                                  18.9            15.6
  Net liabilities of discontinued operations             27.0            33.4
  Other                                                 243.7           234.1
                                                     --------        --------
       Total long-term liabilities                      432.0           409.3
                                                     --------        --------
                                                                  
Commitments and contingent liabilities                            
  (Notes 3, 6 and 9)                                              
                                                                  
8% Series B cumulative convertible preferred                      
  stock contingency (Note 9)                              0.0            10.0
                                                     --------        --------

                 See accompanying notes to financial statements.

                                   -Continued-


                                       3
<PAGE>

              Alexander & Alexander Services Inc. and Subsidiaries

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------

                    Item 1. Financial Statements (continued)
                Condensed Consolidated Balance Sheets (continued)
              September 30, 1996 (Unaudited) and December 31, 1995
              ----------------------------------------------------
                                  (in millions)
<TABLE>
<CAPTION>
                                                            September 30,  December 31,
                                                                 1996          1995
                                                            -------------  ------------
<S>                                                            <C>           <C>     
Stockholders' equity:                                                       
 Preferred stock, authorized 15,000,000 shares, $1 par value:               
   Series A junior participating preferred                                  
     stock, issued and outstanding, none                       $   --        $   --
   $3.625 Series A convertible preferred stock,                             
     issued and outstanding, 2,300,000 shares,                              
     liquidation preference of $115 million                         2.3           2.3
   8% Series B cumulative convertible preferred                             
     stock, issued and outstanding, 4,751,208 and                           
     4,477,170 shares, respectively, liquidation                            
     preference of $238 million and $224 million,                           
     respectively                                                   4.8           4.5
 Common stock, authorized 200,000,000 shares, $1 par                        
   value; issued and outstanding 43,005,799                                 
   and 42,259,282 shares, respectively                             43.0          42.3
 Class A common stock, authorized 26,000,000 shares,                        
   $.00001 par value; issued and outstanding                                
   1,811,121 and 1,920,821 shares, respectively                    --            --
 Class C common stock, authorized 11,000,000 shares,                        
   $1 par value; issued and outstanding                                     
   350,003 and 361,092 shares, respectively                         0.4           0.4
 Class D common stock, authorized 40,000,000 shares,                        
   $1 par value; issued and outstanding, none                      --            --
 Paid-in capital                                                  666.7         638.1
 Accumulated deficit                                             (203.1)       (227.5)
 Net unrealized investment gains - net of income taxes              6.7           5.6
 Accumulated translation adjustments                              (58.3)        (63.1)
                                                               --------      --------
     Total stockholders' equity                                   462.5         402.6
                                                               --------      --------
                                                               $2,922.0      $2,942.4
                                                               ========      ========
</TABLE>


                                       4
<PAGE>

              Alexander & Alexander Services Inc. and Subsidiaries

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------
                    Item 1. Financial Statements (continued)
                 Unaudited Consolidated Statements of Cash Flows
              For the Nine Months Ended September 30, 1996 and 1995
              -----------------------------------------------------
                                  (in millions)

                                                          Nine Months Ended
                                                             September 30,
                                                          -----------------
                                                           1996       1995
                                                          ------     ------
Cash provided (used) by:

Operating activities:
  Income from continuing operations                       $ 47.7     $ 81.9
  Adjustments to reconcile to net cash
    provided by operating activities:
      Depreciation and amortization                         36.9       33.3
      Deferred income taxes                                  5.7       28.9
      Gains on dispositions of subsidiaries
         and other assets                                   --        (30.4)
      Other                                                 10.3        7.8

  Changes in assets and liabilities (net of
    effects from acquisitions and dispositions):
      Net fiduciary cash and cash equivalents
         and short-term investments                        (65.4)     (44.7)
      Premiums and fees receivable                         106.5       38.2
      Prepaid expenses and other current assets             17.3       (8.4)
      Other non-current assets                             (15.2)     (13.2)
      Premiums payable to insurance companies              (53.1)     (10.1)
      Other accrued expenses                               (67.5)    (104.2)
      Other long-term liabilities                           15.7       (8.5)
   Discontinued operations (net)                           (10.4)     (12.8)
                                                          ------     ------

  Net cash provided (used) by operating
    activities                                              28.5      (42.2)
                                                          ------     ------

Investing activities:
  Net purchases of property and equipment                  (18.6)     (15.1)
  Purchases of businesses                                  (22.8)      (2.8)
  Proceeds from sales of subsidiaries and
    other assets                                             0.7       88.1
  Purchases of operating investments                       (26.0)    (180.2)
  Sales and maturities of operating investments             27.8      196.1
                                                          ------     ------

      Net cash provided (used) by investing
         activities                                        (38.9)      86.1
                                                          ------     ------

                 See accompanying notes to financial statements.

                                   -Continued-


                                        5
<PAGE>

              Alexander & Alexander Services Inc. and Subsidiaries

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------
                    Item 1. Financial Statements (continued)
           Unaudited Consolidated Statements of Cash Flows (Continued)
              For the Nine Months Ended September 30, 1996 and 1995
           -----------------------------------------------------------
                                  (in millions)

                                                       Nine Months Ended
                                                         September 30,
                                                       ------------------
                                                        1996        1995
                                                       ------      ------

Financing activities:
  Cash dividends                                       $ (9.6)     $ (9.6)
  Proceeds from issuance of short-term debt              12.0         0.2
  Repayments of short-term debt                         (15.2)       (0.4)
  Proceeds from issuance of long-term debt               30.1         4.6
  Repayments of long-term debt                          (18.9)      (35.1)
  Issuance of common stock                                1.2         0.1
                                                       ------      ------

      Net cash used by financing activities              (0.4)      (40.2)
                                                       ------      ------

Effect of exchange rate changes on operating
  cash and cash equivalents                               1.6         2.4
Operating cash and cash equivalents at
  beginning of year                                     241.2       248.7
                                                       ------      ------
Operating cash and cash equivalents at end
  of period                                            $232.0      $254.8
                                                       ======      ======

Supplemental cash flow information:
  Cash paid during the period for:
     Interest                                          $ 14.7      $ 13.9
     Income taxes                                        14.0        67.5

Non-cash investing and financing activities:
  Notes payable issued for contingency
    settlements                                        $ --        $ 45.7
  Series B cumulative convertible preferred
    stock dividends-in-kind                              13.7        12.6
  Common stock issued for employee benefit and
    stock plans                                           4.5         3.6
  Common stock issued for non-employee stock
    plans                                                 0.2         0.4

                 See accompanying notes to financial statements.


                                        6
<PAGE>

       Alexander & Alexander Services Inc. and Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------

                    Item 1. Financial Statements (continued)
                     Unaudited Notes to Financial Statements
                     ---------------------------------------
                   (in millions, except per share information)

1.   Interim Financial Presentation

     Unless otherwise indicated, all amounts are stated in millions of U.S.
     dollars. In the opinion of the management of the Company, all adjustments,
     consisting only of normal recurring accruals, necessary for a fair
     presentation have been included in the consolidated financial statements.
     The results of operations for the first nine months of the year are not
     necessarily indicative of results for the year.

     These unaudited consolidated financial statements should be read in
     conjunction with the audited consolidated financial statements and the
     notes thereto included in the Company's 1995 Annual Report to Shareholders.

2.   Acquisitions and Dispositions

     Acquisitions

     In the first nine months of 1996, the Company acquired in transactions
     accounted for as purchases, or invested in ten brokerage and consulting
     operations, primarily in the Asia/Pacific region, for combined purchase
     prices approximating $27.5 million. The Company paid a total of $21.9
     million at closing for these acquisitions. These acquisitions produced
     approximately $30 million in annualized revenues.

     In October 1996, the Company acquired a European retail broking operation
     for a purchase price not to exceed $5.3 million of which $3.3 million was
     paid at closing.

     Dispositions

     On February 28, 1995, the Company completed the sale of Alexsis, Inc., its
     U.S.-based third party claims administrator for total cash proceeds of
     $47.1 million resulting in a pre-tax gain of $30.3 million, ($20.8 million
     after-tax or $0.47 per share). Adjustments, including post closing
     adjustments pursuant to the agreement, resulted in a final reported pre-tax
     gain of $28.7 million, ($18.7 million after-tax or $0.42 per share) for the
     year ended December 31, 1995.

     In January 1995, the Company sold its minority interest in a U.K. merchant
     bank for cash proceeds of $7.2 million and a pre-tax gain of $0.3 million.

     These gains are included in Other Income (Expenses) in the Consolidated
     Statements of Operations.

3.   Income Taxes

     On August 6, 1996, the Company received a technical advice memorandum
     ("TAM"), issued by the IRS National Office, favorable to the Company with
     respect to the federal income tax consequences of certain 1991 intercompany
     transactions involving the stock of a U.K. subsidiary. The IRS District
     Director's Office subsequently adopted the TAM and withdrew its proposal to
     increase taxable income for the year 1991 with respect to this issue. The
     examination of the 1990 and 1991 federal income tax returns will come to a
     conclusion with the disposition of this issue.


                                       7
<PAGE>

       Alexander & Alexander Services Inc. and Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------

                    Item 1. Financial Statements (continued)
               Unaudited Notes to Financial Statements (continued)
               ---------------------------------------------------
                   (in millions, except per share information)

3.   Income Taxes (continued)

     Based upon the favorable TAM relating to the 1991 transactions, the Company
     does not expect IRS examiners to take issue with the Company's reporting of
     a similar series of transactions that occurred in 1993. The IRS commenced
     its examination of the tax years 1992 through 1994 in July 1996. The
     potential tax liability, excluding interest and penalties, associated with
     the 1993 transactions had been estimated by the Company at $25 million.

     No provision for any potential liability with respect to the 1991 and 1993
     transactions had been made in the consolidated financial statements.

     The Company believes that its current tax reserves are adequate to cover
     its tax liabilities.

4.   Employees' Retirement Plans and Benefits

     Effective January 1, 1996, the Company adopted Statement of Financial
     Accounting Standards (SFAS) No. 123, "Accounting for Stock Based
     Compensation". The Company has elected to continue to measure compensation
     costs using APB Opinion No. 25 and accordingly will provide the pro-forma
     disclosures required by SFAS No. 123 in its Annual Report on Form 10-K for
     the year ended December 31, 1996.

5.   Stock Option and Incentive Plans

     Worldwide Employee Savings-Related Stock Purchase Plan

     The Company's Worldwide Employee Savings-Related Stock Purchase Plan
     (Worldwide Employee Purchase Plan) was approved by the Board of Directors
     and became effective as of May 16,1996. Under the Worldwide Employee
     Purchase Plan eligible employees outside the U.S. may purchase up to an
     aggregate 750,000 shares of the Company's Common Stock. At the end of the
     5-year offering period, participants can elect to purchase from the
     contributions saved, shares of the Company's Common Stock at a 15 percent
     discount of the closing price of the Common Stock reported on the New York
     Stock Exchange on the first date of the 5-year offering period. 471,000 s
     hares have been subscribed to as of September 30, 1996. Non-U.S. employees
     who are "executive officers" of the Company, as that term is defined
     pursuant to Section 16 of the Securities Exchange Act of 1934, participate
     in a subplan of the Employee Discount Stock Purchase Plan with similar
     terms.

     1995 Long-Term Incentive Plan Amendment

     On May 16, 1996 an amendment to the 1995 Long-Term Incentive Plan (1995
     LTIP) was approved by stockholders. The 1995 LTIP provided that no more
     than 940,000 restricted shares may be used for Restricted Stock Awards and
     Bonus Equity Plan Awards (BEP). The amendment excludesd BEP Awards from the
     940,000 restricted share limitation, but does not increase the number of
     shares authorized under the 1995 LTIP.


                                       8
<PAGE>

       Alexander & Alexander Services Inc. and Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------

                    Item 1. Financial Statements (continued)
               Unaudited Notes to Financial Statements (continued)
               ---------------------------------------------------
                   (in millions, except per share information)

6.   Discontinued Operations

     In 1985, the Company discontinued its insurance underwriting operations. In
     1987, the Company sold Sphere Drake Insurance Group (Sphere Drake). The
     Sphere Drake sales agreement provides indemnities by the Company to the
     purchaser for various potential liabilities including provisions covering
     future losses on certain insurance pooling arrangements from 1953 to 1967
     between Sphere Drake and Orion Insurance Company (Orion), a U.K.-based
     insurance company, and future losses pursuant to a stop loss reinsurance
     contract between Sphere Drake and Lloyd's Syndicate 701 (Syndicate 701). In
     addition, the sales agreement requires the Company to assume any losses in
     respect of actions or omissions by Swann & Everett Underwriting Agency
     (Swann & Everett), an underwriting management company previously managed by
     Alexander Howden Group Limited (Alexander Howden).

     The net liabilities of discontinued operations shown in the accompanying
     Consolidated Balance Sheets include insurance liabilities associated with
     the above indemnities, liabilities of insurance underwriting subsidiaries
     currently in run-off and other related liabilities.

     A summary of the net liabilities of discontinued operations is as follows:

                                              As of                As of
                                       September 30, 1996    December 31, 1995
                                       ------------------    -----------------
                                                           
   Liabilities:                                            
     Insurance liabilities                   $252.4               $257.1
     Other                                     15.1                 14.9
                                             ------               ------
      Total liabilities                       267.5                272.0
                                             ------               ------
                                                           
   Assets:                                                 
     Recoverable under finite risk contracts:              
        Insurance liabilities                 129.4                126.4
        Premium adjustment                      9.7                  9.8
     Reinsurance recoverables                  52.6                 51.6
     Cash and investments                      29.7                 27.2
     Other                                      8.8                  9.3
                                             ------               ------
      Total assets                            230.2                224.3
                                             ------               ------
                                                           
   Total net liabilities of discontinued                   
     operations                                37.3                 47.7
     Less current portion classified as                    
       other accrued expenses                  10.3                 14.3
                                             ------               ------
                                                           
   Remainder classified as net liabilities                 
     of discontinued operations              $ 27.0               $ 33.4
                                             ======               ======
                                                         

     The insurance liabilities represent estimates of future claims expected to
     be made under occurrence-based insurance policies and reinsurance business
     written through Lloyd's and the London Market covering primarily
     asbestosis, environmental pollution, and latent disease risks in the United
     States which are coupled with substantial litigation expenses. These claims
     are expected to develop and be settled over the next twenty to thirty
     years.


                                       9
<PAGE>

       Alexander & Alexander Services Inc. and Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------

                    Item 1. Financial Statements (continued)
               Unaudited Notes to Financial Statements (continued)
               ---------------------------------------------------
                   (in millions, except per share information)

6.   Discontinued Operations (continued)

     Liabilities stemming from these claims cannot be estimated using
     conventional actuarial reserving techniques because the available
     historical experience is not adequate to support the use of such techniques
     and because case law, as well as scientific standards for measuring the
     adequacy of site clean-up (both of which have had, and will continue to
     have, a significant bearing on the ultimate extent of the liabilities) is
     still evolving. Accordingly, the Company's independent actuaries have
     combined available exposure information with other relevant industry data
     and have used various projection techniques to estimate the insurance
     liabilities, consisting principally of incurred but not reported losses.

     In 1994, Orion, which has financial responsibility for sharing certain of
     the insurance pool liabilities, was placed in provisional liquidation by
     order of the English Courts. Based on current facts and circumstances, the
     Company believes that the provisional liquidation will not have a material
     adverse effect on the net liabilities of discontinued operations.

     The Company has certain protection against adverse developments of the
     insurance liabilities through two finite risk contracts issued by Centre
     Reinsurance (Bermuda) Limited (reinsurance company). A contract entered
     into in 1989 provides the insurance underwriting subsidiaries currently in
     run-off with recoveries of recorded liabilities of $76 million, and for up
     to $50 million of additional recoveries in excess of those liabilities
     subject to a deductible for one of the run-off companies of $15 million. At
     September 30, 1996, based on an estimate by an independent actuarial firm,
     the Company had accrued $12.9 million of the deductible.

     On July 1, 1994, the Company entered into an insurance-based financing
     contract (finite risk contract) with the reinsurance company providing
     protection primarily for exposures relating to Orion, Syndicate 701 and
     Swann & Everett. The contract provided for the payment by the Company of
     $80 million, $50 million of which was borrowed from the reinsurance
     company, and for payment by the Company of the first $73 million of paid
     claims. The contract entitles the Company to recover paid claims in excess
     of the Company's $73 million retention. At September 30, 1996, recoveries
     were limited to $120.8 million, which includes the Company's payment of $80
     million. In addition, commencing December 31, 1996, depending on the timing
     and amount of paid loss recoveries under the contract, the Company may be
     entitled to receive a payment from the reinsurance company in excess of the
     amounts recovered for paid losses if the contract is terminated. The
     contract is accounted for under the deposit method of accounting and the
     accounting requirements for discontinued operations.

     The Company's right to terminate the contract entered into in 1994 is
     subject to the consent of American International Group, Inc. (AIG) as long
     as AIG is the holder of certain shares of the Company's stock. In addition,
     the reinsurance company also has the right, under certain circumstances,
     all of which are under the Company's control, to terminate that contract.

     The insurance liabilities set forth above represent the Company's best
     estimates of the probable liabilities based on independent actuarial
     estimates. The recoverable amounts under the finite risk contracts, which
     are considered probable of realization based on independent actuarial
     estimates of losses and pay-out patterns, represent the excess of such
     liabilities over the Company's retention levels. The premium adjustment
     represents the recoverable amount considered probable of realization at the
     earliest date the Company can exercise its right to terminate the finite
     risk contract covering the insurance underwriting subsidiaries currently in
     run-off.


                                       10
<PAGE>

       Alexander & Alexander Services Inc. and Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------
                    Item 1. Financial Statements (continued)
               Unaudited Notes to Financial Statements (continued)
               ---------------------------------------------------
                   (in millions, except per share information)

6.   Discontinued Operations (continued)

     Changes in the total net liabilities of discontinued operations for the
     nine months ended September 30, 1996 are as follows:

     Beginning balance                               $  47.7
       Claims and expense payments                     (10.4)
                                                     -------
     Ending Balance                                  $  37.3
                                                     =======

     While the insurance liabilities set forth above represent the Company's
     best estimate of the probable liabilities within a range of independent
     actuarial estimates of reasonably probable loss amounts, there is no
     assurance that further adverse developments may not occur due to variables
     inherent in the estimation processes and other matters described above.
     Based on independent actuarial estimates of a range of reasonably possible
     loss amounts, liabilities could exceed recorded amounts by approximately
     $165 million. However, in the event of such adverse developments, based on
     independent actuarial estimates of pay-out patterns, up to approximately
     $125 million of this excess would be recoverable under the finite risk
     contracts.

     The Company believes that, based on current estimates, the established
     total net liabilities of discontinued operations are sufficient to cover
     its exposures.


                                       11
<PAGE>

       Alexander & Alexander Services Inc. and Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------

                    Item 1. Financial Statements (continued)
               Unaudited Notes to Financial Statements (continued)
               ---------------------------------------------------
                   (in millions, except per share information)

7.   Investments

     At September 30, 1996, net unrealized holding gains totaled $6.7 million,
     net of deferred income taxes of $2.4 million, and are reported as a
     separate component of Stockholders' Equity.

     At September 30, 1996 and December 31, 1995, the amortized cost and
     estimated fair value of the Company's debt and equity securities and
     related financial instruments used to hedge such investments are summarized
     below:

                                               September 30, 1996
                                  --------------------------------------------
                                                Gross       Gross    Estimated
                                  Amortized   Unrealized  Unrealized   Fair
                                    Cost        Gains       Losses     Value
                                  ---------   --------    ---------   --------
   U.S. Government agencies/
      state issuances             $     -     $    -      $      -    $    -
   Other interest-bearing
      securities                      138.1        -             -       138.1
   Mortgage-backed securities           5.7        -             -         5.7
   Equity securities                    4.7        8.7           -        13.4
   Financial instruments - used
      as hedges                         -          0.9         (0.5)       0.4
                                  ---------   --------    ---------   --------
        Total                     $   148.5   $    9.6    $    (0.5)  $  157.6
                                  =========   ========    =========   ========


                                                December 31, 1995
                                  --------------------------------------------
                                                Gross       Gross    Estimated
                                  Amortized   Unrealized  Unrealized   Fair
                                    Cost        Gains       Losses     Value
   U.S. Government agencies/
      state issuances             $     2.7   $     -     $      -    $   2.7
   Other interest-bearing
      securities                      138.1         -            -      138.1
   Equity securities                    3.1        6.5           -        9.6
   Financial instruments - used
      as hedges                          -         1.3         (0.2)      1.1
                                  ---------   --------    ---------   -------
        Total                     $   143.9   $    7.8    $    (0.2)  $ 151.5
                                  =========   ========    =========   =======

     The above debt and equity securities and financial instruments used as
     hedges are classified in the Consolidated Balance Sheets as follows:

                                      September 30, 1996  December 31, 1995
                                      ------------------  -----------------
     Cash and cash equivalents:
       Operating                            $ 41.7              $ 34.1
       Fiduciary                              93.2                73.1
     Short-term investments:
       Operating                               0.7                 0.3
       Fiduciary                               2.3                18.8
     Long-term operating investments          19.7                25.2
                                            ------              ------
           Total                            $157.6              $151.5
                                            ======              ======


                                       12
<PAGE>

       Alexander & Alexander Services Inc. and Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------
                    Item 1. Financial Statements (continued)
               Unaudited Notes to Financial Statements (continued)
               ---------------------------------------------------
                   (in millions, except per share information)

7.   Investments (continued)

     At September 30, 1996 and December 31, 1995, the amortized cost and
     estimated fair value of debt securities by contractual maturity are
     summarized below:

                                                   September 30, 1996
                                                --------------------------
                                                                 Estimated
                                                Amortized           Fair
                                                   Cost            Value
                                                ---------        ---------
     Due in one year or less                    $   137.8        $  137.8
     Due after one year through five years            0.2             0.2
     Due after five years through ten years           0.1             0.1
     Due after ten years                               -               -
                                                ---------        --------
                                                    138.1           138.1
     Mortgage-backed securities                       5.7             5.7
                                                ---------        --------
       Total debt securities                    $   143.8        $  143.8
                                                =========        ========
  
  
                                                   December 31, 1995
                                                --------------------------
                                                                 Estimated
                                                Amortized           Fair
                                                   Cost            Value
                                                ---------        --------
     Due in one year or less                    $   120.8        $  120.8
     Due after one year through five years            4.8             4.8
     Due after five years through ten years          10.2            10.2
     Due after ten years                              5.0             5.0
                                                ---------        --------
                                                    140.8           140.8
     Mortgage-backed securities                        -               -
                                                ---------        --------
       Total debt securities                    $   140.8        $  140.8
                                                =========        ========

     Certain of the above investments with maturities greater than one year are
     classified as short-term and included in current assets as they represent
     fiduciary investments that will be utilized during the normal operating
     cycle of the business to pay premiums payable to insurance companies that
     are included in current liabilities.

8.   Debt

     The Company has a $200 million three year credit facility with various
     banks, which expires in March 1998. The agreement provides for unsecured
     borrowings and for the issuance of up to $100 million of letters of credit,
     and contains various covenants, including minimum consolidated net worth,
     maximum leverage and minimum cash flow requirements. Interest rates charged
     on amounts drawn on this credit agreement are dependent upon the Company's
     credit ratings, the duration of the borrowings and the Company's choice of
     one of a number of indices, including the prime lending rate, certificate
     of deposit rates, the federal funds rate and LIBOR.

     In August 1996, the Company obtained two short-term bank loans totaling $7
     million. The proceeds from these loans were used to reduce the amount
     outstanding under the agreement. As of September 30, 1996, $50 million of
     unsecured borrowings were outstanding. During the first quarter of 1996, a
     $10 million letter of credit was issued, and, in July 1996, the $10 million
     letter of credit was cancelled.


                                       13
<PAGE>


       Alexander & Alexander Services Inc. and Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------
                    Item 1. Financial Statements (continued)
               Unaudited Notes to Financial Statements (continued)
               ---------------------------------------------------
                   (in millions, except per share information)

8.   Debt (continued)

     In March 1996, the Company obtained a $10 million, short term bank loan
     which was subsequently repaid in April 1996.

     As part of the October 1995 agreement for the purchase of JIB, the Company
     paid a promissory note totaling $10.6 million in April, 1996. During the
     second quarter of 1996, the October 1996 promissory note was revalued to $6
     million in accordance with the revenue retention criteria for the former
     JIB offices stipulated in the purchase agreement.

     In April 1996, the Company paid the first installment of $5.8 million on
     the Mutual Fire zero-coupon note. (See Note 9 of the Unaudited Notes to
     Financial Statements).

     In May 1996, the Company issued a $2.7 million, 9 percent two year note,
     relating to an acquisition in the Asia/Pacific region. This note is
     contingent upon future results of the acquired business. (See Note 2 of the
     Unaudited Notes to Financial Statements).

9.   Contingencies

     The Company and its subsidiaries are subject to various claims and lawsuits
     from both private and governmental parties, which include claims and
     lawsuits in the ordinary course of business, consisting principally of
     alleged errors and omissions in connection with the placement of insurance
     and in rendering consulting services. In some of these cases, the remedies
     that may be sought or damages claimed are substantial. Additionally, the
     Company and its subsidiaries are subject to the risk of losses resulting
     from the potential uncollectibility of insurance and reinsurance balances
     and claims advances made on behalf of clients and indemnifications
     connected with the sales of certain businesses.

     Certain claims were asserted against the Company and certain of its
     subsidiaries alleging, among other things, that certain Alexander Howden
     subsidiaries accepted, on behalf of certain insurance companies, insurance
     or reinsurance at premium levels not commensurate with the level of
     underwriting risks assumed and retroceded or reinsured those risks with
     financially unsound reinsurance companies. The remaining claim asserting
     these allegations is pending in a suit filed in New York. In an action
     brought in 1988 against the Company and certain subsidiaries (Certain
     Underwriters at Lloyd's of London Subscribing to Insurance Agreements
     ML8055801, et al. v. Alexander & Alexander Services Inc., et al., formerly
     captioned Dennis Edward Jennings v. Alexander & Alexander Europe plc, et
     al., 88 Civ. 7060 (RO) (S.D.N.Y.)), plaintiffs seek compensatory and
     punitive damages, as well as treble damages under RICO totaling $36
     million. The defendants have counterclaimed against certain of the
     plaintiffs for contribution. Discovery in this case remains to be concluded
     and no trial date has been set. Management of the Company believes there
     are valid defenses to all the claims that have been made with respect to
     these activities and the Company is vigorously defending the pending
     action. This action is covered under the Company's professional indemnity
     program, except for possible damages under RICO. The Company currently
     believes the reasonably possible loss that might result from this action,
     if any, would not be material to the Company's financial position or
     results of operations.


                                       14
<PAGE>

       Alexander & Alexander Services Inc. and Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------
                    Item 1. Financial Statements (continued)
               Unaudited Notes to Financial Statements (continued)
               ---------------------------------------------------
                   (in millions, except per share information)

9.   Contingencies (continued)

     In 1987, the Company sold Shand Morahan & Company (Shand), its domestic
     underwriting management subsidiary. Prior to the sale, Shand and its
     subsidiaries had provided underwriting management services for and placed
     insurance and reinsurance with and on behalf of Mutual Fire Marine & Inland
     Insurance Company (Mutual Fire). Mutual Fire was placed in rehabilitation
     by the Courts of the Commonwealth of Pennsylvania in December 1986. In
     February 1991, the rehabilitator commenced an action captioned Foster v.
     Alexander & Alexander Services Inc., 91 Civ. 1179 (E.D.Pa.). The complaint,
     which sought compensatory and punitive damages, alleged that Shand, and in
     certain respects, the Company breached duties to and agreements with,
     Mutual Fire. The rehabilitator sought damages estimated at approximately
     $234 million.

     On March 27, 1995, the Company, Shand and the rehabilitator entered into a
     settlement agreement which was approved by the courts and which terminated
     the rehabilitator's litigation and released the Company and Shand from any
     further claims by the rehabilitator. Under the terms of the settlement, the
     Company paid $12 million in cash and issued a $35 million six-year
     zero-coupon note. In addition, in 1995 Shand returned $4.6 million of
     trusteed assets to the rehabilitator and the rehabilitator has eliminated
     any right of set-offs previously estimated to be $4.7 million. The Mutual
     Fire settlement agreement includes certain features protecting the Company
     from potential exposure to claims for contribution brought by third-parties
     and expenses arising out of such claims. In April 1996 the Company paid the
     first installment on the zero-coupon note in the amount of $5.8 million.

     Although the Company's professional liability underwriters have denied
     coverage for the Mutual Fire lawsuit, the Company has instituted a
     declaratory judgment action attempting to validate coverage (Alexander &
     Alexander Services Inc. and Alexander & Alexander Inc. v. Those Certain
     Underwriters at Lloyd's of London, subscribing to insurance evidence by
     policy numbers 879/P. 31356 and 879/P. 35349 and Assicurazioni Generali,
     S.P.A., No. 92 Civ. 6319 (F.D.N.Y.)). On October 16, 1996, the Court issued
     a decision holding that the Company is not entitled to coverage for the
     rehabilitator's claims. The Company plans to appeal the ruling.

     Under the 1987 agreement with the purchaser of Shand, the Company agreed to
     indemnify the purchaser against certain contingencies, including, among
     others, (i) losses arising out of pre-sale transactions between Shand or
     Shand's subsidiaries, on the one hand, and Mutual Fire, on the other, and
     (ii) losses arising out of pre-sale errors or omissions by Shand or Shand's
     subsidiaries. The Company's obligations under the indemnification
     provisions in the 1987 sales agreement were not limited as to amount or
     duration.


                                       15
<PAGE>

       Alexander & Alexander Services Inc. and Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------
                    Item 1. Financial Statements (continued)
               Unaudited Notes to Financial Statements (continued)
               ---------------------------------------------------
                   (in millions, except per share information)

9.   Contingencies (continued)

     Starting in late 1992, the purchaser of Shand has asserted a number of
     claims under both the Mutual Fire indemnification provision and the errors
     and omissions indemnification provision of the sales agreement. During
     1995, most of those claims have been resolved by a series of settlement
     agreements, involving the settlement or release of (a) claims relating to
     reinsurance recoverables due to Shand's subsidiaries from Mutual Fire, (b)
     claims relating to deterioration of reserves for business written by Mutual
     Fire and ceded to Shand's subsidiaries, and (c) a number of potential
     errors and omissions claims by third-party reinsurers against Shand. Under
     the settlement agreement entered into in January 1995, covering the errors
     and omissions claims by third-party reinsurers, the Company obtained a
     release and limitation of indemnification obligations relating to certain
     third-party errors and omissions claims, and restructured the contractual
     relationship with the purchaser so that the parties' future interests as to
     third-party claims are more closely aligned. The Company paid $14 million
     in cash, issued a five-year interest bearing note in the principal amount
     of $14 million and expected to pay a contingent obligation of $4.5 million.
     In June 1995, the $14 million note payable was prepaid in whole. The
     remaining contingent note payable of $4.5 million was paid in full in
     September 1995.

     Notwithstanding these settlements, the limitation of certain contract
     obligations and the restructuring of the parties' relationship, some of the
     Company's indemnification provisions under the 1987 agreement are still in
     effect. As a result there remains the possibility of substantial exposure
     under the indemnification provisions of the 1987 agreement, although the
     Company, based on current facts and circumstances, believes the possibility
     of a material loss resulting from these exposures is remote.

     In November 1993, a class action suit was filed against the Company and two
     of its then directors and officers, Tinsley H. Irvin and Michael K. White,
     in the United States District Court for the Southern District of New York
     under the caption Harry Glickman v. Alexander & Alexander Services Inc., et
     al. (Civil Action No. 93 Civ. 7594). On January 6, 1995, the plaintiff
     filed a second amended complaint which, among other things, dropped Mr.
     White as a defendant. The second amended complaint purported to assert
     claims on behalf of a class of persons who purchased the Company's Common
     Stock during the period May 1, 1991 to November 4, 1993, alleging that
     during this period the Company's financial statements contained material
     misrepresentations as a result of inadequate reserves established by the
     Company's subsidiary, Alexander Consulting Group Inc., for unbillable
     work-in-progress. The second amended complaint sought damages in an
     unspecified amount, as well as attorneys' fees and other costs, for alleged
     violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
     1934.

     In response to the second amended complaint, the Company filed a motion to
     dismiss. On March 4, 1996, the Court entered an order granting the
     Company's motion to dismiss the action and plaintiff was denied leave to
     replead. Following plaintiff's filing a notice of appeal, the parties
     entered into a stipulation withdrawing the appeal, which was entered by the
     court on June 17, 1996, thereby terminating the litigation.


                                       16
<PAGE>

       Alexander & Alexander Services Inc. and Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------

                    Item 1. Financial Statements (continued)
               Unaudited Notes to Financial Statements (continued)
               ---------------------------------------------------
                   (in millions, except per share information)

9.   Contingencies (continued)

     These contingent liabilities involve significant amounts. While it is not
     possible to predict with certainty the outcome of such contingent
     liabilities, the applicability or availability of coverage for such matters
     under the Company's professional indemnity insurance program, or their
     financial impact on the Company, management currently believes that such
     impact will not be material to the Company's financial position. However,
     it is possible that future developments with respect to these matters could
     have a material effect on future interim or annual results of operations.

     Under the Series B Convertible Preferred Stock Purchase Agreement, as
     amended, the Company had agreed to make certain payments to the purchaser
     pursuant to indemnifications given with respect to tax payments and
     reserves in excess of recorded tax reserves as of March 31, 1994. The
     Company's potential exposures under the indemnification, individually or in
     the aggregate, were limited to $10 million. As a result of the IRS decision
     discussed in Note 3, the Company's Series B Convertible Preferred Stock
     purchase agreement has been amended to terminate contingent payment
     obligations for all remaining indemnifications given by the Company with
     respect to tax payments and reserves for contingent liabilities.
     Accordingly, the Company increased shareholder equity by $10 million by
     reclassifying proceeds from the issuance of the Series B stock.

10.  Financial Instruments

     The Company enters into foreign exchange forward contracts and foreign
     exchange option agreements primarily to provide risk management against
     existing firm commitments as well as anticipated future exposures that will
     arise at its London-based specialist insurance and reinsurance broking
     operations. The exposures arise because a significant portion of the
     revenues of these operations are denominated in U.S. dollars, while their
     expenses are primarily denominated in U.K. pounds sterling.

     The Company generally sells forward U.S. dollars and purchases U.K. pounds
     sterling with settlements of up to two years in the future. Such contracts
     provide risk management against future anticipated transactions which are
     not firm commitments. In addition, the Company enters into foreign exchange
     contracts to manage market risk associated with foreign exchange volatility
     on intercompany loans and expected intercompany dividends. Finally, the
     Company enters into foreign exchange contracts to effectively offset
     existing contracts when anticipated exchange rate movements would benefit
     the Company.

     Gains and losses on foreign exchange forward contracts are marked to market
     at each balance sheet date and are included in other current assets or
     liabilities, with the resulting gain or loss recorded as a component of
     other operating expenses. The fair market value of all foreign exchange
     forward contracts at September 30, 1996 was an asset of $1.4 million and a
     liability of 0.1 million as of December 31, 1995.

     At September 30, 1996 and December 31, 1995, the Company had $87.1 million
     and $69.9 million, respectively, notional principal of forward exchange
     contracts outstanding, primarily to exchange U.S. dollars into U.K. pounds
     sterling, and $34.5 million and $16.3 million, respectively, notional
     principal outstanding, primarily to exchange U.K. pounds sterling into U.S.
     dollars.


                                       17
<PAGE>

       Alexander & Alexander Services Inc. and Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------

                    Item 1. Financial Statements (continued)
               Unaudited Notes to Financial Statements (continued)
               ---------------------------------------------------
                   (in millions, except per share information)

10.  Financial Instruments (continued)

     Foreign exchange options written by the Company are marked to market at
     each balance sheet date and the resulting gain or loss is recorded as a
     component of other operating expenses. Future cash requirements may exist
     if the option is exercised by the holder. At September 30, 1996, the
     Company had $20 million notional principal of written foreign exchange
     options outstanding. Based on foreign exchange rates at September 30, 1996
     and December 31, 1995, the Company recognized a current liability of $0.5
     million and $0.6 million, respectively, consisting of unamortized premiums
     and the estimated cost to settle these options on those dates.

     The Company has entered into interest rate swaps and forward rate
     agreements, which are accounted for as hedges, as a means to limit the
     earnings volatility associated with changes in short-term interest rates on
     its existing and anticipated fiduciary investments. These instruments are
     contractual agreements between the Company and financial institutions which
     exchange fixed and floating interest rate payments periodically over the
     life of the agreements without exchanges of the underlying principal
     amounts. The notional principal amounts of such agreements are used to
     measure the interest to be paid or received and do not represent the amount
     of exposure to credit loss. The Company records the difference between the
     fixed and floating rates of such agreements as a component of its fiduciary
     investment income. Interest rate swaps and forward rate agreements which
     relate to debt securities held as investments by the Company are marked to
     market in accordance with SFAS No. 115 and are recorded as a separate
     component of stockholders' equity, net of taxes. At September 30, 1996, an
     unrealized gain of $0.3 million on interest rate swaps and forward rate
     agreements which hedge existing fiduciary investments was reflected in
     fiduciary cash and equivalents in the Consolidated Balance Sheet.

     At September 30, 1996 and December 31, 1995 the Company had the following
     interest rate swaps and forward rate agreements in effect, by year of final
     maturity:

                                         September 30, 1996
                        ------------------------------------------------------
                          Gross      Net Weighted      Gross     Net Weighted
                        Receiving       Average       Paying        Average
      Year                Fixed      Interest Rate     Fixed     Interest Rate
      ----              ---------    -------------    ------     -------------
      1996              $  112.8          6.05%       $100.6          5.71%
      1997                 612.0          6.57         156.3          6.12
      1998                 249.4          6.97          10.0          6.80
      1999                 101.3          6.73            -             -
                        --------          ----        ------          ---
           Total        $1,075.5          6.63%       $266.9          5.99%
                        ========          ====        ======          ====
   
                                         December 31, 1995
                        ------------------------------------------------------
                          Gross      Net Weighted      Gross     Net Weighted
                        Receiving       Average       Paying        Average
      Year                Fixed      Interest Rate     Fixed     Interest Rate
      ----              ---------    -------------    ------     -------------
      1996                $390.3          7.38%       $471.7          6.27%
      1997                 203.2          6.68          40.0          5.90
      1998                 182.9          7.08            -            -
                          ------          ----        ------          ----
           Total          $776.4          7.13%       $511.7          6.24%
                          ======          ====        ======          ====


                                       18
<PAGE>

       Alexander & Alexander Services Inc. and Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------

                    Item 1. Financial Statements (continued)
               Unaudited Notes to Financial Statements (continued)
               ---------------------------------------------------
                   (in millions, except per share information)

10.  Financial Instruments (continued)

     The Company generally enters into interest rate swap agreements with a
     final maturity of three years or less. The floating rate on these
     agreements is generally based upon the six-month LIBOR rate on the relevant
     reset dates. Forward rate agreements generally have a final maturity date
     that is less than two years, and use six-month LIBOR as the floating rate
     index.

     In addition, as part of its interest rate management program, the Company
     utilizes various types of interest rate options, including caps, collars,
     floors and interest rate guarantees. The Company generally writes covered
     interest rate options under which the Company receives a fixed interest
     rate.

     The options are marked to market at each balance sheet date, based on the
     Company's estimated cost to settle the options. The estimated cost to
     settle the options, less any premium deferred by the Company, is recognized
     as a reduction to fiduciary investment income in the period when such
     changes in market value occur. The Company recognized a current liability
     of $0.5 million and $0.3 million, representing the estimated cost to settle
     these options at September 30, 1996 and December 31, 1995, respectively.
     The estimated cost to settle these agreements was determined by obtaining
     quotes from banks and other financial institutions which make a market in
     these instruments.

     At September 30, 1996 and December 31, 1995, the Company had the following
     written interest rate option agreements outstanding, by year of final
     maturity:

                                         September 30, 1996
                        ------------------------------------------------------
                          Gross      Net Weighted      Gross     Net Weighted
                        Receiving       Average       Paying        Average
      Year                Fixed      Interest Rate     Fixed     Interest Rate
      ----              ---------    -------------    ------     -------------
      1996                $  7.8         6.00%         $  -            - %
      1997                  55.6         6.17             -            -
      1998                  61.3         7.05             -            -
                          ------         ----          -----         ----
           Total          $124.7         6.59%         $  -            - %
                          ======         ====          =====         ====
      
                                         December 31, 1995
                         ------------------------------------------------------
                          Gross      Net Weighted      Gross     Net Weighted
                        Receiving       Average       Paying        Average
      Year                Fixed      Interest Rate     Fixed     Interest Rate
      ----              ---------    -------------    ------     -------------
      1996                $43.2          5.41%         $10.0         4.60%
      1997                 15.5          8.50             -           -
      1998                 10.0          8.50             -           -
                          -----          ----          -----         ----
           Total          $68.7          6.54%         $10.0         4.60%
                          =====          ====          =====         ====
   
     The above financial instruments are purchased from large international
     banks and financial institutions with strong credit ratings. Credit limits
     are established based on such credit ratings and are monitored on a regular
     basis. Management does not anticipate incurring any losses due to
     non-performance by these institutions. In addition, the Company monitors
     the market risk associated with these agreements by using probability
     analyses, external pricing systems and information from banks and brokers.


                                       19
<PAGE>

       Alexander & Alexander Services Inc. and Subsidiaries (the Company)
                    PART I. FINANCIAL INFORMATION (continued)
                    Item 1. Financial Statements (continued)
               Unaudited Notes to Financial Statements (continued)
                   (in millions, except per share information)

10.  Financial Instruments (continued)

     The following methods and assumptions were used in estimating the fair
     value of each class of financial instrument. The fair values of short-term
     and long-term investments were estimated based upon quoted market prices
     for the same or similar instruments. The fair value of long-term debt,
     including the current portion, was estimated on the basis of market prices
     for similar issues at current interest rates for the applicable period. The
     fair value of interest rate swaps and forward rate agreements was estimated
     by discounting the future cash flows using rates currently available for
     agreements of similar terms and maturities. The fair value of foreign
     exchange forward contracts and foreign exchange option agreements was
     estimated based upon period-end exchange rates. The fair value of interest
     rate options was estimated based upon market quotes of the cost to settle
     these agreements. The carrying amounts of the Company's other financial
     instruments approximate fair value due to their short-term maturities.

     The following table presents the carrying amounts and the estimated fair
     value of the Company's financial instruments that are not carried at fair
     value.

                              As of September 30, 1996  As of December 31, 1995
                              ------------------------  -----------------------
                               Carrying     Estimated    Carrying     Estimated
                                Amount     Fair Value     Amount     Fair Value
                                ------     ----------     ------     ----------
   Long-term debt, including
     current portion            $150.1       $ 148.1      $135.6       $135.8
   Interest rate swaps and
     forward rate agreements                     2.2          -           5.1


                                       20
<PAGE>

        Alexander & Alexander Services Inc. & Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------
       Item 2. Management's Discussion and Analysis of Financial Condition
                            and Results of Operations
        ----------------------------------------------------------------

     OVERVIEW
     --------

     Alexander & Alexander Services Inc. (the "Company") provides professional
     risk management consulting, insurance brokerage and human resource
     management consulting services from offices in more than 80 countries. The
     Company's principal industry segments are (i) insurance services, comprised
     of risk management and insurance broking services and specialist and
     reinsurance broking, and (ii) human resource management consulting.

     The Company's insurance services revenues are generally derived from
     commissions and fees and can be affected by pricing and seasonality. The
     Company's insurance broking revenues are generally impacted by overall
     available market capacity and premium rates charged by insurance companies.
     Insurance broking commissions and fee growth continue to be constrained,
     particularly in North America and the London-based specialist and
     reinsurance operations, due to soft pricing and excess market capacity and
     the resultant intense competition among insurance carriers and brokers for
     market share. These market conditions are evident in the risk management
     and insurance broking operations in the U.K., Continental Europe and in
     other parts of the world. Soft market conditions were prevalent in the
     first nine months of 1996 and are expected to continue in most insurance
     coverages throughout 1996 and 1997. In addition, an increasing number of
     companies are securing competitive bids for their insurance needs resulting
     in higher account turnover rates.

     Moderate revenue growth is expected from the Company's human resource
     management consulting operations during 1996, excluding the impact of the
     transfer of a business unit to the insurance services segment.

     The timing and realization of revenues are also affected by the timing of
     renewal cycles in different parts of the world and lines of business. This
     produces a degree of seasonality in the Company's results. Broking revenues
     for risk management and insurance broking services are strongest during the
     first quarter for Continental Europe and strongest in the U.S. and
     Asia-Pacific during the fourth quarter. Specialist and reinsurance broking
     revenues are strongest in the first and second quarters. Revenues for human
     resource management consulting are typically strongest in the fourth
     quarter and weakest in the first quarter.

     In addition to commissions and fees, the Company derives revenues from
     investment income earned on fiduciary funds. Contributing to the decline in
     investment income is lower average interest rates during the first nine
     months of 1996 versus the same period in 1995. There is also pressure from
     insurance companies to shorten the time that fiduciary funds are held prior
     to remittance to carriers. The approximate four percent decline in
     investment income earned on fiduciary funds during the first nine months of
     1996 compared to 1995 is anticipated to continue for the full year.

     The Company anticipates operating margins for its insurance broking
     operations to remain under considerable pressure and are unlikely to
     improve for the foreseeable future. Future earnings growth will be
     dependent on both revenue growth from the development of new products and
     services, new business generation and selective acquisitions, and the
     continued emphasis on expense reductions.


                                       21
<PAGE>

        Alexander & Alexander Services Inc. & Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------
       Item 2. Management's Discussion and Analysis of Financial Condition
                      and Results of Operations (continued)
        ----------------------------------------------------------------

     OVERVIEW (continued)
     --------------------

     Over the past two years, the Company has invested significant resources in
     information technology to improve client service, increase productivity and
     lower administrative costs. The Company is also streamlining various
     aspects of account handling and easing administrative burdens on its sales
     and service teams.

     These efforts will produce further cost-reduction opportunities,
     particularly in the U.S. retail operations. The Company expects to report a
     fourth quarter 1996 charge associated with staff reductions and the
     consolidation of operations at certain locations.

     The Company is also reorganizing certain of its specialty market practices
     around a global focus within the Alexander Howden Group. This structure
     will take advantage of Howden's strength in these markets and aligns the
     Company's structure with client needs for specialized risk management
     expertise.

     The Company will continue to evaluate domestic and international
     geographical market expansion possibilities and further industry
     specialization. Furthermore, the Company is considering additional possible
     niche and substantial strategic acquisitions relating to its core
     businesses, as well as other opportunities in the financial services
     industry. As part of its evaluation of opportunities, the Company engages
     with interested parties in discussions concerning possible transactions.
     The Company will continue to evaluate such opportunities and prospects.
     However, the Company cannot predict if any transaction will be consummated,
     nor the terms or form of consideration required. Nor can the Company
     predict, if any such transaction is consummated, what the financial
     benefit, if any, will be to the Company.

     The following discussion and analysis of significant factors affecting the
     Company's operating results and liquidity and capital resources should be
     read in conjunction with the accompanying consolidated financial statements
     and related notes.

     THREE MONTHS ENDED SEPTEMBER 30, 1996 vs. 1995
     ----------------------------------------------

     CONSOLIDATED RESULTS

     The Company reported net income of $13.1 million, or $0.14 per share on
     consolidated operating revenues of $317.9 million for the three months
     ended September 30, 1996. Fully diluted earnings per share for the quarter
     were also $0.14.

     For the same period of 1995, the Company reported net income of $17.5
     million, or $0.25 per share on consolidated operating revenues of $299.7
     million. Fully diluted earnings per share for the quarter were also $0.25.

     Operating Revenues

     Consolidated operating revenues for the third quarter of 1996 were $317.9
     million compared to $299.7 million for the same period in 1995, an increase
     of $18.2 million or 6.1 percent. The increase was primarily due to
     acquisitions. Foreign exchange fluctuations had a nominal impact on quarter
     to quarter comparisons. Offsetting the favorable impact of acquisitions
     were the negative effects of a weak pricing environment in worldwide
     insurance markets.


                                       22
<PAGE>

        Alexander & Alexander Services Inc. & Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------

       Item 2. Management's Discussion and Analysis of Financial Condition
                      and Results of Operations (continued)
        ----------------------------------------------------------------

     THREE MONTHS ENDED SEPTEMBER 30, 1996 vs. 1995 (continued)
     ----------------------------------------------------------

     CONSOLIDATED RESULTS (continued)

     Commissions and Fees

     Total commissions and fees for the third quarter of 1996 were $301.6
     million compared to $283.7 million for the same period in 1995, an increase
     of $17.9 million or 6.3 percent. The increase was primarily attributed to
     acquisition revenues of approximately $17 million.

     Fiduciary Investment Income

     Investment income earned on fiduciary funds for the third quarter of 1996
     increased by $0.3 million, or 1.9 percent, versus 1995 levels primarily due
     to the impact of interest rate hedging performance in the U.K. and U.S.,
     partially offset by lower average interest rates.

     Interest rate swap and forward rate agreements and interest rate options
     increased the Company's fiduciary investment income by $1.3 million in the
     third quarter of 1996 and had no significant impact in the same period in
     1995. For additional information relating to the Company's interest rate
     financial instruments, see Note 10 of Unaudited Notes to Financial
     Statements and Note 12 of Audited Notes to Financial Statements in the
     Company's Annual Report on Form 10-K for the year ended December 31, 1995.

     Operating Expenses

     Consolidated operating expenses for the third quarter of 1996 were $296.2
     million compared to $272.1 million for the same period in 1995, an increase
     of $24.1 million or 8.9 percent. Excluding the impact of favorable foreign
     exchange fluctuations of $1.7 million, total operating expenses increased
     $25.8 million or 9.5 percent, primarily due to acquisitions.

     Salaries and Benefits

     Consolidated salaries and benefits for the third quarter of 1996 were
     $191.6 million compared to $175.4 million for the same period in 1995, an
     increase of $16.2 million or 9.2 percent. After adjusting for changes in
     foreign exchange rates, consolidated salaries and benefits increased by
     $16.5 million, or 9.4 percent, versus the comparable quarter in 1995.
     Acquisitions increased salaries and benefits by approximately $10 million.

     Partially offsetting this increase was the decline in headcount from
     approximately 11,600 at September 30, 1995 to approximately 11,300 at
     September 30, 1996, excluding an increase of approximately 700 people due
     to acquisitions in the fourth quarter of 1995 and first nine months of
     1996. The headcount reductions were primarily effected in the U.S.
     operations.


                                       23
<PAGE>

        Alexander & Alexander Services Inc. & Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------
       Item 2. Management's Discussion and Analysis of Financial Condition
                      and Results of Operations (continued)
        ----------------------------------------------------------------

     THREE MONTHS ENDED SEPTEMBER 30, 1996 vs. 1995 (continued)
     ----------------------------------------------------------

     Other Operating Expenses

     Consolidated other operating expenses increased by $7.9 million, or 8.2
     percent in the third quarter of 1996 compared to 1995. Excluding the
     favorable impact of changes in foreign currency rates and including hedging
     contract gains and losses, total other operating expenses increased $9.3
     million, or 9.6 percent, for the comparable period, including approximately
     $5 million from acquisitions.

     Contributing to this increase were higher goodwill amortization and other
     expenses relating to the acquisitions, a $1.6 million charge associated
     with the Lloyd's reconstruction and renewal program and increased costs
     associated with the Company's ongoing investment in information technology.
     Partially offsetting this increase was a decrease in insurance costs
     primarily relating to the Company's professional indemnity programs.

     Other Income (Expenses)

     Investment Income

     Investment income earned on operating funds decreased in the third quarter
     of 1996 by $1.1 million, or 23.9 percent over the comparable period in
     1995. The decrease was primarily due to a reduction in average investment
     balances and lower interest rates, particularly in the U.S.

     Interest Expense

     Interest expense decreased by $0.7 million, or 15.2 percent, in the third
     quarter of 1996 versus 1995. The decrease was primarily due to the
     Company's redemption and subsequent funding of the 11% convertible
     subordinated debentures with borrowings at more favorable rates under the
     long term credit facility. Partially offsetting the decrease was additional
     interest expense on the promissory note relating to the October 1995
     purchase of JIB.

     Income Taxes

     The Company's effective tax rate for the third quarter was 40.1 percent in
     1996 and 38.2 percent in 1995. The effective tax rates are higher than the
     U.S. statutory rate of 35 percent primarily due to U.S. state and local
     income taxes and to the nondeductibility of certain expenses, including
     entertainment and amortization of goodwill, in various jurisdictions in
     which the Company does business. Partially offsetting these factors was the
     favorable impact of foreign tax rates which were lower than the U.S.
     statutory rate.


                                       24
<PAGE>

        Alexander & Alexander Services Inc. & Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------
       Item 2. Management's Discussion and Analysis of Financial Condition
                      and Results of Operations (continued)
        ----------------------------------------------------------------

     THREE MONTHS ENDED SEPTEMBER 30, 1996 vs. 1995 (continued)
     ----------------------------------------------------------

     SEGMENT INFORMATION

     Insurance Services

     Operating results for the Insurance Services segment of the Company's
     operations are summarized below:

                                             Three Months Ended September 30,
                                             --------------------------------
                                                     1996        1995
                                                    ------      ------
     Operating revenues:
       Risk management and insurance services
         broking                                    $182.1      $166.1
       Specialist insurance and reinsurance
         broking                                      67.6        66.2
       Fiduciary investment income                    16.3        15.9
                                                    ------      ------
           Total operating revenues                  266.0       248.2
     Operating expenses                              240.5       215.7
                                                    ------      ------
     Operating income                               $ 25.5      $ 32.5
                                                    ======      ======

     Risk Management and Insurance Services Broking Revenues

     Worldwide risk management and insurance services broking commissions and
     fees were $182.1 million, an increase of $16 million, or 9.6 percent, for
     the third quarter of 1996 versus 1995.

     The increase was primarily due to the effect of acquisition revenues, which
     approximated $17 million, and revenue gains in the Company's U.K., France,
     Netherlands and Latin American operations. Excluding acquisitions, revenues
     were significantly lower in the North American operations.

     Specialist Insurance and Reinsurance Broking Revenues

     Total third quarter 1996 broking commissions and fees for the specialist
     insurance and reinsurance broking operations increased $1.4 million, or 2.1
     percent, versus 1995 levels. Changes in foreign exchange rates had a
     nominal effect on third quarter broking revenues. This increase was
     primarily due to revenue gains in the Latin American operations and in
     captive management services.

     Operating Expenses

     Operating expenses were $240.5 million for the third quarter of 1996, an
     increase of $24.8 million, or 11.5 percent, versus the comparable period in
     1995. Excluding the impact of foreign exchange rate changes, including
     hedging contract gains of $1.6 million, operating expenses increased $26.4
     million, or 12.2 percent on a comparable basis due mainly to an approximate
     $14 million impact from acquisitions. Additional increases resulted from
     higher salaries and benefits expenses, particularly in the U.K., and costs
     associated with the Company's ongoing investment in information technology,
     as well as the Lloyd's contribution.


                                       25
<PAGE>

        Alexander & Alexander Services Inc. & Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------
       Item 2. Management's Discussion and Analysis of Financial Condition
                      and Results of Operations (continued)
        ----------------------------------------------------------------

     THREE MONTHS ENDED SEPTEMBER 30, 1996 vs. 1995 (continued)
     ----------------------------------------------------------

     Human Resource Management Consulting

     Operating results for the Human Resource Management Consulting segment of
     the Company's operations are summarized below:

                                                    Three Months Ended
                                                       September 30,
                                                    -------------------
                                                      1996       1995
                                                    --------   --------
      Operating revenues:
        Commissions and fees                        $   51.9   $   51.4
        Fiduciary investment income                       -         0.1
                                                    --------   --------
           Total operating revenues                     51.9       51.5
      Operating expenses                                49.4       49.4
                                                    --------   --------
      Operating income                              $    2.5   $    2.1
                                                    ========   ========

     Human resource management consulting commissions and fees of $51.9 million
     increased by $0.5 million, or 1 percent, in the third quarter of 1996
     compared to the same period in 1995. After adjusting for the impact of the
     transfer of a business unit to the U.S. risk management and insurance
     services operations, these revenues increased by $2.1 million, or 4.2
     percent. This increase was primarily attributable to revenue gains in the
     U.S. and U.K. operations.

     Operating expenses were flat for the third quarter of 1996 compared to the
     same period in 1995. After adjusting for the effect of changes in foreign
     exchange rates and the transfer of a business unit, operating expenses
     increased by $2 million or 4.2 percent. This increase was primarily
     attributed to the U.S. operations and the 1996 acquisitions of two small
     operations in Australia and Sweden.

     NINE MONTHS ENDED SEPTEMBER 30, 1996 vs. 1995
     ---------------------------------------------

     CONSOLIDATED RESULTS

     The Company reported net income of $47.7 million, or $0.62 per share on
     consolidated operating revenues of $967.4 million for the nine months ended
     September 30, 1996. Fully diluted earnings per share for the nine months
     ended September 30, 1996 were also $0.62.

     For the nine months ended September 30, 1995, the Company reported net
     income of $81.9 million, or $1.42 per share, on consolidated operating
     revenues of $952 million. Fully diluted earnings per share for the nine
     months ended September 30, 1995 were $1.33. Included in the 1995 results is
     an after-tax gain of $19.8 million, or $0.44 per share, from the sale of
     Alexsis, the Company's U.S.-based third party claims administration
     operation.

     Operating Revenues

     Consolidated operating revenues were $967.4 million for the first nine
     months of 1996, an increase of $15.4 million, or 1.6 percent, from the
     corresponding period in 1995. Revenue comparisons were impacted by both
     foreign currency fluctuations and the effect of dispositions. After
     adjusting for the effect of these items, total revenues increased $33.3
     million, or 3.5 percent, primarily due to acquisitions partially offset by
     the effect of lower premium rates.


                                       26
<PAGE>

        Alexander & Alexander Services Inc. & Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------
       Item 2. Management's Discussion and Analysis of Financial Condition
                      and Results of Operations (continued)
        ----------------------------------------------------------------

     NINE MONTHS ENDED SEPTEMBER 30, 1996 vs. 1995 (continued)
     ---------------------------------------------------------

     CONSOLIDATED RESULTS (continued)

     Commissions and Fees

     Total commissions and fees were $920.6 million for the first nine months of
     1996, an increase of $17.2 million, or 1.9 percent, compared to the same
     period in 1995. After adjusting for the negative impact of foreign exchange
     rates and the impact of operations sold in 1995, total commissions and fees
     increased by $34.5 million, or 3.9 percent. This increase was due primarily
     to the addition of approximately $44 million from acquisitions offset by
     the impact of soft market conditions, primarily in the U.S.

     Fiduciary Investment Income

     Investment income earned on fiduciary funds for the first nine months of
     1996 decreased by $1.8 million, or 3.7 percent, versus 1995 levels
     primarily due to lower average investment levels, particularly in the U.K.
     and lower worldwide short term interest rates, particularly in the U.K. and
     Canada. Partially offsetting this decrease was improved interest rate
     hedging performance in the U.K. and U.S.

     Interest rate swap and forward rate agreements and interest rate options
     increased the Company's fiduciary investment income by $3 million in the
     first nine months of 1996 and $0.9 million in the same period in 1995. For
     additional information relating to the Company's interest rate financial
     instruments, see Note 10 of Unaudited Notes to Financial Statements and
     Note 12 of Audited Notes to Financial Statements in the Company's Annual
     Report on Form 10-K for the year ended December 31, 1995.

     Operating Expenses

     Consolidated operating expenses were $879.1 million for the first nine
     months of 1996, an increase of $35.6 million or 4.2 percent, versus the
     comparable first nine months of 1995. After adjusting for the $8.2 million
     favorable effect of changes in foreign currency rates, including hedging
     contract gains and losses, and the impact of operations sold in 1995,
     operating expenses increased by $51.6 million, or 6.2 percent. The increase
     was primarily attributed to acquisitions which increased operating expenses
     by approximately $41 million.

     Salaries and Benefits

     Consolidated salaries and benefits increased by $22.7 million, or 4.2
     percent in the first nine months of 1996 versus the same period in 1995.
     Excluding the $4.2 million favorable effect of changes in foreign exchange
     rates and the 1995 dispositions, total salaries and benefits increased
     $31.5 million, or 5.8 percent, versus 1995 levels. This increase was
     primarily due to the impact of acquisitions of approximately $27 million.


                                       27
<PAGE>

        Alexander & Alexander Services Inc. & Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------
       Item 2. Management's Discussion and Analysis of Financial Condition
                      and Results of Operations (continued)
        ----------------------------------------------------------------

     NINE MONTHS ENDED SEPTEMBER 30, 1996 vs. 1995 (continued)
     ---------------------------------------------------------

     Other Operating Expenses

     Consolidated other operating expenses increased by $12.9 million, or 4.3
     percent, in the first nine months of 1996 compared to 1995. Excluding the
     favorable impact of changes in foreign exchange rates, including hedging
     contracts gains and losses, and operations sold in 1995, other operating
     expenses increased $20.1 million, or 6.8 percent, in 1996 versus 1995.

     This increase was attributed to the effect of acquisitions, which increased
     expenses approximately $14 million, increased travel expenses primarily
     relating to acquisition activity and globalization of businesses and
     additional costs associated with the Company's ongoing investment in
     information and technology. Partially offsetting this increase was a
     decrease in insurance costs primarily relating to the Company's
     professional indemnity programs.

     Other Income (Expenses)

     Investment Income

     Investment income earned on operating funds decreased for the first nine
     months of 1996 by $3.3 million, or 23.7 percent. The decrease was primarily
     attributable to lower interest rates and a reduction in the average
     investment balances.

     Interest Expense

     Interest expense decreased by $2.3 million, or 16.3 percent, in the first
     nine months of 1996 versus 1995. The decrease was primarily due to the
     Company's redemption and subsequent funding of the 11% convertible
     subordinated debentures with borrowings at more favorable rates under the
     long term credit facility. Partially offsetting the decrease was additional
     interest expense on the promissory note relating to the purchase of JIB.

     Other

     Other non-operating income (expenses) consists of the following:

                                         Nine Months Ended September 30,
                                                 1996       1995
     Gains on sales of businesses                $  -       $30.4
     Other                                         0.6        3.6
                                                 -----      -----
                                                 $ 0.6      $34.0
                                                 =====      =====

     Other non-operating income (expense) decreased $33.4 million for the first
     nine months of 1996 compared to 1995. The 1995 results included the pre-tax
     gain on the sale of Alexsis, Inc., the Company's U.S.-based third party
     claims administrator, totaling $28.7 million ($19.8 million after-tax or
     $0.44 per share). In addition, the 1995 results included gains resulting
     from the sale of two small operations and a U.K. merchant bank, totaling
     $1.4 million and $0.3 million, respectively.


                                       28
<PAGE>

        Alexander & Alexander Services Inc. & Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------
       Item 2. Management's Discussion and Analysis of Financial Condition
                      and Results of Operations (continued)
        ----------------------------------------------------------------

     NINE MONTHS ENDED SEPTEMBER 30, 1996 vs. 1995 (continued)
     ---------------------------------------------------------

     Other Income (Expenses) (continued)

     Income Taxes

     The Company's effective tax rate for the first nine months of the year was
     39.9 percent in 1996 and 38.4 percent in 1995. The effective tax rates were
     higher than the U.S. statutory rate of 35 percent primarily due to U.S.
     state and local income taxes and to the nondeductibility of certain
     expenses, including entertainment and amortization of goodwill, in the
     various jurisdictions in which the Company does business. Partially
     offsetting these factors in the first nine months of both 1996 and 1995 was
     the favorable impact of foreign tax rates which were lower than the U.S.
     statutory rate. In the first nine months of 1995 the rate was also
     favorably affected by the amount of gain recognized for tax purposes on the
     sale of Alexsis.

     As discussed in Note 3 of Unaudited Notes to Financial Statements, the
     Internal Revenue Service withdrew a previously proposed adjustment to the
     Company's 1991 taxable income with respect to certain intercompany
     transactions involving the stock of a United Kingdom subsidiary.

     Discontinued Operations

     In 1985, the Company discontinued its insurance underwriting operations. In
     1987, the Company sold Sphere Drake Insurance Group (Sphere Drake). The
     Sphere Drake sales agreement provides indemnities by the Company to the
     purchaser for various potential liabilities including provisions covering
     future losses on certain insurance pooling arrangements from 1953 to 1967
     between Sphere Drake and Orion Insurance Company (Orion), a U.K.-based
     insurance company, and future losses pursuant to a stop-loss reinsurance
     contract between Sphere Drake and Lloyd's Syndicate 701 (Syndicate 701). In
     addition, the sales agreement requires the Company to assume any losses in
     respect of actions or omissions by Swann & Everett Underwriting Agency
     (Swann & Everett), an underwriting management company previously managed by
     Alexander Howden Group Limited (Alexander Howden).

     In 1994, Orion, which has financial responsibility for sharing certain of
     the insurance pool liabilities, was placed in provisional liquidation by
     order of the English courts. Based on current facts and circumstances, the
     Company believes that the provisional liquidation will not have a material
     adverse effect on the net liabilities of discontinued operations.

     The net liabilities of discontinued operations shown in the accompanying
     Consolidated Balance Sheets include insurance liabilities associated with
     the above indemnities, liabilities of insurance underwriting subsidiaries
     currently in run-off and other related liabilities.

     The insurance liabilities represent estimates of future claims expected to
     be made under occurrence-based insurance policies and reinsurance business
     written through Lloyd's and the London market covering primarily
     asbestosis, environmental pollution, and latent disease risks in the United
     States, which are coupled with substantial litigation expenses. These
     claims are expected to develop and be settled over the next twenty to
     thirty years.


                                       29
<PAGE>

        Alexander & Alexander Services Inc. & Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------
       Item 2. Management's Discussion and Analysis of Financial Condition
                      and Results of Operations (continued)
        ----------------------------------------------------------------

     NINE MONTHS ENDED SEPTEMBER 30, 1996 vs. 1995 (continued)
     ---------------------------------------------------------

     Other Income (Expenses) (continued)

     Discontinued Operations (continued)

     Liabilities stemming from these claims cannot be estimated using
     conventional actuarial reserving techniques because the available
     historical experience is not adequate to support the use of such techniques
     and because case law, as well as scientific standards for measuring the
     adequacy of site cleanup (both of which have had, and will continue to
     have, a significant bearing on the ultimate extent of the liabilities) is
     still evolving. Accordingly, the Company's independent actuaries have
     combined available exposure information with other relevant industry data
     and have used various projection techniques to estimate the insurance
     liabilities, consisting principally of incurred but not reported losses.

     On July 1, 1994, the Company entered into a finite risk contract with a
     reinsurance company, providing protection primarily for exposures relating
     to Orion, Syndicate 701 and Swann & Everett. The contract provided for a
     payment by the Company of $80 million, $50 million of which was borrowed
     from the reinsurance company, and for payment by the Company of the first
     $73 million of paid claims. The contract entitles the Company to recover
     paid claims in excess of the Company's $73 million retention. At September
     30, 1996, the recoveries were limited to $120.8 million, which includes the
     Company's payment of $80 million. In addition, commencing December 31,
     1996, depending on the timing and amount of paid loss recoveries under the
     contract, the Company may be entitled to receive a payment from the
     reinsurance company in excess of the amounts recovered for paid losses if
     the contract is terminated. The contract is accounted for under the deposit
     method of accounting and the accounting requirements for discontinued
     operations.

     While the insurance liabilities represent the Company's best estimate of
     the probable liabilities within a range of independent actuarial estimates
     of reasonably probable loss amounts, there is no assurance that further
     adverse developments may not occur due to variables inherent in the
     estimation processes and other matters described above. Based on
     independent actuarial estimates of a range of reasonably possible loss
     amounts, liabilities could exceed recorded amounts by approximately $165
     million. However, in the event of such adverse developments, based on the
     independent actuarial estimate of pay out patterns, up to approximately
     $125 million of this excess would be recoverable under the finite risk
     contracts.

     The Company believes that, based on current estimates, the established
     total net liabilities of discontinued operations are sufficient to cover
     its exposures.


                                       30
<PAGE>

        Alexander & Alexander Services Inc. & Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------
       Item 2. Management's Discussion and Analysis of Financial Condition
                      and Results of Operations (continued)
        ----------------------------------------------------------------

     NINE MONTHS ENDED SEPTEMBER 30, 1996 vs. 1995 (continued)
     ---------------------------------------------------------

     SEGMENT INFORMATION

     Insurance Services

     Operating results for the Insurance Services segment of the Company's
     operations are summarized below:

                                              Nine Months Ended September 30,
                                              -------------------------------
                                                     1996      1995
                                                    ------    ------
     Operating revenues:
       Risk management and insurance services
         broking                                    $562.4    $542.1
       Specialist insurance and reinsurance
         broking                                     203.5     205.7
       Fiduciary investment income                    46.7      48.3
                                                    ------    ------
           Total operating revenues                  812.6     796.1
     Operating expenses                              715.1     672.4
                                                    ------    ------
     Operating income                               $ 97.5    $123.7
                                                    ======    ======

     Risk Management and Insurance Services Broking Revenues

     Worldwide risk management and insurance services broking commissions and
     fees increased $20.3 million, or 3.7 percent, for the first nine months of
     1996 compared to 1995. After adjusting for the unfavorable foreign exchange
     rate variance of $3.2 million and the impact of operations sold in 1995,
     commissions and fees increased $35 million, or 6.6 percent.

     This increase was due to an approximate increase of $43 million for
     acquisitions and revenue gains in the U.K. operations. Offsetting these
     increases were lower revenues due to severe pricing and competitive
     pressures, particularly in the North American operations.

     Specialist Insurance and Reinsurance Broking Revenues

     For the first nine months of 1996 total broking commissions and fees for
     the specialist insurance and reinsurance broking operations decreased $2.2
     million, or 1.1 percent, versus 1995 levels. Changes in foreign exchange
     rates decreased 1996 broking revenues by $1.7 million. After adjusting for
     the effect of foreign exchange rates, commissions and fees decreased $0.5
     million, or 0.2 percent. Decreased revenues of $2.5 million in the
     Company's U.K. operations were partially offset by a $1.1 million and $0.9
     million increase in the international and U.S. operations, respectively.
     The U.K. operations decrease resulted from unfavorable market conditions
     resulting in premium rate reductions on most classes of business.


                                       31
<PAGE>

        Alexander & Alexander Services Inc. & Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------
       Item 2. Management's Discussion and Analysis of Financial Condition
                      and Results of Operations (continued)
        ----------------------------------------------------------------

     NINE MONTHS ENDED SEPTEMBER 30, 1996 vs. 1995 (continued)
     ---------------------------------------------------------

     Operating Expenses

     Worldwide risk management and insurance services operating expenses for the
     first nine months of 1996 increased $37.7 million, or 7.5 percent, versus
     the same period in 1995. After adjusting for foreign exchange rate changes,
     including hedging contracts gains and losses, and the 1995 dispositions,
     total operating expenses increased $49 million, or 9.9 percent, primarily
     due to acquisitions which increased expenses approximately $40 million.
     Additionally, increases were reported in the Latin American and
     Asia/Pacific operations of $2.6 million and $3.1 million, respectively. The
     increase in Latin America was primarily due to increased staff costs in
     Mexico and Brazil. The Asia/Pacific variance included the impact of
     inflation and higher costs related to the expansion of operations.

     For the first nine months of 1996 operating expenses for the specialist and
     reinsurance broking operations increased $5 million, or 2.9 percent, versus
     1995. Foreign exchange rate variances, including hedging gains and losses,
     favorably impacted expenses by $3.9 million in 1996. After adjusting for
     foreign exchange rate variances, total operating expenses increased $8.9
     million, or 5.2 percent. Contributing to the 1996 increase were the
     international operations, primarily due to increased staff costs, and the
     U.K. operations, primarily due to the charge associated with the Lloyd's
     reconstruction and renewal program.

     Human Resource Management Consulting

     Operating results for the Human Resource Management Consulting segment of
     the Company's operations are summarized below:

                                                     For the Nine Months Ended
                                                           September 30,
                                                     -------------------------
                                                       1996             1995
                                                     --------         --------
      Operating revenues:
        Commissions and fees                         $  154.7         $ 155.6
        Fiduciary investment income                       0.1             0.3
                                                     --------         -------
          Total operating revenues                      154.8           155.9
      Operating expenses                                145.7           149.7
                                                     --------         -------
      Operating income                               $    9.1         $   6.2
                                                     ========         =======

     Human resource management consulting commissions and fees decreased by $0.9
     million, or 0.6 percent, in the first nine months of 1996 compared to 1995.
     Excluding the impact of changes in foreign exchange rates and the impact of
     the transfer of a business unit to the U.S. risk management and insurance
     services operations, commissions and fees increased $5 million, or 3.3
     percent. The increased revenues were spread throughout geographic regions
     with $2.2 million, $1.9 million and $0.9 million in the U.K., U.S. and
     other international operations, respectively.

     Operating expenses decreased by $4 million, or 2.7 percent, for the first
     nine months of 1996 compared to 1995. After adjusting for the effect of
     changes in foreign exchange rates and the transfer of a business unit,
     operating expenses increased $2.6 million or 1.8 percent. This increase was
     primarily attributed to the 1996 acquisitions of two small operations in
     Australia and Sweden.


                                       32
<PAGE>

        Alexander & Alexander Services Inc. & Subsidiaries (the Company)
        ----------------------------------------------------------------

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------
       Item 2. Management's Discussion and Analysis of Financial Condition
                      and Results of Operations (continued)
        ----------------------------------------------------------------

     LIQUIDITY AND CAPITAL RESOURCES
     -------------------------------

     At September 30, 1996, the Company's operating cash and cash equivalents
     totaled $232 million, a $9.2 million decrease compared to the 1995 year-end
     balance. In addition, the Company had $42.5 million of operating funds
     invested in short-term and long-term investments at September 30, 1996, a
     $0.3 million increase compared to December 31, 1995.

     Operating Activities

     The Company's funds from operating activities consist primarily of net
     income adjusted for non-cash items, including depreciation and
     amortization, deferred income taxes, and gains on sales of business. The
     net cash flows relating to discontinued operations and changes in working
     capital balances are also included. In the first nine months of 1996, the
     Company's operating activities provided $28.5 million of operating funds.

     The Company paid approximately $72 million for the 1995 performance year
     and $50 million for the 1994 performance year of incentives in the first
     nine months of 1996 and 1995, respectively. Generally, these payments are
     made in the first quarter of the year for prior year performance.

     Investing Activities

     The Company's net capital expenditures for property and equipment were
     $18.6 million and $15.1 million during the nine months ended September 30,
     1996 and 1995, respectively. These expenditures increased primarily as a
     result of the Company's worldwide investment in technology, particularly in
     the U.S. and Asia/Pacific region, coupled with leasehold improvements in
     the U.S. due to the consolidation of real estate space.

     In the first nine months of 1996, the Company acquired or invested in
     several brokerage and consulting operations, primarily in the Asia/Pacific
     region, for combined purchase prices approximating $27.5 million. The
     Company paid a total of $21.9 million at closing for these acquisitions.

     Financing Activities

     In August 1996, the Company obtained two short-term bank loans totaling $7
     million. The proceeds from these loans were used to reduce the amount
     outstanding under the long-term revolving credit agreement by $10 million.

     On June 11, 1996 in accordance with the terms of the 1995 Jardine purchase
     agreement, the Company reduced the remaining $8.1 million note payable due
     in October 1996 to $6 million.

     In May 1996, the Company issued a $2.7 million, 9 percent two year note,
     relating to an acquisition in the Asia/Pacific region. (See Note 2 of the
     Unaudited Notes to Financial Statements).

     In April 1996, the Company announced a stock repurchase program which
     allows for the repurchase of up to two million shares of the Company's
     common stock that will be used to fund the Company's equity based
     compensation and employee benefit plans. At September 30, 1996, no shares
     had been repurchased under this program.

     During the first quarter of 1996, the Company borrowed $30 million under
     its long-term revolving credit agreement.


                                       33
<PAGE>

        Alexander & Alexander Services Inc. & Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------
       Item 2. Management's Discussion and Analysis of Financial Condition
                      and Results of Operations (continued)
        ----------------------------------------------------------------

     LIQUIDITY AND CAPITAL RESOURCES (continued)
     -------------------------------------------

     Other

     The Company's accumulated translation adjustment balance for its Mexican
     operations reflected an unrealized loss of $8 million at September 30,
     1996. The Company expects to maintain its strategic investment in Mexico
     for the long term and further anticipates that its Mexican operation will
     remain profitable. Accordingly, the Company does not consider its
     investment in Mexico to be impaired.

     During the first nine months of 1996, the Accumulated Translation
     Adjustments, which represent the cumulative effect of translating the
     Company's international operations to U.S. dollars, positively impacted
     total Stockholders' Equity by $4.8 million. The increase reflects the
     strengthening of the U.K. pound against the U.S. dollar.

     At September 30, 1996, the Company had an accumulated deficit of $203.1
     million. The Company's current financial position satisfies Maryland law
     requirements for the payment of dividends. At September 30, 1996, the
     current maximum amount of unrestricted funds the Company has available to
     pay Common Stock dividends under Maryland law equaled approximately $347.5
     million. The Board of Directors will continue to take into consideration
     the Company's financial performance and projections, as well as the
     provisions of the AIG Agreement pertaining to dividends described in Note 9
     of Unaudited Notes to Financial Statements, in connection with future
     decisions with respect to dividend declarations. In addition, no dividends
     may be declared or paid on the Company's Common Stock unless an equivalent
     amount per share is declared and paid on the dividend-paying shares
     associated with the Class A and Class C Common Stock.

     The Company believes that cash flow from operations, along with current
     cash balances, will be sufficient to fund working capital as well as all
     other obligations on a timely basis. In the event additional funds are
     required, the Company believes it will have sufficient resources, including
     borrowing capacity, to meet such requirements.

     INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
     -------------------------------------------------

     The Company has made and may from time to time make forward-looking
     statements concerning future financial results or events or conditions that
     may affect its future financial results. Forward-looking statements are
     made based upon management's expectations, assumptions, judgments and
     beliefs concerning future developments and global economic, industry and
     financial market conditions, and their potential effect upon the Company.
     There can be no assurance that these future conditions and developments
     will be in accordance with management's expectations or that the effect of
     future conditions and developments on the Company will be those anticipated
     by management.


                                       34
<PAGE>

        Alexander & Alexander Services Inc. & Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------
       Item 2. Management's Discussion and Analysis of Financial Condition
                      and Results of Operations (continued)
        ----------------------------------------------------------------

     INFORMATION CONERNING FORWARD-LOOKING STATEMENTS (continued)
     ------------------------------------------------------------

     The Company cautions that the assumptions that form the basis for
     forward-looking statements concerning future financial results, or events
     or conditions that may affect such results, are based on many factors that
     are beyond the Company's ability to control or estimate precisely,
     including future market conditions and the behavior of competitors and
     other market participants. Among the factors, in addition to other possible
     factors not listed, that could affect actual results and cause such results
     to differ materially from those anticipated in such forward-looking
     statements are the following:

     Economic Conditions

     The insurance brokerage industry is affected by changes in national,
     international and local economic conditions as well as in client
     preferences and spending patterns. Factors such as inflation and changes in
     worldwide interest rates and monetary fluctuations may affect the Company's
     clients and the markets in which the Company operates and its ability to
     finance needed capital expenditures.

     Government Regulation and Licensing

     The global insurance brokerage industry is affected by the adoption of new,
     and by changes in, trade, monetary, accounting and fiscal policies, laws
     and regulations such as trade restrictions and prohibitions, as well as
     other activities of federal and local governments, agencies and similar
     organizations. The Company's ability to conduct business may be precluded,
     temporarily suspended or otherwise adversely affected as a result of any
     such changes or activities.

     In addition, the activities of the Company related to insurance broking and
     human resource management consulting services are subject to licensing
     requirements and extensive regulation under the laws of the United States
     and its states, territories and possessions, as well as the laws of other
     countries in which the Company's subsidiaries conduct business. These laws
     and regulations vary from jurisdiction to jurisdiction. The appropriate
     regulatory authorities generally have wide discretionary authority in
     adopting, amending and implementing such regulations. In addition, certain
     of the Company's activities are governed by the rules of the Lloyd's of
     London insurance market and other similar organizations. Compliance with
     such licensing and regulatory requirements and the restructuring and
     reorganization of Lloyd's of London may increase the Company's cost of
     doing business or change the manner in which the Company is permitted to
     operate.

     Competition

     The insurance brokerage industry is intensely competitive with respect to
     broking commissions, fee growth, personnel and the quality of service
     provided. There is keen competition within the industry on a local,
     national and international level, not only to gain new clients but also to
     retain existing clients. In addition, the Company is subject to loss of
     business due to the growing alternative markets and to loss of personnel to
     its competitors.


                                       35
<PAGE>

        Alexander & Alexander Services Inc. & Subsidiaries (the Company)

                    PART I. FINANCIAL INFORMATION (continued)
                    -----------------------------------------
       Item 2. Management's Discussion and Analysis of Financial Condition
                      and Results of Operations (continued)
        ----------------------------------------------------------------

     INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS (continued)
     -------------------------------------------------------------

     Market Conditions

     The insurance brokerage industry is affected by periods of soft pricing and
     excess market capacity which, in recent years, has resulted in a downward
     pressure on premium rates and intense competition among insurance carriers
     and brokers for market share. The occurrence of catastrophic events can
     change loss ratios and, subsequently, pricing, thereby affecting a broker's
     contingent commissions and overriders. The Company's revenues, expenses and
     associated hedging programs are also affected by the general level of
     interest rates and the income earned on fiduciary funds as well as changes
     in foreign currency exchange rates. The timing of renewal cycles in
     different parts of the world and lines of business produces seasonality in
     its results.

     Contingencies

     The Company's financial results are affected by the costs and other effects
     of claims and lawsuits from both private and governmental parties, which
     may include claims and lawsuits in the ordinary course of business,
     consisting principally of alleged errors and omissions in connection with
     the placement of insurance and in rendering consulting services, as well as
     claims relating to the Company's discontinued operations and tax matters,
     which may affect its operations and administrative expenses. The Company is
     also subject to the risk of losses from the potential uncollectibility of
     insurance and reinsurance claims and advances on behalf of clients and
     indemnifications connected with the sales of certain businesses.

     Growth Plans

     The Company plans to explore geographical market expansion as well as
     strategic and niche acquisitions relating to its core business. There can
     be no assurance that the Company will be able to achieve its growth
     objectives or consummate any acquisition or joint venture opportunities it
     may pursue or if a transaction is consummated, what the financial benefit,
     if any, will be to the Company. Growth in certain markets or products can
     impact the historical quarterly comparisons of earnings based on insurance
     renewal cycles.

     Restructuring/Cost Saving Efforts

     The Company's future earnings will be affected by its ability to effectuate
     additional internal consolidation and other cost savings initiatives and
     its investment in new technology, products and personnel.

     While the Company periodically reassesses material trends and uncertainties
     affecting its results of operations and financial condition in connection
     with its preparation of management's discussion and analysis of results of
     operations and financial condition contained in its quarterly and annual
     reports, the Company undertakes no obligation to publicly update or revise
     any particular forward-looking statement in light of future events.


                                       36
<PAGE>

               Alexander & Alexander Services Inc. & Subsidiaries

                           PART II. OTHER INFORMATION
                           --------------------------

Item 1. Legal Proceedings

     Reference is made to Part I, Note 9 of the Unaudited Notes to Financial
     Statements and to MD&A hereof as to the Company's discussion of the Mutual
     Fire litigation and related contingencies which is incorporated herein by
     reference in its entirety.




                                       37
<PAGE>

               Alexander & Alexander Services Inc. & Subsidiaries

                     PART II. OTHER INFORMATION (continued)
                     --------------------------------------

Item 6. Exhibits and Reports on Form 8-K

    (a) Exhibits

        Exhibit No.        Item
        -----------        ----

           11.0        Statement Re: Computation of per Common Share
                            Earnings

           27.0        Financial Data Schedule




                                       38
<PAGE>

                                    SIGNATURE
                                    ---------


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on the 12th day of November, 1996.


                         ALEXANDER & ALEXANDER SERVICES INC.
                         -----------------------------------
                               (Registrant)


                         BY:/s/ Richard P. Sneeder, Jr.       November 12, 1996
                            ---------------------------------------------------
                                Richard P. Sneeder, Jr.       Date
                                Vice President & Controller


                                       39
<PAGE>

                       ALEXANDER & ALEXANDER SERVICES INC.

                          Quarterly Report on Form 10-Q
                    For the Quarter Ended September 30, 1996

                                INDEX TO EXHIBITS

Certain exhibits to this Report on Form 10-Q have been incorporated by
reference. For a list of these Exhibits see Item 6 hereof. The following
exhibits are being filed herewith:


Exhibit                                                                 Page No.
-------                                                                 --------

11.0      Statement Re:  Computation of per Common Share
          Earnings                                                         41

27.0      Financial Data Schedule                                          42


                                       40