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, 1995
                                              ----------------------------------
                                       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                      (Zip Code)
offices)                 


Registrant's telephone number, including area code       (212) 840-8500
                                                  ------------------------------

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, 1995 was 42,125,623.

The number of shares of Class A Common Stock, $.00001 par value, outstanding as
of November 1, 1995 was 1,954,687.

The number of shares of Class C Common Stock, $1 par value, outstanding as of
November 1, 1995 was 361,774.

No shares of Class D Common Stock, $1 par value, were outstanding as of November
1, 1995.



<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, 1995 and 1994.........2

         Condensed Consolidated Balance Sheets, as of
            September 30, 1995 (Unaudited) and December 31, 1994............3

         Unaudited Consolidated Statements of Cash Flows for the
           Nine Months Ended September 30, 1995 and 1994....................5

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

     Item 2.  Management's Discussion and Analysis of
                 Financial Condition and Results of Operations.............24

Part II.  Other Information:

     Item 1.  Legal Proceedings............................................44

     Item 5.  Other Information............................................44

     Item 6.  Exhibits.....................................................45



                                       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, 1995 and 1994
         ---------------------------------------------------------------
                     (in millions, except per share amounts)
<TABLE><CAPTION>

                                                             Three Months Ended      Nine Months Ended
                                                                September 30,           September 30,
                                                             ------------------      -----------------
                                                               1995       1994         1995      1994
                                                             -------     ------      -------   -------
<S>                                                          <C>        <C>          <C>       <C>
Operating revenues:
  Commissions and fees                                        $283.7     $318.7       $903.4   $953.3
  Fiduciary investment income                                   16.0       13.9         48.6     37.4
                                                              ------     ------       ------   ------
     Total                                                     299.7      332.6        952.0    990.7
                                                              ------     ------       ------   ------

Operating expenses:
  Salaries and benefits                                        175.4      200.3        543.9    601.5
  Other                                                         96.7      128.1        299.6    365.2
                                                              ------     ------       ------   ------
     Total                                                     272.1      328.4        843.5    966.7
                                                               ------     ------       ------   ------

Operating income                                                27.6        4.2        108.5     24.0
                                                              ------     ------       ------   ------

Other income (expenses):
  Investment income                                              4.6        3.0         13.9      6.5
  Interest expense                                              (4.6)      (4.7)       (14.1)   (11.9)
  Other                                                          1.2       (2.0)        34.0     (8.5)
                                                              ------     ------       ------   ------
     Total                                                       1.2       (3.7)        33.8    (13.9)
                                                              ------     ------       ------   ------
Income before income taxes and
  minority interest                                             28.8        0.5        142.3     10.1
Income taxes                                                   (11.0)      (0.2)       (54.7)    (4.0)
                                                              ------     ------       ------   ------

Income before minority interest                                 17.8        0.3         87.6      6.1
Minority interest                                               (0.3)      (0.2)        (5.7)    (4.0)
                                                              ------     ------       ------   ------

Income from continuing operations                               17.5        0.1         81.9      2.1
Loss from discontinued operations                                  -       (20.9)          -     (26.9)
                                                              ------     ------       ------   ------
Income (loss) before cumulative effect of
  change in accounting                                          17.5      (20.8)        81.9    (24.8)
Cumulative effect of change in
  accounting                                                      -          -            -      (2.6)
                                                              ------     ------       ------   ------
Net income (loss)                                               17.5      (20.8)        81.9    (27.4)

Preferred stock dividends                                       (6.4)      (4.8)       (18.9)    (9.0)
                                                              ------     ------       ------   ------

Earnings (loss) attributable to common
  shareholders                                                $ 11.1     $(25.6)      $ 63.0   $(36.4)
                                                              ======     ======       ======   ======

PER SHARE INFORMATION:
Primary earnings per share:
  Income (loss) from continuing operations                    $ 0.25     $(0.11)      $ 1.42   $(0.16)
  Loss from discontinued operations                               -       (0.47)          -     (0.61)
  Cumulative effect of change in accounting                       -          -            -     (0.06)
                                                              ------     ------       ------   ------
  Net income (loss)                                           $ 0.25     $(0.58)      $ 1.42   $(0.83)
                                                              ======     ======       ======   ======
Average common and common equivalent shares
  outstanding                                                   44.6       43.9         44.5     43.7
                                                              ======     ======       ======   ======

Fully diluted earnings per share:
  Income (loss) from continuing operations                    $ 0.25     $(0.11)      $ 1.33   $(0.16)
  Loss from discontinued operations                               -       (0.47)          -     (0.61)
  Cumulative effect of change in accounting                       -          -            -     (0.06)
                                                              ------     ------       ------   ------
  Net income (loss)                                           $ 0.25     $(0.58)      $ 1.33   $(0.83)
                                                              ======     ======       ======   ======
Average common shares outstanding, assuming
  full dilution                                                 44.6       43.9         57.1     43.7
                                                              ======     ======       ======   ======
Cash dividends per common share                               $0.025     $0.025       $0.075   $ 0.30
                                                              ======     ======       ======   ======
</TABLE>

                     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, 1995 (Unaudited) and December 31, 1994
         ---------------------------------------------------------------
                                  (in millions)

                                              September 30,   December 31,
                                                  1995            1994
ASSETS                                        -------------   ------------
------                                            

Current assets:
  Cash and cash equivalents:
     Operating                                 $    254.8     $    248.7
     Fiduciary                                      549.4          428.5
  Short-term investments:
     Operating                                       10.8           19.2
     Fiduciary                                      228.1          292.2
  Premiums and fees receivable (less
   allowance for doubtful accounts
   of $21.6 in 1995 and $23.7 in 1994)            1,173.4        1,206.1
  Deferred income taxes                              21.5           71.5
  Other current assets                               80.4          120.7
                                                 --------       --------
        Total current assets                      2,318.4        2,386.9

Property and equipment - net                        121.9          138.0
Intangible assets - net                             171.2          175.1
Deferred income taxes                               109.6           87.1
Long-term operating investments                      58.9           64.1
Other                                               101.5           94.5
                                                 --------       --------
                                                 $2,881.5       $2,945.7
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

Current liabilities:
  Premiums payable to insurance companies        $1,749.8       $1,738.3
  Short-term debt                                     0.8            1.0
  Current portion of long-term debt                   9.2           17.1
  Deferred income taxes                               9.0            8.5
  Accrued compensation and related benefits          60.6           60.0
  Income taxes payable                               32.8           66.3
  Other accrued expenses                            172.6          258.1
                                                 --------       --------
       Total current liabilities                  2,034.8        2,149.3
                                                 --------       --------

Long-term liabilities:
  Long-term debt                                    156.4          132.7
  Deferred income taxes                              17.9           13.4
  Net liabilities of discontinued operations         34.0           56.8
  Other                                             226.6          266.0
                                                 --------       --------
       Total long-term liabilities                  434.9          468.9
                                                 --------       --------

Commitments and contingent liabilities
  (Notes 6, 7 and 11)

8% Series B cumulative convertible preferred
  stock contingency (Note 11)                        10.0           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, 1995 (Unaudited) and December 31, 1994
         ---------------------------------------------------------------
                                  (in millions)

                                                     September 30, December 31,
                                                        1995           1994
                                                     ------------  ------------

Stockholders' equity:
 Preferred stock, authorized 15 shares, $1 par value:
   Series A junior participating preferred
     stock, issued and outstanding, none            $     -         $     -
   $3.625 Series A convertible preferred stock,
     issued and outstanding 2.3 and 2.3 shares,
     respectively, liquidation preference of
     $115 million                                        2.3             2.3
   8% Series B cumulative convertible preferred
     stock, issued and outstanding, 4.4 and 4.1
     shares, respectively, liquidation preference
     of $220 million and $205 million, respectively      4.4             4.1
 Common stock, authorized 200 shares, $1 par
   value; issued and outstanding 42
   and 41.5 shares, respectively                        42.0            41.5
 Class A common stock, authorized 26 shares,
   $.00001 par value; issued and outstanding
   2.0 and 2.3 shares, respectively                       -               -
 Class C common stock, authorized 11 shares,
   $1 par value; issued and outstanding
   0.4 and 0.4 shares, respectively                      0.4             0.4
 Class D common stock, authorized 40 shares,
   $1 par value; issued and outstanding,
   none                                                   -               -
 Paid-in capital                                       630.9           615.0
 Accumulated deficit                                  (227.3)         (287.1)
 Net unrealized investment gains - net of
   deferred income taxes                                 5.3             1.5
 Accumulated translation adjustments                   (56.2)          (60.2)
                                                    --------        --------
     Total stockholders' equity                        401.8           317.5
                                                    --------        --------
                                                    $2,881.5        $2,945.7



                 See accompanying notes to financial statements.

                                       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, 1995 and 1994
         ---------------------------------------------------------------
                                  (in millions)

                                                        Nine Months Ended
                                                          September 30,
                                                        -----------------
                                                        1995         1994
                                                        ----         ----
Cash provided (used) by:

Operating activities:
  Income from continuing operations                   $  81.9       $   2.1
  Adjustments to reconcile to net cash
    used by operating activities:
      Depreciation and amortization                      33.3          38.8
      Deferred income taxes                              28.9          11.1
      Gains on sales of subsidiaries                    (30.4)           -
      Other                                               7.8           8.9

  Changes in assets and liabilities (net of 
    effects from acquisitions and dispositions):
      Net fiduciary cash and cash equivalents and
       short-term investments                           (44.7)        (32.7)
      Premiums and fees receivable                       38.2         158.4
      Other current assets                               (8.4)         17.6
      Other assets                                      (13.2)          0.7
      Premiums payable to insurance companies           (10.1)       (116.3)
      Other accrued expenses                           (104.2)        (94.1)
      Other long-term liabilities                        (8.5)         15.5

  Discontinued operations (net)                         (12.8)         (0.9)
  Cumulative effect of change in accounting                -           (2.6)
                                                      -------       -------

      Net cash provided (used) by operating
         activities                                     (42.2)          6.5
                                                      -------       -------

Investing activities:
  Net purchases of property and equipment               (15.1)        (17.2)
  Purchases of businesses                                (2.8)         (2.3)
  Proceeds from sales of subsidiaries and
    other assets                                         88.1           0.4
  Purchases of operating investments                   (180.2)        (38.0)
  Sales/maturities of operating investments             196.1           7.4
                                                      -------       -------

      Net cash provided (used) by investing
         activities                                      86.1         (49.7)
                                                      -------       -------

                     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 Six Months Ended September 30, 1995 and 1994
         ---------------------------------------------------------------
                                  (in millions)


                                                        Nine Months Ended
                                                          September 30,
                                                        -----------------
                                                        1995         1994
                                                        ----         ----
Financing activities:
  Cash dividends                                     $  (9.6)    $ (19.3)
  Proceeds from issuance of short-term debt              0.2         8.0
  Payments of short-term debt                           (0.4)      (24.8)
  Proceeds from issuance of long-term debt               4.6        51.0
  Payments of long-term debt                           (35.1)       (7.9)
  Payment for a finite risk contract                      -        (80.0)
  Issuance of common stock                               0.1       196.5
                                                     -------     -------

      Net cash provided (used) by financing
         activities                                    (40.2)      123.5
                                                     -------     -------

Effect of exchange rate changes on operating
  cash and cash equivalents                              2.4         5.2
Operating cash and cash equivalents at
  beginning of year                                    248.7       151.5
                                                     -------      ------
Operating cash and cash equivalents at end
  of period                                          $ 254.8      $237.0
                                                     =======      ======

Supplemental cash flow information: 
     Cash paid during the period for:
     Interest                                        $  13.9      $  9.6
     Income taxes                                       67.5        30.8

Non-cash investing and financing activities:
  Notes payable issued for contingency
    settlements                                      $  45.7      $   -
  Series B cumulative convertible preferred
    stock dividends-in-kind                             12.6         2.8
  Common stock issued for employee benefit and
    stock plans                                          3.6         2.3
  Common stock issued for non-employee stock
    plans                                                0.4          -
  Note receivable established for contingency
    settlement                                           1.3          -
  Sale of direct financing lease and related
    mortgage notes                                        -         19.0


                 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. Certain prior period amounts have been reclassified to conform with
   the current year presentation. In the opinion of the Company, all adjustments
   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.

2. Employees' Retirement Plans and Benefits

   Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers'
   Accounting for Postemployment Benefits." This statement requires that
   certain benefits provided to former or inactive employees after employment
   but prior to retirement, including disability benefits and health care
   continuation coverage, be accrued based upon the employees' services already
   rendered. The cumulative effect of this accounting change was an after-tax
   charge of $2.6 million or $0.06 per share in the first quarter of 1994.

3. Restructuring Charges

   In the fourth quarter of 1994, management committed to a formal plan of
   restructuring the Company's operations and recorded a $69 million pre-tax
   charge ($45.1 million after-tax, or $1.03 per share). The restructuring
   charge included $25.2 million to consolidate real estate space requirements
   at 48 offices worldwide, and $43.8 million for voluntary early retirement
   programs and involuntary workforce reductions involving approximately 1,100
   positions, of which 650 were in the U.S.

   The involuntary severance portion of the charge amounted to $22.9 million
   and reflected the elimination of 898 positions worldwide. The voluntary
   early retirement program was accepted by 208 employees prior to December 31,
   1994 and amounted to $20.9 million of the charge. Of these amounts, $5.9
   million will be paid from various pension plans of the Company. As of
   September 30, 1995, the Company has paid $24.8 million of these liabilities.
   The Company expects to pay $5.6 million of the remaining balance of $19
   million throughout the remainder of 1995 with the remaining balance paid in
   the form of annuities, generally over periods of fifteen years or less.

   The charge associated with real estate activities relates to the closure,
   abandonment and downsizing of office space globally, including 34 locations
   in the U.S. The Company anticipates that these actions will be completed by
   the end of 1995. The costs include primarily remaining lease obligations and
   write-offs of leasehold improvements and fixed assets. As of September 30,
   1995, the Company has paid $8.4 million of these liabilities and written-off
   assets of $2.2 million. The Company expects to pay $2.8 million of the
   remaining $11.6 million cash portion of these liabilities throughout the
   remainder of 1995. The cash portion of the remaining liabilities, excluding
   the fixed asset and leasehold improvement write-offs of approximately $3
   million, will be paid out over the remaining lease periods, which range from
   one to ten years.

                                       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
                     ---------------------------------------
                   (in millions, except per share information)

4. Dispositions

   During the second quarter of 1995, the Company sold two small operations for
   gross proceeds of $1.9 million and resulting pre-tax gains totaling $1.4
   million.

   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. The previously reported pre-tax gain on this transaction was
   $30.3 million. Pursuant to the terms of the purchase agreement, under
   certain circumstances the transaction was subject to a post-closing
   adjustment in the purchase price. During the third quarter of 1995, the
   Company and the purchaser reached an agreement resulting in a final pre-tax
   gain of $28.7 million ($19.8 million after-tax or $0.44 per share).

   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.

5. Other Income and Expenses

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

                                     Three Months Ended   Nine Months Ended
                                     September 30, 1995   September 30, 1995
                                     ------------------   ------------------
                                      1995      1994       1995      1994
                                      ----      ----       ----      ----
   Gains on sales of subsidiaries
      (See Note 4)                    $(1.6)    $  -       $30.4    $  -
   Litigation costs                      -       (2.3)      (0.1)    (7.7)
   Other                                2.8       0.3        3.7     (0.8)
                                      -----     -----      -----    -----
                                      $ 1.2     $(2.0)     $34.0    $(8.5)
                                      =====     =====      =====    =====

   Litigation costs in 1994 are associated primarily with the Mutual Fire
   lawsuit described in Note 11 of the Unaudited Notes to Financial Statements.


                                       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
                     ---------------------------------------
                   (in millions, except per share information)

6. Income Taxes

   During 1994, the Company was advised that the Joint Committee on Taxation
   had approved the agreement reached in 1993 by the Company and the Appeals
   Office of the Internal Revenue Service (IRS) on settlement of tax issues
   with respect to years 1980 through 1986. Also during 1994, the Company
   reached an agreement with the IRS on settlement of the examination of years
   1987 through 1989. On February 28, 1995, the Company paid the amounts due
   for such years and charged the tax and net interest totaling $35.6 million
   against previously established reserves.

   In 1994, the Company received a Notice of Proposed Adjustment from the IRS
   in connection with the examination of its 1990 and 1991 U.S. federal income
   tax returns, proposing an increase in taxable income for the 1991 year
   which, if sustained, would result in additional tax liability estimated by
   the Company at $50 million, excluding interest and penalties. This proposed
   adjustment relates to intercompany transactions involving the stock of a
   United Kingdom subsidiary.

   The Company disagrees with the IRS position on this issue. Although the
   ultimate outcome of the matter cannot be predicted with certainty, the
   Company and its independent tax counsel believe there are meritorious
   defenses to the proposed adjustment and substantial arguments to sustain the
   Company's position and that the Company should prevail in the event this
   issue is litigated.

   A similar set of transactions occurred in 1993 for which the IRS could
   propose an increase in taxable income which would result in an additional
   tax liability estimated by the Company at $25 million, excluding interest
   and penalties. The Company's 1993 tax return is not currently under
   examination. The Company believes it should prevail in the event this
   similar issue is raised by the IRS. Accordingly, no provision for any
   liability with respect to the 1991 and 1993 transactions has been made in
   the consolidated financial statements.

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

7. 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 plc (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.


                                       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
                     ---------------------------------------
                   (in millions, except per share information)

7.  Discontinued Operations

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

                                               As of              As of
                                          September 30, 1995  December 31, 1994
                                          ------------------  -----------------
    Liabilities:
      Insurance liabilities                      $273.1          $277.6
      Other                                        17.5            31.4
                                                 ------          ------
       Total liabilities                          290.6           309.0
                                                 ------          ------

    Assets:
      Recoverable under finite risk contracts:
         Insurance liabilities                    133.6           135.7
         Premium adjustment                        10.8            10.8
      Reinsurance recoverables                     60.4            64.2
      Cash and investments                         23.3            23.6
      Other                                        11.5            10.9
                                                 ------          ------
       Total assets                               239.6           245.2
                                                 ------          ------

    Total net liabilities of discontinued
      operations                                   51.0            63.8
      Less current portion classified as
        other accrued expenses                     17.0             7.0
                                                 ------          ------

    Remainder classified as net liabilities
      of discontinued operations                 $ 34.0          $ 56.8
                                                 ======          ======

    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.

    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 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 indemnity 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.

                                      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
                     ---------------------------------------
                   (in millions, except per share information)

7.  Discontinued Operations (continued)

    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, 1995, the Company had recorded $8 million of the deductible.

    On July 1, 1994, the Company entered into an insurance-based financing
    contract (finite risk contract) 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) to 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, 1995, recoveries were limited to $113
    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, the
    occurrence of which is currently considered to be remote by the Company, 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.

    Insurance liabilities in excess of recorded liabilities could develop in
    the future. Based on independent actuarial estimates of the amount and
    timing of claim payments, it is reasonably possible that such additional
    liabilities of $189 million, net of estimated amounts recoverable for paid
    losses under the finite risk contracts of $117 million, could amount to $72
    million. However, management currently believes that such additional
    insurance liabilities are not likely to develop.


                                      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
                     ---------------------------------------
                   (in millions, except per share information)

7.  Discontinued Operations (continued)

    Changes in the total net liabilities of discontinued operations for the nine
    months ended September 30, 1995 are as follows:

    Beginning balance                       $ 63.8
      Claims and expense payments            (12.5)
      Other                                   (0.3)
                                            ------
    Ending balance                          $ 51.0
                                            ======

    The Company believes that, based on current estimates, the established total
    net liabilities of discontinued operations are sufficient to cover its
    exposures. However, there is no assurance that further adverse development
    may not occur due to variables inherent in the estimation processes and
    other matters described above. The Company currently believes that the
    effect of such adverse development, if any, will not be material to the
    Company's financial position and results of operations.

8. Per Share Data

   Primary earnings per share are computed by dividing earnings (loss)
   attributable to common shareholders by the weighted average number of shares
   of Common Stock and their equivalents (Class A and Class C Common Stock)
   outstanding during the period and, if dilutive, shares issuable upon exercise
   of stock options. The $3.625 Series A Convertible Preferred Stock and the 8%
   Series B Cumulative Convertible Preferred Stock are not Common Stock
   equivalents.

   Fully diluted earnings per share are computed by dividing earnings
   attributable to common shareholders plus preferred dividends and interest
   expense, net of tax, on the convertible subordinated debentures by the
   weighted average number of common shares outstanding during the period after
   giving effect to the exercise of stock options, the conversion of preferred
   stock and the conversion of convertible subordinated debentures (in each
   instance if dilutive). The computations of fully diluted earnings per share
   for the three months ended September 30, 1995 and three and nine months ended
   September 30, 1994 were antidilutive; therefore, the amounts for primary and
   fully diluted earnings per share were the same.

9. Investments

    Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting
    for Certain Investments in Debt and Equity Securities." In accordance with
    the Statement, the Company has classified all debt and equity securities as
    available for sale. At September 30, 1995, net unrealized holding gains
    totaled $5.3 million, net of deferred income taxes of $1.8 million, and are
    reported as a separate component of Stockholders' Equity. During the nine
    months ended September 30, 1995, the net unrealized holding gains increased
    by approximately $3.8 million and proceeds from sales/maturities of the
    Company's operating investment securities totaled $196.1 million with gross
    realized gains totaling $0.4 million.


                                       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
                     ---------------------------------------
                   (in millions, except per share information)

9.  Investments (continued)

    The amortized cost and estimated fair value of the Company's debt and equity
    securities and financial instruments used to hedge the existing and
    anticipated fiduciary portion of such investments as of September 30, 1995
    are summarized below:
                                                 Gross       Gross    Estimated
                                   Amortized   Unrealized  Unrealized   Fair
                                     Cost        Gains       Losses     Value
                                   ---------   ---------   ---------   ---------
    U.S. Government agencies/
       state issuances             $     6.8   $     -     $      -    $    6.8
    Other interest-bearing
       securities                      131.1         -            -       131.1
    Mortgage-backed securities           6.5         -            -         6.5
    Equity securities                    3.2        6.5           -         9.7
    Financial instruments - used
       as hedges                          -         1.0         (0.3)       0.7
                                   ---------   --------    ---------   --------
         Total                     $   147.6   $    7.5    $    (0.3)  $  154.8
                                   =========   ========    =========   ========

    The above debt and equity securities and financial instruments used as
    hedges are classified in the Consolidated Balance Sheet at September 30,
    1995 as follows:

      Cash and cash equivalents:
        Operating                              $   36.3
        Fiduciary                                  75.5
      Short-term investments:
        Operating                                   0.9
        Fiduciary                                  10.3
      Long-term operating investments              31.8
                                               --------
            Total                              $  154.8
                                               ========

    The amortized cost and estimated fair value of debt securities at September
    30, 1995 by contractual maturity are summarized below:
                                                                Estimated
                                               Amortized           Fair
                                                  Cost            Value
                                               ---------        ---------
    Due in one year or less                    $   118.0        $   118.0
    Due after one year through five years            5.0              5.0
    Due after five years through ten years           9.8              9.8
    Due after ten years                              5.1              5.1
                                               ---------        ---------
                                                   137.9            137.9
    Mortgage-backed securities                       6.5              6.5
                                               ---------        ---------
      Total debt securities                    $   144.4        $   144.4
                                               =========        =========

    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.

                                       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
                     ---------------------------------------
                   (in millions, except per share information)

10. Debt

    On March 27, 1995, the Company's then existing credit agreement was replaced
    by a new $200 million three-year 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 tangible capital funds, minimum
    consolidated tangible net worth, maximum leverage and minimum cash flow
    requirements. The Company currently believes that the covenants regarding
    minimum cash flow coverage and minimum consolidated tangible capital funds
    are the most restrictive. The minimum cash flow covenant requires that the
    ratio of earnings before interest, taxes, depreciation and amortization to
    interest expense and cash dividends exceed 4.25 to 1. At September 30, 1995,
    this ratio was 7.83 to 1. The minimum consolidated tangible capital funds
    covenant requires that total stockholders' equity less intangible assets, as
    defined by the agreement, plus subordinated debt must equal or exceed $240
    million. At September 30, 1995 the Company's consolidated tangible capital
    funds were $340 million. In addition, the occurrence of a "Special Event"
    under the AIG Agreement, which, if not waived by AIG, would constitute an
    event of default under the new agreement. Interest rates charged on amounts
    drawn on this credit agreement are dependent upon numerous variables,
    including the Company's credit ratings and the duration of the borrowings.
    Interest rates are based upon various published rates, including the prime
    lending rate, certificate of deposit rates, federal funds borrowing rates
    and LIBOR.

    During the second quarter of 1995, the Company arranged a $10 million letter
    of credit under the agreement. On October 13, 1995, the Company borrowed $60
    million under its long-term revolving credit agreement to fund the
    redemption of its outstanding 11% Convertible Subordinated Debentures due
    2007. (See Note 13 of the Unaudited Notes to Financial Statements.) The
    Company has full and immediate access to the remaining $130 million credit
    line.

    On March 27, 1995, the Company, Shand Morahan and Company, Inc. (Shand) and
    the rehabilitator of Mutual Fire Marine and Inland Insurance Company (Mutual
    Fire) entered into a settlement agreement which was subsequently 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 into an
    escrow account on April 1, 1995 and issued a $35 million six-year
    zero-coupon note with a present value of $25.9 million on March 27, 1995,
    secured by a letter of credit, using a discount rate of 9.3%. The cash and
    note were released from escrow on June 9, 1995. The note is payable in six
    equal, consecutive annual installments, commencing on or before the first
    day of April 1996. A partial payment of $0.3 million was paid on the note in
    June 1995. The carrying value of the outstanding principal balance,
    including imputed interest, of the note payable at September 30, 1995 was
    $26.9 million. (See Note 11 of the Unaudited Notes to Financial Statements.)


                                       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
                     ---------------------------------------
                   (in millions, except per share information)

10. Debt (continued)

    In March 1995, a U.S. subsidiary prepaid an unsecured $10 million term loan
    with a bank which was due August 1995.

    In January 1995, the Company negotiated the settlement of certain
    obligations relating to the 1987 sale of Shand. Under the terms of the
    settlement, 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 net contingent obligation of $4.5 million ($5.8 million contingent
    notes payable less $1.3 million contingent note receivable). In June 1995,
    the $14 million note payable was prepaid in whole, as well as $1.8 million
    of the contingent notes payable. In addition, $1.3 million of cash was
    received for payment of the contingent note receivable. The remaining
    contingent note payable of $4 million was paid in full in September 1995.
    (See Note 11 of the Unaudited Notes to Financial Statements.)

11. 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.

                                       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
                     ---------------------------------------
                   (in millions, except per share information)

11. Contingencies (continued)

    Claims asserting these allegations are pending in suits filed in New York
    and Ohio. In a New York action brought in 1985, claims were asserted against
    the Company and certain subsidiaries (Pine Top Insurance Company, Ltd. v.
    Alexander & Alexander Services Inc., et al., 85 Civ. 9860 (RPP) (S.D.N.Y.)).
    The plaintiff sought compensatory and punitive, as well as treble damages
    under RICO totalling approximately $87 million, arising from alleged RICO
    violations, common law fraud, breach of contract and negligence. Two
    subsidiaries counterclaimed for breach of certain reinsurance contracts with
    the plaintiff. This action was settled as of January 12, 1995 and the action
    was voluntarily dismissed in February 1995. The settlement amount was $4.5
    million. The Company's portion was $2.1 million which was previously
    reserved under its professional indemnity program. In a similar New York
    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 some of the plaintiffs for
    contribution. Discovery in this case remains to be concluded and no trial
    date has been set. In the Ohio action brought in 1985 (The Highway Equipment
    Company, et al. v. Alexander Howden Limited, et al. (Case No. 1-85-01667,
    U.S. Bankruptcy Court, So. Dist. Ohio, Western Div.)), plaintiffs sought
    compensatory and punitive damages, as well as treble damages under RICO
    totaling $24 million. A directed verdict in the Company's favor was affirmed
    on March 14, 1994 in a decision by the U.S. District Court for the Southern
    District of Ohio and later affirmed on August 15, 1995 by the U.S. Court of
    Appeals for the Sixth Circuit. 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 actions.
    These actions are 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 these actions,
    if any, would not be material to the Company's financial position or results
    of operations.

    In 1987, the Company sold 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. Mutual Fire was placed in rehabilitation
    by the Courts of the Commonwealth of Pennsylvania in December 1986. In
    February 1991, the rehabilitator filed a complaint in the Commonwealth court
    against Shand and the Company. The case was subsequently removed to the U.S.
    District Court for the Eastern District of Pennsylvania and is captioned
    Foster v. Alexander & Alexander Services Inc., 91 Civ. 1179. 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, through an expert's report, indicated that the
    alleged damages are approximately $234 million, a conclusion with which the
    Company, based on substantial arguments, strongly disagreed.

                                       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
                     ---------------------------------------
                   (in millions, except per share information)

11. Contingencies (continued)

    On March 27, 1995, the Company, Shand and the rehabilitator entered into a
    settlement agreement which was subsequently 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 had paid $12 million in cash into an escrow account
    on April 1, 1995 and issued a $35 million six-year zero-coupon note with a
    present value of $25.9 million on March 27, 1995, secured by a letter of
    credit, using a discount rate of 9.3%. The cash and note were released from
    escrow on June 9, 1995. In addition, Shand has 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. 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 up to $32.5 million (Alexander & Alexander Services Inc. and
    Alexander & Alexander Inc., plaintiffs, against those certain underwriters
    at Lloyd's, London, England subscribing to insurance evidenced by policy
    numbers 879/P. 31356 and 879/P. 35349 and Assicurazioni Generali, S.P.A.,
    defendants No. 92 Civ. 6319 (S.D.N.Y.)). All required documents in this case
    have been submitted to the court, and the Company is awaiting a decision on
    this matter. In the fourth quarter of 1994, the Company increased its
    previously established reserves of $10 million for Mutual Fire based on an
    estimated settlement amount, and recorded a pre-tax charge of $37.2 million
    ($24.2 million after-tax or $0.55 per share).

    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.

                                       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
                     ---------------------------------------
                   (in millions, except per share information)

11. Contingencies (continued)

    Starting in late 1992, the purchaser of Shand had asserted a number of
    claims under both the Mutual Fire indemnification provision and the
    errors-and-omissions indemnification provision of the sales agreement. Most
    of those claims have been resolved by a series of settlement agreements with
    the purchasers of Shand, 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
    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
    from the purchasers of Shand 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 net
    contingent obligation of $4.5 million. In the fourth quarter of 1994, the
    Company recorded a pre-tax charge of $32.5 million ($21.1 million after-tax,
    or $0.48 per share) associated with this settlement. In June 1995, the $14
    million note payable was prepaid in whole, as well as $1.8 million of the
    contingent notes payable. In addition, $1.3 million of cash was received for
    payment of the contingent note receivable. The remaining contingent note
    payable of $4 million was paid in full in September 1995.

    Notwithstanding these settlements with the purchasers of Shand, 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 purports 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 seeks 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. The defendants have filed
    a motion to dismiss the second amended complaint and a hearing on the motion
    has been set for January 26, 1996. Management of the Company believes that
    there are valid defenses to the allegations set forth in the complaint and
    the Company intends to vigorously dispute this claim. The Company currently
    believes that this action is covered by the Company's insurance program and
    that the reasonably possible loss that might result, if any, would not be
    material to the Company's financial position or results of operations.

                                       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
                     ---------------------------------------
                   (in millions, except per share information)

11. 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 AIG Agreement, the Company has agreed to make certain payments to
    AIG pursuant to indemnifications given with respect to the Company's balance
    sheet as of March 31, 1994. Pursuant to an amendment to the AIG Agreement,
    dated November 10, 1994, the Company's potential exposures under the
    indemnification, individually or in the aggregate, were limited to $10
    million. Pursuant to a second amendment, dated March 16, 1995, the
    indemnification was further limited to cover only tax payments and reserves
    in excess of recorded tax reserves as of March 31, 1994. As a result of this
    indemnification, the Company has classified $10 million of the proceeds from
    the issuance of the Series B Convertible Preferred Shares outside
    stockholders' equity until such time as the indemnification, if any, is
    satisfied or terminated.

12. 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 for periods 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 contracts which are designated as hedges of firm
    commitments are deferred until the settlement dates. Contracts which are not
    designated as hedges 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 contracts at September 30, 1995 was $0.7
    million.

                                       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
                     ---------------------------------------
                   (in millions, except per share information)

12. 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, 1995, the Company
    had $20 million notional principal of written foreign exchange options
    outstanding. Based on foreign exchange rates at September 30, 1995, the
    Company recognized a current liability of $0.5 million, consisting of
    unamortized premiums, representing the estimated cost to settle these
    options at that date. At December 31, 1994, the Company's foreign exchange
    options could have been exercised at a nominal cost to the Company.

    At September 30, 1995, the Company had approximately $83.4 million notional
    principal of forward exchange contracts outstanding, primarily to exchange
    U.S. dollars into U.K. pounds sterling, and approximately $29.7 million
    notional principal outstanding, primarily to exchange U.K. pounds sterling
    into U.S. dollars. In addition, at September 30, 1995, the Company had no
    foreign exchange contracts outstanding related to intercompany loans.

    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 with maturities of three
    months or less. 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 are marked
    to market in accordance with SFAS No. 115. At September 30, 1995, an
    unrealized gain of $0.7 million on interest rate swaps and forward rate
    agreements which hedge existing and anticipated fiduciary investments with
    maturities of three months or less was reflected in fiduciary cash and
    equivalents in the Consolidated Balance Sheet.

                                       20


<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)

12. Financial Instruments (continued)

    At September 30, 1995 and December 31, 1994 the Company had the following
    interest rate swaps and forward rate agreements in effect, by year of final
    maturity:

                                        September 30, 1995
                         ------------------------------------------------------
                           Gross      Net Weighted      Gross     Net Weighted
                         Receiving       Average       Paying        Average
    Year                   Fixed      Interest Rate     Fixed     Interest Rate
    ----                 ---------    -------------    ------     -------------
    1995                   $137.4          8.11%       $251.9          6.75%
    1996                    416.6          7.27         285.8          6.61
    1997                    208.7          6.68            -             -
    1998                    107.4          7.16            -             -
                           ------          ----        ------          ---
         Total             $870.1          7.25%       $537.7          6.67%
                           ======          ====        ======          ====


                                           December 31, 1994
                         ------------------------------------------------------
                           Gross      Net Weighted      Gross     Net Weighted
                         Receiving       Average       Paying        Average
    Year                   Fixed      Interest Rate     Fixed     Interest Rate
    ----                 ---------    -------------    ------     -------------
    1995                   $457.0          6.84%       $257.0          6.83%
    1996                    291.9          7.30          31.2          8.85
    1997                     97.8          6.65            -            -
                           ------          ----        ------          --
         Total             $846.7          6.98%       $288.2          7.05%
                           ======          ====        ======          ====

    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 six-month
    reset dates. The Company also generally uses six-month LIBOR as the floating
    rate index for its forward rate agreements. Forward rate agreements
    generally have a final maturity date that is less than two years.

    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 $0.4
    million and $1.3 million, representing the estimated cost to settle these
    options at September 30, 1995 and December 31, 1994, 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.

                                       21

<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)

12. Financial Instruments (continued)

    At September 30, 1995 and December 31, 1994, the Company had the following
    written interest rate option agreements outstanding, by year of final
    maturity:
                                           September 30, 1995
                         ------------------------------------------------------
                           Gross      Net Weighted      Gross     Net Weighted
                         Receiving       Average       Paying        Average
    Year                   Fixed      Interest Rate     Fixed     Interest Rate
    ----                 ---------    -------------    ------     -------------
    1996                   $43.7          5.43%         $10.0         4.60%
    1997                    15.8          8.50             -            -
    1998                    10.0          8.50             -            -
                           -----          ----          -----         ---
         Total             $69.5          6.57%         $10.0         4.60%
                           =====          ====          =====         ====


                                           December 31, 1994
                         ------------------------------------------------------
                           Gross      Net Weighted      Gross     Net Weighted
                         Receiving       Average       Paying        Average
    Year                   Fixed      Interest Rate     Fixed     Interest Rate
    ----                 ---------    -------------    ------     -------------
    1995                   $15.6          5.27%         $ -            -  %
    1996                    43.4          5.42           10.0         4.60
                           -----          ----          -----         ----
         Total             $59.0          5.38%         $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. 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 applicable 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.

                                       22
<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)

12. Financial Instruments (continued)

    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, 1995   As of December 31, 1994
                              ------------------------   -----------------------
                               Carrying     Estimated     Carrying     Estimated
                                Amount     Fair Value      Amount     Fair Value
                                ------     ----------      ------     ----------
    Long-term debt, including
      current portion            $165.6      $166.2        $149.8       $146.4
    Foreign exchange forward
      contracts                     0.7         0.7           1.6          2.6
    Interest rate swaps and
      forward rate agreements       0.7         4.1          (2.8)        (8.2)

13. Subsequent Events

    On October 12, 1995, the Company completed its previously announced plan to
    acquire most of the U.S. retail insurance broking and consulting business of
    Jardine Insurance Brokers Inc. (JIB) for a purchase price not to exceed
    approximately $48.3 million. The Company paid $21.1 million at closing and
    issued two 6.375% promissory notes totaling $21.2 million with payments of
    $10.6 million due on April 9 and October 12, 1996, respectively. The latter
    payment is subject to adjustment based on certain revenue retention criteria
    at the former JIB offices. The remaining purchase price of approximately $6
    million is contingent on the retention of specific accounts over a four year
    period ending October 12, 1999. The acquired offices generated revenues of
    approximately $53 million in 1994.

    This acquisition will be accounted for under the purchase method in the
    fourth quarter of 1995. A substantial majority of the purchase price will be
    allocated to identifiable intangible assets (expiration lists) and goodwill.
    In addition, the Company expects to complete its integration plans before
    year-end and, as a result, it is probable that the Company would incur a
    one-time charge in the fourth quarter of 1995 relating to closing certain of
    its offices and workforce reductions. Based on currently available
    information, the specific amount of the charge cannot be determined at this
    time. However, the Company currently expects that the amount of the pre-tax
    charge will range from $10 million to $15 million.

    On August 23, 1995, the Company announced its intention to redeem its
    outstanding 11% Convertible Subordinated Debentures due 2007. All $60.2
    million of outstanding securities were redeemed on October 13, 1995,
    together with accrued interest and a $0.9 million redemption premium. This
    redemption was primarily funded by the Company through the borrowing of $60
    million under its revolving long-term credit facility. The current interest
    rate on these borrowings is 6.44% which is based on LIBOR.

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

    OVERVIEW

    The Company's insurance broking revenues are generally affected by premium
    rates charged by insurance companies in the property and casualty markets
    and the overall available market capacity. Since the mid-to-late 1980s,
    commission and fee growth has been constrained due to soft pricing and
    excess capacity and the resultant intense competition among insurance
    carriers and brokers for market share. Furthermore, the market conditions
    that have prevailed in the U.S. over the last decade are increasingly
    evident in the U.K. retail business and spreading to Continental Europe and
    elsewhere.

    The Company's investment income earned on fiduciary funds is generally
    affected by short-term interest rate levels. A downward trend in interest
    rates occurred in the early 1990's. However, short-term interest rates have
    risen since the latter half of 1994 and are generally expected to remain at
    these levels in the near future.

    The Company's 1994 restructuring and related initiatives reflect, in part,
    management's view that insurance premium pricing will not improve
    significantly in the foreseeable future. Revenue growth will depend
    increasingly on the development of new products and services, new business
    generation and selective acquisitions, such as the October 1995 purchase of
    most of the U.S. insurance broking and consulting business of Jardine
    Insurance Brokers, Inc.

    Revenue growth from the Company's human resource management consulting
    operations was impacted by uncertainty over health care reform in the U.S.
    Many clients postponed or reduced planned employee benefit reviews while
    waiting to analyze the impact of the potential governmental health care
    proposals. The Company anticipates slightly lower revenues in 1995 as a
    result of the restructuring program, including a decline in the number of
    consultants.

    Overall comparable operating expenses are expected to continue to decline
    throughout 1995, resulting from implementing the plan of restructuring and
    other expense initiatives, including certain employee benefit cost
    reductions, tightening of travel and entertainment practices, elimination of
    certain employee perquisites and the consolidation of vendor and supply
    management. The Company has estimated that approximately $100 million of
    expense savings will be realized from these efforts; however, approximately
    one-half of such savings will be offset by investments in new technology,
    products and personnel to support revenue growth, as well as normal
    inflationary increases.

    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, 1995 VS. 1994
    ----------------------------------------------

    CONSOLIDATED

    The Company reported net income of $17.5 million, or $0.25 per share on
    consolidated operating revenues of $299.7 million for the three months ended
    September 30, 1995. Fully diluted earnings per share for the quarter were
    also $0.25.

                                       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, 1995 VS. 1994 (CONTINUED)
    ----------------------------------------------

    CONSOLIDATED (CONTINUED)

    For the three months ended September 30, 1994, the Company reported a net
    loss of $20.8 million, or $0.58 per share on a primary and fully diluted
    basis, on consolidated operating revenues of $332.6 million. These results
    include a $20.9 million after-tax, or $0.47 per share, charge to
    discontinued operations.

    OPERATING REVENUES

    Consolidated operating revenues were $299.7 million for the third quarter of
    1995 compared to $332.6 million for the same period in 1994. Revenue
    comparisons were impacted by both foreign currency fluctuations and
    dispositions of non-core businesses. After adjusting for the effect of these
    items, total revenues decreased $1.1 million, or 0.4 percent, compared to
    the 1994 third quarter.

    Commissions and Fees

    Total commissions and fees were $283.7 million for the third quarter of 1995
    compared to $318.7 million for the same period in 1994. The sale of non-core
    operations reduced revenues in the third quarter of 1995 by $29.4 million
    and changes in foreign exchange rates had a negative impact of $1.6 million.
    When adjusted for the effect of these items, total commissions and fees
    decreased by $4 million, or 1.4 percent.

    Fiduciary Investment Income

    Investment income earned on fiduciary funds for the third quarter of 1995
    increased by $2.1 million, or 15.1 percent, versus 1994 levels primarily due
    to higher average investment levels, particularly in the U.K. and higher
    worldwide interest rates, particularly in the U.S. and U.K.

    The Company enters into interest rate swaps and forward rate agreements to
    limit the earnings volatility associated with changes in short-term interest
    rates on its existing and anticipated fiduciary investments with maturities
    of three months or less. 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
    effect of these interest rate swap and forward rate agreements and interest
    rate options on the Company's fiduciary investment income was not
    significant in the third quarters of 1995 and 1994, respectively. For
    additional information relating to the Company's interest rate financial
    instruments, see Note 12 of Unaudited Notes to Financial Statements.

    OPERATING EXPENSES

    Consolidated operating expenses were $272.1 million for the third quarter of
    1995, a decrease of $56.3 million or 17.1 percent, versus the comparable
    quarter of 1994. After adjusting for a $29.1 million decrease resulting from
    the sale of non-core operations and the impact of changes in foreign
    exchange rates, including hedging contracts gains and losses, operating
    expenses decreased $27.1 million, or 9.1 percent, on a comparable basis.

                                       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, 1995 VS. 1994 (CONTINUED)
    ----------------------------------------------

    OPERATING EXPENSES (CONTINUED)

    Salaries and Benefits

    Consolidated salaries and benefits decreased by $24.9 million, or 12.4
    percent, in the third quarter of 1995 versus the same period in 1994.
    Excluding the effect of changes in foreign exchange rates and a $16.8
    million decrease resulting from operations sold, total salaries and benefits
    decreased $8.3 million, or 4.5 percent, versus the comparable quarter of
    1994. Contributing to this decrease was a 7.5 percent decline in headcount,
    excluding the impact of sold operations, primarily due to early retirement
    programs and worldwide workforce reductions pursuant to the 1994 plan of
    restructuring. Also reflected in the third quarter decrease were lower
    employee benefit costs resulting from the Company's expense reduction
    initiatives. Somewhat offsetting these items was an increase in incentives
    attributable to improved sales and profit performance coupled with new
    long-term incentive compensation plans.

    Other Operating Expenses

    Consolidated other operating expenses decreased by $31.4 million, or 24.5
    percent, in the third quarter of 1995 compared to 1994. Excluding the effect
    of changes in foreign exchange rates, including hedging contracts gains and
    losses, and reductions resulting from the disposition of non-core
    businesses, other operating expenses decreased by $18.8 million, or 16.2
    percent, in 1995 versus 1994. Contributing to this decline was the
    implementation of the 1994 plan of restructuring and other expense
    initiatives, including tightening of travel and entertainment practices,
    elimination of certain employee perquisites and the consolidation of vendor
    supply management. Additionally, this decrease reflects lower insurance
    costs primarily related to the Company's professional indemnity programs.

    OTHER INCOME (EXPENSES)

    Investment Income

    Investment income earned on operating funds increased in the third quarter
    of 1995 by $1.6 million, or 53.3 percent versus the comparable period in
    1994. Contributing to this increase were higher average operating cash and
    investments levels during 1995 primarily resulting from the Company's
    improved operating performance and slightly higher worldwide interest rates.

    Interest Expense

    Interest expense decreased by $0.1 million, or 2.1 percent, in the third
    quarter of 1995 versus 1994. Although the 1995 average debt level has
    increased slightly over the 1994 level, interest expense has remained
    relatively flat due to the more favorable financing terms of recently issued
    debt and the repayment of certain higher interest bearing debt obligations.

                                       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)
    --------------------------------------------------------------------------

    THREE MONTHS ENDED SEPTEMBER 30, 1995 VS. 1994 (CONTINUED)
    ----------------------------------------------

    OTHER INCOME (EXPENSES) (CONTINUED)

    Other

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

                                             Three Months Ended September 30,
                                             --------------------------------
                                                     1995       1994
    Gains on sales of businesses                    $ (1.6)    $  -
    Litigation costs                                    -       (2.3)
    Other                                              2.8       0.3
                                                    ------     -----
                                                    $  1.2     $(2.0)
                                                    ======     =====

    Litigation costs in 1994 are associated primarily with the Mutual Fire
    lawsuit described in Note 11 of the Unaudited Notes to Financial Statements.

    INCOME TAXES

    The Company reported income tax expense of $11 million on pre-tax income of
    $28.8 million in the third quarter of 1995. The expense is higher than the
    expected tax expense of $10.1 million based on the U.S. statutory rate of 35
    percent, primarily due to U.S. taxes on income earned by foreign
    subsidiaries and to state and local income taxes. Certain expenses which are
    not deductible, including amortization of goodwill also negatively affected
    the tax rate.

    The Company reported income tax expense of $0.2 million on pre-tax income of
    $0.5 million in the third quarter of 1994. The effective tax rate was 40
    percent compared to the U.S. statutory rate of 35 percent. The tax rate was
    negatively impacted by the non-deductibility of certain expenses for tax
    purposes, including amortization of goodwill, and entertainment expenses.
    Partially offsetting these factors were foreign tax rates which were lower
    than the U.S. statutory rate.

                                       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)
    --------------------------------------------------------------------------

    THREE MONTHS ENDED SEPTEMBER 30, 1995 VS. 1994 (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,
                                             --------------------------------
                                                    1995        1994
    Operating revenues:
      Risk management and insurance services
        broking                                    $166.1      $201.0
      Specialist insurance and reinsurance
        broking                                      66.2        61.6
      Fiduciary investment income                    15.9        13.8
                                                   ------      ------
          Total operating revenues                  248.2       276.4
    Operating expenses                              215.7       262.0
                                                   ------      ------
    Operating income                               $ 32.5      $ 14.4
                                                   ======      ======

    RISK MANAGEMENT AND INSURANCE SERVICES BROKING REVENUES

    Worldwide risk management and insurance services broking commissions and
    fees decreased $34.9 million, or 17.4 percent, for the third quarter of 1995
    compared to 1994. Reflected in this decrease are the impact of sold
    operations which reduced such revenues by $29.4 million and an unfavorable
    foreign exchange rate variance of $1.4 million. Excluding the effect of
    these items, commissions and fees decreased $4.1 million, or 2.4 percent.

    The U.S. and European operations, particularly in the U.K., reported
    decreased commissions and fees of $2 million and $3.4 million, respectively.
    These decreases reflect weakened pricing resulting from continued softness
    in certain U.S. insurance markets and evidence of similar market conditions
    in the U.K. and Continental Europe. Partially offsetting these reductions
    was an increase of $1.3 million for the Latin America operations primarily
    attributable to new business production.

    SPECIALIST INSURANCE AND REINSURANCE BROKING REVENUES

    Total third quarter 1995 broking commissions and fees for the specialist
    insurance and reinsurance operations increased $4.6 million, or 7.5 percent,
    versus 1994 levels. Changes in foreign exchange rates decreased third
    quarter 1995 broking revenues by $0.4 million. After adjusting for the
    effect of changes in foreign exchange rates, commissions and fees increased
    $5 million or 8.1 percent. This increase was primarily due to reported
    increases of $4.2 million and $0.8 million in the U.S. and U.K. operations,
    respectively.

    The Company enters into foreign exchange forward contracts and foreign
    exchange option agreements primarily to provide risk management against
    future exposures that 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. For
    additional information relating to the Company's foreign exchange financial
    instruments, see Note 12 of the Unaudited Notes to Financial Statements.

                                       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)
    --------------------------------------------------------------------------

    THREE MONTHS ENDED SEPTEMBER 30, 1995 VS. 1994 (CONTINUED)
    ----------------------------------------------

    FIDUCIARY INVESTMENT INCOME

    For the third quarter of 1995 investment income earned on fiduciary funds,
    held by the Company in connection with its broking services for the risk
    management and insurance services broking and the specialist and reinsurance
    broking operations was $8.3 million and $7.6 million, respectively, versus
    $7.8 million and $6 million, respectively, for the comparable period in
    1994. Total Insurance Services investment income increased by $2.1 million,
    or 15.2 percent, versus 1994 levels. The increase was primarily due to
    higher average investment levels, particularly in the U.K., and higher
    worldwide interest rates, particularly in the U.S. and U.K.

    OPERATING EXPENSES

    Worldwide risk management and insurance services operating expenses for the
    third quarter of 1995 decreased $46 million, or 22.3 percent, versus the
    same period in 1994. Foreign exchange rate changes, including hedging
    contracts gains and losses decreased expenses by $0.8 million in 1995. The
    effect of sold operations reduced operating expenses by $29.1 million in
    1995. After adjusting for the effect of these items, total operating
    expenses decreased $16.1 million, or 9.1 percent.

    The U.S. and European operations, particularly in the U.K., reported
    decreased expenses of $15 million and $1.7 million, respectively. These
    decreases primarily resulted from the aforementioned restructuring and other
    expense initiatives undertaken in 1994. Partially offsetting these
    reductions was an increase reported by the Asia-Pacific operations of $0.9
    million primarily due to the acquisition of a small brokerage business.

    Third quarter of 1995 operating expenses for the specialist and reinsurance
    operations decreased $0.3 million, or 0.5 percent, versus 1994 levels.
    Foreign exchange rate variances, including hedging gains and losses,
    negatively impacted expenses by $0.5 million in 1995. Excluding the impact
    of foreign exchange rate variances, total operating expenses decreased $0.8
    million, or 1.4 percent. Contributing to this decrease were reduced expenses
    of $1.9 million in the U.K. operations partially offset by a slight increase
    of $0.5 million for the U.S. operations.

    HUMAN RESOURCE MANAGEMENT CONSULTING

    Operating results for the Human Resource Management Consulting segment of
    the Company's operations are summarized below:
                                                     For the Three Months Ended
                                                            September 30,
                                                     ---------------------------
                                                       1995              1994
                                                     --------          ---------
    Operating revenues:
      Commissions and fees                           $   51.4          $   56.1
      Fiduciary investment income                         0.1               0.1
                                                     --------          --------
         Total operating revenues                        51.5              56.2
                                                     --------          --------
    Operating expenses                                   49.4              55.0
                                                     --------          --------
    Operating income                                 $    2.1          $    1.2
                                                     ========          ========


                                       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)
    --------------------------------------------------------------------------

    THREE MONTHS ENDED SEPTEMBER 30, 1995 VS. 1994 (CONTINUED)
    ----------------------------------------------

    HUMAN RESOURCE MANAGEMENT CONSULTING (CONTINUED)

    Human resource management consulting commissions and fees decreased by $4.7
    million, or 8.4 percent, in the third quarter of 1995 compared to the same
    period in 1994. After adjusting for the effect of changes in foreign
    exchange rates, commissions and fees decreased by $4.9 million, or 8.7
    percent. This decrease is primarily attributable to consulting revenue
    shortfalls in the U.S. and U.K. operations of $4.1 million and $1 million,
    respectively, resulting from the Company's restructuring program which
    included declines in the number of consultants based in these operations.

    Operating expenses decreased by $5.6 million, or 10.2 percent, for the third
    quarter of 1995 compared to 1994. After adjusting for the effect of changes
    in foreign exchange rates, operating expenses decreased by $5.8 million, or
    10.5 percent. Reflected in this decrease were operating expense reductions
    of $4.8 million, $0.7 million and $0.4 million in the U.S., U.K. and
    Canadian operations, respectively, as a result of the aforementioned
    restructuring and other expense initiatives undertaken in 1994.


                                       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, 1995 VS. 1994
    ---------------------------------------------

    CONSOLIDATED

    The Company reported net income of $81.9 million, or $1.42 per share on
    consolidated operating revenues of $952 million for the nine months ended
    September 30, 1995. Fully diluted earnings per share for the period were
    $1.33. Included in the 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 administrator operation.

    For the nine months ended September 30, 1994, the Company reported a net
    loss of $27.4 million, or $0.83 per share on a primary and fully diluted
    basis, on consolidated operating revenues of $990.7 million. These results
    included a $26.9 million, or $0.61 per share, loss from discontinued
    operations and a $2.6 million after-tax charge, or $0.06 per share, for the
    cumulative effect of a change in accounting principle relating to the
    adoption of SFAS No. 112, "Employers' Accounting for Postemployment
    Benefits."

    OPERATING REVENUES

    Consolidated operating revenues were $952 million for the first nine months
    of 1995 compared to $990.7 million for the same period in 1994. Revenue
    comparisons were impacted by both foreign currency fluctuations and
    dispositions of non-core businesses. After adjusting for the effect of these
    items, total revenues increased $31.1 million, or 3.5 percent.

    Commissions and Fees

    Total commissions and fees were $903.4 million for the first nine months of
    1995 compared to $953.3 million for the same period in 1994. The sale of
    non-core operations reduced revenues in the comparable periods by $78
    million and changes in foreign exchange rates had a favorable impact of $9.2
    million. When adjusted for the effect of these items, total commissions and
    fees increased by $18.9 million, or 2.2 percent.

    Fiduciary Investment Income

    Investment income earned on fiduciary funds for the first nine months of
    1995 increased by $11.2 million, or 29.9 percent, versus 1994 levels
    primarily due to higher average investment levels, particularly in the U.K.
    and higher worldwide interest rates, particularly in the U.S. and U.K.

    The Company enters into interest rate swaps and forward rate agreements to
    limit the earnings volatility associated with changes in short-term interest
    rates on its existing and anticipated fiduciary investments with maturities
    of three months or less. 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. These
    interest rate swap and forward rate agreements and interest rate options
    increased the Company's fiduciary investment income by $0.9 million in the
    first nine months of 1995 and had a nominal effect on the same period in
    1994. For additional information relating to the Company's interest rate
    financial instruments, see Note 12 of Unaudited Notes to Financial
    Statements.

                                       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, 1995 VS. 1994 (CONTINUED)
    ---------------------------------------------

    OPERATING EXPENSES

    Consolidated operating expenses were $843.5 million for the first nine
    months of 1995, a decrease of $123.2 million or 12.7 percent, versus the
    comparable 1994 period. After adjusting for a $78.2 million decrease
    resulting from the sale of non-core operations and the impact of changes in
    foreign exchange rates, including hedging contracts gains and losses,
    operating expenses decreased $55.4 million, or 6.3 percent, on a comparable
    basis.

    Salaries and Benefits

    Consolidated salaries and benefits decreased by $57.6 million, or 9.6
    percent in the first nine months of 1995 versus the same period in 1994.
    Excluding the effect of changes in foreign exchange rates and a $44.9
    million decrease resulting from operations sold, total salaries and benefits
    decreased $20.2 million, or 3.7 percent, versus the comparable 1994 period.
    Contributing to this decrease was a 7.5 percent decline in headcount,
    excluding the impact of sold operations, primarily due to early retirement
    programs and worldwide workforce reductions pursuant to the 1994 plan of
    restructuring. Also reflected in the first nine months decrease were lower
    employee benefit costs resulting from the Company's expense reduction
    initiatives. Somewhat offsetting these items was an increase in incentives
    attributable to improved sales and profit performance coupled with the
    implementation of several new long-term incentive compensation plans.

    Other Operating Expenses

    Consolidated other operating expenses decreased by $65.6 million, or 18
    percent, in the first nine months of 1995 compared to 1994. Excluding the
    effect of changes in foreign exchange rates, including hedging contracts
    gains and losses, and reductions resulting from the disposition of non-core
    businesses, other operating expenses decreased by $29.4 million, or 8.9
    percent, in 1995 versus 1994. Contributing to this decline was the
    implementation of the 1994 plan of restructuring and other expense
    initiatives, including tightening of travel and entertainment practices,
    elimination of certain employee perquisites and the consolidation of vendor
    supply management. Additionally, this decrease reflects lower insurance
    costs primarily related to the Company's professional indemnity programs.

    OTHER INCOME (EXPENSES)

    Investment Income

    Investment income earned on operating funds increased for the first nine
    months of 1995 by $7.4 million, or 113.8 percent versus the comparable
    period in 1994. Contributing to this increase were higher average operating
    cash and investments levels during 1995 primarily resulting from the
    Company's improved operating performance and the remaining proceeds from the
    July 1994 issuance and sale of the Company's 8% Series B cumulative
    convertible preferred stock coupled with slightly higher worldwide interest
    rates.

                                       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)
    --------------------------------------------------------------------------

    NINE MONTHS ENDED SEPTEMBER 30, 1995 VS. 1994 (CONTINUED)
    ---------------------------------------------
    OTHER INCOME (EXPENSES) (CONTINUED)

    Interest Expense

    Interest expense increased by $2.2 million, or 18.5 percent, in the first
    nine months of 1995 versus 1994. The increase is due to a higher average
    debt level resulting from the $50 million borrowing in mid-1994 relating to
    a contract with a reinsurance company and the issuance of long-term notes
    payable upon settlement of the Shand and Mutual Fire contingencies during
    the first quarter of 1995.

    Other

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

                                              Nine Months Ended September 30,
                                              -------------------------------
                                                     1995       1994
                                                     ----       ----

    Gains on sales of businesses                    $ 30.4     $  -
    Litigation costs                                  (0.1)     (7.7)
    Other                                              3.7      (0.8)
                                                    ------     -----
                                                    $ 34.0     $(8.5)
                                                    ======     =====

    During the second quarter of 1995, the Company sold two small operations for
    gross proceeds of $1.9 million and resulting pre-tax gains totaling $1.4
    million.

    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. The previously reported pre-tax gain on this transaction was
    $30.3 million. Pursuant to the terms of the purchase agreement, under
    certain circumstances the transaction was subject to a post-closing
    adjustment in the purchase price. During the third quarter of 1995 the
    Company and the purchaser reached an agreement resulting in a final pre-tax
    gain of $28.7 million ($19.8 million after-tax or $0.44 per share).

    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.

    Litigation costs in 1994 are associated primarily with the Mutual Fire
    lawsuit described in Note 11 of the Unaudited Notes to Financial Statements.

    INCOME TAXES

    The Company reported income tax expense of $54.7 million on pre-tax income
    of $142.3 million in the first nine months of 1995. The expense is higher
    than the expected tax expense of $49.8 million based on the U.S. statutory
    rate of 35 percent, primarily due to U.S. taxes on income earned by foreign
    subsidiaries and to state and local income taxes. Certain expenses which are
    not deductible, including amortization of goodwill also negatively affected
    the tax rate. Partially offsetting these factors is the favorable impact of
    the amount of gain recognized on the sale of Alexsis for tax purposes as
    well as foreign tax rates which were lower than the U.S. statutory rate.

                                       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)
    --------------------------------------------------------------------------

    NINE MONTHS ENDED SEPTEMBER 30, 1995 VS. 1994 (CONTINUED)
    ---------------------------------------------

    INCOME TAXES (CONTINUED)

    The Company's effective tax rate in the first nine months of 1994 was 39.6%.
    The rate was higher than the U.S. statutory rate of 35% primarily due to
    amortization of goodwill, and certain other non-deductible expenses. These
    factors were offset in part by the favorable impact of state and local tax
    benefits on losses generated in the U.S. operations as well as foreign tax
    rates which were lower than the U.S. statutory rate.

    As discussed in Note 6 of the Unaudited Notes to Financial Statements,
    during 1994, the Company was advised that the Joint Committee on Taxation
    had approved the agreement reached in 1993 by the Company and the Appeals
    Office of the Internal Revenue Service (IRS) on settlement of tax issues
    with respect to years 1980 through 1986. Also during 1994, the Company
    reached an agreement with the IRS on settlement of the examination of years
    1987 through 1989. On February 28, 1995, the Company paid the amounts due
    for such years and charged the tax and net interest totaling $ 35.6 million
    against previously established reserves.

    In 1994, the Company received a Notice of Proposed Adjustment from the IRS
    in connection with the examination of its 1990 and 1991 U.S. federal income
    tax returns, proposing an increase in taxable income for the 1991 year
    which, if sustained, would result in additional tax liability estimated by
    the Company at $50 million, excluding interest and penalties. This proposed
    adjustment relates to intercompany transactions involving the stock of a
    United Kingdom subsidiary.

    As discussed in Note 6 of the Unaudited Notes to Financial Statements, the
    Company disagrees with the IRS position on this issue. Although the ultimate
    outcome of the matter cannot be predicted with certainty, the Company and
    its independent tax counsel believe there are meritorious defenses to the
    proposed adjustment and substantial arguments to sustain the Company's
    position and that the Company should prevail in the event this issue is
    litigated.

    A similar set of transactions occurred in 1993 for which the IRS could
    propose an increase in taxable income which would result in an additional
    tax liability estimated by the Company at $25 million, excluding interest
    and penalties. The Company's 1993 tax return is not currently under
    examination. The Company believes it should prevail in the event this
    similar issue is raised by the IRS. Accordingly, no provision for any
    liability with respect to the 1991 and 1993 transactions has been made in
    the consolidated financial statements.

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

                                       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)
    --------------------------------------------------------------------------

    NINE MONTHS ENDED SEPTEMBER 30, 1995 VS. 1994 (CONTINUED)
    ---------------------------------------------

    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 plc (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.

    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.

    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 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 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) to
    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,
    1995, the recoveries were limited to $113 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. As a result of this transaction, the Company recorded a $6
    million charge in the second quarter of 1994 which represented the cost of
    the premium and deductible that exceeded existing reserves for covered
    exposures at that time.

                                       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)
    --------------------------------------------------------------------------

    NINE MONTHS ENDED SEPTEMBER 30, 1995 VS. 1994 (CONTINUED)
    ---------------------------------------------

    DISCONTINUED OPERATIONS (CONTINUED)

    During the third quarter of 1994, the Company recorded a $20.9 million
    charge relating to an agreement that resolved certain indemnity obligations
    to Sphere Drake. Under terms of the Sphere Drake agreement, the Company
    received a cash payment of $5 million in settlement of the zero coupon notes
    receivable and related indemnities as well as certain income tax
    liabilities.

    Insurance liabilities in excess of recorded liabilities could develop in
    the future. Based on independent actuarial estimates of the amount and
    timing of claim payments, it is reasonably possible that such additional
    liabilities of $189 million, net of estimated amounts recoverable for paid
    losses under the finite risk contracts of $117 million, could amount to $72
    million. However, management currently believes that such additional
    insurance liabilities are not likely to develop.

    The Company believes that, based on current estimates, the established total
    net liabilities of discontinued operations are sufficient to cover its
    exposures. However, there is no assurance that further adverse development
    may not occur due to variables inherent in the estimation processes and
    other matters described above. The Company currently believes that the
    effect of such adverse development, if any, will not be material to the
    Company's financial position and results of operations.

    CUMULATIVE EFFECT ADJUSTMENTS

    Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers'
    Accounting for Postemployment Benefits." This statement requires that
    certain benefits provided to former or inactive employees after employment
    but prior to retirement, including disability benefits and health care
    continuation coverage, be accrued based upon the employees' service already
    rendered. The cumulative effect of this accounting change was an after-tax
    charge of $2.6 million or $0.06 per share in the first quarter of 1994. The
    increase to the annual cost of providing such benefits will not be
    significant.

                                       36
<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, 1995 VS. 1994 (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,
                                               -------------------------------
                                                    1995        1994
                                                    ----        ----
    Operating revenues:
      Risk management and insurance services
        broking                                    $542.1      $602.4
      Specialist insurance and reinsurance
        broking                                     205.7       190.2
      Fiduciary investment income                    48.3        37.2
                                                   ------      ------
          Total operating revenues                  796.1       829.8
    Operating expenses                              672.4       771.5
                                                   ------      ------
    Operating income                               $123.7      $ 58.3
                                                   ======      ======

    RISK MANAGEMENT AND INSURANCE SERVICES BROKING REVENUES

    Worldwide risk management and insurance services broking commissions and
    fees decreased $60.3 million, or 10 percent, for the first nine months of
    1995 compared to 1994. Reflected in this decrease are the net impact of sold
    operations which reduced revenues by $78 million and a favorable foreign
    exchange rate variance of $5.3 million. Excluding the effect of these items,
    commissions and fees increased $12.4 million, or 2.4 percent.

    The European, Latin America, U.S., Canada and Asia-Pacific operations
    reported increased commissions and fees of $1.6 million, $5.2 million, $1
    million, $2 million and $2.6 million, respectively. The European operations
    favorable variance reflects increased commissions and fees of $5.1 million
    in Continental Europe, particularly in Germany, the Netherlands and France,
    partially offset by a $3.5 million decrease for such revenues in the U.K.
    The Continental Europe increases are primarily attributable to increased
    commission rates and the acquisition of a small brokerage business. The U.K.
    decrease reflects weakened pricing resulting from their softening market.
    The increases in the Latin America and U.S. operations are primarily due to
    new business production and favorable client retention levels. The increase
    in the Canada operations reflects increased commission rates and new
    business production. Furthermore, the increase in the Asia-Pacific
    operations reflects the acquisition of a small brokerage business.

    SPECIALIST INSURANCE AND REINSURANCE BROKING REVENUES

    For the first nine months of 1995 total broking commissions and fees for the
    specialist insurance and reinsurance operations increased $15.5 million, or
    8.1 percent, versus 1994 levels. Changes in foreign exchange rates increased
    1995 broking revenues by $1.9 million. After adjusting for the effect of
    changes in foreign exchange rates, commissions and fees increased $13.6
    million, or 7.2 percent. This increase was primarily due to reported
    increases of $13.1 million and $0.3 million in the U.S. and U.K. operations,
    respectively.


                                       37

<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, 1995 VS. 1994 (CONTINUED)
    ---------------------------------------------

    SPECIALIST INSURANCE AND REINSURANCE BROKING REVENUES (CONTINUED)

    The Company enters into foreign exchange forward contracts and foreign
    exchange option agreements primarily to provide risk management against
    future exposures that 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. For
    additional information relating to the Company's foreign exchange financial
    instruments, see Note 12 of the Unaudited Notes to Financial Statements.

    FIDUCIARY INVESTMENT INCOME

    For the first nine months of 1995 investment income earned on fiduciary
    funds, held by the Company in connection with its broking services for the
    risk management and insurance services broking and the specialist and
    reinsurance broking operations was $23.9 million and $24.4 million,
    respectively, versus $21 million and $16.2 million, respectively, for the
    comparable period in 1994. Total Insurance Services investment income
    increased by $11.1 million, or 29.8 percent, versus 1994 levels. The
    increase was primarily due to higher average investment levels, particularly
    in the U.K., and higher worldwide interest rates, particularly in the U.S.
    and U.K.

    OPERATING EXPENSES

    Worldwide risk management and insurance services operating expenses for the
    first nine months of 1995 decreased $107.2 million, or 17.6 percent, versus
    the same period in 1994. Foreign exchange rate changes, including hedging
    contracts gains and losses, increased expenses by $2.7 million in 1995. The
    net effect of sold operations reduced operating expenses by $78.2 million in
    the comparable periods. After adjusting for the effect of these items, total
    operating expenses decreased $31.7 million, or 6.1 percent.

    The U.S. and European operations reported decreased operating expenses of
    $34.1 million and $0.6 million, respectively. The European operations
    favorable variance reflects reduced operating expenses of $2.7 million in
    the U.K. substantially offset by increased operating expenses of $2.1
    million in Continental Europe, particularly in France. Furthermore,
    increased operating expenses of $2.9 million and $2.1 million were reported
    in the Asia-Pacific and Latin America operations, respectively. The reported
    reductions were primarily the result of the aforementioned restructuring and
    other expense initiatives undertaken in 1994 somewhat offset by an increase
    in incentives attributable to improved sales and profit performance coupled
    with the implementation of several new long-term incentive compensation
    plans. The reported increases in the Continental Europe and Asia-Pacific
    operations were primarily due to acquisitions of small brokerage businesses.


                                       38
<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, 1995 VS. 1994 (CONTINUED)
    ---------------------------------------------

    OPERATING EXPENSES (CONTINUED)

    First nine months of 1995 operating expenses for the specialist and
    reinsurance broking operations increased $8.1 million, or 5 percent, versus
    1994 levels. Foreign exchange rate variances, including hedging gains and
    losses, negatively impacted expenses by $5.8 million in 1995. Excluding the
    impact of foreign exchange rate variances, total operating expenses
    increased $2.3 million, or 1.4 percent. Contributing to this increase were
    higher expenses of $3.2 million in the U.S. operations partially offset by
    reduced expenses of $1.5 million in the U.K. operations. The reported
    reduction in the U.K. operations was primarily the result of the
    aforementioned restructuring and other expense initiatives undertaken in
    1994. Both of these variances reflect additional incentives during 1995 due
    to improved operating performance.

    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,
                                                     ------------------------
                                                       1995           1994
                                                     --------       --------
    Operating revenues:
      Commissions and fees                           $  155.6       $  160.7
      Fiduciary investment income                         0.3            0.2
                                                     --------       --------
         Total operating revenues                       155.9          160.9
                                                     --------       --------
    Operating expenses                                  149.7          162.9
                                                     --------       --------
    Operating income (loss)                          $    6.2       $   (2.0)
                                                     ========       ========

    Human resource management consulting commissions and fees decreased by $5.1
    million, or 3.2 percent, in the first nine months of 1995 compared to 1994.
    After adjusting for the effect of changes in foreign exchange rates, these
    revenues decreased $7.1 million, or 4.4 percent. This decrease is primarily
    attributable to consulting revenue shortfalls of $7.5 million and $1.7
    million in the U.S. and U.K. operations, respectively, resulting from the
    Company's restructuring program which included declines in the number of
    consultants based in these operations. Partially offsetting these decreases
    were increased commissions and fees of $1.5 million in the Canadian
    operations.

    Operating expenses decreased by $13.2 million, or 8.1 percent, for the first
    nine months of 1995 compared to 1994. After adjusting for the effect of
    changes in foreign exchange rates, operating expenses decreased $15.1
    million, or 9.3 percent. Reflected in this decrease were reductions of $11.9
    million, $1.8 million and $1.7 million in the operating expenses of the
    U.S., U.K. and Canadian operations, respectively, primarily as a result of
    the aforementioned restructuring and other expense initiatives undertaken in
    1994.

                                       39

<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, 1995, the Company's operating cash and cash equivalents
    totaled $254.8 million, a $6.1 million increase over the 1994 year-end
    balance. In addition, the Company had $69.7 million of operating funds
    invested in short-term and long-term investments at September 30, 1995, a
    $13.6 million decrease compared to December 31, 1994.

    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, gains on sales of business and changes in working
    capital balances. In addition, the net cash flows relating to discontinued
    operations are included. In the first nine months of 1995, the Company's
    operating activities used $42.2 million of operating funds, including the
    following items.

    The 1994 charges for restructuring required $20.8 million of cash payments
    during the first nine months of 1995. The Company anticipates that
    approximately $8.4 million of the remaining balance of $33.6 million will be
    funded during the fourth quarter of 1995.

    As described in Note 6 of the Unaudited Notes to Financial Statements,
    during 1994, the Company was advised that the Joint Committee on Taxation
    had approved the agreement reached in 1993 by the Company and the Appeals
    Office of the IRS on settlement of tax issues with respect to the years 1980
    through 1986. Also during 1994, the Company reached an agreement with the
    IRS on settlement of the examination of years 1987 through 1989. In February
    1995, the Company paid the amounts due for such years and charged the tax
    and net interest totaling $35.6 million against previously established
    reserves.

    During the first quarter of 1995, the Company made a cash payment of $14
    million under the terms of the settlement relating to Shand. A $12 million
    cash payment was made on April 1, 1995 in accordance with the Mutual Fire
    settlement agreement. These payments were applied against the 1994 special
    charges reserve and the Company's previously established reserves.

    During the first quarter of 1995, the Company made cash payments of
    approximately $19.5 million relating to the settlement of certain large
    litigation matters. These payments were applied against the Company's
    previously established reserves.

    Investing Activities

    The Company's net capital expenditures for property and equipment were $15.1
    million and $17.2 million during the nine months ended September 30, 1995
    and 1994, respectively. These expenditures decreased as a result of the
    Company's restructuring and other expense initiatives undertaken in 1994.

    In January 1995, the Company received the remaining proceeds of $29.2
    million from the November 1994 sale of the U.S.-based personal lines
    business. In addition, the Company received $7.2 million in January 1995
    from the sale of its minority interest in a U.K. merchant bank and $47.1
    million in February 1995 from the sale of Alexsis.


                                       40

<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)

    Investing Activities (continued)

    On October 12, 1995, the Company completed its previously announced plan to
    acquire most of the U.S. retail insurance broking and consulting business of
    Jardine Insurance Brokers Inc. (JIB) for a purchase price not to exceed
    approximately $48.3 million. The Company paid $21.1 million at closing and
    issued two 6.375% promissory notes totaling $21.2 million with payments of
    $10.6 million due on April 9 and October 12, 1996, respectively. The latter
    payment is subject to adjustment based on certain revenue retention criteria
    at the former JIB offices. The remaining purchase price of approximately $6
    million is cotingent on the retention of specific accounts over a four year
    period ending October 12, 1999. The acquired offices generated revenues of
    approximately $53 million in 1994.

    This acquisition will be accounted for under the purchase method in the
    fourth quarter of 1995. A substantial majority of the purchase price will be
    allocated to identifiable intangible assets (expiration lists) and goodwill.
    In addition, the Company expects to complete its integration plans before
    year-end and, as a result, it is probable that the Company would incur a
    one-time charge in the fourth quarter of 1995 relating to closing certain of
    its offices and workforce reductions. Based on currently available
    information, the specific amount of the charge cannot be determined at this
    time. However, the Company currently expects that the amount of the pre-tax
    charge will range from $10 million to $15 million.

    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.

    Financing Activities

    During the first quarter of 1995, the Company increased long-term debt by
    $19.8 million and recorded a note receivable of $1.3 million under the terms
    of the settlement relating to Shand. In the second quarter of 1995, $15.8
    million of this long-term debt was prepaid and $1.3 million of cash was
    received in payment of the note receivable. The remaining contingent note
    payable of $4 million was paid in full in September 1995. In accordance with
    the Mutual Fire settlement agreement, the Company increased long-term debt
    in the first quarter of 1995 by $25.9 million, representing the present
    value of a $35 million zero coupon note on March 27, 1995, secured by a
    letter of credit, using a discount rate of 9.3%. A partial payment of $0.3
    million was made on this note in June 1995. The first quarter activity was
    applied against the 1994 special charges reserve and the Company's
    previously established reserves. The present value of the outstanding
    principal balance of the note payable at September 30, 1995 was $26.9
    million.

                                       41

<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)

    Financing Activities (continued)

    The decline in cash dividend payments reflects the reduction in the
    Company's Common Stock dividend by 90 percent in 1994, resulting in
    annualized cash flow improvement of $40 million. The 1995 cash flow
    improvement from this action will be approximately $10 million. In addition,
    dividends on the Company's Series B Cumulative Convertible Preferred Shares
    (Series B Convertible Preferred Shares) are payable in kind (additional
    preferred shares) until December 15, 1996 and thereafter, at the election of
    the Board of Directors, until December 15, 1999.

    Under the terms of the AIG Agreement, the declaration or payment of
    dividends on Common Stock in excess of prescribed amounts may require the
    Company to purchase all or part of the then outstanding Series B Convertible
    Preferred Shares. Dividends on the Series B Convertible Preferred Shares
    will reduce the amount of earnings otherwise available for common
    stockholders by approximately $17 million in the first year after issuance,
    and by approximately $23 million in the fifth year after issuance, assuming
    dividends on the Series B Convertible Preferred Shares were to be paid in
    kind throughout the first five years after issuance.

    On March 27, 1995, the Company's then existing credit agreement was replaced
    by a new $200 million three-year 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. During the second
    quarter of 1995, the Company arranged a $10 million letter of credit under
    this agreement. On August 23, 1995, the Company announced its intention to
    redeem its outstanding 11% Convertible Subordinated Debentures due 2007. All
    $60.2 million of outstanding securities were redeemed on October 13, 1995,
    together with accrued interest and a $0.9 million redemption premium. This
    redemption was primarily funded by the Company through the borrowing of $60
    million under its revolving credit facility. The interest rate on these
    borrowings is 6.44% which is based on LIBOR. The Company has full and
    immediate access to the remaining $130 million credit line. See Note 10 of
    the Unaudited Notes to Financial Statements for further information
    regarding this credit agreement.

    Supplementing the credit agreement, the Company has unsecured lines of
    credit available for general corporate purposes totaling $91.9 million, of
    which $91.4 million were unused at September 30, 1995. These lines consist
    of uncommitted cancellable facilities in foreign countries. If drawn, the
    lines bear interest at market rates and carry annual commitment fees of not
    greater than 1/2 percent of the line.

    In March 1995, a U.S. subsidiary prepaid an unsecured $10 million term loan
    which was due August 1995.

                                       42
<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

    As a result of the devaluation of the Mexican peso in late 1994, the
    Company's accumulated translation adjustment balance for its Mexican
    operation reflected an unrealized loss of $6.2 million at December 31, 1994.
    Further devaluation of the Mexican peso during the first nine months of 1995
    has increased this unrealized loss to $9.3 million at September 30, 1995.
    However, 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 permanently impaired.

    In the first nine months of 1995, 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 million. The increase reflects the strengthening
    of most of the major European currencies and the Canadian dollar against the
    U.S. dollar.

    At September 30, 1995, the Company has an accumulated deficit of $227.3
    million. The Company's current financial position satisfies Maryland law
    requirements for the payment of dividends. At September 30, 1995, the
    current maximum amount of unrestricted funds the Company has available to
    pay Common Stock dividends under Maryland law equaled approximately $286.8
    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 11 of the
    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.

    As described in Notes 7 and 11 of the Unaudited Notes to Financial
    Statements, the Company believes its most significant litigation matters and
    other contingencies have been settled.

    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.



                                       43

<PAGE>


               Alexander & Alexander Services Inc. & Subsidiaries
                           PART II. OTHER INFORMATION
                           --------------------------

ITEM 1.  LEGAL PROCEEDINGS

Reference is made to Part I, Note 11 of the Unaudited Notes to Financial
Statements and to MD&A hereof as to the Company's discussion of contingencies
which is incorporated herein by reference in its entirety.

ITEM 5.  OTHER INFORMATION

ACQUISITIONS

On October 12, 1995, the Company completed its previously announced plan to
acquire most of the U.S. retail insurance broking and consulting business of
Jardine Insurance Brokers Inc. (JIB) for a purchase price not to exceed
approximately $48.3 million. The Company paid $21.1 million at closing and
issued two 6.375% promissory notes totaling $21.2 million with payments of $10.6
million due on April 9 and October 12, 1996, respectively. The latter payment is
subject to adjustment based on certain revenue retention criteria at the former
JIB offices. The remaining purchase price of approximately $6 million is
contingent on the retention of specific accounts over a four year period ending
October 12, 1999. The acquired offices generated revenues of approximately $53
million in 1994. This acquisition will be accounted for under the purchase
method in the fourth quarter of 1995. Reference is made to Part I, Note 13 of
the Unaudited Notes to Financial Statements hereof which is incorporated herein
by reference in its entirety.

BOARD ACTIONS

At its regular meeting of the Board of Directors of the Company held on October
24, 1995, the Board of Directors elected Ronald A. Iles as Deputy Chairman of
the Board of Directors. Mr. Iles serves as Chairman of Alexander & Alexander
Services UK plc, the parent company of the Company's European operations and
Chairman of Alexander Howden Group Ltd. (AHG), the Company's primary reinsurance
and specialist subsidiary. He formerly served as Senior Vice President of the
Company.

At the same meeting, the Board of Directors also made the following
appointments:

-    Edward F. Kosnik, Chief Financial Officer of the Company, was appointed
     Senior Executive Vice President of the Company. He formerly served as
     Executive Vice President of the Company.

-    Elliot S. Cooperstone, Chief Administrative Officer of the Company and
     Executive Vice President and Chief Operating Officer of Alexander &
     Alexander Inc., the Company's United States retail subsidiary, was
     appointed Executive Vice President of the Company. He formerly served as
     Senior Vice President of the Company.

-    Kenneth J. Davis, Chief Executive Officer of Alexander & Alexander Europe,
     the Company's United Kingdom and European retail broking subsidiary, was
     appointed Executive Vice President of the Company.

-     Dennis L. Mahoney, Deputy Chairman of AHG responsible for the Company's
      global specialist operations, was appointed Executive Vice President of 
      the Company.

Also, on October 24, 1995, at its regular meeting of the Board of Directors of
the Company, pursuant to Article XI of the Company's Bylaws, the Board of
Directors amended the Company's Bylaws to provide for the position of senior
executive vice president of the Company.

                                       44

<PAGE>


               Alexander & Alexander Services Inc. & Subsidiaries
                     PART II. OTHER INFORMATION (continued)
                     --------------------------------------

ITEM 6.  EXHIBITS

     (a) Exhibits

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


                3.0           Amendment to Bylaws of the Company, 
                              dated October 24, 1995

               11.0           Statement Re:  Computation of per Common    
                              Share Earnings

               27.0           Financial Data Schedule


     (b) Current Reports on Form 8-K

         Current Report on Form 8-K was filed on September 11, 1995, 
         noticing the proposed acquisition of a majority of Jardine 
         Insurance Brokers Inc. U.S. Retail Operations.

         Current Report on Form 8-K was filed on October 16, 1995,
         noticing: (1) the completion on October 12, 1995 of the
         acquisition of a majority of Jardine Insurance Brokers Inc.
         U.S. Retail Operations; and (2) the redemption on October 13,
         1995, of the Company's 11% Convertible Subordinated Debentures
         due 2007 which was primarily funded by the Company through the
         borrowing of $60 million under its long-term revolving credit
         facility.



                                       45


<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 14th day of November, 1995.







                            ALEXANDER & ALEXANDER SERVICES INC.
                                         (Registrant)



                            BY: /s/Edward F. Kosnik            November 14, 1995
                            ----------------------------------------------------
                                   Edward F. Kosnik            Date
                                   Senior Executive Vice
                                   President & Chief
                                   Financial Officer


                                       46

<PAGE>



                       ALEXANDER & ALEXANDER SERVICES INC.

                          Quarterly Report on Form 10-Q
                    For the Quarter Ended September 30, 1995

                                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.
-------                                                         --------

3.0               Amendment to Bylaws of the Company, dated
                  October 24, 1995                                 48

11.0              Statement Re:  Computation of per Common Share
                  Earnings                                         51

27.0              Financial Data Schedule                          52



                                       47